September 5 , 2007
Over the next decade, 25% of the companies that exist today will disappear, either because they will merge with others or go bankrupt. In an interview with Universia-Knowledge@Wharton, Chris Zook, director of global strategy at consulting firm Bain & Co., discusses the key factors that will allow companies to survive the challenges of increasing their presence in the global marketplace. His ideas are presented in a book titled, Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth. The book will be published in Spain this month.
UK@W: What are the main problems that companies face when they try to grow?
Chris Zook: Most companies aspire to aggressive growth targets, but very few --only one in ten worldwide -- achieve more than a modest level of sustained and profitable growth, which we define as: 5.5% real revenue and profit growth...
Bain’s growth research has shown that successful strategies naturally move through a cycle from focusing on the essence of their competitive advantage (I prefer competitive separation which implies that your competitive advantage/position is in part of the offering that is critical to your customer), their “core,” to expanding into new “adjacent” markets or businesses, and finally, the most difficult stage, to redefining their core. In my most recent book on growth, Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, [I discuss] the main problem that we see today, which is that industries are becoming more turbulent at a faster and faster pace. This means that the most profitable activities in an industry are shifting more quickly, and that competitive differentiations (separations) are becoming harder to maintain. Because the cycle is speeding up, huge risks emerge from misjudging where you are in the cycle.
UK@W: What have companies done to get to this point?
Zook: Companies are at different stages of their life spans and not every company is undergoing a crisis in the core that requires redefinition. One of the most difficult decisions a company can face is whether to remain focused on extracting full potential from the core business or, instead, to begin the search for hidden sources of new potential. Knowing your company’s coordinates on a Focus-Expand-Redefine (F-E-R) cycle is the first step when it comes to making correct and well-timed decisions that improve the odds of sustaining or renewing profitable growth.
Each stage of the F-E-R cycle requires a different set of strategic principles that companies must follow. Profitable growth starts by rigorously defining the core business -- knowing how it differs from your competitors. During the Focus phase, there are three keys to success: core business definition, consistently lowering your cost position and discouraging competitors from investing in your core. Doing these three things right results in what Bain calls “full potential.”
As companies begin to reach full potential in their current core, three new imperatives emerge in the Expand phase: first, developing a repeatable formula that allows you to replicate your competitive differentiation in businesses or markets that are outside your core; second, investing in bringing that formula to new geographies, new customer segments or new channels; and, third, avoiding over-expansion by recognizing that the odds for success decline when you try to expand too far from the core.
Finally, as the pace of turbulence and change continues to accelerate, companies will find their strategies for growth reaching a natural limit much earlier in their history. As companies expand globally, they become more established, but also more complicated. You accumulate customer segments, business platforms and capabilities whose value you do not immediately recognize.
Zook: Successful redefinitions are based on “hidden assets” -- customer assets, growth platforms or underutilized capabilities which suddenly assume a center role in how you look at your business going forward. (Go the Wharton web site for a full description of “hidden assets)