FROM FAT TO FIT
Integrating finance into marketing
By
Dr. Victor S. Limlingan
Professor,
Asian Institute of Management
31st
National Marketing Conference
Philippine
Marketing Association, Inc.
PICC
Manila May 23, 2000
Ladies
and Gentlemen:
I must begin my presentation with an
admission. I feel a little awkward at the title of “Marketing Guru”, as I have
not been greatly involved in marketing. Actually my only notable achievement in
marketing was during my stint at the Asian Development Bank.
At that time, I was with the Executive
Director’s office and we had a crisis. Whenever new member-countries join ADB,
there is a realignment of constituencies. Those whose constituencies lack the
needed number of countries were disbanded. Our constituency was in danger of
being disbanded unless we could persuade one of the new members, either
Micronesia or the Marshall Islands to join our constituency. Moreover,
Australia was ardently wooing these two countries to join them. My mission was
to convince the Finance Ministries of one of the two countries to join the
Philippines instead of Australia.
In a desperate move, I sought an
audience the Finance Minister of the Marshall Islands to convince him to join
us. I started my marketing effort by getting him to confirm that the main
reason why the Marshall Islands was joining the ADB was to be able to avail of
the loans and the grants of ADB. Then I presented my sales pitch. What can
Australia teach you about borrowing money and getting grants? All they know is
how to lend money and give grants. You don’t need to learn that. You must learn
how to borrow and ask for grants. And when it comes to borrowing and grant
asking, nobody can beat the Philippines! You join us and we will teach you all
the tricks of borrowing and grant asking!
Needless to say, the sales pitch
worked. Marshall Islands joined our constituency and I was forever left with a
guilty feeling for which we expect to partially atone by presenting before this
conference the right way of integrating finance into marketing.
Defining the
role of finance as simply borrowing money for marketing and operations is a
prevalent misconception which we propose to dispel. While the Philippines did
benefit from such misconception in the case of the Marshall Islands, it has its
harmful effects.
I was in a seminar for the Department of Finance.
And one of the speakers presented what he considered his excellent record of
being able to borrow the most money at the least cost in the international bond
market. While he was expounding on such achievement, I happened to notice the
delegation from the BIR listening to the speech. And I could almost read their
thoughts. “Aha, we don’t have to work so hard meeting our collection target,
there is an easier way, pala!”
And so after my presentation, what I hope you will
conclude is the exact opposite, “Ah so, finance does not provide an easier way
to market our products and services. We have to listen and learn from the other
speakers.”
But then, what can we learn from finance and from
this speaker? Well, first, I will try to present to you what I consider the
true role of finance. Then I will show how this role was played during the
Asian crisis, explain how the discipline of finance works, propose how finance
can be integrated into marketing and identify the role of finance as the
Philippine banking system restructures. In all this, I shall use cases to
illustrate my points.
I start with the admission of a finance man, that
what creates value and gives life to a company is marketing and operations. The
main role of finance is to support marketing and operations as these units seek
to create values. Moreover, once these values are created, it is the role of
finance to translate this achievement into increased shareholder value. In
short, finance is supposed to enhance, not give life to a company.
Sometimes, though crisis strikes and the role of
finance changes somewhat. When the Asian crisis struck in 1997, the role of
finance shifted from enhancing the quality of life to simply prolonging the
life of the company as marketing and operations sought frantically to
reposition the company products and services to create more appropriate values
for clients and customers.
Unfortunately finance people sometimes became confused
as to what their role in such crisis should be. This is best illustrated by the
Case of the Stubborn Resort Owner. I first heard about this stubborn owner from
several bankers who complained bitterly about him. He would not furnish them
with his company plans and continually rejected their proposed restructuring
plans. He countered their threats of legal suits with counter legal suits of
his own. In their view, he was obviously an obnoxious person.
By chance, I got to meet this monster and found him to
be soft-spoken and courteous person, in great contrast to the image painted by
the bankers. When I felt safe enough, I gingerly brought up the matter of his
problem with his bankers.
He started by saying that in good faith, he
authorized his finance manager to give a copy of their corporate plans to the
bankers. Unfortunately, they used the plans as the basis for identifying the
cash flows that could be diverted from marketing and operations to pay off the
loans. And worse, their finance people agreed with the plan of the bankers to
downsize the company.
He then called in his finance people and reminded
them that they were working for him and not for the banks. He then demanded
that they prepare a restructuring plan, which kept the company lean but alive.
He said, “ I cannot imagine cutting my work force and forcing the remaining
staff to take salary cuts simply to pay off the interest which the banks can
capitalize anyway. I need a highly motivated staff to provide quality service
to my guests. In the long-run, this will enable to save the company as well as
repay the loans of the banks."
In this particular case, the non-finance people have
reason to question the recommendation of their finance people. For like all
professions, finance people can make mistakes. Lest I be accuse of deserting my
profession, let me now illustrates the instances where a finance perspective is
a help rather than an hindrance to an organization.
The Mother Superior of a religious organization once
consulted me. This was with regard to their project they had with the poor.
Distressed by the fact that loan sharks have been charging usurious rates to
the poor, they became determined to save the poor from such onerous burden. To
do so, they decided to undertake their own lending program where they charged
concessional interest rates on very liberal terms of payments. They thought
that the poor would appreciate this act of goodness.
They were more distressed when they discovered that
the poor were paying the loans sharks before they would pay the good sisters. I
was asked what could account for such ingratitude on the part of the poor. Was
it lack of value formation or religious upbringing?
