Value Based Marketing Project

A HOLISTIC APPROACH TO VALUE BASED MARKETING

Table of Contents 1. Introdution - Value Based Marketing ………………………….3 2. The Marketing Pentadigm in the context of Cadbury India…………..4

3.

4.

5. 6. 7.

2.1.Discover & Commitment to Customer Value Drivers………...4 2.2.Customer Value System Model by IBM ………............................5 2.3.Customer Value Engineering Model by Oliver Wyman-NY……..6 2.4.Lessons in CVE through competitors failures & success…………7 2.5.Create Customer Value………………………………………………8 2.6.Porter’s Value Chain…………………………………………………8 2.7.Benchmark Practices of Competitors…………………………...8 2.8.Customer feedback & improvement of value proposition………8 VBM at the Marketing- Finance Interface…………………………..........9 3.1.Market based Intagible Assets…………………………………..9 3.2.How Market Based Assets create Shareholder Value……………….9 3.3.Linking Marketing Activities to Shareholder Value………………10 3.4.Marketing Performance & Dupont Analysis………………………11 Conclusion………………………………………………………..11 List of Reference……………………………………………………..12 Annexture-I……………………………………………………13 Annexture-II…………………………………………………..14

Word Count: 1642 words ( Excluding- list of references, table of content, cover page, referencing of sources, schematics diagrams, and Annextures)

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A HOLISTIC APPROACH TO VALUE BASED MARKETING

Value Based Marketing is a marketing Lexicon, used to conceptualise the process of value creation, in the firm, for the customers , without loosing focus on profitability and thus increasing shareholder value. De Bonis, Balinski & Allen approach to value based marketing is, essentially focusing on customer value, through the concept of - Marketing Pentadigm.

Kolter defines, Customer Value = Perceived Customer Benefits (product, services, quality and personal or image benefits) – Customer Cost

Marketing metrics used for evaluating marketing performance, such Brand Equity, CLV, repeat purchase rate etc, generally fall shy of management needs - due to lack of conformity with dominant accounting-finance language of the firm, making it difficult to compare with alternative expenditures undertaken in the firm, humorously reflected in: “ I know I am wasting half of my advertisement budget, but I just don’t know which half” Hence the the concept of VBM has evolved further. Peter Doyle conceptualises it as the Marketing-Finance Interface and attempts to link marketing activities to financial consiquences and creation of intangible assets.

3

A HOLISTIC APPROACH TO VALUE BASED MARKETING

The Marketing Pentadigm in the context of Cadbury India: (I).Discover market segment, based on customers having similar value ratios, Assess competitive position and only serve customers with high Customer Lifetime Value.

(II).Commitment to find the critical cutomer value factors & quantify them, develop customer value commitment superior to competitors, then align orgnisational capability - sales, service, supply chain, to deliver value, so to make economic profit (EVA). In (Fig 1) we discuss a model to identify and maximise a set of hypothetical customer value drivers in the context of Cadbury India. In practice customer value drivers are identified by cojoint analysis. Customer value drivers & their relative importance – would depends on the type of industry/product and also on market factors like demographics, culture, income levels etc. The customer value commitments must be communicated by means of both marketing communications, and internal communications processes. Repurchase behaivior in customers is caused by the diffrential between promised and perceived value. Customer value drivers are important to formulate Marketing Strategy. Since marking is the art of attracting and retaining profitable customers- the company should ideally target the market segment in which it’s value proposition has competative advantage. It has to communicate effectively the value proposition of a particular product category and brand, which in turn would help enhance the total customer perceived values/benefits. Define key performance indicators like - Brand awareness and position, customer acquisition & retention figures, proportion of total sales/profit from new customers/products. Some external indicators are customer satisfaction ratings, status in the industry as a value creator, customer referrals etc. Oliver Wyman’s Customer Value Engineering (TM) –model, allows companies to identify and quantify the true emerging drivers of customer value––those things that customers are actually 4

A HOLISTIC APPROACH TO VALUE BASED MARKETING willing to pay for in a competitive environment ––and evaluate the profitability of alternative strategies. In (Fig 2) we try to adapt this model to FMCG Products in the context of Cadbury.

(Figure : 1) CUSTOMER VALUE SYSTEM: SELF ACTUALIZATION: Not applicable ESTEEM: Childrens height increases with Bournvita Drinks, he’s able to do better in academics. Chocolates appeal to women , Sextuality. SOCIAL : Chocolates mostly satisfies this need. SURVIVAL: Ex: Bournvita- Drinks complements diets, bridges gap in intake of vital nutrients.

