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

Concentrated growthstrategies

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

Executive Overview 'Thi'his article offers a critical assessment of the merits of concentrated growth asthe centerpiece of a business strategy. It includes an analysis of theenvironmental conditions that favor concentrated growth and why it often leadsto superior performance. It also reviews methods by which innovation andexpansion ccmjie managed at reasonable levels of risk to complement the iirm'sbasic focuSyThese guidelines make it possible to compare a firm's corecharacteristics with the knowledge and capabilities in technology andmarketing that are necessary for profit and growth. The most important aspectsof formulating and implementing concentrated growth strategies are analyzedand examples of current practice show specific instances when those aspectshave resulted in success.

Article Many victims of merger mania were once mistakenly convinced that the best wayto achieve company objectives was to pursue unrelated diversification in thesearch for financial opportunity and synergy, only to see corporate performancefall well below expectation. By rejecting that "conventional wisdom," MartinMarietta, Kentucky Fried Chicken, Compaq, Avon, Hyatt Legal Services, andTenant have demonstrated the advantages of what is increasingly proving to besound business strategy.

Pursuing a Concentrated Growth StrategyThese companies are just a few of the majority of American business firms thatcompete by focusing on a specific product and market combination. Yet, little hasbeen written about—and perhaps as little thought given to—the concentratedgrowth strategy.

Concentrated growth is the strategy of the firm that directs its resources to theprofitable growth of a single product, in a single market, with a single dominanttechnology. The main rationale for this approach, sometimes called a marketpenetration or concentration strategy, is that the firm thoroughly develops andexploits its expertise in a delimited competitive arena.'

Despite the popularity and success of concentrated growth strategies, managershave been left without guidelines to help them determine when their firm shouldemploy concentrated growth and how they should go about maximizing theadvantages of the strategy. Furthermore, current adopters of the concentratedgrowth strategy are frequently tempted to expand into unrelated areas withoutfully understanding the consequences. The enticements to stray from this strategyinclude impatience to grow, pressure to use idle capacity, need to meet short-termgoals, and underestimating current opportunities.^ Fascination with new productdevelopment and expansion into new markets should be tempered with the factthat new products fail at an average rate of 40% for consumer goods, 20% forindustrial 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 toretain its basic product and market orientation, it exposes the company to a widerange of financially threatening complications. These potential problems includeextended debt involvement; geographic variations in unions, worker contracts,and conditions of employment; added complexity in strategic planning andmanagement coordination; and difficulties owing to multiple suppliers, localcompetitors, and governmental agencies. So numerous and great are thesecomplications that their discussion is beyond the scope of this article. We restrictour attention to challenges confronted by managers who undertake aconcentrated growth strategy through reliance on internal development.

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

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

This study revealed that the pursuit of growth through expansion into previouslyunmastered technologies, or new markets, is done so at comparatively greatrisk. Other evidence adds support to the view that diversification, particularlyunrelated diversification, is risky.

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

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

Rationale for Superior PerformanceWhy do concentrated growth strategies lead to enhanced performance? Ananalysis of product successes and failures across multiple industries suggestsseveral reasons. This study shows that the greatest influences on market successare those characteristic of firms that implement a concentrated growth strategy.^These influences include the ability to assess market needs, knowledge of buyerbehavior, customer price sensitivity, and effectiveness of promotion. Furtherunderscoring the importance of concentrated growth-based company skills, thestudy also showed that these core capabilities are more of a determinant of

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The concentratingfirm's ability to growstems mainly from itsdevelopment of one ormore of threeimportant strategiccapabilities:marketing abilities,efficiencies of scaleand other costreductions, andproductdifferentiation.

