Intern. J.

of Research in Marketing 26 (2009) 284–293

Contents lists available at ScienceDirect

Intern. J. of Research in Marketing

j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / i j r e s m a r

Linking marketing capabilities with profit growth

Neil A. Morgan a,⁎, Rebecca J. Slotegraaf a, Douglas W. Vorhies b
a
Kelly School of Business, Indiana University, Bloomington, IN 47405, United States
b
School of Business, University of Mississippi, United States

a r t i c l e i n f o a b s t r a c t

Article history: Profit growth is one of the primary drivers of a firm's stock price and therefore is a clear priority for
First received in 19 February 2009 managers. Yet little is known about how a firm's marketing capabilities may be linked with its profit growth.
and was under review for 1 month In this study, we use data from a cross-industry sample of 114 firms to investigate how market sensing,
brand management, and customer relationship management (CRM) capabilities determine firms' revenue
Area editor: Aric Rindfleisch
growth and margin growth—the two components of profit growth. Our results reveal that these marketing
Keywords:
capabilities have direct and complementary effects on both revenue and margin growth rates. Critically, we
Marketing strategy find that brand management and CRM capabilities have opposing effects on revenue and margin growth
Branding rates, such that a failure to examine these two underlying components would mask the relationships
CRM between these marketing capabilities and ultimate profit growth rates.
© 2009 Elsevier B.V. All rights reserved.

1. Introduction management, and CRM capabilities with the two primary components
of profit growth—revenue growth and margin growth. Using a data set
Linking marketing activities and resource deployment with comprised of both primary and secondary data, we show that a firm's
financial performance and firm value has become a clear priority CRM and brand management capabilities have significant but
among marketing scholars (Rust, Ambler, Carpenter, Kumar, & directionally different direct effects on its revenue and margin growth
Srivastava, 2004). Firms expend significant resources on building, rates. Examining the interaction effects of these three marketing
maintaining, and leveraging marketing capabilities, and recent capabilities, we also find that market sensing is primarily important as
research has greatly enhanced knowledge concerning the link a complementary capability in determining a firm's growth rate.
between marketing capabilities and firm performance (e.g., Krasnikov Second, we provide new insights into the nature and the
& Jayachandran, 2008; Slotegraaf & Dickson, 2004; Vorhies & Morgan, marketing capability drivers of firm profit growth. Importantly, we
2005). While researchers agree that firm performance is a complex show that the two primary components of profit growth rates—
multi-dimensional phenomenon, growth is clearly a top priority for revenue and margin growth rates—tend to move in opposite
managers (Day, Reibstein, & Shankar, 2009). Profit growth in directions. This suggests that in most circumstances, managers
particular is widely viewed as being of fundamental importance to pursuing profit growth are forced to make trade-off decisions. This
investors and managers alike (e.g., Brealey, Myers, & Allen, 2008; Day has important implications for managers seeking to grow their firms'
& Fahey, 1988), not least because investors value firms on the basis of profits in order to maximize their stock value. It also has critical
their expected future cash flows (Rappaport, 1997; Srivastava, implications for researchers seeking to examine relationships be-
Shervani, & Fahey, 1998). Despite this, profit growth is an infrequently tween marketing resources, capabilities, activities, and profit growth.
used measure of firm performance in marketing, and we have limited In particular, we reveal that directionally different effects on revenue
knowledge concerning the link between marketing capabilities and a and margin growth rates mask the effects of a firm's CRM and brand
firm's profit growth. management capabilities on its rate of profit growth.
In this research, we address this knowledge gap by examining how
specific marketing capabilities can influence a firm's profit growth.
Our study makes two contributions to the advancement of knowledge 2. Theoretical framework
in this important domain. First, building on endogenous growth
theory from economics as well as resource-based (RBV) and dynamic Much of the research seeking to understand the financial impact of
capabilities (DC) theories from strategic management, we develop marketing is theoretically anchored in the RBV. This resource-based
a theoretical framework linking a firm's market sensing, brand theory views heterogeneity in resources among firms as fundamental in
explaining firm performance, with valuable, rare, inimitable, and non-
substitutable resources considered most beneficial (Barney, 1991;
⁎ Corresponding author. Tel.: +1 812 855 1114; fax: +1 812 855 6440. Wernerfelt, 1984). However, while the RBV has been an influential
E-mail address: [email protected] (N.A. Morgan). theoretical framework in contributing to our understanding of firm

0167-8116/$ – see front matter © 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijresmar.2009.06.005
 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293 285

