How did you get on? Bowman's Strategy Clock is a useful tool for deciding upon corporate strategy.
2010年12月5日星期日
Critical Success Factors
What are the success factors behind imminent critical achievement or probable failure and how do we understand and manipulate the key factors in our favor?
Every achievement starts with a select grouping of actions that in turn create the the correct environment for either accomplishment or defeat, the real secret is to start with the right tools and avoid the pitfalls that those who fail - fail to do.
To excel there are things you must have or obtain and of course conversely there are things that your either avoid or rid yourself of. There are exceptions, but the majority of successes are achieved by adherence to very key critical success factors, either knowingly or otherwise.
Planning
There will always be people who by good fortune, inadvertently stumble upon success. Most people however, will not.
The core of most successful people's accomplishments revolve around a great plan, the type of plan that has all the details including the likely hood of succeeding.
They evaluate from the start the likely hood of success and they Are Not afraid to realize that something may be beyond their capabilities. Chasing a dream is ok, but chasing one blindly when good planning would have told you that even your best efforts would likely be in vain is not.
There is no doubt about it - Failure to plan is tantamount to failure itself.
You can can follow your dream and succeed if the odds are long, but knowing when it's just not viable is part art and part good sense.
Passion
Succeeding without passion is a rarity. If you want to win you must be more than just interested, you must be deeply passionate about accomplishing your ambitions.
Passion gives you drive and that gives you energy that makes the hard work and effort needed to win bearable. Successful people more often than not, are extremely involved in what they do, this results in a natural connection between their ambition and themselves.
This is why successful sports people excel, they have the passion to train through injury and adversity, as well as the intensity needed at the highest levels.
Attempting to succeed at something of which you have no passion is not the action of regularly successful people.
Time And Effort
High achievers are prepared to do what it takes to fulfill ambitions, whereas those who aren't prepared don't achieve.
Time and effort are almost certain requirements, so those who think success is obtainable without these key factors are the one's who chase get rich quick schemes and fail.
Achievement requires considerable time and effort, this automatically separates many from their goals. Your ability to put in the "hard yards" says as much about your personality as it does your likely hood of fruition.
Often time and effort will include an element of persistence and while that is almost a success factor in itself, persistence is also a reason for some people failures. Many people persist too long in the face of obvious defeat, increasing their losses and missing out on lost opportunities while they follow the wrong path.
Putting in time and effort are no guarantees of success but without there is a guarantee of failure.
Sacrifice
For everything you aim to achieve there is an inevitable price and that is what ever you are willing to sacrifice. A really interesting critical success factor as it relies heavily upon you giving something up in order to make a gain. It means your priorities will be tested.
Whether it be money, effort or family time, every single successful person has been willing to forgo some degree of this to mount their challenge towards victory.
Your own personal justification is required and if your can't reach it then your self doubts may very well hamper your best efforts.
You may never be entirely comfortable sacrificing family time or hard earned savings but if you find it entirely justifiable then it will be far easier to commit to.
Sacrifice is the price you must pay for reward, so you must be sure of your self.
Attitude
Wrong attitude = Failure.
I'm not talking about a "bad" attitude, that will also be a burden, but the wrong attitude for your personal project will be ultimately disastrous.
Not all successful people have golden personalities, in fact they are usually as flawed as ordinary folk, but the one thing they possess it the the right attitude specifically for their ambitions.
Different ambitions and differing levels of achievement require select mindsets. If you aim to be a international recording artist but you are shy and meek then automatically a problem exists. If on the other and you have great people skills and you want to become highly successful in sales then you have an automatic advantage.
Sometimes you may have to develop yourself beyond your comfort zone to obtain the right personality and attitude to tackle your goals. A critical success factor that makes you question your mindset and outlook on life.
The Solution
In the end there are certain Critical Success Factors that must be learned to maximize potential and turn ambition into achievement.
What have we learned so far?
Successful people have the following:
*Good, well thought out plans.
*The passion for their ambitions.
*Willingness to extend time and effort.
*A willingness to sacrifice in order to achieve.
*The right attitude or the willingness to get the right attitude.
These Critical Success Factors are the most important keys that help to make up the arsenal of your average (or less than average) high achiever.
Some people are lucky that they inherently possess these traits, but even if you don't you can obtain and possess them for yourself.
In Conclusion
The solution to succeeding lies in many variables, but there are some that are ever present that account for the majority of accomplishments. By seeking to develop your own key factors you can proceed to emulate the feats of the successful or better yet overtake them altogether.
These examples of critical success factors should highlight to you the very things that are needed to succeed and make valuable achievements, but they should also make you value the effort that must be exerted in order to accomplish your goals.
Critical Success Factors By Stephen G
Every achievement starts with a select grouping of actions that in turn create the the correct environment for either accomplishment or defeat, the real secret is to start with the right tools and avoid the pitfalls that those who fail - fail to do.
To excel there are things you must have or obtain and of course conversely there are things that your either avoid or rid yourself of. There are exceptions, but the majority of successes are achieved by adherence to very key critical success factors, either knowingly or otherwise.
Planning
There will always be people who by good fortune, inadvertently stumble upon success. Most people however, will not.
The core of most successful people's accomplishments revolve around a great plan, the type of plan that has all the details including the likely hood of succeeding.
They evaluate from the start the likely hood of success and they Are Not afraid to realize that something may be beyond their capabilities. Chasing a dream is ok, but chasing one blindly when good planning would have told you that even your best efforts would likely be in vain is not.
There is no doubt about it - Failure to plan is tantamount to failure itself.
You can can follow your dream and succeed if the odds are long, but knowing when it's just not viable is part art and part good sense.
Passion
Succeeding without passion is a rarity. If you want to win you must be more than just interested, you must be deeply passionate about accomplishing your ambitions.
Passion gives you drive and that gives you energy that makes the hard work and effort needed to win bearable. Successful people more often than not, are extremely involved in what they do, this results in a natural connection between their ambition and themselves.
This is why successful sports people excel, they have the passion to train through injury and adversity, as well as the intensity needed at the highest levels.
Attempting to succeed at something of which you have no passion is not the action of regularly successful people.
Time And Effort
High achievers are prepared to do what it takes to fulfill ambitions, whereas those who aren't prepared don't achieve.
Time and effort are almost certain requirements, so those who think success is obtainable without these key factors are the one's who chase get rich quick schemes and fail.
Achievement requires considerable time and effort, this automatically separates many from their goals. Your ability to put in the "hard yards" says as much about your personality as it does your likely hood of fruition.
Often time and effort will include an element of persistence and while that is almost a success factor in itself, persistence is also a reason for some people failures. Many people persist too long in the face of obvious defeat, increasing their losses and missing out on lost opportunities while they follow the wrong path.
Putting in time and effort are no guarantees of success but without there is a guarantee of failure.
Sacrifice
For everything you aim to achieve there is an inevitable price and that is what ever you are willing to sacrifice. A really interesting critical success factor as it relies heavily upon you giving something up in order to make a gain. It means your priorities will be tested.
Whether it be money, effort or family time, every single successful person has been willing to forgo some degree of this to mount their challenge towards victory.
Your own personal justification is required and if your can't reach it then your self doubts may very well hamper your best efforts.
You may never be entirely comfortable sacrificing family time or hard earned savings but if you find it entirely justifiable then it will be far easier to commit to.
Sacrifice is the price you must pay for reward, so you must be sure of your self.
Attitude
Wrong attitude = Failure.
I'm not talking about a "bad" attitude, that will also be a burden, but the wrong attitude for your personal project will be ultimately disastrous.
Not all successful people have golden personalities, in fact they are usually as flawed as ordinary folk, but the one thing they possess it the the right attitude specifically for their ambitions.
Different ambitions and differing levels of achievement require select mindsets. If you aim to be a international recording artist but you are shy and meek then automatically a problem exists. If on the other and you have great people skills and you want to become highly successful in sales then you have an automatic advantage.
Sometimes you may have to develop yourself beyond your comfort zone to obtain the right personality and attitude to tackle your goals. A critical success factor that makes you question your mindset and outlook on life.
The Solution
In the end there are certain Critical Success Factors that must be learned to maximize potential and turn ambition into achievement.
What have we learned so far?
Successful people have the following:
*Good, well thought out plans.
*The passion for their ambitions.
*Willingness to extend time and effort.
*A willingness to sacrifice in order to achieve.
*The right attitude or the willingness to get the right attitude.
These Critical Success Factors are the most important keys that help to make up the arsenal of your average (or less than average) high achiever.
Some people are lucky that they inherently possess these traits, but even if you don't you can obtain and possess them for yourself.
In Conclusion
The solution to succeeding lies in many variables, but there are some that are ever present that account for the majority of accomplishments. By seeking to develop your own key factors you can proceed to emulate the feats of the successful or better yet overtake them altogether.