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 requireundeveloped skills, such as serving new customers and markets, acquiring newtechnology, building new channels, developing new promotional abilities, andfacing new competition.^

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

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

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

Conditions that Favor Concentrated GrowthThere are specific conditions in the firm's environment that are particularlyconducive to the concentrated growth strategy. The first is when the firm's industryis resistant to major technological advancements. This is usually the case in thelate growth and maturity stages of the product life cycle and in product-marketswhere product demand is stable and industry entry barriers, such ascapitalization, are high. Machinery for the paper manufacturing industry, wherethe 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 notproduct saturated. Markets with competitive gaps leave the firm with alternativesfor growth in addition to taking market share away from competitors. Thesuccessful introduction of traveler services by Allstate and Amoco demonstratesthat even an organization as entrenched and powerful as AAA could not build adefensible presence in all segments of the automobile club market.

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

A fourth condition favorable to concentrated growth exists when the firm's inputsare reasonably stable in price and quantity and when they are available in theamounts and at the required times. Maryland-based Giant Foods is able toconcentrate in the grocery business largely due to its long-term, stablearrangements with suppliers of its private label products. Most of these suppliersare 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 thenational brands' access to the consumer. Consequently, suppliers haveconsiderable incentive to honor verbal agreements, called "bookings," in whichthey commit themselves to Giant for price, quality, quantity, and timing ofshipments for a one year period.

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

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

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

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

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

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

Pure Concentrated GrowthThe pure concentrated growth strategy involves product improvement, intensifyingpromotion, expanding channels, and pricing for penetration, as exhibited by

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Kentucky Fried Chicken. Using the theme "We Do Chicken Right," KFC stressesproduct specialization, limited menu, expanded distribution, and aggressiveadvertising, sales promotion, and pricing.

Tenant Corporation, MasterCard and Visa pursued pure concentrated growththrough product improvement. Tenant, a manufacturer of mechanized cleaningequipment for industrial markets, recently embarked on a major recommitment toproduct quality and performance. The results include a 60% share of the domesticmarket, a 40% share of the international market, and a rebuff to Toyota which hadplans for increasing its share of the American market. MasterCard's and Visa'sdevelopment of "affinity cards," which allows the holder to select an outsideorganization (usually nonprofit) for a contribution for each transaction, hassucceeded in stimulating the use of its credit cards.

Market ExtensionMarket extension allows companies to practice a different form of concentratedgrowth by identifying new uses for existing products and new demographically,psychographically, or geographically defined markets. Frequently, changes inmedia selection, promotional appeals, and distribution are used to initiate thisapproach. Market extension, by finding a new use for a product, was shown byDu Pont's Kevlar, an organic material used by police, security, and militarypersonnel primarily for bullet-proofing. The product is now being used to refit andmaintain wooden-hulled boats, since the material is both lighter and stronger thanglass fibers and has eleven times the strength of steel.

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

Product ExtensionThe strategy of product extension is based on penetrating existing markets byincorporating product modifications in existing items, or developing new productswith a clear connection to the existing line. The telecommunications industryprovides an example of product extension based on product modification. Toincrease its estimated 8-10% share of the $5-6 billion corporate user market, MCICommunication Corp. augmented its product offering by extending its direct-dialservice to 146 countries, the same as AT&T, at lower average rates. The recentaddition of 79 countries to its network underscores management's belief in thismarket, estimated to grow 15-20% annually.

Other examples of expansions linked to existing lines include Gerber productsdecision to growth through general merchandise marketing to offset the flat babyfood industry. Recent introductions include 52 items, ranging from feedingaccessories to toys and children's wear.

The Hybrid ExtensionThe hybrid extension is the search for new growth opportunities by simultaneouslycombining market and product modifications. This strategy is used by NAPA, afranchise organization of auto parts aftermarket distributors serving the repairindustry and do-it-yourselfers. NAPA has expanded its operations to offerinstallation 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 thosedo-it-yourselfers who want to "trade up" to such services.

The greatest risk isthat by concentratingin a single product-market the firmis particularlyvulnerable to changesin that segment.

Overcommitment to aspecific technologyand product-marketcan hinder a firm'sability to enter a newor growing productmarket that offersmore attractivecost-benefit tradeoffsfor the firm.

