The initiative of corporate management are not limited only to choice of business portfolio or resource allocation. The list of tasks also includes a number of other strategic activities, such as internalisation of business, turnaround of under performing SBUs, determination of routes to be adopted for implementing growth directions, acquisition of new competencies, repositioning of the firm under changed environment, development of criteria for evaluating the performance of individual SBU, and ensuring that all these actions lead to greater competitiveness of the firm as well as the enhancement of shareholder value.
Essay on Corporate Management
Essay Contents:
- Essay on the Diversification and Vertical Integration of a Firm
- Essay on the Internationalisation of Business of a Firm
- Essay on Turnaround Strategy of a Firm
- Essay on the Strategic Repositioning and Corporate Restructuring of a Firm
- Essay on Setting the Context for Implementation of a Firm
- Essay on the Maximising Shareholder Value of a Firm
Essay # 1. Diversification and Vertical Integration of a Firm:
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The managers responsible for developing and implementing business-level strategies need not be concerned directly with the portfolio of businesses the company is in or should be in, the corporate managers have the responsibility to evaluate periodically the performance of their total portfolio (individually and collectively), in terms of such criteria as competitiveness, long-term prospects and profitability, synergy between various businesses, and the firm’s ability to maximise shareholder value, given the mix of businesses and underlying technologies the company has.
Depending on the outcome of the assessment, the firm may decide to enter into new activities (either through diversification or vertical integration), or focus its activities on a few select areas and divest the rest. Determining how best to implement this decision to restructure the business portfolio through internal development, joint ventures, strategic alliances, mergers and acquisitions (M&A) or divestitures, is also an integral part of such a decision.
In 1950, 60% of the Fortune 500 businesses were either single-business or dominant-business firms. By 1974, their share was only 37%, indicating a growing preference for diversified activities during that period30. However, beginning in the late 70s and during the whole of 80s, the trend shifted back to concentrating on core businesses and there was a significant divestiture of unrelated or non-core activities. As a result, the share of single and dominant businesses grew to 53% of all firms in the Fortune 500 list of industrial companies.
This indicates that many diversified firms are now concentrating on specialised or core activities, because they found through experience that firms doing well in one or two major business activities should continue to stay close to their core competence areas. This is because it takes an enormous amount of time and resources to develop the required competencies and create an entry barrier in the new fields.
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In cases where diversification cannot be avoided-either due to very low long-term prospect in existing areas, or due to the opening of new opportunities where some of the existing competencies can probably be used-the firm can pursue a diversification strategy, provided it follows a cautious path and focuses on relatively few rather than many businesses.
Categories of Diversification:
Rumelt provided the following categorisation to describe various levels of diversification, viz., low, moderate to high, and very high level:
(a) Low Level:
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i. Single-Business firms where 95% or above revenue comes from a single business.
ii. Dominant-Business firms where 70% to 95% revenue comes from a single business.
(b) Moderate to High Level:
i. Related-constrained business where less than 70% revenue comes from the dominant business, but there are linkages between various businesses in the portfolio in terms of product, technology, distribution, etc.
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ii. Mixed related and unrelated businesses where less than 70% of the revenue comes from the dominant business and there are only limited linkages between the various businesses in the portfolio.
(c) Very High Level:
Unrelated diversification where less than 70% of revenue comes from the dominant business and there are no common linkages between various businesses.
The trend towards unrelated diversification, as seen in late 70s, is not that visible now and many firms are presently refocusing their activities by divesting the non-core businesses. Failure to leverage resources as well as realise synergy and the lack of core competencies in diversified fields are compelling many firms to review their portfolio and undertake extensive restructuring.
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Motive for Diversification:
There can be a number of reasons for which a firm may opt for diversification. Some of these reasons are:
1. Achieve economies of scope (sharing of activities, transfer of core competencies, etc.);
2. Enhance market power (blocking competitors through multipoint competition, vertical integration, etc.);
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3. Achieve financial economies (efficient resource allocation, risk reduction, business restructuring, etc.);
4. Enjoy incentives;
5. Cope with anti-trust regulations;
6. Poor performance and long-term prospect in existing areas; tackle uncertain future cash flow; minimise risks;
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7. Ambition of management to venture into new areas;
8. Regulation induced diversification.
Ansoff stated that there are four basic reasons that lie behind a firm’s decision to diversify:
a. A firm’s objectives cannot be met any more with the present profile of business portfolio;
b. Retained cash exceeds the total expenditure needs of present portfolio;
c. Diversification opportunities provide greater prospects in terms of profitability vis-a-vis expansion needs in the existing areas; and
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d. An influence of the ‘grass is greener on the other side’ syndrome.
Ansoff maintained that since there is no absolute ‘proper’ set of goals, conservative managers tend to limit their interest in diversification to the reason referred to in (a) above. Such managers normally do not pursue diversification if their firm already meets the current objectives.
On the other hand, entrepreneurially-oriented managers tend to view the firm as a portfolio of investments which needs alteration and improvement from time to time to maximise returns. Such managers pursue a diversification strategy consciously for one or more of the above four reasons extended by Ansoff.
Related Diversification:
Prahalad and Hamel, while proposing their concept of core competence, stated that successful firms perceive their business as a basket of core competencies, and this implies that, to the extent possible, such firms should diversify only if the new fields of activities are related to the existing competencies in some way or the other.
The main reasons for the popularity of related diversification are:
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(a) Potential to reap economies of scope across the SBUs that can share the same strategic assets;
(b) Potential to use existing core competencies in another SBU;
(c) Potential to use one or more of the core competencies of the existing business to create a new strategic asset in a new business much faster or at a lower cost; and
(d) The potential of related diversification to enhance and augment the existing core competencies which in turn improve the quality of knowledge/experience in the existing businesses.
