CP focuses on identifying, sorting and selecting those individual customers or a group of customers that are profitable to a firm in many different ways. It is a backward looking metric because it is based on historical information. The advantage of using the CP measure before CLV is that the unwanted customer data base is filtered out, so that only relevant  customer profitability data is selected and becomes available(revenue and cost data) for CLV calculations. Thus the CP data also provides driving parameters for CLV models. The use of CP before CLV can help managers in shaping their decisions towards optimal marketing spending, and can also reduce the computation time for CLV calculations.

CLV measures the present value of future customer profit streams across entire customer life cycle. CLV is a forward looking indicator because it is forecast based. A positive CLV is considered attractive for selecting a customer for campaigning, and a percentage of this CLV amount can be allocated for campaign spending. By interpreting and analyzing the CLV data the firm can also generate new ideas to acquire new customers. Both metrics (CP & CLV) are important in increasing the value of customer relationship. The combined use of CP & CLV can help the firm to capture the uncertainties associated in estimating and allocating campaign budgets. Additionally, this process can increase the accuracy in allocating funds for campaigns to increase profitability, and can eventually help in reducing marketing spending waste in the first place.

The ROMI metric is used to measure the post campaign marketing effectiveness. It can also be used to justify marketing spending as well as in selecting the right campaign from many alternative campaign solutions in the planning phase. The allocated budgets based on CLV as described above can be used to calculate the projected ROMI or marketing ROI for each marketing campaign or program. After this, a baseline ROMI can be established before the campaign, and then the post campaign ROMI or marketing ROI can be measured. The variances (in post campaign) from baseline ROMI in terms of revenue and profit can be monitored, and through the process of feedback and control the CP, CLV, baseline ROMI and related activities can be fine-tuned or changed as required to bring the marketing spending into control. The marketing spending is typically expensed in the current period; therefore, the ROMI described here focuses on measuring the shot-term performance.  Long-term ROMI can also be projected and measured by adding additional metrics such as payback period (PP), net present value (NPV) and internal rate of return (IRR) metrics to this system.¹  

References and Suggested Further Reading

Farris, Paul W., Neil T. Bendle, Phillip E. Pfeifer and David J. Reibstein (2010),”Marketing Metrics: The Definitive Guide to Measuring Marketing Performance,” Second Edition, Upper Saddle River, NJ: Pearson Education, Inc., p. 354, pp. 153-179, and pp. 337-355.

The traditional strategic planning model^1,2 uses a top-down approach of planning in which plans are created by top management and planning staff with little or no involvement of lower level staff responsible for implementation.  This type of strategic plan can be considered as open-loop system, because it de-emphasizes strategy implementation and the issues of interaction, and evaluation and control.  Open-loop refers to a system where information flows in one direction (for example, top-down planning) and without any provision for feedback and corrective action.  After execution such plans generated huge performance gaps between company’s objectives and actual results. Mainly the unresolved issues as mentioned above led to the failure of strategic planning in the early 1980s. For example General Electric downsized its strategic planning division and transitioned to strategic management during the l980s.

Strategic management now incorporates all approaches (modes) of planning,³ and elicits information and commitment from lower level staff and managers. A strategic management model⁴ uses a closed-loop system that is capable of minimizing or closing the performance gap between strategy formulation and implementation (because of feedback and corrective action) and is certainly capable of delivering superior performance results than using strategic planning alone.

References

1. M. E. Porter, Competitive Strategy (N.Y., The Free Press, 1998), p. xxvi.
2. H. Kerzner, Project Management (N.Y., John Wiley & Sons, 2001), p. 1011.
3. H. J. Thamhain, Engineering Management (N.Y., John Wiley & Sons, 1992), pp. 71-73.
4. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (N.J., Prentice Hall, 2000), p. 1.

Hundreds of thousands of businesses have failed since the economic crisis of 2008.  The primary reason for failure is that these companies were not prepared to handle large turbulences in their external environment as a result they got exposed to severe economic uncertainty and were negatively impacted by it. Strategic management is the only field of study that can help in minimizing uncertainties due to its heavy strategic focus on external environment–the external forces over which a company or industry has no control.  For example by using scenario planning (or scenario analysis) a firm can take into account the uncertainties in making strategic decisions, and therefore, can minimize the effect of uncertainties caused by the external environmental conditions and enable the firm to respond swiftly in turbulent times. Economic turbulence can also create new opportunities for SMEs. Additionally, Strategic management tools can be used to help SMEs in identifying new opportunities and provide an improved understanding of firm’s capabilities, competition, competitive advantage and customers. In a study conducted by Robinson (1982), it was found that small firms that engaged in strategic planning with the assistance of outsiders achieved significant performance improvement in profits, sales growth and productivity. However, many SMEs formally or informally still don’t use the strategic planning (or strategic management) process. According to Small Business Administration, approximately 50% of all new businesses fail within five years. The cause of failure can be attributed to lack of strategic management in place. Lack of strategic management can lead to failure due to many causes ranging from poor accounting to lack of skills in strategic planning to inability to cope with growth and dysfunctional management. Strategic management can more effectively deal with the complex and changing environment by offering reactive solutions to problems and proactive approaches for growth and opportunities.

