Profit From the Core : Growth Strategy in an Era of Turbulence

FROM THE PUBLISHER

Ninety percent of companies failed to achieve sustained, profitable growth over the past decade. While popular wisdom calls for "new rules" for strategy and organization, a breakthrough study reveals the right response to the growth dilemma is usually a return to the fundamentals of business economics.

Profit from the Core argues that a timeless strategic principle -- building market power in a well-defined core business -- remains the key source of competitive advantage and the most viable platform for successful expansion. Based on a 10-year study of 2,000 companies conducted by Bain & Company, the book identifies three factors that differentiate growth strategies that succeed from those that fail: (1) reaching full potential in the core business; (2) expanding into businesses adjacent to that core; and (3) preemptively redefining the core business in times of market turbulence.

An indispensable strategic guide for leaders in all industries, this book identifies enduring and often counterintuitive lessons on achieving profitable growth over the long haul.

A Conversation with Chris Zook and
James Allen, authors of

Profit From The Core Throughout the unprecedented decade, the US economy has been led through a period of turbulent growth. But turbulence also means going through a recession. Do the same principles of a strategy for growth apply in times of an economic slowdown?

The principles of strategy and the findings of our study are even more critical to observe during times of economic downturn for four primary reasons. First, it is during these times that companies discover the true cost of misadventures in growth, which sap resources that are even more lacking during difficult conditions. Second, during a boom time when capacity is tight it is the high cost producer who sets the price and still receives volume. During more difficult times, it is the low cost producer with strength in the core who benefits the most. The profit pool shifts almost entirely to the strongest cores during an economic downturn. Third, examining new growth initiatives are more important than ever to make sure that they strengthen and reinforce the core. This is no time for some of the errors described in the book such as the Bausch & Lomb movement away from contact lenses. Leaving the core underprotected or underresourced is extremely dangerous when every competitor is scrapping for the final shred of market. Finally, the downturn can be a very interesting time for a strong core to acquire or attack weaker competitors, or to acquire smaller companies with key capabilities to help strengthen the core.

What does the threat of an economic slowdown mean for business executives?

With the business environment rapidly changing every day, the goal posts are shifting and narrowing for management. The value shareholders now assign to companies, which represents an average of twenty-six times their price-earnings ratios, demands that those companies grow at a rate three to four times that of the gross domestic product, the total value of a nation's goods and services. Investors are also giving management teams less time than ever to prove themselves. For example, shareholders are shifting in and out of stocks at five times the rate they did a few decades ago, demanding not merely overall growth but continuous growth each and every quarter. Management has been hit with defections of the best talent, and it has become much more difficult to attract and retain new employees. Finally, the rules of the game are constantly changing and industry turbulence has increased by a factor of four, making growth strategy an impossible game to play.

Your analysis shows that nine out of ten management teams fail to grow their companies profitably. Why is this happening, particularly in a time where management is flooded with revolutionary business solutions?

Yes, there are a plethora of new management rules available today, most of which say to discard your historic core business and set out for the promised land. These quick fixes usually do not solve the fundamental problem, and in many cases, they can even aggravate the underlying cause of inadequate growth. Although some of these practices do work, we have found that the key to unlocking hidden sources of growth and profits is to focus on the core business with renewed vigor and a new level of creativity.

Can you give us an example of a company that has failed to achieve sustained growth because they moved away from a core business?

Bausch & Lomb is a prime example of a company departing from its core. Long-time leaders in the contact lens business, Bausch & Lomb transformed the industry in the 1970s by creating the soft contact lens. Throughout the mid-1980s they developed and executed brilliant strategy, driving one competitor after another out of the market and causing others to disinvest in the business. The company's share of new lens fittings rose to 40 percent of the market, several times larger than that of its nearest competitors, thereby becoming the darling of Wall Street. But, as competitors began attacking with new technologies, Bausch & Lomb abandoned their core and began investing in products such as electric toothbrushes, skin ointments, and hearing aids, yet Bausch & Lomb failed to link these new products to the core lens business. The result? The stock that had risen from $3 per share in 1973 to $56 a share in 1991 plummeted to less than $33 per share, putting Bausch & Lomb in third place in contact lens sales behind Johnson & Johnson and Ciba Vision.