Long-Term value of a related diversification lies more on the ability of the firm to exploit (b), (c) and (d) rather than the ability to exploit the economies of scope. While undertaking related diversification, what needs to be ensured, is the development of certain assets and competencies which are not imitable or substitutable by competitors.
When these conditions are satisfied and the firm diversifies by exploiting the existing assets and core competencies, the competitors will find imitation difficult, since they will have to incur extra costs to acquire the same level of competencies or assets and build the required brand awareness. These difficulties act as entry barriers for other firms not having the right kind of assets or competencies.
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The first movers, who are entrepreneurial enough to exploit their key assets and competencies to diversify into related fields, will have an advantage over late entrants who will incur higher costs and need more time to build differentiation or cost advantages. However, the first mover, in order to sustain its position, must be efficient enough to distribute the core competencies between its existing and new businesses; it should also be able to create market- specific assets which are non-tradeable and non-substitutable and are slow or costly to accumulate.
Chatterjee and Wernerfelt made a theoretical and empirical investigation to find out the rationale for diversification and suggested that firms sometimes diversify in order to utilise the productive resources which are surplus to current operations. In other words, information and knowledge about these resources can help predict the direction of a firm’s expansion or diversification moves. They also observed that excess physical assets, strong knowledge-based resources and availability of external funds (such as new equity or high risk debt) are associated with related diversification.
Related diversifiers attempt to exploit the economies of scope between various businesses, the idea being to achieve cost savings by sharing activities and transferring the capabilities and competencies developed in one business to a new business area without incurring significant incremental costs. To achieve the desired economies of scope leading to creation of value, both tangible (such as, plant and machinery, sales force, distribution channel, purchase and quality system, etc.) and intangible (such as knowledge) resources should be transferred efficiently.
Sharing of activities, though it can give important cost savings, requires careful handling since there will be certain costs of coordination, including compromising individual SBD strategies to maximise the overall corporate interest. The firm should take care that the cost savings achieved through the sharing of activities exceeds the costs that are incurred to realise the same.
Transferring competencies-particularly those based on intangible resources-is extremely critical for success in related diversification since it can give distinct competitive advantages in the areas newly entered into (which will be difficult for competitors to understand and imitate) and will also reduce the cost of entry. Such transfer of competencies can take place either through transferring those key people to the new area who have the required competencies, or by forming cross-functional teams.
Since transferring people to new activities is often resisted by SBD managers who think such transfers will be detrimental to their own business, cross functional teams can be a useful medium. However, even the use of cross functional teams can be costly and needs careful consideration.
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Related diversification can help a firm gain more ‘market power’. For example, it can either help the firm sell its products above the existing competitive level or decrease the cost of primary activities below the competitive level, or both. Such market power is also enhanced if related diversification leads to ‘multipoint competition’ thereby enabling the firm to compete with other diversified firms operating in the same product or geographical areas.
Vertical Integration:
Vertical integration exists when a firm produces its own inputs (called backward integration) or owns its distribution channel (called forward integration). It is, however, possible that the firm will adopt a partial vertical integration strategy by which it can produce a part of its input requirements or sell a part of its output through its own distribution channel.
Vertical integration can increase the market power of a firm by achieving savings on operations and marketing costs, exercising better control on quality and services, and also by protecting proprietary technology and know-how. The ownership of key inputs and outputs acts as a barrier against the leakage of technology and important information or know-how to competitors.
However, there are certain limitations to a vertical-integration strategy. For example, having internal production facilities for key inputs may inhibit the firm from switching over to low cost sources available outside, leading to lower profitability and competitiveness. Also, since the in-house production facilities aim to meet only the captive demand, the economies of scale are difficult to realise.
There are other problems also, such as a failure to invest at the right time in technology up gradation (mainly because of a lack of market orientation and also the absence of scale to absorb the required capital investment), chances of entire operations coming to a halt or becoming uneconomic if production stops or becomes costly at one point of the vertically-integrated chain, and the hidden cost of the bureaucracy to manage and coordinate various activities. Thus, while a vertical- integration strategy can give important competitive advantages by way of cost, quality, service, and reliability, it is not without its own risks and associated costs.
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Unrelated Diversification:
Unrelated diversification is normally undertaken when there are no opportunities for growth either in the existing or related fields, or where there is a need to reduce risk through diversifying the portfolio. The underlying assumption is that such an unrelated diversification strategy will be able to create value by way of the cost savings realised through an improved allocation of financial resources based on the investments made inside or outside the firm.
Defined as financial economies, such cost savings are achieved through efficient internal capital allocations in a manner that reduces risks among a firm’s different SBUs. Financial economies can also accrue when a firm decides to diversify- through acquisition rather than internal development-with the objective of increasing the value of the firm.
Unrelated diversification is normally complex to manage since it involves a different set of competencies and asset management skills not known to the firm. As a result, creating value through unrelated diversification is extremely difficult. In such a scenario, the shareholders of the firms can reduce their risks, if necessary, by diversifying their portfolios instead of depending on the firm to diversify its business-mix.
When a firm possesses detailed and accurate information on the actual business prospects of a diversified portfolio to which outside shareholders may not have access, only then the internal capital allocation to individual businesses may lead to potential gains relative to an external capital market.
Also, when a firm undertakes diversification that involves internal capital allocation, it is in a better position to discipline underperforming management teams, adjust managerial incentives, and suggest strategic changes. Thus it is in a position to create value which can be higher than what the external capital market can achieve.
One of the key problems in managing a diversified portfolio (which consists of a number of unrelated businesses) is the adverse impact of the ‘dominant logic’ of the firm on the diversified activities.
Dominant logic is the particular way in which managers perceive their businesses and make critical resource allocation decisions with regard to technology, product development, distribution, advertising, human resource, etc., through a variety of mechanisms that include the choice of senior officials of the SBUs, planning and control system, compensation-pattern, career management and organisation structure.
