Evolution Of Business: Focus And Risk
by Richard Barrett
Previously we discussed the challenge of mapping the environment as a non-linear optimization problem. The environment has peaks, valleys and plains as well as gentle even slopes. Changing a service feature has a non-linear effect, depending upon the topography of the environment at that point. The sensitivity of the environment to a particular service feature is variable. It is impossible to predict, and can only be discovered by experiment and testing.
Focus Can Maximize Fitness, but Raises the Risk Profile
Evolution has developed an effective response to the problem of non-linear optimization—focus.
Most species focus very narrowly on a particular niche. This tight focus allows these species to limit their contact with the environment to the minimum number of features. As a result they can achieve an extremely good fit to this small feature set of the environment.
In a commercial environment businesses also do the same. The narrow focus of many businesses is amazing. Often I am surprised that a company can build a business with such a narrow service focus.
Reaping the Benefits of Better Focus
Remember back in the hardware store when we found the section with nuts, bolts, and screws, which illustrated the incredible diversity of evolution in business?
Just a few aisles over, in the paint section, we can find a similarly striking example of how evolution drives focus. Years ago, paint manufacturers produced the paint and mixed the colors at the plant. They had to guess what colors consumers wanted, and how much of each, but once the pigment is mixed into a can of paint, it cannot be removed. This proved very costly, since making paint is easier than forecasting consumer color preferences, especially as there are thousands of choices.
In a stroke of brilliance, one manufacturer dramatically simplified the forecasting problem by shifting the color mixing function to the point of purchase.
From a business point of view, this manufacturer intensified its focus on its distributors, thus allowing itself to reduce its points of contact with the consumer environment. The manufacturer had to learn how to transfer tools and technology for color production to each distributor, but it freed itself from the need to forecast the fickle preferences of consumers.
The evolutionary description of this process is similar. The paint manufacturer exploited its strength in color production to increase its competitive advantage; it deepened its relationship with a symbiotic partner; and reduced its contact with the consumer environment.
The result is an entire industry that can more easily survive rapid market changes.
Recognize the Risks of a Narrow Focus
In the short term a narrow focus is an excellent strategy. Most of the time the environment is stable and the business remains well suited to this stationary environment.
However, if the environment shifts just a little, the fitness of the business drops dramatically. Then the business species face a daunting challenge—adapt swiftly or face extinction.
Sounds like the situation today, doesn’t it?
Some small companies concentrate their sales within a few large customers. Many small companies have built good businesses selling primarily to IBM, or General Electric, or General Motors.
In the auto-parts business, suppliers have only a few companies in the total customer universe, probably less than twenty significant customers in North America and even in the world.
Unfortunately, the current market for auto-parts suppliers illustrates the other side of the equation—increased risk. If any one of the domestic auto manufacturers goes into bankruptcy, no doubt many auto parts suppliers will simply shut down—permanently.
Checkup: Maximize the Rewards of Focus
- How do you focus your business?
- Find three specific examples of recent decisions that increased your business focus.
- What critical choices are facing your business in 2009?
- How will you use these choices to increase your business focus?
- What low performing services can you drop?
- How can you deepen your relationships with your top customers and business partners?
- Are you reaping the benefits of focus – reduced expenses, increased profits, better stability?
Checkup: Minimize the Risk of Focus
- Where is your company overexposed – largest customer, most important product, key employees?
- How can you manage those risks?
- What key indicators, or early warning signs, will alert you to troubles?
- How do you track those key indicators?
- How will you recover if a major customer suddenly disappears? Major supplier? Key employee?
