When a similar focus on security exists but
within a less stringent context, a company has the
option to separate in order to provide the desired
service security and seek growth opportunities
elsewhere. When security and short-term gains
are the priority, some continued use of legacy
assets is unavoidable, as diversifying into new
ventures will not immediately fulfil either of the
two objectives. However, when the prevailing
context is less restrictive companies should
consider employing a divide and conquer strategy, separating themselves into two distinct
parts, where one delivers the near-term supply
security, dividends or employment targets and
the other is free to pursue diversification for
long-term growth, unhindered by the needs of the
existing legacy assets. Organisationally, this
requires a clear split between the two different
parts of the company. Care must be taken to
carry over any existing organisational strengths
into the appropriate areas of the business.
Innogy was separated from RWE for these
reasons. Although it became clear by 2011 that
both lignite and nuclear generation were declining in relevance, RWE maintained them to preserve short-term cash flows and to try and recoup
as much of its sunk investment in these assets as
possible. Innogy was created as a separate subsidiary that was not burdened with any legacy
assets and was free to innovate and invest in
growing renewable markets.
A binding context can prevent a company
from moving away from its traditional assets,
even when the primary motivation is for
long-term growth—in such scenarios, a focus on
efficiency in core areas and expansion in niche
markets is a sensible response. When regulatory
or capital constraints are tight, companies may
not be able to divest their legacy assets or
effectively invest in new areas. To drive growth
in this scenario, companies can focus on
streamlining their core functions to maximise
efficiency and squeeze up margins. Alternatively,
they can aim to develop within smaller niche
markets where lower capital investments may
still be sufficient to generate decent returns. This
type of strategy is implemented by forming agile,
decentralised market units that can respond
quickly to the unique and often changing circumstances of different niche markets and ensure
that the core business stays as relevant and lean
as possible. Portfolio optimisation is also an
important step to ensure that all business areas
are aligned, and central functions are implemented effectively.
Royal Mail found itself in this situation in
2013. It was limited by tight capital constraints
after several years of losses and was seeking to
generate long-term profit and growth. It began a
programme of intense cost-cutting that returned
the company to profitability despite little revenue
growth, and it started to make small investments
in other logistic areas and geographies to gain a
foothold in potentially long-term growth
markets.
If the motivation is for long-term growth and
the context is non-restrictive, a transformative
strategy can be adopted, although this comes
with higher risk. When long-term growth is the
primary motivation, investment into new areas
becomes a priority as legacy assets will shrink
considerably as structurally lower prices and
greater technology disruptions set in. Companies
facing this situation may seek to diversify
aggressively and shift to new markets or incorporate new technologies. However, such extreme
change comes with inherent risk, which makes
the outcomes for supply security, employment
and profitability uncertain. To adopt such a
strategy effectively, companies should develop
an organisational structure that is flatter and has
more divisional autonomy to facilitate fast
response to the needs of different business areas.
It is also important to strengthen core capabilities
across the group to maximise synergies wherever
possible, especially if elements of the current
business can provide a competitive advantage in
new areas (Fig. 17).
Both Deutsche Post and DONG Energy are
examples of companies that have undergone
extreme transformations to preserve long-term
profits. Deutsche Post used its large internal cash
flows to invest heavily in other logistic areas and
was flexible with its organisational structure to
maximise synergies across its rapidly expanding
business areas. DONG Energy transformed its
68
W. Xiaoming et al.
within a less stringent context, a company has the
option to separate in order to provide the desired
service security and seek growth opportunities
elsewhere. When security and short-term gains
are the priority, some continued use of legacy
assets is unavoidable, as diversifying into new
ventures will not immediately fulfil either of the
two objectives. However, when the prevailing
context is less restrictive companies should
consider employing a divide and conquer strategy, separating themselves into two distinct
parts, where one delivers the near-term supply
security, dividends or employment targets and
the other is free to pursue diversification for
long-term growth, unhindered by the needs of the
existing legacy assets. Organisationally, this
requires a clear split between the two different
parts of the company. Care must be taken to
carry over any existing organisational strengths
into the appropriate areas of the business.
Innogy was separated from RWE for these
reasons. Although it became clear by 2011 that
both lignite and nuclear generation were declining in relevance, RWE maintained them to preserve short-term cash flows and to try and recoup
as much of its sunk investment in these assets as
possible. Innogy was created as a separate subsidiary that was not burdened with any legacy
assets and was free to innovate and invest in
growing renewable markets.
A binding context can prevent a company
from moving away from its traditional assets,
even when the primary motivation is for
long-term growth—in such scenarios, a focus on
efficiency in core areas and expansion in niche
markets is a sensible response. When regulatory
or capital constraints are tight, companies may
not be able to divest their legacy assets or
effectively invest in new areas. To drive growth
in this scenario, companies can focus on
streamlining their core functions to maximise
efficiency and squeeze up margins. Alternatively,
they can aim to develop within smaller niche
markets where lower capital investments may
still be sufficient to generate decent returns. This
type of strategy is implemented by forming agile,
decentralised market units that can respond
quickly to the unique and often changing circumstances of different niche markets and ensure
that the core business stays as relevant and lean
as possible. Portfolio optimisation is also an
important step to ensure that all business areas
are aligned, and central functions are implemented effectively.
Royal Mail found itself in this situation in
2013. It was limited by tight capital constraints
after several years of losses and was seeking to
generate long-term profit and growth. It began a
programme of intense cost-cutting that returned
the company to profitability despite little revenue
growth, and it started to make small investments
in other logistic areas and geographies to gain a
foothold in potentially long-term growth
markets.
If the motivation is for long-term growth and
the context is non-restrictive, a transformative
strategy can be adopted, although this comes
with higher risk. When long-term growth is the
primary motivation, investment into new areas
becomes a priority as legacy assets will shrink
considerably as structurally lower prices and
greater technology disruptions set in. Companies
facing this situation may seek to diversify
aggressively and shift to new markets or incorporate new technologies. However, such extreme
change comes with inherent risk, which makes
the outcomes for supply security, employment
and profitability uncertain. To adopt such a
strategy effectively, companies should develop
an organisational structure that is flatter and has
more divisional autonomy to facilitate fast
response to the needs of different business areas.
It is also important to strengthen core capabilities
across the group to maximise synergies wherever
possible, especially if elements of the current
business can provide a competitive advantage in
new areas (Fig. 17).
Both Deutsche Post and DONG Energy are
examples of companies that have undergone
extreme transformations to preserve long-term
profits. Deutsche Post used its large internal cash
flows to invest heavily in other logistic areas and
was flexible with its organisational structure to
maximise synergies across its rapidly expanding
business areas. DONG Energy transformed its
68
W. Xiaoming et al.