A Business Encyclopedia

Divestment Strategy

Definition: The Divestment Strategy is another form of retrenchment that includes the downsizing of the scope of the business. The firm is said to have followed the divestment strategy, when it sells or liquidates a portion of a business or one or more of its strategic business units or a major division, with the objective to revive its financial position.

The divestment is the opposite of investment; wherein the firm sells the portion of the business to realize cash and pay off its debt. Also, the firms follow the divestment strategy to shut down its less profitable division and allocate its resources to a more profitable one.

An organization adopts the divestment strategy only when the turnaround strategy proved to be unsatisfactory or was ignored by the firm. Following are the indicators that mandate the firm to adopt this strategy:

  • Continuous negative cash flows from a particular division
  • Unable to meet the competition
  • Huge divisional losses
  • Difficulty in integrating the business within the company
  • Better alternatives of investment
  • Lack of integration between the divisions
  • Lack of technological upgradations due to non-affordability
  • Market share is too small
  • Legal pressures

Example: Tata Communications is the best example of divestment strategy. It has started the process of selling its data center business to reduce its debt burden.

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