A successful, family owned residential remodeling and construction firm was having problems with an unproductive business division. While this division was unprofitable and generated a relatively small, and decreasing, share of total company revenue, customers loved their products and services, and the owners were very attached to the division’s manager, who had been with the company for over 25 years. The owners were torn – should they shut it down, keep it but scale back on personnel and space, or go the other way and try to grow it? If they decided to grow the division, would they have to hire new people right away, or was there some way to reallocate management and staff from other parts of the company without hurting the company’s overall bottom line?
Approach
We researched the external market, reviewed company financials, and interviewed management and staff to try to better understand the underlying issues, explore several possible scenarios, and propose a path forward. Our research and analysis clearly showed that the division’s revenue struggles were due to a combination of external and internal factors:
The external market was undergoing rapid automation and consolidation, leading to an overall decrease in aggregate demand. On the other hand, there were so few competitors left that the net effect was to create a new opportunity for the division’s specialized products and services.
The division also had internal issues, including
- The division manager had basically checked out of his job while still collecting a paycheck
- There was a clear misallocation of staff resources so that several of the most skilled workers were getting frustrated
- Loose ties between compensation and performance led to even more worker frustration
- Breakdowns in processes were occurring on a regular basis, partly due to reliance on outdated and inefficient software
Solution
We prepared a risk-benefit analysis for four options: Fix It: Fix the division and keep it within the main business, Convert It: Shift the division to a separate business and sell services to the main business, Shut It Down: Shut the division down, and Fix It: Fix the division so it becomes profitable but stays within the main business. We presented our analysis to our client and discussed the pros and cons of each option. Our client’s management team then sat down with all the parties involved and decided the fourth option — fix it — was the right way to go. In a stroke of luck, the division manager soon saw the writing on the wall and agreed to resign (apparently without any bad feelings). Another employee then stepped up and took over management of the division at a lower pay rate. This, along with a few other changes, allowed the division to quickly increase revenue and move back toward profitability.