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An operations manual, compass, and mine detector for achieving sustainable and profitable growth
April 28, 2010
In this Updated Edition of Profit from the Core published by Harvard Business Press (2010) and written with James Allen, Chris Zook provides updated key examples while adding new ones and renders "the lessons learned in a way that management teams can use can use as a tool to reflect on the way forward in today's economy."
Given what Zook characterizes as "the current structural crisis in business," referring to developments during the "turbulent times" since the collapse of Lehman Brothers in 2008, here are the key points he lists in the Preface:
* Sustained and profitable growth requires a strong, well-defined core.
* Most sustained profitable growth companies have leadership positions in their cores that form the epicenters of their strategies.
* The number-one rule of strategy is to discourage your customers from investing in your core.
* The greatest source of strategic error, he and associates [at Bain] find, stems from an inaccurate understanding of the core and its full potential.
* Strong cores often contain hidden assets that prove to be the seeds of the next wave of growth - the topic of his previous book, Unstoppable.
* The key to sustained and profitable growth is to find a repeatable formula that utilizes the most powerful and differentiated strengths in your core and applies them to a series of new "adjacent" markets.
Zook's concept of "core" bears striking resemblance to Jim Collins' concept of the "Three Circles"," introduced in Good to Great: (a) What a company can be the best in the world at (and equally important, what it cannot be the best in the world at), (2) What drives the company's economic engine, and (3) What those in the company care most passionately about. For Zook, a core business "as that set of products, capabilities, customers, channels, and geographies that defines the essence of what the company is or aspires to be to achieve its growth mission - that is, to grow its revenue sustainably and profitably...The essence of a company's growth strategy is to define the core business as we have defined it and to pour company resources into this core business until it achieves its full potential."
Of special interest to me is what Zook has to say about five paradoxes that most management teams encounter when seeking to revitalize the growth of their company. They usually focus on the underperforming units. Zook and Allen argue that "growth requires instead on increasing the performance of the best businesses, no matter how well they are doing at present. Why? Paradox #1: The better performing of business units are likely to be those operating the furthest below their full potential. When discussing adjacency expansion, they introduce Paradox #2: "The stronger your core business, the more opportunities you have both to move into profitable adjacencies and to lose focus." When addressing when and how to redefine a core business, they introduce Paradox #3: "The management teams that have been most successful in building a strong core business and that have benefited from adjacency expansion are also the most vulnerable to industry turbulence." In Chapter 5, they provide some guidelines for the process of developing and refining growth strategy, then introduce Paradox #4: "All organizations inhibit growth...Overlying all the analysis in this book is a final paradox: From focus comes growth; by narrowing growth one creates expansion."
In order to continue creating value, it is eventually necessary for any company to invest in adjacencies. There are three basic types: a direct move into an immediate opportunity (e.g. Enterprise Rent-a-Car); an "option" purchased in a business related to the core, functioning as a hedge against future uncertainties (e.g. Intel and Microsoft); and a series of sequential moves that expand the boundaries and capabilities of the core business (e.g. Cisco's acquisition of Pure Digital Technologies). Whichever approach is selected, there are certain "pitfalls" that must be avoided. They are identified in Chapter 5 and there are seven of them: expanding toward an entrenched position, overestimating the profit pool, false bundling (of products, services, or both), invaders from unexpected directions, failing to consider all adjacencies, missing a new segment, and single-mindedly (stubbornly?) pursuing high-end adjacencies. They are thoroughly discussed on Pages 97-105.
In the final chapter, Zook poses ten questions that he and Allen believe management teams should periodically ask themselves about their companies and at the start if every review of their basic growth strategy. Here are the first three:
1. What is the most rightly defined profitable core of our business, and is it gaining or losing strength?
2. What defines the boundaries of the business that we are competing for, and where are those boundaries going to shift in the future?
3. Are there new competitors currently at the fringe of our business that pose potential longer-term threats to the core?
Long ago during one of his first meetings with the Green Bay Packers, Coach Vince Lombardi stood next to a blackboard, held up a piece of chalk, and claimed, "I can beat any offense or defense with this." The same is true of asking questions such as those that Zook and Allen pose when concluding the final chapter. In football it is far more difficult to execute the right strategies than it is to present them on a blackboard but you need to do both. In business it is far more difficult to formulate the right answers than it is to ask the right question but, again, you must do both.
In this Update Edition of a book first published in 2001, Chris Zook with James Allen provide a wealth of information and counsel that a management team needs in its quest for sustainable and profitable growth. I agree with them that turbulent conditions create "confusion, blurred boundaries, less time to react, less tolerance for error, and often fewer resources" but they also create "unique opportunities to strengthen and expand string cores, and even to invest to reshape the structure of [its] industry ahead of competitors." For those in need of an operations manual, compass, and mine detector, here it is.