Talking about strategy » core business

Beware divesting core business

Kim Warren — Mon, 18 Jan 2010 11:09:04 +0000

A rare example of clear and useful academic research from Emilie Feldman at Harvard [but treat it with care - see below]. Emilie “investigates “legacy” divestitures, the sale or spinoff of a company’s historical core business. Firms appear to divest their legacy businesses within the context of larger efforts to reshape their identities. I find that operating performance deteriorates in the years following legacy divestitures, and this decline appears to be linked to a loss of intangible resources embedded in the legacy businesses, as well as to the disruption of synergies between legacy businesses and other units within the divesting firms. These results illustrate the challenges associated with divestitures that impact firms’ resources in unexpected ways and shed light on the difficulties firms may experience when they attempt to overhaul their identities.”

Warning – its an academic paper, but get it here. And .. it’s another finding based on answering the wrong question. It’s entirely possible that these divestitures decrease profitability, but increase growth in free cash flow, which is what investors actually value, because the firms immediately start spending to exploit growth opportunities that will deliver future cash flows whilst holding down short-term profitability. It is even probable that the divested core business was making OK returns [ROIC] because it was mature and [a] didn’t justify any spending on growth and [b] could be sold at a good price in a consolidating industry.

Nevertheless, it should give cause to think carefully before buying into a transformation. Remember, strategic transformations are very rare, and even more rarely successful.

Good & bad downturn advice

Kim Warren — Fri, 13 Mar 2009 18:00:56 +0000

I have commented on some of the consultants’ and journals’ advice in earlier posts, so thought I would share what some senior execs think who I’ve been asking in recent events. Here’s just a few …

I asked for two ratings – Useful [no, a little, very] – and Dangerous [no, a little, very] – and allowed people to respond with both if they felt a suggestion was both potentially useful, but also came with dangers. Following are the most common views – with no initial prompting from me! Note that other views were justified in specific cases.

De-layer management

Useless and dangerous in most cases. Most felt it should only to be done in extreme crisis – like danger of bankruptcy.

Consolidate support functions

Possibly useful and not too dangerous, provided it did not distract management from other important tasks.

Redefine your business model

Useless in most cases and dangerous diversion from managing the business.

Save the core at the expense of the periphery

Very useful, and not too dangerous. With prompting, most felt their firms had over-expanded away from their core in the first place.

Buy up cheap assets – or whole businesses

Very useful and not dangerous if current business was not struggling too much.

Pick up good people who become available

Very useful and not dangerous. Most have found it tough to get the people they needed before the crisis, so see this as a great opportunity.

Keep going with all strategic initiatives

Could be useful but also dangerous … most thought they had way too many ‘strategic’ initiatives that should never have been started. Conflicted with the better advice above to focus on the core.