What is Divestment Strategy
Divestment strategy is a corporate level strategy that involves downsizing or completely divesting a business unit that is unprofitable to allocate the company’s resources (such as capital and labor) from a divested operation to other profitable operations.
The divestment strategy occurs when the company found that the business unit is no longer able to compete with other competitors in the industry anymore, the company better invest in alternative choices by allocating their resources from the underperforming operation to the profitable business unit.
The divestment helps the company generate more profit from lower expenses since the company divests a nonprofitable business unit, which means the expense for a non-profit business is gone.
An example of a divestment strategy is when the hotel shut down the banquet halls to focus on the room facilities which is generate more profit. From the example, the room facilities will have more resources which means they have more potential for services
The divestment strategy is also known as the divestiture strategy.
Why does the Company need Divestment
These are the reasons why does the company want to use the divestment strategy:
- When the business expands too quickly, but they cannot control the costs.
- The company has cost problems.
- To increase the stability of the business.
- To get capital instantly, to utilize on expansion or improve an existing business uni.
- When the company needs more funds to invest in profitable operations.
- When the company facing the economic recession.
- The company needs to focus on core operations than multitasking.
- Find a better alternative way to invest.
- To keep the whole company still running.
- The turnaround strategy does not work.
- The company continuous loss for no reason.
Yes, the most common reason to utilize the divestment strategy is to allocate the company’s capital from an underperforming operation to a profitable operation.