Growth Strategies

Should You Split Your Company? What HP's Big Move Can Teach Entrepreneurs.

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Being nimble is the only path to winning.

That’s a quote from soon-to-be-former chief executive of hardware-software powerhouse Hewlett-Packard. Meg Whitman will now run one half of the long-discussed carve out, Hewlett-Packard Enterprise, which will focus on the technology-services business. Unlike its other half, the PC and printer business, now HP Inc., the enterprise business will be on a path for rapid growth and expansion through a faster pace of investment in new products and through acquisitions. If it follows through, the company will truly be putting its money where its mouth is.

Related: Tech Giant Hewlett-Packard to Split Into Two Public Companies

Investment optimization, the process of allocating investment dollars among different business strategies and departments, is a challenge for every business in every industry of every shape and size. A core tenet of corporate finance is that by separating businesses that are no longer synergistic or benefiting from shared ownership, you can maximize the value of each, particularly when there is a faster growing business.

For a company such as HP, comprised of two healthy but very different models from a growth and shareholder-return perspective, creating two separate entities makes sense. For Whitman and the board of directors, the decision to split was really a matter of taking the pressure off of prioritization, allowing each business to pursue an independent growth strategy and make the related appropriate investment decisions. For shareholders, the opportunity to unlock value in entities no longer encumbered by a common ownership sweetens the deal.

Businesses make optimization decisions almost every day. A company owner might ask himself whether to hire more people in marketing or more people in sales in the next quarter. Maybe he does neither and instead invests in a customer-relationship-management system that enhances the efficiency of his existing sales team. Almost every financial decision a CEO makes is evaluated based on a return on investment framework. Investment optimization takes it a step further by prioritizing initiatives amongst competing priorities using that framework.

Choosing -- or reworking -- corporate structure is also about optimization. Even as a public company, the pool of investment dollars is finite. Channeling them to the right areas of the business at the right time requires making careful and delicate decisions. For the smaller company, faced with even more limited resources, there is a serious lesson embedded in the example of a behemoth such as HP pulling this lever to create focus, opportunity and ultimately value.

Related: For Hewlett-Packard, Symbolism in a Split

Three questions can help an entrepreneur evaluate whether a split, spin-off or subsidiary structure might be right for his company.

1. Are you starving one part of your business to feed the other?

It’s not uncommon for a business to find itself catering to one product line, customer group or other area at the detriment of another. Perhaps a company identifies a new enterprise-customer category. While its existing middle-market customer buys regularly and predictably, the enterprise customer possesses bigger budgets but more complicated servicing requirements.

Wanting to grow revenue, the CEO invests heavily to move up market but over time sees churn from the core customer base. One solution for a company experiencing this problem may be implementing changes to the organization’s design or structure so all areas of the business can prosper.

2. Are your investors more interested in growth or value?

Identify why your shareholders are invested in your company. Are they hoping to see steady, stable growth and predictable cash flows, or are they expecting rapid growth and market-share gains? If a company has both kinds of investors, it may be a signal that some sort of alignment of shareholder investment goals and company strategy is needed.

3. Are you truly nimble?

A pioneer in its early days, HP has more recently struggled to keep up alongside agile technology upstarts. In its press release announcing the split, HP used phrases such as “next generation” and “new style” and words such as “flexibility” and “adapt,” confirming its a new world we live in and pursuing a strategy to enable it to operate and compete in that world.

By definition, technology executives are constantly evaluating disruption in their industry and ways to stay in front of it. No matter the industry, however, all companies must be aware of and ready to realign in the face of disruption.

For a company such as HP, one side of its business was being disrupted more significantly and at a faster rate than the other. Experiencing this lopsidedness, splitting into separate entities may allow both sides to adapt at the appropriate pace to compete and stay relevant, not making one side slow down or move more quickly than it needs to.

Related: The 11 Rules of Highly Profitable Companies