Leveraging the business, the new growth avenues. (CH 12)

"The most dangerous moment comes with victory" - Napoleon

"Results are gained by exploiting opportunities, not by solving problems" - Peter Drucker

KEY LEARNINGS

  • Leveraging assets and competencies involves identifying them and creatively determining in what business areas they might be able to contribute.

  • Brand extensions should both help and be enhanced by the new offering in addition to being perceived to have a fit for it.

  • The business can be leveraged by introducing new products to the market or expanding the market for the existing products.

  • Entering a new product market is risky, as the new offerign might lack market acceptance or needed resources.

  • Success likelihood goes up if the core business is healthy, if the new product market is attractive (competitors will be profitable), if the business model is repeatable if market leadership is possible, and if the stretch from the core is small.

Intro

The creative thinking exercise cab best be engaged around the following series of questions, which have proved to be a good source of options:

  • which assets and competencies can be leveraged?
  • what brand extension are possible?
  • can the scope of the offering be expanded?
  • do viable new markets exist?

Which assets and competencies can be leveraged?

  • What are the key assets and competencies that are supporting the core business?

  • What are their characteristics? How strong is each?

  • The next step is to find a business area where the assets and competencies can be applied to generate advantage.

  • One fruitful exercise is to examine each asset for excess capacity. Are some assets underutilized? A legal firm that considered this question took advantage of excess office space to offer tax services.

  • The final step is to address implementation problems. Assets and competencies may require adaptations when applied to a different business.

Let's take a look at the following competencies examples:

  1. Marketing skills - a firm will often either possess or lack strong marketing skills for a particular market.

  2. Capacity in Sales and Distribution - a firm with a strong distribution capability may add products or services that could exploit that capability.

  3. Design and manufacturing ability can be the basis for entry into a new business area. The ability to design and make small motors helped Honda succeed in the motorcycle business and led to its entry into lawn-care equipment, outboard motors etc.

  4. R&D skills - expertise in a certain technology can lead to a new business based on that technology. GE's early research has spawned very successful businesses. For example, its research on turbines for electricity generation provided the basis for its aircraft engine business and its light bulb research provided foundation for what became the medical instrumentation business.

  5. Brand Extension - one common exportable asset is a strong brand name - a name with visibility, associations, and loyalty among a customer group. The challenge is to take this brand asset and use it to enter new product markets. --> see example of Disney (!)

A brand of course, can evolve over time in part by the brand extensions and then get permission to drive a broader assortment of offerings. So the addition of a healthy submenu to McDonald's may allow the firm to venture into areas that would have not made sense before.

!! In general, a brand that has strong ties to a product class and attributes (e.g. Boeing, Netflix, or Kleenex) will have a more difficult time streching than a brand that is associated with intangibles such as a brand personality. For example, Cosmopolitan magazine could not extend its brand into yogurt line or Colgate toothpaste into a line of ready-to-eat milk.

Expanding the scope of the offering

Dometic, a Swedish company that pioneered absorption refrigerators characterized by silent operation, built a business selling them to hotels for use as minibars and to the RV industry. The RV industry success led Dometic to add other products directed at the RV industry, such as air conditioning, automated awnings, generators, and systems for cooking, sanitation and water purification.

Considering the broader use context is a powerful idea. Thus, instead of being in the orange juice business, be in the breakfast business. Instead of selling only basketballs, consider making baskets and courts.

GE's Jack Welch was quoted as saying that dominant companies in slow-growing businesses should redefine their markets, looking at a broader socpe that will have more opportunities.

How to grow when markets don't?

Slytowsky and Wise recommend identifying and serving the customer needs that emanate from the use of existing products.

Cardinal Health for example, moved beyond distributing drugs to pharmacies to managing hospital drug dispensing and related record-keeping and creating medical supply kits for surgeons.

A good way to start determining whether there is a viable growth option is to analyse the total set of tasks surrounding the customer user experience.

Another perspective on expanding the offering socpe is to serve the additional needs of the customer. What other products or services do existing customers buy that could be provided by the firm's operations?

Fast food chains have expanded their offerings to attract more customers in a time slot for which they have capacity.

New markets

A logical avenue of growth is to move existing products into new markets by duplicating the business operation, perhaps with minor adaptive changes. With market expansion, the same expertise and technology and sometimes even the same plant and operations facility can be used.

Thus, there is potential for synergy and resulting reductions in investment and operating costs. Of course, market development is based on the premise that the business is operating successfully; there is no point exporting failure or mediocrity.

Expanding Geographically

Geographic expansion may involve changing from a regional operation to a national level, moving into another region or expanding to another country. KFC, McDonald's, GE, IBM, and VISA have successfully exported their operations to other countries. Most of these companies and many others are counting on countries such as China, India, and Russia to fuel much of their growth for the coming decades.

