Focus on your core business and core competencies is powerful but the wrong use of it leads to executives� objective myopia
To manage a business organization and sustain its profitability or growth, executives of companies need to focus on their core business and core competencies. Studies of many successful companies supported the theory that the company’s non-core business must be sold. For example, Microsoft sold its travel portal company called expedia.com to focus on its core business for which the company is well known-software development. The result of many management studies also recommends that the non-core activities or functions of a company that do not add value on the product being paid by its customers are better to be outsourced from companies that possessed the relevant capabilities or expertise. For instance, it is better for Microsoft, as a software company, to outsource the maintenance of its facilities than to do by its own. The advantage of this management perspective is very clear: Microsoft and its vendor will gain financial and operational benefits on this kind of arrangement because as the vendor provides the same services to other companies, they can use the power of economies of scale to lower the cost of its services and share the savings back to Microsoft. And in addition to the financial benefits that Microsoft can derived from this arrangement, it is relieved from the hassle of managing the people and the day to day operation to clean and maintain its facilities. Hence, it can focus its energy on its core competencies that produce world class products and services that gives the company the competitive advantage and the means to make enormous money in the world economy.
Many Japanese companies used this management perspective to win the competition in the global market too. For instance, Japanese automobile companies surrounded themselves of small and medium companies that manufacture spare parts to bring down the spare parts cost which allow their company to focus on their core business (e.g. manufacturing, assembling, marketing, and distributing its automobile around the world) and core competencies (e.g. developing a better materials for the car, developing elegant designs, and improving the method to engineer a low-cost, high-quality, and fuel-efficient car engines). With the numerous benefits that a company can gain by focusing on its core business and core competency, it is not surprising that many executives of business organizations embrace this management perspective as a rule of thumb to manage their business organization. However, despite of the power of this management perspective, the wrong use of this can lead to executives� own objective myopia because as the executives of company focus on their core business and core competencies for instance, they started to ignore the emerging businesses that offer some of the biggest economic opportunities to make money in the world economy like in the case of information technology which can pave the way for their company to secure the creation of maximum shareholder value and sustainable profitability. How?
When the executives of numerous companies saw the arrival of Personal Computer powered by Microsoft software and Intel chips, they invested on PCs to achieve efficiency and productivity within their company but many executives did not see the underlying great economic opportunities to make money by investing in Microsoft and Intel which were both positioned in the early days to create enormous wealth as personal computer started to appear in every home and office. The economic opportunities lost by many companies and shareholders can be measured in hundred billion to trillion US dollars as executives focused on their core business and core competencies. And from the study and analysis of the history, the failure of many executives to invest in Microsoft and Intel is not due to lack of capital to invest on emerging technologies or the absence of economic opportunities to grow rather there was a failure from its management, primarily in the allocation of capital, due to its executives� own objective myopia. Many executives in different industries had focused on the core business and core competencies as if their business is the only means to earn money or to secure the primary objective of the company in the world economy.
If we will look back on the history in the early 20th Century, we can learn that executives had encountered already a similar event when the automobile was taking the world economy by storm like the Personal Computer, internet, and smartphone. But not all executives of business organizations viewed the advent of automobile as a way to achieve efficiency and productivity in their business operations, some executives saw the automobile revolution as a great investment opportunity too. For instance, in the memorandum to Finance Committee of Du Pont Company dated December 19, 1917, Mr. John Raskob, then the Chairman of Finance Committee, called the attention of the Du Pont management to participate in General Motors. He wrote the following in his own words:
“The growth of motor business, particularly the General Motors Company, has been phenomenal as indicated by its net earnings and by the fact that the gross receipts of the General Motors-Chevrolet Motor will amount to between $350,000,000.00 and $400,000,000.00. The General Motors Company today occupies a unique position in the automobile industry and in the opinion of the writer with proper management will show result in the future second to none in any American industry. Mr. Durant perhaps realize this more fully than anyone else and is very desirous of having an organization as perfect as possible to handle this wonderful business.�
DuPont executives listened on the recommendation of John Raskob and invested 25 million US dollars on December 21, 1917 and then increased it to 49 million US dollar or the equivalent of 28.7 percent of GM common stock at the end of 1919. The result was historical because by the year the Supreme Court order Du Pont to divest its GM stock in 1961 due to the perceived conflict of interest related to DuPont paint business with the company, the 63 million GM shares owned by DuPont was worth 2.9 Billion US dollars on that particular time which DuPont divested at different dates after Supreme Court final decision. With the action of DuPont management to enter on emerging business with transformative products, services, and methods to do work or to manage a business like the General Motors at the height of automobile revolutions, we can concluded that there was management failure on the way the Board of Directors, CEOs, and CFOs of many business organizations managed their companies, primarily in the allocation of capital, that caused their business organizations and it shareholders to miss the great economic opportunities to make money in the information technology companies like Microsoft and Intel as discussed. And the reason they missed the great economic opportunities to make money in the business of information technology is not because of lack of capital or the absence of economic opportunities in the market to grow rather it is because of their management perspective to focus on their core business and core competencies that led to their own objective myopia.
