Two Business Units in One

Uncategorized Sep 21, 2021

Analyzing the performance of individual business segments can be tough, especially if - like most owners - you're used to thinking of the business as a whole.

A contract R&D lab had a federal and state registration that allowed them to work with Scheduled Drugs in categories 2-5.  They worked with clients developing controlled substances in classes like painkillers and stimulants, and these projects contributed about 10-12% of their gross revenues. 

Based on the owner's idea that they could also sell Schedule 1 Controlled Drug standards, they acquired a large safe and an alarm system, and through the much more difficult government Schedule 1 registration process.  Their updated website identified them as having Schedule 1-5 controlled substance capability.  They stocked materials to develop the new products, but over two years they only identified a small customer base. 

We suggested splitting these strategic segments into two, instead of grouping them together under ‘the controlled substance business’.  Broken down this way, the business units were:

Schedule 2-5 Capability

  • Risk: Low-Moderate
  • Competition: Moderate
  • Profitability: High
  • Overhead: Low-Moderate

Schedule 1 Capability

  • Risk: Moderate-High
  • Competition: Low
  • Profitability: Very Low
  • Overhead: High (exceeds profit)

The Boston Consulting Group developed a simple model for Strategic Business Unit analysis some years ago, defining a high performing unit as a Cash Cow, a predicted future performer as a Star, a Star that is not progressing as a Question Mark, and a nonperforming unit as a Dog.

Based on this analysis, our client as able to see the Schedule 2-5 Drug capability as a Cash Cow, producing nearly $1.2M with excess overhead of only $2,000 annually.  The Schedule 1 capability was a Dog - $13,000 in revenue with $25,000 initial investment and annual costs of $9,000 – and no growth in two consecutive years.

The owner felt personally invested in this business unit; it was his idea.  But he had to admit that, by not looking at its performance separately, he was disguising an unpleasant truth.  The program was stopped. 

Lesson?  Every now and then you have to take a hard look at every animal on your farm.

Close

Sign Up for Updates!

Receive a free gift of valuable content - a one page "cheat sheet" of the eight steps every business owner should take to build a more valuable company.