Rajesh Chandy D. Eric Boyd Marcus Cunha Jr.
The short lives of CMOs and the questions surrounding their financial impact prompted us to pursue a research study that was recently published in the Journal of Marketing Research called "When Do Chief Marketing Officers Impact Firm Value? A Customer Power Explanation." We assessed the stock-market impact of a set of newly hired CMOs at publicly held firms across a wide variety of industries and asked the question: How did the appointments of these CMOs affect the stock value of their firms? To answer this question, we first identified all announcements of CMO appointments appearing in major daily newspapers and wire services such as The Wall Street Journal, PR Newswire and Dow Jones Newswire between the years 1996–2005. For all appointments at publicly held firms, we then assessed (using standard methods from the academic literature in finance) how the stock price of each firm in question was affected by the announcement of the new CMO's appointment.
The data suggest that the stock market's reaction to the appointment of new CMOs is far from uniform. Some CMOs contribute substantially to stock-price improvements, whereas others do not. So we tried to figure out why the effect of CMOs varies so much across firms.
We find that CMOs' stock-market impact depends greatly on whether they have managerial discretion: the freedom to make decisions and take actions based on their judgment of what is best for their firms. And what prevents CMOs from gaining managerial discretion? Among other things, the research highlights a surprising culprit: their own customers. Since our sample covers both business-to-consumer and business-to-business firms, our definition of customers covers both end consumers as well as intermediate customers such as retailers (for example, Walmart, by our definition, is a customer of Procter & Gamble, just as American Express is a customer of Oracle). As customers become more powerful, so, too, does their impact on the managerial discretion available to CMOs. Powerful customers tend to give CMOs less discretion.
Customers are not inert actors, and you don't have to look far for evidence of the impact powerful customers can have on managerial discretion. General Motors and Ford, given their clout as major customers to many auto-parts suppliers, consistently exert power on firms they buy from to force price concessions and product modifications. Similarly, large U.S. airlines such as Delta and United, given their position as major customers of feeder airlines such as ExpressJet, Pinnacle and Atlantic Southeast, exert their power on these airlines to wring out cost cuts and schedule changes. And in the consumer-packaged-goods industry, as one senior executive put it, "Big retailers bully small suppliers. It is a fact of life."
The CMO, as a steward of customer relationships in the firm, bears the brunt of the pressure from powerful customers. The push by powerful customers to cater to their current needs can pressure a CMO into making short-sighted decisions to please these customers. Marketing executives at Kodak, for example, resisted the move to digital photography in part because owners of photo-processing stores complained that digital might make obsolete the expensive film-processing equipment they had purchased from Kodak. And fear over losing the revenue provided by a powerful customer can cause the CMO to focus solely on one customer's interests at the expense of others. "Make sure one customer does not come to dominate your business," cautions Stephen Hertzenberg, former CMO at Gertner Communications and senior VP-global sales and marketing at Rosetta Stone. Otherwise, "CMOs can become replaceable parts and they get pushed around," he says.
Fortunately, not all CMOs find customer power equally debilitating. The research identifies several contingencies under which CMOs contribute more or less to shareholder value. Some of these contingencies exist at the level of the individual CMO, and others exist at the level of the CMO's firm. At the individual level, the experience that the CMO brings to the job -- prior experience as a CMO, or prior experience in other firms (i.e., as outsider appointees) -- helps overcome the potentially negative effects of customer power. Experience from her previous career as an entrepreneur offered Sheila Struyck, now CMO-head of strategy at Philips Consumer Electronics, the ability to look beyond the company's existing customers and seek new markets in areas such as consumer health services (and even introduce vibrating devices for couples to engage in "intimate massages").
At the firm level, large firms offer CMOs a better ability to overcome the negative effects of customer power, as do firms with strong records of performance, and firms that conduct business across a wide variety of markets. These contingencies ensure that managerial discretion varies substantially across CMOs. An awareness of these contingencies may help CMOs (and prospective CMOs) assess whether they will have the freedom to implement decisions that they know are right for the companies they help lead. These contingencies may determine whether those that wear the marketing crown breathe a little easier and a little longer.
|ABOUT THE AUTHORS|
Rajesh Chandy holds the Tony and Maureen Wheeler Chair in Entrepreneurship and is a professor of marketing at the top-ranked London Business School. He serves as academic director of London Business School's Institute for Innovation and Entrepreneurship. D. Eric Boyd is the Wampler-Longacre Professor of Marketing and an associate professor in the College of Business at James Madison University. Marcus Cunha Jr. is an associate professor of marketing in the Michael G. Foster School of business at the University of Washington in Seattle.