Smee Cover a lot of ground. 71 STABILITY STRATEGIES U~ stability strategies can performance. No-change Strategy As the term indicates, this stability strategy is a con, the present business definition. This could be char: not s0. Taking no decision sometimes, is a decision too! When faced with a predictable and certain external environment and stable organisational environment, an organisation decides to continue with its present strategy. This is so because the organisation does not find ‘tworthwhile to alter the present situation by changing its strategy. There are no significant opportunities or threats operating in the external and industry environments. There are no major new strengths and weak- resses within the organisation. There are no new competitors and no obvious threat of substitute products Taking into account the external and internal environmental situation, the organisation decides not to do anything new. scious decision to do nothing new, i.c., to continue with acterised as an absence of strategy though in reality, it is One must, however, make a distinction between an inactive organisation that does not wish to change its Strategy owing to inertia and an organisation that consciously decides to continue with its present strategy. In the former case, it would be dangerous and even reckless, for the organisation to be complacent. In the latter ‘ase, it would be prudent for the organisation to continue with its present strategies. Several small and medium-sized organisations operating in a familiar market—more often a niche market ‘hat is limited in scope—and offering products or services through a time-tested technology, rely on the246 Strategic Management and Business Policy ations well until it is time to wake up in the face g¢ pset occurring which threatens the existence of, no-change strategy. Such a strategy serves the organ! threats emerging in the environment or some major u organisation. Profit Strategy ‘No organisation can indefinitely continue with in the present business environment in Indi ano-change strategy. Things do change-~and they do so oi, and the organisation is faced with a situation where ithas gq, something, An organisation may assess the situation and assume thal its problems are short lived and will go away with time. Til then, the organisation tries to sustain its profitability by a Sues By adopting a profit strategy. For instance, ina situation where the profitability is drifting, lower, organisations under ‘measures to reduce investments, cut costs, raise prices, increase’ productivity or adopt a or Measures, sacs ver what are assumed to be temporary difficulties. The problems are ascribed 10 unfavourable ang onsiont extemal factors such as economic recession, government attitude, industry downtur, competitive pressures and the like. The organisation assumes that these problems are going 0 remalt only in the short run ey the situation would turn favourable after some time, Till that time, it is better to lie low and susin profitability by whatever means possible. Obviously, such a strategy could only work ifthe problems inde, fre temporary. If the problems persist, then such a strategy only deteriorates the organisation's stratgi position. ; Examples abound of Indian companies taking desperate measures to hold on in times of crises. A frequen method to tide over temporary difficulties and to keep afloat through a profit strategy, isto sell off assets such as prime land in a commercial locality and move out to the suburbs. Others have hived off some divisionsin non-core businesses to raise money while a few have resorted to provide services to other organisation need. ing outsourcing facilities. Pause/Proceed-with-caution Strategy Imagine an advance reconnaissance party going ahead to monitor the situation before the troops move in fll strength to encounter the enemy. Pause/proceed-with-caution strategy is such a tactic. It is employed by organisations that wish to test the ground before moving ahead with a full-fledged corporate strategy ot organisations that have had a blistering pace of expansion and-wish to rest awhile before moving ahead. This is essential in several cases where an intervening phase of consolidation is necessary before an organisation could embark on further expansion strategies. The purpose is to let the strategic changes seep down the organisational levels, let structural changes to take place and let the systems to adapt to the new strategies. Ia this manner, pause/proceed-with-caution strategy is a temporary strategy just like the profit strategy. It if fers though from the profit strategy in the way the objectives are defined. While profit strategies are a force! choice, aimed at sustaining profitability till such time that environmental conditions become more hospit™ ble, the pause/proceed-with-caution strategies is a deliberate and conscious attempt to adjourn major sr gic changes to a more opportune time or when the organisation is ready to move on with rapid strides ag" In the Indian shoe market dominated by Bata and Liberty, with increasing presence of global brands si** as Adidas, Nike or Reebok, not many of you might be aware that Hindustan Levers, better known for So? and detergents, produced substantial quantities of shoes and shoe uppers for the export markets. In late-2000 it started unobtrusively to sell a few thousand pairs in the cities to gauge market reaction, This was a proce’ with-caution strategy before it decided to focus on the export markets through Ponds Exports based * Pondicherry. Shoes were clearly a non-core area for Hindustan Levers. 