Organic growth: profiting from the union of finance and marketing; The CFO's role in M & A is well established, but acquisitions often destroy shareholder value for the acquirer. To boost internal growth, savvy finance executives are partnering with marketing colleagues to drive more consistently profitable results.

The domain of chief financial officers, long confined to budgets and balance sheets, today extends far into the inner workings of corporations. Most CFOs have long ago shed their "chief bean counter" image and appear regularly at key meetings on strategy, acquisitions, operations and technology. As Ishaat Hussain, CFO of India's giant Tata Group (an $18 billion industrial conglomerate), puts it, the CFO's role has shifted from "an objective and reliable provider of information" to "a shaper of strategy and an architect of change."

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Bearing this out is the recent spate of "hot-button" issues--outsourcing, Sarbanes-Oxley and catastrophic risk management, to name a few--that have fallen into the CFO's lap.

Yet in most companies, the CFO's reach still ends abruptly at marketing's door. A senior sales and marketing executive at a large consumer goods retailer describes the relationship with his finance counterpart as "adversarial on a good day," with "spiraling requests to quantify the unknowable and measure the unimportant" on a bad day. Indeed, the old adage, "marketing spends the money and finance worries about it," continues to define the finance-marketing dynamic. The tension becomes particularly acute in the quest to find and fund profitable growth opportunities.

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But this is not the case everywhere. In a small number of companies, an unusual level of collaboration between finance and marketing is helping to generate outsized returns. What's more, the earnings at industry leaders like Best Buy Co. Inc., Genentech Inc., Barclays PLC and Roche Holding AG--all stock market stars in recent years--have come largely from the best source of new revenue: organic growth. Companies in the top quartile of organic growth are 13 times more likely to be in the top quartile of shareholder returns than their low-growth counterparts, according to research by Marakon Associates, a strategy and management consultancy.

Forming a more perfect union of finance and marketing isn't easy. The CFO, chief marketing officer (CMO) and their direct reports often have to overcome significant cultural and sometimes structural barriers to working together: vast differences in thinking styles and perspectives, conflicting incentives and the occasional run-in. Still, the rewards of getting finance and marketing to collaborate are well worth the pain because the product of a healthy marriage--alignment on where and how to pursue profitable organic growth--is both rare and potent.

So how can these two "oil and water" functions be brought together to drive significant and sustainable growth? Consider these suggestions.

Different Perspectives, Different Relationships

The sources of friction between finance and marketing executives are not hard to find: Their backgrounds and mindsets are almost entirely antithetical. "Any personality test would place CMOs and CFOs on opposite ends of the spectrum," says Mike Murray, former finance director of Barclays' private client business. "Financial directors value the known, prefer stability and are comfortable with measurement; marketing directors are comfortable with the unknown and are rewarded for vision and creativity."

Beyond differences in temperament, a more fundamental cause of the bad marriage lies in the very different nature of the two functions' roles. The differences produce three tensions:

* Short-term vs. long-term perspective. Creative marketers produce a constant stream of attractive-looking growth ideas. But these often require significant initial investment before they yield any profits. According to Ivor MacLeod, CFO of Hoffmann-La Roche Inc. (the U.S. prescription drug unit of Switzerland's Roche), "I'm the one who's forced to fit growth investments within the short-term practicalities of performance expectations. In a perfect world, we'd fund all these things because they all look like bets worth taking. However, the practicality of the need for a balanced short-term performance doesn't allow us to do that."

* Narrow vs. broad perspective. Marketing directors are rightly focused on the organic growth initiatives that they champion, while CFOs see the entire company's financial picture. "How to trade off between IT expense and marketing expense is something finance directors know how to answer; to marketers, it's often not considered a question," notes Murray.

* Known vs. unknown. CFOs seek certainty in approving large capital outlays. Marketers understand that investments such as advertising that build valuable brand equity are vital but difficult to quantify. Darren Jackson, CFO of consumer electronics retailer Best Buy, concedes: "One of the highest levels of friction in the finance organization can be with the chief marketing officer and the advertising people because it's a hard business to get your arms around facts. I don't know who's cracked the code in terms of the return on advertising."

Most companies see these tensions as inevitable--the nature of the game. But from working with and talking to companies in which finance and marketing have truly clicked, one realizes that doesn't have to be the case. Murray says that, success "starts at the top, with the finance director and head of marketing finding ways to make each other successful--institutionally and personally."

