Marketing ROI

McCombs researchers from marketing and finance weigh in on whether marketing pays its way.

by Sandie Taylor

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In the last decade or so, corporations such as General Electric, Intel, Best Buy, Frito-Lay and Coco-Cola have hired chief marketing officers (CMOs) to oversee the branding and marketing strategy of the company. With marketers joining the ranks of top management, this trend suggests that marketing is gaining more influence in many companies.
 
But surprisingly, a recent study by Booz Allen Hamilton revealed that about half of Fortune 1000 companies have not hired a CMO. How can this inconsistency be explained? Because a defined model for measuring marketing’s impact doesn’t exist, some resist giving such status to marketers who cannot show exactly what they contribute and how much value marketing efforts provide the company.
 
Financial officers want proof that marketing boosts a company’s financial performance—that it brings in sales and profits, increases its stock price and adds to its market value. But few seem clear on how to measure the returns on marketing initiatives and judge the performance of CMOs.
 
“Marketing people have to articulate and justify how they are bringing value to the company just as the operations people or finance people justify spending,” says Ramesh Rao, McCombs professor of finance. “If they can’t do that, they are not going to be invited to the boardroom.”
 
Groundbreaking work by McCombs researchers is helping both practitioners and academics demonstrate marketing’s worth.

Challenging the Norm

Vijay Mahajan, professor of marketing, and former McCombs Ph.D. student Pravin Nath, now an assistant professor of marketing at Drexel University, caught the attention of the business media and executives with their paper, “Chief Marketing Officers: A Study of their Presence in Firms’ Top Management Teams.” The co-authors found that the existence of a CMO had neither a positive nor negative effect on the financial performance of a company. The study, which was published in the Journal of Marketing in January, looked at 167 companies, including Procter & Gamble, Microsoft and Apple, to determine under what circumstances a company would have a CMO in its top management team and whether having one affected the company’s financial performance over a five-year period.
 
The research, which appeared on the cover of Advertising Age, stimulated a debate on the role of CMOs and how to measure their impact on a firm’s financial performance.
 
“In the paper, we point out that we may have had wrong expectations,” Mahajan acknowledges. “The CMO’s
presence does not help increase profitability in the short term, but that’s not to say a CMO does not bring long-term benefits to the health of the company.”
 
The CMO serves as a customer advocate, allowing top management to hear the customer’s voice, he says.
What’s more, CMOs contribute to the company’s brand equity, identify new product segments and implement new technology—all initiatives that do not necessarily offer immediate results and which have advantages that are difficult to quantify.
 
Mahajan suggests that perhaps marketing and CMO effectiveness should be assessed using a different standard than the typical financial models.
 
For instance, James Stengel, global marketing officer for Proctor & Gamble, has had a successful run in his role over the past six years. In a September 2007 Fortune magazine interview, he was asked to respond to the study’s findings. Stengel reported that his CEO, A.G. Lafley, measures his performance based on whether the company’s equities are stronger, if the innovation pipeline is stronger and if the organization as a whole is stronger. So far, Lafley seems to be more than satisfied.
 

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