These examples of critical success factors should highlight to you the very things that are needed to succeed and make valuable achievements, but they should also make you value the effort that must be exerted in order to accomplish your goals.
Critical Success Factors By Stephen G
Porter's Five Forces Analysis
If you've ever listened to Warren Buffett talk about investing, you've heard him mention the idea of a company's moat. The moat is a simple way of describing a company's competitive advantages. Company's with a strong competitive advantage have large moats, and therefore higher profit margins. And investors should always be concerned with profit margins.
This article looks at a methodology called the Porter's Five Forces Analysis. In his book Competitive Strategy, Harvard professor Michael Porter describes five forces affecting the profitability of companies. These are the five forces he noted:
- Intensity of rivalry amongst existing competitors
- Threat of entry by new competitors
- Pressure from substitute products
- Bargaining power of buyers (customers)
- Bargaining power of suppliers
These five forces, taken together, give us insight into a company's competitive position, and its profitability.
Rivals
Rivals are competitors within an industry. Rivalry in the industry can be weak, with few competitors that don't compete very aggressively. Or it can be intense, with many competitors fighting in a cut-throat environment.
Factors affecting the intensity of rivalry are:
- Number of firms - more firms will lead to increased competition.
- Fixed costs - with high fixed costs as a percentage of total cost, companies must sell more products to cover those costs, increasing market competition.
- Product differentiation - Products that are relatively the same will compete based on price. Brand identification can reduce rivalry.
New Entrants
One of the defining characteristics of competitive advantage is the industry's barrier to entry. Industries with high barriers to entry are usually too expensive for new firms to enter. Industries with low barriers to entry, are relatively cheap for new firms to enter.
The threat of new entrants rises as the barrier to entry is reduced in a marketplace. As more firms enter a market, you will see rivalry increase, and profitability will fall (theoretically) to the point where there is no incentive for new firms to enter the industry.
Here are some common barriers to entry:
- Patents - patented technology can be a huge barrier preventing other firms from joining the market.
- High cost of entry - the more it will cost to get started in an industry, the higher the barrier to entry.
- Brand loyalty - when brand loyalty is strong within an industry, it can be difficult and expensive to enter the market with a new product.
Substitute Products
This is probably the most overlooked, and therefore most damaging, element of strategic decision making. It's imperative that business owners (us) not only look at what the company's direct competitors are doing, but what other types of products people could buy instead.
When switching costs (the costs a customer incurs to switch to a new product) are low the threat of substitutes is high. As is the case when dealing with new entrants, companies may aggressively price their products to keep people from switching. When the threat of substitutes is high, profit margins will tend to be low.
Buyer Power
There are two types of buyer power. The first is related to the customer's price sensitivity. If each brand of a product is similar to all the others, then the buyer will base the purchase decision mainly on price. This will increase the competitive rivalry, resulting in lower prices, and lower profitability.
The other type of buyer power relates to negotiating power. Larger buyers tend to have more leverage with the firm, and can negotiate lower prices. When there are many small buyers of a product, all other things remaining equal, the company supplying the product will have higher prices and higher margins. Conversely, if a company sells to a few large buyers, those buyers will have significant leverage to negotiate better pricing.
Some factors affecting buyer power are:
- Size of buyer - larger buyers will have more power over suppliers.
- Number of buyers - when there are a small number of buyers, they will tend to have more power over suppliers. The Department of Defense is an example of a single buyer with a lot of power over suppliers.
- Purchase quantity - When a customer purchases a large quantity of a suppliers output, it will exercise more power over the supplier.
Supplier Power
Buyer power looks at the relative power a company's customers has over it. When multiple suppliers are producing a commoditized product, the company will make its purchase decision based mainly on price, which tends to lower costs. On the other hand, if a single supplier is producing something the company has to have, the company will have little leverage to negotiate a better price.
Size plays a factor here as well. If the company is much larger than its suppliers, and purchases in large quantities, then the supplier will have very little power to negotiate. Using Wal-Mart as an example, we find that suppliers have no power because Wal-Mart purchases in such large quantities.
A few factors that determine supplier power include:
- Supplier concentration - The fewer the number of suppliers for a given product, the more power they will have over the company.
- Switching costs - suppliers become more powerful as the cost to change to another supplier increases.
- Uniqueness of product - suppliers that produce products specifically for a company will have more power than commodity suppliers.
It's important to analyze these five forces and their affect on companies we want to invest in. The Porter Five Forces Analysis will give you a good explanation for the profitability of an industry, and the firms within it. If you want to know why a company is able, or unable, to make a decent profit, this is the first analysis you should do.
Analyzing the environment - Five Forces Analysis
Five Forces Analysis helps the marketer to contrast a competitive environment. It has similarities with other tools for environmental audit, such as PEST analysis, but tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. For example, Dell would analyse the market for Business Computers i.e. one of its SBUs.
SWOT analysis of Inditex
COMPANY OVERVIEW
The Inditex Group is engaged in textile design, manufacturing and distribution.The company operates
approximately 3,113 stores in 64 countries.The company primarily operates in Europe.The company
is headquartered in La Coruna, Spain and employs about 69,240 people.
The company recorded revenues of E8,196 million (approximately $11,145 million) during the fiscal
year ended January 2007, an increase of 22% over 2006. The operating profit of the company was
E1,356 million (approximately $1,843 million) during fiscal year 2007, an increase of 24% over 2006.
The net profit was E1,002 million (approximately $1,362 million) in fiscal year 2007, an increase of
25% over 2006.
*The results mentioned above are unaudited. The company has not declared the audited results for
the fiscal year ended January 2007 at the time of the publication of the profile.
KEY FACTS
Head Office Inditex
Edificio Inditex
Avenida de la Diputacion
Arteixo
La Coruna
15142
ESP
Phone 34 981 18 54 00
Fax 34 981 18 54 54
Web Address http://www.inditex.com
Revenue / turnover 8,196.0
(EUR Mn)
Financial Year End January
Employees 69,240
Madrid Ticker ITX
Inditex Page 4
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Inditex
Company Overview
SWOT ANALYSIS
Inditex specializes in fashion retailing. The company has a broad geographical presence. The group
is well established and has diverse offerings in its portfolio for retail spenders which help the group
to carve a niche for itself in the global retail market but it faces the threat of reduction in revenue
from price deflation in the Spanish clothing and footwear market due to opening of new stores.
Strengths Weaknesses
Weak international presence of other brand
concepts
Well established group with diverse
offerings
Zara's competitive advantage Over dependence on the European market
Increasing revenues and net income
Opportunities Threats
Expansion in the Italian market New avenues being utilized by competitors
Growth in online retail spending Increasing labor costs in Europe
Continual growth in the retail apparel Counterfeit goods
industry
Growth in Asian retail sector
Strengths
Well established group with diverse offerings
The Inditex group is a leading fashion distributor, comprising more than 100 associate companies.
Established in 1975, the group now operates in over 400 cities located around the world. The group
operates eight different sales concepts including Zara, Pull & Bear, Massimo Dutti, Bershka,
Stradivarius, Oysho, Zara Home, and Kiddy's Class.
Zara is an international fashion retailing division. While Pull & Bear's clothing and accessories are
targeted at the young, Massimo Dutti offers urban fashions and casual wear to grown up men and
women. Bershka offers music, art and street fashion to youths. Stradivarius offerings include the
latest international fashion trends in the fabrics, design and accessories. Oysho offers a wide range
of women's undergarments and lingerie, casual outerwear and informal clothes. Zara Home is
engaged in home furnishings and also offers cutlery, tableware, decorative items and glassware.
Kiddy's Class offers fashion products including apparel, cosmetics, fragrances, necklaces and
bracelets for children.
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Inditex
SWOT Analysis
This diverse product offering has enabled the Inditex group to carve a niche for itself and emerge
as one of the largest fashion distributor globally.
Zara's competitive advantage
Zara is a unique retail proposition, and is Inditex's strongest concept. Zara's philosophy is to
under-produce inexpensive high fashion apparel, thereby encouraging frequent purchases and
limiting its own markdowns. While the Zara concept has some similarities to H&M, Mango or Topshop,
it offers a higher degree of fashion more quickly and frequently than its competitors.
Zara accounted for 65.9% and 70% of the net sales and earnings before interest & taxes, respectively,
for the fiscal year 2006. As of January 2006, Zara operated 852 stores, which includes 129 new
openings from last fiscal year, having a total selling area of 1,000,000 square meters. Zara achieved
a 41% Return on Capital Employed, during fiscal 2005. Zara has mastered a mixture of attractive,
traditional styles and fashion which appeals to its customers and also has a higher flexibility in
sourcing than most of its competitors, which gives it an edge over the others. It can also protect its
gross margin better than its competitors which have longer lead times. This provides Zara a
competitive advantage.
