Profit from the Core: Growth Strategy in an Era of Turbulence


Ninety percent of companies failed to achieve sustained, profitable growth over the past decade. While popular wisdom calls for "new rules" for strategy and organization, a breakthrough study reveals the right response to the growth dilemma is usually a return to the fundamentals of business economics.

Profit from the Core argues that a timeless strategic principle -- building market power in a well-defined core business -- remains the key source of competitive advantage and ...

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Ninety percent of companies failed to achieve sustained, profitable growth over the past decade. While popular wisdom calls for "new rules" for strategy and organization, a breakthrough study reveals the right response to the growth dilemma is usually a return to the fundamentals of business economics.

Profit from the Core argues that a timeless strategic principle -- building market power in a well-defined core business -- remains the key source of competitive advantage and the most viable platform for successful expansion. Based on a 10-year study of 2,000 companies conducted by Bain & Company, the book identifies three factors that differentiate growth strategies that succeed from those that fail: (1) reaching full potential in the core business; (2) expanding into businesses adjacent to that core; and (3) preemptively redefining the core business in times of market turbulence.

An indispensable strategic guide for leaders in all industries, this book identifies enduring and often counterintuitive lessons on achieving profitable growth over the long haul.

A Conversation with Chris Zook and
James Allen, authors of

Profit From The Core

Throughout the unprecedented decade, the US economy has been led through a period of turbulent growth. But turbulence also means going through a recession. Do the same principles of a strategy for growth apply in times of an economic slowdown?

The principles of strategy and the findings of our study are even more critical to observe during times of economic downturn for four primary reasons. First, it is during these times that companies discover the true cost of misadventures in growth, which sap resources that are even more lacking during difficult conditions. Second, during a boom time when capacity is tight it is the high cost producer who sets the price and still receives volume. During more difficult times, it is the low cost producer with strength in the core who benefits the most. The profit pool shifts almost entirely to the strongest cores during an economic downturn. Third, examining new growth initiatives are more important than ever to make sure that they strengthen and reinforce the core. This is no time for some of the errors described in the book such as the Bausch & Lomb movement away from contact lenses. Leaving the core underprotected or underresourced is extremely dangerous when every competitor is scrapping for the final shred of market. Finally, the downturn can be a very interesting time for a strong core to acquire or attack weaker competitors, or to acquire smaller companies with key capabilities to help strengthen the core.

What does the threat of an economic slowdown mean for business executives?

With the business environment rapidly changing every day, the goal posts are shifting and narrowing for management. The value shareholders now assign to companies, which represents an average of twenty-six times their price-earnings ratios, 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. Investors are also giving management teams less time than ever to prove themselves. For example, shareholders are shifting in and out of stocks at five times the rate they did a few decades ago, demanding not merely overall growth but continuous growth each and every quarter. Management has been hit with defections of the best talent, and it has become much more difficult to attract and retain new employees. Finally, the rules of the game are constantly changing and industry turbulence has increased by a factor of four, making growth strategy an impossible game to play.

Your analysis shows that nine out of ten management teams fail to grow their companies profitably. Why is this happening, particularly in a time where management is flooded with revolutionary business solutions?

Yes, there are 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. 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.

Can you give us an example of a company that has failed to achieve sustained growth because they moved away from a core business?

Bausch & Lomb is a prime example of a company departing from its core. Long-time leaders in the contact lens business, Bausch & Lomb transformed the industry in the 1970s by creating the soft contact lens. Throughout the mid-1980s they developed and executed brilliant strategy, driving one competitor after another out of the market and causing others to disinvest in the business. The company's share of new lens fittings rose to 40 percent of the market, several times larger than that of its nearest competitors, thereby becoming the darling of Wall Street. 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, yet Bausch & Lomb failed to link these new products to the core lens business. The result? 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.

Have you witnessed any "New Economy" companies losing sight of their core business, leading to a decline in profits?

For most new economy companies, it is too soon to estimate whether they will achieve sustained growth., however, exemplifies the complex choices facing a young organization with an unproven business model. The company got its start, as most everyone knows, with online sales of a product with a notoriously inefficient distribution channel: books. By sidestepping the traditional bookstore business model, market capitalization rose to more than $30 billion in 1999 on $500 million of sales. During this time, Amazon increased the stakes, trying to become what its CEO, Jeff Bezos calls "a place where you can buy anything and everything." Amazon moved into power tools, consumer electronics, garden furniture, and even cosmetics. Only time will tell if this new "all things to all people" model will pay off, or if Amazon should have remained faithful to its roots. In the meantime, cumulative losses have mounted to $1.2 billion, and investor nervousness is high, resulting in a 70 percent stock price decline.

