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The source of momentum
The day Gary Kildall went flying
One fateful week in August 1980, two different leaders from similar companies in similar sectors faced the same singularly important opportunity. The decisions they made that week set the direction their companies took and, indeed, each man’s entire future success. One company began to build a momentum that would see it become one of the world’s largest corporations, while the other faltered, stumbled, and failed to fulfil its promise. It was the end of one era and the beginning of another.
The first leader was named Gary Kildall. On the day he was due to meet a delegation from another company about a possible new business deal, he decided to go flying in his plane instead. Insulted, the visitors took their business to the second leader. His name was Bill Gates, the customers were from a company called IBM, and the new business was a contract to develop the operating-system software for personal computers.
The rest is history – the software that Microsoft provided became the de facto operating system for PCs. Microsoft entered a period, lasting almost two decades, during which it generated exceptional, momentum-powered growth and established itself as the leader of a new and crucial industry.1 Whatever its current challenges, during the 1980s and 1990s Microsoft was an exemplary momentum-powered firm – its growth was phenomenal and created enormous value for its stakeholders. While Gates became one of the richest men on the planet, Kildall struggled along, a half-forgotten software pioneer. His company, Digital Research, had created the dominant operating system for the microcomputers of its day – that was why IBM approached him. He had enormous technical vision and talent, he had shaped his industry and was respected by his peers, but he failed to harness the momentum that was his for the taking – Digital Research became a momentum-deficient firm. It simply did not see the huge value-creation potential that lay behind IBM’s plans.2
This failing is a stark illustration of how one company can kill potential in the bud while another grasps it. We do not pretend that if we had looked at Microsoft in 1980 we could have predicted its astonishing success. But we can say that Gates intuitively knew how to seize opportunities and had an accurate vision of customer needs. This understanding led his company to develop or acquire the capabilities to realize a virtually unlimited potential for growth. For at least two decades, it felt the full impact of the momentum effect.
The source of Microsoft’s momentum
An analysis of Microsoft reveals that from the very start the source of the company’s momentum has been its deep understanding of its customers. Bill Gates was always a customer-focused leader with a clear view of who his customers were. At the start, these were just normal people, amateur programmers who wanted independence and the ability to use small computers. He developed and offered them inexpensive compilers for easy-to-use programming languages such as Basic.
When Bill Gates was approached to help develop a program to power the new IBM PC, he immediately agreed. He didn’t quite know how to do it, but IBM was IBM and he wasn’t about to miss out on the potential of a collaboration. He had no operating system on hand, but he managed to find where to buy one. It was called MS-DOS and Gates offered it to IBM’s customers for as little as $40 because he wanted it to reach a mass market.
The momentum was building. Microsoft’s customers were satisfied, and Gates kept improving the offer to keep them satisfied. The more his customers worked on PCs powered by MS-DOS, the more likely they were to become loyal to Microsoft because they grew accustomed to the system and because other programs would be designed as ‘MS-DOS compatible’.
Microsoft refined and expanded its offer, confident that the corporate world would create more value for the company. Now Gates’ engineers developed more applications – word processing, spreadsheet programs and presentation software. Observing Apple’s success with an icon-based and user-friendly operating system, Microsoft developed Windows. The Microsoft story has many other examples of this sort, but the point is this – the company never stopped developing packaged customer solutions with more features, more convenience and at lower prices than previous offerings. Microsoft was not just technologically driven – it knew how to develop compelling offers that would have customer traction and create exceptional growth.
In retrospect it all seems obvious, almost inevitable – but why Microsoft and not Digital Research? What set Gates apart from Kildall? Momentum strategy – a coherent set of actions focused on creating the conditions needed to produce momentum. To understand what momentum strategy is, and why it is so powerful, we must first understand the source of momentum. And that lies at the very heart of the process of value creation.
