Sunday, July 6, 2008

Shrinking to Grow

Vopak is the world leader in independent tank storage of bulk oil and chemicals, operating in 75 port locations from Rotterdam to Houston to Singapore. The origins of Vopak lie in a company that was founded in 1616, by a group of porters on the docks of Amsterdam, for the purpose of loading and unloading ship cargoes.

By 2000 Vopak was enjoying sales of €5.6 billion, with positions in shipping, chemical distribution, and port storage facilities. Its storage business was the most profitable. When Vopak's profits suffered and its stock price came under severe pressure, plummeting from €25 per share in June 1999 to €12 in July 2002, the company took decisive action. It spun off everything but the storage business, reducing the sales volume of the company to €750 million. It even sold some of its storage portfolio, further reducing its size.

Amazingly, the company's market value increased beyond its original level, as the stock price rebounded to €30 in May 2006. Furthermore, the stronger, well-funded business began to grow again – both organically and through acquisitions and new port locations. During the first half of 2006, Vopak's revenues grew by 17% and its earnings by 28%, in an inherently low-growth industry. John Paul Broeders, the chairman of the executive board, says, "Without shrinking first, we would never have created the resources, the management focus, and a stable platform to begin to grow again as we have."

Shrink-to-grow strategies are not an end in themselves, but they can pave the way for redefinition. These moves have a very high success rate when it comes to increasing a company's value and liberating one of the cores to strengthen and grow, provided it's given additional resources. Another three of our 25 case studies in successful core redefinition relied on this tactic: PerkinElmer, Samsung, and GUS.

Chris Zook in an HBR article Finding Your Next CORE Business, April 2007,

Chris Zook is the author of Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth (to be published next month by Harvard Business School Press), from which this article is adapted. Based in Amsterdam, he leads the Global Strategy Practice of Bain & Company.

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