The CMO Survey^® investigated which metrics companies are using to measure the impact of social media investments. In August 2010 and then again in February 2013, top marketers were asked to share which metrics they use to evaluate social media. Looking across the results, we can see which metrics companies most often use. The survey did not, however, ask respondents to rank or rate each metric in terms of importance.

Table: Use of Social Media Metrics 2010-2013

The results offer several interesting insights. The emphasis on pure financial metrics is waning. Sales levels, revenue per customer, profits per customer, and customer retention costs show the steepest drop off in usage with all decreasing by more than 45%. This shift is important because it demonstrates the realization that payoffs from social media are not likely to have a first-order impact on company sales and profits.

Instead, the impact of social media is likely to have first-order effects in non-purchase behaviors, such as people sharing opinions about companies and brands. This sharing, in turn, creates exposure, builds knowledge, generates attitudes, and ultimately prompts purchase. Reflecting awareness of this fact, companies are increasingly using voice metrics—such as referral and buzz indicators—to measure the impact of social media. The number of companies using “net promoter score” increased 30% while the number of companies using the number of followers and friends increased 27%. Buzz indicators increased less dramatically but still grew by 3%.

These voice effects are important to companies in several ways. First, consumers get exposed to and build knowledge about brands and companies without searching on their own. This may be from others who have had company or brand experience and share in forums or blogs as well as those who are just transmitters of “hearsay” chatter, but have no direct experience. Either way, this type of voice can easily get upgraded to the level of “information” that research has shown consumers believe is valuable. Second, companies realize that not all voices are created equal. Although opinion leaders and mavens have been measured for decades, the ability to track who is connected to whom and the movement of information between consumers makes voice metrics even more powerful. The emerging power of “Klout” is a testament to this. Third, companies are beginning to demonstrate that these voice metrics are leading indicators of company growth. This has already been demonstrated for net promoter score. Once that connection is solidified across other voice metrics, the use of these metrics will really take off.

The increased use of text analysis is consistent with the focus on online word-of-mouth that we see in the referral and buzz metrics. While only 8.5% of companies are using such metrics, there was tremendous growth with a 28.8% increase in usage over the last 2.5 years. While tools are still emerging to make the most of text, this trend indicates that companies not only want to know if customers “like” their product or service or if customers are willing to “refer” it to others, but also what customers are actually saying in their own words. This unfettered look at what customers are saying about products or brands can be exceptionally valuable for companies that want to catch early marketplace signals they want to ride, amplify, comment on, or squelch.

Of course, “voice” is always better than “exit.” However, whether voice equates to company learning and company growth hinges on whether companies can capture that voice, effectively filter it, create actionable insights, and drive those insights into strategies.

Despite this big spend, there are reasons to worry that Big Data is not delivering its full strategic wallop. When asked to report the percentage of projects in which their companies use marketing analytics that are available and/or requested, CMOs report a dismal 30% usage rate. This number has decreased from 37% a year ago. So while companies are spending more on Big Data, less of it is being used.

Where does this “utilization gap” come from? I see ten sources:

1. Producers of marketing analytics produce data but not insights. Users need insights.
2. Marketing analytics arrive outside the decision making window.
3. Potential users of marketing analytics may not have a strategic planning process or marketing decision making process that builds in a step to use available analytics.
4. Marketing analytics systems are not sufficiently customized to the company’s marketing decisions.
5. Producers and users of marketing analytics do not have a strong relationship that allows the analyst to understand or anticipate users’ needs.
6. Users do not have sufficient training to understand marketing analytics. A crash course in regression and other simple analytic tools may be necessary.
7. Marketing analytics is often viewed as a silver bullet and companies fail to collect deep, non-quantitative, insights about customers that provide the bigger picture into which analytics needs to be placed.
8. Companies need to figure out how to use marketing analytics to create new growth for their companies, not just penetrate existing markets. Many companies have not figured out how to use analytics to enter new markets or to compete in wholly new ways.
9. Accuracy is essential and yet there are areas in which marketing analytics fails to inspire confidence. Mining text is a good example of this gap. Investing in tools to understand what customers are saying about your company on the web and the valence of these statements is important. My friends in analytics tell me that these tools are not fully developed.
10. Top managers need to model the use of marketing analytics. Asking for the data, asking questions about the data, pushing for insights, and taking actions in response to those insights shows the rest of the company what role marketing analytics plays in decision making.

