A smart divestiture strategy can be a tool for reinvention, but some common biases often prevent leaders from using it.
Five reasons executives have trouble ‘letting go’
A recent PwC divestiture survey of more than 2,500 executives, coupled with interviews and statistical modelling, establishes a strong correlation between long-term value, as gauged by total shareholder return, and a proactive divestiture strategy—one that favours rigorous portfolio reviews and timely, decisive moves on selling business units that aren’t a fit. And yet, only 14% of the surveyed companies have such a strategy in place. What’s holding management back from using this proven value-creation approach? The graphic above shows five common and stubborn psychological factors that can get in the way of good decision-making.
Overcoming them can require a root-and-branch overhaul of how portfolio and divestiture decisions get made. The survey identifies four actions to focus on:
Formalise the portfolio-review process. Relying on infrequent ad hoc analysis can lead to missed signals that a business unit is no longer a fit, and increase the chances that managers will fall prey to overconfidence, confirmation bias or status quo bias. Formalise the review process, basing it on an annual plan and updating it quarterly or even more frequently, underpinning it with rigorous, standardised analysis.
Make the reviews more comprehensive. Too often, companies rely solely on historical financial data in their portfolio reviews. A robust review includes data combining both historical information and an analysis of the current and future competitive environment, including potential market adjacencies, as well as non-financial information. Greater analytical comprehensiveness, including a longer-term focus, can help widen managers’ perspective beyond short-term consequences, reducing resistance to divestiture rooted in anticipated regret and loss of prestige.
Get the board involved. Boards can make capital allocation and reinvestment alternatives a standing agenda item, widening the aperture for the potential divestiture’s proceeds to create value. This can help company leadership focus on the better use of capital, while managing emotions and biases.
Make reinvestment plans. The lack of a reinvestment plan can cloud divestiture decisions. Absent a reasonable alternative, executives are more susceptible to status quo bias and the urge to attempt to fix instead of sell a business. Divesting releases capital that can be reinvested in more strategic initiatives possessing higher returns on capital. The better articulated a company’s reinvestment plans are in a portfolio review, the more likely that managers will overcome individual biases to make smart divestiture moves.
Find out how to make divestitures a central part of your value-creation strategy.
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