Professional Documents
Culture Documents
Janek Ratnatunga (Ph.D., Bradford) is a professor in the Department of Accounting and Finance, Monash University, Australia.
Michael T. Ewing (DCom, Pretoria) is a professor of marketing in the
Faculty of Business and Economics, Monash University, Australia.
26
Ratnatunga, Gray, and Balachandran (2004) offered a valuation approach to link the two DOD reports. This paper seeks
to extend some of the key findings from the DOD study by
applying them in a commercial context, specifically, by providing a theoretical framework for the valuation of marketing activities. (See the Appendix for a glossary of accounting
terms used in this paper.)
VALUATING INTANGIBLES
Several responses to the intangible asset valuation problem have
been presented in the financial literature (see Keller 2003;
Leadbeater 2000; Ratnatunga 2002; Sveiby 1997), but there is
a distinct lack of theory underpinning these approaches. White
the theoretical foundations of organizational capabilities and
contextual knowledge accumulation (see Lave and Wenger 1991;
Orlikowski 2002; Teece, Pisano, and Shuen 1997) are fairly
well developed, notable gaps exist in terms of valuing the effect of asset combinations in the context of organizational capabilities. Thus, there is a need to develop a theoretical
framework to underpin a model develoj^ed specifically for the
valuation of marketing communication capabilities.
Capabilities are sometimes referred to as the distinction
between "knowing" and "knowledge" (Polanyi 1967; Ryle
1949), or as Schoen (1983) states, "our knowing is in our action"; or, more specifically, the essential role of human agency
in knowledgeable performance is critical (Orlikowski 2002).
This paper extends Schoen's observation further by considering the role of human agency and tangible hardware. For example, does an Apple Mac computer have any value to an ad
agency if there are no trained creative staff to use it? Thus, at
the core of the paper is the theoretical question "Should the
valuation of assets be based on what one has or what one can
do?" We believe that the answer is the latter, and therefore
that marketing activities should be viewed in the context of
what an organization does to enhance its brand equity, and
ultimately, its economic value. For example, Orlikowski
(2002) provides a comprehensive case study of a company that
has developed significant capabilities in global product development. She identified a repertoire of practices that constitute organizational capability, from collective know-how to
repeatedly enacting competence over time. Orlikowski (2002)
suggests, therefore, that "knowing" is not a static embedded
capability or stable disposition of actors, but racher an ongoing
social accomplishment, constituted and reconstituted as actors
engage the world in practice. These same arguments can be
extended to marketing capabilities and brand value.
Teece, Pisano, and Shuen (1997) propose a "dynamic capabilities" approach in which a firm's strategic dimensions are
its managerial and organizational/"rflreww (essentially, its decision-making capabilities); its present competitive positton
(e.g., technological capability and intellectual property, cus-
Winter 2005
27
28
FIGURE 1
The Strategic Income Statement
Brand
A
Brand
B
Nonbrand
Segment
TOTAL
Net
ELVI
Capability
asset value
$500,000
$800,000
$50,000
$1,350,000
$25,000
$10,000
$5,000
$25,000
$10,000
$5,000
$1,000
$41,000
$1,391,000
$500,000
$800,000
$50,000
($ 15,000)
($12,000)
($8,000)
($10,000)
($10,000)
($45,000)
($4,000)
($3,000)
($2,000)
($21,000)
($50,000)
($600,000)
($4,000)
($3,000)
($2,000)
($12,000)
($50,000)
($600,000)
($662,000)
($2,000)
($1,000)
($1,000)
($25,000)
($30,000)
($55,000)
($29,000)
($30,000)
($4,000)
($2,000)
($3,000)
($6,000)
($2,000)
($3,000)
($1,000)
($21,000)
($12,000)
($2,000)
($3,000)
($6,000)
($4,000)
($3,000)
($1,000)
.80
-6.00
-12.00
-3.40
-0.50
-^.00
-5.00
.40
-10.00
2.40
$8,400
($500,000)
$ 1.440,000
PPE (depreciation)
Overhead (rent, rates, .etc.)
