RESULT OBTAINED
Canonical method
Divest or exit: deciding the fate of a declining business
What must be established
A useful analysis keeps its controls visible.
- 01
Establish the decline and its pace at the exact scope of the business.
- 02
Compare the value of the business to its current owner and to another owner.
- 03
List the exit barriers, the internal dependencies and the captive customers.
Decision reference
Make the next choice more explicit.
DECISION SUPPORTED
Should a business whose market is declining be maintained, turned around, harvested, divested or closed?
DELIVERABLE TO KEEP
One option retained out of five, with its renunciation, its evidence, the person accountable and its review date.
NEXT ELEMENT TO EXAMINE
Portfolio synergiesExplore →Read the decline before choosing the exit
Not every fall is alike, and the exit is decided on pace as much as on level. A market contracting slowly, with residual demand that stays stable and able to pay, leaves time: harvesting, which means ceasing to invest while still serving the remaining customers, keeps its meaning there. A market collapsing because a substitute technology has made it useless leaves no such time, and the value of a divestment evaporates along with the potential acquirers. Three situations must therefore be told apart: a decline in demand, a loss of share in a market still healthy, and a fall in margin caused by costs. Each of them calls for an opposite answer. Scope matters just as much. A whole business is not judged the way a product line or a contract is; what declines is sometimes a segment that could be left without leaving the business. The first decision is therefore to delimit what is being discussed, then to date what is observed.
- Pace of decline
- Residual demand
- Scope of the business
- Dated observation
Put a figure on what leaving really costs
Leaving is never free, and its cost is rarely found in the income statement of the business. The barriers come first: specialised assets that are hard to resell, contractual commitments of duration, warranties and spare parts to supply, employment obligations, site restoration. Then comes what leaving breaks elsewhere: shared fixed costs that will fall back on the other businesses, production capacity losing its workload, skills that other offers were using, commercial references that opened doors. Captive customers come last, those whose operations depend on the product being stopped: what becomes of them commits the reputation of the company well beyond the business concerned, and the undertakings made to them are documented before the decision, not after. This inventory often yields the most useful result of the exercise: a business with thin profitability sometimes costs less to keep than to leave.
- Exit barriers
- Shared costs
- Captive customers
- Documented undertakings
Who draws the most value from this business?
The decisive question is not whether the business earns, but whether it earns more with you than elsewhere. An acquirer whose distribution network, installed base or cost structure complete the business may draw from it a value above yours, and will pay accordingly; keeping it then amounts to a renunciation of that difference. This best owner test arises early, because the value of a declining business falls with the number of acquirers left: divesting late often means closing. The five options are then compared on one grid: maintain as it stands, turn around by committing resources, harvest without investing, divest, close. Each receives its cost, its lead time, its renunciation and its evidence. A position in a portfolio matrix may flag the subject; it never suffices to conclude, and the decision retained names a person accountable and a review date.
- Value to another
- Best owner test
- Five options compared
- Accountable person and review
DECISION ASSET
Exit grid for a business
The five exit options are compared on the decline observed, the real cost of leaving and the value to another owner.
Decline
- Input
- Pace and scope
- Control
- Demand or share?
- Output
- Dated observation
Cost
- Input
- Barriers and commitments
- Control
- What does leaving cost?
- Output
- Real cost
Owner
- Input
- Value to another owner
- Control
- Who gains the most?
- Output
- Value gap
Option
- Input
- Five routes compared
- Control
- Which one and why?
- Output
- Dated decision
- Harrigan and Porter, End-Game Strategies for Declining Industries, Harvard Business Review, 1983 (opens in a new tab)Reference on end-of-cycle strategies: residual leadership, niche, harvest and quick exit.
- Dranikoff, Koller and Schneider, Divestiture, Strategy’s Missing Link, Harvard Business Review, 2002 (opens in a new tab)Documented case for a divestment decided early, before the value has dissipated.
MOVE FROM ANALYSIS TO YOUR DECISION
Produce a testable decision mandate
MOVE FROM ANALYSIS TO YOUR DECISION
Produce a testable decision mandate
RETURN TO THE DECISION SYSTEM
See the canonical definition of marketing strategy→