Sometimes, the best decision for a business is to reduce the scale of its operations. Want to learn more? Read on to discover the intricacies of this concept and see some examples of divestment strategy!
đź’ˇ Top-7 Divestment Strategy Examples
- Sara Lee Corporation: Strategy and Brand
- European Holding Company's Management Consulting
- Global Petroleum Industry. Multinational Corporations.
- Google’s Business Strategy and Will Show a Thorough Analysis of It
- Applying Cannibalization Methods to Marketing Strategy
- US v. Bayer AG, et al.: Case Study
- Company Analysis of Chevron and Economic Factors That Affects
âť“ What is Divestment Strategy?
A divestment strategy is defined as a crucial investment decision made by an organization to streamline operations and improve financial health. There are several different moves an organization can take to scale down the scope of its business activities. It typically involves the sale of a division of its assets or subsidiaries to raise funds and use it for a strategic acquisition. Divesting strategy can also be used as a form of retrenchment that allows the organization to focus on the core areas of its operations.
The following are example situations when a business must consider divesting:
- Negative cash flow.
- Huge financial losses.
- Seeking better investment options.
- Reducing debt.
- Raising funds for a new acquisition.
How Do You Define Divest?
The word “divest” means the act of getting rid of something. This term is used heavily in the corporate context, which involves selling some assets of an organization. The word does not simply refer to a concrete act – it can also be applied to titles or positions, which involves stripping someone of their title or position within a company.
Which Companies Are Using a Divesting Strategy?
In the Philippines, these companies demonstrate the example of divestment strategy:
- AirAsia divested over 28% of its share to F&S Holdings Inc. as part of its corporate restructuring program.
- PLDT divested its 8% stake at Meralco to foreign investors because of its lower net income earnings.
- Ayala Corp. sold its non-core assets to give Manny Villar’s Prime Asset Venture 100% ownership of the Muntinlupa-Cavite Expressway (MCX).
What Was the Divestment Social Movement in South Africa?
Protests were held in South Africa in the 1960s in the hopes of ending apartheid. When traditional forms of protests proved ineffective, college-based members of the anti-apartheid movement pressured their universities to divest their stocks to enact social change. With the risk of corporations not doing business in South Africa, the government was forced to make reforms to put an end to the apartheid movement. This is the best example of a divestment strategy with a social impact.
🎠Divestiture: Advantages & Disadvantages
Implementing a divestment strategy can have its advantages & disadvantages. There are various reasons why an organization might consider selling its assets. Here are essential pointers to building a successful framework for a divestiture.
Advantages of Divesting Strategy:
- It builds strategic focus. Divesting assets allows an organization to let go of assets or divisions that are not aligned with its core competencies. Letting these non-performing (or low-performing) assets go, a business can focus its resources on those assets that offer the highest profitability.
- It generates cash flow or reduces debt. Cash flow is king in business. If a company is low on cash flow, divesting assets helps generate funds to improve capabilities or eliminate debts.
Disadvantages of Divesting Strategy:
- It negatively impacts cost distribution. When you lose one or two business assets, the fixed costs are spread to other remaining units, which places added financial burden on these assets.
- It has long-term negative consequences. Divestment strategies always involve some risk. A company might obtain immediate funds for the sale, but the parent organization is unable to balance out the cash flow fluctuations. It also loses out on the opportunity to explore the long-term growth potential of that particular unit.
đź‘“ Examples of Divestment Strategy
The importance of looking at divestment strategy examples lies in demonstrating the best way to go about this process. They can help a business discover the best way to come up with a divesting strategy that will bring about long-term benefits.
One example of divesting strategy that works is Weyerhauser. Since 2004, they have sold over $9 billion and utilized the funds raised to expand from a pulp-and-paper company to a leading manufacturer of timber and building materials products.
Roche, a flavors and fragrances company, divested most of its business assets in the 1990s. In the 2000s, they formed Givaudan, which expanded its business into selling vitamins and fine chemical products.
Bell Canada is another notable divestment strategy example, which involved keeping a close tie with its divestor. Bell Canada is a residential wire-line business. The new company that had spun off from its divested assets focused on major urban markets, while the parent company is focused on national markets.