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The power of momentum

(chinadaily.com.cn)
Updated: 2008-09-28 13:25

We thought: "There just has to be a better way than this." Some of our earlier work showed that firms with certain shared characteristics were 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. 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.

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 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.

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, 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 72percent of the Dow Jones Index average growth.

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.

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