As a CEO, you are responsible for driving your company forward, ensuring all parts of the business contribute effectively to your overarching goals. However, not all divisions or subsidiaries are created equal. Some may be underperforming, dragging down overall profitability, or failing to align with your company’s strategic objectives. Identifying these underperforming areas is not just about cost-cutting or slimming down—it’s about unlocking hidden value and positioning your organisation for sustainable growth.
This guide will help you, as a CEO, navigate the complex task of identifying underperforming divisions within your organisation and highlight strategies for addressing these issues effectively.
1. Analyse Financial Performance in Detail
The first and most obvious indicator of an underperforming division is its financial performance. A deep dive into key financial metrics such as revenue, profitability, and return on investment (ROI) will provide an initial snapshot of which divisions may be underdelivering.
Revenue Trends: Look at revenue trends over time. Is the division consistently missing its targets or experiencing a decline in sales? Flatlining or declining revenue should be an immediate red flag.
Profit Margins: While revenue is essential, profit margins are more telling. A division could be generating substantial revenue but still be underperforming if its operating costs are too high or if profit margins are shrinking.
Return on Investment (ROI): Does the capital you are investing in the division yield the expected returns? If not, it may be time to reconsider the allocation of resources.
However, financial data alone does not tell the whole story. Some divisions might be strategically critical despite short-term underperformance, so further investigation is necessary.
2. Assess Strategic Fit
Even if a division is profitable, it may not align with the long-term goals or direction of the business. This misalignment often leads to inefficient resource allocation and a dilution of focus across the company.
Ask yourself the following:
Does this division support the company’s core mission and vision?
Is it aligned with the company’s long-term strategic objectives?
Are there synergies with other divisions, or is it operating in isolation?
If the division operates outside of the company’s key areas of focus, it may no longer warrant continued investment, even if it appears financially sound. Divesting such units could allow the business to refocus and allocate resources to more promising areas.
3. Evaluate Operational Efficiency
Underperforming divisions often exhibit lower operational efficiency. You can gauge efficiency by examining metrics such as employee productivity, process effectiveness, and the division’s ability to innovate or adapt to market changes.
Productivity Levels: Is the division getting the most out of its workforce, or is there evidence of inefficiencies in the labour force? Low productivity can lead to higher operational costs and reduced competitiveness.
Process Bottlenecks: Are there any recurrent operational problems, delays, or inefficiencies in the division’s processes? Long production cycles, frequent downtime, or excessive waste can significantly erode value.
Innovation Stagnation: If the division is not keeping pace with innovation in its industry, it risks becoming obsolete. Lack of investment in research and development, outdated technology, or resistance to adopting new processes can be signs that the division is underperforming.
4. Conduct Competitive Benchmarking
Benchmarking a division’s performance against competitors in the same industry can provide useful insights into how well it is doing. Underperformance can often be relative. While a division might be meeting its internal targets, it could still be underperforming when compared to industry standards.
Key areas to compare include:
Market Share: Has the division’s market share grown, stagnated, or shrunk over time?
Cost Structure: Are the division’s operating costs higher than those of its competitors?
Product or Service Offering: Does the division’s product or service offering stand out in the market, or is it lagging behind competitors in terms of innovation, quality, or value proposition?
5. Employee Engagement and Morale
A less obvious but important indicator of an underperforming division is employee morale and engagement. Divisions with low engagement often experience higher staff turnover, absenteeism, and difficulty attracting and retaining talent, which can severely affect performance over time.
Employee Turnover Rates: High turnover is a clear signal that something is amiss. If employees are leaving a particular division in greater numbers than elsewhere in the company, it’s worth investigating why.
Engagement Levels: Conducting employee engagement surveys can help you gauge how motivated and satisfied the workforce is. Low engagement typically results in poor performance and lacklustre output.
Leadership Quality: Evaluate the leadership within the division. Are they motivating and guiding their teams effectively, or is there a disconnect? Sometimes, underperformance can be traced to poor leadership rather than systemic issues.
6. Customer Satisfaction and Retention
Customer feedback is another valuable metric when evaluating divisional performance. Poor customer satisfaction or declining customer retention could point to deeper issues within the division, such as product quality, service delivery, or misaligned market positioning.
Customer Complaints: Have you seen a rise in customer complaints related to the division’s products or services?
Customer Retention Rates: Are you losing more customers than you are gaining in the division? A declining customer base suggests the division is underperforming in meeting market demands or customer expectations.
Net Promoter Score (NPS): This is a simple yet powerful measure of customer loyalty. A consistently low or declining NPS score is a warning sign of deeper issues within the division.
7. Look for External Changes
Sometimes, external factors contribute to a division’s underperformance. Market shifts, regulatory changes, or technological advancements can render a once-profitable division unviable.
Market Changes: Has there been a fundamental shift in the industry that the division has failed to respond to, such as new regulations, disruptive technology, or changing consumer behaviour?
Competitive Pressure: Are new competitors entering the market and outperforming the division? Are they introducing innovations that the division is not keeping up with?
Macroeconomic Factors: Has the division been hit harder than others by macroeconomic conditions such as recession, inflation, or changes in trade regulations?
If external forces are at play, the division may require a different approach, such as repositioning, strategic investment, or even divestment, to unlock its hidden value.
8. Assess Divestment Potential
Once you have identified an underperforming division, the next step is to determine whether it should be turned around or divested. Some divisions, despite underperformance, might still hold significant strategic or market value when spun off, sold, or merged with another entity.
Consider the following:
Is the division underperforming due to temporary factors, or are the challenges structural and long-term?
Does the division have any core assets, intellectual property, or market share that would make it attractive to buyers?
Would divesting the division allow the core business to focus on its strengths and grow more effectively?
Conclusion
Identifying underperforming divisions is not a simple box-ticking exercise. It requires a strategic, holistic approach that looks beyond mere financial metrics and delves into areas such as strategic fit, operational efficiency, and customer satisfaction. As a CEO, your goal should not only be to cut losses but to unlock hidden value by refocusing the business on what truly drives growth. Whether the solution is to turn a division around or divest it entirely, the insights gained from a thorough evaluation will position your company for a stronger, more streamlined future.
At Divestable.com, we help businesses confidentially market and dispose of non-core or underperforming assets. Our expert team provides tailored advice and support throughout the divestment process, ensuring that your business can streamline operations and focus on its most valuable divisions.
If you’re ready to explore how divesting non-core or underperforming assets can unlock hidden value for your company, get in touch with us today for a confidential consultation. Take the first step towards optimising your business—contact us now to discuss your divestment strategy.
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