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The next chapter shouldn’t be 11

Todd Ordal //February 15, 2012//

The next chapter shouldn’t be 11

Todd Ordal //February 15, 2012//

Diversification in a corporation without good reason is foolish. Although some diversification in our investment portfolio is warranted, disparate operations in a corporate environment often destroy value.

Even though there are exceptions to this, focusing on a specific product line or market is a clearer way to profit than trying to be many things to many people. Leveraging a core competency, intellectual property and a clear understanding of a specific market holds more promise than the department store model of business.

An exception to this rule, of course, has to do with a brick wall looming in the middle of your road. Blockbuster, Kodak, Tower Records and now Sony have either gone “splat” or are about to because they didn’t navigate around a hard object.

Kodak is of particular interest in this regard. This is a good lesson because there’s a “yang” to the “yin.” Fujifilm survived and is prospering because it not only saw the same brick wall that Kodak saw but it also did something about it. They actually had revenue growth in 2011, but very little of their revenue now comes from film.

Outside of Capt. Kirk and the crew of the Enterprise with their handy-dandy transporter, no human or company has been able to will its way through a brick wall. Why do some find a detour while others run headlong into the wall? I believe there are four requirements to avoid going splat:

1. A methodology to consider the future. Even companies that hit the wall usually have this, but they fail to act. As the world spins faster, however, it’s important to watch for disruptive technologies, new regulations and rapidly changing customer requirements. (I wonder if Boeing is worried about transporters.) My best clients have eyes forward and to the side to watch for obstacles.

2. A fearless leader who will act. I believe this one is most often lacking. Whether it’s fear of change, a desire to maximize current income, a nonsupportive board or an obsession with quarterly earnings, too many leaders at the pointy end of the pyramid won’t take the painful actions required for long-term success. Better to drop half of your revenue and survive than to stay the course and fail. Even Apple had to make deep and painful cuts at one point to prosper later.

3. A healthy balance sheet. You must have the financial resources to invest in new product development, people and technology to make a significant change. Without cash or equivalents on the balance sheet, this will be impossible. Your banker usually sees the same brick wall that you do and is unlikely to loan you money to re-create your business.

4. A clear understanding of your core competencies and assets. What are you really good at? Is it publishing books, or is it finding and distributing compelling content? Is it renting DVDs, or is it bringing entertainment to the home? Is it selling personal computers, or is it creating simple but compelling consumer products that leverage existing technology?

I have a client in the business services space that has come to realize that its core competency isn’t its service (e.g., legal or accounting) but rather its ability to develop and leverage deep relationships and provide high value to clients while attaining enviable revenue. How else might you leverage your assets (including intellectual property)? What new assets might you need, including new people with new skills?

Facing impending doom isn’t fun. When experiencing engine failure at night, some flight instructors recommend turning off the landing light as you near the ground to avoid the last few seconds of agony, realizing you’re about to land in the woods rather than a field – sort of like blindfolding a prisoner about to be shot. I never bought this. I’d rather be able to marshal my resources to plan and react up until the last second. Better yet, if you only have one engine, fly during the day. …

Do you have a method to look at the future?
Do you have the guts to take a hard right?
Do you have a healthy rainy-day fund?
Do you really know what your assets and competencies are?

Given the volatile world we live in, any one of us could look at a brick wall in our future. Give yourself a reality check-up with the four questions above.