THE EFFECT OF MARKETING EFFICIENCY, BRAND EQUITY AND CUSTOMER SATISFACTION ON FIRM PERFORMANCE

AN ECONOMETRIC MODEL AND DATA ENVELOPMENT APROACH

Luis Fernando Angulo Autonomous University of Barcelona, Business Economics Department 08193 Bellaterra (Cerdanyola del Valls), Barcelona, Spain Tel. +34 93 581 1209, Fax +34 93 581 2555 Email: LuisFernando.Angulo@uab.es

ABSTRACT

This research focuses its attention to support empirically and not separately the impact of marketing activities, brand equity and customer satisfaction on firm performance. In addition, this study intends to fill the gap of marketing efficiency effect on long-term profits. Through methodology of three stages, two by econometric models and one using data envelopment analysis, the authors provide empirical evidence for the marketing link to firm value. Firstly, the results in the first stage confirm the impact of marketing assets on short-term performance. Secondly, the marketing efficiency shows that there are firms that have better abilities to maximize results in terms of marketing activities. Finally, some future research lines were considered.

Keywords: Advertising, Brand Equity, Customer Satisfaction, Data Envelopment Analysis, Marketing Efficiency, Marketing Impact, Firm Value.

PROBLEM STATEMENT AND PURPOSE Nowadays, Marketing has to face some situations that the new business environment brings with it. One of them is related to the evolution of business atmosphere from Marshall Economy labelled as bulk-processing (Arthur 1996) to the Positive Feedback Economy known as the increasing returns (Arthur 1989, 1990, 1999) as well as the knowledge-processing. In addition, the second situation is linked to the operational and business unit level that Marketing take up in the organization (Ambler 2000). The last situation is connected not only with the increasing expectative of the board to get shortterm profits but also with the rising relevance of the financial perspective on the top management (Webster et al. 2003). In the called bulk-processing perspective, firms wondered how much money is spent (Ambler 2000), focused in the denominator of the business ratio (Hamel and Prahalad 1994), and oriented to reduce inputs. In the new environment, firms have to wonder how much money is generated (Ambler 2000) expand the outputs (Hamel and Prahalad 1994) and look for the generators of cash flow (Srivastava et al. 1998). Through Marketing firms can answer. The response has been the market, the customer. This may seem nothing new but the great majority of firms do not follow the logic through (Ambler 2000). To make worse the board only focuses 10% of its time on figuring out about the originators of money (Ambler 2000). As Marketing is the link between firms and markets, its organizational process, position and path give the firms the possibility to be aware of where the profits come by. Nevertheless, Marketing has been considered at business unit level (Ambler 2000). In addition during 90s and 2000s the financial function in the firms grew in importance (Webster et al. 2003) giving relevance to short-term results. Consequently, as the short time dedicated to discuss marketing metrics as well as the interest of corporate board in short-term returns, marketing managers have to develop tools to quantify its contribution to firm growth and profitability in terms that are meaningful to CEOs, CFOs, and investors (Webster et al. 2003). Focusing on Marketing, Customer Satisfaction and Brand Equity are relevant aspects to the firms profitability. Theoretical aspects have been considered in the research of
2

customer satisfaction construct (e.g. Anderson and Sullivan 1993; Anderson et al. 1994, Fornell et al. 1996) as well as in the research of brand equity (e.g. Aaker 1991; Keller 1993, 1999). Some empirical aspects of the link of marketing positions on firm performance have been developed (e.g. Anderson et al. 2004, Gruca and Rego 2005, Madden et al. 2006). However studies which focus on researching the impact of customer satisfaction and brand equity at the same time is left unexamined. In addition empirical investigations that focus on considering marketing efficiency as an additional influencer of firms profits is a research gap. We expect to fill this gap by shedding light on the following objectives. The first is related to find out more empirical support to the effect of marketing activities and positions on short and long term profits. The other objective intend to demonstrate if the marketing efficiency increase the long term profits of firms more than the augment generated by the marketing positions. The remaining part of this work in progress is organized as following. Firstly, a theoretical and empirical review of marketing impact and efficiency is presented. Secondly, the theoretical model adopted and the hypotheses are stated. Thirdly, the research methodology stage by stage is developed. Fourthly, the discussion and conclusion are presented. Finally, the academic and managerial relevance is suggested.

MARKETING IMPACT AND MARKETING EFFICIENCY The Resource Based View (RBV) recognizes the importance of a firms internal organizational resources as determinants of the firms strategy and performance (Barney 1991; Grant 1991; Wernerfelt 1984). Barney (1991) defines the term internal organizational resources as all assets, capabilities, organizational processes, firm attributes, information, knowledge, that are controlled by a firm and that enable it to envision and implement strategies to improve its efficiency and effectiveness. Although the RBV recognizes that a firms physical resources are important determinants of performance, it places primary emphasis on the intangible skills and organizational resources of the firm (Barney 1991; Collis 1991). Some intangibles resources of the firm are the market-assets (Srivastava et al. 1998) such as customer satisfaction and brand equity.

