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Part 3. How Brand Equity Increases the Value of a Company

In the first part of the SCIENCE + BUSINESS ™ series, we found that neither its marketing function nor the position of marketing director enjoys overestimation in companies. In the second part of the series, we looked at whether there is a margin for this marketing space and found that the situation is that marketing is an essential part of a company’s success. Or at least when marketing is done according to our definition:
“Marketing is a group of primarily future-building, fundamental principles that offer a durable competitive advantage to the company and coordinates an integrated and purposefully direction for the operations of the entire company to evoke cognitive and emotional reactions in the customers to measurably increase the demand so that the value of a company is enhanced.”
Figure 15. The three most important marketing tools for increasing the value of a company listed by elasticity.
Marketing must therefore guide the company’s operations as a whole, as well as activities that comprehensively utilize the entire marketing mix, which thus primarily aims to increase the company’s value.
In the previous section, we also found that, based on the analysis of nearly 500 scientific research results, from all the tools of the different marketing mix, customer equity, marketing capabilities, and brand equity are the most effective in increasing a company’s value (Figure 15) . Of these three, we will take brand equity into more detail in this section.
BRAND EQUITY – #3
The role of a brand in increasing a company’s value, primarily in increasing sales, has been studied for decades. In the first phase, brand research focused on measuring awareness and customer awareness, it was considered that information about the origin of the product allowed for a higher price premium. This was followed by the “era of attributes”, where the focus was, as the name implies, on combining different attributes into a brand. Especially in the 1970s and 1980s, a conjoint analysis was often preferred in brand research, which seemed to be well suited for elucidating the relative order of importance of different attributes. This era also saw the emergence of a new and important concept value for marketing. Although attribute research flourished, research studies, began one after another to show that measuring attributes alone did not predict people’s (purchasing) behavior. A better concept was needed.

Brand equity was needed, defined in several different ways, the most famous of which are probably the definitions of Aaker and Keller. As definitions became more consistent, brand equity was approached from three different perspectives:

1. Customer experience, i.e., which variables (e.g., awareness, attitude, loyalty) contribute to the development of brand equity positively or negatively, and how these variables vary as different moderators (e.g., industry or competitive situation) change.
2. Business outcome, i.e., what is the effect of brand equity on sales, profitability, and market share change, or price premium.
3. Business outturn, i.e., how brand equity is quantified as an asset.
Due to their evolutionary development path, those working in marketing quite often have a very clear view of what brand equity is and what it means. This would otherwise be an excellent basis for a discussion of brand equity, but unfortunately, often that definition varies from respondent to respondent, which makes discussing and measuring brand equity a bit challenging. For this reason, we define brand equity according to scientific studies as follows:
“Brand equity is the business value generated by the brand of a product or service to the company that owns it, compared to an identical product or service without the impact of the brand.”
As stated in our definition of marketing, marketing is basically a constructive activity for the future. This is also perfectly true in brand building. Where short-term profitable marketing measures (e.g., promotional advertising) can, ideally, quickly impact sales through cash flow (and generally negatively to profitability), brand equity increases marketing inventory value (Figure 16), which by its nature cannot be seen by short-term retrospection or reached by accounting-based metrics (e.g. sales, margin, and market share) alone.
Unfortunately, the effectiveness of brand equity, and marketing in general, is often measured primarily through cash flow: how have marketing measures increased short-term sales, what costs have arisen from marketing, and how is all this reflected in this year’s accounts? Thus, for example, building customer loyalty is basically only reflected as an expense in cash flow, even if in the long run its effect on the value of the company is positive.
Regrettably, measurement often focuses solely on advertising, and measurement methods vary by consultant, from time-to-time, or for whatever reason. The actual inventory value (brand equity) created by marketing is then completely ignored, but the credit for the increase in the value of the company is certainly shared between the various functions in the company or its management team.
A comparison to product development and production should open the core of the idea. Product development works in the long run and therefore requires investment, the return on which will only be visible in the company’s cash register after a long time. Thus, if, for one reason or another, a company decided to reduce its investment in product development and instead divert resources in pursuit of a short-term advantage to optimize production, this would quickly translate into a clear improvement in profitability. The company would do well for a while, but in the long run, the lack of product development would force the company into a dead end. Indeed, far-reaching competitors would develop new, more attractive alternatives for customers, which the company’s customers would increasingly move to buy. In addition to the decrease in sales, the margin would suffer. Obsolete products would no longer receive similar margins, instead, customers would pay a higher price for new features they find useful from competing products. Therefore, in the long run, a company cannot build its operations solely on optimizing short-sighted production assets, no matter how exciting they are.
Similarly, if a company sees marketing as subordinate to the sales function, and does not build brand equity for the future, neither from the operations of the marketing department nor from the future of the company, one can’t even expect an awful lot. However, according to our previous definition, brand equity is a way to elicit measurable cognitive and emotional reactions in a company’s customers to increase demand. These reactions materialize at different times and affect not only sales but also the desire to pay a higher price for the product compared to the competitors.
A good example of this is Martha Stewart’s company ImClone, which became mixed in a scandal in early 2002. Stewart and her company were accused in the media of lying to the authorities, and ImClone’s brand equity fell historically in a year. Nevertheless, the effect was hardly reflected in sales in 2002, or more notably in turnover in 2003, although it did not, for example, increase advertising. The change only began to show between 2003 and 2005, when sales fell and profitability eventually fell to dramatically negative. Good brand equity absorbed the attacks and the company lasted commercially a couple of years longer than a company in a similar situation, but with poor brand equity.

