For years, auto and energy industry watchers wondered how high the price of gas would have to climb before consumers in the U.S. — still the world’s biggest automobile market — would change their driving habits. Now they know. As the price neared and passed $4 per gallon in the late spring and summer, American motorists cut back on their driving and started to shun the fuel-hungry small trucks and sport-utility vehicles that had been profit centers for U.S. auto manufacturers. Many even switched to mass transit, the poor step child of America’s transportation mix since the 1950s.

The change in consumer attitudes about fuel efficiency has been so swift and widespread that the American vehicle manufacturers have found themselves once again behind the curve relative to their Asian and European competitors, just as they did following the oil embargo of 1973. But after the 1973 embargo and an oil price spike in the 1970s and early 1980s, the price of gasoline in the U.S. declined. Almost immediately, U.S. automakers began introducing big minivans, powerful new SUVs and luxurious pickup trucks. Consumers loved them, and small cars were displaced from the top of the U.S. sales charts.

Will that happen again, or has the cost of energy — not to mention growing concerns about global warming — triggered a long-term shift in the automobile marketplace?

Wharton management professor John Paul MacDuffie, co-director of the International Motor Vehicle Program, believes that the changes this time are more likely to stick. “It certainly feels and looks like that right now,” he says, citing a key variant in the auto industry of 2008 versus the 1970s and 1980s. “What’s different now is that there are these alternative technologies such as hybrids and fuel cells; some are in the marketplace, some are rushing to market and others are in the pipeline.” In the 1980s, “there weren’t really any brand new technologies that promised significant or permanent reductions in fuel consumption. [Auto manufacturers'] only option was mainly just to build a smaller product.”

Making the situation even worse for automakers is that the high price of oil is driving up other costs — for energy to run its plants and distribute its products, and for raw materials. The cost of steel has doubled since the beginning of the year.

Smaller cars are also part of the industry’s response this time. Autos such as Daimler-Benz’s Smart Car, Honda’s Fit and GM’s Aveo — all comparatively tiny vehicles of the sort once popular only in Europe and Asia, where gas prices have long been higher than in the U.S. — are now entering the U.S. market. GM announced in July that it hopes to introduce a minicar called Beat, which has been successful overseas, to the U.S. by 2012. But automakers in the U.S. — and in Europe and Asia — are also rushing to expand their offerings of hybrid engines, which employ an electric motor to work in tandem with a traditional internal combustion engine to provide a boost in gas mileage. The electric motor is powered by batteries that are recharged by the petroleum-powered engine when the vehicle is cruising at high speed, or when the vehicle brakes or coasts. Some manufacturers, including Ford, GM and Toyota, have said they aim to start selling “plug-in” hybrids in which the electric motor can take on more of the work because of more powerful batteries that can be recharged between trips by plugging them into a standard wall outlet.

Many Unhappy Returns

Consumer demand and the manufacturers’ scramble to serve it can be seen in the sales numbers. Auto sales in the U.S. fell 18% year-to-year in June, mostly due to sparse sales of once popular light trucks, which include pickup trucks and SUVs. Those light trucks represented 55% of all U.S. vehicle sales in 2005. In the first half of 2008, their share was down to 47%. In May, General Motors announced it would close four truck and SUV plants and roll out more fuel-efficient vehicles.

Ford, for its part, announced in June that it would delay by two months the introduction of its redesigned F-150 pickup truck, which for years was the nation’s top-selling vehicle. The new 2009 model will instead debut in the late fall of this year. In addition, the company said it will reduce by 90,000 its production of pickups and sport utility vehicles in the second half of the year. And even though Ford said it plans to build additional fuel-efficient cars, it expects to produce 25% fewer vehicles overall than it did during the second half of 2007. “As gasoline prices average more than $4 a gallon and consumers worry about the weak U.S. economy, we see June industry-wide auto sales slowing further and demand for large trucks and SUVs at one of the lowest levels in decades,” Ford chief executive Alan R. Mulally said in a statement. “Ford has taken decisive action to respond to this accelerating shift in customer demand away from large trucks and SUVs to smaller cars and crossovers.”

