Divesting businesses regularly, even some good, healthy ones assures that remaining businesses reach their full potential and the overall company grows stronger. Some executives well understand the significance of a well-planned divestment program.
Holding on a business too long raises a variety of costs (1) Costs to the corporation, (2) Costs to the unit and (3) Reduced exit price. Though these costs are hidden, they can exceed the benefits of holding on the business.
Costs to the Corporation: On the one side, well-established profitable businesses can generate cash and provide smooth and predictable earnings. On the other hand, they can cripple a company; make it unable to originate new, high- growth businesses. Resolute business building often needs a sense of crises- a clear and pressing need for growth. Long- held/ low- growth businesses may provide a corporation the cash to thrive in the short run but they can hurdle it from preparing for a prosperous tomorrow. A long-held business can cause a corporation the following costs:
(a) Breed Risk-Averse Cultures: Companies dominated by mature low-growth businesses can breed inflexible, risk- averse culture that can stifle innovation and freethinking, making it difficult to attract energetic and entrepreneurial executives. For example, Perkin when took over as CEO, launched a number of divestitures not just to reposition the company but also to attract a new team of executives.
(b) Usurp Corporate Resources: Long-held businesses can usurp more corporate resources than they actually require. They can take up investment funds and require precious management time that might have been applied to creating new businesses with stronger growth prospects. A senior management team can manage a limited number of businesses. A sluggish portfolio can turn a company’s management paralyzed, unable to concentrate on new opportunities. Every year review the role of each business unit as part of the overall company’s strategic planning process, sees divestiture as a powerful way to free up resources.
Costs of the Unit: When a business unit is held too long, it is not only the company as a whole that suffers but also the unit.
Depressed Exit Price A well-timed divestiture can contribute to shareholder value, and a poorly timed divestiture can destroy value. Most corporations unload a unit only after several years of poor performance. In some cases, industries are so turbulent that managers simply cannot foresee markets slumps and booms. In other cases they may be able to identify the peaks but be unable to find a buyer willing to pay the going price. For the vast majority of divestitures an earlier sale would have generated much higher returns. the longer a business exists, the worse it performs for shareholders.
Holding on a business too long raises a variety of costs (1) Costs to the corporation, (2) Costs to the unit and (3) Reduced exit price. Though these costs are hidden, they can exceed the benefits of holding on the business.
Costs to the Corporation: On the one side, well-established profitable businesses can generate cash and provide smooth and predictable earnings. On the other hand, they can cripple a company; make it unable to originate new, high- growth businesses. Resolute business building often needs a sense of crises- a clear and pressing need for growth. Long- held/ low- growth businesses may provide a corporation the cash to thrive in the short run but they can hurdle it from preparing for a prosperous tomorrow. A long-held business can cause a corporation the following costs:
(a) Breed Risk-Averse Cultures: Companies dominated by mature low-growth businesses can breed inflexible, risk- averse culture that can stifle innovation and freethinking, making it difficult to attract energetic and entrepreneurial executives. For example, Perkin when took over as CEO, launched a number of divestitures not just to reposition the company but also to attract a new team of executives.
(b) Usurp Corporate Resources: Long-held businesses can usurp more corporate resources than they actually require. They can take up investment funds and require precious management time that might have been applied to creating new businesses with stronger growth prospects. A senior management team can manage a limited number of businesses. A sluggish portfolio can turn a company’s management paralyzed, unable to concentrate on new opportunities. Every year review the role of each business unit as part of the overall company’s strategic planning process, sees divestiture as a powerful way to free up resources.
Costs of the Unit: When a business unit is held too long, it is not only the company as a whole that suffers but also the unit.
Depressed Exit Price A well-timed divestiture can contribute to shareholder value, and a poorly timed divestiture can destroy value. Most corporations unload a unit only after several years of poor performance. In some cases, industries are so turbulent that managers simply cannot foresee markets slumps and booms. In other cases they may be able to identify the peaks but be unable to find a buyer willing to pay the going price. For the vast majority of divestitures an earlier sale would have generated much higher returns. the longer a business exists, the worse it performs for shareholders.
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