But a single example is always just a single example, and one should, of course, never rely too much on it. Fortunately, there is no need because the impact of brand equity can be looked at through scientific studies, of which one monitored 444 brands for ten years. A time-series analysis was performed using a three-factor model and brand equity results were related to the total return on equity (ROA), market capitalization, sales, and operating profit. Its main result was positive, i.e., brand equity affects the above variables: for example, when brand equity increases/decreases by one variance on average, the return on capital increases/decreases by 6.8% (statistical certainty >99%) and earnings per share increase/decrease by 7.6% (>99%).

However, despite the comforting results described above, perhaps the most important finding of the study is here: based on 10 years of monitoring of more than 400 brands, on average only 3% materializes from brand equity to operating profit in each fiscal year. As many as 97% will not appear in the annual reports until the following years (>99%). The ratio naturally varies from industry to industry, in some the current financial year may be negative, in which case the investment in the brand will not make a profit for a year or two, in others “up to” 20% of the brand’s additional sales may materialize during the current financial year.
Numerous other scientific studies reach a similar conclusion, such as the study in England of 222 companies, where the analysis revealed that the short-term marketing focus does not have a statistically significant effect on the achievement of internal goals or the defeat of competitors. The long-term focus, in turn, increased the company’s probability of beating its competitors by as much as 115% (>95%).
So brand equity clearly matters, as numerous other scientific studies show, but how is it built so it increases the value of a company like the one mentioned above? And as you might guess, the answer, of course, is not simple, there is no miracle-working silver bullet, even if the prevailing hype claims there is one.
Brand equity consists of four dimensions: consciousness, significance, valuation, and differentiation. We will delve into more detailed building instructions later, as we will first highlight the last member of the quartet.
Differentiation, building your own brand to stand out clearly from other competing alternatives, is a concept in marketing, a mantra that everyone who has ever studied or used marketing knows. That is why it is necessary to get acquainted with the matter a little better.
Let’s start with a study of 25 product categories that analyzed 290 fast-moving consumer goods brands over ten years. The brand in the study was a single brand (e.g., Diet Coke) and not just the parent brand (e.g., Coca-Cola). The study examined the impact of price, discounts, distribution, and advertising, as well as the functional risk of the product, the competitive situation of the product category, the social value, and the hedonic/utilitarian nature of the product as moderators. The analysis yielded numerous findings, but the impact of brand components on the sales and market share was most relevant to the present topic. Where consciousness, significance, and valuation were strongly related to sales and market share (r = .39 – .55,> 99%), the differentiation actually correlated negatively with sales and market share (r = -. 14 and -.08,> 99%). In principle, therefore, brand equity is not built through differentiation, although, of course, it also has a place to increase sales and market share if certain boundary conditions are met.
The study’s finding has since been replicated in several studies, such as a study analyzing 39 car brands also over ten years. The brands involved accounted for 97% of U.S. car sales, and, unlike the previous study, were parent brands (car brand), not model-specific brands. More than 6,000 people over the age of 18 participated in the survey each year, and the focus was on the impact of brand equity on new customer acquisition, repurchase, and margin. The relationship was analyzed with both the direct effect of brand equity and the effect through the customer’s life cycle value on the above variables. The study also examined the impact on both brand equity and customer lifecycle value formation of various marketing activities (advertising, new model launches, discounts, and other offers, price. and distribution).
Figure 17. Basically, car brand differentiation reduces sales and increases profitability.
Of course, the analysis again produced many interesting results, but the most important thing in this context is that as awareness, importance, and appreciation increased sales and profitability, differentiation, on the contrary, reduced sales, although it clearly increased the margin in this declining customer segment (Figure 17).
BRAND EQUITY AND FINANCIAL RISKS
Properly built brand equity thus clearly increases the value of a company as sales and profitability increase. However, a slightly less frequently raised point is how brand equity decreases financial risks. Increased sales and profitability are naturally associated with lower cash flow volatility risk, but high brand equity also reduces uncertainty related to credit rating, total equity risk, market risk (systematic equity risk), and company-specific risk (unsystematic equity risk). For this purpose, the brand equity connections of 252 companies were examined, using databases such as Standard & Poor’s and CRSP databases for seven years. The analysis checked the company’s size, long-term and short-term liabilities, return on asset and its volatility, P/B value, level of diversification, age of the company, and industry. The analysis did not take into account companies operating in the financial sector due to the numerous regulations affecting their operations. According to the results of the study, brand equity has a clear effect on a company’s financial risks, i.e., as it increases, it reduces risks and as it decreases, risks increase, as shown in Figure 18.
Figure 18. The change in a single variance in brand equity is reflected in risk classification, capital risk, market risk and equity risk, respectively.

