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.