Using marketing due diligence to connect stategy to share price
Marketing Due Diligence (MDD), an approach to identifying and assessing risk, Smith suggests, is a rational and logical way to address the problem and he predicts will become as common as financial du
By on Dec 7, 2005Marketing Due Diligence (MDD), an approach to identifying and assessing risk, Smith suggests, is a rational and logical way to address the problem and he predicts will become as common as financial due diligence and will allow marketing directors to create a lot more shareholder value than they currently do.
MDD blends proven ideas from strategic and financial management with new concepts about organizational effectiveness to create a process that directly connects marketing strategy to shareholder value, Smith says.
Shareholders want to hear that you'sll deliver a better risk-adjusted rate of return than other investment alternatives and that's not just other pharmas, he says. They'sre, quite frankly, uninterested in what you'sre saying about sales and profit. They'sve heard all that before.
Second, Smith says, shareholders and investors what to understand a company's strategy, or set of management decisions on how to allocate resources, to create or destroy shareholder value. And then, they use an implicit, soft, tacit form of MDD to look at the company's business plan.
And it's not just returns, Smith says, that drives share price, but rather the risk-adjusted rate of return the probability that a company's business plan is going to deliver the results it says it will.
All business plans, he says, are built on three main assertions: market size, market share and expected profit. But those three assertions, Smith says, all carry a level of uncertainty or risk.
If companies can show, however, that they have considered and not only minimized, but managed, that risk, then they are creating shareholder value, he says. On the other hand, the extent to which they have not considered the risk of those assertions can destroy shareholder value.
MDD, Smith says, is a process of systematically and rigorously assessing that risk against benchmarks and is something he believes all marketing directors should be doing.
In pharma, different stages of the product lifecycle are sensitive to different parts of this risk, he warns. The early part of the product lifecycle is especially sensitive to market risks, but in the growth stage, market share risks become more important. And in a drug's later lifecycle stages, the risk becomes whether a company can make the profit it predicts with price competition.
The clever part is trying to understand what makes up those three risks, Smith says. And it turns out, after looking at thousands of business plans, you can break down 15 reasons companies fail to achieve a return on investment.
Then, he says, it is possible to deconstruct the business risk and take a methodical approach to understand what is reducing the probability of a company's plan to achieve what it says it will. Each subcomponent of risk can be measured on a graduated scale and the business plan can be fit to the range.
The beauty of the MDD approach, Smith says, is that it does not require any additional market research data beyond what is generally used but simply involves a more methodical and rigorous assessment of the business planning process.
None of these things on their own are new and novel or surprising, he says. But the fact that you can apply them in a systemized process perhaps is.
If you can reduce business risk, Smith says, it is as good in the eyes of shareholders as increasing the level of returns you'sre going to get and that's something sales and marketing people tend to forget.
The process, he says, works best at the strategic business unit level. For pharmas, Smith suggests, that would be the brand or therapy area level. And to do an MDD diagnostic in those areas usually takes a couple of days of management teamwork, but delivers results that can be used to improve marketing strategy by providing a clear print out of risks and its sources.
Then, the information can be used to reduce unnecessary risk, by revising projections and strategies, and to sell voting directors on the high probability that the plan will deliver the results it claims it will, freeing marketers from the just trust me approach to securing support.
I urge you to consider a more rigorous approach to shareholder value creation in your business plan, Smith suggests.