How companies lose their way

Recently, Wal-Mart CEO Lee Scott announced that the retailer needed to widen its appeal to a broader range of people -- those with higher incomes than the company's core customer base. It's not that same-store sales (the most significant measure of a retailer's performance) are hurting, it's just that Wal-Mart (WMT) wants more (see BW Online, 7/11/05, "Wal-Mart's Missing Spark"). But attempting to broaden its appeal may be a big mistake, judging from the results of my firm's study of 400 of America's fastest-growing companies.

The study compared companies that had lost their footing to those that managed to maintain or even increase growth over the past two decades. It pinpointed seven characteristics that cause growth to stall. Three of them (economic factors, changing industry dynamics, and aggressive competition) fall under the heading of "external uncontrollables." Four are related to internal dynamics, one being a loss of focus. This is what Wal-Mart may soon come to regret.

REPEATED MISTAKE.

In our study, companies that had stumbled were five times more likely to say they've lost focus. They were more likely to believe that the marketplace had changed, and they no longer knew their place in it. And they were significantly more likely to say that their current marketing efforts aren't working.

In another study, this one by Bain & Co., a sample of CEOs of companies that had failed were asked what went wrong. According to Bain, "the overwhelming majority, 70% of them, cited a lack of management focus." These company leaders didn't make excuses based on external uncontrollables but blamed "their failure to focus on the core business."

Is it a surprise that the world's largest retailer may now be heading for this fate? Not really. Company after company makes the same mistake, believing that their brand equity can be stretched beyond its capabilities. It happens to the best of businesses in every industry.

CHICKEN LITTLE.

Take the automotive market. A few years ago, Volkswagen introduced the Phaeton, a luxury car more expensive than some of its upscale Audi models. Who wants to spend more than $60,000 for a VW? Not very many people, it turned out, which is why the Phaeton's sales never got off the ground.

It happens in the restaurant industry, too. Remember Boston Chicken? Once the darling of growth companies, Boston Chicken became Boston Market, losing its focus and stumbling badly. As one analyst put it, "Boston Chicken's finance department failed to keep a sharp eye on the profitability of its restaurants, while its strategists failed to preserve the unique focus of the concept."

And then there's the retail industry. Staples (SPLS) lost focus several years ago, trying to broaden its appeal to the home-office user. In doing so, it became less of a good fit for its core customer -- small businesses. Once Staples realized this, it returned to its roots and has since been doing better.

NECESSARY U-TURN.

Home Depot (HD) suffered a loss of focus earlier this decade as well, as its rapid growth caused service standards to fall. Before its execs knew it, they weren't meeting customer expectations and growth came to a halt. They, too, have since righted the ship.

Still, despite these and many other examples, Wal-Mart seems to be headed down the same road.

By contrast, consider Best Buy (BBY). The consumer-electronics retailer recently announced an incredible 49% jump in first-quarter profits. These outstanding results were fueled in part by strong same-store (stores open at least one year) sales growth of 4.4%.

"BE VERY, VERY RELEVANT."

But what really put Best Buy's earnings over the top was an incredible 9% growth in stores that have been converted to its "customer-centric model." These have been reoriented to cater to a particular type of customer, such as video-game enthusiasts. Best Buy is finding out that it gets better results by narrowing the focus, not broadening it.

The next time someone in your company suggests broadening your appeal to a wider spectrum of customers, consider the results Best Buy is experiencing compared to those of Volkswagen and Boston Market. And remind them of the advice given by one of the CEOs we interviewed for our study: "Be very, very relevant to your market. Be clear on your core and what your place in the value chain is." If Wal-Mart can lose its focus, any company can.

Next month: A look at the last of four internal dynamics that cause growth to stall: inconsistency.

Steve McKee is president of McKee Wallwork Cleveland Advertising, an ad agency specializing in working with fast-growth companies and businesses whose ad budgets are under $10 million.