As the dust settles on J&J’s recent separation of their fast-moving consumer healthcare products business, there is increased momentum and pressure for other big pharmaceutical companies to re-think their business portfolios.
I am 100% certain it will be a topic of discussion in many of our upcoming business acumen programs and several of our pharmaceutical business simulations actually allow participants to spin out product lines and entire businesses to see the impact strategically and financially.
In anticipation of some great questions, here are five reasons why spinouts can be so effective:
- Focused Strategy / Clearer Value Proposition: Spinouts allow companies to focus on their own core value propositions. By divesting a non-strategic division, the parent company can concentrate its resources and efforts on its primary business value proposition, leading to better performance and strategic alignment and the spinout company can also focus on its own unique value proposition.
- Reduced Complexity: Large conglomerates can become unmanageable and complex. By spinning off non-core divisions, companies can simplify their organizational structure and operations, making it easier to deliver on the value propositions and adapt to changing market conditions and opportunities.
- Unlocking Value: Spinouts can unlock hidden value. The market may not fully appreciate the value of a subsidiary or division when it is part of a larger conglomerate. By becoming an independent organization, the spinout can better present its own unique value proposition, usually leading to higher valuations.
- Enhanced Accountability and Focus on the Right Metrics: As separate entities, both the parent company and the spinout become more accountable for their performance. This can lead to greater transparency and management's focus on delivering results. It also allows both organizations to focus on the right metrics of performance that support their own strategies.
- Better M&A Opportunities: Spinouts can be more attractive targets for mergers and acquisitions (M&A) or strategic partnerships, as they are often seen as more manageable and focused than their parent companies. This can lead to growth opportunities, synergies, and potential roll-ups of other similarly focused companies.
It Doesn’t Always Work Out
Now, when participants in one of our business acumen simulations choose to embark on a spinout strategy, we typically share with them that doing it does not always guarantee success. The effectiveness of a spinout depends on various factors, including the skills of the organization, the quality of the management team, market conditions, the competitive landscape, and the overall strategy of the companies involved.
One of the biggest challenges I have heard from leaders who have been part of a spinout is something they call, “working without a safety net.” In a big conglomerate, poor or even average performance of one business can be overlooked or justified as part of the balanced portfolio of businesses. However, in a new smaller spinout company, there is no hiding, and leaders and contributors may not have the skills or capabilities to work without a safety net.