SDA Professor of Strategic and Entrepreneurial Management
Why do so many firms have unfocused business portfolios? Too often, firms pay more attention to adding new businesses to accelerate growth than to divesting existing activities that do not provide the desired results. It is (apparently) easier to add another product category than to gain market share in an existing category. Many managers find it hard to turn down creative ideas, so they let colleagues continue to develop them. At some point – without a deliberate, informed decision – the ideas become too big to stop. On the contrary, it seems to be impossible to build a reputation, a career by identifying and executing divestments.
Companies often have low awareness about the strategic importance of divestitures, often considered a last resort. They also miss the psychological and behavioural dynamics behind these moves. Therefore, the majority of divestitures are reactive at best, tardy at worst, and thus, value-destroyers. Of course, it may be helpful to create a position within a firm based on the identification and execution of divestment opportunities.
However, not all firms value quick divestment from businesses that underperform or no longer fit into the portfolio. That is unfortunate. Instead, divestment should be a pre-condition of investment and acquisitions. Divestment allows a dynamic re-allocation of resources – and it should be a voluntary, planned and deliberate procedure aimed at creating or enhancing the competitive advantage of the divesting company. The figure below depicts the main phases of the divestment process.
Awareness and evaluation gaps in divestiture decisions
The first step in the divestment process is to understand whether there are divestment opportunities to evaluate. There are many reasons why firms have difficulties in questioning the right of a business unit to remain in a firm’s portfolio. The awareness gap is mainly created by informational barriers, such as ineffective reporting systems, the use of short-term indicators without scenario analysis, or low attention to early warning signals that can inform about trends and changes in the market. There are several tools and approaches to support management teams as they attempt to overcome the awareness gap: dedicated divestiture teams, formal portfolio reviews and clear resource allocation rules.
Bridging the awareness gap is a necessary step towards the implementation of a divestiture, but it is not enough. Although managers may be aware of the presence of a problem, they may decide to wait or to hold on instead of phasing out the business. This evaluation gap has roots in managers’ escalation of commitment – or sunk cost fallacy: i.e., individuals or groups stick with a previous decision, investment or investment even though increasingly negative outcomes result from that behaviour. The boundary between awareness and the evaluation gap is often blurred, since an ingrained resistant to divestiture is likely to lead managers to ignore negative signals or minimize the magnitude or urgency of the problem. Even in presence of effective reporting systems, top management might engage in what is defined a “deaf effect”. In other words, they might - consciously or unconsciously - discount information in order to avoid ending up in uncomfortable situations.
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How to overcome the gaps
A first approach to reduce the evaluation gap is to start with an external analysis about key elements that have changed (market lifecycle, competitive dynamics, emerging technologies, etc.) that could represent good reasons for a divestment decision, rather than starting an internal blame game, which would only widen the gap. Another way to fight the evaluation gap is to run reappraisal exercises using role-play to change perspective: “what would a newly appointed CEO do?”
A third method is expressive writing which involves talking or writing about an emotionally stressful or even a traumatic event may have a cathartic effect and reduce emotional upheaval by linking together the affective and the cognitive components of the event, and by allowing to re-organize, assimilate and give meaning to the it. Expressive writing exercises invite participants to write about their feelings and thereby facilitate emotional adaptation. It also reduces the impact of event-related intrusive thoughts and helps people to assimilate the stressor or to restructure their cognition about it by triggering a resolution of the discrepancy between pre-existing schemas and information inherent in the stressful event. In effect, writing about emotional topics is associated with a reduction in stress. Organizations can borrow this tool from psychology and use it in the divestiture context in order to help managers overcome the stress and negative emotions associated with such an experience. To that end, participants may be invited to take a moment to think and write about their feelings and divestiture-related concerns, elaborating on the answers. The instructions could read: “Take a moment and think about the possibility of divesting business XYZ. What are your personal emotions and concerns about such an event? Does this possibility make you feel sad, anxious, uncomfortable, personally or professionally threatened? Feel free to express your feelings and personal worries about it.”
From decision-making to successful execution
Finally, the implementation gap is the one between the decision to divest and the actual execution and completion of the deal. In this case, cognitive barriers have a lower impact, except for anchoring biases that might create a difference in buyer and seller’s pricing of target business. Generally, we can attribute this gap to practical matters such as increasing resistance or unions’ opposition, difficulty in finding a buyer or a feasible alternative divestment option.
*This contribution is based on the work with Lucia Sette (“Learning to Divest: Overcoming Managerial Barriers”, Bocconi MSc thesis, April 2016)