Ibs mmii- sessions-9-10 - copy

IBS MM-II

Sessions 9-10Harish Keswani

Interface of Marketing with Finance

Marketing Performance Measures(Ref: Principles of Marketing – Appendix 2)

• P&L Statement (Income statement, operating statement)

• Difference between Balance Sheet and P&L ?


• P&L -Statement of Financial Performance (eg. for a product or division)

• Balance Sheet – Statement of Financial ‘Position’

Fixed costs & Overheads


• Break Even Sales– Break Even Sales = Fixed Costs / Contribution Margin of Fixed costs– To compute Total Cost = Fixed costs + Variable Cost

• Market Share = Company sales / Market Sales• Gross Margin % = Gross Margin / Net Sales• Net Profit % = Net Profit / Net Sales• Operating Expenses % = Total Expenses / Net Sales• Inventory Turnover Rate =

Cost of Goods sold/ Average Inventory at cost(Higher the better, indicates better efficiency and profitability)

• ROI (Return on Investment)= Net profit before tax/ Investment


• Net Marketing Contribution= Net Sales – cost of goods sold – marketing expenses

(Higher the better)• Marketing Return on Sales and investment

– Marketing ROS = Net marketing contribution/ Net Sales(Higher the better)

– Marketing ROI = Net marketing contribution/ Marketing expenses(Higher the better)

• COSTS : – FIXED COSTS : Costs which remain constant irrespective of production quantity

(eg. Rentals, salaries of core permanent people, marketing expenses etc)– VARIABLE COSTS : Costs which are directly propotional and dependent on

quantity producted (eg. Cost of goods, ie raw material, packaging, etc)

Impact of Marketing Strategies & Action Plans

Marketing Actions The Firm

Tactical Actions Strategies

Customer Impact

Market Impact

Financial Impact

Impact on Firm Value

Marketing Assets

Market Position

Financial Position

Value of the Firm


Tactical Actions

StrategiesPromotion strategy,

Product strategyChannel strategy, etc.

Customer Impact

Market Impact

Financial Impact


Marketing Assets

Market Position

Financial Position

Value of the Firm


Strategies

Customer Impact

Market Impact

Financial Impact


Marketing Assets

Market Position

Financial Position

Value of the Firm

Tactical ActionsAdvertising

Service ImprovementsBranding, Loyalty



Customer ImpactImpact on satisfaction,

Impact on attitudes, loyalty

Market Impact

Financial Impact


Marketing Assets

Market Position

Financial Position

Value of the Firm



Customer Impact

Market Impact

Financial Impact


Marketing AssetsBrand Equity

Customer Equity

Market Position

Financial Position

Value of the Firm



Customer Impact

Market ImpactMarket share impact

Sales impact

Financial Impact


Marketing Assets

Market Position

Financial Position

Value of the Firm



Customer Impact

Market Impact

Financial Impact


Marketing Assets

Market PositionMarket share,

Sales, etc.

Financial Position

Value of the Firm



Customer Impact

Market Impact

Financial ImpactROI, IRR, NPV, EVA


Marketing Assets

Market Position

Financial Position

Value of the Firm

Marketing Actions The FirmTactical Actions Strategies

Customer Impact

Market Impact

Financial Impact


Marketing Assets

Market Position

Financial PositionProfits

Cash flowOther measures

Value of the Firm

Marketing Actions The FirmTactical Actions Strategies

Customer Impact

Market Impact

Financial Impact

Impact on Firm ValueForward thinking

Hinges on growth prospects

Marketing Assets

Market Position

Financial Position

Value of the Firm



Customer Impact

Market Impact

Financial Impact


Marketing Assets

Market Position

Financial Position

Value of the FirmMarket capitalization

Total shareholder return

Financial Analysis of Marketing Tactics(Ref: Principles of Marketing – Appendix 2)

To boost business - • Option 1 : Increase advertising expenditure

Increase in Sales = Increase in Cost / Contribution Margin of that cost head(Similar to break even computation which is = total cost/contribution margin)

• Factor to consider with increased sales targets– Increase sales means increase in market share (if market size is stable)


