How Market-based Assets
Generate Customer Value
by Raj Srivastava

The central task of management, we argue, is to identify, measure, develop, and leverage the firm's market-based assets to increase shareholder value.

You'll recall that market-based assets arise from the commingling of the firm with entities in its external environment. These relational and intellectual market-based assets provide a company some of the same advantages as other business assets - the ability to generate cash flows and to sustain a superior competitive position in the marketplace. Our question - how do these assets generate value?

The Asset Value Tests
Adherents of the Resource Based View (RBV) of competitive advantage maintain that an asset is more likely to contribute to value generation when it satisfies the following four tests:

• It is convertible; if the firm can use the asset to exploit an opportunity and/or neutralize a threat in the external environment, then the potential to create and sustain value is enhanced.
• It is rare; if the asset is possessed by multiple rivals then its potential to be a source of sustained value is considerably diminished.
• It is imperfectly imitable; if it is difficult for rivals to imitate the asset, then the potential to sustain value is considerably enhanced.
• It does not have perfect substitutes; if rivals do not possess, and it is difficult for them to develop strategically equivalent convertible assets, then the potential to sustain value is considerable enhanced.

Three central propositions for market-based assets can be stated:

1. The greater the value that can be generated from market-based assets for external entities such as customer, channels, suppliers, and other strategic partners, the greater their satisfaction and willingness to be involved with the firm, and, as a consequence, the greater the potential value of these marketplace entities to the firm.

2. Market-based assets generate and sustain greater value for external entities the more they satisfy the asset tests I mention above.

3. Shareholder value is created to the extent that the firm taps or leverages these market-based assets to improve its cash flows.

Tangible vs. Intangible Assets
We know that tangible balance sheet assets such as plant and equipment, raw materials, supplies, inventory, and finished products generate value because they can be bought and sold, Furthermore, the value of these tangible assets ultimately is not just their market or trade value, but also their value-in-use. Tangible assets can be leveraged by an organization to:

1. Lower costs by enhancing productivity.

2. Enhance revenues through higher prices if, for example, the raw materials and equipment lead to superior product functionality, features and durability.

3. Serve as a barrier to entry or mobility barrier because others must make similar investments.

4. Provide a competitive edge to the extent they make other assets (e.g., employees) more valuable.

5. Provide managers with options, for example if the plant or equipment can be shared across products

It is important to recognize that market-based assets can also be utilized in the same manner as tangible, balance sheet assets. They can also be leveraged by the firm to:

1. Lower costs; superior relationships with and knowledge of channels and customers lead to lower sales and service costs.

2. Attain price premiums; brand and channel equity lead to higher perceived value.

3. Generate competitive barriers; customer loyalty and switching costs render channels and customers less inclined to purchase from rivals.

4. Provide a competitive edge; by making other resources more productive (e.g., satisfied buyers are more responsive to marketing efforts).

5. Provide managers with options; for example, by creating trial for brand and category extensions.

Generating Long Term Sustainable Value
Interestingly, not only can market-based assets be used for much the same purposes as tangible, balance sheet assets, they are more likely to serve as a basis of long-run, sustained customer value for three specific though related reasons:

1. Market-based assets are more likely to satisfy the four asset value tests noted earlier.

2. They add to the value generating capability of physical assets.

3. They are ideally suited to exploit the benefits of organizational networks.

Satisfying the Asset Value Tests
1. Is it Convertible?
Unless relational and intellectual assets are convertible into customer value, the remaining asset tests are irrelevant. Knowledge is perhaps the ultimate source of opportunity: it is embedded in research and development; it guides product innovation; it energizes marketing and sales. Relationships are now so widely viewed as essential to opportunity creation that they are encapsulated in what has become known as "relationship marketing." Further, relationships with end-users can be exploited in building relationships with other entities (e.g., distributors).

2. Is it Rare?
Knowledge and relationships are often rare, and in some cases, may be unique. For example, some firms' ability to project the future evolution of market sectors, using scenarios and related tools, provides a unique insight into emerging opportunities, how best to exploit these opportunities, what contingent strategies should be developed, and how to monitor which "future" is emerging. Such knowledge allows firms to exploit first-mover advantages, to respond appropriately to the moves of competitors, and to avoid the penalties associated with brash market moves.

3. Is it Inimitable?
The intangible nature of market-based assets renders relational and intellectual assets extremely difficult to imitate. Knowledge and relationships are socially complex and tacit phenomena. The intimacy of relationships with channels and customers attained by some firms such as Home Depot, Nordstrom and Johnson Controls, has proved almost impenetrable by many rivals. Moreover, efforts to replicate these assets often necessitate extensive investments in marketing, sales, service and human resources development, with little, if any, guarantee of success.

