The core of all profits

The core of all profits

Author Chris Zook on what it takes to achieve profitable growth and what lies beneath ‘the core’ of all companies.

When Business Today got management guru, and author of books such as Profit from the Core, Beyond the Core and Unstoppable, Chris Zook, to speak to some of the senior management of Indian companies on profitable growth, the result was an hour-and-a-half of riveting dialogue. Zook also heads Bain & Company’s Global Strategy Practice and leads the Bain Growth Project. BT’s Executive Editor Brian Carvalho and Bain India Partner and Managing Director, Ashish Singh, moderated the discussions that followed. Excerpts:

Zook kicked off the discussions with three “bold guesses” based on Bain research data. “One, less than one in 10 companies will achieve sustained profitable growth. Seventy per cent of companies will fail to achieve targets they are shooting for,” began Zook. And finally, less than one in four growth initiatives pushing away from the core will succeed. “That’s the end of the bad news. Everything else is good news,” he added. Bain data for the period between 2001-06 also revealed that only 7 per cent of Indian companies attained profitable growth.

Zook believes that most companies that fail to grow do not properly recognise, define or utilise their “core.” So, what is the “core” of a company? To quote from Zook’s book Profit from the Core, business can be defined as “that set of products, capabilities, customers, channels and geographies that define the essence of what the company is or aspires to be to achieve its growth mission.”

That’s easy, most people would say. But Zook disagrees. “As trivial as that sounds, in all my experience, I have seen that it is one of the most difficult questions that companies fail to answer—what is their core?” says Zook.

Zook cites the example of optical products giant Bausch & Lomb, that started off in the ophthalmic business way back in 1853. Over the next 120 years, the company grew its business step by step. By 1973, it had grown to $235 million (Rs 940 crore) in sales and was way ahead of competition in its instrument and lens business. It was then that the company introduced the contact lens in the market. By the mid-80s, the company’s share of new lens fittings rose to 40 per cent of the market, several times larger than its nearest competitors.

“And yet the management team began to take the core for granted,” says Zook. “The company did not treat its core as an optical business that deeply understood opticians and lenses. Instead, they thought the core of the company was distribution of small items to professionals like dentists and people treating skin, and people treating hearing deficiencies,” says Zook. So, Bausch & Lomb got into several businesses like hearing implants, skin lotions, etc., by paying a high premium on the new businesses. This despite the fact that contact lenses were not fully penetrated. “They took their eye away from the core. Today, B&L is #4 in the contact lens business and exited every single non-core business it got into at a loss,” says Zook.

Contrasting strategies

Zook also points out to contrasting strategies adopted by leaders in the semiconductor space as an example of a keen understanding of the core. In the late ’90s, the semiconductor industry went through a major slump. Samsung was among the companies that was hit. By 1998, the situation was so bad that the company’s Chairman Kun-Hee Lee reportedly told his employees: “We are facing the worst crisis ever…where survival itself is uncertain. I am ready to give up my money, honour and life to overcome the crisis.” Fortunately, things did not come to that. By 2005, Samsung’s market value had skyrocketed to $78 billion (Rs 3.35 lakh crore then) from $2 billion (Rs 7,000 crore then) in 1996. The secret of Samsung’s success—focussing on its core. The company shut down 34 businesses, sold another 42 low value-added businesses and shut down 250 major internal investment projects. Instead, the company put all its energies and resources into Samsung Electronics, which contained its semiconductor businesses and its consumer electronics.

Daewoo, on the other hand, chose a different path. They were facing problems similar to Samsung’s during the same period. “Remarkably, they chose the opposite course. They decided to grow by expansion… They added 14 new businesses to their portfolio, kept 275 subsidiaries— many of which were distant followers. Couple of years later, they were the first major chaebols to go bankrupt,” says Zook.

Beyond the core

The next logical question is this— given that you have a strong core, how do you go beyond that? “Take the 25 great business disasters of the last 10 years, and just try to look at if external factors were responsible. Was it an economy collapse? Was it a product deficiency? We concluded that 75-80 per cent were because of growth strategies that overreached and went haywire,” says Zook.

Zook illustrated this point by pointing out to the expansion strategies of two sports footwear giants—Nike and Reebok. It might be erroneous to assume that defining the cores of these companies might be easy. Products for sportsmen, one might assume. Zook, who holds Nike in high regard, differs. “If you talk to them, they define their core by four main capabilities— they are their epicentres for profitable growth. One, their supply chain from Asia. Secondly, the brand and how to use that. Third, their ability to manage sports icons—they think they do that better than anybody else. Finally, knowledge of design,” says Zook.

In the late ’80s, both Reebok and Nike were neck and neck when it came to focus and profitability. However, Reebok wandered away from its core over the years by getting into areas like walking shoes, soft products like fashion wear, etc. “Over 20 years, Reebok barely sustained themselves in the twilight of capitalism and then were mercifully put out of their misery by being acquired by Adidas,” says Zook.

Another example that Zook cites is that of semiconductor giant Intel. After being a market leader for nearly two decades, thanks to its relentless focus and profitability, Intel moved away from its core in the late ’90s. “During internet period, Intel moved farther and farther away from the core, making investments with a huge amount of cash. They made over 250 investments from digital cameras, internet service companies they were buying. 250 investments proved very distracting…it began to suck some of the best people from the company, it sucked resources, sucked attention from management team,” says Zook. AMD, which was almost nowhere in the picture till then, began chipping away at Intel’s core of PC microprocessors.

Zook concluded his half-hour long presentation by raising three pertinent questions that companies should ask themselves as they go through their stages of growth. “One, do you really understand what your core is? Two, are you using the success factors fully? Finally, do you have hidden assets that you may not be fully utilising for growth?” sums up Zook.

To a question from BT’ s Executive Editor Brian Carvalho about his advice for Indian entrepreneurs looking for investing in ‘hot industries’ like oil and gas, retail, etc., vis-à-vis their focus on the core, Zook had the following to say: “Hot industries are not unknown to other people. They are industries that a hundred other people are studying. It’s like love at first sight. Only once you get closer, you see the issues. My advice is to deeply understand the core, be wary of making investments that are two steps beyond the core. Make a few small bets. Don’t bet the company.”

To a question from a member of the audience about what India’s core was, Ashish Singh, Bain India Partner and Managing Director, said: “It’s hard to pinpoint what the core of a country is… It probably is the large domestic economy we have. The other thing in India, and also probably in China, is the spirit of entrepreneurship, risk taking.”