Now Declutter Your Business Strategy
Have you experienced the “life-changing magic of tidying up” your home? Such is the promise and title of the book by Marie Kondo, who teaches the Japanese art of decluttering and organizing.
Streamlining and simplifying your living environment can produce peace of mind and enhance personal effectiveness. Eliminating unneeded and extraneous belongings creates a sense of freedom. When there’s less to take care of, there’s more quality of life.
This same argument applies to your business strategy. Most professionals will nod their heads in agreement, yet the websites of these same firms promise “a wide array of services.” A firm that attempts to serve a broad swath of markets with a “complete” set of offerings has a cluttered business strategy.
A streamlined business strategy
Professional service firms are, by default, on a trajectory of ever-increasing complexity. Like barnacles on a ship, firms add more and more service offerings as a direct result of clients asking questions like “Can you help us stage an exposition in Siberia?” Even though you’ve never done anything like that — nor does your firm currently have the competencies — many professionals are tempted to answer “yes” then figure out a way to do it. The chase for revenue clouds our decision-making and we allow ourselves to stray from our core areas of expertise. The result is not only an unprofitable engagement but a confounded and dispirited team.
When professional firms evolve in this way, they are not growing based on a strategic vision, but rather what strategist David Aaker calls “strategic opportunism.” Some out-of-the-blue opportunities are worth pursuing, but strategic opportunism is a poor substitute for a deliberate business strategy.
The cost of complexity
The cost of a complex business strategy can be extraordinary. Providing 37 different services — and maintaining the talent and structure necessary to deliver them — creates a burdensome cost structure and organizational convolution. Wall Street actually applies what they call a “diversification discount” to companies that have expanded into a broad assortment of businesses, because they know these types of diversified companies are inherently less profitable.
The correlation between simplicity and profitability has never been stronger. Business books are littered with examples of companies that unintentionally over-diversified and suffered significant margin erosion, only to rediscover the power of focus, shed extraneous products and return to financial health. “There are greater returns on simplicity than on scale,” observe Jules Goddard and Tony Eccles in their insightful book Uncommon Sense, Common Nonsense. Simplicity is rare, they say, because it is not the natural order of business development. Simplicity is always the product of intentional design.
A two-year study by Bain & Company designed to identify the primary markers of business success concluded that “narrower focus and concentration of resources on a single core business … proved the most frequent road to sustained, profitable growth.” The counterintuitive moral to the numerous case stories they investigated is that companies must focus to grow.
Not common sense
The essence of an effective growth strategy is not to offer every kind of service to every kind of customer, but to define your core offerings and core markets and pour more and more of your resources into fewer and fewer areas of focus. Your clients don’t buy versatility; they buy expertise.
Logic usually points us in the opposite direction. So does the second law of thermodynamics, which states that the level of disorder in the universe is steadily increasing; systems tend to move from ordered behavior to more random behavior. So business leaders must go against both human nature and natural forces and constantly prune their business model to concentrate on what they do best.
Remember, you can be best-in-class in something, but you can’t be best-in-class in everything.