Michael Jordan and Jack Nicklaus have two things in common. First, most people consider them to be the greatest in their respective sports. Jordan is considered the greatest basketball player and Nicklaus is viewed as the greatest golfer. Second, they both understand a fundamental principle of career success — focus on your strengths and don’t be get involved in business opportunities outside your area of competence.
In 1993, Jordan won his third straight NBA title, but for a variety of reasons, he quit basketball to play baseball. He thought because he was a world-class basketball player, he could become a world-class baseball player. As the sports world witnessed, that was not the case. In 1995, he went back to basketball and won another three titles.
Nicklaus has been just as successful in the board room as he was on the golf course. But this wasn’t always the case. In 1975, Nicklaus was $150 million in debt because he got into businesses that weren’t his strength. Specifically, car dealerships and radio stations. Nicklaus cut his losses and got back to his strength — the golf business. Nicklaus then went on to create a half-a-billion-dollar fortune designing golf courses.
Successful people spend the majority of their time and energy in fields in which they understand and excel. They don’t diversify into fields in which they lack expertise. Warren Buffett said it best: “Figure out businesses you understand and concentrate. It is no sin to miss a great opportunity outside one’s area of competence.”
The economics of being focused are pretty simple. In almost every industry, the majority of the profits will go to the top companies within that industry. For example, in many industries, the top 20 percent of the companies make 80 percent of the profits. Therefore, to be one of the best in an industry, entrepreneurs need to focus all their time and energy on their specific industry and not be distracted by other business opportunities.
In 1986, Roger Enrico, CEO of the Pepsi-Cola Company, came out with his infamous book, “The Other Guy Blinked — How Pepsi Won the Cola Wars.” In the book, Enrico took credit for provoking The Coca-Cola Company to engage in one of the century’s worst marketing blunders — the replacement of traditional Coca-Cola with “New Coke.”
Pepsi-Cola was a subsidiary of a much larger organization named PepsiCo, which was comprised of three separate businesses: soft drinks (Pepsi), snack foods (Frito-Lay) and a restaurant division (Taco Bell, Pizza Hut and Kentucky Fried Chicken). Although Enrico was doing a good job with the high-margin soft-drink subsidiary, his corporate bosses were subsequently investing most of Pepsi’s profits into the lower margin restaurant business.
In contrast, The Coca-Cola Company’s only business was soft drinks. So while PepsiCo was investing billions in pursuit of diversification, Coke was spending all its time and money dramatically increasing its global market share.
A little more than a decade after the release of Enrico’s book, Coke was kicking Pepsi’s can all over the globe because of its focused approach. While Pepsi was struggling to break $100 million a year in profit from overseas markets, Coke was generating more than $4 billion. Because of this, The Coca-Cola Company had a market value 300 percent larger than PepsiCo by the end of 1996.
On January 23, 1997, Enrico, now CEO of the parent company, announced, as if in concession, that PepsiCo would spin-off its restaurant subsidiary so that it could dramatically sharpen the company’s focus.
While focusing on your strengths usually means reducing the number of things that you do, it can sometimes mean expansion. Initially, Nike was only a running shoe company. But after Nike missed the aerobics craze in the early 1980s, which built Reebok into a huge competitor, the company correctly broadened its focus into becoming a sports and apparel company.
To achieve your greatest success, learn from people Jordan and Nicklaus. Focus on your strengths and don’t get involved in business opportunities outside your area of competence.
Originally published at medium.com