A similar conclusion was reached by another study analyzing the relationship between the brand equity of 155 companies and financial resources and the credit margin over eight years. According to the study, the direct elasticity of brand equity on the financial resources available to a company is .29 (>99%) in the short term, but already .48 (>99%) in the longer term (Figure 19). And when indirect mechanisms of action are added to the equation, a very significant elasticity value of .61 (>95%) is already reached. Similarly, based on databases of Bloomberg and Standard and Poor’s, brand equity diminishes corporate financial risk in the form of lower credit margins (-.2 and -.33; >95%, and -.35; >99%). The study examined the company’s sales, sales growth, asset size, asset growth, R&D investments, non-debt tax shield, industry concentration, beta, pretax interest coverage, and EBITDA.

Figure 19. Direct short-term (DS) and long-term (DL), and total (T) effects of brand equity on financial resources and credit margin, as well as effects of advertising on brand equity and financial resources.
SUMMARY
Properly constructed brand equity thus clearly has the effect of increasing financial success, but also the effect of reducing financial risks. These build on the elasticity mentioned at the beginning of the paper, i.e. each percentage increase in brand equity construction increases the value of the company by an average of 0.33 percentage points. Pretty good from marketing, but we can do better, right? For this reason, in the next series SCIENCE + BUSINESS ™, we will address Marketing Capabilities with an even better elasticity of Brand equity: 0.55.
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Part 2: The Meaning of Marketing and CMO in Increasing a Company’s Value