How value is created
All businesses, whether they are the most aggressive private enterprises on the prowl for market share or purely altruistic non-profit charities, exist solely to create value for their stakeholders.3 ‘Value’ and ‘stakeholders’ can be defined in different ways, but no business – private, non-profit or public – deserves to exist if it is not creating and delivering value.
‘Value’ is not something that just exists, waiting for firms to come along and harvest it. Before value can be plucked, it must be created. However, the phrase ‘value creation’ is confusing because it is a term used readily by different people in different sectors – fund managers, marketing directors and salespeople all mean something different by it. In our case, by ‘value creation’ we mean the entire process by which a business creates the value that it was established to distribute.4
Value creation starts with customers who spend their money to have their needs satisfied. Customers are the original source of all the value that firms can distribute to their stakeholders. A firm’s ability to move that value from its customers to its stakeholders depends upon its capacity to execute three fundamental business competences as set out in Figure 2.1: value extraction, value capture and value origination.
Figure 2.1 The value creation process
Value extraction is about ensuring that the firm is efficient enough to not waste large amounts of the value it captures before passing it to its stakeholders. The first five years of Jack Welch at the top of General Electric were marked by his successful efforts in making the company leaner and extracting more value out of its activities. The dramatic changes – particularly the rows of empty desks – actually earned him the nickname ‘Neutron Jack’. Any number of corporate turnarounds and mergers have been based on so-called cost synergies improving a business’s ability to extract value.
Value capture is the process through which value is gained by the firm, either from competitors or partners – i.e. through gains in market share or by making sure that the firm is obtaining its fair share from alliances with third parties, such as suppliers or resellers. A famous example is the competitive battles between Coke and Pepsi – the ‘cola wars’ – and the occasional display of power between Coca-Cola and its bottlers.
Value origination involves the creation of new products or services that customers esteem highly enough to pay for. Almost every successful, new and innovative product results in value origination. It is called ‘origination’ because it is the starting point of the value flow that the firm creates. The examples mentioned in the previous chapter were in this category – the Wal-Mart stores in small communities and Toyota’s Lexus and Prius models originated new sources of value.
A firm’s capabilities in these three competences will determine its performance. Each one is crucial, but their relative importance in generating long-term sustainable growth is totally different. Only one of these capabilities offers the potential for unlimited growth.
Where is the unlimited potential?
Figure 2.1 illustrates the upward flow of value, welling up from its source to the firm’s stakeholders. The pyramidal structure of the figure shows how these three competences are built on each other. But there is one striking feature of this process – no matter how well a firm performs at each of its stages, the maximum value that it can potentially pass on at any stage is limited by the value it acquired at the preceding stage. A firm cannot extract more value than it captured, and cannot capture more value than it has originated. It is immediately obvious that there is only one stage in the flow with unlimited potential to deliver growth – value origination.
To gain and maintain momentum, a firm must excel at all three of these strategies – otherwise the value that is originated will not flow through the system. Obviously, value extraction is essential – an inefficient business can squander the value it creates. Indeed, in some particularly troubled situations, a firm will find it easier and faster to improve its results by focusing its efforts on extracting more value from current operations than on originating new sources of value. However, once a business has extracted every last penny through cost-cutting, quality management and other similar initiatives, there is no more to be found.
Likewise, value capture. For the last few decades, the field of business strategy has been dominated by a focus on value capture through competitive strategy, largely under the influence of Michael Porter.5 A company must compete effectively and capture value from its competitors or it will disappear – Porter’s work has been vital in helping firms to improve their capabilities in this area. But ultimately, as with value extraction, growth through value capture can go only so far because traditional competition is a zero-sum game. Even if a company was not hindered by antitrust barriers and was able to secure a dominant market share, its potential would be limited by the size of the markets it serves. The best illustration of the limits of competitive strategy is offered by Chan Kim and Renée Mauborgne with their brilliant and original work on Blue Ocean Strategy.6 They show how successful organizations concentrate on their customers, deliver innovative solutions and eventually, in the authors’ memorable phrase, ‘make the competition irrelevant’.
