The most powerful part of a business is its focus.
It feels pretty obvious that the main goal of the majority of companies is to grow. On the contrary, though, a big and continuously growing business isn’t what helps it succeed, but what makes it smaller.
Al Ries elaborates on how a business’s stress on growing can actually become its Achilles’ heel in the book, “Focus”. It’ll tell you about how making a company go global can actually cause it to die, therefore, it’s crucial to keep up with any technological changes if you want your business to survive.
Ries takes the reader through many example to show the numerous typical ways that a business can work and build their focus. For example, when you specialize tasks, you raise the chances to succeed in a marketplace that’s continuously becoming more and more crowded.
The primary objective of companies is usually growth.
Regardless of whether it’s a family-operated bakery that wants to open another store or a giant fast-food business that is trying to completely take over the market, it looks as if the one thing that links these two is their strive to grow.
However, have you ever asked businesses exactly why they’re so focused on growing?
One explanation for this is that when you grow, you also get more cost benefits.
Some business expenses are constant, so they want be adjusted when the business starts making more. Therefore, the cost per unit gets lower, while the amount of those units produced gets higher.
For instance, a bakery has variable expenses for flour, yeast, and a few other ingredients. They all differ based on how much bread is made. It’s also got constant expenses such as the amount spent on the oven.
Suppose an oven cost $500 and the sum of all of the ingredients required to make a loaf of bread is a $1. If the bakery ends up making 100 loaves of bread, the constant expenses surrounding a loaf of bread comes down to $5 after you divide $500 by $100. When the variable cost is $1, a loaf of bread would be worth $6 if the 100 loaves were made in total. If 500 were made, then the amount it’d take to make a loaf would go up to $2.
Clearly, those kind of cost benefits would give businesses a competitive advantage. The smaller the expenses, their items can be sold at better prices, therefore more buyers will be more likely to purchase them.
Additionally, businesses also want to grow because managers want to take advantage of what comes with a bigger size (ie. cost benefits). Generally, managers want their businesses to make a lot of profit, so it only makes sense that they’d strive to raise revenues, while lower expenses.
That’s the reason why managers place the majority of their focus on growth. For example, during the time when Wayne Calloway was the CEO of PepsiCo, he stated that the company was entirely dedicated to a pretty high, 15% to be exact, long-term growth. To this day, PepsiCo pays attention to growth. Calloway and other former CEOs had strived to reach that goal by purchasing so many other businesses.
Being a large, ever-growing company doesn’t guarantee success.
It’s a really common idea that the bigger the business, the more valuable it is. However, how true is that statement actually?
On the contrary, there are times when large businesses with greater revenues have a smaller value in the stock market than their other, but smaller equivalents do.
For instance, whenever PepsiCo and Coca-Cola are compared, PepsiCo is obviously a much bigger business. Its latest numbers show that they made $28.5 billion in sales in just a year. Coca-Cola, on the other hand, only made $16.2 billion.
However, Coca-Cola is worth $93 billion on the stock market whereas PepsiCo was only worth $44.
How can that even be possible?
You can answer this with one word- focus.
Those bigger businesses are at a disadvantage since their focus is scattered. For example, Coca-Cola only pays attention to drinks. On the contrary, Pepsi makes several drink brands such as Pepsi, Mountain Dew, and 7Up, while also owning many fast-food chains such as Taco Bell, Pizza Hut, and KFC as well as the snack food business, Frito-Lay.
Additionally, a business that isn’t focused is difficult to manage, which expectedly causes there to be performance problems, which leads to less success.
The idea that a professional manager is capable of managing anything is just not true. On top of skills such as people and conceptual ones, which is useful in any industry, management also demands a lot of knowledge as well as experience in a certain area in the business.
Whenever a business works in numerous areas, their management will end up going into issues such as managers without enough expertise.
For instance, PepsiCo’s gotten themselves into three different areas: drinks, fast-food restaurants, as well as snacks. Most likely, they struggle with a deep-rooted management issue.
The business has attempted to fix this issue by juggling potential managers throughout each division. The manager leaves it with a supposedly “well-rounded” practice in each area. However, they only get a third of what they could get from their time with Coca-Cola.
Companies become unfocused by management strategies aimed at growth.
As we’ve observed, managers want to make their businesses bigger so that they can take advantage of the benefits associated with size. Thankfully for them, there are a few methods that they can utilize in order to get just that.
For instance, the airline, Virgin Atlantic, owned by Richard Branson’s Virgin Group, have put their brand name on a variety of items, such as Virgin Cola, Virgin Vodka, as well as Virgin Financial Services.