Have you witnessed any "New Economy" companies losing sight of their core business, leading to a decline in profits?

For most new economy companies, it is too soon to estimate whether they will achieve sustained growth. Amazon.com, however, exemplifies the complex choices facing a young organization with an unproven business model. The company got its start, as most everyone knows, with online sales of a product with a notoriously inefficient distribution channel: books. By sidestepping the traditional bookstore business model, market capitalization rose to more than $30 billion in 1999 on $500 million of sales. During this time, Amazon increased the stakes, trying to become what its CEO, Jeff Bezos calls "a place where you can buy anything and everything." Amazon moved into power tools, consumer electronics, garden furniture, and even cosmetics. Only time will tell if this new "all things to all people" model will pay off, or if Amazon should have remained faithful to its roots. In the meantime, cumulative losses have mounted to $1.2 billion, and investor nervousness is high, resulting in a 70 percent stock price decline.

How would you recommend a company begin defining its profitable core?

Business definition is one of the most frustrating activities for senior executives. It is extremely difficult to arrive at a clear answer to the question, "What is our core business?" In working toward a useful business definition, executives need to first identify the five following assets of their company: ￯﾿ﾽ The most potentially profitable, franchise customers ￯﾿ﾽ The most differentiated and strategic capabilities ￯﾿ﾽ The most critical product offerings ￯﾿ﾽ The most important channels ￯﾿ﾽ Any other critical strategic assets that contribute to the above (such as patents, brand name, position at a control point in a network). These elements will be invaluable in determining an organization's core business.

You talk about adjacency expansion as the second crucial element of a company's growth strategy. Can you explain adjacency expansion and why it is so important?

Adjacency expansion is a company's continual movement into related segments or businesses that build on, and usually reinforce the strength of the profitable core. It is through adjacency expansion that a company in a stable industry repositions itself to go after the most attractive new profit pools or to respond to new environmental conditions. Expansion into logical adjacencies around a core business is an offensive strategy, but it can also have defensive implications. Building a profitable cushion around a core business can help to keep new invaders away or to block a sequence of a competitor's moves that lead into your core. The most successful companies have the largest number of adjacency opportunities raining down upon them every day.

Can you give an example of a company that has been able to successfully expand?

We have witnessed many companies that have effectively expanded by moving into related businesses. One of the more notable firms in Nike. From 1976 to 1983, Nike focused on its running shoe core to grow sales at an annual rate of 80 percent. But the running shoe business slowed to zero growth, on average, from 1983 to 1987. Nike responded and surged powerfully by extending its running franchise into new product segments including clothing. In this way, Nike rekindled growth to 36 percent per year from 1987 to 1991. When Nike's growth again slowed, this time to 8 percent from 1991 to 1994, the company refocused on its athletic show business with emphasis on celebrity endorsements. The move restimulated growth to over 30 percent a year. Inevitably, growth has slowed yet again, and Nike has launched its next round of expansion focusing on a new golf line. Nike is a prime example of a company that has developed a strong core and then repeatedly reignited slowing growth by finding the next logical, large-scale adjacency in which to expand.

You talk about the "Redefinition Dilemma" as the third element of growth strategy. Can you explain this?

