From a podcast interview featuring Professor Leigh McAlister from the University of Texas.
In this episode of CEO Growth Talks, Pete Hayes speaks with Professor Leigh McAlister about the "Growth Gears" framework from their collaborative research. Professor Leigh reveals how marketing proficiency is integral to company growth, offering insights on strategy, customer understanding, and the role of marketing authority in driving success. The conversation explores how aligning marketing insights with strategic execution can help companies unlock their full growth potential, emphasizing the importance of marketing leadership in fostering innovation and competitive advantage.
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“If you pick up any marketing textbook, other than Growth Gears, it will suggest that marketing has control over everything. We found that in some companies, marketing does have authority over all those decisions, while in others, it does not.” Professor Leigh McAlister |
The insights from Growth Gears offers a pivotal model encompassing insight, strategy, and execution, crucial for driving business growth.
Different organizational structures grant varying levels of authority to marketing, impacting a company’s strategic potential.
Using the Growth Gears as a textbook aids in imparting complex marketing concepts effectively to non-marketing students.
Building insight and aligning it with corporate strategy can mitigate the blind spots in operationally-focused firms, enabling more competitive growth.
Companies with a marketing-driven focus at the management level tend to grow faster, highlighting the importance of marketing’s influence.
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[Episode Transcript]
[00:00:00] Pete Hayes: Hello, everyone, and welcome to another edition of CEO Growth Talks. I'm your host, Pete Hayes from Chief Outsiders, and it's my pleasure to welcome my friend and really colleague in some ways, Professor Leigh McAlister from the University of Texas here in Austin, where you hook 'em horns. Hey, number one, number one in football right now.
[00:00:21] Leigh McAlister: Who won that ballgame last weekend?
[00:00:23] Pete Hayes: Yeah, we heard, and the next one is really important too. But, so in any case, we're really looking forward to spending some time with Professor McAlister because she and her colleagues helped us create the research. And Lee, in particular, found some very fascinating insights from the research that we originally did for the Growth Gears.
[00:00:43] Pete Hayes: We're going to talk about Growth Gears, where it's been, how it got here, where it's going, how Professor McAlister uses it today. And I'm going to trip all over that, so I'm going to call you Lee, as I normally do anyway. But welcome, Lee McAlister, to Growth Talks.
[00:00:57] Leigh McAlister: Thank you. No place I'd rather be. No one I owe more to than you and Growth Gears.
[00:01:02] Pete Hayes: McCombs School of Business isn't the first place you've taught, so previously you were teaching at?
[00:01:08] Leigh McAlister: Just before you were here, I was at MIT. Before that, I was at the University of Washington, and before that, I was getting my PhD at Stanford across the world. Little water from you. Everybody knows that Pete's from Berkeley.
[00:01:23] Pete Hayes: Yeah. And there's Berkeley, Stanford, there's all that stuff, but it's okay. I'm over it now. Now that we're friends, but you were getting a PhD in the Stanford Business School, which was not common back when you were doing that, is that right?
[00:01:36] Leigh McAlister: It was just happening. Things. I feel very lucky to have had the faculty that we had at Stanford. I felt like they wanted me to make it, and in particular, of course, they were all men, but in particular, the ones who had daughters were very interested in how I was navigating that world. I felt like they were coaches scouting pre-game plays, and one of them, who was actually at Berkeley, Dave Aaker’s daughter Jennifer, is a generation younger than me. I feel like he was getting tricks for Jennifer, who is a superstar now. She's a chair professor at Stanford.
[00:02:22] Pete Hayes: If you're a marketer watching this, you hear the name David Aaker and his books on brand and brand portfolio management. He's a legend in that category of stuff.
[00:02:32] Leigh McAlister: He's a legend. He's number two to Jennifer.
[00:02:36] Pete Hayes: Wow. That says a lot.
[00:02:38] Leigh McAlister: It scales her for you.
[00:02:40] Pete Hayes: Okay. So when we first met, we were introduced by our friend Lamar Johnson, and you had agreed to do some research with this little unknown company called Chief Outsiders because why?