Certainly, the cost of oil rises and falls based on a wide range of factors. But the factors driving the price higher today — such as fears about future supply and increased demand from the emerging economies of China and India — appear to be long-term elements and have led many economists to conclude that oil prices won’t decline in the short-term. “The price of oil is likely to remain high,” says Wharton management professor Mauro F. Guillen. “On the demand side, Chinese and Indian consumers are eager to substitute cars for bicycles or public transportation. On the supply side, geopolitical conflict and scarce refining capacity are creating bottlenecks. Both forces are causing higher prices. I’m afraid that high oil prices are here to stay, at least for the next three to four years.”

Another result of $4 per gallon gas is that Americans are driving less. A Wall Street Journal review of Federal Highway Administration data found that U.S. drivers logged 11 billion fewer miles in March than a year earlier. The 4.3% decline was the biggest-ever year-over-year reduction in miles driven. The highway and other data led University of California, San Diego, economist James Hamilton to conclude that U.S. drivers “have reached a tipping point. There are a lot of hard numbers that show that we’ve actually reached a point where people are responding,” according to the Journal report.

The Same Mistake Twice

Should Detroit have seen that “tipping point” coming? “Maybe, probably,” says MacDuffie, admitting benefits of hindsight. “When gas prices spiked in 1980, the U.S. was making very big, gas-guzzling vehicles. So they were very vulnerable to competition from the Japanese and European manufacturers who were used to selling [fuel-efficient cars] in a market where gas prices were much higher. So you would think the U.S. automakers, having lived though that experience once, might be guarded about letting that happen again.”

One reason they might have dropped their guard was the irresistible profit margin in light trucks. “The trucks and SUVs had fat profit margins. Even if [the automakers] saw it coming, it would have been hard to shift resources to build more hybrids. The U.S. auto industry has been struggling with a lot of problems for a long time,” MacDuffie notes. “They felt that they could not move away from the SUVs and pickups because they needed the profits from those products to cope with the other difficulties they were having. … Labor and benefits costs were one of the largest problems.” Those costs also meant that Detroit “was slow to make their factories flexible,” which in turn made it more difficult for them to shift quickly from one product to another, adds MacDuffie. So, when U.S. manufacturers decide to reduce inventories of, say pickup trucks, they generally close one or more of the factories that make them. In their European factories, Ford and GM both make fuel efficient cars that are popular in that market. But the companies have said it would be impractical to ship those cars to the U.S. because of weakness of the dollar relative to the Euro.

A question more important than whether Detroit should have seen the coming of the tipping point is what the U.S. Big Three and their competitors in Europe and Asia should do now, according to both MacDuffie and Guillen. “The long-term challenge is to develop truly competitive hybrid or hydrogen cars. We need to make the investments now, so that they become available in 15 or 20 years,” Guillen suggests. “In the short run, we need to incrementally improve fuel efficiency and help people switch to more efficient cars.” Late as they may be, MacDuffie says he is heartened by Detroit’s aggressive investments in alternative engine technologies. “I expect eventually to see hybrids offered across every manufacturer’s full range of models. One good thing is that they are … expecting a more permanent shift in consumer demand. So they are actually closing down truck and SUV capacity and working hard on these new technologies.”

Guillen agrees that Japanese and European manufacturers “are the best positioned right now.” But, he adds, “Don’t write down GM and Ford yet. They will become much nimbler and smaller [and] they are already investing in hybrid cars. They will probably manage to catch up with Toyota.”

