Preface

  1  We use the word ‘effect’ in the same way that it is used in the phrases ‘the Doppler effect’ or ‘the greenhouse effect’ – to describe a phenomenon. The book is called The Momentum Effect rather than simply Momentum to emphasize that momentum is first of all a phenomenon – something exceptional that occurs under specific conditions. For a further clarification of the terminology used, please refer to note 1 of Chapter 1.
     While this book is the first to present a comprehensive investigation of the momentum effect in business strategy, the notion of ‘momentum’ has permeated all spheres of society. It originates in the physics of classical mechanics, where it is defined as the mass of an object multiplied by its velocity and reflects the ability of the object to keep moving. It has been adopted in common language to convey the idea of an intangible force that boosts performance and leads to repeated successes. It has been the subject of many books in a variety of disciplines, including sports, politics and social sciences. In finance, ‘momentum trading’ refers to a method to trade stocks that exploits the dynamics in the stock market. In business, the word momentum has been associated with innovation, high technology and leadership. See for instance: Peter M. Senge, George Roth and Richard B. Ross, The Dance of Change: The Challenges to Sustaining Momentum in a Learning Organization, Currency, 1999; William R. Miller, Change Creators and Momentum Maximizers, BookSurge, 2002; Ron Ricci and John Volkmann, Momentum: How Companies Become Unstoppable Market Forces. HBS Press, 2003; Max Landsberg, The Tools of Leadership: Vision, Inspiration, Momentum, Profile Business, 2003; Dan Coughlin, Accelerate: 20 Practical Lessons to Boost Business Momentum, Kaplan Business, 2007.

  2  Among the contributions that helped construct the framework for The Momentum Effect over time, see the five annual reports on the Competitive Fitness of Global Firms published by Financial Times Prentice Hall from 1999 to 2003. Our initial efforts in the field of marketing excellence were built around the Markstrat simulation developed in conjunction with Hubert Gatignon, extensively used for developing marketing competences and building customer-focused cultures. Markstrat and related simulations are now adopted in three-quarters of all top business schools and by a number of large corporations. They are used, together with other appropriate tools, to help managers create growth through customer focus, innovation and marketing excellence. To learn more about the author’s professional history see Conversations with Marketing Masters by Laura Mazur and Louella Miles and published by John Wiley in 2007.

Chapter 1

  1  When the word ‘momentum’ is used on its own, it refers loosely to the ‘momentum effect’ or ‘momentum growth’, i.e. the phenomenon or its outcome. As mentioned in the preface, we will use the word ‘effect’ when we want to emphasize that momentum is a phenomenon, in the same way that the word is used in the phrases ‘the Doppler effect’ or ‘the greenhouse effect’. The momentum effect is a phenomenon by which, under specific conditions, exceptional organic growth is created that feeds on itself. This exceptional growth we will simply call momentum growth. Later we will also refer to the expressions ‘momentum strategy’ and ‘momentum process’.

  2  See the five annual reports by J. C. Larreche on the Competitive Fitness of Global Firms published by Financial Times Management and Financial Times Prentice Hall from 1999 to 2003.

  3  We started our investigation with the 1000 largest companies (on the basis of their 2004 revenues), US or non-US, quoted on the New York Stock Exchange. Out of these 498 did not exist in 1985, or were the result of mergers and so had to be excluded from the analysis. Of the remaining 504 companies, some sectors were excluded because of the peculiarities of their competitive situation (oil, utilities, etc.), and full data were not available for all firms. This left a pool of 367 companies for which full data were available. We controlled for different sectors of activities. We investigated different definitions of marketing, from the narrower and stricter consideration of just advertising to the broadest definition including field forces and all support functions. All analyses showed robust results in the same direction.

  4  Of the companies in our sample, 119 belonged to this category. We have chosen this sample because it is the largest sector in the survey and because marketing is an important component of their cost structure. The sample in this example was ranked on the basis of the evolution of their advertising-to-sales ratio over the 20 years, but, as said above, alternative definitions of marketing gave remarkably similar results.

  5  As with any statistically based study, there are important caveats. Within each group there are companies that performed outstandingly well, and others that sit at the bottom of the shareholder value creation table. But what we are interested in here is the broad perspective – how would an investment portfolio made up of Plodders have fared against one of Pioneers or one of Pushers over the long term, and what can the behaviour of these firms tell us about which strategy stands the greatest chance of success?

  6  When we refer to the Dow Jones Index, or DJI, we always mean the Dow Jones Industrial Average.

  7  Among the 119 firms considered in this analysis, 13 are represented in the Dow Jones index (DJI). Of these seven are Pushers, three are Plodders and three are Pioneers. The overlap between the companies in the DJI and in the Pushers group is thus about 20 per cent and not enough to explain the similarity of the evolution of the two groups. The overlap between the companies in the DJI and in the Pioneers group is about 10 per cent, and the two groups have very different evolutions.

  8  We looked at changes in the ratios corresponding to the three critical business functions: advertising, operations and R&D. We know that the gap between the Pushers’ and Pioneers’ rates of change in advertising ratio was 7 per cent. But the Pushers more than compensated for this increase in advertising by cutting elsewhere. Compared to the Pioneers, the Pushers cut their cost of goods sold (COGS)-to-sales ratio by 11 per cent, and their R&D-to-sales ratio by close to 3 per cent.
    Beyond advertising, the Pushers also increased other aspects of marketing, in the broader sense. Companies record all expenses other than COGS in SGA (sales, general and administration). We defined OSGA (other sales, general and administration expenses) as SGA minus advertising and R&D, the two strategic functions we identified. In this way, OSGA includes other marketing expenses, sales force and sales support expenses, and the cost of support functions. This is what some authors use as the broader definition of marketing. See for instance Victor J. Cook Jr.’s Competing for Customers and Capital, Thomson, 2006. Over the 20-year period, the Pushers increased the OSGA over revenues ratio by 1.3 per cent more than the Pioneers.

  9  Several studies show that most marketing expenditures do not have a long-term impact. The phenomenon whereby marketing does have a durable impact on sales is called ‘persistence’ or ‘hysteresis’ and is more the exception than the rule. See for instance Marnik G. Dekimpe and Dominique M. Hanssens, ‘The persistence of marketing effects on sales’, Marketing Science. Winter 1995; Dominique M. Hanssens and Ming Ouyang, ‘Hysteresis in market response: When is marketing spending an investment?’, Review of Marketing Science, Vol. 419. Persistence is a necessary condition for momentum, although it is not sufficient. As we will see in the next chapters, momentum requires a set of specific conditions so that the growth feeds on itself.

10  This estimate is fairly arbitrary, because the nature of momentum means that it is artificial to pinpoint the precise moment when it begins and the exact point at which it is lost. However, it is important to note two things. First, there is no ‘Game over: you’ve won’ moment with momentum – it must be constantly nurtured in order to be maintained or it will be lost. Second, that it is possible to maintain momentum for many, many years – even an entire working life.

11  Made in America: My Story by Sam Walton with John Huey, Doubleday, 1992. See also Bob Ortega, In Sam We Trust: The Untold Story of Sam Walton and Wal-Mart, the World’s Most Powerful Retailer, Crown Business, 1998 and for a recent, and excellent, account of the Wal-Mart phenomenon see Charles Fishman, The Wal-Mart Effect. New York, NY: Penguin Group Inc., 2006.

