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.

Please be careful about this kind of journalistic hype! There are plenty of less-thoughtful folk out there who will just pick up the headlines and set off doing dumb things urged on by discussions like this.
‘Transformation’ is about the most exaggerated and over-sold concept in strategy these days. The reality for most organizations is that they should – boring though it may sound – just press on with continuous improvement and careful business development. Getting their top management worked up about transformation risks distracting them from the critical task of actually running the business and building strong performance.
Many examples that get this kind of hype are either glaringly obvious or modest adjustments to existing business. Netflix is hardly being a strategic genius in seeing it needs to deal with streaming, and plenty of companies see benefits in focusing on specific niches without claiming it’s a ‘total transformation’.Â
Unfortunately, a tranformational approach to an otherwise decent business can do extreme damage – anyone fancy selling a few sub-prime mortgages? .. how about another Enron? .. or maybe eBay should hook up with Skype and transform the way their buyers and sellers transact?

Helpfully, the article goes on to offer tactics that, when used together, seem to make transformations more successful, depending on the purpose of the effort.

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Apple’s development of iTunes of course features strongly in demonstrations of the concept, as in Christensen et al in HBR. Music was going digital, so what a great idea to give consumers a neat device to play music that you had to buy through a central online store. Question is – what on earth were the music production companies doing – sleeping?!

I like Coldplay, who are signed up with EMI, so what do I actually want? – just the music by the band, produced by the company. So surely I just key ‘Coldplay’ into Google which takes me to an EMI web-page where I can sample a track and buy it? Being quite bright, I might even just key ‘www.emi.com/coldplay‘ into my browser and get the same. No chance! [try it for yourself, the URL is actually http://www.emi.com/page/emi/Discography_UK/0,,12641~931488,00.html].

So I find what I want – now can I buy it? no. Why not? Why does there have to be anyone else involved in this transaction? I quite understand that 10 years ago the record companies wanted to protect their CD sales, but surely the writing was on the wall for that business model years ago. It looks like the smart players in this situation were the bands themselves, who realised they could offer something that neither Apple nor the record companies could take from them – live shows, worth millions and just great for the fans. Recorded music for the bands now looks like a promo give-away to drive demand for tickets that will make them very, very rich.

Can the record companies still take back control of their own product? Maybe – and maybe they can exploit Apple to do so. There’s plenty of potential added-value content – extended length tracks, video and so on – so Apple could keep selling the basic content and the record companies develop the facility to sell direct to us all the really good stuff. My friend in the industry tells me that they have been able to do much of this for over 5 years, but instead of taking charge many have instead stumbled from crisis to crisis as Apple at one end and the bands at the other have stolen all the value.

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