profit from the core & beyond the core · 041123-yws-kss-hunetlecture_f 3 this information is...

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Profit from the core & Beyond the coreYungwook Shin2004. 11. 25

2041123-YWS-KSS-HunetLecture_f


BOS

The growth forecast

• Only 1 in 10 companies will achieve sustained, profitable growth

• Less than 1 in 4 growth initiatives away from the core will succeed

• Over 70% of businesses are forecasting performance they will never attain



BOS

Market growth expectations still high

1926 1936 1946 1956 1966 1976 1986 1996 20020

10

20

30

40

50

Price to Earnings Ratio

S&P 500

Note: definition is closing price divided by latest 4 quarter as reported diluted earnings per share



BOS

1960 1970 1980 1990 2000 2001 20030

2

4

6

8

10

Holding Period of Average Stocks (in years)

Investor impatience growing



BOS

Sustained Growth Companies are rare

Met SizeCriterion

Met RevenueGrowthCriterion

Met ProfitGrowthCriterion

Earned Costof Capital

100%

27%

16% 13%

0

20

40

60

80

100%

% Meeting Successive Criterion



BOS

Successful businesses address fourkey questions

What is the Full Potential

of my core?

What adjacent markets or segments can I

profitably grow into?

How sustain-able is

my core long-term?

What is my core?



BOS

Most profitable growth is built upon a strong, well-defined core

Single Core Two Cores More thantwo cores

74%

17%10%

0

20

40

60

80%

% companies achieving sustained profitable growth



BOS

© 2000 The New Yorker Collection from cartoonbank.com. All Rights Reserved.



BOS

Polaroid – “chemical based image processing”



BOS

The digital threat



BOS

Polaroid Corporation market value

1997 1998 1999 2000 20010

1,000

2,000

3,000

$ million



BOS

Dell misadventure of 1993

1990 1991 1992 1993

$27M

$51M

$102M

-$36M-50

0

50

100

$150M

Profit Dell suffered in 1993 due to a departure from the economics

of the direct model



BOS

Dell refocused on its core

1990 1991 1992 1993 1994 1995

$27M$51M

$102M

-$36M

$149M

$272M

-100

0

100

200

$300MDell withdrew from retail in 1994Profit



BOS

Att

ract

iven

ess

as

gro

wth

dri

ver

Business competitiveness

• Market dominance: market share, cost competitiveness

• Customer dominance: brand power, customer Loyalty

• Technology dominance: Core technology & management technology

“Strong”

“Weak”

“Moderate”

• Market growth• Revenue

contribution• Operating profit

contribution• Revenue growth• Operating profit

growth

Weak Strong

High

Low

“Qualify as core biz”

Qualitative

Quantitative

Framework to define core business



BOS

Dangers of misdefining the core

• Spread resources too thin

• Inadequately defend the true core

• Prematurely abandon growth in the core

• Pursue wrong adjacencies



BOS

Breakdown #1: Spread resources–Mattel

“We have begun the process of transforming Mattel from a traditional toy company to a global children’s products company…

Jill Barad, Mattel CEO,

December 1998

95 96 97 98 99 00 01 02 030

10

20

30

$40

Mattel stock price

TLC sale

TLC merger

''We had a tremendous run…everything went well. And then we lost our focus.”

Bob Eckert, Mattel CEO,

April 2001



BOS

Breakdown #2: Inadequately defend the true core

2002

Desperate

Divestitures

GermanyBrazilAsiaU.K.

