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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