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Spread Too Thin? Sharpen Strategic Focus by Making Tough Decisions
Business-to-business companies are frequently pressured to identify the next business or market in which they can succeed in order to return value to their shareholders. This is never an easy task because there are numerous growth options that are candidates for funding. The approach to seeking growth also varies from entering new markets to new product development and a number of alternative options. When the search for growth spreads resources thin, however, opportunities may be missed and the growth rate negatively impacted. One solution a company can use to achieve growth is to sharpen its focus.
Consider the following examples:
- One company spreads its bets and budget by inserting salespeople into a number of emerging economies to capture a piece of the growth. The cost of venturing into each country is minimal in terms of dollars, but by spreading the bet no salesperson receives adequate resources required to build a business. After an incubation period, management decides that these markets are not a good fit and exits. However, an alternative reason may have been that the markets were a good fit, but there may have been great opportunities that went unrealized because of the limited resources the company could devote.
- Another company’s product innovation capabilities provide a competitive advantage. In an effort to increase the growth rate, management decides to commercialize new markets. The marketing and sales teams send requests for R&D to develop innovative products based on insights they have learned. Now the R&D team has more requests than it can handle and the queue begins to build. As the queue builds, innovative products roll out at a slower pace and the company risks losing its competitive advantage.
Both of these companies could benefit by sharpening their focus. To do so, these organizations will need to make trade-offs, such as divesting a business or making a bet on one market to the exclusion of others. The decision to make these trade-offs are difficult and require rigorous analysis, thoughtful consensus building, and a sound growth strategy. Following is one way to get to a structured decision.
Steps to a structured decision
- Diagnose the issue: Look for signals that resources are spread too thin.
- Define and communicate the growth strategy: A well-constructed growth strategy enables management to pick optimal funding opportunities. However, to achieve consensus it is important to involve firm leadership in the process of defining the strategy.
- Identify trade-offs: With limited resources decisions need to be made around finding funding to invest in strategic opportunities. Trade-offs can include a shift in R&D allocation or divestiture of a non-strategic asset.
- Consider the strategic impacts to the rest of the organization: Before making trade-off decisions it is imperative to consider the implications to the rest of the organization to avoid unexpected outcomes in other areas of the business.
- Evaluate reinvestment options to ensure the proceeds can achieve an adequate rate of return: This is especially important if one of the trade-offs involves divestiture.
- Gauge appetite for the shift in risk profile: By focusing growth on a certain area, the firm’s risk profile will likely increase. Shareholders need to be tolerant of this additional risk and understand the payback period that is anticipated.
- Set appropriate metrics to measure success: In the near term, revenue and margins may be squeezed. A new strategy will require a runway to unfold and metrics that measure milestones.
When shifting strategy to sharpen the focus it can be difficult to make trade-off decisions, but it is critical to a company’s sustained, profitable growth. A systematic approach to a focused growth strategy, such as the one outlined above, enables executives to be confident in their strategy and make structured decisions to focus investments, which ultimately results in high payoffs and optimal growth.