Larreche - The Momentum Effect How ...

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PART
I
Discovering Momentum
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1
The Power of Momentum
Where’s the Impetus?
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.
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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. Okay, I might tell my mom to buy, but
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The Momentum Effect
then she’s happy with inflation plus one. The way we see it, you’re really
grinding it out. We reckon the strain’s getting harder, too. There’s no
impetus—no momentum.”
Words like that can really take the gloss off a day. The next time you
gather your team, you don’t congratulate them on beating their
targets—you want more. Sure, our results are up, you say, but that’s not
enough—where’s the impetus? When are we going to do something
exceptional? With all the resources at your disposal, when are you going
to start building some momentum?
The team members look at their papers. Then Paul, an anxious
member of your team, looks up and says: “Okay. Got any ideas about
how?” What are you going to say?
What’s Holding Us Back?
This book sets out to answer one question: How can I find a way to
deliver continuous, exceptional growth, year after year?
By
exceptional,
we mean exceptional relative to expectations: growth
that sets you apart. In some high-technology markets, this might mean
60 percent. In others, 6 percent might really stand out from the crowd
if the market average is just 3 or 4. What we are talking about is growth
that puts serious distance between you and your competitors. That is
what this book is offering. It shows you how to get the traction you need
to make sure that none of your effort is being wasted—to make sure that
it all goes toward delivering tangible results. It will help you break free
from the grind.
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.
We thought: “There just
has
to be a better way than this.” Some of our
earlier work
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showed that firms with certain shared characteristics were
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The Power of Momentum
delivering substantially better results than others. The performance of
these firms 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 momen-
tum. We went looking to find out exactly what this momentum was and
how these momentum-powered firms acquired it.
The insight came when we realized that if momentum was powering
a firm’s success, then its
relative
marketing spend should be decreasing.
Contrary to conventional “spend money to make money” wisdom, our
hunch was 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.
To test our hypothesis, we investigated the effect of marketing
investments on the long-term growth of large, established firms. We looked
at the conduct and performance of well-known corporations among the
world’s 1,000 largest, covering a 20-year period from 1985 to 2004. We
looked at these firms’ marketing behavior and tracked the effect that changes
in this behavior had on sales revenue, net earnings, and stock price.
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The results were astounding.
Pushers, Plodders, and Pioneers
We divided the firms into three groups according to how their
marketing behavior could be described: Pushers, Plodders, and Pioneers.
Because we were interested in the effect of extremes in marketing
behavior, our three groups were divided in a 25:50:25 split. For sim-
plicity, let us illustrate the results of our research with an example from
one sector, the largest: consumer goods and services.
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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. In our rankings, these were the firms in the
quartile showing the highest increases in their marketing-to-sales ratio
over the 20-year period. This group, on average, increased its marketing-
to-sales ratio by 3 percent over this time.
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