In This Issue:
New Areas Often Don't Bring Hoped For Business Growth
In today’s rapidly changing world, many prominent companies have now been finding growth more elusive. Recognizing the problem, they may perceive their traditional business as lacking potential and treat it as if it is on the verge of dying. They then often identify new lines of business to pursue. Their resources and attention are often allocated to these new areas, rather than to the old line business.
It is understandable that a struggling old line business might not be seen as having growth potential. But, it is misguided to think that merely pursuing new seemingly high potential areas will foster stronger growth. Most new businesses fail. So do most new products. Yet, companies often follow this misguided path when their primary business faces a struggle.
Unfortunately, it is easy to pin false hopes on the pursuit of new areas. However, the key to success lies not in blindly pursuing the new, but in identifying where the business is truly capable of growing.
Campbell’s Soup is an example of a company that has been facing these kinds of issues. Campbell’s primary business in soup has experienced a slowdown, so the company has attempted to grow via pursuit of new areas. But, as described in the November 16, 2018 Wall Street Journal article “Campbell Investors Should Seek a Change” by Aaron Back, the new areas have not been bringing the hoped for results and activist investors have called for change. The activists have been pushing the company to put more emphasis on turning around its traditional soup business. “Campbell, by contrast, seems to view its main soup brand as a declining cash cow, useful mainly for throwing off money to invest in other areas like snacks,” according to the article.
I’ll add that granted, activist investors may not always have the inside knowledge of what is best for a company and their recommendations do not always pay off. For example, after following activist advice to innovate like Apple, Penney’s encountered serious problems.
Nonetheless, as I see it after researching business success and failure patterns for 25+ years, a company with challenges like those facing Campbell’s needs to identify areas where its best growth prospects lie. Companies need to recognize that new doesn’t always mean successful. Nor does it even mean greater potential for success than the stagnant traditional business. In fact, new often means more likely to fail. That’s why it’s so important to evaluate growth opportunities in terms of what is right for the company. And, this can very well mean looking for growth in the traditional business. For, if the old line business still has some seemingly hidden growth potential, it can often be far more valuable than chasing the long shot new.
On the other hand, some new areas that are really right for a company can be quite successful. But, since so many new areas are prone to failure, it is extremely important to be selective about identifying new areas that actually do have good potential for success. A good example is Microsoft’s pursuit of its cloud business. As a new line of business for Microsoft, the cloud was an area where the company found success and enhanced its growth at a time when its core Windows business was experiencing some weakness.
The cloud does well as a new line of business for Microsoft because it is an area that is right for the company. Dominant cloud purveyor Amazon has also done very well, yet customers with retail businesses often balk at using a supplier that is competing with them, so they want an alternative to Amazon. As I said in a previous newsletter about Coca-Cola, competing with your customers can weaken your ties to them. Microsoft turned out to be an excellent cloud alternative for those customers who preferred non-Amazon.
And, there’s a good reason for this, which the Bloomberg Businessweek November 19, 2018-January 6, 2019 Special Issue on the Year Ahead described very well in its section on the cloud. It quoted KeyBanc analyst Brent Bracelin, who points out that Microsoft is strong in enterprise sales distribution. (For readers less familiar with technology industries, I’ll mentiion that the enterprise market refers to corporate customers.) The article quotes Bracelin saying, “Microsoft has a massive footprint there.” And, based on my research into business success and failure patterns, that’s why Microsoft can thrive in a new area like the cloud.
So, in summary, merely pursuing new areas is generally not the answer when a company’s primary business slows. But, although most new areas are prone to failure, some can be quite successful. That’s why, when considering new areas, it’s extremely important to identify those which are truly right for the company.
La Grange Park, IL