What is the connection between a firms stock price and sales and marketing?
This is a fundamental question in understanding how to radically simplify businesses and achieve breakthrough performance.
To begin, we need to start with some simple basics about how a company is valued. A publicly traded company like General Electric (GE) is owned by shareholders. In this case, one of the largest owners of GE is a company (institution), The Vanguard Group, which owns about 7% of all of the outstanding shares of the company. Each investor, (be it Vanguard or a doctor in Iowa with 1000 shares) has their own theory to determine when to buy, sell, or hold their share in the stock.
Some factor in market trends, others a variety of technical financial metrics, some make decisions by instinct. This process of determining a method to determine if they buy, sell, or hold is called “valuation” and there are almost countless methods of calculating a firms value. GE’s stock price at an given time is a balance across these different valuation strategies. GE’s value as a business is called its market capitalization and its based on its stock price multiplied by all of the outstanding shares.
GE’s board of directors represents all of the shareholders and they oversee the company to determine if it is doing the right things and or doing things right that drive value for the shareholders. GE’s management makes a variety of decisions that impact it. They can buy back shares, offer dividends (a portion of the profit generated from its operations), buy companies, improve execution, etc. The company can also issue shares or sell shares it has in order to raise cash.
On the other end of the spectrum, private equity and other financial service companies set the price based on other factors. It’s very easy to get lost in the weeds of all of the different nuances about valuation and those details have very little to do with sales and marketing except theses two points. 1) your shareholders are investing in your company’s ability to create value and 2) from their lens, your company is an assets, a holding, a commodity.
Your management’s job is to convert this investment into value for those shareholders.
There are many things they can do to make their numbers look better that are often referred to as financial engineering. These things include: taxes, financing, write offs, etc. In some circles it also includes using other financial instruments (Like equity or lines of credit) to buy companies (and their for their revenue streams).
None of those things have anything to do with sales and marketing so we are only concerned with the parts of valuation related to ongoing operations. Terms related here are “EBITA” (earnings before income and taxes) or operating margin (revenues less expenses related to running the company).
In this case your company invests cash (from loans, selling of shares, left over profit from last year, etc) to build products and services your customers will buy.
The more valuable those products and services are to customers, the more of those products and services they will buy and also at higher price points relative to other options or competitors.
So yes, there are lots of important details across all of these points ranging from valuation, revenue recognition regulations for different products, pricing strategies, market dynamics, etc; however from an investor standpoint – they don’t care. They want to see your company yield the most results from its investments.
Therefore, your company is a value engine that converts cash into products and services that are valued by customers.
The more valuable those customers perceive those products and services to be, the more they will buy.
The size of the yield is based on how effectively the company creates these products and services and how efficiently it runs its business processes to build those products and get then to customers.
An important history of financial regulations and their impact on organizational structure
As basic as that sounds, your company isn’t organized this way. The basic organizational models most commonly in use today have their genesis from the first half of the 20th century at the peak of the industrial revolution.
In response to the Great Depression, governments in market-based economies established valuation rules and standard account practices. In the Unites States, it created the Securities and Exchange Commission as a way to regulate banks, investments, and oversee these regulations. These rules led to a foundation of common terms and definitions which helped connect a variety of accounting principles with emerging management and organizational models at the time.
Over time these principles and organizational models became intertwined. This blending of standard terms and organizational models allowed for the massive explosion of scale of businesses.
Starting with the post WWII global business expansion – there was tight aliment between: valuation models, financial regulations, and organizational models because: the pace of business was (relative to today’s standards) slow, we were very much in the peak of the industrial revolution and mass communications age, and “go to market” concepts developed in the 1960’s well reflected the needs to meet customer demand.
During this period, the role of the CFO emerged from the accounting professional and with regulatory reporting requirements, the function grew in power filling in operating details to meet the business needs of the time.
As a result, an organizational model to run companies emerged predicated on roles to manage different assets. Matrix organizations emerged to create more economies of scale and create hand offs across the core functions. But, these models still have a heritage in: division of labor, controlling costs, span of control, authority, and departmentalization.
An emerging paradigm shift
Businesses got more and more efficient with management models that grew from the 1940s. Computers, the internet, and now the ability to track and mange business with mountains of analytics has created an enormously sophisticated management science around running the organization matrix.
However, the nature of business (and thus investment) has changed more dramatically.
Today, we are very clearly in a post industrial revolution world. At the end of 2016, three of the top 10 most valuable companies in the world exist solely because of the internet: #2. Alphabet (Google), #5 Amazon.com, and #7 Facebook. Today’s economy moves as a blistering speed, is fanatically interconnected, customers are more informed and more demanding than ever.
Increasingly, the price elastic curve as a way to understand and quantify how markets behave is being replaced by fuzzy, intangible concepts like “experience” and “engagement”.
So, while the natural behavior of how a market operates – money will flow to value – is universal; the machinery with which most businesses operate (the matrix organizational model and the complex financial system associated with it) is antiqued.
In order for businesses to optimize their value engines, they need to think outside their current organizational structure and adopt more systems thinking into how they develop more modern approaches to operating and executing their firms. Systems thinking can be very difficult to understand, but the graphic below simplifies it.
The goal of a system is to convert inputs into valuable outputs while using resources optimally in order to get the greatest return on the investment.