7.2 RETRENCHMENT STRATEGIES Retrenchment strategy is followed when an organisation substantially reduces the scope of its activities. T* is done through an attempt to find out the problem areas and diagnose the causes of the problems, Next, 8Corporate-Le orate-Level Strategies: Stability, Retrenchment and Restructuring 217 ato solve the problems. These steps oe aga eetepiane blnen nate a ence aces ve stand lerly. he causes of the decline and it con M markets. An organisation therefore nends woe decline 8s consequences, in order to provide an appropriate et of factors leading to a i kes eae cing a xy decline is external to the organisation, Some of the mayor external * New organisational forms . ‘New dominant technologies £ New business models {Adverse government policies Demand saturation + Changing customer needs and preferences «Emergence of substitute products ‘The second set of factors leading to decline is internal to the organisation. Almost any significant operational jiem that an organisation faces internally, could be a cause for decline. Some of the major internal factors leading to decline are as below: 's Ineffective top management « Inappropriate strategies ‘« Continual resistance to externally-imposed change ‘¢ Poor quality of functional management # Wrong organisation design «Excess assets « High costs « Ineffective sales and marketing ‘ Unproductive new product development There ae many industries around the world that are ina state of decline, Some such industries in India a coal mining, cotton textiles and shipbuilding. Fountain pens, jue and jute products, manual typewriters seam engines, slide rules calculators, teleprintes and wooden toys are some examples of products that have either disappeared or face decline, Most companies in hese industries and markets have had to curtail opera- tions or shutdown factories. For instance, a doctoral thesis points out thatthe reported reasons for corporaic fale in India have been reduction in import duties, sti competition from MNCs with wider market acess and better quality products, competition from organised sector that offers cheaper products owing to lower 1axes, inadequate power supply and high cost of finance. The consequences of decline are most often seen in several problems for the organisations. It 1s umportant to understand tht de-line is manifested in several symproms. These symptoms are most ofc reflected in the Performance criteria of companies. Here are some of the major consequences of decline Diminishing profitability Dwindling cash flow Falling sales Shrinking market share Increasing debt : ra of credibility and goodwill Aner ne eement of suppliers, creditors and « ‘effective monitoring and control system can s 4 Vigilant management. This is the situation in sustomers jgnal the impending ich recovery is Seen as a strategic option danger and the malaise can be checked218 Strategic Management and Business Policy Slatter has postulated that there are essentially four types of recovery situations: 1. Realistically non-recoverable situation where there is little chance of survival as the company is y, competitive, potential for improvement is low, there is a cost disadvantage and the demand for its." product or service is in a terminal dechine 2. Temporary recovery situation where there coud be initially, a successful retrenchment but no sustaney tumaround. This could happen when a repositioning of the product is possible, new forms of competi, advantages can be found, or cost reduction and revenue generation are possible Sustained survival situation where a turnaround is achievable but little potential for future growth exisy The industry may be in a process of slow decline. A company facing such a situation could either divey or go in for a turnaround if it foresees a comfortable niche in the industry where it perceives chancey yy being the industry leader. 4. Sustained recovery situation where a genuine and successful turnaround is possible owing to new prog. uct development and/or market repositioning and the industry is still attractive enough. Possibly decline was caused more by internal factors than external conditions. I the organisation chooses to focus on ways and means to reverse the process of decline, it adopts a turns. rownd strategy. Ifit cuts off the loss-making units, divisions or SBUs, curtails its product line, or reduces ne functions performed, it adopts a divestment (or divestiture) strategy. If none of these actions work, thes x may choose to abandon the activities totally, resulting in a liquidation strategy. We deal with each of these strategies below Turnaround Strategies Retrenchment may be done either internally or externally. For internal retrenchment to take place, emphasis 1s laid on improving internal efficiency. This usually takes the form of an operating