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Resist the temptation to expand your business beyond its core competencies

by Stephen Hawley Martin
for Virginia Business
May 1, 2006

Here's something to think about. A study by Bain & Co. shows a majority of the most successful companies during the past 50 years have achieved their status because they stuck to their core competencies. When these companies made acquisitions, the successful ones were almost always tied closely to the acquirer's core business, dovetailing with the company's competencies.

Acquisitions that failed tended to be those far afield of the core, or in altogether unrelated businesses. I suggest you read this study for the details. Take it from me, you are likely to become a believer because the facts it presents are difficult to dispute and lay out a very compelling direction for any company, and most particularly, for a turnaround.

The core of a business can be defined from two perspectives. In "Profit from the Core" by Chris Zook, a short discussion on three car rental companies brings this into focus. The companies are Enterprise Alamo and Avis. All are clearly in what most people would define as the car rental business. This involves purchasing and managing fleets, running automated reservation centers, managing a branch network and serving customers who rent cars for various purposes. Within this framework, however, these companies have core businesses that are quite different.

Enterprise has 70 percent of the market for insurance replacement and repair rentals. The company got its start in this distinct segment, building its suburban locations and creating business model to meet the needs of body shops and insurance companies.

Alamo's core business comes from leisure renters, who don't mind having to pick up rental cars at locations some distance from an airport terminal. The company situates its branches in popular vacation destinations such as Orlando, Fla.

Avis' core is airport rentals to people traveling on business. It sells heavily to corporate renters requiring speedy service, newer cars, a variety of business amenities and, obviously, a network of prime airport locations, most having their cars within walking distance of the terminal.

Each company no doubt views its core differently, and each is right in doing so. Yet each participates in the rental car business that to the casual observer looks the same.

So how do you define your core? It's defined by that set of products, customer segments and technologies with which the greatest competitive advantage can be built. To do this, simply identify:

• Your most potentially profitable, franchise customers.
• Your most differentiated and strategic capabilities.
• Your most critical product offerings.
• Your most important channels.
• Any other critical strategic assets that contribute to the above (such as patents, brand name, position at a control point in a network).

In the turnaround of the 3M divisions that became Imation, which I've written about previously in this space, CEO William T. Monahan decided to create a clear focus on what Imation had to be to achieve sustainable success. He said no to far-afield opportunities, divested businesses where key strengths were missing and focused on where Imation could win and continue to drive costs down in order to stay competitive. Data storage emerged as the business Imation should bet on because it was in the most promising market. As a segment of the information technology arena, the industry was growing. As more and more data are created, more and more data must be stored. Monahan thought the company could be a leader in selling that storage. Imation had the best market position in this business. More than 50 percent of its business was outside of the U.S., so it was strong around the world. The company didn't have all the products it needed, but Monahan felt its R&D had the technology to develop those products. His technical people were good, and he thought they could catch up. Clearly, the data storage market offered Imation the best opportunity for long-term success and financial return.

In summary, three criteria were used to determine the business to establish as the core of Imation. Monahan wanted a business: 1.) That had real, organic market growth opportunity. 2.) With a strong technology position, experience and a strong intellectual property position. 3.) Where the opportunity was truly global and where the company was positioned to win.

The strategy worked. Today Imation is profitable, free of debt, has half a billion dollars in cash> It is the leading supplier of removable data storage media with twice the market share of its closest competitors, Fuji and Maxell.

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Stephen Hawley Martin is a former principal of The Martin Agency in Richmond and the author of more than half a dozen books including his newest, Lean Enterprise Leader: How to Get Things Done Without Doing It All Yourself. He is editor and publisher of The Oaklea Press, a book publishing business dedicated primarily to helping business executives increase productivity.