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Do What You Do Best Part I:

“Young man, the single most important force in strategic management is to focus on what you do best and never forget.” – (G.M.F.)

If you’re a frequent reader of my posts on this blog or my postings on Canadian Business and Financial Webring Forums you’re likely to have heard a line similar to this from me time after time. “Do what you do best” is a discipline of business that I feel passionately about and often one of the key value principles I look towards when assessing a company as a potential investment. Strategic management continues to be one of my favourite hobbies from my past experience in business school. I apply those teachings not only to my investing approach, but also to my everyday life and infrequent consultations for small-medium businesses.

When I talk about strategic focus, management or allocation of resources, I’m not strictly talking about how a CEO or manager decides what they want to do & go about doing it. To me, “plans are nothing & planning is everything” (future post to come). The toughest thing to ever do is create a plan; the implementation is always the easiest part. Planning takes into consideration all variables, expectations, SWOT characteristics or objectives that may be encountered from start to finish. There is always the possibility of fixating too much on the planning segment, but frequently the largest mistakes are made in omissions or assumptions that certain variables won’t drastically influence any specific outcome.

It never fails that I see a company in the news who ventures into an area they have little or no experience in that ends in a miserable failure or over-diversification of a product line, business unit or reduction in profitability due to escalating costs. I won’t ever knock a company for trying something new, but understanding the product life cycle of your business if often a much more complicated challenge than many key managers realize. The best businesses do the same thing over and over again, millions of times and gain valuable experience in perfecting those core competencies. I’ve spoken of Warren Buffett’s predictability assessment of the businesses he invests in, but the lesson here continues to be the same with a slightly different application. WB knows that Coca-Cola (KO) for over 120 years has done nothing better than make a great product and sell it over and over again billions of times to people around the world. Although the company continuously attempts to broaden their portfolio of products with new offerings, their core focus has always remained on selling their flagship product. The red can is the bread winner and although the company may have many other popular or profitable offerings – one product stands out as the most important for securing the fate of the company.

So you might be asking yourself – “How do I go about finding one of these companies?”

What I’m really examining are a company’s core business practices, models & proficiencies. The easiest thing to do is go about your regular daily life gaining a better perspective of the companies who influence you most. Products or services offered by companies that we consume on a regular daily basis and frequently take for granted can be some of the best value opportunities at times when those stocks trade cheap relative to whatever criteria you might use.

There are some important points to remember when looking at prospective companies that focus on their core competencies. The first is doing something CHEAPER, FASTER or on a LARGER scale does not always translate into a company doing something BETTER. You have to assess the company’s priorities and the reasoning behind the their managements’ motives. By putting motives into perspective you should be able to gauge what might be missing from the equation that could have been overlooked. An example would be picking the leader in a specific industry based on market share alone and making an assumption:
ABC Company sells 10x more product than XYZ Company. At first glance you might assume that the obvious winner based on core competencies is the company with more market presence because they sell more products. But XYZ could be focusing on one product targeted specifically to its consumer market with the mindset of doing what they do best, while ABC attempts to do many things in a mediocre method without much success in any one product launch or offering.

Thinking back prior to 2001 is a great example: Sony and Panasonic were the industry leaders in portable CD & MP3 players – yet Apple focused on their ability to create niche products for a specific target market and executed strategically on their integration of the iPod franchise. Although the market did adopt the product on a much broader basis than the intended target market or any product Apple had previously launched (iMac), the company focused on their core strength and the product portfolio expanded along with explosive sales into one of the most widely held consumer electronic devices ever. Good examples that I’ve mentioned in the past would be Motorola or Loblaw’s recent decisions to compete on price in the hopes of gaining market share vs. focusing on core competencies and building from their foundation of strengths.

Another key point I’ve used in the past deals with my Value Rule on Management. It’s important to evaluate management from multiple perspectives and by this I mean not necessarily by what a CEO or key manager currently does, but what he/she has done in the past:
Company MNO & Company QRS are in the recruitment phase of hiring an executive for the recent vacancies left when their respective CEO’s left to form a new company – ScrewU Corp. Both firms make Alpha-Zephron computer processors that are sold to a niche target market for use in multinational server applications.
MNO interviews and makes a successful offer to a young executive from a rival server firm
QRS successfully retains a bright executive from IceDream Icecream Company.
– Both successful applicants have worked at their respective employers since business school.

All other factors being equal, this principle of my value approach would zero in specifically on the company who has hired the executive with direct experience in running a company in the same industry. With all respect given to the other executive, understanding the fundamental nature of the company, industry & target market clearly outweigh most other skills that the alternate candidate might bring to Company QRS. Of course the contrarian view would be to invest in the potential unorthodox approach of the IceDream executive, but for arguments sake I hope my point is clearly expressed. If I had sold pencil erasers for the past twenty-five years and suddenly took a job growing apples (with no past experience in agriculture) there’s the distinct possibility that I may be out of my league and about to fall flat on my face.

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