Profit from the core & Beyond the core

Yungwook Shin
2004. 11. 25

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The growth forecast

• Only 1 in 10 companies will achieve

sustained, profitable growth

• Less than 1 in 4 growth initiatives away

from the core will succeed

• Over 70% of businesses are forecasting

performance they will never attain

BOS 041123-YWS-KSS-HunetLecture_f 2
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 Market growth expectations still high

Price to Earnings Ratio

50

40
S&P 500
30

20

10

0
1926 1936 1946 1956 1966 1976 1986 1996 2002

Note: definition is closing price divided by latest 4 quarter as reported diluted earnings per share
BOS 041123-YWS-KSS-HunetLecture_f 3
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Investor impatience growing

Holding Period of
Average Stocks (in years)
10

0
1960 1970 1980 1990 2000 2001 2003

BOS 041123-YWS-KSS-HunetLecture_f 4
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Sustained Growth Companies are rare

% Meeting Successive Criterion

100%
100%

80

60

40
27%
20 16%
13%

0
Met Size Met Revenue Met Profit Earned Cost
Criterion Growth Growth of Capital
Criterion Criterion

BOS 041123-YWS-KSS-HunetLecture_f 5
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Successful businesses address four
key questions

What is my core?

How What is
sustain- the Full
able is Potential
my core
of my
long-
term? core?

What adjacent markets

or segments can I
profitably grow into?

BOS 041123-YWS-KSS-HunetLecture_f 6
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Most profitable growth is built upon a strong,
well-defined core
% companies achieving
sustained profitable growth

80%
74%

60

40

20 17%
10%

0
Single Core Two Cores More than
two cores
BOS 041123-YWS-KSS-HunetLecture_f 7
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 © 2000 The New Yorker Collection from cartoonbank.com. All Rights Reserved.

BOS 041123-YWS-KSS-HunetLecture_f 8
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 Polaroid – “chemical based image
processing”

BOS 041123-YWS-KSS-HunetLecture_f 9
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The digital threat

BOS 041123-YWS-KSS-HunetLecture_f 10
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Polaroid Corporation market value

$ million

3,000

2,000

1,000

0
1997 1998 1999 2000 2001

BOS 041123-YWS-KSS-HunetLecture_f 11
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Dell misadventure of 1993

Profit Dell suffered in 1993 due to a

departure from the economics
$150M
of the direct model

$102M
100

$51M
50
$27M

-50 -$36M
1990 1991 1992 1993

BOS 041123-YWS-KSS-HunetLecture_f 12
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Dell refocused on its core

Profit Dell withdrew from retail in 1994

$300M $272M

200
$149M

$102M
100
$51M
$27M
0

-$36M

-100
1990 1991 1992 1993 1994 1995

BOS 041123-YWS-KSS-HunetLecture_f 13
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Framework to define core business

“Qualify as core biz”

High

Attractiveness as
• Market growth “Strong”
• Revenue

growth driver
contribution
“Moderate”
• Operating profit
contribution
• Revenue growth “Weak”
• Operating profit
growth
Low
Weak Strong
Quantitative
Business competitiveness
• Market dominance: market share, cost
competitiveness
Qualitative • Customer dominance: brand power,
customer Loyalty
• Technology dominance: Core technology
& management technology
BOS 041123-YWS-KSS-HunetLecture_f 14
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Dangers of misdefining the core

• Spread resources too thin

• Inadequately defend the true core

• Prematurely abandon growth in the core

• Pursue wrong adjacencies

BOS 041123-YWS-KSS-HunetLecture_f 15
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Breakdown #1: Spread resources–Mattel

“We have begun the

Mattel stock price ''We had a
process of $40 tremendous
transforming Mattel run…everything
from a traditional went well. And
toy company to a 30 then we lost
global children’s TLC merger our focus.”
products
Bob Eckert,
company… Mattel CEO,
20
Jill Barad, April 2001
Mattel CEO,
December 1998 10
TLC sale

