Value-based marketing: Marketing strategies for ...

‘Value-based marketing: Marketing strategies for corporate growth and shareholder value’ by Peter Doyle John Wiley; 2000; ISBN 0 471 877271; 370pp; hardback; £24.95

The doyen of British marketing academics has built an important bridge between marketing and the boardroom. Will it ‘spark a revolution’ as his American counterpart Philip Kotler suggests? A revolution is certainly needed to shake up the complacency of British top management so far as marketing is concerned. Doyle puts his finger on the paradox: ‘On the one hand, every chief executive and mission statement puts marketing at the very top of the agenda . . . At the same time, marketing professionals, marketing departments and marketing education are not highly regarded . . . One leading consulting firm called marketing departments ‘‘a millstone around the organisation’s neck’’ (p. ix). Both CEO myopia and a shortage of marketing professionalism, notably performance measurement, may be to blame, but blame solves nothing. Sharing a common language is key, and Doyle has made a major contribution to improving dialogue. Accountantspeak dominates the boardroom, which implies marketers must learn to express their plans and activities in that way. The alternative may be less realistic:

why should the strong bother to learn the language of the weak? This critique will return to these alternatives after reviewing the path that Doyle has laid out. But make no mistake: whether you agree with him or not, every serious marketer should understand this ‘value-based’ approach to marketing. Doyle defines success as maximising shareholder value: ‘That the central task of management is to maximise shareholder value is now virtually unanimously accepted by top managers in the USA and the UK’ (p. x). This may overstate things just a bit (there are other stakeholders), but it establishes both a goalpost for marketing and a framework for assessment. Chapter 2 clarifies the two formulations of ‘shareholder value’. Discounted cash flow (DCF) is presumably well known to readers of this Journal, and the second formulation is the economic value-added (EVA) approach developed by Alfred Rapaport and the consultants Stern Stewart & Company. Most other major consultants have similar methodologies under different brand names. EVA has two stages: ‘economic profit’ is the net profit after tax less a charge for the capital

䉷 HENRY STEWART PUBLICATIONS 1350-231X BRAND MANAGEMENT VOL. 8, NO. 6, 463–466 JULY 2001

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employed times the cost of capital, ie the effective rate of interest the business has to pay for capital. The second stage projects economic profits into future years. Shareholder value then is the current capital employed plus the ‘present value’ of these economic profit projections. The theory assumes that the stock market is a near-perfect instrument for forecasting dividend cash flows. Doyle refers to this early in passing, but later says: ‘For a publicly quoted company, the total return to shareholders in the form of dividends and share price appreciation is the natural way to judge the performance of its management.’ He says this is true in the long term. ‘But as a short-run measure of performance it is often not a good indicator . . . New measures like economic value added may give a better measure of economic profit, but they in no way solve the problem of providing an indicator of long-term value creation’ (p. 149). If we cannot rely on share price changes as indicators of future cash flows, the argument may be undermined just a bit. If you are still following the argument, Doyle is saying that marketing strategies should be compared on the basis of the long-term net cash flows discounted back to the present day. Nothing new about that but, importantly, the language has changed. The book deals with the limitations of this approach, starting with the difficulty of forecasting with any certainty. On a personal note, the reviewer recalls being very impressed on arrival at London Business School by a senior colleague saying he could forecast, with high 90s accuracy, the market share of any new product in each of its first ten years. It turned out that he first had to 464

be told what the penetration percentage for each year was. If only we knew! Missing from Doyle’s list is perhaps the most important limitation: opportunity foreclosure. He includes options for growth (ie experiments) which should be, and are, treated informally outside shareholder value analysis, but the issue is broader than that. Many of the most dramatic innovations occur in the ‘white space’ outside the tunnel vision of long-term planning processes. The need to ground DCF or EVA forecasts in present-day reality means that these white-space opportunities will be missed by the shareholder value approach. Chapter 3 restates marketing as a value driver (‘driving’ and ‘destroying’ are key words in the shareholder value lexicon). The new definition of marketing is ‘the management process that seeks to maximise returns to shareholders by developing and implementing strategies to build relationships of trust with high-value customers and to create a sustainable differential advantage’ (p. 70). We can all be picky about that: what about not-for-profit organisations, for example? Nevertheless this definition links shareholder value specifically with some of the key tenets of modern marketing thinking. For example, ‘the real returns are made from solving customers’ problems. We call this EVC’ (p. 89). EVC is an acronym play which converts ‘economic value to the customer’ to ‘emotional value to the customer’ in consumer marketing. Chapter 4 moves to marketing’s ace card, growth. In the boardroom paradox noted at the beginning of this review, the failure to recognise the overriding importance of building


