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I Academy of Management Executive, 1990 Vol. 4 No. 1

Concentrated growth strategies

John A. Pearce II, George Mason University James W. Harvey, George Mason University

Executive Overview 'Thi'his article offers a critical assessment of the merits of concentrated growth as the centerpiece of a business strategy. It includes an analysis of the environmental conditions that favor concentrated growth and why it often leads to superior performance. It also reviews methods by which innovation and expansion ccmjie managed at reasonable levels of risk to complement the iirm's basic focuSyThese guidelines make it possible to compare a firm's core characteristics with the knowledge and capabilities in technology and marketing that are necessary for profit and growth. The most important aspects of formulating and implementing concentrated growth strategies are analyzed and examples of current practice show specific instances when those aspects have resulted in success.

Article Many victims of merger mania were once mistakenly convinced that the best way to achieve company objectives was to pursue unrelated diversification in the search for financial opportunity and synergy, only to see corporate performance fall well below expectation. By rejecting that "conventional wisdom," Martin Marietta, Kentucky Fried Chicken, Compaq, Avon, Hyatt Legal Services, and Tenant have demonstrated the advantages of what is increasingly proving to be sound business strategy.

Pursuing a Concentrated Growth Strategy These companies are just a few of the majority of American business firms that compete by focusing on a specific product and market combination. Yet, little has been written about—and perhaps as little thought given to—the concentrated growth strategy.

Concentrated growth is the strategy of the firm that directs its resources to the profitable growth of a single product, in a single market, with a single dominant technology. The main rationale for this approach, sometimes called a market penetration or concentration strategy, is that the firm thoroughly develops and exploits its expertise in a delimited competitive arena.'

Despite the popularity and success of concentrated growth strategies, managers have been left without guidelines to help them determine when their firm should employ concentrated growth and how they should go about maximizing the advantages of the strategy. Furthermore, current adopters of the concentrated growth strategy are frequently tempted to expand into unrelated areas without fully understanding the consequences. The enticements to stray from this strategy include impatience to grow, pressure to use idle capacity, need to meet short-term goals, and underestimating current opportunities.^ Fascination with new product development and expansion into new markets should be tempered with the fact that new products fail at an average rate of 40% for consumer goods, 20% for industrial products, and 18% for services.^

A further enticement is to accelerate focused growth through horizontal

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integration. While such a strategy offers the advantage of enabling the firm to retain its basic product and market orientation, it exposes the company to a wide range of financially threatening complications. These potential problems include extended debt involvement; geographic variations in unions, worker contracts, and conditions of employment; added complexity in strategic planning and management coordination; and difficulties owing to multiple suppliers, local competitors, and governmental agencies. So numerous and great are these complications that their discussion is beyond the scope of this article. We restrict our attention to challenges confronted by managers who undertake a concentrated growth strategy through reliance on internal development.

Diversity and Perlormance "Stick to the knitting" is the phrase used by Peters and Waterman to describe one of several characteristics of successful corporations. "* Staying with what the firm does best and avoiding areas of operation of undeveloped skills are the bases for their endorsement of concentrated growth.

Systematic analysis of new product successes and failures further underscores the risk of deviating from company strengths. After examining 195 case histories, Calantone and Cooper identified nine new product introduction scenarios, based on resource compatibility and product superiority.^ The type of introduction that had the highest level of market success (72%) was described as a synergistic "close-to-home" product. These successful introductions had significant overlap with the firm's existing products, markets, technical expertise, and production proficiency. For example, "The Better Mousetrap with No Marketing" type of new product introduction had a success rate of 36%, while the "Me Too" product, with no technical or production synergy, averaged only 14%.

This study revealed that the pursuit of growth through expansion into previously unmastered technologies, or new markets, is done so at comparatively great risk. Other evidence adds support to the view that diversification, particularly unrelated diversification, is risky.

