Conceptualizing the Effects of Divestment on Brand Image-A Communication Perspective

CONCEPTUALIZING THE EFFECTS OF DIVESTMENT ON BRAND IMAGE-A COMMUNICATION PERSPECTIVE

Abstract:

While divestment activities have been a popular business strategy, little is known about the impact of these activities on the brand image. In this paper, we take a communication perspective and argue that divestment activities’ impact on company’s brand image is moderated by the announcement frame companies use. Based on this argument, we also develop several propositions about the impact of different divestment decisions on the company’s brand image for different announcement frames.

Keywords: Divestment, brand image, announcement frame

Inrecentyearsthenumberofdivestment has beenincreasing significantlyhowever theresearchcommunityisstillbehind withregardto divestments(McDermott, 2010)andthedifferent implicationit mayhaveonafirm’sbrand image (Burt, Dawson, & Sparks, 2004).Of all the various types of activity, divestment is the most likely to be under-recorded with firms, having a concern over their image, more likely to not report divestment than entry and growth(Burt et al., 2004).

Awell-definedbrand strategyisakeycontribution tofirmssuccessandmanytimeacompany’s strategydoesn’t includedivestment(McDermott, 2010)as it isoftendeemedas an action whichistheconsequenceoffailure/poor performance(Hamilton & Chow, 1993; Weston, 1989)onthepart ofthecompanyor dueto market conditions. Both(Grunberg, 1981) and (Loke, 2008),havestatedthatowingto the sensitivity ofthetopic in that, many executives view divestments as a being associated with failure and are thus reluctant to participate in the research which makes it isdifficult togather valuabledatatoresearch(Palmer, 2004)

Divestment has often different roles suchas beingacorporatediversificationstrategy(Thompson, 1997)andof suchdivestment mayhaveeffectsonabrand’simage, which is defined as the way consumers view a brand and their associations with it, it is the association of the brand held in a consumers memory(Low & Lamb, 2000). According to (Keller, 1993)brand associations are the beliefs consumers hold for and “associate” the brand with..

Divestment also referred to as withdrawal, disposal, disposition, market exit is a firm's decision to dispose of a part of its business. Divestment involves getting rid of a portion of a business. For example, firms may sell, close, or spin-off a strategic business unit, major operating division, or product line. A firm’s motive to divest may be unsatisfactory financial performance, better investment opportunities, problems associated with managing subsidiary (Boddewyn, 1979; Steenhuis & Bruijn, 2009; Torneden, 1975).

Brandimageplaysaveryvitalrolein the prosperityofabusinessandmaintainingapositivebrandimageisoftop importancewhen decisionmakersinacompanycompileorexecutetheir strategiesor tactics.Withthisinmind, coupled withthelimitedscientific researchinthisareathisresearchseekstoexamineandscrutinizetheimpactof divestmentonbrandimage. In doing so we conduct an empirical study of the effects of divestment on brand image, investigating the usage of “signaling theory” to moderate the effects of divestment and outlining the managerial implications of such business process.

Literaturereview

Brandimageisa well-establishedconcept inmarketinge.g.,(Keller, 1993; Low & Lamb, 2000). In the context of this research, consistent withfindingsby(Dobni & Zinkhan, 1990)brandimageistheconceptofabrandthat isheldbythe consumer. Suchconcept isformedthroughconsumer interpretation, whether reasonedor emotional.Most importantly,brandimageiscreatedby marketingactivities,contextvariables(such as price, availability) andbythepeculiaritiesoftheperceivers, theperceptionofrealityismoreimportant thantherealityitself.Thisdefinition isthebasisfrom whichwedefinebrandimageas “perceptionsabout abrandas reflectedbythe brandassociationsheldinconsumer memory”(Keller, 1993). In that how consumers view a brand/the association a consumer has with a brand because of the way the perceive different notion associated with be it negative or positive.

Divestment constitutes thesaleofpart ofthecompanytoanexternal buyer.Thesellingcompanytypicallyreceives moneyor marketablesecurities, or acombinationofboth.Oneofthepioneersofdivestment researchisJean Boddewyn.Between1973and1985,Boddewynpublishedaseries ofarticlesondivestment,and,today,heremainsanoutstandingearlycontributor to thisareaofstudyininternationalbusiness as hehighlightedthelimitations ofmultinationalenterprises andtheir vulnerability.Accordingto Boddewyn (1979) and BenitoandWelch (1997), divestment,whichisalsoknownas de-internationalization/marketexit /market withdrawal/ divestureisthe reductionofafirm’soperation.Inother words,divestment refersto thedisposal ofpartsofafirm’sassetswhichmaybeadepartment,entireunit,or division(Chang & Singh, 1999; Duhaime & Grant, 1984).

Researchershavefocusedontheimpactofdivestment from thefinancial perspectivessuchas howdivestment affectsfirms’ performance(Haynes, Thompson, & Wright, 2002; Markides & Berg, 1992) andtheimpacts ofdivestmentonfirm valuehowever,verylittleattention havebeengiven to theeffectsofdivestmentonbrandimage.Thus,wehave limitedinsight as tohowdivestmentaffectsbrandimage.

Inthecontext oftheresearch,divestment willbeclassifiedinto3major categories (Grunberg, 1981; Ketkar, 2006; Steenhuis & Bruijn, 2009):

Closure-(liquidation) thisreferstowhenabusinessdecided tostopofferingaservice/shut downitsfacilities.

Disinvestment (starvation) – the decrease in a company’s operation by limiting investing funds or withdrawing profits and investing elsewhere

Asset sell-offs (divestiture); thesubsidiaryissoldtoathirdparty, sononew firm is created,andtheparent firm receivescashinthetransaction.