Going after these sources of big data’s utilization gap is a good first step for companies. Maybe then we’ll see a new hashtag– #bigdatause– that heralds the impact of big data, not just its size.

In the February 2013 CMO Survey, 468 U.S. CMOs rated their optimism for the economy on a scale of 0 (lowest) to 100 (highest). The average score was 62.7, which is up from 58.4 in August 2012. This ~10% increase is important but a set of follow up questions tells us even more. Specifically, CMOs were asked to state whether they were “more optimistic,” “less optimistic,” or “no change” compared to the prior quarter. In August 2012, results indicated that uncertainty was rampant with about one third of the sample more optimistic, another third less optimistic, and the final third no change (see Figure 1). Results of the February survey indicate that CMOs who were more optimistic increased from 29 percent of the sample in August 2012 to a whopping 56 percent in the current survey! This 93 percent increase offers a very strong signal that economic uncertainty is fading.

Figure 1. CMO optimism for U.S. economy compared to last quarter

This confidence also appears in the responses to a set of customer metrics tracked by The CMO Survey. CMOs were asked which customer behaviors they expected to increase in the next 12 months. Top marketers expect customers to buy more volume, buy related products and services (think growth opportunity), and pay a higher price per unit. Finally, 67.7% of CMOs expect that their companies will be able to acquire more customers in the next 12 months. More customers, higher purchases, and higher prices = higher company earnings, all else equal.

Finally, I asked CMOs to rate what they thought will be first, second, and third most important customer priorities in the next year—low price, quality, innovation, brand, trust, or service. Looking at Figure 2, the most striking finding is that CMOs believe that low price will be significantly less important while factors such as quality, innovation, trust, and brand will more important. The latter can form the basis for relationships, not transactions. This again points to good news for companies that want their customers to stick around for as long as possible.

Figure 2. What customers will care about in the next 12 months

Bulls and bears have their own opinions. My bet is on the CMO who knows his or her customers.

Looking back to the first time I asked these questions in August 2009, the levels were 3.5 percent of current budgets and expected to increase to 6.1 percent over the next year and 13.7 percent over the next five years. The increase in current spending from 3.5 percent to 8.4 percent alone represents a 140 percent increase in the last 3 years. No other part of the marketing budget has grown so much in such a short amount of time. In fact, during the same time period, traditional advertising has continued to plummet. It was decreasing by 7.9 percent per year three years ago and continues to drop 2.7 percent in the current year.

The dramatic increases in social media spending were universal across different business sectors: B2B-product, B2B-services, B2C-products, and B2C-services. The B2C-product sector, which includes companies such as Procter & Gamble and The Coca-Cola Company, expects the most dramatic increase, from 9.6 percent to 24.6 percent (see Table 1).

Table 1. Changes in social media spending across sectors

While spending on social media appears easy to do, CMOs reported their companies have not yet cracked the code on how to fully integrate social media with the rest of the firm’s marketing strategy. On a scale of 1-7, only 9.9 percent of respondents believe that social media is “very integrated” with the firm’s marketing strategy (the highest rank for the question), while 15.2 percent believe it is not integrated at all (the lowest rank for the question). Even more striking is the fact that the average score of 3.8 is the exact number recorded the first time this question was asked two years ago in the February 2011 CMO Survey!

Here are my questions: Why spend more but not solve the integration problem? Why is integration so tricky for companies?

Full results, including the “Highlights and Insights” report, are available on the results page.

Chris Moorman’s post about these results can be found at:  blogs.forbes.com/christinemoorman/

At a recent roundtable discussion at Fortune’s Most Powerful Women Summit, Beth Comstock, the Chief Marketing Officer of GE, described how GE approaches marketing: “You have to create a platform that invites innovative ideas.” Unfortunately, we teach marketing and many companies approach marketing as if the organization does not exist. As a result, marketing often fails because it sits outside, or is layered on top, of the most important activities in companies. Marketing needs to be down in the trenches and marketing leadership needs to foster a culture of innovation that creates new products, new services, and new customers.

