Strategic renewal: divining and mining your hidden assets

Citation

Leavy, B. (2008), "Strategic renewal: divining and mining your hidden assets", Strategy & Leadership, Vol. 36 No. 1. https://doi.org/10.1108/sl.2008.26136aae.001

Strategic renewal: divining and mining your hidden assets

Strategic renewal: divining and mining your hidden assets

Brian LeavyAIB Professor of Strategic Management at Dublin City University Business School (brian.leavy@dcu.ie) and a Strategy & Leadership contributing editor.

Unstoppable: Finding Hidden Assets to Renew the Core and Fuel GrowthChris ZookHarvard Business School Press, 2007, 165 pp.

Something has changed fundamentally in the world of business…fundamental threats to the core have moved from rare events to nearly common occurrences. And most businesses are not prepared for what that means – Unstoppable.

As threats to their core become commonplace, businesses will have to develop an ongoing capability to reinvent themselves and their business models, which is much easier said than done.

It is now widely recognized that the competitive landscape across the global economy has changed significantly over the last decade and that industry dynamics in most sectors have become much more volatile and uncertain. The upside is that there has never been more opportunity for companies that are innovative, agile and resourceful enough. The downside is that the life span of any given success formula is becoming shorter and shorter in such rapidly changing conditions.

The potential of business model innovation to change the dynamics of competition in any industry, and the enormous premium available to any company that can find a way to turn this activity into a strategic capability, have been recurring themes in the strategy literature now for more than decade. They lie at the heart of Clayton Christensen’s The Innovator’s Dilemma and The Innovator’s Solution, Gary Hamel’s Leading the Revolution, Chan Kim and Renee Mauborgne’s Blue Ocean Strategy, and Henry Chesbrough’s Open Innovation and Open Business Models, to mention a few of the more prominent examples.

In spite of this attention, key challenges remain. To address the question of how to make “fundamental change in your business model, while still running your business,” is what Chris Zook’s book is about. For example, he explains that when it comes to changing a proven success formula and reinventing your strategic core, getting the timing right is as important as finding a new strategic recipe. It is also a risky undertaking, so Zook suggests following a route to reinvention that helps to mitigate the risk.

Unstoppable also aims to make its mark as a natural extension of the author’s longer-running research agenda aimed at uncovering the keys to sustained and profitable growth. As such it is offered as the third in “a trilogy of sorts” that also includes the two earlier works, Profit from the Core (2001) and Beyond the Core (2004). Taken together, the books offer three valuable and related insights. The first is that too many firms tend to underestimate the growth potential that remains in their core business and seek to diversify prematurely (Profit from the Core), while the second is that the key to successfully expanding beyond the core when the time is right, is to do so by moving into carefully selected adjacent activities using a repeatable formula based on clear leadership economics (Beyond the Core). The third insight is that when the time comes to reinvent the core, the most likely path to success lies in the identification and exploitation of hidden assets already at hand within the company or easily accessible to it (Unstoppable). For many companies this third insight has proven to be the secret that has helped transform them from “unsustainable to unstoppable, against the odds, for a significant period.”

Chris Zook is head of Bain & Company’s Global Strategy Practice and leads the Bain Growth Project. As in his earlier books, the insights of Unstoppable are well grounded in extensive empirical research, allowing to author to claim that his latest offering is “based on the largest study that I am aware of on the patterns and risks of making deep, fundamental change in a business’s strategic direction.” The main data source for this latest study is a set of 25 in-depth cases of successful core redefinition. In addition, Zook was also able to draw on several more extensive data sets developed by Bain researchers and associates over the years, in helping him to assess the robustness of the case insights and understand their wider significance. These include a 15-year database tracking the performance of over 8000 companies in the G7, an examination of 500 US public companies over the 1995-2004 period, an analysis of the 15 largest “big bang” corporate reinvention stories widely reported in the media, and two global surveys of business executives recently conducted by the Economist Intelligence Unit (EIU) in association with Bain.