And looking back at the history of business management, perhaps, there is no company can match the focus of Kodak on its core business and core competency. Kodak, founded by George Eastman in 1888, achieved the creation of significant shareholder value and decades of profitability through its breakthrough product and superior manufacturing capabilities on camera, film, photographic equipment, and photo paper. Hence, we can state that the executives� understanding of its core business and core competencies is unquestionable. Kodak’s core competency in manufacturing film and photo paper was far superior from its nearest competitor, Fuji film. And aside from Kodak’s focus on its core business and core competency, its executives rely heavily on the popularity of its brand and supposed customers� loyalty due to the contribution of Kodak to the society for more than a century. To illustrate the company’s intimate relationship with its customers, Kodak was there when we were recording the most significant events in the world history. Kodak was there when people captured the most intimate and most special moments of their lives like when the couple get married, when their first baby was born, and when they celebrate the birthdays of their family members through the years. Kodak was there too when we celebrated our greatest achievement in life such as winning the Olympic competition or receiving a Nobel Memorial Prize. From Kodak’s slogan “Share moments. Share Life,� we can state that there is nothing more you can ask for if your company exists to provide the kind of services which Kodak had faithfully provided to its customers through the years around the world for more than a century.
But looking back at the history of business management, we can find that Kodak executives� focused on its core business and core competency had played a significant role why the company missed some of the biggest economic opportunities to make huge amount of money on the arrival of numerous transformative products, services, and methods to do work or to manage a business in the last century that could have paved the way for Kodak to secure the creation of maximum shareholder value and sustainable profitability in the passage of time and change in the economic environment. Had Kodak used its massive capital to invest or acquire the emerging companies with transformative products, services, or methods to do work, the company could have survived and thrived in the passage of time and changed in the economic environment. But its executives failed to allocate its capital to the extent that they did not even capitalize the digital camera they invented as the company tried to avoid cannibalizing the source of their livelihood. Rather its executives had focused on their core business and core competency that give them the competitive advantage in the market in the past until the competitors made their core products obsolete. The company’s brand and the expected customers� loyalty due to Kodak’s faithful services to its customers in the last century did not help Kodak to survive too. As Japanese companies entered in business areas where Kodak operates with its innovative and easy to use digital cameras, Kodak was not saved by executives� effort to preserve its core business and core competency. In January 2012, Kodak filed for Bankruptcy. But in contrast to the sad demise of Kodak, Fujifilm, the second biggest competitor of Kodak for several decades, survived and thrived in the age of digital cameras. In the book entitled Innovating out of Crisis, Shigetaka Komori tell the inside story of Fujifilm’s diversification strategy as he led the company to Healthcare, Cosmetics, Pharmaceutical, and many other businesses that have offered Fujifilm the necessary economic opportunities to make money and change its fate very far from Kodak company.
The above analyses mirror the long-time view of Warren Buffett about running a business or investing when he said in his own words “Diversification may preserve wealth, but focus builds wealth.� And by looking at the history of business in the last 100 years, there is substantial evidence that no company doing a single line of business last. Hence, we need to focus to create wealth, and diversify to sustain it.
Marionito Marquez
Many Japanese companies used this management perspective to win the competition in the global market too. For instance, Japanese automobile companies surrounded themselves of small and medium companies that manufacture spare parts to bring down the spare parts cost which allow their company to focus on their core business (e.g. manufacturing, assembling, marketing, and distributing its automobile around the world) and core competencies (e.g. developing a better materials for the car, developing elegant designs, and improving the method to engineer a low-cost, high-quality, and fuel-efficient car engines). With the numerous benefits that a company can gain by focusing on its core business and core competency, it is not surprising that many executives of business organizations embrace this management perspective as a rule of thumb to manage their business organization. However, despite of the power of this management perspective, the wrong use of this can lead to executives� own objective myopia because as the executives of company focus on their core business and core competencies for instance, they started to ignore the emerging businesses that offer some of the biggest economic opportunities to make money in the world economy like in the case of information technology which can pave the way for their company to secure the creation of maximum shareholder value and sustainable profitability. How?
When the executives of numerous companies saw the arrival of Personal Computer powered by Microsoft software and Intel chips, they invested on PCs to achieve efficiency and productivity within their company but many executives did not see the underlying great economic opportunities to make money by investing in Microsoft and Intel which were both positioned in the early days to create enormous wealth as personal computer started to appear in every home and office. The economic opportunities lost by many companies and shareholders can be measured in hundred billion to trillion US dollars as executives focused on their core business and core competencies. And from the study and analysis of the history, the failure of many executives to invest in Microsoft and Intel is not due to lack of capital to invest on emerging technologies or the absence of economic opportunities to grow rather there was a failure from its management, primarily in the allocation of capital, due to its executives� own objective myopia. Many executives in different industries had focused on the core business and core competencies as if their business is the only means to earn money or to secure the primary objective of the company in the world economy.
