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January 18, 2016
How Do Top Companies Create Value?
 
Warning: This post contains a lot of business-speak. Buckle up.

One of the gripes we've always had with both secondary and higher education is that they separate business from advertising. Even the lovely school we attended years back had marketing and business in one school and advertising and "corporate communications" in another. The end result: When we were in the Communications school and were part of a team that had to explain a quarterly earnings report, we did the majority of the work, because we knew what the numbers stood for. Those sweet, creative communications students waited until it all made sense.

We bring this up because we are going to prove the necessity of marketing and advertising through using language many creatives (at least based on our experience) do not us either due to lack of knowledge or out of discomfort of dealing with Corporate America.

However, to brand marketers, this stuff should be right up your alley.

If you had a single class in a reputable business school, then no doubt you have heard of the Boston Consulting Group. They are the creators of that BCG product matrix where we categorize a firm's products as Stars, Cash Cows, Dogs, and Questions/Unknown. Again, if you came into contact with that, we are sorry for bringing up such awful memories wrought from frustration about categorizing companies and deciding what they were.

But the BCG didn't stop after they created that piece of torture for business students. They continue to release studies and reports about how business is done in America, and their work is fascinating. The piece we want to discuss today is how it figured durable consumer packaged goods (CPG) retain value. The group did a large report on 2,000 publicly traded companies, and the durable CPG sector had 47 companies in the report. They wanted to look at what common practices the top ten companies of each year did in order to lead their sectors.

The results, actually, were interesting.

First, some definitions. BCG measured all of this based on Total Stockholder Return (TSR).

The BCG defines TSR as:
…a metric that encompasses all sources of value that accrue to shareholders. It includes changes in sales, margins, and valuation multiples, along with all sources of free cash flow to investors and debt holders, such as changes in dividends, net debt, and the number of shares outstanding.
Even companies that are not publicly traded can take out the variables that deal with public companies and create their own version of Total Return, but this is the metric BCG used to determine the cream of the crop.

The results?

The most glaring element BCG mentioned at the forefront was the amount of churn in its yearly top ten of durable CPG. The BCG said that out of its 2014 top ten rankings, only three returned. The group attributed the churn to the fact that “nimbler” companies can create market value very quickly.

Interesting. We know you're wondering: When in the world will this deal with marketing and advertising? Here's an excerpt about the importance of digital marketing and gathering consumer intelligence (the bolding was on our own):
From new marketing tools to online sales channels to the industrial Internet and advanced manufacturing technologies, digital is creating novel ways for durables categories to generate a competitive advantage...Digital is also completely changing the way consumers research, shop, and buy many durable goods. Tools such as mobile commerce, location-based technology, and social-media platforms are blurring the line between online and off-line channels and creating new opportunities for durables manufacturers to develop relationships directly with end users. Digital technology is also providing more data, such as customer purchase history, product usage patterns and even social-media activity. This allows durables companies with big-data capabilities to develop deeper customer insights, create better forecasts, and constantly refine the products and services they sell.
Yes, it turns out that marketing and advertising have an incredible effect on boosting TSR and therefore overall value to the company.

Too often, companies cut marketing budgets in order to save money and improve the bottom line. This report shows that tactic to be short-sighted and ignorant of mature business strategy. When a company invests in marketing and market research and puts those insights into practice, the TSR that the brand is looking for will increase. When marketing is saved from the cutting block, good things can happen. Boston Consulting Group shows that, but the business must be able to use those insights wisely in order for the investment to bear fruit.

Hopefully, that BCG Matrix will see more Cash Cows and Stars than Dogs and Questions.

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Dwayne W. Waite Jr. is partner and principal at JDW: The Charlotte Agency, a marketing and advertising shop in Charlotte, NC. He enjoys consumer behavior, economics, and football.
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