Why Not to Expand Your Business Beyond Its Core Competencies

Here's something to think about. A study by Bain & Company shows a majority of the most successful companies during the last fifty years have achieved that status because they stuck to their core competencies. When these companies did make 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.

The core of a business can be defined from two different perspectives. In the book, Profit from the Core by Chris Zook, a short discussion on three car rental companies brings this into focus: Enterprise Rent-A-Car, Alamo Rent a Car, 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 particular companies have core businesses that are quite different.

Enterprise has seventy percent of the market for insurance replacement and repair rentals. The company got its start in this distinct segment, building its suburban locations and 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.

Avis's 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 located within walking distance of the terminal. Enterprise, Alamo and Avis each 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:

1. Your most potentially profitable, franchise customers

2. Your most differentiated and strategic capabilities

3. Your most critical product offerings

4. Your most important channels

5. Any other critical strategic assets that contribute to the above (such as patents, brand name, position at a control point in a network).

A man I know, Bill Monahan, was handed a company made up of divisions of 3M that were spun off because they were not performing up to par. Monahan realized that to suceed, a clear focus was need on what would become the new company’s core business. Monahan decided the company could be a leader in data storage. 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 the best opportunity for success.

In summary, three criteria were used to determine the business to establish as the core. 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 we were positioned to win.

The strategy worked. When Monahan took the reins, the company was deeply in debt. When he retired from the company eight years later, it was not only free of debt, the company had half a billion dollars in cash, and was the leading supplier of removable data storage media boasting twice the market share of its closest competitors.

Focusing on the core worked. If you are interested in learning more about what works in business, click here to browser our line up of business management books.