Increasing revenues and net income
The company's net income for 2005 was E803.2 million ($971.5 million), increasing at a CAGR of
25% from E259 million in 2000. Inditex recorded revenues of E6,740.8 million (approximately $8,152.9
million) during the fiscal year ended January 2005, an increase of 21.1% over 2004. Revenues have
increased at a CAGR of 20% for the period 2002-2006.
The consistent increase in revenues over the years will provide the company with a strong base and
enable it to undertake new ventures going forward.This would further lead to good investor confidence
and would therefore, enhance the shareholder's value.
Weaknesses
Weak international presence of other brand concepts
In 2005, the Zara chain contributed 65.9% to the total sales, while all the other concepts put together
amounted to only 34.1% of the total sales. While Zara generated 68.9% of its revenues from the
international market during fiscal 2005, the other concepts focused mainly on the Spanish market.
Kiddy's Class generated only 14% of its revenues from the international markets; Pull and Bear
33.2%; Massimo Dutti 45.6%; Bershaka 41.5%; Stradivarius 17.4%; Oysho 31.8%; and Zara Home
23%. Apart from Zara, the company's other brand concepts including Kiddy's Class, Pull & Bear,
Massimo Dutti, Bershka, Stradivarius, and Oysho do not have a global appeal.
Inditex Page 6
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Inditex
SWOT Analysis
The company has not been laying stress on opening the other stores apart from Zara in other
locations, because of which the revenue generation is highest from Zara stores as compared to
other stores. The revenues of the group might see an increase in the near term if equal attention is
paid to other outlets in other regions. Dependence on a single brand limits the company's revenues
and growth.
Overdependence on the European market
As of January 2006, Inditex operated 3,113 stores in 64 countries across the globe. The company
operated 1,461 stores (including 31 franchises) in Spain alone and another 724 stores (including
124 franchises) in the other European regions. Spain contributed to 43.1% of the company's revenues
during fiscal 2006 and the other European regions accounted for 38.7% of the total revenues.
The company is heavily dependent on Spain and the European markets for its revenues, thus making
it highly vulnerable to economic, political or social change taking place in these markets (especially
Spain).
Opportunities
Expansion in the Italian market
Zara has been expanding in Italy and plans to open roughly 15 stores every year. It is gaining
recognition amongst Italian consumers, who are highly fashion conscious.The company is expected
to operate more Zara stores in Italy by 2013 than in France or the UK. The untapped Italian market
presents strong growth potential for the company.
Growth in online retail spending
Online retail spending is expected to increase from $102.1 billion in 2006 to $144 billion in 2010, a
CAGR of 10%. By 2010, 71% of online users are likely to shop over the internet as compared to
65% in 2006. By 2010, the internet will influence about half of total retail sales, compared to 27% in
2006. The company doesn't sell it products online. Growth in online retail spending would enable
the company to earn more revenues from its online websites. US online retail sales are expected
to grow annually by 17% through 2008. Inditex markets its products through www.inditex.com. A
positive outlook in the US online and catalogue retail market would boost the company's revenues.
Continual growth in the retail apparel industry
Women's retail clothing sales in the US are forecast to expand 2.1% per year during 2004-2009 to
reach $ 137.5 billion. In addition, the intimates and sleepwear segments is expected to advance at
an above-average pace through 2009. The sales are primarily expected as a result of a shift towards
dressier apparel, sports clothes and premium fabrics. The positive outlook for the apparel sector is
likely to increase the demand for the company's offerings and help boost its topline growth.
Inditex Page 7
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Inditex
SWOT Analysis
Growth in the Asian retail sector
Countries such as China offer a large and growing market for consumer goods. Rising income levels
and sustained economic growth is expected to improve the purchasing power of consumers in these
countries. In the period 2006-10, retail clothing sales are forecast to grow at a CAGR of 11.9% in
China. Inditex forayed into the Chinese market by opening Zara store for the first time in Shanghai
and Beijing in 2007.
Entering China offers the company an opportunity to diversify its revenues, which are heavily
concentrated in Europe.
Threats
New avenues being utilized by competitors
The company's competitors are determined to seek out cheaper manufacturing locations in order
to offer consumers lower prices. This is resulting in a shift in apparel manufacturing from Turkey to
Eastern Europe. The main advantage of Zara's vertical integration is not its internal production, but
the frequent feedback from store staff to design. Only if this feedback is truly effective, will Zara be
able to sustain higher manufacturing costs than its competition, in the future. Furthermore, the
competitors are reducing their lead-time, and if the competitors overtake Zara in this regard, then
Inditex would face a reduction in revenues and loss of market share.
Increasing labor costs in Europe
Europe is the primary market for Inditex, accounting for nearly 84% of the company's revenues.The
region has been witnessing an increase in labor costs. For example, the UK government increased
the adult minimum wage rate from £5.05 to £5.35 per hour in October 2005. The rate for those aged
18 to 21 years will be increased from £4.25 to £4.45 per hour and the rate for workers aged 16-17
years would increase from £3 to £3.3 per hour. An increase in labor costs could adversely impact
the company's margins.
Counterfeit goods
The proliferation of counterfeit goods and accessories is adversely affecting the sales of branded
accessories. According to Global Congress on Combating Counterfeiting, more than 5,000 incidents
of counterfeiting and piracy activities worldwide were recorded across the globe. In total, seizure of
more than 1.41 billion counterfeit items valued at more than $4.13 trillion. Counterfeiting is more
prevalent in fashion accessories such as watches, shoes, and handbags and these goods are
increasingly finding place in various retail shops. Low quality counterfeits reduce consumer confidence
in the products of the company. More importantly, what differentiates the products of companies
such as Inditex from competitors is exclusivity. Widespread counterfeits reduce the exclusiveness
Inditex Page 8
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Inditex
SWOT Analysis
of the company's brands. Counterfeits not only deprive the company of revenues, but also dilute its
brand image.
SWOT analysis of FLIR Systems, Inc.
COMPANY OVERVIEW
FLIR Systems (FLIR) is engaged in the design, manufacture and marketing of thermal imaging
systems. The company operates in the US and Europe. It is headquartered in Wilsonville, Oregon
and employs 2,079 people.
The company recorded revenues of $1,147.1 million in the financial year ended December 2009
(FY2009), an increase of 6.5% over FY2008.The operating profit of the company was $347.3 million
in FY2009, an increase of 22.1% over FY2008. The net profit was $230.2 million in FY2009, an
increase of 14.6% over FY2008.
KEY FACTS
FLIR Systems, Inc.Head Office
27700 SW Parkway Avenue
Wilsonville
Oregon 97070
USA
1 503 498 3547Phone
Fax
http://www.flir.comWeb Address
1,147.1Revenue / turnover
(USD Mn)
DecemberFinancial Year End
2,079Employees
FLIRNASDAQ National
Market Ticker
FLIR Systems, Inc. Page 4
© Datamonitor
FLIR Systems, Inc.
Company OverviewSWOT ANALYSIS
FLIR Systems (FLIR) is engaged in the design, manufacture and marketing of thermal imaging
systems.The company has been able to expand its business through a number of acquisitions over
the years. However, intense competition across all the operating divisions of the company could
reduce its market share.
WeaknessesStrengths
Customer concentrationInorganic growth
Legal proceedingsBackward vertical integration
Dependence on sole source and limited
source suppliers of components
Robust financial performance
Strong liquidity position
ThreatsOpportunities
Intense competitionRising defense spending in the US
Rapid changes in technologyGrowth in automotive electronics market
Stringent US government contractual and
regulatory requirements
Agreement to acquire ICx Technologies
Strengths
Inorganic growth
FLIR has been able to expand its business through a number of acquisitions over the years. The
company acquired Cedip Infrared Systems, a provider of infrared imaging cameras and systems;
and Ifara Tecnologias, a developer of software, hardware and developer tools for security and
surveillance, force protection, exploration, and maritime purposes, in 2008. The company also
acquired Salvador Imaging, a leading provider of high-performance visible and low light imaging
systems, in June 2009. Further, it also acquired OmniTech Partners, a company engaged in the
development and manufacturing of image intensified and fused image intensified/thermal imagers,
in October 2009, and Directed Perception, a leading provider of pan-tilt motion control systems for
commercial and military markets, in December 2009. Moreover in May 2010, the company acquired
Raymarine Holdings Limited, a wholly owned subsidiary of Raymarine.
The Cedip Infrared Systems acquisition significantly improved FLIR's international distribution network
and added new products and technology, including infrared cameras. It also provided a strong
manufacturing and technology base for the company in Europe. The Ifara Tecnologias acquisition
provided the company with access to software and middleware solutions including video analytics,
networking and multi-sensor integration. OmniTech added image intensified capability to FLIR's
FLIR Systems, Inc. Page 5
© Datamonitor
FLIR Systems, Inc.
