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How to decide on whether shutting down a line of business makes sense?

Anonymous A asked on Mar 05, 2018 - 3 answers

How can I assess whther shutting down a particular line of business makes sense? Obviously I would check if it is profitable, but what are other areas to look into? And if it is profitable, can it still make sense to shut it down?

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Sidi
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replied on Mar 05, 2018
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Hi Anonymous,

there are a couple of different angles you might want to consider here:

  • Profits: as you wrote, 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)
  • 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 - let me know if you want to discuss deeper.

Cheers,

Sidi

Francesco replied on Mar 06, 2018
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Hi Anonymous,

I think Sidi gave a good answer to address your first question. I would add that the line of business should match the goal of the company: for example, if a company’s objective is to increase revenues and a division is profitable but with low contribution to revenues and high opportunity cost compared to other revenue-enhancing options, it’s not really helping the company to achieve its goal.

To address your second question, I believe there may be two reasons why you may want to shut down a profitable business:

  • Cannibalization: It simply cannibalizes other lines of business
  • Opportunity cost: It requires resources that invested in other segments could bring a better results and that you have no other option to obtain otherwise

Best,
Francesco

Vlad replied on Mar 06, 2018
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Hi!

I would take a process approach here:

1) Analyze the problem 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!