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‘Governing the Firm in Hard Times:The Role of Internal Marketing’

 

Professor Howard Gospel

King’s College University of London and Said Business School Oxford

 

CIM April 2011

A further brief introduction

• Academic backgroundUniversity – Oxford, LSE, King’s College London

• Practical experienceGovernment – DTI / BIS, UKCESConsultancy e.g. Unilever, P&G

• My areas of specialismHuman Resource ManagementCorporate GovernanceBut, … provide a Marketing spin

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Outline

1. Hard Times – ‘The Great Recession’

2. Governing the Firm – relationship to Marketing

3. Governing the Firm: Employees

4. Governing the Firm: Owners, Investors, Lenders

5. Conclusions3

1. Hard Times: ‘The Great Recession’

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‘The Great Recession’

• How did we get here?

• Where are we going?

• What are the risks?

• What are the consequences?

5

Ants, Grasshoppers, Locusts

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Martin Wolf and Financial Times

How did we get here?

• Ants industrious and save – some countriese.g. China, Japan, Germanytrade surpluses and foreign exchange reserves

• Grasshoppers spend – some countries and householdse.g. US, UK, Spain→ big global imbalances

• Locusts – make money out of intermediating between the two, take risks

innovate financially e.g. sub-prime, derivatives… but can leave ruin behind

• = background to crisis of private debt / credit crunch, and asset market collapse

• which has spilt over into public debt crisis – expenditures rise, taxes fall, spotlight effect on some weaker countries

7

The Great Recession – Links in Pictures

The Great Recession – Links in Pictures

How did we get here?

ECONOMIC PERFORMANCE IN THE GREAT RECESSION

90.0

92.0

94.0

96.0

98.0

100.0

102.0

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10

US Japan Germany France Italy UK

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The Deep Decline

How did we get here?

RISE IN UNEMPLOYMENT RATE 2007-2010

5.1

2.5 2.5

1.9

1.5 1.3

-1.3-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

United States Italy United Kingdom Canada France Japan Germany

Source: IMF WEO October 2010

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The Steep Rise in Unemployment

Where are we going?

• Rescue very expensive□ bail-outs□ unprecedented monetary policy

• It largely worked…□ world trade has recovered□ especially in emerging markets, Asia

• But … big problems remain□ recovery fragile, especially in Europe□ fiscal hangover e.g. UK□ big challenge of returning to stable growth□ new shocks / ‘black swans’ – natural

disasters, revolution, war

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Where are we going?

GROWTH OF WORLD ECONOMY

-4

-2

0

2

4

6

8

10

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Advanced economies Emerging and developing economies World

Source: IMF WEO October 2010

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Weak recovery, except in Emerging Countries

Where are we going?

GDP PER HEAD RELATIVE TO US (2009 EK $s)

1.0%

10.0%

100.0%

Japan South Korea China India Brazil

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Catch-up Growth

Continuing risks

• Continuing external imbalances→ protectionism? especially in US

• Internal rebalancing.Fiscal austerity e.g. UK

• Deflation as in Japan?Or inflation more likely in US and UK?

• Commodity prices?

• Sovereign defaults?Greece, Ireland, Portugal. Spain?But these countries need greater competitivenessand something to sell to someone

• Two-tier Europe and break up of Eurozone?

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Consequences: The world has changed

• Greater risk

• End of cheap money / high leverage for countries, firms, and household

• End of long era of Western dominance

• End of the NICE years (non-inflationary constant expansion)?Into the NASTY years (nightmare austerity and stagflationary years)?

• Greater product and service market competition

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The world has changed: How are firms to react?

• Cut back OR invest in anticipation of a solid recovery?

• Find new markets

• Lower costs / improve productivity / flexibility

• Innovate in terms of better goods and services

• Get more out of internal resources ….

• … better internal governance ….to ↓ risksto ↑ trust / reputation / performance

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2. Governing the Firm

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How we view the firm?

The firm is a nexus of contracts, explicit and implicit,located within certain markets – product, financial, labour

The governance of the firm concerns the relationships between these stakeholders

Information is key to the relationship.

Marketing links stakeholders together

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Marketing – types of markets and stakeholders

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1. Product / service markets

2. Financial markets

3. Labour markets

1. External stakeholdersCustomersSuppliers

2. Internal stakeholdersOwners, InvestorsEmployees

How we view the firm

Customers

OthersGovernment, communities

Suppliers

Owners

Managers

Employees

My Focus is on Internal Marketing

• Internal stakeholders

• Use of marketing within the organisation to align interest of internal stakeholders with those of the firm and with external stakeholders

• The organisation is an internal market with its own suppliers and buyers

• ‘If internal stakeholders aren’t sold, don’t buy in, … then customers won’t either’

• Multiple-stakeholder marketing

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Berry 1981, 1983: Rafiq and Ahmed, 2000; Varey and Lewis 2006

