Shrink-to-grow model is a portfolio strategy that involves divesting parts of a business that are underperforming, unattractive, or unrelated to the core activities, and reinvesting the freed-up capital in more profitable and promising segments. The goal is to achieve consistent and sustainable growth by focusing on businesses that have a competitive advantage and a strong market position.
According to McKinsey, shrink-to-grow companies delivered a median excess TSR of 4 percentage points in their study of the 3,000 largest companies by revenue. However, this strategy requires a disciplined approach to resource allocation and a supporting operating model that enables a successful transition from spin-off to a higher growth future.
Some examples of companies that have used the shrink-to-grow model are:
– An emerging-market industrial company that divested two business units—one with small scale and another with limited upside—and made acquisitions to launch new businesses in sectors with strong tailwinds.
– A global consumer goods company that sold off its noncore food brands and invested in its personal care and household segments, which had higher margins and growth potential.
– A US-based technology company that spun off its legacy hardware business and focused on its cloud computing and artificial intelligence services, which offered more value creation opportunities.
How to implement the shrink-to-grow model?
Shrink-to-grow model is a portfolio strategy that involves divesting parts of a business that are underperforming, unattractive, or unrelated to the core activities, and reinvesting the freed-up capital in more profitable and promising segments. The goal is to achieve consistent and sustainable growth by focusing on businesses that have a competitive advantage and a strong market position.
To implement this strategy, you need to follow these steps:
– Identify the businesses that are dragging down your performance, attractiveness, or coherence. You can use criteria such as revenue growth, profitability, market share, strategic fit, synergies, and value creation potential.
– Evaluate the best exit options for these businesses, such as selling them to a strategic buyer, spinning them off to shareholders, or carving them out as a separate entity. You can use criteria such as valuation, speed, complexity, tax implications, and stakeholder reactions.
– Execute the divestiture process with diligence and transparency, ensuring that you communicate clearly with your employees, customers, suppliers, investors, and regulators. You also need to manage the operational separation of the divested businesses, such as transferring assets, contracts, systems, and people.
– Reinvest the proceeds from the divestiture in your core or adjacent businesses that have higher growth and profitability potential. You can use criteria such as market attractiveness, competitive position, strategic fit, synergies, and value creation potential.
– Monitor and evaluate the results of your portfolio reshaping, such as revenue growth, profitability, market share, return on invested capital, and shareholder value.
Some examples of companies that have used the shrink-to-grow model are:
– An emerging-market industrial company that divested two business units—one with small scale and another with limited upside—and made acquisitions to launch new businesses in sectors with strong tailwinds.
– A global consumer goods company that sold off its noncore food brands and invested in its personal care and household segments, which had higher margins and growth potential.
– A US-based technology company that spun off its legacy hardware business and focused on its cloud computing and artificial intelligence services, which offered more value creation opportunities.