Monday, July 09, 2018

Shrink to Grow: Why Don't More Companies Adopt This Strategy?

As we witness the breakup of GE, a thought comes to mind regarding a rarely used corporate strategy - namely, the "shrink to grow" approach.   Many years ago, I went to work for General Dynamics after graduation.  When I began working there, General Dynamics was #44 on the Fortune 500 list of the largest American firms by revenue.  However, the company had been hit by acquisitions scandals and a string of very disappointing financial results.  Then the firm witnessed the fall of the Berlin Wall and the collapse of the Soviet Union, and the US government began to shrink defense spending in key areas affecting the firm's businesses.  The company's leadership knew that consolidation needed to occur in the defense industry.   General Dynamics sold many of its major businesses, including its largest business unit (which manufactured the F-16 fighter jet) as well as smaller units such as its Cessna Aviation division.  

By the mid-1990s, General Dynamics had two major divisions remaining:  one unit produced nuclear submaries, and other manufactured tanks and other armored vehicles.   In 1996, General Dynamics ranked only #350 on the Fortune 500 list.  In the years that followed though, the company began to grow again, building on these two remaining platforms.  It acquired Bath Iron Works, for instance, to expand its shipbuilding business beyond submarines (Bath produced destroyers).   It made a series of other acquisitions as well.  By 2005, General Dynamics had risen to #115 on the Fortune 500 list.   Moreover, the company became highly profitable and delivered strong shareholder returns in this era.   

Why don't more companies adopt a "shrink to grow" approach when experiencing poor financial results and/or other crises/scandals?   Many executives hate the thought of shrinking, of leading a much smaller organization.   They focus on the top line (revenue) and market share, rather than thinking about how to position the organization to thrive in the long run.   As we watch GE shrink now, perhaps we will see that it positions the organization to succeed and grow again over time.  More companies should consider this strategic approach. 


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