Question

Answer in 250-300 words. Under what circumstances might a diversified firm choose to divest one of its businesses?

Answer 1

There can be many reasons for a diversified firm to divest one of its businesses. Before getting on those reasons, first we should know the meaning of the terms that are mentioned in the quesion,. Diversified Firm/Business means a business with alots of range of products in the market, a large firm with a lots of products and businesses is known as "Diversifiedfirm". when a diversified firm decides to close a business or stop the production of a perticular product then it is called the "Divest" of the business or product, the word divest means to deprive someone of power, this can be done to any part of a buiness that the board of directers see fit. Some of the reasons are mentioned below:

1) Divest due to losses: If the business is unable to gain profits and insted gaining losses, the business might get divest.

2) High Recalls: If the business is being asked to recalls the product from the market too many times, that might becomes the reason behind it being divest. But there is high chance that this divest might come from legal authorities.

3) Divest to invest in other: Some times due to financial problems, a firm has to divest some of its businesses to survive and has to decide to run some businesses which are more profit bearing in comparison to others.

4) Going to the basics: Many businesses in growing stages takes over other type of businesses as an investment, but after some time they go back to their primary business and divest the other businesses that they took over in their way of success.

5) Divest due to legal issues: Many times businesses get divest y the order of law, because the government and law dont want one business to create their monopoly in the market.

6) Better and new: When a new and better version of a business comes, the old one many times does not survive and insted of evolving, it gets divest.

7) Social and Moral reason: If a business is hurting the society or the morals of the people, that business will get divest, sooner or later.