0
95 96 97 98 99 00 01 02 03

BOS 041123-YWS-KSS-HunetLecture_f 16
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Breakdown #2: Inadequately defend the
true core
Germany
Wholesale Brazil
suppliers** Asia
Deep U.K.
Wholesale Club discounter Smaller scale
Supercenter format format
Mexico Ranked #1
Discount retailers* Canada
1970: 32 stores Company
Focused on
on Fortune
small 500
& midsize towns
First Wal-Mart Wal-Mart overtakes Kmart
store opened as #1 US retailer

1962 1970 1980 1990 2002

First Kmart
store opened
Australia
1970: ~200
stores Book Stores Filed for
Aggressive Home
Specialty
Chapter 11
Improvement stores
expansion Sports Stores Bankruptcy
of Kmart Drug Stores
Canadian Office Supply stores
stores
Discount outlets Czechoslovakian
Department stores Desperate
Warehouse Clubs Divestitures
Mexico
Book Stores BOS 041123-YWS-KSS-HunetLecture_f 17
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 Breakdown #3: Prematurely
abandon growth in the core

Profit Withdrew
$300M from retail
272

200 Entered
retail 149
102
100
51
27
0

-36
-100
1990 1991 1992 1993 1994 1995

BOS 041123-YWS-KSS-HunetLecture_f 18
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Breakdown #4: Pursue wrong adjacencies —
Anheuser-Busch

Eagle Snacks

BOS 041123-YWS-KSS-HunetLecture_f 19
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Successful businesses address four
key questions

What is my core?

How What is
sustain- the Full
able is Potential
my core
of my
long-
term? core?

What adjacent markets

or segments can I
profitably grow into?

BOS 041123-YWS-KSS-HunetLecture_f 20
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Bain/EIU Survey

How close is your #1 core business to its full potential for

profitable growth?

60% 56%

40

29%

20

8% 7%

0
Full Potential Within 20% Not Close No Idea

BOS 041123-YWS-KSS-HunetLecture_f 21
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Market leadership drives superior returns

Return on Capital

30% 29%

22%

20

14%
12%
Cost of
10 9% Capital

4%

0
Weak Follower Parity Leader Strong
Follower Leader

BOS 041123-YWS-KSS-HunetLecture_f 22
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The trap of leadership

The stronger your market

position the more likely you are
operating below full potential

BOS 041123-YWS-KSS-HunetLecture_f 23
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Full Potential Requires Operational and
Strategic optimization

Return on assets
20% Improved
strategic
position

10%
Operational
improvement

0%
0.1x 1x 10x
Relative market share

BOS 041123-YWS-KSS-HunetLecture_f 24
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Cost control is key

Return on Sales
10%

8
Higher Value

4
Lower Cost
2

0
Driver of profitability differences
(leader versus follower)

BOS 041123-YWS-KSS-HunetLecture_f 25
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Target market can be defined more broadly
- Grainger

Percent of total purchases

$24B $5B $5B $3B $3B
100%

Unplanned purchases
80%

60%

40%
Planned purchases

20%

0%
rer
s
ors le rs nal rcial
ctu act lesa utio me
a r t
nu
f nt o sti Com
Ma Co Wh In

Unplanned purchases = $18B

BOS 041123-YWS-KSS-HunetLecture_f 26
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Grainger’s “Revenue Sieve”

Billions of Dollars
$20
$18.0B $5.0B

15 $2.9B

$4.0B
10
$3.7B

5 $0.2B $0.7B
$1.5B

0
Total New Lack of Market Achieving Customer Insufficient Grainger
market size segment awareness coverage full defections share of Revenue
opportunities potential and wallet
from sales turnover
practice

BOS 041123-YWS-KSS-HunetLecture_f 27
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Actions taken

• Added 100 Branches; planned 150 additional branches

- Untapped markets
- Better proximity to existing customers

• Refocused product lines

- From specialty oriented to convenience
- Low profit items eliminated

• Restructured sales force

- Best sales practices across districts
- Sales resources increased

• Improved customer service procedures

- Specific weakness vs. competition identified
- Needs better understood from customer perspective

BOS 041123-YWS-KSS-HunetLecture_f 28
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Successful businesses address four
key questions

What is my core?

