The Momentum Effect : Book Review

Momentum. Most businesses get it at some point -- the impression that everything they undertake succeeds effortlessly, as if they're being carried along by a tailwind that increases their efficiency and propels them on to exceptional growth.

Some hold on to it. Most don't. Slowly, imperceptibly, the tailwind turns around and the momentum disappears, without anyone quite realizing what has happened. The company is still growing, but not as strongly as before, not as efficiently. Everyone's maxing out, but it seems like there's molasses in the works. Sound familiar?

Sooner or later, it hits you in the face. Imagine you are meeting up with a senior analyst whose opinion counts with some of your company's biggest investors. You think you're on safe ground -- after all, your company is doing better than the competition. But the analyst is in full gimlet-eyed, illusion-killing mode. "That's nothing to crow about," she says. "Yeah, you've got reasonable growth, but it's nothing exceptional. You're a safe bet, nothing more.

What's  In it ?

This book sets out to answer one question: How can we find a way to deliver continuous, exceptional growth, year after year? By exceptional, I mean exceptional relative to expectations: growth that sets you apart. In some high-technology markets, this might mean 60%. In others, 6% might really stand out from the crowd if the market average is just 3 or 4. What I am talking about is growth that puts serious distance between you and your competitors.

After all, grind is what most businesses endure. Most firms that manage to deliver growth do it the hard way. Measures that improve profitability often hold back top-line growth, while measures that drive revenue growth require investments that can drag down profitability. As one foot starts to run, the other starts sinking in the mire. It's devilishly hard to get the balance right and break free: It seems that all you can do is keep pushing. Companies have to push sales forward with big marketing investments while at the same time harrying their employees to become more productive and nagging their suppliers and partners for better deals. Pushing is hard work -- it's exhausting and it churns through resources.

According to the book  "There just has to be a better way than this.". The performance of some firms when observed closely suggested that, under certain conditions, there existed a phenomenon whereby growth could be achieved more efficiently. The disproportionately higher growth these firms delivered hinted at some hidden energy driving their growth -- an energy that seemed to feed on itself without the need for excessive resources. Their progress has been natural, highly efficient, and realized with almost frictionless ease. Because they were not held back by the sheer weight of resources others were employing, they were able to get some speed up. They had momentum.

According to the authors if momentum is powering a firm's success, then its relative marketing spend should be decreasing, Contrary to conventional "spend money to make money" wisdom, the authors argue that firms with momentum achieved superior growth while spending a relatively smaller percentage of their revenue on marketing than those pursuing the traditional "push hard" methods.

 

Pushers, Plodders, and Pioneers

The authors have divided the firms into three groups according to how their marketing behavior could be described: Pushers, Plodders, and Pioneers, since the logic was to study the  effects of extremes in marketing behavior, the three groups were divided in a 25:50:25 split.

For eg.

The Pushers were those companies that pushed their businesses hard in the traditional way, seeking to drive sales through aggressive increases in relative marketing spend.

the Plodders were the firms grouped around the middle of the sample.Their marketing-to-sales ratio remained more or less constant for 20 years. These middling firms stayed in the safety zone of past behavior and took no drastic action one way or the other.

Finally, in the remaining quarter -- those firms that were, either boldly or foolhardily, heading in the opposite direction from the Pushers, and decreasing their relative marketing spend. Taking these firms' average marketing-to-sales ratio,

Given the preeminence that marketing spend has among the tools most firms use to drive growth, this is a big, big call. Would these unconventional firms, which we dubbed the Pioneers, discover other avenues to growth, or fall behind as a result of their foolhardiness?

The first clue to the difference in the strategic behavior of these two groups appears in the top-line growth of the Pioneers. Over the 20-year period, using the Pushers' performance as a reference, the Pioneers' revenue growth was 93% better -- almost twice as high. They achieved this massive revenue growth despite decreasing their advertising ratio. And remember: This is in comparison not to underperforming firms but to firms that actually matched the Dow Jones Index.

If we compare the profitability growth of these two groups, we can see that the Pioneers also did much better, with average earnings growth 58% superior to that of the Pushers. A 58% advantage in earnings growth is very impressive, but it is noticeably smaller than the difference in revenue growth. Despite the Pushers' much poorer performance on revenue growth, and the fact that they were increasing their spending on marketing, they managed to claw back some lost ground: Their relative gap on earnings growth is less severe than one would expect. How did they manage that?

They cut down on other costs, especially in manufacturing and R&D. These combined cuts and efficiency economies more than compensated for the increase in advertising-to-sales ratio, and enabled the Pushers to peg back some of the Pioneers' huge top-line advantage when it came to earnings growth. Despite this partial catch-up, there is little doubt about where one would like to invest or work when one compares these two types of companies. The stock market recognizes this: The share-price premium of Pioneers over Pushers -- 80% -- is significantly higher than the differential in their earnings growth.

The bottom line: Although the combination of pushing hard with marketing investments and slashing other costs can deliver growth, the Pioneers' achievements demonstrates that there is a more creative, exciting, and smarter alternative that delivers even better results.

Obviously, it is not as simple as cutting the advertising-to-sales ratio. A straight cut in advertising would almost certainly result in a drop in growth. In fact, our study shows that the momentum-powered Pioneers actually increased their total marketing expenditures in real terms. But while their marketing budgets were increasing, the proportion of their revenue that this expenditure represented was decreasing. In other words, because of the Pioneers' superior revenue growth, their advertising-to-sales ratio was coming down despite the fact that they were spending more.

In a world of increasing competition, marketing resources must also, inexorably, rise. But if they are to create sustainable, profitable growth, these expenditures must be invested in an effective manner. Compared to the Pushers, the Pioneers' increases in marketing investments were more effective: They got superior growth while reducing their marketing-to-sales ratio, thus improving profitability.