SWOT Analysisproduct line, and created the opportunity to leverage the capabilities of both companies to expand
in the growing market for fused image intensified / thermal imagers. The acquisition of Directed
Perception enhanced and differentiated FLIR's pan-tilt-zoom camera systems for both commercial
and military markets. Raymarine Holdings’ acquisition further strengthened FLIR's foothold in the
marine market by increasing its maritime distribution network with the addition of Raymarine's 1,000
dealer outlets and more than 400 marine OEMs, nearly all of which are additive to FLIR's existing
distribution. FLIR also planned to expand Raymarine's product line breadth by integrating thermal
imaging cameras with Raymarine's display, radar and autopilot product lines to create the broadest,
most effective, and easiest to use suite of products in the marine electronics industry.
Through these acquisitions, the company enhanced its market share, increased its access to a
broader range of customers and extended its product portfolio.
Backward vertical integration
The company focuses on backward vertical integration primarily to reduce the manufacturing costs.
FLIR manufactures many of the critical components for its products, including infrared detectors,
gimbals, optics and coatings, laser subsystems and micro-coolers. It also develops much of the
necessary software and middleware for the systems. In addition, the company purchases other parts
(pre-assembled), including certain detectors, certain coolers and optics, circuit boards, cables and
wire harnesses.These purchased components are then assembled into finished systems and tested
at one of the company’s primary production facilities located in Wilsonville, Oregon; North Billerica,
Massachusetts; Goleta, California; Danderyd, Sweden; Croissy-Beauborg, France; Tallinn, Estonia;
and Bozeman, Montana; Colorado Springs, Colorado; Freeport, Pennsylvania; and Burlingame,
California. This vertical integration minimizes lead times and facilitates prompt delivery of FLIR’s
products. In addition, it also controls costs and ensures that these components satisfy the company’s
quality standards.
Robust financial performance
FLIR has reported consistent increase in its revenues and profitability since FY2009.The company's
revenues have grown at a compound annual growth rate (CAGR) (2005-09) of 23%. In FY2009, the
company recorded revenues of $1,147.1 million, an increase of 6.5% over FY2008. The increase
was primarily due to an increase in unit sales of the company’s large-gimbaled systems.
The company's profitability has also increased since FY2005. Its operating profit increased at a
CAGR (2005-09) of 29%, from $126 million in FY2005 to $347.3 million in FY2009. The operating
margin of the company increased to 30.8% in FY2009 from 24.8% in FY2005. Similarly, the net profit
of the company also increased at a CAGR (2005-09) of 27%. The net profit margin of the company
increased to 20.1% in FY2009 from 17.3% in FY2005. Robust financial performance provides financial
stability to the company which could be leveraged to seek more growth avenues in the future.
Strong liquidity position
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SWOT AnalysisFLIR has a strong liquidity position in FY2009 compared to previous years. For instance, the
company’s cash and cash equivalents at the end of FY2009 were $422.0 million compared to $289.4
million in FY2008. The increase in cash and cash equivalents was primarily due to cash provided
from operations and the cash proceeds and tax benefits generated from FLIR’s stock-based
compensation programs, offset by business acquisitions, capital expenditures, and the repurchase
of FLIR’s common stock. Similarly, the cash provided by operating activities in FY2009 totaled $271.8
million compared to $218.3 million in 2008. The increase in cash provided from operating activities
was primarily due to an increase in net earnings and a lower level of net cash used in FY2009
compared to FY2008 for operating assets and liabilities, principally accounts receivable, inventories
and accrued payroll.
A strong liquidity positions enhances the shareholders confidence in the company and helps in
investing in other profitable businesses in the future.
Weaknesses
Customer concentration
A substantial portion of FLIR’s revenue is derived from sales to the US and foreign government
agencies. The company's business will continue to be substantially dependent upon such sales.
Aggregate sales to the US government agencies accounted for 43% of FLIR’s revenues in FY2009,
41% of its revenues in FY2008 and 39% in FY2007.The funding of contracts awarded to the company
depends on the overall US government budget and appropriation process, which is beyond the
company’s control. The US government programs are subject to uncertain future funding levels
which can result in termination of various programs. A very small part of the company's US sales
come from non-government agencies. Also, being the single largest customer of the company, the
US government has immense bargaining power. Therefore, a significant reduction in the purchase
of the company’s products by these agencies could have an adverse effect on FLIR’s business.
Legal proceedings
The company is subject to various legal proceedings, claims and litigation arising in the ordinary
course of business. In FY2007, FLIR and its subsidiary, Indigo Systems have been named in a
lawsuit filed by Raytheon in the US District Court for the Eastern District of Texas. In August 2008,
Raytheon was granted leave to file a second amended complaint. The complaint, as amended,
asserts claims for tortious interference, patent infringement, trade secret misappropriation, unfair
competition, breach of contract and fraudulent concealment.
In August 2009, the court entered an order granting the FLIR Parties’ motion for summary judgment
on Raytheon’s trade secret misappropriation claim based on the FLIR Parties’ statute of limitations
defense. Raytheon has abandoned all of its other claims except its patent claims which were set for
trial to commence in April 2010. FLIR is also subject to other legal proceedings, claims and litigation
arising in the ordinary course of business. Such contingencies may increase the operating costs of
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SWOT Analysisthe company which may inturn impact the profitability. Legal proceedings may have a material
adverse effect on the company’s market image and on its financial position.
Dependence on sole source and limited source suppliers of components
FLIR is currently dependent on a number of sole source and limited source suppliers to provide
certain key components for its products. The company has increased its internal sources of supply
for certain critical components, in particular, cooled and uncooled infrared detectors, optics and
optical coatings, and laser components, but it relies on sole or limited source third-party suppliers
for other key components including laser rangefinders, certain machined parts, optics, motors and
electronic components. Many of these suppliers are small and the company is often one of their
most important customers.
FLIR’s business, financial condition and results of operations could be materially and adversely
impacted in the event that the company is unable to source certain of these components on a timely
basis or if such components are defective or they do not otherwise meet the company’s performance
standards.
Moreover, if critical components provided by any significant supplier become unavailable, the
company’s manufacturing operations could be disrupted. Any extended interruption in the supply of
sole or limited source components could have a material adverse influence on FLIR’s business,
financial condition and results of operations.
Opportunities
Rising defense spending in the US
The global defense spending is rising consistently over the past few years due to increasing threats
to the security. It is expected to rise further in the future. The total global military expenditure in
FY2009 is estimated to have been $1,531 billion. This represented an increase of 6% in real terms
compared to FY2008, and of 49% since FY2000. The Americas represents 43% of global defense
spending. The US government signed a bill that authorizes $712.9 billion in defense spending for
FY2010. For FY2011, the government has submitted a defense budget of $658.7 billion.The increase
in defense spending by the US government could provide additional opportunities for FLIR to enhance
its revenue base through new contracts.
Growth in automotive electronics market
The automotive electronics market has witnessed a strong growth in recent years. The worldwide
automotive electronics market is predicted to grow at 9% from $125 billion in FY2009 to $244 billion
in FY2017. The biggest demand is expected from the emerging markets in Asia and Europe. The
navigation market will be one of the fastest growing sections of the auto electronics market. The
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SWOT Analysisdriver supporting systems, like night vision, collision avoidance and lane departure warning is also
expected to show strong growth.
In addition to the economic recovery, demand is being fueled by advanced powertrain systems, as
vehicle manufacturers seek to improve the fuel efficiency of their vehicles to meet increasing legislative
and consumer demand. It is estimated that the value of powertrain electronic control units (ECUs)
installed in light vehicles grow at a compound average annual growth rate of 14% over the period
2009 to 2014, outpacing the overall market growth of 11%. Moreover, demand for electronics for
hybrid and electric vehicles would grow to around 20% of the demand for powertrain electronics by
2014.This strong growth in demand is due to the much higher electronics content in these vehicles.
Hence, the growing automotive electronics market would boost demand for the company’s products
and services.
Agreement to acquire ICx Technologies
FLIR is enhancing the operational capabilities of its various by acquiring many technologies through
new acquisitions. In this context, in August 2010, the company entered into a definitive merger
agreement to acquire ICx Technologies (ICx). ICx is a provider of integrated advanced sensing
technologies for homeland security, force protection and critical infrastructure applications. ICx has
established a technology leadership position across a wide spectrum of detection and surveillance
technologies, supported by a robust intellectual property portfolio.
The acquisition expands FLIR's capabilities into advanced sensors for chemical, biological,
radiological, nuclear, and explosives (CBNRE) detection for defense and homeland security markets.