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demand to create growth is puzzling indeed. Growth is a key link between marketing and shareholder value. Doyle lays out this logic impeccably, but he misses the downside of growth, ie growth without substance. Marketers have long learned to be wary of gaining growth or market share without strengthening profitable repeat purchases. For example, an analysis of the rise and fall of ebusinesses would have been instructive. The next two chapters make up Part 2 of the book: ‘Developing high-value strategies’. After identifying some of the inadequacies of the financial orientation, Doyle notes that ‘growth and profitability depend crucially on the ability of the firm to satisfy its customers’ (p. 153). His customer metrics are market share, brand image and awareness, customer satisfaction, retention and acquisition and ranking by key accounts. The other metrics which make up his assessment of the current position complete the Kaplan and Norton balanced scorecard, ie financial, the internal business perspective (percentage of sales from new products, manufacturing, inventory, quality and technology management) and innovation/learning. Much of Part 2 is a reassembly of conventional strategy and planning material, such as Porter’s five forces and segmentation. This overlap may inhibit use as an MBA textbook. Some of the recycled material is a bit outmoded. For example, the advice to enter a market if it is attractive, defined as ‘one where the average competitor earns a return above its cost of capital’ (p. 157), would have us all rushing into tobacco. That is qualified later, but this reviewer was hoping that these widely promoted

ideas would be tested and refined. On the other hand, marketers and other senior managers needing an introduction or refreshment will find the clarity, orderliness and condensation immensely valuable. Part 3 is entitled ‘Implementing high-value strategies’ and begins with brands. So central to the whole marketing paradox, this chapter deserves to be read much sooner. Brand valuation is logically key to the shareholder value approach to marketing. So it is perfectly sensible that this chapter takes a more positive view than less financially oriented observers. Shareholder value and brand valuation have almost identical methodologies; if you buy one, you should buy the other. At the least, brand valuation deserves careful inspection. After applying the shareholder value framework to pricing, Doyle moves to communications. He claims marketers use sales, share and awareness as criteria for budget setting and accountants use incremental short-term profits. In his view, both are wrong. In practice any large company requires budget negotiation between marketing and the accountants, with the result that both financial and non-financial measures are considered. Furthermore, most of these discussions try to take the longer term into account. Nevertheless, Doyle is right that shareholder value is a useful framework, and this view is now supported by the IPA. Going further to condemn all other methods of budget setting as wrong, or at least irrational, may be too quick. DCF estimation, his version of shareholder value, has been around for at least half a century. The writer used it in the 1960s, and it was not new then. So taking Doyle’s own view of marketing as ‘Darwinian’,


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why is the supposedly superior DCF methodology so rarely used today? As you might expect, the book concludes with Internet marketing. Once again, this is a valuable consolidation of contemporary beliefs, for example, that the Web allows firms to move from segmentation to personalisation and conduct simultaneous individual dialogues with all their global consumers. ‘The interactive one-to-one character of the Internet makes building Net brands different from classic brand building’ (p. 346), and ‘The Internet . . . changes the whole nature of business. It destroys the traditional model of business that links information to products’ (p. 352), maybe. Experiencing the medium of the Web is certainly different from personal interaction or reading a newspaper or watching television, but as e-businesses come back down to earth we are learning not to overstate the differences. By the same token, Doyle must be right that the same shareholder value framework can be applied to e-marketing. This is a terrific book and the reviewer agrees with the many impressive endorsements that it should be compulsory reading for serious marketers. Is it radical? No. Does it supply the ‘intellectual basis’ that the book cover claims marketing lacks? Certainly not. Is it new? Conceptually no, but importantly it supplies language which is new to marketers and should promote boardroom understanding. What it does supremely well is to consolidate contemporary marketing thinking with the current account-

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ing methods. Importantly it shows how to use the lingua franca of the boardroom to formulate, interpret and assess marketing strategy. Marketers undoubtedly need to learn this language, and nobody sets it out better than Peter Doyle. But is accountant-speak the right language for marketing? In taking this softer option may we be doing boards a disservice? You could not teach astrophysics using only Chaucerian English. If marketing could be reduced to money, so be it, but it has more to do with what is going on in people’s heads. Neurobiologists would not react kindly to having to report their experiments in shareholder value terms because that is how scientific grantgiving institutes have to justify themselves to HM Treasury. One may want to understand the low road but may not want to take it. The high road, patiently training boards and accountants to understand marketing as it really is, may be tough but, in the long run, it is the one to take. Fortunately, many accountants are keen to learn. The alternative is to accept that these are different worlds. Some of the wisest boards of directors the reviewer has ever met simply gave us marketers the space and resources to play with. We knew what they wanted; and they mostly got it. But that was then, the new century demands that boards and marketers get their acts together. Tim Ambler Senior Fellow London Business School


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