The business world is extremely unstable, and there will be times when a company will have to redefine its core in order to survive and thrive. We have identified five main causes of industry turbulence that should cause management teams to face the dilemma of redefining their core business-even if the core is successful. The first cause is technological change. Information networking and retrieval software, such as Napster, quickly whipped up a hurricane in the music industry and, just two months later, in the film industry. A second cause is the emergence of a new, low-cost business model enabled by a variety of technologies coming together at the same time. The impact of category superstores, such as Staples in office supplies and The Home Depot in hardware, on department stores such as Sears illustrates the effects of this type of turbulence. A third cause can be government regulation that suddenly increases or decreases competition, such as the deregulation of the airline industry. The fourth cause is a discontinuous change in the fundamental nature of customer demand and need. The decision that Wal-Mart and other national chains made in 1994 to switch from local to national magazine distributors, for instance, precipitated a major price collapse and industry consolidation. Finally, the Internet is changing industry after industry from recorded music to securities. The best-performing companies in recent years have been the ones that have successfully redefined their core business to adapt to these changes.

SYNOPSIS

Ninety percent of companies worldwide failed to achieve sustained, profitable growth over the past decade. While current business wisdom calls for "new rules" for strategy and organization, a breakthrough book reveals that the answer to the growth dilemma actually lies in basic, enduring economic principles.

Based on a sweeping ten-year study of more than two thousand technology, service, and product companies in a variety of industries, Profit from the Core argues that most growth strategies fail to deliver value-or even destroy it-primarily because they wrongly diversify from the core business. The authors contend that this timeless strategic precept-building market power in a well-defined core-remains the key source of competitive advantage and the most viable platform for successful expansion.

Drawing from hundreds of in-depth case studies, interviews with more than one hundred CEOs, and the authors' broad consulting and business experience, the book identifies and explains three key factors that differentiate growth strategies that succeed from those that fail: (1) reaching full potential in the core business; (2) expanding into logical adjacent businesses surrounding that core; and (3) preemptively redefining the core business in response to market turbulence.

The authors identify the classic problems that incumbents encounter in each of these areas and-borrowing lessons from private equity and start-up ventures-explain how to resolve them in today's rapidly changing business environment. The book concludes with guidelines for how companies can become sustained value creators-capable of successfully refining and revamping the core business over time.

Identifying enduring, often counterintuitive principles that fly in the face of new economy hype, Profit from the Core is an indispensable strategic guide to achieving long-term, profitable growth in any business.

Author Biography: Christopher Zook is a Director of Bain & Company and Head of its Worldwide Strategy Practice. James Allen is CEO of eVolution Global Partners, a venture capital firm that helps launch new, Internet-enabled businesses.

FROM THE CRITICS

Entrepreneur Magazine

These simple ... powerful ideas emerge smoothly and convincingly from the mass of data and techniques Zook and Allen have compiled ...

INC Magazine

The book makes a persuasive case that you should focus on what your company does best.

Business 2.0

A book such as Profit from the Core comes at the right time.

Journal of Business Strategy

Reason to Buy/Read: Solid, practical and pragmatic ways to study your company's core business(es).

Boston Globe

It puts forward an answer to dot-com mania.Read all 8 "From The Critics" >

WHAT PEOPLE ARE SAYING

David S. Pottruck, President and Co-CEO, The Charles Schwab CorporationZook and Allen remind us that, in the long run, very few companies achieve sustained and profitable growth. To make yours one of them, heed these lessons. — David S. Pottruck

Brook Byers, Venture Capitalist, Kleiner Perkins Caufield & ByersThis back-to-basics book couldn't have come at a better time for CEOs and managers of 'old economy' and 'new economy' companies looking for growth. Their focus should be on expanding and innovating in and around their core business, rather than on chasing whatever the capital markets view as the current hot business model. — Brook Byers

James L. Vincent, Chairman of the Board, Biogen, IncAnyone who has built a successful business knows that these core business concepts are central to sound strategy. Core business theory and value creation are inseparable twins. — James L. Vincent

Mark W￯﾿ﾽssner, Former President and CEO of Bertelsmann AGThe authors make a compelling argument for sustainable, profitable growth. They bring a refreshing approach to corporate strategy, arguing that the job of CEO isn't to adopt the latest fad du jour from business gurus, but rather to focus on creating a winning business. — Mark Wossner