12  A very rich interview of Katsuaki Watanabe is given in Thomas A. Stewart and P. Anand Raman, ‘Lessons from Toyota’s long drive’, Harvard Business Review, July–August 2007, pp. 74–83. This particular quote comes from an interview with the BBC on 9 May 2007, and can be found at http://news.bbc.co.uk/1/hi/business/6637885.stm. Most of the writings on Toyota emphasize its operational excellence. For some recent accounts that offer a broader perspective on the firm’s success see Jeffrey Liker, The Toyota Way, McGraw-Hill, 2003; Jeffrey Liker and David Meyer, Toyota Talent, McGraw-Hill, 2007; and Matthew E. May, The Elegant Solution: Toyota’s Formula for Mastering Innovation, Free Press, 2006.

Chapter 2

  1  Note that there is a subtle but profound difference between what most people call exceptional growth and the exceptional growth that is created by the momentum effect. Not all ‘exceptional growth’ is the result of momentum. Remember that we said that momentum growth is exceptional in terms of both its quantity and its quality. It is this second aspect that is so often lacking in short-term growth that is so gleefully reported as ‘exceptional’. If it lacks the quality of efficiency that momentum growth has, it has probably been obtained through pushing with resources, is lacking in momentum, and will not be sustainable.

  2  There are several accounts of this story. See for instance ‘The man who could have been Bill Gates’ by Steve Hamm and Jay Greene, BusinessWeek, 25 October 2004. Much has been written about the evolution of Microsoft over the years: See Randall E. Stross, The Microsoft Way, Basic Books, 1997; Bill Gates, Nathan Myhrvold and Peter Rinearson, The Road Ahead, Penguin, 1996; Robert Slater, Microsoft Rebooted: How Bill Gates and Steve Ballmer Reinvented their Company, Portfolio, 2004.

  3  For convenience we will generally use the terminology relating to private enterprise (customers, shareholders, profit, competitors, etc.). However, the concepts underlying this argument, and the book as a whole, apply to the public and not-for-profit sectors as well.

  4  For an early perspective on value creation and distribution, see Value Migration: Strategies to Pre-empt the Markets of Tomorrow by Adrian J. Slywotzky (Harvard Business School Press, 1996).

  5  See Michael E. Porter, Competitive Strategy (Free Press, 1980) and Competitive Advantage (Free Press, 1985).

  6  See W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Harvard Business School Press, 2005) and a series of excellent articles in the Harvard Business Review in the preceding years. Their Strategy Canvas and the ERRC (Eliminate, Reduce, Raise, Create) Grid are two of the most powerful diagnostic business tools ever invented.

  7  See for instance Jeffrey M. O’Brien, ‘Wii will rock you’, Fortune, 11 June 2007, pp. 35–44. We will return to the Wii in Chapter 5.

  8  This example may seem small scale but it illustrates that momentum-boosting actions can happen at all levels in an organization and that such seemingly small acts can have an enormous cumulative impact.

  9  Paul Hemp, ‘Managing for the next big thing: An interview with EMC’s Michael Ruettgers’, Harvard Business Review, January 2001, pp. 132–136. Again, as with the example cited in note 8, this is a seemingly small scale example. But the point is that, when building momentum, many small steps will collectively have an enormous impact, provided they are consistently taken in the same direction.

10  The key to iTunes’ success is the 99-cent (79 pence) price point for individual songs. The site offers users safe and legal access to an extensive collection of music at a price that they perceive as fair. Apple has come under pressure from music companies to increase its price but has resisted – some of these companies don’t understand the secret of the iPod/iTunes’ success. In May 2007, Apple announced the launch of iTunes Plus offering songs on EMI’s catalogue at a higher sound quality and with no restrictions on use for $1.29, a premium of 30 cents on the regular iTunes offering. Importantly, however, the consumer could chose to purchase the ‘standard’ option, still at the 99 cent price.

11  Apple press release, 10 September 2007, http://www.apple.com/hotnews/openiphoneletter/. For some insights on the success of the iPod, see Hiawatha Bray, ‘The resurrection of Steve Jobs’, The Economist, 17 September 2005, p. 68; Peter Burrows, ‘Can the iPod keep leading the band?’ BusinessWeek, 8 November 2004, p. 54. For a more complete history of Steve Jobs’ road to the iPod, see Jeffrey S. Young, iCon Steve Jobs: The Greatest Second Act in the History of Business, Wiley, 2005.

12  The expression ‘inferior product’ refers here to a product perceived to be inferior by any relevant customer target. Obviously, a product may be seen as inferior by some customers but as perfectly adequate by others who have different needs. It cannot be called ‘inferior’ from a business point of view as long as it is valuable to a relevant customer target.

13  Building on their work on the persistence of marketing, Dekimpe and Hanssens propose two scenarios for sustained growth: ‘escalation’ (where there is no persistence of marketing effects on sales) and ‘evolving business practice’ (where there is persistence of marketing effects on sales). In a sense, ‘escalation’ can be considered as a form of compensation strategy and ‘evolving business practice’ can be considered as the minimum base for a momentum strategy. See Marnik G. Dekimpe and Dominique M. Hanssens, ‘Sustained spending and persistent response: A new look at long-term marketing profitability’, Journal of Marketing Research, November 1999, pp. 397–412.

Chapter 3

  1  The drug is known as Glivec throughout most of the world but it is marketed as Gleevec in the United States.

  2  This has since been confirmed through the long-term treatment of patients.

  3  Throughout Chapters 4 to 11, we will concentrate on the customer in the narrower sense of the word – i.e. the person who either pays for, prescribes or uses the product. This is to simplify matters. However, it is important to remember that the principles exposed in this book reflect the wider sense of the word, and we will examine the crucial importance of employees and external stakeholders in Chapters 12 and 13.

  4  The story of Glivec is well described by Dr Daniel Vasella himself in Magic Cancer Bullet: How a Tiny Orange Pill is Rewriting Medical History (HarperCollins, 2003).

  5  See for instance David Kiley, Driven: Inside BMW, the Most Admired Car Company in the World, John Wiley & Sons, 2004.

  6  This is not limited to options on new cars. In autumn 2004, BMW also sold 12 000 adapters for its car owners to integrate the iPod into their sound system, and there was a long waiting list. See Peter Burrows, ‘Can the iPod keep leading the band?’, BusinessWeek, 8 November 2004, p. 81. For the adoption of the iPod docking stations by car manufacturers see the 21 June 2004 and 3 August 2006 press releases by Apple in www.apple.com/pr/library/2004/jun/21bmw.html and www.apple.com/pr/library/2006/aug/03ipod.html.

  7  See various reports and tables prepared by the American Customer Satisfaction Index on its website: www.theacsi.org.

  8  The initial sale price in 2005 was $2.6 billion with an earnout of a further $1.7 billion due in 2009 dependent on future performance. Performance between 2005 and 2007 was good but not as good as projected, and in October 2007 co-founder Zennström stood down as CEO taking on a role as non-executive chairman, in what was described as an amicable arrangement. The final earn-out was settled at $530 million, significantly below the anticipated level, bringing the total price to approximately $3.1 billion. See Richard Waters ‘Ebay writes down Skype value by $1.4bn’, Financial Times, 2 October 2007. The earn-out settlement was not as negative as it was portrayed in some quarters at the time. As Friis pointed out on his blog on the day the settlement was announced: ‘Earn-outs are inherently difficult creatures, but we are happy with the result of this one. We are approximately halfway into the earn-out period and the settlement amounts to one-third of the total possible earn-out amount.’ (Janus Friis, ‘Not just another Monday’, www.janusfriis.net/2007/10/01/not-just-another-monday).

  9  For further details of the Skype story, see Skype: Leading the VOIP Revolution by Bharat Rao and Bojan Angelov, Polytechnic University, New York, Case Study, 2005; and From KaZaA to Skype by N. Rajshekar and Kalyani Vemuri, ICFAI Case Study, 2004.

