Determining the value driver of value-based management using Du Pont extended formula in retail companies in digital marketing era

M. Sibarani

Pascasarjana Universitas Katholik Parahyangan, Bandung, Jawa Barat, Indonesia

K.K. Putra

Sekolah Tinggi Ilmu Ekonomi Harapan Bangsa, Bandung, Jawa Barat, Indonesia

ABSTRACT: Value-based management (VBM) is a managerial process which effectively links strategy, measurement, and operational processes with the result of creating shareholder value.

1 INTRODUCTION

The creation of value is the primary goal of managers in leading companies.

Value-based management (VBM) is a corporate management that uses a tool and process to focus an organization to the main purpose of creating the shareholder value. Manager with staff’s company makes decisions toward strengthening stock prices over the long term (Athanassakos 2007).

VBM provides a dynamic assessment and high- performance organization based on the strength of finance. This research used Du Pont formula as value driver to stakeholders’ company. Du Pont formula decomposes the value creation drives as described from margin, turnover, leverage, pullover, and book to value ratio or market to book value ratio.

E-commerce is a growing sales system after the found of the Internet. This marketing or sales system can reach the whole world at the same time without having to set up branch offices in all countries. It can also be done 24 hours without a stop. By simply going through a computer unit connected to the Internet, the company can market its products.

Buyers can conduct transactions anytime any­where, and with the growth of these online compan­ies, competition became a threat for the existing retail companies.

Table 1. Number of visitors in 10 e-commerce sites in Indonesia.

Source: Gracivia (2017)

Figure 1.

Source: Nasution et al. (2018)

Digital marketing strategies have replaced conven­tional marketing strategies and caused many retail company outlets or supermarkets closed (such as Seven Eleven, Ramayana, Lotus, Debenhams) and some listed retail company noted declining sales. The emergence of the phenomenon about the online shop­ping since 2014 influenced sales growth of retail com­panies downward in the past five years (Bright 2017).

Based on Figure 1, three retail companies such as PT Ramayana Lestari Tbk (RALS), PT Hero Super­market Tbk (HERO), and Pt Matahari Putra Prima Tbk (LPPF) suffered decreased sales last year from the previous year. The total sales of 10 retail issuers in 2017 only grew 6.41% from the previous year, whereas in 2013, it recorded a growth of more than 21% from the previous year. This study aims to ana­lyze the application of Du Pont formula in retail com­panies in the present era of digital marketing.

2 VALUE-BASED MANAGEMENT

“Value based management is an approach that ensures corporations are run consistently on value” (Young & O’Byrne 2001), “Values-based manage­ment is an approach to managing in which managers establish, promote, and practice an organization’s shared values. An organization’s values reflect what it stands for and what it believes in” (Robbins & Coulter 2016). VBM is a managerial process which effectively links strategy, measurement, and oper­ational processes to the end of creating shareholder value (Munteanu et al. 2012).

3 EVENT STUDY

The event study method is a powerful tool that can help researchers assess the financial impact of changes in corporate policy (McWilliams & Siegel 1997). It is a study of market reaction to an event where the infor­mation is published as announcement. Event study can be used to test the information content of an announcement and can also be used to test a market that is half strong and commonly used to determine the effect of an event on the price of securities.

Research on this topic has typically focused on theories of event study when digital marketing method had been used in many retail companies. Their approach assumes that the announcement of digital marketing, or buy online usually publicized in the business press, is used as information by market analysts to evaluate the potential profitability of digi­tal marketing method, thereby affecting the firm’s competitor (Agrawal & Kamakura 1995).

4 DU PONT EXTENDED ANALYSIS

The Du Pont Company of the US pioneered a system of financial analysis, which has received widespread recognition and acceptance. This system of analysis considers important interrelationships between dif­ferent elements based on the information found in the financial statements (Melvin 2014).

Du Pont formula is a useful analytical instrument to dissect a company’s financial statements and assess the company’s financial condition (Gitman & Zutter 2012). Du Pont aims to find the return on common equity as a measure for investors’ profits received from each share they plant; higher values will be pre­ferred for investors (Gitman & Zutter 2012) which shows how effective the company uses the capital invested by shareholders (Herciu et al. 2011).

Market ratios are used for the owners of capital so that the capital they plant in assets is in the risk and return expected. There are two ways to calculate market ratios:

- The ratio to profit (price/earnings ratio) is used as a measure of the amount of money that investors are willing to pay for each money-generated company. Subramanyam & Wild (2009) explain that the price- to-profit ratio is inversely related to the cost of cap­ital, if the price-to-profit ratio is high, which means the cost of the share capital is low and vice versa.

- The ratio of market value to book value (market/ book ratio) is used as an investor’s valuation of the company.

5 RESEARCH METHOD

The population in this research are all retail com­panies listed on the Indonesia Stock Exchange (IDX) in 2010-2017.

with a criteria); the criteria are those companies included in the top 6 retail companies listed on the IDX.

