Playing To Win

Confident Companies Do Less

Avoiding the Strategic Peril of Entropy

Roger Martin

--

Source: Roger L. Martin, 2023

Four times in the past two weeks I have uttered the same four words — Confident Companies Do Less — and clients found the phrase to be both provocative and helpful. The companies varied widely — business software, health products, beauty products, and hospitality. The wide dispersion caused me to believe that the idea may have broad appeal. So, I decided (with credit to Darren for a gentle push) to write my 28th Year III Playing to Win Practitioner Insights (PTW/PI) piece is on Confident Companies Do Less: Avoiding the Strategic Peril of Entropy. You can find the previous 138 PTW/PI here.

The Peril of Entropy

Competitive success derives from investment, from the application of resources to a particular business purpose. The resources may be time, money, natural resources, or some combination thereof. But if you don’t invest some combination and quantity of these resources, you won’t succeed. Obviously, you can’t invest in everything because if you did, you would invest too little in each thing to be successful in anything.

If your enterprise is in business today, it is because at some point in the past, you invested enough resources, and invested them smartly enough, to create a viable and (thus far) sustainable business. That meant investing in a specific Where-to-Play (WTP) with a particular How-to-Win (HTW). That initiative got you into the game.

If you chose to invest in a meritorious WTP/HTW pair — i.e., a reasonably attractive WTP and a HTW that is more than just a how-to-play — you will spin off more cash than is necessary to replace your investments as they depreciate. That leaves a very important question: What will you do with the cash that is over and above the replacement requirement?

One obvious use is to reinvest the excess cash in the exact WTP that got you the excess cash in the first place. The investment thesis for this choice would be to deepen and/or strengthen the HTW in the existing WTP. The other obvious use is to invest it in another WTP — in pursuit of some sort of HTW in that new WTP. The new WTP may be close to the existing WTP or further from it, but it is a different WTP from the original choice. The investment thesis for this choice could be one of two. It could be that the new WTP is more attractive than the existing WTP — i.e., its underlying growth is faster than the current WTP or it is more structurally attractive than the current WTP. (Alternatively, the theory could be that adding a different WTP would diversify risk but that is almost always a bogus argument so I am acknowledging it and then ignoring it.)

Both obvious uses can make lots of sense in any particular situation. One is not always or in every way better than the other. But there is a really big peril in choosing to invest in another WTP at the expense of the current WTP. That peril is entropy. It is the dissipation of investment energy which becomes less concentrated as it is spread across a wider territory.

The peril is that the investment energy in the new business (or businesses) isn’t sufficient to get from just playing over the hump to winning, while at the same time the original WTP/HTW source of the excess cash that enabled the broadening is starved for investment energy.

The peril is doubly dangerous because as and when this happens, the starting point for any attempted revivification of the business is a weakened position in the original business and weak position(s) in the new business(es) — and the need for an increased quantum of investment to spread across all the weak or tenuous competitive positions.

What is Confidence in Business?

In business, the prevailing view is that doing more things is a clear sign of confidence. The notion is that it is really bold to say that not only can we do what we are currently doing; we are so confident that we can do other things too. Only if we lacked confidence would we stick to the thing we are currently doing! While I wouldn’t go far as to argue that this is never a valid sentiment, in my experience, doing more things is almost always a sign of lack of confidence.

It was lack of confidence at the business software company mentioned above. Its core offering is awesome — super-valuable enterprise software that is perfectly suited for big companies facing a certain set of circumstances that while not ubiquitous are relatively common (I am being careful to not reveal its identity). Yet the company spends enormous resources selling to smaller companies who buy stripped-down versions at low prices and insist on extensive customization. And the coup de grace is that these are the least satisfied customers whose meagre level of satisfaction does little to advance the reputation of the company with the larger customers.

Why on earth spend resources to serve these customers with those stripped-down offerings? It is because the company isn’t sufficiently confident that if it repurposed those resources to increasing penetration of its best segment, it would increase revenues and profitability — even though current penetration was pretty darn low.

It was lack of confidence at the health products company. It has a fantastic next-generation product that has been selling well and growing quickly. But it also has an extremely broad lineup of other products, many of which are undermining the brand reputation of that fantastic next-generation product. However, by offering a broad range of products, some with zero advantage, others with some advantage, it feels it has a better chance of selling more products and earning a higher return.

