Chapter Strategicplanning

Strategic PlanningProf. Prashant MehtaNational Law University, Jodhpur

STRATEGIC PLANNING

IntroductionCorporate Strategy

The Stages of Corporate Strategy FormulationThe Stages of Corporate Strategy Implementation

Strategic Alternatives

Strategic Planning

• A strategy is an overall approach, based

on an understanding of the broader

context in which you function, your

own strengths and weaknesses, and the

problem you are attempting to address.

A strategy gives you a framework

within which to work, it clarifies what

you are trying to achieve and the

approach you intend to use. It does not

spell out specific activities.

• Thus formulation of Corporate Strategy

forms the crux of the Strategic Planning

Process

Corporate Strategy

• It is concerned with the overall purpose and scope of the business to meet

stakeholder expectations. This is a crucial level since it is heavily influenced

by investors in the business and acts to guide strategic decision-making

throughout the business. Corporate strategy is often stated explicitly in a

"mission statement".

• Corporate strategy spells out the growth objective of the firm, the direction,

extent, pace, and timing of firms growth.

• It is objective strategy of the firm.

Nature, Scope, and Concern of Corporate Strategy

• Concerned with choice of businesses, products, and markets.

• It is design of filling firms strategic planning gap.

• Concerned by choice of firms product and markets.

• To achieve right fit between firm and environment.

• Build relative competitive advantage for the firm.

• Corporate objectives and Corporate strategy

together describes the firms concept of business.

• It is objective strategy of firm.

What Does Corporate Strategy Ensure

• It ensures growth and alignment of firm with its environment.

• Builds relevant competitive advantage.

• It is design for filling the strategic planning gap.

• Make use of SWOT analysis effectively.

• Strategy is adhoc responses to change in environment-in competition,

consumer tastes, technology, and other variables.

• Prepares for long term, well thought out and prepared responses to various

business forces in the business environment.

Strategy is Partly Proactive and Partly Reactive

• Company’s strategy is blend of two opposing actions:

• Proactive action on part of managers to improve

company’s market position and financial

performance besides tackling the task of competing

for buyers patronage.

• Reactive action to unanticipated developments in

dynamic market conditions like rivals firms, shifting

consumer requirements, new technology, market

opportunities, changing PEST elements.

• Crafting a strategy thus involves stitching together a

proactive / intended strategy and then adapting to

changes as they emerge as reactive / adaptive strategy.

Strategy is Partly Proactive and Partly Reactive

Dealing with Strategic Uncertainty

• Strategic uncertainty is key construct in strategy

formulation.

• Strategic alternatives are clustered in order to set

priorities w.r.t. information gathering and analysis.

• Unpredictable future event can lead to strategic

uncertainty which can be handled by scenario

(multiple scenario) analysis.

• Strategic Uncertainty can impact present, proposed,

and even potential SBU and its importance to firm.

• The importance is established by associated sales,

profit, and costs. Which may or may not reflect the

true value of the firm.

Stages of Corporate Strategy Formulation – Implementation Process

• Formulation of strategies is a creative and analytical process. It is a process

because particular functions are performed in a sequence over the period of

time. The process involves a number of activities and their analysis to arrive

at a decision.

• The process set out above includes strategy formulation and its

implementation, what has been referred to as strategic management

process.

Stages of Corporate Strategy Formulation – Implementation Process

Stage 1

•Developing a Strategic Vision

Stage 2

•Setting Objectives

Stage 3

•Crafting a Strategy to achieve Objectives and Vision

Stage 4

• Implementing and Executing the Strategy

Stage 5

•Monitoring Developments, Evaluating Performance, and Making Corrective Action, Revise if needed

1. Developing a Strategic Vision

• What directional path a company should take based on current market position

and its future prospects with respect to product, customer, market, and

technology constitutes strategic vision of the company.

• Strategic vision communicates management aspirations to stake holders and

steers energy of employees in one direction.

• Mission and Strategic intent overall strategic direction should be clear and

precise that is what organization is seeking to achieve. This will help organization

galvanize motivation and enthusiasm throughout the organization.