Experience shows a continuum in the relations between senior executives in marketing and finance. On one end is the all-too-typical adversarial competition. In the middle, there is more productive dialogue and debate between the two functions. In best cases--a rare occurrence--there is a collaborative partnership (see table on page 43).

The adversarial environment is characterized by a lack of trust between marketing and finance, especially around budget time. Marketing comes in with an inflated budget (knowing that finance will knock it down). Sometimes, the CMO brings a case for spending on marketing and new products with some numbers behind it. Finance has received inflated budgets from every department and realizes it must start making cuts somewhere. When it probes the analysis behind marketing's budget demands, the arguments start to topple over.

Requests for budget increases rarely explain how they will boost revenue and profitability. In this environment, finance wins when it "takes the easy way out by cutting marketing spending instead of finding less productive costs that should be reduced to meet profit targets," says Murray.

In the second situation, there is a "healthy tension" between marketing and finance. Hoffmann-La Roche's MacLeod explains: "We each bring to the party our functional expertise, and inherent in that is a somewhat different language. But at the party, we collectively represent the company and are always looking at things from the perspective of what is best for shareholders. At the end of the day, we respect each other's point of view. I understand where they're coming from, and they understand where I'm coming from."

David Ebersman, CFO of biotech pioneer Genentech, also speaks of the need for tension in the dialogue--but tension between ideas, not people. "You want to balance your desire to meet short-term goals with your desire to make long-term investments so that you find the best outcome. These are really hard questions without obvious answers, and I don't think you will get to the optimal answer without having a really deep conversation that brings together different perspectives and different leaders from around the company," argues Ebersman.

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While the dialogue and debate is certainly more productive than the adversarial one, reaching optimal decisions can be difficult. MacLeod says "prioritization and selection can be adversarial," even in a trusting environment.

The most advanced and productive relationship, a collaborative partnership, starts with good personal rapport. Best Buy's Jackson describes an unusually collaborative bond with his company's CMO, Michael Linton, who sits in the office next door. "He's probably one of my best partners in the whole organization," says Jackson, noting that Linton is "better at math than I am."

Frequent, candid communication and trust are key, but beyond that, there is a shared appreciation of "facts instead of anecdotes and opinions." "Really good businesses figure out at the highest level how to build trust and work effectively together," says Jackson. "In organizations, you're always going to have situations where there are differences; part of it's just finding common ground."

Another characteristic of the truly collaborative finance/marketing relationship is a mutual understanding of each other's challenges. This may require the CFO to learn more about the marketing side of the business to appreciate the decisions marketing is wrestling with. Ebersman says he thinks "it's really important for the CFO to get comfortable enough with the technologies you're investing in, with the business strategy and with the approach that [marketing is] taking to developing important new products."

Areas for Jointly Driving Organic Growth

Finance and marketing may never entirely bridge their stylistic differences. But there are areas in which finance and marketing executives can and should collaborate to drive profitable organic growth. The areas are innovation, evaluation of growth opportunities and portfolio management of those opportunities. Focusing on each of these areas will result in a significantly better understanding of the relationship between top-line and bottom-line growth.

* Promoting Innovation. Decisions on new products are decisions on markets, that is, whether a company should pursue a market that it hasn't participated in previously. In evaluating new products and new markets, most companies apply inconsistent standards to deciding which markets they want to participate in. They lack clarity on the potential of these markets and what competencies their company has to exploit the markets and customers' willingness to pay for innovations. But not always.

Michael Fleisher, CFO of recording company Warner Music Group Corp., views his collaboration with the company's A & R [Artist & Repertoire] representatives as the key to making good decisions on where to invest. "They have the ears and the passion, and I try to put that into a commercial framework to triangulate in on audience size and all of the other drivers of success," he says.

At companies with better organic growth records, the finance function supplies more rigorous standards to evaluate new product opportunities, while marketing takes the lead on idea generation. Because of their training, finance executives can help marketers quantify and understand the "headroom" of a market--its growth, margins, the nature of competition and pricing, and the ability to develop sustainable advantages (from patents, unique business models and other assets and capabilities).

Working together, executives in both functions use these innovation standards to create better business cases for growth initiatives. Such business cases specify the growth opportunity, what is driving it, the cost and returns on investments, the basis for those costs and return estimates and the risk. Often, they dissect what kind of innovation is required to trigger growth: A whole new product? A new product feature? The customer's experience in buying or using the product?