How What is
sustain- the Full
able is Potential
my core
of my
long-
term? core?

What adjacent markets

or segments can I
profitably grow into?

BOS 041123-YWS-KSS-HunetLecture_f 29
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Don’t build on a weak core

BOS 041123-YWS-KSS-HunetLecture_f 30
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Complexity of growth

Forward Backward
Global integration
Local integration
Expansion

Sell capability
outside
Internet New-to-world
New New Value needs
Geographies Chain Steps
Distribution
New
New Channels New Businesses substitutes
Core

New Customer New

Indirect New models
Segments Products

Next
Microsegmentation of generation
current segments
Support
Unpenetrated
services
segments New New to
segments world
Complements

BOS 041123-YWS-KSS-HunetLecture_f 31
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Adjacency growth study: Sources

i25 in-depth case studies and interviews with

companies that have extensive adjacency
success records
i100 CEO interviews
iData base of 181 adjacency moves
iPaired comparisons of 24 companies with
different growth paths and move sequences
iBain/Economist executive surveys
iBain case data base
iComplete secondary source analysis
BOS 041123-YWS-KSS-HunetLecture_f 32
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Different studies all say 3 out of 4 growth
initiatives fail

Success rate

40%

30 27
25

20 Range
10-30%

10

0
Analysis of Bain/Economist 24 prior studies
181 moves survey of growth moves
(1996-2002)
BOS 041123-YWS-KSS-HunetLecture_f 33
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How can the odds be improved?

BOS 041123-YWS-KSS-HunetLecture_f 34
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Follow the customer

BOS 041123-YWS-KSS-HunetLecture_f 35
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Customer segmentation

BOS 041123-YWS-KSS-HunetLecture_f 36
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 Customer segmentation
Business Consumer
Small business Corporate Charge Credit Co-branded Specialty
1958

1990
Purchasing Rewards Delta Hilton Seniors

1996
ONE Preferred Cash
Charge Credit financial rewards Optima rewards Starwood Students Sports

Fidelity

Financial Blue Seniors

services
Pre-paid

2002
BOS 041123-YWS-KSS-HunetLecture_f 37
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Results of Amex customer segmentation
strategy

CAGR CAGR
90-96 = 3% 90-96 = 2%
TRS revenue 96-02 = 7% TRS net income 96-02 = 12%
$20B $3.0B
18

15 2.1
2.0
12
10 10
1.1
1.0 1.0
5

0 0.0
1990 1996 2002 1990 1996 2002
BOS 041123-YWS-KSS-HunetLecture_f 38
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Relentless repeatability

Ben Hogan
BOS 041123-YWS-KSS-HunetLecture_f 39
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Relentless repeatability

BOS 041123-YWS-KSS-HunetLecture_f 40
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Nike has relentlessly repeated its
growth formula
New business
Channel Geography

Asia
Europe
Mexico, Latin America
Canada
Backward Forward
integration Running shoes integration
1
Athletic Basketball
wear2 Tennis (1982)
Basketballs
3 Bags Soccer
Golf shoes (1987)
Wimbledon Shirts/shorts Cycle
Footballs equipment Tennis wear
Customer Golf balls (2001)
(1987) (1985) Footwear
Soccer strips
Golf clubs

Equipment Apparel
BOS 041123-YWS-KSS-HunetLecture_f 41
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Nike has relentlessly repeated its
growth formula
New business
Channel Geography

Asia
Europe
Mexico, Latin America
Canada
Backward Forward
integration Running shoes integration
1
Athletic Basketball
wear Tennis (1982)
Basketballs
3 Bags Soccer
2
Golf shoes (1987)
Wimbledon Shirts/shorts Cycle
Footballs equipment Tennis wear
Customer Golf balls (2001)
(1987) (1985) Footwear
Soccer strips
Golf clubs

Equipment Apparel
BOS 041123-YWS-KSS-HunetLecture_f 42
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Nike has relentlessly repeated its
growth formula
New business
Channel Geography