PRODUCT /NEED CATAGORY OCCATIONS

5

A HOLISTIC APPROACH TO VALUE BASED MARKETING CUSTOMER VALUE = PRICE : Price of Cadbury Chocolates/Bournvita wrt to Nestle. margins given to vendors compared to nestle for pushing products. QUALITY: Customer perceived taste compared Nestle products. PRODUCT BENEFIT: It’s health benefits- nutrients, sugar content, differentiation- Ex: Fruit & Nuts variants, choco shakes/ice-creams. CONVENIENCE: Easy availibility- emphasise on channels Ex: vending machines, packeging & size, Easy: Nescafe (3 in 1), Maggi InstaNoddles. SERVICE: taking care of vendor interest- flexibility in supply, buy back of defects, credit/financing of stocks, ease of payments. ENTERTAINMENT : Create a product association with fun, family, festivity. Ex: Cadbury Celebrations gift packs as substitute to sweets. ETHICS & SUCURITY: Parents favour Cadbury for their children as we are safe, healthy. Ex: Audit Storage Fecility of Distributors/Channels

(Source: Adapted & Applied in the context of Cadbury from IBM Institute for Business Value analysis; partially adapted from Retail Forward and “Retailing”, Dale M. Lewison)

Figure 2: Customer Value Engineering 100

New Features

Ex: Fruit Nuts Price

Premium

Finacing/

BRANDS

External

Quality of

Ease of

& Consumption:

Sugar Free Bournvita +Vitamin-C

credit sales, margins

Endorsements

Trials

Ex: By Celebrity. Amitav Bacchan doing for Cadbury

Customer Surveys: Listen to your customers

Delivery Time

Innovation: cold coffes in can,smaller affordable packs for rural consumers

Support to Vendors

80

Core Features

Price

User

Competance

Product

Advertisement/

Choco Caramel/

Endorsements

of Sales Team

Availibility

Promotions

Wafers

( the word of

6

A HOLISTIC APPROACH TO VALUE BASED MARKETING

60

Performance: TASTE relative to competing

mouth is very

Awareness

important for

Campaigns

food products)

Discounts

products

30

Safety Both in Production Storage

&

in Channels Product

Price

Brand

Influencer

Sales Process

Specification 15

40

60

70

75

Time to

Ongoing

Value

Support

80

100

ACTUAL & EMERGING VALUE DRIVERS

(Source : Adapted and Applied in the context of Cadbury India from Oliver Wyman Client Example – of CVE in technology products company)

The values given here are notional based on judjement, however actual weightages of value drivers and their component is dependent on –market surveys and data analytics. It’s important to note that from Cadbury’s point of veiw both the end consumers and distribution channels- like stockist, retailers are customers, so some of the value drivers are not pertaining to end consumers. Lessons in CVE through competitor’s failures & success: Branding: Nestle can be credited for revolutionizing the snack market in India - both Maggi and Nescafe, has attained generic brand status. However Milo has failed in India, despite being the No.1 malted drink brand globally. The reason I believe is that – Milo is also a sorghum grain used as horse fodder, 50% of Milo production is still eaten by the world’s poorest, and during the great famine Indians had to eat Milo imported from USA, as we didn’t have dollars to import wheat.

Ethics: Nestle has helped farmers of Moga district in India, to developing good dairy practices in this area with concepts like high-yield cows, quality fodder and balanced cattle feed. Kraft Foods- became the first to stop advertising junk food to children, CEO-Roger Deromedi said, “Our relationship with consumers is about trust. If you don’t align with society and you get out of step with that, then you’re going to destroy shareholder value.”

7

A HOLISTIC APPROACH TO VALUE BASED MARKETING Product Innovation by Listening to Customers: Food habits are influenced by local tastes and flavors – Nestle India has customised its products to satisfy customer needs. This has allowed them to command higher price premium.

( III).Create customer value commitment culture- as an expected, normative behavior throughout the organization. (Refer to Fig:3) Invest in appropriate resources & infrastructure to deliver value cost-effectively and efficiently, since a customer may not choose to buy even if, the perceived customer benefits are higher than the competitors, due to higher price proposition. Value = Desired Benefits /Relative Costs.The components of Relative Costs are, Acquisition costs, Possession costs like, inventory mangement cost and Usage costs like, product shelf life, replacement costs, etc. The less value you deliver, the more price is commoditized. Fig-3: Value Chain Within an Orgainsation by M.E Porter. SUPPORT ACTIVITIES

PRIMARY ACTIVITIES

Benchmark practices of Competitors: 8

A HOLISTIC APPROACH TO VALUE BASED MARKETING Procurement : Nestle faces stiff competition from Amul Dairy, which can operate on very thin margins owing to it’s co-operative structure. Milk, constitutes 47% of Nestle's total raw material costs. The company has replicated Amul’s procurement system - in Moga district, it sources 1.1 m lts of milk per day from 980,000 farmers through 2,250 collection centers.