At Best Buy, nearly 25 percent of the CFO's 650-person staff works in the businesses to provide decision support, lending their financial and strategic acumen. "We think about it in terms of a two-key approach," says Jackson. "The general managers and the partners in the business can turn one key, and their finance partner is turning the other key, in order to launch new ideas."

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* Evaluating Growth Opportunities. In many companies, scarce communication and cooperation between marketing managers and finance executives limits their ability to accurately determine what a growth investment would be worth to the bottom line. Organic growth stars have a much better handle on what drives value for customers and how profitable those drivers are to the company and its shareholders.

Drawing on expertise from both functions, they generate deep insights into their customers through an integrated and detailed analysis of customer behavior, attitudes and economics. This gives them better information on the perceived benefits of their products and services and how much customers are willing to pay, as well as the company's costs of delivering those perceived benefits.

A large European food and beverage company, for example, had robust top-line growth but stagnant profit growth. Its strategy was to gain scale and lower costs in high-volume, high-growth but low-margin channels. To do so, it shifted marketing support from small and declining market segments to emerging channels. It also streamlined its sales force to reduce costs to serve. But further study revealed that competitors would quickly match these actions. Profits would not rise very much.

A joint finance and marketing task force was convened and, working collaboratively, uncovered a better and more sustainable growth opportunity. The team analyzed all of its products along two dimensions--profit margin and consumer loyalty--and identified a set of profitable niche products and channels where the company's products were strongly preferred by consumers. In fact, the incremental return on a dollar of growth was 16 times higher in these areas than in the large-volume segments.

Acting on this insight, the company refreshed the format and invested in a new message focused on niche opportunities. As importantly, it shifted sales force incentives away from volume and toward growing in these valuable segments. It tripled the value of the business over a five-year period with no significant increase in investment spending.

* Managing the Growth Portfolio. CFOs are typically well-versed in portfolio management at the corporate and business-unit levels. They know how to determine which businesses of a large company are enhancing or destroying economic value, and their short- and longer-term prospects. But rarely do they bring these skills to bear in working with marketing executives to manage a different kind of portfolio--the portfolio of growth options.

These growth options are within a business unit or subsidiary, and can include investments like planned marketing campaigns, new products, new features added to existing products and the like. Here, finance can help marketing make better trade-offs in choosing its options. A global oil company did this type of analysis in determining how to increase revenue at its gas stations/convenience stores.

A multi-functional team including marketing, finance and strategy examined the costs and projected benefits of buying better locations, upgrading existing gas stations, making sourcing changes and other options. Recognizing that improving customers' experience in the stores was a key to increasing loyalty, the team proposed upgrading the stores' personnel via better hiring and training programs. Finance supported the plan because it could clearly see the linkage between increased customer value leading to brand loyalty, revenue and profits.

Most companies lack such data to determine which options are superior. But even more fundamental, they are hamstrung by a much larger belief about the scarcity of resources: that there is a finite amount that a company can invest in worthy growth initiatives (the company's planned budget). Companies with more rapid organic growth understand that capital is a costly but plentiful resource. They believe that it's good growth ideas that are the limiting factor--not money. If marketing can bring a host of good, well-established growth ideas to the table, finance will show them the money--internally or externally in the capital markets--to fund most or all of them.

"Getting the money has never been a problem here," says William Hernandez, senior vice president of finance at PPG Industries Inc., the giant chemicals and industrial manufacturing company. The decision to fund growth initiatives, he says, "is not so much the amount you are asking to spend, it's how you plan to spend it. Are you being wise?" PPG chooses to spend a big chunk of its funds on new product development as well as other organic growth initiatives, such as broadening distribution and expanding its presence in emerging markets. More than a third of its sales each year come from products five years old or less.

Genentech's Ebersman makes the point that funding isn't everything. You have to hire the right people and develop them properly to execute on growth-oriented initiatives. "You can allocate money to all the right things, but if you don't work on them, and if you don't have the right people working on them, they're not going to achieve the goals that you set out."

Star growers like Genentech also aren't afraid to pull the plug on initiatives that aren't meeting their milestones. Ebersman explains: "There's no question that killing projects is hard, because a lot of emotional investment goes into each one. But this is something every company has to try to be good at, because it's really easy to continue making investments in something that no longer looks as promising as it once did."

Ebersman comments that Genentech doesn't have a hard and fast rule for when to pull the plug. "I think the most important thing we do is having a framework for how we make research allocation decisions, and then reevaluating it in the context of that framework as we get new information."

