- Where's the Impetus?
- What's Holding Us Back?
- Pushers, Plodders, and Pioneers
- Momentum-Powered Firms
- The Power of Momentum in Action
- Join the Momentum League
This chapter is from the book
This chapter is from the book
This chapter is from the book
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 simplicity, let us illustrate the results of our research with an example from one sector, the largest: consumer goods and services.4
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.
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. These middling firms stayed in the safety zone of past behavior and took no drastic action one way or the other.
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. Taking these firms' average marketing-to-sales ratio, we see a 4 percent drop over the timeframe.
This 4 percent cut was made while competing against the Pushers who were plowing in a 3 percent rise. In other words, the Pioneers cut their relative marketing spend by seven points when compared to the competition. 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?
We expected these three strategic behaviors to have an impact on the firms' performance in creating shareholder value. What was not expected was the size of that impact.5
When looking at the percentage change in shareholder value over the 20-year period of our three groups, as compared to the change in the Dow Jones Index,6 shown in Figure 1.1, we immediately see that remaining in the safety zone of stable marketing spend is not a viable option: The Plodders underperformed the stock market by 28 percent, achieving only 72 percent of the Dow Jones Index average growth.
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Figure 1.1 The three leagues, 1985–2004
As most analysts would have predicted, the highest increases in advertising ratio did produce significantly more shareholder value than did the Plodders' relatively stable marketing spend. 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.7
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 percent above the Dow Jones Index over the 20-year period. Eighty percent!
As the limitations of the Plodders' inertia are obvious, let's leave them aside. Understanding the difference between the Pushers and the Pioneers—the "good" and the "great" in terms of growth in shareholder value—was both more challenging and more rewarding.
The first clue to the difference in the strategic behavior of these two groups appears in the top-line growth of the Pioneers, as shown in Figure 1.2. Over the 20-year period, using the Pushers' performance as a reference, the Pioneers' revenue growth was 93 percent 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.
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Figure 1.2 The two top leagues: Pushers vs. Pioneers, 1985–2004
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 percent superior to that of the Pushers.
A 58 percent 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.8 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 percent—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.
We meet several firms that have managed to do this in the course of the following chapters. They come from domains as disparate as banking and ball bearings, but the central fact that unites them is this: It is their brains, not their muscle or money, that create the force to power them from success to success. They are momentum-powered firms.