4 ms·

Setting aside the geopolitics and looking purely at the economics, there are several mentions in the article of the sole supplier of some vitally important widg

Setting aside the geopolitics and looking purely at the economics, there are several mentions in the article of the sole supplier of some vitally important widget or chemical announcing that it will be exiting the business. WTF? That makes no sense whatsoever! A company should only exit a business if it is unprofitable. Profit is price minus cost. The cost of just continuing to produce something you are already producing should be small. The price a monopoly supplier can charge the richest and least price sensitive customer in the world for something supposedly vital should be huge. These should be among the most lucrative businesses ever invented. So what's going on?

EliRivers 8y ago
I've seen companies cancel profitable lines because they can better use the resources involved on other, more profitable lines. Big profits over small profits.
- rwallace 8y ago
  But generally speaking, you could do better still by continuing with both product lines - that's pretty much what 'profitable' means. Situations I know of where this is not the case: 1. The product line is not actually profitable, the measurement was wrong, and the CEO isn't comfortable with nitpicky details so prefers to ignore the measurement than fix it. 2. Interest rates are very high, so the working capital for the more profitable product is better obtained by cannibalizing the less profitable product than by borrowing. Or put another way, interest rates are so high that the bank will give you a better return than a profitable product will. 3. The profitability of the product is so marginal that the management time spent thinking about it is worth more than the pennies of profit. 4. The two product lines require diametrically opposed corporate cultures. (But then you should sell off the other product rather than scrapping it.) I don't think any of those apply here. What am I missing?
  - deleted 8y ago
    [deleted]
  - EliRivers 8y ago
    Generally speaking? I disagree. Generally speaking, given a line that makes big profit, and a line that makes small profit, all effort to the big profit line gives the greatest overall profit. What you have presented is not general; you've presented a series of special cases where it might be a good idea to keep the less profitable line running too. There are many such special cases, but in general, if your options are a line that makes big profits and a line that makes small profits, you'll be most profitable by picking the former.
  - Steel_Phoenix 8y ago
    Part of the reason countries just keep making weapons beyond what they need is in order to maintain their manufacturing base. It takes a lot of special tooling, materials, and training to make a particular weapon. If you let it lapse, getting it started back up might be less worth it than just designing a new one. Just adding an additional product when it looks to be more profitable might mean having to buy more land, building a new building, starting with all new workers, etc. Unless the previous product is really profitable and stable, it's likely they'll just retool and retrain for the new product.
overcast 8y ago
The new CEO at my company is doing exactly the same thing. Trimming all of our product lines, except for the absolute most profitable. Just not worth it.
FrojoS 8y ago
From the article, it sounded like their is no continuous demand [1], so business might not survive until the next large order. Of course it could also be a threat to gain subsidies, new orders or higher prices. [1] "[..] start-and-stop nature of munitions procurement over the last 20 years [...]"

EliRivers 8y ago

I've seen companies cancel profitable lines because they can better use the resources involved on other, more profitable lines. Big profits over small profits.

rwallace 8y ago
But generally speaking, you could do better still by continuing with both product lines - that's pretty much what 'profitable' means. Situations I know of where this is not the case: 1. The product line is not actually profitable, the measurement was wrong, and the CEO isn't comfortable with nitpicky details so prefers to ignore the measurement than fix it. 2. Interest rates are very high, so the working capital for the more profitable product is better obtained by cannibalizing the less profitable product than by borrowing. Or put another way, interest rates are so high that the bank will give you a better return than a profitable product will. 3. The profitability of the product is so marginal that the management time spent thinking about it is worth more than the pennies of profit. 4. The two product lines require diametrically opposed corporate cultures. (But then you should sell off the other product rather than scrapping it.) I don't think any of those apply here. What am I missing?
- deleted 8y ago
  [deleted]
- EliRivers 8y ago
  Generally speaking? I disagree. Generally speaking, given a line that makes big profit, and a line that makes small profit, all effort to the big profit line gives the greatest overall profit. What you have presented is not general; you've presented a series of special cases where it might be a good idea to keep the less profitable line running too. There are many such special cases, but in general, if your options are a line that makes big profits and a line that makes small profits, you'll be most profitable by picking the former.
- Steel_Phoenix 8y ago
  Part of the reason countries just keep making weapons beyond what they need is in order to maintain their manufacturing base. It takes a lot of special tooling, materials, and training to make a particular weapon. If you let it lapse, getting it started back up might be less worth it than just designing a new one. Just adding an additional product when it looks to be more profitable might mean having to buy more land, building a new building, starting with all new workers, etc. Unless the previous product is really profitable and stable, it's likely they'll just retool and retrain for the new product.

overcast 8y ago

The new CEO at my company is doing exactly the same thing. Trimming all of our product lines, except for the absolute most profitable. Just not worth it.

FrojoS 8y ago

From the article, it sounded like their is no continuous demand [1], so business might not survive until the next large order. Of course it could also be a threat to gain subsidies, new orders or higher prices. [1] "[..] start-and-stop nature of munitions procurement over the last 20 years [...]"