DECLINE STRATEGIES

4.6 DECLINE STRATEGIES

We often read about relatively successful organisations selling off some of their major assets or even selling a division of the organisation, often resulting in the elimination of many jobs. Why then would an organisation such as Kumba Resources sell off their training department, legal department, and information technology department if these departments functioned well and provided Kumba Resources with essential services?

The situation described above could be justified in situations which an organisation needs to

a) refocus its activities in order to remain or become profitable by cutting costs drastically,

b) where long-run growth and profit opportunities are unavailable,

c) where other opportunities are more attractive, or

d) where there is a period of economic uncertainty. The decline strategies discussed in this section are:

4.6.4 Liquidation An organisation can find itself with declining profits for many reasons but still be worth

saving. South African Airways (SAA) is good example. Poor management, inadequate financial control, price and product competition, a high cost structure, and a change in the pattern of demand are some of the possible factors that can lead to a decline in profits. In

such circumstances, turnaround is an appropriate strategy, as it focuses on eliminating inefficiencies in an organisation. Top management usually looks at cost and asset reduction to reverse declining sales and profits. Closing unprofitable routes and reducing the number of employees were options chosen by SAA. Turnaround strategies could, however, also focus on increasing sales to put the organisation back on track.

A divestiture strategy – another decline strategy – involves the sale of business or a major component of it, to achieve a permanent change in the scope of operations. Reasons for divestiture vary. It may arise when top management recognise that one of their businesses presents a mismatch with their other businesses. Another reason may be the financial needs of an organisation: the cash flow or financial stability of an organisation can be greatly improved if businesses or components of businesses with a high market value can be sold.

Harvesting is an appropriate decline strategy when an organisation seeks to maxims cash flow in the short run, regardless of the long-term effect. Harvesting is generally pursued in organisations that unlikely to be sold for profit but is capable of yielding cash during the harvesting. Management can decrease investments, cut maintenance, and reduce Harvesting is an appropriate decline strategy when an organisation seeks to maxims cash flow in the short run, regardless of the long-term effect. Harvesting is generally pursued in organisations that unlikely to be sold for profit but is capable of yielding cash during the harvesting. Management can decrease investments, cut maintenance, and reduce

In selecting liquidation as a strategy, the owner and strategic managers of an organisation admit failure and recognise that this least attractive of all strategies is the best way of minimising the loss to the stakeholders of the organisation. Liquidation can therefore be seen as the most extreme form of the decline strategies in that the entire organisation ceases to exit. Planned liquidation may be a worthwhile strategy for an organisation, because the organisation can liquidate its assets for more cash than the market value of its shares.

Although the different strategies discussed are treated as separate, organisations can implement multiple grand strategies simultaneously

4.6.5 Corporate combinations Recently, four corporate combinations strategies have

gained popularity in South Africa, African and many

countries abroad. One such corporate combination strategy

PROBLEM

is called a joint venture. A joint venture is a long-term

Which company has

strategy that requires commitment of resources and adopted these decline services by two or more legally separate entities to a strategies? Do you think

there is another

combined undertaking for their mutual benefit. Because of strategic option they

could have chosen to

the magnitude of the Gautrain project many companies had better handle this

situation?

to form a joint venture with another company in order to have sufficient resources to do their job. A joint venture (JV) between two local companies,

Nu Tog and Strategic Partner Group was established to supply personal protective equipment (such as hard hats and safety glasses) to the Gautrain project. Neither of these two companies had sufficient resources to provide the equipment by themselves. Corporate combination strategies discussed in this section are joint ventures; strategic alliances;

mergers; and acquisitions.

Premier Foods seeks more acquisitions in Southern Africa

A strategic alliance is when two or more businesses join resources for a certain period of time. These businesses are usually not in competition but provide similar products or services that are directed

toward the same target audience. The Protea Hotels group has formed a strategic alliance with Budget car rentals. This strategic alliance enables both businesses to gain competitive advantage through access to the strategic partner’s resources, markets, databases, technologies and so on. Other advantages that a strategic alliance offers both partners include: growth through expansion; sharing of technical and operational know how; more time for each partner to focus on its core business; cost reduction and more advantages. However, strategic alliances do not only provide advantages to the partners. One of the major disadvantages of a strategic alliance could be incompatible cultures of two organisations. This could cause major conflict between managers and employees.

While only some resources of each of the companies are used in a joint venture or a strategic alliance, mergers and acquisitions involve the total pooling of resources by two or more organisations. Merger and acquisition strategies there bring separate business organisations together to form larger ones. The reasoning behind the forming of a merger or an acquisition is that `one plus one makes three’. The two companies together are more valuable than two separate organisations. Merger and acquisitions are particularly alluring to management when times are tough. Organisations may want to buy other business organisations to create a more competitive and cost-efficient organisation. Both organisations may hope to gain a greater market share or achieve greater efficiency. Target organisations will often agree to be purchased when they know they cannot survive alone.

Although the term `merger’ and `acquisition’ are often used interchangeably, these two terms do mean slightly different things. A merger takes place when two organisations –

often of about the same size – agree to operate as a single new organisation. Daimler-Benz and Chrysler ceased to exist when the two organisations merged to form a new company,

DaimlerChrysler. When one organisation takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target

(`weaker’) organisation ceases to exist. The buyer organisation `swallows’ the other and the buyer’s share continue to be traded.

Synergy plays an important role when organisations form mergers or acquisitions. By merging or acquiring another organisation management hopes to benefit from the following: staff reductions, economies of scale, access to new technology, higher sales and visibility in the industry.

Many mergers and acquisitions fails because of the incompatibility of the different cultures of the organisations involved. People issues can also sink the new organisation. The merging organisations may have treated their employees differently before the merger or acquisition

took place. This `differentness’ can cause frustration and even anxiety in the new organisation where the two different organisational cultures will be fighting for dominance.

Source: PhakamisaNdzamela : http://www.bdlive.co.za/business/retail/2014/10/23/premier- foods-seeks-more-acquisitions-in-southern-africa

Writing activity Pooling resources and partnering with other organisations in the business sector is becoming a norm in highly competitive markets; why do organisations opt for corporate combinations?