10  When Zennström stood down as CEO in October 2007 Skype had posted four consecutive quarters of profit and was predicted by analysts to be on track to $360 million in revenue for the year, a growth of 85 per cent year on year.

11  Zennström himself pointed this out in his first interview in English after stepping down: ‘Some people may want to monetize [i.e. move users from Skype’s free service to paid-for ones] faster, but the key is to figure out the right speed of monetization. If you act too aggressively, there is a real risk you will lose the huge active user base.’ (Thomas Crampton ‘SCOOP: Zennstrom defends Skype while stepping down’, http://www.thomascrampton.com/2007/10/01/scoop-zennstrom-defends-skype-while-stepping-down).

Chapter 4

  1  See Louis V. Gernster Jr., Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround (HarperCollins, 2002).

  2  See Betsy McKay, ‘Thinking inside the box helps soda makers boost sales’, Wall Street Journal, 2 August 2002.

  3  See Carol Matlack, ‘Dassault may be next in line for takeoff’, BusinessWeek, 7 March 2005.

  4  We are using the word ‘customer’ broadly to include any individual or firm who may potentially become a client. These customers could be existing clients, prospects or not currently interested in existing offers.

  5  One of the most progressive branchless banks in the world is the British-based First Direct which was named the ‘most recommended bank in the world’ and will be discussed in Chapter 7.

  6  See Howard J. Stock, ‘Commerce Bank: Ahead of the curve’, Bank Investment Consultant, 12, No. 10, October 2004, pp. 28–34. Commerce Bank’s sale, announced in October 2007, was hastened by the resignation of its CEO and founder, Vernon Hill, in response to regulatory investigations. This doesn’t lessen the bank’s phenomenal achievement – indeed, according to the Financial Times the sale price of $8.5 billion was lower than would have been expected were it not for the extraordinary circumstances of its sale: (Ben White, ‘TD Bank in US push with $8bn Commerce deal’, Financial Times, 2 October 2007). In fact, it illustrates that while customers are the most essential part of the momentum mix, getting momentum totally right involves more than just customer focus. Hill was a visionary who revolutionized the retail banking industry and built enormous momentum – but unfortunately his excellent work building momentum with his customers was not matched by comparable care in understanding the needs and values of regulators. We will examine the way truly great momentum leaders manage to balance all the competing demands of multiple stakeholders in Chapter 13.

  7  For an excellent development of these issues, see Jeffrey Pfeffer and Robert I. Sutton, The Knowing–Doing Gap, Harvard Business School Press, 2000.

  8  J.D. Power and Associates press release for the 2006 Retail Banking Satisfaction Study, ‘Commerce Bancorp ranks highest in satisfying banking customers in New York’, 26 March 2006.

  9  J.D. Power and Associates 2006 Retail Banking Satisfaction Study.

10  See Malcolm Gladwell, Blink: The Power of Thinking Without Thinking (Little, Brown, 2005), pp. 167-176.

11  The first offset mortgage was offered in 1997 – perhaps unsurprisingly – by Virgin Direct, a financial services company that was part of Richard Branson’s Virgin Group. The product is now sold as the One Account. Another leading provider is First Direct, a momentum-powered firm that we will encounter later in the book.

12  The most comprehensive and strategic approach for the discovery of compelling customer insights is provided in the Blue Ocean Strategy work of Chan Kim and Renée Mauborgne, already referred to in the context of value origination. For more specific customer tools see, for instance, Gerald Zaltman’s Metaphor Elicitation Technique and Clotaire Raspaille’s Cultural Archetypes in Zaltman’s How Customers Think: Essential Insights into the Mind of the Market (Harvard Business School Press, 2003) and Rapaille’s The Culture Code: An Ingenious Way to Understand Why People Around the World Live and Buy as They Do (Random House, 2006).

Chapter 5

  1  A ‘concept car’ is one that is not intended to be put into production but is used to test new ideas. Those that work will often find their way into standard production cars.

  2  For a detailed account of the design process and of the features of the YCC, see the series of press information documents published by Volvo: ‘Your Concept Car – a project with women in the driver’s seat’, ‘Your Concept Car – by women for modern people’, ‘Your Concept Car – bold but elegant exterior’, ‘Your Concept Car – a personal living room with whatever you want within reach’. For some of the press coverage see ‘This Volvo is not a guy thing’, BusinessWeek, 15 March 2004: ‘Women design concept car for Volvo’, USA Today, 2 March 2004. The nine women behind the YCC concept were named Women of the Year by Automotive News Europe, a prestigious industry magazine.

  3  These comments represented a very small minority considering the adulation heaped on the car, but the heat in their comments illustrates the strength of their feeling. Amidst all the praise, a dissenting voice posted: ‘Ok it sounds quite good apart from one little thing – a sealed bonnet!!!....puhlease......and we want men to take us seriously, certainly not with something like that....come on, it’s not that difficult to change the oil and water.’ Feedback: What do you think of the Volvo YCC?, 21 November 2005, on Carsguide.com.au, http://carsguide.news.com.au/story/0,20384,17315170-5001400,00.html, accessed 11 October 2007.

  4  The value story has two sides – value to a customer and value of the customer to the company – and they should not be confused. This chapter focuses on customer value – what a company offers customers and the importance of understanding that value is not the same for everyone. The next chapter will investigate the equally important notion of value of the customer to the company, which we have labelled customer equity.

  5  ‘Customer myopia’ occurs when firms assume that they already know the consumer well, based on past experience. It leads to routine business practices, serving the same type of customers and remaining at a superficial level of understanding of their needs. It is not the same, but is the natural grandchild of ‘marketing myopia’, an expression coined by Ted Levitt in his famous 1960 Harvard Business Review article of the same title, which in some ways marked the beginning of modern marketing. The point of ‘marketing myopia’ was that businesses should redefine more broadly the markets they serve, not in terms of the products they make but in terms of the customer needs they satisfy. Many companies that escaped marketing myopia and went on to serve customer needs based on superficial knowledge, plunged into customer myopia and made new types of mistakes.

  6  See Laura Cohn, Carol Matlack and Dean Foust, ‘Will Coke’s water meet its Waterloo?’, BusinessWeek, 29 March 2004, p. 30. Dasani also suffered initially from some technical problems. Bromide is added to drinking water in the United Kingdom, and Coca-Cola’s process had the unfortunate side effect of turning this harmless bromide into small, but illegal, levels of the carcinogen bromate. This was corrected and early batches recalled, but a product that was already holed below the waterline was further damaged by the news: ‘Things get worse with Coke: Bottled tap water withdrawn after cancer scare’, The Guardian, 20 March 2004.

  7  Chris Nuttall, ‘Wii console helps nintendo raise its game’ Financial Times, 12 July 2007. See also Jeffrey M. O’Brien, ‘Wii will rock you’, Fortune, 11 June 2007, pp. 35–44.

  8  Marketed in most countries outside North America as Dr Kawashima’s Brain Training.

  9  For example, the ‘Strope’ test where the word ‘blue’ may be written in yellow type and the player must say ‘yellow’ rather than the more instinctive ‘blue’, next the word ‘black’ may be written in red and so on. Other tests include simple arithmetic and memory games.

10  See Nintendo Consolidated Financial Highlights, 25 July 2007 at http://www.nintendo.co.jf/ir/pdf/2007/070725e.pdf. Brain Age is not the only non-traditional computer game powering the success of the Nintendo DS. The top selling series is called Nintendogs a dog-owning simulation where players must feed and train their virtual pet. Traditional games such as the Pokemon series continue to be successful but the key to Nintendo’s success is the way they have extended the market by creating new value for new customers. See also Ginny Parke-Woods, ‘Nintendo targets non-gamers’. Wall Street Journal Europe, 23 February 2006, p. 33.

