Ideas for Leaders #581

Why the Chief Marketing Officer Matters

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Key Concept

The position of Chief Marketing Officer has come under fire recently, with some arguing that a CMO does not really add value to a company. A new research study counters this view; showing that companies with CMOs perform up to 15% better than companies who leave the CMO seat empty. 

Idea Summary

Does a Chief Marketing Officer help a company, or is this position a ‘C’ that doesn’t earn its place in the C-suite? In 2008, an influential research study by Pravin Nath of the Drexel University (now at Oklahoma) and Vijay Mahajan of the University of Texas came to the conclusion that a CMO neither adds nor subtracts value to or from the company. The Nath and Mahajan study, which used Tobin’s Q and sales growth to measure firm performance, has subsequently served to gird the argument that the CMO was a waste of salary.

In more recent research, three academics, Frank Germann of the University of Notre Dame’s Mendoza College of Business, Peter Ebbes of HEC and Rajdeep Grewal of University of North Carolina’s Kenan-Flagler Business School, expanded the depth and breadth of the original Nath and Mahajan research study in order to more rigorously test the impact of a CMO on a company’s performance.

Germann, Ebbes and Grewal began with same core data — companies from the Compustat database that reported both advertising and R&D with sales of at least $250 million in 2002 — then expanded the research as follows:

  • They used seven econometric models to measure performance compared to just one for Nath and Mahajan.
  • They added the food, transportation and miscellaneous manufacturing categories of industries that had been excluded by Nath and Mahajan.
  • They lengthened the time frame covered from 2000-2004 for Nath and Mahajan to 2000-2011.

The result was a series of studies that reversed the conclusions from Nath and Mahajan’s earlier study.

Study 1a replicated the original study and led, not too surprisingly, to the same result: there was no significant difference in firm performance between companies with or without CMOs. However, for the other studies in their research, the researchers used their six new econometric models (studies 1b, 2, 3 and 4), adding the new industries (studies 2 and 4), and/or the new timeframe (studies 3 and 4). The results were consistent throughout the series: in each study, six out of the seven econometric models showed that the presence of a CMO led to an increase in the performance of the company.

On average, the researchers calculated an increase of 15% in Tobin’s Q for companies that had a Chief Marketing Officer on its top management team. The difference was especially significant in studies 2, 3 and 4, when factors such as additional industries and a longer time frame were included.

The researchers further tested their results by using additional performance measures: sales growth, a measure also used by Nath and Mahajan; Jensen’s α (a measure of excess stock returns); systematic risk; and idiosyncratic firm risk. The researchers found a positive impact for Jensen’s α, but not for sales growth. Results for the risk measures were inconsistent across the models and thus inconclusive.

Because capital market-based measures such as Tobin’s Q and Jensen’s α are more indicative of long-term strength than accounting measures such as sales growth, the researchers concluded that their results emphasized the sustainable advantage of a CMO.

In addition, Germann, Ebbes and Grewal explored the relationship between the positive impact of a CMO and certain characteristics of a company, such as CEO tenure, number of employees, sales growth (when it is not used as a performance measure) and different strategies of the firm. They found that the positive impact of a CMO on Tobin’s Q is more pronounced for companies with higher sales growth, companies that are relatively smaller, and companies whose CEOs have relatively shorter tenures.

Business Application

A Chief Marketing Officer is not a small investment, especially for smaller companies. However, this study offers proof that the investment will generate a significant, long-term return — despite what some media reports might declare.

One of the challenges of measuring the impact of a certain position in a company, such as the Chief Marketing Officer, is to account for the time lag required for any effect from the position to manifest itself. Thus, in their research, Germann, Ebbes and Grewal expanded the time frame used in previous studies by a significant amount.

Another important decision was to focus on capital market-based measures, such as Tobin’s Q and Jensen’s α, as opposed to accounting-based measures such as sales growth. The problem with accounting-based measures is that they give little information about the future strength of the company – measuring only the impact of past decisions on current performance. Capital market-based measures, on the other hand, capture present and future firm performance.

Companies that create a CMO position should not expect showy results in the short-term. Perhaps one of the key lessons of the comparative studies of Nath and Mahajan versus Germann, Ebbes and Grewal is that if you’re anxious to see quick results from a newly installed CMO, you will be disappointed. To paraphrase the old expression, this pot will boil, profitably, but give it time.  

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Authors

Institutions

Source

Idea conceived

  • May 2015

Idea posted

  • February 2016

DOI number

10.13007/581

Subject

Real Time Analytics