The Key to Every Successful Business

The Key to Every Successful Business

"Lose your focus, lose your shirt."

I once had a marketing professor who uttered these words almost daily. What he meant is this: if a business loses focus on its core and spreads itself too thin, that business will lose its core and eventually fail.

I agree that a successful business is a focused business. But I also think that different companies need to focus on different things in order to be successful. The point of focus depends on the industry, and the company itself.

Focus on the core

Many companies need to do exactly as my professor suggested: focus on their core, on what made them successful. Wal-Mart (NYSE: WMT)is an excellent example of a company that embraces this thinking.

Wal-Mart became successful by doing whatever it takes to give consumers the lowest prices possible. Wal-Mart is cheap, and the retail giant is OK with that. Although Wal-Mart sells brand name electronics and other quality items, the company hasn't attempted to sell luxury items in order to appeal to wealthier consumers. Wal-Mart knows that its customers don't want luxury, they want affordability. In fact, 56.7% of Wal-Mart's customers make $50,000 or less, and 79% make $75,000 or less. Wal-Mart is built around average Americans, not the Kardashians.

If it ain't broke, don't fix it. Wal-Mart's strategy is anything but broken, as the firm is steadily growing with revenue increases of 3.4% and 5.9% in 2011 and 2012, respectively. Although Wal-Mart saw incredible growth the last 10 years, the firm successfully managed the growth by keeping focused on its core business.

Wal-Mart isn't the kind of stock that will jump through the roof in a matter of days. But investors looking for a solid company with buy and hold potential should certainly take a look.

Focus on innovation

In the tech industry especially, a business can quickly become insignificant if it focuses too narrowly on its core. Why? Because the core of tech companies and the entire tech industry can change (almost) overnight. Tech companies need to focus on innovation.

For example, Microsoft (NASDAQ: MSFT) is playing catch-up in the tablet and smartphone markets because it failed to recognize what Apple and other competitors saw: to fail to innovate is to be left behind. Microsoft built its business around PCs, and Windows software is engineered to best work with computers. Until recently Microsoft thought that PCs would keep the company successful if Microsoft focused on building the best PC possible.

Microsoft was wrong. In the third quarter of 2012, PC shipments dropped 8.6%. Microsoft's net income followed, with a 22% decrease to $4.47 billion from $5.74 billion in the same quarter the year before. Then, quarter one of 2013 brought a 13.6% decrease is shipments from a year earlier, and the numbers are expected to get worse.

PC sales are declining because the tech industry created devices that consumers like better: tablets and smartphones. Tablet and smartphone sales are expected to go up over the next five years as they eat into a market previously dominated by PCs.

Today, Microsoft is scrambling to catch up to Apple and Google in the tablet and smartphone markets, with little success. In short, Microsoft was so focused on its core that it failed to aggressively innovate. Now a renewed focus on innovation is the only thing that can save Bill Gates' company.

Microsoft is taking steps in the right direction with its Surface PC strategy, but consumers have yet to get on board. Microsoft's most recent quarter saw net income drop by 22% on a quarterly basis, which included a charge related to excess surface inventory. That isn't a good sign. I think Microsoft is a sell for now.

Focus on profitability

Profitability seems obvious. After all, every business should focus on profitability. True, but sometimes companies get caught up in growth or new opportunities at the expense of profit margins. Investments don't always pan out, and a focus on profitability is an excellent method of rebuilding.

Recently, French telecommunications equipment firm Alcatel-Lucent (NYSE: ALU) announced a plan to cut about $1.34 billion of annual costs and sell around $1.34 billion in assets. CEO Michel Combes said that Alcatel will lean more on its Internet Protocol routing business - one of Alcatel's more successful segments.

The new plan has one focus: profitability. Alcatel-Lucent worked hard to recover following the financial crisis, only to see its stock lose 48% of its value in 2011. The firm crashed in part because it couldn't effectively manage its many product lines. Now, Combes is slimming down the company and directing focus back to the bottom line. So far, the market is showing confidence in the plan, as Alcatel's stock increased 106% since Combes took over on April first.

Alcatel is looking up, and I believe in what Combes is doing. I would go long.

Final Thoughts

A focused business is a successful business. While I think the three points of focus I mentioned can be applied to most businesses, not every company fits into one of these categories. Still, every company must be focused on something, or it will fail. No exceptions.

Find a focused company, and chances are that you will find a good investment.

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This article was written by Randy Holcombe and edited by Chris Marasco and Marie Palumbo. Chris Marasco is HeadEditor of ADifferentAngle. None has a position in any stocks mentioned.The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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