Another way to grow is through diversification, which focuses on raising a business’s number of sales by going out into other markets or items that aren’t similar to what the business already has or the markets that they’re already in. For instance, in the beginning of the 80s, Xerox, a company mostly known for both their photocopiers and printers, branched out into financial services.
Although these kinds of decisions aren’t uncommon, the issue is that they get businesses to lose focus.
For example, whenever a business goes out into other markets, they also have to work with a larger variety of items to manage as well as gain a greater amount of rivals to know about. For instance, when Virgin Group had used the line extension strategy, they didn’t only gain British Airways and American Airlines as competitors, but they also gained both Coca-Cola and Smirnoff.
This shows how making a business bigger can get it to lose focus. This loss can negatively impact a business significantly.
Globalization helps companies to expand their business on a global scale, but this can cause a company to lose focus.
Today, it’s not often that you’ll find businesses that only work in a single national market. More and more often, the majority of businesses, large and small flow along the trend of globalization.
This is not shocking, since today, it’s easier than it’s ever been before for businesses to trade globally. This has been accomplished through the fact that globalization gets rid of trade barriers. Treaties like the General Agreement on Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA) as well as the Asia-Pacific Economic Cooperation (APEC) productively get rid of high tariffs as well as other trade barriers that would typically make both importing and exporting a costly procedure. For instance, NAFTA is an agreement between the U.S., Canada, and Mexico. It gets rid of tariffs on trade, which allows businesses trade without a problem.
There is, though, a negative. Trading globally enlarges the forces that typically cause a company to lose focus in the first place.
Businesses that end up going global end up losing focus by all of the opportunities that the world market has to offer. Although a business is focused within their home market, the minute that they go into the global one, they attempt to diversify it and as a result, they end up dealing with much too many competitors all at one time. The thing is, most of the time, those competitors are difficult to outdo since they’re already sunken their feet in to the concrete of the world market.
For instance, Olivetti was once a typewriter and then became a mainframe business in its home market. When they began going global, they attempted to be the reflection of business in the personal computer industry and then go broader into services, telecommunications, as well as multimedia.
The outcome? There hasn’t been one profitable year for them since 1990.
Even though a business is a hit in their home market, it doesn’t mean that they’ll succeed in a global market. A few may even dispute that those businesses should’ve remained back at home.
Specialization is an effective strategy to focus your company and improve performance.
At this point, you’ve been informed about how businesses get unfocused and the disadvantages of it.
However, is there a solution to it? Or, to phrase it better, is there a way to refocus your business?
In situations where diversification as well as line extension unfocuses a business, you just have to do the complete opposite in order to refocus it. So, instead of increasing the amount of different items that you have, you need to decrease that number. In other words, in order to refocus, a business has to specialize in one field item.
This is due to the fact that a specialized business often gains the attention of consumers more so than a diversified one does. In fact, in the past ten years, department stores such as Bloomingdale’s as well as Macy’s have been getting themselves into and out of bankruptcy and this is due in part to the fact that they’ve ended up losing lots of customers to specialty stores such as Toys “R” Us.
Department stores have got a lot of different items ranging from food all the way to clothes. On the contrary, specialty shops such as Toys “R” Us typically only have a single specialist product field and that gains the attention of many more consumers.
This shows that businesses that are trying to focus their business so that they can be more successful should just hone in on specializing in only one field.
Take, for instance, Toys “R” Us. This well known toy store began as a Children's Supermart and then transformed into a children’s furniture store. Afterward, their founder, Charles Lazarus, decided to add in toys to the store. That store, however, never really became successful prior to when he threw out some furniture as well as made a cut clear and precise narrow focus of only specializing in selling toys that are discounted.
Specialized companies perform better because customers view them as providers of high quality.
If you were having a medical issue, such as a heart disease, who would you go to: a general practitioner or a cardiologist? A lot of people would end up going to the cardiologist since medical specialists typically know a lot more about their specialty in comparison to a general practitioner.
The same situation applies in business. Customers would much rather use specialized businesses since they believe that they are the ones who could produce the best quality.
This is due to the fact that generally, people don’t know enough about various items in order to make a good choice of the item with the top quality. Therefore, they rely on other things that could help them make the best choice, like an expert.
In the world of business, companies that have experts in a certain field are the companies that specialize.
For instance, if you had wanted to purchase a computer mainframe back in the 1970s, you’d have to go to the leading specialist, IBM, who has items that are viewed by experts as very quality ones.
Whenever you want to sell quality items, it’s not really important whether or not that item is actually at a higher quality technology wise. The only thing that really matters is whether or not those customers see the quality since they’re the ones who actually make the choice to buy it.
