Book Reviews

May 26, 2007

Tough Choices, Bad Board

In the fall semester of 2004 I offered an MBA course at Tulane University based on the 3rd revision of the pre-publication manuscript of my book.  This was about the 4th running of the course in both the undergraduate and graduate programs.

The course was cross-listed for credit in marketing, accounting, and finance concentrations at the Freeman School of Business. It was the only marketing course in the history of the school ever cross-listed for credit in accounting and finance. It may have been the only one in the world. Thirty-seven students took the course. Most of them were accounting and finance majors.  Marketing students knew they had to work with dreaded financial accounting data online from WRDS (Wharton Research Data Services). Word on the street was "Cook's course really isn't marketing."

In that semester nine teams of MBA students updated analyses in my book. One of these teams worked on the strategic group in Chapter 6 on The Battle for Your Desktop.  The companies in this group were Compaq, Dell, Hewlett-Packard, and IBM. The analysis covered the years from 1991 through 2000 – the pre-merger period. Their job was to update it from the 1st quarter of 2002 through the 2nd quarter of 2004 (the most recent data for all firms available in the fall of 2004).

Dell was the focus of this team's report. But since they ran the numbers on all four companies, they couldn't help but notice an apparent inconsistency in the results for HPQ: the company's "relative earnings productivity" under Carly Fiorina's leadership continued to improve after the merger, hitting 98.7% in the 4th quarter of 2003. Relative earnings productivity is a measure of the degree to which a company achieves maximum potential earnings. Yet, investors drove HP's value/revenue multiple down from 9.3 in her first year as CEO to just 2.8 in the 2nd quarter of 2004. See my last post "Carly Delivered While Investors Fiddled."

Roughly speaking my theory of Competitive Stock Valuation asserts that earnings productivity and the value/revenue ratio are positively correlated. Or, if the quality of earnings is increasing, so should a company's value/revenue ratio.

Picture a scatter diagram with relative earnings productivity on the vertical axis and the value/revenue multiple on the horizontal axis. Over time you should see these metrics move toward the upper right-hand corner of the chart. In other words, a "Northeast Drift" in these numbers. HPQ was exhibiting a strong "Northwest Drift" – exactly the opposite of my prediction. The team, and the entire class since all their results were projected on huge screens in the front of the classroom, wanted me to explain this result. Here is what I told them in 2004:

Considering the bad press Ms. Fiorina continued to receive and investor’s failure to reward the company’s performance under her leadership this appears to be case of bad PR coupled with poor investor relations (Competing for Customers and Capital, page 239).

Of course, the MBA students concluded my theory failed a critical test. One of them asked "How can bad press and poor investor relations disregard the facts?" I really wasn't able to answer that question until yesterday, when I read Carly Fiorina's book cover to cover.

What I failed to understand about HP's problem was that the bad PR and poor investor relations were not being driven by the unseen-hand of the market:

Although not everyone could yet see it, by the end of 2004, a sustainable, successful business transformation had been achieved. It wasn't perfect, but it was perfect enough. … The only clouds on the horizon were the press and the stock price. These were not insignificant, but I believed that the strong performance we would deliver over the coming year would take care of both in time (pages 275-276).

The PR and investor relation problems were the product of several seriously dysfunctional members of HP's own Board of Directors. To find out what happened you've got read the details for yourself, but I can point to an event that occurred after the January, 2005 off-site Board meeting which documents their dysfunctional behavior. In her book Carly reports:

The following Friday afternoon I received an urgent phone call from one of our press people. The Wall Street Journal was going to print a detailed story the next Monday morning about our Board meeting. The reporter was talking to at least two, possibly three, Board members. Was it true we were going to reorganize? Did I have a comment?

It is hard to convey how violated I felt. Until a Board makes a decision, its deliberations are confidential. Whoever had done this had broken a bond of trust with me and every other Board member. … Trust is a business imperative. No Board or management team can operate effectively without it (page 290).

That article appeared in the Jaunary 24, 2005 issue of the Journal. Here's what it said:

At its annual planning meeting between Jan. 12 and Jan. 15, H-P's board discussed giving three senior executives more authority and autonomy over key operating units, according to people familiar with the matter. The board also has asked Thomas Perkins, a prominent venture capitalist and a former H-P director, to rejoin the board, these people said.

