In this Updated Edition of Profit from the Core published by Harvard Business Press (2010) and written with James Allen, Chris Zook provides updated key examples while adding new ones and renders “the lessons learned in a way that management teams can use can use as a tool to reflect on the way forward in today’s economy.” Zook’s concept of “core” bears striking resemblance to Jim Collins’ concept of the “Three Circles”,” introduced in Good to Great: (a) What a company can be the best in the world at (and equally important, what it cannot be the best in the world at), (2) What drives the company’s economic engine, and (3) What those in the company care most passionately about. For Zook, a core business “as that set of products, capabilities, customers, channels, and geographies that defines the essence of what the company is or aspires to be to achieve its growth mission – that is, to grow its revenue sustainably and profitably…The essence of a company’s growth strategy is to define the core business as we have defined it and to pour company resources into this core business until it achieves its full potential.”
Of special interest to me is what Zook has to say about five paradoxes that most management teams encounter when seeking to revitalize the growth of their company. They usually focus on the underperforming units. Zook and Allen argue that “growth requires instead on increasing the performance of the best businesses, no matter how well they are doing at present. Why? Paradox #1: The better performing of business units are likely to be those operating the furthest below their full potential. When discussing adjacency expansion, they introduce Paradox #2: “The stronger your core business, the more opportunities you have both to move into profitable adjacencies and to lose focus.” When addressing when and how to redefine a core business, they introduce Paradox #3: “The management teams that have been most successful in building a strong core business and that have benefited from adjacency expansion are also the most vulnerable to industry turbulence.” In Chapter 5, they provide some guidelines for the process of developing and refining growth strategy, then introduce Paradox #4: “All organizations inhibit growth…Overlying all the analysis in this book is a final paradox: From focus comes growth; by narrowing growth one creates expansion.”
In order to continue creating value, it is eventually necessary for any company to invest in adjacencies. There are three basic types: a direct move into an immediate opportunity (e.g. Enterprise Rent-a-Car); an “option” purchased in a business related to the core, functioning as a hedge against future uncertainties (e.g. Intel and Microsoft); and a series of sequential moves that expand the boundaries and capabilities of the core business (e.g. Cisco’s acquisition of Pure Digital Technologies). Whichever approach is selected, there are certain “pitfalls” that must be avoided. They are identified in Chapter 5 and there are seven of them: expanding toward an entrenched position, overestimating the profit pool, false bundling (of products, services, or both), invaders from unexpected directions, failing to consider all adjacencies, missing a new segment, and single-mindedly (stubbornly?) pursuing high-end adjacencies. They are thoroughly discussed on Pages 97–105.
In this Updated Edition of a book first published in 2001, Chris Zook with James Allen provide a wealth of information and counsel that a management team needs in its quest for sustainable and profitable growth. I agree with them that turbulent conditions create “confusion, blurred boundaries, less time to react, less tolerance for error, and often fewer resources” but they also create “unique opportunities to strengthen and expand string cores, and even to invest to reshape the structure of [its] industry ahead of competitors.” For those in need of an operations manual, compass, and mine detector, here it is.