The dustbin of business failures is full of once sharply focused companies that lost their way because they diversified across too many markets. Market focus wasn’t all that was lost. So were positive cash flow and a customer who, instead of seeing clear choices and remaining loyal, became confused and bought a competitor’s product. This Ivey professor describes why market focus is imperative today and how managers can create and sustain it.
Companies in crisis: The loss of market focus
There is little doubt that competition is dramatically heating up in virtually every major product/market and business in the world. In such a hyper-competitive, rapid change atmosphere, managers are constantly faced with complex and difficult choices of new and changed products, services, customer segments, technologies, and market networks. And in many global markets, aggressive, innovative new competitors are attacking both global and traditional domestic markets with high-quality, high-value new products that challenge the market’s competitive status quo.
In such difficult environments, the need for market focus has become critical. Not surprisingly, numerous companies are losing their market focus and falling into negative cash flow, loss of competitiveness, loss of market shares and very tough competitive positions. For some, the question of survival has become very real. For others, acquisition by stronger, more market-focused companies becomes the only solution. This article will describe why market focus is so important in today’s complex global environment of business and suggest how organizations can create and manage market focus.
GM and Nortel: Whither market focus?
The challenges facing General Motors and Nortel illustrate the importance of market focus. For GM, particularly in the critical low-priced, small-car segment, the loss of market focus has become a major problem. In past years, different divisions of GM have made a long and difficult series of many product entries into this market segment, including an entirely new Saturn division. Over these years, GM lost significant cash flow. The problem is that, in this low-price car segment, it has had too many car models, too many brands, too much cross-divisional product replication, too many product variations and customer choices, slow product redesign cycles, too many dealerships, and too many divisions competing for the same customers in the same segment. All of these realities have combined to present a large, growing and confusing set of choices to GM car buyers. In many cases, price points for GM small cars overlap price points for larger cars, creating even more customer confusion. This proliferation of models and confusion have resulted in some serious quality problems. These factors, coupled with high, inefficient manufacturing, distribution, and other cost structures, have led to near disaster.
By contrast, Toyota has had a small and highly market-focused portfolio of low-priced, clearly positioned, high-quality car models and brands that are frequently redesigned, with clear price points between brands and products. It has also created solid market shares and high cash flows, with tightly-managed car manufacturing and distribution cost structures.
Historically, Nortel had a clear and successful market focus on digital telecommunications switches. But about ten years ago, it decided to enter a wide range of wireless markets. As a result, its market focus became fragmented across a wide and complex range of telecommunications equipment and acquisitions.
The impact on cash flow and market positions was devastating. Even worse, Nortel’s costing and financial systems for tracking cash flows from different products and markets have made it difficult for it to discern which products are “winners” (generating cash flow), and which are “losers.” In contrast, Microsoft has developed five highly clearly positioned, market-focused and synergistic businesses, including client operating systems, service and tools, online services business, Microsoft business division, and the entertainment devices division. Most businesses generate high cash flow. Financial metrics and performance data are tightly managed, and allow Microsoft to quickly and clearly see where the positive and negative cash flows are coming from in their portfolio.
What is market focus?
A market-focused company is one that has imbedded in all of its managers powerful planning processes and tools to continuously focus and re-focus critical cash flow and human resources on a changing portfolio of market opportunities that create long term cash flow. To some, this may seem self-evident. However, I offer two sobering thoughts: Firstly, the examples above show that many global companies formerly thought unbeatable are losing their market focus. Secondly, many of these same companies have literally hundreds of MBA’s from the best business schools the world in management positions. Clearly, at the critical conceptual and operational levels, many managers are having difficulty understanding, creating and managing market focus. Further, many of these managers have problems creating and managing the critical conditions necessary in their company for achieving and sustaining market focus. It clearly presents a very difficult task.
What is a market-focused product winner?
The overriding objective of a market-focused company is to make sure that every product in the portfolio at every level of the company is a current or potential winner. At any moment, this is unlikely to happen in any company’s entire product portfolio. However, the great market- focused companies are constantly driving toward it. More importantly, managers in market-focused companies are very tough on products and portfolios that are not performing. So what is a market-focused product winner?
Product winners must have three outstanding characteristics:
Product winners must create and sustain customer choice, loyalty and market share. They have to be highly differentiated to target customers who compare the product to competitors’ choices. In the case of General Motors, the low-priced Saturn project actually achieved good market shares. But this is not nearly enough.
