Intercomp library: Focus. The Future of Your Company Depends on It by Al Ries

When diversification is bad or why the whole is less than the sum of its parts

Recommended by Ilya Panteleev, General Director Russia and CIS

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Studies of merged companies show that following a merger most companies end up with increased turnover and decreased profitability.

Why do strategies intended to diversify business or seek synergy are often self-defeating? Al Ries answers this question based on the example set by the development of the largest American corporations.

Focus is a book intended for business owners and managers in charge of development. This book challenges M&A investment consultants as it questions certain asset purchase transactions intended for business expansion. Ries also discusses whether umbrella brands, which bring together unrelated products or services under one name, are worth setting up.

The paradigm of continuous growth has become over the past decades a kind of “corporate mantra” adopted by the “social behavior” of successful companies and managers.
Annual revenue growth positively affects the value of shares and analytical reports from finance and investment groups. Market appraisal of managers also takes into account business volume: the greater the turnover, the more experienced managers are deemed to be with a higher value on the market.

When companies follow the “corporate mantra” of diversification and synergy, often customers no longer see their specialization, and companies end up “losing” markets in which they used to be leading players while their profitability sharply decreases. So, for instance, when General Motors “diversified” and expanded its model range, it ended up on the verge of bankruptcy. And when PepsiCo, in search of vertical synergy, bought the chain of restaurants Pizza Hut, it lost its prime American fast food market share as customers began viewing the company as a competitor and switched to buying Coca-Cola.

Examples of companies deliberately narrowing their specialization show an increase in profitability in the long term. “Taking over” a key market and concentrating on product and brand are, according to Al Ries, essential for growth and success.

The history of Levi’s jeans brand is an example of how a company has rolled back its diversification program and returned to focusing in due time so that Levi Strauss & Co still epitomizes “real denim” clothing. Following the diversification and umbrella brand trends, Levi’s launched a line of non-jeans leisure clothing in the 90’s and then began producing office clothing under the same brand. This undertaking tanked. Now, Levi’s is again a leading denim brand, while Dockers is a brand of clothing and footwear for outdoor activities. And although Levi’s owns Dockers, customers do not associate the jeans giant with this brand.

The Russian market takes its cue from world practice, often repeating the mistakes made decades ago.

When considering options for business development, it is important to bear in mind that the actions that will result in more focusing on strategic market or product and those that will result in concentration loss and effort diffusion. Focus by Al Ries is a great tool essential to aptly determine methods for further development.