1
Marketing
($2,000)
($1,000)
($3,000)
($5,000)
($500)
($1,500)
($3,500)
($6,500)
($20,000)
($45,000)
($ 1,000)
($20,000)
($45,000)
($1,000)
($1,000)
resources
Brands
Customers
i^arkets
Promotions
Channels
Alliances
Networks
$0
$9,600
($12,000)
($36,000)
$20,400
($2,000)
($ 18,000)
($5,000)
Innovation resources
($100,000)
($50,000)
($150,000)
($166,000)
($50,000)
4.30
.60
$713,800
$30,000
($40,000)
($10,000)
($50,000)
($40,000)
($ 10,000)
.70
$28,000
Financial resources
Lease costs
Interest expenses
$0
Total expenses
$0
$0
($1,072,000)
$319,000
($ 127.600)
$191,400
($50,000)
$141,400
$1,677,200
Note: ELVI = Expense Levfragctl Value Indexes; PPE = property, plant. and equipment; NPAT = nee profit afcer tax; CEVITA = capability economic
value of intangible- and tan^jiblc assets.
Winter 2005
29
first recognize what the capability-based tangible and intangible assets are (some of which are more easily identifiable
than others). Some of the more identifiable (bur still troublesome) key intangibles found in most organizations are summarized below.
The first category of intangibles is comprised of human
capital and customers. Most of the more recent performancemeasurement systems include measures of customer and employee acquisition and retention, life cycle, and turnover. The
challenge is to show how these nonfinancial measures can be
translated into financial measures that could be relevant to
the economic value of the brand in terms of its capabilities. A
strong brand can give a company benefits such as greater customer loyalty, less vulnerability to competitive marketing,
larger margins, and decreased elasticity in customer response
to price increases. Human capital and customer expenses need
to be leveraged to ascertain the asset value being created. R&D,
marketing research, intellectual property, and patents are some
of the other relevant intangibles. Most marketing expenditure occurs in this area, with the specific objective of either
obtaining an immediate sale, or enabling a potential future
sale by enhancing the brand's capability value or equity. Some
R&D is basic research that may be highly risky but that could
provide the basis for substantial long-term growth. Other
forms, such as software development, are aimed at developing products with a short life span. This product development type of R&D differs from research designed to make
production/logistics/supply chain processes more efficient.
Financial accounting regulators often take the view that such
R&D spending (like most marketing spending) should not be
recorded as an asset but treated as a single-period expense.
However, such expenditure could be leveraged to provide a capability in future j^eriods (i.e., a capability economic asset).
Similarly, patents are becoming a focus for intellectual-capital
management within many organizations. Of course, the existence of patents increases the capability of the organization and
must therefore form part of the overall CEVITA measure.
We have already discussed that it is the highly contextdependent combinations of tangible and intangible assets that
make up an organization's capability, and that often it is the
marketing activities that provide the base of the contextual
capability combinations tbat competitors find difficult to
imitate. Such organizations strive to leverage their IMC expenditures to create capability-related market values, especially in terms of their brand(s). This suggests that there is a
strong and demonstrable link between what an organization
spends in a particular period on marketing and how such expenditure can increase (or if the spend is inadequate, decrease)
brand value. Therefore, we contend that the approach taken
by Ratnatunga, Gray, and Balachandran (2004), where asset
values are calculated via a single-period valuation process using ELVI (similar to the revaluation of a noncurrent asset in
30
= r.E.
dt
M-S
M
Assets
There is a whole host of organizational assets that are recognizable as intangible, but do not neatly fit into the more
conventional intangible assets mold. These arise due to the
unique technological, physical, and financial processes found
in some organizations. Some examples are unique technological assets (domain names, unique software or code, hardware
infrastructure); unique process assets (core competencies, dis-
Winter 2005
tribucion or channel power, economies of scale); unique physical assets (speciali:ced or well-located showrooms or warehouses,
specialized or well-located equipment); and unique financing
assets (ease of access to equity/venture capital or cheap debt).