Smaller scaleformat

1990

Wal-Mart overtakes Kmartas #1 US retailer

SpecialtySports Stores

Office Supply stores

CzechoslovakianDepartment stores

Mexico

Book Stores

Wholesalesuppliers**

Deepdiscounter

Mexico

Canada

1980

Wholesale Club

Supercenter format

Discount retailers*

Book Stores

HomeImprovement stores

Drug StoresCanadian

Discount outlets

Warehouse Clubs

1970

1970: ~200 stores

Aggressive expansion of Kmart stores

Australia

1970: 32 stores

Focused on small

& midsize towns

1962

First Wal-Mart store opened

First Kmart store opened

Filed for Chapter 11 Bankruptcy

Ranked #1 Company

on Fortune 500



BOS

1990 1991 1992 1993 1994 1995

2751

102

-36

149

272

-100

0

100

200

$300M

Profit Withdrew from retail

Entered retail

Breakdown #3: Prematurely abandon growth in the core



BOS

Breakdown #4: Pursue wrong adjacencies —Anheuser-Busch

Eagle Snacks



BOS



of my core?



How sustain-able is

my core long-term?

What is my core?



BOS

Bain/EIU Survey

Full Potential Within 20% Not Close No Idea

8%

29%

56%

7%

0

20

40

60%

How close is your #1 core business to its full potential for profitable growth?



BOS

Market leadership drives superior returns

WeakFollower

Follower Parity Leader StrongLeader

0

10

20

30%

Return on Capital

4%

9%

14%

22%

29%

12% Cost of Capital



BOS

The trap of leadership

The stronger your market position the more likely you are operating below full potential



BOS

Full Potential Requires Operational and Strategic optimization

Return on assets

Relative market share

20%

0%0.1x 10x1x

10%

Improved strategic position

Operationalimprovement



BOS

Cost control is key

Higher Value

Lower Cost

Driver of profitability differences(leader versus follower)

0

2

4

6

8

10%

Return on Sales



BOS

Target market can be defined more broadly- Grainger

Manufac

turers

Contra

ctors

Wholesal

ers

Institutio

nal

Commerc

ial

$24B $5B $5B $3B $3B

Unplanned purchases = $18B

0%

20%

40%

60%

80%

100%

Percent of total purchases

Planned purchases

Unplanned purchases



BOS

Grainger’s “Revenue Sieve”

Totalmarket size

Newsegment

opportunities

Lack ofawareness

Marketcoverage

Achievingfull

potentialfrom salespractice

Customerdefections

and turnover

Insufficientshare ofwallet

GraingerRevenue

$18.0B $5.0B

$2.9B

$4.0B

$3.7B

$0.2B $0.7B$1.5B

0

5

10

15

$20

Billions of Dollars



BOS

Actions taken

• Added 100 Branches; planned 150 additional branches- Untapped markets- Better proximity to existing customers

• Refocused product lines- From specialty oriented to convenience- Low profit items eliminated

• Restructured sales force- Best sales practices across districts- Sales resources increased

• Improved customer service procedures- Specific weakness vs. competition identified- Needs better understood from customer perspective



BOS



of my core?



How sustain-able is

my core long-term?

What is my core?



BOS

Don’t build on a weak core



BOS

Complexity of growth

New Channels

New Geographies

New Businesses

New Value Chain Steps

New Customer Segments

New Products

Core

LocalGlobal

Expansion

Internet

Distribution

Indirect

Forward integration

Backward integration

Sell capability outside

New-to-world needs

New substitutes

New models

Next generation

Support services

Complements

New to world

New segments

Unpenetratedsegments

Microsegmentation of current segments



BOS

Adjacency growth study: Sources

i25 in-depth case studies and interviews with companies that have extensive adjacency success records

i100 CEO interviews

iData base of 181 adjacency moves

iPaired comparisons of 24 companies with different growth paths and move sequences

iBain/Economist executive surveys

iBain case data base

iComplete secondary source analysis



BOS

Different studies all say 3 out of 4 growthinitiatives fail

Analysis of181 moves

(1996-2002)

Bain/Economistsurvey

24 prior studiesof growth moves

2725

0

10

20

30

40%

Success rate

Range 10-30%



BOS

How can the odds be improved?



