How Do You Determine What Your New Core Business Should Be?

Common management reactions when core businesses face extinction Probability of success Defend the status quo Enter a hot new market Transform company all at once through big merger <10% <15% Finding Your Next Core Business, by Chris Zook, HBR, April 2007

Companies that successfully redefine their cores possess four common features Gradualism during transformation Discovery and use of hidden assets Achievement of leadership economics Transition from one unique and repeatable formula to another Gradualism during transformation Discovery and use of hidden assets Achievement of leadership economics Transition from one unique and repeatable formula to another The first is gradualism during transformation. Successful companies rarely make anything like a “bet the company move” – which is often tempting when a business is struggling but almost always a loser’s game. Instead, they redefine their core businesses by shifting them to an existing vector of growth. The second is the discovery and use of hidden assets within the company. These assets tend to fall into three categories and we’ll explore each of these in greater detail in the coming slides. The third is that many of these companies achieve leadership economics in their respective markets. Leadership economics are present when a small number of competitors capture a disproportionate share of the profit pool. It is not at all unusual, for example, for the top two players in a given market to capture more than 75% of the profit pool. Finally the fourth is the transition from one unique and repeatable formula to another. Finding Your Next Core Business, by Chris Zook, HBR, April 2007

Uncovering hidden assets In 2007, Chris Zook analyzed 25 companies that successfully redefined their core businesses* In 21 of the 25 companies studied, a hidden asset became the centerpiece of the new core business In 2007 Chris Zook, the head of Bain’s Global Strategy practice analyzed 25 companies that successfully redefined their core businesses. In 21 out of the 25 companies he studied, a hidden asset was the centerpiece of the new strategy which suggests that the surest route to reinvention is not to venture too far away from your core but to mine new value close to home with assets that are already in your company but peripheral to your current core business. Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, by Chris Zook, Harvard Business School Press, May 2007

Uncovering hidden assets, ctd. Zook’s research suggests that hidden assets tend to fall into one of three categories: Undervalued business platforms Untapped insights into customers Underexploited capabilities Zook’s research suggests that hidden assets tend to fall into one of three categories: Undervalued business platforms Untapped insights into customers Underexploited capabilities Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, by Chris Zook, Harvard Business School Press, May 2007

1. Undervalued business platforms IBM’s global services group was once a tiny network-operations unit (not even a stand-alone business unit within IBM) Lou Gerstner chose to make it the centerpiece of his reinvention of IBM By 2001, it was larger than all of IBMs hardware business and accounted for two-thirds of the company’s market value Finding Your Next Core Business, by Chris Zook, HBR, April 2007

1. Undervalued business platforms, ctd. Perkin Elmer was once the market leader in optical electronics for analytical instruments By 1993, its core was under attack by lower cost and more innovative rivals In early 1990s, PE expanded into analytical instruments for the fast growing segment of life science labs PE divested its optical business, renamed itself and grew its new smaller business to a size much larger than its original core Note that in both of these examples, the companies actually shrunk in size in order to grow Finding Your Next Core Business, by Chris Zook, HBR, April 2007

2. Untapped insights into customers Harmon/Kardon consumer and professional audio business began to stagnate in the early 1990s Harman realized that people were spending more time in their cars and that many purchased high end equipment for their homes Purchased Becker which supplied radios to Mercedes Benz Harman’s branded high end systems resulted in 40-fold increase in market value from 1993- 2005 Sidney Harman realized that people were spending an increasing amount of time in their cars and that many of these people purchased high end audio equipment like Harman’s for their homes. With that insight, Harman decided to build on it’s fledgling automotive business which represented a mere 10% of total company revenues at that time. They purchased Becker audio which supplied radios to Mercedes Benz and leveraged this close relationship to convince Mercedes about the opportunity for a high end automobile audio systems. Mercedes bought in and Harman’s branded … Finding Your Next Core Business, by Chris Zook, HBR, April 2007

2. Untapped insights into customers, ctd. Dometic pioneered refrigerators that could run on propane instead of electricity Saturated the hotel and RV markets and then leveraged knowledge of RV customers to build interior systems that transformed RVs into homes Increased channel power in RVs enabled Dometic to sell directly to RV makers Dometic captured 75% of RV interiors market and then expanded into interior systems for trucks, boats, etc. Dometic grew from 16.9 million in sales in 1973 to $1.2 billion in 2005. Finding Your Next Core Business, by Chris Zook, HBR, April 2007

3. Underexploited capabilities Apple’s strengths in software design, hardware design and user friendly interfaces were underexploited capabilities Apple leveraged these strengths to create the iPod and then married them together with new capabilities in digital retail (iTunes store) and digital rights management (Fair Play) to transform the company By 2005, Apple’s iPod-based music business accounted for nearly 50% of revenues and 40% of profits We spoke about Apple’s near death experience earlier in this segment. Apple’s share of the PC market plummeted from 9% in 1995 to less than 3% in 2005 forcing the company to re-examine its core and decide whether it was time to move on to a new one. Finding Your Next Core Business, by Chris Zook, HBR, April 2007

3. Underexploited capabilities, ctd. From jogging to tennis to basketball, Nike developed a repeatable formula for successfully penetrating new sports markets Nike penetrates the shoe segment first and then expands into apparel and equipment Nike entered the golf market in 1995 and by 2000 provided shoes, apparel and clubs to Tiger Woods, the world’s #1 player Nike’s operating profit grew from $164MM in 1987 to $1.1B in 2002 while Rebok’s declined from $309MM to $247MM We spoke about Apple’s near death experience earlier in this segment. Apple’s share of the PC market plummeted from 9% in 1995 to less than 3% in 2005 forcing the company to re-examine its core and decide whether it was time to move on to a new one. Growth Outside the Core, by Chris Zook, HBR, December 2003

Summary Companies that successfully redefine their cores do it gradually by exploiting hidden assets with leadership economics that can be applied in a repeatable way The first type of hidden assets are undervalued business platforms that already exist in your company today The second type are untapped insights into customers that enable you to satisfy a broader range of their needs The third type of hidden assets are underexploited capabilities that can be redeployed successfully in adjacent segments