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During this millennium, many marketers seem to have bet the family silver on customer relationship management investments with little to show for it, and those marketers are now attempting to justify further investment in order to achieve their original goals. To suggest that they have arrived at this uncomfortable place because they are regarded as unaccountable and financially innumerate,1 or that CRM technologies are immature and consumers simply won’t engage with such new technology, is too simplistic. The problem is more fundamental: Most senior management teams have an unbalanced approach to managing marketing investments, and this is particularly evident in the case of CRM. They focus on the key resources in which they invest capital, such as technology, location and advertising, but ignore the commensurate investment of time, energy and talent to develop the capabilities required to leverage those investments. Of course, this approach to marketing investment is risky: It generates excessive investment before the organization is capable of leveraging it profitably.
All of this is a far cry from CRM’s original promise. Do you remember how new forms of consumer relationships were going to revolutionize marketing, rewriting its rules and calling into question decades of scholarship and practice?2 Buying behavior would change as consumers used the information-rich environment to secure better terms of trade, personalize service and join online communities to cocreate solutions with suppliers.3 Marketers, armed with perfect information about consumers, would optimize every marketing cent they spent generating a step-change in marketing effectiveness.
The Leading Question
How should marketing investments be managed for the greatest return?
- Develop new capabilities to improve customer relationships.
- Backfill with capital investment to sustain and embed capability development.
Companies bought heavily into this “new paradigm” thinking: Between 2000 and 2005, organizations spent $220 billion implementing CRM solutions,4 creating a market worth almost $50 billion per annum and growing in excess of 16% prior to the credit crunch. Yet despite these enormous investments, publicly available data consistently show that 55% to 75% of companies fail to meet the expected return on their CRM investments.
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1. Marketing is indeed hard on itself, perhaps more so than any other function in business, and particularly on the issue of marketing accountability. See M. McDonald, “Marketing: Priority Case for a Reality Check,” Marketing Review 3, no. 3 (2003): 253-271. Despite such harsh self-critique, a growing body of high-quality research links marketing activities to business performance and increased market capitalization. A recent exemplar of this research is S. Srinivasan, K. Pauwels, J. Silva-Risso and D. Hanssens, “New Products, Sales Promotions, and Firm Value: The Case of the Automotive Industry,” Journal of Marketing 68 (Oct. 2004): 142-156.
2. J.N. Sheth and R.S. Sisodia, “Revisiting Marketing’s Lawlike Generalizations,” Journal of the Academy of Marketing Science 27, no.1 (winter 1999): 71-87.
3. J. Hagel and M. Singer, “Net Worth: Shaping Markets When Customers Make the Rules” (Boston: Harvard Business Press, 1999).
4. See A. Payne and P. Frow, “A Strategic Framework for Customer Relationship Management,” Journal of Marketing 69 (2005): 167-176. The estimates of the CRM solutions market are cited from A. Payne, “Handbook of CRM: Achieving Excellence Through Customer Management” (Oxford: Butterworth-Heinemann, 2006). Payne and Frow define CRM in the context of a continuum. The broad, strategic definition of CRM is a “holistic approach to managing customer relationships to create shareholder value,” whereas the narrow definition is about the “implementation of a specific technology solution.” In between the two extremes is the mainstream definition of CRM as “the implementation of an integrated series of customer-oriented technology solutions.”
5. See A.R. Zablah, D.N. Bellenger and W.J. Johnston, “Customer Relationship Management Implementation Gaps,” Journal of Personal Selling & Sales Management 24, no. 4 (fall 2004): 279-295. Zablah et al. provide a meta review of CRM’s very mixed results. In their article they refer to a study by Gartner Group from which we cite our failure rate. Their study is said to be the most authoritative.
6. Information systems scholars are very clear that it is the ability to leverage technology rather than the technology per se that generates competitive advantage; the technology can be bought by anyone, but only a few companies really leverage it effectively. See A. Hughes and M.S.S. Morton, “The Transforming Power of Complementary Assets,” MIT Sloan Management Review 47, no. 4 (summer 2006): 50-58; and J. Peppard, J. Ward and E.M. Daniel, “Managing the Realization of Business Benefits from IT Investments,” MIS Quarterly Executive 6, no. 1 (2007): 1-11. Strategy scholars make similar claims; see M. Zollo and S.G. Winter, “Deliberate Learning and the Evolution of Dynamic Capabilities,” Organization Science 13, no. 3 (June 2002): 339-351; and R. Sanchez and A. Heene, “Reinventing Strategic Management: New Theory and Practice for Competence-Based Competition,” European Management Journal 15, no. 3 (June 1997): 303-317.