Capturing and extracting value are fundamental to the way we do business today, but organizations have been striving to become more efficient and competitive for years and many still find delivering consistent, profitable growth a challenge. Why? Because the battles they are fighting blind them to the unlimited potential available at the very source of value creation.
To capture value you must focus on your competitors and partners. To extract value you must focus on your own internal processes. But these are not the source of the value creation flow.
Where is that source? With the customers.
The waves of restructuring, downsizing, outsourcing and total quality management – aimed at improving efficiency – have caused many leaders to become obsessed with value extraction. Michael Porter’s work led others to fixate on the combative drive to succeed in the Red Ocean of competition. Kim and Mauborgne’s exciting work opened the eyes of others to the unlimited potential of the Blue Ocean.
In the end, to deliver exceptional growth, firms must navigate effectively across all three levels of value creation: origination, capture and extraction. This is what momentum strategy achieves. We will expand and deepen the explanation of the way momentum strategy works throughout the book, but to start with here is the broad picture in a nutshell. The source of momentum lies in value origination but the momentum inherent in that source can be exploited only when certain conditions are aligned and reach a sufficient level of intensity. First, firms need to be able to develop offers that are perceived as compelling by customers. The customer traction that stems from these compelling offers gives an initial, rapid and efficient burst of growth. This growth is maintained and accelerated by customer retention and engagement, and by systematic actions aimed at nurturing the momentum. Next, the momentum-powered firm is able to capture all the value that it has originated because the speed of its growth makes it difficult for competitors to react effectively – in a sense, it leaves its competitors trailing in its wake. In the last stage, the momentum-powered firm exploits the strengths of its compelling offers and high customer engagement to extract as much as possible of the value that it has captured. It is able to do this because its operations are targeted at supplying the high growth of successful products and its marketing simply has to reinforce the underlying customer traction, rather than compensate for market resistance.
In short, momentum-powered firms originate more value through compelling offers. They capture more value by being continuously ahead of their competitors. They extract more value with more focused operations and more efficient marketing. The coherent combination of actions at these three levels creates a momentum strategy.
Drivers of momentum strategy
Momentum strategy rests on some key competences, including customer focus, innovation and marketing excellence, but it also requires an interactive involvement of multiple functions within the firm. The avenues for the successful design and execution of a momentum strategy are implicit in the brief exposition given above. They are the key drivers of exceptional growth – exploring the customer’s space, crafting power offers and mobilizing for growth.
Exploring the customer’s space
The traction that provides the initial grip needed for momentum to develop comes from novel insights into the customer’s world. A large part of the success enjoyed by Nintendo’s Wii, the TV-based home computer game system, comes from the simple insight that moving is more fun than sitting still, and that when people move their bodies they naturally interact more with those around them than they do when they’re sitting down. From that insight it becomes obvious that using your arms to control a virtual tennis racket, baseball bat or boxing glove feels more real than using your thumb.7 Also, that by standing side by side with your opponent rather than sitting next to them, you will look at them more, touch them more, talk to them more and generally become more engaged and active – in short, you will have more fun.
But to acquire those insights, firms must explore their customers’ space, their worldview and the emotions that drive their behaviour. Consider the example of an elderly woman who was a member of a focus group on anti-inflammatory drugs. Suffering from chronic back pain, this unfortunate woman regularly used an anti-inflammatory gel. In the focus group, she explained that she was unable to reach her back herself to apply the treatment but that she lived alone and had no one to help her. Her solution – ineffective, impractical and humiliating – was to smear the gel on her shower door and then rub her back against it. Obviously, there had to be a better way. The company, Novartis, invented a special applicator to be included with the gel in a special package for back pain.8
Not all avenues for momentum strategy can be so directly pointed at by customers. As Henry Ford memorably said, ‘If I’d asked consumers what they wanted, I would have invented a faster horse.’ Exploration means being ahead of others, including customers – ahead, down new paths that open up valuable avenues for them. It is the insights revealed by this exploration that uncover original sources of value and drive exceptional growth. To exploit these growth opportunities successfully, firms must craft offers that have a powerful appeal to customers – just like the Wii.