[00:02:53] Leigh McAlister: Because you were interested in what makes marketing important in a firm. With the functional rivalries inside the business school, we're always interested in being able to document the fact that the marketing department is very, very important and deserves more of the resources. I was hoping that's what we were going to find, and I was thrilled when we did find it.
[00:03:17] Pete Hayes: Wow, and just to pause myself for just a second, and I'm not trying to say let's pause the broadcast or anything, but I do want to let everybody know, CEOs in particular, the reason we're going down this path is recognizing what the growth gears has basically brought to light and what Lee's research has brought to light is really, really important for growth.
[00:03:42] Pete Hayes: We're going to unpack that a little bit, but that's why we're here today. So, Professor McAlister, what did you find in the growth gears research, or you can set that up any way you like, but what was the discovery?
[00:03:54] Leigh McAlister: One thing I loved about the research was a bunch of CMOs got together and made up all the questions. Professionals who knew how to ask the questions, but one of the questions that's been most important for me is, which decisions does marketing actually have authority over? And pick up any marketing textbook other than mine, which is the growth gears, any other marketing textbook, it's going to suggest marketing has control of everything.
[00:04:22] Leigh McAlister: Product, price, place, promotion. Of course, marketing has authority for all those things. And we found that some companies, yeah, marketing has authority for all those decisions. Other companies, no. That's huge news. Marketing academics of the universe.
[00:04:39] Pete Hayes: So this kind of fits in there, but you threw in a real interesting data point that most people listening probably don't recognize. You actually use the growth gears as a textbook with your honor students who typically aren't marketing majors, which is interesting, and maybe you could explain why you and maybe it's an extension of what you were just talking about.
[00:04:59] Leigh McAlister: Everyone out there, have you read the growth gears? If you haven't, you should.
[00:05:09] Pete Hayes: On the LinkedIn live, if you comment, either the live or the recording, and give me a way to contact you, I'd be happy to share even just a PDF copy of the book with you so you have a chance to at least read the introduction and read the research. So this is not a pitch to sell books. I'd be happy to give you one if you like.
[00:05:28] Leigh McAlister: Most textbooks are this thick and they have lists. Every fact that's ever been uncovered, just list after list after list. Nobody's been through school that isn't familiar with that. None of the marketing textbooks say, well, what does marketing really do? Well, it informs, it communicates.
[00:05:47] Leigh McAlister: What I love about the growth gears is it says, if you want to grow, here's what you have to do. I don't have any trouble getting my finance-oriented students, honor students, interested in growing a firm. They understand stock price is a discounted so expected future cash flows. We grow those that stream cash flows, rolls back, stock price goes up, CEO gets a bonus, everybody in the company is happy. So it's just a much easier sell on day one.
[00:06:20] Leigh McAlister: Primarily because it says, "This is what we're trying to accomplish." My favorite topic is pricing. You go to a traditional marketing textbook, it'll say, "Well, you can price higher, you can price lower, you can discount, or you can do 40 different pricing strategies for you." How do you choose?
[00:06:37] Leigh McAlister: They never talk about that. Growth Gears says, you look at your strategy gear and you say, "That tells me if my execution gear is going to be consistent. I need to price in this way." So rather than long laundry lists, it gives you a model of how to make the decision, and you don't start with pricing. You don't even start with strategy.
[00:07:03] Leigh McAlister: You start all the way back here with insight. What problem does your customer have that you can solve better than the competition? Pretty compelling. If we could answer that, of course we're gonna win. One thing I like about it is it has an objective; there's something it's trying to do, and that something, that growth piece, is something I don't have any trouble selling to any students.
[00:07:28] Leigh McAlister: Even if they're not finance students, they get it. They understand that we need to grow because they're all worried. They want to be sure the company they take a job with is still there when they graduate, and they understand they ought to be looking at the growth prospects of the companies they're talking to.
[00:07:45] Leigh McAlister: Okay, so enough about growth. Number two, it does not break their back carrying this textbook around.
[00:07:53] Pete Hayes: It's portable.
[00:07:55] Leigh McAlister: It's portable. That's non trivial. That's a real value to these students even though all of your listeners are getting the book for free, my students have to pay for it. It's about 15 dollars on Amazon now. Your typical textbook is 200, 250 dollars. Students love that.
