WHEN DO CHIEF MARKETING OFFICERS IMPACT FIRM VALUE?
A CUSTOMER POWER EXPLANATION
D. Eric Boyd
Marcus Cunha Jr.
Forthcoming, Journal of Marketing Research
D. Eric Boyd is Associate Professor of Marketing, College of Business, James Madison University
(email: firstname.lastname@example.org). Rajesh K Chandy is Tony and Maureen Wheeler Chair in
Entrepreneurship, Professor of Marketing, and Academic Director of the Institute for Innovation
and Entrepreneurship, London Business School (email: email@example.com). Marcus Cunha Jr. is
Associate Professor of Marketing, Michael G. Foster School of Business, University of Washington
(email: firstname.lastname@example.org). The authors thank Alina Sorescu for her useful suggestions. The first
author acknowledges the research grant support provided by the James Madison University College
of Business. The second author acknowledges the financial support of the Center for Marketing at
London Business School.
WHEN DO CHIEF MARKETING OFFICERS IMPACT FIRM VALUE?
A CUSTOMER POWER EXPLANATION
Abstract: Recent discussions in the academic literature and business press often paint an
unflattering picture when describing the contributions that Chief Marketing Officers (CMOs) make
to the financial value of their firms. Some have even suggested that CMOs, despite being the top
marketing leaders in firms, have little or no effect on firm performance. However, formal empirical
research examining the impact of CMOs on financial performance is scarce. This paper presents
conceptual arguments and empirical evidence about this controversial issue. The authors suggest
that CMOs are far from irrelevant to the financial performance of firms. However, the impact of
CMOs on financial performance is highly contingent on the managerial discretion available to them.
Focusing on the role of customer power in limiting the managerial discretion available to CMOs,
this paper identifies individual and firm-specific conditions under which CMOs contribute more or
less to firm value. Analyses of abnormal stock returns associated with the appointment of CMOs
provide support for the hypothesized effects of customer power and managerial discretion.
WHEN DO CHIEF MARKETING OFFICERS IMPACT FIRM VALUE?
A CUSTOMER POWER EXPLANATION
To aspiring marketing graduates of today’s business schools, the Chief Marketing Officer
(CMO) embodies the highest position of leadership within the marketing function in a corporation.
It is a job that is in great demand. As a recent issue of Advertising Age (McLane and Selby 2007, p.
7) put it: “So, you want to become a chief marketing officer? Get in line.” As the primary functional
executive with responsibility over marketing strategy, CMOs help orchestrate activities that are
central to their firms. Because the CMO is the most direct steward of a firm’s customers, and since
customers are one of the few stakeholders who actually provide the revenues that keep a firm
running, the job of the CMO is one of great responsibility (Court 2007).
However, it is also a job that seems to be in great peril. Indeed, some have suggested that the
most serious challenge facing CMOs may be justifying their own existence – both within the firm
and to Wall Street (Wheaton 2007). For example, a recent survey indicates that the average tenure
of CMOs in large firms is only 23 months (McGirt 2007). Furthermore, CMOs have variously been
described as “dead man (or woman) walking” (Kiley and Helm 2007, p. 63), and as holding “the
most dangerous job in business” (McGirt 2007, p. 33). Some have also suggested that publicly held
firms are particularly difficult places for CMOs, given the intense pressures put on them by Wall
Street to demonstrably create value (Wheaton 2007).
Despite the concern and controversy surrounding the CMO position, much of what we know
about their impact on firm performance is based on anecdotal information (see Nath and Mahajan
2008 for a recent exception). Part of the challenge is empirical. The CMO operates as part of a
larger management team, and he or she is unlikely to be solely responsible for driving performance
up or down. As such, it is difficult to properly isolate the impact of the CMO on the firm relative to
the impact of other managers in the firm. Indeed, some have argued that since marketing outcomes
cannot always be easily quantified, CMOs may end up getting less credit than they deserve, and
more blame than they deserve.
The uncertainty surrounding the role of the apex marketing executive in the firm has
important implications for marketing practice and theory. On the practice side, the uncertainty could
cause some CEOs to conclude that marketing does not deserve a formal place at the corporate level.
Such a conclusion would greatly reduce marketing’s strategic influence within firms and weaken
the ability of managers to acquire the resources needed for carrying out marketing activities. On the
theory side, a lack of empirical evidence relating CMOs to firm performance could lead researchers
to question whether marketing’s role in top management deserves further attention. Such a
viewpoint would greatly limit the scope of marketing’s contribution to advancing our understanding
of firm strategy.
This research is an early look at the conditions under which CMOs impact firm value. In this
paper, we seek to make three contributions to the literature. First, we seek to add to the nascent
academic literature on the role of CMOs in driving firm performance. One of the few systematic
studies on this topic is the recent work by Nath and Mahajan (2008), whose research suggests that
the absence or presence of a CMO does not affect firm performance (also see Weinzimmer et al.