• Questions like short term profits vs. long term growth, related business vs.

diversified business, global coverage vs. regional coverage, internal innovation

and new products vs. acquisition of other business etc., needs to be addressed

for better strategic choice.

2. Setting Objectives

• Corporate objectives flow from the mission and growth ambition of the

corporation.

• The purpose of setting objectives is to convert the strategic vision into

specific performance targets, results, and outcomes the management wants

to achieve and then use this objectives as yardsticks to tackle companies

progress and performance.

• Managers use objective setting exercise as a tool for truly stretching an

organization to reach an full potential.

• It helps organization to be ore inventive, improves financial position and

performance besides it business position.

2. Setting Objectives: Balanced Score Card Approach

• BSC approach measures companies performance and requires the setting of

both the financial and strategic objectives besides tracking their

achievement.

• A trade of between financial and strategic objectives has to be made

depending on the situation.

• Mainly strategic objectives will deliver sustained future profitability every

quarter and strengthen company’s business position by its growing

competitive advantage over rivals.

• Thus financial objectives will be achieved by strategic objectives that

improves company’s market strength.

2. Setting Objectives: Short and Long Term

• Financial and strategic objectives include both short term (yearly) objectives that

delivers immediate performance improvements and long term (3-5 years)

objectives that deliver Profitability, Productivity, Competitive Position, Employee

Development, Employee Relations, Technological Leadership, and Public

Responsibility.

• Long term objectives represent results expected from pursuing certain strategies.

Qualities of long term objectives are Acceptable, Flexible, Measurable,

Motivating, Suitable, Understandable, and Achievable.

• Objectives should be quantitative, measurable, realistic, understandable,

challenging, hierarchical, obtainable, and congruent among organizational units.

2. Setting Objectives: Short and Long Term

• Objectives are commonly stated in term of:

• Growth in Assets

• Growth in Sales

• Profitability

• Market Share

• Degree and Nature of Diversification

• Degree and nature of Vertical Integration

• Earnings Per Share

• Social Responsibility

• Such objectives provide direction, allow synergy, aid in evaluation, establish

priorities, reduce uncertainty, minimize conflicts, stimulate exertion, aid in

allocation of resources and job design.

• Short term obj. differ from long term obj. when elevating organizational

performance but it cannot be done in one year time

Concept of Strategic Intent

• Strategic intent means company relentlessly pursues ambitious strategic

objectives and concentrates its full resources and competitive action on

achieving the objectives , targets, and become dominant company in the

industry.

• There is need for objectives at all organizational levels that are supportive

rather than conflicting. The objectives need to be broken down in

performance targets for each separate business, product line, functional

department, individual work unit.

• Such division will help the company move down the chosen strategic path

and produce the desired results.

3. Crafting a Strategy

• Strategy crafted at Corporate, Business, Functional, and Operational level by top

management needs to synchronized and united for good performance.

• Good communication of strategic themes to greater number of companies

personnel serves a greater purpose, guiding principle, and valuable insight into

strategy decision making for consistent strategic action.

• The goal is to develop a strategy that exploits business strength and competitors

weakness, and neutralize business weakness and competitors strength.

• In making strategic decisions , inputs from variety of assessments are relevant viz.

Organizational Strength and Weakness, Competitor Strength and Weakness,

Market Needs, Attractiveness, and Key Success Factors

3. Crafting a Strategy

Organizational Strength and

Weakness

Competitor Strength and

Weakness

Market Needs, Attractiveness,

and Key Success Factors

Strategic Decisions: Strategic Investment,

Functional Area Strategies, Sustainable Competitive Advantage

4. Implementation and Executing the Strategy

• It is operation oriented activity which is most demanding, and time consuming

part of strategy management process. It involves:

• Staffing the organization with right mix of people (supportive competencies and

competitive capabilities) by motivating them to pursue objective targets.

• Developing budgets for activities critical to strategic success.

• Installing Information system, Policies, Operating procedures, Systems should facilitate

execution of work day in and day out.

• Tying rewards and incentives to achievement of objectives and good execution strategy.

• Creating conducive work culture / climate for successful strategy implementation.

• Exert internal leadership to drive strategy implementation by creating strong fit

between strategy and organizational capability, between strategy and reward structure,

internal operating systems, and organizational work culture / climate.

