Issue link: http://digital.copcomm.com/i/16726
fully inadequate. In many com- panies, resource allocation decisions are based on cash flow inputs dictated by the finance department. However, cash flows are critically dependent on the company’s marketing decisions: the price charged for a product or serv- ice, the advertising budget for the product or service, the channels of distribution used for selling it, and so forth. And here’s the real problem: It’s difficult to know “The marketing department must explicitly recognize that a whole new set of metrics is urgently needed,” subgoals, they are simply inade- quate tools upon which to base resource allocation. “The marketing department must explicitly recognize that a whole new set of metrics is urgently needed,” he reflects. “That means marketing people can’t stay inside their silo any- more, but must reach across the aisle and coordinate decisions with the finance department.” To avoid strategic blunders, Marketing and Finance how these marketing decisions affect cash flow. In par- ticular, says Jagpal, it’s hard to measure the degree of uncertainty involved when a company chooses a partic- ular marketing policy. Decision makers agonize over questions like: “How can I measure the effects of my company’s marketing policies on cash flow?” “How can I quantify the uncertainty in cash flows when my company chooses a particular marketing strategy?” “What are the short- and long-term effects of differ- ent marketing policies on my company’s perform- ance?” Fusion for Profit is the first book to address these questions (and many others) head-on. Aimed at diverse audiences — it’s a crossover book that’s equally appro- priate for academics and business practitioners — it provides sound, to-the-point strategies and techniques decision makers need to know if they’re to coordinate Marketing and Finance to maximize organizational performance. Clearly, such a transformation is easier said than done! There must be fundamental changes in the mind- sets of managers at all levels in the organization and across functional areas. Marketing people must shine some light into the murky waters of the profit and loss statements and bal- ance sheets. Finance people often perceive marketing as a bottomless pit into which money disappears. Marketing professionals, perhaps rightly, see this perception as unfair. Still, their indig- nation doesn’t change the fact that they must con- vince others to get behind their ideas financially, Jagpal points out. While behavioral meas- ures such as share of voice and p r o d u c t awarenes s are fine as 28 must work together to measure risk and balance it against return. Let’s say you’re comparing two market- ing strategies, each of which requires the same dollar expenditure. You can either 1) focus on acquiring new customers, or 2) focus on retaining the customers you already have. Now, let’s say the market-growth strategy will, on average, produce higher average profits than the customer retention strategy. You might assume the decision is a no-brainer, but Jagpal says it’s more com- plex than it first appears. “The market-growth strategy is not necessarily supe- rior,” he insists. “Even though, on average, this strategy will produce more profits than the customer retention one, it is much riskier. Indeed, depending on the mag- nitude of the uncertainties involved, after comparing risk and return, it may be better to focus on the strate- gy with lower average profits.” So, regarding the “market growth” vs. “customer retention” question, how should a company decide which is best? Jagpal says two steps are necessary: The marketing department must provide quantita- tive estimates of the risk and return of the cash flows from these two strategies, and The finance department (or senior management or CEO) should determine which strategy provides a higher return after adjusting for risk. In this analysis, the ownership structure of the firm is critical. A pub- licly owned firm should focus on market risk — i.e., the risk to stockholders after they have diversified their holdings across firms. A privately held firm should choose the optimal strategy based on the owner’s tol- erance for risk and return. “Starbucks is a prime example of a company that made the mistake of focusing on market growth at the expense of risk,” notes Jagpal. “In October 2006, the company dramatically raised its long-term store open- ing goal to 40,000 from its prior goal of 30,000. The stock market responded positively to this announce- ment and the company’s shares closed higher by 7.6 percent that day. But subsequently, Starbucks’s share prices plunged and the company paid the price for choosing the wrong strategy. It paid a high price for ignoring risk!” Involve both Marketing and Finance when designing salesforce compensation plans. How a company pays its Black Meetings & Tourism July/August 2010: www.blackmeetingsandtourism.com