BOS

Follow the customer



BOS

Customer segmentation



BOS

Customer segmentation

Charge

1958

Corporate

1990

Credit

2002

Fidelity

SeniorsBlue

StudentsPreferred rewards

Cash rewards

Pre-paid

SportsONE

financial

Financial services

StarwoodCharge Credit Optima

Specialty

Business Consumer

Small business

1996

Co-branded

Rewards HiltonDeltaPurchasing Seniors



BOS

1990 1996 2002

1012

18

0

5

10

15

$20B

TRS revenue

1990 1996 2002

1.01.1

2.1

0.0

1.0

2.0

$3.0B

TRS net income90-96 = 3%96-02 = 7%

CAGR

90-96 = 2%96-02 = 12%

CAGR

Results of Amex customer segmentation strategy



BOS

Relentless repeatability

Ben Hogan



BOS

Relentless repeatability



BOS

Wimbledonequipment (1987)

Equipment

Customer


Forward integration

Footwear

Apparel

Channel Geography

New business

Golf balls (2001)

Footballs

BasketballsBags

Shirts/shorts

Athleticwear

Running shoes

Basketball

Tennis (1982)

SoccerGolf shoes (1987)

Cycle

Canada

Mexico, Latin America

Europe

Asia

Tennis wear (1985)

Soccer stripsGolf clubs

Nike has relentlessly repeated itsgrowth formula

23

1



BOS


Equipment

Customer


Forward integration

Footwear

Apparel

Channel Geography

New business

Golf balls (2001)

Footballs

BasketballsBags

Shirts/shorts

Athleticwear

Running shoes

Basketball

Tennis (1982)


Cycle

Canada


Europe

Asia

Tennis wear (1985)



23

1



BOS

Nike’s growth formula

23

1


Equipment

Customer


Forward integration

Footwear

Apparel

Channel Geography

New business

Golf balls (2001)

Footballs

BasketballsBags

Shirts/shorts

Athleticwear

Running shoes

Basketball

Tennis (1982)


Cycle

Canada


Europe

Asia

Tennis wear (1985)




BOS

Nike vs. Reebok: Late 1980s

“You’ve got two winners,” said LaMoine Adams, VP and GM or Foot Locker. “Nike and Reebok have both been very strong, neck and neck.”

Wall Street Journal, Dec. 19, 1989

“In the race for athletic footwear supremacy, Nike and Reebok are headed for a photo finish.”

USA Today, Oct. 27, 1988

“When a customer laces up a new pair of sneakers at Foot Locker, it’s likely they’ll choose Reebok or Nike. They are the titans of the industry, the Coke and Pepsi of athletic footwear! “

The Boston Globe, Oct. 3, 1988

“These two archrivals (Nike and Reebok) are now locked in a tense battle for America’s feet.”

Newsday, Nov. 22, 1987



BOS Sold off

2

1

Reebok: Inconsistent adjacency moves

34 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


Forward integration

Soft goods

Channel Geography

New business

NFL uniforms (2000)

Other products

Weeboks(1986)

Aerobic Shoe (1982)Tennis (1983)

Basketball (1985)



BOS

Nike vs. Reebok

Nike Reebok0

3

5

8

10

$13B

Revenues

Nike Reebok0

5

10

15

$20B

Market value

12.3X

2.2X

38X

1.2X

19872002



BOS

Vodafone growth

1996:

2002:

Growth

Employees

5.6K

99K

18x

Customers

3.5M

101M

28x

Marketcap.

£7.3B

£78B

10x

Revenue

£1.4B

£22.8B

15x

EBITDA

£0.5B

£8.0B

15x



BOS

Global growth



BOS

Dell vs. Gateway: Selling PCs direct

1995Starting position

Revenues Margin MV

2002Ending position

Dell

Gateway

How did this happen?

$5.2B 7% $2.0B $35.4B 6% $75B

$3.7B 7% $1.7B $4.1B <0 $1B

Revenues Margin MV



BOS

Dell vs. Gateway: International expansion

iOrganicMethod iOrganic or acquisition-Australia, Osborne 1995-New Zealand, PC Direct 1998-Etc.