[00:08:19] Pete Hayes: Let me make a note. We're raising prices on Tuesday. So, you mentioned the three gears: insight, strategy, and execution, and just share in our world, one of the greatest insights that really helped us is recognizing that most CEOs and their businesses are operationally oriented.
[00:08:38] Pete Hayes: They tend to come from an operational background, and as a result, they have a blind spot. They're really good at running their business, but they're not as good at looking outside the four walls and getting aligned with the realities and dynamics of the marketplace. And using that, to your point, of getting the insight aligned with the strategic decisions aligned with how they're going to go to market and execute, and it comes down to that. The ones that do grow faster than their industry peers, is what the research said.
[00:09:04] Leigh McAlister: Is that a surprise?
[00:09:05] Pete Hayes: Well, it's nice to have a data point that's real. Yeah, but that wasn't the only piece to it because what you discovered, because you said in the book, it said it looks like dogs can become cats, or at least dogs can take on feline properties, which meant that an operationally oriented company, they don't give up their operational excellence, but they add to it.
[00:09:28] Pete Hayes: The market-oriented capabilities, and they'll run a great business and grow faster than their industry peers. Because they're going to be aligned with the realities of the marketplace. It sounds very simple, and the set of gears are relatively simple.
[00:09:42] Leigh McAlister: While the set of gears is simple, I think it’s not so simple for an operationally oriented company. I think they need help. What do I know? I’ve got a PhD. From my outside perspective, it’s good to be operationally oriented. It’s great to drive costs down; that gives you a particular kind of expertise. You are a gymnast. Now, if we’re going to play baseball, you need to bring in some outside talent to help with that.
[00:10:14] Pete Hayes: You need a baseball coach if you're going to play baseball. I'm not a gymnast coach. Interesting.
[00:10:18] Leigh McAlister: Maybe the gymnast can do some things better; the analogy doesn’t work perfectly, but I think it’s too much to mail this book to the CEO of an operational company and say, "Okay, now grow."
[00:10:32] Pete Hayes: Yeah. I've never had any of our clients ever say, "Well, I got the book. We're all set." Experience helps. For your students, what’s the hardest part of the Growth Gears for them to either get or accept? What’s the hardest part?
[00:10:44] Leigh McAlister: Of course, they want to jump to execution. Whatever we’re talking about. If I haven’t just pounded on them, "You don’t do that until you’ve done these other two." They want to jump to—and the element of execution they want to jump to is price, and they want to cut it because I think there are students living on student budgets, and they can’t get outside themselves very effectively. They feel themselves.
[00:11:08] Leigh McAlister: They say, "Oh, man, we just had an article about Burberry. If they just cut the price on Burberry, I could have one of those coats." They aren’t thinking about, "If you’re Burberry, how do you maintain your luxury image?" You don’t go to outlet malls. They go to outlet malls, so they want Burberry there.
[00:11:26] Pete Hayes: Outlet malls would be in the market section of the strategy gear, which is routes to market, including your channels. And so as strategic decisions get made, or maybe it’s not considered, the decision was made maybe more just to get volume rather than in terms of the overall long-term business.
[00:11:46] Leigh McAlister: Which Growth Gear says, "Don’t do it just because your competitors did." So, I would say the biggest problem students have is getting outside themselves. They don’t have any experience being in senior management. They’re having to make up [00:12:00] a whole problem.
[00:12:00] Pete Hayes: Let me pivot just a little bit because, after the Growth Gears had been out a little while, you came back around and asked several of our CMOs for some help. We did some additional research, which added to the existing research we had. We published a paper. You put some of our names on it, which was very generous of you.
[00:12:08] Pete Hayes: That paper got published, but there were some really interesting findings in there about different ways of organizing where marketing fits into the organization. That gets into your original comment about who’s in charge. But what was the essence of that paper’s message?
[00:12:31] Leigh McAlister: That was step one in my move to change the entire world, or at least all of the academic world teaching marketing. They’re teaching out of those thick textbooks with lists because they believe marketing’s in control of everything. So, this is a heretical paper, and having Pete as a coauthor and a couple of other cheap outsiders as coauthors made it hard for the marketing establishment to say, "This couldn’t possibly happen because there were people who were out there in the field.".
