Chapter 7 Corporate Strategies II Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: [email protected] 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 organization’s 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 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 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 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 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 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 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 Organization’s ability to minimize the use of resources in achieving firm objectives Effectiveness Organization’s 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 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 High ( > 1.0) High Industry Growth Rate Stars 1.0 Low (< 1.0) Question Marks Or Cash Hogs 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 Weak Winners Winners Question Mark Winners Average Business Losers Profit Producers Losers Losers 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