When to stay focused on the core business

1 The bottom line

Stay with the core unless a new move uses what only you do well, earns strong returns, and leaves your best people free. Money is not scarce, but time, talent and focus are, so a distraction costs more than it seems.

2 Key takeaways

• Expand only where you hold an advantage others lack. A move built on your own skill extends the core, and a move into unfamiliar ground competes without it.
  • Jensen Huang, Nvidia2:18:11 waited until its Grace CPU could pair with its own GPU clusters, rather than fight Intel years earlier.
  • Eric Schmidt, Google4:01:40 would not fund a product that lacked a core technical insight.
• Test every new business for differentiation, size and returns. A new line that fails any one of the three only adds work.
  • Jeff Bezos, Amazon50:00 declined physical stores in 2006 because he had no differentiated idea, but backed Fulfillment by Amazon and AWS, which passed all three tests.
  • Jensen Huang, Nvidia1:32:49 passed on console chips because gross margin was only 29% in 2004, against about 66% on its GPUs today.
• Count the cost in talent and attention, not dollars. Your best people can only work on one problem at a time.
  • Steve Ballmer, Microsoft2:06:10 said bad acquisitions only lose money, but Vista pulled a huge share of the best engineers off the field for years.
• Get the current business working before you open another front. A new bet stacked on an unsolved problem compounds both.
  • Howard Schultz, Starbucks1:14:35 stayed in Chicago through a winter of poor results before moving on, and delayed New York.
• Staying narrow can also be a mistake. Focus protects an advantage, but it can blind you to a market that is moving.
  • Phil Knight, Nike2:10:05 refused to make aerobics shoes, and Reebok passed Nike in sales in 1988.

money is not the scarce resource the scarce resource is time and talent and focus

Steve Ballmer, Microsoft

2.1 Ask whether the move rests on what only you can do

A real expansion extends a skill or insight you already own, and a distraction asks you to compete where you have none.

• Wait for a reason that only you have. Jensen Huang, Nvidia2:18:11
  • Huang's rule is to do things others can't, not to fight over what anyone can do.
  • Nvidia entered CPUs only when it could build Grace to pair with its GPU clusters.
  • Nvidia began building its own Arm-based Grace CPU in 2022, after years living inside Intel's server architecture.
• Ask for the core insight before you fund anything. Eric Schmidt, Google4:01:40
  • Schmidt asked product managers what their core technical insight was.
  • The hosts argue that Google's wins mostly rest on a technical breakthrough that is the product, such as PageRank, the ad auction and Chrome's V8.
  • Google+ and Wave, built from a design idea alone, failed. Android is the exception that won through execution and distribution.
• Aim new research at the products you already sell. Mark Zuckerberg, Meta4:33:54
  • Facebook set up its Fair lab in 2013 to improve feed ranking and ad recommendation, not blue sky work.
  • It paid off in about two years, and without Fair, Reels would not have come out as fast against TikTok.
• Keep the product line tied to one shared thing. Soichiro Honda, Honda42:00
  • Honda resisted other fields and said its products must have an engine.
  • David Packard chose complementary instruments29:36 for measuring and testing electronics over unrelated businesses.
  • Sony's Ibuka credited Honda's concentration for engine technology that, in his words, only Honda has.

2.2 Run the numbers before you commit

A venture is worth entering only if it is differentiated, can grow large and beats the returns of your core.

• Apply a three part test: differentiated, large, strong returns. Jeff Bezos, Amazon50:00
  • Bezos said he had no idea for a meaningfully differentiated store and no interest in a commodity business.
  • He applied the same test to FBA and AWS, which passed it.
  • FBA let sellers use a 12 million square foot fulfillment network for 45 cents per month per cubic foot.
• Compare the margin with your core, and walk away if it is worse. Jensen Huang, Nvidia1:32:49
  • Huang's logic is that with finite resources a project must be unique and change the world.
  • Console revenue is low margin and can vanish when the next generation goes elsewhere.
  • Nvidia powered the original Xbox under a $500 million a year deal with a $200 million advance, but has since powered only the PlayStation 3 and the Nintendo Switch.
• Notice when a side business pays less than the core. Sol Price, Price Club51:28
  • Retailers wanted to sit next to Price Club, and Price, who loved real estate, pushed to develop the land.
  • Executives and investors objected because real estate returns were far lower than the warehouse business.
  • It pulled money and attention away just as competitors closed in.
• Measure new technology against the plain alternative of opening another store. Joe Coulombe, Trader Joe's3:04:00
  • Trader Joe's has no loyalty program, no shopper data and no e-commerce, because opening the next store is always wildly more profitable.
  • It still adopted desktop publishing for the Fearless Flyer because that cut costs.
• Do not let cleaner margins pull you off the capability that makes you win. Jeff Bezos, Amazon2:17:48
  • In 1998 Meg Whitman concluded warehouses were not cool and high margin internet businesses were.
  • Bezos reasoned that the best place to buy online needed reliable shipping, stock and trust, so Amazon had to hold the fulfillment.
  • eBay reached a $25 billion market cap in 1999, but Amazon passed it in 2007.

