Bias busters: Pruning projects proactively
Companies hang on too long to underperforming
assets. Continual pruning can help them avoid significant losses.
Despite their best intentions, executives fall prey to cognitive and organizational
biases that get in the way of good decision making. In this series, we
highlight some of them and offer a few effective ways to address them.
Pruning projects proactively
The dilemma
You’ve seen it too many
times: your company has a number of projects that are underperforming or
business units that just won’t die. Much of the time, they linger because of
emotional or legacy attachments that executives have toward specific projects
or parts of the business. Rather than pull back when there are signs of
significant financial or operational weakness, individuals and teams are
inclined to escalate their commitment to losing courses of action. For these
executives, hope springs eternal.
The research
The tendency to hang on
too long is a common phenomenon. A range of studies reveal that senior
executives are more willing to invest in divisions they previously led than in
emerging opportunities; and both individuals and teams tend to overinvest in
the founding business within a multibusiness company. Additionally, a
close examination of asset distribution and performance in both cash-needy and
self-sufficient multibusiness and stand-alone US companies is illustrative: a
significant percentage of assets in both types of companies are underperforming
(exhibit).
Exhibit IN THE ORIGINAL ARTICLE
The remedies
There are two effective
techniques for understanding when to hold on to an asset and when to let it go.
Change the burden of
proof. One energy
company counterbalanced executives’ natural desire to hang on to
underperforming assets with a systematic process for continually upgrading the
company’s portfolio. Every year, the CEO asked the company’s corporate-planning
team to identify between 3 percent and 5 percent of the company’s assets that
could be divested. The divisions could retain any assets placed in this group,
but only if they could demonstrate a compelling turnaround program for them.
The burden of proof was on the business units to prove that an asset should be retained rather than just assume that it should.
Categorize business investments. Some companies have taken a
ranking approach: they assign existing businesses to one of three groups—grow,
maintain, or dispose—and follow clearly differentiated investment rules for
each group. Depending on the company and industry, the rules might involve
thresholds for growth or profitability or a reexamination of the businesses’
competitive position. The rules should come from the corporate center, and they
should be transparent to all in the organization, so that resource-allocation
decisions are based on business realities rather than corporate politics. Even
in this scenario, executives need to explain why existing businesses should be
grown or maintained rather than disposed of.
By deploying both
techniques, companies can more easily—and more objectively—cull underperforming
assets and business units from their portfolios.
By Tim Koller, Dan Lovallo, and Zane Williams
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/bias-busters-pruning-projects-proactively?cid=other-eml-alt-mcq-mck&hlkid=195f5d81aaf44840a87f05275b8423e5&hctky=1627601&hdpid=95601435-b002-43a7-b622-194f26bc2565
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