CHAPTER  |  THIRTY

Drucker's Theory of Abandonment

Jack Welch began his twenty-year tenure as CEO of General Electric in 1981. Welch was the youngest CEO in GE's history. This also was the start of his legend as one of the leading CEOs of the twentieth century. When Welch became CEO, the company's market value was about $12 billion. When he left, it was worth more than twenty-five times that figure. GE saw the largest increases in both its sales and its profits under his leadership.

According to Welch, two simple questions from Peter Drucker initiated and helped to propel GE to these amazing accomplishments and to establish his own stature as a business executive of heroic accomplishments. The first question was, “If GE wasn't already in a particular business, would you enter it today?” The second was, “If the answer is no, what are you going to do about it?”

Welch said Drucker's questions led him to shed less profitable and underperforming businesses. His implementation of responses to Drucker's two questions resulted in an order that any GE business that was neither number one nor runner-up in its market, and that had no chance of attaining this status, would be sold or liquidated.^1,2 This freed up resources, which allowed GE to concentrate on businesses that would soon dominate their markets and become hugely successful.

The GE story is a prime example of Drucker's theory of abandonment. He did not originate it during his consulting engagement with GE; rather, it had been his advice given in his book Managing by Results, published in 1964, almost twenty years earlier. Of course, the GE results are also a powerful testimony to Welch's ability to apply Drucker's theory correctly and to implement his own solution for a phenomenal success.³

Drucker's Systematic Process of Abandonment

Drucker's concept of abandonment was so challenging, both psychologically and in real terms, that it had to be instilled at the molecular level of an organization. To move ahead, an organization had to be prepared to abandon everything it had been doing at the same time as it devoted itself to creating something new in order to move ahead. This approach required someone like Welch, with the determination and moral courage to take action, especially since abandonment required action in the face of significant previous success (or what appeared to be success at the time of abandonment). If that weren't enough, the abandonment had to be executed simultaneously with continuous improvement and exploitation of past successes, wherever possible, as well as with innovation.⁴

There was no getting around it. A proposal for a major new effort had to spell out in detail what of the old effort must be abandoned and how this should be accomplished.⁵ No wonder Welch was disparagingly called “Neutron Jack” as he ruthlessly sold off GE companies and forced employees, both workers and managers, to move to areas of the company where they were needed—or to leave the corporation altogether.⁶

Rethinking: The Prelude to Abandonment

In an essay entitled “Really Reinventing Government,” Drucker analyzed the thought that must take place as a preamble to abandonment.⁷ This notion of rethinking should be applied to reinventing anything, including a company's products or policies. It must involve a review of the organization's ongoing programs that require resources of any kind to continue. Drucker recognized that this would mean a long list of activities, programs, or products to examine.

The most successful entities, at the top of the list, should then be given even more resources to further exploit their success. As in the example of GE, these roughly correspond to businesses that are both profitable and the leaders in their markets. Those at the bottom of the list have to be discarded. Those in between might be retained if they showed promise, but if so, they probably need to be modified significantly.

Farewell to Good Intentions

Drucker noted that corporate policies tend to rank programs and activities according to good intentions. That is, a business might be profitable; everyone hopes these profits will increase and the business will grow. This was true for GE's businesses when Welch became CEO. But rather than having good intentions, rethinking ranks all businesses according to performance, both present and achievable.⁸

This ranking is somewhat analogous to the Boston Consulting Group's well-known categorization of businesses into shooting stars, cash cows, question marks, and dogs. However, there is a major difference. Under Drucker, there is no sense in retaining a business, even a cash cow, if its performance does not warrant doing that. The simple question is how high to set the bar.

Abandonment Is Both a Necessity and an Opportunity

During rethinking, the manager conducts categorization. The rethinking prior to abandonment is not just for purposes of constructing a list; it also helps you identify opportunities as products (or businesses, or anything else). Existing businesses, therefore, are divided into three categories:⁹

1. A high-priority ongoing group where there is a significant opportunity to achieve extraordinary results
2. A high-priority group where the opportunity is in abandonment
3. A large group of mediocre items for which neither efforts to exploit nor abandonment are likely to lead to significant results

As noted previously, whenever a business or operation is abandoned, this frees up resources: money, personnel, facilities, equipment, and time to develop new opportunities or to take advantage of older ones with higher potential. Drucker called this sorting into areas of priority “push priorities.” He noted that they were easy to identify: Push priorities are opportunities where the results have the potential to pay back their investments many times over.¹⁰

There are other advantages to abandonment, too. Psychologically, abandonment makes it acceptable to search for and find replacements for former businesses or products. You don't have to confront the sacred cow. According to Drucker, abandonment also renders an “existing business entrepreneurial”—one that can “work today on the products, services, processes, and technologies that will make a difference tomorrow.”¹¹ Finally, abandonment facilitates change management. Extending Drucker's principle that the best way to predict the future is to create it, the most effective way to manage change is to create change yourself.¹²

Finding the Right Candidates for Help or Abandonment

Any rethinking list, or more extensive analysis in a systematic abandonment review process, will result in pointing to certain areas that deserve priority attention. These are the push priorities mentioned in the last section and they include:

• Identifying tomorrow's breadwinners and sleepers. Breadwinners are those candidates who routinely produce positive benefits. Sleepers, which Drucker termed “Cinderellas,” are those candidates who have hidden potential.
• Making development efforts to replace tomorrow's breadwinners, “the day after tomorrow.”
• Recognizing important new knowledge and distribution channels.
• Reducing high support costs, high control costs, and waste.

The candidates for help are usually obvious—they need resources to take advantage of a potential that clearly exists. Examples of these would be Welch's profitable GE businesses that were market leaders. The candidates for abandonment are equally obvious, including those for which investment is primarily managerial ego, unjustified specialties, unnecessary support activities, waste that can be almost effortlessly dispensed with, and, of course, yesterday's breadwinners. Finally, whenever the cost of incremental acquisition is more than one-half the probable return, abandonment should be seriously considered.¹³

Drucker summarized a lifetime of observation of the abandonment concept by stating three cases where “the right action is always outright abandonment.”¹⁴

1. If a product, service, process, and so on still has “a few good years left”
2. If the only argument for keeping it is that it is “fully written off”
3. If a new candidate is being stunted or neglected because an old, declining product is being maintained

The Criterion for Abandonment

Drucker provided no criteria for abandonment because the criteria are almost unlimited. However, he did provide some clues. For example, in decision making, Drucker recommended looking at what he called “boundary conditions.” These are specifications regarding intended objectives, minimal attainment goals, and other considerations that must be satisfied for an organization to remain viable. By inference, these boundary conditions are markers for the development of criteria for abandonment.¹⁵

Drucker added that budgeting, the most widely used management tool, provides a forum for evaluating and analyzing the existing situation. Thus, budgeting should be used along with other quantitative and non-quantitative measurements and controls in reviewing which candidates qualify for abandonment.

Implementing Abandonment

Of course, a plan for abandonment should be complete with specific objectives; numbers of people needed with various capabilities; and the tools, money, information, and other resources required for completion of the implementation, along with unambiguous deadlines for reaching certain stages. Drucker noted that this “how” of abandonment was of no less importance than the “what.”

Abandonment is not without its cost. For example, Welch's abandonment of some GE businesses required displacement of more than 100,000 employees, as he discarded underperforming businesses and acquired new ones. However, the abandonment process Welch initiated ultimately benefited the remaining employees, GE's customers, its stockholders, and most importantly, society. The latter is true because society is hurt when it continues to allocate workers and managers to no longer fully productive activities, but it is benefited when these valuable resources are reallocated to the best possible opportunities in an organization.