Finding Your Next Core Business

Finding Your Next Core Business
Chris Zook
Harvard Business Review, April 2007

How do you know when your core business needs to change?  And how do you determine what the new core should be?  These are the questions that have driven the efforts of a research team led by strategy consultant Chris Zook over the past three years.

Zook leads the Global Strategy Practice of Bain & Company.  He is the co-author of the 2001 best-seller Profit from the Core and the author of the new book, Unstoppable:  Finding Hidden Assets to Renew the Core and Fuel Profitable Growth.

What he has discovered from an in-depth study of 25 companies, including Apple and IBM, is that when a core strategy is exhausted, it’s generally for one of three reasons.

The first has to do with profit pools — the places along the total value chain of an industry where attractive profits are earned.  If your company is targeting a shrinking profit pool, improving your ability to execute can accomplish only so much.

Consider Apple, whose share of the market for personal computers plummeted from 9 percent in 1995 to less than 3 percent in 2005.  But more to the point, the entire profit pool in PCs steadily contracted during those years.  If Apple had not moved its business toward digital music, its prospects might not look very bright.

The second reason is inherently inferior economics.  These often come to light when a new competitor enters the field unburdened by structures and costs that an older company cannot readily shake off.

General Motors saw this in competition with Toyota, just as Compaq did with Dell.

The third reason to rethink a core strategy is a growth formula that cannot be sustained.  A manufacturer of a product like cell phones might find its growth stalling as the market reaches saturation.

Or a company may run out of new territory to conquer:  Think of the difficulties Wal-Mart has encountered as the cost-benefit ratio of further expansion shifts unfavorably.  The core business of a mining company might expire as its mines become depleted.

In all such circumstances, finding a new formula for growth depends on finding a new core.

The companies in the study that were the most successful in remaking themselves focused on tapping their organization’s hidden assets.

For example, the Swedish company Dometic was manufacturing small absorption refrigerators for boats and RVs when it discovered a hidden asset:  its access to cu...