Profit From Growth Markets, Not “core” Markets

27 August, 2010

Summary:

 

We are biased toward doing what we know how to do, rather than something new.

We like to think we can forever grow by keeping close to what we know – that’s a myth.

Growth only comes from entering growth markets – whether we know much about them or not.

To grow you have to keep yourself in growth markets, and it is dangerous to limit your prospects to projects/markets that are “core” or “adjacent to core”.

Recently a popular business book has been Profit from the Core.  This book proposes the theory that if you want to succeed in business you should do projects that are either in your “core,” or “adjacent to your core.”  Don’t go off trying to do something new.  The further you move from your “core” the less likely you will succeed.  Talk about an innovation killer!  CEOs that like this book are folks who don’t want much new from their employees. 

I was greatly heartened by a well written blog article at Growth Science International “Profit from Your Core, or Not.. The Myth of Adjacencies.”  Author Thomas Thurston does a masterful job of pointing out that the book authors fall into the same deadly trap as Jim Collins and Tom Peters.  They use hindsight primarily as the tool to claim success.  Their analysis looks backward – trying to explain only past events.  In doing so they cleverly defined terms so their stories seemed to prove their points. 

But they are wholly unable to be predictive.  And, if their theory isn’t predictive, then what good is it?  If you can’t use their approach to give a 98% or 99% likelihood of success, then why bother?  According to Mr. Thurston, when he tested the theory with some academic rigor he was unable to find a correlation between success and keeping all projects at, or adjacent to, core.

Same conclusion we came to when looking at the theories proposed by Jim Collins and Tom Peters. It sounds good to be focused on your core, but when we look hard at many companies it’s easy to find large numbers that simply do not succeed even though they put a lot of effort into understanding their core, and pouring resources into protecting that core with new core projects and adjacency projects. Markets don’t care about whatever you define as core or adjacent.

It feels good, feels right, to think that “core” or “adjacent to core” projects are the ones to do.  But that feeling is really a bias. We perceive things we don’t know as more risky than thing we know.  Whether that’s true or not. We perceive bottled water to be more pure than tap water, but all studies have shown that in most cities tap water is actually lower in free particles and bacteria than bottled – especially if the bottle has sat around a while. 

What we perceive as risk is based upon our background and experience, not what the real, actual risk may be. Many people still think flying is riskier than driving, but every piece of transportation analysis has shown that commercial flying is about the safest of all transportation methods – certainly much safer than anything on the roadway. We also now know that computer flown aircraft are much safer than pilot flown aircraft – yet few people like the idea of a commercial drone which has no pilot as their transportation. Even though almost all commercial flight accidents turn out to be pilot error – and something a computer would most likely have overcome. We just perceive autos as less risky, because they are under our control, and we perceive pilots as less risky because we understand a pilot much better than we understand a computer.

We are biased to do what we’ve always done – to perpetuate our past. And our businesses are like that as well.  So we LOVE to read a book that says “stick close to your known technology, known customers, known distribution system – stick close to what you know.” It reinforces our bias.  It justifies us not doing what we perceive as being risky. Even though it is really, really, really lousy advice.  It just feels so good – like sugary cereal for breakfast – that we justify it in our minds – like saying “breakfast is the most important meal of the day” as we consume food that’s probably less healthy than the box it came in!

There is no correlation between investing in your core, or close to core, projects and high rates of return.  Mr. Thurston again points this out.  High rates of return come from investing in projects in growth markets.  Businesses in growth markets do better, even when poorly managed, than businesses in flat or declining markets. Where there are lots of customers wanting to buy a solution you simply do better than when there are lots of competitors fighting over dwindling customer revenues. Regardless of how well you don’t know the former or do know the latter.  Market growth is a much better predictor of success than understanding your “core” and whatever you consider “adjacent.”

Virgin didn’t know anything about airlines before opening one – but international travel from London was set to boom and Virgin did well (as it has done in many new markets.)  Apple didn’t know anything about retail music before launching the iPhone and iTunes, but digital music had started booming at Napster and Apple cleaned up.  Nike was a shoe company that didn’t know anything about golf merchandise, but it entered the market for all things golf (first with just one club – the driver – followed by other things) by hooking up with Tiger Woods just as he helped promote the sport into dramatic growth. 

Success comes from entering new markets where there is growth.  Growth can overcome a world of bad management choices. When there are lots of customers with needs to fill, you can make a lot of mistakes and still succeed. To restrict yourself to “core” and “adjacent” invites failure, because your “core” and the “adjacent” markets that you know well simply may not grow.  Leaving you in a tough spot seeking higher profits in the face of stiff competition — like Dell today in PCs.  Or GM in autos.  Sears in retailing.  They may know their “core” but that isn’t giving them the growth they want, and need, to succeed in 2010.


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Profit From Growth Markets, Not “core” Markets

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