2003). As a next step in the evolution of this research area, we seek to go beyond the question of
whether or not CMOs affect firm performance. Instead, we argue and demonstrate empirically that
individual CMOs vary considerably in their contribution to firm performance. In doing so, we seek
to move toward a more nuanced understanding of the likely impact of CMOs on firm performance.
Second, we propose an explanation for why some CMOs have more of an impact on firm
value than others. We begin by outlining the roles that CMOs can play in the firms they help
manage. We then draw upon the well-established literature on top management performance
(Hambrick and Finkelstein 1987; Hambrick and Mason 1984) to introduce a concept – managerial
discretion – that provides a basis to understand differences in performance among top managers.
Next, we apply the general management concept of managerial discretion to the specific marketing
context of CMOs by linking CMOs’ effects on firm value to customer power (Christensen and
Bower 1996; Gaski and Nevin 1985). Our focus on customer power - the ability of a customer to
cause a selling firm to undertake action it would not have undertaken otherwise - recognizes a trend
toward consolidation on a global basis, which has resulted in the emergence of only a few giant
players in many industries (Farris and Ailawadi 1992). Firms are increasingly relying on individual
customers for larger and larger shares of their revenue; indeed, research indicates that the sales
made by the average firm to its largest customer rose from 10% in 1989 to over 26% in 1997
(Gosman and Kelly 2002). We argue that as customers become more powerful, so too does their
impact on the discretion that CMOs have in fulfilling their roles: powerful customers tend to give
CMOs less discretion. However, not all CMOs find customer power debilitating. The effects of
customer power are enhanced or mitigated depending on the particular background that the CMO
brings to the job, and the organizational context in which the firm operates.
Third, we examine how the stock market reacts to CMOs. The precarious tenure of many
CMOs is often attributed to Wall Street’s apparent impatience, and its insistence on tangible proof
of the effectiveness of marketing activities. We seek to provide some guidelines - to aspirants to top
marketing positions, as well as to firms considering prospective candidates for such positions -
about attributes to watch for in themselves and in those they consider, to increase the odds of
creating shareholder value. Our approach, which examines abnormal stock returns due to CMO
appointments, allows us to empirically isolate the effect of the CMO on firm performance, thus
allowing us to separate the impact of the CMO from that of all the other executives who might also
affect firm performance. Isolating the CMO’s impact is an important step in making the case for
marketing’s role in driving firm performance.
In the next section, we develop a conceptual framework and hypotheses linking CMOs to
firm value. We then test our arguments empirically, by seeking to explain the variation in stock
returns associated with CMO appointments across firms. We find strong support for our
hypothesized model and discuss the theoretical and managerial implications of our findings. We
conclude by identifying limitations to the research and directions for future research.
The Role of the CMO
The Chief Marketing Officer (CMO) is the member of the top management team responsible
for providing strategic leadership regarding the marketing activities performed by a firm. As a
leader with responsibility over marketing, the CMO can play at least three roles that provide the
opportunity to influence firm performance. First, the CMO can play an informational role in the
firm by helping identify new market opportunities for a firm to pursue, and threats to guard against.
The informational role that CMOs play can enhance firm value by providing new revenue streams
from existing and new customers. Second, the CMO can play an important decisional role within
the firm by helping determine the level and type of investments to be made in the activities
associated with the marketing function. Even when key decisions are made by others on the
management team, the CMO can contribute a customer perspective to these decisions. Third, the
CMO can play a relational role by developing and managing a firm’s relationships with external
stakeholders such as customers, advertising agencies, and alliance partners. The informational,
decisional, and relational roles of the CMO can – at least in theory - help firms increase their
competitive capabilities in ways that can enhance firm value.
In practice, however, not all CMOs seem to contribute much toward firm value. For
example, Nath and Mahajan (2008) find that neither the absence nor presence of a CMO in the top
management team of a firm had any effect on a metric related to firm value: Tobin’s Q. Although
Weinzimmer et al. (2003) report a positive effect of CMO’s on sales growth, Nath and Mahajan
(2008) report no effect of CMOs on sales growth. Taken together, the studies suggest that the effect
of CMOs on firm value may be a mixed bag. Under some circumstances, CMOs may contribute a
great deal toward firm value. In others, they may actually reduce firm value. In yet others, they may
have no effect at all on firm value. Our current state of knowledge begs the question: When do
CMOs create firm value? The literature is silent so far on this crucial question. To address this
question, we first review the general literature on top management performance, and highlight the
concept of managerial discretion as a crucial factor in explaining the impact of top managers on
Managerial Discretion and CMO Performance
Top managers vary in their impact on the firms they lead. A key explanation for the
variation in the extent to which top managers affect firm performance is the concept of managerial
discretion, proposed by Hambrick and Finkelstein (1987). Managerial discretion refers to the
strategic latitude enjoyed by top managers and captures the ability and freedom that top managers
have to make decisions and take actions that in their judgment are most likely to yield successful
performance outcomes (see Crossland and Hambrick 2007).
