PoS Jun 2013 | Personality of Inquisitive Organizations
Most, if not all, consistently successful firms focus sharply on a few things.
Most managers, however, believe it means addressing niche markets and chasing small opportunities. It seems to be restrictive and consequently assumed that a focuser is destined to remain small. This misconception may have stemmed, in part, from Michael Porter’s generic strategies, one of which is Focus.
Dimensions of Focus
It is true that companies that pursue focus as a Generic Strategy aim to serve one or more niche segments. They develop cost leadership or differentiation strategies within this scope. In a larger context focus has other connotations that offer important approaches to strategy.
It begins with choice of business and regions where the firm will operate. Next the firm should choose one or more customer segments they wish to serve. Resources and capabilities the firm possesses or can acquire at reasonable cost determine these choices.
Strategy making now involves configuring the activities in the value chain such that target segments are delivering superior value. This is the third dimension of focus. The final aspect is development of resources and capabilities that create competitive advantage.
There are scores of companies that are highly successful because they focus. Starbucks, Sigma Aldrich, Asian Paints, and Olam International are a few celebrated examples. They have grown rapidly, very profitably over many years, and become market leaders. But does it work for an ordinary company?
How an Indian company got its Focus right
In late 2009 an Indian software services company, a client of mine, was facing a stark prospect.
The Company’s sales growth and profitability had begun to flag. Desperate for growth sales teams were pitching for new businesses wherever they could but revenue was not growing as expected. Most new contracts were small. Large customers were not willing to give them substantial business.
In the mad scramble for orders number of customers had risen, and margins had fallen. The Company’s stock had lost 32% value in the first nine months of 2010. That is when one of the firm’s two business units decided to revisit their strategy.
They agreed to focus on customers where they could add genuine value on the strength of expertise.
They laid down clear selection criteria for new customers and for those they would no longer work with, the kind of work they would do and those they won’t. They concentrated on a few regions of the world and mandated sales teams to shed unprofitable clients. Simultaneously, they set about investing in capabilities that would help them serve target customers better.
Inspite of misgivings about the effectiveness of this approach the team of senior managers agreed to give it a good shot. In six months their business was growing faster and more profitably.
By March 2013, these numbers stood out:
- The Division’s revenue had more than doubled in three years. Three target industry verticals growing at 32% annually had powered the rapid growth.
- Focus on large accounts where the Company created compelling value had grown to 75% of the revenue. Their number had risen from 3 to 10. Customers generating sales between $ 1 million and $ 10 million had increased by 37%.
- Gross margin had risen sharply net of depreciation of the Rupee. EBIDTA had increased 3 percentage points in two years.
- All this was achieved from doing business with 22% fewer customers.
Choosing what not to do
Focus is a matter of choosing whom to serve and how. Equally, it is choosing whom not to chase, what not to do, and where not to play.
Making these choices enables the firm to focus their energies in much the same way as a magnifying glass can be used to concentrate the sun’s rays.
It builds expertise and specialisation. In turn they enable delivery of superior customer value and sustain competitive advantage.
Focus can yield rich dividends for your company too. Find out how.
Business & Corporate Strategy
Read my article ‘Bigger or Greater?’ on the relevance of focus in strategy formulation.