For managing a diversified portfolio consisting of a number of unrelated businesses, the firm will need multiple dominant logic since the strategic varieties across various individual businesses in the portfolio will be quite substantial.
Unfortunately, the dominant logic of the core activities of an organisation tends to influence general management logic of the other diversified activities, thereby causing a harmful effect on the latter. Prof. Ranjan Das observed that as a firm diversifies into various unrelated fields, it needs to acquire new general management competencies that are specific to each such diversified activity.
No doubt, unrelated diversifications are complex to manage and they rarely create value. Yet examples abound on large scale, unrelated diversification by firms worldwide. There are certain specific reasons for such unrelated diversification. For example, sometimes anti-trust policies and tax laws of governments either incentivise or force firms to undertake unrelated diversification (as were seen in the 1960s and the 70s in the USA and the late 70s and early 80s in India). In the USA, for instance, the merger waves in the 60s and 70s were primarily conglomerate in character, and during 1973-77, 29% of all mergers were conglomerate. Tax laws also influence decisions on unrelated diversification.
For example, if a company operating in a mature industry has free cash flows for which there is no internal need and which should ideally be distributed to the shareholder in the form of dividend, the shareholders may expect the firm to invest the surplus cash in diversified activities (either through internal development or through M&A), if the tax rate on dividends is quite high.
The objective of such a course of action is that the firm will be able to create more value through such an investment in diversified activities which will result in an appreciation in the stock prices, and as a result, the shareholders may receive a higher post-tax return (net of capital gains tax) than what they would receive through dividend payments.
Similarly, continued low performance in existing areas or uncertain cash flows may compel a firm to undertake unrelated diversification. This is in line with the research findings that firms facing poor performance seek higher risks, one option being to undertake higher diversification especially where there are idle resources.
However, more often than not, poor performance continues even after diversification, resulting in their disposal as part of restructuring exercise. It is useful to mention that there is a curvilinear relationship between diversification and performance which indicates that performance improves with diversification into related fields, but as the firm moves into unrelated areas, the same shows a downward trend again.
For undertaking diversification, be it related or unrelated, a firm must possess the resources to make such a diversification economically viable. Resources can be tangible, intangible and financial, each of which has a different utility so far as value creation is concerned. Not all of these resources are, however, critical; only those resources which are not imitable or substitutable (such as core competencies, access to raw materials or distribution channel, etc.) provide competitive advantages to the firm in the new area, and thus, create value.
Specifically, tangible resources, such as plants and machinery, sales force, etc., are normally not very useful unless the firm diversifies into some related field. Intangible resources, such as goodwill, brand equity, etc., can help in getting a share of the attention of the customers in the newly diversified activities and can, thus, assist in building volumes rapidly.
Financial resources, though critical to any diversification move, are less likely to create value on their own, since any firm that has equivalent financial strengths can also undertake such diversification. What is important, thus, is to find out whether or not the firm, intending to diversify, possesses certain special assets and competencies which are unique, non-imitable and non-substitutable, and hence, shall give the firm distinct advantages over the existing (and also new) competitors who are (or will be) operating in the diversified field being targeted.
Managerial Motivation to Diversify:
The managerial motives for diversification can be independent of the organisational objectives and resource availability. The set of motives, so far as managers are concerned, includes personal risk reduction and higher compensation. For example, diversification can reduce the employment risks of top corporate executives till such time that the profitability of the entire firm does not suffer excessively.
Managers also resort to diversification as the resulting increase in size shall have a positive correlation with executive compensation. These two managerial motivations may cause a firm to undertake unlimited diversification, but thanks to various corporate governance mechanisms, strict monitoring by major shareholders and financial institutions, and the existence of a market for corporate control, there are now sufficient checks to limit managerial ambitions to over diversify. As a matter of fact, these checks actually force the managers to maintain the strategic competitiveness of their total portfolio, as otherwise they will face such consequences as takeover by rival firms and loss of personal reputation as capable managers.
Key Action Areas:
From the foregoing account it must be clear that related diversifications generally create more value than highly unrelated ones. Needless to say, a firm needs to be careful with regard to the definition of ‘relatedness’. Any exaggeration in this regard will be risky. For example, if certain competencies and assets are considered as transferable to a new activity area, one may get tempted to come to the conclusion that the said new activity is closely related to the existing core business and can thus be chosen for diversification.
However, what needs to be understood is whether the same are imitable or tradable, and if the answer is in the affirmative, the competencies and assets proposed to be transferred will not give sustainable advantages. Hence, the same are non-strategic and will not be able to create the desired value.
Another task is to find out whether the competencies in the existing SBUs can create ‘new’ strategic assets in a new ‘business’ area faster and at a lower cost. If it is possible, this will open up new diversification opportunities which can be implemented easily by the firm, using its existing assets and competencies that cannot be imitated easily by competitors. (Canon has used this route successfully to enter into various diversified activities.)
To conclude, the extent of the desired diversification by a firm is determined by the interaction of a variety of factors, such as current performance and long-term prospects of the existing business, resource availability (tangible, intangible and financial), managerial motives, incentives (such as government policy and tax laws, quality of intervention by the capital market-including market for corporate control, etc.), market for managerial talent, and the nature of the existing internal and external governance.
Essay # 2. Internationalisation of Business of a Firm:
Internationalisation of business is one of the strategic tasks of corporate management. In the present-day context of increasing globalisation of industries and integration of the economic activities of various countries across the world, there is no question about whether or not to globalise. The question confronting the corporate managements is how to internationalise the operations at the earliest so that their firms can achieve global standards of performance and withstand global competition. Seen from this angle, the decision to internationalise is strategic, and hence, a corporate management responsibility.
Under the new world economic order, there are both incentives and opportunities to internationalise. A firm needs to formulate a strategy for entering the international market and to choose an appropriate route. A number of options are available for entering a foreign market, viz. exporting from home country, licensing, forming a joint venture with overseas partners, acquisition of foreign- based firms, and setting up subsidiaries.
