Corporate Entrepreneurship: Partial Divestitures as a Real Option

• DOI: http://doi.org/10.1111/emre.12099
• Date: 01 March 2017
• Author: Johanna Mair,Caterina Moschieri
• Published date: 01 March 2017

Corporate Entrepreneurship: Partial

Divestitures as a Real Option

CATERINA MOSCHIERI

1

and JOHANNA MAIR

2

1

IE Business School, Madrid, Spain

2

Hertie School of Governance, Berlin, Germany

Scholarsin strategy and entrepreneurship havediscussed the benefits and difficulties of keepingventures inside the

firm versus separatingthem through divestituresand the balance between control and autonomy. Using an in-depth

analysis of cases of partial divestitures, this study examines the organizational arrangement that arises from

divestitures with a retained parent-unit relationship. The emerging framework connects the parent-unit relationship

and its modifications along the divestiture’s objective –specifically, the exploration carried out by the unit. Partial

divestitures are designedas real options, for firms to managecorporate venturing, takingadvantage of the flexibility

that such arrangement may grant.

Keywords: corporate entrepreneurship; corporate strategy; corporate venturing; divestitures; organizational

architecture; real options; restructuring

Introduction

In the last decades, understanding corporate ventures

and how they are designed and structured has been a

major concern for researchers interested in corporate

entrepreneurship (Guth and Ginsberg, 1990; Zahra,

1995) and strategy (Burgelman, 1983a; Zahra, 1991).

Within this line of research, scholars have weighed the

pros and cons of keeping ventures inside a firm versus

spinning them off. In that decision, companies face the

problem of striking a balance between autonomy (as

found with a spin-off) and control (when a venture is kept

inside) (Sharmaand Chrisman, 1999; Chesbrough, 2003).

Departing from the common perception that spin-offs

and divestitures in general are a reaction to past strategic

or managerial mistakes and a means to end relations with

unwanted business units (Porter, 1987; Capron, Mitchell

and Swaminathan, 2001), research in corporate

entrepreneurship has argued that spinning off units

increases the likelihood of venture success (Seward and

Walsh, 1996; Semadeni and Cannella,2011). Divestitures

can help to address the problem of size mismatch between

a new venture and its parent company, and can allow the

venture to explore opportunities in unfamiliar markets,

industries or technologies that would be hard to explore

within the umbrella of the corporation (Sharma and

Chrisman, 1999; Kuratko and Audretsch, 2009). But for

the divesting company, a spin-off can also mean the loss

of key knowledgethat might be useful in the future.These

considerations were important for example for Xerox,

which divested morethan thirty units, but supported them

by sharing sales forces, licensing technologies and

investment capital. Xerox managers understood that

divested units wereuseful to enhance internal congruence

and to cultivate the parent company’sunutilizedbusiness

opportunities (see Chesbrough and Rosenbloom, 2002;

Chesbrough,2003). The divested units eventuallybecame

successful new companies, such as 3Com, Adobe, and

Documentum, and Xerox shared the financial gains from

the commercialization of their technologies or their initial

public offerings (IPOs). The case of Xerox is not an

isolated example. In 2006–2007, 3,504 units were

divested (worth $293bn.) worldwide, in which the parent

retained at least a 20% ownership stake. In 20 to 40% of

divestitures,companies divest their unitssequentially over

time, retaining an initial ownership stake and selling the

residual ownership within a few years, while about 30%

of all divested units are reacquired by their former

parent within a few years (Schipper and Smith, 1986;

Klein et al., 1991; Hand and Skantz, 1997; Reuer and

Shen, 2004).

Correspondence: Caterina Moschieri, IE Business School, Calle

Maria de Molina 11, 28006 Madrid, Spain. Tel: +34 915689600;

Fax: +34 914116511; E-mailcaterina.moschieri@ie.edu

European Management Review, Vol. 14, 67–82, (2017)

DOI: 10.1111/emre.12099

©2016 European Academy of Management

Previous theoretical and empirical studies in strategy

and entrepreneurship observed a variety of different

aspects of the parent -unit relationship in the se common

operations, building on an equally varied number of

theoretical lenses (for a review, see Moschieri and Mair,

2008). What is lacking is a framework that examines

partial divestitures as a mechanismfor corporate venturing

that connects the how to the why of this phenomenon,

namely, the different aspects of the parent-unit relations,

with the strategic objectives of the divestiture. This study

seeks to contribute to the literature in corporate venturing

by examining the organizational arrangement that

emerges from divestitures with a retained parent-unit

relationship and conceptualizing it as a real option for

the firm. As a real option a divestiture allows the parent

to explore new technologies, new areas of business or

new approachesto the market that go beyond theumbrella

of the firm. The parent unit can also maintain partial

ownership of the venture without making a final decision

about the product or technology until the fit with its

businesses or technology is clear.

