Somewhere amidst the frenzy of mergers…

During the frenzy of mergers, acquisitions and alliances in the last decade, money managers and fast-food managers alike embraced and bought into (literally) the notion of cocooning. First posited by pop psychologist Faith Popcorn in 1991, cocooning was quickly proclaimed The New New Thing.

Partly a marketer’s construct and partly a social phenomenon, cocooning was seen as a strategy for coping (and boosting consumption): The home – specifically, staying, eating and entertaining there— would become a sanctuary, a refuge from the tumult of the harsh world outside. For millions, “Back home where I belong” became a kind of anthem.

I mention this now because I am struck by the emergence of a certain, familiar trend in the corporate world – cocooning. In Asia, Europe and North America, corporations are re-discovering their roots, returning home to do what they do best, to hone and strengthen their core competency. Retrenchment reigns. Acquisitions are being divested, convergence strategies are being abandoned, and alliances taken up as fast as one-night stands are just as fast becoming undone. Serial acquirers like WorldCom’s Bernard Ebbers and Tyco International’s Dennis Kozlowski are being otherwise dealt with, or if not, they are being unceremoniously dumped. Even if they still stand, they appear chastened, only too willing to return to the business that got them there in the first place.

That the great and not-so great corporations of today would ever cocoon certainly does seem implausible. Or does it? For example, consider innovation, the theme of this issue of the Ivey Business Journal Online. The most innovative companies do one thing — and in most cases, one thing only — well: They stick to and strengthen their core competencies, and leverage those competencies to bring new products to market. In large part, staying close to home is what makes them great innovators. Straying from the core — as when an industrial cleaning company (Tyco) buys an adult diaper company, among many others – leads straight to the auctioneer’s block.

The value of a strong core business, particularly as a platform for successful innovation, was underlined by Harvard Business School Professor Clay Christensen in an interview with the Ivey Business Journal. “A company’s stock price is predicated on its growth rate, and if a company stops growing – or even if its growth rate decelerates – its stock price will plunge,” said the author of The Innovator’s Dilemma. “If a big company stops growing, then the amount of new business that’s required to restart the historical growth rate becomes huge. It will need innovations that will have to get very big very fast. But no growth business gets real big real fast. So, if you get to a point where you need big growth fast, you can’t grow. You can, however, if the core business is still growing. Then, the growth of the core business can provide air cover and time for the new business to get big. That’s the key idea.”

Three of the feature articles this month are about innovation. I believe that you will enjoy and derive value from reading them and the other articles in this issue of the Ivey Business Journal Online.