5. Monitoring Developments, Evaluating Performance, and Making Corrective Adjustments

• This stage is trigger point for deciding whether to continue or change

companies vision, objectives, strategy, and strategy execution methods.

• Whenever company encounter disruptive changes in the external

environment, then strategy needs to be reevaluated (cause related to poor

strategy or poor execution) and timely corrective action needs to be taken by

modifying or redrafting its strategic vision, direction, objectives etc.

• Proficient strategy execution is always the product of much organizational

learning. It is achieved unevenly coming quickly in some areas and problematic

in other areas.

• Periodic assessment and quick adjustments helps in making corrective actions

more meaningful and effective.

Strategic Alternatives: Michael Porter’s Generic Str.

• This strategy involves the organisation aiming to be the lowest cost producer

and/or distributor within their industry. The organisation aims to drive cost

down for all production elements from the sourcing of materials, to labour costs.

• To achieve cost leadership a business will usually need large scale production so

that they can benefit from "economies of scale".

• Large scale production means that the business will need to appeal to a broad

part of the market. For this reason a cost leadership strategy is a broad scope

strategy. A cost leadership business can create a competitive advantage:

• By reducing production costs and therefore increasing the amount of profit made on

each sale as the business believes that its brand can command a premium price.

• By reducing production costs and passing on the cost saving to customers in the hope

that it will increase sales and market share

Michael Porter’s Generic Strategies: Cost Leadership

• To be different, is what organizations strive for; companies and product ranges that appeal

to customers and "stand out from the crowd" and appeal to customers including

functionality, customer support and product quality have a competitive advantage.

• A differentiation strategy is known as a broad scope strategy because the business is

hoping that their business differentiation strategy, will appeal to a broad section of the

market. New concepts which allow for differentiation can be protected through patents

and other intellectual property rights.

• To make a success of a Differentiation strategy, organizations need:

• Good research, development and innovation.

• The ability to deliver high-quality products or services.

• Effective sales and marketing, so that the market understands the benefits offered by

the differentiated offerings.

Michael Porter’s Generic Strategies: Differentiation

• Under a focus strategy a business focuses its effort on one particular segment of

the market and aims to become well known for providing products/services for

that niche market segment. Examples include Roll Royce, Bentley etc.

• Focus strategy is to ensure that you are adding something extra as a result of

serving only that market niche. The "something extra" that you add can

contribute to reducing costs (perhaps through your knowledge of specialist

suppliers) or to increasing differentiation (though your deep understanding of

customers' needs).

• Once a firm has decided which market segment they will aim their products at,

Porter said they have the option to pursue a cost leadership or a differentiation

strategy to suit that segment. A focus strategy is known as a narrow scope

strategy because the business is focusing on a narrow segment of the market.

Michael Porter’s Generic Strategies: Focus

Resources RequirementGeneric Strategy Commonly Required Skills and

ResourcesCommon Organizational

Requirements

Overall Cost Leadership

Sustained Capital Investment Access to Capital

Process Engineering SkillsIntense Supervision of Labour

Product Design for Ease in Manufacture

Tight Cost ControlFrequent, Detailed Control ReportsStructured Org. and ResponsibilitiesIncentives on Quantitative Targets

Differentiation Low Cost Distribution SystemStrong marketing Abilities

Product EngineeringCreative Flair

Strong capability in Basis ResearchCorporate Reputation

Technological LeadershipStrong Cooperation from Channels

Strong Coordination among R&D, Product Development, and

MarketingSubjective Measurement and

Incentives instead of Quantitative Measures

Amenities to Attract highly skilled labour, Scientists, and Creative

People

Focus Combination of the above Policies directed at the particular Strategic

target

Combination of the above Policies directed at the particular Strategic

target

• To create a competitive advantage businesses should review their strengths and pick

the most appropriate strategy cost leadership, differentiation or focus. So, when you

come to choose which of the three generic strategies is for you, it's vital that you

take your organization's competencies and strengths into account.

• Step 1: For each generic strategy, carry out a SWOT Analysis

• Step 2: Use Five Forces Analysis to understand the nature of the industry you are in.

