I’ve published several posts on the power of focus. (Heck there’s a whole category in the blog history on it). Bottom line, companies improve their performance by narrowing their focus. Diversification usually makes the bottom-line worse, even if it improves the top line.
Today’s example is Gibson Guitar. Probably the most famous guitar brand in the U.S., they filed for bankruptcy last week. Well, the current incarnation of the company, Gibson did. You see while they still make the iconic guitar, back in 2010 when they were doing “only” $300MM in revenue and 12.9% profit, their CEO decided to “diversify.” Five years later they were doing $2.1B in revenue with a 4.1% profit margin. Skill and excellent management strikes again.
The guitar business is still growing. They have a 20% market share in electric guitars and over 40% market share in guitars costing over $2K.ng. It’s the rest that’s a mess, along with huge debt that came from the acquisitions for diversification.
What went wrong? A lack of focus, driven by a strategy to take Gibson from a guitar brand to a “lifestyle brand.” Seriously? Did the CEO think that up all by himself or did he pay somebody to help him? The lifestyle focus took them into headphones, speakers and turntables including the Phillips and Onkyo brands among others.
They are restructuring to cut other than the guitar business it would seem. The CEO owns 36% of the company, which he undoubtedly will lose most of in the restructuring. At least it is not just public shareholders being hosed by this failed strategy.
Unfortunately, many companies believe that once they go public they must keep growing the top line to drive an ever-increasing stock price. This may be true, but an ever-increasing bottom-line is what really matters; and that comes from focus.