HispanicBusiness

NEW YORK, NY -- (Marketwired) -- 05/07/13 -- Leaders often try to expand into hot new growth industries, looking for accelerated performance they think isn't available in their core business. But that's a significant mistake, according to research by Booz & Company. In fact, companies perform better and produce better shareholder returns when they strengthen the key capabilities that help them win in their core industry. Companies that try to grow into new industries are likely to fail.

A Booz & Company study of total shareholder return (TSR) for 6,138 companies in 65 industries shows that, except for the best-performing (tobacco) and worst-performing (computers and peripherals) industries, mean 10-year TSR compound annual growth rates (CAGRs) across all industries were within 15 percent of one another. But within each industry, the top company outperformed the worst company by an astonishing 69 percent, on average.

"The analysis indicates that the best performance improvement and growth opportunity for a company is to rise to the top of the industry it's already in," said Evan Hirsh, Booz & Company partner. (Mr. Hirsh is the coauthor of "The Grass Isn't Greener," a recent Harvard Business Review article that references the study.) "Getting better at what you already do is what gives you the biggest upside," Hirsh added.

"Many leaders spend a lot of time and energy on finding a 'better' industry to get into," he continued. "They convince themselves that their company's growth is slowing because their core industry is unattractive, and the way out is to shift into a fast-growing industry. And boards routinely accept that conventional wisdom."

But the study found that in fact, moving into another industry generally isn't the best way to grow. "When we reviewed shareholder returns over the past decade, we found that median performance across most industries was strikingly similar," explained Hirsh. "What this indicates is that if a company expands into a new industry, the odds are not good that it will exceed its current performance. In fact, by focusing its attention on trying to compete in the new industry, the company will probably neglect its core business and fall behind there."

The better move is for companies to improve their performance and try to rise to the top of their own industry. "We've found huge differences in returns within each industry," said Kasturi Rangan, Booz & Company principal and coauthor of the Harvard Business Review article. "In every industry, there are companies that greatly exceed median performance. For example, the airline industry is often thought of as being a laggard, but the top performer there, Latin America's LATAM Airlines Group SA, has a 10-year TSR CAGR of 35 percent -- better than the median performers in any other industry, better even than the median performer in the best-performing industry, tobacco, where the median was 21 percent. The computer and peripherals industry is the worst-performing industry in the study. But the top performer there, Apple Inc., had a 10-year TSR CAGR of 54 percent. As the Spanish like to say, it's better to be the head of a rat than the tail of a lion. That is, it's better to win in a so-called bad industry than be an also-ran in a supposedly good one."