Product winners must produce long-term positive cash flow over some reasonable time horizon. In the case of Saturn, despite some healthy market shares, the car lost a large amount of cash flow over many years. This problem was virtually guaranteed by the combination of very high investments and fixed costs in a new “greenfield” manufacturing plant, long product-development time, new complex, high-cost, high-tech manufacturing processes, a technically complex car and slim manufacturing margins.
Product winners must create strategic synergies for other products in the portfolio, those shared characteristics between products that help other products create more long-term cash flow. With General Motors’ high degree of cross-divisional replication and proliferation of low-priced cars, Saturn not only lost cash flow, but also likely cannibalized other General Motors divisions’ and brands’ potential market shares, and therefore reduced their cash flows as well.
Managers in market-focused companies are constantly striving to make sure that every product, market and customer in their entire corporate product portfolio has these three characteristics. It is a difficult task for every company and professional manager.
What is a market-focused product portfolio?
Many companies have product portfolios that compete at many different organizational levels, from the corporate level to divisions, and from major product/markets and geographies to specific products, customer, and deals. Great companies demand market focus at every one of these levels of market strategy.
An outstanding example of great market focus is General Electric, where the resources relentlessly flow to the highest long-term cash flow opportunities at every level of the company. These cash flow performance metrics drive all of the other significant financial performance measures. Critical cash flow and human resources are constantly re-focused and reallocated. Failing products, divisions, customer segments, technologies and geographies are quickly exited, sold, or changed with dramatic new market strategies. There is aggressive, continuous and major product and market “turnover,” as “losers” are eliminated or strategically changed, and the resources flow to the “winners.”
Critical conditions for market focus
Creating and sustaining a market-focused company is very difficult. Managers in companies never “get it perfect.” It is an elusive, fast-moving and frustrating target. It is not just a marketing challenge, but a challenge for multifunctional, cross-enterprise leadership. What are some of the critical conditions that are necessary for market focus?
In the cross-enterprise market and strategic planning processes that managers go through at every level, companies must seek continuous exposure and outward reach to potential and current customers about new products or strategic changes before large resource commitments are made. The tough questions about the product have to be addressed candidly. For example, is there real product differentiation that will drive customer choice? Can you really match competitive quality, prices and value? Will your cost structures allow you to create cash flow?
In the case of General Motors’ struggles in the low-priced car market, the emergence and growth of Chinese and South Korean companies as highly market-focused, low-price, low-cost, high-quality global car competitors, and their efficient supply chains, may make it impossible for GM to continue to focus on this market segment.
In the market and strategic planning processes across the company, the business and product portfolios have to be clearly conceptualized, mapped and shared, so that all managers “see” the business and portfolio through the “same eyes.” This enables wide and shared cross-enterprise recognition of the current and future “winners and losers,” the most critical markets, products and services, customer segments, technologies, and market supply chains and networks. More importantly, it enables the transparent and cohesive organization of cash flow and performance information across the portfolio. In the case of General Motors, it is evident that managers in the different car divisions see and map their market segments and opportunities differently, and in many cases, see that different divisions attack the same buyer segments and market positions, effectively competing with and “cannibalizing” each other’s market share and cash flows.
All levels of management in every role across the corporate portfolio have to understand and share the meaning of market focus and the impact of their cross-enterprise decisions on it. In General Electric, there is a deeply embedded process of continuous cross-enterprise dialogue and practice across divisions and within the entire company.
Financial cash flow measures, tracking, and information have to be valid and continuously available at every level of the business and product portfolio so all managers and teams can see the real cash flow performance of every product in their portfolio. This is not just critical for finance and accounting managers, but for all managers and cross-enterprise teams who are involved in running every level of the product/market portfolio. In the case of Saturn’s venture into low-priced cars, the most cursory estimates of positive and negative cash flows early on in the project made it likely that it was going to lose a lot of cash flow.
The financial performance metrics have to focus on making real money (cash flow). For many companies and managers, this is a continuing and frustrating block to market-focused strategies. In some companies, many objectives and measures of product financial performance are misleading, overly-complex, and conflicting. Today, many companies and managers continue to base goal performance for different functional managers and product/markets on a wide range of conflicting metrics, such as revenue, market share (unit and dollar), unit sales, return on investment, return on sales, return on equity, inventory turns, percent product margin, dollar product margin, gross margin, EBITDA, and a host of other measures. When managers in different functional roles pursue many of these measures at the same time, it can actually drive cash flow in the opposite direction.
