Strategic Planning

STRATEGIC PLANNING

Introduction
Corporate Strategy
The Stages of Corporate Strategy Formulation
The 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 Stage 2 Stage 3 Stage 4 Stage 5

•Developing a •Setting •Crafting a •Implementing •Monitoring

Strategic Objectives Strategy to and Executing Developments,
Vision achieve the Strategy Evaluating
Objectives and Performance,
Vision 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

Strategic Decisions:
Strategic Investment,
Competitor Functional Area
Strength and Strategies,
Weakness
Sustainable
Competitive
Advantage

Market Needs,
Attractiveness,
and Key
Success
Factors
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.
Michael Porter’s Generic Strategies: Cost Leadership

• 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: Differentiation

• 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: Focus

• 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.
 Resources Requirement
Generic Strategy Commonly Required Skills and
Resources
Overall Sustained Capital Investment
Cost Leadership Access to Capital
Process Engineering Skills
Intense Supervision of Labour
Product Design for Ease in
Manufacture
Differentiation Low Cost Distribution System
Strong marketing Abilities
Product Engineering
Creative Flair
Strong capability in Basis Research
Corporate Reputation
Technological Leadership
Strong Cooperation from Channels
Focus Combination of the above Policies
directed at the particular Strategic
target
Common Organizational
Requirements
Tight Cost Control
Frequent, Detailed Control Reports
Structured Org. and Responsibilities
Incentives on Quantitative Targets
Strong Coordination among R&D,
Product Development, and
Marketing
Subjective Measurement and
Incentives instead of Quantitative
Measures
Amenities to Attract highly skilled
labour, Scientists, and Creative
People
Combination of the above Policies
directed at the particular Strategic
target
 Michael Porter’s Generic Strategies: Conclusion

• 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.
 Best – Cost Provider Strategy

Type of Advantage Sought

Lower Cost Differentiation

Broad Overall Low-Cost Broad

Range of Provider Differentiation
Market Target

Buyers Strategy Strategy

Best-Cost
Provider
Strategy
Narrow Focused Focused
Buyer
Low-Cost Differentiation
Segment
or Niche Strategy Strategy
 Grand Strategies / Directional Strategies

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.

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 Retrenchment Combination

Intensification Diversification

Market Market Product Vertically Concentric Conglomerate

Penetration Development Development Integrated Diversification Diversification

Forward Backward
 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.
 Divestment Strategy is Adopted When

• Compulsions of Disinvestments may be varied, such as:

• Business becoming Unprofitable,

• High Competition,

• Industry Overcapacity,

• Failure of Strategy
• Generate Resources
 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

1. Growth in Existing Product Markets

2. Product Development
Increased market Share
Add Product features
Increased Product Usage
Product Refinement
Increase the Frequency
Develop a New Generation Product
Increase the Quantity Used
Develop New Product fro Same Market
Find New Applications for Current Users

Product Market
Expansion Grid

4. Diversification
3. Market Development Involving New Products
Expand Geographically Involving new Markets
Target New Segments Related
Unelated
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. Related
Diversification

Unrelated
Diversification

• 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 and Unrelated Diversification:
Options for Manufacturer

Related: Unrelated
• Exchange / Share Assets / • Manage and Allocate Cash Flow
competencies there by • Obtain Higher ROI
exploiting: • Obtain a Bargain Price
• Brand Name • Refocus a Firm
• Marketing Skills • Reduce Risk by Operating the
• Sales and Distribution Multiple Product Markets
Capacity • Tax Benefits
• Manufacturing Skills • Obtain Liquid Assets
• R&D • Vertical Integration
• New Product Capability • Defend Against Takeover
• Economies of Scale
 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 competition Industry overcapacity

• Failure of strategy
Reference:

Prof. Prashant Mehta

National Law University, Jodhpur