Change Or Die: Not Everyone Buys That

By Jane Genova - July 10, 2012 | Tickers: AMZN, GOOG, NFLX, WAG | 0 Comments

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Change or Die. Obviously, not everyone has been beaten over the head with that meme or the bashing didn't take.  Otherwise, analysts, shareholders, and the media wouldn't react with high angst when a company like Google makes a shift.

Google’s (NASDAQ: GOOG) so-called “core competence” had been search.  Thanks to the exploding growth of apps, search may someday become an anachronism.  Also, had Google stuck with its supposed core competence (or 'stuck to its knitting," as management guru Tom Peters had put it), there would be no Nexus 7 tablet.  Retailing at $199, it could be an Amazon (NASDAQ: AMZN) Kindle Fire killer.  Sure, there are those, as Alexia Tsotsis reports in TECH CRUNCH, who view Google's navigation into other categories as losing its way.  Yet, its way has long been to try whatever and risk failure.  It promotes as part of its branding that it allows employees a certain percentage of company time to experiment with developing new products and services.  Google seems to belong to the School of Schumpeter or Creative Destruction. 

There was a time too that Amazon’s core competence was being an online retailer of books.  Early in its game, it only broadened that core competence to other categories in retail.  Now, in addition to the Kindle e-reader, it provides cloud computing services for companies such as Netflix (NASDAQ: NFLX).

There was a time also when Netflix’s core competence had been distributing films on DVD by snail mail.  Some claim that time hasn’t passed, at least not in terms of where the current profits are.  However, investors would likely not have returned to Netflix after its pricing disaster had it not entered the arena of streaming online video.  On the day after the Fourth of July holiday, shares jumped 13% to the over-$80 mark.  The day before the Fourth, the chief executive officer Reed Hastings disclosed statistics that in June its customers had streamed more than a billion hours. Had Netflix not migrated from its core competence it could be going the way of Blockbuster which stayed in it.

Core Competence as Irrelevant

Investors considering these three examples might be now wondering, if they hadn’t wondered long before, if that sacred cow “core competence” has become irrelevant. Consider Walgreen (NYSE: WAG).  Not many years back it was the neighborhood drug store, with a few retail items like band aids and mouthwash.  But that pharmacy business is part of many supermarkets like Kroger and general retailers like Wal-Mart.  In addition, profits are getting squeezed. Currently Walgreen is in the process of acquiring 45% of international drug distributor Alliance Boots.   More recently it announced it is expanding its presence in the Southern part of the U.S. by picking up the 144 drug stores under brands like USA Drug and Super D.  It has also reinvented itself as a healthcare center, convenience outlet, and, in selective locations, a plush experience-economy store. Walgreen is struggling to grow. The jury is out on much of that.  The point is not that it is shifting but how.

When Staying in the Box Was Championed.

The phrase “core competence” entered the business lexicon and became embedded in a very different time. That was 1990.  Almost a decade before that, the meme was "stick to the knitting." That was embedded in management speak by the book "In Search of Excellence."  Many of those companies cited as being excellent because they stuck to their knitting were soon out of business. Well, in 1990, in the then bible of business HARVARD BUSINESS REVIEW, management consultants C.K. Prahalad and Gray Hamel brought "core competence" mainstream in the private sector as being a useful way to characterize how an enterprise organized itself and operated. Essentially a core competency of a company was determined by three factors:

 * It was not easy for the competition to replicate.  More recently we refer to that as a “moated” business, a phrase loved by Warren Buffett, as well as "blue ocean strategy."

* It must be a source of value for the customer or client.  When invented, for-profit education such as Kaplan was viewed as creating no-frills career training.

* It could be leveraged.  The classic example is Apple’s iPlatform.

Very soon, though, some investors picked up that staying in the box could lead to disaster.  In the early 1990s, IBM, whose core competence was mainframes, almost went bankrupt.  Currently its revenues come primarily from services and software.  Yet, the concept is easily trotted out when those associated with a stock want to create positive or negative spin around a move.  That was exactly what happened when Procter & Gamble sold and Kellogg purchased Pringles.

iPlatform Not Core Competency, Not Sticking to Knitting, Not Staying in the Box

Likely, though, when it comes to the movers and shakers among public companies like Apple, no one is going to argue for or against reliance on the iPlatform in terms of core competence etc.  Motivated by fear and greed, they are focused on what technologies will make the next trillion dollars. 

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