Wall Street Journal
November 9, 1999


Corporate America Struggles
To Define 'Core' Business


TULSA, Okla. -- Williams Cos. is one of the world's biggest pipeline companies. It builds steel pipelines that transport natural gas and fiber-optic pipelines that can carry Internet traffic. To Williams, both businesses are essentially the same.

"There are a lot of analogies between steel pipes and fiber pipes," says Chief Executive Keith Bailey, pulling a pen from his pocket and sketching a graph that looks like a ski jump. "Whether it's a piece of glass or a piece of steel," costs drop steeply as transport volume grows, he says. Riding that declining cost curve to profit is Williams's strategy. And that means sticking with its formula of big pipeline projects and big customers.

In other words, Williams has found its core business. That makes it one of the lucky ones at a time when so many other companies are struggling to define their niches, especially with the Internet blurring many of the traditional lines. Some companies have gone about it by slicing and dicing themselves into pieces.

Take Tektronix Inc. Once the biggest employer in its home state of Oregon, Tektronix has been shedding businesses since the early 1990s. By June, after years of pressure to boost shareholder value, it was down to just two lines -- color printers and technical instruments. Then, it decided to split the two survivors into separate companies.

'Pendulum Theory'

But which one would be called Tektronix? Or, put another way, which one was its core business? The company resolved its dilemma in September, when it agreed to sell the color-printer business to Xerox Corp. for $950 million. Tektronix thus reverts to its original business, making oscilloscopes and the like.

"I'm a believer in the pendulum theory," says Jerry Meyer, Tektronix's chief executive. "In eight or 10 years, there'll be more of a conglomerate view again. Now, it's swinging to a lot of focus."

Indeed. Focus is in these days, both on Wall Street and in boardrooms across America, and this raises a surprisingly complex question: What constitutes a core business? Is it a product? A cache of intellectual property? A process? Or, is it a business design, such as the one used by online retailer Amazon.com Inc., that can be deployed across multiple industries?

Some of North America's best-known companies are grappling with the core-business issue. At Dun & Bradstreet Corp., which bills itself as a credit-information powerhouse, management is wrestling with the idea of splitting off the company's bond-rating business, Moody's Investors Service Inc. And Laidlaw Inc. of Canada recently put its ambulance business up for sale after concluding that the operation had more in common with health care than it did with the bus company's core transportation business.

Freedom to Choose

But there's a paradox behind Wall Street's embrace of focus: Companies today have much more freedom to choose what they want to be. Capital is abundant, and plenty of corporations of all sizes are up for sale. Many healthy companies could double their size in a single stroke with acquisitions. In fact, consolidation is sweeping the telecommunications, energy, automotive and financial industries.

What the "core business" advocates are saying, however, is that even in the most dynamic industries, such as telecommunications, it is crucial to pick a specialty. That's the mantra at Williams Cos. That's also the strategy shareholders have forced on Tektronix -- and plenty of other companies. Covering the waterfront is yesterday's approach. And so, the question is, how does a company find its forte?

The question is especially urgent now because of the Internet. Nothing has so rattled traditional business executives as the rise of the Web, because Internet companies dispense with many of the things traditional businesses consider essential -- for example, stores.

Internet lenders could destroy bricks-and-mortar banks. Internet classified advertising could steal the single biggest profit source of most newspapers. And how's a distributor to cope when the industry it serves suddenly becomes obsessed with selling direct?

Internet Attackers

Especially alarming to many businesses is the advent of so-called Internet attacker companies whose core business isn't really a product at all. It's a business design. Amazon.com, for example, started out as an online bookseller, but that's ancient history. Now, it's taking its core business -- gathering customers over the Internet, then pulling together orders -- into toys, electronics, music and videos. Such a company, which can easily change its stripes, completely redefines the idea of what a core business is.

So does Capital One Financial Corp., which pioneered the "you have been preapproved" approach to credit-card marketing. Spun off by Signet Bank in 1995, Capital One has built a huge business, with more than 20 million cardholders. Yet, its top executives staunchly deny that Capital One is a credit-card company. Indeed, it has started direct-marketing auto loans and even wireless-phone service.

"A wireless phone is just a credit card with an antenna," says Richard Fairbank, Capital One's chief executive. It's a quip he uses a lot, but it speaks to what Capital One is really all about. Its core business isn't a product, it is computer-based marketing built on a process called data mining.

Capital One has amassed purchase and credit histories on millions of Americans. A Capital One analyst might tap some keys on a computer and pull up names and addresses of Mercedes owners, and target them for a direct-marketing blitz. Or, he might look for people with tarnished credit histories whose other spending habits might make them a good credit risk anyway -- at least for a higher-interest-rate card with a low credit limit.

"There's an infinite number of things you can try out," says Mr. Fairbank. Plus, if you can data-mine for credit-card business, you can data-mine for just about anything. That's the theory, anyway.

And that's where the wireless-phone business comes in. Capital One, which is based in Falls Church, Va., is taking on store-based wireless providers AT&T Corp., Sprint Corp., Bell Atlantic Corp. and others -- by direct-marketing its America One wireless services.

Capital One, which buys cellular capacity from a wholesaler and then resells it to consumers, initially assigned 1,000 employees to its wireless-phone business and tried to compete in the mainstream wireless market. But the enormous costs involved -- buying wireless phones to give away to subscribers, for example -- left America One with an operating loss of $57 million for the first six months of 1999, on revenue of $67 million. Its losses narrowed last quarter, after Capital One transferred 350 people to its credit-card operations from its wireless sales force. Then, it refocused its wireless campaign, this time target-marketing prepaid wireless service to people with past credit difficulties, a group mainstream carriers largely shun.

