By J. Peter Duncan

What you do, and often more importantly, what you choose NOT to do can have a huge impact on the profitability of your company. How can selecting things you will not do make you money? Well, making the choice sets your focus. When you choose not to do certain things, you are eliminating a set of distractions and focusing your available resources directly on what you must do to make money.

Take the example of a car salesman. Let’s suppose you were selling an expensive car, say a Hummer, at a dealership that also carries a more modest line, such as Chevy Blazers. As a Hummer salesman, your job is to sell Hummers. But your challenge is that there will be a lot of customers who walk through the door who can only afford to buy a Blazer, but who would love to take a Hummer for a test drive before they go to the other end of the show room and find the Blazer they can afford. If you don’t develop a quick way to sort out the “tire kickers” from the real Hummer customers, you could easily spend most of your time giving test drives to prospects who will never become profitable customers. It is critical for you to figure out who is NOT your customer so you don’t waste time. In your business, how many “customers” are just kicking the tires and taking you for a test drive? If you don’t have a way to figure that out, I can assure you your profits will be small.

Selecting an appropriate Strategic Focus is one of the most important decisions a company can make. When selecting a Strategic Focus, you are doing more than deciding which customers you will or won’t focus on, you are deciding what will be the underlying driving force of your business. While most companies consider their Strategic Focus to be a “given,” dictated by the kind of business they are in, it really is a choice that every company must make. In the Discipline of Market Leaders, Treacy and Wiersema argue that every business must select one of three “disciplines” to guide their business: operational focus, customer focus or product focus. Ben Tregoe, in his long standing best seller, Top Management Strategy insists that the management team must choose from among nine “driving forces” to anchor a business. For Jim Collins, in Good to Great, it is all about identifying your “hedgehog concept”. In our book, Simplified Strategic Planning, Robert Bradford and I offer a menu of six potential areas of Strategic Focus to steer your company to profitability. Regardless of what you call it, choosing a clear Strategic Focus is one of the most important elements of a successful strategy leading to a successful company.

What’s the difference?

Every company has both products and customers, so what is the difference between a “product” focus and a “customer” focus? A company with a “products” focus is oriented around a fairly narrow product offering and looks to grow by taking that product to as many markets and customers as it can. It starts with a product development group that creates a great “mousetrap”, but then really depends on sales and marketing folks to get it out to a broad market. Dupont, with its Nylon products, or Intuit with its tax and financial software products are both examples of companies that pushed a fairly narrow product into many markets with many applications. Success depends on finding more customers in more regions for the product or service.

By contrast, a company, which selects markets or customers for its focus, hones in on a narrow customer base or market, but grows by selling them a wide range of products. These companies flourish by selling more services or items to their target audience. Wal-Mart and most accounting firms select this sort of focus saying they don’t care what it is, as long as their target customer wants it they will provide it in a “one-stop-shopping” experience. To be successful, these companies have to be very close to their customers and know their needs and preferences so that they can assemble an attractive combination of products that will keep customers loyal to the brand and coming back for more. High customer retention helps improve profits by holding down marketing costs.

While Strategic Focus is usually one of the most stable and enduring elements of a company’s strategic plan, it can and should change in response to changes in the environment. Here is a case where such a change has been at the root of one of the more dramatic turnarounds in the past decade.

IBM figures it out

For several decades leading up to the 1980’s IBM could best be described as a company with a “products” Strategic Focus. It made computers which it sold to businesses, governments, academia and eventually to consumers. To grow the business and generate profits it kept finding more customers for its line of computers. While it could have done a lot of other things, making and selling computers were the driving force of the business. Of course, setting up and running a computer was a bit of a challenge, so IBM offered plenty of assistance in this area. “You were never wrong if you bought IBM,” was the saying among CFOs of that era. Then the environment changed. Increasing integration of components made computers easier to set up, standard operating systems made them all the same, software could be moved from one brand of computer to another and customers began to treat computers as commodities. They started buying on price, rather than the features and benefits that IBM had relied upon to generate strong margins.

After several years of decline, outsider Lou Gertsner became CEO, opening the door for IBM to reconsider its Strategic Focus. After some time and analysis Gertsner and his team came to realize that while it would be difficult for IBM to be profitable strictly selling hardware, the market placed considerable value on the service and solutions. In the new world of commodity hardware, open systems software and networked computing, there was no one to take responsibility for putting the package together and making it work for the customer. Computers themselves might have become commodities, but integrating multiple computers into a network and getting the right software to work across all platforms so as to create a truly effective solution for a customer was a need that no one was addressing. Shifting their focus from the product (computers) to providing integrated solutions for the customer was a complete change in their Strategic Focus and was the stroke of brilliance that pulled IBM from a slide into poor profitability and turned them to a path of highly profitable growth.

