AuthorJoe Thomas, Hal Kirkwood

Page 193

Divestment is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities. Divestment usually involves eliminating a portion of a business. Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or product line. This move often is the final decision to eliminate unrelated, unprofitable, or unmanageable operations.

Divestment is commonly the consequence of a growth strategy. Much of the corporate downsizing of the 1990s has been the result of acquisitions and takeovers that were the rage in the 1970s and early 80s. Firms often acquired other businesses with operations in areas with which the acquiring firm had little experience. After trying for a number of years to integrate the new activities into the existing organization, many firms have elected to divest themselves of portions of the business in order to concentrate on those activities in which they had a competitive advantage.


In most cases it is not immediately obvious that a unit should be divested. Many times management will attempt to increase investment as a means of giving the unit an opportunity to turn its performance around. Portfolio models such as the Boston Consulting Group (BCG) Model or General Electric's Business Screen can be used to identify operations in need of divestment. For example, products or business operations identified as "dogs" in the BCG Model are prime candidates for divestment.

Decisions to divest may be made for a number of reasons:


Firms may divest when their market share is too small for them to be competitive or when the market is too small to provide the expected rates of return.


Firms may also decide to divest because they see better investment opportunities. Organizations have limited resources. They are often able to divert resources from a marginally profitable line of business to one where the same resources can be used to achieve a greater rate of return.


Firms sometimes reach a point where continuing to maintain an operation is going to require large investments in equipment...

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