Big Winners: Hitting That 'Sweet Spot' of Success Year After YearPublished: February 28, 2007 in Knowledge@Wharton
Alfred A. Marcus, a professor at the University of Minnesota, Carlson School of Management, reviewed detailed performance metrics for the 1,000 largest U.S. corporations, identifiying the 3.2% that have consistently outperformed their industries for a full decade. In his book, Big Winners and Big Losers: The 4 Secrets of Long-term Business Success and Failure (Wharton School Publishing), Marcus explains the strategies these companies followed, how they found opportunities in markets that others didn't see, and how they managed the tension between agility and discipline. Below is an excerpt from Chaper Seven, titled "Focus."
Winning companies moved into sweet spots and defended them, but they did not stop there. They deepened their position. They enlarged and extended it. They were focused. Their concern was with meeting the critical needs of their customers. Their global reach was consistent with these principles. They reduced their risks by limiting themselves to their core competencies and steering away from activities that might easily involve failure.
Focus on Core Strengths -- Stick to Your Mission
Big winners focused on their core strengths. They stuck to their mission. This lesson is illustrated by six traits that the big winners exhibited. Big winners (i) streamlined by spinning off noncore businesses that detracted from their mission, (ii) focused away from activities that had high risk of failure, (iii) gained flexibility by allowing other companies to assume the risks of development, (iv) exploited brands through sequels and related products, (v) reached out through new channels, and (vi) totally dedicated themselves to customer categories. Ball, Forest Labs, Brown & Brown, Activision, Dreyer's, and Family Dollar provide examples of the big winners' focus on their core strengths.
Streamline by Spinning Off Noncore Businesses That Detract from Your Mission
Ball redeployed assets and focused on a limited set of businesses associated with its core capabilities. It once had been much more vertically integrated. It had tried to gain control over the supply of its raw materials. It had absorbed zinc smelting operations, a rolling mill, and a number of manufacturers of paperboard, plastics, and rubber. It also had explored diverse businesses for expansion, including computer components, prefabricated housing, and acrylic gifts. From 1992 to 2002, it moved away from vertical integration and exited from diversified businesses, settling on packaging products for the food and beverage packaging industry as its main area of concentration. When Ball bought Heekin Can in 1992 and then spun off seven noncore businesses in 1993 in a company called Alltrista, the stage was set for it to focus on and grow this area. The noncore businesses only accounted for 12 percent of revenue, but they took a fair amount of resources in capital and management time. With the spin-off of these businesses, Ball was able to maintain a more streamlined operation, in comparison to many of its competitors, such as Alcoa and Alcan, which were vertically integrated and had stakes in extraction, smelting, and packaging.
Focus Away from Activities That Have High Risk of Failure
Forest Laboratories did not put much emphasis on the discovery or development of new drugs itself. Rather, it licensed the rights to new drugs from foreign laboratories engaged in those activities, which did not have the resources or competencies to get their products through the U.S. regulatory process or to the U.S. market without a partnership arrangement. This strategy effectively reduced the company's exposure to the high risk of failure typically associated with the discovery and development of new drugs. The company's expenditures in research and development were focused mainly in post-discovery efforts, such as clinical trials and ongoing product support for products already in the market. This strategy not only reduced the company's risk of failure, but it also limited the amount of capital tied up in a new drug before it reaches the marketplace. Forest's investment in R&D increased dramatically from 1997 levels of $40 million to 2003 levels of $205 million, but most of it was reserved for preclinical and clinical studies required for the approval of new products by the FDA.
Gain Flexibility by Selling Products While Other Companies Take on the Risks of Development
Brown & Brown positioned itself exclusively as a brokerage concentrating wholly on selling insurance to two niche markets: mid-size businesses through its retail divisions, and professionals such as doctors, lawyers, and dentists through its professional programs division. It gained tremendous flexibility by selling other companies' policies. It could enter and exit markets by offering or no longer offering a product, which helped maintain its profitability. It was not liable for any claims against the policies it sold. Its risk was mitigated, and its profits were maximized. B&B excelled at its distribution-only model, which not only provided a constant in-flow of revenue but also reduced the operational risks involved in underwriting policies. Its overhead remained small. The primary insurers sustained losses in property and casualty, but B&B assumed no responsibility, in terms of claims, for the policies it sold.
Exploit Brands Through Sequels and Related Products
Activision's strategy was to create, acquire, and maintain strong brands. It capitalized on the success of Tony Hawk's Pro Skater products to sign exclusive long-term agreements with Tony Hawk and many other action sports athletes. It converted popular titles into franchise-like lines, including the Zork, Shanghai, Pitfall, Quake, and Hexen series. These products served as the basis for sequels and related new products. Activision's success was attributable to a clearly defined strategy. It stayed focused on its main competencies. It eliminated noncore projects and processes and leveraged outside resources to create operating efficiencies and improve profitability. It was rewarded for its focus by overcoming threats like changing technology and industry standards, backward integration of hardware manufacturers, and consolidation of retailers.
