Transcript Marketing X Finance = Product with High Return and Low Risk Profile

Marketing X Finance =
Product
with High Return and Low Risk Profile
Joost M.E. Pennings
Professor of Marketing
ALEX Beleggersbank Professor in Finance
Marketing-Finance Interface: New
Frontiers
1. Financial Product Development
2. Channel Relationships & Financial Derivatives
3. Shareholder Activism & Marketing
4. Market Sentiment
5. Interdepartmental MF Integration
Faculty of Economics and Business Administration
Marketing-Finance Interface: New
Frontiers
• Financial Product Development:
– $630 trillion derivatives traded
– Fierce competition
– Low new product success rate
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Financial Product Development
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MF-Approach
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Financial Product Development:
Challenges-Future Research
• How can we translate customer needs into concrete
attributes that are technical feasible?
• Research methodology
– Marketing-finance approach
• Attributes of financial product
– Marketing approach conjoint approach
– Finance approach  objective measure e.g., hedging
effectiveness
Faculty of Economics and Business Administration
Financial Product Development:
Challenges-Future Research
• New tools are needed that:
– Can transform customers’ preferences in concrete
attributes AND………….
– are able to take the technical constraints into account
simultaneously
Hence operationalize the MF approach toward product
development
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Financial Product Development:
Challenges-Future Research
• Research methodology
– Marketing-finance approach
• (Mis)-match subjective vs. objective performance
• Current case study:
– Dairy futures
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Channel Relationships & Financial
Derivatives
• Channel contract preferences differ
– Driven by risk attitudes, capital structure etc.
Conflicts and unable to meet financial
performance targets in terms of risk
(volatility)
– expected cash flow (return) trade offs.
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Marketing Channels & Financial
Markets
Faculty of Economics and Business Administration
Channel Relationships & Financial
Derivatives
• Role of Financial Markets:
– May complement cash flow stream from internal
channel relation with external third part financial
service, if………….
– How should we organize or marketing activities
and financial product design to accomplish this?
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Channel relationships & financial
derivatives
• Marketing: Behavioral & cash flow characteristics of
“relationships”
– How does “Trust”, “Power” influence cash flow structures?
• Finance: what are the attributes of financial products that can
complement cash flow structure of relations?
– Hedging effectiveness
– Market micro structure (liquidity)
– Complete markets (arbitrage; marketing relationships and
financial products)
Faculty of Economics and Business Administration
Shareholder Activism
• “Upheaval at VNU is yet another example of increasing
shareholder activism in Europe.” (The Economist April 6th
2006)
• “Activist shareholders are getting tough with boards and
managers.” (The Economist May 31st 2007)
• “Investors are making life uncomfortable for boards in
America.” (The Economist May 31st 2007)
• “Keeping shareholders in their place: Bosses around the world
celebrate a series of victories over activist shareholders.” (The
Economist October 11th 2007)
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Shareholder Activism
• Questions from the Industry:
– Why do shareholders become active?
– What is the impact of shareholder activism?
– How can we improve Investor Relations (IR)?
– Who is leading in IR: Finance or Marketing?
Faculty of Economics and Business Administration
Shareholder Activism
• Research questions:
– What are the underlying dimensions of shareholder
activism?
– What is the impact of shareholder activism on firms’
marketing activities:
• 4 P’s (price, product, place, promotion)
• Time horizon (short versus long term view)
– What is the role of Marketing in IR?
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What is the role of Marketing in IR?
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Market Sentiment
• Explanation for all movements in markets?!
– Industry, Academia in disagreement
 No consensus: remains a black box
• Market sentiment index industry:
–
–
–
–
Proprietary methods
Technical Indicators
Surveys
Put/call ratio
Do they add value?
these are not measures but the result of market
sentiment!
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Market Sentiment
• What is it? What drives it?
– Affective constructs
• Mood A mood is a lasting affective state triggered by
a particular stimulus or event. Moods generally have
either a positive or negative valence.
• Optimism Expectation of positive outcomes in (e.g.,
online investing).
• Confidence-> A state of being certain, either that a
hypothesis or prediction is correct, or that a chosen
course of action is the best or most effective given the
circumstances.
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Market Sentiment
• MF approach:
– Bottom-Up approach: Start with
individual decision-maker
– Determining drivers of sentiment
– Most approaches are top-down
• aggregate studies do not address causality.
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Conceptual Model
• The effect of Investor Sentiment on Risk Behavior:
Risk Perception
Investor Sentiment
Optimism
Confidence
Mood
General affective state affects
risk perceived in market.
When investing, general affective
state also depends on the state of
the market – Positive Feedback Loop
Mood is dynamic  Risk Perception is dynamic
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Conceptual Model
• Effect of Susceptibility to Affect Richness (STAR) on
Risk Behavior:
STAR measures “irrationality” in an
investor who accounts for affective
Risk Attitude
value when calculating risk-return
trade-offs.
Susceptibility to
Affect Richness
A “STAR” investor seeks
more risk than a “non-STAR”
investor in order to acquire the
“affective” benefits of investing
STAR is a personality trait
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Conceptual Model
Investment Decision
Risk Behavior
Risk Attitude
Affect
Susceptibility to
Affect Richness
Risk Perception
Interaction
Investor Sentiment
Optimism
Confidence
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Mood
Market Sentiment
• Financial Product Development:
– Investment products
– Trading support systems
– Market sentiment derivatives
– Insurance products
– Regulation
– Confidence during crises
» (in the US credit system for example)
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Interdepartmental MF integration
• Interdepartmental integration:
– interaction and
– collaboration
• in a way that benefits are produced to them
that exceed individually produced benefits of
the departments.
In order to effectively work together,
marketing and finance must align their goals
Faculty of Economics and Business Administration
Interdepartmental MF integration
• Research questions
– Does M-F integration within a firm contribute to
business performance?
– Do relational characteristics and organizational
structure variables have an influence on the level
of M-F integration?
– Is there a gap between perceived versus actual
integration, and does this have an influence on
business performance?
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Interdepartmental MF integration
Faculty of Economics and Business Administration
Interdepartmental MF integration
• Managerial implications
– Provide insights into how interdepartmental
integration should be managed
– Provide guidelines for top management on how to
design their organization
– Marketing managers can learn how to interact
and collaborate with finance managers
– Develop a measure that measures actual
interdepartmental integration in terms of
contribution to financial performance
Faculty of Economics and Business Administration
Marketing X Finance = Product with
High Return and Low Risk Profile
• Can we disentangle what discipline
contributes what to financial performance?
– Marketing X finance
• Is that a relevant question?
– Not for shareholders
– For rewards for both disciplines
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Marketing X Finance = Product with
High Return and Low Risk Profile
• Because:
– High return:
• They complement each other: The Whole is greater than the
sum of its parts.
– Low Risk
• Natural hedge between the disciplines
– Risk, in terms of contribution, is cancelled out by both disciplines
MF approach is investment with high Sharpe ratio!
Faculty of Economics and Business Administration