Marketing Expert's Corner
This article written in 2010
When Marketing Means Stock Valuation
Last month, the Idiot Marketing Awards highlighted examples where the lack of marketing torpedoed companies' stock valuation. In almost all cases, the marketing department wasn't the cause of their ills. The big problems came from corporate behavior that reduced trust, degraded product competitiveness, or just made customers feel like they were being had.
This month, we're looking at the other side of the coin: boosting stock values. And you'll see a continuation of last month's theme: it's not that a few people in the marketing group can increase your stock price. Stock valuation goes up because marketing thinking* permeates the executive ranks, informs company decisions, guides individual actions, and frames company statements. Clear product value, solid customer service, and coherent customer-oriented behavior are the foundations of every "marketing company."
So how does all this effect stock valuation? As Benjamin Graham said, "in the short run, the stock market is a voting machine...but over the long term, it's a weighing machine." Looking at fundamental valuation techniques, a stock's P/E multiple is a measure of how much Wall Street likes your future growth and profitability prospects. With technology companies, there's an extra twist. In The Gorilla Game, Geoffrey Moore and Tom Kippola argue that a tech stock's P/E multiple is directly correlated with market power. Powerful companies can all but dictate standards, have commanding influence over the sales channel, and freeze markets with vaporware. Think Microsoft in PCs or Apple in mobile phones or Salesforce.com in SaaS. Then think about P/E multiples of 50 or more.
Getting Market Power
You wouldn't expect to gain market power from a short-term action, even if it were something straight out of Mad Men. Market power is something that builds gradually, and almost always is built on a foundation of sales. Solid and growing sales volume gives you credibility with customers, partners, the press, Wall Street, and even competitors. Over time, it gives you market share and installed base that are a force in the market.
You'd think that great sales come from a great sales department. Sort of. You always need a strong sales channel and tight execution, but truly great sales happen because of a compelling product or service. Something that's fits the needs of the market, is well timed with other trends, has features that matter, and carries a price that reflects great value (not just "cheapest"). Terrific products don't spontaneously come out of engineering. Great services don't just appear out of your operations group. That's where marketing comes in.
Not the stuff that you have marketing do for ads, events, lead gen, eCommerce, PR -- that's the tactical meat that (hopefully!) feeds your pipeline. While those outbound marketing activities are important, they're not strategic. They're taken for granted (as necessary, but not sufficient) in your stock valuation.
The key to the strength of your product and service lines is the effectiveness of your company's product management and product marketing functions. (Don't know the difference between them? Wise up!)
Let's look at the poster-child for stock valuation that's been driven by products and services, Apple. In this exercise, you can ignore the servers, software, Macs that drove their valuation back in the day. Now, that just represents revenue...not growth or power. Probably 80% of Apple's current valuation is driven by the iPod and its scions, iPhone and iPad.
Looking back at the original iPods, there certainly wasn't much evidence of market power at the outset. They started in third-place market share, and this in a business destined to be commoditized. In the end-game, an MP3 player was pretty much an MP3 player. iTunes version 1 was just a music library manager, and every major MP3 player had something like it. But that's an engineer's (or an economist's) view, not the marketing vision of the future.
What Apple did was to take its strengths in hardware design and software interface to gain a burst of initial sales. It rapidly evolved iTunes, creating a novel channel for media delivery via a new concept called a podcast. Thanks to the size of the iPod audience and Apple's no-brainer commercial terms, content publishers were immediately drawn to this cached form of internet radio. Apple soon followed with the iStore, which was the final nail in the coffin of Tower Records, Wherehouse, and every other CD retailer. Introduction of the iPhone brought an even more compelling client for the iStore, consuming billions of downloaded applications and video clips per year. Addition of the iPad gave books, videos, photos, and applications their ultimate client. Only Android has a chance of more than a distant second place. It all looks so obvious now, looking backwards. But at every turn, none of this was a sure thing. Apple was breaking new ground and creating new rules for the marketplace around it.
Market power? You bet. Driven by compelling products and services, even though at premium prices? Yep. But it did take 8 years to happen, even with the focus and firepower of Apple. And it wasn't just a few folks in marketing who made it happen. It was the whole company -- from manufacturing to engineering to legal to marketing to the channel (don't forget the Apple Stores!). At the core, though, were the spark and principles of marketing (not just the person of Steve Jobs) that guided this industry transformation:
- Clear definition of who the target customer is
- Appreciation of what s/he values, with a willingness to listen
- Creation of interesting, exciting, high-quality products
- Simple, consistent messaging over long periods
- Very strong product identity, with an emotional hook
- Ability to see and leverage industry economics / business-model dynamics
- Discipline and repetition.
Of course, following all these principles doesn't guarantee market power. Consider poor Tivo, which was positioned atop similar tectonic forces and was able to create a truly compelling series of products and services to match. They were able to inspire their own verb, but they just didn't have the luck to achieve the market power of Apple.
What Marketing Actions are Unlikely to Get You Market Power
A branding campaign. A killer sales force. Lots of PR. A ginormous Twitter following. These things can all help, but by themselves they don't have the depth or longevity to really impact your marketplace position or stock market valuation.
Let's look further at an area that senior marketing folks may advocate. Despite the fact that the end-game for nearly all tech companies is merger or acquisition, M&A has a very poor track record of creating market power. According to the Gartner Group, 80% of mergers in the software industry fail...and things aren't that much better for acquisitions. It's now common wisdom on Wall Street that most tech mergers actually destroy market valuation. Which means they generally undermine market power.
This is counter-intuitive because the acquiring company (already big) is getting bigger, and therefore should gain influence. I've done two acquisitions and been involved with 7 others... so take it from me, it just doesn't work out that way very often. Most acquisitions are doomed from the start due to technology, channel, and career conflicts. Too often, they're two garbage trucks colliding, so it won't yield a race-car. The deal gets done because the financials have been tarted up with wishful thinking and the marketing guys have created PowerPoints that fool folks for a while. All the execs will be crowing that 1+1=3 due to "synergies" (another word for "magic"), but all too often the truth is more like 1+1=1^3.
There are notable exceptions of tech companies that don't fall into these traps. Cisco, Oracle, Computer Associates, Google, and Microsoft have consistently used M&A to bolster their market power and stock valuation. It works for them because M&A is baked into their strategies, execution systems, and corporate culture:
- They make different acquisition choices
- They integrate companies differently
- They deliver the products to market with a coherent transition strategy
- Their marketing message is backed up with consistent behavior at all levels that builds more marketplace trust with each acquisition.
*No, that's not an oxymoron.
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