Technology : Nestle India has access to global technology, brands and product development skills of the parent, Nestle SA, which spends more than US$1.5b on R&D every year. Nestle India now uses its own ERP- Application Software for supply chain management. (Source Of Data : Motilal Oswal Securities, India –Oct 2007 Investment Report, Nestle Annual Report )

(IV &V). Asses customer feedbacks & Improve customer value ratio:As customer value needs and expectations are dynamic, so anticipate change and redefine customer value commitments through innovation.

Conceptual Framework: VBM as the Marketing – Finance Interface

(Individual Marketing Activities: Advertisement, Customer Satisfaction, Customer Value, Branding, Promotions, Product Innovation) Marketing is viewed as an investment that produces an improvement in the drivers of customer equity.This leads to improved customer perceptions which result in increased customer attraction and retention, Better attraction and retention lead to increased CLV and customer equity. (Source : Rust, Roland, Lemon,Zeithaml, Valarie)

(Source: Adapted from, Linking Market-Based Assets to Shareholder Value (Srivastava, Shervani and Fahey 1998)

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A HOLISTIC APPROACH TO VALUE BASED MARKETING

(Source:Rust et. al. The Chain of Marketing Productivity, Rust, et. Al, 2004),

Performance Analysis of Cadbury vs Nestle in India, Using Dupont Model:

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A HOLISTIC APPROACH TO VALUE BASED MARKETING

Analysis ( Refer to Annexture I &II for workings) : Marketing ROS of Nestle is about 15 % higher over the last 5 years as compared to Cadbury, suggesting Nestle has been more effective in it’s marketing activities & commnicating it’s value proposition. Being leaders in the category – like chocolates & beverages, Cadbury didn’t invest Selling & Marketing for 3 years. But Nestle has been consistanly doing so, and now Kit-Kat is the market leader in choco-wafers. Strong marketing investments and performance will result in higher margins as well as turnover as expressed in revenue premium and measure of brand equity. Brand equity helps protect margins, turnovers, and results in even cash flows. By managing operating margin & net margins (margins/sales) and asset turnover (sales/assets), companies can “engineer” return on assets (ROA). Operating margins of Nestle has been (5-9)% higher than Cadbury in the past 5 years. Cumulative value creating for shareholders (EVA)generated by Cadbury in 5 years is about Rs 3030 mn, 5x less than Nestle at Rs 15610 million, although difference in Sales in about 3x. Interbrand Survey- values Nestle Brand at $5.6 b (excluding Nescafe), while Cadbury is yet to feature in the ranking.

Conclution: VBM tools enables managers to integrate data on customer benefits and costs in a systematic manner, analyse relative importance of attributes & anticipate market value of their products to multiple targets groups. It’s also a management system for marketing to grow it’s fianacial contribution.

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A HOLISTIC APPROACH TO VALUE BASED MARKETING

LIST OF REFERENCES: Value-Based Marketing for Bottom-Line Success by De Bonis, Balinski, and Allen Linking Marketing Metrics to Financial Performance- by Rajendra Srivastava, David J. Reibstein and Yogesh V. Joshi. A Technical Report , Zymen Institute of Brand Science –Emory Goizueta Business School. "Measuring Marketing Productivity: Current Knowledge and Future Directions" October 2004, Journal of Marketing article by Roland T. Rust, Tim Ambler, Kumar, and Rajendra K.Srivastava Roland T. Rust, Katherine N. Lemon, & Valarie A. Zeithaml, : Return on Marketing: Using Customer Equity to Focus Marketing Strategy, Journal of Marketing 68(1), 2004, 109-127) Value Based Marketing by Peter Doyle Marketing Essentials by Philip Kotler NESTLE Report: Return of Golden Era – by Motilal Oswal Securities, Bombay 9th October 2007 IBM Institute for Business Value quick read, undated by Steve Ballou, Julian Chu, Gina Paglucia Morrison. Oliver Wyman New York, Customer Value Engineering http://www.oliverwyman.com/ow/pdf_files/Uncover_Drivers_Cust_Demand.pdf From Customer Lifetime Value to Shareholder Value: Theory, Empirical Evidence.Paul D Berger; Naras Eechambadi; Morris George; Donald R Lehmann; et alJournal of Service Research : JSR; Nov 2006; 9, 2; ABI/INFORM Global. High Performance Marketing , by Naras Eechambadi, Chapter 4, THE MEASURE OF MARKETING. Calculating EVA,Principles of Corporate Finace by Brealey & Myers. JOURNAL OF MANAGERIAL ISSUES Vot. X\7I 2005: 11-25 Customer Lifetime Value, Customer Profitability, andthe Treatment of Acquisition Spending Phillip K. Pleifer. Bombay Stock Exchange www.bse.com 12

