The excitement around the boardroom was palpable as department heads streamed in with a shared sense of both victory and optimism. There were plenty of smiles to go around, and warm handshakes and hot coffee were the order of the day. As they slowly settled into their chairs, they chatted about how the firm’s stock price had responded favorably to the change in strategy over the last three quarters.
The fortunes of the firm had indeed made an impressive turnaround since the previous vice president of marketing had left. Rumors were that he was judiciously let go because the firm’s flagship brand in the marketplace had been steadily slipping and losing share to private labels. The vice president of human resources had launched an aggressive search for a replacement and, in a significant departure from past practice, had strived to and been successful at bringing in someone from outside the industry.
What subsequently transpired reflected a different approach to how the firm did business. The market research process was formalized and the results of extensive customer feedback resulted in a major design change in the packaging of the firm’s key product, including a change in the color of the package from yellow to blue. Postlaunch tracking had indicated that customer response to the change was both positive and immediate and had improved the sales per customer by about 50%. The brand was stronger and the private label challenge seemed to have waned.
Today’s meeting was to celebrate the firm’s recent success and to share thoughts about future strategic moves. The chief executive officer (CEO) walked in with a wide smile on his face and the now familiar and well-known management consultant and advisor at his side. As they settled in and exchanged pleasantries, the CEO gave a general overview of the turnaround at the firm and highlighted the fact that the value of the firm had increased by about $20 million since the time the key strategic change was made to the firm’s flagship brand. He then invited each of the departmental heads to give their own perspectives on what had transpired and what the next few steps should be.
The new vice president (VP) of marketing was first and gave an articulate presentation of the major change in the fortunes of the flagship brand. She touted the success of the research-driven approach that had pointed to the brand’s key deficiency in packaging and the subsequent strengthening of the brand brought about primarily by the change in the color of the brand’s package. She then went on to present the financial consequences of the change in strategy by outlining the dramatic increase in the flagship brand’s equity. She explained that she computed the future incremental cash flow that the brand would have generated over a comparable no-name product under the previous strategy. She had calculated the present value of these incremental cash flows using the firm’s cost of capital for discounting and called it the baseline brand equity. Next, she presented results from a similar analysis using the revised projections of future cash flows under the new brand strategy and called the metric the updated brand equity. And there was a mild applause from the CEO when she showed that the change in strategy had increased the equity of the firm’s flagship brand by an estimated $20 million, which was very close to the increase in the firm’s value over the same period. The VP of marketing enjoyed the moment and took a few questions and suggestions on the future course of the strategy.
The VP of sales stepped up next and shared the details of how the customer response to changes in the firm’s strategy had been positive and the sales per customer had registered a significant increase. He then went on to show that the value of an average customer was now much greater than what it had previously been. Interestingly, he said that he had computed the future cash flow per customer under the previous strategy, discounted it, and called it the lifetime value of the customer. He then proceeded to explain how he had aggregated the lifetime value of all the customers and had computed a metric called customer equity. Much like the VP of marketing had done, he too had computed the change in the value of customer equity following the change in strategy and placed the difference at about $20 million. He hurried through the next slide that showed that the change in the value of the firm could be traced almost entirely to changes in the firm’s customer equity. The CEO gave him a somewhat confused look and whispered a question into his consultant’s ear. The consultant gave a thoughtful glance at the VP of sales but kept quiet.
What followed next was somewhat dramatic. The VP of human resources touted the shift in the firm’s hiring strategy and the recruiting of people from outside the industry. She hailed the almost newly minted VP of marketing as a prime example of how the shift had increased the value of the firm by enhancing its people equity. By now, the story was clear and the method to compute people equity was no different from what those who preceded her had followed. Less surprising was the conclusion that the shift in strategy had enhanced people equity by about $20 million, roughly the same amount that firm’s value had increased over the same period.
The smile had vanished from the CEO’s face, and he was increasingly turning to his consultant to seek clarification regarding what was causing the increase in the value of the firm. Why was it that brand equity, customer equity, and people equity had gone up to the tune of about $20 million each, yet the firm value was up by only around $20 million? He sent a questioning glance at the chief financial officer (CFO) of the firm and tried to read whether he felt that the truth was better than they thought or that there was less credit to go around than was being claimed. The head of packaging and the chief of market research were yet to make their presentations, and the CEO was trying to guess whether they too would claim returns on packaging and returns on market research to the tune of $20 million each. Was he about to learn about things such as research equity and packaging equity? As he was lost in his thoughts trying to make sense of all that he had heard, the consultant got up to speak.