GE has written this approach into its DNA. In particular, GE’s culture ensures that technological innovation (the historical backbone of GE) and commercial innovation (managing with deep consideration of the customer’s needs and wants) are inextricably entwined. We interviewed Beth Comstock during her visit for the Distinguished Speaker Series at the Fuqua School of Business, Duke University. From this talk and from other press accounts, we derived four capabilities that constitute GE’s organizational platform for innovation. We discuss these capabilities and offer examples of the new products, services, and customers that have resulted.

Capability 1: Create Marketing Innovation Internally

A big feeder of GE’s marketing innovation is the ECLP—Experienced Commercial Leadership Program—GE’s first externally focused leadership program. ECLP began in 2002 as part of Jeff Immelt’s commitment to grow GE’s commercial pipeline and aims to position GE as the “gold standard in marketing.” The two-year post-MBA program develops a pipeline of future leaders and also teaches the company what good marketing is and how it has the potential to change traditional views of product development. The program is viewed as a mutual learning experience—the graduates bring an external perspective and unique talent to GE and program participants learn from GE’s R&D expertise. As Comstock noted, “Marketing must bring a different viewpoint to tough problems. This involves data analytics that produce customer insights and the ability to address customer needs in a creative manner.” She went on to point out that “The best marketers are the ones who have both the creativity and analytical skills in the right proportion.”

Capability 2: Integrate Collaboratively Within GE

There are two key illustrations of this capability—the Commercial Council and the Imagination Breakthrough Process.

The Commercial Council is composed of top marketing and sales leaders from across GE. This group meets regularly to share best practices and to plan growth programs. In 2012, the Commercial Council monitored a new initiative referred to as “Growth Sprints.” This initiative involves bringing a GE-wide view to 3-5 key verticals/services/solutions to identify bigger opportunities. This approach has created early success. For instance, in the 3rd quarter, GE completed growth sprints in Germany and Brazil by identifying significant revenue opportunities in the mining vertical and top prospects in the food and beverage vertical. Without this integrated view, GE might have under-invested in or completely missed these opportunities.

In support of these activities, Comstock argues that “Successful marketers need to be good at conveying their ideas to the team and proving their ideas to others through effective prototyping. I can’t emphasize enough how important it is for marketers to be able to translate customer insights to their teams, their organizations, and to markets.” In a different venue, she goes on to say, “When you hear marketing, most people think advertising. While we of course do that, we have made sure that marketing has been redefined as innovation. We expect our marketers to be the champions of ‘what’s next.’” Likewise, Comstock points out that “You don’t get to be a 130 year-old company without developing some kind of resilience and an ability to be nimble. You certainly have to focus on today, but also be prepared for tomorrow. We expect our marketing and innovation teams to be the champions for that.”

Comstock recognized the need to link GE’s technological genius with its emerging commercial capability to serve new markets, new segments, and new customers. To do so, she created the Imagination Breakthrough Process, which fosters cross-company talent and cross-disciplinary engagement on future-oriented projects. Through the Imagination Breakthrough Process, GE integrates its collective talent across functions to forge unique solutions.

Capability 3: Collaborate with the Customer

Following the 2008 financial crisis, senior leadership recognized the importance of improving the “stickiness” of GE’s relationships with customers. The strategy was to make GE’s value to the client so great that customers would not be able to afford not to work with the company. Two approaches lie at the heart of this capability.

The Differential Value Proposition (DVP) System combines software, data, and processes to foster conversations between GE businesses and their clients. These exchanges start with questions such as “If you had $1M of GE’s money, how would you spend it to best impact your business?” These conversations produce an assessment of the monetary value that GE brings clients over GE’s closest competitor. From there, these GE and customer teams create plans to increase the mutual value of the relationship. This involves mapping out “promises” that GE will execute over a given time frame and a monetary value that these promises will deliver to the client. Comstock notes, “I think marketers’ next hurdle is a knowledge management one. One where we have to figure out how to start to harness the data that exists, so that you know your customer better than they know themselves, and that you can understand and intuit and feed them data back that’s going to make them even smarter.”

