How Marketing Capabilities Shape Financial Performance

How Marketing Capabilities Shape Financial Performance

Based on the research of Sridhar N. Ramaswami, Rajendra K. Srivastava, and Mukesh Bhargava

ISBInsight Management Briefs is pleased to showcase an important contribution to the field of marketing strategy by Dean Professor Rajendra Srivastava and Visiting Scholar Professor Sridhar Ramaswami. First published in 2009, this research identifies the pathways through which market-facing business processes add value to the firm’s financial performance. The insights from this research can be applied by managers in designing optimal customer management, product development, and supply chain strategies.

“Getting units to work together is not easy for any firm. But if a firm can do it, that gives a competitive leverage, since other firms will need considerable time, effort and luck to make that happen.”

- Senior Executive, Fortune 100 firm

The business landscape has changed significantly in the last twenty years because of technology developments and globalization of markets. To meet the demands of the changed landscape, managers have had to shift from a traditional functional structure to a cross-functional business process structure. Why is this structural change important? What impacts will it have?

To understand how economic and technological transformation forces structural change within the firm, it is useful to understand how firms operated traditionally. When firms were structured based on specialized functional areas, such as marketing, finance, operations or procurement, this structure determined the communication flow, budget allocation, resource allocation and formal reporting in a firm. The vertical flow of communication and collaboration in a functional structure limited interaction and cooperation outside the functional units, effectively creating silos. These silos, in turn, impeded the firm’s business processes.

Process structures are expected to bring about better coordination and cooperation among different functions of a firm. Managers recognize that a structure that brings about better coordination among units will enable superior market and financial performance.

Core business processes

Prior research by Srivastava, Shervani and Fahey (1998) identified three core business processes – customer management, supply chain management and new product development – as key influencers of a firm’s financial performance. These authors also hypothesized that intangible assets such as market-based assets (brands, customers, channels) and capabilities (marketing expertise, process knowledge) create value within these business processes. For example, e-commerce retailer Amazon’s mission of being the ‘Earth’s Most Customer-Centric Company’ is driven by a massive technology ecosystem that integrates more than 50 fulfilment centres, over 15 sortation centres, and about 90,000 full-time Amazon employees in its United States fulfilment network alone. Amazon has transformed a mundane activity like shopping into a delightful shopping and purchasing experience.

Ramaswami, Srivastava, and Bhargava test this value hypothesis using cross-sectional data from a sample of 88 firms. They provide an integrated framework on how these market-based assets and capabilities enhance both business process and market performance of firms.

Build capabilities that support business processes

The researchers strongly suggest that firms should build appropriate capabilities to support business process performance. For example, having the ability to identify and focus on the requirements of high value customers, the capacity to coordinate within the firm across functions to respond to customer requirements and treating such customers as a firm’s asset rather than as an external stakeholder contribute to maximizing the performance of the customer relationship management process. The practices used by business to business firms in identifying key or strategic accounts and designing an action plan to address their needs completely and with care can be translated into the retail consumer space as technology improves organizational capacity to develop deep insights at the individual customer level.

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Image source: RAMASWAMI, Sridhar N.; SRIVASTAVA, Rajendra K.; and BHARGAVA, Mukesh. Market-based capabilities and financial performance of firms: Insights into marketing’s contribution to firm value. (2009). Journal of the Academy of Marketing Science. 37, (2), 97-116. Research Collection Lee Kong Chian School of Business. Available at: http://ink.library.smu.edu.sg/lkcsb_research/3525
 

Similarly, the researchers say that streamlining the firm’s supply chain network can translate into both decreased cost and increased sales and thus lead to higher corporate profitability. For instance, Procter & Gamble’s (P&G) primary competitive advantage in the consumer products industry was through its marketing excellence. P&G restructured its marketing focus and effectively incorporated its supply chain capability to tackle the uncertainties in demand induced by in-store sales and price promotions. The company partnered with suppliers like Walmart to streamline its logistics and replenishment programs. It halted its price promotions to reduce variations in demand and surge in holding large inventories. In this way, P&G was able to reduce its production and inventory costs and meet its customer demand by building transparent relationships with its supply chain partners. The company has saved more than $1.2 billion in cost per year, and expected a savings of $1.6 billion at the end of 2016.

Finally, an integrated product development process allows firms to deliver a stream of new products to the marketplace with meaningful benefits that consumers are willing to pay for. The capability to bring new products to the market at a faster pace increases share of the market and growth in revenues to the firm. For example, Nike’s constant endeavour is to create faster, lighter and powerful footwear and apparel for athletic activities. Nike regularly collaborates with its customers on ideas for design and closely aligns its product design, production, marketing and distribution processes.

Business processes and impact on financial performance
Exploiting the interdependencies among the three core processes will yield superior performance for firms than simply maximizing the outcome of any one process. Making value-added products and services available to customers when and where they want them requires a firm to develop more innovative products and an efficient supply chain.

But will the three processes (customer management, supply chain management and new product development) have a positive synergistic impact uniformly across all firms? The researchers suggest a caveat here. The synergy between the three processes – customer management, supply chain management and new product development – is likely to have a higher, positive impact on firm performance for larger firms compared to smaller firms.

Larger firms enjoy economies of scale and scope by combining the interrelationships among various functional units; however, they may not have the flexibility to make rapid adjustments to changing business requirements. Smaller firms may not have a large portfolio of product offerings to facilitate economies of scope benefits (such as development of multiple relationships with customers). Another firm-level factor that may constrain the potential synergies among the three processes is the age of the firm. Learning relating to cost reductions, product improvements and new market techniques improve with age of the firm. The synergy between the three processes – customer management, supply chain management and new product development – is thus likely to have a stronger impact on firm performance for older firms as compared to younger firms.

Synergize, Synchronize, Strategize

Most managers recognize that two business processes working together will enable superior firm performance but are often unsure about how to get them to work together. The researchers’ prescription is clear – processes are intertwined and affect each other. Firms need to create transparency and share information across customers and suppliers to build direct relationships. Information sharing provided firms with the ability to lead supply chain networks and gain substantial advantage on a firm’s supply chain performance. Finally, firms need to recognize high-value customers, be responsive in managing their expectations, and nurture them as assets of the firm.

Srivastava, RK, Shervani, TA, & Fahey, L. 1998. Market-based assets and shareholder value: A framework for analysis. Journal of Marketing, 62(1): 2-18.

All quotes are taken from the following working paper:
Ramaswami S.N., Arunachalam S., & Chai L., 2017. Impact of synergy between CRM process and supply chain process on customer performance: A multi-method study. Mimeo, Iowa State University.

About the Researchers:

Rajendra K. Srivastava is the Dean and Novartis Professor of Marketing Strategy and Innovation at the Indian School of Business.
Sridhar N. Ramaswami is Professor of Marketing in the College of Business at Iowa State University.
Mukesh Bhargava was an Associate Professor of Marketing in the School of Business Administration at Oakland University.

About the Research:
Ramaswami, S.N., Srivastava, R.K., & Bhargava, M. 2009.  Market-based capabilities and financial performance of firms: Insights into marketing’s contribution to firm value. Journal of the Academy of Marketing Science. 37(2): 97–116.

About the Writer:
Glory George is a Research Associate at the Indian School of Business.

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