Academy of Management Executive

I Academy of Management Executive, 1990 Vol. 4 No. 1

Concentrated growth strategies

John A. Pearce II, George Mason University James W. Harvey, George Mason University

Executive Overview ‘Thi’his article offers a critical assessment of the merits of concentrated growth as the centerpiece of a business strategy. It includes an analysis of the environmental conditions that favor concentrated growth and why it often leads to superior performance. It also reviews methods by which innovation and expansion ccmjie managed at reasonable levels of risk to complement the iirm’s basic focuSyThese guidelines make it possible to compare a firm’s core characteristics with the knowledge and capabilities in technology and marketing that are necessary for profit and growth. The most important aspects of formulating and implementing concentrated growth strategies are analyzed and examples of current practice show specific instances when those aspects have resulted in success.

Article Many victims of merger mania were once mistakenly convinced that the best way to achieve company objectives was to pursue unrelated diversification in the search for financial opportunity and synergy, only to see corporate performance fall well below expectation. By rejecting that “conventional wisdom,” Martin Marietta, Kentucky Fried Chicken, Compaq, Avon, Hyatt Legal Services, and Tenant have demonstrated the advantages of what is increasingly proving to be sound business strategy.

Pursuing a Concentrated Growth Strategy These companies are just a few of the majority of American business firms that compete by focusing on a specific product and market combination. Yet, little has been written about—and perhaps as little thought given to—the concentrated growth strategy.

Concentrated growth is the strategy of the firm that directs its resources to the profitable growth of a single product, in a single market, with a single dominant technology. The main rationale for this approach, sometimes called a market penetration or concentration strategy, is that the firm thoroughly develops and exploits its expertise in a delimited competitive arena.’

Despite the popularity and success of concentrated growth strategies, managers have been left without guidelines to help them determine when their firm should employ concentrated growth and how they should go about maximizing the advantages of the strategy. Furthermore, current adopters of the concentrated growth strategy are frequently tempted to expand into unrelated areas without fully understanding the consequences. The enticements to stray from this strategy include impatience to grow, pressure to use idle capacity, need to meet short-term goals, and underestimating current opportunities.^ Fascination with new product development and expansion into new markets should be tempered with the fact that new products fail at an average rate of 40% for consumer goods, 20% for industrial products, and 18% for services.^

A further enticement is to accelerate focused growth through horizontal

61

Academy of Management Executive

integration. While such a strategy offers the advantage of enabling the firm to retain its basic product and market orientation, it exposes the company to a wide range of financially threatening complications. These potential problems include extended debt involvement; geographic variations in unions, worker contracts, and conditions of employment; added complexity in strategic planning and management coordination; and difficulties owing to multiple suppliers, local competitors, and governmental agencies. So numerous and great are these complications that their discussion is beyond the scope of this article. We restrict our attention to challenges confronted by managers who undertake a concentrated growth strategy through reliance on internal development.

Diversity and Perlormance “Stick to the knitting” is the phrase used by Peters and Waterman to describe one of several characteristics of successful corporations. “* Staying with what the firm does best and avoiding areas of operation of undeveloped skills are the bases for their endorsement of concentrated growth.

Systematic analysis of new product successes and failures further underscores the risk of deviating from company strengths. After examining 195 case histories, Calantone and Cooper identified nine new product introduction scenarios, based on resource compatibility and product superiority.^ The type of introduction that had the highest level of market success (72%) was described as a synergistic “close-to-home” product. These successful introductions had significant overlap with the firm’s existing products, markets, technical expertise, and production proficiency. For example, “The Better Mousetrap with No Marketing” type of new product introduction had a success rate of 36%, while the “Me Too” product, with no technical or production synergy, averaged only 14%.

This study revealed that the pursuit of growth through expansion into previously unmastered technologies, or new markets, is done so at comparatively great risk. Other evidence adds support to the view that diversification, particularly unrelated diversification, is risky.

An analysis of the 250 largest firms in America’s 25 largest industries revealed that firms that have higher measures of concentrated growth show greater financial performance.^

Another indictment of unrelated diversification was found in a study of America’s best midsize businesses.^ Among the key findings was that “unrelated diversification is a mortal enemy of winning performance.” In contrast, successes often resulted from “edging out.” This term refers to strategies based on clear mission statements that are well-understood within the firm, predicated on offerings with value, and serve selected market segments while cautiously moving into related products, related markets, or both. Success with edging out strategies is derived from a commitment to innovation within well-known technology and well-defined market niches.