Under Pressure to Fulfill short term goals, The Management is giving in to The Practice of Myopic Management. But The Need of the hour is to stay away from such Practices and Concentrate on Long Term Strategic Issues
The problem
Management is increasingly under pressure to increase shareholder value. Given the immediate pressures of meeting short-term targets, many managers opt for reductions in long-term investments to achieve short-term goals. An empirical study conducted by Mizik and Jacobson (2006) found that 65% of organisations were applying this “myopic management”, thus harming intangible marketing assets and consequently destroying shareholder value in the long term.
Part of the challenge lies in the increasing importance of intangible assets to the value of the firm.
For the S&P 500 companies in 1980, traditional accounting assets composed on average 80% of market value; by 2002, this had fallen to 25%. Consequently, “75% of the value of the companies lies in their brands and other marketing-based intangibles”. While other intangible assets include intellectual capital, management expertise, employee skills, favourable supplier agreements, patents, etc, the focus of marketing is to leverage those marketing-based intangibles, particularly brand equity and customer equity:
Companies are under pressure to become more accountable with respect to the marketing investments that are made and the returns generated from these programmes. The challenges to marketers are whether to focus on building brand equity, customer equity, or both, to increase shareholder value?
For organisations operating in mass markets and through distribution channels, such as Coca-Cola in the fast-moving consumer goods market, brand Equity is a major driver. For organisations that can monitor and develop individual relationships with its customers, such as MasterCard in the financial services market, customer equity is a critical element.
The two concepts have different objectives – a brand equity focus drives product and brand investment decisions, whereas a customer equity focus is on customer management decisions, hence a broader focus, which is a response to trends in the field of marketing.
Customer equity and brand equity are not mutually exclusive, but overlap in many respect in terms of their interactions. The two concepts are presenting different perspectives of the same intangible asset, as the financial worth in both cases is estimated by taking the net present values of the same future cash flows. However, little research has been done to reconcile the relationship between these two concepts.
This paper analyses the current state of the Brand Equity/Customer Equity debate, draws some comparisons between the two schools, and proposes a model for guiding marketers in different industries.
The concept of customer equity was initially proposed by Blattberg and Deighton in 1996, and has been refined by extensive further research over the last several years. Central to customer equity is the concept of Customer Lifetime Value (CLTV), which is the discounted future income stream derived from acquisition, retention, and expansion projections and their associated costs.
Research into the field of CLTV has included:
1. Analysing the customer lifetime-profitability pattern in a noncontractual setting, where it was found that long-life customers are not necessarily profitable customers. 2. Development of a model to fill the gap between marketing actions and shareholder value.
3. Development of a framework to assess how marketing actions affect customers’ lifetime value to the firm.
4. Providing a conceptual framework to link CLTV to shareholder value.
5. Correlating customer value with firm market value for five organisations.
6. Integrating the concepts of customer equity and shareholder value, by making certain investment and financing adjustments to the former to calculate the latter.
Customer Equity is then the sum of all the customer lifetime values of the firm’s current and future customers. Various models of customer equity have been developed using different approaches, typically focused either internally or externally to develop optimisation models to guide marketing investments.
Brand equity is a market-based intangible asset that can be leveraged to improve the performance of the organisation.
There are four major asset categories that make up brand equity:
a) Brand name awareness: the strength of a brand’s presence in the consumer’s mind, and measured by recognition and recall.
b) Brand loyalty: the willingness of customers to repurchase the same brand.
c) Perceived quality: the reason-to-buy of many customers, for which they are prepared to pay a price premium.
d) Brand associations: the attributes that consumers associate with a brand, e.g. lifestyle for Harley-Davidson.
Brand Equity therefore provides value to the customer by enhancing the customer’s interpretation/processing of information, confidence in the purchase decision, and use satisfaction. It also provides value to the organisation by enhancing the efficiency and effectiveness of marketing programmes, brand loyalty, prices/margins, brand extensions, trade leverage, and competitive advantage.
Link to shareholder value
Rust, Ambler, Carpenter, Kumar & Srivastava (2004), researching marketing productivity, concluded that it is possible to show how marketing expenditures add to shareholder value. The CLTV methodology has been further expanded to integrate the concepts of customer equity and shareholder value, adding certain investment and financing adjustments (such as tangible capital employed and tax rates) to the former to calculate the latter (Bauer & Hammerschmidt). Gupta et al (2004) have found that Customer Value approximated firm Market Value quite well for three (Ameritrade, Capital One and E*Trade) of the five organisations studied – the two exceptions were Internet-based companies Amazon and eBay. This could be due to the fact that traditional market valuations are not factoring in some components of value of Internet companies.