7. R. Makadok, “Toward a Synthesis of the Resource-Based and Dynamic-Capability Views of Rent Creation,” Strategic Management Journal 22, no. 5 (2001): 387-402.
8. Zollo and Winter, “Deliberate Learning.”
9. Tacit knowledge is a foundational concept in the resource-based view of the company. Competitive advantage is derived from the combination of company-specific assets (e.g., brands, distribution networks) developed in step with dynamic capabilities to create inimitable resources. The dynamic capabilities result from organizational routines, how-we-do-things-around-here, that distinguish one company from its competitors and are based in employees’ tacit knowledge. Because this knowledge is tacit, competitors cannot acquire it; if they could, the resource would no longer be inimitable. This sets up one of the great challenges for management: How does one manage and leverage that which is tacit in order to develop competitive advantage? A means of addressing this challenge, the importance of which is widely discussed in the literature, is presented by the authors in this paper. See A.W. King, S.W. Fowler and C.P. Zeithaml, “Managing Organizational Competencies for Competitive Advantage: The Middle-Management Advantage,” Academy of Management Executive 15, no. 2 (May 2001): 95-106; D.J. Teece, G. Pisano and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (August 1997): 509-533; and N.K. Kakabadse, A. Kouzmin and A. Kakabadse, “From Tacit Knowledge to Knowledge Management: Leveraging Invisible Assets,” Knowledge and Process Management 8, no. 3 (July-September 2001): 137-154.
10. CSC, pioneers in re-engineering, found that overwhelmingly, IT-process-led re-engineering was led by the IT function. In none of the companies it surveyed did marketing lead a re-engineering program. See CSC Index, “State of Reengineering Report” (Cambridge, Massachusetts: 1994). IT should not lead large change projects alone; see M. Sumner, “Risk Factors in Enterprise-Wide/ERP Projects,” Journal of Information Technology 15, no. 4 (December 2000): 317-327; and T.H. Davenport, “Mission Critical: Realizing the Promise of Enterprise Systems” (Boston: Harvard Business Press, 2000).
11. The strategy literature makes a clear distinction between individuals’ skills and abilities and the concept of the organization’s capabilities; see the references for Teece et al., “Dynamic Capabilities” and Zollo and Winter, “Deliberate Learning.” For a knowledge-based perspective on this issue, see R.M. Grant, “Toward a Knowledge-Based Theory of the Firm,” Strategic Management Journal 17, Special Issue (winter 1996): 109-122.
12. P. Kotler, “A Generic Concept of Marketing,” Journal of Marketing 36, no. 2 (April 1972): 46-54.
13. D. Peppers and M. Rogers, “The One to One Future” (London: Piatkus, 1994).
14. C. Shapiro and H.R. Varian, “Information Rules: A Strategic Guide to the Network Economy” (Boston: Harvard Business Press, 1999).
15. R.S. Achrol and P. Kotler, “Marketing in the Network Economy,” Journal of Marketing, 63 (Special Issue 1999): 146-163.
16. Further explanation of the research behind this analysis can be found in S. Maklan and S. Knox, “Dynamic Capabilities: The Missing Link in CRM Investments,” European Journal of Marketing 43, no. 11/12 (2009): 1392-1410.
17. To “back,” for example, the New York Yankees to win the World Series, one would bet that they will win. To “lay” that bet, one would bet that they do not. Traditional bookmakers laid bets while ordinary bettors backed. Online exchanges allowed private bettors to lay bets for the first time.
18. G. Wood, “Flutter’s Departure Leaves Bitter Taste,” Guardian, Jan. 16, 2002.
19. S. Maklan, S. Knox and L. Ryals, “Using Real Option to Help Build the Business Case for CRM Investment,” Long Range Planning 38, no. 4 (August 2005): 393-410.
i. K.M. Eisenhardt, “Building Theories from Case Study Research,” Academy of Management Review 14, no. 4 (October 1989): 532-550.
ii. The integration of business processes around the needs of individual customers or customer segments as a means of delivering the brand is discussed by M. Christopher, A. Payne and D. Ballantyne, “Relationship Marketing: Strategy and Implementation” (Oxford: Butterworth-Heinemann, 1999); D. Peppers and M. Rogers, “Enterprise One-to-One: Tools for Competing in the Interactive Age” (New York: Currency Doubleday, 1997); and J.N. Sheth, R.S. Sisodia and A. Sharma, “The Antecedents and Consequences of Customer-Centric Marketing,” Journal of the Academy of Marketing Science 28, no.1 (winter 2000): 55-66.