How and why do managers select and utilize marketing metrics and financial metrics, and with what outcomes?

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1 How and why do managers select and utilize marketing metrics and financial metrics, and with what outcomes? 1. Introduction The amount of data in companies today in terms of volume, velocity and variety is unique in the history of business (McAfee & Brynjolfsson, 2012). The amount of data companies are receiving, generating and managing has increased over the past decade in terms of amount (Leeflang, 2011), type(s) (Day, 2011), frequency (Hopkins & Brokaw, 2011), number of channels and technologies (McAfee & Brynjolfsson, 2012) to a level that exceeds the capacity of traditional analysis methods (Davenport, Barth, & Bean, 2012). The ability of companies to transform data into information and usable knowledge is a critical factor for differentiation and competitive advantage (Brown, Chui, & Manyika, 2011; CMO-Council, 2011; LaValle et al., 2011; Manyika et al., 2011). McAfee and Brynjolfsson (2012) found that companies that use data in decision-making were on average 5% more productive and 5 % more profitable. From the marketing orientation literature we know that companies that use consumer data outperform their counterparts in financial terms (Liao et al., 2011; Song, Di Benedetto, & Parry, 2009). This study regards metrics as a lens through which to approach data, convert it into information and finally into knowledge that has the potential to guide managerial decision-making. Empirical studies frequently distinguish between financial metrics and marketing metrics, or customer metrics (e.g. Mintz & Currim, 2013; O Sullivan & Abela, 2007; Schulze, Skiera, & Wiesel, 2012). Researchers have suggested that marketing metrics can be tools to drive engagement with the customer (Rust et al., 2010), to decrease the misuse of financial metrics that drive short-sighted management practices (Mizik, 2010) and finally to support the establishment of customer centricity (Shah et al., 2006, Wind, 2008). Existing empirical literature largely focuses on testing formal relationships between single marketing metrics and financial metrics (e.g. Aksoy et al., 2008; Kumar & Shah, 2009; Luo et al., 2010; Morgan et al., 2009a; Ngobo et al., 2011; O Sullivan et al., 2009b; Rao & Bharadwaj, 2008). What is missing is a holistic investigation of a set of metrics as drivers of managerial practice. This study poses the following research question: How and why do managers select and utilize marketing metrics and financial metrics, and with what outcomes? 2. Literature Context The following subsections set the context for this study and outline relevant conceptual domains. 2.1 The Definition of Metrics Metrics can be regarded as a lens through which to address data. Metrics include a variety of constructs that are commonly classified according to the characteristics of the underlying data (e.g. Gupta & Zeithaml, 2006; Petersen et al., 2009). There exists no universal definition of the term metric. Some authors highlight that metrics are a means of quantifying a trend (Farris et al., 2009), others focus on their role as performance indicators (Raithel et al., 2012). Most of the empirical studies distinguish between financial metrics on the one hand and either marketing metrics (Mintz & Currim, 2013), customer metrics (Schulze, Skiera, & Wiesel, 2012), or non-financial metrics (Homburg et al., 2012; O Sullivan & Abela, 2007) on the other hand. 2.2 The Dominating Financial Metrics? Financial metrics traditionally play a dominant role when it comes to managers attention (Bendle et al., 2010). The reason is deeply rooted in the concept of shareholder theory, 1

