It’s typically advisable for companies to focus on their strengths rather than try and broaden their reach too far and enter domains in which they are not strong. Colgate’s entry into the ready meals market is a good example.

Research from the University of Notre Dame explores this desire to focus on one’s strengths while also showing sufficient ambition that you’re able to branch out into new areas.

“We wanted to think about how CEOs manage focus versus breadth of opportunity,” the researchers explain. “When CEOs focus on just a few issues do they perform better? Or, for CEOs who do not follow that advice, do their organizations end up essentially chasing squirrels?”

Available opportunities

The researchers suggest that rather than dealing in absolutes, a better approach would be to act based on both the quality and quantity of opportunities available to them, while also considering the previous performance of the firm in capitalizing on such opportunities.

They hypothesized that a shortage of low-quality opportunities would result in leaders casting their net wider to search for potential growth opportunities, with this especially so if the organization is using its existing resources efficiently.

They tested this theory by asking a number of consulting firms to categorize the various activities organizations focus on, while also conducting a literature review to understand how strategic opportunities are characterized.

Categorizing choices

The analysis revealed 13 different categories that cover a range of options CEOs tend to focus on. These include improving stakeholder management and customer experience, pursuing joint ventures, and buying other firms.

Software was used to analyze the transcripts of earnings calls to understand how aligned executives were with each of the categories. The transcripts were pulled from a random sample of half of the S&P 500.

“We wanted to have a representative sample of large public companies in part because these are the organizations that are leaders in their industry and have a disproportionate influence on the success and failure of industries as well as consumer welfare,” the researchers explain.

The results show that focus was the best strategy for the majority of organizations, but that it’s not an approach that should be universally applied.

“If a CEO is facing a market where there’s not a lot of opportunities, focus doesn’t work as well and they need to branch out,” the researchers say. “Same goes for a firm that has struggled to convert opportunities into results. So if in the last couple of years they’ve struggled to take their value proposition and make it work effectively, those organizations can benefit from broader strategic attention.”

Similarly, if a company was generally efficient at using the resources available to it, then a broader focus can be an effective strategy. If the company is not efficient at using its resources, then limiting its focus tends to work better.

“It’s a bit counterintuitive because you would think that if there’s a strong market with a lot of opportunities out there, it would make sense to go out and try to grab those,” the authors conclude. “But we find in the data that CEOs end up destroying more value when they try to chase those opportunities. That’s because there’s a tension with cognitive overload. When CEOs and organizations pursue too many things, they end up not doing as well at anything. So you spread yourself too thin.”