The literature on managerial discretion provides a theoretical framework to explain
differences in the performance impact of top managers. First, a significant stream of work in this
area emphasizes the role of external stakeholders in increasing or reducing the discretion available
to managers by pressuring managers to take certain actions or preventing managers from taking
certain actions (Greening and Gray 1994; Peteraf and Reed 2007). As a voice for the customer, the
CMO is responsible for understanding the concerns and interests of customers and ensuring that the
voice of this critical stakeholder group is disseminated throughout the organization. However,
customers are not inert actors, and this has implications for the CMO’s managerial discretion.
Second, the literature on managerial discretion places a particular emphasis on the role of
individual-specific and firm-specific contingencies in explaining the performance of top managers.
Individual-specific moderating factors include the experiences and skills that top managers bring to
their respective positions (Magnan and St-Onge 1997; Preston, Chen, and Leidner 2008). In line
with this literature, one can expect that the experience CMOs bring to their jobs – their experience
in their roles as CMOs, as well as their experience within the firms they help lead – is likely to
moderate the relationship between customer power and CMO contributions to firm value. Firm-
specific moderating factors include the resources available to the firm and the scope of the firm
(Finkelstein and Boyd 1998; Magnan and St.-Onge 1997). In line with this literature, one can expect
firm-level factors such as firm size, firm performance (which, as we note later, suggest greater
resources) as well as firm scope will likely moderate the relationship between customer power and
CMO contributions to firm value. These contingencies ensure that discretion varies substantially
across CMOs, and across the contexts in which they manage (Crossland and Hambrick 2007;
Hambrick and Abrahamson 1995).
Figure 1 provides a pictorial overview of our arguments. In the section below, we elaborate
upon the relationships described in Figure 1, by describing conditions under which CMOs are likely
to have the managerial discretion to perform their informational, decisional, and relational roles.
Customer Power and CMO Discretion
According to the literature on power and dependence, customers and the sales they provide
represent a valued resource in the environment of a firm that is essential for the firm’s survival
(Pfeffer and Salancik 1978). Staying true to the definition of power offered in the marketing
literature (e.g., Gaski and Nevin 1985), we define customer power as the ability of a customer to
cause a selling firm to undertake actions it would not have undertaken otherwise. We note that
individual customers who represent a substantial revenue stream for a firm can gain power over the
firm’s actions and decisions due to their economic importance in determining the firm’s
performance (Pfeffer and Salancik 1978). While power is generally defined as an ability rather than
as a behavior, anecdotal evidence indicates that customers will often exert their power. For
example, Wal-Mart, given its clout as a major customer to many consumer packaged goods firms,
and General Motors, given its clout as a major customer to many auto parts suppliers, both
consistently exert power on suppliers to force price concessions and product modifications.
Similarly, large US airlines such as Delta, Continental, and United, given their position as major
customers of feeder airlines such as ExpressJet, Pinnacle, Atlantic Southeast, Mesaba, and Comair,
exert their power on these airlines to wring out cost cuts and schedule changes. Substantiating the
anecdotal evidence is research revealing a proclivity for major customers to exercise their power
through tactics such as requiring price concessions (Balakrishnan, Linsmeier, and Venkatachalam
1996) and investment in their interests at the expense of other existing and potential customers
(Christensen and Bower 1996). This response to the possession of power is captured more generally
in work by Gaski and Nevin (1985) which reveals that the more a customer possesses power the
more likely it will exercise that power in its relationships with sellers.
Responding to a powerful customer can impact a CMO’s managerial discretion in ways that
have important consequences for the CMO’s contribution to firm value. For instance, Christensen
and Bower (1996) demonstrate how firms feel pressure from a powerful customer to undertake
more limited information search by limiting their environmental scanning activities to the interests
of the powerful customer. In such cases, customer power limits a CMO’s managerial discretion
associated with performing the informational role involving the identification of new market
opportunities. The push by powerful customers to focus on their interests also impacts the flow of
resources within a firm by resulting in the investment of a firm’s financial, human, and capital
resources into activities that focus on the current needs of the powerful customer. As a result, the
decisional role played by a CMO becomes more constrained and short-term oriented in the presence
of a powerful customer. Additionally, fear over losing the resources provided by a powerful
customer can cause a firm to become risk averse and escalate commitment along strategic paths
focused solely on the powerful customer’s interests. As Christensen and Bower (1996) demonstrate,
this can result in a firm ignoring important technological trends that can eliminate a firm’s
competitive advantage. A CMO’s ability to forge a broad set of relationships, and thus the CMO’s
relational role, is also limited by the strain that powerful customers place on investment resources.
For instance, prior research demonstrates how powerful customers can bargain away the efficiency
benefits associated with investments made toward increasing productivity, leaving few resources for
investing in relational activities (Balakrishnan, Linsmeier, and Venkatachalam 1996).
Overall, we expect that customer power will limit a CMO’s focus and attention in
performing his or her informational role, limit the focus of the CMO’s investment activity
associated with his or her decisional role, and limit the CMO’s latitude in forming strategic
relationships. Taken together, the effect of customer power on CMO managerial discretion should