Chris Zook Highlights the Most Important Ideas from Growth from the Core

Chris Zook highlights the most important ideas from Growth from the Core The Secret to Growth? First, Define Your Core Chris Zook is a partner at Bain & Company and leads the firm’s Global Strategy Practice. He is the author of Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth. On a recent trip to Shanghai, I visited Suzhou Industrial Park and saw, out the window of my bus, what appeared to be a long dark band — like a Möbius strip — winding its way around many buildings. I looked closer and I realized that the band was a line of thousands of people, two abreast, inching their way toward the entrance of what I learned was a massive job fair. This seemingly endless ribbon of humanity was supplying labor to a park that was expanding seven miles in each direction each year, adding a new factory every four days. Only 10 years before, the same park had been a rice paddy. Now it was a gold rush town. Transforming the “core” of its economy at its highest level, China has found that its people, unshackled and unleashed, are its ultimate hidden asset. There is a lesson here for companies. More organizations than ever before are entering a period of globalization where their historic core is not enough. The good news is they may already have what they need to win, to dramatically transform their core business model and renew profitable growth. The first step in figuring out just what those cards, or “hidden assets,” are is to define your core business itself. How do you define your core? Start by being realistic. What are you best at? What is the economic center of your activity? Your core relates to the root cause, several levels down, of your competitive advantage. What is the state of that advantage? Is it relevant to the consumer right now? And what about your business’s boundaries: Is the market in which you can compete using your core assets? What’s your reason for being? Ask yourself how long it has been since your company talked at length about the boundaries of the core or the root cause of differentiation several levels down — or, better yet, since you made a full assessment of the state of the core itself. What did your assessment say? At worst, such an exercise reinforces your known strengths. At best, it could save you and your employees from standing in a long line at a job fair. Alexander the Great, Google, and the Full Potential of the Core In career terms, it’s called the Peter Principle. In corporate terms, I call it the Alexander Problem. Either way, it’s moving too fast beyond your strength and core. Alexander the Great fell prey to this management shortcoming even though — or more accurately because — he quickly conquered the largest area of the earth ever ruled by a single individual, stretching from Mount Olympus to Mount Everest. Though not everyone’s idea of the model CEO, Alexander achieved this goal in less than four years, covering more than 4,000 miles by foot, and winning l00% of his battles. This is a remarkable record. But did he create lasting value? Just a few years after his death, his empire had dissolved. Alexander’s problem was not poor execution, it was lack of long-term strategy and inability, because of extensive departure from his core of governance in Macedonia, to consolidate his extraordinary short-term gains throughout the Orient to India. This tension between expanding the boundaries of a business, in the presence of success and seeming invincibility, and maintaining the original core, is at the center of business strategy today, as more and more companies face slowing growth in their traditional lines of business. 1 Chris Zook highlights the most important ideas from Growth from the Core Google, for instance, reacting to a decline in its core business of selling ads tied to search terms, has been scouring the landscape for new fields to conquer. It bought YouTube for $1.65 billion in 2006 (and soon found itself facing a $1 billion copyright infringement suit from Viacom). This year it has bought 11 more companies – ranging from a video conferencing provider to a parallel processing company. Capping this quest was its $3.1 billion acquisition of DoubleClick. With outlays of this magnitude, and at these price premiums, Google will find the next wave of profitable growth increasingly difficult to achieve. Spurred by such need for spectacular success, more and more companies are likely to face the Alexander Problem. Many will find that one of the greatest mistakes in business is to prematurely abandon the core in search of hot new markets, technologies, or opportunities. Our surveys repeatedly show that more than 60 percent of executives say that their core business is not within 50 percent of its full potential for profitable growth. Yet most of them are not sure where that potential lies. What is the full potential of your core? How do you know? These two questions need to be at the top of the agenda of any system for evaluating growth opportunities in companies. Though it may sound obvious, the road to full potential begins with the first step of self-awareness. More management teams should ask each other more often in their off sites and strategy meetings these four questions: What is our core? What is the root cause of our competitive advantage today? What will each be in the future? Legend has it that Alexander cried when he discovered he had no more worlds to conquer. He might cry harder today. For maybe even sadder are hard-fought gains lost, or a strong core rendered weak by overexpansion. The Value of Leadership Economics Successful companies considering their next act shouldn’t stray too far from their core. Positions of leadership, even in sub-segments of your business, may be more valuable than you realize. Usually a core of leadership economics accounts for most of the value of a company. How much? Our analysis reveals that the typical industry has more than six competitors. The top two usually capture more than 75 percent of the profit pool, and the company with the greatest market power usually snares about 70 percent of total profits and 75 percent of profits above the cost of capital. Wanabees act as the shock absorbers of the economic system, enduring a much bumpier ride during downturns. When we analyzed 22 pairs of global leaders and followers (Nike versus Reebok or Bridgestone versus Continental, for example) we found that the average variance in profit margin was three times as great for followers as leaders. When thinking about new directions, clear leaders also have a much greater success rate at driving their core business into areas close to their core: more than 40 percent. Followers, though, even with relatively close-in growth moves, have a success rate of only about 17 percent. Accounting systems tend to obscure the power of leadership economics. This is true not only in finding the launching pad for transformation but also in appraising the odds of success of an adjacent move, or even in assessing the value of investing in pure market share. Ask yourself whether you are absolutely sure that you understand the true boundaries and profit economics of any leadership positions you do have. As it turns out, followers can sometimes have pockets of leadership that they don’t realize exist. One such was Enterprise Rent-A-Car’s top position in the niche replacement and body shop business, serving customers whose vehicles were being repaired. Creating a new strategy around this core may have been unanticipated, but the results were no accident: today Enterprise is the world’s largest car rental company. 2 Chris Zook highlights the most important ideas from Growth from the Core When it comes to wanting a larger stage for your talents, it pays to determine where you are already the best. Even then it remains a hard slog. In our study of 801 U.S. followers’ movements from 1990 to 2001, only 10 percent actually moved into the leader’s circle. But if you do nothing, the odds are zero. What is in Your Company’s Investment Wheelhouse? The average strong core business might have as many as 70 to 100 investment opportunities that radiate around it, everything from new customer segments to geographic expansion. Tempting as many are, though, most are outside the strike zone. As an analogy, think of Tony Gwynn, the former Padres right fielder, who will be inducted into the Baseball Hall of Fame this month. His potent hitting at .338 over his career spurred pitcher Al Leiter to say, “The only way to pitch to Tony is throw the ball down the middle and hope he hits it at someone.” Yet consider the slim margin between Gwynn and a journeyman player batting somewhere around .240. In other words, the batting difference between a “futility infielder” and a 15-time All Star is a scant 10%. The point is that it matters hugely in adjacency moves whether the odds are 20% or 50% and whether they can create competitive separation of the kind that characterizes Nike and Dell (as opposed to Reebok and Gateway). How do you increase your average? Four big factors are at play: 1) Does the idea emanate from the customer, or has it been validated by the core customer? Some 85% of the best adjacency ideas are. 2) Does it follow a repeatable formula, such as the kind Nike has used to enter one new sports market after another? 3) Is it clearly related to the core and within two steps of it? 4) Does it build on leadership economics or a strong core? With the typical odds for success at only 25% (or about the same as the average Major League hitter), stardom hinges on establishing clear, agreed-upon criteria on what constitutes a great opportunity.

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