Chapter 7 Corporate Strategies II Moses Acquaah, Ph.D. 377 Bryan Building

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