The Idea in Brief
It’s hard to know when your core business must change. Some companies cling too long to their cores, even in the face of crushing competition. Others, lured by hot new markets, abandon their core prematurely—with devastating results.
There is a smarter approach, says Zook. First, recognize when it’s truly time to find a new core. For example, perhaps your growth formula no longer works because your target market is saturated. Then, examine your company’s hidden assets—neglected businesses, unexplored customer insights, latent capabilities. Ask how they can help you define a new core that will propel fresh growth. For instance, American Express transformed its ailing core charge-card business after discovering neglected data showing how different customer segments used the cards and what other products might interest them.
By redefining your core at the right time and in the right way, you boost the odds of profiting from change—before rivals do.
The Idea in Practice
Zook offers these guidelines for deciding when it’s time to redefine your core business.
Assess the Need for Change
Periodically ask whether your current strategy is exhausted. It may be if:
- Your company is targeting a shrinking profit pool. For example, Apple wisely moved toward digital music as the PC profit pool contracted.
- A new rival has entered the field unburdened by your cost structure. Compaq, for instance, suffered from Dell’s superior economics.
- Your growth formula isn’t sustainable. For example, a mining firm loses its natural advantage as its mines become depleted.
Recognize the Makings of a New Core
If your business is losing potency, remake your core gradually. Example:
Dometic had long sold absorption refrigerators, which have no moving parts and no need for electricity, to boat and recreational-vehicle owners. When revenues stalled, it decided to expand its core to hotel minibars. It also began developing additional products for its RV customers—including air-conditioning and water-purification systems. Dometic now commands 75% of the world market share for RV interior systems.
Harness Your Hidden Assets
Hidden assets can spur fresh growth from your new core if they provide clear, measurable differentiation from competitors; tangible added value for customers; and a robust profit pool. Hidden assets can be:
- Undervalued businesses. General Electric identified an underutilized internal business unit: GE Capital. Fueled by new investment, the division made more than 220 acquisitions over 15 years. Today, GE Capital accounts for 32% of GE’s profits.
- Untapped customer insights. Harman International, which makes high-end audio equipment, realized people were spending more time in their cars and many drivers were music lovers accustomed to high-end equipment at home. Harman acquired a firm with expertise in designing audio systems for high-end cars. Today, its market value is 40 times greater than in 1993.
- Underexploited capabilities. A company’s existing capabilities can often be better utilized to spur growth—especially when combined with new capabilities.
Example:
Apple capitalized on its strengths in design, brand management, user interface, and easy-to-use software to create the iPod. But it needed to acquire expertise in the music business and digital rights management. Once it had, Apple gained access to content by signing up the top four music companies before rivals did—creating the successful iTunes Music Store.
It is a wonder how many management teams fail to exploit, or even perceive, the full potential of the basic businesses they are in. Company after company prematurely abandons its core in the pursuit of some hot market or sexy new idea, only to see the error of its ways—often when it’s too late to reverse course. Bausch & Lomb is a classic example. Its eagerness to move beyond contact lenses took it into dental products, skin care, and even hearing aids in the 1990s. Today B&L has divested itself of all those businesses at a loss, and is scrambling in the category it once dominated (where Johnson & Johnson now leads). And yet it’s also true that no core endures forever. Sticking with an eroding core for too long, as Polaroid did, can be just as devastating. Both these companies were once darlings of Wall Street, each with an intelligent management team and a formerly dominant core. And in a sense, they made the same mistake: They misjudged the point their core business had reached in its life cycle and whether it was time to stay focused, expand, or move on.
