Beyond the Core

We have followed four specific principles in moving into new areas: First, build around the greatest geographic strengths. Second, focus and build around a few relationship customers in those geographies first. Third, later add in very focused value-added services in these specialty areas. And fourth, pay for performance. Regional leadership creates more margin. Industry scale with subcontractors creates margin and the ability to spread fixed costs. The economics of density creates margin in each of these specialized areas of contracting

Core Versus Adjacency: Determining the Degree of Integration

By contrast, businesses with weak competitive positions are preoccupied with survival and typically are not surrounded by an abundance of high-quality opportunities

The primary reason that companies die or tumble into extended periods of value destruction is not because their market suddenly disappears. Nor is it because their market persists, but becomes uniformly unprofitable

Most companies participate in many businesses, though one or two dominant cores usually deliver the true economic profit

Core businesses differ widely in their abilities to support a major new growth initiative. The three critical dimensions along which they vary are competitive position, market dynamics, and financial performance (figure 4-1

itable. Rather, it is because those companies were overtaken by competitors. They had failed to adapt, and failed to redefine the core. Even some of the longest-lasting markets, from oil production to home building to automobiles to clothing, contain a range of companies—some highly profitable and some highly unprofitable. One analysis that we conducted found that only about 20 percent of the variation in profitability levels among companies related to the specific choice of market that they participated in, leaving 80 percent for company-specific factors such as performance relative to their competitors

Companies with a portfolio of core businesses should ask themselves whether they are defining the boundaries of those cores correctly, whether they really understand the competitive position of each business, and where each fits in the positional matrix of figure 4

Of course, survival alone does not create value. Only two of the twenty-seven companies in the Forbes 100 seventy years ago that have survived have outperformed the stock market

The unproductive adjacencies have hidden costs. One cost is the obvious financial and human cost of resources that could be invested elsewhere in the core or a more promising adjacency.