The author of The Momentum Effect, to be published in the UK on 1 May, Larreche argues that companies waste resources - people, money, time and effort - on 'compensation strategies' that attempt to make up for a poor product, service or proposition. These compensation strategies, he says, gobble up resources, acting as a barrier to the continuous, exceptional, organic growth that shareholders demand.
Larreche and his research team at INSEAD examined the conduct and performance of some of the world's biggest and best-known firms during a 20-year period between 1985 and 2004. They found that the companies that pushed their businesses hard in the traditional way, seeking to drive sales through aggressive increases in relative marketing spend, delivered 80% less shareholder value and were 42% less profitable than those that reduced their average marketing-to-sales ratio over the period.
The INSEAD team categorised the firms into 'plodders', whose marketing-to-sales ratio stayed fairly constant over the 20 years; 'pushers', who increased their marketing-to-sales ratio by 3%; and 'pioneers', who cut their marketing-to-sales ratio by 4%.
The plodders underperformed the Dow Jones index average growth by 28%, the pushers' growth in shareholder value was in line with the index, while the pioneers outperformed it by 80%. In profit terms, the latter group outperformed the pushers by 58%.
What characterises the pioneers is 'momentum growth', which, says Larreche, allows firms to 'go from success to success, sweeping all before them with disconcerting ease'.
Such strong performance is driven by 'origination strategies' that create breakthrough products and services such as the iPod or First Direct. 'Because these things change people's lives, they virtually sell themselves,' adds Larreche.
He goes on to claim that these 'power offers' are about more than marketing and sales, and don't result from the linear research and development activities that most big organisations rely on.
'Firms need to spend more money and time upstream on team-based exploration and discovery,' he explains. 'Taking people out of their normal environments for a couple of days is very empowering and has an amazing effect on their ability to think creatively.'
This upstream activity also encourages excellent execution, argues Larreche, because it creates greater understanding of the offer, and breaks down silo thinking. Companies lose their instinctive ability to be original as they grow bigger and more complex, while the arrogance and resources that come with size exacerbate the problem. 'Entrepreneurs lack the money to fund compensation strategies, so they have to be original,' he says.
The Momentum Effect maps out an eight-step process to achieve sustained growth, with reference to firms that have achieved it for 10, 20, 30 or, in the case of IBM, 50 years. However, Larreche sounds a warning, 'Momentum is dynamic - unless it is nurtured, it will ebb away,' he says. 'When Wal-Mart began to pay less attention to the key drivers of its success - respect for employees, local communities and suppliers - it began to lose momentum.'
Larreche is highly regarded in both business and academic circles, but some question whether the book adds anything, and whether delivering continuous exceptional growth ad infinitum is either possible or advisable.
Patrick Barwise, emeritus professor of management and marketing at London Business School, points out that Larreche's findings are consistent with management writer Peter Drucker's comment that 'a business has only two basic functions - marketing and innovation. The rest are costs'.
'While you earn a brand reputation through behaviour rather than by throwing money at communications, you hit the real sweet spot when you successfully do both,' says Barwise.
For his part, Hugh Davidson, visiting professor of marketing at Cranfield School of Management, is wary of growth that is too prodigious. 'It is more important to aim for steady and reasonable revenue growth, based on the right vision, values and processes, rather than stretching for outstanding growth, which creates a disruptive pattern that is unsustainable,' he says. 'There is too much excitement about personalities and inventions and too little
credit given to organisations that grow patiently through a clear strategy that is understood and contributed to by everyone not just a few hundred PhDs working on "the next iPod".'
Momentum-powered firms
- Company Years
- IBM 50
- BMW 30
- Enterprise Rent-A-Car 30
- FedEx 30
- Johnson & Johnson 30
- IKEA 20
- Rentokil 20
- Tetra Pak 20
- Virgin 20
- First Direct 15
- Apple 10
- Dell 10
- Nike 10
- Sony 10
- Starbucks 10
- South West Airlines 10
- Swatch 10
- Toyota 10
Source: The Momentum Effect
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