4. Is it difficult to Substitute?
Finally, knowledge and relationships present profound difficulties to rivals seeking to develop direct substitutes, that is, assets that allow them to pursue a similar strategy. If a firm possesses truly unique knowledge of its customers, then a competitor must either develop another form of knowledge (such as technology knowledge) or another type of asset (perhaps a one-of-a-kind manufacturing process) that will allow it to achieve the same marketing outcomes. If, for example, the firm is using its distinct customer knowledge to customize its solutions (Pine, 1993), then it may be extremely difficult for rivals to develop substitute equivalent assets that will allow them to customize their solutions.

Adding Value to Tangible Assets
The role and importance of market-based assets is further augmented when we recognize how often they add to the value generating capability of physical assets. For example, knowledge of customers' changing tastes and buying criteria allows a firm to adapt its manufacturing and engineering processes to produce products with the functionality and features demanded by customers. Strong customer relationships, manifested in channel and brand equity, allow human resources to be committed to entrepreneurial activity such as developing new products and extending existing product lines and customizing existing solutions. Interestingly, a firm's market-based assets can create value by exploiting not just the firm's own tangible assets, but also the tangible assets of partner firms. Thus, a manufacturing firm's relationship with a retailer (a market-based asset), can be used to leverage the retailer's physical asset (e.g., shelf space), to create value for the manufacturing firm.

Indeed, a strong argument can be made that relational and intellectual assets are necessary to invigorate and unleash the customer value generating potential embedded in tangible assets such as plant, machinery, people and products. Without knowledge of and relationships with external entities such as customers, channels, suppliers, and other strategic partners, marketing capabilities inherent in organizational processes such as new product development, order fulfillment and speed to market (Day 1994) can be neither created nor leveraged. Knowledge and relationships are essential sources of these capabilities; and, they are in turn, extended and augmented by the successful execution of these capabilities. Research has provided evidence of conceptual quagmires and managerial conundrums that ensue when researchers and managers fail to recognize that knowledge and relationships not only undergird every form of distinctive customer advantage, but are the essential building blocks of every form of competence or capability.

Networked Value
Finally, market-based assets underlie benefits that can be derived from "networks" or product ecosystems. As individual firms increasingly become the node in an interconnected web of formal and informal relationships with external entities, including suppliers, channels, end-customers, industry and trade associations, technology sources, advertising agencies, universities, and in many instances, even competitors, their capacity to generate, integrate and leverage knowledge and relationships extends considerably beyond the resources they own and control.

For example, Intel's Pentium microprocessor's successful defense against both DEC's Alpha and the IBM/Motorola/Apple PowerPC chips is in part related to its network of users, OEM's, and software vendors. Each network link allows customer value generation beyond what could be created by the nodal firm alone or any other network entity operating on its own. Therefore, a network can be viewed as a coordinated set of knowledge sources and cooperative relationships.

Illustrations of the role and importance of networked market-based assets are widely evident. A firm's offerings to customers become stronger when bolstered with superior service by members of the network or "value-net".

A car manufacturer can provide superior products that become even more valuable when accompanied by outstanding service provided by its dealers. A software publisher is likely to be more attentive to a hardware manufacturer with a dominant buyer installed base. And, the value of X-Box or Play-Station to kids depends largely on the number of exciting interactive games that run on these platforms. Collectively, networked producers of complementary products are more valuable to buyers.

Consequently, networked market-based assets help a firm create value over and above that created by market-based assets individually. Thus, the value of a network of market-based assets can be greater than the sum of its individual components.

A Framework
Thus we present a conceptual framework that links the contribution of these assets to the financial performance of the firm, and begins to suggest ways in which the value of marketing activities can be identified, measured and communicated.

Linking Market-Based Assets to Shareholder Value

I'll get deeper into this in my next article...

Rajendra Srivastava is the Executive Director of the Zyman Institute of Brand Science, and Professor of Marketing at Emory University’s Goizueta Business School. Contact him at raj@zibs.com.

The ideas presented here first appeared in "Market-Based Assets and Shareholder Value: A Framework for Analysis," by Rajendra K. Srivastava, Tasadduq A. Shervani, and Liam Fahey in Journal of Marketing, January 1998, Vol. 62, #1, 2-18. The paper was the recipient of: 1999 Maynard Award (Best Theoretical Paper) 1999; the MSI/Paul Root Award (Best Practice Paper); and the 1999 MSI Best Paper Award (for 1997 Working Paper Version of this Paper). Related concepts were also discussed in "Resource-Based View and Marketing" by Rajendra K. Srivastava, Liam Fahey and Kurt Christianson in the Journal of Management, 2001, Volume 27, 777-802, (Special Issue on Resource-Based View Retrospectives)