'Quantum Acceleration'

To Capital One, which had net income of $169.9 million in the first half of 1999, wireless is just another way the company can tap into its core business, using computers and trial-and-error marketing tests to sort out likely deadbeats from otherwise solid citizens with unfortunate credit histories. The Internet, says Mr. Fairbank, "is a quantum acceleration of the whole phenomenon we have been preparing for," in part because it offers the ability to test-market ideas very quickly and cheaply.

Meanwhile, in banking, the business model of bundling all kinds of financial services into a network of bank branches is increasingly under attack, as specialty companies train their guns on the industry's most-profitable niches. Is a bank in the meet-and-greet business, forming relationships with customers as it takes deposits, makes loans and offers safety-deposit boxes? Or, is it in the business of offering competitively priced loans over the Internet?

Certainly, the Internet is fracturing the market for financial services. At Boston Consulting Group, the shorthand for this phenomenon is "Blown to Bits," the title of a recent book by consultants Philip Evans and Thomas Wurster. In their view, the whole financial-services industry soon will be linked by the Internet -- from banks and mutual-fund managers, to information providers -- and consumers will control it all from their desktops.

"Customers will be able to contact any financial institution for any kind of service or information," say the authors. "The competitive value of one-stop shopping and established relationships will drop," they add. That strongly implies that many financial companies will narrow their focus in the future, despite the rise of a few financial conglomerates, such as Citigroup Inc.

Moreover, it will be the core business of many such winners to be the "brand name," the part of the industry that has direct contact with consumers, watching how they navigate cyberspace and learning their purchase patterns and habits.

But not every company can be the famous brand. More and more, other, different companies will do the heavy lifting in the background. When Aunt Edna buys a refrigerator, one company will run the Web site, another will make the product, another will do the delivery, and so on. And as companies figure out what their core business is going to be in the future, many of them will have to decide whether to try to be the big-name brand or the less-glamorous supplier/manufacturer.

Clearly, the chic thing to be these days is the brand. Nike Inc. has done it in athletic shoes, focusing on marketing via celebrity endorsements while contracting out its footwear manufacturing.

Less appreciated are the growing number of companies that have decided to stake out the "back end" of an industry, making private-label technology products, as in the case of Solectron Corp. or Taiwan Semiconductor Manufacturing Co. Low cost, constant innovation and enormous scale are the prerequisites for success in this sector. And as industries break up into specialties, some believe such background niches can be huge and hugely profitable.

Exploiting 'Stealth'

"Stealth manufacturers" is what some call these backfield players. And that's where Tektronix may be heading. Mr. Meyer, its CEO, hopes that the slimmed-down company will build "operational equipment" for digital networks, parts that might go into Sun Microsystems Inc.'s workstations or intoLucent Technologies Inc.'s switches. "There's a stealth electronics environment" that Tektronix can exploit, Mr. Meyer says.

And that's that same type of behind-the-scenes role that Williams Cos., based here in Tulsa, has staked out in telecommunications. Its rivals, such as AT&T, may be buying up cable companies to gain a new channel to consumers for phone and Internet services, but Williams is determined to play the Internet game as a wholesaler, selling long-distance bandwidth, primarily to phone companies.

True, some of the Baby Bells are reintegrating. But Williams is convinced the way to succeed is to specialize. Its goal, says Williams Communications Group Inc. President Howard Janzen, is to be the "Intel" of telecommunications, staying pretty much in the background while making the huge capital outlays necessary to stay current with fast-moving technology. In fact, Williams is spending $2.7 billion over just an 18-month period to build its new fiber-optic network.

Reprising a Role

It's a familiar role for Williams. "We have been a business-to-business company since the early 1900s," says Mr. Bailey, the CEO. It focused on large, capital-intensive projects and a small number of vital business customers when it started building and operating gas pipelines. It applied the same strategy when it decided, back in the early 1980s, that it could run fiber-optic cables through the same pipes, building a huge network that it sold to the forerunner of MCI Worldcom Inc. in 1995.

Now, Williams, which also supplies energy services and commercial communications systems, is reprising its wholesale role as it builds a second and more advanced 33,000-mile fiber-optic network. Earlier this month, it sold a portion of its Williams Communications unit in an initial public offering. The IPO was successful, but some potential investors were skeptical that the unit, which has racked up sizable losses but rising revenues as it builds its network, could distinguish itself from its rivals enough to avoid being drawn into a potential long-distance price war.

To Williams, it is a given that telecommunications prices will fall. But the company says its expertise in building volume and cutting costs still will allow the unit to be enormously profitable. Secondly, its executives say that the company's pipeline experience enables it to move rapidly and cheaply. For example, it expects to complete its current fiber-optic project by the end of 2000, a year ahead of schedule.

Lastly, Williams Cos., which had third-quarter profit of $15.7 million on revenue of $2.2 billion, says it knows how to do business on a large scale. Already, it has lined up SBC Communications, the Baby Bell powerhouse, as both a big customer and an equity investor in Williams Communications, having agreed to buy at least $425 million, or 4.3%, of the unit's shares. It also has a long-term agreement with Telefonos de Mexico SA.

"Wall Street pushes a lot of things toward you" when it is peddling potential acquisitions, says Mr. Bailey. "They come and give what I call the 'train is leaving the station speech.' " But Mr. Bailey and his lieutenants are convinced that Williams's wholesaling strategy plays to the company's strengths.

"It's one where we understand the cost structure. And yes, it isn't as glamorous as having a top line," or revenue, "that's nine or 10 times bigger," he says. "But it's the bottom line that counts."