performance (Peteraf, 1993), it has also been criticized for its inability to et al. (1998) also emphasize the importance of developing market
explain how firm resources are developed and deployed to achieve knowledge but distinguish between the creation and leveraging of
competitive advantage (e.g., Lengnick-Hall & Wolff, 1999; Priem & brand- and customer-based assets. As a result, we focus here on three
Butler, 2001). To address such limitations, theorists have achieved a capabilities1. First, market-sensing capability reflects a firm's system-
number of developments that are collectively labeled dynamic atic, thoughtful, and anticipatory ability to “learn about customers,
capabilities (DC) theory. DC theory posits that the most significant competitors, and channel members in order to continuously sense and
and enduring source of competitive advantage, rather than being act on events and trends in present and prospective markets” (Day,
located in the simple possession of idiosyncratic resources, is constitut- 1994: 43). This capability generates superior market knowledge,
ed by the capability of firms to acquire, integrate, and deploy resources which is posited to be critical for any dynamic capability (Eisenhardt &
in ways that match each firm's market environment (Eisenhardt & Martin, 2000; Grant, 1996). Second, CRM capabilities underlie a firm's
Martin, 2000; Morgan, Vorhies, & Mason, 2009; Teece, Pisano, & Shuen, ability to create and manage close and strong customer relationships
1997). (Rust et al., 2004), which have been posited as a key market-based
From this perspective, a firm's capabilities involve complex, resource that should be linked with cash-flow growth (Srivastava
coordinated patterns of skills and knowledge that become embedded et al., 1998). Third, brand management capabilities concern the
as routines over time (Grant, 1996) and are distinguished from other processes and activities that enable a firm to develop, support, and
organizational processes as they are performed better than those of maintain strong brands (Aaker, 1994; Hulland, Wade, & Antia, 2007),
their rivals (Bingham, Eisenhardt, & Furr, 2007; Ethiraj, Kale, which in turn have been identified as another key resource linked
Krishnan, & Singh, 2005). To the extent that such capabilities are with firms' ability to grow cash-flows (Srivastava et al., 1998).
valuable, they may be sources of advantage that are particularly We investigate the extent to which these three marketing
difficult for rivals to compete away, since they are difficult to observe capabilities are directly linked to a firm's profit growth, and also
and embedded within the firm (Day, 1994; Grewal & Slotegraaf, whether there are complementary effects among these capabilities
2007). The literature suggests that marketing capabilities in particular that help to explain profit growth. In examining profit growth, we
may be immobile (Capron & Hulland, 1999), inimitable (e.g., follow the conventional economic and financial approach and focus
Bharadwaj, Varadarajan, & Fahy, 1993), and largely non-substitutable on growth rates. As outlined above, while profit growth is desirable, it
value-creation mechanisms (e.g., Moorman & Rust, 1999). is difficult to achieve because its primary components—revenue
As firms strive to improve their financial position and stock value, growth and margin growth—often move in opposite directions. We
profit growth becomes a key objective (Brealey et al., 2008). To therefore focus our predictions on the direct and complementary
achieve profit growth, firms can increase sales revenue, margins, or linkages between marketing capabilities and rates of growth for the
both. When operating within a munificent environment, demand may two components of profit growth.
often exceed supply, creating the potential for simultaneous growth in
sales revenue and margins (Dickson, 1992; Keats & Hitt, 1988). 2.1. Hypotheses
However, absent strong market-level growth, a firm can grow its sales
revenue and/or margins in only two ways: i) by growing its market 2.1.1. Market-sensing capability
share through some combination of increasing unit sales to current Market-sensing capability concerns a firm's ability to learn about
customers and acquiring new customers and ii) by raising margins customers, competitors, channel members and the broader market
through some combination of raising prices realized for each unit of environment in which it operates (Day, 1994). The literature suggests
output sold and/or lowering costs. However, there are often trade-offs numerous reasons to expect that market-sensing capabilities may be
between sales revenue and margins, such that these two components linked with firms' revenue and margin growth rates. From a revenue
of profit growth rarely increase simultaneously (e.g., Markman & growth perspective, superior market-sensing capabilities allow a firm
Gartner, 2002; Steffens, Davidsson, & Fitzsimmons, 2009). For this to identify underserved segments and those where its rivals' offerings
reason, we focus on the extent to which marketing capabilities may not be fulfilling customer and channel requirements (Slater &
influence revenue and margin growth separately, while accounting Narver, 2000). These underserved and/or unsatisfied segments
for any potential synergies. provide good targets for the firm's efforts to grow revenue by
Our underlying theoretical logic for expecting a link between attracting new customers. The customer intelligence aspects of
marketing capabilities and profit growth is based on endogenous market sensing should also provide insights for managers concerning
growth theory from economics. Specifically, endogenous growth opportunities within the existing customer base to expand the share
theory posits that market- and economy-level growth can be affected of customer requirements that the firm can exploit (Morgan,
by firm and government actions that create and disperse “useful Anderson, & Mittal, 2005).
knowledge” (e.g., Lucas, 1988; Romer, 1986). Marketing scholars have From a margin growth rate perspective, superior market-sensing
recently begun to build on endogenous growth theory to link market- capabilities provide market insights that enable firms to lower their
based assets and the capabilities by which they are created and average costs through more productive resource use by better
deployed with economy-level (Fornell, Rust, & Dekimpe, in press) and matching the firm's resource acquisitions and deployments with
market-level (Bharadwaj, Clark, & Kulviwat, 2005) growth. At the firm customer and prospect opportunities (e.g., Hult, 1998; Morgan et al.,
level, to the extent to which marketing capabilities can be used to 2009). Firms that do so are also better able to accurately forecast the
create and disseminate useful knowledge (Bharadwaj, et al., 2005), value of different resources, which enables them to avoid overpaying
and have the characteristics of value, inimitability, immobility, and for resource acquisitions (Makadok, 2001). Firms with strong market-
non-substitutability (e.g., Vorhies & Morgan, 2005), firms with sensing capabilities are also better able to identify the least price-
stronger marketing capabilities should be better positioned to create sensitive customers and prospects, which enables them to charge
demand growth and appropriate the accompanying growth in higher prices. These capabilities should also provide new insights into
economic rents. how a firm's product and service offerings may provide the greatest
The marketing literature identifies a number of conceptualizations non-price value to customers and channel members (Slater and
of different marketing capabilities. Here we focus on capabilities that Narver, 2000). Finally, superior market sensing allows a firm to learn
are consistent with both Day's (1994) marketing capability model and more and learn faster about customer and competitor reactions to its
Srivastava et al.'s (1998) framework linking market-based assets with
cash-flow growth. Day's (1994) focus is on market sensing and the 1
Since channel bonding capabilities apply only to firms that sell indirectly to end-
firm's ability to link with end-user and channel customers. Srivastava user customers, we do not consider this capability here.
