Importance of Marketing on Organization's Goodwill - Assignment Example

? Study on the Importance of Marketing on Organization's Goodwill Introduction One of the important tasks of the strategic management is establishing and support the dynamic cooperation of organization with the environment aimed at providing benefits in competitive struggle (McCarthy, M. G. and. Schneider, 1995). This is achieved by providing clients with company’s production. That’s why marketing is considered to be the one of the leading functions of the strategic management. For a great number of organizations marketing is the key function that secures their successful activity depending on how they follow their goals and which strategies they realize. Kotler & Keller (2012) state that according to the philosophy of management, the company should avoid just making unfavorable products trying to sell them to the client by all means, and in this case marketing is becoming something more than separate function of management (Kotler & Keller, 2012). In the modern world marketing influences all the spheres of company’s activity. The concept “goodwill” implies the readiness of the buyer to pay bigger or smaller sum of money than the net assets of the company that he wants to purchase may cost. The goodwill can be positive or negative. In many cases business owners tend to overestimate the influence of their intangible assets and as a result the realized value of business increases substantially (Massoud, M. F. and Raiborn, C, 2003). It is important to take into account the fact that intangible capital should convert into income and the index of this income should be substantially higher than the market average one. The given paper will discuss the importance of marketing for establishing goodwill. The review of literature will be implemented in order to answer the question. The main goal is to investigate the importance of marketing on organization’s goodwill Literature review a) The notion of goodwill According to Johnson and Petrone (1998), goodwill is a strong management team and developed market strategy, high level quality of production, high credit measures as well as corporate culture and favorable location, good relations with suppliers (Johnson and Petrone, 1998). Day states that “goodwill is the difference between the value of a business enterprise as a whole and the sum of the current fair values of its identifiable tangible and intangible net assets. Net assets are the assets that are left after subtracting the company’s liabilities. Goodwill is only recorded when its amount is substantiated by an arm’s-length transaction. Goodwill cannot be sold or acquired separately but has to be included in a purchase with the net assets of a business enterprise” (Day 2008: 1). It is clear that the cost of organization that is represented by the single property complex differs much from the assets and liability cost of the organization. The great amount of mergers and takeovers in the USA and Europe can serve as a proof of such statement. It is enough to recollect the time when companies were bought by the sums of money, which were considerably bigger or smaller than the cost of company assets (Samuelson, 1996). The difference between these two indicators is called goodwill. It means that brand is less valuable in case if it fails the competitive struggle and does not allow to sell the product at the higher price than the similar product of the competitors is sold at. Accrodign to Stolley (2013), in this case goodwill is negative and has a negative impact on the final cost of the company. It can be easily explained as it will be more difficult to realize the production with the same tangible assets than with the positive goodwill (Stolley, 2013). b) The evaluation of goodwill According to Wang, the estimation is made with the help of management account and provides the owners and managers with the important information (Wang, 1995). In order to find the answer to the question, it is essential to determine how the goodwill is evaluated. Certainly, it is not necessary to sell the company in order to evaluate the goodwill. Evaluating goodwill, it is essential to consider such notion as brand, but it is important to determine what brand actually means today and if it is just a notion or it should be specially estimated using different tools. In the marketing terminology the word “brand” is explained in the following way: emotional reaction of buyers to the product. Brand as a phenomenon can manifest itself only in the market as a reaction of buyers and their positive perception. It is essential not only to pay attention to the emotional reaction of buyers, but to depict their perception in numbers and figures. “When intangibles are recognized as part of the acquired business, these will be subject to amortization over their remaining useful economic life and thus result in reduced earnings in future periods. Depending on the useful economic life assumed, this effect may be significant. In cases where an asset is determined to have an indefinite useful life, such as for very strong brands or R&D projects, these assets are not amortized but instead tested for impairment on an annual basis” (Castedello, Marc, Klingbeil 2001:3). According to Massoud and Raiborn (2003), in this case brand is the asset, which implies that the methods of its formation should be described in the accounting legislation (Massoud and Raiborn, 2003). Let’s examine the concept “brand” from the side of the business owner, not from the market position. Power to sign, trade signs, trade name and separate group of intangible assets, goodwill, also belong to the intangible assets. Here it is possible to state that brand consists of trade name and the goodwill. “The argument for goodwill is that acquirers pay the fair market value of firms and the difference between the purchase price and the fair market value of acquired assets represents a premium for intangible assets such as brand name, customer base, intellectual property, the skills of management and other value not captured by Generally Accepted Accounting Practices (GAAP). The issue is whether goodwill represents a rent generating asset, as claimed, or an overpayment papered over by bookkeeping. A further question arises as to whether goodwill generates rents in all industries or only in industries that rely upon brand name, intellectual property, and specialized management expertise” (Johnson 1998: 1). The company should have the goal, technical possibility and resources to put the intangible assets in the condition suitable for their realization and operating (Schuetze, 1993). And the company should have the information for the costs reliable determination that is connected with the intangible assets development. The goodwill can be explained as purchasing cost surplus. The surplus is determined by the market activity and buyer’s behavior, because the success of every company depends on the emotional attitude of the buyers towards the products it launches (Kotler & Philip). c) The importance of accurate marketing