Corporate Strategy Decline and Recovery in Business

Introduction

A corporate strategy is a strategic approach that charts the way forward for a business entity by analyzing the external and the internal environment of the business. It also seeks to come up with new effective and efficient approaches for running a business organization and tries to develop and consolidate policies and relevant resources for use towards the realization of the vision of the business.

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Porter’s generic strategy

The strategy states that the strength of a business firm is pegged on cost advantage and differentiation in the market. The generic strategies are usually used at the firm’s unit level and are usually independent from the firm. The implication of the strategies is that a firm has to position itself strategically in order to achieve a reasonable level of profitability. These generic strategies mainly include:

Cost leadership strategy

Using this type of generic strategy, the firm has to be the least cost producer for a given level of quality amongst other industrial players. This means that the firm has to minimize its cost without compromising the quality of its products. To earn higher profits than its competitors it has to price its commodities at the average price level in the market. On the other hand, if a firm wishes to gain a sizeable market share then it has to price its products below the average level in the industry. In an industry dominated by price wars, the business is able to maintain a reasonable level of profitability as opposed to the competitors who make losses.

In a normal business environment, even in the absence of competition, prices fall in the long run as the industry matures (Anon, Strategic Management: Porter’s Generic strategies, 2007). At this level, those firms with minimal levels of production cost maintain their profitability longer. However, one might run at risk if the competition is able to effectively lower their cost of production thus eliminating your competitive advantages.

Differentiation strategy

In this strategy, the firm designs products with unique attributes that are valued by the customers who perceive these products as being superior to those of the competitors. The uniqueness of the product has the effect of adding some sort of value to the product hence enabling the business to give it a premium price. The higher price charge for the commodity is supposed to cover the cost of integrating the unique attributes into the products.

This additional cost is usually passed on to the customers who find it harder to get an equal substitute in the market. This strategy is made possible by scientific innovations, skillfulness and creativity, highly trained sales force and the firm’s reputation towards quality and innovation (Anon, Strategic Management: Porter’s Generic strategies, 2007). Its major risk is the threat of imitation by the competitors and the changing tastes of customers which might prove counterproductive to the firm.

Focus strategy

In this strategy, the firm chooses a narrow segment of the market and focuses its attention to it using cost advantage and differentiation strategies. By focusing entirely on the needs of the particular segment, one inculcates customer loyalty in the market. Use of this strategy however lead to low sales volumes as a result of the narrow segment and thereby reduced bargaining power with the firms suppliers. When combined with differentiation strategy, it’s easier to pass the higher costs to customers due to lack of existence of substitutes. Those who employ this customize their products to suit the needs of their well known market segment (Anon, Strategic Management: Porter’s Generic strategies, 2007). Its weakness is its susceptibility to imitation and the changes in the segments.

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Use of mixed strategies

In the event that a firm has separate business units, it can employ different strategies for each unit. These units are often characterized by different cultures and business policies which enable use of a mix of policies within the firm. Other circumstances call for a combination of competitive pricing, quality, convenience, and style to enhance customer satisfaction. In such circumstances, a mix of strategies comes in hardy to satisfy the market (Anon, Strategic Management: Porter’s Generic strategies, 2007).

Causes of decline and failure of firms

Lack of understanding of the market, customers, and their buying patterns

The lack of proper understanding of ones customers and the market is a leading cause of business failure. The lack of understanding makes it hard for one to respond correctly to their needs and also to know what to sell, and to who to sell. Such a firm will also be able to identify way of reaching out to their customers (Mason, 2010). Along with this is the lack of understanding of the buying habits of the customers which renders the firm incapable of tailoring the products to meet their needs.

Uncompetitive pricing

Poor pricing of the firm’s products is a sure recipe for failure. Over pricing will lead to low sales volumes as a result of competition from other industrial players in the market while under pricing can depress the profit margins leading to a decline of business (Mason, 2010). For example, in a poorly priced market, if a better competitor comes into the market the existing firms experience loss of sales as customers shift to the new seller. For example with the entry of Wal-Mart in the US retail market, some traditional retail shops such as Kroger, Whole Foods, and others started experiencing declines due to lack of competitive pricing

Inadequate capital

Businesses will require adequate financing in order to expand and to run their operations. Some entrepreneurs however have unrealistic expectations that lead to business failure. Some will anticipate for 100% financing from financial institution while others will allocate inadequate funds for business operations. Financial institutions require adequate collateral to cover the loans and an impressive credit record (Sim, n.d.). This has been found lacking in many of them leading to denial of financing. For example small start ups have a hard time financing their business operations due to their limitation on capital.