Read more....
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
The problem
Management is increasingly under pressure to increase shareholder value. Given the immediate pressures of meeting short-term targets, many managers opt for reductions in long-term investments to achieve short-term goals. An empirical study conducted by Mizik and Jacobson (2006) found that 65% of organisations were applying this “myopic management”, thus harming intangible marketing assets and consequently destroying shareholder value in the long term.
Part of the challenge lies in the increasing importance of intangible assets to the value of the firm.
For the S&P 500 companies in 1980, traditional accounting assets composed on average 80% of market value; by 2002, this had fallen to 25%. Consequently, “75% of the value of the companies lies in their brands and other marketing-based intangibles”. While other intangible assets include intellectual capital, management expertise, employee skills, favourable supplier agreements, patents, etc, the focus of marketing is to leverage those marketing-based intangibles, particularly brand equity and customer equity:
Companies are under pressure to become more accountable with respect to the marketing investments that are made and the returns generated from these programmes. The challenges to marketers are whether to focus on building brand equity, customer equity, or both, to increase shareholder value?
For organisations operating in mass markets and through distribution channels, such as Coca-Cola in the fast-moving consumer goods market, brand Equity is a major driver. For organisations that can monitor and develop individual relationships with its customers, such as MasterCard in the financial services market, customer equity is a critical element.
The two concepts have different objectives – a brand equity focus drives product and brand investment decisions, whereas a customer equity focus is on customer management decisions, hence a broader focus, which is a response to trends in the field of marketing.
Customer equity and brand equity are not mutually exclusive, but overlap in many respect in terms of their interactions. The two concepts are presenting different perspectives of the same intangible asset, as the financial worth in both cases is estimated by taking the net present values of the same future cash flows. However, little research has been done to reconcile the relationship between these two concepts.
This paper analyses the current state of the Brand Equity/Customer Equity debate, draws some comparisons between the two schools, and proposes a model for guiding marketers in different industries.
The concept of customer equity was initially proposed by Blattberg and Deighton in 1996, and has been refined by extensive further research over the last several years. Central to customer equity is the concept of Customer Lifetime Value (CLTV), which is the discounted future income stream derived from acquisition, retention, and expansion projections and their associated costs.
Research into the field of CLTV has included:
1. Analysing the customer lifetime-profitability pattern in a noncontractual setting, where it was found that long-life customers are not necessarily profitable customers. 2. Development of a model to fill the gap between marketing actions and shareholder value.
3. Development of a framework to assess how marketing actions affect customers’ lifetime value to the firm.
4. Providing a conceptual framework to link CLTV to shareholder value.
5. Correlating customer value with firm market value for five organisations.
6. Integrating the concepts of customer equity and shareholder value, by making certain investment and financing adjustments to the former to calculate the latter.
Customer Equity is then the sum of all the customer lifetime values of the firm’s current and future customers. Various models of customer equity have been developed using different approaches, typically focused either internally or externally to develop optimisation models to guide marketing investments.
Brand equity is a market-based intangible asset that can be leveraged to improve the performance of the organisation.
There are four major asset categories that make up brand equity:
a) Brand name awareness: the strength of a brand’s presence in the consumer’s mind, and measured by recognition and recall.
b) Brand loyalty: the willingness of customers to repurchase the same brand.
c) Perceived quality: the reason-to-buy of many customers, for which they are prepared to pay a price premium.
d) Brand associations: the attributes that consumers associate with a brand, e.g. lifestyle for Harley-Davidson.
Brand Equity therefore provides value to the customer by enhancing the customer’s interpretation/processing of information, confidence in the purchase decision, and use satisfaction. It also provides value to the organisation by enhancing the efficiency and effectiveness of marketing programmes, brand loyalty, prices/margins, brand extensions, trade leverage, and competitive advantage.
Link to shareholder value
Rust, Ambler, Carpenter, Kumar & Srivastava (2004), researching marketing productivity, concluded that it is possible to show how marketing expenditures add to shareholder value. The CLTV methodology has been further expanded to integrate the concepts of customer equity and shareholder value, adding certain investment and financing adjustments (such as tangible capital employed and tax rates) to the former to calculate the latter (Bauer & Hammerschmidt). Gupta et al (2004) have found that Customer Value approximated firm Market Value quite well for three (Ameritrade, Capital One and E*Trade) of the five organisations studied – the two exceptions were Internet-based companies Amazon and eBay. This could be due to the fact that traditional market valuations are not factoring in some components of value of Internet companies.
Read more....
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
