As a strategy management consultant, I am frequently asked, “What is the best way to go about developing a strategy for growth?” People are surprised when I tell them that the first step is deciding what business to get rid of.
My most successful clients understand that the first step in developing a growth strategy is not deciding where and how to grow. It is deciding what business to abandon. This counterintuitive truth, first described by Peter Drucker decades ago, still holds true today. Drucker insists that a business must have a “systematic policy” to get rid of the outgrown, the obsolete and the unproductive. Few people would argue with that. However, Drucker further recommends abandoning “yesterday’s breadwinner before one really wants to, let alone has to.” It is this last part with which many managers struggle the most. After all, why would you possibly want to abandon business that is still generating revenue and profit?
Walter Isaacson’s biography of Steve Jobs illustrates the principle of purposeful abandonment well. When Steve Jobs rejoined Apple in 1997, in order to return the company to growth, he started by cutting the bulk of Apple’s product line-up, reducing it to only four products. Jobs made purposeful abandonment a part of standard practice. When Apple managers aired concerns about how the iPhone would cannibalize sales of the iPod, Apple’s cash cow at the time, Jobs would hear nothing of it and forged ahead. Jobs similarly dismissed concerns of how iPad would hurt laptop sales.
Isaacson contrasts Apple’s practice to Sony’s. Sony regularly dismissed new product ideas out of hand if those products might compete with existing product lines. The result over the years? Stagnation, decline, moving from industry leader and trendsetter to industry has-been. In the 1990s, people would go to the Sony Showroom in Ginza to see and handle all the new, exciting Sony products. Many people at the time found Sony’s innovative products simply stunning. Today, for that experience, people go to the Ginza Apple Store, which is just down the street.
Companies tend to cling to business and practices that made them successful. They continue to exploit them even as their potential declines. In some cases, this is because they are part of the company’s identity.
When I ask the managers of a highly successful Japanese chemical company what business the company is in, they invariably respond, “We are a manufacturer,” and extoll the virtues of their Japanese factories.
Manufacturing is in their blood. Like many Japanese companies established just after World War II, manufacturing brought them their success. Saying that they are anything else would be tantamount to betrayal. However, those once cutting-edge factories are these days turning out products that are under increasing attack from lower cost alternatives of equivalent quality made overseas.
When I ask the same managers which of their products are the most successful, have the highest profit margin, and most potential for future growth, I get a very different kind of response. They tell me about products based on patented ingredients they develop in their own lab. They talk about how they use their global network to sell these to major global brands. None of these products is made in their own factories. Rather, the manufacturing is outsourced.
So, is this chemical company really a manufacturer, or has it become a technology innovation company with a strong marketing arm? To be sure, the products coming form their aging factories are still the “breadwinners,” but how much longer can the company continue to exploit this business before they are simply forced out of it?
Imagine how the answer to these questions drive strategy. If they cling to the view that “We are a manufacturer,” strategic choices will tend to focus on measures that enhance their eroding position as a manufacturer in order to better address an increasingly crowded and commoditized market. This company has made such choices, some with disastrous results.
However, if they view themselves as an innovation and marketing company, they may begin to let go of their manufacturing business in favor of enhancing their R&D and marketing strengths.
Identities are unfortunately difficult to discard. It is difficult to abandon yesterday’s breadwinner while it is still making money. It often it takes years of continuous decline and a shocking realization that it isn’t going to get better before managers feel compelled to act. Even then, rather than abandoning old business for something new, I have seen companies scramble and develop desperate measures to somehow revive their moribund core. Such measures are frequently futile.
Companies need to regularly clear out old business to make room for new growth, even business that may still be profitable. We need to do this without hesitation or regret. It needs to be a part of our thinking, our values and our culture. It needs to be the first step in developing any strategy for growth.
So, what about your business? Do you cling to business that maybe should be abandoned? Is today’s business holding you back from developing tomorrow’s ideas and products, seeking tomorrow’s new markets and new customers, growing value beyond anticipation and expectations?
The next time you start to think about growth strategy, what will you let go?