Examples of successful small businesses: America Online, Apple Computers, Dell Computers, Microsoft Corporation.

Examples of failed businesses: Blockbuster, Borders, Circuit City, Large Format Digital.

The discounted cash flow method (DCF) definition of shareholder value is the present value of the firm’s future cash flows (FCFs) discounted at its weighted average cost of capital (WACC), add to this initial cash, marketable securities and other investments, and subtract the value of debt. This approach makes sense that a company can only make an economic profit only after it has repaid the cost of capital. Investors are interested in not only knowing how the company performed in the past but also more importantly how it is likely to perform in the long–run(say,3 to10 year period).  This long-run focus of investors makes a connection to firm’s strategy that lies at the core of any enterprise success. The CFC term in shareholder value definition also makes SHV focus on long-term value creation and therefore it is easily integrated into the strategic management process. In strategic management process a performance measurement system is used as a means to monitor, evaluate and control performance measures. It is said that if you can’t measure, you can’t control. By establishing meaningful measureable shareholder value objectives (from pro forma models) in the strategy formulation process and finally monitoring, evaluating, and controlling the financial results will ensure that an organization is aiming at its strategies to achieve its overall goals and objectives. Therefore, shareholder value (SHV) management system plays a vital role in every organization as it offers key tools for performance measurement system and provides forward looking indicators to assist management in predicting and controlling company’s economic   performance.

Traditional accounting measures such as earning per share (EPS), return on investment (ROI) and return on assets (ROE) are also used by corporations and analyst to assess corporate performance. The drawback of these approaches is that they are not forward looking to predict the future performance, do not consider cost of capital in calculation and are influenced by accrual based accounting.

In addition to the SHV model defined above, there are few other important “SHV measures,” which are:

• economic  value added(EVA) and market value added(MVA)
• cash flow return on investment(CFROI)
• total business returns(TBR) and total shareholder return(TSR)

Competitive advantage is the ability of a company that does something well in comparison to its competitors, earns above-average profits in its industry and is the end result of successful strategy execution. If the above-average profits or above-average performance is sustained over a long run it is called sustainable competitive advantage. Thus identifying and understanding your company’s competitive advantage is essential. Many successful companies have competitive advantages over their rivals but fail to articulate them. Many factors including new technologies, imitation, new entrants, and introduction of substitute products can erode all your competitive advantage, thus preventing you from sustaining the competitive advantage. For this reason your competitive advantage should be unique, valuable and difficult for competitors to imitate it. Besides cost reduction you must constantly work to improve your competitive position and add value to your products or services.

A business strategy (competitive and/or cooperative) mainly focuses on improving firm’s competitive position in an industry. Michael Porter, an authority on competitive strategy proposed lower cost and differentiation strategy to be successful and outperform competitors within an industry. These two strategies results in two basic types of competitive advantages: cost advantage and differential advantage.

The resource-based approach proposes a wider definition of competitive advantage in which a firm uses its resources and capabilities to develop competitive advantage that finally results in superior value creation. According to this approach sustainability of an advantage is determined by two characteristics: durability and imitability.

In contrast, the recent economic crisis has resulted in lower growth and lesser profitability to firms across all industries. In an economic downturn there is less demand of industry products, which leads to higher industry capacity. Although, there can be other reasons in which capacity can exceed market demand. This unfavorable market condition alters a company’s competitive position (if there is any) and erodes structural attractiveness of industries–resulting in poor performance with lower sales, lower profits or even losses. Lower demand and excess industry capacity also leads to price wars among competitors and ultimately reduces the industry profitability.

To stop the bleeding and stabilize the situation companies have been responding by taking reactive measures like downsizing & across-the-board cost-cutting to improve short-term performance without thinking of the long-term consequences of these actions. The contraction and consolidation strategies if not used carefully can further weaken the firm’s competitive position and delay its recovery.

As short-term measures are equally important to improve performance, companies should also look for new opportunities and focus on value creation. Michael Porter defines value as, “in competitive terms, the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue… A firm is profitable if the value it commands exceeds the costs involved in creating the product” (Porter, 1985: 38). When industry capacity exceeds demand, firms must have a competitive advantage to survive. A firm’s ability to create value under this condition and enjoy a competitive advantage over other firms depends on how it repositions itself within its industry. To outperform competitors companies first need to understand where and how value is created and destroyed. Then, by selecting value–driven goals and strategies a firm can create best fit between its abilities and market opportunities to maximize firm value. Research indicates that firms that systematically focus on creating value first are able to achieve higher value performance with respect to its competitors over a long-run. To realize a competitive advantage, a firm must create additional value than competitors to remain profitable and grow. This means earning a return that exceeds firm’s cost of capital and the competitors return.

We can work with you to identify the value related issues and provide you with solutions to create long-term value for your owners and customers.