The question is: What was improving the efficiency of their marketing investments? This is not simply a case of great marketing, although marketing excellence is a key part of the mix. These firms achieved greater efficiency with their marketing because they found a different path to growth: They exploited the momentum effect. They created specific conditions that ignited an exceptional organic growth that feeds on itself: momentum growth.

The Power of Momentum in Action

Wal-Mart and Toyota are two apparently dissimilar firms. They operate in two different industries and come from different countries and cultures. But they are two of the world's 15 richest companies, and each is number one in its own industry. More importantly, both got there by creating the conditions needed for the momentum effect to emerge. Although one has lost its momentum, the other is still in full swing.

Wal-Mart:

Sam Walton launched his company with a focus on customers. What is remarkable is the way that this customer focus created exceptional growth and continued to power Wal-Mart for many years after it had become a major industry force. Whatever its current challenges -- and there are many -- for the better part of a generation Wal-Mart was a momentum-powered firm.

Sam Walton knew about retail, but his main asset was the fact that he knew about customers. His strength was this: He liked to listen to them and observe them, and he understood their needs. When he started out, he related deeply to a very specific kind of customer -- people like him, people from the United States' rural South.

Walton's customer orientation made him aware of the potential of this region's smaller towns. In 1962, when Wal-Mart was launched, the standard wisdom held that large retail operations could not survive in towns with fewer than 100,000 residents. But Walton decided that this was where opportunity lay, and he deliberately opened stores only in small towns where there was no large-scale competition.

Walton understood that these customers would value his offering, that they would appreciate being able to shop locally, rather than making long journeys to larger towns. He also realized that these shoppers were worth more than they seemed. Although their wallets weren't as full as those of people in large cities, Wal-Mart was able to command a higher share of their spending because there was no competition. The combination of cheaper premises, lower labor costs [and] no competition ... meant that Walton's customers were extremely profitable to service.

This winning combination gave Wal-Mart the traction it needed to start building momentum. As the firm mushroomed, it continued to improve all aspects of its operation, from customer service to supply chain and supplier relationships. Eventually, Wal-Mart was able to glean economies of scale in purchasing to achieve its mantra of "Every Day Low Price" (EDLP) and gain further momentum.

EDLP runs counter to traditional retail promotions that lure customers into stores, hoping that they'll also end up buying more expensive products. The famous expression to describe retail strategy in the days before Wal-Mart was "an island of losses in an ocean of profits." It was really an island of bait in an ocean of arrogance and customer abuse. It was akin to duck hunting -- attracting customers the same way hunters attracted wild ducks with decoys.

With EDLP, Wal-Mart turned the relationship with customers upside down. It moved from duck hunting to a vibrant partnership. Wal-Mart's competitors, to their discomfort, failed to understand that, although EDLP was jargon on the surface, it expressed a strong, hidden emotional value deeply appreciated by customers: trust. This customer trust powered the company's growth for decades.

Unfortunately, momentum doesn't look after itself. There is a perception that Wal-Mart slowly began to pay less attention to many of the key drivers of its success -- respect for employees, local communities, and suppliers -- and began to lose its momentum as a result. Momentum is dynamic: Unless it is constantly nurtured, it will ebb away. However, the reward for that unstinting attention can be immense -- it can make you number one in the world.

Toyota:

When asked in May 2007 about the prospect of Toyota becoming the world's number-one car manufacturer, company president Katsuaki Watanabe refused to take even a minute to gloat about beating his competitors. "Rather than think about other companies," he said, "I feel that we must do our utmost to satisfy customers around the world. There is plenty left for us to do." This simple statement, reflecting an unswerving customer focus, demonstrates why companies like Toyota are able to develop a detailed and subtly nuanced understanding of customers -- and why they are able to deliver better results.

It also shows that there is much more to Toyota's success than Kaizen and lean production. That is just the base: its excellence and efficiency at extracting value from its business. It is Toyota's ability to create new, original, and compelling value in the first place that drives its growth. Its secret is its ability to connect totally with customers' sense of self, to create products that are more than mere goods but complete, perfect, and compelling presentations of value. The Prius, for example, offers a package of utterly compelling value to environmentally aware city-dwellers: With its low carbon footprint, practicality for city driving, and celebrity association, it is more than just a car -- it is a statement. The Lexus offers a totally different package of value to a totally different market, but the package is just as compelling, if you are part of its target market.

Consider the contrasting histories of the U.S. auto industry and Toyota. American car manufacturers are among the best illustrations of the limitations of the Pusher's strategy. They have given everything a try in terms of efficiency drives, but although they are now leaner, they are no fitter. They sought to drive top-line growth through expensive advertising as well as sales promotions to generate volume, along with deep discounts to move inventories of finished goods. These expensive tactics were needed to compensate for the failure of their products to really connect with customers.

Toyota, on the other hand, has become the world's largest and most profitable car manufacturer, riding a fantastic wave of momentum. Its success is based on a number of factors, but underlying its achievement is a deep understanding of its customers. First, Toyota proved that it could consistently deliver reliable, impeccably engineered automobiles. Once this crucial plateau had been achieved, it went on to innovate its range with cars that were somehow more than mere vehicles. Models like the Prius and the Lexus range appeared in their showrooms. Both of these cars connect on an emotional level with their drivers' self-image and aspirations -- green and clean for the one, luxurious and status based for the other. This level of customer engagement did not happen by chance -- it was the result of a focused, iterative process that created the conditions under which the momentum effect, and the efficient momentum growth it delivers, could flourish.