Divestiture Strategy

Selling a division or part of an organization is called divestiture. Divestiture strategy is often used to raise capital for further strategic acquisitions or investments. Divestiture strategy can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, that require too much capital, or that do not fit well with the firm’s other activities.

Divestment is a difficult decision for the management of any organization. The barriers that impede an organization from following a divestment strategy have been described as follows:

  • Structural (or Economic) Strategy. Characteristics of a business’s technology and its fixed and working capital impede exit, especially if the business is a core competence to the company.
  • Corporate Strategy. Relationships between the various business units within an organization may deter divestment of a particular business unit.
  • Managerial Strategy. Aspects of company’s decision making process inhibit exit from an unprofitable business. Such aspects may be:
    • Company does not know that it is making unsatisfactory return on its investment.
    • Exit is a blow to management’s pride.
    • Exit is taken externally as a sign of failure.
    • Exit threatens specialized managers’ careers.
    • Exit conflicts with social goals.
    • Managerial incentive systems work against exit.

Specific suggestions on overcoming exit barriers include the following:

  • Have someone in the top management who has the responsibility of encouraging management to consider the divestment option.
  • Design compensation and incentive systems so that they do not discourage sound exit decision.
  • Design management information systems that provide meaningful data to assist in the exit decision.
  • Carefully plan answers to the questions of job security and easier progression for the middle managers affected by the divestment decision.
  • Change top management periodically to overcome commitments built up over time by incumbents.

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