Breaking with decades of culture, IBM learned to sell not only its own hardware, but also that of companies who would have once been considered competitors. They partnered with software providers and scores of peripherals vendors so an IBM service rep could truly act as the "advocate" for the customer in all aspects of information technology. To do this took not only a change in the operating model of the business, but also a slew of new competencies and a change in culture. All of this tore at the traditional heart of the company and caused it to shudder deeply. But in pulling off the shift of focus, IBM escaped the commodity noose that awaited erstwhile competitors like Unisys, Sun, Ahmdal and HP. IBM redefined its focus and the profitability of the business by shifting from a product focus to a customer focus driving growth by bringing a wide array of services and products to a well-defined customer base.

Amazon on the move

As the IBM case demonstrates, there are times when the current choice of a focus for a business has limited potential for generating profits. When this occurs (and there can be many causes of this difficulty), it is important to re-focus the business in an area where strong profits can be generated.

Amazon.com, born in the “dot-com” frenzy of the 1990’s is now working on the third iteration of its Strategic Focus in search of profits. Amazon began life as a concept for retail sales of books over the internet at discount prices. Following a “product” Strategic Focus, their business model was to sell books to as many people as possible. They considered Barnes and Noble, Borders and other book retailers to be their primary competitors and expected to leverage the internet to beat these competitors at the game of finding more and more customers who wanted to buy books. The plan, to create a virtual business where the combination of vast amounts of information and ease of on-line transactions combined with outsourced fulfillment would allow for substantial profits amassed at a few pennies per transaction. But, as so many other internet retail businesses discovered, it was very difficult to make a profit on thin or negative margins and all the volume in the world only made the losses pile up faster. While this might have been a good way to develop the on-line market, it was clearly not a long-term focus for profitability.

As an early mover, however, Amazon built better and stronger competencies in internet retailing, than most other e-commerce firms. Amazon quickly became regarded as having one of the best consumer retail sites in the industry. It wasn’t long before they realized they could effectively sell a lot more than books on their site. With this realization, their Strategic Focus shifted to a “customer” focus with its emphasis on selling many products to a fairly narrow group of customers, namely those early adopters who were willing to try internet shopping. While other book retailers might have still been competitors, the real battle was with the shopping malls and other general shopping sites.

To grow with this new focus, Amazon had to create an attractive offering for the early internet shoppers that would get them to buy more and more through the Amazon “storefront.” Amazon launched head long into signing up vendors and partners to sell on their site- music CDs, software, toys and electronics were added in short order. Amazon began to develop competencies in acting as a partner for companies looking to outsource their e-commerce activities. Lands’ End, Toys-R-Us and Circuit City were some of the early and most successful Amazon partners. This change in focus has brought profits to Amazon. As a general merchandise retailer, Amazon commands gross margins of 25%- more than Wal-Mart at 22% and Costco at 12%.¹

But Amazon does not appear to be stopping there. While changing its focus over the last three years and becoming a strong retailer may have brought Amazon’s profitability close to break-even, retailing remains a crowded field with considerable commodity pressure on prices and margins. The way out of that trap may well be yet another change in focus that is being explored at Amazon- a shift to a “”technology” Strategic Focus. With a technology focus a company develops a particular technology to a world class level and then grows by selling or licensing that technology for others to use in their businesses.

According to Business Week, Amazon is “fast morphing into a tech company.”¹ They are creating a suite of tools and web applications that they are making available to retailers to use in implementing e-commerce for shopping. “Search engines, distribution software, web store-fronts, shopping carts and more are being assembled into the foundation of a powerful “platform” for e-commerce that could be the backbone of many applications, just as Microsoft Windows is the basic platform for windows applications. Amazon will need to build substantially new competencies to pull off this change of focus. It won’t be easy and trying it will put the company at considerable risk. But, if they are able to accomplish it, they will have transitioned the firm from a commodity retailer of books to a software developer offering the tools for other companies to build state-of-the-art e-commerce websites. As a result of this transition, some stock analysts are predicting they will achieve operating margins well above 10%. While this may not be as strong as pure software firms like Microsoft, it will be much higher than the best retailers at 5-6%.

Changing your focus

With so many examples of firms profiting by changing their focus, you might think that a company should periodically change its focus, or that a change of focus is the cure for whatever ails a business. Such responses, however, miss the point. Strategic Focus should be one of the most stable elements of your strategy, but it should not be set in concrete. Strategy is often the art of being different in a meaningful way. If you find your business surrounded by competitors who all have the same focus and are trying to woo the same customers, then there will be little difference between competitors and the customer will be left with only price to select with whom they do business. In this sort of situation, it is reasonable to consider an alternative Strategic Focus to see if there is a way you can bring a different value to the customer - a value proposition that will reenergize growth and profits in your business.

¹Business Week, December 22, 2003.

For more information, contact

For more, click here for a free subscription to Course and Direction.

© Copyright 2008 Center for Simplified Strategic Planning