By Al Ries of Ries & Ries

After World War II, an explosion of new goods and services hit the marketplace. The combination of pent-up demand and rapid technological development led to a massive increase in the number and variety of products available to consumers everywhere.

Television, computers, jet aircraft, video cameras and recorders, plain-paper copiers, cellular phones, facsimile equipment, the list is endless.

Existing companies responded by rapidly expanding their product lines. General Electric, a manufacturer of electrical equipment got into television equipment, jet engines, computers, plastics, financial services and a host of new products and services unrelated to their core electrical lines. And so did virtually every company in the world from Daimler-Benz to General Motors.

Today the bloom is off the rose. It should have been obvious that a company cannot keep expanding its product line forever. You reach a point of diminishing returns. You lose your efficiency, your competitiveness and most ominous of all, your ability to manage a diverse collection of unrelated products and services.

Even mighty General Electric is no longer expanding; it's contracting. In the past decade, the company has sold hundreds of businesses and cut its workforce almost in half. General Electric sold off major businesses like computers, television equipment, small appliances.

Mathematically, of course, annual growth rates of l0, 15 or 20 percent are impossible to sustain over an extended period of time. But the real problem is not mathematics, it's marketing. Over time, rapid expansion of a company's product line destroys its competitive ability. For many companies in many industries we have now reached that point. What you are seeing today is the opposite phenomenon. Instead of expansion, companies are getting back to basics. Companies are "refocusing."

Even a casual reader of the business press in almost any country of the world must have noticed a raft of stories on the subject. Here are some recent examples from the United States.

• The Wall Street Journal, May 4, 1994. "Eastman Kodak Co., in a surprisingly sweeping reorganization, said it will put up for sale its big Sterling Winthrop drug unit and two other businesses to focus on its core film operations."
• The New York Times, June 21, 1994. "Citicorp, continuing to shed non-strategic assets in an effort to build capital and focus on its core financial businesses, said yesterday that it had sold I/B/E/S Inc., a supplier of corporate earnings estimates."
• International Herald Tribune, November 5-6, 1994. "Bowater PLC said Friday it was selling its tissue and timber business in Australia as part of its drive to focus on its core printing and packaging sectors."
• The Wall Street Journal, November 11, 1994. "Sears, Roebuck & Co., completing a return to its retailing roots, plans to spin off its $9 billion controlling stake in its huge Allstate Corp. insurance unit."
• Business Week, January 23, 1995. "Late last year, ITT Corp., the quintessential conglomerate, took another step to shed that label by deciding to divest its financial services operations and concentrate on a narrower range of businesses, notably entertainment.

Why are companies refocusing themselves? What are some of the factors to keep in mind as your company approaches the refocusing decision? These are some of the questions this article will attempt to answer.

What's the driving force among top management today? In a word, growth. Management demands 10 or 15 or even 20 percent growth in annual sales and profits, even when the company is in a market that shows no overall growth.

Predictably, in order to meet these targets, companies offered more varieties and flavors. Or they branched out into other markets. Whether you call it line extension or diversification or synergy or some other management philosophy of the moment, the urge to grow has caused companies to become unfocused. That's why a company like IBM can have $60 billion in revenues and still lose money. While growth might be an admirable objective, the pursuit of growth for its own sake is a serious strategic error.

It's not just the pursuit of growth that causes problems. Unfocusing itself seems to be a natural phenomenon. Over time, a company becomes unfocused. It offers too many products and services for too many markets at too many different price levels. It loses its sense of direction. It doesn't know where it's going or why. It's mission statement becomes a mess.

You've probably worked for a company like that. Most people have. At first, everything seems to be going well. The initial product or service turns out to be a big winner. But success creates something else: The opportunity to branch out in many different directions. The halls and corridors are filled with anticipation and excitement: "We're going to rule the world."

Such a scenario could describe General Motors in the sixties. Sears, Roebuck in the seventies. IBM in the eighties. And even Microsoft in the nineties.