In addition, the Dynamic Capabilities, strengthening RBV, put emphasis in how combinations of resources and competences (Teece et al. 1997) can be developed, deployed and protected. The factors that determine the essence of a firms dynamic capabilities are the organizational processes where capabilities are embedded, the positions the firms have gained (e.g. assets endowment) and the evolutionary paths adopted and inherited (Teece et al. 1997). Based on this perspective, the marketing factors that determine the competitive advantage are marketing efficiency resulted of marketing organizational process and the endowments of market assets that has generated such as customer satisfaction and brand equity, i.e. marketing positions. In the context of global competition, RBV and Dynamic capabilities theory suggest that historical evolution of a firm (accumulation of different physical assets and acquisition of different intangible organizational assets through tacit learning) constrains its strategic choice and so will affect market outcomes (Collis 1991). According to Douglas and Craig (1989), the development of a Marketing Strategy is carried out during the stage of global rationalization. It means that the firm has had to take the step of initial foreign market entry and expansion of national markets during its process of internationalization. Consequently, in the two previous stages, the firm learned and accumulated not only different physical assets but also different intangible organizational assets; likewise, it faced and took risks in different and complex market contexts. This process of learning affected its performance (Collis 1991). Marketing Impact The need for measuring marketing impact is intensified as firms feel increasing pressure to justify their marketing expenditures (Gupta and Zeithaml 2005; Rust et al. 2004; Srivastava et al. 1998). According to this, marketing practitioners and scholars are under increased pressure to be more accountable for showing how marketing activities link to shareholder value. It is important to know that marketing actions, such as packaging, brand name, density of the distribution channel, advertising, permanent exhibitions, sponsoring, press bulletins, among others (Van Waterschoot and Van den Bulte 1992) can help build long-term assets or positions (Teece et al. 1997) as brand equity and customer satisfaction (Srivastava et al. 1998). These assets can be leveraged to deliver short-term profitability (Rust et al. 2004) and shareholder value (Srivastava et al. 1998).

Marketing impact studies have evolved in three stages of development. The first one is related to research that link marketing activities to accounting-based measures. The most studied activity in this stage has been advertising, and it has been connected to sales (Assmus et al. 1984; Clarke 1976; Dekimpe and Hanssens 1995), to profits (Jedidi et al. 1999), and return on investment (Danaher and Rust 1996; Fitzgerald 2004). The second stage is associated with research that connects marketing activities to marketing assets. Cornwell et al. (2001) explores how the use of advertising and promotion to support the sponsorship, and active management involvement are significant predictors of both the perceived differentiation of the brand from its competitors and adding financial value to the brand. Other studies are from Bolton and Drew (1991) and Dodds et al. (1991). The last stage is related to studies that link marketing activities and marketing assets to shareholder and firm value, measured by data from capital markets such as Tobins Q, Operating Cash Flow, Market Value, Earnings per Share, among others. Srivastava et al. (1998) develop a conceptual framework of the marketing-finance interface which concerns with the task of developing and managing market-based assets such as customer satisfaction and brand equity with the objective of increasing shareholder value by accelerating and enhancing cash flows, lowering the volatility and vulnerability of cash flows, and increasing the residual value of them. The research of Maden et al. (2006) intends to cover the propositions of Srivastava et al. They find empirical evidence to the impact of brand equity on the generation of long-term profits. In addition, Anderson et al. (1994) investigate the nature and strength of the link between customer satisfaction and economics returns. They discuss how expectations, quality and price should affect customer satisfaction and why customer satisfaction, in turn, should affect profitability. The findings support a positive impact of quality on customer satisfaction, and in turn, profitability measured as return on investment. In the same vein, Gruca and Rego (2005) find empirical support to the link between customer satisfaction, cash flow and shareholder value. The research which associates the three stages mentioned above is the one of Rust et al. (2004). They propose a conceptual framework that can be used to evaluate marketing as a whole. It is a chain-of-effects model that relates the specific actions taken by the firm (marketing actions) to the overall condition and standing of the firm. The chain model

includes besides the marketing actions, the impact on customer, on the market, and on financial and firm value. Marketing Efficiency The other way that research in Marketing has faced Marketing performance is related to efficiency. Charnes, Cooper and Rhodes (1978) define the efficiency as the comparison among firms of the ratio of outcomes over the inputs required to achieve them. On the other hand, Sheth et al. (2002) define marketing efficiency as the ratio of marketing output over input. Both of them are the definitions that will be used. Sheth et al. (2000) and Sheth and Sisodia (1995), in referring to their definition of marketing productivity, include two the dimensions, efficiency as well as effectiveness, i.e. getting loyal customers at low marketing costs. On the other hand, Rust et al. (2004) use the term marketing productivity to refer how marketing activities are linked to short-term and long-term profits. In reference to literature review, Charnes et al. (1985) first suggested applying DEA to gain insights into efficiency of marketing efforts. Since then, there have been some marketing studies that used the DEA as a methodology. Kamakura et al. (1988) used DEA to measure welfare loss and market efficiency. Mahajan (1991) studied a DEA model for assessing the relative efficiency of sales units that simultaneously incorporates multiple sales outcomes, controllable and uncontrollable resources, and environmental factors. Boles et al. (1995) propose a DEA based approach that provides a measure of relative performance efficiency to evaluate the salesperson. Kamakura et al. (1996) evaluated multiple retail stores (branches from a commercial bank) for their efficiency using DEA and multiple translog cost function estimation, while Donthu and Yoo (1998) compared the results obtained in the evaluation of multiple retail stores (restaurant chain) using DEA and regression. Fre et al. (2004) use techniques from the efficient measurement literature to evaluate the performance of six United States beer firms in terms of their ability to translate advertising messages into sales. Luo and Donthu (2001) demonstrate the application of DEA to benchmark advertising efficiency and to estimate the relative efficiency of advertising campaigns characterized by multiple inputs and multiple outputs.

