Keeping an eye on profits: It takes focus
The Mercury News 05/13/01
by David A. Sylvester
If you expect the company you work for to grow successfully and profitably over a long time, here's some unwelcome news: Your company has a 90 percent chance of failing.
That might not reflect the skill of management as much as the difficulties presented by growth itself, especially over time. These results come from an exhaustive study by two Bain & Co. management consultants who looked into what makes the most successful companies win over a decade.
In their new book, ``Profit from the Core,'' Chris Zook, a Bain director of its world strategy growth, and his co-author James Allen come up with a surprising answer full of paradoxes. The central reason for long-term success, they say, is that these companies have strong core businesses that they never sacrifice as they expand. In other words, don't expect to find conglomerates succeeding over a long time.
The authors examined more than 8,000 companies throughout the world, and winnowed them down to a couple of hundred top companies. And of these, they discovered that a mere 10 percent had succeeded, defined by increasing sales and profits at 5.5 percent a year, after discounting for inflation, as well as earning their cost of capital.
The quickest way to flounder is to get tempted into a "hot" market outside the company's main business or spread resources too thinly. And the quickest way to get back on track is to prune away the diversions.
This isn't the only paradox of real success. Among others they found:
The best-performing business probably has the greatest potential and is underperforming the most. Why? Successful units aren't scrutinized as carefully, are dominant enough in their markets to become more complacent and have greater inherent potential.
A successful core business has the greatest opportunities to move into new business areas, and so has the greatest temptation to lose focus on the core that made it successful.
Managers who have been successful at a business are often least able to help it make the transition when the core must be updated.
By this analysis, if Amazon.com winds up in trouble, it will be because it is too broadly defined. It should concentrate on its main business of selling books and CDs, rather than branching out to become a retail supermarket.
Dell, for example, strayed from its core expertise of selling customized PCs cheaply and directly to customers, when it tried temporarily to sell through retail stores. Intel is an example of a company that focused on its core by shedding its memory chip business and emphasizing microprocessors and all that supported it.