Based on the research data we presented in the first part of the SCIENCE+BUSINESS™ series, the appreciation and influence of marketing is in a sorrowfully bad shape, and it seems likely that it will worsen further down the line. There are many reasons for the weak and weakening state of marketing. One of the most important of those reasons is pointing out the effects, and especially the economic effects, of actions in marketing to the management group and chief executive officer. As long as marketing is unable to prove its worth, it will weaken the meaning and influence of both marketing and the CMO within the company. Marketing as a function and the CMO as its leader are in desperate need of something to prove the influence of their actions.
Before going through the scientific studies verifying the impact of marketing we will define what we mean by marketing, for proving the impacts isn’t possible without a clear sight of what we are doing, how it is done, and the impacts we are trying to accomplish with it. Although in recent discussions the core of traditional business enterprise has been justifiably questioned2, we will still define marketing in an “old fashioned” way:
Marketing is a group of primarily future-building, fundamental principles that offer a durable competitive advantage to the company and coordinates an integrated and purposefully direction for the operations of the entire company to evoke cognitive and emotional reactions in the customers to measurably increase the demand so that the value of a company is enhanced.
According to the first half of our definition, marketing is a group of principles that holistically direct the actions of a company. This is essential. From the quotation of Albert Einstein, value is the most important, and value doesn’t arise with advertising that aims for brief sales or with “social media buzz”. Even though the CMO has the responsibility for the success of marketing, he cannot build up marketing by himself or with his team alone. Hence marketing concerns the whole organization, and this is called marketing orientation . So, let’s start with that. What does science say about marketing orientation?
THE IMPACT OF MARKETING ORIENTATION
Fortunately for the CMO, science has studied this subject a lot and the results are what you would expect. Let’s start with a study that analyzed the impact of marketing orientation in the success of a company based on 61 scientific studies and 479 research results. 15,801 CMOs across the world participated in the research3. According to the primary result, marketing orientation relates quite strongly to the company’s success in customer satisfaction (r = .49; >95% statistical reliability), sales (r = .40; >95%), and profitability (r = .29; >95%). If the effect sizes after the letter r don’t ring a bell, you can compare the results to some of the reference values in graph 11. The results are just as convincing as in many generally accepted phenomena or medical methods in constant use. So, if you, for example, believe that the closer to the equator you get the warmer it gets, or that men are on average bigger and heavier than women, or you, for example, rely on home pregnancy tests, the power of Viagra and/or the decision of a dentist to operate on your teeth based on an x-ray, you can also rely on the fact that if your organization has internalized and holistically executes a customer-based and competitive operational culture, its customers will be happy, turnover will increase, and profitability improves. The responsibility of the CMO’s own team and customers does not just lie with the CMO and our definition, but with the whole organization and its operational culture. Marketing really has to direct the actions of the whole company.
The impact of marketing orientation on the success of a company is somewhat undeniable. However, we are, in principle, more interested specifically in the impact of the marketing function, i.e. the marketing department and its work results, on the value and growth of a company. So how does marketing as a function help with increasing the company’s value?
WHAT ENHANCES THE VALUE OF A COMPANY?
To know how marketing can enhance the value of a company most effectively we need to go through the 97 scientific studies on the topic, in which 488 connections of marketing measures to the increase of a company’s value were analyzed to answer this question.
In this analysis, the impacts of customer equity, brand equity, price and pricing, distribution, competencies, advertising, online/social media, and new product launches on the company value were studied. In other words, the analysis fully covers the traditional marketing mix. Some of the studied tools increased the value of a company whilst some had no effect at all, and for others, the effect was negative, i.e. they decreased the value of a company. Based on the results (statistical reliability >99%), the three tools marketing has that increased the value of a company the most were customer equity, competences, and brand equity (graph 12) .