An analysis of the 250 largest firms in America's 25 largest industries revealed that firms that have higher measures of concentrated growth show greater financial performance.^

Another indictment of unrelated diversification was found in a study of America's best midsize businesses.^ Among the key findings was that "unrelated diversification is a mortal enemy of winning performance." In contrast, successes often resulted from "edging out." This term refers to strategies based on clear mission statements that are well-understood within the firm, predicated on offerings with value, and serve selected market segments while cautiously moving into related products, related markets, or both. Success with edging out strategies is derived from a commitment to innovation within well-known technology and well-defined market niches.

Rationale for Superior Performance Why do concentrated growth strategies lead to enhanced performance? An analysis of product successes and failures across multiple industries suggests several reasons. This study shows that the greatest influences on market success are those characteristic of firms that implement a concentrated growth strategy.^ These influences include the ability to assess market needs, knowledge of buyer behavior, customer price sensitivity, and effectiveness of promotion. Further underscoring the importance of concentrated growth-based company skills, the study also showed that these core capabilities are more of a determinant of

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competitive market success than are the environmental forces faced by the firm. High success rates of new products are also tied to avoiding situations that require undeveloped skills, such as serving new customers and markets, acquiring new technology, building new channels, developing new promotional abilities, and facing new competition.^

A major misconception about the concentrated growth strategy is that the firm that practices it will settle for little or no growth. This is certainly not true for a firm that correctly utilizes the strategy. A firm employing concentrated growth grows by building on its competencies and achieving a competitive edge by concentrating in the product-market segment it knows best. The firm employing this strategy is aiming for the growth that results from increased productivity, better coverage of its actual product-market segment, and more efficient use of its technology.

The concentrating firm's ability to grow stems mainly from its development of one or more of three important strategic capabilities: marketing abilities, efficiencies of scale and other cost reductions, and product differentiation. Since the firm will try to develop a specific product-market it has two alternatives to no growth: (1) stimulate increased consumption of the product through marketing-related activities achieving efficiencies in production and distribution that allow the firm to cut its costs or to increase the value of the product in the consumer's mind, or (2) to develop special attributes that brands the product as different.

Taken together, these points provide insights into why concentrated growth strategies work. Managers should focus on well-understood markets, competitors, technology, manufacturing processes, promotion, and distribution. This approach significantly improves the likelihood of market success.

Conditions that Favor Concentrated Growth There are specific conditions in the firm's environment that are particularly conducive to the concentrated growth strategy. The first is when the firm's industry is resistant to major technological advancements. This is usually the case in the late growth and maturity stages of the product life cycle and in product-markets where product demand is stable and industry entry barriers, such as capitalization, are high. Machinery for the paper manufacturing industry, where the basic technology has not changed in more than a century is a good example.

A second especially favorable condition is when the firm's target markets are not product saturated. Markets with competitive gaps leave the firm with alternatives for growth in addition to taking market share away from competitors. The successful introduction of traveler services by Allstate and Amoco demonstrates that even an organization as entrenched and powerful as AAA could not build a defensible presence in all segments of the automobile club market.

A third condition that favors concentrated growth exists when the firm's product-markets are sufficiently distinctive to dissuade competitors in adjacent production markets from trying to invade the firm's segment. John Deere and Co. refrained from its planned growth in the construction machinery business when mighty Caterpillar threatened to enter Deere's mainstay, the farm machinery business, in retaliation. Rather than risk a costly price war on its own turf, Deere scrapped these plans for growth.

A fourth condition favorable to concentrated growth exists when the firm's inputs are reasonably stable in price and quantity and when they are available in the amounts and at the required times. Maryland-based Giant Foods is able to concentrate in the grocery business largely due to its long-term, stable arrangements with suppliers of its private label products. Most of these suppliers are the same makers of national brands that compete against the Giant labels.

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With a high market share and aggressive retail distribution. Giant controls the national brands' access to the consumer. Consequently, suppliers have considerable incentive to honor verbal agreements, called "bookings," in which they commit themselves to Giant for price, quality, quantity, and timing of shipments for a one year period.

