What happens when your investment strategy renounces or yield unsatisfactory results? Smart individuals and businesses, in such cases, sell their assets or shares to pay off debts and revive their financial position.
Well, most of you might know this strategy or have even used it at times. This strategy is none other than a divestment strategy.
What is a Divestment Strategy?
In technical terms, divestment is a process of an organization or a company selling its assets, investment, or a division of a company to maximize the value of a parent company as well as to satisfy business, financial, political, and social goals.
Let’s take an example of the latest merger of Zee and Sony, two of the biggest entertainment networks in India that have been in the news for weeks. Although the deal is in limbo and is yet to successfully close, the key points we observed in this divestment strategy are interesting.
- Zee has a stronghold on regional content with broadcasting entertainment channels in more than ten regional as well as international languages. In comparison, the regional reach of Sony Entertainment is almost non-existent.
- Sony Entertainment, over the years, has made its name in sports entertainment with streaming matches of practically every game from Cricket, hockey, football, tennis, badminton, and more. On the other hand, Zee’s foot is weaker in sports entertainment.
By this “ink merger deal,” both the entertainment networks will be tapping into each other’s strengths, thereby widening the reach together in both regional and sports entertainment.
However, as a business is a game, and a serious one at that, organizations have to play by the rules. If you manage a team or run the business yourself, you must already know the importance of delegation, whether it’s delegating your responsibility, resources, or financial assets.
In simple words, organizations need to watch for these indicators making the divestment mandatory for business survival or expansion.
Indicators that make divestment mandatory for the company
- Continuous negative cash flow or loss of business from a particular division.
- Business expansion is stuck.
- Better alternative investment options.
- Small market share.
- Legal pressures.
- Lack of divisional integration or technology up-gradation due to low budget.
How businesses implement divestment strategy
- Division spin-off
One of the most popular implementations of divestment strategy is spinning off the divisions.
This, again, can be done in two ways. The company either chooses to operate a certain division or its part as a separate entity, or it can sell a certain division to another organization.
- Closing non-profitable division
Another popular way companies choose to divest is by shutting off the division yielding negative finances or cash flow. In simple words business that has been running at a loss for a long. In such cases, the resources of this division are delegated to other functioning divisions of the company.
A famous denim brand Levi’s, saw its popularity decline among the young boys of age 14-19 and thus has since shut off its several operations.
Delegation: It’s easier said than done
Even though the company is identified as a suitable target of divestment in the market, the rest process is not easy to follow. Things rather start to get difficult from here.
First, the organization has to find the right buyer, which is difficult when selling off a failing unit, then the price must be negotiated. Many organizations often see their negotiations blocked by the management’s expectations of the operations picking up and the unit performing well again.
Here managerial roles and skills play a crucial part. A good manager knows when to turn a failing unit into a profitable one and when they should just let go.
Divestment can also be seen as an administrative failure on the management’s part. Thus, it is usually not the first choice when a business or its divisions is underperforming.
However, as the market needs, business competition, and management strategies often keep changing, divesting becomes inevitable for businesses. And a properly implemented divestment strategy often leaves the company in a strong financial and competitive position.