Moving Beyond the Core Makes Sense for Many Mid-Market Firms

In fact, a majority of executives in a recent McKinsey survey said their companies were pursuing growth in categories outside their core businesses and reported a strong belief that doing so has created company value. This despite the fact that such activities have produced only modest results so far.

Three-quarters of respondents to a McKinsey Global Survey said, that over the past five years, their companies have pursued at least one business activity in a new category. Another 14% said their companies either have considered pursuing this growth or plan to do so in the next five years. But only one-third said their companies’ moves beyond the core generate more than 10% of their revenues today.

“Three-quarters of respondents to a McKinsey Global Survey said, that over the past five years, their companies have pursued at least one business activity in a new category.”

Still, Gazelles Strategy, a business-growth consulting firm, has opined that the inability to diversify beyond their cores is “what stops many mid-market companies from reaching their potential. They have mastered their core business but are unable to locate their next growth opportunity.”

One mid-market company that recently has grown successfully beyond its core is Leviton, a Melville, N.Y.-based maker of electronic wiring devices. Management wanted to reach beyond Leviton’s core North American market but also had to change its core product strategy to do so. A variety of local electrical standards and established low-price competition would make it difficult for Leviton to score abroad with its standard wiring devices, but its strong brand and universal technical standards for data-communications would smooth its introduction of those higher-margin products overseas.

“We definitely don’t want to be a low-end manufacturer,” CFO Mark Baydarian recently told Deloitte. “We’re creating a brand that means service, innovation, quality and value—but you have to pay for that. In those markets where the low-end manufacturer is the sales leader, we won’t compete there.”

For mid-market CEOs with a mind to similarly move outside their core, McKinsey offered three key considerations:

1. Understand the market context. “It’s important to understand first the extent to which growth beyond the core in their region and industry is either an opportunity or a risk,” the consulting firm said. For instance, diversifying activities “can benefit companies in some industries more than others.”

2. Find growth close to home. Unique links between the core business and a diversification activity are most important, CEOs who’ve executed such moves told McKinsey. These include “ideas or opportunities where they can leverage existing capabilities and skills beyond their core business.”

3. Build the right capabilities. Companies “with the capabilities to scan, evaluate, and integrate opportunities have a much higher chance to create value” as they move beyond the core, McKinsey said. CEOs “should assess their companies’ capabilities to make sure the right processes and practices are in place to maximize the value that new activities can add.”

In a world where growth can be stubbornly difficult to come by and undependable, growing beyond the core is a great temptation to many mid-market CEOs. And it can pay off if they tackle it strategically.

Dale Buss :Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other business publications. He lives in Michigan.