My Focus is on Internal Marketingto Two Sets of Stakeholders

2. Owners, Investors, Lenders

1. Employees

3. Governing the Firm:Employees

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Marketing and Employees

1. Large groups

2. Small groups

3. Individuals

Marketing and Employees

• Marketing the firm to present and potential employees viz. attract and retain, get best out of

• Stage 1. ‘Employer Branding’Selling the firm to employeesGetting ‘buy-in’To serve each other and to serve the customer

• Premise: ‘You need satisfied employees to have satisfied customers’Theory: staff satisfaction → staff motivation → customer orientation → customer satisfaction → better performance

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Berry 1981, 1983: Varey and Lewis 2006; Edwards 2005

Employees marketing the firm on…

• Stage 2. ‘Employee branding’

• Using image and competence of employees to sell product or service

• Empowering employees to sell product or service

• ‘All staff are front-line staff’

• ‘Walking talking brands’

• Of course, given Hard Times,e.g. lay-offs, pay cuts,

all this may be different

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Adapted from Edwards (2005, 010)

The Employee → Product / Service Marketing → Profit Chain

Internal marketing and empowerment

Employees feel able to produce results for customers

Employee satisfaction and loyalty. Employee brand

Product / service value

Customer satisfaction and loyalty

Profits and growth

Adapted from Heskett et al.(1994)

Does it work / pay off? Evidence

• Macrostatistical

• Micromini case studies – 1 big, 1 small

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Macro Evidence

• My study – 1,000 + firms. Data on information provided to employees on financial matters, investment plans, marketing plans, tasks, …

• High variance

• Determinants□ Size* □ Listed *□ Management sophistication **□ Shared values ***□ Direct participation ***□ Path dependence ***

• Outcomes□ + effect on employee commitment *□ + effect on quality *□ + effect on financial performance *

• Financial performance not a predictor, but an outcome

30Peccei, Bewley, Gospel, Willman 2005, 2008, 2010

Micro Evidence – Case studies

•McDonalds

•Paul Ltd.

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The Case of McDonald’s in the UK

• ‘Brand that went bad’ Got a bad reputation in terms of product, service, jobs.

• McJob: ‘an unstimulating low-paid job, with few prospects’ OED

• … and producinga poor service and product

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The Case of McDonald’s in the UK

• Established Corporate Reputation TeamWork on branding and employer / employee brandingWork with Marketing, HR, Training, agencies

• Your Viewpoint Surveyneed for engagementneed to work for a socially responsible employer

• Lancaster University analysise.g. restaurants with more mix of employees (50+), 20% higher customer satisfactione.g. restaurants with higher commitment scores, higher customer orientation (20%)e.g. restaurants with highest commitment scores, make 25% more sales.

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The Case of McDonald’s in the UK

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• Recruitment campaignincluding more older workers

• Offer bundle of practices □ Basic skills training □ Apprenticeship programme – 6,000 staff. □ Foundation Degree: 2-year. Talent management for restaurant managers and beyond – MMU

accredited □ Can log on in staffroom and at home

• Job applications ↑Pride in working for company ↑Absenteeism and Turnover ↓ – not just becos of recessionSelf image of employer ↑

The Case of McDonald’s in the UK

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• Enters Sunday Times ‘25 Best Companies to Work For’ as number 22.

• At same timeinvested in refurbishmentintroduced new menusintroduced free wi-fi

• Sales ↑New restaurants opened in motorway services

• The old ‘McJob label is out-of-date, lazy, and snobbish’

The Case of McDonald’s

• ‘I’m loving it’• ‘I used to come in to work

hard and to get the job done. Now I understand more aboutgood business practice… andI do a better job’

• ‘Not bad for a McJob’

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The Case of Paul Ltd

• French, family-owned bakery company.

• Moved into UK; later into US, Asian countries.

• Developed employer brand – French food, sandwiches, patisserie and bread, French language

• Developed employer brandwhich became marketing / consumer brand

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The Case of Paul Ltd

• Advertises on web e.g. Gumtree, YouTube, Facebook

• Offer package □ 12 days on-the-job training □ Advancement through the Paul Academy □ Career path – specialisms, team leader, shop manager etc. □ Recognition e.g. celebrations, pins □ Pay for experience scales and bonuses

• ‘Breakfasts’ and ‘supper clubs’ with higher managementNewsletter and ‘speak out’3-way communication – top-down, bottom-up, horizontal

• Tried to create bigger jobsEncourage cross boundary workingTeam working – ‘serve each other to better serve customers’

• Job applicants ↑Absenteeism and turnover ↓

• Successful expansion in UK

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Care Home

• Competitive market – private and public• Attract staff

to poorly paid and difficult jobs• Attract residents and state commissioning• Stress training and HR systems• Fear of complaints → new complaints procedure to identify

training needs and improve standard of care• Show quality of care to residents and their families• Trained staff an important part of this.• Used in their advertising

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4. Governing the Firm:Owners, Investors,

Lenders

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Owners, investors, lenders

• Always importantBut, more important in

Hard times - money tight Investors demand higher return

• New ownersmore demandingless patient

• Firms having to think more aboutstart-up financeon-going financegoing publicmaintaining share pricebond issue

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Owners and investors

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1. Family Owners

2. Dispersed Owners / Institutions

3. Bank Owners4. Venture Capital

Intermediaries – Fund managers and analysts

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2. Analysts:‘Follow’ companies

1. Fund Managers:Manage funds for large institutions

Marketing to owners, investors etc.