[00:13:24] Leigh McAlister: You played a very important role in that, and we found three patterns of marketing authority. In one pattern, marketing had authority for research, segmentation, targeting, positioning, pricing, distribution, dot, dot, dot—had control of all of it. There was another group where marketing just had communications, advertising, media, PR communication, no price, no distribution.
[00:13:33] Pete Hayes: Which is, by the way, very common in technology firms, that approach.
[00:13:37] Leigh McAlister: Right. We don’t know who our respondents were. That’s why they would tell us all their secrets. We can guess those are technology firms. We can guess that the first set of firms are packaged goods firms.
[00:13:49] Leigh McAlister:Then we had the majority, the biggest group, marketing didn’t have authority for any of those decisions. When marketers were making those decisions, I’m guessing that you’re operationally oriented companies. Then, marketers may make brochures for the sales organization.
[00:14:05] Pete Hayes: So, in that first group, and I think it was like maybe only 17%, they charge marketing with the mission of growth.
[00:14:13] Leigh McAlister: Yes. I think we call that, I should ask you, P&L responsibility. Whoever has P&L is going to have pricing and distribution because those are so critical to bringing in revenue.
[00:14:26] Pete Hayes: And that is real common in consumer packaged goods companies, where a brand manager literally owns the P&L of that product or that brand category.
[00:14:36] Leigh McAlister: It’s brand managers that roll up to be general managers of divisions and then roll up to be CEOs.
[00:14:45] Pete Hayes: So, why don't we think this happens more often in a B2B company?
[00:14:48] Leigh McAlister: Well, what kind of B2B?
[00:14:50] Pete Hayes: Well, let's say technology. Let's go back to that.
[00:14:53] Leigh McAlister: Here's my hypothesis. This will be our step three, Pete. This is what we'll do after we get our next step completed. Step three: I think it goes back to inception. When the company started, what was the founder's background? Tech companies, it's usually an engineer. Engineers have a world outlook, and as they're trying to build the company and people to support them, they're looking for other people with that world outlook.
[00:15:20] Leigh McAlister: As they get big enough to need to organize P&L, they put people in place that understand the engineering outlook, so they can. And this was way back in inception. By the time Pete Hayes took a job with them, nobody even remembered that. They just know that you've got to be an engineer if you want to run a business.
[00:15:41] Pete Hayes: Yeah. Okay.
[00:15:43] Leigh McAlister: Consumer companies, I guess it was somebody who was very marketing consumer-oriented that started the firm.
[00:15:50] Pete Hayes: It's almost like you really have to have in-depth consumer insight in order to find those little nuances to make those product changes and brand extensions. The sophistication of marketing still seems to be in consumer products.
[00:16:02] Pete Hayes: Thanks. It's wild, isn't it?
[00:16:04] Leigh McAlister: It's wild, but it's exactly what you'd expect. How sophisticated do you think the engineers at Procter & Gamble are? Well, I'm sure they're very confident. Compare them to those at AMD. So whichever function is leading, we know you hire the best people. You've hired the A-plus students for that function. Give them the most challenging jobs, the highest salary. You promote them fastest. You're grooming them for top management. So what a surprise that it's the engineers and the tech companies that are the best of the engineers, and the marketers and the consumer goods companies are the best of the marketers.
[00:16:41] Pete Hayes: So I have a confession to make. You know, chief outsiders. We have a hundred-plus fractional marketing executives and fractional sales executives, and we rally around the growth gears framework, and that's great. But it actually is quite instructional even for us because the gift that we get and the challenge that we get is working with mid-market companies and lower mid-market companies.
[00:17:04] Pete Hayes: We actually have an opportunity to work directly with the CEO, and the objective is growth. We need a playbook with lots of flexibility in it because every company is different, but we need a playbook for how we're going to help a company grow. So we get quite a bit of latitude to turn all the knobs across the growth gears to help businesses, which, frankly, these lower mid-market companies at an advantage to their large competitors, should they have large competitors in their markets, because we're able to make those changes.
