In Pursuit of Multiple Goals: Influences of Corporate and Business Unit Performance on Divestitures

Abstract

We investigate how diversified firms adapt in response to performance feedback on multiple goals across corporate and business unit levels. By connecting performance feedback theory to the divestiture literature, we show that organizational structure influences adaptation through business and geographic divestitures in response to performance close to and far below aspirations, and that performance feedback on a lower-level business unit goal can modify the response to performance feedback on a higher-level corporate goal. We posit that declining corporate performance increases divestments of business and geographic segments to fix corporate performance problems up to a point after which these relationships taper off due to threat-rigidity response. In contrast, declining unit performance leads to increases in business divestitures and net decreases in geographic divestitures as freed-up resources from unproductive areas are reinvested into attractive regions; these coordinated set of refocusing and reinvestment activities improve profitability up to a point after which the relationships taper off as troubled units face reduced flexibility to change. We also posit that conflict resolution of multiple interdependent goals across levels occurs through changes in the types of divestitures. By empirically studying how adaptation occurs across diversified firms, we contribute to extending knowledge on divestiture behaviors in response to performance shortfalls with respect to multiple hierarchical goals.