Applying financial tools to marketing decisions

It is widely argued by both managers and academics that the principal criterion for the survival of any trading institution is its ability to create value for its shareholders (Delves, 1998 and Doyle, 2000). All investment decisions, therefore, should aim to maximise shareholder wealth. Two traditional finance techniques, net present value (NPV) and internal rate of return (IRR) are widely considered the predominant methods for assessing investment decisions. However, more recently, a performance measure based on the concept of economic profit, economic value added (EVA), has been touted as the ultimate technique for maximising shareholder wealth. A positive EVA measure indicates that shareholder wealth has been created, while a negative measure indicates that shareholder wealth has been destroyed. Many users (Len and Makhija, 1996 and Dierks and Patel, 1997) strongly endorse EVA, suggesting that it better motivates managers to increase shareholder wealth than do traditional accounting metrics. Doyle (2000) and Srivastava, et al (1999) call for marketing strategy to be integrated directly into the process of creating value for shareholders by including developments in finance. To this end, this paper shows how EVA can be used as an effective strategic marketing tool, whether for product promotion or product development, and consequently the importance of marketers understanding the tools of finance. We provide an example where EVA is used to evaluate the promotional budget to launch a new product and compare the outcome to the NPV method, with surprising results. The remainder of the paper first gives an overview of the more commonly used investment appraisal methods and then outlines some criticisms of the more traditional performance appraisal methods. It provides some findings from a relatively recent New Zealand study and compares traditional approaches of investment appraisal with EVA.