A HOLISTIC APPROACH TO VALUE BASED MARKETING National Stock Exchange www.nse-india.com www.investopedia.com

ANNEXTURE – I ( Income Statement & Calculations) Industry : Food Processing

Profit & Loss ( Rs crores)

CADBUR Y

India

Dec '05

Dec '06

Dec '07

Dec '03

12 mths

12 mths

12 mths

12 mths

Other Income Stock Adjustments Total Income

India

Dec '04

Dec '05

Dec '06

Dec '07

12 mths

12 mths

12 mths

12 mths

Dec '03 12 mths

Dec '04 12 mths

729.81

764.05

879.78

1,058.2 4

1,293.4 7

2,160.2 1

2,229.4 2

2,475.09

2,819.1 6

3,500.96

18.98

13.44

17.87

8.71

7.68

15.87

8.21

23.67

15.33

21.24

5

13.48

10.44 908.09

-7.88 2,168.2 0

6.55 2,244.1 8

2,515.49

13.42 2,847.9 1

71.01

790.97

17.29 1,318.4 4

16.73

753.79

-2.54 1,064.4 1

3,593.21

402.27

439.67

499.07

613.92

772.33

1244.72

1338.39

1472.06

1732.58

2219.06

55.12

57.54

56.73

58.01

59.71

57.62

60.03

59.48

61.46

63.38

0

0

0

266.54

323.54

417.12

423.06

460.53

480.14

496.22

0.00

0.00

0.00

25.19

25.01

19.31

18.98

18.61

17.03

14.17

Income Net Sales

NESTL E

Expenditure Cost of Goods Sold Gross Margin % Selling and Admin Expenses Sales & Mkt % Marketing ROS

55.12

57.54

31.54

33.00

40.40

38.64

41.43

42.44

47.28

63.38

Miscellaneous Expenses

246.69

256.33

292.11

35.88

696

791.18

916.34

42.76 1,804.2 1

1,989.37

87.55 2,300.2 7

172.54

648.96

54.96 1,716.8 0

56.78

Total Expenses

43.13 1,139.0 0

2,887.82

Operating Profit

85.85

81.53

99.04

139.36

171.76

435.53

431.76

502.45

532.31

684.15

Operating Margin %

11.76

10.67

11.26

13.17

13.28

20.16

19.37

20.30

18.88

19.54

104.83

94.97

116.91

148.07

179.44

451.4

439.97

526.12

547.64

705.39

PBDIT Interest

1.85

2.41

1.7

2.22

2.03

1.92

0.78

0.21

0.44

0.85

102.98

92.56

115.21

145.85

177.41

449.48

439.19

525.91

547.2

704.54

30.89

33.95

34.07

33.41

34.32

46.27

49.14

56.84

66.28

74.74

87.7

83.94

100.74

141.58

173.79

437.45

432.54

502.66

532.75

685

Profit Before Tax

72.09

58.61

81.14

112.44

143.09

403.21

390.05

469.07

480.92

629.8

Tax

26.44

22.24

35.19

43.62

44.67

136.06

134.58

159.49

165.43

214.8

36.676

29.551

43.3695

38.8029

17.779

34.7536

35.4134

34.0035

34.4797

34.295

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

Reported Net Profit

45.65

41.29

45.95

68.81

117.65

263.08

251.92

309.57

315.1

413.81

NOPAT=OPBIT*(1-tax)

57.01

54.56

65.48

92.03

112.96

284.34

281.15

326.73

346.29

445.25

PBDT Depreciation OPBIT

Effective Tax Rate Assuned Constant Tax Rate

13

A HOLISTIC APPROACH TO VALUE BASED MARKETING (Source of Raw Data: www.moneycontrol.com)

