When and how to drop a business that isn't working anymore.
By Rita Gunther McGrath
Texts on strategy and innovation are full of great ideas of new things that leaders should do. But, lamented a senior executive I was with recently, “There aren’t any textbooks on what to stop doing!” In a world of temporary advantage, stopping things—exiting declining advantages—is every bit as critical as starting things. Activities need to stop because they can no longer demonstrate good growth potential, or perhaps competitors have made them a commodity, or perhaps they simply have few growth prospects.
Growth outlier firms—those rare companies that have maintained steady growth despite industry upheaval—use a process of continuous small changes to avoid having to make more substantive exit and disengagement decisions. But not all firms are so fortunate, and there are occasions in which a more radical disengagement is simply necessary. This could be because a declining business drops off faster than expected (as happened to Fuji Photo in the 1990s), because markets change in a radical way (as happened to the smartphone business with the introduction of the iPhone), or simply because a firm lingers a little too long in the “exploit” phase and didn’t reconfigure.
Evidence that a business or business model is going into decline is usually quite clear long before it creates a corporate crisis. If one is interested in looking, there is usually a lot of good information to be found. The trouble is that this information seldom turns up in the routine measurements that companies use to drive their businesses.
By the time a decline shows up in your performance numbers, it is usually too late to muster a proactive response, and you find yourself clambering back in a weaker position than you had been in.
The first clear warning sign is when next-generation innovations offer smaller and smaller improvements in the user experience. If the people designing the next-generation offer are having trouble conceiving of new ways to differentiate what you do, that’s not good. If your scientists and engineering types are predicting that some new discovery will undermine the existing trajectory, that is also not good. For instance, RIM’s BlackBerry email devices were the natural descendants of the first pagers, with keypads. The trajectory on which they developed didn’t change much, adding mostly incremental touches such as colored screens, cameras, voice recorders, and some applications. Although customers appreciated these innovations, they were no longer excited by them.
A second clear warning sign is when you start to hear customers saying that new alternatives are increasingly acceptable to them—or, worse, that cheaper alternatives are just as good as what you have to offer. For example, Google has developed a maps application for Android-equipped mobile phones that provides turn-by-turn spoken navigation. This has prompted a decline in the attractiveness of standalone GPS navigation devices and even predictions that such devices will no longer be popular in automobile dashboards or as handhelds. Even worse is when a competitive or substitute offering shows the threat of changing the dimensions of competition customers are looking for, particularly if it comes as a surprise. RIM, stuck in a pager-based mindset, never saw the iPhone coming.
Finally, of course, you can consult your numbers. Usually, there’s first a small decline in the sales growth rate. Then a flattening out. Then noticeably declining sales. Unfortunately, by the time a decline shows up in your performance numbers, it is usually too late to muster a proactive response, and you find yourself clambering back in a weaker position than you had been in.
At Wolters Kluwer, a once-traditional publishing company navigating a transformation to the digital world, the executive team has honed the process of managing a portfolio of products. With products that still have some life cycle, the company manages by “pruning,” as CEO Nancy McKinstry notes. Updates might be a little less frequent, and fewer editorial resources might be dedicated. This is considered “harvesting” and has been readily adopted as part of the way in which publishing life cycles are managed. Far more difficult is the challenge of an outright divestiture. McKinstry has instituted a review that “organizes micro markets by category”: Anything growing organically more than 5 percent is considered to be high growth and will continue to be supported; growth in the 2 percent to 5 percent range is considered “maintain”; growth below 2 percent is a candidate for harvest and, failing that, for divestiture.
Who Makes the Exit Decision?
It is unrealistic to expect managers whose careers and future prospects depend on “their” business continuing to put up their hands and suggest that the company kill that business. Indeed, all the skills of increasing efficiency and deepening customer loyalty that are so valuable during the period of exploitation can make a business that really should be a candidate for disengagement look attractive long after its time. Further, many companies fail to effectively aggregate or present information that might lead to questions about a business or division. There seem to be three ways of overcoming this challenge. The first is to set up an ongoing, dedicated team to regularly go through the firm’s portfolio and identify candidates for disengagement or divestiture, as Wolters Kluwer has done. The second is to aggressively and frequently change the management team. The third is for the CEO to drive regular evaluations of what should be in and out of the business’s portfolio, a challenge that Procter & Gamble’s A.G. Lafley defines as “linking the outside to the inside” of a business. As he argues in an HBR article, “only the CEO has the enterprisewide perspective to make the tough choices involved.”
At Wolters Kluwer, a once-traditional publishing company navigating a transformation to the digital world, the executive team has honed the process of managing a portfolio of products. With products that still have some life cycle, the company manages by “pruning,” as CEO Nancy McKinstry notes.
At Yahoo! Japan (a growth outlier company), Makiko Hamabe, head of investor relations, echoes this thought: “Our CEO says that he is his own heaviest user, and as a user he doesn’t want Yahoo! Japan to do something that annoys him. That’s the basic idea.” This connection to the business allows the CEO to drive a relatively dispassionate numbers-based evaluation of what offerings Yahoo! Japan should pursue and which it should abandon. In that company, key reasons for disengagement are when usage and profitability are low, or if a service creates conflicts with other businesses. “For example,” Hamabe says, “several years ago we stopped offering videocast. It was like YouTube in that people can upload videos. But as you know, on YouTube you have a lot of non-licensed unofficial videos. So we have instead a service like Hulu; we call it Yell. It’s also a video service, but the content is authorized.” The videocast business, deemed incompatible with good relations with content producers, was ended.
It’s important to remember that over time, statistically, most businesses lose value. Indeed, in researching their 2001 book Creative Destruction, then-McKinsey researchers Richard Foster and Sarah Kaplan found that as a business ages, its total return to shareholders, relative to its industry, declines systematically. A 2002 HBR article makes a similar point: If you think you have a candidate for divestiture or otherwise ramping down, you should move quickly because the passage of time will rapidly destroy any remaining value.
Here, however, we are contemplating the problem that is sometimes unavoidable: when a business that once created competitive advantage ought to be removed from the corporate portfolio. This can be for any of three reasons. First, you may have concluded, as Netflix has, that your current core offering is becoming obsolete for some reason and you need to transition customers, suppliers, and the organization to some new platform. Second, a business might actually have strong cash flow and be attractive as a going concern, but it no longer fits your strategy. Or, finally, a business or capability may simply be heading into obsolescence.
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