The Value of Business Focus

January 24, 2012

The essential, underlying aspect of your company’s strategy is its distinctive competence and the perceived value of this competence by your customers. You need to articulate your purpose, and this requires a strong focus.

A great example of exquisite focus is found in the book, Good Strategy/Bad Strategy by Richard Rumelt. While I personally lack experience in manufacturing, I can certainly appreciate the example of Crown Cork & Seal and its brilliant strategy crafted by John F. Connelly in the 1960s.

Back in the day, Crown Cork and Seal was a smaller manufacturer specializing in containers for “hard-to-hold products” like aerosols and carbonated drinks. The industry was dominated by three major competitors: Continental Can, National Can, and American Can.

It was a standard industry practice of most beverage companies to maintain at least two sources of can supply, and there was always the threat that a beverage company could purchase a can line and manufacture its own cans. In response to this, the “big three” can makers often set up plants close to a customer. Thus, the big can makers became willing, captive producers in order to benefit from long production runs (because there was a large cost involved with changing lines to make one can type versus another).

The net result were low profit rates of 4 to 5 percent return on assets by the major can companies. Despite being a smaller player in a difficult industry with low returns for major players, Crown Cork & Seal managed to be fifty to sixty percent more profitable than the big three.

How did they do it? Richard Rumelt posed this question to his executive MBA Class on strategy identification. And that meant digging and thinking deeply about the situation, looking for answers beyond information that was readily at hand.

Conventional wisdom was that Crown specialized in containers for hard-to-hold products such as aerosols and carbonated drinks, but that alone does not explain Crown’s success. Someone suggested that Crown must be the low-cost producer, since putting soda into a can is not a big technical feat and that Crown wasn’t the only company able to do this. And is it turned out, Crown’s unit cost per can was actually higher, not lower, than its competitors’.

“You can’t differentiate a can.” So how did Crown profitably differentiate itself?

Rumelt steered the class towards the real answer by drawing their attention on Crown’s policies and positioning to determine its true focus. The first two policies examined were those of providing technical assistance and rapid response.

The critical observations were that large companies don’t need technical assistance, and in fact are more likely able to give it. It is the small companies need assistance. Likewise, smaller companies also have less stable demand.

Related to demand instability, companies can also produce seasonal products or introduce new products that could lead to unpredictable demand spikes. A hotter than anticipated summer with a new beer product, for example, could create a situation for rush orders.

But there was more. Crown also had a manufacturing policy. Crown’s plants were actually smaller than its competitors, and none of the plants were captive. Not only did Crown’s plants service more customers per plant than their competition, their production of cans per customer was a lot lower.

In effect, Crown’s policies were different from the industry norm. Going for the “long runs” made the majors captive, but Crown chose to play by different rules in the same industry. Crown specialized in soft drink and aerosol cans with shorter runs. The runs may be shorter because the customer is smaller, because the product is newer, or because there is a rush order to cover seasonal or unexpected demand.

By specializing on a carefully selected part of the market, Crown increased its bargaining power with respect to its buyers and generated a greater return. Crown crafted a competitive, profitable advantage for itself in a very tough industry.

I don’t do justice to the Crown story in this post -- you really should read the book for a more complete walkthrough of strategy identification (and more). I found Good Strategy/Bad Strategy to be an excellent book on business strategy.