Minding My Own Business

Know your limitations

November 1, 2006

Peter Drucker, perhaps the most famous management guru of the 20th Century, insisted that "management by objective works - if you know the objectives. Ninety percent of the time you don't." Those words echoed through my mind as I recently facilitated a discussion at a client of ours that was struggling to define itself and its markets. As part of the exercise, I asked each of the five top managers to provide me with what they believed to be their top four target markets. When I gave the results of this quickie survey to the managers, they were dumbfounded to discover that despite the relatively small size of their company (under 60 employees), the five of them were so dramatically out of touch with each other that they named 13 different markets in total of a possible 20.

Certainly, they expected something other than unanimity, since they sold to customers in many markets. But operating the company with management so clearly internally out of sync highlighted one of the major problems of their business. Each, in his own area, was putting in extraordinary efforts to develop products, refine processes and create value - but they were each acting to expand their business in different areas, often at cross purposes. So all-consuming were their individual focuses that strategic myopia, like a virus, inflicted every department.

As an objective observer, it was obvious to me that the company was trying everything it could to achieve growth. But so many centrally uncoordinated efforts diluted the impact of its limited resources: capital, labor and customer goodwill. I don't believe this disharmony to be anomalistic, but rather a flagrant example of a widespread problem that many companies, regardless of size, face daily.

Too many of us try too hard to produce too wide a range of product to secure too wide a customer base. As clichéd as it sounds, we try too hard to be all things to all people. For larger organizations this is less of an issue, but even the most sizable companies have had to throw on the brakes and check their ambition. It wasn't too long ago that Jack Welch was forcing GE to exit those businesses in which securing number one or number two market share was unattainable.

Fundamentally, any company's business model cannot be based on "out-offering" every competitor across every product line in every market. Successful companies excel at developing expertise (depth), instead of thickening their catalogs (breadth). The challenge for management is to recognize early on what the company's core competency is (or should or could be), and then devote the time and resources to nurturing it into an industry-best capability.

It is a function of focus. Management cannot merely create an environment where the company focuses on understanding the needs of its customers. A great company must also have a crystallized sense of self identity, defined by what it produces, how it produces, why it produces, and for whom it produces.

Lack of focus does not inhibit short term sales as much as it threatens long term profitability. It is easy to stretch your capabilities to land that new account. But there is a huge difference between finding avenues of growth within an existing account and extending yourself to keep that account happy, and initiating a relationship with a new customer who cannot define your company through the prism of a track record of your delivering your core competencies. Growing your company is like accelerating a car - you can't just floor the pedal and steering be damned. You have to accelerate, steer, brake, and above all, know where you are going. Otherwise, you will, in the case of a company, risk spreading yourself too thin or worse, sacrificing profitable business at the altar of hopes and aspirations.

We live in the age of specialization. Left-handed relief pitchers face a single batter once every two or three games. Nickel backs play only on third and long. Tax attorneys can't mount a defense in traffic court. Heart surgeons. Business is no different. Companies that specialize in a particular area of consequence will always find an eager market. Customers are like patients; they don't want a psychiatrist performing open heart surgery.

Large companies can afford to try to be all things to all people (or at least all things to the customers they really want). Typically, they pursue arrays of products, services and manufacturing processes, along with geographic diversity and the kinds of innovation that are well beyond the means of smaller competitors. They often thrive on offering virtually limitless customized options to their customers, differentiating themselves at almost every level. They may not be successful at every attempt, but they can usually afford to fail every once in a while.

Obviously, small and midsized companies don't have the deep pockets to effectively compete on each level. "Dreams have their place in managerial activity," observed Lord Weinstock, Britain's answer to Jack Welch, "but they need to be kept severely under control." To succeed, they must focus on specific niches wherein they can develop the kind of in-depth expertise that the more broadly focused larger companies could never reach. This deep-dive formula is how fashion boutiques compete with Saks and Nordstrom, and how microbreweries compete against Miller and Anheuser-Busch.

Aristotle Onassis once claimed that "the secret of business is to know something that nobody else knows." This can be accomplished through the development of proprietary products or technologies. It can also be accomplished by focusing within a particular niche and developing a unique combination of expertly manufactured products, accurately and timely provided services, and perfectly executed business processes.

Niches come in all shapes and sizes. You can develop a geographic or product niche, focus on a specific production process or operational flexibility, offer a niche capability, or concentrate on a single industry or customer type by developing barriers to entry for your more casual competitors.

For those companies with well defined niches, there is another important internal force that requires attention. Every company has a particular engine that drives its decision making. In most industries, there are typically three different drivers: product, marketing and customer (sometimes referred to as sales).

The product driven company pursues customers by offering a more appealing product or service. It determines its markets by selecting those which require the benefits of its product. Product driven companies eschew commodities and focus on R&D in pursuit of innovation and distinct differentiation. Threats to product driven companies include intellectual piracy, knockoffs and the inability to develop effective innovative solutions. Examples of product driven organizations are Apple Computer, the National Football League and Pfizer.

A marketing driven company focuses on the literal and figurative packaging of its offering. Its focus is on crafting and delivering a message of association to its markets and customers to create an affinity for the company and its products. It typically defines its markets by who uses or purchases the product. Threats to marketing driven companies include poor product or service quality, which reduces customer loyalty (a key to the success of any marketing driven company), and obsolescence in the face of innovation from product driven companies. Well known marketing driven companies are Procter & Gamble, General Motors and McDonalds.

The customer driven company drives, survives and thrives by the mantra espoused by Sam Walton: "There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else." This company doesn't strategically distinguish between unique and commodity products; it simply seeks to provide its customers with what they need. Its focus is on researching customer desires and needs, and finding ways to fulfill as many as possible. Obviously, Wal-Mart is the prime example of this type of company. Others include real estate brokerages and the vast majority of printing companies.

So how does this affect you? Regardless of your position or title, understanding into which of these three categories your company falls is critical to the performance of your job. If you are the top executive or an owner, your strategic decision making must take this driving force into account. Like any other defining factor or niche, know where you stand. Uncertainty in this area will impede progress. Straddling this fence will not only stunt your company's growth, but can damage your existing business and customer base.

For struggling businesses, re-evaluating their key business drivers is often a first step towards strategizing their way out of trouble. Given the competitive landscape in most industries today, merely deciding to alter your business model is not enough. Drill deep and locate a sweet spot, some core competency or area of specialization that is unique to your chosen market. Heed the advice of Ralph Waldo Emerson, the legendary American poet and thinker, who espoused, "Do not follow where the path may lead. Go instead where there is no path and leave a trail."

Elisha Tropper is president and CEO of T3 Associates, a New York based strategic consulting firm, and the former president of Prestige Label, a North Carolina converter.
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