Yin and Yang
If a company can be de-valued by bad marketing and public relations, logic follows that the value of a company can be improved through effective marketing and PR efforts. But this is not a casino game, nor is it a break-even proposition.
The good news is this isn't a "zero-sum" game either. Wal-Mart's image doesn't improve just because Kmart's image deteriorates, and vice versa. Fortunately, consumers are sophisticated enough to judge each company on its own merits—and in the new global climate that the Internet has created, that judgment moves with lightening speed.
Marketing Value = Goodwill
While many business students (and even some marketing practitioners) believe there is no concrete way to quantify the value of marketing and public relations, I believe there is a financial value to marketing and it stares you right in the face every time you look at the balance sheet. It's called goodwill. What is goodwill? It is simply the value of a company over and above the value of its assets. In short, goodwill is the price someone is willing to pay for a company, not what you could get by selling its components.
Here's an example. Arguably, one of the greatest cars ever made was the AC Cobra. The performance of the AC Cobra has not been duplicated, even in today's most expensive high-performance cars. Only about 200 Cobras were ever built. It was designed to be a street-legal race car of sorts. An AC Cobra in mint condition will fetch upwards of US$ 500,000. Break an AC Cobra down and sell its component pieces and you'll probably get $5,000. Is the car worth $500,000 or $5,000? All depends on whom you're asking. To a parts dealer, the car is worth $5,000, but to a car collector, it's probably worth the half million, because that's what someone who values AC Cobras is willing to pay for them.
A company might be worth $1 billion on paper, but if the market is willing to pay $10 billion, that is the value of the company. Herein lies the value of marketing and public relations. Marketing creates the value; public relations helps retain the value and keep it from deteriorating.
The Best of Times, the Worst of Times
When a company falls on hard times, the first department to receive wholesale cuts is marketing. In effect, when companies have fallen on hard times, they are voluntarily de-valuing their own company at a time when, in the face of competition, value should be trumpeted. In this sense, marketing should not be thought of as its components such as advertising, direct mail, premiums, couponing, etc. In hard times, or in good times, marketing should be thought of as "value." Marketing is goodwill. Goodwill is achieved through marketing, recruiting and product development and protected by public relations.
One relatively recent example is the HP-Compaq merger. Compaq was valued at nearly $25 billion at the time of the merger. Turns out, Compaq was not worth nearly as much goodwill as HP credited to it. In fact, shareholders received such little value in the HP-Compaq merger, HP will likely be forced to write off a major portion of the $14.5 billion in goodwill on its balance sheet, virtually shouting to the world that the merger was an unmitigated failure—to the detriment of both companies.
Let's explore that a little further. Of the $25 billion HP paid for Compaq, it was determined that $14.5 billion was goodwill, or the added value of the company. Compaq added that goodwill value to its balance sheet when the merger took place. The offsetting entry for the goodwill asset entry was probably retained earnings or some other line item in shareholder equity. Goodwill is an intangible asset, but since it has value, it can be depreciated just like any other asset. In short, since Compaq wasn't worth that much in goodwill, HP will have to write off the difference between the value it assumed and the value it actually got. That action will likely affect the bond rating along with a host of other financial indicators.
Yes, This Means You
Don't think because you're not a public company and you don't have "goodwill" on your balance sheet that you're not responsible for creating goodwill. Admittedly, goodwill comes into play most often when one company purchases another, but even the mom and pop grocery store on the corner has to create goodwill to survive.
Witness the recent public relations nightmare that Wendy's endured when a woman claimed to have found a piece of a finger in a bowl of Wendy's chili. It seemed to take the Wendy's PR machine forever to gear up. Wendy's investigated the store where the chili was served. Then it investigated all the stores in the area. Then it audited the processes of all its stores nationwide. Then they spent countless, precious, agonizing days trying to figure out if the finger had been cooked (for some reason). All the while, Wendy's was virtually silent. Anyone who has ever spent a day in the PR world knows that the quicker you start dispelling rumors and embarking on "damage control," the quicker you recover.
While this public relations and marketing disaster was going on, I was teaching a university class in Promotions Management. I asked a pointed question over the course of our discussion: "Would you eat at Wendy's today?" And then, "Would you buy Wendy's stock today?" Most students answered no to both questions. Suddenly, the light went on for some of them. The actual value of the Wendy's empire was decreasing before their very eyes, because it had decreased to them as well. It's fair to say the damage from this incident will have long-lasting effects.
I used this incident in my classroom to illustrate the value of goodwill and the role public relations plays in retaining that goodwill. Even though marketing has established the Wendy's brand, 30 years of marketing could not keep customers going to the restaurants while they thought they might be in danger of pulling a digit out of a bowl of chili. But companies can recover if they have a "reserve" of goodwill built up. Because Wendy's does have substantial goodwill in the community, some customers showed their support by showing up at Wendy's restaurants specifically to order the chili.
A situation like this makes even a massive company like Wendy's vulnerable. If McDonald's had had a mind to do so, they likely could have mounted a hostile takeover bid for Wendy's—and they would have gotten the empire much cheaper than they would have a week before this incident.
I predicted to my students that if the woman who claimed to find the finger in the chili was lying, Wendy's would have no choice but to land on her with both feet. Companies must vigorously protect the goodwill value they have spent years building. Just as Tylenol prosecuted the perpetrators of the cyanide hoax and just as Coca-Cola prosecuted the perpetrators of the infamous syringe hoax, the company had to protect its brand image by prosecuting those who had damaged it. Fortunately, those two companies have recovered from their public relations nightmares, and they likely even gained a few fans for how well they handled these incidents.
What company is next in line, and has it built enough goodwill to weather the storm?
Let us not discount the value of internal goodwill. Some of the internal items that comprise the esoteric goodwill entry on the balance sheet are executive and managerial acumen and skill of the labor force. While these are all internal assets, they still create external value. The mantra of venture capitalists in leaner times has been, "I'd rather invest in a company with excellent management and a mediocre idea rather than a company with mediocre management and an excellent idea."
It should be noted, for the sake of accuracy, that goodwill has many components and, by definition, most of them are intangible, as has already been stated. Among the items that comprise external goodwill is the company's identity.
It should also be noted that the executives in a company create internal goodwill value through investment in resources like training for the labor force, compensation packages for highly skilled executives and investment in political action committees and lobbyists to help pass laws amenable to the particular business the company is in. The value to the company is still external, but the source of the value is internal.
Furthermore, executives create external goodwill value also through the investment in resources, but external resources are other companies and business blocks that hopefully create synergies such that the whole is greater than the sum of the two parts. There hasn't been a tremendous amount of evidence lately that major mergers do, in fact, create that synergy.
Marketing and public relations have a clear-cut financial value. The components that make up that value are admittedly esoteric, difficult to quantify and often up for debate, but the potential value is there. You need look no farther than your balance sheet to find it.