Comstock noted that a huge part of GE’s marketing innovation is maintaining a strong focus on the customer. Listening keeps GE focused on a “what to make for the markets” approach instead of reverting to a “make and sell” approach. She explained that GE regularly conducts discovery sessions with customers, maps the customer journey (all actions taken by the customer in the product or service area), and conducts observational research. Comstock observes, “Any successful organization will produce a good system of tension and bring these two facets [customer and market] together. They have to be interwoven and work together with an inward focus of vision and outward focus of success.”[1] The key, she added, is marketing’s ability to “…translate the customer vision to the team, your organization, and the markets.”

Access GE, a web-based portal, allows all GE customers to tap into GE’s unique insights, tools, and best practices. The Access GE team is composed of internal experts at GE who help customers tackle their biggest business challenges. Some of GE’s partnership successes in this area include growing sales and exploring new markets, managing costs, building a best-in-class finance function, planning and integrating a merger, developing and retaining talent, managing regulatory, market and competitive dynamics, and increasing operational effectiveness and productivity. Since 2000, more than 6,500 customers have participated in 8,500 Access GE engagements.

Capability 4: Collaborate with Entrepreneurs

GE CEO Jeff Immelt recently made the point at an ECLP Conference that “I am not most afraid of our biggest competitors. I am afraid of the guy in his garage coming up with an idea that could potentially wipe out one of our businesses.”[2] It follows, therefore, that the final pillar of engagement in GE’s marketing innovation takes place with the entrepreneur. GE collaborates with outside entrepreneurs to stay ahead of the curve and maintain a forward-looking stance. One way that GE fosters this collaboration is through contests, such as its ecomagination Challenge. GE casts a wide net for new business ideas by offering large cash prizes and new business opportunities for entrepreneurs. GE melds an open call for ideas in this business challenge with a large commitment to invest in winning companies and commercialize their ideas quickly. The ecomagination Challenge is part of the larger initiative ecomagination Platform, which Comstock describes as “A platform for business development [that is] basically a shadow P&L across the company.”

Ireland-based FMC-Tech, a smart grid technology company, won GE’s 2010 ecomagination Challenge. As a result, GE and its venture capital partners invested $55M in FMC-Tech to quickly commercialize its unique technology—real-time power line monitoring that improves utility distribution automation systems. FMC-Tech’s solutions provide utilities with a new level of grid intelligence through real-time information on power outages, dynamic power line capacity ratings, and assistance for maintenance and repair crews. FMC-Tech’s impressive on-the-ground success after the ecomagination win prompted GE’s acquisition of the company in late 2011. FMC-Tech’s expertise in online power management seamlessly complements GE’s expertise; its integration into GE’s portfolio will allow GE to drive faster technology developments and to offer broader-based utility solutions.

The Payoffs From GE’s Innovation Platform

The four capabilities have paid off for GE. Here are just a few examples of the new products, new services, new markets, and new business models that have resulted.

New Products: GE’s new GeoSpring™ hybrid electric water heater was developed to address consumers’ growing desires to save money and be environmentally conscious. GeoSpring, which uses a novel integrated compressor and evaporator mechanism, is 62% more efficient than traditional electric water heaters and saves consumers an average $325/year on utility bills. GeoSpring is an output of GE’s ability to integrate big-picture economic dynamics, customer trends, and cutting-edge innovation to capture market share and new customers. It was recently named to BuildingGreen’s Top-10 list of green building products for 2013 and, not incidentally, its manufacturing facility will create more than 1,300 new U.S. jobs by 2014.

New Services: GE’s Trip Optimizer automatically controls a locomotive’s throttle, helping keep trains on schedule while minimizing fuel use. This software-based service calculates an optimal trip profile that considers such factors as train length, weight, grade, track conditions, weather, and locomotive performance. During the trip, a sophisticated network of on-board computers and GPS systems updates the profile continuously, adjusting for changes to ensure the train arrives on time and with minimum fuel use. For each locomotive, Trip Optimizer can reduce fuel consumption an incremental 32,000 gallons, cut greenhouse gas emissions by 365 tons, cut NOx emissions by 5 tons, and decrease particulate matter emissions by 0.2 tons.

New Markets: One of GE’s Imagination Breakthrough successes leveraged its products and technology from established markets to grow in new markets. Through cross-business collaboration, GE made the connection between MRI machines and wind turbines. For decades GE has used superconducting magnets in MRI machines to lower costs and produce higher image quality. GE then applied the superconducting magnet technology to develop an innovative wind turbine generator that delivers more wind power at a lower cost. This technology also eliminates the need for rare earth materials formerly used in wind turbine generators. The superconducting magnet project is one of many in GE’s wind research portfolio focused on scaling up wind power in the most economically feasible way.