You can repeat this pattern at a macro level (think about how sophisticated managing a global supply chain and manufacturing process) or at a micro level (think about actions of a individual seller connecting with his or her clients).
To help identify where the gaps are within sales and marketing, we can conceptualize the value engine into three specialized sub-systems. 1) The value creation process 2) The value delivery process and 3) The value communications process.
The value creation process
The various activities your company does to develop its short and long term business strategy, define plans and set budgets, develop and tune the operating model to manage the overall company, and to communicate overall progress internally and externally are examples of actives all relate to the value creation process.
The purpose of these related actives is to determine the right path forward for the company that will produce the most shareholder value and then collect and configure the various pieces of the puzzle to complete that vision. Taken together, these various activities performing the value creation process are the “Strategy System” of the Value Engine.
The value delivery process
The first thing a company needs to execute its value creation process are things to sell to customers. This would include: development work to innovate new products and services, the formation of business unit or product groups, product development and production efforts, and end when those products and services are delivered to customers. Taken together, this integrated set of actives are the “Portfolio System” of the Value Engine.
The value communications process
Once a company has set its strategy and built its portfolio – it needs to tell customers it has these products and services. This is our area of focus because this is the process where a business: understand its customers requirements, engages with them, and tries to complete the value exchange through a variety of interactions with customers. The functional groups commonly involved in these activities include: product or marketing groups from the value delivery process, all corporate or segment marketing functions, the various sales organizations and then the corporate functions that support them. These processes are the value communications process and are the “Selling System” of the Value Engine.
Going to market connects strategy and portfolio systems
Businesses have developed fairly sophisticated ways to define their corporate strategy, build out its portfolio and then the organization constructs to develop it. Firms like: McKinsey, Boston Consulting Group, and Bain work with corporate strategy groups within businesses to help them identify holes in the market, define the strategy, and help communicate it.
Overtime, techniques have evolved to align: the portfolio and strategy systems together and organize then into a business unit organization construct that is relatively simple to communicate to investors the linage between market opportunity and how the firm is allocating its assets to realize it. This also feeds into the tradition operating models the have their genesis in the 1940’s.
Illuminating the gap between strategy and execution
Using a market model to conceive of a future strategy and link that plan to the companies products and services makes a lot of sense. However, as mentioned earlier, dynamics in the market place are driving radical changes in the buying dynamic. Simply put, “go to market” thinking is no longer good enough in order to successfully execute the business strategy and optimize the Value Engine.
“Markets don’t write checks, people do”
In today’s mass customization, experience driven world – customer’s have more power over the value exchange than at any other time in history.
This power shift means that businesses need now to think more granularity about how the “go to customer” and their current organization models does not allow them to do it easily. The graphic below is from a presentation I gave while at Forrester contrasting the difference between these perspectives.
Friction between the strategy and selling systems
Looking at business execution problem through the two lenses of “Go to Market” and “Go to Customer” its easy to see where gaps emerge. The first one is between the value creation and value communication process.
Put simply, when a business articulated its market opportunity in the abstraction of a market (like “the internet of things”) and then communicates its growth based a total addressable market number calculated on collections of aggregated data, you can get very weird and un-natural behavior when trying to execute.
It’s not uncommon for entirely new markets to emerge (look at how radically the entertainment industry has transformed over the last 20 years) that create huge opportunities for some (Apple and Itunes, and extinction events for others Tower Records). However, many business don’t go through steps to identify the specific person who would benefit most from that vision. Without going through the process of translating that vision into an outcome for a specific person and the total addressable market into how the person will pay fore it, it creates massive amounts of ambiguity for sales and marketing. As a result, a tremendous amount of generic and unclear resources get created to arm sales people to have vague and confusing conversations that are not targeted to people but more general market concepts. This puts an enormous burden of connecting increasingly vast amounts of subject matter specific content to customer who are equally confused.
Friction between the portfolio and selling systems
To make matters worse, as businesses add more and more products and services to their portfolio, they tend to organize then into separate P&L units based in many cased with how those products or services revenue is recognized. For example, a software company might have the following different P&L groups: consulting, implementation, training, software, and managed services. Each of these have their own pricing structures, subject-matter experts, order enter codes, contact terms, and even revenue recognition requirements. Unfortunately, the business strategy is relying on these products and services to be cross-sold together as an integrated story to customers to realize that total addressable market figure (through which should be theoretically efficiently achieve because the firm already has access to these customers and channels to reach them). The reality is that customers are increasingly demanding a mix of these products and services in ways that meet their outcome, and not the way the company is organized. As a result, the number of permutations sales people have to sort though to connect the customer need with all of the product is becoming unbearable.
The modern economy is only going to continue to rip apart business operating models with design points from the industrial revolution. Today, most businesses attempt to transform themselves either by reorganizations or major reallocation of assessments (or both). Neither of these approaches are effective because they do not address the fundamental problem – customers have more information and are more demanding. When they do buy “products”, so many of them are so good – they choose the least expensive option (which will result in commondization of markets). What they prefer are “outcomes” and “experiences” which are currently very hard conceptualize, design, and deliver. It is not practical yet to build an entire organizational model around “outcomes” and “experiences” because there are now proven models that can work at scale.
Therefore, businesses should first define a portfolio of different revenue streams based on common customer types, define an end to end value communications process for each, rethink sales and marketing from expense centers to investments to activate these revenue streams, and create entirely new operating models than can work across the existing matrix organizational structure.