About the author
- One of the contemporary strategic thinkers, Top 50 voted by Time of London.
- CEO of the conference of Forbes magazine, Business-week conference.
- Speaker of the World Economic Forum.
“Expanding from core values” are the answers, valuable lessons for every executive who is faced with difficult times and choices before seeking growth and profitability.
1 – Growth Crisis
Risky moves when "doing outside the industry"
Enron expands its business beyond the industry, many areas of investment are far different from their core business. Four years later, they became a major bankruptcy in America.
Kmart expands business in the wrong direction, these mistakes reduce Kmart's power; while Wal-mart organized methodical expansion and became the largest company in the Fortune 500.
When a growth strategy goes out of reach; pushing a company into thinly fragmented resources, not focused on protecting its core business, or moving into areas the company doesn't know how to manage, has the potential to bring great risk.
Finding a sustainable source of growth is a concern of CEOs, because when profitable growth slows down, there is a decline in positive energies, leading to destruction of the value of the organization itself. So, what are the steps to successful scaling? Depending on the case, each option has a certain value: Change from selling typical products to developing services. Reach new customer groups and create new markets based on core business strengths. Leverage existing assets to create a whole new line of business. Expand into new geographies. Add new product lines to a distribution network.
ST is a small-scale company, losing 10 years in a row, when Pistorio took over the leadership position, he started to implement it: “I set up the microcosm myself, focusing on a few strong resources. to build around products with competitive advantages, towards customers with potential for long-term cooperation. The only way to manage customers is to meet and get to know them, share their comments about you. If we listen and act, they "reward" us growth rates.
The leading businesses are the ones most afraid of failure. They face the risk of losing their valuable business focus when they dive into investing in new business directions.
Another situation that makes leaders want to enter new areas is when their companies are in turmoil.
In the above situations, pressure from inside and outside the business is very evident, pushing the company into a situation where it is imperative to expand beyond its business focus.
Different types and characteristics of extensions:
Extend product development: a new product or a new service to existing customers.
– Geographic expansion: moving to a new location, often companies tend to disregard, so the probability of success is low.
– Value chain expansion: moving up and down the value chain and entering a new set of businesses (buying a company and then selling when it doesn't fit, or entering the retail market and then exiting) ).
– Expanding business channels: Dell abandoned indirect retail transactions, built a warehouse to sell products to Walmart.
– Expanding customers: modifying old products, consolidating technology to reach new customer territories.
– Expand new business lines: build a new business.
When developing, it should be noted that the core business and the extended business area complement each other, instead of inhibiting each other, creating opportunities for success and reducing the risk of failure.
2 – Visualize the ideal model
The first rule to grow and expand the business field
Consistency is the essence of the winning edge. In the case of business expansion, this consistency is not easily achieved. It requires a lot of preparation and absolute attention to detail.
Olam has grown thanks to its consistency in underdeveloped markets: as an agricultural raw material supplier, Olam manages this supply chain including sourcing, raw material handling, and transportation. products, transactions, advertising, distribution and risk management… Olam's goods produced in developing countries, coffee, cocoa from West Africa, India; shelled cashews, peanuts from India, Vietnam, Brazil… After that, the products are sold in developed countries with 10 different items. They are based on three factors: a stable business focus, creating economic benefits and competitive advantages, and carefully studying customer attitudes.
Nike and Reebok: both companies have a business focus on sports shoes. In the first stage, the financial capacity and revenue of the two companies are almost equal.
Nike has built a clear strategy in front of shareholders with a unified expansion approach, adding a variety of sports products from baseball, football, volleyball, climbing, rugby and offensive into the territory. golf site. Nike has successfully applied an expansive and focused formula, thus capturing the market from 22% in 1990 to 38% in 2002.
Reebok has a mysterious direction for company employees. Reebok invests in many directions unrelated to its core business, such as the acquisition of the Boston Whaler shipping company; selling fashion brands Ralph Lauren and Polo Footwear… and became a corporate nightmare in 1997.
