Doug DavidoffThis book review originally appeared in Baltimore and Washington SmartCEO Magazine February issue.
When I was a wealth management advisor at Merrill Lynch, I used to keep a sign in my office that said, "Don't confuse brains with a bull market." For the last five years, I've been telling senior executives and salespeople at mid-market companies, "just because the fish are jumping in your boat, doesn't mean you an expert angler."
As businesses put growth back at the top of their agenda and try to put the issues of the "Great Recession" behind them, they are discovering a fatal flaw:
They've lost their core business (or they've never had a core business).
For far too long, businesses have been selling to the lowest common denominator, simply because general demand was growing rapidly. For 25 years, from 1982 through 2007, executives could count on the record growth of markets to mask many of the errors that were taking place beneath their businesses.
Now, in response to the economic displacement companies are struggling to find new formulas for growth. If growth is on your agenda this year, there are two things you should understand and focus on.
1. Maybe Your Business Was Never As Big As You Thought It Was
I work with a client who did $38 million of business in 2007, did almost $62 million dollars in 2008, and did $30 million in 2009. Demand in the market dropped by more than 50% as a result of the recession. Now, I don’t care how well you manage your business –that type of loss hurts.
As we worked with them to put together a strategy that would allow them to return to profitability, we discovered something quite interesting: They had lost their core.
So we did a “core business analysis” to deterimine what their core business really was. We found that, at the peak, their core business was about $19 million. In 2009, when the business was down nearly 50%, the core part of their business was only down 20%. Plus, their core business had gross margins that were 25-75% above their other lines of business.
Here’s what I know, and what we told them. If they had viewed their business as a $19 million business (their core) instead of a $62 million business and fully focused on that business there are certainly a couple of things that would have happened:
- The core business would have been larger than $19 million. Now, the company probably wouldn’t have grown to be $62 million; but their core business would have been bigger had they focused on it.
- The business would have been more profitable – in good times and bad.
We recommended they follow the strategy implemented by Steve Jobs when he retook over the reins at Apple and announced, “Apple will get bigger by first getting smaller. We will refocus on our core and we will continue to grow for our core.” No suprise, that Apple is the top performing stock since Jobs came back.
2. Good Is No Longer Good Enough
Famous investor Warren Buffet is fond of saying, “It’s only when the tide goes out that you learn who’s been swimming naked.” In the post-recession, “new normal” good is the equivelent of swimming naked. It works for you if the tide is in your favor, but once the tide turns you’re in toruble.
Simply put, there are only two types of companies in the world. You are either:
- The Best, or
- Me Too
And, no matter how good you think you may be, you cannot be the “best” for everyone. To be the best you must focus on the key activities and the key customers where you can excel. You must disproportionately invest and allocate your resources to those areas. You must take away resources, such as time and attention, from the areas where you have determined you will not be the best.
When you’re the best, you earn margin premiums that allow you to further invest in expanding your competitive advantage. If you’re a “Me Too” company, then you’ll be forced to compete with everybody for the table scraps.
Executives that are intersted in what is involved in both identifying and exploiting their core business would benefit from reading Chris Zook’s Profit From The Core: A Return to Growth In Turbulent Times. Zook, a consultant with the Bain Consultants, shares the research Bain Capital has conducted into what businesses must do to trigger real growth.
According to Zook, even in good times nine out of ten management teams fail to gain real growth profitably. When you factor in natural growth, fewer than one in ten companies deliver growth and return greater than the cost of capital. Not suprisingly, 80% of those companies focus on their core.