Finding Your Next Core Business
No competitive formula lasts forever — in fact, only one in 10 companies achieves sustained and profitable growth over a decade. This is because the frequency at which companies encounter what Chris Zook, author of Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, dubs “inflection points” is increasing. Zook, who leads Bain & Company’s Global Strategy Practice, states that companies have begun to reach their natural growth limits faster due to the following situations:
- Faster movement of information, capital, executives and low-cost competitors;
- Reduced capital intensity in profitable new industries;
- The rise of private equity; and
- Accelerated technology evolution.
As a result, he says, the “focus-expand-redefine” business cycle had sped up considerably, meaning more companies need to make fundamental changes to their core businesses sooner to keep up.
Cutting to the Core
Zook penned Unstoppable as the last in a series of three books (the other two are Profit from the Core and Beyond the Core) on how companies can revitalize and capitalize on their core businesses. The book offers practical advice on accomplishing what could be a leader’s most daunting professional task, and the statistical findings from several studies about how companies go about reinventing themselves provides both proof and consolation about what works. Here too are stories of how De Beers, Samsung, Royal Vopak, Avis, PerkinElmer, Harman International and others went from unsustainable to unstoppable.
Zook stresses the importance of knowing when it’s time to revise a core strategy. For instance, a company needs to consider altering its core business when the industry’s profit pool is shrinking or shifting, when there is a direct threat from new technology, when the company’s growth function has plateaued or when its distinctiveness has eroded. However, redefining a core business costs money and time. Often it includes restructuring and in some cases, shrinking before growing. But effective change is rewarding: Statistically, Zook writes, industry leaders capture most of an industry’s profit pool, they garner premiums in the capital markets and they are more successful at moving into other activities.
Digging for Gold
However, there are three wrong ways to redefine a company’s core, writes Zook: defending the status quo (that is, hoping everyone is wrong, which doesn’t work when technology changes), betting the farm on a “big-bang” transforming move (like Time Warner did when it acquired AOL), and diversifying into trendy new markets.
So Zook offers a better option: use existing assets in or near the company’s core business in a new way. Although it’s still risky, the method has a success rate four to six times higher than the other three. How do you find hidden assets? According to Zook, it’s probably a hidden asset if: customers keep asking for it, it grows profitably without much required attention, it prospers in the middle of a large and growing profit pool, it is a leader (even in a small market), it has capabilities that demonstrate world-class excellence or it is related to but different from the core business.
Hidden assets fall into three categories: (1) undervalued business platforms, such as new geography, distribution channels, customer segments, products or services; (2) unexploited customer assets, such as databases, brand power, proprietary data or unrecognized niches; and (3) underutilized capabilities, which can be linked in a new way. In a Bain survey of 105 companies that redefined their core operations using hidden assets, 7 percent of the time the hidden asset was an underused product line; 34 percent of the time the hidden asset was an unexploited adjacency; and 26 percent of the time the hidden asset was a major capability or internal support function. Zook’s keen advice, businesses can discern the necessary steps to take to define their core and exploit their hidden assets.
Why We Like This Book
Unstoppable is a book with four themes: understand your core business, be willing to shrink in order to grow, learn to use new perspective and passion for operational excellence to see hidden assets and don’t be afraid to redefine your organization. Other books, like Good to Great, focus on improvement through operational changes, whereas Unstoppable focuses on the strategic dimension of performance renewal.