Post on 18-Jan-2022
Define the core
Whatwe’lltalkabout–strategicdiscipline
2!
Companies expand from a strong core into adjacencies by applying
a repeatable formula
Sustained profitable growth requires
focus on battlefields and leadership
economics
A melting core forces redefining
the business through hidden
assets
Expand
• The basics: business definition
• Core business - reaching full potential
• Moving beyond the core – the art of repeatable adjacencies
• When the core is melting
Strategicdiscipline
Where to play? Business definition and why strategic moves sometimes fail
Sometimes good companies make bad decisions
Company expanded from a strong core (toothpaste) into adjacencies but not applying a logic nor repeatable formula
Cosmopolitan enters the yoghurt market. From release to removal … in 18 months
Focus on the correct battefield?
Microsoft Zune digital media players introduced in 2012
8!
Adjacent to the core business? But being too late in the market … 2 years after iPod
Our roll sausage is made from premium quality pork, and every breakfast food we make is created to help people start off their morning rightly…
10!
Jimmy Dean knows its customers and core business. JD commands 53% of the $1.1 billion segment for so-called frozen breakfast items, increasing its revenue in that segment 6.3% (2014).
11!
Progresive car insurance - what is their business definition?
12!
Progressive's CEO Peter Lewis: "We're not in the business of auto insurance. We're in the business of reducing the human trauma and economic costs of automobile accidents in effective and profitable ways."
What is Business Definition?!
14!
Business definition describes the core and the economic boundaries of the battlefield within which companies
compete
Business activities beyond these core boundaries have little influence on strategic success or failure within them
Business Definition
Ø Indicates whether two business segments should be operated as one or as separate businesses
Ø Allows to determines the relevant market share
Ø Is key to assess the basic economics of your business: relative market share drives profitability
15!
Companies that define their businesses incorrectly make poor strategic decisions. Many companies define their businesses too broadly to be useful and at the same time overlook competitors who are successfully
leveraging more narrowly defined economics against them (cherry picking)
Relative Market Share = best indicator of leadership!
16!
Relative Market Share for the market leader is
expressed relative to the number 2 player
Market leader’s revenueNumber 2 player’s revenue
Other player’s revenueMarket leader’s revenue
Relative Market Share is expressed relative to the
market leader
Consequences of incorrect Business Definition
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Costs Competitors
• Incur unnecessary costs
• Forgo opportunities to capture synergies
• Do not transfer experience
• Underinvest in important R&D initiatives
• Overlook relevant competitive threats
• Miscalculate “market share”
• Set inappropriate performance targets
• Overlook relevant capacity changes
• Misjudge true cost position
Customers
• Neglect profitable customer segments
• Over-invest in unprofitable customers
• Misjudge relevant market trends
• Overlook relevant geographies
Examples of incorrect Business Definition!
18!
American Express
Allegis
Saatchi & Saatchi
Charge cards and credit cards are separate
Charge cards and credit cards are one business - plastic money
Charge card division lost money due to poor cost position and misguided marketing efforts
Airlines, hotels and rental cars are one business - caring for travelers worldwide
Airlines, rental cars and hotels are three separate businesses
The combination provided little value to customers: Allegis was split up
Advertising and consulting are one business - service to global business executives
Advertising and consulting are separate businesses
Company suffered severe losses due to inability to transfer experience, lack of focus, and tainted image
Company A better business definition
Consequences of incorrect business
definition
How management defined the business
Complexity of Business Definition!
19!
Is it one business or not? One Business Separate Businesses
• Touring quality microphones and speakers
• Lady Gaga and rappers use both
• Similar distribution channels
• Different manufacturers (Audio Technica vs. Bose)
• Little manufacturing process knowledge is transferable
• Limited direct cost sharing
• Cross pens and BIC pens
• Beer and distilled spirits
• Both used for same function, writing
• Similar raw materials• Some manufacturing steps shared
• Brand name sharing opportunities• Same distribution channels• Sold by same salesforce
• High perceptual barriers to customers
• Limited customer base overlap
• Limited benefits of shared R&D
• Key manufacturing processes are different
• Different raw materials
Ø A few logical arguments are not robust enough to delineate businesses
To delineate the economic boundaries, use the !Business Definition matrix!
20!
High
Cost Sharing
Low Low Customer Sharing
One business (charge cards and credit cards)
One business with potential for differentiation or niche position (cross pens and BIC pens)
Separate businesses with potential for cost leadership (oil and refinery by-products)
Separate businesses (beer and distilled spirits)
Separate businesses with potential for bundling (touring quality microphones and speakers)
One business with potential for substitution (milk cartons and glass milk bottles)
High
Degree of customer sharing
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Do different products currently (or potentially) fulfill the same customer needs?
- Product utility analysiso Do products offer similar
value along non-price attributes (e.g., scissors and knives cut cloth well)?
o Is product bundled with other products (e.g., razors and blades)?
- Cross-price elasticity analysis
Do you share many of the same customers?
- Who makes the purchase decision?
- Who uses the product?- What else is
purchased with the product?
