Chapter 7 Corporate Strategies II

Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: acquaah@uncg.edu

Lecture Objectives
Describe when organizational stability is an appropriate strategic choice. Define organizational renewal strategy Discuss the causes of corporate decline and indicators of corporate performance decline Describe the two main types of renewal strategies Explain how renewal strategies are implemented Describe how corporate strategies are evaluated Discuss the major portfolio management techniques Describe 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 Strategy

Not expanding organizations level of operation Should be a short-run strategy

ORGANIZATION RENEWAL
A strategy that is used to reverse organizational decline & put the firm back on a more appropriate path to successfully achieve its strategic goals Main cause of corporate decline is poor management Poor management manifests itself in:
Over-expansion or too rapid growth Inadequate financial controls Uncontrollable costs or too high costs Inability to anticipate & deal with new competitors Inability to anticipate unpredictable shifts in consumer demand Slow or no response to significant external or internal changes

ORGANIZATION RENEWAL
Indicators of corporate performance decline
Excess 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 Strategies

Two main types: (1) Retrenchment; and (2) Turnaround Retrenchment Strategy
Common 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 Strategies
A renewal strategy designed for situations where the firms 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 when
Reasons for poor performance are short-term Divestment doesn't make long-term sense

Two basic phases of a turnaround strategy

Contraction effort to quickly stop the bleeding Consolidation stabilizing the new leaner organization

Implementing the Renewal Strategies

Cost cutting
Costs are cut to revitalize the firms 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

Restructuring
Divestment: 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 organizations 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 working Corporate Objectives or Goals
Maximizing shareholder wealth Increased market share Strong global presence Increased productivity Positive reputation/image Strong customer satisfaction High product quality Increased revenues & earnings

Evaluation Measures
Efficiency
Organizations ability to minimize the use of resources in achieving firm objectives

Effectiveness
Organizations ability to complete or reach goals

Productivity
Measure of the quantity of inputs needed to produce specified outputs Measure as the ratio of overall output to inputs used to produce the output

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

Portfolio Analysis
Three main ones
The 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 units 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
High ( > 1.0) High 1.0 Low (< 1.0) Question Marks Or Cash Hogs

Industry Growth Rate

Stars
10% Low

Cash Cows

Dogs

BCG Growth-Share Matrix

Question Marks or Cash Hog
Internal 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

Stars
Businesses 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 share When market slows, stars become cash cows Strategic options
Fortify & defend position in industry Short-term priority

BCG Growth-Share Matrix

Cash Cow
Businesses that generates cash surpluses over & above what is needed to sustain its present market position Cash 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

Dogs
Businesses 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

Business Unit Strength Strong
High Industry Medium Attractiveness Low

Average
Winners Average Business Losers

Weak Question Mark

Losers Losers

Winners

Winners Profit Producers

Strategic Implications of StrengthAttractiveness Matrix

Winners
Given top investment priority Strategic prescription is grow & build

Question marks, Average, Profit producers

Given medium investment Strategic prescription is invest to maintain position

Losers
Candidates for divestment May be candidates for turnaround

Changing Corporate Strategies

Changes are needed if evaluation shows
Growth objectives are not being attained Organizational stability causes firm to fall behind Corporate renewal efforts are not working

Possible Strategies to change

Functional Competitive Corporate direction