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?
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?
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 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).

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.
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™.