The story of Nike and Olam is about showing different ways to research a certain group of customers. Every time they invest their time and resources in reaching customers, they find new opportunities, be it opportunities to strengthen their focus, or to expand according to the right business formula.
One of the most effective ways to identify growth directions and opportunities is to capture the cost and economic benefits of core customers in detail. Sometimes the company even captures the financial potential of the customer more than the customer itself. One way to identify an opportunity to maximize a customer's spending is to capture the lifecycle of the purchased product.
Michael Dell believes that the most important growth engine is the right customer segmentation to identify new customers to attack and focus on serving them better. Procter & Gamble has shown that understanding customer psychology plays an important role: from the established Tide brand, liquid detergent developer Liquid Tide to Tide Bleach detergent soap. For 60 years they have constantly reformed and developed the Tide brand that has delighted housewives. That said, homogeneity is the actual side of the company's "competence and strength". For example, Honda's strength is the engine and they have been successful in motorcycles. Or Sony's strength is the ability to design and miniaturize electronic products and they have been successful in the electronic product line.
In addition to the above lessons, leaders always ask themselves: Do I have a uniform scaling formula? What is the development strategy in the external environment? Does my opponent have that formula? Where do they look for growth opportunities? Are we going in too many directions? What do we understand about the customer? If this direction works, what should we continue to do in the future?
3 – Evaluate development steps
Balancing desire and reality
Vodafone is the world leader in mobile phones. Vodafone's direction revolves around the sector choices the company approaches.
At first, the company decided to only provide services, not expand equipment production, so it sold the manufacturing equipment brand to Ericsson.
The company decided to become a purely wireless network provider, stopping development of wired networks.
Geographically expandable, works globally, suitable for mobile phone users.
Taking risks and opening a retail store, because directly with customers will understand how they use, spend, require and want is necessary.
The selection process focuses on the following three aspects:
– Control the economy and control the market of the newly expanded field.
- Has great profit potential.
Have a clear connection to the business focus.
They are very strict in setting selection criteria and relying on multiple sources of information. The nature of all choices is imperfect, and this is true of decisions that have to do with emotions or self-esteem.
Three factors make a successful development project
Element one: A strong business focus
The close connection between the field of expansion and the business focus is the core and most influential factor in each company's ability to create value when it wants to push its boundaries.
Mekesson undertook a development project that was out of focus while trying to compete with Cardinal Health, resulting in significant damage. The price they have to bear is inadvertently creating conditions for competitors to grow stronger.
So how can we estimate the distance from the business center of gravity? It must be determined if the areas of expansion have something in common or similar to the business focus in terms of customers, competitors, cost structure, distribution channels, individual strengths (strengths and strengths). Can this be used in a new field?). If the new field has a distance with the center of gravity as small as possible, the larger the danger.
The second element: Direct expansion projects to the most profitable areas
Evaluating a profit group involves assessing the size of the industry, current profits, future potential, and profit potential of industry leaders to offset the cost of capital. Sometimes a new competitive model can create new profit groups.
The profit group diagram includes:
- The profit pool is created directly from the expansion steps.
- Impact of expansion steps on profitability of business focus.
- The impact of business focus on the field of expansion.
- The expansion step's role in creating new growth opportunities, customer and supplier profit groups, and associated products.
The third factor: Affirming leading economic potential
An investment decision to expand a business requires a clear view of the reinvestment potential and future costs incurred. If a company does not have the economic potential of the industry leaders, it is very likely that the company has overinvested. People under a lot of pressure often lose faith, stay away from conflicting figures.