The acquisition also enhances FLIR's existing intelligence surveillance and reconnaissance product
suite through the addition of ICx's advanced radars and integrated platforms. Upon closing of the
transaction, ICx's operations will be integrated into FLIR's Government Systems segment.
Upon completion, this transaction will enhance the FLIR's product portfolio and will leverage its
global infrastructure to reduce costs and drive growth.
Threats
Intense competition
Competition in the markets for FLIR’s products is intense. The principal competitive factors are
product performance, price, customer service and training, product reputation, and effective marketing
and sales efforts. In the thermography market, FLIR competes with Fluke (a division of Danaher)
and NEC San-Ei.The company faces competition with L-3 Communications, ULIS, Axsys
Technologies, ICx Technologies and other smaller companies in the CVS market. In the government
systems market, FLIR’s competitors include Raytheon, BAE Systems, L-3 Communications, DRS
(a Finmecanica Company), Lockheed Martin, El-Op, Sagem, Tamam and Thales. Many of these
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SWOT Analysiscompetitors have substantially greater financial, technical and marketing resources than the company.
All of these factors, as well as the potential for increased competition from new competitors, require
FLIR to continue to invest in, and focus on, research and development and new product innovation.
Intense competition may negatively impact the FLIR's operations and its financial condition.
Rapid changes in technology
The market for thermal imaging equipment is characterized by rapid technological developments
and frequent new product introductions. A company's success is highly dependent on its ability to
develop new technologies that anticipate changing customer requirements.This might require FLIR
to make substantial capital expenditures and incur significant research and development costs to
improve manufacturing capability, reduce costs, and to develop and introduce new products and
enhancements. Moreover, the company has limited financial resources as compared to its peers
like Raytheon, BAE Systems, Lockheed Martin and L-3 Communications Holdings. This might fail
to match up to their product development efforts limiting its ability to launch new products in a timely
manner. This could have an adverse effect on the company's market share.
Stringent US government contractual and regulatory requirements
As a US government contractor, FLIR is subject to a number of procurement rules and regulations.
The company is obliged to comply with, and is affected by the laws and regulations relating to the
formation, administration and performance of the government contracts.These laws and regulations
require certification and disclosure of all cost and pricing data in connection with contract negotiations,
and could impose accounting rules that define allowable and unallowable costs for certain cost-based
government contracts in the US. Any default on these regulations could lead to termination or
modification of contracts and transactions and reductions in the value of contracts.This in turn could
have an adverse effect on the company’s profit margins.
Applying the PESTEL Framework to the University of Worcester Business School
Political
• The Business School operates in a partially controlled market. The
Higher Education Funding Council for England (HEFCE) allocates
student numbers, and their attendant funding, to Higher Education
Institutions on an annual basis. Significantly, the University of
Worcester has secured a substantial increase in funding to support
a 50% increase in student numbers by 2010. A proportion of these
additional student numbers will have to be attracted to the
University by courses offered by Worcester Business School. It is this
requirement to deliver growth that led to the strategies for growth
discussed in the Summer issue of Student Advisor article (Richardson
& Evans, 2007).
• The UK Government’s now re-stated intention to move to
40% participation in Higher Education by 2020 (Tysome, 2007)
indicates significant and sustainable medium term growth potential
for our core offer – undergraduate business courses.
• The introduction of a £3,000 top-up fee made these additional
student numbers more attractive to the Business School and,
alongside HEFCE funding, made UK students more-or-less as
profitable to the Business School as the traditionally more lucrative
international student market. Whilst UK student numbers are
regulated, international student numbers are not, and therefore
continue to represent a valuable opportunity for growth.
Economic
• The introduction of the £3,000 top-up fee appears to be having
limited impact upon the total number of students wishing to study
at University. Demand amongst our core 18 to 21 year old target
audience is therefore forecast to remain stable.
• Top-up fees do appear to be having some impact upon the market.
Firstly, the trend for students to study closer to home appears to be
accelerating. Secondly, there appears to be an increasing tendency
for students to consider vocational courses, such as Business and
Management, which may benefit their future employability.
• Economic growth in key international markets, notably India and
China, offers significant revenue potential, with numbers intending
to study in the UK anticipated to grow significantly over the
medium-term.
Social
• The proposed growth of the University of Worcester is largely
predicated upon the fact that its local geography, centred on
Herefordshire and Worcestershire, is under-provided for in Higher
Education – a helpful factor, bearing in mind students’ increasing
propensity to study from home.
• The demographic trends – a growth in the 18-21 age group – also
support growth in the short term.
Technological
• The strategic direction of the University of Worcester is based around
“inspirational teaching & learning” in a face-to-face context. Potential
growth in distance learning, facilitated by new web-based technologies,
is therefore not core to the strategic development of Worcester
Business School.
Environmental
• Whilst the University is determined to champion environmental
sustainability, this is not driving the course portfolio or affecting the
nature of the student population.
Legal
• Whilst legislative changes do not solely have an effect on the Business
School, we have to be mindful of general legal requirements affecting
staff and students, such as health and safety legislation, employment
law and equality and diversity policies.
Facing the Competition
The market environment is becoming increasingly competitive.
University Business Schools are enhancing their market offer
through a combination of product proliferation (and increasing
the range and diversity of attractively titled courses) and enhanced
marketing communications activities.
Put together, the political, economic and social trends outlined above
highlight a relatively benign market environment in which to operate,
with growth in both UK and overseas markets. Furthermore, the
University has secured a substantial proportion of the available growth
in UK student numbers.
Despite this relatively settled environment, an attractive market
proposition will clearly be important if Worcester Business School is to
thrive in an increasingly competitive market. Senior managers within
Worcester Business School will need to constantly monitor the
environment in which we operate and develop increasingly sophisticated
responses to changes which are, in some cases unpredictable, and, in
many cases, uncontrollable.
Johnson et. al. (2006, p. 69) are keen to emphasize that managers
should not merely list the environmental factors, but more importantly
recognize the key drivers of change that could structurally affect the
industry or market. For this, David (2003) recommends some form of
ranking or scoring system, which could entail managers simply scoring
each factor (out of 10), with a high score indicating a key driver of change
or most important factor.
Managers can obtain data on environmental factors from a variety
of sources (refer to Figure 2). The important thing is to gather as much
as possible – it can be filtered down and evaluated by management
teams afterwards.
A Continuous Process Figure 2
Given the increasingly complex and dynamic environment within
which most organisations operate, the assessment of the environment
and subsequent strategic actions will ultimately affect corporate
success. Consequently, the importance of scanning the environment
cannot be underestimated. Nor should it occur once a year as part
of the business planning/budget planning process, but be a
continuous process of gathering and evaluating environmental data.
The PESTEL framework, when combined with a competitor analysis,
provides a useful structure to assess the environment.
Assessing the environment should naturally lead on to the
identification of potential opportunities and threats. Here, Johnson
et al. (2006) highlight the importance of recognising opportunities
and threats, especially when considering strategic choice.
Consequently the challenge to readers is to apply the PESTEL
framework in order to identify the environmental factors that are
affecting, or could affect, your organization. Consider the implications
of these factors and what actions you need to take in order to seize
opportunities or nullify threats.
Also consider where you are going to get this environmental data
from; how effective and reliable are your existing sources? Who will
you involve in the assessment of the gathered data? How will the
subsequent actions be rolled out to teams? Be aware – the process
of assessing the environment now
How can a shareholder value approach improve marketing's strategic influence?
1997) maintains that marketing has surrendered its strategic responsibilities to other organizational functions that do not prioritise the customer. Serious concerns about marketing's strategic role, and even its identity and organizational impact, have also been expressed by Day and Montgomery (1999), Varadarajan and Jayachandran (1999), Srivastava et al. (1998), Hunt (1992), and Day (1992). Such has been the decline in marketing's strategic influence that marketing is even claimed to be experiencing a “crisis” (e.g., Brown, 1995 and Brownlie et al., 1994).
We contend that marketing's lack of strategic influence within organizations will continue to happen until marketing has a better understanding of what shareholder value is and how it provides opportunities for the discipline to engage in a meaningful performance dialog with top management. The quality of, and motivation for, such a dialog depends on fully understanding the marketing–finance interface, which is centered on the interdependence between the marketing function and shareholder value (Day and Fahey, 1988; Doyle, 2000; Srivastava et al., 1998 and Srivastava et al., 1999). This understanding, we believe, rests on answers to two questions: What can marketing do for shareholder value; and what can a shareholder value approach do for marketing?
Regarding the first question, we now have a better understanding of what marketing can do for shareholder value. The analysis of shareholder value is based on a well-founded body of financial theory (see Black et al., 2001; Copeland et al., 2000; Martin and Petty, 2000 and Rappaport, 1998), which states that the value of a business is increased when managers make decisions that increase the discounted value of all future cash flows. Srivastava et al., 1998and Srivastava et al., 1999 developed a framework that makes more explicit the contribution of marketing to shareholder returns. The framework demonstrates how marketing accelerates and enhances cash flow.
