Last Updated Nov 3, 2009 5:44 AM EST
The Chancellor of the Exchequer is breaking up three of the recently nationalised banks. Lloyds TSB, RBS and Northern Rock, now catchily renamed BankCo, will be spinning off parts of their existing operations to the highest bidder.
The Chancellor is responding to pressure from the European Commission, rather than following his own value-maximising strategy, and the sales will reverse the general trend of acquisition and consolidation that has characterised the banking and many other industries.
But breaking up a business can be a highly effective way of driving growth. Far from signalling the end of a business, splitting a company into more coherent entities can be the catalyst for future success.
Walgreen's became the largest drugstore chain in the US throughout the 1980s and 1990s (a position it has since given up to CVS) and outperformed the stockmarket by a factor of 15, only after it had disposed of 500 restaurants and a food service business. To succeed, it first needed to shrink and to focus.
Even more famously, in the 1980s Jack Welch, the CEO of General Electric, stated that each business unit must be either number one or two in its market, or it would be sold. By following through on this vision, GE was able to direct investment to its highest potential businesses, such as its emerging star, GE Finance.
Here are four value-driving benefits from breaking up a business:
- Increase your focus on your core business. In his book, Unstoppable, Chris Zook tells how Bausch & Lomb lost its market leadership in contact lenses to Johnson & Johnson as a result of misguided moves into dental, skin and hearing products. It is easy to assume that your core business can carry on without too much attention, but that is rarely the case.
- Drive innovation. Mike Harris, founder of First Direct and Egg banks, once told me that large organisations that are truly innovative are remarkable and few. Yes, they do exist, but smaller companies drive most true innovation. Today's winners in our mature and fast-moving markets are companies that offer distinctive differentiation, not simply economies of scale.
- Get rid of loss-making activities. The best way to make more profit is to stop making losses. Businesses should periodically dispose of brands and businesses that are either under-performing or no longer fit with the business's capabilities, in order to concentrate on those with the highest returns and greatest potential.
- Create a simpler organisation. Large businesses are inherently complex, but many organisations make the situation worse with unnecessary management layers, fudged decision rights and accountabilities and arcane governance procedures. Let's face it, the banks got into trouble in the first place because their leaders simply didn't understand the risks the businesses were taking.
What's your view? Is your organisation too complex to really drive market-leading growth?