Chris Zook: An interview by Bob Morris

Posted on: March 9th, 2011 by bobmorris

Chris Zook

A partner at Bain & Company,  Chris Zook is co-leader of the firm’s Global Strategy Practice. Zook’s work has focused on companies searching for new sources of profitable growth, in a wide range of industries. His published works include Profit from the Core, written with James Allen, Beyond the Core, and most recently, Unstoppable, a book that completes the “trilogy” of Zook’s analysis of profitable and sustainable growth. He received a B.A. from Williams College, an M. Phil. in economics from Exeter College, Oxford University, and holds Master’s and Ph.D. degrees from Harvard University. His latest book is Repeatability, co-authored with James Allen.

I conducted this interview a few years ago. If anything, Zook’s responses and more relevant and more valuable now than they were then.

Morris: Before focusing on three of your books, please share what you consider to be the most important revelations generated by the extensive research on profitable and unprofitable companies that Bain & Company has completed over the years.

Zook: The three most important revelations from this work are, first, that very few companies, only one in ten worldwide, achieve more than a modest level of sustained and profitable growth (5.5% real revenue and profit growth and earning the cost of capital); yet most companies aspire to these targets. Furthermore, the odds of sustianing profitable growth are declining over time.

Also, that about one in five “adjacent” growth moves that companies make – such as new geographies, new channels, or new customer segments — actually generate sustained and profitable growth.  Picking your spots is becoming a more important competitive discriminator.  The key drivers of the odds of success are the strength of your core, relatedness to the core, and the ability to create a repeatable model for expansion.

Third, that successful strategies move through a cycle from focus to expand to redefinition. This cycle is speeding up, huge risks emerge from misjudging where you are in the cycle, and most companies do not know for sure where they are.

Morris: Given your response to the previous question, which of these revelations did you personally find most surprising? Why?

Zook: I found the low and declining odds of sustained and profitable growth to be the most surprising. Competitive differentiations are becoming harder to maintain. Two thirds of companies say their main competitor in five years will be a different company and they are not sure who it will be.  I think it is also amazing how many management teams do not really understand the essence of their competitive advantage, their “core” at a deep level, and do not agree amongst themselves on what it is. Yet, if you do not understand who you are, it is tough to know what to become.  That lack of self awareness always surprises me a lot.

Morris: Please explain what you mean by “the core.”

Zook: The “core” is defined as the essence, the root cause, of your competitive advantage.  It might consist of capabilities that are truly differentiated, strong customer positions that others cannot replicate, or a uniquely strong brand.   The core represents the crown jewels of most businesses and is what differential profitability and ability to win versus competitors can be tracked back to.  If you do not understand your core, it is tough to define a strategy to expand it profitably. Yet, most do not understand their core.

Morris: In your opinion, to what extent (if any) can a company’s core compromise timely and effective responses to significant changes within its competitive environment?

Zook: Companies with very strong historic records of success whose business model is built around a few, unique capabilities are the ones, not surprisingly, that often have the most difficulty seeing changes in the environment and mobilizing fast enough.  Classic examples range from Xerox’s struggles to react to low cost copiers or to the advent of small printers replacing xerography to Kodak’s difficulties weaning itself away from a film-based model in the photography business even though they had predicted almost perfectly when digital technologies would take over.

Morris: By what process should a core business be defined?

Zook: There is a difference between a company’s core (its root cause of competitive advantage)  and its core business (the boundaries that define a company’s competitive arena and set of key customers and products where it can hope to compete). The method to understand your core must blend data and analysis (the left brain) with discussion and reflection in the management team (the right brain). The most important considerations are suggested by questions such as these: “Who are our most loyal customers, and what explains that?”, “Where do we consistently beat and out-earn competitors and why?”, “What capabilities do we have that we can prove are differentiated or superior?”, and “What have we been able to extend most successfully into new adjacencies, and why?” Of course, the correct and appropriate answers will inevitably change as the nature and extent of one’s competitive envirfonment change.

Morris: Here is a related question. From your perspective, what are the most formidable barriers to change initiatives that are required by a re-definition of a core business?

Zook: We have identified three “dilemmas of redefinition,” that must all be addressed. Each poses major barriers of its own.  These are (1) How do you know whether to begin the difficult work of redefining your core? (2) What should be the foundation of the redefined core of the future? and (3) How should you redefine the core while still running the business today and delivering quarterly results?  Possibly the third dilemma is the most difficult of all, and is a reason why many management teams delay or get caught in the headlights.

