How Do You know When Your Core Business Needs to Change?

Understanding when focus, expand and redefine: Leadership’s #1 imperative The average lifespan of S&P 500 companies declined from 61 years in 1958 to just 18 years in 2012 Of the Fortune 500 companies in 1994, 153 had either gone bankrupt or been acquired by 2004 and another 130 had engineered a fundamental shift in their core business strategy 2 Creative Destruction, by Richard Foster and Sarah Kaplan, April 2001 Finding Your Next Core Business, by Chris Zook, HBR, April 2007

It’s common for companies to prematurely abandon their core in pursuit of the next big idea In the 1990s, Bausch & Lomb moved beyond contact lenses into dental products, skin care and hearing aids J&J identified new sources of growth in extended-wear and disposable contact lenses and quickly overtook B&L to become the market leader By 2007, B&L had divested all of those business at a loss and was scrambling to regain share in the category it once dominated 3 Finding Your Next Core Business, by Chris Zook, HBR, April 2007

It’s also common for companies to cling to an eroding core far too long Polaroid invented the instant camera in 1947 and then dominated that market through its decline in the 1980s Polaroid failed to exploit adjacencies in home movies, one-hour film processing, videotape recorders, digital cameras and digital printers despite having an early lead in many of these technologies In October 2001, the companied filed for bankruptcy 4 Finding Your Next Core Business, by Chris Zook, HBR, April 2007

So how do we avoid these fates? Not every company that falls on hard times needs to rethink its core strategy Declining performance in a once thriving business can often be attributed to an execution shortfall 5 Finding Your Next Core Business, by Chris Zook, HBR, April 2007 First, by avoiding a misdiagnosis

When strategies actually are out of gas, it’s usually for one of three reasons 1.Your company is targeting a shrinking or shifting profit pool 2.Your company has inherently inferior economics 3.Your company’s growth formula cannot be sustained 6 Finding Your Next Core Business, by Chris Zook, HBR, April 2007

1. Your company is targeting a shrinking or shifting profit pool 7 Finding Your Next Core Business, by Chris Zook, HBR, April 2007 The personal computer industry’s profit pool Profit Pools: A Fresh Look at Strategy, by Orit Gadiesh and James L. Gilbert, HBR, May 1998

2. Your company has inherently inferior economics General Motors experienced this when it began competing with Japanese imports which had lower healthcare costs per worker Compaq experienced this when it began competing with Dell’s direct selling model which eliminated distributor margins and required significantly less finished inventory Taxi companies are experiencing this today as Uber assembles networks of vehicles without purchasing expensive licenses or taxis 8 Finding Your Next Core Business, by Chris Zook, HBR, April 2007

3. Your company’s growth formula cannot be sustained Think cell phone manufacturers whose growth stalled as this market reached its initial saturation point Think of Home Depot whose growth flattened as it saturated the US market and came under attack by rival Lowe’s Think of the difficulties Wal-Mart has encountered trying to expand its business model outside of the US Think of a mining company whose growth stalls as its mines become depleted 9 Finding Your Next Core Business, by Chris Zook, HBR, April 2007

Summary It’s just as common for companies to prematurely abandon core businesses as it is for them to cling to eroding ones The first step to avoiding either pitfall is distinguishing execution issues from structural ones When strategies are out of gas, it’s usually for one of three reasons 1.Your company is targeting a shrinking or shifting profit pool 2.Your company has inherently inferior economics 3.Your company’s growth formula cannot be sustained 10