Crafting ‘power’ offers
‘Power’ offers lie at the heart of momentum. They are offers that are so resonant, so compelling, so powerful that customers are drawn magnetically toward them. The crafting of power offers is not just another name for product development: it’s not concerned with just the product, and it involves much more than development – power offers have both breadth and depth. The complete offer includes the image, a relationship, the trust, the kudos that ‘membership’ of the ‘club’ of users brings, the reliability and every other component of the value that a customer acquires. Crafting involves shaping all aspects of the complete offer to maximize both its perceived value to the targeted customers and the equity of these targeted customers to the firm.
The crafting of power offers also reflects an ambition to go beyond the norms to achieve something exceptional for the customer and for the firm. It expresses the collective care that an organization places in the realization of an offer, in the same way that true craftspeople put all their heart and ingenuity into creating a beautiful and unique piece of work.
Nowhere is Toyota’s ability to craft a power offer that generates traction better illustrated than the Scion, a range of cars aimed at young drivers. For them, value is all about customization and individuality, with the Internet playing a pivotal role in their lives. So what has Toyota done? It has crafted a car that doesn’t look like Mum’s or Dad’s car, that can be designed by the customer online, and that is packed with optional extras like extreme sound systems and radical paint schemes.
And because Toyota is focusing on the drivers of tomorrow, it has entered a sponsorship deal with Whyville, a virtual reality world aimed at 8-to-15-year-olds, which means that kids can buy, customize and ‘drive’ their own virtual Scion. The sponsorship supports Whyville’s underlying educational purpose by teaching kids maths – in the context of arranging their virtual car financing.
The Wii and the Scion are examples of offers that could not have been designed by traditional product development processes. They are the fruits of firms that had the ambition to craft offers that are so perfectly aligned with their customers’ desires and sense of self that they feel as if the offers were designed personally for them.
Mobilizing for growth
An effective momentum strategy requires a shared ambition across the firm, an objective that must trickle down to all levels of employees. Everyone in the firm must be focused on satisfying, retaining and, most importantly, engaging customers. Inspirational leaders such as Richard Branson at Virgin, Steve Jobs at Apple, Lou Gerstner at IBM and Sam Walton in Wal-Mart’s first three decades are all excellent examples of this.
Effective mobilization also involves a sense of urgency. Michael Ruettgers, the former CEO of data storage manufacturer EMC, once took a novel approach to making staff realize the importance of customers. The firm was way behind on its sales targets and had consequently accumulated a vast inventory. ‘So to make sure everybody understood how important this was,’ Ruettgers explained, ‘we took all that extra inventory and put it in people’s offices. People had to climb around crates to get to their desks. Miraculously, by the end of the next quarter we had met our sales targets. And all of the offices were empty.’9 His action was effective in this context because it was coherent with other measures aiming at mobilizing employees to create value for their customers.
Momentum strategy at work: the iPod
If you want an example of momentum strategy at work, just look for a pair of white ear buds. Whether you’re on a plane or in a coffee bar, at a shopping centre or the beach, the little white buds of an Apple iPod are ubiquitous. The iPod has become the decade’s defining consumer item and iTunes, its related music store, sells millions of licensed music files every month. But think back to 2001 – Napster was effectively threatening the future of the music industry by enabling users to download unlicensed digital copies of songs for free, Sony was taking its powerful Walkman brand into the digital age, and Apple’s main product was the iMac, a beautiful-looking computer aimed at a relatively niche market that prized design and simplicity over compatibility.