11  When using the customer value wedge, a good visual approach is to systematically write the costs (value destroyers) in red and the benefits (value enhancers) in green, for each of the four elements.

12  See, for instance, Carol Matlack, ‘The Vuitton money machine’, BusinessWeek, 22 March, pp. 50–56.

13  See Donald N. Sull and Alejandro Rueals-Gossi, ‘The art of innovating on a shoestring’, FT Mastering Series, 24 September 2004. For more details on Cemex’s strategy, see also the Harvard Business School case study by Hau L. Lee and David Hoyt, CEMEX: Transforming a Basic Industry Company, 2005.

14  See Benedetto De Martino et al., ‘Frames, biases, and rational decision-making in the human brain’, Science, 4 August 2006, pp. 684–687. See also Clive Cookson, ‘Emotions’ role in economic thinking’, Financial Times, 13 June 2003.

15  See, for instance, Victoria Murphy, ‘Microsoft’s midlife crisis’, Forbes, October 2005, pp. 88–96.

16  For a concise but excellent account of the development of Dell’s business model over its first 15 years, see Nancy F. Koehn, Brand New: How Entrepreneurs Earned Consumers’ Trust, from Wedgwood to Dell, Harvard Business School Press, 2001. See also Michael Dell, Direct From Dell, Profile Books, 2000; and Steven Holzner, How Dell Does It, McGraw-Hill, 2005.

17  See for instance Louise Lee, ‘Dell’s road to recovery’, BusinessWeek, 1 June 2007. Even before Dell’s problems surfaced in the open, Victor Cook had identified some of the issues from a value creation perspective in his book Competing for Customers and Capital. See especially ‘Why did Dell fall short?’, pp. 158–160.

Chapter 6

  1  To complete this story, one should note that the Rentokil Initial merger was probably not a proper move for the company’s long-term growth. Absorbing a company twice one’s size is an obvious challenge and monopolizes management attention. In this operation, Rentokil Initial lost the extraordinary momentum it had created and entered a difficult period of consolidation. Thompson himself was the focus of much public anger in 2006 for his role in what became known as the ‘Farepack scandal’. The details are not relevant here, but this shows again the transitory nature of momentum, both for the firms and their leaders, if it is not carefully nurtured.

  2  We use the term ‘customer equity’ to reflect the long-term value to the firm of a single customer or a group of customers. The term is also sometimes used to describe the long-term value of all current and future customers of a firm. The specialized literature on customer equity has progressed substantially in recent years. For an excellent review, see Villanueva and Hanssens, ‘Customer equity: Measurement, eanagement and research opportunities’, Foundations and Trends in Marketing, 2007.

  3  Expertise in one field can often lead us to apprehend readily the essence of situations pertaining to that area of expertise. There are often cases, however, when we are systematically biased because of our experience. Transaction myopia is such a situation. For a fascinating account of great successes and failures in the rapid perception of truth, see Malcolm Gladwell, Blink (Little Brown, 2005).

  4  The pizzeria example finds its genesis in a throwaway line (accompanied by a fetching illustration) in an excellent article by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger, ‘Putting the Service-Profit Chain to Work’, Harvard Business Review, March–April 1994, p. 164. It is also referred to in the book by James L. Heskett, W. Earl Sasser, Jr., and Leonard A. Schlesinger, The Service-Profit Chain, (Free Press, 1997), p. 65. It is a particularly effective example to help management teams reflect on the concept of customer equity. It can be built upon in many ways to illustrate different points and it will recur again as we progress through the book.

  5  The financial technique used to correct for the time value of money is called net present value. It discounts the money amounts to be received in the future to reflect their present equivalent value. For instance, the $5000 sum calculated in the pizzeria is obtained over a period of 10 years and is not the same as $5000 received today. With a discount rate of 6 per cent, the $5000 would represent about $3700 in net present value. This is a smaller number by about 25 per cent but does not change the implications. For more information on customer lifetime value see, for instance, Robert C. Blattberg, Gary Getz and Jacquelyn S. Thomas, Customer Equity: Building and Managing Relationships as Valuable Assets, Harvard Business School Press, 2001; Roland T. Rust, Valarie A. Zeithaml and Katherine Lemon, Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy, Free Press, 2000; Sunil Gupta and Donald R. Lehmann, Managing Customers as Investment, Wharton School Publishing, 2005.

  6  The Financial Times reported that analysts estimate that Nintendo made a profit of around $48 (¥5 600) on each Wii sold in the US. By comparison, Sony’s PS3 units were expected to remain loss-making until 2009: Mariko Sanchanta, ‘Nintendo Wii success helps component makers score’, Financial Times, 17 September 2007.

  7  For an overview, see Kamran Kashani’s excellent article ‘Marketing through collaboration: How seller and buyer can benefit’, European Business Forum, Spring 2004, pp. 37–43. This example is derived from the case studies developed by Sandra Vandermerwe and Marika Taishoff at IMD, SKF Bearings Series: Market Orientation Through Services, 1990.

  8  Note that we are dealing here with real customers whose prestige should be taken into account when estimating their equity for the firm. This is different from other sources of prestige for which a firm pays. For instance, athletes sponsoring brands are not customers with high equity. They are partners paid by a firm as part of its communication strategy.

  9  Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference (Little Brown, 2002).

10  There were, obviously, many other ways in which this situation could have been handled, and each would have had different implications for customer equity. It is worth exploring them as a learning exercise.

11  We are often asked if these customers that offer compelling equity are the same as those that are called key accounts in many firms. The answer is: No. Key accounts are identified in most firms in terms of volume. For instance, ‘Our 12 key accounts represent 80 per cent of our revenues.’ Customers with compelling equity need not be the largest ones. Their definition is related to the business benefits they bring relative to the business costs they absorb and to their potential for growth. Their equity can be expanded and become a base for momentum growth. Unfortunately, key accounts often have the opposite impact. Because of their volume, they have a tendency to offer limited growth and to place the firm under price pressure.

Chapter 7

  1  The bank’s commitment to innovation continued after its launch. It was among the pioneers of Internet banking in the UK in the late 1990s and in 2001 launched one of the first offset mortgages outlined in Chapter 4.

  2  Personal communication from Alan Hughes, 2007.

  3  In their work on persistence, Hanssens and Ouyang have expressed the hypothesis that ‘the higher the product’s perceived value, the stronger the persistence of the advertising effect on sales’. See Dominique M. Hanssens and Ming Ouyang, ‘Hysteresis in market response: When is marketing spending an investment?’, Review of Marketing Science, Vol. 419.

  4  Effective branding is the result of power offers and not the reverse. Business executives sometimes ask us: ‘What is the difference between power offers and branding? Isn’t “power offer” a different expression for branding?’ No. The power offer capitalizes on insights brought by deep exploration of customer value and customer equity that are then integrated into the various components of a company’s strategy. This could be interpreted as a broad definition of branding, but the reality of branding is that it is most often limited to increasing the value of a product through communications.

  5  Stephen Bayley, ‘The MT Executive Car of the Year: The Fabulous 5 Series’. Management Today, March 2004, p. 72.

  6  In our investigations, we have generally considered power offers for which we could claim that status for at least 10 years and thus observe a sustained exceptional growth. We have made exceptions to this rule only for recent ventures such as Skype, the iPhone or the Wii. Several of the power offers we studied lost their momentum because the drivers of this momentum were not understood or not nurtured. All the power offers and all the momentum-powered firms we studied were, however, a source of learning and helped us in building our momentum strategy framework.