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past revenue and margin growth enhancement efforts, providing strong brands can deliver significant value to the firms that own them
insights that are necessary to allow the firm to increase the rate at (Aaker & Jacobson, 1994). For example, promotions have a greater
which such growth outcomes are achieved (Dickson, 1992). As a influence on long-term sales for high-equity brands than for lower-
result, we expect that: equity brands (Slotegraaf & Pauwels, 2008).
From a revenue growth rate perspective, firms with strong brand
H1. The stronger a firm's market-sensing capabilities, the higher its
management capabilities are able to establish and maintain aware-
(a) revenue growth rate and (b) margin growth rate.
ness among prospective and existing customers and to differentiate
their products and services in ways that lower their customers' search
2.1.2. CRM capability costs and perceived risk (Berthon, Hulbert, & Pitt, 1999; Hulland et al.,
CRM capabilities are built on two key conceptual foundations. First 2007). As a result, firms with strong brand management capabilities
is a recognition that relationships with customers are more than a are likely to enjoy higher revenue growth rates through the attraction
series of discrete transactions, with a relationship-level view being of new customers. In addition, by continuously creating perceived
more likely to create profitable outcomes for suppliers and greater differentiation from rivals in ways that add value for customers, such
need satisfaction for customers (Dwyer, Schurr, & Oh, 1987; Verhoef, firms should also be better placed to protect their existing revenues
2003). Second is an understanding that not all prospective and from customer “churn” (e.g., McAlister, Srinivasan, & Kim, 2007; Mela,
existing customers are equally attractive from the perspective of a Gupta, & Lehmann, 1997). This means that more of such firms' new
firm's ability to profitably satisfy their needs and requirements (e.g., customer revenue contributes directly to revenue growth, as opposed
Mulhern, 1999; Niraj, Gupta, & Narasimhan, 2001). We therefore to offsetting revenue loss from defecting customers.
define CRM capabilities as the firm's ability to identify attractive From a margin growth rate perspective, building and using the
customers and prospects, initiate and maintain relationships with capabilities required to create, maintain, and leverage high levels of
attractive customers, and leverage these relationships into customer- brand awareness and strong, positive, and unique brand associations
level profits (e.g., Boulding, Staelin, Ehret, & Johnston, 2005; Day & in the minds of target customers is expensive (Keller, 2003).
Ven den Bulte, 2002; Reinartz, Kraft, & Hoyer, 2004). Unfortunately, there are a number of growing impediments to
From a revenue growth rate perspective, strong CRM capabilities effective brand management that are continually raising costs for
focus the firm's attention on the profitability of acquiring prospective firms relying on their ability to develop, maintain, and leverage strong
customers and retaining existing customers (Bolton, Lemon, & brands. For example, an ever increasing number of different
Verhoef, 2004; Reinartz, Thomas, & Kumar, 2005). In focusing only marketing communication messages are creating more and more
on attracting “high-potential” prospects, firms with strong CRM “clutter” through which firms have to “cut” to effectively reach
capabilities are likely to attract fewer new customers (e.g., Mulhern, customers with brand awareness and association messages (e.g.,
1999; Ryals, 2005), which thereby weakens their revenue growth Aaker, 2004). In addition, growing media choices and fragmentation
rates. Furthermore, firms with strong CRM capabilities seek to satisfy mean that the media costs associated with reaching the same number
only those existing customers who are similarly profitable or likely to of customers are rising every year (e.g., Keller, 2003). As a result, firms
become so, so that they are continually “weeding out” other less that rely on brand management capabilities to attract and keep
attractive customers (Reinartz et al., 2005). Increases in revenue customers are likely to face year-over-year brand building and
growth rates caused by raising the share of attractive customers' maintenance cost increases. As a result of higher perceptions of
requirements may not offset the decreases in revenue growth rates quality (e.g., Aaker & Jacobson, 1994; Erdem, 1998), strong brands
that come from divesting less attractive customers (e.g., Verhoef, should encounter lower price sensitivity among customers (e.g.,
2003), thus reducing overall revenue growth rates. Allenby & Rossi, 1991). However, unless the average unit prices
From a margin growth rate perspective, however, CRM capabilities realized can be continuously raised to cover these cost increases,
should be more valuable. Firms with strong CRM capabilities should strong brand management capabilities are likely to be associated with
focus their resources on those customers who are the most profitable lower rates of margin growth. We therefore hypothesize that:
and those who represent a high potential for future profits (Bolton
H3. The stronger a firm's brand management capabilities, the (a)
et al., 2004). Such firms continuously increase their knowledge of and
higher its revenue growth rate, and (b) lower its margin growth rate.
experience with these customers, lowering the cost of serving them
over time (Reinartz & Kumar 2000). This may be reinforced by higher
customer retention among firms with strong CRM capabilities, leading 2.1.4. Capability complementarities
them to have more experienced users of the firm's products and Beyond the independent effects of these three capabilities, we are
services, which further lowers the cost of servicing their customers also interested in examining whether capability complementarities
over time (e.g., Ryals 2005). As a result, such firms should be able to exist that may help to explain rates of revenue and margin growth.
increase their margins at a higher rate by continually lowering the Capabilities are complementary when the returns to one capability
average cost of serving customers. In addition, by continuously are affected by the presence of another (e.g., Milgrom & Roberts, 1990;
focusing on customers for whom price is not the only purchase driver, Moorman & Slotegraaf, 1999). Such complementarities can be
firms with strong CRM capabilities should also be better able to valuable because the interaction between the two capabilities can
increase realized prices for their products and services (e.g., Cao & increase the firm's effectiveness and/or efficiency, as well as limit
Gruca, 2005). This leads us to hypothesize that: rivals' ability to successfully imitate the source of this advantage.
However, it is also possible that the presence of one capability may
H2. The stronger a firm's CRM capability, the (a) lower its revenue
attenuate the effectiveness or efficiency of another (King, Slotegraaf, &
growth rate and (b) higher its margin growth rate.
Kesner, 2008). In light of the potential trade-offs involved in pursuing
revenue growth and margin growth, we examine the possibility that
2.1.3. Brand management capability the three marketing capabilities on which we focus may produce
Brand management capabilities reflect the ability not only to either positive or negative interaction effects on growth rates.
create and maintain high levels of brand equity but also to deploy this In terms of a firm's market-sensing and CRM capabilities, we
resource in ways that are aligned with the market environment. expect a growth-enhancing complementary relationship. CRM capa-
Brands with high equity have achieved high levels of brand awareness bilities may enhance market-sensing capabilities by providing
and brand associations that positively affect customer attitudes and direction for external market information search efforts (Day, 1994).
purchase behavior (e.g., Keller, 1993; Netemeyer et al., 2004). Such Moreover, CRM processes are likely to be more effective when
 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293 287

