In a recent journal article “How to create market-focused product winners” by Roger More (a marketing prof at the Richard Ivey School of Business) talked about why companies fail due to lack of market-focused. Prof More has a unique and entertaining style of delivering which is hard to find, he has been teaching marketing for decades at Ivey. Him and I often have very opposite views on many aspects of marketing. I did enjoy his classes.
He observed that many companies lost their way because they diversified across too many markets. He writes about why market focus is imperative today and how managers can create and sustain it. Here I will use this to bring up some arguments and I think there are more to the questions of “over-focused” and “over-extending”.
There are no questions the Fortune 500s are facing the most challenging climate in 50 years. The intensity of competition from low cost base countries such as China; the ever-shrinking product lifecycles and the media/channel proliferation are making life difficult for CEOs and CMOs. In this environment, more suggested that the need for market focus has never been more critical. According to More:
Using this argument, Mercedes and BMW should not have expanded their product platforms and Mercedes would not have enjoyed the successes of the C series and BMW would only be selling 3 series. BMW was very successful in bringing the '60s Mini back and extending their product choices. BMW is constantly exploring new and niche segments to boost both volume and profits, of which the X6 'coupe' 4WD is a prime example. And the Isetta (photo above) which is rumored to be BMW secret ecocar.
It is an overly simplistic proposition (although in the case of GM his argument is correct) and his article missed the other half of the story. A growth strategy is about new products and new customers. The world is full of possibilities and isn't just a question of making a choice. Before reaching that stage, management must establish a list of alternatives, potentially valuable uses and extensions of the firm's core competencies. Part of a CEO’s job is to manage corporation's scope to maximize potential to generate the best shareholder returns. There are other factors that affect a corporation’s performance, adjusting the breadth of a corporate business portfolio represents a large portion of contribution to shareholder return.
There are no questions easy to point out that lack of focus is typically a problem for many. While conventional wisdom maintains that "market-focus is the answer", long term research points out (empirically) that investors allocate capital among diverse businesses more efficiently than corporations do and that good projects can typically attract funding in public or private capital markets.
So it is not simply an either or question. CEO knows that no matter how focused his or her business is, innovation (that leads to diversification) is necessary to regenerate growth and create value over the long term. Companies must actively extend themselves into new businesses to compensate for the maturing of the old ones.
Maintaining market-focused is important (and very important), but it should never be a the expenses of innovation that leads to “strategic diversification.” When Mercedes-Benz first moved down in size and price to compete against BMW, it was not only answering to customer needs but also leveraging their R&D and bringing scale to many of their technologies. The Mercedes R-Class has not been the most successful product is no big secret and has not lived up to their original plans. But is this a question of market-focus or a question of execution or they still benefited from it by buying the “option” to play in that segments.
Going back to Mercedes’ decision to develop the C-class, that strategy has proved to be a right one. For Mercedes, to have produced one million C-Class vehicles in less than three years was a major achievement. The C-Class marked the first time the company has based a complete model family comprising sedan, station wagon and sports coupe on a single platform. No question managing the portfolio has become a strategic undertakings, an example is they are making the decision to cancel the name CLK (I am a big fan of the CLK and I have two including a CLK5 convertible), the current plan is to call them E-Class Coupe and E-Class Convertible and the CL-Class becoming the S-Class Coupe.
The down market (R and A class) moves decision is a strategic one for Mercedes. 70% of people who bought the previous model Sports Coupe traded in another brand, while 40% of those buyers traded up to another, more expensive Mercedes. The average age of buyers was also about 10 years younger than the company’s usual average, at 35 to 40 years old. You get it? It is about creating customers of the future.
Prof More criticizes that while many of these companies have literally hundreds of MBA’s from the best business schools the world in management positions. Clearly, at the critical conceptual and operational levels, many managers are having difficulty understanding, creating and managing market focus. Further, many of these managers have problems creating and managing the critical conditions necessary in their company for achieving and sustaining market focus. It clearly presents a very difficult task.
I’ll add to that while many of these companies have literally hundreds of smart managers spending too much time on their current markets and segments and leaving opportunities for disruptive innovations. The notion of “market-focus” is creating many side effects; “over-focus” will result in systemically ignoring any unserved segments. The concern for cannibalization is another factor. The thing is if you don’t cannibalize yourself, someone will cannibalize you anyway. Challenge with management writer is they often advocate a consistent view of how best to manage a company's scope, which is elusive. While it is a no-brainer that a constant focus generally leads to better performance, the ongoing processes of innovation and strategic diversification is even more important in today’s chaotic business environment.