Divestiture Capability and Firm Performance

Patia McGrath, PhD Student in Management, The Wharton School

Abstract: In order to sustainably innovate and grow, firms must, at times, shrink. This research is premised on the concept that the success of a firm’s innovation strategy relies not just on its ability to “grow smart,” but equally on its ability to “shrink smart.” Indeed, firm expansion and firm contraction are inextricably linked, and together they comprise a firm’s strategic heartbeat. By opening the black box of the divestiture process and examining divestiture capability development, this research is positioned to show that there is tangible (and often, untapped) value associated with “shrinking smart” — and perhaps that a proactive approach around the execution of scope reduction could be a differentiating factor in the success of a firm’s innovation management strategy.