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Shareholder Value - Essay Example

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Every business exists to make a profit while selling a product or service to customers willing to pay the right price. As the business remains profitable, it survives, and if its owners are ambitious and motivated, it grows, selling more products or services in its markets, hiring more employees, or using the profits to reward its owners or buy more assets.
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Download file to see previous pages Some strategic decisions (entering new markets, increasing sales capacity, etc.) need shareholder approval as these may require capital investments that affect profits, while most tactical marketing decisions (like advertisements, promotional campaigns, etc.) do not.
Since shareholders are after increasing the value of their investment (Shareholder Value or SHV), they want higher profits. Since profits result from how much the business sells and spends to generate those sales, it seems logical that SHV is a good framework for evaluating marketing decisions. This paper in effect analyzes the reasoning that making good and correct marketing decisions would increase profits and SHV.
Drucker (1955, p. 36) was among the first to argue that the purpose of a business is to create value for its owners by creating and keeping customers, and that marketing encompasses the entire business and must permeate all areas of the enterprise because it is what will create and keep customers.
Since then, academics and practitioners from Levitt (1960) to the American Marketing Association (AMA) have linked the marketing function with the concept of value - both to the business owners and to its customers. AMA (2004) defined marketing as "an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships (customer value) in ways that benefit the organization and its stakeholders (shareholder value)."
Marketing therefore links two areas where value is created: customer value that leads to shareholder value.
Marketing is a complex activity that aims to satisfy people outside (customers) in order to satisfy the people inside (shareholders, managers, and employees) the business, and not the other way around. Since customers are satisfied if the business makes the right strategic and tactical marketing decisions, the customers buy what the business sells, and enough profits will come to keep everyone happy, at least in theory.
Marketing decisions used to be simple and easy to make: find out what customers need, what price they are willing to pay for it, make the product, and sell it to them.
Friedman (2004) argued that the age of mass production after the War was more about selling than marketing, but as the world became affluent and globalized, customer needs and wants became more sophisticated, business competition intensified, and meeting market needs became more scientific and complex and considered not only what customers want now but also what they would want in the future (Achrol, 1991).
Thus, marketing decisions came to be classified as long-term (or strategic) and short-term (or tactical) depending on their impact on the business. Strategic marketing decisions took into account making an accurate (or close to it) prediction of what products would be demanded by customers in the future, and how much they are willing to pay for them, so that the business would not only decrease their profits and the rate at which profits are growing, but continue to compete and grow.
Strategic marketing includes long-term decisions, aside from knowing what the present market would need and want in the future, about discovering new customers for present products, deciding on which new markets to enter, how much profits each market could generate and how much of that profit the ...Download file to see next pagesRead More
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