• Step 3: Compare the SWOT Analyses of the viable strategic options with the results of

your Five Forces analysis.

• Reduce or manage supplier power.

• Reduce or manage buyer/customer power.

• Come out on top of the competitive rivalry.

• Reduce or eliminate the threat of substitution and new entry.

• Select the generic strategy that gives you the strongest set of options.

Michael Porter’s Generic Strategies: Conclusion

Mar

ket T

arge

t

Type of Advantage Sought

Overall Low-CostProviderStrategy

BroadDifferentiation

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Best-CostProviderStrategy

Lower Cost Differentiation

BroadRange of Buyers

Narrow Buyer

Segmentor Niche

Best – Cost Provider Strategy

Various strategy alternatives are available to firm for achievement of growth

objective. These grand strategies form the basis of coordinated and sustained

efforts directed towards achieving long term business objectives.

Grand Strategies / Directional Strategies

Strategy Basic features

Stability The firm stays in current business and product markets, maintains existing level of effort and is satisfied with incremental growth.

Expansion Seeks significant growth within current business or entering new business that is related to existing business or unrelated to existing business.

Retrenchment Retrenches some of its activities of the existing business – may sell out or liquidate.

Combination The firm combines the above business alternatives in some permutation or combination to suit specific requirements as per market conditions.

Grand Strategies / Directional Strategies

• Grand strategy is a general term for a broad statement of strategic actions

coordinated to achieve a main objective with. It describe multi-tiered strategies

in general.

• In business, a Grand strategy is a general term for a broad statement of strategic

actions, combined into one purpose. A grand strategy states the means that will

be used to achieve short, medium, and long-term objectives with.

• Most business decisions are focused on actions and results – very few are

focused on capacity and capability – then on a very limited scale do you see

sustainable results and actual growth.

• Only if our paradigms are strategic, and we seek sustainable growth paths, that

yield and build on capacity and capability, will business become holistically

strategic.

Grand Strategies / Directional Strategies

Strategy Alternatives

Stability Expansion

Intensification

Market Penetration

Market Development

Product Development

Diversification

Vertically Integrated

Concentric Diversification

Forward Backward

Conglomerate Diversification

Retrenchment Combination

Stability Strategy

• It is strategy by a company where the company stops the expenditure on expansion, do not venture into new markets or introduce new products. Stability strategy is adopted by company due to following reasons:• When the company plans to consolidate incrementally, its position in the industry in

which company is operating.

• When the economy is in recession companies want to have more cash in their balance sheet rather than investing that cash for expansion or other such expenses.

• When company has too much debt in the balance sheet than also company stops or postpones their expansion plans because it would not able to pay interest rate on such debt and it may create liquidity crunch for the company.

• When the company is operating in an industry which has reached maturity phase and there is no further scope for growth than also company adopts stability strategy. It is safe oriented less risky strategy.

• When the gains from expansion plans are less than the costs involved for such expansion than company follows the stability strategy.

Stability Strategy is adopted because

• It is less risky, involves less change, and people feel comfortable with things

as they are.

• The environment faced is relatively stable.

• Expansion may be perceived as being threatening.

• Consolidation is sought through stabilizing after a period of rapid expansion.

Expansion Strategy

• It is opposite to stability strategy where rewards and risks are high.

• It is true growth oriented strategy which redefines the business.

• The process of renewal of firms through fresh investments in new products,

markets etc.

• It is highly versatile strategy which offers various permutations an combinations

for growth.

• Expansion strategy has two major strategic routes: Intensification and

Diversification. Both of them are growth strategies and how you pursue them.

• Intensification means pursuing growth in current business.

• Diversification means expansion into new business that are outside current

business and markets.

Expansion Strategy is adopted because

• It is adopted when environment demands increase in pace of activity.

• When organization strives for growth and growth forces expansion.

• Increasing size may lead to more control over the market vis-à-vis

competitors.

• Advantage from experience curve and scale of operations may occur.

Divestment Strategy

• The process of selling an asset. Also known as divestiture, it is made for either

financial or social goals. Divestment is the opposite of investment and involves

retrenchment of some activities. The term divestment is more appropriate

however in the following contexts:

• A change in corporate strategy - a firm might say that they are divesting a

particular subsidiary to focus on their core business.