The firm pursuing concentrated growth also benefits from being in a market with minimal seasonal or cyclical swings that would propel the firm to diversify. Night Owl Security, the Washington, D.C. market leader in home security services, commits customers to initial four-year contracts. In a town where affluent consumers tend to be quite transient, the length of this relationship is remarkable. Further reinforcement for Night Owl's concentrated growth strategy comes from the company's success in getting subsequent owners of its customers' homes to extend and renew the security service contract.

The firm can also grow while concentrating when it experiences competitive advantages based on efficient production or distribution channels. These advantages enable the firm to formulate advantageous pricing policies. More efficient production methods and better handling of distribution also allow the firm to achieve greater economies of scale or, in conjunction with marketing, result in a product that is differentiated in the mind of the consumer. Graniteville Company, the large South Carolina textile manufacturer, realized decades of growth and profitability by adopting a "follower" tact as part of its concentrated growth strategy. By producing fabrics only after market demand was well established, and by featuring products that could reflect its expertise in adopting manufacturing innovations and in highly efficient, long production runs, Graniteville prospered through concentrated growth.

Finally, the success of market generalists creates conditions for successful concentrated growth. °̂

When generalists succeed using universal appeals, they avoid making special appeals to different groups of customers. The net result is that markets dominated by generalists leave open many small pockets of markets where specialists can emerge and thrive.

For example, hardware store chains such as Stanbaugh-Thompsons and Hechinger, focus primarily on routine household repair problems and offer solutions that can be easily sold on a self-service, do-it-yourself basis. This approach leaves gaps at both the "semi-professional" and "neophyte" ends of the market—in terms of the purchaser's skill at household repairs and the extent to which available merchandise matches individual homeowner requirements.

Putting A New "Spin" on Concentrated Growth Firms that rely primarily on concentrated growth strategies may wish to modify their courses of action, yet retain their bases of strength. Managerial options represent varying degrees of concentrated growth. Managers can practice "Pure Concentrated Growth," edge out into related markets (let's call this "Market Extension"), or make minor modifications in products or develop closely related new ones that fit within existing lines ("Product Extension"). A final opportunity for growth is to combine market and product extensions to form a "Hybrid Extension" strategy.

Pure Concentrated Growth The pure concentrated growth strategy involves product improvement, intensifying promotion, expanding channels, and pricing for penetration, as exhibited by

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Kentucky Fried Chicken. Using the theme "We Do Chicken Right," KFC stresses product specialization, limited menu, expanded distribution, and aggressive advertising, sales promotion, and pricing.

Tenant Corporation, MasterCard and Visa pursued pure concentrated growth through product improvement. Tenant, a manufacturer of mechanized cleaning equipment for industrial markets, recently embarked on a major recommitment to product quality and performance. The results include a 60% share of the domestic market, a 40% share of the international market, and a rebuff to Toyota which had plans for increasing its share of the American market. MasterCard's and Visa's development of "affinity cards," which allows the holder to select an outside organization (usually nonprofit) for a contribution for each transaction, has succeeded in stimulating the use of its credit cards.

Market Extension Market extension allows companies to practice a different form of concentrated growth by identifying new uses for existing products and new demographically, psychographically, or geographically defined markets. Frequently, changes in media selection, promotional appeals, and distribution are used to initiate this approach. Market extension, by finding a new use for a product, was shown by Du Pont's Kevlar, an organic material used by police, security, and military personnel primarily for bullet-proofing. The product is now being used to refit and maintain wooden-hulled boats, since the material is both lighter and stronger than glass fibers and has eleven times the strength of steel.

News in the medical industry provides other examples of new markets for existing products. The National Institutes of Health's report of a study showing that aspirin may lower the incidence of heart attacks in healthy men is expected to boost sales in the $2.2 billion analgesic market. Due to the expansion of this market, it is also predicted that share values of non-aspirin brands, such as industry leaders Tylenol and Advil, will be hurt. Product extensions currently planned include "Bayer Calendar Pak," 28-day packaging to fit the once-a-day prescription for second heart attack prevention.