I had to explain to the good sisters that the poor
were just following a basic rule in finance. You pay off the most onerous loans
first no matter what you feel about the lenders. This will assure the greatest
cost savings for you or your organization.
When I tell this story of the forgiving sisters to
groups like yours, the initial reaction is condescension at the gullibility of
the good sisters. Then I ask why their clients pay banks before they do their
suppliers. After all without the product or services of the suppliers,
companies cannot operate. Only then does it dawn on them that bankers get
priority over suppliers in being paid because they charge interest on their
loans while suppliers do not.
Now, lest you overreact and start acting like loan
sharks, I would like to caution with the Case of the profligate borrower.
A large part of my work at the Asian Development
Bank was to continually seek better terms for the loans that ADB would extend
to the Philippine government. I had a problem however. Whenever, I would
protest against an onerous condition, the ADB loan officer would counter that
the very same condition was acceptable to another ASEAN country that out of
diplomatic courtesy I will not identify.
I met with this ASEAN counterpart and requested that
we stick together in rejecting the onerous conditions being imposed. He looked
at me and with a sly smile replied, “Victor, if you have no intention of paying
a loan, no condition is too onerous.”
Among finance people, this case illustrates one the
principles that make their work so difficult. The first is the so-called,
“Asymmetry of information”. Unlike in marketing where you know more of the
customer than he probably does, in finance the lender knows much less about the
borrower than the borrower does about himself. Hence this continuous demand by
bankers for more and more information. The other finance principle is called,
“Adverse selection”. If your conditions are too onerous, then the only people
who will borrow from you are the most credit risky. This ASEAN country and ours
was then going to ADB because we could not get loans from private international
lenders.
Incidentally, the people who fall victim to this are
the smart and the overconfident. Consider the case of Urban Bank and the
illustrious list of their depositors. Many of these depositors erroneously
believed that the higher interest rates being offered to them by Urban Bank is
due to their superior negotiating skills rather than to the inferior financial
position of the bank.
Having provided a glimpse into the discipline of
finance, I now turn to integrating finance into marketing. I have already
mentioned that finance cannot transform a poor marketing plan into a financial
success. I will now turn to defining how a finance man can assure that a
successful marketing plan becomes a financial success.
The first point of integration is for finance to
complement the marketing plan. If the marketing plan is aggressive, finance
cannot afford to be aggressive. To do so, invites disaster, as everything must
go right for the company to succeed. And we all know that not everything goes
right especially in daring undertakings. Thus, aggressive marketing of a brand
new product should not be financed by debt. On the other hand, if the marketing
plan is conservative, then finance can be aggressive. Lastly, if both marketing
and finance are conservative, disaster will be avoided but decline will
inevitably occur.
The second point of integration is for finance to
act as the independent evaluator of the marketing plan. Let’s take the recent
military activities in Mindanao. When the military prepared their plan, we
would hope that there would be independent non-military policy makers who would
ask. How much military force do we need? Will we achieve our objective? At what
cost do we achieve our objectives.
So, when marketing campaigns are launched, there is
need for an outsider to ask. How much financial resources do we have to commit
to this marketing campaign? What are our chances of winning? What will it cost
us? In the final analysis, will it be worth it? This is the question that financial
analysis raises and for which the answers will have to come from marketing.
Without going into details, but merely sketching in
broad outline, financial analysis seeks to answer the following question:
1.
Will
the additional costs be more than covered by the additional revenues? We in
finance call this contribution analysis.
2.
Will
the additional contribution be more than enough to cover a fair share of our
present costs? We in finance call this profit-and-loss analysis.
3.
Will
the additional profit be more than enough to cover the cost of capital we put
into this marketing campaign? We in finance call this investment analysis?
4.
Will
the addition investment income that will be derived from this campaign
complement and balance the other income we expect from other investments? We in
finance call this portfolio analysis.
The financial analysis we outlined above are the standard types of analysis that are presently in use. The latest addition to financial analysis derives from the present pre-occupation of finance of increasing shareholder value. Called brand premium analysis, this deals with the observation that companies with strong brand names i.e. Jollibee tend to sell in the stock market at a higher price than comparable companies with weak brand names. Financial analysis seeks to quantify such premium so that marketing plans aimed at creating brand names are treated as investment rather than expenses.
The third point of integrating finance into
marketing is to provide financial support for marketing. While in the past,
this came in terms of surviving the Asian crisis, at present financial support
is in terms of shielding the company from the ill-effects of the restructuring
which our present banking system is going through now.
I guess that I do not have to tell you that
Philippine banks are going through a shakeout. The financial support that must
be extended to marketing would encompass the following:
1.
To
shield the company from the adverse effects of the restructuring;
2.
To
identify the banks that will dominate the industry and establish ties with such
banks;
3.
To anticipate the new players that will enter the banking industry;
4. To be conversant with the new products and
services that these now more market-oriented banks will offer.
For the future, when the banking system
is completely restructured, finance may be able to outsource the financing
function to the more competitive banks. The analogy here is the trend of clubs
outsourcing the accounting and the collecting of club member dues and
receivable to the credit card companies.
Once the financing function is
outsourced to the banking system, companies can concentrate on their core
competencies. Finance can then be integrated into marketing and operations to
create higher values for the customer. Finally, finance can then focus on
translating the higher values created into higher shareholder values. And then
the main worry of both finance and marketing is when to exercise their stock
options.