• Social goals - there are many political reasons why investors might reduce

investments. A notable example was the withdrawal of American firms from

South Africa during apartheid.

• Compulsions of Disinvestments may be varied, such as:

• Business becoming Unprofitable,

• High Competition,

• Industry Overcapacity,

• Failure of Strategy

• Generate Resources

Divestment Strategy is Adopted When

Retrenchment Strategy

• Retrenchment is a corporate-level strategy that seeks to reduce the size or

diversity of an organization's operations.

• Retrenchment is also a reduction of expenditures in order to become financially

stable.

• Retrenchment occurs when an organization regroups through cost and asset

reduction to reverse declining sales and profits.

• This strategy is design to fortify an organization's basic distinctive competence.

• In some case, bankruptcy can be an effective type of retrenchment strategy.

Bankruptcy can allow a firm to avoid major debt obligations and to avoid

union contracts.

Retrenchment Strategy is Adopted because

• The management no longer wishes to remain in business either partly or

wholly due to continuous losses and unviability.

• The environment faced is hostile and threatening

• Stability can be ensured by reallocation of resources from unprofitable to

profitable businesses.

• Divest businesses

• Too small to make sizable contribution to earnings .

• Having little or no strategic fit with firm’s core businesses

Combination Strategy

• It is the combination of stability, growth &retrenchment strategies adopted

by an organisation, either at the same time in its different businesses, or at

different times in the same business with the aim of improving its

performance.

• Combination strategy is not an independent classification but it is a

combination of different strategies

Combination Strategy is adopted when

• The organization is large and faces complex environment

• The organization is composed of different businesses, each of which lies in

the different industry requiring a different response.

• It is commonly followed by organizations with multiple unit diversified

product & National or Global market in which a single strategy does not fit

all businesses at a particular point of time.

Expansion Strategy: Product Market Expansion Grid

3. Market DevelopmentExpand GeographicallyTarget New Segments

Product Market Expansion Grid

Intensification: Market Penetration

• In marketing terms “penetration” means to acquire a portion of a market.

• Sell more existing products or services to existing customers

• Sell existing products or services more frequently to existing customers

• Sell more existing products or services at higher prices to existing customers

• Sell new products or services to existing customers

• Sell new products or services often to existing customers

• Sell new products or services at higher prices to existing customers

• Sell existing products or services to new customers

• Sell new products or services to new customers

• The firm directs its resources to the profitable growth of single product, in a

single market, and with a single technology.

• Market penetration poses a reduced amount of risks, in part because it

makes use of established products as opposed to new ones.

Intensification: Market Development

• A company follows a market development strategy for a current brand when it

expands the potential market through new users or new uses. New users can be

found in new geographic segments, new demographic segments, new

institutional segments or new psychographic segments. Another way is to

expand sales through new uses for the product.

• It can be achieved by adding different channels of distribution, by changing the

content of advertising or the promotional media.

• Marketing development is a market development strategy employed by a

company to increase its market, broaden its customer base, and ultimately sell

more products, all three key factors to succeed in market penetration. The two

most used marketing development approaches are attracting customers of

competing firms and branching out to a heretofore unserved market segment.

Intensification: Product Development

• Developing new products or modifying existing products so they appear

new, and offering those products to current or new markets is the definition

of product development strategy.

• There is nothing simple about the process. It requires keen attention to

competitors and customer needs now and in the future, the ability to

finance prototypes and manufacturing processes, and a creative marketing

and communications plan.

• There are several subset of product development strategy:

• Product development and diversification

• Product Modification Strategy

• Revolutionary Product Development

Diversification Strategy

• Diversification strategies are used to expand firms' operations by adding markets,

products, services, or stages of production to the existing business. The purpose of

diversification is to allow the company to enter lines of business that are different

from current operations.

• Firstly, companies might wish to create and exploit economies of scope, in which

the company tries to utilize its exciting resources and capabilities in other markets.

• Secondly, managerial skills found within the company may be successfully used in

other markets.

• Thirdly, companies pursuing a diversification strategy may be able to cross-

subsidize one product with the surplus of another.