It never happens. After awhile things start to go wrong. What seemed like a world of opportunity turns into a world of problems. Objectives unmet. Sales flattening. Profits declining.

Everyone knows this is what happened at General Motors, Sears and IBM. But the jury is still out on Microsoft. If history repeats itself, as it usually does, Microsoft is the next IBM, the next company to become unfocused.

In the physical world, unfocusing is called entropy, or disorder. And the law of entropy states that over time, the entropy of any closed system increases. Let's say you straighten out your clothes closet. A month later, the closet is a mess. You have witnessed the effects of entropy, one of the fundamental laws of nature.

One day a company is tightly focused on a single, highly profitable product. The next day the company is spread thin over many products and is barely breaking deven or even losing money.

Take IBM again. Years ago when IBM was focused on mainframe computers, they made a ton of money. Today IBM makes mainframes, midrange computers, workstations, desktop computers, home computers and software (to mention some of their major product lines) and they are losing money. In 1991, for example, IBM's revenues were $65 billion. Yet they wound up losing $2.8 billion. In 1992, they lost $5.6 billion. In 1993, they lost $8.1 billion. (In 1994, IBM managed to make $3 billion, but the future looks anything but bright at Big Blue.)

Along the way, IBM dropped millions on copiers (sold to Kodak), Rolm (sold to Siemens), Satellite Business Systems (shut down), the Prodigy network (limping along), SAA, TopView, OfficeVision and OS/2.

When a company becomes incredibly successful, it invariably plants the seeds for its future problems. Take Microsoft, one of the most successful companies in the world today. If ever a company is on top, it's Microsoft. (Even though it's one-thirtieth the size of General Motors, Microsoft's stock is worth more than GM's.)

Whom does that sound like? Sounds like IBM. Microsoft is setting itself up as the next IBM with all the negative implications that term suggests.

There are ominous signs of softness in Microsoft's strategy. The Economist reported in early 1992, "Mr. Gates is putting together a range of products, based on a common core of technology, that will compete across virtually the whole of the software industry: from big computers to small ones, and from operating systems in the information engine-room to graphics programs that draw every picture for executives. Nobody in the software industry has yet managed a venture of that complexity--though IBM has tried and failed."

When you try to be all things to all people, you inevitably wind up in trouble. "I'd rather be strong somewhere," said one manager, "than weak everywhere."

While management is focused on growth, the driving force in business is not growth, it's specialization.

That specialization is the driving force is not so easy to see in today's world of mergers, acquisitions, alliances, globalization, reengineering, downsizing. But a quick look at the economic history of the human race, courtesy of Adam Smith, suggests otherwise.

In the beginning each family did everything for themselves. They built their own shelter, made their own clothes, grew their own food. They were generalists.

What raised every one's living standards was specialization and trade. If I spend full time making shoes, for example, I can get pretty good at making shoes. I could even become more efficient if I built a shoe factory and further divided the shoemaking process into areas of specialization: Soles, uppers, laces, etc.

You can't eat shoes, however. So unless you can trade your shoes for food and other goods, specialization has no advantages. But when you combine specialization with trade, everyone benefits.

How much specialization takes place depends on the size of the trading area. Why this is so is best explained by an analogy.

Let's say you're living in an isolated small village with a population of 100 people. What kind of retail stores are you likely to find? Exactly. One "general" store that sells everything: Food, clothing, gasoline.

Now move to New York City with a population of 8 million. What kind of retail stores are you likely to find? Exactly. Many highly specialized retail establishments. Not just shoe stores, for example, but men's shoe stores, women's shoe stores, children's shoe stores, athletic shoe stores.

The larger the market, the more specialization that takes place. The smaller the market, the more generalized the companies.

Another example. Visit an isolated community of three or four hundred people. When you compare this town with a big city, you'll notice a much lower degree of specialization in the small town. You might find one physician and one lawyer, invariably general practitioners in both professions. you'll also find a handful of stores, each selling a wide range of products.

