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The Unfocusing of Corporate America What's the driving force in Corporate America? In a word, growth.
Management demands substantial increases in annual sales and profits, even when companies are in markets that show no overall growth.
Predictably, in order to meet these targets, companies offer more varieties and flavors. Or they branch out into other markets. Or they acquire other firms or products. Or they set up joint ventures.
Whether you call this expansion process "line extension" or "diversification" or "synergy," it's the process itself, the urge to grow, that causes companies to become unfocused.
That's why a company like IBM can have $63 billion in revenues and still lose $8 billion. And General Motors can have $133 billion in revenues and still lose $23 billion.
While growth might be an admirable result of other initiatives, the pursuit of growth for its own sake is a serious strategic error. It's the major reason why so many American corporations have become unfocused.
Chief executive officers have been paying the price for their strategic mistakes. There's no question that many CEOs have made strategic errors that have unfocused their companies. Never in history have so many chief executives been handed their hat and told to go home by their own boards of directors.
To name a few: James Robinson at American Express, John Sculley at Apple, Anthony D'Amato and Ervin Shames at Borden, Barry Gibbons at Burger King, Rod Canion at Compaq, Ken Olsen at Digital Equipment, Kay Whitmore at Eastman Kodak, Robert Stempel at General Motors, Tom Barrett at Goodyear, John Akers at IBM, Joseph Antonini at Kmart, William Agee at MorrisonKnudsen, and Paul Lego at Westinghouse.
It's not just the pursuit of growth that causes unfocusing problems. Unfocusing itself seems to be a natural phenomenon that occurs without any conscious effort on a company's part.
A successful company usually starts out highly focused on an individual product, service, or market. Over time, the company becomes unfocused. It offers too many products and services for too many markets at too many different price levels. It loses its sense of direction. It doesn't know where it's going or why. Its mission statement loses its meaning.
You've probably worked for a company like that. Most people have. At first, everything seems to be going well. The initial product or service turns out to be a big winner. The company has momentum and great expectations. The stock is taking off like a rocket.
But success creates something else: the opportunity to branch out in many different directions. The halls are filled with anticipation and excitement. Most often heard comment in the corridors: "We're going to rule the world."
Such a scenario could describe General Motors in the sixties. Sears in the seventies. IBM in the eighties. And Microsoft in the nineties.
It never happens. After a while things start to go wrong. What seemed like a world of opportunity turns into a world of problems. Objectives unmet. Sales flattening. Profits declining. The press unflattering.
"I sometimes wonder if the people at the top of most big U.S. corporations are afflicted with attention deficit disorder," says consultant Barry Spiker. "They don't stay focused." This is what happened at General Motors, Sears, and IBM. But the jury is still out on Microsoft. If history repeats itself, as it generally does, Microsoft is the next IBM, the next company to become unfocused.
In the physical world, unfocusing is called entropy, or disorder. And Rudolf Clausius's law of entropy states that over time, the entropy of any closed system increases. Let's say you straighten out your clothes closet. A month later, the closet is a mess. You have witnessed the effects of entropy, one of the fundamental laws of nature.
Corporations are no different from clothes closets. Over time, every company tends to become unfocused.
Also garages. Let's say you take a Saturday afternoon in April to straighten out your garage. It's hard work, but at the end of the day you're pleased with yourself because everything looks great. You have a place for everything and everything's in its place. You make yourself a promise: From now on you're going to put everything back where it belongs and keep the garage exactly as it is this particular Saturday in April.
A year later, you're back to square one. Everything is a mess again. Corporations are no different from garages.
Or glove compartments. Empty the glove compartment of your car and see what you find. Probably a lot of things you never knew were there. Maps, pens, sunglasses, gas receipts, portable telephone, chewing gum, change, Kleenex, vehicle registration certificate, insurance cards for the last three years, owner's manual. Everything except a pair of gloves. Corporations are no different from glove compartments.
Open the top drawer of your desk. Is it focused or unfocused? Enough said.
Like human nature itself, the destiny of corporations is to become unfocused. Peter Drucker paints a bleak picture of the typical corporation: "Analysis of the entire business and its basic economics always shows it to be in worse disrepair than anyone expected. The products everyone boasts of turn out to be yesterday's breadwinners or investments in managerial ego. Activities to which no one paid much attention turn out to be major costs centers and so expensive as to endanger the competitive position of the company. What everyone in the business believes to be quality turns out to have little meaning to the customer."
Does that sound like the company you are working for? Peter Drucker recommends focusing "scarce resources on the greatest opportunities." Or you might consider a strong dose of Ritalin for top management.
There are two reasons for this unfocusing. One has been widely discredited; the other is still alive, but showing signs of wear and tear.
The discredited reason is "diversification." Remember how wildly popular the management strategy of diversification once was? Literally every major corporation in America went out of its way to proclaim its belief in the philosophy of not putting all your eggs in one basket.
The stool was the favorite analogy. The three-legged stool representing the three major businesses a company was engaged in, or the four-legged stool representing four major businesses. (For obvious reasons the two-legged stool was not a favorite analogy of corporate planners.)
Financial services were a special favorite of the diversification crowd. Scores of companies went down the financial services chute, including Sears, American Express, Xerox, Prudential Insurance, and Westinghouse Electric.
The story at Westinghouse is particularly painful. Nearly crippled by its now defunct credit subsidiary (Westinghouse Financial Services), the company barely skirted bankruptcy court a few years ago. In the past five years Westinghouse has had four chairmen. They also had $2.4 billion in losses on $58.6 billion in sales. There are a lot of Westinghouses out there that could do better by turning the company's assets into Treasury bonds.
Then there's the unhappy experience at Xerox. In the early eighties, the Copier King decided to diversify into financial services. Under the name "The Xerox Financial Machine," the component companies included Crum and Forster property/liability insurance, Van Kampen Merritt mutual funds, Furman Selz investment banking, and Xerox Life insurance.
When The Financial Machine broke down in late 1992, the company took an after-tax charge of $778 million and announced its total withdrawal from the field. "The long-awaited decision was a humbling admission of failure from Xerox," said the Wall Street Journal, "which bought into the business at its peak only to watch the investment spoil the acclaimed comeback in its core copier operation."
Yet company after company continues to search for the magic acquisition that will drive sales and stock prices skyward. But in the end they usually find only disappointment and disillusionment.
- IBM bought Rolm in 1984. IBM sold Rolm in 1989.
- Coca-Cola bought Columbia Pictures in 1982. Coca-Cola sold Columbia Pictures in 1989.
- Metropolitan Life bought Century 21 Real Estate in 1985.Metropolitan Life sold Century 21 in 1995.
- Chrysler bought Gulfstream Aerospace in 1985. Chrysler sold
Gulfstream in 1990. - Eastman Kodak bought Sterling Drug in 1988. EastmanKodak sold Sterling in 1994.
- Dow Chemical bought Marion Merrell Dow in 1989. Dow sold Marion Merrell Dow in 1995.
- Matsushita bought MCA in 1990. Matsushita sold MCA in1995.