Have a Plan to Reach Out Through New Channels
Throughout its history, Dreyer's remained focused on premium ice cream products. Its mission was to be the preeminent premium ice cream company. In 1994, it launched its Grand Plan to realize this mission. Between 1992 and 2002, Dreyer's had a clear mission based on the Grand Plan, and it was able to effectively act on that mission. It expanded its product line, and through its distribution network, extended its presence from select grocery stores in the Bay area to grocery stores, general chain stores, and convenience outlets around the world.
Totally Dedicate Yourself to a Single Customer
Family Dollar limited itself to the value sector within discount retailing. It was totally dedicated to low-income consumers. It tapped into this segment of the market that had few competitors, staying centered on this niche while it was unsaturated, and tried to dominate it. It did what it knew how to do best. It was an extreme-value discount general store with a stable product mix dominated by hard line goods. Its strategy was constant, with low prices, low overhead, and low debt being key factors.
Develop High-Growth, Application-Specific Products for Markets with Growth Potential
Big winners developed high-growth, application-specific products for markets with growth potential. This lesson is illustrated by five traits that the big winners exhibited. Big winners (i) extended collaborative solution providing activities to new domains, (ii) derived advantage from solutions and not patented technology, (iii) identified and satisfied critical customer needs, (iv) limited their selling to products with high demand, and (v) used service to be on the cutting edge of customers' needs. Amphenol, SPX, Ball, Forest Labs, Fiserv, and B&B provide examples of these qualities.
Extend Collaborative Solution Providing Activities to New Domains
Amphenol was positioned in high-growth, high margin, application-specific sectors as a solution provider. The company decreased its exposure to standard products that were under intense pricing pressure. It aligned its R&D with that of its customers, spending just 2 to 3 percent of its revenues on R&D. In a declining market, it more than held its own. Its customers preferred the company because of the broad product line. It achieved speed in product development while maintaining strong cost controls, thus earning high margins. In this way, the company was able to extend its product line to diverse markets. Among the markets it served were the converging voice, video, and data communications market, including cable television operators and telecommunication companies that entered the broadband market; factory automation and machine tools; automotive applications, including airbags, seatbelts, and other car and truck electronics; high-performance commercial and military aerospace applications, consisting of avionics, flight controls, entertainment systems, missile systems, battlefield communications, and satellite and space station programs; and oil exploration, medical instrumentation, and off-road construction.
Derive Advantage from Solutions, Not Patented Technology
SPX had 68 new patent applications in 2002, up 68 percent from 2001. In total, it owned more than 600 patents and 900 registered trademarks, but it did not view patents and trademarks to be of such importance that they were critical to its business. Its focus was not mainly on patents and trademarks. Rather, it was on creating market advantage through "full customer solutions." For example, in its original specialty tool business, to reduce dependence on OEMs, it focused efforts on niche markets in the aftermarket tool and equipment market where it had the chance to offer services and not just equipment. By 2002, 40 percent of this segment's revenues came from these aftermarket niche services. An important issue was whether it was too diversified for its own good.
Identify and Satisfy Critical Customer Needs
Ball's research and development was focused on providing solutions that met the needs of the end consumer. Its R&D was aimed at giving customers what they wanted. It was the first company to develop the 8-ounce container for the new sport drinks market. It also introduced a new plastic beer bottle, which was popular at sporting and outdoor events. Because of its leadership position in the imaging area, it was also benefiting the changing global geopolitical climate. It was meeting high profile needs of the security and defense establishment.
Limit Selling to Products with Large Demand
Forest Labs sought solutions to high-profile U.S. health issues, such as depression, hypertension, and alcohol addiction. It limited its presence to these markets where it developed a niche -- namely depression, cardiovascular conditions, respiratory illnesses, and pain and inflammation conditions. The antidepressant market, in particular, was the largest therapeutic market within the U.S. pharmaceutical industry. The company's drugs targeted the growing senior citizen population with medicines to treat hypertension, dementia, Alzheimer's, and irritable bowel syndrome. A strength was Forest's large sales force that marketed to physicians, pharmacies, and managed health care organizations (HMOs). Its sales force met directly with physician specialists. It formed strong, close, and enduring ties with them. The company targeted customers that had large growth potential, especially the HMOs that were gaining influence over which drugs were prescribed. It had a responsive sales organization and was close to its customers. To support demand for Lexapro and the other drugs, Forest Labs quickly ramped up the number of its sales representatives. It concentrated on selling, whereas other firms concentrated on developing new drugs.
Use Service to Be on the Cutting Edge of Customers' Needs
Fiserv positioned itself on the cutting edge of its customers' needs by understanding those needs and providing updates necessary to meet them. It stated that its goal was to help clients meet changing needs, expand their markets, and overcome technological challenges by "providing the highest service levels in the industry." It encouraged an exchange of ideas with customers by hosting twice-annual meetings to discuss industry, technology, and product direction. It maintained that it listened "carefully to customers' suggestions" and developed and integrated their recommendations into its products and services. Fiserv grew by extending its reach to its current customers and markets by means of value enhancements in systems it already offered. Growth in revenues came from cross-selling to its clients. It came from price increases that clients were willing to absorb because of additional services. The company found new ways to service customers. It marketed extra services to customers to address their changing needs. By extending products and services, Fiserv was able to assist its customers in many different capacities.