What you don't usually find are too many BMWs, Rolex watches or fine French wines. Invariably in a small, isolated community, everybody is relatively poor.

You obviously don't need Dom Perignon and other luxury goods to live, but M.R.I. scanners, cardiologists, Nautilus fitness centers and other products of specialization are in another category. They just might keep you alive longer.

The truth is, the larger the trading area, the greater the degree of specialization and the wealthier the average person is.

The same principle applies to countries. In a small country, you might find a handful of enterprises that make and sell a broad range of products and services. In a large country, the companies are much more specialized. It's this specialization that makes a country efficient and productive. (And it's this specialization that is the primary reason for the benefits to be found in trade.)

The biggest business story in the world today is the rise of global trade. Take a trip to any major airport in the world and read the billboards on the way into town. "Sharp, Canon, Xerox, Philips, Marlboro, Shell, IBM, Coke." What country are you in? You can't tell by the billboards because business has gone global.

Foreign trade is healthy for a country's economy. The Far East is the most spectacular example of what can be accomplished by foreign trade. Japan, Taiwan, Hong Kong, Singapore, Korea have all gotten relatively rich through the medium of trade. Virtually every business of any significant size is rapidly moving into world markets.

The globalization of business is also unfocusing many companies who have yet to understand the long term implications of a world based on free trade. Again, it's back to the basic principle of specialization: The larger the market, the more specialized a company must become. When we have truly free trade on a worldwide basis, we will have reached the ultimate in specialization.

Except that many companies don't see it that way. They see the rise of a global economy as an opportunity to broaden their lines, not narrow them. Take the example of a German food company on the first day of 1993. With the arrival of the European Community "single market," the company found that its "home" market had quintupled overnight. How did most companies respond to that kind of overnight population explosion? The temptation to broaden the line must have been overwhelming.

"Let's see, we'll need a sweet-tasting version for the English, a tart-tasting version for the Italians, an herbal version for the Dutch, etc." While this might be logical thinking, it's also diametrically opposed to the principle that the larger the market, the more specialized a company must become. As you expand your market, you must contract your product line.

Compared with United States companies, most European concerns have a much broader product line. Siemens makes many of the same electrical products that General Electric makes. Plus Siemens also makes a wide range of computers and electronic equipment, products that General Electric doesn't make. As a matter of fact, intense competition in mainframe computers drove General Electric out of the computer business. Lesser computer competition in Germany helps keep Siemens in the computer business, but that will change as the computer business goes global.

Or take Fiat which makes a full line of automobiles much like General Motors. But Fiat also has interests in everything from publishing and sports to railroads and defense.

The larger size of the American market (and therefore the greater specialization) has made American companies more focused. As the globalization trend continues, European companies will be at a relative disadvantage. As a result, you can expect to see a lot of refocusing taking place in the European business community.

The same principles apply on the other side of the globe. Japan has been in an economic slump for several years. One reason is that Japanese companies, to a large extent, have much too broad a product line. It's not just the fact that the size of the Japanese market is smaller than that of the United States, a factor which accounts for part of the broadening of the line, but also the Japanese government has encouraged the trend. It's easier for the Japanese government to keep track of a few companies making a broad range of products than it would be here in the wild and woolly U.S. where many narrowly-targeted companies compete for a slice of the market.

If you want to be an expert prognosticator of trends, go to the movies, listen to popular music and keep your eyes focused on retailing.

No other segment of the market is as sensitive to trends as retailers. As retailing goes, so goes the nation. And how is retailing going? In a word, specialization.

Go back a few decades and observe the state of retailing in the United States. The big players were the department stores. In New York City, you found Abraham & Straus, Alexander's, B. Altman, Arnold Constable, Bergdorf Goodman, Best & Co., Bloomingdale's, Bonwit Teller, EJ Korvettes, Gimbels, Henri Bendel, JC Penney, Lord & Taylor, Macy's, Ohrbach's, Saks Fifth Avenue and Stern's, to name a few.