The process of choice will be influenced not only by the opportunities and incentives available but also by such factors as the political and economic risks that are normally associated with operations in an alien country and the complexities of managing an international firm with operations in several countries, each having its specific cultural, legal, product and market characteristics. Also important are considerations, such as the availability of key resources and assets as well as core competencies, which have a bearing on the ultimate competitiveness in the global marketplace.
Opportunities:
International strategy can be triggered by a desire to undertake international diversification, as conceptualised by Vernon. Internationalisation is also described by Ansoffss as diversification into a new geographical territory which can be related to the present portfolio (with regard to market, technology, or both), or even be unrelated.
Another incentive for internationalisation is to secure key resources either in relation to maintaining reliability supply or to have a steady availability of low-cost inputs (including low-cost labour). Many well-known companies have moved their production facilities offshore with such objectives in mind.
Protecting the domestic market position and achieving international competitiveness are other important incentives for globalising the marketing and manufacturing activities of a firm. The idea here is to develop global strategic capabilities that will enable, a firm to adopt the best of international practices, monitor the activities of global competitors, offset the disadvantages of the home country by tapping the advantages of host countries selectively, and identify new opportunities.
One other incentive for internationalisation is the challenge to face the increased pressure for global integration successfully and yet maintain the required local responsiveness. This calls for managerial competencies of a high order. The responsibility to establish such competencies is a strong incentive to go international.
Opportunities:
There are four basic opportunities which a firm going international may wish to exploit.
These are:
a. Increase market size;
b. Enhance ROI; (Returns on Investment);
c. Exploit economies of scale and facilitate learning;
d. Reap the benefits of locational advantages.
These four opportunities, along with a company’s existing resources and capabilities (including core competencies), influence a firm’s choice of international strategy.
International Business-Level Strategies:
To develop an international business-level strategy, a firm needs to understand the competitive advantages of its home nation, using the framework developed by Porter. According to this model, if the home country has a favourable ‘national diamond’ (consisting of factor conditions, demand conditions, related and supporting industries, and finally, the structure, strategy and rivalry among the domestic firms) in respect of the products being targeted for international expansion, then the country will have a competitive advantage with regard to the same over other countries.
However, whether a particular firm shall be able to exploit these home country advantages and achieve a strong international presence depends on its capabilities, resources and managerial motivations to spot and seize the same. In other words, each firm must create its own success; and not all the firms from a particular industry-for which the home country has competitive advantages-will, be equally successful.
International strategy can be based on one of the three generic strategies focus, differentiation overall low cost leadership. International low-cost strategies are characterised by centralised production in order to achieve the economies of scale and the selective outsourcing of low value-added components. The main production centre is normally located in the home country and the products are exported from the same.
However, in an international context, an exclusive focus on low-cost strategy can be risky since cost leadership can shift to other companies in different countries, thanks to the advancement in technology, or due to availability of cheaper labour elsewhere. The steep rise in labour costs in Korea, once a cost leader in manufacturing sports shoes, has pushed the bulk of the industries to China and Indonesia which right now, have a comparative advantage in this regard.
International differentiation strategy, based on advanced and specialised factor conditions-as defined by Porter, can give sustainable competitive advantages. Such a strategy was pursued successfully by German companies in specialised chemicals, Japanese companies in memory chips and integrated circuits, and the USA in logic chips.
The third generic strategy, viz. focus, is also applicable in the international context wherein the firm concentrates on satisfying certain specific needs (such as quality, image, design, etc.) in which it has some cost advantages and which are not attractive enough (in terms of size, growth prospect or cost of servicing) for other established broad line international players.
The concept, successfully implemented by many industries (an example is the Ceramic Tile Industry in Italy which produces about 50% of the world’s tile requirement), assumes that the producer will make steady investments in technology in all areas of the value chain (from design to marketing to services, as applicable), in order to enhance productivity and quality. The aim is also to maintain a close liaison with both suppliers (of equipment and inputs for production) and customers to design and supply products that meet or exceed the expectations of the ‘niche’ customers.
The above three generic strategies are applicable in an international context as much as in the domestic market. Long-term success will accrue to those firms that are able to combine low-cost and differentiation strategy effectively since such a combination has the potential to deliver the highest perceived value at the lowest delivered cost. Thanks to the progresses in the flexible manufacturing system; improved information flow across and within firms; and the increasing use of best-operating practices (including quality and safety standards), it is now possible to pursue this twin strategy. Given the proliferation of markets and the number of competitors, there is a distinct scope for such a strategy to become effective.
International Corporate Level Strategy:
International business-level strategy, as described above, is formulated within the context set by international corporate strategy.
There can be three kinds of international corporate strategy as given below:
1. A multidomestic strategy, highly responsive to local market requirements, where strategic and operating decisions are delegated to the SBD head of each country.
2. An ethnocentric or mono centric strategy in which the strategic and operating decisions are influenced mostly by the home office and where the emphasis is on supplying standardised products across various country markets.
3. A transnational or global strategy that combines the twin objectives of global efficiency and local responsiveness.
Of the above three approaches, the transnational or global strategy is the most difficult to implement since the same involves global coordination and local responsiveness simultaneously. In order to be successful, a company needs to have the right structure, culture, and the people who understand and appreciate the inherent contradictions between the two modes and yet work towards achieving the same. In spite of the complexities in implementing such a strategy properly, there is an increasing emphasis in most industries for efficiency on a global scale as well as enhanced responsiveness to local requirements.
The present trend is one of managing the upstream activities, such as design, R&D, component manufacturing, marketing and, even high volume/high value purchase of key inputs on a global basis, and leaving the downstream activities, such as assembly, packaging, sales and service, etc., to be managed as per the local market requirements.