Marketing has failed, however, to consider the importance and implications of the second question: what can shareholder value do for marketing? Modern marketing's reluctance to fully incorporate current financial valuation techniques and, thus, properly quantify its contribution to financial market performance has made it a bystander in many boardrooms. The criteria used by marketing for judging the true financial success of a marketing strategy, or comparing strategic alternatives, remain incomplete and inadequate (cf. Day and Wensley, 1988). This, in turn, means it is difficult to accept marketing recommendations on product policy, pricing, promotions, or, indeed, any aspect of the marketing function.
The purpose of this article is to set out a framework for understanding the contribution of shareholder value to marketing. Particular emphasis is placed on the opportunities that arise for marketing from embracing and incorporating shareholder value principles and metrics. We propose that if these opportunities are seized, then marketing can begin to exercise strategic and managerial influence within the firm commensurate with its importance.
We begin with an explanation of shareholder value analysis, including its philosophical underpinnings and components, followed by an evaluation of its metrics. We then present a framework that uncovers five opportunities that a shareholder value approach offers marketing. The article concludes by recognizing some of the potential pitfalls of shareholder value analysis, but it also argues that marketing can play a role in reducing the impact of these concerns. We also provide a discussion of some of the key research issues that emerge from our framework.
2. Overview of the shareholder value approach
Before we explore the contributions of a shareholder value approach to marketing, we need to be clear on what the approach entails. A shareholder value approach to marketing entails the utilization of shareholder value analysis to create and utilize marketing assets to generate future cash flows with a positive net present value. We do not have the space in this article to provide a detailed analysis of the techniques of shareholder value analysis. A more elaborate examination of these techniques can be found in studies by Black et al. (2001), Copeland et al. (2000), Martin and Petty (2000), and, from a marketing perspective, Day and Fahey (1988) and Doyle (2000). Here, we concentrate on the essence.
The starting point is that shareholders are the owners of the firm. From the shareholders' perspective, managers are their agents, acting on their behalf. Shareholder value analysis recognizes that the implementation of strategic decisions generates a stream of cash flows over a number of years. A company generates cash, i.e., creates value, when its sales exceed costs, including capital costs. Shareholder value analysis emphasizes the importance of cash flow because this determines how much is available to pay shareholders and debtors. Particular attention is paid to long-term cash flows; one of the tenets of shareholder value analysis is that, contrary to what many managers believe, most investors have a long-term perspective. They acknowledge, for example, that a strategy that yields considerable long-term gains may have a negative impact on both short-term earnings and cash flow, and factor this into their evaluation.
The shareholder value approach typically is associated with publicly listed companies, but it can also be used by private companies. The situation becomes more complex, but techniques are available for estimating the necessary metrics when market prices for the company's stock are not observable (seeErhardt, 1994). These techniques essentially involve the use of a proxy capital structure and are based on an analysis of what the company would look like if it were publicly listed.
There are a variety of approaches to measuring shareholder value. Accordingly, the marketing manager, trying to understand the nature of shareholder value, encounters a variety of competing terms. Metrics that measure shareholder value directly include free cash flow, shareholder value added, economic value added, market value added, cash flow return on investment, and cash value added. Despite the plethora of different labels and approaches, each shares a common conceptual heritage—the critical importance of the present value of the future cash flows that a company is expected to generate. The approaches can differ, however, in terms of their views as to how cash flow is best measured and/or the period for which it is to be measured.
The marketing manager is also likely to encounter a number of proxy measures purporting to measure shareholder value. These involve accounting measures, such as earnings (profits), earnings per share, price earnings ratios, return on investment (earnings divided by assets), and return on equity (earnings divided by the book value of shareholder funds). Despite the clear contrary evidence, the belief still persists that good earnings growth will lead to a parallel growth in the market value of the company's shares. Similarly, managers erroneously believe that if they concentrate on improving earnings per share, price earnings ratios, return on investment, and return on equity, the share price will automatically follow.
Earnings are a poor measure of performance compared to changes in shareholder value (Copeland et al., 2000; Martin and Petty, 2000 and Rappaport, 1998). Unlike explicit shareholder value metrics, accounting earnings are arbitrary and easily manipulated by management. While profits are an opinion, cash is a fact. Another problem with earnings as a value-based measure is that, unlike cash flow, accounting profits exclude investments. A growing business will invariably have to invest more in working and fixed capital, so that it could easily have positive earnings, but cash could be draining away. On the other hand, depreciation is deducted in the calculation of earnings even though it does not involve any cash outlay. Furthermore, earnings ignore the time value of money. The calculation of earnings does not recognize that the economic value of any investment is the discounted value of the anticipated cash flows. The discounting procedure in shareholder value analysis recognizes that money has a time value—money today is worth more to investors than a money return tomorrow. Finally, perhaps the most crucial weakness with earnings from a strategic viewpoint is that earnings produce a short-term managerial focus. Rising earnings can easily disguise a decline in shareholder value because earnings ignore the future implications of current activities, especially marketing activities. For example, earnings can quickly be boosted by cutting advertising or customer service levels. In the short run, this is beneficial, but in the long run, it will erode the company's market share, future earnings, and shareholder value.
3. What are the contributions of a shareholder value approach to marketing?
We now demonstrate that marketers who understand and adopt a shareholder value approach, and use the accompanying metrics that directly measure shareholder value, have the opportunity to enjoy much greater ‘clout’ in the sense that marketing can be recognized as a significant corporate value driver. We make our case by presenting a framework that shows the multiple opportunities that a shareholder value approach provides to marketing (see Fig. 1). A by-product is that it raises important questions about the basis of marketing.
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Fig. 1. Contributions of a shareholder value approach to marketing: an opportunity framework for marketing.
We propose five contributions of a shareholder value approach to marketing, each of which is interlinked. The logic of our framework begins with the realization that marketing cannot assert its strategic role unless it changes its objectives in line with shareholder principles. Changing the objectives, in turn, requires marketers to understand the language of finance in general and shareholder value in particular. Without this language, marketing will not be able to explain its contribution to the achievement of shareholder value objectives. This contribution relates principally to demonstrating the importance of marketing assets. And if one recognizes the role of these assets, then one also recognizes that money needs to be spent in maintaining and building them. It should, therefore, become easier to protect marketing budgets from profit maximization policies. And with the importance of its assets now acknowledged, and its budget protected, marketing can assume a pivotal role in strategy formulation.
3.1. A shareholder value approach helps marketing properly define its objectives
We propose that a shareholder value approach changes the objectives of marketing. This is critical if marketing's strategic influence in the firm is to be elevated. To the extent that the governing business objective of a firm is increasingly accepted as being to maximize shareholder value (Black et al., 2001), the goal of marketing should be to contribute to this governing objective. Marketers, therefore, need to understand what determines shareholder value. From a value-based perspective, the task of marketing management should be to ensure that the level of cash flow that it generates is high, that it achieves its full cash-generating potential quickly, that the cash flow effects endure, and that the cash flows are not put at unnecessary risk (cf. Srivastava et al., 1998 andSrivastava et al., 1999). This will not necessarily happen while marketing management is solely concerned with meeting traditional marketing objectives. There is a possibility, in fact, that the pursuit of traditional objectives may lead to a declining share price and the unraveling of the company's corporate strategy (see Anderson, 1982). For marketing executives, ignoring the market realities and the financial drivers of the share price leaves them exposed in the boardroom as functional advocates rather than genuine contributors to the balanced development of the business.
A closer look at this last assertion is necessary. Marketing managers have formulated a variety of objectives to justify their activities. Common marketing objectives include growth in sales as well as improved market share and customer satisfaction (Butterfield, 1999). Unfortunately, these objectives can be counterproductive and have weak direct relationships to profitability, which itself has been flagged as a potentially misleading performance indicator (Day and Wensley, 1988).
Sales growth may as easily decrease, as increase, profits. Copeland et al. (2000) and Rappaport (1998) demonstrate that sales growth increases economic profits only if the operating margin on the additional sales covers the higher costs and investment incurred to achieve the growth. The case for market share was made very familiar to us by economists under the concept ‘economies of scale’. But some marketing professionals want to go further, suggesting the firm should maximize market share (cf. Day and Wensley, 1988). Such a view, however, is absurd. Lowering prices and increasing service levels can always increase market share further, but such a policy would quickly erode the firm's margins. Finally, even the most focused financial manager understands that the source of a company's long-term cash flow is its satisfied customers. Therefore, many managers, especially those with marketing background, have gone on to argue that maximizing customer satisfaction should be the primary goal. The problem is that providing customer satisfaction does not automatically lead to shareholder value. Delighting customers with lower prices than competitors or superior quality and features cannot provide a sustainable advantage if the cost of delivering all these exceeds the price they are paying. The unconstrained pursuit of customer satisfaction certainly can conflict with a shareholder value orientation.