These asset categories are listed in Figure 2 as the investment side of a strategic balance sheet. Furthermore, for the
balance sbeet to balance, the financing that was used to create
such assets also needs to be shown as a reserve account. This is
no different from the way tangible asset revaluations are treated
in the financial accounts of organizations.^
dT
15.000.000
| = 6(.67).I60.000-300,000=$340.000
dT
Thus, based on these ELVI, by spending only $160,000 on
31
= = approximately $75,000
32
FIGURE 2
The Strategic Balance Sheet in a Commercial Organization
STRATEGIC BALANCE
I
I
Investments
Capability-Enhancing
Assecs
Tangible Assets
inungible Assets
(Appraisals lo
Market Vaiue)
i
,_
I
Working
Capital
I
In vestments
Patents &
Copyright
Financing
iHuman
Resource Assets
(Index-based)
Labor
Workforce
I
Reserves
Human Capital
[_
^ira
iMvk^it
'**'-'
Options
Organ riational
' " " ^ ^ Assets
(Index-based)
Management
Alliances
Debt Capital
Share Capital
Workforce
Capital
~'\'"'"'
Attention
Knowledge
Workers
Customers
Suppliers
Technological
Unions
Physical
Disertbutlon
Channels
Gort.
Relationship
Capital
Managerial
Capital
Buiineis Process
Capital
Customer
Capital
Internal
Infrastructure Assets
(Index-based)
External
Relacionship
Asset*
(Index-based)
Intellectual Capital
Organliational
Capital
Business Renewal
Capital
Intangible Assets
(Mostly NonTradable)
Tangible Asms
Innovation
Asseu (Pure
"^ *
Capiuttced)
Equity Capital
Supplier Capital
Other
Relationship
Capital
Financial
(Deep
Pockets)
Financiers
Winter 2005
33
EIGURE 3
Antecedents and Consequences of Brand Recognition
Antecedents
Intermediate
Variable
Consequences
Advertising
Direct
marketing
Public
relations
Immediate sales
Brand
recognition
capability
Future sales
Sponsorship
Promotions
WWW
many ELVI values that constitute IMC effort in an organization first need to be combined to provide brand capability
value, as follows:
M-S
M
-6.5
34
TABLE I
Projected Contribution of Advertising to Sales
% weight of
task in the
sales process
Selling task
Making contact
Arousing interest
Creating preference
Making specific proposals
Closing orders
Keeping brand wanted
Sales forecast
Brand contribution to so/es
Estimate
Actual
10%
15%
25%
15%
fO%
25%
100%
$18,518,519
% contribution
to selling task
due to brand
recognition
Est.
70%
80%
60%
0
0
80%
Act.
Total
contribution
of brand
recognition
Est.
Act.
7%
12%
15%
0
0
20%
54%
$10,000,000 (54%)
This model uses a multivariate approach to capability asset valuation, and we have termed this the Brand Capability
Value of Integrated Marketing Communication (BCV'"),
which forms one of the components of the overall CEVITA of
an organization. The extension of the univariate CEVITA
model to incorporate IMC processes requires the derivation
of the p^ measure for each IMC task. This will initially also
have to be a consensus measure, until experience in using the
model is developed. One approach to obtaining such p values
initially is to ask those carrying out the above performance
appraisals to first break up the selling process into six separate selling tasks and estimate a percentage for each task indicating the relative weight of the task toward the total selling
process. Next, they could be asked to indicate the contribution of brand equity (i.e., brand recognition) using a "scale"
ot some sort (e.g., rates, weights, percentages) for each selling
task.'" Such an evaluation is obviously based on subjective
estimates, and therefore, che resulcs obtained are a "subjective-squared" figure. Such a figure is not an end in itself, however, but a structuring of the complex process of thought upon
which the various managers will be basing their decisions.