The Clock Is Ticking

But can the U.S. manufacturers do what they have to do fast enough? Can they develop the technologies, design the vehicles, retool the factories and sell the new cars before they run out of money? That will be a tough fight, MacDuffie says. European and Asian manufacturers have invested billions to build flexible assembly plants throughout the United States, all with the latest robotic technology. And when Detroit last stumbled over gas shortages in the 1970s and 1980s, Korean manufacturers such as Kia and Hyundai were not even factors in the U.S. market. Today, Hyundai not only sells cars in the U.S. but builds them here as well.

MacDuffie believes that Ford, GM and Chrysler each should be able to get access to the capital they need to shift to a more fuel-efficient product line and avert rumored bankruptcy filings. “GM is certainly feeling an unexpected cash crunch,” he notes, “and the company’s stock has hit an historic low. But [GM executives] have the potential for raising cash by selling some things. They could even go to the capital markets to get more money. I don’t see them lacking in options to deal with the cash crunch.”

GM, which maintains a narrow and shrinking lead over Toyota for the most sales in the U.S. market, has said it may be interested in selling its Hummer division, and is reportedly considering the sale of its Saab, Buick and Pontiac divisions. The cars in many of the GM divisions differ only cosmetically and often are built on identical platforms, sometimes even in the same plants. In the end, MacDuffie says, GM will have to weigh the marketing and sales value of maintaining each division against the money it would save through consolidation. That calculation led GM in 2000 to begin phasing out its Oldsmobile division.

Meanwhile, investor Kirk Kerkorian, who spent $1 billion to buy a 6.5% stake in Ford, recently told BusinessWeek that he would be willing to invest “a few billion dollars” if the company finds itself short of cash. Kerkorian, who has a reputation for fighting with the management of the companies he invests in, “likes what [Ford CEO Alan R.] Mulally is doing to reduce the size of the company and wean it off its dependence on light truck profits, says MacDuffie. “Chrysler in a way seems to be the most squeezed,” he notes, although its new private equity owner, Cerberus Capital Management, “has a lot of ways to get cash.”

Even though the stocks of Ford and GM (Chrysler is privately held) might seem like a takeover opportunity, MacDuffie suggests that the companies “have enough problems” to stave off serious interest. Those problems should also dissuade most bargain-hunting individual investors from picking up Ford and GM shares. “I think for most investors, there is too much uncertainly in these shares.” He agrees with CNBC Mad Money host Jim Cramer, who has labeled the shares as “too dangerous to own.”

A strategy that could help the Big Three, says MacDuffie, is to partner with each other or with overseas competitors to share research and development costs for new power trains. GM, BMW and Daimler-Benz have been working jointly since 2005 to develop an advanced hybrid system which is expected to appear in some of their vehicles by 2010. Ford and Nissan have licensed Toyota’s hybrid technology to power hybrid versions of the Ford Escape and Nissan Altima. “When people talk about a company’s core competency — meaning the one thing that the company would never give up — I often reach for the example of car companies and their engines,” MacDuffie observed. “But, lo and behold, over the last decade, there has been a steady increase in companies buying engines from other companies.”

Still, he doubts that the internal combustion engine, a technology that is now more than 100 years old, will soon fade into history. “Eventually there will be a fuel cell or hydrogen based alternative coming along, but I don’t see that anytime soon because the infrastructure costs are so massive,” MacDuffie says. “There will continue to be innovations to the internal combustion engine…. There’s often a kind of last-gasp dynamic in which there is a flurry of innovation before an old technology is finally replaced by a challenger.”

How can a company deliver continuous, exceptional growth, year after year? J. C. Larreche, a professor of marketing at INSEAD, answers that question in his book, The Momentum Effect: How to Ignite Exceptional Growth. According to the author’s research, momentum-powered firms delivered 80% more shareholder value than their slower rivals. “Momentum leaders are not lucky — they are smart,” he writes in the following excerpt. “They have discovered the source of momentum and, with it, the beginnings of a smarter way to exceptional growth. Managers often talk about ‘riding the wave.’ Momentum leaders aren’t that passive. They live by this motto: First build your wave, then ride it.”

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?

