In praise of focus

Alain Larocque

Updated: Nov. 11. 2018

“…The hardest decisions we make are all the things not to work on” – Tim Cook, Apple’s CEO.

I was drinking my coffee on the terrace, at the beginning of the summer, when I read that General Electric’s stock, one of the largest American manufacturers of the 20th century, had been booted from the Dow Jones Index. The company may be dismantled, they wrote, and I was shocked. I’ll come back to this later.

I was reflecting on the first topic to broach for my blog, and the GE news reminded me that the primary factor for successful business is an absolute focus on a limited number of opportunities. However, that is a difficult discipline for most business leaders.

Dollarama has developed by doing one and only one thing: the retail sales of everyday products for a few dollars in Canada. Two key skills: the supply and control of operating costs. Although its stock was subjected to a correction on the stock market in September, the creation of wealth for its shareholders over the last decade has been impressive.

Apple only sells high-end communication and access tools to the media. They had resisted up until now to the temptation of launching inexpensive telephones to compete with the Chinese models or to design an autonomous luxury car to compete with Tesla.

Rise Kombucha makes one thing: kombucha, in 6 flavours in 2 formats.

In an attractive market, the competition quickly becomes fierce. In a competitive market, the winner is the most dedicated, the most alert, the one who masters the minor details of his trade and profits from it, the one whose resources are focussed on what he does best. All businesses have limited resources and most of them do not have the financial or human capital to beat out the competition on several fronts at the same time.

On the other hand, fragmentation inevitably leads to waste and underperformance. At best, success in a given market subsidizes the losses in others. At worst, the priority market does not receive sufficient resources and there is no success anywhere.

Seems obvious? Fragmentation is still the most widespread weakness of businesses. Why? Focussing is not a discipline that comes naturally to human beings.

Most entrepreneurs are running on adrenaline. They feel that they are not working or are bored to death if they cannot regularly be launching new projects. Aiming at everything that moves initially seems to succeed for the most energetic and charismatic ones, especially if they have the opportunity to expand in emerging markets. We praise them in the media. Their approach is validated in the eyes of other entrepreneurs... until more disciplined competitors come along, catch up to them, and then they lose one by one the activities to which they committed themselves without sustainable competitive advantages.

Focussing is also a discipline that can be learned if you have the opportunity to go to the right school. Unfortunately, recognizing strategic focus as the best management practice is relatively recent, and is mastered at the moment by too few leaders and administrators.

The product multiplication myth

Many strongly believe that it is crucial to multiply a company’s fields of activity to make it grow. A leader must look to broaden the range of products and opportunities. Here is a simple example: having success with five varieties of cookies, we decide to add five to double our sales. What happens? Three years later, after high development and launching costs, inventories doubled and the three original varieties still represent 85% of sales. Even worse, to save the investment, the sales and marketing team now spends half of their time developing programs to shore up the new products. Sound familiar?

Here is another example: a small business launches its products in five new regional markets at the same time, hoping to see their sales surge. What a nice way to fragment yourself and fail! I will address the best geographic expansion practices in an upcoming article.

Red Bull reached a turnover of $10 billion with essentially only one product (an original version and an unsweetened one), the potential of which was exploited to the maximum. Others would have quickly added colas and fruit juices to optimize the distribution infrastructure. Their communication budget was focussed on one brand, one product, one message and one target market. That’s efficiency. Red Bull increased its revenues in a disciplined manner starting in Thailand, and then tested its product in Austria before methodically launching it in most of the world markets.

You are right if you tell me that this company just launched several new products; their shareholders should start to worry.

Many companies that had succeeded in a spectacular way as a result of their discipline did go off the rails when a leader with old school training became CEO. Green Mountain Coffee Roasters experienced one of the fastest growth rates of all American companies listed on the stock market at the beginning of the 2000’s, after focussing entirely on the sale of individual coffee pods for the Keurig coffeemaker. In 2010, Green Mountain acquired Van Houtte as well.

A few years later, a new CEO recruited from Coca Cola succeeded in convincing the Board that the future of the company was to add a new use to the Keurig brewer to prepare soft drinks at home. The R&D team developed at great expense, a new pod system for sparkling beverages, and the company drastically cut into the coffee’s marketing budget. The redeployment of resources stunted the growth of coffee sales and the new product was a monumental failure. The stock price plummeted drastically in mid 2015 and the company was sold at the end of the year. The Coke pod was discontinued a few months later.

The diversification myth

The other myth that is slow to disappear is the one strongly promoting business diversification to reduce the level of risk and ensure its sustainability. This theme was developed in its most extreme form in the 60’s and the 70’s. ITT, a telecommunications business, acquired nearly 300 companies in the 60’s in sectors as varied as the hotel business (Sheraton), industrial baking (Wonder Bread) and rental cars (Avis). ITT did not succeed in creating shareholder value in most of the new subsidiaries, each one vulnerable to the activities of more targeted competitors. The conglomerate was dismantled in the early 70’s.

This is where I come back to General Electric. Jack Welch, named CEO in 1981 quickly introduced a performance culture without compromise that resulted in a marked and rapid increase in the company’s profitability and trading value. Probably fearing the likelihood of not being able to maintain the growth rate, he decided to diversify. Starting in 1986, he acquired NBC among others, and several business banks grouped under GE Capital, despite the fact that his management team had no experience either in the media or in financial services management.

Great creativity in the way results were published and the excitement in the financial markets during the 1990’s, hid for years the weaknesses of the new subsidiaries, in particular risk management. In 1999, Fortune magazine even awarded Jack Welch the title of “Manager of the Century”.

The GE share value from 1981 until today

What about Google? Is it an example of successful diversification? Clearly the business is doing well.

It’s easy to intuitively understand the synergies between the famous search engine and products such as YouTube, Android, Waze, Google Maps, Gmail, and Chrome. These are tools whose purpose is to organize information available on the web, making it accessible and easy to communicate. Those tools helped Google become No.1 in the world for advertising revenues.

However, the autonomous car project (Waymo), research in the health sector (50 businesses including Calco and Verily), and the sale of control and monitoring equipment for connected homes (Nest) do not operate from the same business model. While most sectors depend on their expertise in the field of artificial intelligence, here Google acts as a venture capital business. Is this a reasonable risk for their shareholders or rather projects driven by the interest of the founders for start-ups?

Since the late 2015, Google publishes the results of its more speculative investments separately grouped under “Other Bets”. For 2017, “Other Bets” represents revenues of $1.2 billion on a total of $110 billion, i.e. 1% of the total. The sector generated losses of $3.4 billion on consolidated net profits of $12.7 billion for Alphabet.