One of your client's three divisions is losing money. Should they fix it, sell it or close it?
First check whether the division really hurts the group by separating its own losses from head office costs that would stay anyway. Count shared customers and costs, then compare fixing, selling and closing on total group value. Ask for the cost breakdown.
See this answer go from 50 to 90
Example answer
50/100
A division that loses money drags down the whole company, so I'd lean toward selling or closing it. I'd answer four questions in order.
One, is it really losing money?
Two, can it be fixed? I'd find out why it loses money.
Three, what is it worth to someone else?
Four, what would closing cost?
Then I'd pick whichever option is best for the company.
What holds it back
It leans toward selling or closing before checking whether the loss is real. The four questions are a good order, but there's nothing under them, and "best for the company" is never defined.
Before choosing, I'd check the premise. Is the loss measured after head office costs are charged to the division? And does it share customers, plants or sales staff with the other two? I'd answer four questions in order. One, is it really losing money? Shared costs get charged out by a formula, and most of them stay if the division goes. Two, can it be fixed? I'd find out why it loses money. A division that trails its competitors can be fixed. One in a shrinking market is much harder. Three, what is it worth to someone else? A buyer with more scale might earn more from it than the client can. Four, what would closing cost? That's severance, leases and contracts, and any sales the other divisions lose. Then I'd value each option for the group as a whole and choose the highest. I'd start with question one, because it can change the whole case. Do we have the division's results before head office costs?
Before choosing, I'd check the premise. Is the loss measured after head office costs are charged to the division? And does it share customers, plants or sales staff with the other two? I'll assume an office products group whose printing division loses $10 million a year, after $25 million of head office costs. I'd answer four questions in order. One, is it really losing money? Shared costs get charged out by a formula, and most of them stay if the division goes. Before that charge, it earns $15 million. If only $5 million of that cost goes with it, closing leaves the group $10 million a year worse off. Two, can it be fixed? I'd find out why it loses money. A division that trails its competitors can be fixed. One in a shrinking market is much harder. So I'd compare its margin with other printers. Is the gap price, idle presses or cost? Three, what is it worth to someone else? A buyer with more scale might earn more from it than the client can. A larger printer could run this volume on its own presses. A sale strands the same $20 million of head office cost as closing, so a lump-sum offer has to be worth more than $10 million a year of group profit, several times that in cash, and more if a fix works. Four, what would closing cost? That's severance, leases and contracts, and any sales the other divisions lose. Closing brings no sale price and all of those bills, so it's the fallback. Then I'd value each option for the group as a whole and choose the highest. I'd start with question one, because it can change the whole case. My hypothesis is that closing wouldn't cure this loss, so the real choice is fix or sell. Can I see its results before head office charges, and which of those costs would go?
The numbers, step by step
The printing division's yearly result, assuming a $10 million reported loss after a $25 million head office charge, of which $5 million would go away on a sale or closing.
- Profit before the head office charge−$10 million + $25 million
- $15 million
- Head office cost left after a sale or closing$25 million − $5 million saved
- $20 million
- Group profit lost by selling or closing$15 million − $5 million saved
- $10 million
What the interviewer listens for
- Do you question whether the division really loses money before picking an option?
- Do you know that allocated head office costs mostly stay when a division goes?
- Do you look at what the division shares with the other two?
- Do you compare fix, sell and close on the same measure?
- Do you take a position and ask for the data that would test it?
Common mistakes
- Taking the reported loss at face value.If most of the head office charge stays after a sale or a closure, the remaining divisions simply absorb it.
- Treating closing as free.Severance, leases and customer contracts all have to be paid, and there's no sale price to offset them.
- Forgetting links between divisions.Shared customers, plants or internal sales can make the other two worse off once the third is gone.
- Walking through fix, sell and close as three separate lists without one measure, such as value to the group, to compare them on.
More case openings
- A packaging manufacturer's cost per unit has risen 15% in two years. How would you find the cause?
- Your client is a regional grocery chain. Profits are down 20% over two years. How would you structure the problem?
- An airline's profits are falling even though it is carrying more passengers. What is going on?
- A software company is growing 40% a year and still losing money. How would you assess whether that is a problem?
- A clothing retailer needs to cut costs by 10% without hurting sales. Where would you look?
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