Remember the Maytag repair man – bored to tears because he had nothing to do? Maytag’s success was built on their durable, reliable, “never break down” washers and dryers. Maytag had a good thing going – that is until someone decided they needed to leverage their brand name to other appliance markets. With dollar signs in their eyes but no strategy, Maytag expanded into refrigerators and cooking products and purchased appliance makers like Jenn-air, Hoover and Magic Chef. With the acquisitions came staggering growth. From $680 million in sales in the mid 80’s they peaked at $3.4 billion by the mid 90’s.
If high activity is the goal, Maytag wins! Sadly the return on sales over the same time period plummeted from a high of 12% to a near death defying 1%. The profit on $3.4 billion in sales was less than it was on $680 million.
The goal of any company is to outperform its competitors by establishing product and service differences that can be defended and preserved. Maytag outperformed its competitors in washers and dryers by making a more reliable product. When return on sales dropped to 1% in the 1990’s most of that profit was still generated from the washers and dryers. What Maytag failed to realize was that growth by itself is not a strategy. A strategy is characterized by tough resource allocation decisions where a company chooses to serve one set of customers and equally chooses not to serve another. In the end a strategy creates value for both a select group of customers (called a segment) and for the company (through superior margins and volume).
Maytag tried to get bigger and more profitable by expanding their brand into new product lines and services they didn’t know how to run well. In trying to do everything they succeeded at nothing. With no strategy in place to guide them, Maytag stretched their expertise and resources to the breaking point. If your business division or company seems to be chasing every opportunity that comes along, stop doing what’s urgent – start doing what’s important. That begins with developing a strategy! Answering the questions below can help get you back on track. Once you answer them, re-focus your business in these areas.
- Which products or services that we offer are most distinctive?
- Which products or services are most profitable?
- Which customers are most satisfied with us?
- What activities in our value chain add high customer value?
In most businesses a small percentage of customers (or customer groups) make up a large percentage of the profits. A customer in the top 10% can bring in 30 to 50 times more profit than a customer in the bottom 10%. This holds true across industries. The goal is to re-align your company’s activities around the unique services / processes / products that bring these top groups real value – that’s strategy! Now go develop one.
Strategy defined:“A market driven strategy is an organization-wide focus on creating value for the customer, the company (and possibly other stakeholders) through the deployment of resources in such a manner that brings one’s strengths to bear on attractive markets (and sometimes competitor’s weaknesses) to achieve a central set of objectives through a continuously changing set of circumstances” C. Tipping
If you’d like to better understand the process for building a strategy – go to our web site and download IIBD’s Strategic Planning Process: http://www.iibd.com/strategic-planning-process2.pdf.