Heskett et al. (1994) propose the framework for the Service-Profit Chain for linking service operations, employee assessments, and customer assessments to firms profitability, and Kamakura et al. (2002) develop an approach to assess it. The approach combines data such as measures of operational inputs, customers perceptions and behaviours, and financial outcomes from multiple sources. They use de DEA for the operational analysis. Donthu et al. (2005) try to fill the gap in research of the lack of appropriate methodological tools for analysing the benchmarking process in marketing. DEA is suggested to aid traditional benchmarking activities and is useful in identifying the best performing units to be benchmarked against, as well as in providing actionable measures for improvement of a companys marketing performance. On the other hand, Keh et al. (2006) intend to answer how a service firm (49-unit Asia-Pacific Hotel) can right-size marketing expenses and yet strive to maximize revenue. They employ a triangular DEA model with total expenses (controlling for number of rooms) as the raw input, marketing expenses as intermediate output/input and revenues from room rentals, and food and beverages as final outputs.

THEORETICAL MODEL ADOPTED According to Rust et al. (2004) the firms marketing strategies, which might include product strategy, price strategy, promotion strategy, lead to tactical marketing actions such as packaging, brand name, density of the distribution channel, advertising, permanent exhibitions, sponsoring, press bulletins (Van Waterschoot and Van den Bulte 1992), or any other initiative designed to have marketing impact. Under RBV, these initiatives are organizational resources of the firm (Barney 1991). In addition, under Dynamic Capabilities, these initiatives are the decisions of marketing organizational processes (Teece et al. 1997). Then, the tactical actions and intangible resources of marketing management (Srivastava et al. 2001) influence and generate firms marketing positions such as customer satisfaction and brand equity (Srivastava et al. 1998). Besides, the current marketing positions are often shaped by the path of marketing activities; it means that firms previous routines constrain their future behaviour (Teece et al. 1997).

Hence (See figure 1) we expect that: H1a: The actual marketing activities influence positively the generation of customer satisfaction and brand equity. H1b: The path of marketing activities influence positively the generation of customer satisfaction and brand equity. At any point in time, tactical actions will have made more marketing positions (e.g. brand equity and customer satisfaction), but they may not yet have influenced firms profit and loss account (Rust et al. 2004). Under RBV, the drivers that determine the better performance of the company are intangible resources (Barney 1991). Likewise, based on Dynamic Capabilities perspective, one of the drivers of firm performance is the marketing positions or the strategic posture of the firm (Teece et al. 1997). As a consequence, the path and current positions can be leveraged to deliver short-term profitability (Rust et al. 2004) and long-term profitability (Srivastava et al. 1998). Therefore we look forward to: H2a: The actual Customer Satisfaction and Brand Equity have a positive impact on long-term profitability. H2b: The path of Customer Satisfaction and Brand Equity has a positive impact on long-term profitability. H2c: The path of Customer Satisfaction and Brand Equity has a positive impact on short-term profitability. Sheth et al. (2000) suggest that the objective of being efficient and effective is to get loyal customers at low marketing costs, and consequently increasing profits (Rust et al. 2004; Srivastava et al. 1998). Nowadays, one of the top priorities of marketing is concerned about measure the effect of its assets or positions on firm value; it is being tested as has been shown by the works of Anderson et al. 2004, Gruca and Rego 2005, and Madden et al. 2006. The two formers found evidence about the effect of customer satisfaction on shareholder value. The latter supported the effect brand equity over firm value. Nevertheless, marketing research has not considered the differences of efficiency among firms to demonstrate with strong support the relationship between marketing and firm performance. Under Dynamic Capabilities perspective, marketing efficiency is associated with the combination of marketing abilities and resources to generate rents; i.e. the ability of marketing to maximize firms short-term financial results better than
8

competitors with the restriction of the same level of marketing expenditures. In addition, according to Williamson (1991) the best strategy to increase long term profits is to organize and operate efficiently. Hence we expect that: H3: Marketing efficiency will increase the impact on long-term profits.
Customer Satisfaction Brand Equity
H1a H1b MARKETING ACTIVITIES H2c H3

H2a, b H2a

LONG-TERM PROFITS

SHORTTERM PROFITS

[Inputs]

MARKETING EFFICIENCY

[Outputs]

Figure 1 Conceptual Model Adopted It has not been tested

RESEARCH METHODOLOGY: THE STAGES OF EFFECTS First Stage: Econometric Approach The objective of this stage is to examine the chain of effects of marketing activities and marketing positions on short-term performance. The construct of marketing activities (See Table 1) is composed by the variable advertising spending (Rust et al. 2004; Van Waterschoot and Van den Bulte 1992). The construct of marketing assets is shaped by the variables brand equity and customer satisfaction (Srivastava et al. 1998). The variables used to measure short-term profits are revenues and operating profits (Anderson et al. 1994). The long-term profits will be measured by the Tobins Q (Anderson et al. 2004). Control variables that will be used are R&D intensity, number of brands, segments (Gruca and Rego 2005), market share and concentration level of firm in the industry (Anderson et al. 2004; Gruca and Rego 2005).

