21 May 2007  Research & Ideas

Fixing the Marketing-CEO Disconnect

In many companies, the marketing function has wandered far from the company's overall strategy. The result: lower margins and declining productivity, says Professor Gail McGovern. She discusses what executives can do to repair the split and introduces a new diagnostic tool for measuring marketing performance used in HBS executive education programs. Key concepts include:

  • In many companies a wall has grown between the marketing function and the C-suite. Reasons for this are varied, but may include CEO and board priorities taken up by other issues or too much delegation of responsibility to the chief marketing officer.
  • When a firm's marketing activities are not supportive of its greater strategic goals, the result can be low growth and declining margins.
  • The key challenge in aligning marketing activities with corporate strategy is to develop a set of metrics to be used by top executives and the board that measure the impact of marketing activities against the goals of the corporation.

 

In most companies, no one knows and understands your customers and their changing needs better than the marketing department. Certainly that knowledge should be routinely presented and understood by the chief executive and board of directors, right?

But over time, and for a number of reasons, the marketing function and the C-suite often drift apart, resulting in a disconnect between the overall strategy of the company and what marketing understands to be the actual needs of customers. One result is that company strategy becomes less attuned to market needs, resulting in eroding profits and susceptibility to competition. How to repair the rift?

Two HBS faculty developed a CD-based program called Measuring Marketing Performance targeted at senior executives—namely CEOs, COOs, and CMOs. The tutorial helps execs understand how the customer base is segmented, how the size and profitability of each segment is changing, and how the company's products and services address the needs of each segment.

The product was developed by Gail McGovern, a professor of management practice, and John Quelch, the Senior Associate Dean and Lincoln Filene Professor of Business Administration, in collaboration with Harvard Business School's Educational Technology Group. McGovern will be using the product in the Advanced Management Program "Managing for Senior Executives" program in June.

The program has been made available for purchase through Harvard Business School Publishing.

We asked McGovern to discuss the CEO-marketing rift in more detail and describe the benefits of the tutorial.

Sean Silverthorne: Why has marketing evolved so far from the executive suite over the years? You'd think corporate leaders would want to align the marketing function with the overall direction of the company.

Gail McGovern: In many companies, marketing exists far from the executive suite because the CEO perceives that there is not the same pressing need to master the marketing discipline as there is, for example, to master finance due to compliance issues surrounding Sarbanes-Oxley. Unlike operations where there are established techniques in inventory management and reengineering, there are no obvious and permanent cost-cutting results to be gained through marketing, short of simply slashing the advertising budget. In addition, marketing is not naturally inherent in a CEO's day-to-day job as is organizational behavior/leadership.

Part of the problem is the current corporate climate, in which questions of governance and financial purity dominate CEOs' and boards' attention. Additionally, boards, and even CEOs, have been lulled into complacency by the chief marketing officer (CMO). With the emergence of the CMO position, one might expect that oversight of marketing would be efficiently consolidated. However, marketing decision making has been increasingly pushed down through the corporate hierarchy. While CEOs have commonly delegated advertising and advertising strategy to outside agencies, now they are delegating sales, distribution strategy, pricing, and product development to CMOs, who often lack overarching strategic responsibility. CEOs expect their CMOs to drive marketing decisions, but no one is singularly accountable for the results.

This lack of accountability makes it very difficult to track the financial impact of marketing investments, and so marketing becomes abstract to both the CEO and board.

Q: What are the consequences of not having this alignment?

A: When a firm's marketing activities are not supportive of its greater strategic goals, the result can be low growth and declining margins. The presumption of organic growth is baked into most companies' stock value, but many companies and their boards are faced with a requirement for organic growth that they're unsure how to meet. For these companies, the yawning gap between actual revenue growth and investors' expectations is a ticking time bomb. Marketing is the way in which firms can close this gap because it encompasses all the activities of an organization that listen to the customers' voice and ultimately generates profitable relationships.

CEOs expect their CMOs to drive marketing decisions, but no one is singularly accountable for the results.

Second, responsibility for brand equity still resides in the marketing function, yet brand equity has never been more volatile and important. Today, powerful brands can emerge almost overnight. Similarly, in recent years brands have toppled virtually overnight. Poor marketing is largely to blame.

