RETURN ON INVESTMENT: A TOOL FOR MEASURING MARKETING IMPACT OF AN ORGANIZATION

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RETURN ON INVESTMENT: A TOOL FOR MEASURING MARKETING IMPACT OF AN ORGANIZATION

CHAPTER ONE

INTRODUCTION

1.1Background of the study

The impact on the marketing business at the company level is largely evaluated by the performance through changes in the share price and dividends to shareholders. However, performance analysis at the company level, whether for strategic or public policy purposes, is often inadequate due to the heterogeneity of the company’s operations. The strategic business units (SBUs) that make up a company are often very diverse. The profitability analysis that groups these entities provides little information on strategic or public decision making. Due to this heterogeneity, the profitability analysis is often recommended and carried out at the SBU level. The absence of a stock market at the SBU level means that a measurement instrument other than a stock based measure must be used to assess profitability.

Strict promotion measure is essential for the progress of science, especially when the variables of interest are complex or not observable. Paradoxically, strategic management has been criticized for not giving high priority to this problem (Boyd, Gove & Hitt, 2005). The lack of precision in measurement affects the quality of quantitative research and hides true relationships (Venkatraman and Grant, 1986).

This is particularly critical in the case of the company’s performance, one of the most relevant concepts in the field (Rumelt, Schendel and Teece, 1994) and a concept commonly used as a final dependent variable (Richard, Devinney, Yip and Johnson) . 2009) in several domains (Cho and Pucik 2005, Sila and Ebrahimpuor 2005, Wiklund and Shepherd 2003). Despite its relevance, business performance research presents problems such as the lack of consensus, the selection of indicators based on convenience and the lack of consideration of its dimensionality (Combs, Crook and Shook, 2005, Ketchen, Combs and Todd, 2008, Richard et al., 2009).

Many studies measure the performance of a company with a single indicator and represent this concept as one-dimensional, even admitting its multidimensionality (Glick, Washburn and Miller, 2005). If there are several dimensions, the researcher must choose the most relevant dimensions for his research and evaluate the results of this choice (Richard et al., 2009). Ray, Barney and Muhanna (2004) emphasize this point, highlighting the difficulties encountered in testing the theory of resources using aggregate measures of performance and suggesting the use of indicators directly related to the resources analyzed.

As such, the strategic management area clearly needs a clearer conceptualization of business performance, discussions about its dimensions and better measurement efforts. To contribute to these questions, we propose and test a multidimensional business performance model in this article. We have modeled our model on stakeholder theory (Freeman, 1984) and have carefully selected a list of indicators to represent the concept of corporate performance. We designed the measurement model to allow comparison between companies in the medium term and we tested it with a sample of senior executives and board members of Brazilian companies. We use subjective measures, but not for reasons of convenience. These measures are preferable when the focus is on comparisons between companies (Ketokivi and Schroeder, 2004), since the standards to register objective indicators vary according to the companies and the sectors. They also allow the evaluation of non-financial criteria (Richard et al., 2009).

1.2 Problem statement

Due to the lack of alternatives, the performance of a reporting unit is almost always based on accounting data. In particular, accounting measurement, the return on investment (ROI), is generally considered the most useful measure and the final test of the “final result” of corporate performance (James Reese and William Cool, 1978). It is used both as a management objective and as a dependent variable / criterion to evaluate the effect of various factors on performance. Despite its widespread use, the return on investment has been widely criticized as a totally inadequate indicator of the economic rate of return (G. C. Harcourt 1965, Ezra Solomon 1971, Franklin Fisher and John McGowan 1983).

The return on investment, generally defined as net income / total assets, 1, does not correctly link the flow of benefits to the investment that produced it. The numerator of results is a consequence of investment decisions made in the past, but we can expect that the denominator of the asset has had an influence not only on the past and current results, but also on the results. future. Due to this inability to produce accurate maps, the return on investment has been criticized for its serious flaw that has little or no resemblance to the crucial concept of internal or economic rate of return. The inadequacy of the return on investment would be so serious that its cross-sectional variations could be completely explained by the insufficiency of the measure. In the absence of proven validity, Fisher and McGowan characterized the empirical surveys using ROI as “completely deceptive” and George Benston (1985) as “doubtful”. Those who use ROI argue that the noise created by the accounting distortions does not necessarily mask the underlying signal of the economic performance contained in the return on investment and that, therefore, the return on investment is still appropriate for a given investment. Use in analysis (FM Scherer, 1979). and William Long and David Ravenscraft, 1984).

1.3 Purpose of the study

The purpose of this study is to examine the Return on Investment as a tool for measuring Marketing Impact of an Organization. Specifically the study sought:

1 to determine whether or not ROI is used as an indicator of business growth

2 investigate professionals perception on the use of ROI as marketing impact measure

3 to analyze the validity of ROI as a performance measure

1. 1. Significance of the study

Policy makers, business administrators and teachers in the education sector can use the findings of this study to formulate strategies for implementing marketing plns that promote the business growth. The study can also benefit the legal or legislative framework by providing the necessary information to business the laws and regulations. The findings can also contribute to the global debate on profitability index and its control, as well as ideas for future research on the causes, impacts and relationships of with other elements

1. 1. Study hypothesis

The study hypothesis is:

HO1: ROI is not a significant performance measure

H11: ROI is a significant performance measure

H02: ROI doesn’t show extent of business growth

H12: ROI shows extent of business growth

1. 1. Scope and Limitations of the Study

The study scope is limited to investigating the Return on Investment as a tool for measuring Marketing Impact of an Organization. Limitation faced by the research was limited time and financial constraint

1. 1. Organisation of study

The study is grouped into five chapters. This chapter being the first gives an introduction to the study. Chapter two gives a review of the related literature. Chapter three presents the research methodology; chapter four presents the data analysis as well as interpretation and discussion of the results. Chapter five gives a summary of findings and recommendations.

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