  7  See Christian Pinson, Swatch, INSEAD Case, 1987.

  8  An excellent tool to assist when working through the top two boxes of this tool is the ERRC (Eradicate, Reduce, Raise, Create) grid presented by Kim and Mauborgne in their Blue Ocean Strategy framework. Their simple but powerful tool should be used to systematically review the transformation of product dimensions in terms of their value contribution. See Blue Ocean Strategy, p. 35.

  9  This is because the exploration of customer equity will naturally tend to identify a particularly compelling source of equity, whereas with the exploration of customer value the central focus tends to be on a particularly compelling value proposition. Both explorations, however, will provide insights into these two key elements of power offer design. That is why the process of design must be iterative. As the explorations converge, insights from one will feed into the other, constantly changing and improving the end result.

10  The owners of digital cameras have increased their use of inkjet printers, and the toner they consume, to print their snaps. Dell came late into printers and then did not focus on this segment. The gaming community has ever-increasing demands for ultra-high processing power and graphics performance.

11  As power offers go, the Astra GCT is not yet in the same league as the iPod, but it’s doing well. In less than two years, the car had increased its market share by 10 per cent. Sales of the new model in 2006 were 30 per cent higher than those achieved by the previous model just two years earlier. Private communication from Jonathan Browning, GM Europe’s vice president for sales, marketing and aftersales. The Opel Astra GCT is sold in the UK as the Vauxhall Astra.

12  ‘The miracle of Älmhult,’ The Guardian, 17 June 2004.

13  See Elen Lewis’s excellent book GREAT IKEA!, Cyan Books, 2005.

14  See J.C Larreche and Anne-Marie Cagna, First Direct 2005: The Most Recommended Bank in the World, INSEAD Case Study, 2006.

15  First Direct marketing material, September 2007.

16  These aspects of power crafting can be considered as the essence of enterprise marketing. See Victor Cook, Competing for Customers and Capital, Thomson, 2006.

Chapter 8

  1  To this day, the story of the delicate but skillful introduction of the Walkman is preserved in Sony history. See ‘Please listen to this!’ in http://www.sony.net/Fun/SH/1-18/h3.html.

  2  The initial value delivery framework first emerged from the consulting firm McKinsey & Company in the 1980s. For one of the most complete descriptions, see Michael J. Lanning, Delivering Profitable Value, Capstone, 1998.

  3  See Richard S. Tedlow, The Watson Dynasty: The Fiery Reign and Troubled Legacy of IBM’s Founding Father and Son, Collins, 2003 for a history of IBM before and at the beginning of the computer era.

  4  For simplification, we are using modern vocabulary throughout this example. In the early days of business IT systems, the expressions ‘information technology’ and ‘chief information officer’ had not been coined! One referred to ‘electronic data processing’ and ‘EDP Managers’.

  5  For an early account of IBM’s loss of momentum in the late 1980s, see Regis McKenna, Who’s Afraid of Big Blue: How Companies are Challenging IBM – and Winning, Addison-Wesley, 1988.

  6  See Louis V. Gerstner Jr., Who Say’s Elephants Can’t Dance? Inside IBM’s Historic Turnaround, Harper Collins, 2002; Robert Slater, Saving Big Blue: Leadership Lessons and Turnaround Tactics of IBM’s Lou Gestner, McGraw-Hill, 1999. For the customer-focused approach of IBM after Gertsner’s turnaround, see Harvey Thompson, The Customer-Centered Enterprise: How IBM and Other World-Class Companies Achieve Extraordinary Results by Putting Customers First, McGraw-Hill, 1999.

  7  Full details of this simulation are available on this book’s website. Each firm started the simulation making $30 million annual profit. At the end of five years, Momentum-Deficient Inc.’s profit had risen steadily to $56 million annually, while Momentum-Powered Inc.’s had snowballed to $86 million. In other words, over this time one firm’s profits had grown by $26 million and the other’s by $56 million. These figures have been rounded to the nearest million. Remember that these are just some of the ways that momentum accelerates growth. We will examine the equally powerful effects of retention in Chapter 10 and then look at the combined power of all of the stages of momentum in Chapter 11.

  8  See the excellent case written by Reinhard Angelmar and Christian Pinson, Glaxo’s Zantac (A &B), INSEAD, 1993. Prilosec was originally marketed worldwide as Losec. The name was changed to Prilosec in the US in 1990, throughout much of the rest of the world it is still marketed as Losec.

Chapter 9

  1  Jan Carlzon, Moments of Truth, Collins, 1989.

  2  See ‘If you try to match complexity with complexity, it will kill the organization’, Focus, vol. IX/1, 2005, pp. 4–10. A.G. Lafley has consistently repeated the ‘two moments of truth message’: See for instance Robert Berner, ‘P&G: New and improved’, BusinessWeek, 7 July 2003; Rajat Gupta and Jim Wendler, ‘Leading change: An interview with the CEO of P&G’, McKinsey Quarterly, July 2005; Pascal Kuipers, ‘Fuelling P&G’s P&L’, Elsevier Food International, Vol.8, No.3, September 2005.

  3  For an excellent book on the concept of customer delight, see Timothy Keiningham and Terry Vavra, The Customer Delight Principle (McGraw–Hill, 2001).

  4  Abraham Maslow, ‘A theory of human motivation,’ Psychological Review, 50, 1943, pp. 370–396; Motivation and Personality, 3rd edition. (HarperCollins, 1987).

  5  Richard Layard, Happiness: Lessons from a New Science (Penguin, 2005).

  6  An early graph linking satisfaction and retention was proposed by the service management interest group at Harvard Business School during the 1990s, as they very skillfully developed an operational model to help service companies to simultaneously increase service quality and profits. See the classic article on the subject by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr. and Leonard A. Schlesinger, ‘Putting the service–profit chain to work’, Harvard Business Review March – April 1994, p. 164–174 and the book by James L. Heskett, W. Earl Sasser Jr., and Leonard A. Schlesinger, The Service–Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value (Free Press, 1997). They were the first to model the connection between satisfaction and retention as a driver of growth, and the first to make a connection between employee satisfaction and customer satisfaction. Their ideas have since been taken further by others. In this particular instance we are making three major additional contributions. First, we have linked satisfaction, as a state of mind, to the emotions that drive action, thus demonstrating why extreme levels of satisfaction are so powerful. As a result, the shape of our curve in this figure differs markedly from theirs. Secondly, and as a direct result of the intense emotions stirred by extreme satisfaction, we will show in the following chapters how the process goes beyond mere retention to the much more powerful dynamics of engagement. Thirdly, we are proposing a broader strategic framework that includes design and execution of power offers. On a purely semantic scale we are using the terminology of ‘Desperados’ and ‘Champions’ instead of ‘terrorists’ and ‘apostles’, respectively, because of political and religious sensitivities.

  7  For some comprehensive guides on customer satisfaction measurement, see Chris Denove and James D. Power, Satisfaction: How Every Great Company Listens to the Voice of the Customer, Portfolio, 2006; Jonathan D. Barsky, World–Class Customer Satisfaction, Irwin, 1995; Alan Dutka, AMA Handbook for Customer Satisfaction: A Complete Guide to Research, Planning and Implementing, NTC Business Books, 1994.

  8  See Andy Taylor, ‘Top box: Rediscovering customer satisfaction’ Business Horizons, 46, No. 5, September/October 2003, pp. 3–15.

  9  See J.C. Larreche and Anne–Marie Cagna, First Direct 2005, INSEAD, 2006. The reported customer satisfaction ratings are based on the percentage of customers who are extremely or very satisfied. The customer recommendation ratings represent the percentage of customers who have recommended in the past 12 months.

10  Anthony Bianco and Wendy Zellner ‘Is Wal–Mart too powerful?’, BusinessWeek, 6 October 2003.

11  See for instance Jay Greene, ‘Troubling exits at Microsoft’, BusinessWeek, 26 September 2005 and the related online interview of Microsoft’s CEO, ‘Online extra: Steve Ballmer shrugs off the critics’.