Poor planning

Poor planning or lack of it is another cause of business failure and declines. Some firms, especially start ups, do not carry out effective market research before venturing out into business or undertaking a market strategy. This impairs their understanding of the market leading to poor strategies and eventual decline or failure of business. As a result they invest in a business line whose demand is either stagnating or declining. Besides, improper application of business strategies and promotional activities such as marketing, branding and advertising, poor time allocation is also an important culprit for business failure (Sim, n.d.).

Unrealistic Expectations

Many first time entrepreneurs hope their businesses to be a success from the start. However, this doesn’t turn out to be the case as business will take up to a year to gain profitability. In the initial stages the business person needs to be patient with his firm as it returns its investment. During this stage most of the proceeds from the investment are ploughed back. This is to mean that during this time it is advisable to have other sources of income as one tends the business to maturity (Mason, n.d.). Sometimes the business even calls for injection of more capital for it to succeed. This means that unrealistic expectations will lead to a downfall of a business.

Strategic reasons why firms are forming strategic alliance and internal joint ventures

Entering a new market

When companies have successful string of successes in a certain product or services, they sometimes will desire to venture out in new markets. The need for an alliance is prompted by lack of marketing expertise as a result of inadequate knowledge of the customer needs, poor knowledge of effective promotional strategies, and also effective distribution channels for its goods. Development of this form of expertise is difficult and to avoid the associated cost, a firm may opt to look for a firm that already possesses the desired marketing skills. The combined effect of the marketing skills and the product development skills lead to a faster and more effective realization of the company goals. These forms of alliances are particularly effective in locations with diverse cultures and ethnicities (Walters, Peters, & Dess, 1994).

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Reducing manufacturing costs

When companies form strategic alliances, they can easily pool capital and other resources together thus reducing manufacturing cost. This is achieved through utilizing their economies of scale and optimizing their use of facilities. For example, companies can enter into a joint venture to build facilities in relatively cheaper countries thereby leading to reduction of expenses. The overall synergies generated by the joint activity leads to increased returns of the companies. It is also possible to cut costs by going into strategic alliances with suppliers and customers. A company can reach an agreement with its supplier to contribute their combined expertise to meet the customer needs which results to lower cost (Walters, Peters, & Dess, 1994). In the process it is possible to also draw down the administration costs of the two entities in the venture.

Developing and diffusing new technologies rapidly

Two or more companies may also go into an alliance to contribute their technical expertise to develop technical products that would otherwise be difficult to develop independently (Walters, Peters, & Dess, 1994).

Such companies are thus able to pool their combined expertise to create new products and gain from the associated outcome. For such companies, it becomes very hard for their competitors to produce substitutes for the products since independent production is very expensive and may not be cost effective. Besides, it’s the sharing of the technical expertise in various areas that produce the final product hence leading to the production of a highly competitive product. This is particular effective in the production of highly technical products that require state of art technology such as airplanes, vehicles, and electronics such as computers and cell phones

Accelerate product introduction and overcome legal and trade barriers

Joint ventures and alliances also help to speed up introduction of products in the market and also to overcome the expected trade barriers present in the target market (Walters, Peters, & Dess, 1994). Delays in introduction of new products are avoided through sharing of ideas on production, distribution, and marketing. As a result of the combined advantages shared by the firms, bottlenecks associated with these processes are avoided. Due to the fact that one of the firms is usually located in the target market, trade barriers inherent in the country are avoided. Thus, none of the firms have to go through the painstaking procedures required by the authorities in the target market.

Reasons for difficulties to implement culture change strategy

Complexity and scope of change management

The strategy virtually affects all areas of the business organization and tends to influence the functioning of the organization, the companies production processes communication, and sharing of information within the organization. As a result it calls for the bringing on board of the stakeholders in order to develop the objectives for the cultural change, to identify the need for change and developing the possible approaches for implementing those changes. Of course it is true that technology has gained prominence today in inculcation of cultural change in a company but it can not replace people. This means that the management of the organization has to overcome resistance from employees and get them to understand the importance and benefits of the cultural change for them to own the changes.

Irreversibility of the change

Once some form of cultural change has been integrated into the company, it becomes extremely difficult to undo the effects of the change. As a result, if there was an unintended mistake, it is very hard to reverse. For instance, if at one time you failed to involve the employees in the change process, it will be very difficult to motivate them again.