2.3 Count the cost in talent and attention

The price of a distraction is the best people and the daily focus it consumes, and that is usually larger than the cash.

• Ask which of your best people the project will take. Steve Ballmer, Microsoft2:06:10
  • Ballmer called Vista his worst moment as CEO.
  • Brian Valentine left Exchange to fix Vista, then left Microsoft for Amazon.
• Clear your own head of side bets. Andrew Carnegie, Carnegie Steel47:03
  • Carnegie sold his outside stocks because he checked quotations first thing each morning.
  • He wanted his mind calm and free to judge the problems of his manufacturing business.
  • He said he had rarely met a man who reached preeminence in moneymaking while interested in many concerns.
  • He had been spread thin across bridge companies and railroad stocks37:07 before he closed them to bet on steel. By about 1905 he sold to J.P. Morgan with a reported fortune near $250 million.
• Be suspicious of ventures far from your skills. Irwin Jacobs and Andrew Viterbi, Qualcomm1:45:55
  • In 2012 Qualcomm built a fab for its Mirasol display with no customers, and the iPad became the future instead.
  • Nvidia's Tegra phone chip35:30 used little of its core skills, and Android economics left little profit.
  • Morris Chang, TSMC26:15 put a former CEO on solar and LEDs in 2009. China's subsidies ruined solar, and LED patents sat with a few companies.
  • The Mirasol fab cost about $2 billion.
  • Nvidia also bought baseband company Icera in 2011 and then shut the effort down.
• Listen when your own people call it a distraction. Amancio Ortega, Inditex44:00
  • Ortega and his CEO thought buying Sephora was important, but most of the company saw it as a distraction from Zara.
  • Cosmetics was a business Inditex did not know or control, so they did not buy it.
  • Ingvar Kamprad42:02 put 25 to 30% of IKEA's assets into a TV factory stake. He said he did not learn from it and later lost more on a Russian sawmill.

2.4 Fix and finish what you have first

The safest expansion comes after the core works, and often it widens the core rather than leaving it.

• Open one new market at a time. Howard Schultz, Starbucks1:14:35
  • Howard Behar refused to compound growth in a new market with problems in an existing one.
  • Starbucks entered Chicago, LA and Portland and stayed until it had evidence of success.
  • Chicago did not work at first, and Behar stayed through the winter to recalibrate it.
• Learn from the first failed detour and go back to what you do. Sam Walton, Walmart15:35
  • Walton thought he could develop shopping centers nationwide without money, and his first one failed.
  • He returned to building stores and never again took his eye off that focus.
  • Ray Kroc11:31 left paper cups for a Florida real estate boom that vanished. Back in Chicago he vowed to devote every ounce of his energy to selling cups, and he sold them for 17 years before the multimixer.
• Solve your few goals in order. Hans Wilsdorf, Rolex35:53
  • He wanted watches that were precise, waterproof and self-winding, and solved them one after another.
  • Founded in 1905, Rolex took roughly 20 years to reach the first waterproof watch and about six more to the Perpetual.
• Widen the offer inside the footprint you already run. Dan Bane, Trader Joe's2:15:57
  • Bane moved customers from monthly party shopping to weekly groceries, taking SKUs from about 1,500 to about 4,000.
  • He kept stores the same size and refused to become a supermarket.
  • Revenue was about $1 billion when he joined and over $20 billion by 2023.

2.5 When it is a real expansion, give it room

A move that passes the tests still fails if it is buried inside the old business or built the wrong way.

