Stay within your core competence, venture not into alien territory

“Profit from the Core”
Chris Zook with James Allen
Harvard Business School Press, 2001


One way to view mergers and acquisitions that have, of late, become more frequent is to look at it from the seller’s end. Why is he selling a company that has been perceived to be raking in revenues and making profits? Or, why is the seller leaving an industry that is not even a dying one?

A respected group of companies is spinning off its food business. Its reason: “It is not within its core business.” A large American insurance firm has sold its Philippine and other Asian operations to a European company. Why? It has decided to focus on its domestic core business – meaning concentrate on its American market.

What is happening in the Philippines and the rest of Asia is happening everywhere. When managing boards review their sales, profits and shareholder values, they make strategic and monumental decisions: to spin off operations that are less profitable or that turn out to be pulling down the average growth rate of the entire company.

Viewed another way, those who have just acquired companies or invested into new ventures are paying close attention to their organization’s performance, the market’s response, and the new acquisition’s impact on their consolidated financial results – to find out early enough if such decision was wise. If not, they could go back to their core business.

Whatever point of view you are taking, you need a more systematic, logical and insightful approach – backed by careful study -- to evaluate a prospective deal: sell or acquire. Or, take a second look at a done deal – a buy-out, a merger, or a new venture. The objective: To find out if this action results or is resulting in sustained revenue and profit growth.

The book, “Profit from the Core,” takes a position on this subject, based on a study by Bain & Company’s Worldwide Strategy Practice: Ninety percent of all companies that invested outside their core business have failed to achieve sustained growth and failed to meet shareholder expectations.

The authors, emphasizing the virtue of staying within your core business, put it another way in a paradox: “From focus comes growth; by narrowing scope one creates expansion.”
The book gives you a mix of success and failure stories from among familiar global companies owning world-renowned brands to illuminate their findings in a number of studies. For example, Bausch & Lomb ventured beyond its highly successful soft contact lens business into electric toothbrushes (!), skin ointments (!) and hearing aids (!!). Result: Bausch & Lomb’s contact lens business “flattened out” and its $56 per share in 1991 plummeted to less than $33 per share.

After reacting with desperate measures, and after Johnson & Johnson entered the contact lens business with Vistakon, B & L returned posthaste to its original business. The book points out: “But precious ground, time, and capital have been lost. Even more important, new and strong competitors are now entrenched.”

Then the authors give this final word, a lament that could be shared by ill-advised straying away from the core business: “And it probably did not have to be this way.” Read about Amazon.com’s “all things to all people” policy, abandoning focus on books-on-demand from the Net, and how it incurred $1.2 billion in losses. Examples abound in the book, including the wise move of Pepsi to spin off its restaurant businesses to concentrate on beverage – and thus collide head-on with the leader, Coke.

It does not mean that a company remains at the core. The book reveals findings where “adjacency expansion”. This is the company’s move into related segments or businesses that utilize and, usually, reinforce the strength of its profitable core. “Building a profitable cushion around your 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 authors point out.

Equipped with tables and case histories, the book is a must-read for CEOs and corporate planners who have ventured into new projects, but who want to take a timely exit if need be; or who are about to respond to the “siren song” – as the authors put it – and be enchanted by a call to the unknown.

As global management consultants, the authors offer their advice to companies to, first of all, define their core business, then extract the utmost profit from it, and consider integration (backward and forward) – the old term for adjacent expansion – when industry turbulence dictates it or when competitors are posing a grave threat. This is easier said than done. The book provides insightful details.

Finally, to deliver the message even more powerfully, to forewarn companies about the seeming logic to stray away from their distinctive culture and competence in order to cash in on growth opportunities -- the authors give us this distilled wisdom:“Certainly, the world is full of paradoxes. To hit a golf ball farther, you hold the club looser. To make a plane lift off, you pull back on the throttle. To make the plant grow stronger and more quickly, you cut it back. To create the most organized economy in the world, you allow the free market to work its magic.”