2 according to which the primary goal of a company is the maximisation of both shareholder wealth and the valuation by financial markets (McSweeney, 2009). Similarly, the justification of shareholder value-based metrics lies in the maximisation of a firm s short-run stock price, in order to influence metrics such as the firm s cost of capital, the value of its stock options as well as analysts perception of the firm (Raithel et al., 2012). Over the past decades, the use of financial metrics has become common practice as they are established as an integral part of mandatory financial reports (Beyer et al., 2010), and thus familiar to most managers regardless of their discipline (Danielson & Scott, 2006; Hanssens, Rust, & Srivastava, 2009). There is a debate on the usefulness of financial metrics, as they have been criticised for encouraging short-sightedness (Mizik, 2010) and being historical, or backward-looking (Homburg et al., 2012; Prince, 2008). Despite these shortfalls, we know from a number of studies that managers outside the marketing domain are often systematically biased towards financial metrics (Homburg et al., 2012). The severe consequences of the recent recession have led to a heated debate on the suitability of traditional financial metrics (e.g. Ambler, 2010; Danielson et al., 2008; Davidson, 2009; McDonald, 2010). Mizik (2010, p.609) demands that marketing researchers need to explore and better understand the role of various marketing metrics and the amount of incremental information they provide to traditional accounting performance measures in depicting the health of a firm. 2.3 The Coexistence of Marketing Metrics and Financial Metrics Extant literature regards marketing metrics and financial metrics as two distinctive types of metrics (Mintz & Currim, 2013; O Sullivan & Abela, 2007) and acknowledges the synergies of combining both types, which leads to increased breadth in marketing performance measurement systems (Homburg et al., 2012). In practice, it appears that customer satisfaction and customer loyalty are the only marketing metrics frequently used by CEOs (Arens & Rust, 2012; Bendle et al., 2010). Executives are continuing to rely on satisfaction metrics as the ubiquitous mantra for corporate success, in the belief that high levels of satisfaction may lead to increased customer loyalty, intention to purchase, word-of-mouth recommendation, profit, market share, and return on investment (see Bowden, 2009, p.63). A shortfall of most metrics in use, such as customer satisfaction, is that they relate to past purchase experiences, i.e. that they are backward looking metrics. Petersen et al. (2009, p.102) stress that while these metrics can show managers why the firm is at its current state, these metrics have been shown to offer little to no predictive ability to future customer behaviour or firm performance. As LaValle et al. (2011, p.22) recently noted, knowing what happened and why it happened are no longer adequate. Organizations need to know what is happening now, what is likely to happen next and what actions should be taken to get the optimal results. However, the role of marketing metrics as indicator of the health of a firm and provider of incremental information to financial metrics is underresearched (Mizik, 2010) and not operationalized in practice. Empirical studies show that statistically, a strong correlation between different types of marketing metrics and financial metrics exists (e.g. Aksoy et al., 2008; Kumar & Shah, 2009; Luo, Homburg, & Wieseke, 2010). This has resulted in a series of normative prescriptions for managers to use marketing metrics in order to increase firm performance (e.g. Morgan, Anderson, & Mittal, 2005). However, what is missing is a deeper investigation of how managers should implement these prescriptions in practice (Jaworski, 2011; Leeflang, 2011). For example Morgan et al. (2005) found that out of 37 firms, none linked any measure of customer satisfaction to financial performance. 3 Methodological Limitations of Empirical Studies The following subsections articulate five limitations found in the prevalent empirical literature in the context of metrics. 2

3 3.1 There is a Lack of Definitional Rigor of the Term Metric Despite its relevance across disciplines (such as finance, strategic management, marketing) and its key role within management concepts (e.g. the balanced-scorecard, market orientation), a review of the literature reveals that the term metric lacks a rigorous definition. Apart from the small number of prevailing definitions mentioned above, the term metric is frequently used without further reference to a definition. For example, Gupta and Zeithaml (2006, p.718) analyse the literature on the impact of customer metrics on financial performance and state that customer metrics include a variety of constructs. The first contribution of this study is to develop a working definition of the terminology that comprehends attributes relevant in the current managerial environment. 3.2 Empirical Studies Tend to Focus on Data External to the Firm The majority of the studies in the area of marketing metrics are driven by the positivist paradigm. Frequently applied approaches such as the four-factor model, calendar portfolio, stock return response models and persistence modelling (Srinivasan & Hanssens, 2009) clearly fall under the logical positivist approach (Deshpande, 1983). One reason for this onesided distribution is that data on individual customers is often proprietary (Srinivasan & Hanssens, 2009). Hanssens et al. (2009, p.116) note that data linking marketing actions and their impact on firm value are difficult to obtain - thus the paucity of research in this domain. Similarly, a lack of data on individual customers, which is often proprietary, is the reason why customer valuation metrics are underresearched in comparison to non-financial marketing metrics such as customer satisfaction (Srinivasan et al., 2009). Petersen et al. (2009, p.103) find that perhaps one of the biggest challenges to overcome in this area is the availability of data on customer and firm value. A substantial part of the academic studies on marketing metrics is therefore based on data external to the firm, for example the publicly available American Customer Satisfaction Index (ACSI) (e.g. Ngobo et al., 2011, Luo et al., 2010, O Connell and O Sullivan, 2010, Jacobson and Mizik, 2009, Aksoy et al., 2008). Businesses today, however, are rather concerned with how to use the vast amount of data available to them internally (Rust et al., 2010) The Majority of Studies Solely Focuses on Customer Satisfaction Many of the existing articles investigate a certain, predefined set of metrics (Petersen et al., 2009; Raithel et al., 2012). Most studies focus on a single metric, which in many cases turns out to be customer satisfaction (Fornell, Rust, & Dekimpe, 2010; Ngobo et al., 2012). This use overlooks the lagging nature of this data (Ngobo et al., 2012). Still, between 2005 and 2010, as many as 13 studies published in top-tier marketing journals ( ) analyze the impact of customer satisfaction on abnormal stock returns (Raithel et al., 2012, p. 510). It is questionable whether studies that formalize relations between single marketing metrics and firm value are relevant to practitioners (Leeflang, 2011). Rather than one measure what is needed is range of measures that are manageable but comprehensive (Clark et al., 2006a; Clark, 1999). 3.4 The Majority of Studies Applies a Key Informant Approach While a large number of the studies in the context of metrics use firm-level data, most studies that inquire at a managerial level use a single informant approach (e.g. Grafton, Lillis, & Widener, 2010; Morgan, Vorhies, & Mason, 2009), some focusing on the chief marketing officer (CMO) (e.g. O'Sullivan & Abela, 2007). A review of these studies suggested that the results are generic, lack depth and are high level and they call for more presciptive, action or practice orientated research at managerial level (Jaworski, 2011). As it is individuals who 3

