Question

Discuss some of the important considerations when making decisions around dropping products or departments that are less profitable than desired.

Answer 1

Some of the important points to be considered while making a decision to drop products or divisions that are less profitable as compared to your expectations are as follows:

1) When products are dropped off the production line whether the capacity released by not producing the products can be diverted or used to produce other products still in the production line of the company or whether the surplus capacity could be leased out or it would become idle capacity for the company.

2) By discontinuing a product the company should consider whether another product of the company could substitute for the product which has been dropped. An important point to be taken into account is whether the market would be in position to absorb the additional volumes without adversely affecting the selling price of this product that is coming in as a substitute.

3) Whether the permanent employees can be redeployed in other divisions of the company if a division is closed and if not then how to resolve the issue of lay off and the terminal benefits to be paid to them..

4) Retrenchment of labour due to closure could lead to the company facing industrial relation problem if the company has a very strong union and this could lead to labour unrest or may end up in a strike..

5) The plant and technology used may become outdated . It would require huge capital investment to restore it to running condition..

6) There would be some Fixed Expenses of the department which will continue even if the division is closed.

7) In a competitive scenario it may become difficult for the company to re-instate its position in the market .

8)This decision may have an negative effect on the morale and confidence of the employees.The employees would be disillusioned.

9)They should also consider the effect of this decision on the company’s goodwill , image, long term profitability , expectation of the stakeholders and the reaction of the customers..