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Shifting Your Business Strategy – 4 September 4, 2009

Posted by David Dirks in business strategy.
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David DirksThere is a point when the definition of shifting business strategies gets a bit muddled.  In general, there are two types of business strategy shifts.  The first is when you make adjustments or shifts within your core business.  For example, a local dry cleaner may want to expand revenues by adding a pick-up & delivery service.  That adjustment is relevant to their core business of providing dry cleaning services to the public.  It’s a shift from relying on just the brick & mortar building where people bring their garments to them.

The second shift is when you make an adjustment to your business strategy that is outside the core business.  Using our dry cleaning example, if the dry cleaner decided to utilize some extra space and open a cafe within his/her shop, that would be considered an out-of-core strategy.

In our current economic times, not a day goes by without another large corporation declaring that it is shedding ‘non-core’ operations and ‘re-focusing  efforts on our core business of (you  fill in the blank)’.  This is all neatly packaged as a ‘retrenchment’.  It’s more aptly called a ‘retreat’.

Why is that?  The answer is rather simple.  In a roaring economy, it’s far easier to justify shifting business strategy outside of your core business in the name of more revenues and profitability.  That old cliche, ‘a rising tide floats all boats’ comes to mind.

When the economic tide finally goes out something bad happens.  Those non-core business strategy shifts can sometimes become sink holes for cash or they require greater and greater internal investment to keep them moving forward…all at a time when capital is scarce.  Or capital is all of a sudden guarded like Fort Knox (unlike the free wheeling days of the booming economy).

When this happens, everyone heads for the hills.  The golden geese of last year suddenly have no supporters that want to keep them.  One of the main issues is that when a non-core business hits the skids, it’s much tougher to nurse it back to health.  Why?  Mostly because the intellectual capital of the company is not well invested in the non-core strategies.  There’s another saying is appropriate here:  Times of high profitability and growth can hide a lot of mistakes.  When the music stops, all of a sudden things are much more complicated and there isn’t enough talent available to fix it.  Again, it’s outside their core knowledge base.

A lot of times these non-core strategies get sold off to the companies that should have had them in the first place.  Now they can pick these assets up for song because the seller can’t get rid of them fast enough.

I know what you’re thinking.  Isn’t Berkshire Hathaway, Warren Buffets conglomerate, an example of shifting business strategy out of your core business?  In a word, no.  While Buffet buys and owns many different kinds of businesses, each runs independently and sticks to its core business strategy.  Geico, for example, was primarily known for car insurance but has expanded it’s core strategy to include other insurance lines like homeowners insurance.  Geico doesn’t own anything outside of that core business strategy of providing insurance.

So for now, we’ll continue to hear about businesses of all sizes and shapes starting to declare that they’re going back to their core business once again.  In many cases, refocusing on the core strategies makes sense.  However, when the next economic boom hits, they’ll be a migration once again to chasing profits by adding non-core business strategies to the mix.

The relentless drive for increasing shareholder value and profits will once again find executives scrambling to acquire or develop cash cows outside of their core business strategy.

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