Current Affairs

February 20, 2007

The CMO Challenge

There are two kinds of market value – tangible value and intangible value. What do we know about how these values are created? Most of the value creators in finance are based on tangible assets.  The following story tells how business students today are taught about market value:

Linda Tan, a recent MBA graduate and financial news reporter, was given an assignment to analyze the financial performance of various Asian and American companies. It was her job to present her findings in a front-page feature on "identifying value creators." To assess which company created or destroyed value for investors, Linda would make use of several financial criteria.

In this case Linda compared a number of public Asian and American companies on the basis of sixteen value creators including sales revenue, net income, earnings per share, return on capital, return on assets, market value of equity, share price, price earnings ratio, beta, and debt to equity ratio.  Notice that the lion's share of these value creators is found on a company's balance sheet.  Sales revenue was the only marketing measure included in the list.  The only conclusion you can reach is that customers’ brand experiences and market share, for example, are not among the value creators.


So why should this matter to CMOs?  Because this is precisely where you get cut out of the action. You know what "ROI" matters the most to your CFO? It's total return to shareholders. This return is based on two factors: price appreciation (or, God forbid, depreciation) and dividends.

What's the threshold return to shareholders? As a rule of thumb it's about 20% per year. Less than that and your company is under-performing.  More than that and you're doing a great job. But there are well know upper bounds.  Beyond an ROI of 60% or 70% your CFO will think one of three things: you've made an error in your calculations; or you're doing something illegal; or you don't know what you're doing. The other possibility is you were working for a private equity firm in 2006! So, when a CMO circulates an internal report that shows an ROI of, say 300%, on a multi-million dollar ad campaign, other senior managers who read that report roll their eyeballs and throw it into the round file. Then they try to find a new candidate for the CMOs position that knows what he or she is talking about. This is one of the reasons why the tenure of CMOs is notoriously short.


So what's a CMO to do? You have no control over dividend payouts.  That's the domain of the CFO and his or her boss. So the $64 billion question is this: how can you show the impact of marketing on the price of your company's common stock? This is the CMO challenge.

You might try to do this the Willy Lowman way by schmoozing your most important customer – the CFO.  I don't recommend this approach, unless you have something substantive to offer. And that something has got to be more than explaining the importance of customer loyalty, retention rate, and brand awareness on accounting profits.


You've got to go the next step and show the link between marketing and stock price. And to do that you must broaden your horizons. In two ways.  First, learn to speak the language of financial accounting and use these data to make your case on the impact of "marketing" on stock price. Second, embrace the concept of "enterprise marketing" and sell it to your peers and superiors. For a quick walk through new ideas that can empower all CMOs click on this link to my narrated Breeze presentation on "Enterprise Marketing Expenses." Sounds pretty dry I know, but it could help you double your compensation and it runs only 14 minutes.


The framework is simple in concept. I call it the "three parts of a dollar." The finance department in your company probably subscribes to one or more syndicated financial accounting database services. More than likely one of these is Standard & Poor's Research Insight.  The finance department may also subscribe to one of the competitors the EDGARonline Pro "I-Metrix suite.

These syndicated services provide flexible and friendly access to the filings submitted to the U.S. Securities and Exchange Commission by your company and its competitors, if they are publicly traded on North American stock exchanges.  All domestic and many foreign companies file these reports with the SEC. The two reports of most importance to you as the CMO are the Income Statement and the Balance Sheet.

The income statements reported in COMPUSTAT and EDGARonline standardize the line items into three parts. I use the following short hand to account for each part: r = o + s + a.  Where "r" is company revenue; "o" is cost of goods sold; "s" is selling, general and administrative expense; and "a" is earnings before interest, taxes, depreciation and amortization.  It's useful to give these three parts of the revenue dollar a functional name: the domains of executive action.


Here's how these domains shake out. The cost of goods sold is the domain of operations management.  Selling, general and administrative expenses is the domain of enterprise marketing.  Earnings are the domain of corporate finance. Marketing is second in the line of command, but last in the heats and minds of board members. The CMO challenge is to change that by learning the principles of enterprise marketing.

The soul of enterprise marketing is a cross-functional perspective where “every member of your sales force, every customer service rep, every email, every invoice, every voice mail, every interaction with every customer at any time (Enterprise Marketing Management) is a part of the practice of enterprise marketing.  In manufacturing industries, selling, general and administrative (SG&A) expenses capture the costs of all these events and interactions.  These are the costs of enterprise marketing resources.   Looking at these expenses as a whole breaks down the silos and opens the analysis to how the company should operate if management's objective is to maximize long-run earnings.


Each of these expenses affects the way customers and investors feel, think, and act toward your company. Conceptually, the management of these resources is the domain of enterprise marketing. The job of a chief (enterprise) marketing officer is to lead all of the functional departments to maximize earnings after deducting the cost of these enterprise marketing resources. If you want to jump right into the future take a look at this narrated Breeze presentation on how the CMO can demonstrate the impact of enterprise marketing expenses on stock price. It summarizes the chapter on "Competitive Stock Valuation." This one runs just 14 minutes.

All this is a big challenge. It means partnering with the VPs of research and development, sales, human resources, and marketing as well as mastering the financial accounting data. Finally, armed with their support and this knowledge, you really can get the attention of your CFO and CEO.