The definition of what is upstream and what is downstream differs from industry to industry, but the guiding principle is that activities which require close interaction with local customers, and where the final product and service package should be tailor-made to the local customers’ specific requirements, should be managed locally, leaving die balance activities of the value chain (called upstream activities) for global production and coordination.
Another issue that confronts the managements of international firms is whether to compete in several markets or to focus on a particular region. Competing in many markets may give global-scale efficiency-at least in the upstream activities, but it also has associated problems, such as the need to adapt, to many cultures, legal and social norms, distribution and consumption practices, and so on.
Focusing on specific regional markets, such as the Far East, South Asia, the Middle East or North America, where the market characteristics within a particular region are by and large similar, is sometimes useful, since operating in countries belonging to one or the other region may be comparatively easier from the point of view of coordination, resource-sharing and achieving better efficiency.
A regional approach towards managing international business is beginning to make more sense today, since there exist a number of trading regions in the world (such as NAFTA, ASEAN, EU, APEC, MERCOUSUR, SAARC etc.) where countries belonging to each such bloc have entered into trade agreements to enhance the economic power of that particular region. These agreements can provide many opportunities to international firms to build a market share in specific region.
Entry Route:
There are various options available to a firm to internationalise its business. Some important entry routes are:
1. Exporting (either using own brands or private labels);
2. Licensing;
3. Strategic alliance with a local partner (including 50 : 50 joint ventures)
4. Acquisition of existing outfits (located in the host country); and setting up a wholly-owned subsidiary.
Export is normally the initial route followed by many firms. It involves, among others, the setting up of distribution outlets in the host country. While this route can help in avoiding the cost of setting up offices abroad, there are a number of disadvantages, such as higher cost of transportation, difficulty to customise products and the need to respond to various tariff and non-tariff barriers imposed by the host countries.
Licensing enables a firm to manufacture its products in a host country by entering into an agreement with a licensee, under which the latter puts up the required facilities and also pays a royalty and/or a lump-sum payment to the licensor for using the technology or know-how.
Though licensing is the least costly form of international expansion, there are some hidden costs also, such as relatively less control on foreign operations (both marketing and operations), and lower profit opportunity from overseas activities (since profits are shared). There is also the problem of the licensee learning the skills of the licensor over a period of time, thereby enabling him to offer the same products or services on its own after the license has expired.
A strategic alliance between two or more firms belonging to different countries allows such firms to share the risks and resources to operate in an international market. Normally, one partner provides access to the local market, takes care of local legal and social issues, and provides all other facilities (including supply of labour) that are needed to produce and sell. As against this, the other partner may provide the know-how, technology, key plant and machinery, and even critical raw materials and other inputs.
Which partner will provide what varies from one situation to another, but the guiding principle is that by and large the risks and resources (marketing, financial, technological, organisational and managerial) should be shared equally, and that the arrangement should be so designed that both partners gain from the same, so far as -the outcome is concerned. There are many instances of how alliances just did not work out due to inadequacies in these areas.
There are also problems relating to a conflict between two different cultures (corporate and national) as well as underlying tensions that may get created due to the divergence of views between partners, with regard to the objectives, direction of growth, and the strategies/policies being (or to be) pursued.
There is also a chance of ‘deskilling’ of the partner providing the critical know-how-as has been the experience of many strategic alliances between Japanese and US firms. When problems crop up due to one or more of these reasons and partners do not take steps to resolve the differences well in time, the alliance normally fails, with one partner ultimately buying the holding of the other.
Acquisition provides a quick access to an overseas market. It can help in such areas as obtaining know-how; getting access to the local market, sourcing a low-cost production centre and tapping the selective advantages of the host country. International acquisition, which is regarded as one of the most popular and effective modes of entering the international market, can be quite complex from the points of view of negotiation and legal formalities involved, as well as the costs incurred in making such acquisitions.
Inadequate information on the target firm as well as the host country makes it difficult for the decision maker to arrive at the right price. There can also be problems in managing the acquired firm due to differences in the social and cultural practices and norms. All of these imply high costs and multiple risks, even though the advantages of using this route cannot be ignored.
Setting up a wholly-owned subsidiary is often a complex and costly process. No doubt, this alternative provides the maximum control so far as the firm is concerned, but the risks can also be high since the cost of setting up the subsidiary is borne exclusively by the firm. The absence of local partners or shareholders not only makes it ‘foreign’ to the host government and people, it also reduces its ability to gauge the social, cultural, political and legal environment of the overseas country.
The process of setting up the subsidiary can be lengthy in certain cases, implying that the firm must assess the relative benefits of a wholly-owned subsidiary vis-a-vis the cost of setting up the same, including the delays involved. In general, such an option is generally favoured in the case of products which involve proprietary or high technology and where the protection and control of know-how is critical to ensure long-term competitive advantages.
Also, in situations where the firm has a plan to build a strong market position in the host country to achieve which there is need to offer a very competitive price over an extended period of time, the firm may choose to set up a wholly-owned subsidiary, since implementing such a strategy (which implies sacrificing profit in the short run) may not be acceptable to the minority shareholders.
Of the above five modes of entry, the export and licensing routes are relatively less risky and can be adopted during the early stages of internationalisation by a firm. Even strategic alliances are not that risky, if properly managed, since the costs and risks can be shared between the partners. Acquisitions as well as setting up wholly-owned subsidiaries can help significantly in building strong, long-term positions though there are associated costs and risks.
Managing the International Firm:
Because of the multiple risks involved in operating in several host countries, there are limits to international expansion. Beyond a point-defined in terms of size and diversity-it is difficult to reap the benefits of internationalisation because of the underlying complexities connected with managing the firm and its various subsidiaries, affiliates and joint ventures operating in multicultural environments.
The differences in legal, financial, political and regulatory environments, lack of stability in the policies and programmes of various host governments, and the intensity of competition in individual host country markets, also add to the complexities. All of these produce a set of unique challenges in managing an international firm.