Carefully Target Special Niches
A key to B&B's success was its ability to identify and develop productive niche markets. It concentrated on selling retail products to small- and mid-sized companies. It gave them group policies and employee benefits. It sold property and casualty policies to these businesses. It was less involved in selling policies to individuals. It did not evolve into a "one-stop" model wherein it tried to provide for all of the financial needs of individuals. By primarily forging relationships with mid-sized companies, B&B gained large blocks of clients all at one time. Further, by staying away from extremely large corporations, it avoided having clients with too much bargaining power. No single client represented more than 1 percent of B&B's total revenues. It benefited from dealing with clients such as nursing homes and car dealers that had little in-house insurance expertise. It worked with specific groups like dentists, lawyers, doctors, professionals, and professional organizations to provide policies that met specific needs.
Extend Your Global Reach
Big winners extended their global reach. This lesson is illustrated by four traits that the big winners exhibited. Big winners (i) capitalized on overseas market growth, (ii) made acquisitions to extend their global presence, (iii) combated domestic overcapacity with global growth, and (iv) provided high service levels to foreign clients. Amphenol, SPX, Ball, and Fiserv, provide examples of the big winners' broadening their global reach.
Capitalize on Overseas Market Growth
The U.S. market for cable was saturated; by 1998, about 70 percent of U.S. households subscribed to cable programming, a number that was not growing. Because satellite technology had become a potent substitute for cable in the United States, growth would have to come from elsewhere -- for instance, Europe, where the subscription rate was only 31 percent. Amphenol capitalized on the growth of overseas cable programming, the result being that its international sales of coaxial cable exceeded domestic sales in 2001. In 1997, 88 percent of its sales were in North America and Europe. Only 12 percent were from Asia. By 2002, in response to changing market needs, 24 percent of the company's sales were Asian. Its movement into Asia allowed it to tap markets that were less affected by the downturn in North America and Europe.
Make Acquisitions to Extend Global Presence
Prior to SPX's acquisition of UDI, 86 percent of its sales came from the United States, only 7 percent from Europe, and 7 percent from other countries. With this acquisition, it grew its operations overseas (it had operations in 21 countries) and increased sourcing outside the United States. From 2000 to 2002, the company's international revenues grew more than 350 percent. In 2002, the United States remained its largest market with 67 percent of sales, but Europe accounted for 20 percent, and the rest of the world was 13 percent.
Combat Domestic Overcapacity with Global Growth
In 1974, Ball entered the global arena with its first international joint venture. By means of acquisitions and joint ventures, the company continued to expand its geographic reach to China, Brazil, Hong Kong, Thailand, and the Philippines. These moves were taken to combat overcapacity in North America and to increase market share where possible elsewhere in the world. In 1997, Ball acquired 75 percent of M.C. Packaging in Hong Kong, making its subsidiary the largest beverage can manufacturer in China. When it had poor results in China, it exited the Chinese market. It closed its Chinese plants that were not profitable, although it continued to have strong ties to Thailand, Taiwan, and the Philippines. It continued to have minority or majority ownership in packaging companies in Canada, Europe, Asia, and South America. In late 2002, Ball acquired Germany-based Schmalbach-Lubeca.
Provide High Service Levels to Foreign Clients
Fiserv extended its ability to sell additional services to its customer base globally. Along with its U.S. operations, the company had sites in Argentina, Australia, Colombia, Indonesia, the Philippines, Poland, Singapore, and the United Kingdom. As of December 31, 2001, Fiserv serviced more than 13,000 clients. It operated in more than 60 countries, most with sophisticated and well-capitalized financial markets that were receptive to the advanced technological data processing solutions it offered. Significant global achievements in 2002 included the selection of Fiserv's core banking and customer servicing solutions by CITIC Industrial bank, the sixth largest bank in China, with $36 billion in assets. Fiserv had a knack for acquiring a company with a local solution and then expanding the scope of that solution at global levels. In supporting international markets, Fiserv employees were urged to speak the same language as their clients, to understand their clients' different styles in doing business, and to recognize the financial product requirements and regulations that were unique to each specific market.
This chapter has shown the type of focus that sweet spot companies exhibited. They concentrated on their core strengths. They did not chase opportunities that were too risky. They had plans for product enhancements, extensions, and sequels. Their dedication to their customers was near total. Extensive collaboration led them to meeting the cutting-edge needs of customers for solutions. They were not in the business of providing mere isolated products, no matter how technically superior the products might be. With great care, they applied these principles to their global expansion. They identified markets with growth potential. They developed and extended the reach of their high-growth, application-specific products and deepened their penetration of global markets.
Having completed this analysis of the winning companies, I now turn to the losing firms and show how their traits differed.