Third, and perhaps most important, the fundamental nature of marketing has shifted so rapidly that many companies have not kept pace, making them vulnerable to more savvy competitors, and unable to capitalize on new growth opportunities. Over the past 10 years the mix of marketing skills needed by a company has radically changed, and many senior executives—specifically, those who have remained detached from the marketing discipline—have not kept pace. The changes within the discipline have been particularly pronounced in the area of customer relationship management; not only have the technologies to support CRM changed radically in recent years, but the principles that firms use to serve customers have evolved as well.

Q: What are the key challenges in aligning marketing activities with corporate strategy?

A: The key challenge is to develop a set of metrics that measure the impact of marketing activities against the goals of the corporation. Many marketing managers will tell you that marketing performance can't be measured. It's not that managers are short on measurement tools, or that marketing metrics lack utility. The problem is that these managers don't know what metrics to measure or how to interpret the results. They may collect all manner of plausible marketing-performance metrics, from customer satisfaction to retention, but if these can't be correlated with marketing activities and revenue results, the data aren't very helpful.

Indeed, popular metrics such as customer satisfaction, acquisition, and retention have turned out to be very poor indicators of customers' true perceptions or the success of marketing activities. Often, they're downright misleading. High overall customer satisfaction scores, for example, often mask narrow but important pain points—areas of major dissatisfaction—such as unhappiness with poor customer service or long wait times. They can also mask backsliding against competitors; while gently climbing satisfaction scores may be reassuring to management and the board, if competitors' scores are increasing faster it should be a cause for alarm. Acquisition rates may be robust, but if old customers are abandoning ship as fast as new ones are coming on board, strong acquisition can give a deceptive picture of marketing performance. And what, exactly, should the board make of stable customer retention? If customers are staying on because they're held hostage by a contract, good retention may be obscuring the truth that customers will flee the instant they can.

Selecting the wrong metrics can actually cause firms to lose ground with customers. For example, Starbucks was measuring "innovative beverages" as a key metric. As a result, their efforts were focused on designing complex drinks that ultimately slowed their operations. They subsequently learned that customers valued fast service more than product innovation and added staff to shorten waiting times. Similarly, Kinko's was measuring on-time performance for copying large batch jobs for their corporate accounts. Their staff was thus engaged in back office activities to generate these copies. However in actuality, their customers were seeking a more user-friendly layout in their retail stores.

These examples show that even if today's boards wanted to exercise their governance role over marketing activities, they often wouldn't have the information they need to make sound judgments. Boards need a fundamental understanding of how the company is meeting its customers' needs, and how marketing strategy supports this goal. It is rare to find a firm that provides its board with a scorecard that allows this.

Q: From a 30,000-foot view, how do the Measuring Market Performance CD and tools help? Once users complete the tutorial, what will they have learned?

A: The tutorial provides instructions as to how to improve the link between high level corporate strategy and the marketing function.

Selecting the wrong metrics can actually cause firms to lose ground with customers.

First, participants are exposed to three companies in which marketing programs are tightly aligned with corporate strategy. Second, the CD explains how to create a marketing dashboard that can reveal the true performance of a company's marketing activities. The resulting dashboard can be used to inform boards of directors and senior leaders as to how well their marketing efforts are supporting customers' needs. Unlike isolated measures of marketing performance that are often insufficient, irrelevant, or misleading, this dashboard allows the board to quickly and routinely assess how effectively marketing is supporting corporate strategy and determine when marketing and strategy are misaligned. Armed with a clear understanding of marketing's role and performance, the board can optimize this critical function in the organization.

The dashboard is structured to develop and track:

  • Business Drivers: business conditions that, when manipulated or changed, will affect performance directly and predictably. Business drivers are leading indicators of revenue growth.
  • Pipeline of Growth Ideas: a set of future customer initiatives and innovations that translate into sustainable future growth.
  • Marketing Talent Pool: the skills that are needed to facilitate the marketing function as well as a plan to address any gaps through staffing, training, and/or outsourcing.

Lastly, the tutorial takes participants into the Harvard Business School classroom, where they can experience first-hand how other executives learned to master the marketing dashboard creation process.

About the author

Sean Silverthorne is the editor of HBS Working Knowledge.