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

Risks and Rewards of Concentrated GrowthUnder stable conditions, a concentrated growth strategy poses the lowest riskamong grand strategies to a firm's economic stability. However, in a changingenvironment, a firm committed to concentrated growth faces high risks. Thegreatest risk is that by concentrating in a single product-market the firm isparticularly vulnerable to changes in that segment. Slowed growth in the segmentmay jeopardize the company because its investment, competitive edge, andtechnology are deeply entrenched in a specific offering. Sudden changes by thefirm are difficult when the product is threatened by near-term obsolescence, afaltering market, new substitutes, or changes in technology or customer needs. Forexample, the manufacturers of IBM-clones faced such a problem when IBMannounced its adoption of the OS/2 operating system for its personal computerline. The change effectively made existing clones "out of date."

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

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

A firm pursuing a concentrated growth strategy is also vulnerable to highopportunity costs by remaining in a specific product-market when other optionsare ignored that could employ the firm's resources more profitably.Overcommitment to a specific technology and product-market can hinder a firm'sability to enter a new or growing product market that offers more attractivecost-benefit tradeoffs for the firm. Had Apple computers maintained its policy ofmaking equipment that did not interface with IBM equipment, it would havevoluntarily ignored the strategic options that instead have proven to be its mostprofitable.

RewardsExamples abound of concentrating firms that report exceptional returns on itsstrategy. Companies like McDonald's, Goodyear, and Apple Computers haveused first-hand knowledge and deep involvement with specific product segmentsto become powerful competitors in its markets. The strategy is even more oftenassociated with successful smaller firms that have steadily and doggedly improvedmarket 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 growthstrategy, medium-sized Deere and Company was able to become a major force inthe agricultural machinery business even when competing with much bigger firmslike Ford Motor Co. While other firms were trying to exit or diversify from the farmmachinery business, Deere spent $2 billion in upgrading its machinery, boostingefficiency, and engaging in a program to strengthen its dealership system. Thisconcentrated growth strategy enabled the company to become the leader in thefarm machinery business, despite the fact that Ford was 10 times its size.

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

ConclusionFirms that are tempted to seek revenue streams through commitment to unrelatedtechnology and markets or to lessen their dependence on mature products, mustfully understand the risks of such actions. The enticement to develop new productsand to expand into new markets must be tempered with the knowledge of highnew product failure rates. When assessing strategic options, managers shouldconsider the merits of concentrated growth. While building from a basis of stabilityand experience, concentrated growth strategies can also provide innovation andexpansion at manageable levels of risk.

Endnotes ' For a more detailed and comprehensivedescription oi alternative business strategies,refer to John A. Pearce II. "Selecting AmongAlternative Grand Strategies." CalUoiniaManagement Review, 30(2). Spring. 1982. 23-31.

^ A more complete list of nine reasons forabandoning a concentrated growth strategy isprovided 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 ProductsManagement for the 1980s, New York: Booz.Allen & Hamilton. 1982.

* The top selling book in which the term firstappeared is T.J. Peters and R.H. Waterman. InSearch of Excellence: Lessons From America'sBest Run Companies, New York: Harper. 1982.

^ For details on this study, see RogerCalantone and Robert G. Cooper. "New ProductScenarios: Prospects for Success." Journal ofMarketing, 45. Spring. 1981. 48-60.

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

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

' A comprehensive and indepth presentationof the study appears a s Donald K. Clifford. Jr.and Richard E. Cavanagh. The WinningPerformance: How America's High-GrowthMidsize Companies Succeed, New York: BantamBooks. 1985.

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

^ For a complete description and analysis ofthe study, see Robert G. Cooper. "The Impact ofNew Product Strategies." Industrial MarketingManagement, 12(4). October. 1983. 243-256.

'° For a provocative discussion of thecorporate strengths of specialists andgeneralists. see Glenn R. Carroll. "TheSpecialist Strategy." California ManagementReview, 26(3). Spring. 1984. 126-137.

About the Author John A. Pearce II, Ph.D. is the holder of the Eakin Endowed Chair in StrategicManagement in the School of Business Administration at George MasonUniversity and chairman of the school's Management Department. Dr. Pearce ispresident of the Southern Management Association, and past chairman of theAcademy'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 activeconsultant to business and industry.

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

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