New Business Models: GE’s entry into the global wind turbine market illustrates its willingness to challenge current assumptions among competitors to innovate a new business model. Through deep immersion into the needs of current and prospective customers, GE uncovered and subsequently address two main drivers of customers’ perceptions of economic value in wind power: gearbox reliability and efficiency in capturing wind energy. Existing competitor wind turbines were unreliable, inefficient, and costly because of short production runs.

GE’s first step was to acquire Enron Wind Corporation’s assets in 2002 to learn about the wind market. It then leveraged its capabilities in making gas turbines and jet engines to develop a better wind turbine that generated 20 percent more wind energy than competitors’ turbines. At the time, the global market was heavily dependent on government subsidies and the large European market was characterized by a scarcity of open land. German competitors, such as Siemens, responded to market conditions by offering 20 different models that could fit on different-sized plots of land. GE, on the other hand, decided to focus on one turbine size that met the needs of markets where tight spaces were not a constraint and devoted resources to optimizing the efficiency of that turbine model. With the design changes and the cost advantages of high-volume production, GE improved reliability (uptime) from 85 percent to 97 percent at a price advantage to customers.

Summary

Reflecting on GE’s capabilities and these outputs, Comstock points out, “We as marketers helped GE move from pursuing a ‘make and sell’ approach to a ‘what to make for our markets’ approach.” In a follow-up observation, she notes, “Marketing should be a constant incubator of ideas in finding new markets to sell our products and should be a big driver of organic growth for our company.”

In her comments at Fuqua’s Distinguished Speaker Series, Comstock brought the importance of marketing and its marriage with technology success back to GE’s beginning. She remarked, “I believe that Thomas Alva Edison, the founder of GE and inventor of the light bulb, was the world’s greatest marketer. He announced that ‘In six weeks, I will make gas lights obsolete through electricity’ and proved it by organizing a march of men who walked through Manhattan with electric torches on their forehead. That’s guts, a key characteristic of marketing.”

Figure 1. Marketing Excellence Ratings in Companies

Over time, The CMO Survey will develop a longitudinal database and provide more definitive answers to the questions surrounding marketing excellence. However, using only the August 2012 data, I can share some of the performance, spending, strategy, leadership, and organizational choices/outcomes that are and are not correlated with marketing excellence.

To generate these insights, I classified companies participating in The CMO Survey according to whether they performed above or below the mean on the marketing excellence question. The high-performing group (n=184 firms) has a mean marketing excellence score of 5.52 (s.d.=0.66) and the low-performing group (n=170 firms) has a mean marketing excellence score of 3.22 (s.d.=0.88).

Then I looked at differences between the two groups. Here is what I found:

1. Excellent marketing companies report less spend on traditional advertising (high-performing = -2.91% change vs. low-performing = -0.62% change) and more spend on digital marketing (high-performing = +12.61% change vs. low-performing = +10.26% change).
2. Excellent marketing companies spend more on marketing as a percent of firm revenue (high-performing = 13.62% vs. low-performing = 10.04%), but the difference on marketing spend as a percent of firm budget is not statistically different (high-performing = 11.79% vs. low-performing = 10.99%).
3. Excellent marketing companies spend more on social media as a percent of their current marketing budgets (high-performing = 8.6% vs. low-performing = 6.53%) and one-year budgets (high-performing = 11.76% vs. low-performing = 9.57%). Excellent marketing companies also more effectively integrate social with the firm’s marketing strategy (7-point scale, 1=not at all effectively and 7=very effectively) (high-performing = 4.37 vs. low-performing = 3.15).
4. Excellent marketing companies spend more on marketing analytics as a percent of their current marketing budgets (high-performing = 9.61% vs. low-performing = 6.49%). Excellent marketing companies also use marketing analytics to make decisions in a higher percentage of projects (high-performing = 40.2% vs. low-performing = 29.3%).
5. Excellent marketing companies have 10.7% of their employees engaged in marketing versus low-performing companies which have 7.3% of their employees engaged in marketing.
6. Excellent marketing companies spend more on marketing training YOY (9.6% increase) versus low-performing companies, which report only a 3.86% increase in marketing training.
7. Excellent marketing companies have more direct reports to their marketing leaders (11 people) vs. low-performing companies, which have only 5 people. Indirect reports are no different (high-performing = 24 people vs. low-performing = 23 people).
8. Excellent marketing companies give more responsibility to marketing. The CMO Survey asks CMOs to rate whether or not they are responsible for 19 different activities in companies (e.g., new products, positioning, distribution, market entry strategies, advertising, brand, promotion, innovation, market selection, customer service, pricing, social media, lead generation, stock market performance, customer relationship management, marketing research, sales, and competitive intelligence). Excellent marketing companies give marketing more responsibility (11.2 areas) vs. low-performing companies (8.6 areas).
   Perhaps as a result of the priorities and behaviors described in points 1-8 above, I find these final two performance differences between high and low marketing excellence companies:
9. Excellent marketing companies exhibit bigger changes in profitability metrics: marketing ROI (high-performing = +4.32% change vs. low-performing = +1.66% change) and firm profits (high-performing = +4.18% change vs. low-performing = +2.38% change).
10. Excellent marketing companies outperform low-performing companies on customer metrics: customer acquisition (high-performing = +4.10% change vs. low-performing = +2.55% change), customer retention (high-performing = +2.59% change vs. low-performing = +1.38% change), and brand value (high-performing = +4.42% change vs. low-performing = +2.02% change). The difference for customer retention is weaker and I’ll discuss that opportunity in a forthcoming blog.

1. New jobs: Marketing appears to be taking a leadership role in managing social media activities in companies. Given social media spending as a percent of marketing budgets is expected to rise from 7.6% to 18.8% over the next 5 years, this means new funds are flowing toward marketing.
2. New skills: Companies plan to increase marketing training by 3.7% in February 2012 to 7.2% in August 2012. In particular, I see many companies in investing in programs to build marketing capabilities. A good example is GE’s Experienced Commercial Leadership Program, which develops cohorts of young marketers for the company. Another example is Becton Dickinson’s Marketing Excellence Initiative, which provides non-marketers with a big dose of training in key marketing tools and processes.
3. New knowledge: Big Data has captured the imaginations of leaders in companies big and small. The ability to leverage information about customers in order to deliver and demonstrate value opens the door for marketers to fill the role as analysts and “data whisperers” as McKinsey calls them. As noted by McKinsey in its Chief Marketing and Sales Officer forum, “Data whisperers are those analysts who can coax meaning and insights from the increasingly sophisticated and massive data sets available today.”
4. New growth: Experience of the recession reminds leaders that growth is not a certain prospect and that they need to seek out new markets for existing offerings and develop new products and services. Both types of growth are expected to rise over the next year. Currently, marketing plays a leadership role in innovation in only 39% of firms. This means that growth strategies are driven by strategy, finance, or R&D, none of which necessarily has the customer as their primary focus. As these strategies falter, I expect business leaders will recognize that new growth must have a stronger customer focus, which marketing can uniquely provide.
5. Increasing focus on long-term firm value: Over the last twenty years, there is a clear shift in expectations toward improving marketing’s contributions to the firm over the long run. This means that marketing is no longer viewed as merely a tool for building market share or short-term revenues, but is instead considered a strategic investment in building critical intangible assets, such as customer relationship and brand equity, which produce important long-term profits. As the promise of marketing contributions rises, so does the funding.
6. New cooperation with sales: In most companies, especially B2B, marketing and sales share the customer management process. In 69% of companies, marketing and sales work on an equal basis. Firm success hinges on finding ways to increase the effectiveness of interactions between these two groups. If marketing plays a bigger role in marketing analytics and social media activities as noted above, this should influence how marketing and sales interact. This requires marketing to figure out how to use Big Data to improve the selling process and to ensure that social media contributes to sales activities. Marketing will likely receive increased funding to do so.

Why do you think marketing is receiving larger budgets?

First and the weakest, CMOs reported that marketing spend is expected to grow by 6.4% in the next year. This number is positive, supporting my thesis, but the number is actually down from expected growth of 9.1% from August 2011. Given continued depressed firm growth and slow economic growth, this decrease is not altogether unexpected. It is positive nonetheless.