The defensive side of an expanding field
Sometimes a new direction of expansion is driven by the threat of a competitor. Kodak is a company specializing in film, photo editing and cameras, and had a market share of 80% in 1984. Fuji entered the US market at a lower price and sponsored the Olympics, challenging Kodak, forcing Kodak price must be adjusted accordingly. In 1997, digital cameras took over the market opened by Sony, forcing Kodak to step up to digital technology. Then the photo-processing technology of Wal-mart, Ofoto, HP's photo printer… The competition gives Kodak many opportunities to develop the market, have new products, and at the same time, make Kodak also face difficulties when the relationship Danger lurks on all sides.
Common pitfalls when evaluating an open field
The three aspects of attack, defense and investment hazard can lead to a number of pitfalls. Therefore, businesses must create a rigorous decision process to avoid these pitfalls, by not confusing the concept of market and profit group; must understand how competitors control the profit pool; Don't misunderstand leadership. When a competitor expands into a new area, your company will feel pressure to catch up. Imitating your opponent's actions will lead to mistakes and costs.
4 – Arrange the expansion moves
Enhance core values or invest in expansion
The state of core business value in the enterprise is a key feature in all scenarios involving neighboring expansion developments. The most compelling growth opportunities can become unattractive, unrealistic, or even destructive when attached to the wrong core values or at the wrong time. But a fairly normal expansion move when tied to a strong core value, coupled with an investment of resources, acts as a catalyst, contributing to new business growth.
Core business activities vary widely, the three main measures of a company's core values are: Competitive position (market follower, average, market leader); the movement of the market (slow development, steady development, fast development); and financial capacity (lack of efficiency, full potential).
Market-followers may have weak core strength or no longer have viable core values while a competitive advantage remains. Or they are dying where there is still progress, but the core values are gone.
So how to reposition to help the company get rid of the position of a laggard? The first scenario is that the “following” company is suddenly able to create a distinctive competitive advantage product of equal value to the “leading” company. In the second scenario, the “following” company develops a direct success strategy, targeting another “following” company, consolidating, merging, or acquiring this company. Alternatively, the company “follows” redefining and building on a narrower customer segment. Thus, customer loyalty is built through a strategy that best suits, that is, shrink to grow. Another way, to increase profits, is to dramatically revamp a core product line that has lost its edge.
The core melts full of anxiety
The challenge of managing a business where the entire core product market has been eroded, like a synthetic fiber company as consumers switch back to cotton; manufacturer of vinyl for use in phonographs…
The core meltdown could be a signal for when to merge with another company, or it could assume a new status within a multi-core company. Sometimes it is possible to transform the infrastructure, take advantage of the existing brand, invest in the main product to move into the service business.
Reaching the greatest potential in the core sometimes requires a big shock to the internal system instead of outside intervention (wage reform, evaluation, training, incentives for employees before they start working). non-industry development).
Assess the potential of the core business
How do you know if your company is possessing the full potential of its core business? While you may not know for sure, there are some obvious signs such as: lack of consistency, undefined core, decline in core customer market share, efforts to expand beyond core disappointing recent, increased product and process complexity, variable and inexplicable performance differences between units; never reviewed customer segments.
Auxiliary or core?
Neighborhood moves are almost never the solution for a business with a weak core and trailing behind the competition; Possible path is narrow to growth.
Neighborhood moves are important for a business whose core values are melting.
Businesses with a strong core but sluggish performance need to focus all their energy on achieving their core potential.
Businesses with strong cores that dominate a market segment can enter a period of neighborhood migration that will shape the future.
So we need to ask ourselves, have we defined the core boundaries correctly? Understand the competitive advantage of each field? What is appropriate for each field?
5 – Take steps to expand into neighboring markets
Manage the organization's material issues that have a certain impact on success or failure
The strongest core businesses certainly have enough appeal to retain the best. However, this gravity can prevent the flow of gray matter to new opportunities. The opposite reaction creates a force that expands neighboring businesses like a magnet and weakens the core business. These trends need to be managed if the company is to achieve sustainable profitable growth.