combined with an in-depth knowledge of existing and prospective capabilities to be more proactive in its brand strategy than its rivals
customers (e.g., Srinivasan & Moorman, 2005), channel members and to continuously enhance customer perceptions of the relevance of
(e.g., Payne & Frow, 2005), and competitors (e.g., Boulding et al., its brands (Mizik & Jacobson, 2008).
2005). There are two particular reasons to expect that strong market- In terms of margin growth rate, we expect market-sensing
sensing capabilities will limit the hypothesized negative impact of capabilities to attenuate the negative effects of brand management
CRM capabilities on a firm's revenue growth rate. First, firms with capabilities in two ways. First, superior market sensing fosters the
stronger market-sensing capabilities are likely to have a more ability to observe events and trends ahead of competitors, as well as to
externally focused orientation (e.g., Day, 1994). This should help to more accurately anticipate competitive reactions (Day, 1994). It also
ameliorate the commonly observed internal focus of CRM implemen- facilitates the identification of customers' reference prices and fosters
tation and its negative impact on the revenue outcomes of CRM an understanding of channel members' strategies, costs and revenue
investments (Mithas, Krishnan, & Fornell, 2005; Rigby, Reichheld, & drivers. Such knowledge allows firms to continuously leverage their
Schefter, 2002). Firms with strong market-sensing and CRM capabil- brand management capabilities by enabling them to raise their
ities should also be better able to locate growing market segments brands' realized unit prices wherever and whenever appropriate.
and, by understanding latent needs, better serve customers in these Secondly, the superior market knowledge associated with strong
segments than do their rivals. Secondly, strong market-sensing market-sensing capabilities allows for better targeting of the
capabilities can enable CRM managers to more accurately forecast resources deployed in building a firm's brands. For example, greater
changes in customer needs and requirements (e.g., Day and Van den knowledge of changing media usage among customers and prospects
Bulte, 2002). This should enable a firm to use its CRM capabilities to should enable better targeting of a firm's media spending as the firm
more quickly and appropriately adjust the ways in which it serves builds and maintains brand awareness and relevant brand associa-
attractive customers and thereby enhance the firm's ability to grow its tions. This should help to alleviate the negative impact that firms'
share of customer requirements. efforts to build, maintain, and leverage their strong brands has on firm
Meanwhile, from a margin growth rate perspective, we expect costs. Therefore, we expect that:
strong market-sensing capabilities to facilitate CRM capabilities by
H5a. Stronger market-sensing capabilities will elevate the positive
continuously enabling firms to better distinguish high profit potential
effect of brand management capabilities on a firm's revenue growth
prospects from others, leading to increasingly higher margin new
rate.
customers being attracted to the firm (Cao & Gruca, 2005). They may
also facilitate CRM by providing superior knowledge about competi- H5b. Stronger market-sensing capabilities will attenuate the negative
tors, especially with respect to their value offerings and prices, which effect of brand management capabilities on a firm's margin growth
should enable firms with strong CRM capabilities to continuously rate.
identify the highest price points at which attractive existing Finally, CRM and brand management capabilities may also exhibit
customers can be retained (e.g., Boulding et al., 2005). Meanwhile, complementary effects that affect firms' growth rates, as brands and
CRM capabilities may also facilitate the efficient use of market-sensing customer relationships have both been identified as key market-based
capabilities by effectively directing external search efforts. Market- assets by which firms generate cash-flows (Srivastava et al., 1998).
sensing capabilities also provide competitor and channel insights that From a revenue growth rate perspective, strong CRM capabilities
enable managers to more accurately gauge customers' value-offering should enable firms to continually better distinguish attractive
referents and therefore make better decisions concerning how to customers (e.g., Cao & Gruca, 2005). These insights may be leveraged
allocate resources in serving attractive prospects and existing via the firm's brand management capability into more successful
customers. This should allow firms with strong market-sensing and efforts to increase the firm's share of requirements among the
CRM capabilities to continuously optimize their CRM resource attractive customers identified. Conversely, firms with superior brand
deployments in serving attractive customers. This leads us to expect management capabilities create and leverage strong brands, and it is
that: likely that synergies are generated when these capabilities and the
brand assets they create are used to enhance CRM programs designed
H4a. Stronger market-sensing capabilities will attenuate the negative
to attract new customers, retain existing customers, or recapture prior
effect of CRM capabilities on a firm's revenue growth rate.
customers (Ambler et al., 2002).
From a margin growth rate perspective, the efficiencies surround-
H4b. Stronger market-sensing capabilities will elevate the positive
ing better identification and selection of the most attractive customers
effect of CRM capabilities on a firm's margin growth rate.
and prospects in firms with superior CRM capabilities may spill over
We also expect a firm's market sensing and brand management to other internal processes, enabling more productive resource
capabilities to exhibit valuable complementarities that may affect firm deployments (e.g., Ryals, 2005). In particular, greater productivity-
growth. For example, a firm's brand management capabilities may enhancing insights concerning the most appropriate brand-related
enhance its market sensing by directing search efforts towards resource deployments in these firms should translate into more
emerging market trends that are most relevant to the firm's desired efficient use of marketing resources and thereby reduce the
brand positioning and existing brand associations. From a revenue hypothesized negative effect of brand management capabilities on
growth rate perspective, a firm with strong market-sensing capabil- the ability to lower costs. For example, firms with strong CRM
ities is continuously better able to identify prospective new customers capabilities should have a better developed profile of those prospec-
and generate insights concerning their latent needs so that the firm tive customers that the firm should seek to capture. This should allow
can better position its brands relative to those of its rivals in order to brand managers to more finely target their brand campaigns and
attract these new customers (Aaker, 2004; Hulland et al., 2007). In lower the costs associated with using the firm's brand management
addition, having more in-depth knowledge of competitors and greater capabilities to attract the more profitable new customers. We
understanding of rival brands also enables a firm with strong brand therefore hypothesize that:
management capabilities to more effectively position its brands to
win a greater share of existing customer requirements (e.g., Keller,
H6a. Stronger CRM capabilities will elevate the positive effect of
2003). Greater knowledge of marketplace events should also enable
brand management capabilities on a firm's revenue growth rate.
managers to more accurately forecast changes in customer needs and
requirements, rival offerings, and channel developments (Slater & H6b. Stronger CRM capabilities will attenuate the negative effect of
Narver, 1998). This allows a firm with strong brand management brand management capabilities on a firm's margin growth rate.
288 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293