Based on this array of data the book sets out to do four things: offer evidence of the odds of success of the primary pathways to renewal and redefinition, identify the primary types of hidden assets, provide a set of case insights and offer specific frameworks and ideas for detecting hidden assets. It also makes three main arguments, firstly that “more companies than ever before will discover that their once-successful growth formula is approaching its natural limits,” secondly that “the warning signs of change” are “revealed less in typical financials and operating ratios and more in structural indicators and liabilities lying beneath the surface,” and finally that the most successful cases of transformation are “modular or gradual in nature, target leadership economics in the new core, seek a repeatable formula for growth, and build on hidden assets.” To Zook, the notion of leadership economics is bedrock. In a study of 801 companies from 1990-2001 he and his team found that only 10 percent of followers ever make it “into the leadership circle.” So this “book, and the entire topic of redefinition, contains in every chapter and example a single theme,” that of “leadership and the economics of leadership.”

The book begins by looking at why “strategies are becoming obsolete faster than ever before” and why “fundamental threats to the core have moved from rare events to nearly common occurrences.” It uses the recent history of De Beers as its lead-in example. The company was founded in 1880 and long enjoyed a privileged position in a diamond trade that had been highly stable for over a century. Yet, by 1999, the company’s growth had stalled, and its long-standing success formula, based on control over production and distribution, was being undermined by the increasing penetration of synthetic diamonds. For the first time in its long history it was facing a pressing need to find a new core strategy.

In today’s competitive landscape, more and more companies are finding themselves in similar situations. Zook and his team identify seven key trends which they see driving much of this turbulence, including quicker access to information on competitive movements, the increasingly mobility of both capital and executive talent, the rise of low-cost global competition, the relatively low capital intensity in many of newer industries, the growing ability of private equity firms to “shake up” industry structures, and the compression of product cycle times due to the acceleration in technology innovation. They estimate “that as many as half of industries can be deemed to be turbulent,” which is hard to refute when we consider that over the 1994-2004 period, 153 of the Fortune 500 failed to survive intact and a further 130 underwent some fundamental shift in strategy.

Strategic reinvention in the media often “emphasizes the spectacular,” or “big bang” transformational move, “large in magnitude and sudden in implementation.” Examples over the last decade include AT&T, Compaq, Daimler-Benz, Merck, Monsanto and Time Warner. One of the central findings of Zook’s research is that such large moves turn out to be “inferior by a wide margin to more measured paths to redefinition, especially those that leverage existing hidden assets and drive them to their full potential.” This is exemplified by the case of De Beers. As the company’s current group managing director described the situation they were facing, and how they sought to address it: “You have to start with the big questions: what is your DNA? What is it that you are really good at? I think most people are not very good at understanding their core. In 1999 I am not sure that we understood that, or how it had changed.” In the end, De Beers found the basis for a new growth formula nearby in existing but undervalued and underutilized assets rooted in the company’s unique relationship with its customers and in the power of the brand.

The identification of hidden assets forms the centerpiece of the book, and the three primary types, “undervalued business platforms,” “untapped customer assets” and “underutilized capabilities,” are each examined in chapters. As Zook explains: “At the heart of this book, and of our findings overall, is the idea that the past phases of a company’s growth inevitably collect and foster a range of hidden assets that often prove to be central to the strategy of the future.” Any company of any reasonable size and complexity is likely to have them, and the book argues that looking for them should be the first port of call in any attempt at strategic redirection, as the lower risk option and the one most likely to succeed.

The case of PerkinElmer

To understand what he means by an undervalued business platform, and to illustrate how it can become a major asset in strategic reinvention, Zook uses the case of PerkinElmer, now called Applera. Founded by Dick Perkin and Charles Elmer in 1937, the company went on to become a leading player in the optical electronics industry, specializing in the manufacture of large telescopes, including the world-famous Hubble Space Telescope for NASA. In the early 1990s, quite fortuitously, the company entered into a new area of activity through a strategic alliance with Cetus Corporation to develop ways to amplify DNA. In the process, it obtained rights to a new technology called PCR (Polymerase Chain Reaction). Around the same time its core market stalled, and a new CEO, Tony White, was brought in to re-ignite the firm’s fortunes.

White soon became convinced that the “only way was to turn the company from a declining old-line lab-instrument business into the company that would be seen as having the most focused commitment to the new life sciences industry.” He found the basis for a reinvention strategy in PerkinElmer’s still embryonic life sciences activity. The hidden assets were PCR technology, and a company called Applied Biosystems that PerkinElmer’s had acquired in 1993, primarily for its line of instrumentation. The new CEO quickly set about reassembling scattered key parts of the earlier acquisition back into a distinct division, with a view to reforming “the core of the company over a three-year period around this unique platform with leadership in the key life-sciences detection technology.” Within five years of his appointment, White had sold off the original business to EG&G (which a short time later renamed itself PerkinElmer), and restyled the new core. Now named Applera, the business had two main divisions: Applied Biosystems, soon to establish itself as the “gold standard in gene-sequencing instrumentation,” and Celera Genomics, which came to earn a place in history by being first to decode the human genome. The overall outcome was a redefined core that quickly came to surpass the original in terms of revenues and set the firm on a renewed and sustainable path to profitable growth.