Of the risks faced by a multinational firm, the primary ones are political and economic risks. The political risks include instability in national government, chances of war or civil disturbance and uncertainty in government policies pertaining to the free flow of capital, technology and manpower.
Favourable assumptions made at the time of entry may turn out to be unfavourable because of instability in the political environment. The economic risks include a possible adverse movement in the value of the different currencies (particularly those of the home country and the host country) as well as the rate of inflation, which can dramatically erode the competitiveness as well as the profitability.
International expansion becomes more and more expensive as the geographic scope increases. There will be greater cost of coordination and distribution not only due to greater geographical diversity but also due to the fact that the firm has to respond to a larger number of government regulations and trade barriers. Generally speaking, cultural diversities, trade barriers, logistical costs and various other differences (in relation to the availability of key inputs and skills) tend to make international activities quite complex to manage.
There are problems as well in transferring competencies from one country to another due to institutional and cultural factors which act as strong barriers. Due to the differences in country specific factors, there may be a need to alter the various functional strategies and policies substantially as well as to incur higher capital and revenue costs. All of these make it difficult to manage international operations effectively.
Today the biggest challenge in managing an international firm is how to achieve global integration and local responsiveness simultaneously. Obviously, the firm needs to be concurrently centralised and decentraiised to achieve these twin requirements. Different organisational forms can be tried to achieve both the objectives, but it is unlikely that complete satisfaction on both the counts can ever be realised. What is needed is to develop an appropriate culture and various administrative systems (consisting of planning, control and rewards system) shat clearly signal that maintaining both the perspectives is desirable and also the right way to augment corporate and individual performance.
Another point that is important in managing an international firm is the need to maintain favourable relationships with the national governments of the various host countries where the firm is operating. While resistance to the MNCs has softened considerably during the past 20 years or so-thanks to the globalisation and liberalisation of various economies across the world and due to a greater realisation among the developing and less developed countries that the MNCs can offer important support by way of funds, technology and management capabilities-there is no denying the fact that maintaining a favourable relationship with the host government will continue to remain a priority area for the MNCs.
Essay # 3. Turnaround Strategy of a Firm:
If determining the business portfolio, chalking out the future growth plans, and executing them are strategic activities of corporate management, so also is effecting a turnaround of the existing businesses that have run into trouble for a variety of reasons. For a multi-product firm, it is quite possible that one or more of its businesses will be reeling under crisis at any point of time, requiring urgent intervention by the corporate managers.
Turnaround implies corporate renewals. A turnaround strategy aims to correct deep-rooted weaknesses and vulnerabilities that an organisation has developed over a period of time-due to internal and external reasons and to bring it back to the desired healthy state. There can be various kinds of turnaround situations which an organisation may have to face from time to time.
These are:
1. Decline in the organisational efficiency and/or profitability;
2. Stagnation or decline in the organisational size, growth and market share;
3. Poor organisational asset utilisation (it is a key area since continuing poor asset utilisation will open up threats of corporate takeover, even if the performance is reasonable in terms of profits).
A turnaround task becomes complex under the following three situations:
1. A decline in the above three areas has been taking place over the last three to four years and there is no sign of reversal of this trend;
2. The situation has become so critical that the firm will need to do surgery’ and not just concentrate upon doing things better to bring about the desired improvement. In other words, the actions will have to be different and substantial;
3. The case is fairly terminal, implying that improvement has to take place over a relatively short span of time (say within 18 to 24 months).
Reasons for Downturn:
A combination of certain external and internal factors can lead to a decline in performance. While external factors, such as changes in regulations, technology, competition or social practices, and lifestyle do create discontinuities in the environment, it is important to remember that crisis takes place more often due to the shortcomings within the organisation.
There is no denying the fact that sharp and adverse changes in the external environment can upset a company’s performance significantly, but the same is accentuated even more when the organisation fails to perceive and interpret the signals of change correctly because of its preoccupation with current goals, policies, methods and competencies and also due to the influence of a paradigm or mindset that is hopelessly out of tune with the emerging realities.
Even though the external factors are outside the control of a company, perceptive management can take action to reduce the adverse impact of change through a timely and objective identification of the direction of change and by initiating strategies to respond to the same.
Their range of actions can comprise a number of alternatives, such as impressing the regulatory bodies well in advance with the need to ensure that harsh measures are not introduced, influencing the government policy making agencies to formulate favourable rules and guidelines; continuous communication with various external stakeholders about the vital role played by the firm in national economic development; and investing in frontline technologies and R&D in areas specific to the firm’s business. The idea here is to understand the direction of the environmental changes ahead of the competitors and to initiate actions that can reduce the impact of such changes, thereby ensuring that the firm avoids becoming a victim of the same.
Crises triggered by organisational weaknesses are, however, more common. An internal decline across the entire value chain of a company, starting from design/R&D to manufacturing to sales and services, takes place quietly over the years. But the managements of crisis-prone companies fail to diagnose the same, partly due to the absence of a proper information system and partly due to mindset problems, causing inability to initiate corrective actions. Even in situations where data on the decline is available, the management often fails to identify the real underlying causes because of its tendency to explain away such trends as being caused by some external developments which are beyond the management’s control.
The list of internal factors that cause decline will be a lengthy one and will include such factors as technological obsolescence; outdated plant and machinery; poor product quality; unsatisfactory customer service and brand image; inadequate distribution; high cost structures caused by excess manning; disproportionate overheads; poor labour productivity and inefficient operations; uncooperative trade unions; bureaucracy and red tape; unsatisfactory interdepartmental coordination and communication; inappropriate organisational policies, systems and styles of management; and finally, wrong values and culture.
All these factors individually and collectively contribute to the creation of a crisis. As mentioned before, a decline in performance due to the inadequacies in internal factors takes place slowly over the years, and an alert management, conscious of this pattern, can do a lot to avoid the snowballing of simple problems into major crises through effective and timely intervention.