Thus, the figures arrived at must be considered as one of the
inputs in the difficult field of planning-communications strategies and measurement of their effectiveness. Note chat the
selling tasks and cheir relative weights will differ from industry to industry. The techniques outlined above could be used
before the actual sales process begins to enable more objective
Winter 2005
35
TABLE 2
Contribution of Integrated Marketing Communication (IMC) Variables to Brand Recognition
IMC variable
Advertising
Direct marketing
Public relations
Sponsorship
Promotions
World Wide Web
Actual
Estimate
Iteration 3
Iteration 2
Iteration I
Estimate
Estimate
Actual
60%
15%
5%
5%
10%
5%
50%
20%
15%
5%
5%
5%
45%
26%
15%
5%
100%
100%
100%
Actual
5%
4%
TABLE 3
Brand Capability I n c r e m e n t a l
IMC variable
Value
Valueincreasing
ELVI constant
Valuedecaying
I_Y|TM constant
Percentage of
costs expended
(Iteration 1)
4.8
6.5
3.5
.2
.2
.1
.01
.3
.03
60%
Advertising
Direct marketing
Public relations
Sponsorship
Promotions
World Wide Web
2
10
1.5
IMC (integrated
marketing
communication)
variable contribution
to BCV (brand
C(^)ability value)
($480,000)
($56,250)
($6,250)
$20,000
($50,000)
$3,750
15%
5%
5%
10%
5%
($568,750)
$10,000,000
($568,750)
$9.431.250
$17,465,277
$10,000,000
54%
$298,750
$10,298,750
$19,071,759
36
TABLE 4
Brand Capability Maintenance Value
Valueincreasing
ELVr" constant
IMC variable
Advertising
Direct marketing
Public relations
Sponsorship
Promotions
World Wide Web
Valuedecaying
ELVI constant
Percentage of
costs expended
(Iteration 1)
.2
60%
15%
5%
5%
10%
5%
4.8
6.5
3.5
2
10
.2
.1
.01
.3
.03
1.5
IMC (integrated
marketing
communication)
variable contribution
to BCV (brand
capability value)
($165,303)
$50,288
$12,872
$30,927
$59,270
$11,945
$0
TABLE 5
Advertising Capability Maintenance Value
Valueincreasing
IMC variU)le
ELVr" constant
Advertising
Direct marketing
Public relations
Sponsorship
Promotions
World Wide Web
IMC (integrated
marketing
communication)
variable contribution
to BCV (brand
capability value)
Valuedecaying
ELVI^" constant
Percentage of
costs expended
(Iteration 1)
.2
.2
60%
$0
15%
.1
.01
5%
$106,250
$22,917
$36,667
$i 16,667
$ 16.250
4.8
6.5
3.5
2
10
1.5
variables. Using the Iteration 2 column from Table 2, keeping the total spend at $830,000, the brand capability value
increases to $313,500 (see Table 6). Using the Iteration 3
column, brand capability value increases to $352,500. This is
because the different ELVI values of the IMC variables impact the capability values differently.
CONCLUSIONS
While there are many new measurement systems using mea.sures of human capital, customer relationships, and brand
values, these approaches are plagued by variously restrictive
limitations. Many of these new systems appear elegant but
would require large investments in daca collection. Many
measure "assets" that have no obvious bearing on strategic
values. In contrast, the CEVITA measure, presented via stra-
.3
.03
5%
10%
5%
$298,750
Winter 2005
37
TABLE 6
Brand Capability Growth Sensitivity Analysis
IMC (integrated
IMC variable
Advertising
Direct marketing
Public relations
Sponsorship
Promotions
World Wide Web
Valueincreasing
ELVI constant
Valuedecaying
ELVr" constant
Percentage of
costs expended
(Iteration 2)
4.8
.2
.2
.1
.01
.3
50%
20%
15%
6.5
3.5
2
10
1.5
serve as a useful point of departure for enlightened organizations to customize, implement, and refine. Of course, IMC is
a process, not a program (Schultz 1994), and the challenge is
not only to measure value, but also to manage it (Neckermann
2004). Our approach should allow firms to do both. As Jones
(2005) points out, however, marketing communication is
highly context-specific; this is something that we believe we
have been able to capture in our model. Yet for our assertion
to be verified, the brand capability model needs to be implemented and adapted in different organizations and industries.
As Shoebridge (2004) taunts, it is now time for marketers
to stop complaining and start quantifying. We hope we have
provided IMC practitioners with a tool to manage the process
more efficiently and profitably. Finally, it is perhaps worth
reflecting on what we perceive to be the paper's five most
salient contributions:
1. While 'measuring marketing ROI" is unquestionably a
"hot topic" at the moment and the subject of frenetic scholarly activity, the harsh reality remains that until marketers
can master the lingua franca of the boardroom (i.e., finance),
the function will remain marginalized. Ambler's (2000) research reveals the startling fact that boards devote nine times
more attention to spending and counting cash flow than to
wondering where it comes from and how it could be increased.
