Page 131 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 7: Corporate Level Strategies

2. Decreasing constant rupee sales: Sales figures, to be meaningful, should be adjusted for Notes
inflation. If constant rupee sales figures are showing a declining trend, then this is a
danger signal to watch out.
3. Decreasing profitability: Profit figures are a good indication of a company’s health. Care
must be taken to interpret the profit figures correctly, so as to avoid any misjudgments.
Decreasing profitability can show up as smaller profits in absolute terms or lower profits
per rupee of sales or decreasing return on investment or smaller profit margins.
4. Increasing dependence on debt: A company overly reliant on debt soon gets into a tight
corner with very few options left. A substantial rise in the amount of debt, a lopsided debt-
to-equity ratio and a lowered corporate credit rating may cause banks and other financial
institutions to impose restrictions and become reluctant to lend money. Once financial
institutions are hesitant to lend money, the company’s rating on the stock market also
slides down and it becomes very difficult for the company to raise funds from the public
too.
5. Restricted dividend policies: Dividends frequently missed or restricted dividends signal
danger. Often, such companies may have earlier paid substantially higher proportion of
earnings as dividends when in fact they should have been reinvesting in the business.
Current inability to pay dividends is an indication of the gravity of the situation.
6. Failure to reinvest sufficiently in the business: For a company to stay competitive and
keep on the fast growth track, it is essential to reinvest adequate amounts in plant,
equipment and maintenance. When a business is growing, the combination of new
investments and reinvestments often warrants borrowing. Companies which fail to
recognize this fact and try to finance growth with only their internal funds are applying
brakes in the path of growth.
7. Diversification at the expense of the core business: It is a well-observed fact that once
companies reach a particular level of maturity in the existing business, they start looking
for diversification. Often this is done at the cost of the core business, which then starts to
deteriorate and decline. Diversification in new ventures should be sought as a supplement
and not as a substitute for the primary core business.
8. Lack of planning: In many companies, particularly those built by individual entrepreneurs,
the concept of planning is generally lacking. This can often result in major setbacks as
limited thought or planning go into the actions and their consequences.
9. Inflexible chief executives: A chief executive who is unwilling to listen to fresh ideas from
others is a signal of impending bad news. Even if the CEO recognises the danger signals,
his unwillingness to accept any proposal from his subordinates further blocks the path
towards recovery.
10. Management succession problems: When nearly all the top managers are in their mid-
fifties, there may be a serious vacuum at the second line of command. As these older
managers retire or leave because of perception of decreasing opportunities, there is bound
to be serious management crisis.
11. Unquestioning boards of directors: Directors, who have family, social or business ties
with the chief executive or have served very long on the board, may no longer be objective
in their judgment. Thus, these directors serve limited purpose in terms of questioning or
cautioning the CEO about his actions.
12. A management team unwilling to learn from its competitors: Companies in decline often
adopt a closed attitude and are not willing to learn anything from their competitors.
Companies which have survived tough competitive times continuously analyse their
competitors’ moves.

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