Functional substitutionCustomer base overlap Perceptual barriers
Do customers perceive significant differences among the products?
- Value perceptiono Functional valueo Ease of doing
businesso Individual &
network value o Inspirational value
Degree of cost sharing
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• Shared suppliers• Shared raw materials• Shared inbound logistics
• Same distribution channels
• Common marketing + advertising• Same sales force
• Shared info systems• Shared general management
• Gasoline and petrochemicals• Standard to luxury car models on
common platform
• Cigarettes and candy (Philip Morris)• Electronic connectors & wire and cable
• Healthy Choice frozen dinners and cereal
• Soda and orange juice (Coca-Cola)
• BankBoston checking accounts and savings accounts
Branding + Price Realization
Distribution Channels
Administrative Support
Sales and Marketing
R&D
Manufacturing
Purchased Materials
Procurement
• Similar or shared manufacturing- facilities- processes
• Vitreous china toilets and sinks (Kohler)• Forgings for Hammer Heads and
wrenches
• Multiple applications of same R&D effort
• Tape and Post-it Notes (3M)• Combustion chamber design in Diesel
engines
• Shared brand image driving premium price realization
• Walmart versus category specialists• Northern Europe truck markets
Value chain steps How sharing occurs Examples
Team exercise - PepsiCo, Inc. is a multinational food, snack, and beverage corporation
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• PepsiCo has interests in the manufacturing, marketing, and distribution of grain-based snack foods, beverages, and other products
• #5 business categories
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High
CostSha
ring
Low
Low CustomerSharing
Onebusiness(chargecardsandcreditcards)
Onebusinesswithpoten@alfordifferen@a@onornicheposi@on(crosspensandBICpens)
Separatebusinesswithpoten@alforcostleadership(oilandrefineryby-products)
Separatebusiness(beeranddis@lledspirits)
Separatebusinesswithpoten@alforbundling(music-touringqualitymicrophonesandspeakers)
Onebusinesswithpoten@alforsubs@tu@on(milkcartonsandglassmilkboHles)
High
High
CostSharing
Low
Low CustomerSharing
Onebusiness(chargecardsandcreditcards)
Onebusinesswithpoten@alfordifferen@a@onornicheposi@on(crosspensandBICpens)
Separatebusinesswithpoten@alforcostleadership(oilandrefineryby-products)
Separatebusiness(beeranddis@lledspirits)
Separatebusinesswithpoten@alforbundling(touringqualitymicrophonesandspeakers)
Onebusinesswithpoten@alforsubs@tu@on(milkcartonsandglassmilkboHles)
High
BusinessDefini,onMatrix:…………………………………………………
• Describethebusinessdefini@onofVALID:• ……………………………….…….…….…….…….………….…….…….…….…….………….…….…….…….…….………….…….…….…………………………………………..…• ……………………………….…….…….…….…….………….…….…….…….…….………….…….…….…….…….………….…………………………………………..…….…….…• ……………………………….…….…….…….…….………….…….…….…….…….………….…….…….…….…….………….…………………………………………..…….…….…• Posi@onthebusinessesaccordingtoyourideasinthebusinessdefini@onmatrix.
• The basics: business definition
• Core business - reaching full potential
• Moving beyond the core – the art of repeatable adjacencies
• When the core is melting
Strategic discipline
How to define your ‘core’ business ?!
29!
Customers
Products
Capabilities / Value chain parts
Channels
Assets
Core
Most profitable
Most critical
Most differentiated
Most critical
Most important
1. 2016!
Core vs. non-core expansion path!
• Desperate divestitures
• Specialty Sports Stores
• Office Supply stores• Czech + Slovakian
Department stores• Big Kmart incl. home
fashion and children’s apparel
• (no serious investment in supply chain IT)
• Book Stores• Home
Improvement stores• Drug Stores
1970: 200 stores
Aggressive expansion of Kmart stores
First Kmart store opened
Filed for Chapter 11 Bankruptcy
Wal-Mart overtakes
Kmart as #1 US retailer
• Brazil• U.K.
• Germany• Asia
• Wholesale suppliers• Deep discounter
• Mexico• Canada
• Wholesale Club• Supercenter format• Discount retailers
• Satellite network for real-time inventory &
sales tracking1970: 32 stores
Focused on small and midsize towns
First Wal-Mart store opened
Ranked #1 in revenue
on Fortune 5001
1962 1970 1980 1990 2002
How to reach full potential in your core!
1. The dimensions used to assess the core, can vary! 31!
Customers
Products
Capabilities / Value chain parts
Channels
Geographies1
Core
Ø Building superior loyalty (=retention, cross-sell and referral)
Ø Designing new experience around unmet needs
Ø New-to-world featuresØ Patents
Ø High regional density
Ø Channel dominanceØ Partnerships with
leading channel participants
Ø GEM in online
Ø Experience build-upØ Cost leadershipØ Agile governance
Relatedness to the core drives success!
Source: Profit beyond the core, C. Zook! 33!
