Week 2 Flashcards
What is the CAPM Formula? And what does each component refer to?
E(ri) = rf + Bim (E(rm) – rf)
E(ri) = expected return of capital
Bim = beta
(E(rm) - rf) = market risk premium
(rm) = market return
(rf) = return on risk-free asset
What is the goal of CAPM?
show how the market price of an individual asset must be valued in comparison to the total market
What does CAPM predict?
the risks of assets
What does CAPM calculate
calculate price and asset of a wallet
Intuition behind CAPM
spread risk in someone’s wallet of investments
ACSI Index
provides information on customer satisfaction with regards to quality of products and services
Myopic Management
short-term focus of managers which leads to cutting marketing and R&D budgets. Negative long-term consequences.
Tobin’s q
measure of a firm’s assets in relation to a firm’s market value
Purpose MFI streams
- broaden the scope of marketing
- include investors as a relevant stakeholder
- demonstrate that marketing matters
Top 3 positive marketing drivers of firm performance
- innovation
- customer satisfaction
- customer-based brand equity
Top 3 negative marketing drivers of firm performance
- negative social media sentiment
- myopic management
- product recalls
Marketing is an optimization problem
- focus on demand (revenues), costs and profitability, and the use of traditional economic analysis
- few professional marketing departments
Marketing’s role in large bureaucratic hierarchical organizations
- marketing part of sales department
- focus on maximizing profits
Characteristics flexible organization forms (wheels)
- flexibility
- specialization
- emphasis on relationship management
Goal flexible organization forms
respond quickly and flexibly to change
Transactional relationship
- find buyers
- no brand name, no recognition
- rare
Repeated transactions relationship
- no contact between marketeer and buyer
- brand loyalty and repeated purchase
- relationship marketing (industrial markets)
Long-term relationships
- battle for a low price
- strategic asset
Mutual, total-dependence buyer-seller partnerships
- higher quality, lower inventory costs
- close relationship with suppliers and contractors
Strategic Alliances
- new venture
- same strategic goal
- change company’s strategic position
Networks
- multiple strategic alliances
- confederation
- marketing is key function
- core competencies
- avoid doing everything
Marketing at corporate level
- determine mission, scope shape, structure firm
- depend on what type of relationship?
- assessment firm’s distinctive competencies
- analyze need customers, promote customer orientation, develop VP
Marketing at business level
- how to compete
- marketing segmentation, market targeting, positioning
- purchase or perform marketing functions?
Marketing at operational level
functional strategy (4p’s)
General idea Webster (1992)
emphasis on long-term relationships and ongoing activities, which create new dimensions to the marketing task.
Old world marketing focus (microeconomic approach)
- products
- prices
- firms
- transactions
New world marketing focus (political and organizational approach)
- people
- processes
- organizations
Conclusion Webster (1992)
- marketing is responsible for being expert on the consumer
- focus on customer value and relationship management may result in stronger sales
- an end of impersonal mass communication and the beginning of personal communications
2 premises value-based management approach
- first obligation of companies is to maximize returns
- the market value of the stock depend on investors’ expectations on the cash generating abilities of each business unit
logic on shareholder value approach
managers should be evaluated on their ability to make strategic investments that promise returns greater than their cost of capital
ROI formula
net profit/cost of investment*100%
2 reasons why using past performance as future performance indicator is questionnable
- only valid if the future will look like the past
- risk-return paradox
residual value meaning
the future value of a good in terms of absolute value in monetary terms
- depends on planning period
Harvest strategy
generating cash flows not but at the expense of residual value at the end of the period
residual value formula
perpetuity cash flow/cost of capital
Market to book ratio
the stock value per share divided by the book value per share
determinants market to book ratio
- recent return on equity
- growth
- spending on R&D
- interest coverage ratio
Economic value creation
creating a sustainable competitive advantage
4 reasons why, even with the same information, stakeholders and managers would not come to the same stock price
- reliability of information
- the value of intangibles
- the value of interdependencies among business units
- the degree of risk
Conclusion Day & Fahey (1998)
the shift from projects to strategies is aided by the adoption of value-based planning methods.
- residual value and risk
- defensible framework for sensitivity analysis
- understanding the competitive situation
findings digital marketing and firm value
- online communication actions by firms have positive impact on firm value
- earned social media is a driver of firm value, with potential asymmetries for positive and negative sentiment and likely spillovers on rivals
- data breaches can have severe negative firm-value effects on focal firms and rival firms (to lesser degree)
findings tradeoffs between doing good and doing well
- positive changes for customers are associated with positive shareholder effects
- employee satisfaction has a positive effect on firm value and a positive interaction with a firm’s brand and customer activities
- mixed findings on CSR investments
Goal Srivastava et al (1998)
explain the role of marketing to shareholder value with a focus on market-based assets as a bridge between marketing and shareholder value.
asset (definition)
physical, organizational or human attribute that enables the firm to generate and implement strategies that improve efficiency and effectiveness.
characteristics market-based assets
- external to firm
- don’t appear on the balance sheet
- intangible
An asset contributes to value generation when it satisfies… (4 requirements)
- it’s convertible
- it’s rare
- it’s imperfectly imitable
- doesn’t have perfect substitutes
relational market-based assets
- key external stakeholders
- brand equity
- channel equity
intellectual market-based assets
- knowledge
- facts, perceptions, beliefs, assumptions and projections
intangible and market-based assets can be leveraged by a firm to
- lower costs
- attain price premiums
- generate competitive barriers
- provide a competitive edge by making other resources more productive
- provide managers with options
market-based assets: influence on accelerating cash flows
- increasing responsiveness of the marketplace to marketing activity
- greater reaction speed to marketing efforts
- quicker response of customers to new products
sell-side analysts
- individual
- multiple clients
- short-term focus
buy-side analysts
- institutional investor
- long-term focus
- create value for its fund
Efficient market hypothesis
- price of effects reflect all public information and future prospects
- analysts are able to deeply analyze all relevant information as basis of their decision
Marketing according to Burggraeve (2021)
building sustainable pricing power in your brands
shareholder value approach to marketing…
utilization of shareholder value analysis to create and utilize marketing assets to generate future cash flows with a positive NPV
problems with earnings as value-based measure
- easily manipulated
- exclude investments
- marketing as expense
contributions shareholder value approach to marketing (5)
- helps marketing properly define its objectives
- provides the language for integrating marketing more effectively with other functions of business
- allows marketing to demonstrate its importance of its assets
- protects marketing budgets from cutting down
- puts marketing in a pivotal role in the strategy formulation process
downsides of the shareholder value approach
- different judgements lead to difference in estimates
- terminal value is hard to be confident about
- underestimates the value of new ventures by overestimating risks
- doesn’t produce business strategies
conclusion Lukas et al (2005)
shareholder value approach empowers marketing to assert its role within the organization in ways meaningful to execute management and owners