There are various determinants and motive for the decision to divest and upon making a divestment decision firms are then faced with the paramount task of announcing their decision. Studies have noted that divestment decision are usually taken by the key decision makers such as top manages in the headquarters and only after are subsidiaries/unites informed (McDermott, 2010). In the same breath (Cairns, Quinn, Alexander, & Doherty, 2010) found that it usually take the appointment of a new CEO to tackle the divestment decision and process. On account of this, firms have to pay upmost care as to how they announce or frame their divestment decision. A company divesting due to poor management may not be ready to blatantly accept that they have failed at their task but would rather frame the issue as “strategic restructuring” which in itself is rather vague. (Dean, 2004) pointed out that negative publicity is likely to have adverse effects on organizational image (which include brand image) as people tend to weigh negative informationheavier than positive information. Owing to this on the basis of signaling theoryfirms can manipulate the information which is made available to the respective stakeholders (shareholders, employees, customer). In their work “Signaling Theory: A Review and Assessment” (Connelly, Certo, Ireland, & Reutzel, 2011) amicably outline the impactfulness of the use of signaling theory by businesses to achieve their desired results. They also highlighted the notion that “the intuitive nature of signaling theory in part helps explain its pervasiveness”.

Signaling theory (Spence, 2002)examines the communication between individuals; in the heart of this theory is the concern of reducing information asymmetry between two parties. Information asymmetry can be categories as information about quality and information about intent.

Information about quality is plays a vital role when one party has limited knowledge about the other party whereas information about intent is the platform for when one party is concerned about another party’s behavior or behavioral intentions(Connelly et al., 2011; Elitzur & Gavious, 2003; Stiglitz, 2000, 2002)

This paper has twofold focus: consumers that have limited knowledge of firms’ divestment decisions, and firms that strive to keep the public in line with their activities (e.g. for shareholders to know the direction in which the company is heading, to increase brand awareness or image among consumers/ customers). We aim to examine how the signaling of divestment decision by a company will affect the brand image of the company. We address the following research questions: 1) whether and to which extentabrandimageinfluencedbydivestment, 2) doesthe typeofdivestment haveadifferentialimpactonbrandimage, 3) how does framing of the divestment decision affect/ moderatetheeffectsofdivestment onbrandimage?

Theoretical framework

Areviewoftherelevantliteraturerevealsthat divestment tendstohavea negativeimpactonabrands imageandthisismoderatedbythetypeof divestment. Brand image will be operationalizedbrand value of a brand value that is the value of a particular brand for the company that makes it.This so because consumers’association of a brand influences their decisions to buy the products of the said company hence impacting on the market value of a brand. However, there are exceptions, consumers may still but a product even if they have a bad image and this may due to factors such as lack of financial means to purchase other products, attributes of a product, uniqueness etc. The way a consumer perceives a brand will influence their purchase in the market place (Berk & Burç, 2003). On a similar note (Zhang, 2015) posits that through marketing, businesses“ establish the brand image in consumers’ mind, and stimulate consumers’ actual purchasing behavior of the brand, therefore increasing sales, maximizing the market share”

The different modes of divestment have various issues as a focal point, however the significance of the issues vary depending on the mode of divestment. Insert table 1 here

In light of this divestment can be considers as having effect on a brand. However, these effects may be moderated by the way a company “frames” its divestment decision. In that, the way a company rationalizes its decision to divest to the public.

Grounded in signaling theory which put forward by (Spence, 1973)is the concerned with the way a company communicate me information regardingitself and/or its products to the targeted agent. Signaling theory is built on the basis of how firms through their marketing activities conveying some meaningful market, product, or service information to customers and/or another party in their marketplace (Hult, 2010). Companies use different communicating strategies and tactics “signal” in terms of the research “frame” a particular issue so as to achieve their desired result be it brand awareness, market positions etc. It is against this background that the research argues that through the use of signaling theory in the form of framing companies are able to moderate the effects of divestment on brand image.

The propositions based on literature review are:

Proposition 1: Divestment always has an effect on brand image, although the sign and extent of this effect vary depending on the divestment mode.

Proposition 2: Closure as a mode of divestment will have the most severe effect on brand image.

Proposition 3: Splittingcapital as a mode of divestment will have an indifferent effect on brand image.

Proposition 4: Assets sell off as a divestment mode with will have minor negative effects on brand image.

Insert figure 1 here.

Thepresentedmodel infigure1seeks toacquireinformationabout howdivestment affectsbrandimage with the use ofsignaling theory, which is operationalized by the framing approach that firms use to convey information consumers. Thisincorporatesvariableswith impactuponbrandimage perception.Thismodelisemanatedfrom initial imageandtriestoelaboratetherelationsandinteractionsthatoccurwhenacompanydecidestodivest.Consideringthevariables ofdivestment modeanditslinkage withthedivestment,the modelclarifiestheeffectsofthesevariablesonbrand image.Basedonthemodel,thedecision todivest andthemodeofdivestment affect brandimage,however theseeffectsmaybemoderatedusingthe signaling theory ground.

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Appendix

Main issues associated with divestment

Type of Divestment / Main Issues
Closure (liquidation) / Loss of jobs, highly controversial, highly publicized, highly sensitive, a spin off effect on other companies which are closely related to it, employees maintain may maintain their employment, the line of business may continue as was under new management, may cause political tension,
Disinvestment (starvation)
Asset Sell-offs (divestiture)

Table 1

Theoretical model of divestment and its effects on brand image

Figure 1