• Fourthly, companies may also want to use a diversification strategy to spread

financial risk over different markets and products,

Vertically Integrated Diversification Strategy

• Vertical integration allows the firm to enlarge its scope of operations within

the same overall industry. It takes place when one firm acquires another that

is involved either in an earlier stage of the production process (backward or

upstream) or a later stage of the production process (forward or

downstream).

• The organization can move backward to prior stages to guarantee sources of

supply and secure bargaining leverage on vendors; or it can move forward to

guarantee markets and volume for capital investments, and became its own

customer to feed back data for new products.

• The degree to which a firm owns product – process chain, both for its

upstream suppliers and its downstream buyers determines how vertically

integrated it is.

Horizontal Integrated Diversification Strategy

• Horizontal integration is referred to acquisition of additional business

activities at the same level of the value chain.

• The growth can be achieved by internal expansion or by external expansion

through mergers and acquisitions of firms offering similar products, with the

sensible diversification synergies mount up.

• Acquiring competitors help reduce the threat from competition.

• A firm may diversify by growing horizontally into unrelated businesses.

• It increases market power and fulfills customers expectations.

Related and Unrelated Diversification Strategy

• Related Diversification occurs when the company adds to or expands its existing

line of production or markets. In these cases, the company starts

manufacturing a new product or penetrates a new market related to its

business activity. For example, a shoe producer starts a line of purses and other

leather accessories.

• Unrelated Diversification is a form of diversification when the business adds

new or unrelated product lines and penetrates new markets. For example, if

the shoe producer enters the business of clothing manufacturing. In this case

there is no direct connection with the company´s existing business - this

diversification is classified as unrelated.

Related Diversification

Unrelated Diversification

Related and Unrelated Diversification: Options for Manufacturer

Related: • Exchange / Share Assets /

competencies there by exploiting:

• Brand Name• Marketing Skills• Sales and Distribution

Capacity• Manufacturing Skills• R & D • New Product Capability• Economies of Scale

Unrelated• Manage and Allocate Cash Flow• Obtain Higher ROI• Obtain a Bargain Price• Refocus a Firm• Reduce Risk by Operating the

Multiple Product Markets• Tax Benefits• Obtain Liquid Assets• Vertical Integration• Defend Against Takeover

Concentric Diversification Strategy

• Concentric diversification is a type of business strategy where a company

acquires or creates new products or services to reach more consumers. These

new products and services usually are closely related to the company's existing

products and service through process, technology, or marketing. For example,

an office supply company seeks to purchase paper manufacturers or ballpoint

pen creators.

• A company employing the concentric diversification strategy seeks to add

complementary products and services across several market areas as a means

of establishing a wide distribution network. This improves business synergy,

improved product development, and increased market share.

• Concentric diversification differs from vertically integrated diversification in

nature of linkage the new product has with existing product.

Conglomerate Diversification Strategy

• Conglomerate diversification occurs when there is no common thread of

strategic fit or relationship between the new and old lines of business; the

new and old businesses are unrelated. These are the two philosophies

guiding many conglomerates:

• By participating in a number of unrelated businesses, the parent corporation

is able to reduce costs by using fewer resources.

• By diversifying business interests, the risks inherent in operating in a single

market are mitigated.

• History has shown that conglomerates can become so diversified and

complicated that they are too difficult to manage efficiently.

Retrenchment, Divestment, and Liquidation

• Retrenchment is a corporate-level strategy that seeks to reduce

the size or diversity of an organization's operations. Retrenchment

is also a reduction of expenditures in order to become financially

stable.

• Retrenchment is a pullback or a withdrawal from offering some

current products or serving some markets.

• This is adopted to find the problem areas and diagnose the cause

of problem and finding solutions to problems.

• Retrenchment is often a strategy employed prior to or as part of a

Turnaround strategy. It may be done internally or externally

Captive Company Strategy

• The captive company strategy is the scenario in which a small firm sacrifices its

freedom for the security of being part of a large conglomerate. The 3M

company uses this strategy extensively. They lure in small start-up firms with

state of the are technology with the opportunity for large R&D budgets.

• Essentially, a captive company's destiny is tied to a larger company. For some

companies, the only way to stay viable is to act as an exclusive supplier to a

giant company. A company may also be taken captive if their competitive

position is irreparably weak.