12  For the service revolution at Harrah’s, see David O. Becker, ‘Gambling on customers’, The McKinsey Quarterly, 2003, No. 2, pp. 46–59; Shaun Smith and Joe Wheeler, Managing the Customer Experience: Turning Customers into Advocates, FT Prentice Hall, 2002 and Walter E. Shill and Robert J. Thomas, ‘Exploring the mindset of the high performer’, Outlook, October 2005.

13  Kamran Kashani, ‘Marketing through collaboration: How Seller and Buyer can Benefit,’ EFB, Issue 17, Spring 2004, pp. 37–43; Tetra Pak (A, B, C, D): The Challenge of Intimacy with a Key Customer,’ Case Study IMD–5–0604.

14  Personal interview with Jan Carendi, member of the Allianz Management Board in charge of a customer focus initiative.

15  See, for instance, Sandra Vandermerwe, Breaking Through: Implementing Customer Focus in Enterprises, Palgrave, 2004, and W Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How To Create Uncontested Market Space and Make the Competition Irrelevant, Harvard Business School Publishing, 2005.

16  On Amazon.uk, the total cost of the transaction was €105.58, which included a €20.24 shipping charge. On Amazon.fr, despite ‘free’ shipping, the order cost €131.62. The cost of the books themselves, excluding shipping, was 54 per cent higher!

17  See J.D. Power press release: ‘JetBlue and Continental continue to rank highest in airline customer satisfaction’, 19 June 2007: http://www.jdpower.com/pressreleases/pressrelease.aspx?id=2007097. JetBlue press release: ‘JetBlue Announces Second Quarter Results,’ 24 June 2007: http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol–newsArticle&ID=1029705&highlight=. See also Marci Alboher Nusbaum, ‘JetBlue turning fliers into fanatic loyalists,’ Deseret News, 24 March 2004; and Wendy Zellner, ‘Is JetBlue’s flight plan flawed?’, BusinessWeek, 16 February 2004, pp. 72–75.

Chapter 10

  1  See Stanley Bing, ‘It’s a !@#$% man’s world,’ Fortune, 14 October 2002.

  2  For example, for many years choosing to use an Apple Mac meant forgoing access to hundreds of programs designed for PCs. In addition, the first generation of iPods were not compatible with PCs running Windows. Tunes purchased on iTunes could only be played on iPods, which themselves will not play music files except those in Apple proprietary formats, and when the iPhone was launched the phones were locked so that they could only be used on Apple’s chosen network provider (AT&T in the US and others in different territories). However, unlike the restrictions and barriers to change we often see other companies employing, Apple’s approach doesn’t seem to alienate its most dedicated customers. Apple fans simply do not perceive the restrictions as infringing on their freedom. In the case of the iPhone, some users did resent being forced to adopt Apple’s choice of network. Initial ‘hacks’ to get around this were negated by Apple with software updates that rendered unlocked iPhones virtually unusable. Despite this, most Apple users continue to feel that the company’s products provide benefits that outweigh the imposed restrictions and, from their perspective, offer greater freedom than competitors’ offerings. Interestingly, having built a strong, dedicated fan base, Apple then tends to open its products up to drive even greater growth. For example, the iMac now comes with software that will help a user load Microsoft Windows as an alternative operating system if they so chose. Likewise songs from consenting music companies are now available on iTunes in a format that is compatible with any music player.

  3  For some fundamental contributions on customer retention, see Frederick F. Reichheld, Loyalty Rules! How Today’s Leaders Build Lasting Relationships, Harvard Business School Press, 2001; Arthur Middleton Hughes, The Customer Loyalty Solution, McGraw-Hill, 2003.

  4  There are many others, most notably measurement on a purchase occasion basis. This considers the percentage of customers who bought the same product last time and it works well for businesses like the personal car market, where customers may buy a new car only every three or so years. More complicated measurements can be used or combined with an annual basis measurement, but these often end up becoming very detailed statistics which can be difficult to decipher.

  5  For the purposes of this illustration, we have assumed that defecting customers go at the end of the year. The figure therefore represents the average number of years that existing clients will keep doing business with the firm after the end of the current year. One could have an estimate including the current year, in which case one should add one year to all the reported numbers. Or one could reflect the fact that customers might defect regularly throughout the year, and add half a year to all reported numbers.

  6  This graph shows the average customer lifetime value corresponding to a retention rate, as per the remark in the previous note. The formula used to produce this graph is: CLTV = R/(1 – R) where CLTV is the customer lifetime value in years and R is the retention rate expressed as a fraction. For instance, for a customer retention rate of 50 per cent, this gives 0.5/(1 – 0.5), which is equal to one year as reported earlier. More quantitative developments are available on the book’s website: www.themomentumeffect.com, for the mathematically inclined reader. These calculations do not make any adjustment for the time value of money.

  7  See David Kirkpatrick, ‘Facebook’s plan to hook up the world’, Fortune, 11 June 2007, Steven Levy ‘Facebook grows up: Can it stay relevant?’, Newsweek, 20 August 2007 and www.facebook.com/press/info.php?statistics, retrieved 2 October 2007.

  8  There are a number of traps in the management of customer retention. They are in great part related to a simplistic treatment of retention statistics that do not differentiate between passive and active retention. For a better understanding of the pitfalls of retention, see Werner Reinartz and V. Kumar ‘The mismanagement of customer loyalty’, Harvard Business Review, July 2002, pp. 86–94; Timothy L. Keiningham, et al., Loyalty Myths: Hyped Strategies that Will Put You Out Of Business – and Proven Tactics that Really Work, Wiley, 2005.

  9  The powerful image of the ‘leaking bucket’ was offered by James Teboul, Service is Front Stage, Palgrave, 2006, p. 89.

10  As we saw earlier, a seemingly small increase in retention from 95 per cent to 96 per cent will increase the average customer lifetime from 19 to 24 years, a 25 per cent impact. A firm that moves from 50 per cent to 51 per cent manages just a 4 per cent improvement in average customer lifetime.

11  Defector recovery covers a wide range of situations depending on the firm and the industry. At one end, it includes cases such as magazine readers who will not renew their subscription because they are furious that the rate they have to pay as loyal customers is above the one offered to new subscribers. At the other end, it concerns contracts in millions of dollars that may not be renewed because of real or perceived issues. The defector recovery strategy we expose is valid in all these cases, although the resources used and the specific approach will be totally different to fit the situation. SWAT is a military term that stands for ‘special weapons and tactics’. The use of this military term can help to stress the importance of the situation when it involves a major customer relationship with a lot at stake.

Chapter 11

  1  These last two volumes are the sixth and seventh in the Harry Potter series by J.K. Rowling, Harry Potter and the Deathly Hallows, Bloomsbury, 2007, and Harry Potter and the Half-Blood Prince, Bloomsbury, 2006. For the impressive statistics on their launch see http://news.bbc.co.uk/1/hi/entertainment/6912529.stm

  2  Published in the US in 1998 as Harry Potter and the Sorcerer’s Stone.

  3  One of the great advantages that all the other power offers in this book had over Harry Potter was that they didn’t have to be perfect first time. Building power offers, and the momentum they generate, is an iterative process, unlike publishing a book!

  4  By 31 July 2007, a total of 5331 customers had left reviews on Amazon.com for Harry Potter and the Sorcerer’s Stone. Of those, 4518 (85 per cent), gave it the maximum five-star rating; only 65 (just over 1 per cent) had given it the minimum one star. Subsequent books in the series achieved top-box ratings of 83 per cent, 88 per cent, 85 per cent, 66 per cent, 61 per cent and 73 per cent. By way of comparison, on the same day Dan Brown’s The Da Vinci Code, another recent publishing phenomenon, had 2000 fewer reviews and a top-box rating of just 39 per cent.