It was lack of confidence at the beauty products company. It had broadened its lineup to the point that it confused its customers. Stunningly, its smartest customers are pressuring the company to narrow its lineup to focus on its most appealing offerings. It is quite something when customers have to do that!

I pointed out to all three companies that the opposite was true. Doing more was a mark of the lack of confidence. They weren’t confident enough in the thing at which they were excellent to stick to it and make the most of it. Hence, they felt they needed to do other things, even if there was no indication that they would be particularly good at those other things. They hoped that it would turn out well. But as we all know, hope is not a strategy.

What does a confident company look like? It is one that does less because it has confidence in what it is doing.

Take for example, The Vanguard Group. It does two things. It sells index mutual funds and index exchange traded funds. And it sells $7.2 trillion of them — more than any other fund company. Vanguard doesn’t try to do everything. Far from it. It does almost nothing — selling two forms of the same thing. Why be so very narrow? It is because Vanguard is supremely confident. It believes in the thing that it is doing. Vanguard founder and legendary leader, the late Jack Bogle, had to have his arm severely twisted to broaden from traditional mutual funds to exchange traded funds — even though they were both forms of index funds.

Or take Southwest Airlines. It does one thing — fly short-haul, point-to-point flights featuring one class of service, flown on one type of aircraft, the Boeing 737. It used its confidence in that model to grow from a tiny, irrelevant Texas carrier to #1 in passenger-seat-miles in America. All of its now-smaller competitors do many more things than does Southwest.

Or take Procter & Gamble. In consumer-packaged goods, private label products are big business — on the order of 20% of industry volume, with some categories lower and others higher. It is such a big business that virtually all the branded players also sell private label versions of their products. They aren’t confident that they can grow sales and profits without producing private label products — even if the existence of those directly comparable products is damaging for their branded versions. P&G never produces private label products because it is confident of doing less.

Or take Apple. It sells high-end smartphones featuring the closed iOS operating system. That isn’t much. It is pretty narrow. Depending on the quarter, it means Apple only sells 15% of the world’s smartphones. Android phones make up almost all the remaining 85%. Wouldn’t it make sense for Apple to produce phones at the price point at which the majority of smartphones are sold, or even Android phones too to give it a bigger share of the market and better growth prospects? No, not really. With the one thing that it does, Apple earns about an 80% share of the industry’s gross profit. It has the confidence to do a little and prosper a lot. Every once in a while, Apple has let its confidence drop and it attempts to sell lower-end phones — and it fails, which seems to restore its confidence to do less and stick with high-end smartphones.

The hospitality company mentioned above does one thing and is by far and away the most successful company in its industry — because it has the confidence to do less. However, it is thinking about doing other things.

Based on the conversations with the business software company, health products company, and beauty company, the three companies made commitments to do less. I am highly confident that they will be rewarded for their confidence to do less. I cautioned the hospitality company to be careful not to let entropy damage its fabulously narrow strength.

Practitioner Insights

Every time you are tempted to do more things, recognize that it is most likely a sign of lack of confidence, not a manifestation of confidence. When the temptation strikes, before jumping, ask why you are so underconfident in your current business that you feel the need to channel investment out of it into the new thing — whatever that new thing is.

Don’t just ask whether an investment in a new thing appears to be sensible. Ask whether it is definitively smarter than deepening your investment in your existing thing. Don’t view the potential new thing investment in isolation but rather in comparison to incremental investment in your current WTP/HTW.

I am open to the possibility that the new thing is superior. Companies do find new and exciting fields in which it makes lots of sense to invest. For many years, I was on the board of one, Thomson Corporation (and later Thomson Reuters). It exited newspapers, university textbooks, North Sea oil, and European travel, and entered online subscription delivery of must-have information for legal, tax, accounting, communications, and media professionals. Had it stayed in the former four businesses, it would be worth a fraction of its current US$58 billion.

But I think that Thomson is the exception, not the rule. The rule is that things that are treated as Cash Cows get driven slowly into the ground while the potential Stars that get the positive investment are generally the product of the ‘grass is greener’ phenomenon.

And even the breadth of things you are doing today is likely to unhelpfully distract you from doing more of what you do well and could grow more — but only if you invest energy behind it.

Entropy is such a strategic peril that you should be tough on decisions to disperse investment energy by doing more and easier on decisions to press your advantage in what you already do well.

--

--

Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.