3.2. A shareholder value approach provides the language for integrating marketing more effectively with the other functions of the business
The point has already been made clear that shareholder value is increasingly the common criterion for evaluating strategies and the performance of managers (Rappaport, 1983 and Rappaport, 1998), and that this is largely because of the realization of the defects of conventional accounting as measures of performance. Shareholder value analysis is rooted in the discipline of finance, which is the language of the boardroom. Unfortunately, it is a language that marketers do not speak. Until marketing learns to do so, its influence will be limited.
A shareholder value approach highlights the importance of financial value drivers. These drivers have direct impact on economic returns for shareholders, as measured by dividends and by the company's share price (Copeland et al., 2000). The significance of shareholder value analysis for marketers is that it offers a well understood, widely used, and objective way to show how marketing activities can contribute to shareholder returns. If marketers can show how their strategies impact on the financial value drivers, their powers of persuasion in the boardroom will increase.
Shareholder value depends upon four key financial drivers: the level of anticipated cash flow, its timing, its sustainability, and the risk attached to it (Rappaport, 1998). Marketing activities can be evaluated in terms of their impact on these four drivers (Srivastava et al., 1998 and Srivastava et al., 1999). Marketing's contribution can then be directly compared with other business functions. Furthermore, the shareholder value approach allows top management and boards to evaluate marketing activities in the same way as do those investing in the company, namely in terms of the impact on future cash flow. The onus, therefore, is on marketing managers to use the language and the criteria common to both the board and investors and to justify investments in marketing assets in terms of their ability to generate positive cash flow. Shareholder value analysis presents an opportunity for marketers, that they must seize, to present proposals using performance criteria that the board accepts as objective and well founded.
3.3. A shareholder value approach allows marketing to demonstrate the importance of its assets
Marketing assets are largely intangible. Shareholder value analysis recognizes the importance of both tangible and intangible assets and assesses them in terms of their contribution to accelerating and enhancing operating cash flow. Once marketing embraces a shareholder value approach, we argue, it is in a better position to document the nature, and demonstrate the significance of its assets. This is an essential prerequisite to marketing increasing its strategic influence in the firm.
Strategic significance will remain restricted while marketing measures performance using only accounting-based metrics because of the continuing difficulties of the accounting discipline to measure intangible assets. A consequence has been to ignore the contribution of such assets (see Johnson and Kaplan, 1987). Marketing remains underfunded in many businesses because of the failure to take into account the long-term profit streams generated by such investments. Shareholder value analysis, however, gives explicit recognition to the importance of intangible assets in underpinning long-term growth prospects. Companies that accept the shareholder value approach should, therefore, be more receptive to the idea that marketing assets are key ingredients in a growth strategy.
These points need to be examined in more detail. From an accounting perspective, assets should be defined as economic resources, owned by an entity, whose cost at the time of acquisition can be objectively measured. Unfortunately, this definition generally leads accountants to only include tangible assets such as cash, stock, debtors, plant, and equipment in their balance sheets (Johnson and Kaplan, 1987). Yet, in modern companies, such tangible assets account for only a small proportion of the market value of companies.
Marketing assets can be divided into two types of assets—intellectual and relational market-based assets (Srivastava et al., 1998). Shareholder value analysis provides a powerful mechanism for demonstrating the financial contribution of these assets. Intellectual market-based assets involve marketing knowledge. Superior marketing knowledge provides a core competency consisting of skills, systems, and information that convey a competitive advantage to the firm in terms of identifying market opportunities and developing marketing strategies. Relational market-based assets involve brands, strategic relationships, and customer loyalty. Successful brand names convey powerful images to customers that make them more desirable than competitive products (Keller, 1993) and enduring generators of cash (Kerin and Sethuraman, 1998). A company's network of strategic relationships with channel partners can provide incremental sales, access to new markets, and allow the firm to leverage its competencies in additional areas. Finally, without customer loyalty, there can be no shareholder value (see Reichheld, 1996). Loyal customers buy more of the company's products, are cheaper to serve, are less sensitive to price, and bring in new customers. Marketing assets, then, are no different from the firm's tangible assets in that their value lies in their contribution to generating future cash flow. However, marketing assets are often more valuable to the firm. The discrepancy between market and book values suggests that investors recognize this (cf. Fama, 1970 and Fama, 1991).
3.4. A shareholder value approach protects marketing budgets from profit-maximization policies
We propose that marketing can help prevent an erosion of its influence by using a shareholder value approach to prevent cuts in its budgets as a quick means of improving short-term profits. There are two ways in which the shareholder value approach offers this protection. One is that it is fundamentally long-term with an explicit disdain for short-term solutions. It recognizes that the quest for competitive advantage may, in fact, lead to net cash outflow in the short run. The other is the one discussed in the previous section, namely, that marketing assets contribute to long-term growth and that spending to enhance these assets should be considered an investment. To put this another way, shareholder value analysis can be used to demonstrate that profit-driven marketing budget cuts destroy rather than build firm value. Informed shareholders are likely to react by reducing the market value of the company, even though such budget cuts may increase profits in the short term.
Cuts to the marketing budget are sometimes justified by using accounting logic, which tends to see marketing activities purely as expenses. Spending on advertising, for example, is treated as costs to be deducted immediately from revenue on the annual profit and loss account. Such practices suit short-minded managers who think that the easiest way to increase profit is to reduce costs. Marketing becomes an easy victim; marketing expenditures, especially advertising expenditures, are the first things management seeks to cut (see Finance Directors Survey, 2000). They may subsequently justify this by noting that the reduction in marketing expenditure was not associated with sales loss in the short term, but did increase the bottom line. However, it is clearly incorrect to assume that, if the company does not continue to support marketing, sales and margins will continue at their current level. In competitive markets, this is not likely to be the case. If a brand receives insufficient support, both its sales and operating margins are likely to erode as it loses saliency to the market.
The other side of this quick-fix mentality is to focus purely on activities that will immediately increase sales. It becomes difficult, when organizations think this way, to get marketing investments such as advertising through a board of directors. As a rule, marketing spending does not yield sufficient sales growth in the short term to meet break-even requirements, principally because the elasticity of demand with respect to marketing activities and the profit contribution margin are not high enough (cf. Vakratsas and Ambler, 1999).
The principal benefits of marketing spending are realized mostly in the long run. For example, the expenditure on brand development will increase sales this year but, more importantly, in the future (Aaker and Joachimsthaler, 2000). In this respect, investment in marketing assets is no different to investment in tangible assets, for plant and equipment rarely payoff in their first year. The fact that such policies invariably lead to longer-term erosion in market share and price premiums has been mostly ignored by other business disciplines. Cutting, rather than increasing, marketing expenditures will almost always boost short-term profitability. Because of the lagged effects of most marketing investments, treating these expenditures as accounting costs is a dead end for marketers.
3.5. A shareholder value approach puts marketing in a pivotal role in the strategy formulation process
The market value of a company is based on the most informed estimates of its ability to create a competitive advantage and to achieve profitable growth in its markets (Copeland et al., 2000). A shareholder value approach is based on the belief that management should evaluate business strategies in the same way that outsiders do (Rappaport, 1998). Investors assess strategies on their ability to create shareholder value. The company's share price reflects investors' evaluations of whether the current strategy of management will create value in the future (see Chaney et al., 1991). Thus, we argue that marketing needs shareholder value analysis if it is to be at the center of the strategy dialog.
At the heart of shareholder value is the concept of competitive advantage (Day and Fahey, 1988). Shareholder value is based on the premise that economic value is created only when the business earns a return on investment that exceeds its cost of capital. From economic theory, we know that in competitive markets, this will only occur when it has a differential advantage in cost or product superiority (Hunt, 2000). Without a unique advantage, competition will drive profits down to the cost of capital (see Copeland et al., 2000). Creating shareholder value is then essentially about building a sustainable competitive advantage—a reason why customers should consistently prefer to buy from one company rather than others.
Marketing, perhaps more than any other discipline, provides the tools for creating such a competitive advantage. These include frameworks for analyzing customer needs and identifying opportunities for growth, techniques of competitive analysis, and systems for measuring and enhancing customer loyalty (Hunt, 2000). And this gives marketing the potential to play a critical role in the strategy formulation process. The key is to make the link more explicit: shareholder value depends on the creation of competitive advantage; marketing strategy contributes fundamentally to identifying the sources of competitive advantage.
