There is no question that “growth” is back at the top of any CEO’s strategic agenda. “However, the mindset that has developed around growth projections is totally unrealistic for most companies – even considering the past decade of strong, economic expansion” argued Chris Zook during his growth strategy presentation last Thursday at HBS. The event, which was organized by Bain & Company and the Management Consulting Club, gave HBS students the opportunity to hear Chris Zook discuss his first book Profit from the Core, which was recently published by the Harvard Business School Press.
Zook, a Director of Bain & Company, leads the company’s Global Strategy Practice and has specialized in helping companies develop and implement growth strategies. Over the last ten years, Zook and his colleagues at Bain have studied the growth paths of more 2,000 companies around the world in order to understand the drivers of profitable growth. “What we found was shocking,” said Zook. “Only one in 10 companies achieved true sustained, profitable growth – defined as 5.5% average annual revenue and income growth (adjusted for inflation) and earning the cost of capital – over the past 10 years.”
According to Zook and his co-author James Allen, the handful of companies that are able to sustain profitable growth usually share four characteristics:
o An ability to properly define their business’ “profitable core”,
o An ability to develop the core to its full potential before expanding into “adjacencies,” or related business segments
o A disciplined pursuit of logical business adjacencies that leverage and strengthen the profitable core, and
o The ability to anticipate and quickly react to major industry structural changes that threaten the core business.
Profit from the Core is based on the fundamental but often-ignored axiom that prolonged corporate growth is most profitably achieved by concentrating on a single core business. “There is 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,” said Zook. “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.”
Zook went on to support his argument with real-world examples such as that of Bausch & Lomb, the long-time dominant player in the contact lens business. “The company transformed the industry in the 1970s, by creating the soft contact lens, and developed and executed brilliant strategy in the mid-1980s, driving one competitor after another out of the market. “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, without linking these new products to the core lens business. “The result?” asked Zook, “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.”
In another case study, Zook described how American Express recently recovered from some ill-advised departures from its payment-system core – Travelers Cheques, and the card. American Express’ core dated back to the merger of an express-mail companies and a money-order business in 1850. When management departed from this core by trying to turn the company into a financial supermarket in the mid-1980s, competitors ate into the company’s market share, the stock price collapsed, and a new management team turned the company around by using the principles described by Zook to grow profitably.
“Today, American Express’s annual income growth and return on equity reflect an ability to properly define its business’ “profitable core”, a commitment to focus and strengthen the core to its full potential before expanding aggressively, and a pursuit of business adjacencies that leverage and strengthen the profitable core.”
“With the business environment rapidly changing every day, the goal posts are shifting and narrowing for management,” Zook pointed out. The value shareholders now assign to companies 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. “What is more,” Zook added, “the rules of the game are constantly changing and industry turbulence has increased by a factor of four, making growth strategy a very sophisticated game.
To help companies identify this true essence, narrow their focus accordingly, and move forward in a manner that builds upon existing structure the book offers “a set of practical and proven principles, diagnostic tests, and questions for management teams to use as tools for reexamining or revising their strategies in search of the next wave of profitable growth.”
Ultimately, growth management must carefully and exhaustively analyze what companies do, and what they can achieve. “After all, growth can only come from a management team focused on the core competence of its business.” If companies don’t achieve dominance in at least one “core” business, it is next to impossible to achieve sustained, profitable growth. Growth should be driven off those businesses in which a company has achieved such dominance. What is more, opportunities to get into other businesses should be evaluated on the basis of how well they either help companies sustain or improve their position in one of those core businesses, or how much of an advantage being in those core businesses helps them succeed in the new ones.