Product Extension The strategy of product extension is based on penetrating existing markets by incorporating product modifications in existing items, or developing new products with a clear connection to the existing line. The telecommunications industry provides an example of product extension based on product modification. To increase its estimated 8-10% share of the $5-6 billion corporate user market, MCI Communication Corp. augmented its product offering by extending its direct-dial service to 146 countries, the same as AT&T, at lower average rates. The recent addition of 79 countries to its network underscores management's belief in this market, estimated to grow 15-20% annually.

Other examples of expansions linked to existing lines include Gerber products decision to growth through general merchandise marketing to offset the flat baby food industry. Recent introductions include 52 items, ranging from feeding accessories to toys and children's wear.

The Hybrid Extension The hybrid extension is the search for new growth opportunities by simultaneously combining market and product modifications. This strategy is used by NAPA, a franchise organization of auto parts aftermarket distributors serving the repair industry and do-it-yourselfers. NAPA has expanded its operations to offer installation of its products. This new service is directed at the market of drivers

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who want complete services that NAPA has never served, and to those do-it-yourselfers who want to "trade up" to such services.

The greatest risk is that by concentrating in a single product- market the firm is particularly vulnerable to changes in that segment.

Overcommitment to a specific technology and product-market can hinder a firm's ability to enter a new or growing product market that offers more attractive cost-benefit tradeoffs for the firm.

Using a similar strategy, Dunkin' Donuts now offers a wider variety of breakfast items, such as eggs, breakfast meats, and croissants, targeted at the market segment not previously served by its donut and coffee offering, and at existing customers desiring diversity. Additionally, by packaging its coffee in cans for the first time, Dunkin Donuts is implementing a market extension strategy aimed at new customers who wish to serve its coffee at home or in the office.

Risks and Rewards of Concentrated Growth Under stable conditions, a concentrated growth strategy poses the lowest risk among grand strategies to a firm's economic stability. However, in a changing environment, a firm committed to concentrated growth faces high risks. The greatest risk is that by concentrating in a single product-market the firm is particularly vulnerable to changes in that segment. Slowed growth in the segment may jeopardize the company because its investment, competitive edge, and technology are deeply entrenched in a specific offering. Sudden changes by the firm are difficult when the product is threatened by near-term obsolescence, a faltering market, new substitutes, or changes in technology or customer needs. For example, the manufacturers of IBM-clones faced such a problem when IBM announced its adoption of the OS/2 operating system for its personal computer line. The change effectively made existing clones "out of date."

By entrenching in a specific industry, the concentrating firm is particularly susceptible to changes in the economic environment of its industry, since the firm does not have a cushion from involvement in other industries. For example. Mack Truck, the second largest truck maker in America, saw an 18 month slump in the truck industry result in a $20 million loss for the company.

Entrenchment in a specific product-market tends to make a concentrating firm more adept than competitors at detecting new trends. However, any failure to properly forecast major changes in the industry can result in extraordinary losses. Numerous makers of inexpensive digital watches declared bankruptcy when they failed to anticipate the competition posed by Swatch, Guess, qnd other trendy watches that emerged from the fashion industry.

A firm pursuing a concentrated growth strategy is also vulnerable to high opportunity costs by remaining in a specific product-market when other options are ignored that could employ the firm's resources more profitably. Overcommitment to a specific technology and product-market can hinder a firm's ability to enter a new or growing product market that offers more attractive cost-benefit tradeoffs for the firm. Had Apple computers maintained its policy of making equipment that did not interface with IBM equipment, it would have voluntarily ignored the strategic options that instead have proven to be its most profitable.

Rewards Examples abound of concentrating firms that report exceptional returns on its strategy. Companies like McDonald's, Goodyear, and Apple Computers have used first-hand knowledge and deep involvement with specific product segments to become powerful competitors in its markets. The strategy is even more often associated with successful smaller firms that have steadily and doggedly improved market position.

