Traditionally, marketing has been viewed as important in the development of business strategies that lead to superior product-market performance as measured by indicators such as sales, market share, and operating income. Most companies stop there.

But a few enlightened companies are different. In these companies, senior management, usually led by the CEO, is demanding that marketing view its ultimate purpose as contributing to the enhancement of shareholder value.

As far back as 1998, a group of colleagues (Tas Shervani and Liam Fahey) and myself addressed this trend and established a framework for analyzing the relationship between market-based assets and shareholder value.

What we said back then matters even more today.

CEOs must address the marketing-finance interface more effectively.

What did we mean by this?

We meant that there had to be a shift in thinking in the board room.

Marketing, we felt, should rise to the task of developing and managing market-based assets. These market-based assets, in turn, increase shareholder value by accelerating and enhancing cash flows, by lowering the volatility and vulnerability of cash flows, and by increasing the residual value of cash flows.

The Relationship Between Finance and Marketing

Furthermore, we recognized that the relationship between marketing and finance must be systematically managed; no longer should we rely on the traditional assumption that positive product-market results will automatically translate into optimal financial results.

We urged marketers to adopting the perspective that customers and channels are not simply the object of marketing’s actions, but that they are, in fact, assets that must be cultivated and leveraged.

Leveraging these assets requires marketers to go beyond the traditional inputs to marketing analysis, such as marketplace and organizational knowledge, to also include an understanding of the financial consequences of marketing decisions.

Indeed, it also expands the external stakeholders of marketing to explicitly include the shareholders and potential shareholders of the firm, and requires broader input into marketing decision-making by other functional managers.

A CEO Imperative: Rethinking the Relationship between Finance and Marketing

Types of Market-Based Assets

Market-based assets arise from the commingling of the firm with entities in its external environment. They are principally of two related types; relational and intellectual.

Such assets are primarily external to the firm, generally do not appear on the balance sheet, and are largely intangible. Yet stocks of these assets can be developed, augmented, leveraged and valued.

Relational market-based assets are outcomes of the relationship between a firm and key external stakeholders, including distributors, retailers, end-customers, other strategic partners, community groups, and even governmental agencies. The bonds constituting these relationships and the sources of them may vary from one stakeholder type to another. For example, brand and channel equity reflect bonds between the firm and its channels and customers. Brand equity may be the result of extensive advertising and superior product functionality. Channel equity may be in part a result of long-standing and successful business relationships between the firm and key channel members.

Intellectual market-based assets are the types of knowledge a firm possesses about the environment, such as the emerging and potential state of market conditions, and the entities in it such as competitors, customers, channels, suppliers and social and activist groups. The content or elements of knowledge include facts, perceptions, beliefs, assumptions and projections. The content of each type and the sources of it vary greatly from one type to another. Thus, a firm may develop projections of the way its industry will evolve so that it knows how it will react when total industry sales decline by a particular percentage or when a substitute product might emerge. Or, as some have suggested, a firm may develop over time unique facts, beliefs and assumptions about its customers’ tastes, manufacturing processes, or proclivities to respond in certain ways to promotion, sales and pricing moves.

The development and evolution of relational and intellectual market-based assets intertwine in many ways. Both evolve in part out of the firm’s unavoidable interaction with entities in its environment.

Intimacy of relationships allows knowledge to be developed, tested and refined. Knowledge of the environment guides the firm in choosing which entities to align with, how to do so and when. Relationships with and knowledge of specific entities are often developed by the same set of individuals. Customer service personnel, because of the relationships they develop with multiple distinct sets of customers, often generate unique insight into their background, behaviors and propensities.

Relational and intellectual market-based assets also share a number of common characteristics. Both assets are intangible; they can not be inventoried or physically divided into specific portions. Yet, both can be assessed in terms of their stock and flow. Stock refers to a specific amount or extent of brand equity, or knowledge of customer’s purchasing criteria, possessed by a firm. Flow refers to the extent to which a stock of a particular asset is augmenting or decaying.

Thus, a firm may strive to augment its knowledge of a corporate customer’s buying processes, the individuals involved in it, and the organizational systems supporting them.

The Central Task of Management

The central task of management, we argue, is to identify, measure, develop, and leverage the firm’s market-based assets to increase shareholder value.

The identification and measurement of market-based assets involves using cross functional teams to list such assets and to begin a dialogue across organizational boundaries about the impact of market-based assets on shareholder value.

The development of market-based assets requires managers to make a case, in the language of finance and top management, for investments in such assets.

Finally, managers must grapple with the task of leveraging market-based assets by using them to accelerate and enhance cash flows, to reduce the volatility and vulnerability of cash flows, and to increase the residual value of cash flows.

In my next column, we’ll explore the contribution of these market-based assets to the financial performance of the firm. I’ll outline the framework my colleagues and I came up with to link market-based assets to shareholder value.

Rajendra Srivastava is the Dean and Novartis Professor of Marketing Strategy and Innovation at The Indian School of Business. Prior to that he was the Provost and Deputy-President (Academic Affairs), Singapore Management University, occupying the  LKCSB Chair in Marketing Strategy and International Business. He is the author/editor of The Future of Branding, and over 200 articles on marketing, and is a widely-sought advisor and expert.