The art of the trade-off

Trade-offs are a necessary part of business life but they can be painfully difficult for a CEO.

Unless you’re a supermarket, trying to be all things to all people ultimately leads to failure. Growing companies in particular have to focus their scarce resources on what they do best.

This point is perfectly illustrated by Yahoo. Take a look at the internet giant’s home page and it’s hard to work out what its core offering is. No wonder it has lost market share to Google, whose home page is a byword for simplicity.

There will always be temptations to look at what competitors are doing and try and emulate their success by launching new business lines and services. If we can just take 1 per cent of this market, the argument runs, it’ll be worth it.

The trouble is that often the power of a market leader is very difficult to combat. You may end up taking that 1 per cent of the market, but you’ll have little control of pricing and will end up diverting resources into barely profitable ventures – with a heavy opportunity cost.

Sometimes, it will even be necessary to close down or sell off business lines as a company grows and develops. This is particularly hard for most CEOs. It takes real confidence in your strategy, as you are closing doors that might, in future, lead to richer opportunities. And it may well involve job losses, or pruning off parts of the business you are personally attached to. But it’s an important step for companies to recognise what they’re good at and concentrate resources accordingly.

Laithwaites Wine, the company behind Virgin Wines and The Sunday Times Wine Club, is a case in point. When CEO Simon McMurtrie joined the company in 2007, it was selling 3,500 varieties of wine. He dramatically reduced the inventory along with staff numbers and restored the company to profitable trading, increasing global sales into the bargain. Revenues increased by nearly half to £344 million last year.

Needless to say, this doesn’t mean that you should never try anything new, and great things can come out of taking a company in a fresh direction. But such decisions should be taken as seriously as if you were starting a business from scratch, with a proper assessment of the market and a realistic appraisal of how sharp a competitive edge you’ll have. Meanwhile, there is always room to run your existing business better, deliver more to your current customers and win market share in the areas where you’re strongest.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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