turnaround strategy. Is contrast, a strategic turnaround is a more serious form of external retrenchment and leads to divestment or liquidation, Turnaround strategies derive their name from the action involved, i.e., reversing a negative trent and turning around the organisation to profitability. Conditions for Turnaround Strategies There are certain conditions or indicators which point out ta 4 turnaround is needed if the organisation has to survive. Some of the major danger signs are: Persistent negative cash flow Negative profits Declining market share Deterioration in physical facilities Over manning, high turnover of employees and low morale Uncompetitive products or services Mismanagement IOWA | | | An organisation which faces one or more of these problems is often referred to as a “sick” company Managing Turnaround There are three ways in which tumarounds can be handled-° 1. The existing chief executive and management team handles the advisory support of a specialist external consultant entire turnaround strategy, 81 The use of this method ean only be suecess!! chief executi ¢ has a reasonable amount of creditability left with the banks and financial insttuuens?™ a qualified consultant is available. This type of turnaround manag is rarely atiempted In another situation, the existing teas withdraws temporarily and an executive consultant or turnarou™ specialist is employed to do the job. This person is usually deputed by the banks and financial institule™ and, after the job is over, reverts to the orginal position. This method is also very rarely used in Ind? ment, that is, under the existing nvCorporate-Level Strategies: Stability, Retrenchment and Restructuring 219 ‘The last method—the one most difficult to attempt but that is most often used involves replacement of the existing team, specially the chief executive, or merging the sick organisation with a healthy one. Jagproaches to Turnaround When a chiet executive officer (CHO) is replaced by another, the new jncumbent can broadly follow two types of approaches: surgical and non-surgical or humane.’ The surgical roach to turnaround involves a tough attitude and the pattern of action followed 1s roughly the same gverywhere. The turnaround works in somewhat the manner described further. The new CEO quickly asserts his authority by issuing orders and directives for changes, centralises functions, fires employees and closes gown plants and divisions. Then, the product mix may be changed, obsolete machinery replaced. R é D. marketing and financial controls strengthened and accountability fixed until the business shows signs of suming around. The second approach is non-surgical or humane and involves understanding problems. clicting opinions. adopting a conciliatory attitude and coming to negotiated settlements among different factions. The emphasis is clearly on behavioural change and aimed at improving the work culture and morale Both the above approaches may succeed, depending upon the circumstances, but the latter generally has a greater potential to succeed in the long run.* imperative to focus on the Action Plans for Turnaround For turnaround strategies to be successful, i A short- and long-term financing needs (as banks and financial institutions do) as well as on strategic issu workable action plan for a turnaround should include: 1. Ananalysis of product, market, production processes, competition and market segment positioning. 2. Clear thinking about the market place and production logic. 3. Implementation of plans by target-setting, feedback and remedial action Exhibit 7.1 reports the findings of an interesting research study of turnaround strategies in the Indian context. Exhibit 7.1 The elements in a turnaround strategy Ten comparable Indian companies, in five groups of two each, were selected for a study. In each group. one company seemed to have been more successful while the other less successful, in adopting the turnaround strategy. Based on a set of ten elements that contribute to turnarounds, the case studies of these ten companies were analysed First, itis important to note what these ten elements are’ Changes in the top management Initial cred:bility-building actions Neutralising external pressures Initia! controt Identifying quick payoff activities Quick cost reductions Revenue generation Asset liquidation for generating cash 8. Mobilisation of the organisations 10. Better internal coordination The comparative analysis of the actions taken by the more successful companies and the less successful com- Panies revealed that no significant difference was there as far as the first three elements were considered. The crucial difference lay in the way the companies attempted a turnaround on the basis of inital control of operation by the new management, quick cost reductions through various means, mobilising the organisation for improv- 'Ng motivation and morale, and better internal coordination Source: Pradip N. Khandwalla, ‘10 elements in Turnarounds', Business World, June 7-20, 1989, pp.18-19. PN DORONvesiment eeerereeee pivestment Strategies, ~ A divestment (also called divestiture or cutback) strate, business, or a major division, profit centre or SBU. Div. turing plan and is