Beyond the Core: Expand Your Market Without Abandoning Your Roots
By Chris Zook
Harvard Business School Press, November 2003
272 pages, $29.95
Two years ago, in Profit from the Core, Zook, who leads the global strategy practice at management consultants Bain & Co., outlined strategies companies can use to gain the greatest possible sales and earnings from their core businesses.
But what happens when your core business isn’t big enough to accommodate a steady increase in sales and earnings? After all, as Zook writes, “If businesses have a primal urge, it is the need for profitable growth. That growth is the source of value creation to shareholders. It is the gravitational pull that attracts and retains the best people. No business that has failed to grow has ever been able to maintain excellence over time.”
Picking up where Zook’s last one left off, this book focuses on how a company can expand its core business into adjacent segments in a way that is both profitable and defends (or redefines) that core business.
At first glance, moving into an adjacent market would seem to be the least risky path a company can take in its quest for increased revenues. It knows the related market, and potential buyers know something about the firm. Both market segments may contain the same members of the supply chain, and usually there are some economies of scale.
But Kmart could have listed all these potential benefits in describing its attempt to move into specialty retailing by purchasing stakes in Sports Authority and Borders. And Swissair executives would have presented those same benefits if asked to defend their decision to acquire numerous regional airlines. Both moves were disasters. Indeed, as Zook’s own research shows, 75 percent of moves into adjacent markets fail.
To help improve the odds, Zook lays out a template to follow that begins with a frequently overlooked first step: Before moving into a related market, make sure your core business is as strong as it can be. Zook’s research shows that “a weak core business is the most powerful predictor of failure [in moving into adjacent markets].”
And look before you leap. “Most companies believe they have rigorous criteria for evaluating growth opportunities, but do not,” Zook writes. The best companies have stringent criteria—and stick to them. The most critical questions to ask: How certain are you of future profits in the adjacent market? How closely related is the market to your core business? (The closer, the better.) What are your chances of becoming the market leader in the adjacent segment?
Finally, once you develop an approach to moving into related markets, stick to it. Nike’s entry into golf equipment is only the most notable example of a strategy the sneaker company has followed before: It began by gaining a small toehold, introducing a new product (golf shoes) closely related to its core. It followed up by signing a huge celebrity endorser (Tiger Woods). Then it used the endorser to promote its new products (golf balls and clubs).
Zook’s approach is helpful. But you can’t help but conclude that a certain percentage of managers will use it for the wrong reasons, even though the consultant has warned them otherwise: “Major adjacency moves are almost never the solution for a weak core business in a stable market.”
Paul B. Brown is the author of 16 business books, including Publishing Confidential:
What It Really Takes to Land a Nonfiction Book Deal, to be published in February
by Amacom.