In his examination of this particular category of hidden asset, Zook delves further into his data to identify three primary types of undervalued business platforms: adjacencies that were earlier entered to expand the original core; services and activities developed to support the core; and non-core businesses or orphan products.

To look at little more closely at the first of these, Zook explains that adjacencies “are the way most companies grow,” yet these “unspectacular extensions” to any core business may later “combine in surprising ways” to offer a new platform for growth. In the case of Swedish company, Dometic, for example, an adjacent move based on absorption refrigeration (a technology, suitable for use in small fridges that requires no electricity, only a heat source like propane gas) brought it into the recreational vehicle market, and further adjacent moves within this domain based on getting closer to the customer and aimed at making the RV more livable, helped the company to reinvent itself. Dometic, which was small and going nowhere in the early 1970s, now enjoys over 75 percent of the market for RV interior systems and leadership in the distribution channel. Similar illustrations are offered for the other two primary types, support services and activities (as exemplified by the cases of IBM Global Services, GE Capital and Sabre, the American Airlines reservation system, since spun off as an independent business) and non-core or orphan products (illustrated by the role played by Argos in the reinvention of the British company, Great Universal Stores).

Zook’s examination of the other two major categories of hidden assets, untapped customer insights and underutilized capabilities, follows a similar format. Zook breaks each into its most significant sub-categories, and illustrates each of these with a striking example. In the case of untapped customer insights, the three primary types are identified as undervalued customer segments (Harman International), a position of untapped influence over a specific group of customers (De Beers and Hyperion Solutions), and proprietary data or information (American Express). Similarly, in the case of underutilized capabilities, the three most important types are seen to be those that can be found at corporate level (Novozymes, Danaher and P&G), those that can allow a management team to restructure the economic model of a particular business (Boston Scientific), and those that can act as catalysts for the creation of an entirely new core (Apple). Each of these chapters offers practical advice on how to go about detecting the particular form of hidden asset in any business.

While the main contribution of Unstoppable lies in the identification and examination of these main types of hidden assets, the chapters that examine them are sandwiched between one which seeks to address the question of when you should go about the taking on the risky, expensive and distracting work of redefining your core, and one which distills some advice on the process overall. At the heart of both chapters is an integrating framework called the Focus-Expand-Redefine (FER) cycle of sustainable growth, which brings together the key insights from all three Zook books into dynamic synthesis. “Our seven-year study of profitable growth reveals that sustainable growth companies often exhibit a cyclical pattern over time” in which you can “chart their shifts in focus from a preoccupation with strengthening their core, to exploring adjacent expansion moves at the boundaries of the core, to redefining the core and its fundamental capabilities.”

Tracking where you are on the FER cycle is key to identifying when the time is ripe for fundamental change in your core business model, and the author offers a “state of the core diagnostic” to help in this regard. The warning signs usually involve one of more of the following dilemmas: a shrinking or shifting of the future profit pool; a direct threat to the core from a new competitive model or disruptive technology; and/or a stall-out in the growth formula and an erosion of differentiation. The book ends on the theme of managing through the growth cycle. Zook distills some final reflections from all three books, which take the form of four lessons in redefining with hidden assets and ten principles of core growth and redefinition.

Zook positions Unstoppable at the intersection of three bodies of work, the literature on turnarounds, the search for growth opportunities in difficult and low-growth markets, and strategic innovation. In this, as in his other two books, his contribution tends to lie less in the realm of the conceptual big idea and more in the painstaking search for what really works in practice. Rather than try to offer any panacea for corporate renewal, he is realistic enough to acknowledge that reinvention “is not always possible” and that not all businesses “have a path to the future that does not destroy value.” What Unstoppable does attempt to do is provide “a simple framework for understanding how hidden assets can become the keys to transformation” and to identify “the best techniques for detecting and using them in your own business” in order to improve the odds of success. In this it delivers, and for most executives that will be more than enough to merit its place as a valuable addition to the strategist’s bookshelf.