2.1.5. Overall profit growth effects 3.2. Measures

Firms are often forced to accept a trade-off between revenue
growth and margin growth, so that pursuing growth in one may We first conducted a pre-test to assess the psychometric
hamper the firm's ability to simultaneously grow the other. Any properties of the marketing capability measures using data collected
examination of profit growth that does not account for this trade-off from a sample of marketing managers participating in executive
may therefore mask important effects. Considering the different education courses at three major U.S. universities. Measure purifica-
directions of our hypothesized effects of marketing capabilities on the tion was conducted via confirmatory factor analysis (CFA), and
two components of profit growth, their direct effects on the firm's modifications were made as necessary. A scale to measure social
overall profit growth rate may not be significant. In essence, we desirability bias was also included on the pre-test survey. No
anticipate that the hypothesized opposing effects on revenue growth significant correlations were found between the social desirability
and margin growth will largely cancel one another out, so that a test of construct (Crowne & Marlowe, 1960) and the marketing capability
the link between marketing capabilities and overall profit growth will constructs in the pre-test study, thus indicating that socially desirable
likely reveal no significant effects. This may not be the case if some of responses are unlikely to play a role in respondent assessments of the
the marketing capability effects about which we hypothesize are three focal capabilities.
significantly larger than others, but we have no a priori reason to Each of the three marketing capabilities was measured with multi-
expect such differences. This expectation with regard to the link item measures based on primary survey data. The measures were
between overall profit growth rate and the three marketing constructed so that the individual items refer to various necessary and
capabilities is in effect a null hypothesis. As a result, while we related areas of the unobserved construct (Cohen, Cohen, Teresi,
examine these relationships in our analyses, we do not offer any Marchi, & Velez, 1990). The specific measures for each capability used
formal hypotheses. scale items adapted from Vorhies and Morgan (2005) and were
designed to tap how well a business undertakes market-sensing,
customer relationship management, and brand management activi-
3. Methodology ties in comparison to the firm's closest competitors. Each of these
measures is provided in the Appendix, with measurement results
3.1. Data description discussed in Section 4.1.
To measure a firm's profit growth rate, revenue growth rate, and
To investigate our hypotheses, we collected primary survey data margin growth rate, we first collected data from COMPUSTAT
on the three marketing capabilities from top marketing executives, as regarding the firm's annual gross profit (DATA12–DATA41), annual
well as objective financial data from each firm's annual reports. We total sales (DATA12), and annual gross margin ([DATA12–DATA41]/
focused our survey administration on publicly traded, single-business DATA12). We obtained financial performance data for the year of our
dominant U.S. companies in seven industries: computer hardware, primary data collection and the following year for each respondent
computer software, electronic equipment, specialty retail, pharma- firm (e.g., Boulding, Lee, & Staelin, 1994) to calculate growth.
ceuticals, consumer packaged goods, and business services. This Specifically, we calculated the growth rate (Gji) for profit, revenue,
approach allowed us to combine primary data estimates of each firm's and margin using Eq. (1).
marketing capabilities with their objective growth performance. To
develop our sampling frame, we searched available records for Gji = ðPji;ðt + 1Þ −Pji;ðtÞ Þ = Pji;ðtÞ ð1Þ
contact information for each publicly traded, single-business domi-
nant firm in each of these industries within the U.S. We then where Pji refers to performance outcome j (profit, revenue, and
contacted each firm to determine the identity of the top marketing margin) of firm i in year t.
executive and pre-notified each executive concerning the objectives We controlled for potential firm-specific and industry-specific
and nature of the research. From this protocol, we were able to extraneous effects in the following ways. First, we controlled for firm
acquire contact information for 507 executives at the targeted firms. size using a log transformation of the number of employees in the firm
Following the collection of the primary data, we collected secondary (COMPSTAT DATA29) (e.g., Moorman & Slotegraaf, 1999). Second, we
data regarding firm size and financial performance from COMPUSTAT. controlled for the firm's base-year performance. Specifically, when
We used this multi-data source approach for two key reasons. estimating the revenue, margin, and profit growth models, we
First, we wanted to limit common method bias by collecting data on controlled for the revenue, margin, and profit level of the firm,
independent marketing capability variables and dependent growth respectively, in base year (t). Finally, since environmental munifi-
variables from different sources. Second, no obvious proxies of our cence may impact the potential for firm-level profit growth, we also
three focal marketing capabilities were available from secondary controlled for industry growth rate. To measure industry-level
sources. In addition, standard measures of firm capabilities using growth, we followed Keats and Hitt (1988) and first calculated
archival data adopt input:output conceptualizations (e.g., Dutta, industry sales performance for five years using Eq. (2):
Narasimhan, & Rajiv, 1999) that only capture the efficiency aspect
yt = λ0 + λ1 t + ut ; ð2Þ
of firm capabilities. This would likely skew results, in that a focus on
only the efficiency aspect of capabilities may affect revenue growth where yt is a linear transformation (Loge[Industry sales]) for year t, t
and margin growth differently. refers to the year, and u is the residual term. We then used the
We received a total of 121 surveys from primary contact regression slope coefficient from Eq. (2) for each of the five years to
informants, of which 7 were deleted due to excessive omitted data, calculate the industry growth rate by estimating Eq. (3).
yielding 114 usable surveys (a response rate of 23.5%). An analysis of
non-response bias was performed using the extrapolation approach IGt = lnðλ1 Þ ð3Þ
recommended by Armstrong & Overton (1977). Tests revealed no
significant differences between early and late respondents on any of where IGt refers to industry growth and λ1 is the regression coefficient
the survey constructs, suggesting that non-response bias is unlikely to from Eq. (2). Using this approach, industry growth reflects a
be present in the sample. We also conducted t-tests on our non- smoothed measure of the average growth rate over the previous
respondent versus respondent firms using secondary data on firm size five years (Keats & Hitt, 1988).
and revenue. Again, no significant differences were found, thus Descriptive statistics and correlations among key measures are
confirming a lack of non-response bias in the sample. presented in Table 1.
 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293 289