Bankruptcy Strategy

• This may also be a viable legal protective strategy. Bankruptcy without a

customer base is truly a bad place. However, if one declares bankruptcy with

loyal customers, there is at least a possibility of a turnaround.

• Bankruptcy is no longer primarily limited to small or start-up companies, but is

increasingly used by large, powerful corporations as well.

• Example: Other large corporations have taken advantage of bankruptcy

protection on more than one occasion. Continental airlines, sought the

protection of federal bankruptcy court to revoke its costly labor union contracts

(Good Law, 1983). After filing, Continental declared its collective bargaining

agreement void, and established new, competitive salary levels. While this

decision was difficult and unpopular, it was necessary for survival.

Turnaround Strategy

• If your company is steadily losing profit or market share, a turnaround

strategy may be needed. Turnaround strategy means backing out,

withdrawing or retreating from a decision wrongly taken earlier in order to

reverse the process of decline.

• There are two forms of turnarounds: First, one may choose contractions

(cutting labor costs, PP&E and Marketing). Second, they may decide to

consolidate. There are certain conditions or indicators which point out that

a turnaround is needed if the organization has to survive.

• Workable turnaround plan should include Analysis of Product Market,

Production process, Competition, and Market Segment Positioning.

Turnaround Strategy

These danger signs are as follows:

• Persistent negative cash flow

• Continuous losses and negative

profits

• Declining market share

• Deterioration in physical facilities

• Over-manpower, high turnover of

employees, and low morale

• Uncompetitive products or services

• Mismanagement

Elements that Contribute to Turnaround

• Changes in Top Management

• Initial Creditability Building Actions

• Neutralizing External Pressures

• Initial Control

• Identifying quick payoff activities

• Quick Cost Reductions

• Revenue Generation

• Asset Liquidation for Generating Cash

• Mobilizing of the Organization

• Better Internal Coordination

Divestment Strategy

• This is a form of retrenchment strategy used by businesses when they

downsize the scope of their business activities.

• Divestment usually involves eliminating or liquidation of a portion of

business, or a major division, profit centre or SBU.

• Firms may elect to sell, close, or spin-off a strategic business unit, major

operating division, or product line. This move often is the final decision to

eliminate unrelated, unprofitable, or unmanageable operations.

• Divestment is usually a restructuring plan and is adopted when a

turnaround has been attempted but has proved to be unsuccessful or it was

ignored.

Disinvestment Strategy

• A divestment strategy may be adopted due to the following reasons:

• A business acquired is mismatch and cannot be integrated within the

company.

• Persistent negative cash flows from a particular business create financial

problems for the whole company.

• Firm is unable to face competition

• Technological up gradation is required if the business is to survive which

company cannot afford.

• A better alternative may be available for investment , causing a firm to

divest a part of its unprofitable business.

Liquidation Strategy

• Liquidation strategy means closing down the entire firm and selling its assets. It is

considered the most extreme and the last resort because it leads to serious

consequences such as loss of employment for employees, termination of future

opportunities, and the stigma of failure.

• Generally it is seen that small-scale units, proprietorship firms, and partnership,

liquidate frequently but companies rarely liquidate. The company management,

government, banks and financial institutions, trade unions, suppliers and

creditors, and other agencies do not generally prefer liquidation.

• Liquidation strategy may be unpleasant as a strategic alternative but when a

"dead business is worth more than alive", it is a good proposition. For instance,

the real estate owned by a firm may fetch it more money than the actual returns

of doing business.

Liquidation Strategy

• This is very simple. Take the book value of assets, subtract depreciation and sell the business. This

may be hard for some companies to do because there may be untapped potential in the assets.

Moreover, the firm cannot expect adequate compensation as most assets, being unusable, are

considered as scrap.

• Liquidation strategy may be difficult as buyers for the business may be difficult to find. Under

Companies Act 1956 liquidation may be either by Court, Voluntary, or Subject to Supervision by

Court

• Reasons for Liquidation include:

• Business becoming unprofitable Obsolescence of product/process

• High competitionIndustry overcapacity

• Failure of strategy