The Marketing Book 5th Edition

Managing the marketing mix 291

reported profits. Profits also fail to incorporate
the cost of capital. So a company can be
growing profits, but declining in value because
it is not achieving a return above its cost of
capital on new investment. Finally, profits
exclude the added investments in working and
fixed capital needed to support the company’s
growth. So a company can be profitable but
rapidly running out of cash.
 Alternative measures of profitability. Most
companies set objectives not in terms of
absolute profits, but express them as a ratio
such as return on assets, return on investment,
return on equity or earnings per share. All
these measures, because they have profits in
the numerator, suffer the same problems as
outlined above. There are even added
problems since measures of assets, investment
and equity are equally ambiguous. For example,
should assets be valued at cost or replacement
value? Should R&D spending be treated as
investment or as a cost?

Value-based marketing

A value-based approach to the marketing mix
reconciles the marketing and accounting
approaches in an optimal manner. The key prin-
ciple is the optimum marketing mix is that
which maximizes shareholder value. The con-
cept of value-based management – that the job of
the board and its senior executives is to maxi-
mize shareholder value – has become almost
universally accepted in major businesses. As a
recent Business Week(2000) study concluded,
‘the fundamental task of today’s CEO is simpli-
city itself: get the stock price up. Period.’ Most
companies – even those with a strong marketing
orientation – now have the goal enshrined in
their mission statements; for example:

We exist to create value for our shareholders on

a long term basis... this is our ultimate

commitment.

Coca-Cola Corporation

Disney’s overriding objective is to create share-

holder value by...

Walt Disney Corporation

Our governing objective is growth in share

owner value...

Cadbury Schweppes plc

Why value-based management?

Value-based management says that decisions

have to be made which maximize the wealth of

the company’s shareholders. Today, these

shareholders are not the bloated capitalists of

socialist propaganda, but rather the pension

funds and insurance companies responsible for

managing the savings of ordinary people. It is

the financial value of the companies in their

portfolios that will determine the future quality

of life for most of us.

The key arguments for value-based man-

agement are:

1 Ownership rights. In a market-based economy,

companies are owned by their shareholders.

The central responsibility of management is to

maximize shareholder value and to do so

legally and with integrity. Managers have

neither the legitimacy nor the expertise to

pursue other social goals. Social objectives are

the function of government or other social

institutions.

2 Pressure from capital markets. Today, chief

executives have little choice. Unless

shareholders believe top management are

pursuing strategies to create shareholder value,

executives will not retain their jobs. In recent

years, a stream of CEOs from major

companies have been ousted for allowing their

company’s share price to slide. As the Financial

Times(2000) commented, ‘the model of

capitalism, which emphasizes shareholder

value, is the yardstick on which global capital

markets are converging.’

3 Consistency with other stakeholders’ interests. A

company seeking to maximize shareholder

value cannot neglect other stakeholders. In