Let’s look at a couple of examples of the impact of brand equity on the economic success of a company, which has been thoroughly researched throughout the last two decades. We’ll start with a study where 444 brands were followed for ten years. The time series analyses were executed with a three-factor model and the results of brand equity were pro-rated in the return on assets (ROA), market value, sales, and profits. Its main result was positive, which means that brand equity created in a scientifically-proven manner affects the aforementioned variables: for example, in general, if the brand equity increases/decreases by one dispersion, the profits increase/decrease by 6.8% (statistical reliability 99%) and the share profits increase/decrease by 7.6% (statistical reliability 99%) accordingly.
Similar results were achieved, for example, in a scientific study analyzing the connection of brand equity to economic resources and credit spread over 155 companies for eight years. According to that study, the direct elastic effect of brand equity on the economic resources of a company is, over a short time span, .29 (>99%) but over a longer time span up to .48 (>99%). When we add indirect mechanisms to the equation, we get to a significant elasticity rate of .61 (>95%). Respectively, reflecting on Bloomberg and Standard And Poor’s databases, brand equity also decreases companies’ funding risks by lowering the credit spread (-.20 and -.33; >95%, and -.35; >99%). In the study, the sales, increment of sales, size of assets, increment of assets, R&D investments, non-debt tax shields, concentration of the branch, beta coefficient, pretax interest coverage, and gross margin were all controlled.
On page 3, the analysis of 61 scientific studies containing 479 research results was mentioned. The analysis showed that marketing orientation has a significant impact on a company’s economic success. However, to the CMO’s delight, this isn’t the whole truth but rather the more exact analysis nicely revealed the necessity for the CMO and their team. When the different effects of marketing ability were removed from the marketing orientation, the impact of marketing orientation to customer loyalty dropped from the aforementioned .49 to the negative scale value of -.04 (the capability to understand competitors and customers was removed from the general marketing orientation) and .34 (capability to perform marketing mix was removed).
The results of these studies are underlined by a scientific study analyzing the successes and failures of up to 5,000 companies, according to which approximately 17% of companies will not survive economically uncertain times, and out of those that do survive, up to 80% will have difficulties three years after those times have passed. On the other hand, 9% of the companies will achieve economic excellence after recession or depression, have increased turnover and better results than before, and beat their competitors with an evident mark-up. A couple of factors separate the losers from the winners, and one of them is a different attitude towards marketing. The group of companies most likely to suffer had a management team who regarded minimizing the negative impact on finances as their most important job, which was executed mainly by reducing the staff and shifting investments, which led to companies also being forced to significantly reduce their marketing resources when their financial state worsened.
In another group that was unlikely to succeed, the companies had the opposite reaction to a recession. They invested in marketing more than usual. This approach isn’t advisable either, although it did marginally better than the choice of means in the first group.
The third group took care not to “panic brake”; especially considering marketing. The best success rate was accomplished by companies that didn’t reduce marketing or reduced their marketing budget or staff significantly less than average, and invested in marketing somewhat holistically (the statistical reliability of the results being >95%).
So, by just restraining from cutting, at least in marketing, and by finding savings in adding efficacy, the company can more than triple their likelihood of surviving. The EBITDA of companies operating this way is also six percentage points higher than companies in general after a recession, and almost eight percentage points higher than companies that reduce their marketing staff and budget.
NOTHING LASTS FOREVER
Nothing good lasts forever, not even for marketing. According to the study researching the marketing orientation and its impact on sales and profits for eight years in 300 companies, after noticing the impacts of new marketing competence, other companies started to increase their efforts to improve their own marketing orientation (graph 13).
The consequence of this is that a company tuned to the maximum and getting excellent results in the first year will not remain at that level with the same processes and competences after two, and definitely not after six years. The marketing orientation has to be continuously increased, developed, and improved. As per usual for businesses, neglecting this development will destroy you. So according to these research results, early adopters will benefit most from implementing new procedures and competencies that increase marketing orientation, while others have to make do with weaker results. Conversely, we could say that the companies who improve their marketing slowly and lag behind undertake more development to prevent failure rather than to achieve the best competitive advantage.