Types of Turnaround Strategies:
There are two types of Turnaround Strategies that can be adopted:
These are:
1. Business Unit Level.
2. Strategic Turnaround Operating Turnaround.
Strategic Turnaround itself consists of two broad directions:
1. Change of priorities and emphasis for competing in the existing business areas.
2. Move into new business or businesses.
As against this, an Operating Turnaround, comprising the following three options, is implemented within the overall business-level strategy:
1. Increase revenue through product-market refocusing, improved marketing effectiveness, better distribution, etc.;
2. Decrease cost/improve efficiency and productivity of all types of assets; demobilise assets (in- eluding divesting unrelated or underutilised assets);
3. A combination of two or more of the above three options.
In reality, the distinction between the strategic and operating turnaround rarely remains clear since the actions taken to effect an operating turnaround may require substantial changes in business strategy. The distinction, however, is useful to clarify the thought processes and also to delineate any trade-off that may be needed while pursuing these two types of strategies.
Certain broad guidelines can be suggested for turning around a firm from a specific crisis situation:
1. Mature businesses can initiate efficiency improvement programmes and effect downsizing to reduce costs;
2. Businesses with low-capacity as well as high-capacity utilisation can pursue cost-cutting strategies;
3. Businesses with high market shares can pursue revenue-generating strategies and product-market refocusing.
Needless to say, the above strategies are only indicative and may not be applicable in all situations. However, what is important is to ensure that a comprehensive programme consisting of both strategic and operating tasks, as described above, is worked out well in time and implemented in right earnest.
Turnaround Process:
It consists of five distinct activities:
1. Diagnosis (i.e., analysing the troubled company or business and identifying the internal and external factors causing the decline);
2. Developing the turnaround plan, consisting of strategic and operating programmes as defined above;
3. Stepping up communication, in all formal and informal forms, to make employees understand how and why the company got into trouble;
4. Developing the right organisation to implement the turnaround strategy;
5. Implementation.
Since a turnaround must be achieved within the shortest possible time in most crisis situations, the following ground rules must be adhered to for ensuring success:
1. There must be a clear authority to act and decide. Any delay or slowing down of the decision-making process will reduce the effectiveness of the turnaround strategy;
2. Analysis and action must be simultaneous;
3. The inevitability of purging of incompetent managers must be accepted; however, care should be taken to retain a threshold level of existing employees who are competent and enthusiastic;
4. The stage of decline shall determine the severity of the action to be taken; obviously, salvaging will become increasingly difficult as the situation steadily deteriorates;
5. Periodic sharing of information on the successes achieved is a must, to retain the support of employees at large;
6. Initiative, analysis, and a commitment to effect a turnaround have to come from the top; in other words, the process has to be administered top down but the involvement of employees at all levels both in decision making and implementation is a must;
7. Attention must be paid to manage change caused by various actions taken.
Other requirements are:
8. The business or businesses being turned around must have a viable core;
9. Determination of the targeted turnaround time in advance and setting the key milestones; also install a reporting system to measure the progress against such milestones;
10. The employees must be ready to accept the hardships caused by various changes that shall take place during implementation of the turnaround initiatives;
11. The right management staff and culture to drive change;
12. The programme must be led by a competent turnaround manager who has the following attributes:
a. The ability to think and act fast and have a thick skin,
b. The ability to solve problems simultaneously on several fronts, should be result-oriented,
c. Ability to inspire people to follow the leader,
d. Tough, yet compassionate; firm, yet fair, and
e. Single-mindedness in achieving targets.
Starbuck et al., while dealing with the subject of crisis, have suggested the following to cope with the same:
1. Avoiding excesses,
2. Replacing top managers,
3. Rejecting implicit assumptions, and
4. Experimenting with the portfolio, and managing ideology.
A turnaround strategy is formulated when a firm is facing a major crisis that may endanger its viability. However, performing firms perceive that such crisis can be converted into opportunities to clean up and rebuild their organisations for the competitive battle of the future.
Such firms marshall required courage, enthusiasm and resources to put in place the new arrangement for coming out of the crisis and also for winning in the future. Whether the firm will be able to do this or not depends to a large extent on the senior managers and their ability to shape values and ideologies, nurture courage and arouse enthusiasm.
Essay # 4. Strategic Repositioning and Corporate Restructuring of a Firm:
One of the key tasks for corporate managements is to reposition their firms periodically in order to remain viable in a fast-changing environment. The need to reposition a firm arises when there is a growing mismatch between the firm’s strategy and its environment leading to lower performance as well as loss of opportunities.
Specifically, the rationale for repositioning can be one or more of the following:
1. Change the vision of the company along such dimensions as size, concept of business, technology level, market leadership, etc.;
2. Concentrate on areas of core competencies;
3. Exploit new opportunities;
4. Achieve a step change in market share and confront leading competitors;
5. Improve competitiveness;
6. Effect a turnaround;
7. Improve image in the eyes of the key stakeholders (shareholders, government and financial institutions, consumers, talented potential employees, etc.).
The list of reasons given above is not exhaustive and each firm has its own logic in this regard. The intellectual clarity and foresight of the top management in repositioning the company, against the background of a fast-changing environment and rising competitive intensity, can give a significant advantage to the firm over its rivals. It must be appreciated that ‘strategic repositioning’ has to be a conscious and deliberate effort on the part of the management to achieve the objectives of market dominance, growth, maximisation of shareholder value, and overall excellence. Needless to say, an improvement in financial performance is a result of such a strategy and not the main objective.
To give shape to the repositioning strategy, one key action will be to assess how the repositioned company should be perceived by the key stakeholders, I.e. customers, suppliers, financial institutions, employees, government, etc. The stakeholders must be able to perceive the company as standing for ‘something’ unique which makes it distinct from the other competitors.