The next time I teach my course, Carly Fiorina's book Tough Choices: a Memoir will be required reading. It's that important in understanding how the competition for customers and capital really works, at a personal level. The next time you find yourself frustrated and angered by the self-destructive behavior of those who care more about themselves than the future of your organization, just stop and read Carly's book.


March 24, 2007

The Origin of Brands

Once in a great while a new book comes along that stops you in your tracks. This is one of those books.

I read The Origin of Brands at the same time I was reading "Here Comes Trouble" in the February 2007 issue of Wired. The author says this is a story about the guys who "…Kazaa'd the music industry and Skyped the telcos. Now Janus Friis and Niklas Zennström want to Joost your TV. (That's a good thing.)"

Since "Skype … demonstrated P2P’s ability to stream data, in real time, on a global scale" it led Friis and Zennström directly to Joost. Friis says “We’ve taken the best things about television and added the best things from the Internet.” And it appears they've done just that, while sidestepping the copyright problems and preserving the 30 second spot!

I had just finished reading the Chapter 6 "Swiss Army Knife Thinking" and I thought: isn't Joost exactly what Laura and Al said would not happen? So I went back to read the chapter again and discovered the answer to my question was no! They said the convergence of the PC and TV in the form of interactive television had not happened in twenty-seven years after its founding. And Joost is not interactive TV.

The point is, you've got to be as careful in thinking and talking about convergence vs. divergence in marketing as Darwin was in biology. And even so, it's sometimes difficult to see the light. Especially if you're personally or professionally involved with a "new category" you just launched. And make no mistake, the authors show you how creating a new category by diverging from existing ones is where fortunes are to be made. Convergence (read clock radio) is where fortunes are lost. Remember the AOL/Time Warner merger?

Al and Laura Ries say "THE MOST DIFFICULT JOB IN MARKETING, and also the most rewarding, is creating a new category (Chapter 14, pages 227 through 255)."

If "…there is no definition of what the category is all about, there is no market, there are no distribution channels, and there are no competitors to benchmark … The first, and the most important question of all, is what's the name of the new category?"

At the risk of being pedantic I'm going to quote the nine main points I took away from reading "Creating a Category" in Chapter 14 (pages 227-255):

1. Simple names work best … marketing people are sometimes too literal. What matters most is not describing exactly what the benefits of a new category are, but expressing the essence of the new category in as simple a way as possible.

2. Marketing can be visualized as filling a hole in the mind.

3. Every product needs two names, not just one. A brand name and a category name.

4. People think generic first, brand second.

5. In the rush to build a new brand, the need to first build a new category often is overlooked.

6. When your brand doesn't stand for anything, you have to compensate by increasing your marketing expenditures!

7. Categories exist in the mind. You create categories in exactly the same way you create brands. By positioning the name of the category in the mind of prospects.

8. People THINK categories, but they TALK brands.

9. Categories are pigeonholes in the mind; brands are the names in those pigeon holes. The two names serve two different (and strategically important) purposes.

With an international business press totally committed to the Holy Grail of "convergence" you should read this important book. Not only is it a good read, it will open your eyes to the power of divergence in marketing. And this will stop you in your tracks.

These comments were taken from my replies to comments made this past week in the discussion forum on Book Club. If you want to learn much more about this book check it out.


March 10, 2007

Enterprise Marketing Management

Enterprise marketing management is a fundamentally different way of looking at your business. It is, literally, the management of all activities that influence how customers think, feel and behave toward the enterprise. Not just about individual brands, but also about the entire portfolio of brands owned by the enterprise. It requires:

… integration and accountability in action on relevant customers insights across key enterprise constituencies such as marketing, sales, service, manufacturing, finance, human resources (HR), information technology, and so forth, increase the profitability of the business (“Enterprise Marketing Management,” Dave Sutton and Tom Kline, page 7).