Lack of Support from top management

If a strategy is not backed up by the top management in the firm, it becomes very hard for the rest of the staff to buy it. This is because they wield a lot of influence in the company and their lack of support could exert considerable over the rest of staffing the company. Besides, they can easily run campaign in the company to sabotage your efforts thus leading to a failure of otherwise noble idea. Their opposition could emanate from lack of understanding of the objectives of the change and lack of involvement in the developing of the changes of sheer malice. Either way, the cultural change has to be approached with utmost caution so as not to court rejection from the staff.

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Barriers of perception

There exist stereotypes among employees which affect the implementation of these strategies. People generally will see what they expect to see. As a result the pre-formed perception will affect the way they view the cultural changes. This causes resistance among the workers threatening the failure of the strategy. It is sometimes very hard to pinpoint and carry out an effective analysis of the source of the problem. This in itself leads to wrong strategies resulting to misinformed cultural change strategy. At other times the scope of the problem is too narrow resulting to a one sided view that tends to concentrate on given aspects only.

Cultural barriers

Some issues may take the form of taboos within the organization hence becoming hard to change. Another related impediment is the emphasis on focus at the expense of imagination in the society. Often than not, children are more creative than adults. This is because our cultures emphasize more on targeted thinking. Problem solving is also perceived as a very serious matter hence allowing no room for humor in the process which in turn undermines the freedom of creativity.

Ways in which a firm can design and implement a successful turn around strategy

The ultimate aim of a turn around strategy is to transform an underperforming firm into profitability, solvency, and reasonable cash flow. The strategy amongst other things is meant to reverse the causes of distress, improve the financial performance, and to overcome the internal constraints. In designing a turn around strategy the following stages are involved:

Management change

During this period consultants may be called in to undertake the management of the firm during the turn around process. Their effective mandate is governed by the agreement reached by the parties involved. Usually it runs until the time reasonable gains have been made in terms of stabilization of the business from the financial crisis and the support of stakeholders has been regained. In undertaking its mandate, the emergency management team is quite conservative and seeks to generate cash at the expense of delivery of profits in the short run.

Performance of a situation analysis

This is carried out to evaluate the survival prospects of the company. This determines whether a firm is worth a turn around or not. If it finds its worth, it chooses a turn around strategy and makes recommendation to the board. These recommendations could be change of top management, change of business strategy, increase in revenue, reduction of costs or pulling out investment from certain nonperforming assets.

Creation of an emergency action plan

This is geared towards achieving a positive cash flow which is made possible through reduction of management staff, reduction of departments among other cost cutting measures. The emergency plan is geared towards stabilizing the company and setting the backbone for resource mobilization and renewal of the underperforming company.

Restructuring of the business

On achieving a positive cash flow, the firm can now implement the strategic plan which helps to boost the operations, reposition the product mix of the company, and making changes to the products where necessary. The firm’s management thereby shifts its focus to sustaining the firm’s profitability. For instance, Xerox the largest photocopier manufacturer started experiencing a slump in profitability from 1999 up to 2001 reporting a $273 million loss in 2000.

This was blamed on reorganization process. A turn around was initiated which included the change of top management, reduction production costs, raising more capital through sale of assets, divesting from non-core business and lay-offs. The efforts started bearing fruits on 2002 when it returned to profitability (Anon, Strategic Management: Porter’s Generic strategies, 2007).

Return of the business to normalcy

Once the firm returns to profitability, the changes made are internalized. Even the confidence of the employees towards the firm is regained and the focus of the firm is directed towards business restructuring while being keen to maintain a strong balance sheet. For example Dell company which is coming from a financial slump that cost its market share to HP has had a turn around which is already bearing fruits. The inefficiencies that were pulling it down have been corrected successfully and signs of recovery are already rife. The company is now focusing on better product designs, expansion of retail sales, and attracting new customers (Anon, Can Dell’s Turnaround Strategy Keep HP at Bay?, 2007), this is expected to help it retrace its path to high profitability.

Reference List

Anon, 2007. Can Dell’s Turnaround Strategy Keep HP at Bay?. Web.

Anon, 2007. Strategic Management: Porter’s Generic strategies. Web.

Anon, 2004. Xerox Corp’s Turnaround Strategy. Web.

Mason, Moya, K., 2010. What Causes Small Businesses to Fail?. Web.

Sim, A. B., n.d. Corporate Decline and Recovery A Review Perspective, Malaysian Institute of Management. AWeb.

Walters, Bruce A; Peters, Steve and Dess, Gregory, G., 1994. Strategic alliances and joint ventures: making them work – corporate collaborations, Web.

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