TABLE 1 Model Specifications

Constructs Variables Indicators Years of Analysis Sources of Information Kind of Source

Marketing Activities

Advertising

Annual spending in million US$ Annual Brand Value in million US$ Annual Index

2002 - 2004

Advertising Age Digital and Print Edition

Secondary

Brand Equity Marketing Assets Customer Satisfaction

2002 - 2004

Interbrand Data National Quality Research

Secondary

2002 - 2004

Center at the University of Michigan

Secondary

Short-term Profits (Accounting Data)

Revenues Operating Profits Return on Investor (ROI) a

Annual revenues in million US$ Annual profits in million US$ Annual ROI in % Annual in million US$ Annual in million US$ Annual in US$ Annual Quotient Annual % of R&D spending / Sales Herfindahl and Hirshman Index Number Annual % Number of distinct Business Segment Number of Countries Number of Abroad Stock Exchange Years

2002 - 2004 2002 - 2004 2002 - 2004

Fortune Review Fortune Review Fortune Review

Secondary Secondary Secondary

Market Valuea Long-term Profits (Capital Market Data) Book Valuea Earnings p/ sharea Tobins Q
a

2002 - 2004 2002 - 2004 2002 - 2004 2002 - 2004

Fortune Review Fortune Review Fortune Review Compustat

Secondary Secondary Secondary Secondary

R&D Intensitya Concentration Levela Number of Brandsa Market Share Control

a a

2002 - 2004 2002 - 2004 2002 - 2004 2002 - 2004 2002 - 2004 2006 2006 2002 - 2004

Compustat Data Compustat Data Web Page Compustat Data Compustat Data Web page Web pages Web page

Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary

Segmentsa International Expansion

a

Stock Exchange Internationalizationa International Experiencea

Source: Self-devised

a. It is being gathered.

The research has been applied to the top United States firms reported in Advertising Age, Business Week, American Customer Satisfaction Index (ACSI) and Fortune 500

10

Review. The data of marketing expenditures in advertising was obtained from the report of Global Marketers published by Advertising Age. This report contains information about the rank in terms of the amount of advertising spent, the worldwide advertising spending, the U.S. measured media spending, and the spending by regions (Asia, Europe, and Latin America). All data are from secondary sources, hence objective; none of them are the result of applying a survey, through susceptible of subjective response. The data of brand value was found in the Business Week report about the ranking of the worlds most valuable brands. This report has information about the rank, the brand value in millions of dollars, the percentage of change of brand value, the country of ownership, and the main news that caused such value. The customer satisfaction index was obtained from the annual ACSI from 2002 to 2004 that were made available to us by the National Quality Research Centre at the University of Michigan. The ACSI methodology provides a uniform, independent, customer-based, cumulative, firm level satisfaction measure for 200 companies in 40 industries and in 7 sectors of the U.S. economy (Anderson et al. 2004). In reference to financial information, Fortune 500 Review was the source. The report about 500 largest U.S. corporations permitted us to get data of revenues, profits, assets, stockholders equity, market value, earnings per share and total return to investor. The sample of analysis considered is composed by U.S. largest companies published in Fortune (2005); that meanwhile is equal to 15. The methodology employed is structured, quantitative, and explanatory. Multiple Regression Analysis (Anderson et al. 2004; Gruca and Rego 2005) was used as the technique for measuring the effects of the constructs of the model. The definition of the regression models1 are the following: Ln (Revt / Revt-1) = f [Ln (ADt / ADt-1), Ln (CSt / CSt-1), Ln (BVt / BVt-1)] Ln (Profitst / Profitst-1) = f [Ln (ADt / ADt-1), Ln (CSt / CSt-1), Ln (BVt / BVt-1)] where, Ln (Revt / Revt-1) is the annual variation of firm revenues, Ln (ADt / ADt-1) represents the annual variation of advertising spending, Ln (CSt / CSt-1) is the annual variation of customer satisfaction index of each firm, Ln (BVt / BVt-1) represents the annual variation of financial brand value, and Ln (Profitst / Profitst-1) is the annual variation of operational profits.

This is an approach of the final model. Some variables information is still in gathering process.

11

In this stage, we examined the relationship between model variables. Significant relationship was found among advertising, customer satisfaction, brand value and revenues (See Table 2). Nevertheless, when we examine the second model, we observe that the impact of customer satisfaction and brand value on operational profits is significant, but advertising does not have impact on them. Table 2 Initial marketing effects on firm performance
Model Revenues Profits Intercept .030* 0.038 AD 0.322*** 0.223 CS 0.992** 3.154* BV 0.513*** 1.15** R2 0.759 0.45 F 11.534 3.005 Sig. 0.001 0.077 n 15 15

