Gluttony and Starvation (#416)
Companies that fail when they run out of money often have a counterintuitive fatal flaw
Over the past two years, many companies have failed because they have been unable to secure additional financing or liquidity after a decade of easy money and credit. While it may seem obvious to declare the cause of death for these organizations was running out of money, that’s often just part of the story.
With respect to businesses, there is substantial data that suggests more organizations die from gluttony than starvation. These companies fail not because they were starved by a lack of funding or opportunity, but because they bit off more than they could chew and lost focus on their most important priorities. In many cases these companies allowed their primary business to wither, or never found a viable primary offering in the first place.
Most successful companies build a dominant position in the market for a specific product or service before expanding into other domains. They lock in on their target customer and deliver something that meets that customer’s need at a profitable, sustainable price. It’s only once they’ve conquered the core market that they look to expand to other areas from a position of strength.
Apple is a great example of this. When Steve Jobs returned as CEO in 1997, Apple was in dire financial straits and potentially headed for bankruptcy. One of Jobs’ initial decisions was to streamline the company's focus by discontinuing products that diverted the company’s attention from potential areas of excellence. This strategic move, often referred to as the “great Apple culling,” reduced Apple’s offerings from 350 products to a mere 10.
As a result, Apple focused fully on what it knew it did best and refreshed its PC’s, leading to the immensely successful launch of the iMac in 1998. Only after that success did Apple build an ecosystem by moving into other products such as the iPod and iPhone. They didn’t try to do everything at once.
Conversely, many growing companies constantly add new products and services simply to keep revenue growth from slowing. These expansions add complexity to the businesses, and they’re often made without leadership knowing whether they really meet a customer need or if they can be delivered profitably.
I remember that we fell into this trap at Acceleration Partners as we were growing. We expanded our offerings significantly before we reached even $10M in revenue. This cost us focus, and our growth slowed significantly—I had failed to account for all the hidden complexity costs of the additional sales, marketing and people management. Once we pared back our services offerings and focused on our core business of affiliate marketing, our growth rate in that core offering, which had stalled, doubled within six months.
The earlier a company loses focus in its lifecycle, the harder it is to recover. Adding complexity to your business before you have found real, sustainable success is never a recipe for an enduring company.
A team or leader that is considering expanding their business’ offerings should ask themselves a few questions first:
What are clients asking for that we don’t do today, which we are well-positioned to deliver?
How much synergy or cross-selling opportunity is there between the products we offer today and new potential products? Do they appeal to the same customers?
What is the degree of difficulty of developing and producing the new products/services?
Can we expand with existing resources—Sales, Marketing, HR, etc—or do we need new people with different training?
A new product or service should be tailored to your customers’ needs, should be something your current sales and marketing team can effectively sell, and should not require a substantial upfront investment to know if it is viable. Conversely, if it targets a new, unfamiliar market, is in an unfamiliar business model, or requires extensive investment in new team members and infrastructure, the juice is probably not worth the squeeze.
Over the next year, we’ll continue to read stories about companies that seem to fall victim to starvation when cash runs out. What we won’t see is the real behind-the-scenes stories where those same businesses ran out of money because they lost focus and bit off more than they could chew.
Quote of The Week
“Deciding what not to do is as important as deciding what to do.” - Steve Jobs
Have a great weekend!
New For Premium Subscribers
I appreciate your framing questions that make room for tempered and intentional growth.
Greed and Gluttony are grave sins that leads utter destruction .