Table 1
Descriptive statistics.

Variable Mean Std. dev (1) (2) (3) (4) (5) (6) (7) (8)

(1) Profit growth rate 0.11 0.62 –

(2) Revenue growth rate 0.23 0.60 0.48 –
(3) Margin growth rate 0.01 0.26 0.37 − 0.33 –
(4) CRM capabilities 5.00 1.03 − 0.05 − 0.06 − 0.05 0.60
(5) Brand management capabilities 4.51 1.17 − 0.14 0.14 − 0.29 0.51 0.58
(6) Market-sensing capabilities 4.77 0.83 0.06 0.16 0.00 0.47 0.46 0.51
(7) Firm size 1.54 2.72 − 0.23 − 0.32 0.05 0.07 0.17 − 0.11 –
(8) Industry growth rate 1.03 0.07 − 0.15 0.13 − 0.22 0.15 0.17 0.03 − 0.16 –

Note: Descriptive statistics represent unstandardized variables, with correlations exceeding 0.20 significant at p b 0.05. The average variance extracted (AVE) for the three latent
constructs are reported along the diagonal.

4. Analysis and results hypothesized marketing capabilities as specified in the set of

Eqs. (4a)–(4c):
4.1. Measurement
3 3
RGi = α0 + ∑ Αki MCi + ∑ Αki ðMCi × MCi Þ + α7i Rit + Αgi Xgi + εi
An analysis of the psychometric properties of the three marketing k=1 k=1
capability constructs was first performed using reliability analysis and ð4aÞ
confirmatory factor analysis (CFA). All measurement items were
modeled to load on their corresponding latent variables, and all latent 3 3
variables were allowed to correlate. This analysis resulted in a final MGi = β0 + ∑ Βki MCi + ∑ Βki ðMCi × MCi Þ + β7i Mit + Βgi Xgi + εi
k=1 k=1
CFA with five items each representing market-sensing capabilities,
ð4bÞ
CRM capabilities, and brand management capabilities (χ2 = 94.33, 62
d.f., p = 0.005; CFI = 0.954; NNFI = 0.942; RMSEA = 0.068). In all
3 3
cases, the items loaded strongly (loadings range from 0.54 to 0.93) on PGi = γ0 + ∑ Γki MCi + ∑ Γki ðMCi × MCi Þ + γ7i Pit + Γgi Xgi + εi
the constructs they were intended to measure, with little evidence of k=1 k=1
cross loadings. ð4cÞ
To assess convergent validity and reliability, we calculated the
composite reliability (CR) and average variance extracted (AVE) for where MCi represents firm i's marketing capability (CRM, brand
each measure. As shown in the Appendix, the results indicate that the management, and market sensing); Α(k), Β(k), and Γ(k) are the
CR for all three marketing capability measures exceeds the 0.7 coefficient matrices; Rit is revenue of firm i in base year t; Mit is
benchmark and that the AVE exceeds the 0.50 benchmark (Fornell & margin of firm i in base year t; Pit is the profit of firm i in base year t;
Larcker, 1981). Discriminant validity was tested by setting the inter- and Xg is the matrix of remaining firm- and industry-specific control
factor correlation equal to one and comparing this result with that of variables.
the unconstrained measurement model. A further check of discrim-
inant validity was performed by comparing the AVE to the squared 4.3. Results
inter-factor correlations. In all cases, discriminant validity was
supported. The coefficient alpha, CR, and AVE for each construct are We entered the variables into the models by first including only
presented in the Appendix. the control variables (Model 1), then adding the main effects of the
three marketing capabilities (Model 2), and finally adding the
complementary effects across the three capabilities (Model 3). The
4.2. Model estimation results indicate that Model 3 explains the highest degree of variance
across the three models, and we interpret the results based on this
To test our predictions, we used seemingly unrelated regression Model.
(SUR) for a number of reasons. First, SUR estimation takes into First, as expected, we find no evidence to suggest that market-
account that the models used to estimate endogenous variables are sensing, CRM, and brand management capabilities have a significant
not based on separate samples and allows for the possibility that the effect on overall profit growth rates (all three p values N .10) for the
errors across equations are correlated (see Zellner, 1962). This is firms in our sample (see Table 2). We also find that the interaction
helpful given the significant negative correlation between revenue effects capturing complementarities between the three marketing
growth and margin growth rates (r = −0.33) and the significant capability pairings have no significant effect on overall profit growth
positive correlations between each of these variables and overall rates (all three p values N .10). As seen in Table 2, only firm size (γ =
profit growth rate (see Table 1) in our data. Secondly, given that SUR −0.37, p b .01) and firm profit (γ = 0.19, p b .10) influence profit growth
accounts for the correlation between the errors, it produces more rate in our data, and the overall variance explained is modest (R2 of .13).
efficient estimates than does an ordinary least squares approach While still exhibiting relatively modest R2 values of .24 and .22, our
(Pindyck & Rubinfeld, 1998). Third, SUR handles the interactions Model 3 regressions containing the marketing capability main and
required to test our complementary capability predictions better than interaction effects clearly explain greater variance in the revenue and
does an alternative structural equation modeling (SEM) approach. margin growth rates of the firms in our sample. When examining the
Moreover, our sample size did not provide sufficient power to test a direct effects of the three marketing capabilities and their complemen-
full-information SEM using the standard 10 observations to 1 tary interaction effects on revenue and margin growth rates, interesting
indicator guideline (Bentler & Chou, 1987). results emerge that are largely in line with our hypotheses. Specifically,
We test our hypotheses by estimating a 3-equation SUR model. we find that market-sensing capabilities have a significant, positive
Specifically, we simultaneously regress firm i's rate of revenue effect on revenue growth rate (0.21, p b .10) yet fail to affect margin
growth (RGi), margin growth (MGi), and profit growth (PGi) on the growth rate (0.04, p N .10), offering support for H1a but not H1b. In
290 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293