Source: Self-devised (*) 90% (**) 95% (***) 99%

According to Williamson (1991), the best strategy to increase profits is to organize and operate efficiently. Departing from this suggestion, we measure whether the inclusion of the efficiency in the model increases the explanatory effect of marketing activities on long term value. Based on what Charnes et al. (1985) suggested about applying DEA to gain insights into efficiency of marketing efforts, the next stage is to calculate the efficiency score through a DEA. Second Stage: Data Envelopment Analysis The objective of this stage is to measure the efficiency of marketing. Marketing strategy plays a central role in winning and retaining customers, ensuring business growth and renewal, developing sustainable competitive advantages, and driving financial performance through business processes (Srivastava et al., 1999). Consequently, the marketing actions (advertising) taken by the U.S. companies permit them to have business growth and profits. Therefore, the efficiency measure is related to the ability of the firm to maximize the level of short-term profits with the restriction of the same level of marketing expenditure. The methodology employed in this stage is quantitative and evaluative. DEA (Charnes et al. 1985) will be used as the technique for measuring the efficiency of marketing. Charnes et al. (1978) first proposed DEA as an evaluation tool to measure and compare decision-making units (DMU) productivity. Data Envelopment Analysis is a method for mathematically comparing different DMUs productivity based on multiple inputs

12

and multiple outputs. The ratio of weighted inputs and outputs produces a single measure of productivity called relative efficiency. DMUs that have a ratio of 1 are referred to as efficient, given the required inputs and produced outputs. See Seiford (1996) for a more technical description of DEA. The model of marketing efficiency has two outputs and one input, the formers are Revenues and Operating profits, and the latter is Advertising. Technical Efficiency: Characterization of Marketing Efficiency The output-oriented DEA model (Charnes et al., 1978)2 is employed to measure Marketing Efficiency. According to Hamel y Prahalad (1994) to be a revolutionary in the market and compete for the future, firms have to change the perspective of management, it means forget to concentrate efforts in the denominator (inputs) and to concentrate on the numerator (the outputs). This orientation is similar to the applied by Seiford and Zhu (1999). The output-oriented DEA model is presented next:
t max0 ;t=1,2,3,4

s.t.

.Y
k k=1 K

k i

.Y;i=1,2,...,I i X j ;j=1,2,...,J

.X
k k=1

k j

t 0 ,k 0

(2) Yik and Xk j

where

are the amount of the ith output produced and the amount of the jth

input consumed by the kth DMU, respectively. We have n = 16 DMUs, i = 2 outputs revenues and operating profits, j = 1 input advertising. Let be the optimal value for Marketing Efficiency. If
1 0

1 = 0

1, then a firm is said to be

CCR-efficient in marketing. Tables 3 reports CCR efficiency scores. Only one firm, namely General Electric is CCR-efficient in Marketing.

The model is known as CCR in reference to Charnes, Cooper and Rhodes (Charnes et al. 1978). 13

Table 3 Efficiency Results and Return-to-Scale

2003 DMU Altria Group Anheuser-Busch Cos. Coca-Cola Co. Colgate-Palmolive Co. Dell Computer Ford Motor Co. General Electric Co. Hewlett-Packard Co. Kellogg Co. Yum Brands McDonalds Corp. Microsoft Corp. Nike Pepsi Co. Time Warner CCR 2.63 4.25 6.33 7.60 1.75 1.87 1.00 1.35 8.56 13.18 8.58 1.43 3.44 5.64 6.57 BCC 1.93 2.59 5.87 5.97 1.35 1.00 1.00 1.22 6.76 12.42 7.96 1.15 1.00 5.09 3.45 CCR 3.47 5.23 8.48 7.83 2.74 2.37 1.00 1.48 11.81 15.74 11.05 2.33 4.09 6.42 8.50 2004 BCC 2.20 3.24 5.87 5.31 2.61 1.00 1.00 1.32 10.31 15.31 8.19 1.76 1.00 5.30 3.88

Source: Self-devised Scale efficiency has been recognized in the literature as an important issue (Seiford and Zhu 1999). However, the CCR model (2) assumes constant return to scale (CRS). In order to determine the scale efficiency of these firms, we employ the output-oriented BCC3 DEA model which allows variable return to scale (VRS) (Banker et al. 1984).
t max 0 ;t=1,2,3,4

s.t.

.Y
k k=1 K k k=1 K

k i

.Y;i=1,2,...,I i X j ;j=1,2,...,J

.X
k k=1

k j

=1
t 0 ,k 0

(3)

Let

1 0

be the optimal value for (2) in Marketing Efficiency. Define a scale efficiency

measure by:
t 0 =

0t t 0
(4)

for : t = 1,..., 4
3

The model is known as BCC in reference to Banker, Charnes, and Cooper (Banker et al. 1984).

14

Obviously,

t 0

1. If

t 0

= 1, a firm is called scale efficient; otherwise, if

t 0 t 0 =

t 0

> 1, a firm is

called scale-inefficient. Table 3 displays measure Marketing Efficiency. Note that

for each firm when (3) is employed to 1 if and only if

0t

t 0

. In our case, only

firms that were CCR-efficient are scale-efficient. A paired-difference t-test was applied to CCR and BCC scores in each stage. The results of the t-test were significant, indicating that serious scale inefficiency was present for the firms analyzed (See Table 4). Table 4 Paired-Difference t-test between CCR and BCC
Stage 2003 2004 Paired CCR-BCC CCR-BCC Mean Difference -1.03 -1.62 t-test 4.40 -4.72 Sig. 0.001 0.00

Source: Self-devised We next determine whether increasing or decreasing returns to scale (IRS or DRS) is the primary cause of scale inefficiency. As shown in Banker (1984), the optimal solution for
k
K

(k = 1,, n) in (4), i.e., the magnitude of , contains the information

k k=1

for return to scale (RTS) classification. To determine the RTS classification we run the data on Efficiency Measurement System (EMS) software. Using this method, possible misclassification errors from multiple optimal solutions for
k

are avoided. The RTS

classifications are readily obtained from optimal solutions to (2) and (3) (Seiford and Zhu 1999). Table 3 shows that CCR-inefficient and scale-inefficient firms were operating on IRS frontier. As economists have long recognized, an IRS frontier firm would generally be in a more favourable position for expansion, compared to a firm operating in CRS or DRS region (Arthur 1996; Seiford and Zhu 1999). The next step is to introduce the marketing efficiency score as explaining variable through an econometric approach, but the last stage is in process of development and has been introduced in future research lines.

