Diamond in the rough

Too many companies are slow to respond when growth hits a wall.

Too many companies are slow to respond when growth hits a wall. Chris Zook and James Allen believe you can renew your core business by tapping into hidden assets.
Diamond in the roughFew products conjure up such a range of experience and emotion as diamonds. Often associated with bleak, poor regions, diamonds are symbols of enduring love. For all the emotions involved, the business world of diamonds was for decades much like a diamond itself: colourless and highly stable. At the top of the industry was De Beers Group, the market leader for decades. Yet, this powerful market-leading company learned that sometimes your core business alone won’t carry you into the future.

In fact, by 1999, De Beers’ dominance seemed to have ended. New mines were opening and new competitors emerging. De Beers’ share of global production had declined, its market value was shrinking, and its profits were vanishing. As new chairman, Nicky Oppenheimer, with new group managing director, Gary Ralfe, discussed the situation with shareholders, board members, analysts and senior managers, they found no shortage of opinions. Some felt things would turn around; De Beers just needed to cut costs and stay the course. Others thought the company should acquire competitors, invest in new mines or both. A few mavericks suggested that De Beers should diversify. A bone of particular contention was what to do with De Beers’ $5 billion stockpile of rough diamonds, once used to stabilize prices: Maintain it? Expand it? Sell it off?

Oppenheimer and Ralfe came to believe that they could not reverse the situation with a strategy anything like the one De Beers had pursued in the past. Somehow, some way, they would need to redefine De Beers’ core.

Redefinition and the cycle of growth

Redefine the core. Change where you compete, how you compete or what you compete over. It’s a major event in a company’s life. But De Beers is just one of many companies that have faced such a challenge in recent years, as we learned at Bain & Company through a series of multiyear studies on companies that have redefined their fundamental business. The findings underscore the rising level of turbulence in business. Of the companies that made up the Fortune 500 in 1994, 153 either went bankrupt or were acquired in the subsequent 10 years. Of the remaining 347, 130 undertook a fundamental shift in their core strategy. In other words, 283 out of the 500 faced serious threats to their survival or independence during the decade, and only about half of this group was able to meet the threats successfully by redefining their core.

Why such a need for big transformations? One way to understand it is through what might be called the Focus-Expand-Redefine (F-E-R) cycle. Nearly every large enterprise seems to move through this cycle over time. In the focus phase, companies concentrate on building their core business to its full potential. They grow their markets, cut costs, improve operations and develop innovations in core products. In the expand phase, they take advantage of these capabilities and market positions to move into adjacent markets. They seek out new customer segments, new geographies, new distribution channels and new-but-related product lines.

At some point, however, many companies find growth and profitability tapering off or even declining. Perhaps the market has reached a saturation point, or perhaps the pool of available profits has shifted. Perhaps new competitors with lower cost structures or innovative products have appeared. This is the time to redefine the core.

Today, there is little doubt that the F-E-R cycle has accelerated: companies must move faster than ever, thanks to a number of well-recognized forces. New competitors, many from China and India, have shaken up whole industries. New technologies have lowered costs and shortened product life cycles. Capital, innovation and management talent all flow more freely and more quickly around the globe. The average holding period of a share of common stock has declined to nine months – from three years in the 1980s. The average lifespan of companies has dropped to just over 10 years from 14, and the tenure of CEOs has declined to less than five years from eight years a decade ago.

Redefinition today is more than an option: it’s essential. The issue for executives is what to do. Some will decide to man the fort and defend the status quo. Others will try to transform their companies all at once through a big merger or a leap into a hot new market. All such strategies, it turns out, are inordinately risky. But a number of companies have found a far less risky alternative. They search out and uncover hidden assets – those that have been overlooked, undervalued or underutilized – and redefine their company around them.

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