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Managerial Discretion and CMO Value

Jan 24, 2011 |

You know the stats:  CMOs are reported to have an average life of just over 2 years.  You also know the gripe:  Marketing has an unproven effect on the firm’s performance in capital markets.  I intend to help shed light on these ideas throughout this blog at various times.  Academic colleagues Boyd, Chandy, and Cunha recently published a paper in the Journal of Marketing Research (and a much easier to read version in Advertising Age) addressing the stock market impact of a CMO. The specific questions they asked were whether, and under what conditions, hiring a CMO contributes to firm performance.

The study used new CMO announcements collected from major newspapers and wire services (such as the Wall Street Journal, PR Newswire, and Dow Jones Newswire) from 1996-2005 and included a variety of industries.  It may not be surprising that the results were mixed—some CMOs contributed substantially to stock price movements and others did not.  In fact, in 46% of the cases in the sample, the stock market response to the appointment of a CMO was positive, whereas in 54% of the cases, the response was negative. Given these results, the next logical question is why the CMO effect differs across firms.

As it turns out, a CMO’s “managerial discretion” is a critical factor in determining his or her impact on stock values.  Discretion can come from a variety of sources, including the CEO.  This study examined the effect of the firm’s own customers as a factor limiting the CMO’s freedom to decide or act in accordance with what a CMO judges best for the firm.  In short, powerful customers can constrain a CMO’s discretion.  The authors explain that this finding extends to both end customers and intermediate customers (such as Walmart, a P&G customer or American Express, an Oracle customer).

How do powerful customers limit the managerial discretion of CMOs?  They can force price concessions and product modifications, they can demand extra service or special deals, and perhaps worst of all, they can resist innovations that cannibalize products in inventory, that require new training or expensive new infrastructure investments.

One piece of good news is that customer power does not influence all CMOs alike.  Individual and firm factors affect the contribution a CMO makes to the firm value.  Experienced CMOs—either previous CMO experience or experience from outside of the firm—mitigates the degree of customer power.  CMOs that head large firms, CMOs in firms with strong performance records, and CMOs of firms operating across a broader scope of markets also tend to escape these problems.

The authors state that “Marketers often play an important role in developing strong economic ties between firms and their customers, but the results from this research ironically show that a move toward strong economic ties with a few customers may actually limit the effectiveness of top marketers in driving firm value.”  That’s a tough tightrope to walk.

If you are a marketing leader in your firm, how do these findings resonate?  How do you serve your customers while also ensuring they are not challenging your discretion beyond what is reasonable?

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