Is marketing spending directly correlated to top line and bottom line growth? Is there an alternative way to grow? A recent article in Knowledge@Wharton discusses various growth styles and creates a hypothesis based on the concept of "momentum"… nothing really new, but once again repackaged. Presumably there will be a nice definition of "momentum" and how to achieve it… we’ll see…
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?
Perhaps. But let’s dive into the author’s study.
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.
Interesting analysis. Decoupling marketing spend from growth should yield other growth factors, and perhaps that elusive "momentum."
We divided the firms into three groups according to how their marketing behavior could be described: Pushers, Plodders, and Pioneers.
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. Then there were the Plodders. These were the firms grouped around the middle of our sample — fully half of those in the study. Their marketing-to-sales ratio remained more or less constant for 20 years. Finally, there was 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. In other words, the Pioneers cut their relative marketing spend by seven points when compared to the competition.
What did they learn?
The Plodders underperformed the stock market by 28 percent, achieving only 72% of the Dow Jones Index average growth. Pushers managed, on average, to create shareholder value exactly in line with the evolution of the Dow Jones Index, thus demonstrating the soundness of the conventional faith in the power of active marketing spend to contribute to increasing shareholder value.
What conventional analysis probably would not have predicted was the performance of the Pioneers. Despite having decreased their advertising-to-sales ratio, these momentum-powered companies created shareholder value 80% above the Dow Jones Index over the 20-year period. Eighty percent!
Since the Plodders are probably already near death, lets compare the Pushers and Pioneers a bit further.
Over the 20-year period, using the Pushers’ performance as a reference, the Pioneers’ revenue growth was 93% better — almost twice as high. 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.
What are the characteristics of these Pioneers?
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.
Good. I thought I was going to have to thrash the article for assuming that marketing efficiency was the end-all of business growth. Instead the authors take traditional marketing to task in a way that’s analogous to how inventory can cover up production sins.
Too often, companies invest more in marketing to compensate for something: an inferior product, a poor pipeline of new products, deterioration of growth prospects, or a general lack of creativity.
Firms with such a limited vision compensate for their less-than-spectacular offers by pushing them on an unconvinced market using heavy-handed marketing resources. Even more compensation is required when, to fund this expensive marketing, they are forced to cut costs on the very activities that could improve the attractiveness of their offer: operations and R&D. This kind of behavior eats up resources and destroys firms from the inside out. They are momentum-deficient firms.
So let’s tackle… "momentum."
The Pioneers show there is an alternative. These momentum-powered firms don’t have to push so hard because they have built up a momentum that improves their efficiency. Rather than just better-than-average growth, they deliver exceptional growth. Their growth is exceptional on two counts: It is both higher and more efficient.
Ok, but I still don’t know what "momentum" really is, in a quantifiable, actionable way. The article then provides two case studies: Wal-Mart and… Toyota. Hey, why not. Toyota can be used as a positive case study for just about anything.
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.
True, but what is "momentum?"
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.
Great business practices, but what is "momentum?"
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.
Good analysis of the auto wars, but what the heck is "momentum"? The article concludes:
The Pioneers achieved revenue growth 93% greater than the Pushers. That is the sort of growth that gets companies noticed, that drives exceptional increases in value for all stakeholders. How did they do it? By creating the conditions that are needed for the momentum effect to take place.
I guess I better go forth and create "momentum"… whatever that is.