Elegant Report

 The only route to more shareholder value is to create more value for customers. Creating shareholder value is essentially about building a sustainable competitive advantage so that the customer buy from one company rather then other.

Creating value for both customers and shareholders can be done by doing value-based marketing. In value based marketing, marketing activities are linked with elements of value creators for customers, marketing results and financial results are linked with shareholders.

FINDINGS

1. New definition of marketing

Marketing is a management process that seeks to maximize return to shareholders by developing and implementing strategies to build customer relationships of trust with high value customers and creating a competitive advantage.

The new definition of marketing tells us about the business enterprise and the strategies that contribute to it. The objective is to plan a strategy to maximize the return to the shareholders and make a strategy to create a differential advantage for customers.

Shareholder is the value of the company minus the future claim or it can be defined as the difference between the price paid and the economic cost of delivering the product or service which is called Economic profit or value from customer as in shown in figure-1. 

Shareholder value= corporate value (firm value) - Future Claim (debts)

Companies whose goal is maximizing shareholders value need a frame work for placing a development and management of marketing assets at the centre of their planning process. It is these marketing asset-brands, market knowledge, customer and partner relationship that have become the key generators of long terms profits as we know that the shareholder value is a long-term measure, it is not link with short-term rise and falls in share price.

However companies can use Boston Consulting group (BCG) matrix, which can be use as a guide for companies to think about different investment needs. Especially appropriate to diversified organization, helping introduce some form of prioritisation and direction into their spread of business activities. The whole idea of the Boston square model is to highlight that the strategic management of a product, or even a whole industry, needs to focus beyond internal factors to consider market pressures. It also stresses the need to re-invest income to provide long term sources of revenue. It is essential that four strategies emerge from this matrix. Firstly, to 'build' - increase market share, turning question marks into stars. Secondly, 'hold' - preserve market share, ensuring cash cows remain cash cows. Thirdly, 'harvest'- increase short-term cash flow by using cash cows to fund other business products. Lastly to 'divest' - eliminate those businesses whose use of resources is inefficient.

Value based marketing is about creating value for shareholders which makes the marketing more effective. It is fundamentally about decision making - choice of markets and positioning, choice of products and customers, choice of offering and price, choice of activities and investment. Figure-2 shows the value of shareholders.

In 1996 John Sunderland CEO of Cadbury Schweppes started a campaign under the banner of “managing for value” and followed the principle of value based marketing and became successful with 4-years. 

The four disciplines which were followed by Cadbury Schweppes were as follows:

• Setting the right ambition.
• Distinctive advantage.
• Selective resource allocation.
• Finding win-win for customer and shareholder.

All the above discipline was to create a strategic planning in order to create the value for both customers and shareholders which were done by Cadbury Schweppes successfully.

2. Setting the Right Ambition

Companies that are serious about translating revenue growth into value growth tend to take a different, more considered approach to target setting.

Value-based marketing provides the framework to identify the best opportunities, allocate budgets to activities that have the most impact, measure the results, and articulate the return on investment. This involves assessing existing strategies, organization, and environment to develop new strategies and strategic plans capable of delivering future competitive advantage.

 This is all about: (1) What is our business mission? (2) Who are our customers? (3) What do our customers consider value? (4) What have been our results? (5) What is our plan?

3. Distinctive Advantage

In the search for new profitable growth strategies, many companies fall into the trap. Companies that are leaders in value creation bring a different mindset and take a different approach to strategy development. They strive not just to be different from their competitors but also to be both different from and more profitable than their competitors. Creating such distinctive strategies is a difficult challenge and, as only a few companies in any given industry are likely to be successful at implementing and sustaining them, it is a very high standard to set.

4. Selective Resource Allocation

The allocation of resources, including management's time, has the biggest impact on long-term value growth. While developing profitably different strategies is crucial, failure to allocate the right resources at the right time can doom even the most distinctive strategies. Companies should allocate resources in an informed way based on a thorough understanding of where and how each unit will earn an economic profit over time.

5. Increase Both Customer and Shareholder Value

In recent years, there have been many management theories on how to understand, attract, retain and better serve customers the theories such as "customer relationship management", have helped many companies become more sophisticated about how their customers behave and think. Unfortunately, most of these efforts do not focus on the underlying profitability and value of the customer relationships they are trying to improve.

This has led many businesses to increase the value of a product or service to a customer in ways that reduce value for their own shareholders (e.g., increasing levels of service and support to customers who are unwilling to pay for the improvements). The challenge is how to grow customer and shareholder value.  

By delivering superior value to customers, management can in turn deliver superior value to shareholder. Indeed this formula- customer value creates shareholder value is the fundamental principle of capitalism.

For any company to create value for both customers and shareholders is to study what the company has to do or conceivably do to increase the economic profit   being earned by each of its major customers. Secondly the companies have to develop a detail understanding that how it could improve its own profitability with each of these customers by satisfying customer needs. By doing this the company can arrive to number of ideas that would increase value for both customers and shareholders.  Shareholders care about the future not the past. Shareholder value is the sum of likely future cash flows. Marketing creates three times more value than anything else.