Sooner or later, it hits you in the face. Imagine you are meeting up with a senior analyst whose opinion counts with some of your company’s biggest investors. You think you’re on safe ground — after all, your company is doing better than the competition. But the analyst is in full gimlet-eyed, illusion-killing mode. “That’s nothing to crow about,” she says. “Yeah, you’ve got reasonable growth, but it’s nothing exceptional. You’re a safe bet, nothing more. Okay, I might tell my mom to buy, but then she’s happy with inflation plus one. The way we see it, you’re really grinding it out. We reckon the strain’s getting harder, too. There’s no impetus — no momentum.”

Words like that can really take the gloss off a day. The next time you gather your team, you don’t congratulate them on beating their targets — you want more. Sure, our results are up, you say, but that’s not enough — where’s the impetus? When are we going to do something exceptional? With all the resources at your disposal, when are you going to start building some momentum? The team members look at their papers. Then Paul, an anxious member of your team, looks up and says: “Okay. Got any ideas about how?” What are you going to say?

What’s Holding Us Back?

This book sets out to answer one question: How can I find a way to deliver continuous, exceptional growth, year after year? By exceptional, we mean exceptional relative to expectations: growth that sets you apart. In some high-technology markets, this might mean 60%. In others, 6% might really stand out from the crowd if the market average is just 3 or 4. What we are talking about is growth that puts serious distance between you and your competitors. [We want to] show you how to get the traction you need to make sure that none of your effort is being wasted — to make sure that it all goes toward delivering tangible results. It will help you break free from the grind.
After all, grind is what most businesses endure. Most firms that manage to deliver growth do it the hard way. Measures that improve profitability often hold back top-line growth, while measures that drive revenue growth require investments that can drag down profitability. As one foot starts to run, the other starts sinking in the mire. It’s devilishly hard to get the balance right and break free: It seems that all you can do is keep pushing. Companies have to push sales forward with big marketing investments while at the same time harrying their employees to become more productive and nagging their suppliers and partners for better deals. Pushing is hard work — it’s exhausting and it churns through resources.

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 momen­tum. 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 sim­plicity, 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% drop over the timeframe. This cut was made while competing against the Pushers who were plowing in a 3% 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 72% 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.

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!

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. Over the 20-year period, using the Pushers’ performance as a reference, the Pioneers’ revenue growth was 93% 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.

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. 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. 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% — 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. 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.

Momentum-Powered Firms

The results of this research might seem counterintuitive at first sight, but they are perfectly logical. 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. These businesses will never build momentum. They are momentum-deficient firms.

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.

The Power of Momentum in Action

Wal-Mart and Toyota are two apparently dissimilar firms. They operate in two different industries and come from different countries and cultures. But they are two of the world’s 15 richest companies, and each is number one in its own industry. More importantly, both got there by creating the conditions needed for the momentum effect to emerge. Although one has lost its momentum, the other is still in full swing.

Wal-Mart:

Sam Walton launched his company with a focus on customers. What is remarkable is the way that this customer focus created exceptional growth and continued to power Wal-Mart for many years after it had become a major industry force. Whatever its current challenges — and there are many — for the better part of a generation Wal-Mart was a momentum-powered firm.

Sam Walton knew about retail, but his main asset was the fact that he knew about customers. His strength was this: He liked to listen to them and observe them, and he understood their needs. When he started out, he related deeply to a very specific kind of customer — people like him, people from the United States’ rural South.

Walton’s customer orientation made him aware of the potential of this region’s smaller towns. In 1962, when Wal-Mart was launched, the standard wisdom held that large retail operations could not survive in towns with fewer than 100,000 residents. But Walton decided that this was where opportunity lay, and he deliberately opened stores only in small towns where there was no large-scale competition.