• New literature on ‘Investor Relations’Mainly Finance literatureBut some on ‘Investor Marketing’

• Need to market yourself to raise financestart-upexpansionInitial Public Offering (IPO)new share issue or bond issuesmaintain share price

• Providers of capital / investors have buying decisions‘Why buy a share?’‘Why hold onto a share?’

Marketing in an IPO Factsheets, pressreleases

Roadshow materials Personal meetingspress conferences

Online IR Accounts, reports,brochures

The Owner / Investor → Product / Service Marketing → Profit Chain

Marketing to owners / investors

These prepared to supply capital, stick with firm

Help in hard times; new investment for future

Product / service value

Investor satisfaction and loyalty

Profits and growth

Adapted from Heskett et al.(1994)

Does it work / pay off? Evidence

• Macrostatistical

• Microcase studies – 1 big, 1 small

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Macro-evidence

• Meta-analysis for UK Department for Trade & Industry

• Provision of good information to investors – quantity, quality, timelyEngagement

• Firms provide more information where□ bigger *□ need to raise capital **□ more widespread share dispersion **□ more institutional shareholders **□ more independent directors, with more expertise

**□ perform better / worse

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Filatotchev, Gospel, and Jackson 2007

Macro-evidence

• Firms which provide more information / better engagedReduce the so-called ‘lemons’ problem – purchasers know where they areReduce uncertainty

• As a result □ Easier to raise capital ** □ Lower cost of borrowing capital (equity and debt) ** □ Reduces volatility in share price ** □ Attracts institutional investors ** □ Reduces under-pricing in IPOs **

• But also costs – administrative, proprietary

• But benefits outweigh costs

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Micro Evidence – Case studies

•Infosys

•BTF

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Micro-evidence – the Case of Infosys

• India’s largest software companyEstablished 1981, with $1,000Now employs 122,000

• India a bit of a backwater in terms of marketing, corporate governance, and information provision.

• Infosys set out to do it differently

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Khanna and Palepu, 2004

Micro-evidence – The case of Infosys

• Given increasing opening up of economy and competiton

• Set out to market itself

• Felt some need to raise capital, in India and overseas

• Felt need to attract top talent

• To gain credibility with customersespecially foreign customersespecially given negative image of India

• Signal high quality

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Micro-evidence – The case of Infosys

• How did it do it?□ Good corporate governance e.g. board, directors□ Listed in Bombay (1993) and NY (1999)□ Provided more and better information than required

‘when in doubt disclose’‘becos you tell us in good and bad time, we trust you’

□ Recruited top talent – branded its HRmost desirable place to work and great employeestrained its talent

• Results□ Confidence in company□ Able to raise finance□ Positive growth for company in India and overseas□ Positive externalities on Indian software industry

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Micro-evidence – the case of BTF

• Small Australian biotech companyFounded by two professors

• 1st financial marketing: raise capital from university + development agency

• Grew … but needed more capital

• Considered banksConsidered IPO

• But then approached a group of venture capital companies

54Hirshorn et al. 2011

Micro-evidence – The case of BTF

• 2nd marketing: had to market itself – factsheets, reports, ‘roadshow’

• ‘Beauty contest’

• Aim to raise highest sum of money but giving away least in terms of ownership and control.

• Successful – innovation and growth

• 3rd stage approach to venture capitalists again

• 4th stage: became subject of interest by other firmsSold itself to a French company

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5. Conclusions

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Conclusions

• Hard Times: we live in a new and tougher world□ less cheap money□ NICE to NASTY?□ increased competition□ other changes e.g. demographics

• Firms will look to multiple strategies □ new markets, new products, □ low road – cost cuttng, □ high road – investment □ get more out of internal resources

• Greater emphasis on marketing to external and internal □ benefits □ costs

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Conclusions

• Information provision is keyEngagement is key

• Honest, not manipulative‘Substance not spin’

• Long-term relational exchanges, not transactional ,with stakeholders wherever possible.

• Not shareholder value, but shared value for employees, customers, shareholder

• Will not get rid of conflictsConflict can be productive

• Will not get rid of risks, but will reduce

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Conclusions

• Danger of breach of formal and informal contracts

• In Hard Times e.g. lay-offs, pay cuts, cuts in dividends, …. all this make it more difficult.

• Fit, ‘bundles’ of practices, holistic approach.

• Remember always: internal marketing to meet needs of external customers

• Pay-offs, but not all do….Why?

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‘Governing the Firm in Hard Times:The Role of Internal Marketing’

 

Professor Howard Gospel

King’s College University of London and Said Business School Oxford

 

CIM April 2011