Second and more telling is the fact that marketing budgets as a percent of firm budgets increased 40% from 8.1% in February 2011 to 11.4% in August 2012. The Figure shows that this percentage has increased steadily over the last 18 months, pointing to the fact that companies are placing a greater emphasis on marketing spend relative to other types of strategic spend.

Figure. Marketing Budgets as a Percent of Firm Budgets

Third, marketing spending as a percent of firm revenues increased 30% from 8.5% in February 2012, the first time The CMO Survey™ asked the question, to 11% in August 2012.

Digging deeper into these three findings, several other observations jump out.

• Business-to-consumer product companies show the biggest increases in expected growth in marketing budgets (8.6%) and marketing budgets as a percent of firm budgets (17.4%), but not marketing budget as a percent of firm revenues (9.8%) which is dominated by business-to-consumer services companies (16.1%).
• The biggest companies (>$10B) and the smallest companies (<$25M) surveyed in The CMO Survey™ display the biggest gains: marketing budgets as a percent of firm budgets (>$10B = 11.9% and <$25M = 18.1%), and marketing budgets as a percent of firm revenues (>$10B = 13.1% and <$25M = 17.8%). This is not true for expected growth in marketing budgets for which $100-$499M companies dominate (10.9%).
• Companies that have more than 10% of sales from the internet also spend more on marketing: expected growth in marketing budgets (7.9%), marketing budgets as a percent of firm budgets (16.4%), but not marketing budget as a percent of firm revenues (18.3%).

In my next blog, I will offer some reasons underlying these trends.

In addition to studying product-market strategies for company growth, I have also been asking CMOs how they use a set of “firm boundary” strategies to grow. In response to the question to “Allocate 100 points to reflect how your firm will grow during the next 12 months,” The CMO Survey™ (August-2012) reports that the majority (68.9%) of growth is expected to be organic or from within the firm’s own boundary, 12.9% from partnerships (ranging from alliances to joint ventures), 12.2% from acquisitions, and 6.1% from licensing arrangements. Organic growth gives the firm more control because growth activities happen within the firm boundaries. It does not go to the “market” for goods or services and therefore does not have to manage a partnership or licensing agreement. It also does not extend the firm’s boundary (sometimes called a “hierarchy”) to include a new firm which gives more control, but is also more expensive and may dilute the firm’s focus. At the same time, organic growth is potentially more costly because the firm must learn to do things that potential partners or acquisition targets have already mastered.

Results show that organic, partnership, and licensing growth activities have not changed significantly in the last four years of The CMO Survey™, despite minor fluctuations. The use of acquisitions as a growth strategy, however, has steadily increased. Figure 1 shows this progression from 8.8% in February 2009 to 12.2% in August 2012. There may be many reasons for this—companies have cash on hand or can get low-cost loans to make acquisitions, acquisition targets are cheaper, or firms are engaging in riskier growth (new markets and new offerings). The latter appears to be true based on data from The CMO Survey™ as I noted in an earlier blog.

Figure 1. Company Use of Acquisition Strategies Over Time

These speculations are trumped by one important fact that lies deeper in this trend data. Specifically, when examining the use of acquisitions as a growth strategy I find that the overall momentum observed in Figure 1 is driven in large part by technology-centric firms. Figure 2 compares the by-sector use of acquisition growth strategies for August 2009 versus August 2012. Although all sectors other than Banking/Finance/Insurance posted an increasing reliance on acquisition growth strategies, the bellwether of growth is the tech sector. The use of acquisitions to fuel growth more than doubled for technology firms from 8.6% to 18.5% in just 3 years!

Figure 2. Sector Differences in the Use of Acquisition Strategies Over Time

Why are tech firms on an acquisition bender? Certainly growth aspirations are important. However, the thesis I want to advance in this blog is that the acquisition strategy surge within tech appears to have coincided with an increasing focus on intellectual property (IP). This IP focus is not necessarily about growth, though. Instead it appears that the dictum “The best offense is a good defense” is at play. Specifically, companies are protecting options and creating barriers to entry for competitors.