They realize that success will involve significant investment in logistic, distribution infrastructure, and organization building and adaptation.

Expanding into new market segments

A firm can also grow by reaching into new market segments. If the target segments are well defined, there are always a host of other segments to consider that would provide growth directions. Consider, for example:

  • Distribution channel - a firm can reach new segments by opening up a second or third distribution channel. A retail sporting goods store could market to schools via a direct sales force. A direct marketer such as Avon could introduce its products into department stores, perhaps under another brand name.

  • Home versus office - a supplier of office equipment to businesses might look to the home office market.

  • Move upscale - Olay, which was a mass-market P&G brand, was injected with innovation, eye-catching packaging, and new positioning and was able to demonstrate that the mass market would be willing to pay premimum prices if the offering merited them. In the process, a $2.5 billion business was created.

A key to detecting new markets is to consider a wide variety of segmentation variables.Sometimes looking at markets in a different way will uncover a useful segment.

It is especially helpful to identify segments taht are not being served well, such as the women's computer market fo the fashion needs for older people. In general, segments should be sought for which the brand can provide the value.

Evaluating business leveraging options

There will be no shortage of ways to leverage the existing business. Ultimately, these need to be evaluated to see whether one or more should be pursued either immediately or within a planning horizon.

This section proposes several questions that represent important criteria to consider. These criteria are all supported by a series of studies of initiatives that leverage existing busienss conducted by Chris Zook of Bain & Company.

Is the product market attractive?

It's good to recall Porter's 5 forces here. The most logical expansion will fail if there are no profits to be had because competitors control them, or if the margins have been squeezed by overcapacity or the nature of customer demand.

Projecting a market forward, particularly a new one with potential new entrants, is difficult, but the risk of entering a hostile market can be significant.

is the core business successful?

There is no point in extending mediocrity. A weak business will seldom have either resources or assets and competencies to spin out to a growth initiative. The chances of successfully leveraging business has been estimated by the Zook studies to be around 25 percent. And this falls to well under 8 percent when the core business is weak.

Can the core business be transferred to the New Product Market?

  • The closer the leveraged business is to the core business, the more likely it is to adapt to a new product market and succeed.

  • The task of adapting a business into a new market is easy to underestimate as illustrated by the experience of FedEx when it attempted to duplicate its concept in Europe. Setting up a hub-and-spoke system in Europe was inhibited by regulatory roadblocks at every turn.

  • Attemps to short-circuit regulations by acquiring firms with related abilities resulted in something of a hodgepodge

Will the business be successful, become a market leader?

The first question, which is not trivial, is whether the new business can avoid failure. The acceptance of new products is low. Even for firms with high levels of competence in a market and with real synergy to buttress the new entry, failure rates are extremely high.

and we know the primary reasons...

Dozen of studies in very different contexts and in different markets have concluded that the main reason for failure is that the new products lacked a point of difference, a reason to succeed.

  • Too often they were "me-too" products, at least as perceived by customers. There was in essence no reason to succeed, so they didn't.

  • Even real advances may not be perceived by customers. They may even read and advance as a reason not to buy.

  • Even the use of an established brand cannot guarantee success. The concept a colorless cola, Crystal Pepsi, did not achieve acceptance, because the appearance had a negative flavour connotation.

Is the leverage strategy repeatable?

There is great value in creating initiatives that are repeatable. Repeatability leads to learning curve effects, speed of execution, organizational simplicity, strategic clarity, and the ability to get the details right. In the Zook database, around two-thirds of the most successful, sustained growth companies had one or two repeatable formulas.

Nike, for example, has done much better over time than Reebok. While Reebok was buying a boat company, Nike duplicated its basketball success with moves into tennis, baseball, football, volleyball, hiking, soccer, and golf. The strategy was very similar in all these efforts, starting with a prominent credible endorser from Michael Jordan to Tiger Woods and systematically moving from shoes to clothing equipment.

The Mirage of Synergy

Synergy is an essential source of competitive advantage. However, synergy is often more mirage than real.

Strategists often manipulate semantics to delude themselves that a synergistic justification exists. But when a packaged-goods manufacturer bought Burger Chef, a chain of 700 fast food restaurants, the fact that both entities were technically in the food business was a of little consequence. Because the package-goods firm never could master the skills needed to run restaurants, there was considerable negative organizational synergy.

There are many examples of expected synergy based on a superficial analysis that did not materialized.

Potential synergy exists but is untattainable

Sometimes there is a real potential synergy, but implementation difficulties - usually far greater than expected - inhibit or block this synergy from being realized. When two organizations (perhaps within the same firm) have different:

  • culture
  • strategies
  • and processes

There are significant issues to overcome. The effort to combine United Airlines, Westin Hotels and Resorts, and Hertz into one organization was a classic case in which the operational problems coupled with presenting a confused brand face to customer doomed the idea.