For example, a diversified company may find it difficult to position itself in the minds of some of its key stakeholders-investors and financial institutions- since it is well known that diversified companies are not always strong achievers on key fundamentals vis-a-vis focused companies. From this angle, strategic repositioning of a firm is needed not only for maintaining fast growth, retaining market leadership or maximising shareholder value, but also for communicating to the key stakeholders what the company stands for. A proper understanding of the expectations of the key stakeholders should help in determining the desired positioning.
Corporate restructuring’ is the route by which a firm implements the strategic repositioning of its business portfolio.
There are five distinct forms of corporate restructuring:
1. Streamlining internal operations reengineering),
2. Mergers and acquisitions (M&A),
3. Divestitures,
4. Strategic alliances (SA), and
5. Financial restructuring.
Even though the above five options are different routes for effecting corporate restructuring, in reality, firms aiming to reposition their organisations strategically, often employ a combination of two or more of these options to achieve the desired results. It must be noted that each of these options has different strategic, organisational, legal, financial and accounting implications, and hence, require careful examination at the planning stage.
Essay # 5. Setting the Context for Implementation of a Firm:
The business-level strategy, and the corporate strategy cannot be implemented effectively unless the context for implementation is appropriate. We have mentioned that unless there is a perfect balance between the chosen strategy and the six key implementation variables-viz. structure, systems, staff, skills, styles and shared values-which constitute the context, the implementation will suffer and the goal of repositioning the corporation will remain unachieved. Thus, the onwards strategy, of the firm, driven by the CEO and his top management team must include the steps to be taken to set the context for achieving excellence in implementation.
Essay # 6. Maximising Shareholder Value of a Firm:
As a corporation reinvents itself by pursuing appropriate business-and corporate-level strategies that are better than those of the competitors, it becomes able to dominate the future. The most important aim of such efforts is to increase shareholder value. This is because strategies are evaluated by the economic value they create for the shareholders, as measured by the dividends plus an increase in the share prices.
There is a direct linkage between a firm’s strategy and shareholder value, and when a firm is able to develop a strategy that ensures long-term, sustainable and profitable competitive advantages, its implementation helps in creating the greatest value for the shareholders. This concept of shareholder value should be applied to evaluate alternative strategies. The strategies that contribute to the maximisation of shareholder value should be chosen for implementation.
The concept-which essentially consists of estimating future cash flows associated with each strategic option and assessing the impact of the same on enhancing shareholder value, is gaining importance in the context of:
(a) Growing takeover threats from firms who are looking for undervalued or undermanaged assets,
(b) Irrelevance of traditional accounting measures such as EPS or ROI the performance of a firm, and
(c) A growing realisation that executive compensation should be linked to the returns to shareholders.
As mentioned above, the very purpose of any new strategic initiative is to increase the economic value of the firm. Value-Creating strategies help in achieving returns on incremental investments that will be at or above a firm’s average risk-adjusted cost of capital. Models are now available to calculate the value contributed by each individual strategic initiative.
Whatever approach may be followed, it is important to understand the current value gap which consists of:
(i) an expectation gap (defined as the difference between the current stock price and what the incumbent management thinks is the right value), and
(ii) a strategy gap (which is the difference between the value that can be achieved by pursuing the highest value creating strategy and the value that the incumbent management is creating by pursuing the current strategic posture).
Once the value gap has been understood correctly, the emphasis of the corporate management will be’ on closing the value gap by pursuing the most effective strategy that is capable of creating the highest value for the shareholders.
In order to maximise shareholder value, a firm needs clarity regarding the basic concept, including ways to estimate the same.
To put it simply the following relationships describe the concept:
(a) Corporate value is the ‘summation’ of:
i. The present value of future-operating cash flows during
ii. The forecast period, the present value of residual cash flows beyond the forecast period, and
iii. All non-operating assets and investments.
(b) Shareholder value is equal to corporate value (as defined in above):
(a) Less the market value of debts and other obligations:
The cash flow, stated in (a) above, is defined as the reported post-tax Pre-interest earnings, plus all non-cash expenses-including depreciation, less the incremental capital expenditure and working capital. For determining shareholder value, accounting profit is not to be considered since it consists of distortions, which cash flows do not have. The building in of the present value concept incorporates the risk factors and the time value of money in the analysis.
Rappaport had aptly shown how management decisions in the areas of operation, finance and investment contribute to the creation of shareholder value, which in turn enhances shareholder returns through higher dividends and capital gains. He identified a number of value drivers, viz. value growth duration, sales growth, operating profit margin, income-tax rate, and working and fixed capital investments, which influence the rate and pattern of cash flows from operations. Such cash flows, when discounted at a pre-determined discount rate, provide an estimate of the shareholder value.
The concept of shareholder value provides an important perspective for the evaluation of business and corporate strategies. For example, Salter and Weinhold observed that unless the management-in its desire to diversify through acquisition-has good reasons to believe that the proposed acquisition can produce a higher market value than what an investor can obtain by diversifying his own portfolio himself, the company should not make the said acquisition.
Taking into account the influence of maximising shareholder value as the principal criterion for evaluating corporate and business-level strategy, the following guidelines can be kept in view:
1. Explore the highest value use for all assets;
2. Exclude all investment proposals that do not have a realistic and credible value-creation prospect;
3. Return the cash to shareholders when value-creating investment proposals are not available; and
4. Introduce incentive schemes for managers and employees to focus on drivers that create value (such as sales growth, operating profit margin, fixed and working capital management, etc.).
An emphasis on creating and maximising shareholder value goes beyond the financial techniques of cash flow estimation or discounting. The benefit of the approach lies in the fact that it raises the consciousness of both managers and employees about the need to create a culture that has a concern for value.
When this happens, the entire approach to strategy formulation undergoes a distinct change, and fundamental questions, such as whether the corporate plan is creating value for the shareholders, or which business units are creating value and which are not, become the principal consideration for accepting or rejecting any strategic option.