Organizational Structures for Leveraging Brand and Innovation: Return on Marketing Mix Investments (from the dissertation “Role of Organizational Structure in Achieving Marketing and Financial Outcomes”)
My overall research focuses on integrating organizational structure as a strategic marketing tool in performance models, and evaluating its effects on financial and marketing outcomes in various marketing contexts (e.g., brand management, new product success, and customer satisfaction). Through a domain that I refer to as structural marketing, my work provides empirical evidence and managerial insights into the firm’s use of its structural design elements to achieve marketing objectives.
There is a growing consensus that customer-centric organizational structures demonstrate superior returns on marketing investments because they nurture closer customer relationships and enhance customer value. Yet, theoretical and empirical evidence of such effects is absent. Recognizing these issues and concerns, the Marketing Science Institute has designated “organizational structure” as its top research priority in two consecutive biannual reports, and raised the question “What are effective strategies for firms that are transitioning … to a customer-focused organization?” To address this gap, my conceptual framework (Figure 1) examines how organizational structure (e.g., functional, product-centric, customer-centric) leverages the effectiveness of two key marketing mix variables—advertising and R&D.
To explore the conceptual framework empirically, I have acquired complete information about the internal organizational structures of all Fortune 500 companies over a period of 13 years, using financial reports (Form 10-K and Form 10-Q), in combination with a wide range of secondary sources: financial/ accounting statements from COMPUSTAT and CRSP; overall customer satisfaction from the American Customer Satisfaction Index; brand equity from Harris Interactive EquiTrend; and innovation equity from the U.S. Patent and Trademark Office. To the best of my knowledge, this panel data set is the most comprehensive source of secondary data available for organizational structure research.
The preliminary analysis based on the longitudinal data from Fortune 500 manufacturing firms between 1998 and 2010 shows clear trade-offs in the performance elasticities of advertising and R&D across different organizational structure types. Using a cluster-robust standard errors estimation, which controls for firm- and time-specific effects, the results reveals that an organizational structure with a greater external focus (i.e., more customer-centric structure) provides more positive R&D effectiveness; an organizational structure with a greater internal focus (i.e., more functional structure) provides more positive advertising effectiveness.
To further clarify the underlying mechanisms by which organizational structure leverages the effect of marketing mix investments on financial returns, I incorporate brand equity and innovation equity into my conceptual model. Drawing on resource-based view and configuration theory, I propose that two dimensions of brand equity (i.e., brand quantity and brand quality) mediate the impact of advertising on performance, which is differentially moderated by organizational structures. Similarly, two dimensions of innovation equity (i.e., innovation quantity and innovation quality) mediate the impact of R&D on performance, which is differentially leveraged by organizational structures.
This paper provides boardroom executives with some caveats to consider before changing their organizational structures. First, the returns from marketing investments may vary according to organizational structure that a firm adopts, but each structure entails a different set of strengths and weaknesses. Second, the returns from marketing mix investments may vary by dimensions of brand and innovation, and must be isolated to unravel the distinct effects. Thus, making structural design decisions without guidance from marketing perspective may lead to unintended consequences that undermine marketing mix effectiveness and financial performance.