When deciding whether or not to integrate a new business segment into your existing one, there are several key elements to consider. These include:
Analyze the new business segment’s effectiveness in determining sales success, growth, and overall success
Analyze the new business segment’s cost of doing business
Compare the perceived benefits of the new business segment to those of your other businesses segments
When looking at each of these factors, take into account both positive and negative evidence. If some evidence suggests positive, than there is likely to be more benefit from joining this new group than leaving it. If evidence suggests negative, then there is likely to be less benefit from joining this group than leaving it.
It is important to review these factors when deciding whether or not a new business segment should be integrated into your organization.
Eliminate segments with low sales volumes
When deciding whether to eliminate a business segment or not, it is important to keep in mind what percentage of the total sales a business has.
On average, businesses sell their products for around 5% of their total sales. So, when deciding whether to eliminate a business segment or not, it is important to keep this in mind.
When a segment has lower than this average amount of sales, then it is better to keep the segment because its customers are likely loyal enough to buy from them every time they ask for something.
It is also good for financial reasons because if someone buys from you every month, you have good recurring revenue.
Eliminate segments that are not part of the company’s core business
When deciding whether to eliminate a business segment or not, it is important to keep the following in mind.
All businesses are not founded with the goal of making money. Some businesses are established with the intention of public recognition, outreach, and social support.
Public recognition can come in many forms: paid advertising, community engagement, endorsement, or even philanthropy. Outreach is what happens when someone else knows about your business and wants to get your attention for a specific reason. Public recognition can include free products or services, invitations to events or opportunities for growth, and finally any amount of money spent on outreach is what gets noticed.
Some businesses have developed niches within the market that they belong in. The odds of this being noted is why it is an important part of the decision-making process.
Having two businesses that operate in separate markets but share some common customers and products is considered a core business and should be kept around.
Eliminate segments where the competition is fierce
Once a company has decided on its market segment, it should look into whether or not the competition is fierce.
If the other companies in your market are aggressive towards each other, then it would be best to remove one of them to make room for yours.
This is because when there is only one company involved, they charge a fee for their services and you would need to pay them to make your business work. By having several companies, you can save money in the long run.
If the other companies are very competitive with each other, then it would be best to eliminate one of them. This is because if one company loses confidence in your product or service, then they can decide to leave the industry and not charge anyone else anything for their services. This would save both parties from having to spend money on that product or service completely.
Apply the razor and blade rule to segment elimination
After determining whether a business segment should be eliminated, the next step is to determine whether the segment should be razor and blade-ed.
The razor and blade rule states that if some aspect of a business segment is good, then other aspects should be cut. For example, if a restaurant offers great food, then other restaurants should also offer great food.
If a nurse serves her community well, then other nurse practitioners should also serve their communities well. If an insurance company provides value to its customers, then other insurance companies should also provide value.
When considering which parts of a business segment should be eliminated, it is important to consider what makes that person or company unique enough to remain distinct.
Keep in mind that when deciding which parts of a business organization to cut, no one will see the different entity as equal.
Use the break-even analysis to segment elimination
Once you know if a business segment is justified or not, the next step is to eliminate it. The break-even analysis can be used to segment elimination as well.
Using the break-even analysis, you can figure out if a business segment is worth keeping or not. The break-even analysis looks at all costs and benefits associated with each business segment.
When deciding whether to eliminate a business segment or not, it is important to use what cost difference there is between the remaining businesses and the new one. This difference can be big or small, depending on what you want out of the new company.
Calculate the net present value of each segment and eliminate those with a negative NPV
When deciding whether or not a business segment should be eliminated, there are several factors to take into account. These include:
The total cash flow of the business
The expected growth in that cash flow over the next year and years
The expected return on that capital
The NPV of the current capital versus the expected growth in future revenues and profits
“Expected growth” is a tricky thing to calculate. There are many ways to determine what “expected growth” is, but the best way is to ask what people expect from this business? What do they expect from this business? Then add a little bit of confidence to those answers. People tend to be honest about their expectations, which is one of the reasons we have businesses in our community.
Apply the weighted cost of capital approach to segment elimination
When segmenting a business into three pieces with different costs of capital, the weighted cost of capital approach should be used. This method takes into account both financial and product market forces that keep a business cohesive.
Using the weighted cost of capital approach can help reduce the number of firms in your portfolio, making it more cost-effective to buy and sell businesses.
When deciding whether to eliminate a business or not, you should take into account its cost of debt, equity, and operational funding. If an elimination would result in a loss of value, then it should be done with care to not harm the remaining value of the company.
Lastly, if there is no significant change in consumers or industry conditions, then the business should be eliminated because it has been serving its needs for years and years have shown no expansion.
Conduct a discounted cash flow analysis for each segment and eliminate those with a negative DCF value
When it comes to evaluating the cash flow needs of a business, there are several ways to consider. The most basic is the discounted cash flow analysis, orDCA. This analyzes the future value of a business’s assets using today’s prices and uses that value to pay off debts and invest in new assets.
The best DCAs take into account future costs such as taxes, insurance, legal, and other necessary expenses. When these future costs are accounted for, a better outcome can be found. A more advanced tool used in finance is the discounted forward-looking-cash-flow analysis. This takes into account today’s costs and hypothetical future costs but does so with regards to today’s cost savings.
When used effectively, these analyses can help eliminate segments of a business that aren’t spending enough to continue operations.