To Grow, You Need to Know How to Cut

DIVESTITURES OF COMPANY BRANCHES ARE MORE EFFECTIVE AND GUARANTEE MORE RESOURCES FOR INNOVATION WHEN THEY ARE PARTIAL. ACCORDING TO A BOCCONI STUDY, MANAGERS OF COMPANIES WITH A HIGH LEVEL OF KNOWLEDGE SHOULD SUPPORT THE SALE OF INDIVIDUAL PRODUCTS OR PARTS OF COMMERCIAL UNITS

by Nilanjana Dutt, Dept. of Management and Technology, Bocconi

Not all divestitures are born equal. In 2013 GSK offloaded its thrombosis brand Arixtra, selling all physical and intangible resources connected to the medicine, yet likely retaining technological knowledge connected to its product class. In 2015, on the contrary, GSK sold its full oncology unit, including all associated products, patents, and R&D facilities, in what can be considered a full divestiture.
 
Divestitures have typically been considered as a mode by which firms fix prior mistakes of over-expansion and diversification, but it has been recently suggested that they can also improve performance, by freeing underutilized resources to drive subsequent growth.
 
New research conducted in the pharmaceutical industry shows that the technological resources lost in partial or full divestitures differ greatly, thus impacting differently a firms’ ability to generate new technological knowledge. Because full and partial divestitures differ in the degree to which they disrupt and modify an organization’s resource base, they influence technological knowledge growth differently.
 
Differences in the magnitude and nature of the knowledge losses systematically influence the likelihood of subsequent technological knowledge growth. In the case of partial divestitures, although access to knowledge and technological capabilities embedded in the sold product, product line, or manufacturing unit will be reduced, some knowledge is likely retained as it may be embedded in other parts of the unit. Instead, when a full business unit is sold, all related knowledge and capabilities will be lost. Furthermore, because the existing knowledge base is critical to new knowledge development, organizations at risk of losing foundational knowledge are more likely to be hampered in the production of new technological knowledge.
 
Thus, we expect that relative to full divestitures—which are associated with greater knowledge losses—partial divestitures will be more significantly associated with technological knowledge growth.
 
With Elena Vidal we have measured technological knowledge growth by examining changes in the number of active clinical trials across all phases by each firm in each year. Because clinical trials are a precursor to drug commercialization, they represent an appropriate measure of technological knowledge. The results demonstrate significant differences between how full and partial divestitures are associated with future technological knowledge growth: as compared to full divestitures, partial divestitures are associated with higher growth in technological knowledge. These findings suggest that although the sale of full units diminishes a firm’s ability to generate new technological knowledge, resource growth driven by divestitures likely comes from partial divestitures.
 
Our findings suggest that partial divestitures are strongly associated with resource growth and that the removal of assets can be an input to subsequent technological knowledge growth. Together, this research highlights the important role of corporate strategy in driving innovation activities. For firms and managers in knowledge-intensive industries, these results are relevant. Managers should embrace divestitures but, ideally, if they are able to sell products and partial business units. Firms may also benefit from decomposing the sale of full business units into multiple partial divestitures over time, to reduce the loss of technological knowledge in any given period.