The research object is the 6 largest retail com­panies listed on the stock exchanges Indonesia namely Ace Hardware Indonesia (ACES), Alfaria (AMRT), Ramayana Department Store (RALS), Matahari Department Store (LPPF), Matahari Putra Prima (MPPA), and Hero Department Store (HERO).

This research is a descriptive research that describes a symptom, event, or incident happening at present. Descriptive research focuses on actual prob­lems as they were at the time of the study. Through descriptive research, researchers try to describe the events that became the center of attention without giving special treatment to the event. The variables studied can be single (one variable) or multiple (McMillan & Schumacher 2010, Lind et al. 2012). Research methods used descriptive qualitative with apply a model Du Pont extended to the company so acquired a conclusion.

Measurement of variables consists of 2 variables, namely profit margin and price earning ratio, as follows:

The analytical technique in this research is to test the difference of average profit margin and price earning ratio four years before applying digital mar­keting and four years after applying digital market­ing. Before the hypothesis test, the data to be researched is tested for its normality first, by using Kolmogorov-Smirnov test. When the data is nor­mally distributed, the next test is done by using para­metric method for two paired samples with paired sample /-test. Conversely, if the data is not normally distributed, then the next test is done using non-para­metric testing methods of two paired samples with Wilcoxon Signed test.

The testing hypothesis for profit margin before the application of digital marketing and after the application of digital marketing is:

μ₁ is the average profit margin before the applica­tion of digital marketing and μ₂ is the average profit margin after the application of digital marketing.

The testing hypothesis for price earning ratio before the application of digital marketing and after the application of digital marketing is:

μ_R1 is the average price earning ratio before the application of digital marketing and μ_R2 is the aver­age profit margin after the application of digital mar­keting. If sign > 0.05, then H₀ is accepted.

6 RESULTS AND DISCUSSION

This study wants to see the condition of value drivers before and after digital marketing by using two aspects of Du Pont that represent the com­pany’s fundamental performance which is profit margins and the company’s market performance which is PER.

Before performing statistical tests, the first step to be done is to test the normality of data using Kolmo­gorov-Smirnov. The results of normality test data indicate that the two variables to be tested indicated significance value less than 0.05 (see Tables 2 and 3).

The data show that means will be tested using Kolmogorov-Smirnov test, which is a paired two- sample test for abnormal data.

6.1 Hypothesis testing

The results of hypothesis testing 1 listed in Table 4 shows that there is no significant difference in profit margin in the period before application of digital mar­keting compared with the period after the application of digital marketing, because the value of asymp. Sig. > 0.05. This means the rejection of hypothesis 1 indi­cates no difference in profit margin contribution as value driver before the implementation and after the implementation of digital marketing that occurs in the

Table 2. Normality test of profit margin data.

Source: Processed secondary data, 2018.

Table 3. Normality test of price earning ratio.

Source: Processed secondary data, 2018.

business world today. It can also be said that the sale for 6 largest retail companies listed on the BEI is rela­tively uninterrupted by the emergence of marketing methods of digital marketing in online companies.

The results of hypothesis 2 testing listed in Table 5 show that there is no significant difference for price earning ratio in the period before applica­tion with profit margin compared with the period after the application of digital marketing, because of the asymp value. Sig. > 0.05. This means the rejec­tion of hypothesis 2 indicates no difference in the contribution of price earning ratio as a value driver before the implementation and after the application of digital marketing that occurs in the business world today. It can also be said that the share price per share for 6 largest retail companies listed on BEI is relatively uninterrupted by the emergence of mar­keting methods of digital marketing at online companies.

The emergence of Internet-based social media has made it possible for one person to communicate with hundreds or even thousands of other people about products and the companies that provide them. Thus, the impact of consumer-to-consumer communica­tions has been greatly magnified in the marketplace (Mangold & Faulds 2009).

The development of digital marketing methods in the retail business world when the emergence of online companies did not disrupt the sale and stock prices of the 6 largest retail companies is listed on the IDX in the period 2010-2017.

Digital marketing expert Genc (2018) said that companies must pay attention to business envir­onment conditions such as politics, economics, social, and technology to survive in competition. Political factors relate to policies that are in force. Economic factors relate to market condi­tions and people’s purchasing power. Social fac­tors relate to the pattern of society in seeking information, which is currently through social media, celebrity endorse, and online shopping. The technological factor in marketing today is

non-human interaction and transactions made by handphone or search engine technology. Business strategy adjustments that can be used are:

- Restructuring, means company does not close their business but do renewal.

- Revitalization, means company uses a new model such as digital marketing strategy.

- Restructuration, means company closes unprofit­able product.

Reframe, means company makes new target or new vision.

7 CONCLUSION

Hypothesis 1 and Hypothesis 2 were rejected because there is no difference about value driver indicated by profit margin and price earning ratio before implementation and after implementation of digital marketing method in business.

Profitability and market ratio PER as value driver in VBM are not decreased in 6 largest retail companies.

The impact of non-human interaction in market­ing strategies or digital marketing has been greatly magnified in the marketplace but the development of digital marketing methods in the retail business did not disrupt the sale and stock prices of the 6 largest retail companies listed on the IDX in the period 2010-2017.

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