A New Role for Finance

As the companies described show, a productive union of finance and marketing is indeed possible. But it requires finance executives to understand marketing's dilemmas and vice versa. By working productively with marketing in innovation, evaluation of growth opportunities and portfolio management of those opportunities, CFOs can play a central role in driving organic growth--in the same way that many are central to their company's M & A strategy.

Finance executives at a number of companies have gained newfound stature and the respect of their marketing counterparts by helping existing businesses increase their revenue. They are showing that master marketers and product innovators aren't the only prerequisites for strong and steady organic growth. Finance professionals who can help marketers better evaluate the top- and bottom-line impacts of their plans and secure funds for the most worthy ones have become a necessary piece as well.

Michael Jenkins and David Meer are partners in the New York office of Marakon Associates (www.marakon.com), an international strategy and management consulting firm. They can be reached at [e-mail] and [e-mail].

RELATED ARTICLE: Why Is Organic Growth So Difficult?

Few executives would say that steady organic growth is easy to achieve. Over the years, business strategy experts have largely pointed to three external obstacles: mature markets, more and fiercer sources of competition and the increased power of retailers and consumers. Though understandably daunting, these explanations do not excuse companies from growing.

Take mature markets. In industries such as consumer product manufacturing, average organic growth rates reflect U.S. population growth: 1 percent-2 percent per year. Yet organic growth leaders aren't daunted: Between 1993 and 2003, the U.S. coffee market declined by just under 1 percent in volume, but Starbucks Corp. grew its sales by 38 percent annually! As General Mills Inc. Chairman and CEO Stephen Sanger once put it, "There are no mature markets, only mature marketers."

Similarly, no one denies the challenges of new competition, including increasingly effective global companies. In today's landscape, new products are imitated much faster than in the past. When the Adams division of Cadbury Schweppes plc introduced Listerine PocketPaks breath strips, it expected its main rival, Wm. Wrigley Jr. Co., to take three years to respond with a similar product. Wrigley's Eclipse Flash Strips were introduced a mere 18 months later.

Despite this assault on the sustainable advantage of innovation, companies such as Procter & Gamble Co. (with its Crest SpinBrush and Whitestrip tooth whiteners) and Gillette Co. (whose Mach3, Venus razors and other products are soon to be under the P & G umbrella) have consistently used innovation to grow faster and more profitably than the competition.

The third explanation, the shift of power to the retail channel and end consumers, is also undeniably true. In industries such as apparel, toys, consumer electronics, building supplies and groceries, retailer consolidation has put more revenue in the hands of fewer players. The result: unprecedented clout to reduce supplier prices or keep increases to a minimum. Consumers' ability to compare prices on the Internet, moreover, has pinched the profits of automobile makers and many other companies. All this makes it harder for companies to sustain premium pricing and, as a result, strong organic growth.

But there's another, more systemic reason why organic growth is exceptionally difficult, one that few strategy experts talk about. It is the poor working relationship between the managers who put the company's capital at risk by developing new marketing campaigns and new products (largely marketing executives) and the managers whose role it is to parcel out large chunks of capital for any corporate purpose (the finance organization). This is a chasm that a few select companies have learned to bridge.

RELATED ARTICLE: takeaways

* At most companies, the old adage, "marketing spends the money and finance worries about it," continues to define the finance-marketing dynamic.

* A select number of high-performing companies, however, have seen growth surge as a result of a partnership between finance and marketing.

* Innovation, evaluation of growth opportunities and portfolio management of those opportunities are major areas where this partnership can drive benefits.

* Finance can help marketing make better trade-offs in reaching decisions about investments, new products and other "growth options."

CFOs and CMOs: The 3 Stages of Relationships

                                                           Collaborative
Tension     Adversarial Competition  Dialogue and Debate   Partnership

Short- vs.  Marketing budgets cut    Prioritization of     Ongoing,
Long-Term   to meet quarterly        marketing programs,   consistent
            profit targets           backed by commitment  process to
                                                           monitor
                                                           progress of
                                                           long-term
                                                           investments
Broad vs.   Political environment:   Marketers prepare     Transparency
Narrow      constant lobbying for    cogent standardized   and shared
            funds                    business cases        ownership of
                                                           trade-off
                                                           decisions
Known vs.   Capricious approach to   Drive for better      Mutual
Unknown     marketing spending:      measurement/          appreciation
            plentiful when times     accountability        of the need
            are good, cut when       around marketing      for both
            times are bad            investments           discipline
                                                           and intuition
                                                           in making
                                                           risky bets