If we will look back on the history in the early 20th Century, we can learn that executives had encountered already a similar event when the automobile was taking the world economy by storm like the Personal Computer, internet, and smartphone. But not all executives of business organizations viewed the advent of automobile as a way to achieve efficiency and productivity in their business operations, some executives saw the automobile revolution as a great investment opportunity too. For instance, in the memorandum to Finance Committee of Du Pont Company dated December 19, 1917, Mr. John Raskob, then the Chairman of Finance Committee, called the attention of the Du Pont management to participate in General Motors. He wrote the following in his own words:
“The growth of motor business, particularly the General Motors Company, has been phenomenal as indicated by its net earnings and by the fact that the gross receipts of the General Motors-Chevrolet Motor will amount to between $350,000,000.00 and $400,000,000.00. The General Motors Company today occupies a unique position in the automobile industry and in the opinion of the writer with proper management will show result in the future second to none in any American industry. Mr. Durant perhaps realize this more fully than anyone else and is very desirous of having an organization as perfect as possible to handle this wonderful business.�
DuPont executives listened on the recommendation of John Raskob and invested 25 million US dollars on December 21, 1917 and then increased it to 49 million US dollar or the equivalent of 28.7 percent of GM common stock at the end of 1919. The result was historical because by the year the Supreme Court order Du Pont to divest its GM stock in 1961 due to the perceived conflict of interest related to DuPont paint business with the company, the 63 million GM shares owned by DuPont was worth 2.9 Billion US dollars on that particular time which DuPont divested at different dates after Supreme Court final decision. With the action of DuPont management to enter on emerging business with transformative products, services, and methods to do work or to manage a business like the General Motors at the height of automobile revolutions, we can concluded that there was management failure on the way the Board of Directors, CEOs, and CFOs of many business organizations managed their companies, primarily in the allocation of capital, that caused their business organizations and it shareholders to miss the great economic opportunities to make money in the information technology companies like Microsoft and Intel as discussed. And the reason they missed the great economic opportunities to make money in the business of information technology is not because of lack of capital or the absence of economic opportunities in the market to grow rather it is because of their management perspective to focus on their core business and core competencies that led to their own objective myopia.
And looking back at the history of business management, perhaps, there is no company can match the focus of Kodak on its core business and core competency. Kodak, founded by George Eastman in 1888, achieved the creation of significant shareholder value and decades of profitability through its breakthrough product and superior manufacturing capabilities on camera, film, photographic equipment, and photo paper. Hence, we can state that the executives� understanding of its core business and core competencies is unquestionable. Kodak’s core competency in manufacturing film and photo paper was far superior from its nearest competitor, Fuji film. And aside from Kodak’s focus on its core business and core competency, its executives rely heavily on the popularity of its brand and supposed customers� loyalty due to the contribution of Kodak to the society for more than a century. To illustrate the company’s intimate relationship with its customers, Kodak was there when we were recording the most significant events in the world history. Kodak was there when people captured the most intimate and most special moments of their lives like when the couple get married, when their first baby was born, and when they celebrate the birthdays of their family members through the years. Kodak was there too when we celebrated our greatest achievement in life such as winning the Olympic competition or receiving a Nobel Memorial Prize. From Kodak’s slogan “Share moments. Share Life,� we can state that there is nothing more you can ask for if your company exists to provide the kind of services which Kodak had faithfully provided to its customers through the years around the world for more than a century.
But looking back at the history of business management, we can find that Kodak executives� focused on its core business and core competency had played a significant role why the company missed some of the biggest economic opportunities to make huge amount of money on the arrival of numerous transformative products, services, and methods to do work or to manage a business in the last century that could have paved the way for Kodak to secure the creation of maximum shareholder value and sustainable profitability in the passage of time and change in the economic environment. Had Kodak used its massive capital to invest or acquire the emerging companies with transformative products, services, or methods to do work, the company could have survived and thrived in the passage of time and changed in the economic environment. But its executives failed to allocate its capital to the extent that they did not even capitalize the digital camera they invented as the company tried to avoid cannibalizing the source of their livelihood. Rather its executives had focused on their core business and core competency that give them the competitive advantage in the market in the past until the competitors made their core products obsolete. The company’s brand and the expected customers� loyalty due to Kodak’s faithful services to its customers in the last century did not help Kodak to survive too. As Japanese companies entered in business areas where Kodak operates with its innovative and easy to use digital cameras, Kodak was not saved by executives� effort to preserve its core business and core competency. In January 2012, Kodak filed for Bankruptcy. But in contrast to the sad demise of Kodak, Fujifilm, the second biggest competitor of Kodak for several decades, survived and thrived in the age of digital cameras. In the book entitled Innovating out of Crisis, Shigetaka Komori tell the inside story of Fujifilm’s diversification strategy as he led the company to Healthcare, Cosmetics, Pharmaceutical, and many other businesses that have offered Fujifilm the necessary economic opportunities to make money and change its fate very far from Kodak company.
The above analyses mirror the long-time view of Warren Buffett about running a business or investing when he said in his own words “Diversification may preserve wealth, but focus builds wealth.� And by looking at the history of business in the last 100 years, there is substantial evidence that no company doing a single line of business last. Hence, we need to focus to create wealth, and diversify to sustain it.
Marionito Marquez
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