Morris: Now please focus on Profit from the Core, written with James Allen. For those who have not as yet read it, what is “The Alexander Problem” and why is it significant?

Zook: We defined “the Alexander Problem” as the situation where a business expands, step by step, farther and farther from its core business in ways that seem somehow logical at each point. Yet, as a result, the company has spread itself too thinly and weakened its core business, and its ability to defend itself competitively, as a result. The term is taken from the fact that Alexander the Great won all of his battles and expanded half way around the world, yet shortly after his death his empire crumbled because it had been stretched too far for the core to support or protect.  You see this in company after company that got into trouble from Bausch & Lomb to Swissair to Zurich Financial Services to WorldCom.  A large percentage of the real business disaster stories relate to failed growth moves and to the Alexander problem.

Morris: One of the key points in Profit from the Core is that there are types of strategic business decisions “that most often seem to tilt the odds of future success of disappointment.” For example?

Zook: The key decision is how to define your core. If you define it too narrowly, like Polaroid did in photography, you are vulnerable to new competitors attacking at the boundaries. If you define it too broadly, like Vivendi’s incredibly grand entertainment strategy years ago, you get out of control. What is your core and what is necessary for leadership economics is the key decision.

Morris: In Beyond the Core, you share your thoughts about what you characterize as “adjacency growth.” What is it and how can it help organizations to expand their markets without abandoning their “roots”?

Zook: Adjacencies are the basic moves, like the game of Go applied to business, that expand the boundaries of a business. These are moves like new geographies, new channels, new customer segments, new products and services, or new steps in the value chain. There are four key success factors in improving the (low) odds of success, which average about 20-25%. First, build on a strong core with leadership in some segment or category. Also, recognize that the best expansion ideas emanate from the customer. Then develop a repeatable formula and constantly work to improve it. Meanwhile, don’t move too far from your core too fast.  Each of these has much more data, methods, and concepts attached to them that are explained in my three books

Morris: From your perspective, what are the key organizational issues that have the greatest influence influence on an organization’s success or failure?

Zook: The key issues are (1) Making certain that the most critical decisions in the new growth initiative have a clear process and relationship with the core so that it is not overwhelmed by the core and its priorities, (2) Building organizational capacity before it is needed and to grow into, (3) Leadership and the open mindedness for change, and (4) Investing enough in new capabilities, driving for world class.

Morris: Having explained in Profit from the Core how companies define and grow their core and then in Beyond the Core how they can push out their boundaries into new territory, you focus in Unbstoppable on how and why they may one day need to re-define and renew their core. In this latest book, you seem to suggest that with most organizations that are unabvle to sustain profitable growth, many of their “wounds” are self-inflicted. Is that a fair assessment?

Zook: Yes, most management teams looking back on a disappointing experience feel that it was more due to decisions taken, to choices made, and to quality of implementation than to outside forces they did not control.  Some of the most common self-inflicted problems stem from failure to understand and protect the core, from an inability to react fast enough to changes in the environment that they could see coming, and from the human tendency to overreach beyond what is possible to accomplish well.

Morris: By what process can organizations identify their “hidden assets” and then leverage them to renew their core and fuel their profitable grtowth?

Zook: Insights about hidden assets can come from many places, but begin by simply asking the question in an organized manner. The best insights often come from front line employees, from core customers, and from looking for areas of unusual strength or growth or profitability buried in the complexity of a business.  Some of the best ideas about how to redefine a business model, using hidden assets, can come from looking at other companies in other industries that have gone through a similar evolution.  For instance, a business that thinks it will have to migrate from product based to service based has many examples to study in “parallel worlds.”

Morris: Many organizations do not possess the capabilities they need. Then what?

Zook: Acquisitions were seldom the number one focus of strategies that redefined a business’core, but were very often an important ingredient or catalyst.  Most often, such acquisitions were for the purposes of obtaining new capabilities.  Examples of such capability driven acquisitions might be the Roche acquisition of Genentech (to obtain biotechnology science), the Ebay acquisition of Skype (to obtain telecom/VOIP know how), or the set of acquisitions made by Boston Scientific that provided the elements of its highly successful, and transformational,  strategy in the stent business.

Morris: All three of your books stress the importance of understanding an organization’s core in order to profit from it. In 1963, Peter Drucker suggested that “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” Presumably you agree.

Zook: I could not agree more. What is the purpose of having the trains run perfectly on time if they are going to the wrong places, or places no one wants to go? What I call “ the core” involves efficiency and productivity, of course, but it also involves first knowing what must be done and why it must be done. It is as easy and, yes, as difficult as that.

 

 

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