An important dimension of enterprise marketing management is “integration.” There are many opportunities for integration across the functions of your business that you’ve never thought of because we all were trained to operate in functional silos. Here’s a simple example of the near global failure to take advantage of integration in traditional financial and marketing management. Every public company has two significant proprietary enterprise marketing assets: the corporate brand and the stock market ticker symbol. Take the case of Southwest Airlines for example. Every investor who has bought the company’s stock knows its ticker symbol is LUV. But few consumers know this. Why? Because they’ve never bought the stock. It may be held in a mutual fund, but customers don’t know it. Picture this. Every day hundreds of Southwest 737’s take off with a cabin full of passengers laughing at the steward’s last joke while looking right at the company’s logo (with its heart in the middle of a winged insignia). If LUV were to appear in the middle of that heart it would do two things: make passengers aware of the stock’s brand name on Wall Street and suggest that it might be a good idea to buy a share or two. But LUV doesn’t appear in Southwest’s logo? Why? It’s just another example of the separation between traditional marketing and financial management.


Marketing can’t achieve real accountability until it’s plugged into corporate financial statements. These are the single most important documents in your company’s flow of information, both inside and outside the enterprise. You’ve got to look beyond the market segment P&L. How can marketing possibly plug into the corporate income and cash flow statements? Good question. A first step would be for everyone that wears a marketing hat to get a user ID and PW to the company’s financial databases like COMPUSTAT or EDGAR Online. You can’t be plugged in if you don’t have a key to the kingdom! The next step would be to get your hands on a copy of Sutton and Kline’s book. They have redefined the domain of marketing. Because of this one book the discipline will never be the same. Their new take on enterprise marketing finally will achieve the broad reach across organizations that has been so elusive until now. “Enterprise Marketing Management” does even more for Chief Marketing Officers. It gives them a road map into the boardroom, with step-by-step directions for reclaiming their rightful place at the table.


February 18, 2007

About My Book


The genesis of this book dates to 1964 when I was a doctoral fellow at the Marketing Science Institute, then located in Philadelphia . At that time Wroe Alderson was a member of the marketing faculty at the Wharton School and MSI's offices were just across the street from the old Dietrich Hall. Alderson's contributions to marketing knowledge are summarized in this Brief History of the Wharton Marketing Department.


As a young doctoral student I was in awe of Professor Alderson. Physically he was a large man. Intellectually, he was bigger than life. I often overheard long conversations with his students in the cubical next door to mine on the second floor of MSI's offices. Those conversations motivated me to study his now classic book Marketing Behavior and Executive Action. In that book he developed the concept of "differential advantage." To me it was one of the most compelling concepts I had ever encountered. Before and after that experience there were many others that were influential in the development of this book. A brief review of these is available on my Listmania.

These accumulated experiences converged 1983 when I published a paper on "Marketing Strategy and Differential Advantage" in the Journal of Marketing. In this paper I operationalized Alderson's concept of differential advantage and defined the strategic marketing cost function. In their rebuttals, five marketing scholars attacked these ideas with unusual ferocity. The last time I read my response to these attacks published in the Journal of Marketing in my 1985 paper on "Understanding Marketing Strategy and Differential Advantage" was when I decided not to include it in the 1989 second edition of Readings in Marketing Strategy co-authored with Jean-Claude Larreche and Edward C. Strong. I excluded my response because it summarized a controversy I thought was settled. However, I should have cited it because this paper answers questions that you might ask about one of the key constructs in my book: the enterprise marketing cost function. If you're interested in reading a paper that was another foundation of my book, here is a link to "The Net Present Value of Market Share" also published in 1985 in the Journal of Marketing.


Since these papers appeared I've spent a lot of time and effort applying the principles to the financial accounting data. I was motivated to do this by two things. First, if I tested my theories with audited financial accounting data they could not be dismissed so easily by those who simply didn't like them. Second, I believed the future of marketing strategy and corporate finance rested on their convergence.

My book is the culmination of these efforts. The data are available online to academics and students at over 150 universities world-wide through the Wharton Research Data Services (WRDS).  Alternatively, professionals can access the same data through Standard & Poor's Research Insight or use the EDGARonline Professional I-Metrix suite if their company subscribes to either of these interactive online services. All my applications (from Amazon to Toyota, from eBay to Whole Foods Markets) are based on the audited financial statements of public companies reported to the U.S. Securities and Exchange Commission. This means they all may be replicated.


What's a one-line description of the book?  It would be something like "microeconomics applied to the financial accounting data of public companies to measure the quality of earnings and the riskiness of enterprise marketing opportunities."  One of my students at Tulane last semester called it a real page turner … compared with his other textbooks!