Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
How far to go afield? Strong research on where to look for growth
Paul FavaroPresident of Agilis, a firm that advises top management on strategic and organizational issues. Mr. Favaro is also an adjunct Professor of Management and Strategy at the Kellogg School of Management at Northwestern University, Chicago, IL.
Beyond the Core: Expand Your Market without Abandoning Your RootsChris ZookPublished by Harvard Business School Press
It is well known that the market value of a typical public company is to a large extent supported by investors' views of the company's future growth prospects. But many companies today struggle with the enormous challenge of consistently creating profitable growth in their businesses. Pundits and consultants alike have flocked to the issue with such offerings as How to Grow When Markets Don't by Mercer's Adrian Slywotzky, and Strategies for Growth from the Harvard Business Review.
Enter Chris Zook, who has taken a decidedly Jim Collins-like approach to the subject – he's out-researched everyone on the topic and has some very useful analysis and insights as a result. Beyond the Core picks up where his first book, Profit from the Core, leaves off. That book made a strong case for the view that most companies have the greatest opportunity to grow their value by driving performance improvements – returns and growth – from existing businesses, rather than by chasing growth through diversification.
The objective of Zook's new book is to provide a fact-based perspective on how successful companies generate profitable growth by expanding into business areas adjacent to their core business and in so doing expand, defend and sometimes even redefine the core business itself. An important element of this is helping companies understand what is "core", what is "adjacent" (or related), and what is truly unrelated to the core business. This is because it seems relatedness is a critical driver of success in adjacency initiatives.
Zook defines this relatedness along six dimensions: products, geography, value chain, channel, customers, and core capabilities. The more alignment a growth opportunity has with the core business along these dimensions, the greater the likelihood of success. In particular, he stresses that the customer dimension is the one most successful companies try to keep closest to the core. It also aligns very well with the current trend toward creating "customer-centric organizations", where deep customer knowledge lies at the heart of competitive advantage.
As such, the framework for judging relatedness in Beyond the Core serves as a useful primer for any management team struggling with how to approach the challenge of sifting through profitable growth opportunities. Again, this is backed up by research, not just theory.
Zook posits that businesses have a "primal urge" for profitable growth. I might amend that by suggesting most businesses crave any type of growth – profitable or not. Why? It is growth that creates interest and opportunity for management, and indeed all employees. Growth provides an ever-changing landscape, with escalating challenges, opportunities and rewards. Unfortunately, too often the interests of management and shareholders are misaligned, and the results of growth initiatives are often disastrous for the latter.
While Zook notes that most failed growth initiatives are driven by either straying too far from the core, or building on a weak core, I would have liked him to explore more fully the underlying organizational causes. In particular, what role did compensation systems, and in particular those that rewarded (albeit unintentionally) unprofitable growth, play in leading companies astray? Zook notes, for example, that much of the pressure for growth has come from the increasingly ambitious quarterly targets that management promises investment analysts, so called "guidance". But he doesn't explore the root causes of this seemingly self-defeating behavior. And yet this is a critically important part of the equation.
I can use one of Zook's examples to illustrate this. He cites Gillette CEO Jim Kilt's "cycle of death" as a series of missed quarters due to unachieved growth. But that is not the whole story. In the times that I have heard Kilts speak directly to this point, he has emphasized that the problem has come primarily from management making unrealistic promises to investors to support the stock price and then bending the entire organization to try to meet these expectations, with disastrous results. It is the need to keep the stock price high – and thus the value of options – that is often the culprit, and not necessarily growth for its own sake.
By the way, the term for this that I have always heard used by Kilts, a client of my former firm, is "the circle of doom" (Surely these must be the same thing, as I can't imagine even a very large company being able to simultaneously accommodate both a "circle of doom" and a "cycle of death").
An inherent problem with business books is they are snapshots in time. Principles and frameworks that explain performance today may not apply so neatly a few years down the road. Many people have found entertainment in following the harrowing post-publication fates of the companies featured in "In Search of Excellence". And yet perhaps there are as many lessons to learn in evaluating carefully the stumble as the rise to the top in the first place. A missed opportunity in Beyond the Core is the story of Lloyds TSB. Its former Chairman and Chief Executive, Sir Brian Pitman, and his team managed to increase the value of Lloyds TSB by a factor of 50 during their 18 years at the helm. Zook covers their path to glory extensively. But in the three years since Pitman's retirement, Lloyds TSB's market value has declined by almost 50 percent, significantly more than its UK banking peers. Why? How did Lloyds fall off its value leadership perch? The book is silent on this.
I believe the most important message in Beyond the Core is the one that reinforces the theme of Zook's first book – companies should focus most on driving profitable growth as the core business itself. This is for two reasons: first, because there is more growth left in existing business models than most executives realize; second, any adjacency strategy that is not built on the foundation of a solid and profitable core will almost assuredly fail.
Perhaps the most impressive part of this book is the research underlying it. Most business books that express a point of view and attempt to support it with facts tend to employ research based on publicly available information, and then tell several client "war stories". Zook and his team clearly went well beyond this by, among other things, compiling a database of 181 growth initiatives in the US and UK in the 1990s, conducting three global surveys on executive perceptions and intentions about growth, building a proprietary database containing financial information on over 8,000 public companies spanning 14 years, and conducting detailed research on about 100 companies, including extensive top management interviews, many of which were conducted by Zook himself.
The amalgamation of this research alone is worth the price of the book. It reveals such nuggets as: in 2002, the vast majority of executives put profitable growth as a top-three priority, and almost half put it at number one. Pair that with the finding that a sobering 75 percent of all growth initiatives fail (as defined by creating value and adding growth), and you sense the overwhelming urgency for corporate executives (and opportunity for consultants like Zook) in cracking the code on profitable growth.