When to hold, when to fold.

• Author: Cooper, Stephen F.
• Position: Determining the viability of underperforming units - Includes related article

If you're questioning the viability of one of your firm's business units, follow five steps before you decide how to cut your losses.

Have you been confronted by investment analysts who continue to question your underperforming business units, even if your company's overall results are outstanding? More and more, senior executives are being pressured to maximize the economic value of their operating units and to look for ways to create more value for shareholders. The marketplace is making clear it won't tolerate underperforming units, requiring each business unit to earn a satisfactory return given the resources invested in it and its interrelationships with the other business units of the parent entity. If the unit doesn't, the economic value of the entire company will feel the impact.

That's why managements are now focusing on improving the viability of their individual business units -- and they're looking for tools to help them. There are common factors you must measure and assess, and these are incorporated into a five-step process for addressing the viability of business units and the viability of the overall business entity (more on these later). The adversarial, litigious environment that envelops seriously troubled companies, where the issue is whether to let live or liquidate, continually tests both the efficiency and the effectiveness of the five-step process, which otherwise healthy firms are increasingly applying to their underperforming units.

HOW TO GET THERE FROM HERE

While the premise that viability significantly influences your company's economic value seems simple to understand, don't be deceived into thinking the process for addressing it is easy to carry out. Look at the experiences of Eastman Kodak, General Motors, IBM, RJR Nabisco and Sears Roebuck & Company. In the mid-1980s, each was in the top quartile of the list of the most-admired companies in the United States, according to Fortune. But, by 1994, each had fallen to the bottom quartile. They all have fine histories, with many outstanding managers -- and they're all now striving to revitalize their underperforming areas and restore their firms to their former levels of viability. Despite the commentary in the business press, the underlying lesson from such firms is that preserving and enhancing your business-unit viability is complex and difficult.

So, where do you start? You have to understand the key characteristics of business-unit viability. First, viability isn't static. Change is inevitable, dynamic and evolutionary. You're either moving forward or you're moving backward, and even a commitment to move forward is no guarantee you'll be successful in the future.

Second, management is the key to viability. And viability drives results, and results define management. That's why you, as part of senior management, must induce the adaptation that's required for a business unit to maintain and enhance its viability.

Unfortunately, unit managers, like other people, often resist change, believing they can "snare" success by preserving the status quo. Their thinking isn't totally illogical. They want to imbue the business unit with the same culture to which they attribute the unit's past successes. While this type of thinking may promote operating efficiencies, it erects dangerous barriers to adaptation. So you must work with the management of your business unit to overcome such natural tendencies and to create a unit that's flexible enough to change.

Third, you can measure and assess viability. Capital markets continually do this to arrive at the overall value of a firm. Understanding how it's done -- and ensuring that it is done -- is your best weapon in preserving or increasing economic value. But you must recognize that measures of financial performance and other quantifiable results, which are the most commonly used benchmarks for measuring viability, aren't enough. Results are trailing indicators since they deal with only the past.

To assess viability, you must make sure your business unit managers look beyond today's results to the key factors the business unit's future results will depend on. You must identify objectively and without prejudice the conditions that account for changing results, understand these conditions and acknowledge their implications for the business...