strategy Kerin 2012 states that in order to evaluate goodwill , it is necessary to make different estimations and much depends on the firm’s activity on the market (Kerin, 2012). Thus, it was determined that marketing plays a very important role in company’s goodwill evaluation. Accurate marketing strategy is very important for every organization that wants to have good showings, name and reputation Market is changing and the activity can change rapidly in modern conditions. It is essential to turn to the question how to establish positive goodwill with the help of correct marketing. According to Wang (1993), the first essential step is to provide customers with surprises as people like to be pleasantly surprised (Wang, 1993). Thus, it is essential for the managers of the company to do their best to surprise the customers with something unusual. According to McCarthy and Schneider (1995), here it is important to understand that any costs spent on the surprise will be recompensed by the returns of the grateful clients. (McCarthy and Schneider, 1995). Wang states that the second essential rule is the necessity of being transparent and honest with the audience Practice shows that if you hide something from people, they will anyway get to know about that and this will really spoil the company’s reputation. It is not necessary to hide what can’t be hidden. If the company is honest with the customers, they will understand that the managers of the company are only humans and also can make mistakes and face difficulties (Wang, 1995). Such honesty will be valued by people high (Samuelson, 1996). The next step is one of the most important: it is essential to make the customers happy. The company may not have ideal showings and activity, but making the clients happy is the top priority (Nearon, 2004). The main rule to follow is that the customer is always right. In order to make customers happy, it is important to establish constant communication with customers. If the customers are happy, they will return for sure. Liability is the next very important issue. The company should be reliable. Johnson and Petrone (1998) emphasize that the customers should be sure that they can depend on the company and this dependency will bring only good to their life (Johnson and Petrone, 1998). Every manager should understand that to launch the product is only a half of the task he has to fulfill. It is necessary to make this product high-quality. It is good to sell more, but the main attention should be paid to the quality, not to the quantity (Hochbaum etal, 2011). The customers will never value high the company, which tries to save money producing low-quality goods. According to Lander and Reinstein, (2003), the company has to have strong relationships with the customers (Lander and Reinstein, 2003). The main thing is to make these relationships positive. In every company conflict can occur between the managers and customers. Such conflicts are inevitable but they should be avoided as much as it is possible (Schuetze, 1993). Every post or e-mail can be helpful as they can help establish good relations or reveal the risk of the conflict. A good marketing strategy should include charity. All of us are obliged to give back at least a part of what we receive in order to receive more (Jennings et al, 1996). Every respectful company should take part in charity. Such activity makes people trust the company and respect it. The next essential step is to make the quality of the products higher than the price for them (Lander, G. and A. Reinstein, 2003). The customers tend to make their own evaluations of the price/ quality ratio. Those companies, which have a good brand, tend to set higher prices, but it can be possible, if the goal is already reached and the goodwill is positive. Blair and Wallman (2001) state that it is also necessary to be focused on the target audience, not on the people who are not interested in the product launched by the company. Advertising the product to such audience is time-wasting (Blair and Wallman, 2001). Conclusion The conclusion can be made that marketing plays a very important role in establishing goodwill of the company Goodwill plays a very important role when the company is going to be sold as it contributes to company’s value. Correct marketing strategy is crucial for every company that wants to have good showings, name and reputation. Marketing has become a phenomenon that penetrates into all the spheres of company’s activity. If to examine this aspect from the physiologic point of view, marketing has become a part of company brain, soul and feelings and even the source of pulse that drives the whole body of the company and provides the company with the life energy. Peter Dracker proposes his understanding of marketing. He states that marketing is the business in the eyes of clients. So it is possible to state that marketing plays a crucial role in strategic management that is more than just production selling and market research (Al Halborg, D., Ross, 2001). At the same time it should be underlined that the development of marketing contributed to the change in the philosophy of management. The conditions of company’s activity were changing, the dynamic and the influence of the environment were increasing and as a result the marketing function was developing The development of marketing demands the changes in the conception of management and the opportunity to manage in a new way with the orientation to the surroundings particular to the buyer’s requests. References Al Halborg, D., Ross 2001, "Introduction". Marketing: principles and practice (4th ed). Castedello, Marc, Klingbeil, C 2001, Intangible Assets and Goodwill in the context of Business Combinations, KPMG AG Wirtschaftsprufungsgesellschaft Blair, M.M. and Wallman S. H. 2001, “Unseen Wealth: Report of the Brookings Task Force on Intangibles” Brookings Institution. Jennings, R., J. Robinson, R. B. Thompson II and L. Duvall 1996, “The relationship between accounting goodwill numbers and equity values,” Journal of Business Finance & Accounting, June, Vol. 23 Iss. 4. 513-533 Johnson, T. L. and K. R. Petrone 1998, “Is goodwill an asset?” Accounting Horizons Sept. 1998 Vol. 12 Iss. 3. 293-304. Hochbaum, D.S., Moreno-Centeno, E., Yelland P, and Catena R.A 2011 Rating Customers According to Their Promptness to Adopt New Products, Operations Research 59(5): 1171-1183 Kerin, R. A 2012, Marketing: The Core. McGaw-Hill Ryerson. p. 31.  Kotler, A, Philip, G. Principles of Marketing. Pearson education. Kotler, P., Keller, L. K 2012, Marketing Management 14e. Pearson Education Limited   Lander, G. and A. Reinstein 2003, “Models to Measure Goodwill Impairment,” International Advances in Economic Research, Aug. Vol. 9 Issue 3, p227-232 Lev, B 2001, Intangibles: Management, Measurement, and Reporting. Brookings Institution Press. Massoud, M. F. and Raiborn, C. A 2003. “Accounting for Goodwill: Are We Better Off?” Review of Business, Spring, Vol. 24 Issue 2, 26-32 McCarthy, M. G. and. Schneider D. 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