I recently read an article in the January-February issue of the Harvard Business Review titled ‘The Grass Isn’t Greener comparing the prospects of shifting your business into a new industry or focusing on winning in the space that you currently are playing.
I speculate through the economic downturn that many businesses have considered a foray into a new industry or segment because they saw revenue shrinking and profits declining. We can point to multiple cases where businesses expanded into new industries because they believed the grass was greener or that another industry was the “Next Hot Thing”. While it is true that some industries out-perform others, data supports that the actual difference in returns within industries is much greater than the difference across industries.
The research backing up the article analyzed shareholder returns for 6,138 companies in 65 industries over a 10 year period. “In almost every case, a bigger opportunity lies in improving your performance in the industry you’re in, by fixing your strategy, and strengthening the capabilities that create value for customers and separate you from your competitors.” Businesses that were top performers in each industry experienced annual shareholder returns of 17% or more.
There are a couple of reasons why the “Grass is Greener” philosophy is faulty. First, management makes the assumption that if they have been successful in one industry, they can transfer that managerial talent and knowledge to another industry and be just as successful. The actuality is that the capabilities that matter develop over decades in the form of human capital and financial capital.
Second, management teams get caught in the “Next Hot Thing” cycle. This assumption is “an industry that seems superior today will remain so.” There are many cases of this. If we reflect back on the late ‘90’s, there was the tech bubble. Everything was going to be driven by technology, stores would become irrelevant, and orders would be fulfilled by robots. In the last 10 years, it was the mortgage industry. The mortgage bubble actually buoyed many segments of the economy from housing and construction to consumer goods. The research in the article concludes there is no such thing as a bad industry. Sure, there are temporary periods that an industry is depressed, but they rarely last. “One decade’s leaders can become the next decade’s laggards.”
If you review the data that was analyzed across the 65 industries, the difference in shareholder returns for the median companies in each group were within 16% of one another. However, if you looked at the gap within industries, top performing companies performed 72% better, on average, than the worst companies in their industry group. The conclusion here is that your chance of being a top performer in your industry is far greater than migrating into another industry in an attempt to be a top performer there.
This is all good information, but how do we work with it and apply it to our own businesses? The first thing you can do is define, or redefine, growth for your business. Focus on gaining market-share in your industry. Second, focus your company’s resources on those areas that are critical to your success and minimize all other costs. Third, focus your management and teams on what really matters. While financial measurements like revenue, profitability and expenses are important, there may be other metrics that serve your team better. For example, you can measure customer satisfaction, revenue per customer, lifetime value of customers, employee satisfaction, and market share. Changing this focus will change the focus of your business and improve shareholder returns.
We work with several clients to measure what matters to them. With one of our clients, we implemented a monthly metrics reporting package and monthly management meeting. In the first complete year of the process they increased their profit 15 fold. For them, the value came out of the conversations that we engaged in during the meetings and their work after the meetings to focus on what mattered. While the metrics tell a story, it is the interpretation of the story and changes that take place afterwards that create the value.
Here is my challenge for you: determine your average lifetime value of your customers and then brainstorm with your team on how to increase that. It will most likely have something to do with customer satisfaction.
