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Title: Profit from the Core
Author(s): Christopher Zook and James Allen Publisher: Harvard Business School Press, 2001, 186 pages. Manageris 96b. Following several years in which companies raced pell-mell toward diversification, particularly in new economy ventures, Profit from the Core offers a theory that seems to go against the current. It postulates that the best way to ensure profitable and sustainable growth is to stick to the core business. The authors support their theory with research by Bain & Company that demonstrates the risks of diversification. They insist upon the importance of defining the core business with precision and focusing on tapping the full potential of that core business. The book offers guidelines for thinking about how to grow a business without falling into the trap of poorly-managed diversification. Main subject [Growth] |
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Reading Tips for...
This brief book reviews a fundamental principle of sustainable growth strategy, i.e. the main path to profitable growth is to tap the full potential of the core business.
Companies sometimes forget this principle, as they are drawn by the siren’s song of the new economy and other diversification opportunities. The authors base their conclusions on a detailed analysis of the economic performance of 2000 companies. They support their theory with many examples, and provide numerous checklists and methods that managers will find practical.ue les managers trouveront utiles.The central theme of the book—focus on the core business to grow profitably—can be found in chapter 2. Many statistics and examples illustrate the risks of diversification. Case studies of companies like Bausch & Lomb and Amazon.com presented in chapter 1 provide additional concrete proof.
The key question then becomes how to define the core business. Chapter 2 provides some tips and warnings about this. It also provides inspiring examples, like Dell and Hilti International.
Nonetheless, companies must sometimes redefine the core business. This topic is addressed in chapter 4. The authors emphasize the great risk involved in radical business transformations. However, managers will discover many useful tips on how to manage change projects, and redefine the business model. In this chapter, readers will also find a practical checklist of signals indicating the need for transformation.
Finally, chapter 3 offers a relevant analysis and methodological guidelines on how to expand into markets adjacent to the core business. This is demonstrated with many examples, such as Nike, American Express, Microsoft and Hewlett Packard. The 20 pages devoted to the systematic review of all expansion opportunities are particularly useful.
Critical commentary…
By Vikas Tribewala,
Senior Affiliate Professor of Marketing at INSEAD.
Profit from the Core is the latest of innumerable articles and books published by Ted Levitt over the past 40 years. As in the preceding works, the authors of this book exhort companies to define their businesses from the point of view of the customer, then adapt and expand this definition to drive profitable growth.
This is not to imply that Profit from the Core is not an important addition to a manager’s bookshelf. To the contrary, managers who espouse the core message of the book are likely to reap the benefits of the experience of the many companies researched by the authors. My concern is that managers reading the book will ignore the message, as generations before have done.
In essence, the authors'message is simple and compelling: Identify what you do uniquely well, consolidate it as the stable foundation of a growth strategy, and then look for new growth opportunities in adjacent markets. This is useful both for successful companies that wish to sustain growth, as well as those that would like to rediscover the path to profitability.
Many managers will appreciate the subtle precision with which the authors define a core business. For example, the car rental industry is broken down into different cores, with Avis specializing in airport rentals, Alamo in leisure, and Enterprise in replacements for vehicles in repair. Few would disagree that this approach has merit. However, the authors failed to explore a question that is perhaps more important, i.e. given the fundamentally different core businesses of these companies, what can be said about their future growth strategies? Logically, Enterprise should reinforce its links with insurers and repair shops (e.g. by offering other replacement goods such as television sets and cell phones). Alamo, on the other hand, should expand into other leisure-related rentals, such as golf and ski equipment. Companies that can successfully negotiate this non-intuitive growth path should indeed prosper.
My biggest criticism of the book is that it does not address the role that alliances and partnerships can play in enabling a company to focus on its core. A strong core naturally makes you an attractive potential partner. This in turn helps you capture a significant share of adjacent profit without exposing you to the risks of over-expansion.
Details aside, I would strongly encourage all managers to absorb the ideas in Profit from the Core. As they do so, however, I would challenge them to reflect on why so few companies adopt such a simple, compelling strategic principle. My own experience suggests that successful companies believe that they can afford to diverge from their core business, while struggling companies believe that they cannot afford to remain there. Both strategies are wrong for different reasons. Which one will you choose?
Further readings…
- The Alchemy of Growth
M. Baghai, S. Coley, D. White – Perseus Books.
(Book and Manageris synopsis 75a) - The Profit Zone
A. Slywotzky, D. Morrison – Random House.
(Book and Manageris synopsis 60a) - Corporate-Level Strategy
M. Goold, A. Campbell, M. Alexander – Wiley.
(Book and Manageris synopsis 25a) - Rejuvenating the Mature Business
C. Baden-Fuller, J. Stopford, Routledge.
(Book and Manageris synopsis 2b)
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