Today, Abraham & Straus, Alexander's, B. Altman, Arnold Constable, Best & Co., Bonwit Teller, EJ Korvette, Gimbels and Ohrbach's are gone. Macy's and Bloomingdale's have been in and out of bankruptcy. Saks Fifth Avenue has required a $300 million capital infusion by its wealthy backers in the Middle East.

It's not Wal-Mart that has caused the demise of the department store. (There are no Wal-Mart stores near New York City.) Wal-Mart has wiped out many of the small, inefficient stores in rural and smaller communities. As Wal-Mart moves into the big cities, they will face the same problems that have devastated the department stores.

The sad saga of Sears is a case in point. In 1886, Sears mailed out its first catalog. It wasn't until 1925 that Sears opened its first retail store. Six years later it established Allstate Insurance, at first to sell auto insurance and then the company branched out into property, casualty, life and even mortgage insurance.

In 1959 Sears formed Homart Development Co. to develop shopping centers. In 1981 Sears bought Dean Witter Reynolds, a stock brokerage firm, and Colwell Banker, a real estate firm. In the eighties Sears opened Financial Network Centers in many of its retail stores, the famous "stocks and socks" strategy. Also in the eighties the company opened Sears Business Centers to sell computers and software.

In 1986, came the nationwide launch of the Discover credit card. This was the high-water mark; from now on everything would be downhill. On Wall Street analysts were calling on Sears to be broken up into separate companies that would be worth more individually than as part of the retailing giant.

In 1988 Sears sold Colwell Banker's commercial real-estate business. In 1992 Sears spun off Dean Witter including the Discover credit card and 20 percent of Allstate. In 1993 Sears shut down its general catalog business and also Sears Business Centers.

Size is not a determining factor in creating a profitable business. Focus is. The Sears general catalog operation was a $3 billion business, but it managed to lose $450 million in the three years before the axe fell.

In 1994 Sears announced plans to spin off the rest of Allstate and to seek a buyer for Homart. What's left at Sears? A retailing company with 800 department stores, a credit company and 1,200 specialty stores, including Western Auto Supply Company and Homelife furniture stores.

Most fair-minded observers of the retail scene have concluded that the golden age of the department store has past. Those that remain will be under constant pressure to cut costs to stay alive. Prognosis: More department store bankruptcies to come. This is not to say that some department stores won't succeed. Many will. In a declining industry the few survivors can remain fabulously profitable. The reason is that a declining industry attracts almost no fresh competitors and there's always a market, however small, for almost any product or service.

While department stores are dying, people haven't stopped buying. Taking up the slack are the specialty stores. One specialty store in particular has served as a pattern for all the rest: Toys "R" Us. Today the company has 618 stores in the U.S. and sells 22 percent of all the toys in the country. In addition, the company is moving its concept overseas with 293 units outside the United States.

Ironically, Toys "R" Us started as a children's furniture store to which founder Charles Lazarus added toys. The original name: Children's Supermart. Now here comes the interesting dilemma. How does a children's supermart grow? The obvious answer is to add children's clothing, bicycles, diapers, baby food, etc. In other words, broaden the base of the merchandise. But that's not what Charles Lazarus did. He threw out the furniture and opened another, larger store with discount toys only. In another words, he narrowed the focus to toys only. How unusual and how effective. No wonder Forbes Magazine calls Mr. Lazarus "without question one of his generation's most brilliant retailers."

Actually, Toys "R" Us pioneered a pattern since adopted by every retailer looking to create a category killer. The five key principles in the Toys "R"" formula:

• Narrow the focus.
• Stock in depth.
• Buy cheap.
• Sell cheap.
• Dominate the category.

What Toys "R" Us has done in toys, Blockbuster Video has done in video rentals. Other examples include The Limited in women's upscale clothing, The Gap in basic clothing for younger people, Foot Locker in athletic shoes, Staples in office supplies.