ANNEXTURE- (II) ( Balance Sheet & Calculations ) Industry : Food Processing Balance Sheet (Rs crore)

CADBUR Y Dec '03 12 mths

Dec '04 12 mths

India Dec '05 12 mths

NESTL E Dec '06 12 mths

Dec '07 12 mths

Dec '06 12 mths

Dec '07

12 mths

India Dec '05 12 mths

335

319.4

354. 1

388.89

418.43

5.1 340. 1

7.91

16.27

2.87

405.16

421.3

541.79

601.81

38.24

73.7

77.77

94.4

276.22

401.22

55.76

53.49

583.45

678.7 1,027.3 0

Dec '03 12 mths

Dec '04

12 mths

Sources Of Funds Total Equity

433.8 1

357.93

395.99

12.34

7.04

370.27

403.03

8.22 442.0 3

153.73

145.93

160.6 2

Capital WIP

6.85

21.41

Investments

127.34

232.3

Inventories

94.76

98.28

29.55 258.2 1 102.3 3

Sundry Debtors Total CA, Loans & Advances

24.13

24.59

10.68

217.59

176.04

184.8

Total CL & Provisions

135.24

172.65

218.5

82.35

3.39

370.27

403.03

-33.7 442.0 3

Contingent Liabilities Interest (From P&L A/C)

57.33

58.83

66.54

1.85

2.41

1.7

Cost of Debt % G Sec Coupon% (NSE) Rf Beta (ITC:0.64), (HUL:0.45) BSE SENSEX ( 5 yr

14.99

34.23

0.06 0.64 0.15

Total Debt Total Liabilities

392. 1 10.0 1 402. 1

406.1 4

165. 1 82.1 8 253. 4 122. 1 11.3 7 189. 5 301. 8

245.5 9

8.76 414.9

327.3

14.3 368. 4

Application Of Funds Net Block

Net Current Assets(WC) Total Assets

-112 402. 1 84.7 5

25.58 298.4 9 151.0 2 13.14 246.0 2 400.8 -154. 8 414.8 8 106.1 2 2.03

391. 4 13.9 4 73.6 4 219. 4

397.2 34.09 154.9 216.7

31.7 412. 4 551. 2

26.17

-139 340. 1

-258.9

4.87

421.2 680.1

473. 8 22.8 3 104. 4 253. 1 30.5 2 514. 6 747. 2

836.1 -252.6 5 405.15

421.31

10.39

-233 368. 4 50.0 4

35.93

63.27

0.78

0.21

0.44

0.85

9.86

1.47

2.70

29.62

327.3

-348.6

20.68

2.22 22.1 8

23.17

1.92 37.6 5

0.05

0.07

0.07

0.07

0.06

0.05

0.07

0.07

0.07

0.64 0.15

0.64 0.15

0.64 0.15

0.64 0.15

0.45 0.15

0.45 0.15

0.45 0.15

0.45 0.15

0.45 0.15

14

A HOLISTIC APPROACH TO VALUE BASED MARKETING CAGR) R = Rf + Beta( Rm-Rf)

11.76

11.40

12.24

WACC

11.87

11.80

12.40

Capital Employed

236.0 8

149.32

126. 92

WACC*Capital Emp

28.01 73

17.618

15.7 33

57.01

54.56

65.48

28.99 27

36.942

49.7 47

NOPAT=OPIBT (1-tax) EVA

12.2 4 12.4 9 5 2.8 2 6 .59 5 92.0 3 8 5.4 3

12.12 12.35 90.8 1 11.2 18 112.9 6 101. 74

10.0 5 10.4 6 2 52. 5 2 6.4 2 284. 3 2 57. 9

9.50 9.51 138.4 13.16 281.4 268.2

10.7 8 10.4 2 2 41. 2 2 5.1 3 326. 7 3 01. 6

10.78

10.60

10.46

10.73

289.1 4

253.2 1

30.23 58

27.16 83

346.29

445.25

316.0 54

418.0 82

( Source of Raw Data from www.moneycontrol.com, www.nse-india.com, www.bse.com )

Assumptions & Notes: 1. Published beta values of ITC & Hindustan Unilever taken as proxy to Cadbury and Nestle respectively. 2. EVA = Nopat – WACC *( capital employed not including investments) 3. Net operating income after tax = (Operating Income exclusing other income)*(1-tax) 4. Rm: market return assummed as BSE Sensex ( 5 years CAGR).

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