Similarly, Jones (2005) observes that advertising has fallen
off top management s agenda and that brand management is
being relegated to relative juniors in many organizations. It
is our hope that our approach can help empower marketers by
allowing them to present both budgeting and evaluative processes within a cogent financial framework, thereby giving
marketing more legitimacy and credibility in the boatdroom.
2. Until fairly recently, advertising's defensive or btand
maintenance role has been overlooked (at least, outside of the
United Kingdom, where the Ehrenbergian/weak theory doc-
.03
5%
5%
5%
marketing
communication)
variable contribution
to BCV (brand
capability value)
$(4,000)
$139,500
$67,875
$36,500
$57,500
$16,125
$313,500
trine is most widely accepted). In mature markets, maintaining market share is atguably the most important priority for
(most) established brands today. We provide a method to justify defensive marketing communications expenditure (i.e.,
where customer retention is more of a priority than customer
acquisition). Such an approach has hitherto been lacking, leaving many brand managers feeling compelled to strive for totally unrealistic gtowth strategies, causing them to then
(predictably) "fail" and face further budget cuts. To address
this, we offer a sophisticated "bottom-up," objective-and-task
method for budget setting. Despite the rhetoric, many firms
today still use archaic "top-down" approaches (e.g., percentage-of-sales or share-of-market/share-of-voice), which severely
restrict growth and/or "punish" maintenance.
3. VoTmer Journal of Advertising editor George Zinkhan recently noted that marketing and finance professors live in two
diffetent worlds, seldom interacting, and even constructing
artificial barriers between one another (Zinkhan and Verbrugge
2000). This paper is a tangible example of what can be achieved
when the two disciplines put aside their differences and work
to achieve a true research synergy, one that we hope advances
theory in both disciplines, and fmds application among practitioners at the coalface.
4. As Ambler (2000) points out, many marketers remain
confused as to the difference between brand equity (an asset)
and brand value (a financial metric). This paper provides a
link between the two via a new construct called brand capability (i.e., what one can actually achieve with the asset). It also
outlines the potential role of IMC in enhancing brand equity.
5. Finally, we have substantially extended Ratnatunga,
Gray, and Balanchandran's (2004) univariate valuation model
(applied to the Australian Department of Defence) by constructing a multivariate model with widespread commercial
applicability.
38
NOTES
Baker, Susan, and Helen Mitchell (2000), "Integrated Marketing Communication: Implications for Managers," papet
1. We define an asset as a cost Incurred that has a "future
presented at the European Society for Opinion and Mareconomic benefit." Current financial accounting reporting stanketing Research conference, "Reinventing Advertising,"
dards do not recognize some of these costs as assets {e.g., adverRio, Brazil, November.
tising costs), many of which are considered as having only
Barsky, Noah P., and Garry Marchant (2000), "Measuring and
single-period economic benefits, and thus are expensed in finanManaging Intellectual Capital," Strategic Finance, 81 (8),
cial accounting reports. However, Ratnatunga, Gray, and
59-62.
Balachandran (2004) argue that such costs enhance the strategic
Blattberg, Robert, and John Deighton (1996), "Manage Marcapability of an organization and should therefore be considered
keting by the Customer Equity Test," Harvard Business Reas capability assets for future-oriented decision making.
view. 74(4), 5-14.
2. Cash flow measures and market-based measures were not
Cornelissen, Joep R (2000), "Integrated Marketing Communiconsidered relevant for military capability valuation, as assets in
cations and the Language of Market Development," Intersuch contexts were not expected to generate income.
national Journal of Advertising. 20 (4), 483-499.