Virtually every department in a traditional department store is now a new retail category dominated by one or more national chains. Baby Supermarket in baby supplies. Petsmart in pet supplies. Home Depot in hardware and home-repair supplies.

No two companies illustrate the power of a focus better than PepsiCo Inc. and The Coca-Cola Company.

PepsiCo is a company driven by growth at all costs. "We're not at all backing off our commitment to 15 percent long-term growth," said PepsiCo's CEO D. Wayne Calloway recently. Over the years Calloway (and his predecessors) have worked hard at fulfilling this commitment to growth. In addition to Frito-Lay, the world's largest snack food company, PepsiCo owns three of the seven largest fast-food chains in the U.S: Pizza Hut, the world's largest pizza chain. Taco Bell, the world's largest Mexican food chain and KFC, formerly Kentucky Fried Chicken, the world's largest chicken chain.

The sun never sets on a PepsiCo restaurant. In addition to the three big chains, PepsiCo also owns Hot'n Now, Chevys, California Pizza Kitchen, D'Angelo Sandwich Shop and East Side Mario's. Together, PepsiCo's 24,387 restaurant units make up the world's largest restaurant system. (By comparison, McDonald's has only 14,000 restaurant units worldwide.)

It should come as no surprise that PepsiCo, Inc. is a much larger company than The Coca-Cola Company which has pretty much stuck to its beverage heritage. In its most recent year PepsiCo had sales of $28.5 billion versus $16.2 billion for Coca-Cola.

What might come as a surprise is the relative "value" or worth of the two cola companies. Using one measure of value, the stock market, PepsiCo, the larger company, is worth $30.1 billion and Coca-Cola, the smaller company, is worth $71.9 billion, or more than twice as much. Per dollar of sales, Coca-Cola is worth more than four times as much as PepsiCo. That's the power of a focus.

Well, you might be thinking, that's not fair. PepsiCo is bogged down by its relatively low-profit fast-food chains.

Let's try another comparison. McDonald's Corporation versus PepsiCo, Inc. McDonald's has some 14,000 restaurant units which do $7.4 billion in sales compared to PepsiCo's more than 24,000 units which do $9.4 billion in sales. If given a choice, why wouldn't an investor want to own the PepsiCo fast-food chains rather than McDonald's?

One reason is profits. On its $7.4 billion in sales, McDonald's keeps a hefty $1.1 billion in net income, or 15 percent. On its $9.4 billion in sales, PepsiCo manages to keep only some $400 million in net income, or 4 percent.

The stock market tells the same story. McDonald's is a much smaller company than PepsiCo's restaurant chains, yet the market values McDonald's Corporation at $20.2 billion. How much the KFC, Taco Bell, Pizza Hut combination is worth is a matter of conjecture. One way to estimate the market value is to take the $400 million profit as a percentage PepsiCo's net income ($1.8 billion) and then calculate what that would represent as a percentage of PepsiCo's total market value ($30.1 billion.) On this basis, the PepsiCo restaurant chains would be worth $6.7 billion, or one third of the value of McDonald's.

Note again the power of a focus. McDonald's with $7.4 billion in sales is worth $20.2 billion. PepsiCo's restaurant chains with $9.4 billion in sales is worth $6.7 billion. The smaller more-focused company is worth three times as much as the larger, less-focused operation.

In the conventional view, a business strategy usually consists of developing an "all-encompassing vision." In other words, what concept or idea is big enough to hold all of a company's products and services on the market today and in the plans for the future?

In the conventional view, strategy is a tent. You stake out your tent big enough so it can hold everything you might possibly want to get into.

IBM has erected an enormous computer tent. Nothing in the computer field, today or in the future, will fall outside the IBM tent. This is a recipe for disaster. As new companies, new products, new ideas invade the computer arena, IBM is going to get blown away. You can't defend a rapidly growing market like computers even if you are a financial powerhouse like IBM. From a strategic point of view, you have to be much more selective, picking and choosing the area in which to pitch your tent.