Table 2
SUR results: the effect of marketing capabilities on firm growth rates.

Revenue growth rate Margin growth rate Profit growth rate

Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 Model 1 Model 2 Model 3

Capabilities
Market sensing (MS) 0.11 0.21† 0.15 0.04 0.10 0.06
CRM − 0.26* − 0.34** 0.12 0.24* − 0.01 0.04
Brand management (BM) 0.23† 0.27* − 0.41** − 0.47** − 0.13 − 0.16

Complementary effects
MS × CRM − 0.11 0.07 0.12
MS × BM 0.26* − 0.25* − 0.11
CRM × BM − 0.15 0.23† 0.08

Control variables
Firm size − 0.35** − 0.40** − 0.33* 0.03 0.10 0.10 − 0.37** − 0.35** − 0.37**
Firm sales t0 0.07 0.13 0.03
Firm margin t0 − 0.14 − 0.10 − 0.16†
Firm profit t0 0.17 0.19 0.19†
Industry growth 0.09 0.09 0.14 − 0.25* − 0.18† − 0.27* − 0.17† − 0.14 − 0.16

Model fits
Individual regression R2 .11 .19 .24 .09 .19 .22 .10 .11 .13
Model 1 system R2 = 0.09
Model 2 system R2 = 0.15
Model 3 system R2 = 0.21

Note: standardized estimates.

**p b .01; *p b .05; and †p b .10.

terms of CRM capabilities, our results reveal a significant, negative effect growth and margin growth rates reveal opposing effects that likely
on revenue growth rate (−0.34, p b .01) and a positive effect on margin mask the effects of the three marketing capabilities on a firm's overall
growth rate (0.24, p b .05), offering support for both H2a and H2b. rate of profit growth.
Conversely, we find that brand management capabilities have a Finally, since our results indicate that the three marketing
significant, positive effect on revenue growth rate (0.27, p b .01) and a capabilities have directionally different effects on the revenue growth
negative effect on margin growth rate (−0.47, p b .01), offering support and margin growth components of profit growth, we further explored
for H3a and H3b. These results are largely consistent with those when no the value of these marketing capabilities to a firm's overall profit
complementary interaction effects are included (see Table 2). Overall, growth rate. Specifically, we re-estimated the SUR equations, allowing
these results support the expected trade-offs between the revenue and the revenue growth and margin growth rate components to factor into
margin growth rate components of profit growth rate. the overall profit growth rate, to allow us to calculate the direct and
In terms of the complementary marketing capability effects we indirect effects of the three marketing capabilities and their bivariate
hypothesized, our results indicate that market-sensing and CRM interactions, about which we hypothesize. This analysis revealed that
capabilities do not generate a significant complementary effect on even though the marketing capabilities we examine have directionally
either revenue or margin growth rates. While the signs for these two differing effects on revenue growth and margin growth rates, their
effects are in the predicted direction, they are not significant and total effect on firms' profit growth rates is still positive.
therefore do not support either H4a or H4b. However, we do find a
significant complementary effect between market-sensing and brand 5. Discussion and implications
management capabilities. Specifically, market-sensing capabilities
appear to elevate the positive effect of brand management capabilities Overall, our results provide evidence that marketing capabilities
on revenue growth rate (0.26, p b .05) and attenuate the negative effect are connected with firm growth rates. Linking marketing actions and
of brand management capabilities on margin growth rate (−0.25, capabilities to financial performance has become an important
p b .05), offering support for both H5a and 5b. Furthermore, while we do priority for marketing managers and scholars. Our investigation of
not find evidence of a significant complementary effect between CRM the link between marketing capabilities and profit growth rate
and brand management capabilities on revenue growth rate (−0.15, illustrates that there is indeed a significant relationship, yet we
p N .10), we do find that these capabilities generate a significant uncover very different effects depending on the type of capability.
complementary effect on margin growth rate (0.23, p b .10), supporting Thus, managers need to be aware, when focusing on revenue growth
H6b but not H6a. or margin growth, that different marketing capabilities may have very
Two noteworthy conclusions may be drawn from the overall different effects. Consequently, our research offers important implica-
pattern of results shown in Table 2. First, while the three marketing tions in several areas.
capabilities and their complementarities do not directly influence First, our results support previously untested endogenous growth
profit growth rates, they do influence its underlying revenue and theory-based propositions that firms' marketing capabilities should
margin growth rate components.2 Second, the results for revenue create useful knowledge and thereby influence demand growth. It
also provides support for DC theory arguments that firms with
2
We also estimated a two-equation SUR with only revenue growth and margin superior and complementary capabilities should be better posi-
growth, and we found similar results for H1–H6. In addition, to further investigate the tioned to garner the economic rents associated with demand growth.
potential masking effect for overall profit growth, we also estimated an OLS regression Tying a firm's dynamic marketing capabilities with the components
model that regressed each of the marketing capabilities, their interactions, and the
specified firm-specific and industry growth covariates of PGi. Results from this OLS
of profit growth offers new insight into how these two theories may
regression also indicate no support for any significant main (or interaction) effects of be connected. Importantly, it suggests that endogenous growth
marketing capabilities on profit growth. theory can be usefully extended by RBV and DC theory to help us
 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293 291