The following questions guide our empirical analysis:

Once a divestiture has been decided on, why does the

parent retain a partial relationship with the divested unit?

What is the nature of the retained relationship between

parent and unit and how does it change over time? The

possibilityof retaining a measure of controland being able

to bring the divested venture into the fold constitutes a

unique setting to examine the characteristics and drivers

of decisions in the context of corporate entrepreneurship.

Although recentquantitative analyses have shednew light

on divestitures as a means to manage environmental

uncertainty (e.g., Damaraju et al., 2015), there remains a

general lack of understanding about how companies can

structure divestitures in a way that is reversible. We use

an exploratory research design and examine four cases

of publicly listed multi-business companies that divested

units and retained a relationship with them over a period

of up to five years after the divestiture.

The framework we develop connects the parent-unit

relationship and its subsequent modifications contingent

on the divestiture’s objective –specifically, the type of

exploration carried out by the unit. Our study provides

evidence on how p artial divestitur es can be consider ed

as real options. The parent company might choose to

exercise the option by reacquiring the unit, or it might

fully divest. When the divested unit explores new

products, the parent company tends to reacquire the

divested unit oncethe product has been developed. When

the unit exploresnew markets or partners, theparent tends

to sell off its residual ownership.

Our study contributesto existing literature on corporate

entrepreneurship and divestitures in several ways. First,

our study provides a fine-grained and grounded

understanding of divestitures. It confirms and extends

others’arguments about the structuring of divestitures

(e.g., Bergh et al., 2008; Moschieri, 2011; Semadeni and

Cannella, 2011)by more fully representing the continuum

of existing divesting modes to include a thus-far

understudied type of divestitures, that is, partial

divestitures.In contrast to traditional modelsthat examine

corporate venturing from the perspective of all in or out,

that is, keeping the venture in the firm or spinning it off,

we examine a common alternative approach, partial

divestitures, where the firm can keep an option to undo

the decision to separate the new venture. Our findings

offer a unified framework of how companies implement

their choices of divesting mode and which relational

arrangement they may adopt post-divestiture. The option

to intensify or further loosen the relationship with the

divested unit is especially valuable when new markets,

partners, or products are a strategic priority, but when it

is not clear how the outcome of such explorations will

fit in the firm’s future strategy. This puzzle is the natural

territory of corporate venturing.

Second, our insights about how managers address this

uncertainty contribute to theory on corporate venturing.

We propose that partial divestitures complement the

options available for companies to develop a portfolio of

staged exploratory investments. To invest in exploratory

projects and develop the necessary expertise, companies

leverage –often simultaneously –a range of

organizational arrangements, such as internal R&D,

acquisitions, joint ventures and alliances (Nicholls-Nixon

and Woo, 2003). Our studyshows that companies can use

partial divestitures to actively manage their units and

assess whether and how theycan fit together to add value

to the corporation. Thisstrategy gives firms the flexibility

to increase or decrease commitment to the unit and to

postpone decisions about permanent structural changes

until time and context-specific circumstances are optimal.

It also helps firms avoid potential losses associated

with internal development, direct investments in new

markets, partners, or products, and excessive fixed costs

and losses.

Lastly, this study explains how compan ies can set up a

real optionapproach to their existing businesses.Previous

research used a real optio n analytical lens to underst and

companies’investments in exploration-oriented activities

at the inter-organizational level, for example, the factors

that influence i nvestors’decisionsto buyout their partners

in external equity partnership arrangements (Miller and

Folta, 2002; Vassolo et al., 2004). The assumption w as

that divestitures can be analyzed with the same real

options logic as investment decisions because a real

options logic may serve to manage the uncertainty about

the value of the unit-to-be-divested (Damaraju et al.,

2015). Instead we focus on how and why companies

structure a real option for their existing internal activities,

namely, divestitures for internal corporate ventures. Our

68 C. Moschieri and J. Mair

©2016 European Academy of Management