THE STORY
There’s one thing that has always puzzled me when I watch the local news on TV. It seems like the majority of crimes and burglaries take place in the poor and run-down sections of the city.
I don’t know. It seems to me that if I wanted to be a burglar, I would try to rob from the wealthy people who have a bunch of great stuff to steal. Yet it seems that most of the burglaries shown on local TV take place in poor areas where there is not a lot of great stuff to steal.
I’m reminded of the famous burglar Willie Sutton. When he was asked why he robbed banks, he replied, “Because that is where the money is.” That makes sense to me…steal from the people who have lots of money.
Why do so many try to steal from the poor? I’ve been told that the reason is because burglars tend to prefer staying in familiar surroundings. Since most of the burglars live in the run-down neighborhoods, that is where the burglaries take place.
Maybe if the burglars started stealing from rich people, they could afford to live in the nicer neighborhoods.
THE ANALOGY
Like these burglars, many businesses prefer to stay in familiar surroundings—the industry where they started. Unfortunately, over time many nice neighborhoods (or nice industries) can deteriorate and become run-down. They can move from being dynamic and exciting growth industries to declining, obsolete or mature industries. Just as it can be very difficult to become wealthy stealing from poor people, it is very difficult to be an exciting growth company when you stay in a declining industry.
If burglars want great wealth, sometimes they need to move to wealthier neighborhoods. Similarly, if your want great growth and profitability for your company, sometimes you need to move the business to industries where the prospects for growth and profitability are brighter.
Run-down and poor neighborhoods are not great places to rob. Neither are run-down industries great places for a business to find growth and prosperity. Sometimes, you need to move to a new neighborhood.
THE PRINCIPLE
The principle here is that it is often easier to find growth and profitability for your firm when the firm seeks a position in a growing and profitable area. If your firm is not currently operating in such an area, it may be time to move to such an area.
It may not be comfortable leaving the neighborhood your firm is comfortable in, but sometimes the best way to have growing results is to get into a growing business. We’ve talked about this idea of abandoning old businesses and moving on to a better neighborhood in a number of prior blogs, so I will just summarize some of the examples we’ve gone into greater detail on in earlier blogs and then provide a link.
1. Textron
Textron started out in the textile business, making yarn back in the 1920s, and was still principally a textile-based business until the 1950s. Unfortunately, the US was no longer a place where the textile industry could thrive (the neighborhood had turned poor and ugly). Therefore, Textron got out of textiles and diversified into more prosperous industries, including Bell Helicopters, Cessna Aircraft, and other such non-textile businesses. For more details, go here.
2. Procter and Gamble
As recently as 1995, processed food products made up about 12% of their portfolio. Most of these categories of food are now very mature (the neighborhood has gotten run down). As a result, P&G has divested of all food except Pringles and has built up its portfolio in higher growing areas like health care and beauty care, which now make up over 50% of the mix (up from around 295 in 1995). For more details, go here.
3. Intel
The Intel company built its initial reputation around DRAM memory chips. This was their heritage—what they were known for—and management had strong emotional ties to the business. Unfortunately, over time that DRAM “neighborhood” had turned ugly and unprofitable. It was tough for Intel to walk away from that heritage, but they did and reinvented the company around newer technologies, which were growing faster and were more profitable (a better neighborhood to steal from). For more details, go here.
4. GE and Limited Brands
GE has continually shifted its portfolio over the years so that “poor neighborhood” industries are shed, and growing, more profitable industries “better neighborhood” are added. Limited Brands started as a ladies’ sportswear retailer with a chain of stores called The Limited. Over time, the mall-based apparel retail industry in the US has matured. Growth slowed. So Limited Brands sold off its apparel retail operations, including its namesake brand, and put its emphasis behind the faster growing and more profitable areas like lingerie (Victoria’s Secret) and beauty care (like P&G).
For more details, go here. As a side note, this blog also discusses a McKinsey study which found that the greatest determinant of being a growing company is to build a portfolio around growing industries. In other words, if you want to steal nice stuff, go to a neighborhood full of nice stuff.
5. Cardinal Health
Back in the 1970s, the company started out in the grocery wholesaling business, under the name of Cardinal Foods. It’s primary customer was the independent grocer. Unfortunately, the big grocery store chains were putting the small independent grocers out of business. It’s not much fun being in a business where your customers are disappearing (sort of like stealing from people whose money has already disappeared). Therefore, Cardinal got out of that declining business and moved to the faster growing industry of health care (a much better neighborhood). For more details, go here.
6. IBM
IBM started out essentially as a manufacturer of large equipment for business. For a time, it was making a fortune off of that business, particularly in computers. Over time, however, that business matured and was no longer very profitable. The profits and growth had moved to software and services. Therefore, IBM sold its PC business to Lenovo and reinvented itself as primarily a software and services company
We could go on and look at a lot more examples, but I think the point has been made. Just like the McKinsey study found, if you want to get the big prize (big growth and fat profit margins) you need to continually modify your portfolio to include more industries where growth and fat profit margins are already occurring. Sometimes this means totally abandoning your heritage and doing a major reinvention. It may sound emotionally and operationally daunting, but a lot of companies have been successful in doing it.
SUMMARY
Achieving high growth and profitability is a lot easier if you are in industries with naturally high growth and high profits. Therefore, fill your portfolio with these naturally good industries. However, one cannot rest there. Just as neighborhoods can deteriorate over time, so can industries. Therefore, this is a continual process of moving out of the old and moving into the new.
FINAL THOUGHTS
Timing is very important when moving to the new neighborhood. If you stay too long in the old, deteriorating neighborhood, you will not get much when you sell the house. If you wait too long to get into the hot new neighborhood, you will have to pay more to get into the more limited open spaces. Therefore, it is better to make the switch early.
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