  5  The idea of the heroes in Harry Potter ageing at the same rate as their readers has led some to suggest designing brands that would follow a certain customer cohort as they age. This would definitely be a more effective strategy to build loyalty than segment markets in terms of age groups. See Frédéric Dalsace, Coralie Damay and David Dubois, ‘Brand magic: Harry Potter marketing’, Harvard Business Review, February 2007, p. 6. This would capitalize on a phenomenon that exists without being an explicit marketing strategy. People often divulge their age because of what they buy. Indeed, we tend to keep consuming some brands that were most fashionable when we were young, especially hygiene and cosmetic products.

  6  See Blaise Cronin, ‘Burned any good books lately?’, Library Journal, 15 February 2003, p. 48; David Serchuk, ‘Harry Potter and the ministry of fire’, Forbes, 12 January 2006.

  7  The strength of this sense of belonging can be seen when customers perceive a threat to it. The Body Shop, the UK-based ethical cosmetics company, built up an intense level of dynamic customer engagement with a specific group of consumers over the years through its public opposition to animal testing and advertising that they perceived as damaging to women’s self-image. As soon as the sale of the business to L’Oréal was announced in early 2006, online bulletin boards filled with despairing postings from customers appalled at what they perceived as a ‘sell-out’ to a firm that, in their opinion, represented the antithesis of the Body Shop’s values. They felt they could no longer support an organization that had become fundamental to their sense of who they were.

  8  Blogs, short for ‘web logs’, are easily published online diaries that have become influential tools for customers to demonstrate their opinions and belonging.

  9  For details on its measurement and correlation with growth rates, see Frederick Reichheld, ‘The one number you need to grow’, Harvard Business Review, December 2003, pp. 1–9; ‘The microeconomics of customer relationships,’ MIT Sloan Management Review, Winter 2006, pp. 73–78; The Ultimate Question (Harvard Business School Press, 2006). The term ‘Net-Promoter Score’ is a registered trademark.

10  See Tom Rieger and Guido M.J. de Koning, ‘Roadblocks to customer engagement (Part 1)’, Gallup Management Journal, 13 November 2003, pp. 1–5, and ‘Roadblocks to customer engagement (Part 2)’, Gallup Management Journal, 11 December 2003, pp. 1–4.

11  Of course, there are also unprofitable unsatisfied customers who are simply demanding. A customer-focused organization should be able to distinguish between painful customers and profitable customers and understand which ones are worth listening to.

12  Von Hippel defines lead users as: ‘users of a novel or enhanced product, process or service…who display two characteristics with respect to it: 1. Lead users face needs that will be general in a marketplace, but they face them months or years before the bulk of that marketplace encounters them, and 2. Lead users are positioned to benefit significantly by obtaining a solution to those needs’, in The Sources of Innovation, Oxford University Press, 1988, p. 109. For the active involvement of lead users in the creation of value, see C.K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-Creating Unique Value with Customers, Harvard Business School Press, 2004.

13  The Ford Mondeo was sold in the US as the Contour. The chassis for the X-Type Jaguar was a modified version of the European Mondeo chassis. To this day, many Jaguar salespeople fail to comprehend customers’ emotional reactions to the Jaguar’s chassis. Instead, they attribute the car’s failure to more rational reasons, like its size. This demonstrates the importance of investigating the deep emotions of customers, as explained in Chapter 5, on compelling value.

14  See Christian Pinson, Vikas Tibrewala and Francesca Gee, United Colours of Benetton, INSEAD, 1996, Case No. 01/96-4520.

15  Because of lack of space, we are focusing here on promoting engagement as opposed to recovering Detractors. The subject of recovery has already been addressed in the Satisfaction and Retention chapters and would naturally extend itself to engagement. An extreme example of Detractor recovery is the reaction of Coca-Cola when its customers revolted following its change in formula. The firm soon brought the old formula back as Classic Coke and offered the first case of the revived production to the leaders of the movement as a token of peacemaking. The new drink was referred to as New Coke, then rebranded Coke II, and slowly phased out of the company’s portfolio.

16  See www.redbullairrace.com for a demonstration of the excitement that Red Bull creates for its customers. The firm has also created the Red Bull Music Academy, which has a similar positive impact on customers. See www.redbullmusicacademy.com.

17  Second Life is a virtual world developed by Linden Lab and progressively built by its users. You can enter the Second Life world in the form of an avatar that you have designed to represent your virtual personality. You can visit it, participate in events, buy real estate, build properties and sell services. See www.secondlife.com. Second Life is developing rapidly, and already contains the virtual sites of major corporations, political parties, pressure groups and universities. For instance, INSEAD has developed a virtual business school campus under the direction of Professor Miklos Sarvary.

18  Emphasis added. See Steve Jobs, ‘To all iPhone customers’, http://www.apple.com/hotnews/openiphoneletter/, retrieved 4 October 2007. The existence of websites like www.anythingbutipod.com, a website that reviews alternative products to the iPod with an almost evangelical zeal, demonstrates that even Apple has its Detractors. The site states that it ‘is here to present the other options, not to bash and hate the iPod’ but the emotional tone in the rest of its ‘About’ statement demonstrates the strength of feeling of Apple’s Detractors: ‘With the iPod there are no decisions to make; you give up your right to choose. You are just another face in the crowd…This website is dedicated to individuals who can think for themselves.’ Of course, despite this, for much of its life the iPod has enjoyed over 70 per cent market share and in April 2007 Apple announced that they had sold the 100 millionth iPod: ‘100 Million iPods Sold’ Apple Press Release, 9 April 2007, http://www.apple.com/pr/library/2007/04/09ipod.html. Detractors like this are unlikely to be recovered, and in many instances their impact will be minimal. However, it is vital that the causes of their perceived grievance is investigated as it may reveal insights into the sort of momentum killers that may be negatively affecting other less engaged customers.

19  Because Momentum-Powered Inc. is experiencing greater profit growth, it has the capacity to increase its actual spend on customer acquisition more than Momentum-Deficient Inc. In the displayed example, the increases in marketing spend are 7 and 5 per cent, respectively. Despite this absolute increase, the percentage of its revenue that Momentum-Powered Inc. devotes to acquisition will drop by more than half from 20 per cent to 8.5 per cent over the course of the five years, adding further acceleration to its profitable growth.

Chapter 12

  1  Later in this chapter we will mention the cultural problems that the cheer encountered and that slowed down Wal-Mart’s momentum as it expanded across the world. For example, its lack of sensitivity to cultural differences of employees in different countries led to some German employees hiding in the bathrooms when it was time to chant the morning corporate cheer. See ‘Wal-Mart around the world’, The Economist, 8 December 2001.

  2  Sam Walton and John Huey, Made in America, My Story, pp. 199–200. Also Bob Ortega, In Sam We Trust: The Untold Story of Sam Walton and Wal-Mart, the World’s Most Powerful Retailer, Crown Business, 1998; Charles Fishman, The Wal-Mart Effect, Penguin, 2006.

  3  The Wal-Mart Cheer was an appropriate solution to develop a unifying customer culture at a time of fast expansion. Its initial acceptance by the organization owes much to the retailer’s southern rural culture and Sam Walton’s particular form of leadership.

  4  See Elen Lewis, Great IKEA! Cyan Books, 2005.

  5  Club Med was created by a group of friends who wanted to enjoy a certain concept of holidaying between people who shared common values of nature, fun and freedom. From the outset, they rejected the use of the words ‘employee’ and ‘client’ and coined the expressions GO (gentil organisateur in French, translated as ‘gracious organizers’), and GM (gentil membre, translated as ‘gracious members’).

