What Is Asset Redeployment?
Asset redeployment is the strategic reallocation of assets from a less profitable use to a more profitable use. When companies redeploy assets, they take idle or underutilized capital and change how this capital is used in order to increase profitability. A proper asset redeployment strategy can allow a firm to achieve better results for the same cost.
- Asset redeployment refers to the strategic reallocation of assets from a less profitable use to a higher profitable use.
- Assets cost money to store, maintain, and replace. Therefore, effectively deploying assets is crucial to a company's cost management strategy.
- Successfully redeploying assets can result in increased efficiency and higher profits at the same cost.
- When an asset is not utilized and can be redeployed or sold, it is known as a "surplus asset."
- An alternative to asset redeployment is an asset sale, known as an "asset disposal."
Understanding Asset Redeployment
Though assets benefit companies, assets also cost money. These costs include storage, maintenance, and replacement. When assets are not efficiently utilized, they undermine profitability. When this occurs, it is beneficial for a company to review costs associated with its assets in order to determine whether they should be redeployed elsewhere.
Take for example a company that spends $5 million a year on upkeep for a widget making machine that generates $6 million in profits. The $1 million in profit margin can be good or bad, depending on whether the $5 million could be used more efficiently elsewhere.
If the $5 million is allocated to a "New and Improved" line of widgets that generates $7 million in profits, then the additional profit margins would make this a more lucrative option. In this example, the company would be better off retiring its widget making machine and redeploying capital to the new product line.
When the asset is a good—such as equipment or machinery—redeployment can be a money-saving alternative to buying a brand new replacement. In the example above, the widget making machine might be capable of producing the new product line, making it unnecessary to purchase a new one.
Another form of asset redeployment is an asset sale (called "asset disposal"). The proceeds from the sale increase the company's cash balance and remove the costs of maintaining the asset.
Asset disposal usually refers to the removal of a long-term asset that has been fully depreciated or is no longer useful. In the latter case, the asset would be sold at a loss or gain, and there would no future costs associated with that asset. Previously allocated funds could then be used elsewhere.
An asset disposal impacts the balance sheet by recording the removal of an asset, marking depreciation, and noting the gain or loss from the sale.
Assets that a company doesn't use at all and which need to be redeployed or sold are called "surplus assets."
Real World Example
In 2014, General Electric (GE) sold its appliance business to Electrolux for $3.3 billion. The sale was part of the company's long-term redeployment of capital from non-core assets such as media, plastics, and insurance in favor of high-growth, higher-margin businesses such as oil and gas, power, aviation, and healthcare. These moves enabled GE to generate 92.8% of revenue from its industrial business by 2016.
Furthermore, in 2020, GE sold its 125-year-old light-bulb business. The subsidiary had been performing poorly for years, so the company decided to sell and redeploy its assets, allowing for greater focus on industrial business.