6. Properties Of a Winning Value Proposition

• Customer Benefit- Customer must see value to them in their own terms.
• Unique- Customer must recognize their benefit.
• Profitable- The Company has to deliver at a profit.
• Sustainable- The advantage should be difficult to copy.

Customer want to deal with companies that they believe will solve the problems. Understanding customer problems better then the competitors can is the key capability of competitive success. Understanding customer needs require research and knowledge.

Value based marketing not only focus on satisfying customer needs but also focuses on competitive dimension. Companies must seek a value proposition that seeks the need of the target customer more effectively then competitors.

The differential advantage is necessary for two reasons; one marketing the other is financial. First the differential advantage attracts the new customer and for the existing customers buy again and again. Second a differential advantage is necessary if the business is to maintain earnings above the cost of capital i.e. to generate shareholder value. Without the differential advantage the company can easily enter the market by copying the company’s offer and compete away its premium profit margin.

Figure #3, Developing the Differential Advantage, Source: Adapted from Doyle,P. (2000)  Value-Based Marketing,,  John Wiley & Sons, Ltd.

A differential advantage is carried out by offering superior value to customers. Value can be increased by offering customers more performance or benefits for the same cost or the same benefit for a lower cost.

Competitive strategies should be the most precise level of strategic planning since they relate to actions regarding products and markets which are to be implemented to achieve the most specific objectives of the organization. The organization here could acquire or develop new products to sell its existing customers, mapped out in the Ansoff matrix. The Ansoff matrix indicates the appropriate types of strategies which should be implemented depending on which box the organization decides to select as its preferred method of growth. The fourth alternative that this matrix suggests is new products for new customers, otherwise described as a diversification strategy or questionable strategy, because it doesn't build on any obvious existing competitive advantage of the business.

Since different customers have different needs, requirements and preferences, some of them will greater emphasize on benefit some of them will emphasize on lower cost. The choice of management makes is called the company’s market positioning strategy.

Market positioning strategy is the choice of target customers, which defines where the firm competes and the choice of value proposition, which determines how it competes.   

Different companies have different strategy some compete on cost and convenience and other on the basis of offering more benefits.  Four type of positioning strategy can be distinguished that compete on this dimension.

1. Product leadership:

Some Companies target customers which are looking for product with innovative feature and latest technology. These types of companies invest more on research and development, hiring the brightest talent and build organizational cultures focused on creativity and innovation.

2. Service leadership:

Some customers look for high value on outstanding service. Companies competing in  this area need first to identify the types of customers who will pay more to be pampered.  

3. Customer intimacy:

This strategy is about communicating with customers on an individual basis to learn about their needs and develop a solution which improves customer performance or experience. It is often called one-to-one marketing & is one of the successful strategy.

4.  Brand leadership:

Brands give consumers the confidence that they can trust their suppliers. The Brand reduces the personal, social or economic risks attached to making decision. The benefit of strong brand is that it is easier to gain market share.

Understanding the customer needs, creating a differential advantage are both very important in creating customer value. But there is another factor which is also very important in creating the customer and shareholder value which is known as customer relationship. Customer relationship is about the customer buying again and again because of the loyalty, trust and satisfaction. For most companies, customer loyalty is the single most important determinant of long-term growth and profit margins.

Customer relationship marketing is about focusing on transaction to build a long-term, profitable customer relationship. Companies focus on their most profitable customers, products, and channels.

CONCLUSION

The traditional marketing doesn’t work anymore. Complexity, speed and power means that even the best brands and marketers need to think differently in order to be successful.

Marketing needs to be more intelligent and imaginative. It must combine more rigorous analysis and more radical creativity, to make sense and stand out in today’s markets. Marketing must create tomorrow whilst delivering today. Build the brands, innovations and relationships to drive future cash flows whilst also delivering quarterly profits. This can all be done by following the principle of value based marketing.

However this requires marketers to think differently, identifying the few markets, products and customers than really do “create value” and focusing creatively on them. The only route to more shareholder value is to create more value for customers. Shareholders care about the future not the past. Shareholder value is the sum of likely future cash flows. marketing creates three times more value than anything else.

REFERECES

Books:

• Doyle,P. (2000),Value based marketing, John Wiley & Sons Ltd.
• Kotler,P. 11th Edition, Marketing management, Prentice hall international editions.

Electronic Sources:

• Speakers for Business, www.sfb.co.uk (accessed on 25th November,2005)
• Marakon Associates, www.marakon.com (accessed on 25th  November,2005)
• The Times100 case study, www.thetimes100.co.uk (accessed on 25th November,2005)
• Cadbury Schweppes, www.cadburyschweppes.com (accessed on 25th November,2005)
• Tutor, www.tutor2u.net (accessed on 25th November,2005)

APPENDIX

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