To boost business - • Option 2 : Increase Distribution coverage by hiring more sales

people• One possible tool : Workflow method to determine increase

in sales team sizeNo. of Sales People = No. of customers * Frequency of calls * Length of calls_____________________________________________Time avg sales person has for sales activities per year

• Now if this adds to cost by XThen Additional sales required = X / Contribution margin


To boost business - • Option 3 : Decrease Price (or give discounts)• How do we compute how much increase in sales is required

to compensate for the discount to maintain break even• Assume for a product Z– Total Sales = Rs. 1 billion– Current Unit Price = Rs. 17,000– Unit Variable Cost % =76% = Rs. 12,920– Unit Contribution = Rs. 4,080 (24%)


• Option 3 : Decrease Price (or give discounts)….cont

• Assume we want to decrease price by 10% for Product Z– New Price = Rs.15,300– Unit Variable cost = Rs.12,920 (This will not change just because

we want to reduce the price)– Unit Contribution = Rs. 2,380 (15.56%)

• In order to maintain total contribution we can say– New contribution margin X New Sales Level = Original Contribution – So New Sales Level = Original Contribution/ New contribution margin– Rs. 240 million / 0.1556 = Rs. 1.543 Billion– Thus Sales must increase by 543 million in order to break even on a 105 price

reduction– This again will point towards increasing market share proportionately


• Option 4 : Extend Product line with a lower priced product

• Sometimes adding new products in same category ‘Cannibalize’ existing products ,i.e eat into sales of existing product.

• In order for this strategy to work, the total contribution margin to fixed costs has to be maintained or increased.

• Eg. explained

Interface of Marketing with Operations

Toyota – Case Study

Toyota Motor Company: Losing its Quality Edge?

• On January 21, 2010, Toyota Motor Corporation (Toyota) recalled 2.3 million select Toyota Division vehicles in the US.

• The recall was done to fix sticking accelerator pedals which caused unintended acceleration, leading to accidents. Earlier in November 2009 too, the company had recalled 4.2 million cars in the US to rectify accelerator pedals which were getting lodged under the floor mats of the vehicles.

• Subsequently on February 1, 2010, Toyota suspended the sales of eight of its popular car models involved in the recall and discontinued production at six of its North American car-assembly plants in response to growing customer concerns.

• The eight car models represented 57% of Toyotas sales in the US � in 2009

• The scale of the recalls was huge. The situation was serious. It points to the possible dangers a global economy can bring to large corporations.


• Automotive operations accounted for 89% of Toyotas total revenues in 2008. �

• The company manufactured vehicles at 53 production sites in 27 countries around the globe.

• In the fiscal year 2008, Toyota sold approximately 8.91 million vehicles in 170 countries and regions under the Toyota, Lexus, Daihatsu, and Hino brands. North America was its biggest market followed by Japan, Europe, and Asia.


General Perception about Toyota before recalls –

• Toyota recognized quality as one of the most important factors affecting customer satisfaction and strove to achieve excellence in manufacturing quality products at competitive prices.

• Toyota inplemented Qulaity frameworks like Kaizen (continuous improvement), PDCA (plan, do, check, action), Pokayoke (mistake-proofing), and Just-in-Time (JIT) to achieve excellence in production.

• To ensure zero defects in the finished product, Toyota set up quality assurance systems across various divisions, including development, purchasing, and production.

• Because of its competent quality process system, the Toyota brand had become synonymous with quality, reliability, and durability, experts said.


TMHE Improves Efficiency & Quality - The Toyota Production System (TPS)http://www.youtube.com/watch?v=Tc9IQLJl4AU


A U-turn in perception of Toyota after recalls

• Some analysts felt that the Japanese company had succumbed to the pressures of rapid globalization and sacrificed its legendary quality to reach the goal of becoming the number one auto maker in the world. According to them, a series of recalls in the US, China, and Europe had tainted the automakers image of manufacturing reliable cars and trucks�

• “Toyotas reputation for long-term quality is finished. People � �arent going to buy Toyotas, period. It doesnt matter which � �model. Whats happened is sufficient to keep people out of the �stores”


Some analysts remained loyal and confident

• Some analysts were positive that Toyota would not lose its quality edge. According to them, the fact that the car maker had discontinued sales of the affected models until the recall issues were resolved was proof of its commitment to quality

• They need to do something warmer, something that demonstrates caring. I think they can recover, but that window is closing. They will have to do something big and fast


• Though the company was hit by a series of quality issues in 2006, it continued with its global expansion spree. In 2007, Toyota added an average of two new factories a year to its global network.