The limited additional resources necessary to implement concentrated growth, coupled with the limited risk involved, also make this strategy desirable for a firm

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with limited funds. For example, through a carefully devised concentrated growth strategy, medium-sized Deere and Company was able to become a major force in the agricultural machinery business even when competing with much bigger firms like Ford Motor Co. While other firms were trying to exit or diversify from the farm machinery business, Deere spent $2 billion in upgrading its machinery, boosting efficiency, and engaging in a program to strengthen its dealership system. This concentrated growth strategy enabled the company to become the leader in the farm machinery business, despite the fact that Ford was 10 times its size.

Firms that remain within a chosen product-market often extract the most from technology and market knowledge and minimize the risks associated with unrelated diversification. The reason for the success of a concentration strategy lies with the firm's superior insights into its technology, product, and customer, as a means of obtaining a sustainable competitive advantage. Superior performance on these aspects of corporate strategy has a significant positive effect on market success.

Conclusion Firms that are tempted to seek revenue streams through commitment to unrelated technology and markets or to lessen their dependence on mature products, must fully understand the risks of such actions. The enticement to develop new products and to expand into new markets must be tempered with the knowledge of high new product failure rates. When assessing strategic options, managers should consider the merits of concentrated growth. While building from a basis of stability and experience, concentrated growth strategies can also provide innovation and expansion at manageable levels of risk.

Endnotes ' For a more detailed and comprehensive description oi alternative business strategies, refer to John A. Pearce II. "Selecting Among Alternative Grand Strategies." CalUoinia Management Review, 30(2). Spring. 1982. 23-31.

^ A more complete list of nine reasons for abandoning a concentrated growth strategy is provided by M. Lauenstein and W. Skinner. "Formulating a Strategy of Superior Resources." Jouinal of Business Stiategy, Summer. 1980. 4-10.

' These results were reported in New Products Management for the 1980s, New York: Booz. Allen & Hamilton. 1982.

* The top selling book in which the term first appeared is T.J. Peters and R.H. Waterman. In Search of Excellence: Lessons From America's Best Run Companies, New York: Harper. 1982.

^ For details on this study, see Roger Calantone and Robert G. Cooper. "New Product Scenarios: Prospects for Success." Journal of Marketing, 45. Spring. 1981. 48-60.

° The complete findings of the study are reported in P. Varadarajan. "Product Diversity

and Firm Performance: An Empirical Investigation."/ournai o/Mariefing, 50. July. 1986. 43-57.

' A comprehensive and indepth presentation of the study appears a s Donald K. Clifford. Jr. and Richard E. Cavanagh. The Winning Performance: How America's High-Growth Midsize Companies Succeed, New York: Bantam Books. 1985.

° The original presentation of the study and its results appeared in Robert G. Cooper, "Identifying Industrial New Product Success: Project NewProd." Industrial Marketing Management, 8(2). April. 1979, 124-135.

^ For a complete description and analysis of the study, see Robert G. Cooper. "The Impact of New Product Strategies." Industrial Marketing Management, 12(4). October. 1983. 243-256.

'° For a provocative discussion of the corporate strengths of specialists and generalists. see Glenn R. Carroll. "The Specialist Strategy." California Management Review, 26(3). Spring. 1984. 126-137.

About the Author John A. Pearce II, Ph.D. is the holder of the Eakin Endowed Chair in Strategic Management in the School of Business Administration at George Mason University and chairman of the school's Management Department. Dr. Pearce is president of the Southern Management Association, and past chairman of the Academy's Entrepreneurship division. A State of Virginia Eminent Scholar, Dr.

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Pearce is a frequent leader of executive development programs and an active consultant to business and industry.

James W. Harvey is an associate professor of marketing at George Mason University in Fairfax, Virginia. His research interests include philanthropy, healthcare services, and strategic marketing. Dr. Harvey has served as consultant and executive development instructor for various organizations, including National Institutes of Health, Department of Health and Human Services, United Way of America, and National Academy for Voluntarism.