P1 Does Marketing Matter? January 2009

Marketing Finance: An Autobiographical Journey

Marketing Finance Thought Series Type 2 Consulting

New York March 2014

P2

The Origin of the Species

•  A former boss of mine used to say “every company is global from somewhere” – meaning that, however objective we believe our viewpoint to be, it is inevitably shaped by where we come from

•  These slides explain the formative influences on my thinking and the basis for my conviction about the importance of integrating the marketing and finance perspectives on business

P3

I began my career at the Bank of England (the UK’s equivalent of the Federal Reserve) and for the first 10 years of my professional life, I sincerely believed that anything that mattered could be expressed in numbers.

Like the man in this iconic ad from the 1970s, numbers were my life. This attitude survived my transition from banking to strategy consulting. Then something changed...

What changed my life was not Smirnoff but J&B… And not because I was drinking it. Rather, I was working on the strategy for J&B in France that included some radical options for how the brand should be positioned and distributed in the wake of changes in the laws governing spirits advertising.

I realized that my entire focus was on reducing the cost of marketing and delivering J&B to the consumer, and not on enhancing J&B’s value to the consumer

Then a light bulb went off. Actually, two. First, I realized that the ultimate source of value is the customer. Until value is created for customers, there is no value to be captured for shareholders. Second, I realized that how you define value depends on whether you are producing or consuming it.

As a producer, you define value as the difference between the revenues you generate and the costs of generating them.

As a consumer, you define value as the difference between the benefits you receive and the price you are required to pay.

Since the price paid by the consumer determines the revenue received by the producer, then the equation for sustainable business success simplifies to the balancing of customer benefit with the economic costs of delivering that benefit.

Tilting the balance too far in the direction of extracting excessive value from customers results in bankruptcy.

Tilting the balance too far in the direction of delivering benefits to customers results in bankruptcy.

BANKRUPT BANKRUPT

Achieving a desirable ratio of economic cost to customer benefit depends on effective collaboration between two departments whose relationship is famously fractious.

MARKETING: Focused on

value creation for customers

FINANCE: Focused on

value capture for the business

Marketing professionals consider Finance like Oscar Wilde’s cynic – aware of the cost of everything and the value of nothing.

Finance professionals often regard Marketing as a peripheral activity focused on tactical, promotional activities with limited business impact.

P13

Acknowledging Different Perspectives and Priorities

Marketing Perspective

•  Value and Equity are defined from the perspective of the customer

•  Value is the difference between the benefit received and the price demanded

•  Equity is defined in terms of value delivered

•  Ambition is to enhance customer utility

•  Performance is measured in terms of preference

Finance Perspective

•  Value and Equity are defined from the perspective of the shareholder

•  Value is the difference between the revenue received and the costs incurred

•  Equity is defined in terms of value captured

•  Ambition is to enhance business efficiency

•  Performance is measured in terms of profit

P14

Marketing Finance

Only through the integration of the marketing and finance perspectives

can a sustainable balance be achieved between value creation and value capture

in the short- and long-run

P15

What I Believe

•  Customers are the ultimate source of business value •  Sustainable business success is about delivering customer

benefit at attractive economic cost •  Business is not “zero sum” – customers do not have to lose

in order for shareholders to win •  Breakout business success begins with an insight about how

new value can be delivered to customers (which is why Peter Drucker described marketing and innovation as the two business disciplines that “produce results”)

•  The silo’d structure and orientation of companies towards short-term value extraction make it challenging to achieve a balance between value creation and value capture

•  That is why the integration of the marketing and finance perspectives is an essential element of business strategy

P16

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