Focus on own industry for growth, firms told
Dubai, February 3, 2013
There is a strong perception among chief executives that expanding into a thriving new industry is the key to maximising growth.
Business leaders attribute their stagnant revenues to industry specific factors and firmly believe that, by finding better industries and putting their companies in a position to compete in them, they can reap greater rewards.
However, following an in-depth analysis of shareholder returns spanning 6,138 companies in 65 industries worldwide from 2001-2011, management consulting firm Booz & Company said that nothing could be further from the truth.
In fact, in almost every case, a bigger opportunity lies in improving the company's performance in the industry that it is already in by fixing its strategy and strengthening the capabilities that create value for customers and differentiate it from competitors.
"In reality, the data do not support this belief," said Booz & Company partner Evan Hirsh.
"While some industries certainly outperform others, the differences are far smaller than one might think, and most high-fliers eventually revert to the mean.
"Moreover, the difference in returns within an industry is several times greater than the difference across industries. Thus chief executives and boards shouldn't waste time and shareholder capital trying to succeed in a new industry."
Booz & Company's 10-year study of shareholder returns reveals that firms in the top quartile had annual total shareholder returns of 17 per cent or more.
"Yet, it is hard to find a leader today who hasn't entertained the idea that his or her company was simply in a bad industry or market space and a better opportunity lurked nearby," said Booz & Company principal Kasturi Rangan.
"This explains why product or service lines that still have growth potential get exploited to fund other businesses instead of being allowed to reinvest in their own.
"It also sheds light on the loss of focus that results when companies place multiple bets across various industries in the hope that one will be a big winner. Finally, it highlights the reckless pursuit of mergers that are billed as transformational but often involve overpayment, underperformance, a big write-off, and the loss of the chief executive's job," he stated.
"Half the industries we studied that were in the top quartile from 1991 to 2001 ended up in the bottom quartile during the next decade," said Hirsh.
"This variability, found in every type of economic cycle, shows why it is generally very risky to enter an industry at its peak."-TradeArabia News Service