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Divestiture Strategy and Firm Performance

In this article, we’re going to talk about going out of business, and it’s called divestiture strategy. A company decides to go out of business as a strategy to reduce its costs. This process often occurs as a result of the growth of an organization. We are going to try to understand: what is an exit strategy, what is its purpose, what are its reasons, how this strategy is implemented, and what benefits companies get from it.

What is a divestiture strategy?

Divestiture is one of the business strategies that is meant as the sale of a business to reduce the corporate costs that a company faces during their business operations.  The volume of their business is reduced, and therefore costs are reduced. Alienation usually serves as a reason to liquidate part of their business. Then companies have three actions to choose from, they can decide what to do with a part of their business, they can sell it, close it, or spin-off a strategically profitable business unit, main division, or product type. This process helps to get rid of unprofitable unnecessary and unrelated operations, and usually becomes a result of the growth and development of the company. For example, the concentration of divestment strategies that occurred in organizations in the early 1900s was directly related to the mergers and acquisitions that took place in the 1980s. The main mistake firms made at that time was to conclude deals with companies in which they knew next to nothing. After many attempts to integrate new processes into their company’s operations, the owners gave up and decided to abandon the part of the business that did not suit them and put more emphasis on what they were good at to improve their competitiveness.

Divestiture companies: the reason for sales

The fact that some part of a company doesn’t serve its benefit may not be immediately apparent. In the beginning, business owners will try to work through the company’s problem areas, investing more in them to improve the department. There are even organizations that can help you determine which part of your business needs to be sold. So there may be several reasons for liquidating a business:

  • Little market share – In this case, companies start selling their stock to stay afloat. This happens because the market is not living up to expectations of providing rates of return
  • Better alternatives exist-when a firm has better stock options, they can divest a piece of the line of business that does not serve them well. Because companies are limited in their resources, they carefully select areas in which the same resources can bring them more benefit
  • Need to increase investment – sometimes firms need additional investment to move forward, but instead of investing the finances, they decide to sell the unit
  • Lack of strategic alignment-sometimes companies makes deals without paying attention to inconsistencies in business culture between businesses. As a result, it turns out that the newly acquired services do not fit the company’s image and strategy. This often happens when buying a diversified business. This can also be the effect of solutions for restructuring and refocusing current enterprises
  • Legal pressure with liability-sometimes companies buy too many other companies to expand their reach, then the Trade Commission can fine you for restricting trade. There has already been a similar case in business history where a large funeral home company created its monopoly throughout the region. As a result, the organization was asked to give up some of its acquisitions