adopted when a turnaround has be option of a turnaround may even be ignored if it is obvious that divestment is the only answer. Harvesting strategies, a variant of the divestment Strategies, involve a process of gradually letting a company or business wither away in a carefully controlled and calibrated manner. Another term common in the Indian context is disinvestment. Disinvestment is not a corporate strategy ir the sense that we are discussing are. It involves the sale of government equity in public sector enterprises to another public sector enterprise, institutional investors, mutual funds or the general public, thereby diluting the government shareholding. Many government companies such as the ITDC hotels, Maruti Udyog, Bharat Aluminium and Videsh Sanchar Nigam have been disinvested in order to be privatised. ‘SY involves the sale or liquidation of a portion of a estment is usually a part of a rehabilitation or restruc- €n attempted but has proven to be unsuccessful Theoy 222 Strategic Management and Business Policy Reasons for Divestment 4 divestment strategy may be adopted due to various reasons. 1. A business that had been acquired proves to be a mismatch and cannot be integrated within the com, 0 has to be divested. Similarly, a project that proves to be ae in - long-term is dived ee ancial problems for tk 2. Persistent negative cash flows from a ert bu: _ create fin: ial a Whole con ny, creating the need for divestment of that business. : a iseciget Coates and the inability of an organisation to cope with it may cause it to dives, 4. Technological upgradation is required if the business is to survive but in cases where it is not poss the organisation to invest in it, a preferable option would be to divest. 5. Divestment may be done because by selling off'a part ofthe business, the company may be ina po, tosurvive. , 6. A better altemative may be available for investment, causing an organisation to divest a par of unprofitable business. 7. Divestment by an organisation may be a part of a merger plan executed with another organisation, wn, mutual exchange of unprofitable divisions may take place. The assumptions that such an exchange s- ‘mutual strategic interest. : 8. Lastly, an organisation may divest in order not to attract the provisions of the MRTP Act or ov oversize and the resultant inability to manage a large business. ble fe, igo Approaches to Divestment An organisation may choose to divest in two ways. A part of the companys divested by spinning it offasa financially and managerially independent company, with the parent compan retaining partial ownership or not. Alternatively, the organisation may sell a unit outright. a ‘marketing concept’ approach is advisable where a buyer is found who can consider th: the selling organisation) to be a ‘strategic fit’. In this way, high. Decision to Divest The decision to divest isa painful one for the management as it amounts to admitting 8 failure. This is the reason why many organisations fail to divest even though the strategic alternative s apparent. The CEO who is associated with the project finds it psychologically difficult to renege on at mitment. This is another reason why it is easier for a new CEO to divest a unit, to which he is not emotional connected. In the latter cas, 1@ divested unit by the likelihood of the unit being sold profitably s ‘With increasing pressure to streamline and restructure businesses and with the ‘emergence of profession management, divestment strategies have become quite popular in the Indian industry, Another reason WY divestment is a preferred option is the fact that several family business houses as well as public sector comp nies in India have always been widely diversified. This made sense when licensing was prevailing and ewe Sion opportunities were severely limited. Companies had no option but to diversify. With a wide-ring® Ponfolio of businesses, companies now face the problem of diffusion of cove ‘competencies. This is ® reason why several companies in India are employing divestment as a Strategy to streamline theie busi" Portfolios and emerge as focussed organisations, Here are a few examples of how com, India’s largest paint manufacturer, to divest its panies have attempted divestment strategies Asian Paints undertook an international divestment when it deve Ke in its Australian operations. The company's operations in Queensland were small Pot Expected to make any significant impact in the company's performance The company has ent into a share purchase agreement to offload its stake in Asian Paints (Queensland) Ltd, held by its wo” owned subsidiary, Asian Paints (International), Mauritius, Compared with Asian Paint’s revenues 0! 