DISCUSSION AND CONCLUSION The objective of the research was to find out more empirical evidence that supports the impact of marketing activities and positions on firms performance, as well as, to

15

demonstrate if marketing efficiency increase the influence of marketing on financial value of the firm more than the generated by marketing assets. After running the econometric models, we observe, in the first stage, significant effects of advertising spending, customer satisfaction and brand value over short-term performance. These are consistent with Ittner and Larckers (1996). They examine the correlation between customer satisfaction and a firms raw market value and also find mixed and inconclusive results. On the other hand, in the second stage, we expect significant relationship among marketing activities, positions and Tobins q after the inclusion of the efficiency scores. According to these results, the application of DEA permits us to discriminate between efficient and inefficient firms, and to incorporate the efficiency score in a-posteriori regression analysis. In the same vein, these results would be consistent with other research that link positively marketing actions and positions to firms value (Anderson et al. 2004, Gruca and Rego 2005, Maden et al. 2006). In addition, we expect that level of firms marketing efficiency has been obstructing the effectiveness of marketing activities over the firms value improvement. These results would be consistent with Villalonga (2004), who affirms that intangibles play an effective role in sustaining a firms competitive advantage. These intangibles are responsible for the difference between market value and book value. Marketing, through Brand Equity and Customer Satisfaction, is the main origin of intangibles, and consequently contributes to firms position (Teece et al. 1997) and value. Nevertheless, it is also clear that marketing activities cannot be responsible for the whole of these intangibles. The main contributions of this research are related to methodological and empirical aspects. The first one allows research in marketing to observe some significant effects of marketing using regression and DEA as complementary techniques. On the other hand, the empirical data of top U.S. firms according to Fortune 500, Advertising Age Review, and Business Week permit us to provide evidence that Marketing actions and positions contribute to increase the value of the firm. The main conclusion of this research is that marketing actions can prove its effectiveness in efficient firms. This is not new, but this affirmation needed of empirical confirmation.

FUTURE RESEARCH DIRECTION

16

The measurement of the additional effect on long-term profits generated by the inclusion of the efficiency score of the U.S. Largest firms as an additional explanatory variable is still in process of development. The methodology that will be employed is structured, quantitative, and explanatory. Econometric model approach (Anderson et al. 2004; Gruca and Rego 2005) is the technique for measuring the effects of the constructs of the model. The definition of the model is the following: Ln (Tobins Qt / Tobins Qt-1) = f [Ln (ADt / ADt-1), Ln (CSt / CSt-1), Ln (BVt / BVt-1), Ln (MktEfft / MktEfft-1)] where, Ln (Tobins Qt / Tobins Qt-1) is the annual variation of Tobins Q. To calculate the Q coefficient will be employed the proxy proposed by Chung and Pruitt (1994). In addition, Ln (ADt / ADt-1) represents the annual variation of advertising spending, Ln (CSt / CSt-1) is the annual variation of customer satisfaction index of each firm, Ln (BVt / BVt-1) represents the annual variation of financial brand value, and Ln (MktEfft / MktEfft-1) is the annual change in marketing efficient score. This is the future part of the working paper.

ACADEMIC AND MANAGERIAL RELEVANCE In reference to academic relevance, this research pretended to support empirical evidence to the field of marketing metrics in a global context. The suggestion of Rust et al. (2004) about search for empirical support to the chain of marketing activities has been taken into account. Another relevant aspect is the conjunction between effectiveness and efficiency of marketing (Sheth et al. 2000). Studies of marketing efficiency evaluate the maximization of sales in terms of advertising. Studies of efficiency focus on measuring the efficiency score and then treat this score as a dependent variable. This study measures the efficiency score and then uses it as an explaining variable. Consequently it works based on the rationale of being effective but with an efficient use of inputs. In reference to managerial relevance, this research pretended not only to tell the board that marketing contributes to the company, but also to give them the effectiveness of marketing in money terms. On the other hand the use of Data Envelopment Analysis (DEA) as an evaluative technique is practical because managers can measure their efficiency based on multiple inputs and outputs.

