Business Strategy and Policy Lecture 24

Recap Diversification Strategy is the development of new products in the new market. Diversification strategy is adopted by the company if the current market is saturated due to which revenues and profits are lower. At the corporate level, it is generally and its also very interesting entering a promising business outside of the scope of the existing business unit

Today’s Lecture DEFENSIVE STRATEGIES Retrenchment Divestiture Liquidation

Retrenchment Retrenchment (turnaround) Defined Example A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system. Defined Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy.

Retrenchment Strategy and its Challenges Retrenchment strategy is a strategy that is geared towards reducing expenditures; withdraw products or services from the market and to reduce the size of diversity. Retrenching strategy is also known as downsizing and cutback initiatives. The many challenges that are associated with retrenching are as follows: Growth decline. Smaller workforce. Inability to meet consumer demands with smaller workforce. Lack of diversity. Decrease in profitability.

Alternatives of Retrenchment Strategy Turnaround Strategy It is also known as cutback strategy “hold the present business and cut the costs” It is one in which a company tries to recover from its declining state by improving internal efficiency. Turnaround actions may include: Change in the product mix Selling of assets which are not useful for long time or in future also to generate cash. Closing down plants & divisions which are not rewarding. Replacement of obsolete machinery Focus on specific products and customers and improved marketing, etc.

Guidelines for Retrenchment Firm has failed to meet its objectives and goals consistently over time but has distinctive competencies Firm is one of the weaker competitors Inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance. When an organization’s strategic managers have failed Very quick growth to large organization where a major internal reorganization is needed.

Divestiture Divestiture Defined Example Harcourt General, the large US publisher, is selling its Neiman Marcus division. Defined Selling a division or part of an organization

Advantages of Divestiture Strategic Focus Companies often divest assets and business units that no longer fit with the company's core business. Divesting therefore helps companies maintain their strategic focus. Companies also divest underperforming assets. Divesting assets with poor profitability frees up internal assets, which the company can use to strengthen its other businesses. It also provides cash to purchase or improve assets that can enhance profitability.

Advantages of Divestiture Transparency and Value Divestitures also provide greater operational transparency in companies with large and diverse businesses and activities. Transparency is a greater concern for companies that have multiple lenders and investors who are not typically privy to the same information that owners and managers are. The overall benefit of divesting is the increase in value that results. The streamlined focus, increased transparency, freed resources and cash received all help drive a higher overall value for the remaining company.

Disadvantages of Divestiture Costs One potential disadvantage of a divestiture is the negative impact on a company's cost structure. If a company has spread its fixed costs -- including rent, maintenance, personnel allocation and administrative support -- over two or more business units, the remaining business units must now absorb those costs. In addition, companies may encounter difficulty re-allocating personnel, as some employees may perform work for more than one business unit.

Disadvantages of Divestiture Contractual A divestiture has other disadvantages. Partnership agreements, support agreements and vendor contracts may contain mentions of the divested business. These contracts must either go with the divested business or undergo modification to remove the references. Yet another issue with a divestiture is support. If the unit received significant marketing, accounting or operational support from the parent company, it may not receive the same level of support as a stand-alone entity or under its new owners. Therefore, the divested unit may require long-term support.

Guidelines for Divestiture When firm has pursued retrenchment but failed to attain needed improvements When a division needs more resources than the firm can provide When a division is responsible for the firm’s overall poor performance When a division is a misfit with the organization When a large amount of cash is needed and cannot be obtained from other sources.

Liquidation Liquidation Defined Example El-Ameer Block factory sold all its assets and ceased business. Defined Selling all of a company’s assets, in parts, for their tangible worth

Guidelines for Liquidation When both retrenchment and divestiture have been pursued unsuccessfully If the only alternative is bankruptcy, liquidation is an orderly alternative When stockholders can minimize their losses by selling the firm’s assets

Examples Retrenchment Divestiture Liquidation America West Airlines closing its hub at Columbus, Ohio and laying off 390 employees Divestiture ConocoPhillips recently sold its Circle K convenience store chain to Alimentation Couche-Tard, a Canadian firm Liquidation Sprint liquidated its Web-hosting division

Combination Strategy Combination strategy is not an independent classification but it is a combination of different strategies – stability, growth, retrenchment – in various forms. Thus the possible combinations of strategies may be: Stability in some businesses and growth in other businesses Stability in some businesses and retrenchment in other businesses Growth in some businesses and retrenchment in other businesses Stability, growth and retrenchment in different businesses

Summary DEFENSIVE STRATEGIES Retrenchment Divestiture Liquidation

Next Lecture MICHAEL PORTER’S FIVE GENERIC STRATEGIES Cost Leadership Differentiation Focus