What happened? How did Apple manage to create so much value so fast? It was all due to excellence in value origination. One of the key factors Apple has always understood is the importance of design and of the customer interface, but the iPod is much more than a user-friendly, good looking gadget. It is cool. It captures its customers’ imagination. Even today, with dozens of cheaper alternatives offering similar functionality, the iPod is still top of the tree.
But it is the iTunes website that stands out as the greatest achievement of Apple’s momentum strategy. Remember that, in 2001, illegal copies of songs were being shared across the Internet for free and with no digital rights management restriction embedded in the files. Who would have predicted that a service offering the same files, with restrictions on excessive copying, could become a successful paid-for service?
It worked because Apple understood its customers’ space. They knew that they were ripping CDs and illegally sharing files – not because they were dishonest but because their sense of honesty and fairness was affronted by the music companies’ business model. They felt that most CDs contained only one or two hit songs that people wanted, and a large number they didn’t want but were forced to buy in order to get the ones they did. By offering users safe and legal access to the specific tracks they wanted, at a price they perceived as fair, iTunes originated new value for its customers. It created a market-leading service, selling a product that just a few months before was regularly being exchanged for free.10
The momentum effect Apple is enjoying is based on value origination, but the company has also improved its performance on the next two levels of value creation. Both the iPod and iTunes have captured significant value from Apple’s competitors. iTunes in particular is also a great example of value extraction. An offering that not only sells you a music player, but then continues to sell you music to play on it, will obviously extract much more value than one which consists of a player alone. Indeed, not doing so would be like Gillette selling razors but not selling blades. Obvious, sure, but Apple was the only company to do it successfully.
In mid-2007 Apple launched the iPhone. Early indications are that the company has done it again. Despite a hefty price tag, the one millionth iPhone was sold just 74 days after launch.11 The new Apple momentum that started with the iMac and took off with the iPod and iTunes may be beginning a new phase. It’s an impressive record.
How momentum growth opens a new efficiency frontier
One of the defining themes of momentum is how it both ensures growth opportunities and exploits them more efficiently. You can say it in three words – more for less.
Efficiency, of course, represents one of capitalism’s most ancient and never-ending quests. Ever since the Industrial Revolution, managers have devoted their waking hours to cutting production costs by improving organization, seeking cheaper or more productive labour, and installing better technology. Pushing the boundaries of cost-based efficiency enables firms to increase profits – but this alone cannot create sustainable growth.
The result is that while efficiency has progressed in operations and organization, marketing costs have been increasing as a percentage of revenues, so much so that in many companies marketing expenditure has become the value chain’s number-one component. This is typical of the Pushers. Winning the old style efficiency battles can still provide growth, but that growth is limited. Pioneers, on the other hand, have discovered that there is a new efficiency frontier – one that focuses on providing customers the best offer in the most efficient way. This is the one that creates momentum.
Moving from compensating to momentum strategy
Most businesses compensate for inadequate products and poor customer targeting by pushing their products on a sceptical market place. They attempt to batter their way to their customers’ wallets through advertising, special promotions, hard selling or discounting. To compensate for 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 is exactly how the Pushers we looked at in Chapter 1 behaved. We call it ‘compensating strategy’. It is the long-term cancer of business – eating resources and weakening the firm from the inside out. It is not sustainable.
The return on the marketing investment may even be positive, increasing both growth and profits in the short term. But our research reveals that penalties appear in the longer term. Even a good return on a marketing investment supporting an inferior product does not necessarily mean that it should be made. Investing first in product improvements is a better option for profitable growth.12
Unfortunately, the first reflex of marketing managers facing a challenge is to ask for more resources. It’s natural. Everybody knows that a large part of marketing resources is wasted, but this has become acceptable. In business meetings, managers laugh at the old adage, attributed to John Wanamaker, ‘Half the money I spend on advertising is wasted: the trouble is I don’t know which half.’ They shouldn’t laugh. They should cry. They should fall down on their knees and beg forgiveness for such profligate inefficiency.