17

REFERENCES Aaker, D. (1991) Managing Brand Equity. New York: The Free Press. Ambler, T. (2000) Marketing metrics. Business Strategy Review, Volume 11, N 2: 5966. Anderson, E.W., and M.W. Sullivan (1993) Antecedents and Consequences of Customer Satisfaction for Firms. Marketing Science, Volume 12, N 2: 125-143. Anderson, E.W., C. Fornell, and D.R. Lehman (1994) Customer Satisfaction, Market Share and Profitability: Findings from Sweden. Journal of Marketing, Volume 58, July: 53-66. Anderson, E.W., C. Fornell, and S.K. Mazvancheryl (2004) Customer Satisfaction and Shareholder Value. Journal of Marketing, Volume 68, October: 172-185. Arthur, W.B. (1989) Competing Technologies, Increasing Returns and Lock-in by Historical Events. Economic Journal, Volume 99: 106-131. Arthur, W.B. (1990) Positive Feedbacks in the Economy. Scientific American, Issue 262, February: 92-99. Arthur, W.B. (1996) Increasing Returns and the New World of Business. Harvard Business Review, July-August, 100-109. Arthur, W.B. (1999) Complexity and the Economy. Science, Issue 284, Volume 2, April: 107-109. Assmus, G., J.U. Farley, and D.R. Lehmann (1984) How Advertising Affects SalesMeta Analysis of Econometrics Results. Journal of Marketing Research, Volume 21, N 1: 65-74. Banker, R.D., A. Charnes, W.W. Cooper (1984) Some Models for Estimating Technical and Scale Efficiencies in Data Envelopment Analysis. Management Science, Volume 30, N 9: 1078-1092. Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management, Volume 17, N 1: 99-120. Boles, J.S., N. Donthu, and R. Lohtia (1995) Salesperson Evaluation Using Relative Performance Efficiency: The Application of Data Envelopment Analysis. Journal of Personal Selling & Sales Management, Volume 15, N 3: 3149. Bolton, R., and J. Drew (1991) A Longitudinal Analysis of the Impact of Service Changes on Customer Attitudes. Journal of Marketing, Volume 55, January: 1-9. Charnes, A., W.W. Cooper, and E. Rhodes (1978) Measuring the Efficiency of Decision Making Units. European Journal of Operational Research, Volume 3: 429-444. Charnes, A., W.W. Cooper, D.B. Learner, and F.Y. Philips (1985) Management Science and Marketing Management. Journal of Marketing, Volume 49, April: 93-105. Chung, K.H., and S.W. Pruitt (1994) A Simple Aproximation of Tobins Q. Financial Management, Volume 23, N 3: 70-74. Clarke, D.G. (1976) Econometric Measurement of Duration of Advertising Effects on Sales. Journal of Marketing Research, Volume 13, N 4: 345-357. Collis, D.J. (1991) A Resource-Based Analysis of Global Competition: The case of the Bearings Industries. Strategic Management Journal, Volume 12, Summer: 49-68.

18

Cornwell, T.B., D.P. Roy, and E.A. Steinard (2001) Exploring Managers' Perceptions of the Impact of Sponsorship on Brand Equity. Journal of Advertising, Volume 30, N 2: 41-51. Danaher, P.J., and R.T. Rust (1996) Determining the Optimal Return on Investment for an Advertising Campaign. European Journal of Operational Research, Volume 95, N 3: 511-521. Dekimpe, M.G., and , D.M. Hanssens (1995) The Persistence of Marketing Effects on Sales. Marketing Science, Volume 14, N 1: 1-21. Dodds, W.B., K.B. Monroe, and D. Grewal (1991) Effect of Price, Brand, and Store Information on Buyers' Product Evaluations. Journal of Marketing Research, Volume 28, August: 307-319. Donthu, N., and B. Yoo (1998) Retail Productivity Assessment using Data Envelopment Analysis. Journal of Retailing, Volume 74, N 1: 89-105. Donthu, N., E.K. Hershberger, and T. Osmonbekov (2005) Benchmarking Marketing Productivity using Data Envelopment Analysis. Journal of Business Research, Volume 58: 1474-1482. Douglas, S.P., and C.S. Craig (1989) Evolution of Global Marketing Strategy: Scale, Scope and Synergy. Columbia Journal of World Business, Volume 24, N 3: 47-59. Eisenhardt, K.M. (1985) Control: Organizational and Economic Approaches. Management Science, Volume 31, February: 134-149. Fre, R., S. Grosskopf, B.J. Seldon, and V.J. Tremblay (2004) Advertising efficiency and the choice of media mix: a case of beer. International Journal of Industrial Organization, Volume 22: 503-522. Fitzgerald, J. (2004) Evaluating Return on Investment of Multimedia Advertising with a Single-Source Panel: A Retail Case Study. Journal of Advertising Research, Volume 44, N 3: 262-270. Fornell, C., M.D. Johnson, E.W. Anderson, J. Cha, and B.E. Bryant (1996) The American Customer Satisfaction Index: Nature, Purpose and Findings. Journal of Marketing, Volume 60, October: 7-18. Fortune (2005) Up, Up, and Away: Largest U.S. Corporation. Fortune, April: 232-255. Grant, R.M. (1991) The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation. California Management Review, Volume 33, N 3: 114-135. Gruca, T.S., and L.L. Rego (2005) Customer Satisfaction, Cash Flow, and Shareholder Value. Journal of Marketing, Volume 69, July: 115-130. Gupta, S., and V. Zeithaml (2005) Customer Metrics: The Past, The Present, and The Future in Academia and Practice. Marketing Science Institute, Special Report, N 05-200: 39-75. Hamel, G., and C.K. Prahalad (1994) Competing for the Future. Harvard Business Review, Volume 72, N 4: 122-128. Heskett, J.L., T.O. Jones, G.W. Loveman, W.E. Sasser, and V. Mittal, F. de Rosa, and L. Schlesinger (1994) Putting the Service-Profit Chain to Work. Harvard Business Review, Volume 62, N 2: 164-174. Ittner, C.D., and D.F. Larcker (1996) Measuring the Impact of Quality Iniciatives on Firm Financial Performance: Advances in the Management of Organizational Quality, Soumen Ghosh and Donald Fedor, eds. Greenwich, CT: JAI Press, 1-37, in Anderson, E.W., C. Fornell, and S.K. Mazvancheryl, 2004, "Customer Satisfaction and Shareholder Value", Journal of Marketing, Volume 68, October: 172-185.