Walton understood that these customers would value his offering, that they would appreciate being able to shop locally, rather than making long journeys to larger towns. He also realized that these shoppers were worth more than they seemed. Although their wallets weren’t as full as those of people in large cities, Wal-Mart was able to command a higher share of their spending because there was no competition. The combination of cheaper premises, lower labor costs [and] no competition … meant that Walton’s customers were extremely profitable to service.

This winning combination gave Wal-Mart the traction it needed to start building momentum. As the firm mushroomed, it continued to improve all aspects of its operation, from customer service to supply chain and supplier relationships. Eventually, Wal-Mart was able to glean economies of scale in purchasing to achieve its mantra of “Every Day Low Price” (EDLP) and gain further momentum.

EDLP runs counter to traditional retail promotions that lure customers into stores, hoping that they’ll also end up buying more expensive products. The famous expression to describe retail strategy in the days before Wal-Mart was “an island of losses in an ocean of profits.” It was really an island of bait in an ocean of arrogance and customer abuse. It was akin to duck hunting — attracting customers the same way hunters attracted wild ducks with decoys.

With EDLP, Wal-Mart turned the relationship with customers upside down. It moved from duck hunting to a vibrant partnership. Wal-Mart’s competitors, to their discomfort, failed to understand that, although EDLP was jargon on the surface, it expressed a strong, hidden emotional value deeply appreciated by customers: trust. This customer trust powered the company’s growth for decades.

Unfortunately, momentum doesn’t look after itself. There is a perception that Wal-Mart slowly began to pay less attention to many of the key drivers of its success — respect for employees, local communities, and suppliers — and began to lose its momentum as a result. Momentum is dynamic: Unless it is constantly nurtured, it will ebb away. However, the reward for that unstinting attention can be immense — it can make you number one in the world.

Toyota:

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.

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. The Prius, for example, offers a package of utterly compelling value to environmentally aware city-dwellers: With its low carbon footprint, practicality for city driving, and celebrity association, it is more than just a car — it is a statement. The Lexus offers a totally different package of value to a totally different market, but the package is just as compelling, if you are part of its target market.

Consider the contrasting histories of the U.S. auto industry and Toyota. 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. Models like the Prius and the Lexus range appeared in their showrooms. Both of these cars connect on an emotional level with their drivers’ self-image and aspirations — green and clean for the one, luxurious and status based for the other. This level of customer engagement did not happen by chance — it was the result of a focused, iterative process that created the conditions under which the momentum effect, and the efficient momentum growth it delivers, could flourish.

Join the Momentum League

We have spent many years focusing on the difference between the majority of ordinary firms and those few that deliver truly exceptional results. Our research has shown that increases in marketing pressure can lead to significant profitable growth. The Pushers delivered good performance and matched the Dow Jones average over a 20-year period. But who wants average growth when there is a much better option? 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. Ask yourself the question prompted by that meeting with a financial analyst at the beginning: When are we going to start building some momentum? Momentum offers an easier, more efficient, and exceptional form of growth. But it requires the ambition to break free from the traditional reflex of using more resources to fuel it. The very things that seem to push you forward are holding you back. Momentum does not happen by chance. Nor can it simply be willed into existence. Achieving momentum requires an understanding of its source, and then the relentless application of a systematic process. It requires a momentum strategy.

Momentum leaders are not lucky — they are smart. They have discovered the source of momentum and, with it, the beginnings of a smarter way to exceptional growth. Managers often talk about “riding the wave.” Momentum leaders aren’t that passive. They live by this motto: First build your wave, then ride it.

For nearly 30 years, Wharton management professor Lawrence G. Hrebiniak has taken the art of business strategy and put it under a microscope. Over time, he has brought one critical element into irrefutable focus: Creating strategy is easy, but implementing it is very difficult.

In his new book, Making Strategy Work: Leading Effective Execution and Change (Wharton School Publishing), Hrebiniak presents a comprehensive model to help business leaders bridge the gap between strategy making and successful strategy execution. He challenges executives to recognize that making strategy work is more difficult than setting a strategic course — but also more important — and he documents the obstacles that get in the way of successful performance.

