Page 130 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes

Task Give examples of companies that have recently opted for diversification into
unrelated businesses. Can you find out the reasons behind their diversification?

7.2 Retrenchment Strategies

They are the last resort strategies. A company may pursue retrenchment strategies when it has
a weak competitive position in some or all of its product lines resulting in poor performance –
sales are down and profits are dwindling. In an attempt to eliminate the weaknesses that are
dragging the company down, management may follow one or more of the following
retrenchment strategies.

1. Turnaround
2. Divestment
3. Bankruptcy
4. Liquidation

7.2.1 Turnaround Strategy

A firm is said to be sick when it faces a severe cash crunch or a consistent downtrend in its
operating profits. Such firms become insolvent unless appropriate internal and external actions
are taken to change the financial picture of the firm. This process of recovery is called “turnaround
strategy”.
Any successful turnaround strategy consists of three inter-related phases:
1. The first phase is the diagnosis of impending trouble. Many authors and research studies
have indicated distinct early warning signals of corporate sickness.
2. The second phase involves analyzing the causes of sickness to restore the firm on its profit
track. These measures are of both short-term and long-term nature.
3. The third and final phase involves implementation of change process and its monitoring.

When Turnaround becomes Necessary

Do companies turn sick overnight and qualify as potential candidates for turnaround or do they
become sick slowly which can be stopped by timely corrective action? Obviously, the latter is
true in most of the cases. But the reality is also that companies becoming sick often do not
themselves recognize this fact, and fail to take timely action to remedy the situation.

Despite the fact that factors that lead to sickness may vary from company to company, there are
some common signals which herald the onset of sickness. John M Harris has listed a dozen
danger signals of impending sickness.

1. Decreasing market share: This is the most significant symptom of a major sickness. A
company which is losing its market share to competition needs to sit up and take careful
note. Regular monitoring of market share helps companies to keep a tag on their
performance in the market vis-à-vis their competitors. Any indication of declining market
share should trigger off immediate corrective action.

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