Staying in Business by Staying Out of Some Businesses

Quick Summary: Give as much thought to product and market extensions as was given to the original business.

Abstract:

Initial success in one business or with one product can boost the confidence of a company and encourage them to expand.  Although growth is key to long-term success, understanding why the growth has occurred and the impacts on proposed future businesses is critical.  The grass on the other side may be greener, but it may also contain landmines.  So, proceed thoughtfully and carefully.

From high school math we learned that it takes at least two data points in order to draw a graph.  With only one data point an infinite number of possibilities for the shape and direction of a graph exist.  One of the key elements for a company to stay in business is to collect enough data about their business to know in which direction to move.  Unfortunately, data is not enough.  Careful thought must be given to convert that data into useful information in order to plot and plan the desired business trajectory.

In many instances, companies will react to data instead of taking time to understand what it really means.  As an example, two or three months of excellent sales results from a new product or service may lead a company to forecast the demand will continue to increase.  They then may decide to significantly ramp up inventory to meet the future projected demand.  Upon closer inspection, the initial results could have been caused by pent-up demand in a small market; or it could have been due to limited seasonal or regional interest; or it could have been the result of a unique offering that will quickly disappear because of a competitor entering the market; or a host of other reasons.  Perhaps some latent defects will appear in the product that could render the newly purchased inventory useless.  There is no question that revenue is the life blood of an organization and growth is key to long-term success.  However, understanding why growth is occurring and understanding why it will or may not continue is critical unless you are in the shooting star business.

Not only can high growth cause false steps, but the lack of growth can be equally problematic.   Although we appear to live and work in world markets, there are incredible differences from one market or region to another. Companies having trouble in one market can easily fall into the trap that those “other markets” are better suited for their product or service following the simplest notion that the grass is always greener on the other side.  The grass may, indeed, be greener but it also may contain landmines.  Understanding what went wrong is far more important than projecting what will go right elsewhere.  The concept of “going international” is an incredibly naïve approach.  There is no such thing as international.  Imagine for a moment, a small company in Austria talking about “going international.”  Would they lump China, India, and the United States into that one category?  Unfortunately, many U.S. based companies make that mistake when discussing “international”. 

Finally, it is easy to project that the success of one product or service will logically lead to the success of other related products or services.  There is no question that selling new products or services to existing customers has some major benefits.  Also, developing different product or service variations can provide access to adjacent markets.  However, when increasing the depth (selling to existing customers) or the breadth (selling to new segments) of market opportunities, significant increases in internal complexity are easy to miss.  Although the new opportunities may appear to be logical extensions of the company’s core business, new skills sets, new competitors, and new demands can easily cause a company to lose focus on their initial markets.

The end result of these factors is that to stay in business a company must carefully consider many factors before getting into other businesses.  One plus one does not always equal two.  Pursuing growth through new business opportunities can dilute the efforts that made the primary business successful.  In that case, one plus one could be negative two!

 

Article Number : 2.020105   

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