19

Jedidi, K., C.F. Mela, and S. Gupta (1999) Managing Advertising and Promotion for Long-Run Profitability. Marketing Science, Volume 18, N 1: 1-22. Kamakura, W.A., B.T. Ratchford, and J. Agrawal (1988) Measuring Market Efficiency and Welfare Loss. Journal of Consumer Research, Volume 15, December: 289-302. Kamakura, W.A., T. Lenartowicz, and B.T. Ratchford (1996) Productivity Assessment of Multiple Retail Outlets. Journal of Retailing, Volume 72, N 4: 333356. Kamakura, W.A., V. Mittal, F. de Rosa, and J.A. Mazzon (2002) Assessing the ServiceProfit Chain. Marketing Science, Volume 21, N 3: 294-317. Keh, H.T., S. Chu, and J. Xu (2006) Efficiency, Effectiveness and Productivity. European Journal of Operational Research, Volume 170: 265-276. Keller, K. L. (1993) Conceptualizing, Measuring, and Managing Customer-Based Brand Equity. Journal of Marketing, Volume 57, N 1: 1-22. Keller, K. L. (1999) Managing Brands for the Long Run: Brand Reinforcement and Revitalization Strategies. California Management Review, Volume 41, N 3: 102. Luo, X., and N. Donthu (2001) Benchmarking Advertising Efficiency. Journal of Advertising Research, Volume 41, N 6: 7-18. Madden, T.J., F. Fehle, and S. Fournier (2006) Brands Matter: An Empirical Demonstration of the Creation of Shareholder Value through Branding. Journal of the Academy of Marketing Science, Volume 34, N 2: 224235. Mahajan, J. (1991) A Data Envelopment Analytic Model for Assessing the Relative Efficiency of the Selling Function. European Journal of Operational Research, Volume 53: 189-205. Oliver, R.L., and E. Anderson (1987) Perspectives on Behaviour-Based versus Outcome-Based Sales Control Systems. Journal of Marketing, Volume 51, October: 76-88. Rust, R.T., T. Ambler, G.S. Carpenter, V. Kumar, and R.K. Srivastava (2004) Measuring Marketing Productivity: Current Knowledge and Future Directions. Journal of Marketing, Volume 68, October: 76-89. Seiford, L.M. (1996) Data Envelopment Analysis: The Evolution of the State of the Art (1978-1995). Journal of Productivity Analysis, Volume 7, N 2/3: 99137. Seiford, L.M., and J. Zhu (1999) Profitability and Marketability of the Top 55 U.S. Commercial Banks. Management Science, Volume 45, N 9: 1270-1288. Sheth, J.N., and R.S. Sisodia (1995) Feeling the Heat: Making Marketing More Productive. Marketing Management, Volume 4, N 2: 8-23. Sheth, J.N., R.S. Sisodia, and A. Sharma (2000) The Antecedents and Consequences of Customer-Centric Marketing. Journal of the Academy of Marketing Science, Volume 28, N 1: 55-66. Sheth, J.N., R.S. Sisodia, and A. Sharma (2002) Marketing Productivity: Issues and Analysis. Journal of Business Research, Volume 55: 349-362. Srivastava, R.K., L. Fahey, and H.K. Christensen (2001) The Resource-Based View and Marketing: The Role of Market-Based Assets in gaining Competitive Advantage. Journal of Management, Volume 27: 777-802. Srivastava, R.K., T.A. Shervani, and L. Fahey (1998) Market-Based Assets and Shareholder Value: A Framework for Analysis. Journal of Marketing, Volume 62, January: 2-18.

20

Srivastava, R.K., T.A. Shervani, and L. Fahey (1999) Marketing, Business Process, and Shareholder Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing. Journal of Marketing, Volume 63, Special Issue: 168-179. Teece, D., G. Pisano, and Shuen, A. (1997) Dynamic capabilities and strategic management. Strategic Management Journal, Volume 18, N 7: 509-533. Van Waterschoot, W., and C. Van den Bulte (1992) The 4P Classification of the Marketing Mix Revisited. Journal of Marketing, Volume 56, October: 83-93. Villalonga, B. (2004) Intangible resources, Tobins Q, and sustainability of performance differences. Journal of Economic Behaviour & Organization, Volume 54: 205-230. Webster, F. E. Jr., A. J. Malter, and S Ganesan (2003) Can Marketing Regain Its Seat at the Table? Marketing Science Institute, Working Paper, report no. 03113. Wernerfelt, B. (1984) A Resource-Based View of the Firm. Strategic Management Journal, Volume 5, N 2: 171-180. Williamson, O.E. (1991) Strategizing, Economizing, and Economic Organization. Strategic Management Journal, Volume 12: 75-94.

21