• Direct onlyModel • Direct only, retail (60 stores) & JV

Dell Gateway

• 6 primary countries• Primarily business

• Low complexity/repeatability

• Steadily growing profits

Focus • Business & consumer, many countries

• High complexity, not repeatable

• Overhead rose to 33% of revenues in 2001

• 1996 profit ($60MM) loss 2001



BOS

How repeatability creates a competitive advantage

iGreater learning curve effects through repetition

iReduced complexity by adapting a known pattern

iFaster and more reliable decision makingon investments

iAbility to build the organization for a focused purpose

iStrategic clarity for employees and investors

iAbility to “drill down” into deeper and deeper understanding of customers

iAbility to think several moves ahead



BOS

Success is harder the farther moves arefrom the core

Sucessrate

1 1.5 2 2.5to 3

3.5to 4

4.5to 5

0

10

20

30

40%

Odds of success

Steps away from core



BOS

Economic distance from the core is measured on five dimensions

Core

1 step adjacencies

2 step adjacencies

3 step adjacencies

Diversification

Shared customers

Shared costs

Shared channels

Shared competitors

Shared capabilities/ technology

Full SharePartial ShareNo Share

Primary dimensions



BOS

Att

ract

iven

ess

Relatedness

• Future market size• Annual growth

rate until 2010• Avr. operating

margin• Industry

concentration• Competition

Weak Strong

High

Low

• Customer sharing• Cost sharing• Relevance to KT Group’s

core capabilities

Item Weight

Xx%

Item Weight

Qualitative analysis

Quantitative analysis

“Priority opportunities”

Evaluation of adjacency opportunities

Xx%

Xx%

Xx%

Xx%

Xx%

Xx%

Xx%



BOS

Myth on customer base

1

5

No sharing

Physical sharing

Occasional sharing

Complementary relationship

Replacement relationship

4

3

2



BOS

Summary(1/2)

Fact

• Sustained and profitable growth is becoming more difficult to achieve.

Core business

• The most important growth driver is a strong core business with leadership economics.

• Strong core businesses usually perform far below their full potential.

• Achieving full potential in the core is the most important task of management.

• Weak or unstable cores don’t support strong adjacency moves.



BOS

Summary(2/2)

Adjacency moves

• Growth opportunities must be judged in relation to the core.

• Relatedness to the core is one of the most difficult management judgments.

• Strong cores are at the greatest risk from a misconceived adjacency move.

• Repeatability is a profound idea central to the math of profitable growth.

Change

• Organizations preserve the status quo and inhibit growth

• There is no status quo strategy in business; you are either gaining or losing share.



BOS

Monday morning questions

• Do I know what is my core business? Is that recognition shared among management team?

• How close am I to full potential in the core? How do I know?

• How do I evaluate growth opportunities and assess relatedness to the core?

• Have we taken full account of the hidden power of repeatability?

• Will I need do redefine my core? How?



BOS

Competitor returns vary dramatically: Why?

Company

Southwest

Dell

General Dynamics

Cardinal

Walgreen

Sysco

Wal-Mart

Intel

Nike

10-year rate of return

14%

43%

20%

24%

19%

18%

13%

19%

9%

Company

Delta

Gateway

Raytheon

McKesson

CVS

Fleming

Kmart

AMD

Reebok

10-year rate of return

(7%)

--

4%

12%

4%

(13%)

(37%)

(3%)

(1%)

Airline

Computers

Defense

Drugs

Drug stores

Food

Retail

Semiconductors

Athletic Shoes

Industry



BOS

Management is the key

External events

Management driven

Causes of majorperformance changes

0

20

40

60

80

100%



BOS

감사합니다

profit from the core & beyond the core · 041123-yws-kss-hunetlecture_f 3 this information is...

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