Strategically, it is just as important to formulate what to stop doing as it is to formulate what to start doing. In Rita McGrath’s book, The End of Competitive Advantage, she argues for healthy disengagements of businesses.
It is a case of recognizing decline as soon as you can and appropriately disengaging from the business in a way that conserves resources and supports your strategic direction.
Signs of decline can easily be spotted and usually long enough before it creates a crisis. But as McGrath identifies, the measurements for decline are not the usual routine operational measurements. She lists the categories of declines as:
- Diminishing Returns to Innovation – next generation innovations start to be smaller and smaller improvements in the user’s experience
- Increasing Commoditization – alternatives start to be increasingly acceptable to potential customers
- Diminishing Returns to Capital Employment – growth rates in certain portfolio offerings begin to perform below an acceptable target
Once a portfolio business becomes a candidate for shifting resources or divestiture, you have to act quickly to conserve the value as it declines. McGrath identifies three reasons a business should be removed from the corporate portfolio:
- Capability-Offering is core – the offering is heading for obsolescence, but customers, suppliers, and the organization need to be transitioned to a new platform or service offering
- Capability-Offering has value, but not for us – divest for reasonable prices
- Capability-Offering is in decline – optimum pay for customer support while decreasing investment
Of course, to complicate each of these reasons and actions is the element of time. If there is relatively little time pressure, then the delineated approach can work in a deliberate fashion, but if time pressure exists, the response becomes more urgent. A migration becomes a divestiture, divesting for reasonable prices become bargain prices, and continuing support becomes transitional in an end-game.
To equip your business to prune in a healthy manner, McGrath recommends that you identify the warning signs of decline, create metrics to highlight the import, and once the decision for disengagement has been made, pick the appropriate approach in accordance with value to the business, the reason for decline, and the pressure of time.
Pruning your business is an important on-going strategic action for businesses who desire to build and exploit transient competitive advantages.
