Love Your Dogs?
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A current Strategy+Business article, Love Your Dogs, suggests that conventional wisdom may be wrong when it dictates that resources should be focused on a businesses 'stars' while leaving 'dogs' to starve or hiving them off. (The terms, of course, come from Boston Consulting Group's famous model that divides businesses into stars, question marks, cash cows and dogs.)
This issue is a particularly troublesome topic in many professional service firms, where practice areas that may have commoditized to the point of marginal profitability are not faceless business units but one's partners, colleagues and, frequently, friends. So facing up to the need to starve or divest dogs is something that many firms simply don't have the stomach for. The result is that they are tolerated and sometimes (in the name of 'fairness') even invested in as much as high growth areas of the firm.
S+B's article does fly in the face of conventional wisdom. To illustrate, some years ago Berkshire Hathaway owned a low-end, low margin textile business. The people came to Warren Buffett and told him that a new kind of loom had been invented, that would do twice as much work as the old ones that they were using. Buffett's retort was:
"Gee, I hope it doesn't work because if it does I'm going to close the mill."
And he meant it. He wasn't going to invest new capital in a lousy industry with sub-standard returns, when that money could be invested in other, more promising areas. The mill employed many people, of course, and closing it would cause hardship, but capitalism often needs to be brutal in order to work. It's a little like "survival of the fittest" in the wild.
So, if you keep your mills open to protect the people and in the name of collegiality, well and good, but don't justify that decision on economic terms.
Back to the S+B article: In the second paragraph, the real story emerges. It appears that the authors are not talking about "real dogs," but about businesses that are more promising than conventional accounting methods make them appear to be. Maybe stars that look like dogs? This is a very different argument. But then the paragraph finishes with the statement: "The way to thrive is to love your dogs." Nope, lost me again. I'm a great believer in Jack Welch's dictum that if you can't be number 1 or 2 in the market, then reconsider your decision to be in that business. The only real reason to keep underperforming practice areas in a firm, I believe, is if they are critical to the performance of the firm's primary practice areas. This does not include commercial law firms maintaining a family law practice "in case the CEO of a major client needs a divorce." Baloney! In every sophisticated legal services market in the world, pressure on the mid market and the high street firms is pushing 'general service firms' into oblivion.
The S+B article concludes that:
-Fixing your dogs can yield unexpected levels of shareholder value
-Improving operations is an important management lever for adding shareholder value
-Buying and fixing someone else's dogs will produce more shareholder value than buying stars.
Yes, okay, all well and good. The third bullet in particular raises the important point that one firm's dog may well be another firm's star. This happens as a service becomes commoditized and so less attractive to the top tier firms that are not geared to cost efficiencies, so when clients become more price sensitive then other firms that can offer a similar service at a lower cost become more competitive. See this piece about the S-Curve for a more detailed explanation of how this works.
It is undeniable that increased investment may make dogs produce higher returns, BUT two very important questions prevail:
1)Is investing in the 'dog' practice area or service the best use of the resource (time, effort, money,) or will applying it elsewhere in the firm yield a higher return?
2)Is the 'dog' practice area or service really a dog, or does it have real potential that the firm's current performance evaluation system overlooks?
Both these questions require more than just superficial scrutiny. Today's market is far too competitive for resources to be squandered on the 'textile mills' in the firm.
Comments, as always, are most welcome. Please post below.