Companies get into bundles of trouble by assuming they can easily -- and without much research -- sell a panoply of diverse services to their core customers, management consultant Chris Zook warns.
"History has been littered with cases of unproven customer bundling strategies," says Mr. Zook, author of the new book, Beyond the Core: Expand your Market Without Abandoning Your Roots.
Bundling is one of the panaceas of modern corporations, who see it as an easy, efficient way to grow beyond their core businesses, which, while still cash-spinners, are often stuck in no-growth maturity.
It's a favourite strategy of banks -- insurance and mutual funds, anyone? -- as well as telecommunications and cable TV operators, which dream of loading up their customers with wireless, Internet and telephone services in a single bundle with integrated billing.
The bundling boom took on huge momentum during the Internet and entertainment boom of the late 1990s-2000 when a number of major companies -- from Vivendi SA to BCE Inc. -- bet on new technologies and services that failed to yield the expected instant synergies.
Mr. Zook, a Boston-based director of Bain & Co., is not opposed to bundling per se, but he argues that it can work well only if it springs from a deep understanding of how customers actually buy their products.
But too often, he says the concept of customer bundling is one of those irresistible siren-song theories that lead to potentially fatal mistakes.
"In the absence of any data on how customers really behave, it is very, very easy to sit in a corporate office and imagine how wonderful it would be for a single customer to get all of its services from one place with one statement," he says.
"Why not buy your insurance from the same person at your bank and why not do your banking with the person who helps you on investments? Isn't this all just money?"
But, he says, "the reality is that most consumers have shown no propensity at all for purchasing [products]that way."
Mr. Zook's new book -- a follow-up to his 2001 release, Profit from the Core -- focuses on bundling and other strategies that companies use to grow beyond their core businesses. Most companies believe that the best way to achieve sustained growth comes by making moves into areas adjacent to the core.
This can mean geographic adjacency, such as U.S. office supplies giant Staples Inc.'s move into the Canadian market, or product adjacency, such as American Express Co.'s assembling a portfolio of plastic beyond its original charge card. It may mean new customer segments, or distribution channels.
Companies pin a lot of hopes on such adjacency moves. Even in times of economic slowdown, Bain has found the average U.S. company believes it will outgrow its product market by a factor of two, and its profit will expand at twice that rate.
When interviewed, executives say two-thirds of the performance gap will be filled by pushing out the boundaries of the core business. But what is less clear is how to do it, Mr. Zook says. Three-quarters of major companies fail to create value or sustained earnings growth.
Many find it difficult because there is a constant tension between the two corporate objectives -- mining the core and pushing out the boundaries of this core.
He says there is one reliable approach to this challenge: Eighty per cent of the best adjacency moves came from drilling down into research to understand the tastes, habits and practices of core customers.
He is contemptuous of risky shots-in-the-dark based on high-falutin' theories of convergence or synergies.
"When you see acquisition strategies based on grand untested theories, and particularly linked to words that have three or four syllables, such as fully integrated seamless bundling, or integrated convergence of technologies, I think it's up to investors to say: Show me the evidence."
CEOs who buy into grand convergence theories like to say it is only natural that there is no empirical evidence to support their strategies. After all, they are talking about the future, which is by nature unpredictable.
Mr. Zook often hears executives say: "This is the way the future is going to be. I see it -- you don't. The future goes to the creative."
But that's not true, Mr. Zook insists. "The future goes to the disciplined, and through discipline comes creativity."
He concludes that "these bundling strategies are a case in which false creativity overwhelms the need for business discipline."
He finds that successful companies get good at adjacency growth because they do it often and in small bursts -- they find a credible, tested formula for expansion and keep relentlessly repeating it.
Mr. Zook contrasts the fates of two athletic footwear companies, Reebok International Ltd. and Nike Inc., which in 1990, had uncannily similar annual revenues -- about $2.3-billion (U.S.) -- and operating income (between $300-million and $500-million). But 10 years later, Nike's market capitalization had soared, and Reebok's had been halved.
Why the difference? Mr. Zook said Reebok's growth approach, while its core business was under attack, was to make unrelated investments that suggest an incoherent hunt-and-peck approach to expansion.
Nike, meanwhile, had developed a repeatable formula from its experiences with running gear and basketball. It tackles each new sports market by moving from shoes to apparel and then to hard goods; from softer advertising to athlete endorsements; and from U.S. entry to global presence. Having refined this approach over and over, it is now applying it to golf.
Such repetition sounds hopelessly boring, Mr. Zook admits, but boring actually yields excitement. No composer, he points out, worked harder than Mozart, who was not just the stereotypical child genius whose creativity sprung from God.