Presently, however, the link has not been fully explained. The unfortunate consequence is that boards have tended to look at nonmarketing strategies for competitive advantage. One has been cost reduction—sometimes disguised by more appealing names such as reengineering, downsizing, or rightsizing. Unfortunately, in a time of rapid market change, such actions are invariably only palliatives at best. The other common remedy has been acquisition. Acquisitions have broken all records in the last decade. They have been seen as a way of generating value by adding top-line growth and by permitting a reduction in average costs. But the evidence is that three out of four acquisitions fail to add value for the acquiring company. Excessive bid premiums, cultural differences among the businesses, and a failure to rejuvenate the company's market orientation appear to be the major weaknesses. In the process of pursuing these strategies, companies have lost sight of the key strategic issues of growth and value creation, issues for which marketing provides important insights (Gale, 1994).
4. Potential pitfalls of the shareholder value approach
Like any concept, a shareholder value approach is no panacea; it is only as good as the assumptions and forecasts upon which it is based. The key inputs are forecasts of sales growth, operating margins, and investment requirements for at least 5 years ahead. These all depend upon sound judgments about the evolution of the market and the firm's ability to sustain a competitive advantage (cf. Fama, 1970 and Fama, 1991). The cost of capital is also a critical variable and again depends upon assessments, particularly those to do with the degree of risk faced by the company, the business unit, or the brand. Different judgments can lead to significant differences in estimates of the shareholder value created from a particular strategy (see Gitman and Mercurio, 1982).
Another key issue arises from the fact that shareholder value analysis splits the estimation of shareholder value into two components: the present value of cash flow during the planning period, and the continuing or terminal value. The latter is the present value of the cash flow that occurs after the planning period. For growth businesses, the overwhelming proportion of value arises in the terminal value. Unfortunately, it is difficult to be confident about this value. The reason for splitting the estimation into two components is that it is often difficult for management to forecast beyond 5 years. Different assumptions can give quite different estimates of shareholder value. Furthermore, there are a variety of competing methods for estimating the continuing value of the business, and analysts have to choose among them. An additional concern is that shareholder value analysis underestimates the value of new ventures by overestimating the risks involved. In practice, the risks are not as high as they appear, because managers can often proceed step-by-step, piloting new projects on a small scale before major investments have to be made. More recently, shareholder value analysis has been extended with the development of real options analysis to fill this important gap (Luehrman, 1998).
While recognizing these limitations, a shareholder value approach, as we have argued, is genuinely important for the development of marketing. It is also true that marketing can help overcome some of these limitations, especially those related to forecasts of cash flow during the planning period and the judgments upon which they are based. Marketers are well trained in analyzing market opportunities and assessing their potential. Accordingly, marketers can play an important role in improving the accuracy of estimates of things such as sales growth. Furthermore, since market orientation is at the heart of marketing (Slater and Narver, 1994), marketers are sensitive to the importance of trying to determine latent and incipient needs. As such, they can improve the way market evolution is evaluated.
An even more fundamental point is that shareholder value analysis does not, by itself, produce business strategies. It does not address how top management can identify and develop the strategic value drivers that accelerate growth, increase profit margins, and lever investments. The extent to which shareholder value increases is ultimately a function of the adoption of strategies that are dynamic and growth oriented (see Barwise et al., 1989). Marketing is uniquely placed to provide those strategies.
5. Discussion
We would like to reiterate at this point that, just as the shareholder approach needs marketing (Srivastava et al., 1998), the reverse is equally true: Marketing needs shareholder value. Our framework demonstrates this fundamental truth. Its overriding message is that the shareholder value approach, if adopted, empowers marketing to assert its role within the organization in ways meaningful to executive management and owners. We now discuss the preconditions for accepting these opportunities, as well as the constraints that may impede their realization. We conclude with a discussion of key research issues entailed in our framework.
5.1. The challenges of using the framework
If marketers are to embrace our opportunity framework, they need to acknowledge two fundamental aspects of shareholder value. One is that the primary obligation of managers is to maximize the returns for shareholders of the business. The other is that the stock market value of the company's shares is based on investors' expectations of the cash-generating abilities of the business. This then leads to the view that marketing's task is about developing strategies that maximize the value of these cash flows and, hence, shareholder value, over time. This reevaluation of marketing's objective necessitates a reformulation of the discipline as being about developing and managing market-based assets (see Srivastava et al., 1998).
The achievement of this objective requires, in turn, a recognition of the preeminence of some basic principles and processes. The principles are the strategic foundations upon which value is determined. These are, first, targeting those markets where positive economic returns can be made and, second, developing a competitive advantage that enables both customers and the firm to create value. The processes are the activities necessary to implement the beliefs and principles. These concern how strategies should be developed, resources allocated, and performance evaluated—each of these needs to be tied to the objective of maximizing shareholder value.
It needs to be stressed that, even where marketers attempt to capitalize on the opportunities that we have presented here, they should not assume that there will be some kind of magical improvement in their status and influence. The opportunities outlined in our framework work best in a company that adopts a shareholder value approach in its entirety rather than in a purely rhetorical sense. Too often, companies claim to be committed to shareholder value, but they do not really include the long-term perspective which is at its heart. In some companies, shareholder value has become synonymous with rationalization and downsizing. Other companies that claim to have a commitment to value-based planning have surrendered this function to finance. Lacking the concepts and experience to build value through strategies to develop competitive advantage and growth, financial directors have relied upon what they can control. Their concept of value, and strategies by which it can be achieved, are limited in scope. In both cases, the essence of shareholder value does not really exist.
In such situations, the challenge for marketing would be to become the apostle within the organization for the shareholder value approach—a situation that may prove beyond them (see Anderson, 1982). Nevertheless, the position of marketing will still be improved if it takes advantage of the framework, because it will have a language with which it can explain its proposals and demonstrate the importance of its assets, and because it will begin to make explicit, in quantifiable terms, its contribution to organizational performance.
5.2. Directions for future research
Our framework raises a number of research issues. We need to empirically test the notion that, in those organizations in which marketing has reformulated its strategies in terms of the contribution they make to shareholder value, marketing now has a greater voice. The question here is, even if marketing incorporates a shareholder value approach, will this be enough to increase marketing's influence? What happens if the rest of the organization is suffering from an accounting mentality? Can the use of a shareholder value approach allow marketing to exercise greater influence, even when the rest of the organization merely gives lip service to shareholder value? And finally, is there empirical evidence that companies that have embraced shareholder value are companies in which marketing enjoys a more preeminent role?
One way to bring order to these research issues is to consider the four situations presented in Fig. 2. Our paper can be read as a rallying cry for those marketers who have thus far ignored shareholder value, but who nevertheless are in organizations that understand and accept shareholder value, to begin to exploit the opportunities outlined in our framework. These are the ones in Box 1 in Fig. 2. Nonetheless, we are also offering hope to the marketers in Box 3. They are the ones that have embraced shareholder value, but are in organizations that have not. Our hypothesis would be that, in either case, marketing's influence must be greater than the situation in Box 4, where neither marketing nor the organization has embraced shareholder value. We would also hypothesize that marketing's influence would be greatest in the situation portrayed in Box 2, where both the organization and marketing embrace shareholder value. Both of these hypotheses need to be tested empirically.
If we are to test the hypotheses, we need to be able to determine whether or not both marketing and the organization have, or have not, adopted a shareholder value approach. Fig. 2 assumes a bipolar approach. It may be, however, that the adoption of shareholder value is a matter of degree. In this case, there is a need to devise a scale in which acceptance and implementation of shareholder value is part of a continuum.
Finally, once marketing adopts a shareholder value approach, it shifts from being a specialist activity to an integral part of the general management process. Where in the past, marketing managers were seen as experts on customers, channels, and competitors, they should be seen in the future as experts on how marketing can increase shareholder value. To do this, marketers need to extend their skill base to add expertise in modern financial planning techniques. In the past, as we have argued, marketers have often allowed themselves to be trapped by accounting-oriented management into seeking to justify their marketing strategies in terms of improving immediate earnings. Indeed, preoccupied with traditional marketing metrics, some marketing studies have not moved beyond navel gazing. These biases continue to be seen in the preference for accounting- and marketing-based performance measures in marketing research. What is urgently needed is an appreciation for finance-based measures, and especially the inclusion of shareholder value metrics, notably those most amenable to being influenced by marketing, namely the level, timing, sustainability, and riskiness of cash flow. We can then begin to build on the work of Day and Fahey (1988) and Srivastava et al. (1998). The inclusion of these metrics will give us a better understanding of marketing's contribution to corporate performance. The more research conducted into how marketing improves shareholder value, the greater will be the interest in the concept of shareholder value itself. And as interest in shareholder value increases, more marketers, hopefully, will begin to explore the benefits outlined in our framework.
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Corresponding author. Tel.: +61-3-8344-5335; fax: +61-3-9349-4293.
1 We are sad to note that Peter Doyle passed away after the original version of this paper was submitted.
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