Wednesday, December 5, 2012

Knowing When to Stay and When to Go

In “Lessons in Longevity” and “G.E. Goes With What It Knows: Making Stuff,” the authors emphasize the importance of:
  • ·        Building upon competitive advantages and pivoting even while things are good (IBM).
  • ·        Asking "what’s next?" and trying to identify long-term market shifts as a quality of strong leadership. (G.E.)
  • ·        Not pulling back on spending for competitive advantages during the tough times (e.g., G.E. did not drastically decrease spending on research and long-range projects).

An article in the Washington Business Journal, “Diversification Can Be Deadly,” takes the idea of “sticking with what you know” a step further by warning against diversification for diversification’s sake.   Diversification does present some benefits, author Peter Bloom asserts, namely: insulation against loss in one part of the business and better access to capital markets (because banks are more willing to gamble).  But Bloom warns, diversification without strategy can be fatal: businesses risk “duplicating their systems, increasing cost, distracting company leadership, and potentially even competing against itself.” 

For example, the National Semiconductor Corporation tried to make electronic consumer products in addition to the conductors that went inside them but was crushed by companies better suited to retail.  On the other hand, in a case of diversification controlled successfully, McDonald’s is almost constantly changing its menu but it stays within the fast food sphere with which it is comfortable.  Bloom points out that the lesson of playing to one’s strengths is especially important during tough times.

Because the project that I am working on for class is centered in the higher education arena, I can’t help thinking about how some of these lessons apply.  Just because a competitor thirty miles away has a stellar Chemical Engineering program, doesn’t mean that this university can develop the infrastructure and faculty to match its competitor overnight.  Instead the university should stick with the fact that it is a really good institution for Mathematics and develop its capacity in that arena.

But this brings us to the question: in tough times, what are signs that it is time to pivot or stay the course?  Of course, leadership experience and finely honed instincts help.  Maybe the scientific methods steps outlined in “Bringing Science to the Art of Strategy” do as well.  But there must be other common signs that a student of business history could recognize. What are they?

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