4 make decisions (Turner & Makhija, 2012) studies should be carried out at the level of individuals (Jaworski, 2011; Leeflang, 2011). 3.5 The Role of Technology is Ignored or Restricted as a Result of the Research Design Despite being a core focus of top-level managers (CMO-Council, 2011; LaValle et al., 2011) and a driver of competitive advantage (Davenport, 2006) only very few studies in the field of marketing metrics truly investigate the involvement of supporting technology, such as visualisation techniques (Pauwels et al., 2009). Rust et al. (2010, p.96) note, never before have companies had such powerful technologies for interacting directly with customers, collecting and mining information about them and tailoring their offerings according. Over 80% of 1700 CMOs surveyed indicate that they are planning to deploy new technologies to grapple with big data (CMO-Council, 2011, p.26). According to a large scale study, visualisation technology is expected to be the most valuable technique in two years (LaValle et al., 2011). The limited conceptualisation of visualisation techniques in existing studies is often a direct result of their positivist research design (e.g. O Sullivan & Abela, 2007). In sum, the researcher has identified five particular gaps in the literature that are resulting from the prevailing positivist research design and that will be addressed in this PhD study through the application of a qualitative approach (Appendix 1). 5. Methodology The underdeveloped state of knowledge in the domain of metrics selection and utilisation justifies significant conceptual development (Homburg et al., 2012; Jaworski, 2011; Leeflang, 2011). While providing a high degree of external validity, statistical generalizability and conceptual replicability (Kim & Richarme, 2010), the existing, positivist studies in the field of metrics do not provide an explanation of how the phenomena under research work in practice. Positivist studies aim at deductive theory testing, while realism, critical theory and constructivism fall under the category of Interpretivism or phenomenology and allow for inductive theory building (Bonoma, 1985; Parkhe, 1993). Also, Interpretivism emphasises the difference between conducting research among people rather than objects (Saunderset al., 2009, p.116). The authors suggest an inductive research approach (Bonoma, 1985). The contribution of this study is to investigate multiple case scenarios of how and why managers choose and utilize a set of marketing metrics in comparison to financial metrics. The literature holds that companies that are facing fierce competition and high market dynamism are particularly dependent on measures which reflect engagement and focus on the customer in order to survive (Homburg et al., 2012; Rust, Moorman, & Bhalla, 2010). The tourism industry has therefore being selected as a research site. Access to the research site as well as funding is provided through a scholarship granted by Fáilte Ireland, the National Tourism Authority in Ireland. The study will consist of a two-stage empirical research process: (1) The conduct of pilot interviews and (2) the conduct of multiple case studies. 5.1 Stage 1 of the Empirical Investigation: Pilot Interviews (Mai October 2012) Design Between Mai and October 2012, ten pilot interviews with managers as well as industry experts occupied in the tourism domain were conducted. Managers positions included general managers, a marketing manager, a financial manager and a director. Among the industry experts was one partner working for a consultancy providing financial advice for firms in the tourism industry, one research officer working with customer-related data within the tourism industry and two CEOs of firms dealing with IT-related issues, one of which is a consultancy and the other an IT service provider (Appendix 2). For the analysis of the pilot 4