Asia
Europe
Mexico, Latin America
Canada
Backward Forward
integration Running shoes integration
1
Athletic Basketball
wear Tennis (1982)
Basketballs
3 Bags Soccer
2
Golf shoes (1987)
Wimbledon Shirts/shorts Cycle
Footballs equipment Tennis wear
Customer Golf balls (2001)
(1987) (1985) Footwear
Soccer strips
Golf clubs

Equipment Apparel
BOS 041123-YWS-KSS-HunetLecture_f 43
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Nike has relentlessly repeated its
growth formula
New business
Channel Geography

Asia
Europe
Mexico, Latin America
Canada
Backward Forward
integration Running shoes integration
1
Athletic Basketball
wear Tennis (1982)
Basketballs
3 Bags Soccer
2
Golf shoes (1987)
Wimbledon Shirts/shorts Cycle
Footballs equipment Tennis wear
Customer Golf balls (2001)
(1987) (1985) Footwear
Soccer strips
Golf clubs

Equipment Apparel
BOS 041123-YWS-KSS-HunetLecture_f 44
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Nike’s growth formula
New business
Channel Geography

Asia
Europe
Mexico, Latin America
Canada
Backward Forward
integration Running shoes integration
1
Athletic Basketball
wear Tennis (1982)
Basketballs 2
3 Bags Soccer
Golf shoes (1987)
Wimbledon Shirts/shorts Cycle
Footballs equipment Tennis wear
Customer Golf balls (2001)
(1987) (1985) Footwear
Soccer strips
Golf clubs

Equipment Apparel
BOS 041123-YWS-KSS-HunetLecture_f 45
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Nike vs. Reebok: Late 1980s

“You’ve got two winners,” said LaMoine Adams, VP and GM or

Foot Locker. “Nike and Reebok have both been very strong,
neck and neck.”
Wall Street Journal, Dec. 19, 1989

“In the race for athletic footwear supremacy, Nike and Reebok
are headed for a photo finish.”
USA Today, Oct. 27, 1988

“When a customer laces up a new pair of sneakers at Foot

Locker, it’s likely they’ll choose Reebok or Nike. They are the
titans of the industry, the Coke and Pepsi of athletic
footwear! “
The Boston Globe, Oct. 3, 1988
“These two archrivals (Nike and Reebok) are now locked in a
tense battle for America’s feet.”
Newsday, Nov. 22, 1987
BOS 041123-YWS-KSS-HunetLecture_f 46
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 Reebok: Inconsistent adjacency moves

New business
Channel Geography

Backward Forward
integration Aerobic Shoe (1982) integration
Tennis (1983) 1
Basketball (1985)
2
Customer Weeboks
(1986)
Avia (1987)
John Frye 3
4
Boots (1987) 5
Ellesse USA(1988)
Rockport walking “The Pump” (1990)
Boston Whalers shoe (1988) Shaq Line (1993)
Boats (1989)
Greg Norman Golf 6
clothes (1990)
Ralph Lauren Footwear Footwear
(1996)
Other Logo Athletics (2000)
products Other shoes 7 NFL uniforms (2000)

Soft goods
Sold off
BOS 041123-YWS-KSS-HunetLecture_f 47
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Nike vs. Reebok

Revenues Market value

$13B $20B
12.3X
38X
10
15

8
10
5
2.2X
5
3
1.2X

0 2002 0
Nike Reebok 1987 Nike Reebok

BOS 041123-YWS-KSS-HunetLecture_f 48
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Vodafone growth

Market
Employees Customers Revenue EBITDA
cap.
1996: 5.6K 3.5M £7.3B £1.4B £0.5B

2002: 99K 101M £78B £22.8B £8.0B

Growth 18x 28x 10x 15x 15x

BOS 041123-YWS-KSS-HunetLecture_f 49
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 Global growth

BOS 041123-YWS-KSS-HunetLecture_f 50
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Dell vs. Gateway: Selling PCs direct

1995 2002
Starting position Ending position

Revenues Margin MV Revenues Margin MV

Dell $5.2B 7% $2.0B $35.4B 6% $75B

Gateway $3.7B 7% $1.7B $4.1B <0 $1B

How did this happen?