How would you recommend a company begin defining its profitable core?

Business definition is one of the most frustrating activities for senior executives. It is extremely difficult to arrive at a clear answer to the question, "What is our core business?" In working toward a useful business definition, executives need to first identify the five following assets of their company: · The most potentially profitable, franchise customers · The most differentiated and strategic capabilities · The most critical product offerings · The most important channels · Any other critical strategic assets that contribute to the above (such as patents, brand name, position at a control point in a network). These elements will be invaluable in determining an organization's core business.

You talk about adjacency expansion as the second crucial element of a company's growth strategy. Can you explain adjacency expansion and why it is so important?

Adjacency expansion is a company's continual movement into related segments or businesses that build on, and usually reinforce the strength of the profitable core. It is through adjacency expansion that a company in a stable industry repositions itself to go after the most attractive new profit pools or to respond to new environmental conditions. Expansion into logical adjacencies around a core business is an offensive strategy, but it can also have defensive implications. Building a profitable cushion around a 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 most successful companies have the largest number of adjacency opportunities raining down upon them every day.

Can you give an example of a company that has been able to successfully expand?

We have witnessed many companies that have effectively expanded by moving into related businesses. One of the more notable firms in Nike. From 1976 to 1983, Nike focused on its running shoe core to grow sales at an annual rate of 80 percent. But the running shoe business slowed to zero growth, on average, from 1983 to 1987. Nike responded and surged powerfully by extending its running franchise into new product segments including clothing. In this way, Nike rekindled growth to 36 percent per year from 1987 to 1991. When Nike's growth again slowed, this time to 8 percent from 1991 to 1994, the company refocused on its athletic show business with emphasis on celebrity endorsements. The move restimulated growth to over 30 percent a year. Inevitably, growth has slowed yet again, and Nike has launched its next round of expansion focusing on a new golf line. Nike is a prime example of a company that has developed a strong core and then repeatedly reignited slowing growth by finding the next logical, large-scale adjacency in which to expand.

You talk about the "Redefinition Dilemma" as the third element of growth strategy. Can you explain this?

The business world is extremely unstable, and there will be times when a company will have to redefine its core in order to survive and thrive. We have identified five main causes of industry turbulence that should cause management teams to face the dilemma of redefining their core business-even if the core is successful. The first cause is technological change. Information networking and retrieval software, such as Napster, quickly whipped up a hurricane in the music industry and, just two months later, in the film industry. A second cause is the emergence of a new, low-cost business model enabled by a variety of technologies coming together at the same time. The impact of category superstores, such as Staples in office supplies and The Home Depot in hardware, on department stores such as Sears illustrates the effects of this type of turbulence. A third cause can be government regulation that suddenly increases or decreases competition, such as the deregulation of the airline industry. The fourth cause is a discontinuous change in the fundamental nature of customer demand and need. The decision that Wal-Mart and other national chains made in 1994 to switch from local to national magazine distributors, for instance, precipitated a major price collapse and industry consolidation. Finally, the Internet is changing industry after industry from recorded music to securities. The best-performing companies in recent years have been the ones that have successfully redefined their core business to adapt to these changes.

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Editorial Reviews

Harvard Business Review
. . . They effectively illustrate how a focused strategy can bring impressive results.
Boston Globe
It puts forward an answer to dot-com mania.
Entrepreneur Magazine
These simple ... powerful ideas emerge smoothly and convincingly from the mass of data and techniques Zook and Allen have compiled ...
Journal of Business Strategy
Reason to Buy/Read: Solid, practical and pragmatic ways to study your company's core business(es).
INC Magazine
The book makes a persuasive case that you should focus on what your company does best.
Business 2.0
A book such as Profit from the Core comes at the right time.
Publishers Weekly - Publisher's Weekly
In this short, focused and well-reasoned book, Zook, the head of worldwide strategy for the prestigious consulting and investment firm Bain & Co., and Allen, head of a venture-capital company, argue persuasively that focusing on what a business does best is the easiest and most efficient way for companies to grow and be profitable. This idea isn't new, of course: in the 1980s, Tom Peters and Robert Waterman, in their classic In Search of Excellence, called it "sticking to your knitting"; a decade later, most notably in the Harvard Business Review, Gary Hamel and C.K. Prahalad described the concept as focusing on "core competencies." But, Zook and Allen maintain, as firms rushed to embrace the Internet, executives forgot this basic truth. Taking the idea one step further, they contend that by looking at what a firm does best, executives will also find it easy to spot inefficiencies within their businesses. Based on a study of 2,000 companies, the book concludes that three factors differentiate growth strategies that work from those that don't: (1) make sure to get everything possible out of the core business, (2) expand into related businesses and (3) redefine the business before someone else (e.g., a competitor) does. Zook and Allen stress "how to," giving managers a list of questions to ask and signposts to watch for as their companies evolve. As managers everywhere are re-examining their businesses in light of recent fallout among dot-coms and major layoffs and restructuring among even the most stalwart of companies, this book's timing could not be better. (Mar.) Copyright 2001 Cahners Business Information.
Based on a ten-year study of some 2,000 technology, service, and product companies in various industries, this work argues that most growth strategies fail because they wrongly diversify from the core business. It identifies and explains three key factors that differentiate successful and unsuccessful growth strategies, and borrows lessons from private equity and start-up ventures to explain how to resolve common problems of expansion. Zook is director of a global business strategy consulting firm. Allen is CEO of a global venture capital firm. Annotation c. Book News, Inc., Portland, OR (
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Product Details