Strategically, General Motors is in the same boat as IBM. GM is into anything and everything on wheels. Sedans, sports cars, cheap cars, expensive cars, trucks, minivans, even electric cars. So what is GM's business strategy? If it runs on the road, or off the road, we'll chase it.

As the globalization of business continues, this sort of "everything for everybody" strategy is not going to work. Companies are going to have to refocus themselves on a single idea or concept. Here are some thoughts to begin the refocusing process.

Emery Air Freight was in the air cargo business. Anything you wanted to send by air, Emery could handle: Small packages, large packages, overnight rush deliveries, two or three-day economy deliveries. Then Federal

Express introduced one type of service, small packages overnight. Today Federal Express is a much bigger company than Emery. As a matter of fact, Mr. Emery was fired.

The 914 copier was the most profitable single product ever produced by any American company. Yet Xerox was not focused on the copier product. Xerox was focused on the "plain-paper" attribute of the product. In the same way, Volvo is not focused on cars, Volvo is focused on "safety." Federal Express was not focused on air cargo, Federal Express was focused on "overnight" delivery.

Gillette is the dominant brand in the wet-shaving market. But it doesn't focus on its full line of razors and blades. Rather, Gillette keeps developing new products to obsolete its old razors. The latest is the Sensor, the shock-absorbent razor. Although it markets a full line, Gillette's focus is on its latest product, the Sensor.

If it were, everyone in your industry would already be using it. For example, Ford Motor Company tried a safety approach for one year and then abandoned the concept. "Safety doesn't sell," because a watchword in the Detroit automotive industry.

Volvo successfully used exactly the same focus as Ford. The only difference is, Volvo didn't abandon the safety ship after the first year. They kept at it, for 30 years straight.

Nothing last forever. Even the most powerful focus sooner or later becomes obsolete. That's when a company must refocus itself.

Lotus Development Corp. is a good example. Lotus developed 1-2-3, the first spreadsheet for IBM PC computers and in the process became the dominant brand. You might say that Lotus owns "spreadsheets" in the mind.

But life goes on. Now that almost every computer user has a spreadsheet, the market is limited to upgrades. Lotus needed a new focus.

Their new focus is "groupware." Lotus developed Notes, a software product that enables groups of people to work together. By pre-empting the groupware concept in the mind, Lotus Development Corp. has aligned itself with the future.

No one product or service can appeal to everybody. Take the presidential elections in the United States. Except for the first election, when there was only one candidate, no candidate, no matter how popular, has ever received more than 61 percent of the national vote. To develop a powerful focus, you need to sacrifice.

Pizza Hut was first in the pizza category and owns the category. The No. 2 and No. 3 pizza chains are not companies who compete "across the board." They are companies who focus on one piece of the pizza pie. The No. 2 company is Domino's Pizza which focuses on "home delivery." The No. 3 pizza company is Little Caesars which focuses on "takeout."

When you have a focus, you can greatly increase the effectiveness of your strategy by taking the focus one step further: Owning a word or concept in the mind. At its high-water mark, Domino's Pizza had 45 percent of the pizza delivery market by virtue of its famous pledge: "Home delivery in 30 minutes, guaranteed."

Safety considerations, including a number of fatal accidents involving Domino drivers, convinced the company to drop the guarantee. Sales dropped, too. What Domino's Pizza needs to do is to replace the guarantee with another word or concept they can own in the mind by virtue of their home delivery focus.

Right behind Domino's Pizza is Little Caesars, one of the fastest growing fast-food chains in America. Little Caesars focuses on takeout pizza, the least expensive way to sell a pizza pie. No tables, no waiters or waitresses, no delivery trucks, no drivers. Little Caesars focuses on its takeout segment with a concept called "two pizzas for the price of one."

Refocusing is a concept whose time has come and is the ultimate challenge for top management in the global markets of the nineties.

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