According to what was shown previously, we now have a clear understanding that marketing has an evident and undeniable impact on the turnover and profits of a company. Based on equivalent and even weaker scientific research results, doctors, for example, continuously make decisions related to the health and the need for health care for us all, even you (graph 11).

WHAT ABOUT THE INFLUENCE OF THE CMO?
If in the light of results of the report “CMO and the diminishing influence”, marketing doesn’t seem to be highly respected as a function, neither is the position of the leader of the function, the CMO, exactly luminous. So, what do we even need a CMO for if his responsibilities are increasingly shifted to others? If marketing was reduced to nothing more than buying advertising services and controlling social media, wouldn’t the role of the CMO be virtually useless as we wouldn’t need a strategic view of marketing? This question might sound provocative; however, it is completely justifiable. If the CMO can’t bring anything useful to the operations of a company, as shown by decreasing respect, short careers, and numerous conflicts with chief executive officers, why should he get a place at the strategic table?
Firstly, let’s look at the reasons CMOs are assigned to management groups. The reasons can be rational and based on the success of a company, or they can be very irrational and seemingly random. The latter reason is represented by social herding, which practically means copying the actions of others without better knowledge. The impact of social herding on the involvement of the CMO on the management group was detected in a study following over 500 companies based in the USA for 12 years, according to which the companies were a little more likely to assign a CMO to their management group when they noted that other companies were acting this way (β = .09, >95%) . The factors increasing the likelihood of social herding were the uncertainty in the company’s operations (β = .14, >99,9%) and the strong fluctuation of strategic operations, reducing it in the reference companies (β = -.04, >95%). Surprisingly, the uncertainty of the business environment did not affect social herding (β = -.04, N.S.).
Based on the previous research, the increasing respect towards marketing and CMOs when measured by assigning them to the strategic planning table can partly be due to an ungrateful reason. Imitating the actions of other companies isn’t recognizing the true value of a CMO, even with the best will. This in turn negatively impacts the valuation of CMOs in the long run since, as we previously stated, the studies have found that the companies that first implement new management practices will significantly benefit from it economically, unlike the companies that react more slowly and mainly copy what others are doing (graph 13).
Respect and the right to have a place at the strategic table is generated from being useful, which is naturally measured in companies by economic success. So, what do the scientific studies tell us about the impact of a CMO in the growth of a company’s value? Let’s start with a study following over 100 large companies, at least by Finnish standards (turnover >250 musd), for twelve years. These were companies in different industries from production to retail and services doing both consumer marketing and business marketing.
In the analysis, numerous error variables which could distort the results were controlled: strategic focus areas (innovations, differentiation, brand or diversification), the length of the chief executive officer’s term of office, recruiting the chief executive officer outside the company, market concentration, the number of employees, the influence of the chief operating officer, return on funds, and increase in sales. The impact of a CMO on the company’s success was analyzed using Tobin’s Q since, unlike backward-looking variables based on accounting (e.g. growth in sales), Tobin’s Q also observes incoming profits and it is not just based on the profits made in a certain time reference point. In principle, marketing is a future-aiming long-haul activity, unlike carrying amounts based on history. The decision to use Tobin’s Q is also justified by different short-time aims of companies (e.g. results or growth), different means of accounting, and Tobin Q’s way of using the right, risk-corrected discount rate.
The analysis aimed to also note other error-inducing variables, for example, the budget used for advertising and the relation of the CMO’s position to the general strategic marketing orientation of a company. In this way, a self-fulfilling forecast was controlled, where the CMO was picked up by the management group because the company believed that the presence of a CMO would improve the company’s performance, which is why the possible success of a company is explained partly by the CMO’s role in the management group or the faith in the strategic competence of a CMO makes the rest of the organization act more efficiently for the company’s outcomes. For the error variables, the following models were used: (1) rich data models, (2) unobserved effects models, (3) IV models, and (4) panel internal instruments models.

The results of this study were quite clear: with the statistical reliability of 95% that those companies where the CMO was a part of both the management team and strategic decision making had a better result of 15% measured by Tobin’s Q than companies where the CMO was not a part of the activity of a strategic management team. The results remain steady throughout the whole period considered, hence the participation of a CMO in the strategic work always produced better results compared to companies that arranged things differently (graph 14).

The results were also repeated if the economic success of a company was evaluated using stock returns (Jensen’s α). Another noteworthy observation was that the impact of CMO on the economic success of a company through working in the management group did not generate a statistically meaningful result when the impact was considered from the viewpoint of a narrow short-term sales increase. In other words, marketing is not a short-term salesforce effect that can be seen in the cash flow, but rather long-haul work to increase the brand’s stock value which will show in the cash flow only in a future period point (more on this in upcoming parts of the series).
And since a singular research result is never reliable enough, let’s see what other studies have to say on the matter. One of them investigated the data of 401 companies for five years based on the database of S&P Compustat. CMOs, sales directors, technology and product development directors, and finally production, purchasing, and supply chain managers (e.g. Chief Supply Chain Officers) were picked up for the study. The industry, volatility of the industry, the number of companies in the industry, and the innovativeness of the industry were analyzed as moderators. Furthermore, the study researched the impact of different strategies and controlled the profitability of a company and industry, growth in sales of a company and industry, concentration, SG&A, size of a company, funding, and finances of a company, R&D expenses, term of the chief executive officer, the background of the chief executive officer, and the presence of an operational director in the management team.
The main results of the analysis showed that out of the members studied in the management team, only the presence of a CMO was generally related positively and statistically significantly to the growth of a company’s value (r = .20, >99,6%). The presences of a sales director and technology director however were not significantly related to a change in company’s value (r = -.04, N.S. and r = -.001, N.S.), and the presence of production, purchasing, or chain managers generally decreased the value of a company (r = -.09, >95%).
Marketing really is an important factor in a company, as long as it, in Albert Einstein’s words, aims to create pervasive value. On the other hand, having marketing or a CMO sitting in the strategic table doesn’t automatically increase the value of a company. Marketing has to be executed holistically and by the patterns identified in scientific studies.
SUMMARY
Despite these results stressing the clear usefulness, even the necessity, of marketing, only stating that “actions favoring marketing and the role of a CMO in the strategic table increase sales and profitability” isn’t enough in practice. We need more concrete information on what it means and by what practical means we can create this positive impact? Based on the results of the aforementioned 488 scientific studies, the most efficient ways for marketing to increase a company’s value are brand equity (elasticity 0.33), competencies (elasticity 0.55), and customer equity (elasticity 0.72). We will tackle these subjects in the upcoming parts of SCIENCE+BUSINESS™.
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Part 1: Chief Marketing Officer and Diminishing Authority