0
10
20
30
40%
1 1.5 2 2.5to 3
3.5to 4
4.5to 5
Steps away from core
Odds of success
SuccessRate
34!
But it goes both ways
Adjacencies closer to the core have more success
But the core remains fit by smart adjacencies
2 3
1
Wimbledon equipment (1987)
Equipment
Customer
Backward integration
Forward integration
Footwear
Apparel
Channel Geography New business
Golf balls (2001)
Footballs
Basketballs Bags
Shirts/shorts
Athletic wear
Running shoes
Basketball Tennis (1982)
Soccer Golf shoes (1987)
Cycle
Canada Mexico, Latin America
Europe
Asia
Tennis wear (1985)
Soccer strips Golf clubs
35!
Example Nike
Sold off
2
1
3 4 5
6
7
John Frye Boots (1987)
Ellesse USA(1988)
Avia (1987)
Boston Whalers Boats (1989) Shaq Line (1993)
Footwear
Rockport walking shoe (1988)
Ralph Lauren Footwear (1996) Logo Athletics (2000)
Greg Norman Golf clothes (1990)
“The Pump” (1990)
Other shoes
Customer
Backward integration
Forward integration
Soft goods
Channel Geography New business
NFL uniforms (2000) Other
products
Weeboks (1986)
Aerobic Shoe (1982) Tennis (1983)
Basketball (1985)
36!
Example Reebok
37!
The outcome…!
0
3
5
8
10
$13B
Revenues
Nike Reebok
12.3X
2.2X
0
5
10
15
$20B
Market value
Nike Reebok
38X
1.2X 2002 1987
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Ø Strategic clarity
Ø Reduced complexity – less new parameters
Ø Ability to reach deep understanding
Ø Speed of execution
Advantages of a repeatable, adjacency formule
CEO, Jos Nelissen: ‘... We are inspired by Darwin. It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most responsive to change...’. !!
39!
Company origins!
• 1956 The family company Nelissen Pluimvee, founded, originally a combined company for horticulture and egg production. !
!Over the years, the focus shifted towards the production of eggs.!
• 1990 The son Jos Nelissen and his wife took over the company. !
Together they developed the company into one of the largest egg production companies in the Netherlands.!
• 1995 The quest for growth began and the properties of eggs fascinated them, making them wanting more than just produce !and sell eggs. !
40!
Description of the Core Business!
• In 1990 the company was named Globus Egg and had a 8% market share in The Netherlands growing to 18% in 2006. !
• The Netherlands is the world's number one exporter in Europe, distributing at large volumes. Their core market is the retail market (supermarkets).!
• The company delivers to retailers like Ahold, Aldi, Lidle, Carrefour and has market shares of 10% in France, 18% in Belgium and 12% in Germany!
• The best performing companies in the European market are those with:!• Distribution power !• The capability to manage the value chain from egg production up to the retail market. !
• The company was a 1st mover and among their core capability is their use of a high quality assurance system and managing a demonstrable quality in the value chain. Among their assets was their knowledge of the nutritious value of eggs.!
• They developed a high tracking and tracing system, with a method that even traces back to the raw materials of the feeding. Tracing of the origins and the residues from goods and raw materials is a main topic in the agricultural markets. !
• The company introduced a process innovation and developed a new logistics system which reduced 50% of the logistics costs with a smart use of the stock pallet systems. But the idea was in no time taken over by the competition.!
41!
The team question: Can you think beyond the core of eggs? !
You have to present to the management team your growth strategy beyond the core of the egg business!
Brainstorm on the following question:!Ø Which new business would you like to explore (away from the core)? !
First, take 30 minutes to sketch ideas to go beyond the core!!Assign one person who will present the team ideas!
43
Customersegments
Markets&Products
Capabili,es/Valuechain
Channels
Assets
BeyondthecoreintheEggbusiness
• Businessdefini@on–describewithkeywordsthecorebusinessoftheeggbusinessonthe5dimensionsanddrawaline• Next,sketchthegrowthstrategythatyourteamproposes
Beyond the core - Does a deeper understanding of assets lead to more breakthroughs? Explore the assets like e.g. nutrition value!
Reinvent industryPrevent ‘elderly'
blindness
Strategy of ‘More and Similar
Think differentnutritional value
• The basics: business definition
• Core business - reaching full potential
• Moving beyond the core – the art of repeatable adjacencies
• When the core is melting
Strategic discipline
Signs that you have to redefine your core!
46!
2. Industry profit pool shrinks or shifts
3. New model threatens core
1. Growth formula stalls out
Signs that you have to redefine your core!
47!
1. Growth formula stalls out
Acquiring other cell phone companies faster and more effectively than competitors running to an end
2. Industry profit pool shrinks or shifts
Signs that you have to redefine your core!
48!
Ø Newspaper category shifts to online channel
Ways to redefine your core!
52!
Likely paths
1. Underdeveloped adjacency paths
2. Underexploited capabilities
3. Underserved client segments
53!
Dometic’s redefinition:
• Use of hidden assets
• Gradual transformation
• Leadership economics (RMS)
• Repeatable formula