Many executives believe that expanding products and product lines can generate more sales. At least that’s what companies often do when they are stuck in a sales slump or are trying to meet financial expectations by investors on Wall Street. In some cases, sales actually increase in the short run. But in the long run, profits most likely go down.
Expansion Leads to Extinction
The way to expand your business is not by increasing your product lines, but instead to narrow your focus, according to Al Ries in an article Ad Age published in May 2011. Ries points out that companies that expand product lines actually lose money. For example, he highlights:
- AOL had $2.1 billion in losses between 2008 and 2010 with 26% revenue decrease in 2010 and 22% in 2009, despite the company acquiring media and entertainment companies such as The Huffington Post, Studio Now, TechCrunch and Patch Media.
- Alta Vista, the first search engine, lost its leadership after expanding its product line with email, directories, topic boards, comparison shopping, advertising and portal-services. Today where is Alta Vista in the search engine market? It’s extinct since Yahoo acquired the company in 2003 and shut the business on July 8, 2013.
Take a look at what happened to Microsoft after it shifted its growth from its core software business. For example, Microsoft invested in Xbox and has lost nearly $3 billion over the last ten years as a result. As a result of these big losses, analysts expect Microsoft to sell off its Xbox product line, perhaps to Sony or Barnes and Noble.
In the end, expansion of product lines often leads more to company extinction than it does to growth. That’s why you should consider the alternative road to success.
Focus Is the Way to Increased Profitability
Focus is a strategy whereby you narrow your target market. This means instead of expanding your product line you actually get rid of products that require you to expend too much resources.
Companies that sell off product lines that are not in their core business may reduce sales in the short run, but may increase profits in both the short and especially in the long run.
General Electric is a great example of a successful company narrowing its focus and improving its profitability. GE’s second quarter results in 2013 had a small increase in net income, and the company is gaining steam after it recently decided to focus its business on industrial products and shed its media and financial services businesses that represented over one-third of its revenues. As a result of this change in strategy, in just a few months GE had a 4% increase in infrastructure sales and 0.5% increase in profits. Analysts expect GE’s profits to increase at a robust pace in the second half of this year.
Another example is Royal Philips Electronics NV. Earlier this year, the company decided to sell its entertainment division, which contains consumer products to Funai. It shifted the corporate focus away from consumer electronics manufacturing and concentrated on the lighting sector, of which it is the world's largest manufacturer, and also in health care equipment. As a result of this move, Phillips improved the profitability of its business, including a 43% increase in sales of its lighting division.
Your Bottom Line
The next time your company faces a financial crisis or finds its sales not meeting expectations, don’t fall for the trap of product expansion. If you do, then this strategy will likely weigh down your profits.
Instead, get lighter. Sell off the products that no longer represent your core business. You’ll likely become more profitable, perhaps earlier than you project.