The company culture and management compensation metrics must be explicitly and financially linked to market focus. Cross-enterprise teams of managers who plan and achieve high cash-flow strategies should be visibly recognized and rewarded, and there should be downside risk for managers and teams whose products do not perform.
Cross-enterprise teams must be visible and well-organized, empowered and accountable at every level of the company, and focused on specific product portfolio market opportunities. Matrix-type organizations present a major block to market focus because of their lack of accountability. Specific cross-enterprise teams of managers must be accountable for specific product/market opportunities.
In the corporate culture, the company has to support open, continuous, and transparent comparisons between product/market performance and cross-enterprise teams to identify problem and failure products, and act on them quickly rather than bury them in lengthy planning documents or endless meetings.
The market-focused planning process has to be seen and practiced as a continuous strategic review and fast-change process, rather than as the slow and sporadic writing of detailed planning documents, which are frequently valid for a short period of time in fast-moving competitive markets.
The culture of the company has to legitimize and honor teams of managers by saying “No” to product/market opportunities that they feel are “losers,” those incapable of creating long- term cash flow. This has to apply regardless of where the product is in its planning and execution cycle, and what resources have already been committed.
Executive and management education workshops and activities can play a powerful and highly leveraged role in building and reinforcing market focus. In the case of General Electric, a large and highly visible commitment of financial and human resources has been made to executive education for many years, for managers in every functional role and stage in their career. Its executive education has been a major factor in the outstanding and widely-recognized excellence of market focus in GE.
Market focus and leadership
In many business schools and management consulting firms, research, teaching, and executive education in “leadership” has become a huge industry onto itself. But it is conducted largely in isolation. Leadership is too often conceptualized as a strategic context-independent human trait and capacity, as if it is an intrinsic or trained ability of which some managers or teams have more or less. Further, many executive education workshops purport to train managers and teams in “leadership” and “leadership skills” through a wide range of experiential exercises and teaching processes completely removed from any real-world competitive market realities.
All of the critical conditions cited in this article for market focus are also the critical conditions for real corporate and management leadership. How can you have real leadership without market focus? Without market focus, where is leadership leading the organization? Without clear objectives for cash flow (making real money), how do you know if leadership is working or failing? Without managers’ (leaders’) compensation metrics tied to real performance (cash flow), how do you recognize and reward leadership? Without a cross-enterprise, cultural sharing of what market focus means, and the impact of non-marketing decisions, where does leadership reside? Who is leading?
Market focus execution
The challenge of execution is critical in marketing and strategic change, but where does market-focused planning end and execution begin? In great market-focused companies, execution is seen as an integral and continuing part of the market-focused planning process. Seeing it as a separate process is a false and very dangerous distinction. When strategies fail, it is utterly futile to debate whether it was bad strategy or bad execution! Too often, market and strategic planning is seen as an internal management process, and execution as an external customer and market network process (sales and account management).
What are some critical connections between market focus and execution?
Making sure that there is a high degree of overlap in the membership and leadership of the cross-enterprise teams that are involved in both planning and execution. Execution should be conceptualized as a continuation of the market-focused planning process, with overall responsibility by the same managers.
Making sure execution as an integral phase of an integrated, iterative, and continuous planning process is critical. The tough strategic questions that guide a great market-focused planning process do not vanish once execution begins. Often, execution is the first real test of many of the critical strategic and market assumptions that underlay the strategy.
During execution, the management teams must have the same capacity to stop a “loser”, no matter how far along it has progressed. When new information or changes in the situation make it clear that it cannot make cash flow in a reasonable time, get out!
Frequent and detailed comparisons should be made among all of the planning process performance and progress estimates as the execution proceeds to spot any major shortfalls, and to make strategic changes.
The execution process should never be slavish to the strategic and market plan documents. The objective is not to implement the plan, it is to be successful and create cash flow with the strategy!
Mixed performance metrics can be the death of successful strategic execution. For example, a company may enter a market with a market-focused product portfolio well-planned to build cash flow and evaluated on that basis. However, as is often the case, the field sales forces and account managers may be goaled and compensated on revenue, not cash flow. The result is disastrous, since the some of the highest-revenue products may be the lowest in cash flow.
More and more companies are recognizing the critical importance and meaning of market focus and its impact on management leadership, strategic execution and other key areas that drive competitive performance and financial success. Today, the leading companies make market focus a key focal point for executive education programs for their cross-enterprise management teams at every level of the company.