Got a sucessful product or line of business? Even if your profits are strong you might want to consider getting rid of them. Here's why.
In 1981, Jack Welch began his twenty year tenure as CEO of General Electric and his legend as one of the leading CEOs of the 20th century. He was also the youngest CEO in GE’s history and the greatest of both sales and profit increases came under his leadership. When he became CEO the company’s market value was about $12 billion. When he left, it was worth more than 25 times that figure.
According to Welch, two simple questions from Drucker helped propel GE to these amazing accomplishments. The first question was, "If GE wasn’t already in a particular business, would you enter it today?" Then Drucker asked a follow-up question. "If the answer is no, what are you going to do about it?" According to Welch, Drucker’s questions led him to shed less profitable and underperforming businesses which streamlined GE into its extraordinary success. Welch mandated that any GE business that was neither number one nor runner-up in its market, would be sold or liquidated.
These two questions are examples of Drucker’s theory of abandonment, which he discussed first in his book, Managing by Results in 1964, almost twenty years earlier before his discussion with Welch and a powerful example of Welch’s successful application of Drucker’s theory.
Should the 20th Century’s most Influential Car have been Abandoned?
Henry Ford’s Model T was named the world’s most influential car of the 20th century. No doubt it was, as no less than 15 million Model T’s were built between 1908 and1927. Although there were minor changes over this nineteen year period, the Model T was primarily characterized by a stubborn lack of change and continuance of design. This was exemplified by Ford’s well-known instructions to his staff that Ford’s customers could have any color they wanted so long as it was black.
Challenged by rival GM which had begun to provide a variety of designs and options, Ford replied that the Model T design "was already correct" and therefore would not be altered. Barely profitable at the end of its career, the Model T could no longer compete with more modern offerings. Ford’s failure to abandon this successful product much earlier cost his company’s leadership to General Motors for forty years, early confirmation of Drucker’s claim that abandonment of a successful product at the right time is a necessity whether the product was "already correct" or not.
The Systematic Process of Abandonment
Drucker’s concept of abandonment comes from the dynamics of knowledge advancement and requires a single imperative for every organization: management of change has to be instilled at the cellular level, that is, in the organization’s very structure. He saw that logically this meant that an organization must be prepared to abandon everything it does at the same time that it must devote itself to creating the new. Abandonment must simultaneously be executed along with continuous improvement, exploitation of past successes and innovation. In fact, he recommended that a proposal for a major new effort must always spell out what old effort must be abandoned.
Rethinking the Preamble to Abandonment
In an essay on his thoughts on "re-thinking re-inventing government," Drucker considered rethinking as a preamble to abandonment. The notion of rethinking is as easily applied to re-inventing anything, including a company’s products or its policies. Drucker said that rethinking should result in a long list of activities, programs, or products to examine. Those at the top of the list should be strengthened. That is they should be given even more resources to exploit their success. They would roughly correspond to GE’s business which were both profitable and the leaders in their markets.
Those at the bottom of the rethinking list should be dumped. Those in between should be refocused. Drucker noted that conventional policy making ranked programs and activities according to good intentions. This was much as was true for GE’s businesses when Welch became CEO at GE and Drucker asked his now famous questions. The same can be said for retention of the "already correct" Model T when technology had changed significantly over time. But rather than good intentions, correct rethinking ranks all on the list according to performance.
Why Abandonment is not only a Necessity, but an Opportunity
During rethinking, the manager conducts categorization which will identify opportunity. Like "The Sorting Hat" in the Harry Potter books which automatically categorizes new students and sends them to different academic houses of magic in the fictitious Hogwarts School of Witchcraft and Wizardry, the rethink list categorizes and sorts products (or businesses, or anything else) into three categories:
- A high priority ongoing group where there is a significant opportunity to achieve extraordinary results
- A high priority group where the opportunity is in abandonment
- A large group of mediocre items in which neither efforts to exploit or abandon are likely to lead to significant results
If something is abandoned, this frees up resources: money, personnel, facilities, equipment, and time for necessary resources for new opportunities, or to take advantage of older ones with higher potential. Drucker called this sorting into areas of higher priority "push priorities." He said that they were easy to identify. Push priorities are opportunities where the results, if successful, produce their costs many times over.
In addition there are other advantages to abandonment. Psychologically, it stimulates the search for a replacement to take the place of an old successful product which is no longer present. According to Drucker abandonment is also necessary to render an "existing business entrepreneurial" that is "to work today on the products, services, processes, and technologies that will make a difference tomorrow." Finally, abandonment even facilitates change management since the most effective way to manage change is to create change yourself.
Candidates for Priority for Help or Abandonment
Any rethinking list or more extensive analysis in a systematic abandonment review process will result in certain areas which deserve priority for our attention. These are the push priorities we spoke of earlier and include:
- Tomorrow's "breadwinners" and "sleepers." Breadwinners are those candidates that routinely produce positive benefits. "Sleepers," which Drucker also termed "Cinderella’s," are those that have hidden potential if given a chance
- Development efforts to replace tomorrow’s breadwinners, the day after tomorrow
- Important new knowledge and distribution channels
- Reducing high support costs, high control costs, and waste
The candidates for help are obvious --- they need resources to pay off a potential which clearly exists. Those would be Welch’s profitable businesses that were market leaders. The candidates for abandonment are equally obvious including where the investment is primarily managerial ego, unjustified specialties, unnecessary support activities, waste that can be almost effortlessly dispensed with, and of course yesterday’s breadwinner. Finally Drucker noted that whenever the cost of incremental acquisition is more than one-half of the probable return, abandonment should be seriously considered.
Toward the end of his career, Drucker summarized a lifetime of observation of the abandonment concept by stating three cases where he could barely contain himself and boldly stated that "the right action is always outright abandonment."
- If a product, service, process, etc. still has "a few good years left."
- If the only argument for keeping it is that it is "fully written off"
- If a new candidate is being stunted or neglected because an old, declining product, or whatever, is being maintained
The Criterion for Abandonment
Drucker provided no specific criteria for abandonment. This is because the potential items that might usefully be abandoned and the criteria for their selection are almost unlimited. However, he did provide clues. For example in decision making he recommended looking at what he called "boundary conditions." These are specifications regarding intended objectives, minimal attainment goals, and other conditions that must be satisfied. He felt that clear thinking regarding the boundary conditions was needed to know when something must be abandoned, and by inference their understanding was also necessary for development of criterion for abandonment.
He also commented that budgeting, the most widely tool of management, provided a forum for evaluating and analyzing the existing situation. Budgeting should be used along with other measurements and controls as well as organized information needed to be reviewed as candidates for abandonment were sought. It follows that quantitative criteria for deciding what should be eliminated and what should remain could then be determined.
The Abandonment Plan
Of course a plan complete with specific objectives, numbers of people of various capabilities needed, along with the tools, money, information and other resources necessary for completion of the abandonment along with unambiguous deadlines is needed. Drucker noted that this "how" of abandonment was of no less importance than the "what. This was also important because abandonment was not without cost. Welch’s abandonment at GE required the displacement of more than 100,000 employees as he discarded underperforming businesses and acquired new ones. It was also the source of the disparaging nickname given him of "Neutron Jack." However the abandonment ultimately benefited employees and customers as well as stockholders as well as society.
Adapted from the forthcoming book Drucker on Marketing (McGraw Hill, 2012)