In the early 1980s, dental company Colgate decided to pursue the booming convenience food market and launch its own line of frozen meals. Yet, rather than expanding Colgate’s market share, the strategy backfired and resulted in declining revenue and low net income.
According to Michael Mannor, John F. O’Shaughnessy Associate Professor of Family Business at the University of Notre Dame, Colgate’s faux pas is a classic example of a company going against standard expert advice to prioritize sharp focus rather than broad goals.
“For 50 years or more, business consultants and academics have encouraged ambitious CEOs to focus, focus, focus,” said Mannor, a professor at Mendoza College of Business who has spent 15 years researching how structures Organizational challenges can either create challenges for or support CEOs. “But these are people who have been very successful in their organizations – they are captains of industry – who tend to have big business growth plans and who have been selected by boards for their ability stimulate growth.”
Mannor wanted to study the tension between the dominant emphasis on focus and the CEO’s typical tendency toward ambition. He detailed his findings in the article “Keep your eye on the ball or on the pitch? Exploring the Performance Implications of Executive Strategic Attention,” published in the Academy of Management Journal by Mannor and co-author John Eklund of the University of Southern California.
“We wanted to think about how CEOs manage focus versus breadth of opportunity,” Mannor said. “When CEOs focus on a few issues, do they perform better? Or, for CEOs who don’t follow this advice, do their organizations essentially end up chasing squirrels? »
Recognizing that there are no absolutes, Mannor and Eklund hypothesize that leaders should adjust the span of strategic attention based on the quantity and quality of opportunities available and the effectiveness of their business in today’s opportunity landscape. They suspected that when there are fewer low-quality opportunities, executives should expand their network to find potential growth options. Alternatively, if a company is already using its resources efficiently, management should opt for broader strategic attention.
To test this theory, the researchers contacted various leading consulting firms and asked them to characterize and categorize the different types of activities that organizations tend to focus on. They also consulted academic journals and the major trade journals that CEOs often read to determine how these journals characterized strategic opportunities. After gathering all the data, they then asked top professors from different business schools in Europe and North America to evaluate the results. Ultimately, they determined there were 13 categories that represented the range of strategic attention CEOs could focus on. These strategic categories included topics such as joint ventures, customer experience, stakeholder management, risk management, and mergers and acquisitions.
To measure how focused executives are on each category, Mannor and Eklund used software to analyze quarterly earnings call transcripts for language aligned with each of the 13 categories. They pulled the transcripts from a random sample of half of the S&P 500 companies.
“We wanted to have a representative sample of large public companies in part because these are the organizations that are leaders in their industry and have a disproportionate influence on the success and failure of industries as well as the well-being of consumers. “said Mannor.
The analysis confirmed that concentration is indeed the best strategy for a large number of organizations. However, this advice should not be applied universally.
“If a CEO is facing a market where there aren’t a lot of opportunities, focus doesn’t work as well and they need to diversify,” Mannor said. “The same goes for a business that has struggled to convert opportunities into results. So if over the past couple of years they’ve struggled to take their value proposition and make it work effectively, those organizations can benefit from broader strategic attention.
Likewise, if a company is very efficient in the use of its resources, a broader focus can still be very effective. Meanwhile, a company struggling to use its resources efficiently should limit its focus.
“It’s a bit counterintuitive because you’d think if there’s a strong market with lots of opportunities, it would make sense to try and grab them,” Mannor said. “But we see in the data that CEOs end up destroying more value when they try to chase those opportunities. That’s because there’s a tension with cognitive overload. When CEOs and organizations chase too many things, they end up not doing so well at anything. So you spread yourself too thin.
Mannor, who teaches a version of this paper in his graduate courses to expose students to how academic research methods are developed, believes this study can benefit organizations struggling to create value on their market. “Broader attention could be very helpful in moving into new spaces,” he said.
Additionally, investors can use this information to evaluate companies. “Most people have a 401(k) or do some degree of stock investing,” Mannor said. “It gives you a way to look at an organization’s strategies in greater depth and think about the extent to which this company has its attention divided against what its main areas of interest are. It also provides some discipline the average person who buys and sells stocks to not just prioritize innovators who seem to be coming out and looking for a lot of opportunities, because often these companies will underperform those that focus on fundamental value creation.
Originally published on Mendoza News.