Discontinuing line of business in strategy cases?

Hi Anonymous,

interesting topic! There are a couple of different angles you might want to consider here:

• Profits: you should first check whether the business line generates profits, and what the outlook to the future is (will it generate profits going forward?).
• Profitability: Not to be consfused with profits - how much profit is generated relative to resources spent (i.e., profits over cost)? Thereby, you check whether there are better options for utilizing resources (e.g., other lines of business that could be expanded with a better value creation outlook?)
• Cannibalization: Even if profits and profitablity look good, cannibalization could eat into other areas of business. So this should also be checked.
• Natural ownership: there might be other companies that, due to their particular asset base or footprint, can extract more value out of your business line. In that case it might be worthwhile to sell off this particular line of business for a price that exceeds expected profits over your target time horizon.

All of these aspects should be succinctly outlined and then assessed (either all of them one by one (in order of priority according to your hypothesis), or following guidance by the interviewer).

Hope this is helpful.

Cheers, Sidi

Two other things to consider in addtion to Sidi's list:

• Margin: If you have 4 lines of business and 3 have a 40%+ profit margin and one has a 15% profit margin, you may consider divesting that line of business to improve overall margins. This can be done for numerous reasons (e.g., company stock price is judged on margins)
• Shift in business strategy: Companies often times shift their business model (e.g., tech company shifts from hardware to services) and you want to divest parts of the business that don't this strategy. IBM would be a classic case where they moved to more of a sevice strategy and divested parts of their business like their lapop division.

Matthew

Hi!

I would start a bit more high-level here. Before I come to shut down the business line I would try to analyze the business:

1) Analyze the business and fix it:

• Profits
• Revenue / cost problem
• Revenue -> Market / market share problem
• Costs -> Fixed / variable

2) Analyze the additional opportunities if can't fix the problem:

• Adjusting current product / improving the value proposition
• Entering the new markets
• Entering the new segments (geographical, customer, etc)
• Building new capabilities (Distribution, supply, assets, knowledge, etc)

3) How to shut down the business if needed? 

• Costs and benefits of shut down
• Time to shut down
• The exit value of the business / Fair value of assets
• Key capabilities to maintain (Distribution, supply, assets, knowledge, etc)

Best!

Good answers from Sidi and Matthew.

I'd add "Size & Scalability" as a criterion for investigation: Imagine you have five global multi-billion business units and one 100 million unit that's local to one market, can't be scaled globally for some reason, isn't growing like crazy - it's just too small to receive the management attention and resources it requires. So you might be better off spinning it off, selling it or even closing it down.

Also, all jokes aside, this is very much a "trend" thing.

For a while, it was en vogue that companies focus on their "core competencies" and get rid of everything "non-core". Then "diversification" was everything and companies tried to build out "adjacent businesses" or even became conglomerates, producing everything from tanks through toothbrushes and financial solutions...

All great answers. 

I agree with Vlad to start at a higher level. The decision to discontinue / spin off / sell / divest / etc. comes as a result of internal / external forces higher up.  You might want to look at this first. An example. Costa Coffee was meant to be spun off due to activist pressure, but ended up being sold to Coca Cola. Personal example. Regulation meant the tower operations of an operator be spun off.

I'd think of discontinue as one 'branch', alongside other possibilities like sell or whatnot, but these options are a result of a higher level scenario.

Lol. Was just thinking...

That actually makes for a case. Whitbread is under activist pressure to spin off Costa Coffee. What to do? Can make a story like although Costa has done really well, councils are p*ssed off that high streets are full of coffee shops and want to regulate (regulation). Also, business rates up (costs). Coffee bean price gone up due to crop problem. 

Or... betting firms are p*ssed off that FOBT machines will have limit cut to £2. Ladbrokes wonder what to do, so asked ConsultingCo to help. 

Hmmm... maybe I should consider writing cases for a living. Worth it? Got market? Lol, even this can be a case! Haha!

Yes, I know, I know. I'm sick in the head.