Any company aims to bring value to different stakeholders, and by the principles of the predominant economic systems, primarily to the owners, which is why the different functions of a company need to prove their part in the development of a company’s financial outcomes. This has traditionally been very challenging. Various reports have proven that the biggest problem faced by a CMO is linking their performance to the performance of a company convincingly (graph 1) , and a natural repercussion of this is the constant decrease of the marketing department’s authority within different companies.
Let us start with some older research conducted in Germany between the years 1996 and 2013 in 178 different companies. The sample comprised of companies in different fields whose turnover varied between a couple of tens of millions to over 20 billion. The research defined the leadership of the following eleven marketing-related sectors: pricing, development of new products, strategic decision-making, large investment decision-making, expansion into new markets, choosing strategic partners, planning and execution of customer service and support, improving customer satisfaction, strategy for distribution, and finally, advertising and measuring customer satisfaction (the sectors have been listed from the most to the least important according to the companies).
Graph 1. CMOs feel that their biggest challenge is to prove the influence of marketing actions to the rest of the management group. (The CMO Survey 2019).
Graph 2. The authority is moving from the marketing towards the sales
The first conspicuous observation we make is that the marketing departments of the companies studied announced that they were clearly overshadowed by the sales department primarily in marketing-related decisions that were important for the operation of the company (graph 2) by as much as 42%. Further examination of the results (graph 3) shows that, of the eleven studied sectors, the sales department has more authority than the marketing department in eight of the most important sectors, in one sector the authority is divided equally (customer satisfaction) and marketing has the upper hand in only two of the least valued sectors (advertising and measuring customer satisfaction).
The current trend does not suggest any improvements either. Over the measured seven-year period, the authority of the marketing department within companies decreased the most with over 95% statistical reliability, whereas the authority of the sales department increased (graph 4). Perhaps somewhat surprisingly, there was no significant change in the authority of all the other departments considering the measured sectors.
Graph 3. Marketing feels primarily responsible for the two sectors ranked the least important within companies (advertising and measuring customer satisfaction).
Graph 4. The biggest decrease in the inner authority of a company between 1996 and 2013 was seen in marketing, whereas the sales had the biggest increase.
The study we went through above gives an interesting insight into the status of marketing and its development, but it is slightly too outdated to be able to provide any reliable data about the current situation. For this reason, it is better to view the subject at hand by considering more recent data.
According to the more recent 2020 “The CMO Survey”, CMOs still have no real authority in any of the four sectors of the marketing mix (graph 5). Communication is most clearly in the hands of the marketing department (65%), however, even that is most likely because of advertising (86%). The marketing department barely manages production decisions and planning, pricing, and pricing measures, not to mention distribution. For these, the decisions are primarily made somewhere else.

Graph 5. The share of CMO’s authority in different sectors of the marketing mix.