The book relies on Hrebiniak’s research as well as case studies from companies like GM, Chase-Manhattan, Disney and GE. After examining why businesses find strategy execution so difficult, Hrebiniak provides a roadmap that incorporates the critical areas of organizational structure, coordination, information sharing, incentives, controls, change management, corporate culture, and the role of power and influence in a company. The book concludes with a case study on mergers and acquisitions which Hrebiniak uses to show “how practical execution can be in confronting an important and pervasive real-work issue and how it can save management a lot of time, effort and money.”

In April and September, Hrebiniak will lead two executive Wharton School workshops on “Implementing Strategy” that will focus, in part, on why the devil is in the details when it comes to strategy execution. Below, he discusses his book with Knowledge@Wharton.

Knowledge@Wharton: The premise of your book is that “making strategy work is more difficult than strategy making.” Why do you think this is so difficult for companies to grasp?

Hrebiniak: I’ve asked myself that question for years. In the book, I talk about how managers in MBA and undergraduate business programs are well-versed in how to plan but not to execute. They first learn about it in the work place, and that’s difficult because people tend to jump into execution without thinking about why it is so important.

Knowledge@Wharton: So execution is like the strategy stepchild?

Hrebiniak: Yes. Only recently have people begun to realize that effective execution is a competitive business advantage. Companies are now seeing that if they execute better, they perform better. If they integrate long-term and short-term objectives, if they consider incentives, controls and feedback, they execute better. And if one company has that and the other doesn’t, the competitive advantage is clear.

Another reason why it’s so difficult for companies to grasp this, is that there are more people involved in executing strategy today – and execution takes longer than people expect. Political and organizational problems typically surface. So you develop a strategy, but you have to go throughout the organization and through dozens of planners to make sure it is carried out. It takes longer. Once execution starts, it could be one or two years, or even require a three-to-five year time frame.

Knowledge@Wharton: You write that managers often dream up ambitious scenarios but leave the execution of strategy to their underlings – which leads to the perception of what you call the strategy “grunt.” To achieve successful execution of a strategy – and to make sure that it gets the right emphasis – isn’t it important to change this hierarchy of planning vs. executing strategy? Don’t managers have to get rid of the idea that executing strategy is somehow inferior to making strategy?

Hrebiniak: Absolutely. There is still the perception that smart people plan and grunts execute. The short answer is that those who have power or influence have to embrace, believe in and foster execution. Some people think it is a lower-level responsibility – that’s the older perception of execution – but this simply isn’t true. I’m talking with a CEO of a global aerospace company who is starting to see that changing strategy is a high-level execution issue. If the CEO gets his VP involved and they get their managers involved, people take it more seriously through the organization.

When companies separate the planning and doing – that’s wrong. Executive strategy requires ownership at all levels, from corporate level managers on down. Strategic success really demands a simultaneous view of planning and doing. The greater the overlap of doers and planners, the greater probability of success. It’s so important for managers to be thinking about execution as they are formulating the plans.

Execution takes longer. Execution is a process, and not an action or a step. And execution involves more people than strategy formation.

Knowledge@Wharton: In Making Strategy Work, you point out that managing change, including “culture change,” is an important but often elusive concept.

Hrebiniak: Managing change has always been a problem. Look at the Wharton-Gartner Survey from the book [a joint project between Wharton and researchers at the Gartner Group that asked managers about the challenges they face]: Based on responses from 223 managers, we know that their number-one problem is the inability to manage change effectively or to overcome internal resistance to change. Why? Because change is difficult. It creates resistance. People lose power, resources, autonomy, or they perceive that they might lose autonomy. The real problem, though, is that people don’t lay out a change plan. They don’t even think about a change plan. They do everything at once. They don’t set priorities. This makes coordination difficult. And if you fail, you can’t explain it. If there is a problem, and you are doing 22 things wrong, you don’t know if it’s the interactions of the 22 or the interactions of the subsets. What accounts for the failure? People try to change, and when they can’t, they turn around and say, ‘We can’t manage change. We tried this three times and screwed up.’ Change has to be taken seriously, not ‘What’s hot this week?’ You set priorities and decide up front what it is you want to change. Every plan should have an action agenda, with steps laid out for accountability and follow-up.