3.700 crore in the 2006, the Australian unit fetched only Rs. 15 crore, © Hindustan Unilever, formerly Hindustan Li ever Ltd, divested its marine Temptation Foods. Temptation Foods, which is a fruit and veyetables 7 ef foods business to Mumbsi-bs export company, will get diCorpotate-Level strate, ies ing 223, i jes: Strategies: Stability, Retrenchment and Restructuring Pradesh and shut down operations in Gujarat Id its seafood processing plant in Andhra «Tata group is @ highly diversified entity with rn non-core businesses for divestment. TOMCO detergents were not considered a core business Tatas, Merind and Tata Pharma were divested to t Wockhardt. The agro-chemicals i divested its pharmaceutical business to rationalise assets, The cosmetioe, company Takes ear aacget and sold to Hindustan Levers as, besides bay e ‘ and would have required substantial meee ae eatey eerie + nan Organic cremicals (1OC) setup in 1960 by the Ghai group, diversified into food processing in 1986, from its main usiness of Organic chemicals. But by early 1989, its ‘Future’ foods division and another: organisation, Convenience Foods, reached a position where they had to be divested. These units aan a rca i tie manufacturing of potato wafets and banana chs and he beastie anvbite ons reasons for their failure were: unfair competition from the unorganised sector, technological problems, mismatch between the manufacturing orientation of the Ghai group with the marketing orientation re. quired for fast foods and a lack of funds, * VST Natural Products, the food business company of VST, the tobacco organisation, was divested to Global Green Company of the Thapar group. The reasons for divestment wer 1on-availability of raw materials and inadequate working capital infusion. VST, the parent company, could not invest more net was itself running under loss. Asis evident from the above illustrations, divestment may be the result of failures. But they may also be the result of prudent thinking to divest unprofitable lines and divert resources to other areas co that the overall effect could make a company or business group more focussed on its core competencies and create competi- tive advantage. When divestment does not work, liquidation may be the only strategic alternative left Liquidation. Strategies A retrenchment strategy considered a most extreme and unattractive is the liquidation strategy, which in- volves closing down an organisation and selling its assets. It is considered as the last resort because it leads to serious consequences such as loss of employment for workers and other employees, termination of oppor- i i! tunities where an organisation could pursue any future activities and the stigma of failure. ic -scale units and proprietorship and partner- Why idation Indesirable? Many small-sca . ieee medium- and large-sized companies rarely Cee in a ome to ; nt, banks and financial institutions, trade unior number of reasons. The company management, government, ial oe ees Suppliers and creditors and ie agencies are extremely reluctant to take . oo os m Lg 7 7 Each party has its own reasons for doing so. While the management may eee ame failure, the government may not easily allow liquidation due to pal i a eee Unions would naturally resist the loss of employment of workers. Ceasing op s and suppliers unless, of course, itis, Stganisation is freed from its contractual obligations to the creditors and supp! ‘lard insolvent or bankrupt. also be difficult as buyers are difficult to find. Selling assets for implementing a liquidation strategy may als st assets, being unusable, are consid- ene meme jun consonant nt Png ls ns cred ag ae ne or wanisation can: ‘Affairs that oversees the legal process of quidaion, eimai tt ane ta? The Ministry of Company Tised on liquidation, which itself takes 15 to 20 years ately 12.5 per cent of the asset value is real ers224 Strategic Management and Business Policy the proceedings. '? Besides the practical difficulties in liquidation, there is also a psychological aspecy cannot be overlooked. The prospects of liquidation create a bad impact on the company’s (or bys group's) reputation. For many executives who are closely associated with liquidated organisations, a0" tion may be a traumatic experience. Despite the hesitancy on the part ofall concerned with a compayy intends to liquidate and the difficulties in the process of liquidation, sometimes an organisation ie = forced to liquidate Planned Liquidation‘ iquidation strategy may be unpleasant as a strategic alternative but when», business is worth more than alive’, itis a good proposition. For instance, the real estate owned by an cry sation may fetch it more money than the actual returns of doing business. When liquidation is evident itis difficult to say exactly when), an abandonment plan is desirable. Planned liquidation would inv systematic plan to reap the maximum benefits for the organisation and its shareholders through the proces, liquidation Legal Aspects of Liquidation Under the Companies Act, 1956, liquidation is termed as winding.op The Act defines winding-up of a company as the process whereby its life is ended and its property admin, tered for the benefit of its creditors and members. The Act provides for a liquidator who takes control of he company, collects its assets, pays its debts and finally, distributes any surplus among the members according to their rights. At the end of winding up, the company will have no assets or liabilities. When the affairs of company are completely wound up, the dissolution of the company takes place. On dissolution, the comp. | ny’s name is struck off the register of the companies and its legal personality as a corporation comes ton end Liquidation or winding-up