Stars and Dogs

S + B has an interesting article by Harry Quarls, Thomas Pernsteiner, and Kasturi Rangan titled Love Your “Dogs” on talent retetion strategies of companies.They talk about the general market tendency of going after star performers in organizations; they argue that greater shareholder value can be created by improving the operations of the company’s worst-performing businesses.

The typical strategy is to invest more heavily in the “stars” that are earning superior returns on capital, while starving or selling the underperforming “dogs.” This is the conventional approach in corporate finance and has become so ingrained in management practice that it is almost impossible to question it.

But what if it is wrong?

What if corporations would be better off shortchanging their stars and nurturing their dogs? What different decisions would managers make then?

There is, in fact, reason to believe that the conventional wisdom is wrong. Corporate managers often rely on accounting metrics to make business decisions. However, these metrics are based on past performance; the market is interested only in the future. And past performance is generally a poor predictor of the future. Thus, when performance is assessed over time, greater shareholder value can be created by improving the operations of the company’s worst-performing businesses. The way to thrive is to love your dogs.