Chapter 7 Corporate Strategies II

Moses Acquaah, Ph.D.

377 Bryan Building

Phone: (336) 334-5305

Email: acquaah@uncg.edu

Lecture ObjectivesDescribe when organizational stability is an appropriate strategic choice.Define organizational renewal strategyDiscuss the causes of corporate decline and indicators of corporate performance declineDescribe the two main types of renewal strategiesExplain how renewal strategies are implementedDescribe how corporate strategies are evaluatedDiscuss the major portfolio management techniquesDescribe how corporate strategies are changed

ORGANIZATIONAL STABILITY

A strategy where the organization maintains its current size and current level of business operations

When is stability an appropriate strategy?Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertain

Industry is facing slow or no growth opportunities

Many small business owners follow stability strategy indefinitely – personal objectives met

ORGANIZATIONAL STABILITY

When is stability an appropriate strategy?Organization has just completed a frenzied period of growth & needs to have some “down” time in order for its resources & capabilities to build up strength again

Large firm in large industry at maturity stage of industry life cycle

Implementation of Stability StrategyNot expanding organization’s level of operation

Should be a short-run strategy

ORGANIZATION RENEWALA strategy that is used to reverse organizational decline & put the firm back on a more appropriate path to successfully achieve its strategic goalsMain cause of corporate decline is poor managementPoor management manifests itself in:

Over-expansion or too rapid growthInadequate financial controlsUncontrollable costs or too high costsInability to anticipate & deal with new competitorsInability to anticipate unpredictable shifts in consumer demandSlow or no response to significant external or internal changes

ORGANIZATION RENEWAL

Indicators of corporate performance declineExcess number of personnel

Unnecessary & cumbersome administrative procedures

Fear of conflict or taking risk

Tolerating work incompetence at any level or area

Lack of clear vision, mission, or goals

Ineffective or poor communication within various units and between various units

Types of Renewal StrategiesTwo main types: (1) Retrenchment; and (2) Turnaround

Retrenchment StrategyCommon short-run strategy designed to address organizational weaknesses and deficiencies that are leading to performance declines

What does retrenchment involve?Stabilizing operations

Replenish & revitalize organizational resources & capabilities

Be prepared to compete again

Types of Renewal Strategies

Turnaround StrategiesA renewal strategy designed for situations where the firm’s performance problems are more serious but not yet critical

Objective of turnaround strategies• Improve operational efficiency

• Improve revenue and profitability of money loosing businesses

Types of Renewal Strategies (Turnaround continued)

Turnaround most appropriate whenReasons for poor performance are short-term

Divestment doesn't make long-term sense

Two basic phases of a turnaround strategyContraction – effort to quickly “stop the bleeding”

Consolidation – stabilizing the new leaner organization

Implementing the Renewal Strategies

Cost cuttingCosts are cut to revitalize the firm’s performance (retrenchment) or save the firm (turnaround)Cost cutting can be approached from

• Across-the-board – all areas of the organization• Selective cuts – selected areas of the organization

Strategic managers evaluate & eliminate waste, redundancies, & inefficiencies in work areas

Implementing the Renewal Strategies

RestructuringDivestment: Selling off business to someone else where it will continue as a going concern

Spin-Off: Setting up business unit as a separate business through the distribution of shares

Liquidation: Shutting down the business completely

Reengineering: Fundamental rethinking & redesign of the organization’s business processes

Downsizing: Laying-off employees

Bankruptcy: Dissolving or reorganizing the business under the protection of bankruptcy legislation

EVALUATING CORPORATE STRATEGY

Without evaluation, strategic managers would not know whether the implemented strategies are workingCorporate Objectives or Goals

Maximizing shareholder wealthIncreased market shareStrong global presenceIncreased productivityPositive reputation/imageStrong customer satisfactionHigh product qualityIncreased revenues & earnings

Evaluation MeasuresEfficiency

Organization’s ability to minimize the use of resources in achieving firm objectives

EffectivenessOrganization’s ability to complete or reach goals

ProductivityMeasure of the quantity of inputs needed to produce specified outputsMeasure as the ratio of overall output to inputs used to produce the output

BenchmarkingSearch for best practices from leading firms that are believed to contribute to superior performance

Portfolio Analysis

Three main onesThe BCG (Growth-Share) Matrix:

• Simple four-cell matrix created by the Boston Consulting Group

• A way to determine whether a business unit is a cash producer or a cash user

McKinsey-GE Spotlight Matrix• A nine-cell matrix which provides a comprehensive analysis of

a business unit’s internal (competitive strength) & external (industry attractiveness) factors

Product-Market Evolution Matrix• A 15 cell matrix developed by C. W. Hofer

BCG Growth-Share Matrix

Relative Market Share Position

Industry

Growth

Rate

Question Marks

Or Cash Hogs

Dogs

Stars

Cash Cows

High ( > 1.0) 1.0 Low (< 1.0)

Low

10%

High

BCG Growth-Share Matrix

Question Marks or Cash HogInternal cash flows are inadequate to fully fund its need for working capital & new capital investments

Parent company has to pump in capital to “feed the hog”

Sometimes called “problem children” or “wildcats”

Strategic options• Aggressively invest in attractive cash hogs

• Divest cash hogs lacking long-term potential

BCG Growth-Share Matrix

StarsBusinesses that are market leaders Usually in rapidly growing markets Able to generate enough cash to maintain share in the market, but sometimes requires significant investment to maintain market shareWhen market slows, stars become cash cowsStrategic options

• Fortify & defend position in industry• Short-term priority

BCG Growth-Share Matrix

Cash CowBusinesses that generates cash surpluses over & above what is needed to sustain its present market positionCash cow businesses are valuable because surplus cash can be used to

• Pay corporate dividends• Finance new acquisitions• Invest in promising cash hogs

Strategic Objective• Fortify & defend present market position

BCG Growth-Share Matrix

DogsBusinesses with low market share & no potential to bring in much cash

Requires significant cash injection to maintain position

Strategic options• Exit business by divesting or liquidating

• Harvest if business is generating some profits

McKinsey-GE Spotlight Matrix

Winners

Winners

Winners

Average

Business

ProfitProducers

Question

Mark

Losers

Losers

Losers

Business Unit Strength

Industry

Attractiveness

Low

Medium

High

Strong Average Weak

Strategic Implications of Strength-Attractiveness Matrix

WinnersGiven top investment priority

Strategic prescription is grow & build

Question marks, Average, Profit producersGiven medium investment

Strategic prescription is invest to maintain position

LosersCandidates for divestment

May be candidates for turnaround

Changing Corporate Strategies

Changes are needed if evaluation showsGrowth objectives are not being attainedOrganizational stability causes firm to fall behindCorporate renewal efforts are not working

Possible Strategies to changeFunctionalCompetitiveCorporate direction