Growth by IP is therefore fundamentally a defensive strategy as it appears to be playing out in the tech trenches. Some of the largest recent tech acquisitions have involved either the sale of just patents, or of firms that come with massive IP portfolios. For example, after losing a bidding war to a group of firms headed by Apple and Microsoft for bankrupt Nortel’s nearly 6000 coveted wireless patents, Google acquired Motorola Mobility and its almost 25,000 patents and applications.

Unfortunately, at least so far, most of these patents are not ending up in products, but instead in the courtroom. Take for instance a set of patents Microsoft purchased from America Online in April, that Microsoft two weeks later sold to Facebook, who in turn used them to sue Mitel for patent infringement. Google’s Senior Vice President and General Counsel Kent Walker noted this shift last year saying, “The tech world has recently seen an explosion in patent litigation …. Some of these lawsuits have been filed by people or companies that have never actually created anything; others are motivated by a desire to block competing products or profit from the success of a rival’s new technology.” And not having IP protection can be expensive; consider the recent $1B verdict handed down against Samsung in its fight with Apple (which now spans 6 countries on 3 continents).

Why this strategy? Why now? A combination of three factors appears to be driving this shift: fuzzy product-market boundaries, litigation as strategy, and mountains of cash.

Fuzzy product-market boundaries. A decade ago technology firms operated in relatively defined fields. Apple made personal computers, Amazon sold books online, Google developed search engine software, Intel made PC chips, Microsoft made operating systems, and so forth. Today, all of these titans in some way compete in an increasingly crowded product-market landscape. For example, Apple, Microsoft, and Amazon all sell their own tablet devices, a product category that was non-existent just three years ago. And as technologies converge, traditional product categories have blurred. Tablets and smart-phones are functioning increasingly like computing devices. Laptops are less than an inch thick and touch-enabled, making them both a computing device and tablet.

Litigation as strategy. With increased competition, firms are aggressively defending their stakes in the market, and the weapon de jour is patent litigation. Recent patent litigation has pitted some of the world’s largest tech companies against each other—Microsoft vs. Motorola, Apple vs. Nokia, Apple vs. HTC, Google vs. Apple, Oracle vs. Google, Sony vs. LG, and Apple vs. Samsung—to name just a few. Here is an interesting example: Facebook, with only 56 patents at its disposal at the beginning of this year, found itself sued for patent infringement from Yahoo!, who is backed by a war-chest of over 1,000 patents. Facebook has since acquired IP from Microsoft, IBM, Friendster, Walker Digital, and HP, and now just 9 months later has a collection of over 1,400 patents. And just as it did with Mitel, Facebook allegedly is using acquired patents to subsequently counter-sue Yahoo!. Facebook is not alone, though. Google, Microsoft, Apple, Ericsson, EMC, Sony, RIM, Intel, Oracle, and EMC have collectively spent billions to purchase tens-of-thousands of patents over the past two years. And acquiring IP has become so prevalent that firms are even hiring executive level positions to lead their patent acquisition strategies, such as Amazon’s currently open Patent Acquisitions Executive position.

Mountains of cash. In addition to blurred product markets and increased IP litigation, cash has fueled the acquisition frenzy. Based on 2011 financial statements, the top 10 cash positions for tech firms totaled almost $300B. With the need for patents to enter new product spaces (or to keep competitors out), acquiring patents has become an increasingly attractive and necessary, but expensive, investment. Google recently paid $12.4B for Motorola Mobility and its nearly 25,000 patents and applications. Microsoft paid over $1B for over 1,100 America Online patents and licenses (Facebook then purchased 650 of the patents from Microsoft for $550M), while Intel spent $375M on 1,700 InterDigital patents. And two consortiums of tech giants recently paid over $5B for the roughly 7,000 patents held by Nortel and Novell. But the combination of cash-in-hand purchasers and the need for product protection has had an impact on the market. Prices of patents in high tech are increasing at an alarming rate. Recent patent acquisitions have been running as much as $750K per patent—quadruple the price from just a few years earlier.

Will the current strategy shift to building protective IP fortresses stymie innovation in new product categories? If so, we may eventually see the acquisition trend for technology firms reverse as the market reaches a new equilibrium of a few dominant—and untouchable—players. Or will the defensive strategy backfire and leave the door open for new entrants to out-innovate the current incumbents? History may very well repeat itself, fueling future tech acquisition frenzies as tomorrow’s innovators feast on the IP remains of today’s litigants.