Andy Taylor, CEO of Enterprise emphasized: "We spend a lot of time researching to organize the company to ensure the close connection of adjacent business areas and be governed by the core business area." . The three lenses for managing this problem are:
The lens of economic division: need to understand the scope of new development and core business in terms of customer similarity, infrastructure, overhead costs, organizational design, help ensure points properly managed at both the initiation and maturity stages.
The decision prism: implementation of the decisions faced by the organization regarding price, new products, major expenditures, positioning, customers. The decisions that show the most cohesion between the core and the adjoining factors are the choice of distribution channels and new geographical areas to make the market interconnected.
The prism of dividing culture and personnel system
The core culture, even the system around people management, is not always suitable for expansion. Business is segregated, a distinct culture is developed.
However, there are approaches – sharing economy, decision overlap and cultural fit – that can help shape the options for an organization doing business in the adjacent market:
A completely separate and reporting-only approach to management has been used with great success by some companies; Another method is to integrate the information processing department and separate the outsourced department, because expanding into a new neighborhood market will lead to new customer groups, new channels, and new locations are the main issues. in marketing. Another way is to separate the information processing department and link the external work department, because research on new customer groups, spending levels, and needs needs to be reflected separately on the information processing team.
Some businesses take a hybrid approach by adopting a high-level self-regulation structure in which the adjacent business will have its own team of salespeople.
A simple structure is a product management model in which most products and services work directly with customers.
Full integration approach: the adjacent business is integrated into the core business as quickly as possible.
There is no exact formula for linking a business, core and sub-sector. New market share and options nearby and major market factors that need to be considered in order to determine the best side of the selection. Basically, success is due to the company having a solid core business foundation, can also come from the choice and implementation of strategies that have a high success rate, achieve success quickly, make good use of potential, good deal when expanding market share.
When a company expands into the wrong, disappointing neighborhood early enough, it becomes necessary to withdraw from the neighborhood to reduce management complexity and free up resources for productive operations.
6 – Movement through expansion of neighboring business markets
Redefining core business across sub-sectors
All the once-prosperous companies that could not adapt in time to rapidly changing market conditions, collapsed rapidly.
Therefore, the best businesses should learn to adapt to new changes faster, not to fall behind and create value in the long run. One way to achieve this is to redefine the core business. But how?
The reason companies fail is because they have been overtaken by competitors; they failed to adapt and redefine the core domain.
Companies with long schedules and unexpected transformations, even complete changes, across industries include: American Express, Tetrapak, Li & Fung, Lloyds Bank, UPS, Enterprise Rent-A-car, Tesco… They moved aggressively to the sustainable stage, profitable growth by driving the core business, then found methods to expand beyond the core business in a way. most suitable and beneficial.
We research and identify 4 important factors for adjacent business expansion, co-existence and co-occurrence:
– Strong core business as the foundation for transitions to adjacent areas.
– Steps to move to neighboring fields must meet the following criteria: close contact with the core field, large profit source and potential for economic domination.
– Formula of adjacency or repeat franchise.
– The organizational method is easily adaptable and scalable to manage the adjacent field.
The above criteria seem obvious, but a lot of companies are still "struggling" to apply them. Great companies are often strict about funding new ideas, only after building the core, moving steps and thinking about a series of similar steps in the future. They set criteria that force projects to achieve profit growth after 2 years and voluntarily withdraw from the neighboring market if the company does not achieve the rate of return.
An eternal truth: concentration is power. The inherent tension between focus and perpetual growth is a difficult issue in corporate decisions.
One of the most successful merchants, Andrew Carnegie, advised: “People often advise you: don't put all your eggs in one basket. That is wrong advice. My advice: Put all the eggs you have in one basket and watch that basket carefully. It is easier to invest and do well in one area than to invest in many, and most projects fail.”
“Beyond the core” represents a tension between comfort and a sense of focus, temptation, and the need to go the unknown. The company is the organization that balances the best opposing forces to create future value.