3. The theoretical underpinning of this model was derived
Damodaran, Ashwath (2002), Investment Valtiation, 2nd ed.. New
from the Vidale-Wolfe (1957) model employed to describe the
York: John Wiley.
sales response to advertising efforts,
Eagle, Lynne, and Phillip Kitchen (2000), "IMC, Brand Com4. Over time, and with experience, these coefficient values
munications and Corporate Cultures," European Journal of
should reflect the value-expense relationships that exist in most
Marketing, 35 (5/6), 677-686.
spending decisions, but remain largely unquantified. The ELVI
Ewing, Michael T , Nigel de Bussy, and Albert Caruana (2000),
essentially attempts to quantify the "qualitative" aspects of the
"Perceived Agency Politics and Conflicts of Interest as Pocost-benefit approach.
tential Barriers to IMC Implementation," 7'"'"'*'^ of Mar5. The DOD obtained these intangible asset categories from
keting Communications. 6 (2), 107-120.
numerous research studies (see Barsky and Marchant 2000;
Fortini-Campbell, Lisa (1994), "Brand Contacts," in Integrated
Leadbeater 2000; Litman 2000; and Ratnatunga 2002).
Marketing Communications Symposium. R. Kaatz, ed., Lincoln6. For a full discussion of the double-entry procedure sugwood, IL: NTC Business Books, 1-5.
gested to record asset capabilities and associated financing costs,
Jones, John Philip (2005), How to Turn Advertising Expenses into
see Ratnatunga, Gray, and Balachandran (2004).
Investments. Singapore: Pearson Education.
7. We thank the guest editors for pointing this out.
Kaplan, Robert S., and David P. Norton (1992), "The Balanced
8. This paper provides a conceptual model of generating caScorecard-Measures That Drive Performance," Harvard
pability values in the context of the interaction effects of marBusiness Revietv. 70 (1). 71-79.
keting communications variables. Extensions of this model can,
Keller, Joyce (2003), "The Evolving Business Reporting Model
theoretically, be applied to the interaction effects of all of the
and Use of Performance Measurement Methodology,'" The
marketing mix variables.
CPA Letter/Education (AICPA; American Institute of Certi9- Over time, and with experience, these coefficient values
fied Public Accountants) (April), G2-3.
should reflect the value-expense relationships that exist in most
Lave, Jean, and Etienne Wenger (1991), Situated Learning: Lespending decisions, but remain largely unquantified. The ELVI
gitimate Peripheral Participation, Cambridge: Cambridge Uniessentially attempts to quantify the "qualitative" aspects of the
versity Press.
cost-benefit approach.
Leadbeater, Charles (2000), New Measures for the Economy, Lon10. For example, the salespersons may say that 70% of the tiisk
don: Centre for Business Performance, Institute of Charof making contact with a customer was made easier because the
tered Accountants of England and Wales.
brand was well known.
Litman, Joel (2000), "Genuine Assets: Building Blocks of Strat11. Here, the salespersons are being asked to determine the extent
egy and Sustainable Competitive Advantage," Strategic Fioi effectiveness of each IMC variable on the enhancement of the brand's
nance. 82 (5), 3 7 ^ 2 .
capability value at the end of the period, that is, the ex post percentLow, George S. (2000), "Correlates of Integrated Marketing Comages (actuals). This will be in the feedback stages of model applicamunication,"Jo/vratf/tf/A^/ctT/ww^ Research. 40 (3), 27-39.
tion, and would help in the ceplanning for the next period.
MEKITUM Guidelines (2002), Guidelines for Managing and Re12. For simplicity, no distinction has been made between the
porting on Intangibles (intellectual capital report), Madrid:
current sales and future sales in this sales forecast.
VodafoneFoundation, available at www.uam.es/proyectosinv/
meritum (accessed October 5, 2005).
Neckermann, Christian (2004), "Don't Just Measure Customer
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Ambler, Tim (2000), Marketing and the Bottom Line. London;
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Winter 200^
39
APPENDIX
Glossary
current assets: Asset values that vary in a single accounting period, such as the value of inventory, accounts
receivable, and cash.
4()
trates the trading activities of the firm during rhe specified period. Items are classified as revenue less expenses,
to obtain the net profit or loss. Also referred to as income
statement, revenue statement, or profit and loss statement. This is a statement of financial performance.
replacement costs: Money that will have to be spent to
replace an asset to its current income-generating ability.
reserves: Profits that have been retained within a company
for specific purposes, such as capital reserves (reserves
that are not available for distribution) or revenue reserve
(reserves that are distributable to the shareholders).
tangible asset: Assets that one can physically touch, such
as the plant and machinery.