BOS 041123-YWS-KSS-HunetLecture_f 51
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Dell vs. Gateway: International expansion

Dell Gateway
Method i Organic i Organic or acquisition
- Australia, Osborne 1995
- New Zealand, PC Direct 1998
- Etc.

Model • Direct only • Direct only, retail (60 stores)

& JV

Focus • 6 primary countries • Business & consumer, many

• Primarily business countries

• Low complexity/repeatability • High complexity, not repeatable

• Steadily growing profits • Overhead rose to 33% of

revenues in 2001
• 1996 profit ($60MM)
loss 2001
BOS 041123-YWS-KSS-HunetLecture_f 52
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How repeatability creates a competitive
advantage

iGreater learning curve effects through repetition

iReduced complexity by adapting a known pattern

iFaster and more reliable decision making

on investments

iAbility to build the organization for a focused

purpose

iStrategic clarity for employees and investors

iAbility to “drill down” into deeper and deeper

understanding of customers

iAbility to think several moves ahead

BOS 041123-YWS-KSS-HunetLecture_f 53
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Success is harder the farther moves are
from the core
Odds of success

40%

30

20

10
Sucess
rate
0
1 1.5 2
2.5 3.5 4.5
to 3 to 4 to 5
Steps away from core
BOS 041123-YWS-KSS-HunetLecture_f 54
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Economic distance from the core is measured
on five dimensions
Shared
Shared Shared Shared Shared
capabilities/
customers costs channels competitors
technology

Core

1 step
adjacencies

2 step
adjacencies

3 step
adjacencies

Diversification

Full Share
Primary Partial Share
dimensions No Share
BOS 041123-YWS-KSS-HunetLecture_f 55
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Evaluation of adjacency opportunities

High

Item Weight “Priority

Attractiveness
• Future market size Xx% opportunities”
• Annual growth Xx%
rate until 2010
• Avr. operating Xx%
margin
• Industry Xx%
concentration
• Competition Xx% Low

Weak Strong

Relatedness
Quantitative analysis
Item Weight
• Customer sharing Xx%

Qualitative analysis • Cost sharing Xx%

• Relevance to KT Group’s Xx%
core capabilities
BOS 041123-YWS-KSS-HunetLecture_f 56
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Myth on customer base

5 Replacement relationship

4 Complementary relationship

3 Occasional sharing

2 Physical sharing

1 No sharing

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Summary(1/2)

Fact

• Sustained and profitable growth is becoming more difficult

to achieve.

Core business

• The most important growth driver is a strong core business

with leadership economics.

• Strong core businesses usually perform far below their full

potential.

• Achieving full potential in the core is the most important

task of management.

• Weak or unstable cores don’t support strong adjacency

moves.

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Summary(2/2)

Adjacency moves

• Growth opportunities must be judged in relation to the core.

• Relatedness to the core is one of the most difficult

management judgments.

• Strong cores are at the greatest risk from a misconceived

adjacency move.

• Repeatability is a profound idea central to the math of

profitable growth.

Change

• Organizations preserve the status quo and inhibit growth

• There is no status quo strategy in business; you are either

gaining or losing share.

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Monday morning questions

• Do I know what is my core business? Is that

recognition shared among management team?

• How close am I to full potential in the core? How

do I know?

• How do I evaluate growth opportunities and

assess relatedness to the core?

• Have we taken full account of the hidden power of

repeatability?

• Will I need do redefine my core? How?

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Competitor returns vary dramatically: Why?

10-year rate 10-year rate

Industry Company of return Company of return

Airline Southwest 14% Delta (7%)

Computers Dell 43% Gateway --

Defense General Dynamics 20% Raytheon 4%

Drugs Cardinal 24% McKesson 12%

Drug stores Walgreen 19% CVS 4%

Food Sysco 18% Fleming (13%)

Retail Wal-Mart 13% Kmart (37%)

Semiconductors Intel 19% AMD (3%)

Athletic Shoes Nike 9% Reebok (1%)

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Management is the key

100%
External events
80

60

40 Management driven

20

0
Causes of major
performance changes

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 감사합니다

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