Divestiture Strategies Aimed at Retrenching to a Narrower Diversification Base


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1.   Retrenching to a narrower diversification base is usually undertaken when top management concludes that its diversification strategy has ranged too far afield and that the company can improve long-term performance by concentrating on building stronger positions in a smaller number of core businesses and industries.

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CORE CONCEPT: Focusing corporate resources on a few core and mostly related businesses avoids the mistake of diversifying so broadly that resources and management attention are stretched too thinly.

2.   Other reasons for divesting one or more of a company’s present businesses include:

a.   Market conditions in a once-attractive industry have badly deteriorated

b.   It lacks adequate strategic or resource fit

c.   It is a cash hog with questionable long-term potential

d.   It is weakly positioned in its industry with little prospect the corporate parent can realize a decent return on its investment in the business

e.   The initial decision proves to be a mistake

f.    Subpar performance by some business units

g.   Business units do not mesh well with the rest of the firm

h.   Poor cultural fit with the rest of the firm

3.   Recent research indicates that pruning businesses and narrowing a firm’s diversification base improves corporate performance.

4.   The Two Options for Divesting a Business: Selling It or Spinning It Off as an Inde­pen­dent Company: Selling a business outright to another company is far and away the most frequently used option for divesting a business. Sometimes a business selected for divestiture has ample resource strengths to compete successfully on its own. In such cases, a corporate parent may elect to spin the unwanted business off as a financially and managerially independent company. When a corporate parent decides to spin off one of its businesses as a separate company, there is the issue of whether or not to retain partial ownership. Selling a business outright requires finding a buyer. This can prove hard or easy, depending on the business. Liquidation is obviously a last resort.

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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to contact@bms.co.in.

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