Knowledge@Wharton: What about a timeframe?

Hrebiniak: It means different things in different industries. Management doesn’t like sequential change. It takes longer. It’s too boring. I often say to them, ‘Factor in some smaller, more manageable pieces in your strategy, so that you can celebrate each step and move sequentially.’ But managers love to jump in, grab the low-hanging fruit, grit their teeth and get it done. The problem is, speed kills. You jump in and do change all at once, and you can’t coordinate and you don’t understand the cause and effect, and you can’t explain mistakes. The biggest error is that we do too many things at once. I warn people about speed. Excessive speed or moving very fast when it comes to culture change sometimes sounds desirable but it’s dangerous.

Knowledge@Wharton: Who should be in charge of making strategy work? Do companies need a CSO – a chief strategy officer?

Hrebiniak: This is a difficult issue. Some companies are large enough and so complex that they need someone who literally is in charge of integration, so companies are creating these roles. In most good organizations, there is delegation. Let’s say we are entering a new market and we are going to execute a new global strategy. Who is involved with that? The CEO says, ‘Me and my executive committee,’ so the VPs get together, and now we have changed the structure worldwide. This affects IT capabilities. Then who is in charge of that? The chief information officer who reports to the CFO has to get involved, and then that person has to deal with the IT people worldwide. My point is, there has to be a logical flow of strategic information between the upper and lower levels in terms of strategy and tasks, and there has to be accountability along the way. If you come up with a good goal – but don’t identify the who, what, when and why up and down the organization — accountability varies along the way. Also — and I want to stress this point — I don’t want people to think that execution is doing something different. We do it every day.

Knowledge@Wharton: In your model of strategy execution, you stress that business strategy is important to the execution of the corporate strategy. Why isn’t this given more priority? And would this be at the heart of why more mergers and acquisitions don’t work?

Hrebiniak: Yes. The two are interdependent. In a corporate plan for diversification or, if a company is acquired, as an acquisition strategy, the business has to know where it fits in and have clear performance metrics from the corporation — such as, ‘Here’s why we bought you.’ Often there is not clear communication between corporate and the business. I do say in the book that the dog should wag the tail, but sometimes the tail wags the dog if the division is powerful and it’s not integrated into corporate-level strategies.

Knowledge@Wharton: You call your concept the “model of strategy execution.” No catchy phrase, no clever acronyms. Was this intentional?

Hrebiniak: No, not really. I’m pretty straight forward. The only time I come close to [using a catchy phrase] is when I claim that the model offers the “25,000-foot view” — an important integrative perspective to help the reader understand the logic of the entire strategy execution process. I hope it gets people to see the whole picture of making strategy work.

“Cisco’s Graeme Wood: Acquisitions Happen Quickly, but Integration Is a ‘Slow, Steady Process’
Graeme Wood is director of acquisition integration at Cisco, the leading worldwide supplier of networking equipment and network management for the Internet, headquartered in San Jose, Calif. Since In this role, he has overseen the integration of 30 Cisco acquisitions — the most notable of which is Scientific Atlanta. The $7 billion deal, completed earlier this year, allows Cisco to offer an end-to-end data, voice, video and mobility solution for carrier networks and the digital home. During a recent visit to campus, Wood spoke with Wharton management professor Saikat Chaudhuri about how acquiring a global company like Scientific Atlanta fits into Cisco’s overall acquisition strategy, and the lessons learned about integrating on a large scale”.

This piece of article is collected from the web site:
knowledge.whatton.upenn.edu
From: November 29, 2006