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How folded towels lead to more of the folding stuff
The Sunday Times 11/09/03
by William Lewis

WALK into the reception areas of Tesco's head office in Cheshunt, Hertfordshire, and you will see a wall covered with details and pictures of staff who have generated new ideas that either save the company money or make it money.

My particular favourite is the one recently thought up by Chris Rowberry, a non-food manager at a Tesco store. "As all stores use the same towel display, suppliers could fold towels pre-delivery." And beside that quote is a picture of Chris, and a picture of a rack of folded towels in a Tesco store.

The benefit of the idea, implemented by Tesco's commercial team, is described as follows: "Saves time to fold towels and also keeps consistency of presentation throughout the stores."

Brilliant, naturally, and also mind-bogglingly boring. But with hundreds of such ideas being suggested each year, so Tesco relentlessly moves forward in its quest to improve market share and profitability.

Further along the wall is a stack of Tesco mobile phones. Tesco used to sell just food, and then it moved into clothes, banking, and now telecoms. Legal services could be next. The company is relentless, continually pushing forward into new markets and products.

There are many things to learn from companies such as Tesco. It has avoided bonkers acquisitions and exotic growth initiatives and concentrated on expansion out from the core. And boy, has it been successful. It is Britain's No 1 supermarket, Wal-Mart's toughest competitor around the world, and shareholders are delighted.

The success of Tesco and other top companies feature in a soon-to-be published highly stimulating book by Chris Zook, a director of Bain, the management consultancy.

Beyond the Core: Expand Your Market Without Abandoning Your Roots describes in detail how companies can manage to achieve growth outside their core operations - without damaging the heart of their business.

For many chief executives, so-called "adjacent growth" is their holy grail. With transforming mergers frowned upon, growth in their core business perhaps having stalled, chief executives know that seeking out new markets is the best bet they have.

There are some great case studies to pick on. Wal-Mart and Kmart both opened their first stores in 1962 in America. As Zook points out, the history of Wal-Mart is one of "methodical movement" into so-called adjacencies such as Sam's Club, electronics, Mexico - slowly but surely, one by one.

In comparison, the history of Kmart is littered with growth ideas that have failed - including buying a chain of department stores in Czechoslovakia. Funnily enough, Wal-Mart is now one of the world's largest companies, while Kmart drifted into near-terminal decline.

Tesco's success in its battle with Sainsbury is also touched upon by Zook. In 1990 Tesco had a market value substantially smaller than Sainsbury, and it was about £1 billion behind in total revenues.

Bain studied the two companies for 11 years, and during that time each made 24 separate moves to build growth on its original core business. The basic point is that Tesco got it right, and Sainsbury did not. Tesco's market capitalisation quadrupled, while Sainsbury's went up by only 35% - less than the average of the stock market as a whole.

Some of Sainsbury's moves included investing in a 100-store chain in Egypt, the do-it-yourself store group Texas, and spending heavily to start Homebase.

In contrast, Tesco first invested in its core supermarket business and then slowly began to roll out a series of products that were Bain- approved adjacencies, "tightly bonded onto a newly strengthened core". Lovely.

But the story I like best is the once-legendary head-to-head battle of Nike and Reebok. As the chart indicates, there once was a time when the two companies had almost identical financial situations. In 1990 Nike's revenues were $2.3 billion, Reebok's $2.2 billion. Nike's operating income was $481m, Reebok's $300m.

Both companies had well-known brands and were focused on selling athletic shoes. By the end of a 10-year period, things had got quite different. Zook points out that Nike's market capitalisation had increased by 380%, while Reebok's had halved.

"Nike had a clear strategy apparent to all constituencies, consisting of a repeatable method it had developed and refined over the decade to attack one sport after another. Reebok's path was a mystery," he writes.

While Reebok's core shoe business was under attack, it bought a boat company. Worse still, it launched a number of incorrect growth initiatives, including the women's Incubus running shoe. It later transpired that an incubus is a medieval spirit with bad intentions that lives to have sex with sleeping women.

In contrast, Nike's management worked out a repeatable formula. It took years to develop, but it worked wonderfully. The company moved from selling running shoes to basketball kit with Michael Jordan's endorsement in 1985, then a year later into tennis with John McEnroe, and then (with the same formula and process) into a whole host of other sports - baseball, football and, more recently, golf.

Zook calls what Nike, Tesco and Wal-Mart have done "Relentless Repeatability". He argues that having a successful formula for selling new stuff is the thing to aim for when running a company or a division of a company.

Take your time to work out a strategy for growing into new markets, but once you have one, use it time after time.

Handily, Zook leaves us with some warnings of what can go wrong. Companies can misdefine their core - for example Mattel, which made a disastrous attempt to transform itself from a traditional toy company into a "global children's products company" (whatever that is). Companies can also hit trouble if they allow their growth efforts to distract them from problems in their core activitiy.

But perhaps you should most of all beware companies that pursue big, untested strategies - otherwise known as global nonsense. Remember the words of Jean-Marie Messier, who, when chief executive of Vivendi Universal, said the company would be "the world's preferred creator and provider of personalised information, entertainment and services to consumers anywhere, at any time and across all distribution platforms and services".

No longer folding towels, I wonder what Tesco store manager Chris Rowberry makes of that.

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