Do CMOs Make any Difference to Company Value? By Nancy Pekala
Just how relevant are Chief Marketing Officers to the bottom line of the firms that employ them? That’s a topic that’s been widely bandied about in both the academic and business press. It is especially significant in today’s post-recession climate as organizations look to recover, recoup and revamp their business models. A forthcoming Journal of Marketing Research article, “When Do Chief Marketing Officers Impact Firm Value? A Customer Power Explanation,” suggests that CMOs are far from irrelevant to the financial performance of firms. In the new research, academics D. Eric Boyd, Rajesh Chandy and Marcus Cunha assert, however, that the impact of CMOs on financial performance is highly contingent on the managerial discretion available to them. Indeed, the authors maintain that a CMO’s value is closely tied to the role of customer power in the organization. The research notes that “Firms are increasingly relying on individual customers for larger and larger shares of their revenue; indeed, research indicates that the sales made by the average firm to its largest customer rose from 10% in 1989 to over 26% in 1997 (Gosman and Kelly 2002).” The authors assert that as customers become more powerful, so too does their impact on the discretion that CMOs have in fulfilling their roles: powerful customers tend to give CMOs less discretion. However, not all CMOs find customer power debilitating. The effects of customer power are enhanced or mitigated depending on the particular background that the CMO brings to the job, and the organizational context in which the firm operates. The authors define power as an ability rather than as a behavior. For example, Wal-Mart, given its clout as a major customer to many consumer packaged goods firms, and General Motors, given its clout as a major customer to many auto parts suppliers, both consistently exert power on suppliers to force price concessions and product modifications. Similarly, large US airlines such as Delta, Continental, and United, given their position as major customers of feeder airlines such as ExpressJet, Pinnacle, Atlantic Southeast, Mesaba, and Comair, exert their power on these airlines to wring out cost cuts and schedule changes. Customer power serves to limit a CMO’s focus and attention in performing his/her informational role, limits the focus of the CMO’s investment activity associated with his/her decisional role, and July 2010
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limit the CMO’s latitude in forming strategic relationships. Indeed, the authors maintain that the appointment of a CMO in the presence of high customer power actually reduces firm value while the appointment of a CMO when customer power is low creates firm value. “Some CMOs find customer power debilitating to their role performance, while others prevail and even thrive despite it,” the authors state. “These differences across CMOs are not random; rather, they can be systematically explained by the experience that CMOs bring to the firms they join, and by the firm context in which they manage. Analysis of CMO appointments reveals strong support for these assertions.” An additional finding of the research is that the influence of CMOs may have declined due to the escalating presence of major customers in a firm’s customer base. “While marketers often play an important role in developing strong economic ties between firms and their customers, results from this research suggest—ironically—that a move toward strong economic ties with a few customers may actually limit the effectiveness of top marketers in driving firm value,” explained Boyd, Chandy and Cunha. The research findings also suggest that CEOs consider appointing a CMO when customer power is low but that if a firm faces considerable customer power, then a CMO should bring the right background and experience to the job. Role-specific experience is most important in situations where the candidates are likely to face strong customer power. Writing on her branding blog at brandrepublic, Helen Edwards, Director and Owner at London-based Passionbrand, noted that “What’s most striking about this academic perspective on the CMO role is the view that the customer who CMOs must aim to influence is the distributor rather than the end customer who chooses and uses the product or service of the business.” She explained, “The best CMOs understand their end customers (the ones who actually use the products) and are highly skilled in developing their brands to meet the rational and emotional needs of their customers. That knowledge, understanding and the resulting brand equity that derives from it is `power’, and not just an important negotiating tool in making the right long-term choices for the brand and the business, but also for meeting the shorter-term needs of the distributor.” Edwards added, “It wasn’t long ago that distribution, or `place’ was taught as one of the 4Ps that marketers had to play with in their marketing mix—something over which they had some control. This research suggests that the tables have completely turned, that the P of Place is a given, and that the hard-headed buyers of that Place have considerable influence over the other 3Ps too.” However, Karen Davis, Creator & Lead Contributor at Los Angeles-based Urban Nomad, suggested that “First and foremost, a CMO’s success is wholly dependent on that CMO's skill, understanding of the business and ability to connect with distribution partners who have access to customers. Perhaps even more crucial is his/her importance to the ultimate company decision maker, be it President, CEO, Chairman or Board. If a CMO is not at the highest level of their corporate food chain, he or she will never make the kind of impact that truly defines and credits "value" to the company.”
Nancy Pekala is the AMA’s Director of Online Content and Editor of Marketing Thought Leaders. Follow us on Twitter at twitter.com/marketing_power. Submit feedback and ideas relating to the AMA’s newsletter program to
[email protected].
July 2010
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