  • ISBN-13: 9781578512300
  • Publisher: Harvard Business Review Press
  • Publication date: 2/28/2001
  • Pages: 186
  • Product dimensions: 6.37 (w) x 9.51 (h) x 0.83 (d)

Meet the Author

Chris Zook is a Director of Bain & Company, a global business strategy consulting firm. He leads the company's Global Strategy Practice, is an architect of many of its Internet-related initiatives in consulting and investing, and serves as a member of the Bain Management Committee and of its Investor Committee. During his seventeen years at Bain, Zook has specialized in developing strategies for information and technology companies concerned with finding directions for new growth and building capabilities to accomplish their missions. His clients have ranged from large corporations in the computer business to small technology companies to start-up incubations in Bainlab to venture funds themselves. His current focus is on developing reliable processes for finding profitable growth and building business systems to realize these opportunities. Zook has also worked outside of Bain in the private equity business.

James Allen is CEO of eVolution Global Partners, a global venture capital firm founded by Kleiner Perkins Caufield and Byers, Bain & Company, and the Texas Pacific Group. eVolution helps corporate partners build new, independent e-commerce businesses. Allen spends most of his time working with CEOs to spin off businesses that require the capital, business-building skills, and separate equity and compensation structures necessary to compete against Internet start-ups. Previously he was a Director of Bain & Company, where he led global strategy projects with technology, consumer products, and media firms in over twenty countries; co-led Bain's strategy practice; served on the company's board; and helped establish its private equity and venture capitalpractice in Europe. Prior to entering the business world, Allen worked in government, focusing on U.S.-Soviet trade and security issues.

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Read an Excerpt

Chapter 1: Desperately Seeking Growth

Have you managed to grow your business profitably during the recent boom but find yourself running out of obvious paths to more and more profitable growth? Or do you feel pressured to initiate business activity in the Internet economy but find yourself worried about choosing the right activity to target while also minimizing distraction from your core business? Perhaps you feel that your core business has untapped profit growth potential, but you are not sure how to determine where it is. Or perhaps your industry is changing in a way that makes you wonder whether it might soon be time to redefine the business model that has been so productive for so many years. But then the question is, how can you manage a path of profitable growth through the transition?

If you can see your company in any of these situations, the findings of this book may surprise and interest you. The most important issue faced by all management teams is how to grow their companies. As we enter the twenty-first century, the odds against winning the growth game are worse than ever, in spite of the unprecedented success of the economy. Consider how the goal posts have moved for management:

  • The value shareholders now assign to companies, which represents an average of twenty-six times their earnings, demands that those companies grow at a rate three to four times that of the GDP.
  • Investors are giving management teams less time than ever to prove themselves. For instance, shareholders are shifting in and out of stocks at five times the rate they did a few decades ago (every six days in the case of Internet economy stocks), demanding not merely growthbut growth each and every quarter.
  • Even in the best of times, our analysis shows that nine of ten management teams fail to grow their companies profitably. Given investor expectations of quarter-by-quarter growth, ninety-nine of one hundred management teams will fail to meet shareholder expectations.

Ironically, the space between the goal posts is narrowing and shifting, and this is happening just as management is experiencing unprecedented difficulties putting players on the field and keeping them there:

  • Management has been hit with defections of the best talent and finds it increasingly difficult to attract and retain new employees. The average tenure for someone in information technology, the "star player" in the Internet economy, is now only thirteen months.
  • Even the coaches-the CEOs themselves-are remaining in a given job for only one-third the time they did as recently as a decade ago.