understand firm-level growth, which is an important area for further growth rates. Nonetheless, RBV theory suggests that executing
research. strategies that successfully manage such complex trade-offs may
Second, our research provides insight into the manner in which offer a source of competitive advantage that is particularly difficult to
complementary marketing capabilities can drive a firms' growth imitate (e.g., Reed & Defillipi, 1990). However, a competing IO theory
performance. Specifically, our results suggest that while CRM and viewpoint suggests that when faced with two performance objectives
brand management capabilities can have important direct effects on that may have inherent trade-offs with one another, managers should
growth rates in both revenues and margins, market-sensing capabil- seek to maximize one objective, i.e. either revenue growth or profit
ities have a weaker direct effect on revenue growth rate and no direct growth, or risk getting “stuck in the middle” (e.g., Rust, Moorman, &
effect on margin growth rate. However, market-sensing capabilities Dickson, 2002). Research addressing this question would clearly have
do offer synergistic effects with brand management capabilities in important implications for both theory and practice.
influencing both revenue and margin growth rates. In line with recent Finally, we uncovered significant negative effects of CRM
research, our results are consistent with the notion that the superior capability on revenue growth rates and of brand management
market knowledge that may result from strong market-sensing capabilities on margin growth rates. An important question for
capabilities is primarily valuable in determining firm performance future research is whether there are specific ways in which these
indirectly as an input to firms' other value selection, creation, and negative effects can be ameliorated without damaging the significant
delivery processes (e.g., Hult, Ketchen, & Slater, 2005; Morgan, Zou, positive effects of each capability. Much has been written about
Vorhies, & Katsikeas, 2003). inwardly focused execution as a rationale for the common failure of
Finally, the potential masking effect that occurs for overall profit CRM investments to create expected profit growth outcomes (e.g.,
growth rate has important implications for those seeking to link Rigby et al., 2002). Nevertheless, we fail to find significant effects of
marketing resources and capabilities with firm growth. Our results market-sensing capabilities in lessening CRM's negative effects on
suggest that both managers and researchers need to be much more revenue growth. What other types of resources, capabilities, or
aware of the trade-offs that may be implicit in single aggregate execution choices lessen these negative effects without simulta-
measures of performance. For managers, our results suggest that the neously weakening the observed positive effect of CRM on margin
precise route by which they seek to achieve profit growth must be growth? Similar but less well documented is the expense many firms
made explicit and should be well understood, as it appears to have bemoan as being associated with building, maintaining, and using
very important implications for the question of which marketing brand management capabilities. While market sensing appears to
capabilities the firm should build, maintain, and use. For researchers, play a useful complementary role in mitigating brand management
our results clearly highlight the need for very careful consideration in capability's negative effect on margin growth, what other comple-
the selection of dependent variables when studying firm growth. Our mentary resources and capabilities may also help slow cost increases
study also suggests that using multiple related dependent variables and raise realized price increases without damaging the positive top-
may provide very different insights than the more common use of a line revenue growth benefits of strong brand management capabil-
single dependent variable, particularly when there is reason to believe ities? These are clearly questions of fundamental importance for
that there may be trade-offs among related dependent variables. both researchers and managers.
While researchers often implicitly assume that different dimensions
of firm performance generally move in the same direction, our study 7. Conclusions
shows that this may not be the case when it comes to different aspects
of firm growth. This study is the first to examine the linkage between marketing
capabilities and firms' revenue growth and margin growth performance.
6. Limitations and future research Our results clearly indicate that marketing capabilities can explain
significant variance in these two components of firms' profit growth
As with all research of this type, our study contains a number of performance. Importantly, however, we find that revenue growth and
limitations that offer avenues for further research. First, we were only margin growth rates are significantly negatively correlated. Our results
able to test our hypotheses with one-year lagged financial perfor- further suggest that CRM and brand management capabilities have
mance data, and we were therefore limited in our ability to directionally opposing effects on revenue and margin growth rates, such
empirically assess the sustainability of the marketing capability that their direct effects on the rate of profit growth are masked. We also
effects we observe on growth performance. While we found find that firms' market-sensing capabilities are primarily valuable in
important linkages between marketing capabilities and the two determining financial growth via their complementary effect on firms'
components of profit growth, a natural and interesting extension of CRM and brand management capabilities.
this study would be to deploy longitudinal research designs to
empirically confirm causality and assess growth performance out- Acknowledgments
comes over time. Second, our goal was to establish the empirical link
between marketing capabilities and profit growth. However, our data The authors all contributed equally to this work. We wish to thank
do not allow us to examine the underlying processes that drive the the Marketing Science Institute for financial support of this project
direct and complementary effects on profit growth rates. Research and the Editor and AE for their constructive guidance.
designed to uncover these underlying processes would provide a
valuable complement to our study. Appendix A. Primary marketing capability measures
In addition, the significant trade-offs that we find between
revenue growth and margin growth rates offer an important avenue
Construct label and items
for future research. Research that explores whether and how these
trade-offs may be managed to allow firms to simultaneously increase Market-sensing capabilities
(7-pt. scale, relative to competitor anchors) α = 0.87, CR = 0.85, AVE = 0.51
both components of profit growth would be particularly valuable.
Learning about customer needs and requirements.
Clearly, the trade-off may not exist when demand exceeds supply, but Discovering competitors' strategies and tactics.
a critical question is whether specific actions and investments may Gaining insights about the channel.
mitigate this trade-off for individual firms. There is unlikely to be an Identifying and understanding market trends.
obvious answer to this question; otherwise, we would not have seen Learning about the broad market environment.

the significant negative correlation between revenue and margin (continued on next page)
292 N.A. Morgan et al. / Intern. J. of Research in Marketing 26 (2009) 284–293

Appendix A (continued )
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