MarketingManagement.pdf

Management uses financial analysis to identify the factors that affect the com-

pany’srate of return on net worth.^25 The main factors are shown in Figure 6-9, along

with illustrative numbers for a large chain-store retailer. The retailer is earning a 12.5

percent return on net worth. The return on net worth is the product of two ratios,

the company’sreturn on assetsand its financial leverage. To improve its return on net

worth, the company must increase the ratio of its net profits to its assets or increase

the ratio of its assets to its net worth. The company should analyze the composition

of its assets (i.e., cash, accounts receivable, inventory, and plant and equipment) and

see if it can improve its asset management.

The return on assets is the product of two ratios, the profit marginand the asset

turnover. The profit margin in Figure 6-13 seems low, whereas the asset turnover is

more normal for retailing. The marketing executive can seek to improve performance

in two ways: (1) Increase the profit margin by increasing sales or cutting costs; and

(2) increase the asset turnover by increasing sales or reducing the assets (e.g., inven-

tory, receivables) that are held against a given level of sales.^26

Market-Based Scorecard Analysis

Most company measurement systems amount to preparing a financial-performance

scorecard at the expense of more qualitative measures. Companies would do well to

prepare two market-based scorecards that reflect performance and provide possible

early warning signals.

Acustomer-performance scorecardrecords how well the company is doing year after

year on such customer-based measures as:

■ New customers ■ Target market preference

■ Dissatisfied customers ■ Relative product quality

■ Lost customers ■ Relative service quality

■ Target market awareness

Norms should be set for each measure, and management should take action when re-

sults get out of bounds.

The second measure is called a stakeholder-performance scorecard. Companies need

to track the satisfaction of various constituencies who have a critical interest in and

impact on the company’s performance: employees, suppliers, banks, distributors, re-

tailers, stockholders. Again, norms should be set for each group and management

should take action when one or more groups register increased levels of dissatisfac-

tion.^27 Consider Hewlett-Packard’s program:

part five

Managing and

Delivering Marketing

(^700) Programs
1.5%
3.2
Asset turnover
Profit margin
Net profits
–––––––
Net sales
= 4.8%
Return on assets
Net profits
–––––––
Total assets
x 2.6
Financial
leverage
Total assets
–––––––
Net worth
= 12.5%
Rate of return
on net worth
Net profits
–––––––
Net worth
Net sales
–––––––
Total assets
FIGURE 6-13
Financial Model of Return on Net
Wor th