However, don’t forget that high-quality items do sell much better, which causes the business’s performance to get better, too.
Take, for instance, the world’s most well-known as well as best-selling soft drink: Coca-Cola. Whenever people asked why they’d rather drink Coca-Cola on the contrary to Pepsi or any other soft drink for that matter, the majority replied claiming that it tasted better.
Therefore, specialized businesses do better in comparison to those that are unspecialized since they have the benefit of being looked up to as an expert in their industry.
New technologies change the market, so you should be prepared to adapt your company’s focus accordingly.
Has there ever been a time when you realized that there was something in your life that has stayed the same all of this time?
Surprisingly, the economy is no different. Any adjustments that it goes through is due largely in part because of the fact that technology itself has made some adjustments.
The thing is, technology is always changing, therefore with every new influx of technology, more economic demand is made, which slowly starts to take the place of old technology.
For instance, a couple of years ago, photography relied lots on analog technology. Therefore, if you wanted to take a picture, you had to buy photographic film as well as get it developed at a lab. Afterward, there was a huge technological breakthrough: today’s universal digital camera came out onto the market.
If businesses don’t end up adjusting with the economy, then they’ll fall behind with time. Take, for example, George Fisher, the CEO of Kodak in the 1990s. He could only wrap his head around the fact that analog photography would not be able to replace digital for a while. However, only a bit later, digital photography ended up taking over the majority of the market.
Kodak, in 1992, was a $20 billion corporation as well as the leader in the analog photography market. However, as soon as technology got better, this businesses began to face difficulty. 3 years later, in 1995, Kodak’s worth dropped down to $13 billion.
Since the sales of photographic film decreased, people wanted to purchase the newer technology, which were digital cameras at the time, since they didn’t need any film.
Due to the fact that Fisher had put in so much of his efforts into analog photography, Kodak was sadly one of the final businesses to begin marketing as well as selling digital cameras. As a result, this let other businesses become the market leaders.
Since Fisher was hesitant to take on this new technology, they ended up paying a hefty price for it in the future.
Adjusting a business to shifts in the economy requires them to move their focus towards something that is necessary for that “new” economy. In order to steer clear from the difficulties that Kodak had faced, in the past, George Fisher should’ve been more attentive towards technological advancements and should’ve shifted the business’s focus from analog to digital photography at the right time.
A single company needs a single focus, while a conglomerate needs a multi-step focus.
Thus far, we’ve only talked about businesses that only have one focal point and that work really well.
However, giant conglomerates also exist with a few brands, so they focus on multiple things, and yet they’re doing so well, regardless.
How do they do it?
On the contrary to businesses with one focus, that work in one market, conglomerates typically work in a few markets at the same time.
Take, for instance, General Electric. They make $64.7 billion in sales and $4.7 in profit. GE is one of the most prosperous conglomerates. They were in fifth place back in 1993 in Fortune 500, which is the yearly list of the world's top 500 most successful enterprises.
Another example is Dover Corp, which were 361st on the list with a sales of $3 billion. They had 54 working businesses that worked with over 70 different companies.
However, why does this difference not cause businesses to lose focus?
This is due to the face that successful conglomerates divide their various and many markets and then working on creating a focus for each one, which turns into a multi-step focus.
This lets them purposefully go after various customer segments and steer clear from any competition from within.
Take, for instance, at the beginning, when General Motors had just been starting out, the conglomerate had been an unfocused disaster. They had multiple brands, Chevrolet as well as Cadillac, that had set foot in different markets. The biggest problem that they faced was the fact that a few of the markets actually ended up crossing one another since the price ranges of both brands weren’t precisely defined.
This caused both of the brands to end up competing to see who could take the others customers. This cause the conglomerate to make less in profits.
However, when Alfred Sloan had taken the reigns of General Motors back in 1921, he created a multi-step focus for the business.
He had chosen five of GM’s automotive brands, Chevrolet, Pontiac, Oldsmobile, Buick, as well as Cadillac respectfully, and created a clear and distinguished focus for each one of them. Every brand had a price range specific to them which would be attractive to various customers. Therefore, the brands wouldn’t have a reason to compete with one another, causing the conglomerates profits to increase instead.
Even though growing is typically the main priority of a business, this, often times, leads them to lose sight of the biggest asset, which is focus. Globalizing a business could potentially cause it to lose focus, however, specialization can help bring it back. Additionally, specialization assists a business with succeeding since there’s a bigger chance that shoppers will view a business’s goods or services as having greater quality.