Graph 6. The authority of a CMO by strategic instruments.
The marketing mix should offer the marketing department a large variety of different methods for reaching their targets. However, this idea only provides an insight into what tools a marketeer is supposed to be able to use. In practice, the reality seems to be completely different.
Of course, the outcome can be dismissed by the fact that the marketing mix is only one expression and only one kind of vision. The tools that the marketing department has can be viewed by other premises too, for example, from the aspect of the tools that are strategically important for marketing. According to the same survey, the CMO has a slightly tighter grip on strategic instruments, though even for them, the directorship lies elsewhere, excluding the brand (graph 6).
Further analysis of the survey also shows that the only sector that the CMO truly has power over is the development of the brand through different forms of marketing (graph 7). The CMO has 80% authority only over digital and traditional advertising as well as social media activities. The implementation of the “four Ps” of marketing seems to have narrowed down to only “one P”, so is the role of the CMO diminished to only the buyer of advertising services and a “social media talent”?
And what direction are we taking? How will respect for CMOs develop in the future if it is defined by changing authority and trust? The future is known to be hard to predict, but we can search for an answer by again mirroring the changing trends of the companies’ inner power dynamics. By comparing this year’s readings to that of the two previous years’ surveys, the trend seems to be, unfortunately, primarily negative. Between the years 2018 and 2020, CMOs were reported to have systematically lost authority within brand, communications, positioning, control over business information, market-entry strategy, new products, pricing, and customer service (graph 8). Respectively, an increase of authority has only happened in two sectors: traditional (+6%) and digital (+3%) advertising.
Graph 7. The authority of a CMO is centred around the different forms of branding and advertising.

Graph 8. The change in the authority of a CMO between the years 2018 and 2020.

Even though the CMO is often expected to bring profit, it would seem that they do not have enough authority to accomplish that, and their diminishing status will not make reaching goals any easier in the future. The CMO can be hired to “lead the growth of sales and profit”, but according to these surveys, their role, unfortunately, seems to be often limited to buying advertisement services and controlling social media. The division of the roles is somewhat understandable.

SHORT CAREER

Work is done collectively, and there are many different roles represented within the management group. Thus, the CMO, not unlike any other director, could never be solely responsible for the increase or decrease of a company’s success. One might think that the bigger the management group becomes, the smaller the authority of all the functions within it becomes. However, this logic is compromised if we remember the earlier research results, according to which the change of authority from the important instruments of the markets is not equally divided for the whole organization, but specifically shifted from marketing to sales (graph 4). This observation is against the idea that marketing would suffer from the divergence of responsibility the same way other functions do.

Graph 9. The career of a CMO ends faster than anyone else’s (in 3.5 years).

One huge challenge in marketing is the difficulty of linking its actions and accomplishments with the actions and the outcomes of the company as a whole. The product, distribution, customer service, discounts, and advertising, are influenced by the agendas of, for example, the financial director, line management, IT-department, and the chief executive officer. This proves that the effectiveness of marketing is challenging, which is why the merits of marketing are shared by different parties, but the failures are mainly endured by marketing management alone.
The position growing all the more uncertain, the weakly proven link between actions and accomplishments, and the lack of authority are sadly often manifested by others questioning the utility of marketing management, which seems to be reflected surprisingly often in the relationship between the CMO and the CEO. According to a study published in 2017, up to 80% of CEOs do not trust the CMO or feel disappointed by their accomplishments. Out of the management group, the CMO (graph 9) has the shortest career life (3.5 years) compared to the CEO (6.9 years), Chief Financial Officer (4.7 years), Chief Information Officer (4.6 years), and the Chief Human Resource Officer (3.7 years).
According to another related study, the difference in career length is even more ruthless (graph 10): according to the study, the majority of CMOs switch, or are forced to switch, their company after a maximum period of three years after starting the job. Only a handful of CMOs manage to hold their position for longer.
There are probably multiple reasons for this unfortunate situation, but out of interest, we want to bring up a study from Germany and the United States. According to that study, out of the higher education institutions teaching marketing in Germany only 18% offered training modules specifically related to pricing control, whereas 55% offered training modules specifically related to communications. The results were similar in the United States (39% vs. 100%).
According to the survey we went through above, companies regard pricing as the most important issue and marketing and advertising as the second most useless. It seems reasonable to ask whether the decrease of marketing authority stems all the way back to higher education?

Graph 10. Most CMOs change employers within three years.

SUMMARY
In the light of the surveys we have gone through, the role of the CMO is, all things considered, unfortunately weak, their authority low, and their responsibility and power to use marketing tools also seem to be moving further away from the marketing department – and especially towards sales. In the future, we predict the threat is that the marketing department may degenerate into nothing more than a specialist department for advertising and social media marketing. But are there real grounds for lack of respect and decrease of authority? We will answer this question in the SCIENCE+BUSINESS™ series document: “The meaning of marketing and CMO in the increase of a company’s value.”