Indeed, top management should give marketing and sales investments much closer scrutiny. This is where the new efficiency frontier lies, rich with opportunities for improvement!
We do not intend to bash marketing people. Marketers are often among the most able, innovative and dynamic people in an organization – much closer to the customer than others in the business. Marketers and salespeople are skilled communicators, capable of connecting with customers and presenting images and ideas that resonate with their desires. And this holds for both sides of their crucial function – upstream in guiding the creation of offers to fulfil unsatisfied needs, and downstream in diffusing them to customers in the most effective and efficient way. Unfortunately, most spend a disproportionate amount of their time downstream, outspending the competition on existing product categories. It is upstream that they should turn their eyes, to outsmarting the competition through innovation and discovery.
Consider the Apple iPod again. The iconic advertising campaign – a silhouetted figure with white headphones and an iPod against a bright, solid colour – was totally integral to the value being offered to the customer. The ads didn’t just try to sell the value, they were a fundamental part of the value being offered. The design strength of these ads – and their successors, incorporating musicians as diverse as U2, Eminem and Wynton Marsalis – contributed to the iPod’s appeal. They were cool and looked great, just like an iPod. They were clear and simple, just like an iPod. They expressed enjoyment and variety, just like an iPod. This is true marketing excellence – not just spending money to try to force-feed the public with a product but actually adding to the value of the offer itself. It is the whole process of understanding the customer and thereby inspiring the insights that make such ads effective. This is marketing’s role in momentum strategy.
Creating offers perfectly crafted to customers’ needs and values creates powerful customer engagement – a momentum that obviates the need for expensive sales and marketing and the cost-cutting necessary to fund them. That is how momentum opens up the new efficiency frontier. Exploiting this frontier by moving from compensating strategy to momentum strategy is the subject of several later chapters in this book. Now, as we head that way, the time has come to proclaim what we believe should be the single rallying cry of all momentum-powered businesses: ‘Less is more, more for less’.
Less is more and more for less
The key to the new efficiency frontier is to realize that less should be more for the customer, and that as a result the business will get more for less.
It’s not at all paradoxical. For customers, ‘less’ should mean that they get exactly what they need and nothing more, with no superfluous elements that create complexity and that could destroy value. In a world where people are subjected to a geometric progression of pressures, time is a crucial resource and simplicity an increasingly valuable prize. The absence of unwanted features and complexity makes customers feel that they have been listened to and understood. This apparent personalization is why giving them less can actually provide them with more value. For customers, less is more.
This obviously requires a considered, confident understanding of human nature in general and one’s target customers in particular. Firms that lack this understanding generally engage in a compensating strategy to make up for their deficiencies. To reduce the risk, they provide more – just in case. But this only increases costs to the firm and decreases value to customers.
In contrast, firms that are strategically focused on value origination develop a superior awareness of their customers’ needs. This enables them to deliver exactly the offer that will resonate with them – nothing unnecessary, nothing wasted. By knowing that less is more for customers, they achieve more for less for the business. This is the essence of the new efficiency frontier. It is the road from compensating to momentum strategy.13
Unlock your unlimited potential
Although efficiency drives, restructuring, mergers and acquisitions can all help a company in capturing and extracting value, their potential impact on growth is limited. Likewise is our obsession with acquiring and maintaining spending superiority. Pushing growth year after year through additional resources has obvious limitations that will one day catch up with a firm, its stakeholders and its leaders.
The key imperative of modern business leaders must be to simultaneously achieve superior growth and superior efficiency – what we call exceptional growth. To achieve this ambition, they must seek not only to extract value from the business and capture value from competitors, but also, and more importantly, to originate new sources of value from customers. This is the unlimited potential of momentum strategy. The attention that momentum leaders give to the three drivers of a momentum strategy – customers, power offers and mobilization – is what sets them apart from the rest. We will now examine how this can be put into practice through a systematic momentum process of eight specific steps. It is time to take the road to momentum and fulfil your unlimited potential.