Leg 1. Understanding “Core Business”. Part I.

eleonoraescalantestrategy 24 Oct 2017 1 Comment

The Volvo Ocean Race 2017-2018 started last Sunday. We can follow the race “LIVE” at their website: Volvo Ocean Race 2017-2018.

Also if you wish to get used to the Volvo Ocean Race teams, and learn a bit more about sailing, I decided to post the most interesting video of the week, because in this way we will get acquainted with each of the 7 teams, and we will see what is happening at the race week by week.

As far as my mission with this blog, Leg 1 (From Alicante to Lisbon) means a whole week to understand what is “core business” and how to apply this concept when doing strategy analysis.

The idea of “core business” is not new. Several economic authors and strategist gurus have developed it since centuries ago. knowledge alfred marshall.jpg Even in the 1800s, the idea of a “core set of economic activities” was exposed in writings by economists as David Ricardo and later by Alfred Marshall. Alfred Marshall was a firm believer in finding solutions to reduce poverty and creating progress or development by focusing on a “core business” economic activity. During the 1980s Professor Michael Porter, indeed, found evidence that “companies which were diversified declined their profits when their activities became more diffuse and their core became less well defined”. Professors Gary Hamel and Prahalad recommended to “stick to your knitting theme” in his book “Search of Excellence”, and soon after James Collins and J. Porras expanded the idea of a central core strategy in their book “Build to Last”. In 1997, Professor Clayton Christensen from Harvard University outlined the concept of Disruption, with the introduction of his book “The Innovator’s Dilemma”. For Christensen, “Disruption is a term that describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses” and how affects their core businesses. Chris Zook from Bain & Company has dedicated several years of his life to writing books about “core businesses” and has developed several topics around the idea of getting growth from it.

Now let´s go to the topic of today: What is core business? How can we locate the core business in a company? How can we define it?

From Investorwords.com, you will find the following answer: “Core business is the primary activity which defines a company’s main emphasis and for which the company exists”. But I find this concept too general for the purposes of this strategy ride.

I will stick to Chris Zook “core business” definition but I have added one new word to it (the word technology): “Core business is the set of products, capabilities, technology, customers, channels, and geographies which defines the essence of what the company is or aspires to be to achieve its growth mission – that is to grow its revenue sustainably and profitably”. For the purposes of this strategy race, we will stick to this concept from now and then. Again repeat after me – Core business is a set of:

Products and services: What do you sell?
Customer segments: To whom are you selling?
Geography: Where are your customers?
Distribution channels: How do you serve customers or distribute products and services?
Capabilities: What are your core competencies and competitive advantages?
Technology: What is your digital technological source of value in your business?

The “core business” is centered around our strongest position in terms of loyal customers, competitive advantage, unique capabilities, skills and the ability to earn profits. If we are not profitable in our core business (with exception of the earliest phases such as market development and startup), something is probably wrong…

When I have done my consulting analysis with clients, I have found a tremendous struggling when I ask this question to the top managers and directors of the companies. If I ask “what is this company core business” to a marketing director, he will answer me from his perspective of marketing planning or brand identity. If I ask the same question to the financial director, he will open his excel spreadsheet and will name the products or the division which offers more than 80% of sales per year. If I ask the same question to the CEO, she will reply to me that core business is what the most beloved future customers would like to buy next year. And this is just the beginning.

Core Business Growth comes first. Source: PWC, Canada.

In summary, one of the most difficult tasks for any company owners, the board of directors and management is to define the core business. As Professor Grant has remarked it in his book “No business has clear boundaries either in terms of products, supply chain or geographical areas”. And in order to help them, sometimes is better to start by defining what is not our core business, don´t you think? Chris Zook from Bain & Company has written in his books, that defining our business boundaries helps us to define our core business. “Without a clear point of view about business boundaries it is difficult to determine a competitive position, the relative importance of differently positioned competitors or the relative strategic importance of different growth opportunities”.

From my own perspective, in order to help company leaders to understand the location of their “core business”, I have some tools which have proven to make them an easy task to reply to me this question. It is helpful to show them the supply chain of their business. The concept of the supply chain helps them to see how the company operates from upstream activities to downstream activities. And also this helps them to realize exactly what is the exact industry of their company and the network of other industries, which are fundamental constituents of their production of goods/services.

Simplified Supply Chain

Professor Henry Mintzberg from Mc Gill University elaborated a simple analysis about how to define and locate our “core business” industry. Based on Mintzberg, a business can be thought to exist at a junction in a network of industries that takes inputs and transforms it into various finished products (or services) called outputs. There is an inherent network of industries who are helping us to create the outputs.

“A Supply chain is the system that links a company with its suppliers and customers or buyers”. Also for practical understanding, a supply chain is the system that connects the inputs with the outputs.

Traditionally, industries have been categorized as being in three stages of operations:

Primary Industries: Raw materials extraction and conversion
Secondary Industries: Manufacturing or production
Tertiary Industries: Delivery or other services

In addition, we can define our business operation following the same concept with the “stream” state:

Upstream Business: An entity that functions close to the raw materials: The flow of product tends to be divergent, from a basic material (wood, fruits, etc.) to a variety of uses for it. Upstream business tends to be technology and capital-intensive rather than people intensive, and more inclined to search for advantage through low costs than through high margins. Example: Fruit farmers, Oil-Gas Extraction companies, etc.
Midstream Business: Organizations, which are drawing a variety of inputs into a single production process out of which flows the product to a variety of users. Examples: manufacturing companies.
Downstream Business: Here a wide variety of products already finished (outputs) converge into businesses called retailers, distribution wholesalers, e-retailers, etc. Example: Department stores, amazon.com, etc.

Locating the Core Business1

Let´s pick up an example to understand this structure which will help us to determine to define and understand where is our core business located. There is a lady called Christine Ferber in France. Christine Ferber, 57 years old and nicknamed the “Jam Fairy” by her friends and admirers, has a shop of pastries and delightful jams, jellies or marmalades in Niedermorschwihr, a little village at the heart of the Alsatian wine region, France.

Christine Ferber Jams

Christine Ferber was born in Niedermorschwihr, near Colmar in Alsace, into a family of bakers. In Belgium, she obtained her diploma as a pastry chef, confectioner, and chocolatier. Back in France, she won a national competition of young pastry chefs and went to work at Peltier, in Paris, for a year. In 1980, she returned to her native village, and took over the family business, extending her activities to the chocolate factory. In parallel, she obtained her master’s degree in French confectioner. In her laboratory located at the back of her shop Relais des Trois Epis, she prepares with her team jams cooked in copper cauldrons (with marriages of innovative flavors, raspberries/violets or blueberries/licorice), pastries, Kouglofs Alsatian pâtés, strawberries, black forests, chocolates, honey pickles, etc. Her know-how is recognized far beyond her village: her clients include great chefs like Alain Ducasse or Maison Troisgros, pastry chefs like Pierre Hermé and Jean-Paul Hévin, whom she has conquered with her creations. Her jams also are served and sold in restaurants, gourmet department stores and luxury hotels like The Crillon and George V in Paris, the Four Seasons in Hong Kong, or the Connaught in London. In the USA, she also sells it through online gourmet retailers or other high-end gourmet stores as Epicerie Boulud. She is the author of many books about jams and other sweets. I have prepared some slides using the different stages of the supply chain for Christine Ferber business. In addition, I have added a video about her (courtesy of DW).