Finally, the rules of the game are continually changing. As we demonstrate later in this book, turbulence in industries has increased by a factor of four.

It is no wonder, then, that participants in a game that's impossible to play, much less win, are now particularly receptive to the soothing, dulcimer tones of pundits who suggest deceptively simple (and consistently incorrect) strategies for winning an extremely complex, multifaceted game. Their siren song seduces with its revolutionary appeal: "discard the old, leave your historic core business behind and set out for the promised land." Sometimes this advice leads to the right course. Yet, as we argue in this book and demonstrate with examples and extensive empirical data, it usually does not solve the fundamental problem and can even aggravate the underlying cause of inadequate profitable growth. Like the ancient mariners of the Odyssey, those managers who respond to the siren song of growth can experience brief periods of euphoria. But when they finally awaken to reality, they often find themselves heading straight for the shoals.

We have found that the key to unlocking hidden sources of growth and profits is not to abandon the core business but to focus on it with renewed vigor and a new level of creativity. We have also found that often the most successful businesses are at greatest risk of succumbing to the siren song. Consider the following examples of four companies that have moved away from a core business in search of greener pastures.

Case 1: Bausch & Lomb

Bausch & Lomb got started in the ophthalmic business in 1853, when German immigrant Jacob Bausch opened a small store in Rochester, New York, to sell European optical imports. Over the next 120 years, the business developed slowly and carefully, step by step, just like the work of the meticulous eye doctors that it served. By 1973, Bausch & Lomb had grown to $235 million in sales and was the leader in its instrument and lens businesses.

Then everything changed. In the mid-1970s, Bausch & Lomb obtained from an independent Czechoslovakian scientist the patents for spin casting, a process for making soft contact lenses. Spin casting not only produced lenses that were more comfortable than those on the market but did so at a lower cost. At the time, the standard procedure for creating a lens was to lathe it from a button of hard plastic. With spin casting, a drop of polymer is spun in a shaped dish and then stabilized under ultraviolet light to make the lens...

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Table of Contents

1 Desperately Seeking Growth
2 The Profitable Core
3 The Alexander Problem
4 The Redefinition Dilemma
5 Growing from the Core
About the Authors
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  • Anonymous

    Posted March 30, 2001

    Measuring Without Understanding

    This book shows all of the weaknesses of a data-heavy backward look at business. It describes the outlines of what has happened, but is very light on insights into what the lessons of that experience are. The book's key conclusions will be very reassuring to those who are not inclined to look very far away from where they are today. The book is 'a call back to the basics.' 'The better performing of your business units are likely to be those operating the furthest below their full potential.' 'The stronger your core business, the more opportunities . . . to move into profitable adjacencies and to lose focus.' 'The management team . . . most successful in building a strong core business . . . and benefited from adjacencies are . . . most vulnerable.' 'All organizations inhibit growth.' 'From focus comes growth; by narrowing scope one creates expansion.' As you can see, the apparent meaning of the words makes little surface sense. The buggy whip manufacturer should narrow focus to grow faster, perhaps by just focusing on one type of buggy ship. The problem just described relates to a slippery concept of what your core is. You are to consider your most: - potentially profitable, franchise customers (what does that mean?) - differentiated and strategic capabilities - critical product offering (what if you offer services?) - important channels (what if you don't sell through channels?) - other critical strategic advantages {such as?). Then, you have a lot of questions to answer about these areas, and then you will know what your core is. It was opaque to me. But I do know from reading the book that Enterprise Rent-a-Car's core is renting to people with car insurance after accidents. The problem is then described through a metaphor to the fact that Alexander the Great's empire did not last under one person after he died. I'm not quite sure why that metaphor applies. Alexander the Great got wonderful results from his empire for almost all of the time while he was alive. That seems like a success example. Isn't that the General Electric problem? No one describes General Electric as having been a big failure for the last 20 years. Then we get into a discussion of industry turbulence. The authors cite Arie de Geus (The Living Company) as saying that companies will have to redefine their core quite often. Charles Schwab says you have to do it in their business every year. But, there wasn't much here to tell me how to redefine my core (if I knew what it was). If you are like me, you're more confused now. Southwest Airlines seems to be doing about the same things now that made it successful for the last 30 years now. Why doesn't it have to redefine its core? Isn't the airline industry turbulent? Dell Computer has been redefining its core like crazy (adding servers and storage for the same corporate customers), operates its business very effectively, and is having a horrible time. What I suspect is happening in this book is that the authors got too hung up on the idea that success has to be the combination of high revenue growth, high profit growth, and high stock pri

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    Posted January 19, 2010

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