• By 2007, about two-third of Toyota's workforce was located outside Japan and the company could no longer rely on word of mouth to convey its managerial and manufacturing methods to workers at its overseas plants.

• As a result, quality suffered. There were complaints from customers that oil-sludge buildup had destroyed their vehicles engines. Between 2004 and 2007, �Toyota recalled 9.3 million vehicles, a number exceeding its total annual output.

• In the 2007 J.D. Power survey, the Toyota brand scored below that of Hyundai

• Despite the recalls, in 2008, Toyota realized its goal and surpassed GM as the worlds largest car maker in terms of sales volume �


• Critics alleged that Toyota had had to compromise on quality to achieve the number one spot in the auto industry. The ranking came at the expense of the companys engineering �and quality control prowess, they said.

• As the intensity of the recalls increased, experts began to question Toyotas reputation as a �quality automaker. Toyotas position began to �slip in consumer satisfaction surveys too


Discussion, reasons :• Rapid expansion overseas, increased demands on production• Most of the production outside Japan may have taken time

to adapt the Quality Systems setup in Japan.• Outsourcing of certain components’ design• Chasing Sales volume and Market share put pressure on

manufacturing to ramp up faster• Cost cutting measures may have impacted quality

How does this impact ‘ Brand Image’• “It takes a very long time to establish a reputation for safety

and reliability. It doesnt take very long to lose it”�


Solutions:• Experts felt that in order to prevent its image from slipping further,

Toyota had to focus on its quality aspect. The company needed to closely monitor quality and overhaul its design, engineering, and manufacturing operations.

• According to industry analysts, Toyota, known for its reputation for quality, had to effectively communicate its strategy to customers to retain its position as one of the biggest auto makers in the world.

• Toyota should contact owners individually in order to get them into dealerships for repairs, and then compensate them by offering a rebate or another free service. Toyota must avoid creating more bad feelings among consumers, they said.

Toyota Motor Company: Losing its Quality Edge?Solutions:• On January 31, 2010, in order to rebuild its

decades-long reputation for quality and to promote the reliability and safety of its vehicles, Toyota launched a major public relations campaign. The company ran a full-page print ad in major newspapers explaining its decision to halt production of the defective cars.

• A top executive from the company was likely to appear on television to discuss the recalls.

• Toyota planned to set up a global quality special task force that would conduct regional quality improvement activities around the world. The committee headed by the president was to inspect every process quality in design, quality �in production, quality in sales, and quality in service and provide customers with satisfying products in each and every region

Toyota Motor Company: Losing its Quality Edge?Solutions:• To develop quality-management professionals, Toyota would start an

Automotive Center of Quality Excellence in key regions. � �

• Based on the improvements, Akio planned to seek evaluation from outside experts regarding its newly improved quality-control management and listen to each and every customer and improve quality.

• Talking about his initiatives, Akio said, Under the banner, Lets build better � � �cars, we will go back to the basics of customer first and genchi genbutsu, � � � � �and once more, deeply consider what customer first really means. � �

• All our employees around the world, all of our dealers, and all of our suppliers will unify in their utmost efforts to regain the trust of our customers as soon as possible.

• Discuss : Role of marketing !


While solutions were being worked out :• In the fiscal year through March 2010, Toyota expected a net loss of

200 billion yen despite efforts to cut costs by 440 billion yen during the year.

• It was reported that global recalls of about 8 million vehicles would reduce the demand by 100,000 vehicles and cost the company 100 billion yen.

• In the three months ending March 31, 2010, sales of 503,000 vehicles were predicted in North America.

• However, analysts felt that the company would not able to achieve the sales target as customers were reluctant to buy Toyota vehicles due to quality problems.

Next Session Topics :

Interface of Marketing with HRMCoaching a Sales Team

Ibs mmii- sessions-9-10 - copy

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