  6  See James R. Sengel, Andrea L. Dixon, and Chris T. Allen, ‘Listening begins at home’, Harvard Business Review, November 2003, pp. 1–9.

  7  In Amy Barrett, ‘Staying on the top’, BusinessWeek, 5 May 2003, pp. 40–45.

  8  The ‘Rules of the Garage’ were included in the 1999 Annual Report to the HP shareholders. They were introduced with these words: ‘We are – at the end of the day – a people business, and therefore, a business for which customer experience is the only true measure of success. And so, we are reinventing the way we do business. Getting back to our roots. Back to the rules of the garage.’ (Emphasis in the original text).

  9  Wal-Mart’s culture and values sprang from the organization’s environment. This is why the organization was receptive to Sam’s proposed cheer after his trip to South Korea. But values can never be artificially imposed from the top down, as the later example of Wal-Mart’s experience in Germany demonstrates.

10  See Anthony Bianco and Wend Zellner, ‘Is Wal-Mart too powerful?’, BusinessWeek, 6 October 2003, pp. 46–55. Also ‘Wal-Mart around the World’, The Economist, 2001, 8 December, and Deutsche Welle, 28 July 2006.

11  For a complete description of the crisis, see Tamara Kaplan, ‘The Tylenol crisis: How effective public relations saved Johnson & Johnson,’ in Glen Broom, Allen Center and Scott Cutlip, Effective Public Relations, 7th edition, Prentice-Hall, 1994. See also, ‘Tylenol regains most of no. 1 share, astounding doomsayers’, Wall Street Journal, 24 December 1982. A short strategic analyses of the management of the Tylenol crisis is in Victor Braden et al., Crisis – A Leadership Opportunity, Harvard University, John F. Kennedy School of Government, National Security Program, CADRE/PC 2005-003, April 2005.

12  A second and similar tampering of Tylenol capsules happened three years later on 8 February 1986, causing the death of a young woman in Westchester County, New York. The company reacted as swiftly as in the first case. With the cooperation of the authorities, another tampered bottle was found before it could do any harm. The company then took the dramatic step to stop producing capsules. See Bill Powell and Martin Kasindorf, ‘The Tylenol Rescue’, Newsweek, 3 March 1986, p. 52; Robert D. McFadden, ‘Maker of Tylenol discontinuing all over-counter drug capsules’, The New York Times, 18 February 1986.

13  Robert Wood Johnson recognized that the Credo would have to evolve to reflect changes in language and in the environment. The Credo has indeed changed several times and the 1979 and 1989 versions are displayed on the company website with the details of specific additions and deletions. The spirit of the Credo has, however, never changed. It has always stressed the responsibility of the company towards all its stakeholders: customers, employees, communities and stockholders. See: www.jnj.com/our_company/our_credo_history/revisions/index.htm. An excellent article showing how the Credo and the culture it created were essential in resolving the Tylenol crisis is provided by Lawrence G. Foster, ‘The Johnson & Johnson Credo and the Tylenol crisis’, New Jersey Bell Journal, Vol. 6, No. 1, 1983.

Chapter 13

  1  The description of the transformation of Val d’Isère is based on an unpublished work by the author and personal communications with Michel Giraudy.

  2  See for instance Peter F. Drucker, The Effective Executive: The Definitive Guide to Getting the Right Things Done, Harper Collins, revised edition, 2006; John P. Kotter, Leading Change, Harvard Business School Press, 1996; Ram Charan, Stephen Drotter and James Noel, The Leadership Pipeline: How to Build the Leadership-Powered Company, Jossey-Bass, 2001; Henry Mintzberg, Mintzberg on Management, Free Press, 1989; Manfred F. R. Kets de Vries, The Leader on the Couch: A Clinical Approach to Changing People & Organisations, Wiley, 2006.

  3  For the account of this story by Gerald Ratner himself, see his recent book, Gerald Ratner: The Rise and Fall ... and Rise Again Wiley, 2007. Ratner was ousted from his own company, which was renamed Signet Group. The event occurred in April 1991 and had such an impact that the expression ‘doing a Ratner’ is now a British expression referring to a business executive who criticizes the company’s products or disparages the customers, with disastrous results.

  4  John Gapper, ‘How to make a million connections’, Financial Times, 8 July 2005.

  5  Alan Hughes, CEO of First Direct from 1999 to 2004, is a case in point. Many of the examples we’ve looked at from First Direct, including the offset mortgage, come from his period in office.

  6  Throughout this book, although we have been centreing on customer momentum, we have used the terms vibrant satisfaction, retention and engagement without specifying who is being satisfied, retained or engaged. This is because the concept is valid for all stakeholders, and we didn’t want to imply that the concept is restricted to customers. However, now that we are looking at the synergy between momentum derived from the internal and external markets, we must differentiate between these two groups – hence, vibrant customer retention is mirrored by vibrant employee retention and so on.

  7  Note that at a first glance the internal momentum virtuous circle appears to be different from the version presented in Figure 12.1, but it is not. Although the direction of the arrows has been altered from clockwise to anti-clockwise, the components have also been transposed so that they are still in the same positions, relative to each other. It is as if you are looking at Figure 12.1 from the other side. This is simply to demonstrate the synergy between the two engines of vibrant customer momentum execution and vibrant internal momentum execution when they are brought together.

  8  Rajat Gupta and Jim Wendler, ‘Leading change: An interview with the CEO of P&G’, McKinsey Quarterly, July 2005.

  9  See Carola Hoyos, ‘Shell boss fails to turn up for the bad news’, Financial Times, 10 January 2004; Alison Maitland and Carola Hoyos, ‘Shell’s man who wasn’t there’, Financial Times, 14 January 2004; Stanley Reed, ‘Shell’s drama isn’t over’, BusinessWeek, 23 February 2004, pp. 24–26; ‘New chief offers a safe pair of hands’, Financial Times, 4 March 2004; Stephen Labaton and Jeff Gerth, ‘At Shell, new accounting and rosier oil outlook’, New York Times, 12 March 2004.

10  We have restricted this Hall of Fame to leaders who in our judgement, have achieved a five-star momentum leadership status for at least 10 years and whose success is sufficiently documented to serve as a guide. Some of these leaders ended their careers while their firms were still enjoying momentum growth, others are still leading momentum-powered organizations and others are trying to recover a momentum they once created and then lost.

11  There is a general recognition, inside the company and among outsiders, including competitors, that Sam Walton was an exceptional leader and his multiple qualities have been detailed many times, including in several books. The emphasis here is that these qualities focused on delivering value to multiple stakehoders with the net result of creating momentum and exceptional growth for a long period of time. See Bob Ortega, In Sam We Trust: The Untold Story of Sam Walton and Wal-Mart, the World’s Most Powerful Retailer, Crown Business, 1998; Charles Fishman, The Wal-Mart Effect, Penguin, 2006.

12  The statements attributed to Sam Walton in the rest of this chapter are taken from his book Made in America: My Story.

13  From 1977 to 1987, Wal-Mart’s average annual return to investors was 46 per cent.

Chapter 14

  1  In 1985 Steve Jobs was ousted from Apple, the firm he founded. He was called back 10 years later. In the meantime, he had created NeXT Computer, which contributed a number of significant innovations, including some that helped Apple develop its new operating system. In 1986 he bought The Graphics Group from Lucasfilms. This company, renamed Pixar, has made some of history’s most successful animated movies and was sold in 2006 to Disney for more than $7 billion, making Steve Jobs Disney’s largest shareholder. Quite an impressive momentum record!