in accordance to the Companies Act, 1956, may be done in three ways: 1. Compulsory winding-up under an order of the Court 2. Voluntary winding-up 3. Voluntary winding-up under the supervision of the Court The Act also provides for the dissolution of a company in which it ceases to exist as a corporate entity foral | practical purposes and is kept under suspended animation for two years. The Companies Act, 1956 unde: Part VII, Sections 425 to 560, deals comprehensively with the different legal aspects of liquidation. Liquidation Strategies in Indian Context As mentioned above, liquidation strategies are not pop anywhere, much less in the Indian context, yet there are instances where there is no other alternative bu liquidate the company or one or more of its divisions in order to survive. Here are some illustrations of liquidation strategies of Indian organisations @ Alpic Finance, a non-banking finance company, was ordered to be liquidated by the Bombay # when it defaulted on its outstanding payments to its investors. The liquidation was ordered 00 4 5 filed by the Small Industrial Development Bank of India, which was one of the investors 0 creditors. These investors got the first charge over the liquidated company’s assets but the dePs lost money. © Punjab Wireless Systems (Punwi Haryana High Court on a private petition, owing to the company’s inability to disehal ) was put under liquidation under the orders of the Punys® ats deb 2 liabilities. if © The cooperative banking sector in the various States of India hay faced massive ligquidanen own to rampant mismanagement and corruption. More than 100 banks have been ordered to be Nd under the orders of various high courts in the country or their licenses cancelled by the Reserve Bam India.also had a similar business in Isra el. It was ami managed to raise USS 40 million fro Tana : 1m venture funds, Tha ith this, we come to the end of our disc ; That did not prevent f hs we come tothe en of our discussion of pure or individual : Pena neato a wil ‘atives or combination strategies, Strategic alternatives. The next section 7.3 COMBINATION STRATEGIES Combination strategies (also referred to as mixed ; or Cmachment strategies, applied either simultane ron sea minute oF sabilty, expansion or ; 3 os {equentially (at different times in the same business), Ee It would be difficult to find any iat strategy. The complexity of doing pecan a and grown by adopting a single “pure demands made upon the organisation. An organisation oe beadopted to suit the situational cerpas to think of expansion, Am i as followed a stability strategy for quite some- eee ly organisation which has been on an expansion path for long, has to pause to consolidate its businesses. Multi-business organisations—as most large and medium India companies are eee i" follow multiple strategies either sequentially or simultaneously. s Hass a ieee ae which have adopted multipronged strategies to deal with the complex- ‘The Murugappa group is a pan-Indian diversified group, with major presence in several businesses such as auto components, cycles, tubes and fertilisers. Tube Investments of India (TI), a Murugappa group company, created strategic alliances in its three major businesses: tubes, cycles and strips, EID Parry created joint ventures in the sugar industry. Backward integration took place in the fertiliser and abra- sives businesses. Recent strategic moves have been towards aggressive internationalisation. « ITC Ltd. is a diversified conglomerate having varied corporate portfolio consisting of FMCG, hotels, paperboards and packaging, agribusiness and IT. Starting in 1910, it adopted backward integration in 1925, into the packaging and printing business. It diversified into hotels in 1975 and agribusiness in 1990, It adopted a turnaround strategy for the speciality paper business, Triveni Tissues, after its agqui- sition and merger with its paperboards business, while the financial services business was divested. «The Aditya Birla group of companies is a diversified conglomerate with businesses in several sectors. It has applied practically all types of corporate strategies in its illustrious history dating back to 1857, Most recently, it acquired Novelis to become the world’s largest aluminum rolling company. It has several joint ventures abroad, notably in South East ‘Asia and China and claims to be India’s first multinational company, On the way, it has diversified, divested, acquired and merged and demerged companies and business array of combination strategies. . _ to oing nay fmt gui thn ton ong enero ts prot lo es Mt rycen ne constructis als and art materials. s Is busi : been in Dubai, Singapore and Brazil : ational expansion pl * Candico’s, the domestic confectionery company international expan e up of independent manufacturing in individua ‘ d several plants in Se Afca to cater to countries in that region. It entered into joint ve ures with Leading European vont for fa high quality products through international partnerships. It has @ JO" ae Eurobase oo an Cust Georgi of Germany. The company Is following an equally ager ase of Belgium a domestic expansion strategy within India Jans include a combination joint ventures or setting