[00:17:34] Pete Hayes: It might just be the secret sauce that we have in the business. It's really something.
[00:17:38] Leigh McAlister: Textbook, you know, I think it is.
[00:17:41] Pete Hayes: Well, tell me where it is. Professor Leigh McAlister, go from here. What's next?
[00:17:47] Leigh McAlister: Okay. Marketing professors are very concerned about how important the marketing function is. As I mentioned before, we have this bitter interfunctional rivalry, as you will find anywhere in the industry. But it's not clear how to measure how important a function is. So, in the marketing literature, what we've done is look at the top management team. Unfortunately, CEOs don't just report who their direct reports are, except in our survey, but big Fortune 500 companies don’t put that in their annual report. But they are forced to report the highest-paid employees, 8 to 12 highest-paid employees.
[00:18:27] Leigh McAlister: So we draw the inference that those 12 are the top management team and then we say, well, is marketing important in that group? We know nothing about these people. We have only their titles. So we say, is there anybody there with a title that has marketing in it? There's almost never somebody called chief marketing officer, but sometimes there'll be a senior VP of marketing or whatever.
[00:18:49] Leigh McAlister: So we look for marketing. We look for a brand. We look for advertising. We look for customers, but that can be tricky because this could be customer service, which is often part of operations. The way we're doing it in our literature, we're just taking all those things, and then my favorite one: We put sales in there because of big marketing textbooks, sales is one of the chapters. Marketing professors think sales is a subfunction of marketing. I kid you not.
[00:19:19] Pete Hayes: That's okay. Sometimes we do too. It's part of the execution.
[00:19:26] Leigh McAlister: But probably get the University of Houston, who is a sales scholar, and it just drives him up the wall. It's a different function. When you were talking about your business, as you said, it is...
[00:19:36] Pete Hayes: Sales is a different function that needs a different leader. They need to be yoked well together.
[00:19:43] Leigh McAlister: All this is to say, we don't have a very good measure of how important marketing is just looking at the titles. But there's a brand new data service out, secondary data, called Revealio. And they've gone and scraped the web, scraped LinkedIn, gotten resumes for every executive that they can, which is a very large percentage of all those people that are highest paid in the Fortune 500 companies.
[00:20:09] Leigh McAlister: So now I can look at their work history. And the first thing I notice is that in every company there's some function that has, of seven functions, you'd think there'd be about 15 experiences from each of them. No, there's some function that has, on average, 70% of all the work experience of everybody on the top management team comes from that function. Engineering in tech companies, marketing in some packaged goods companies, sales, it's often sales, sometimes operations. So that's the measure of how important a function is that we're trying to look at. When is marketing important? When has marketing been the line function? So the people that get, they bring the best, the A-plus students in, they give them the best assignments, they promote them to general manager, they're on the top management team. If that's mostly marketing experience up there, what we've learned is those firms grow faster. We use something called Tobin's Q.
[00:21:12] Leigh McAlister: That's market cap, how many shares of common stock are outstanding, what's the price of a share, market cap divided by book value of assets. If we sold everything today, how much would we get? When marketing is the line function, it's multiples of two and three, all those intangible assets that marketing's created.
[00:21:32] Leigh McAlister: But one other thing I want to say about my colleagues who are looking at titles. We go look at some of these titles, these people. It's a company where engineering is the predominant function. There's somebody over there with the title. It sounds like marketing or branding or advertising. They're engineers.
[00:21:50] Leigh McAlister: Those people came up through engineering and we have to have somebody coordinating marketing. It'll be Joe, the engineer. We're misleading ourselves, and guess what? Nobody wants to be told that. That's why I have to have Pete as a coauthor. So my colleagues don't just say, "You're dreaming."
[00:22:12] Pete Hayes: Well, we've learned a lot working with you and we love contributing to your classrooms when with speakers, when that's appropriate. I can't wait to see where this all leads because I know we're not done.
[00:22:24] Leigh McAlister: Fabulous.
[00:22:25] Pete Hayes: Yeah, so Professor McAlister, thank you so much for being with us today, and we'll sign off and we'll see you all next time on CEO Growth Talks. Thanks. Take care.