• Grow in adjacent steps from what you already do. Henry Singleton, Teledyne26:30
  • Singleton wanted Teledyne to branch like a living plant, with managers recommending acquisitions in adjacent areas.
  • Seismic capabilities led to oceanography and offshore petroleum exploration.
  • Teledyne ran about 130 profit centers, and by 1979 only one lost money.
• Give a threatening new business its own leader. Jeff Bezos, Amazon38:18
  • Bezos judged that digital media managed inside physical media would never be a priority.
  • He gave digital a leader who focused on nothing else, in effect choosing to disrupt his own largest business.
  • Roughly 77% of Amazon's revenue then came from physical books, CDs and similar goods.
• Be patient with small seeds that have big potential. Jeff Bezos, Amazon52:10
  • Bezos wrote that in many large companies, growing new businesses from tiny seeds takes patience they lack.
  • Many Amazon employees had watched multiple $10 million seeds become billion-dollar businesses.
• Integrate only when members get more value. Jim Sinegal, Costco2:28:01
  • Costco found only four or five chicken processors, a concentration that keeps prices high. It rented a plant in Alabama to learn, then built its own in Fremont, Nebraska.
  • It stays a plain merchant where integration would not help.
  • Costco can now process 200 million chickens a year, out of about 500 million sold, which keeps outside processors honest on price.
• Put the famous name on a new product when it plays offense. Roberto Goizueta, Coca-Cola2:40:10
  • Coke put its sacred name on a diet drink in 1982 even though Tab led the category, and marketed it on taste.
  • Diet Coke was the number one diet drink in America by the end of 1983 and the third best-selling soft drink by 1984. 30% of its drinkers were men.

2.6 Cut what proved to be a distraction

Dropping a business that no longer fits is part of focus, and it often comes with the best results.

• Sell the capital-hungry units and keep the high margin core. Irwin Jacobs and Andrew Viterbi, Qualcomm1:34:40
  • In 1999 Qualcomm sold infrastructure to Ericsson and handsets to Kyocera, while settling lawsuits.
  • It kept the chip group and the licensing group.
  • Qualcomm stock rose about 26x in 2000, the best performer of that year.
• Make leaders name the business they are in. Steve Jobs, NeXT35:56
  • Andy Grove asked each NeXT leader what business they were in, and after six years they could not agree.
  • In 1992 Jobs sold the hardware division to Canon40:24 and kept the software.
  • NextStep let corporate customers build custom apps five to ten times faster.
• Pull back when a side brand dilutes the core asset. Axel Dumas, Hermès2:26:40
  • Hermès took stakes in Leica and John Lobb and created Shang Xia in 2009.
  • The hosts judge the Leica stake and Shang Xia misplaced, because French heritage is its core asset.
  • It divested Leica and later sold Shang Xia to the Agnelli family.
  • Dumas strategy means picking your fight2:57:00, and he is disappointed when his team says it does everything at once.
• Drop a service that drags you into other people's problems. Joe Coulombe, Trader Joe's1:15:00
  • The wine bank stored customers' collections, and in divorces one spouse raided it and the other sued.
  • Trader Joe's no longer runs wine banks.

2.7 Where they differ

The right amount of focus depends on the era, the market and which parts of the business are the true core.

• One product can win, until buyers want choice. Henry Ford, Ford Motor Company24:26
  • Ford held over 50% market share with one black Model T.
  • Billy Durant built GM by buying Buick and Cadillac and offering cheap, medium and luxury cars. Once buyers wanted cars that said something about them, GM's lineup took over.
  • David Senra's point is that two founders with opposite philosophies each won, depending on the era.
• Refusing a new market can be hubris. Phil Knight, Nike2:10:05
  • With about half the running market, Nike refused on principle to make aerobics shoes, and Reebok took the market.
  • Later, Nike stopped buying brands2:51:40 like Converse and Cole Haan and bought digital capabilities that extended the Nike brand.
  • Nike's four apps now reach about 500 million users a quarter, and 40% of its $50 billion revenue is direct.
• One basket or many branches. Andrew Carnegie, Carnegie Steel47:03
  • Carnegie said to put all good eggs in one basket and watch that basket.
  • Henry Singleton26:30 spread Teledyne across many businesses so none mattered too much, and it worked because each branch grew from an adjacent one.
• Outsource the commodity, but build the core yourself. Jeff Bezos, Amazon Web Services48:50
  • The hosts frame AWS as removing undifferentiated heavy lifting so engineers focus on what makes the beer taste better.
  • Qualcomm designed chips but outsourced fabrication1:31:30, because manufacturing was a commodity and the differentiation sat in IP and semiconductors.
  • Sam Walton, Walmart1:36:00 built logistics in house, because when best in class infrastructure does not exist and the capability is your competitive core, building it is right.
  • Kmart borrowed Kresge's network and led for two decades, but Walmart's logistics beat it.