Chapter 7 Corporate Strategies II

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Chapter 7 Corporate Strategies II

• Moses Acquaah, Ph.D.
• 377 Bryan Building
• Phone [phone]
• Email acquaah_at_uncg.edu

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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BCG Growth-Share Matrix
Relative Market Share Position
High ( gt 1.0)
Low (lt 1.0)
1.0
High
Question Marks Or Cash Hogs
Stars
Industry Growth Rate
10
Cash Cows
Dogs
Low
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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

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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

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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

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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

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McKinsey-GE Spotlight Matrix
Business Unit Strength
Strong
Average
Weak
Question Mark
Winners
High
Winners
Industry Attractiveness
Medium
Average Business
Losers
Winners
Losers
Low
Profit Producers
Losers
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Strategic Implications of Strength-Attractiveness
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

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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