5 interviews, the cloud-based, qualitative research analysis software Dedoose ( was used, which allowed for the application of weighted codes and facilitated the production of a sophisticated report at an early stage of the project (Appendix 3). Preliminary results are discussed in the following section Initial Empirical Results In practice, there was a collective agreement that despite the financial crisis, financial metrics still dominate or have become even more important. To the majority, marketing metrics were only relevant if they could be related down to the bottom line (#3, general manager). To the question whether purely financial metrics have decreased in importance as a result of the recession, one hotel director (#2) answered: No. You would look at it even more in the recession. ( ) They [marketing metrics and financial metrics] do go hand-in-hand, but I suppose financial would just tip the top. Interestingly, it is external stakeholders, primarily bankers, that require more detailed financial data from participants and thus drive their focus on these metrics. A research officer (#6) confirmed that because of the recession ( ) banks and stakeholders demand more detailed data ( ) and they are more rigorous about it. As a result of the recession, the banks were asking for more information, so it has forced the hoteliers to improve their financial reporting (#4, consultant). Concerning the role of technology, a pattern became evident that technology is transforming the way data and metrics are handled. The director of a hotel (#10) confirmed that some of the tools out there are very good ( ) and they have what is called a dashboard, it gives you a summary of what is going on. The general manager of a hotel that had commissioned the development of a software solution tailored for their online data justified this investment as being essential to interpret and act upon the data coming from innumerable online presences (#3, general manager). Generally, whether technology could be successfully deployed in order to facilitate the acquisition and utilization of metrics appeared to depend on the resources available to the business: Smaller, owner-managed properties often use antiquated systems that do not provide the visualisation capabilities that modern software solutions do (#4, Consultant). In sum, the pilot interviews show that, while all participants used some form of technology in the context of metrics, external, easily accessible web solutions, such as Google Analytics were dominating in comparison to company-specific IT solutions. 5.2 Stage 2 of the Empirical Investigation: Case Studies (Beginning in February 2013) In the second step, multiple case studies will be conducted. In case study research, the purpose of analysing multiple cases is not to increase representativeness, but to enhance theory building by either a) producing similar results for predictable reasons (literal replication), or b) producing contrary results for predictable reasons (theoretical replication) (Yin, 2009). As the number of cases that can be studied is limited, it is suggested to use extreme situations as well as polar types that allow for a transparent observation of the research issues (Pettigrew, 1990). The knowledge about which dimensions to be used can be derived from the literature and/or from empirical data. The results of the pilot interviews, which are still being analysed, will inform the selection of appropriate cases. A case study protocol is currently developed based on the literature and the findings of the pilot studies. In terms of access, the researcher has gained initial contacts to the tourism industry in Ireland through the collaboration with Fáilte Ireland. Through this cooperation, access to a number of hotels and consultancies that focus on the Tourism sector was facilitated. Subsequently, the snow-ball technique was applied in order to increase the number of available contacts. 5

6 Appendices Appendix 1: Conceptual Model and Gaps in the Literature Appendix 2: Pilot Interview Participants # Company Location Position Type 1 Hotel, corporate Berlin, Germany Marketing Manager Skype 2 Hotel, owner-occupied Cork, Ireland Director Face-to-face 3 Hotel, corporate Dublin, Ireland General Manager Face-to-face 4 Consultancy Dublin, Ireland Partner Face-to-face 5 Hospital, public service Saarlouis, Germany Finance Manager Face-to-face 6 Consultancy Dublin, Ireland Research Officer Face-to-face 7 IT Solutions Provider Dublin, Ireland CEO Face-to-face 8 Hotel, family-owned Dublin, Ireland General Manager Face-to-face 9 Consultancy Zürich, Switzerland CEO Skype 10 Hotel, corporate Dublin, Ireland General Manager Face-to-face 6

7 Appendix 3: Main Screen of the Data Analysis Software Dedoose Source: own project data 7

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