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The article demonstrates, using data collected from analyzing 6,316 companies over 2001-2011, that management decisions to try to reclaim profits and market share by shifting their business into a “better” market are often misguided. For example, when considering total shareholder returns across various industries, the median TSR’s are surprisingly similar across the board- where industries vary is the range of returns. So, instead of attempting to move into a new industry, managers should focus on moving to the top of their own.

Faulty AssumptionsEdit

  1. Managerial Talent and Knowledge are Transferable: Shareholders often assume that a company that’s capable in one area can rapidly learn to be capable in another. Firms that have moved into and dominated new areas, such as Apple in online music and Amazon in computer services, chose industries that took advantage of unique capabilities they already had.
  2. An Industry that Seems Superior Today will Remain so: Half the companies studied that were in the top quartile from 1991 to 2001 ended up in the bottom quartile during the next decade.
  3. There is Such Thing as a “Bad” Industry: 10-year analysis of TSRs proves the point. If you throw out the number one and number 65 industries in our study (tobacco and semiconductors), the median returns of the “best” and “worst” industries are within 16% of one another. The gap within industries is far greater: The top companies in each industry have annual TSRs that are 72% higher, on average, than the TSRs of the worst companies. Be a good or a great company in just about any industry, and you won’t be looking for new businesses to enter—you’ll be popping champagne.

How to Win in your Own IndustryEdit

  1. Rethink Your Definition of Growth: Considering growth as a dichotomous relationship of “organic” (intra-market) and “inorganic” (adjacent markets) can be counterproductive. A single view on market share gains can be much better.
  2. Funnel Resources to Core Business Factors: This will drive profitability faster than any extraneous acquisitions and be far less risky.
  3. Change the Focus of Your Business Units and Teams: Better than managing on the basis of numbers such as profitability and revenue growth, CEOs should focus on more independent variables such as market share or customer satisfaction.

 

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