What is Corporate Level Strategy? Stability, Retrenchment, Turnaround Strategies

What is Corporate Level Strategy?

A corporate-level strategy is often referred to as a corporate strategy or a corporate business strategy. It encompasses the strategic scope of the entire organisation. For most organisations, a corporate-level strategy is the only strategic plan required.

Corporate strategy refers to a set of decisions that determine an organisation’s objectives, goals and purpose. It also comprises of the principal policies and plans to achieve those objectives. In short, corporate-level strategies are formulated to fulfil the corporate objectives of the organisation.

The corporate-level strategy sets the range of business activities of the organisation and the kind of economic and non-economic role it intends to play to the organisation, shareholders, employees, customers and communities.

Thus, the strategy, being comprehensive in nature, defines the business in which the organisation plans to operate. Corporate-level strategies are basically formulated to achieve the longterm organisational objectives. Therefore, these strategies are also known as grand strategies or master strategies.

Usually, the top management of an organisation formulate corporate-level strategies. These strategies are mainly concerned with decisions regarding the product or service to produce and the geographical location to target. Corporate-level strategies give a direction to an organisation to achieve its objectives.

In addition, these strategies determine resource allocation, such as how to allocate cash and equipment among various departments. Decisions regarding expansion policies or addition of new products also fall within the area of corporate-level strategies. Corporate-level strategies also involve decisions regarding establishing relationships with other organisations and competing with rival organisations.

Corporate-level strategies deal with the following major issues:

• Defining the type of business that an organisation should venture into
  
  
• Dividing the resources among different operations of the organisation
  
  
• Transmitting and transferring resources from one set of businesses to another
  
  
• Selecting and managing the investment portfolio of an organisation
  
  
• Deciding the nature and level of diversity required to exist in a particular business
  
  
• Determining the boundaries of the organisation, and how these boundaries should put impact on relationships among various parts of the business and other interest groups
  
  
• Determining on which basis the organisation should function. Should it be cooperative basis, mutually beneficial relationships or business?

Stability Strategy

A stability strategy involves maintaining the status quo or growing in a methodical, but slow, manner. The firm follows a safety-oriented, status-quo-type strategy without affecting any major changes in its present operations. The resources are put into existing operations to achieve moderate, incremental growth. As such, the primary focus is on current products, markets, and functions, maintaining the same level of effort as at present. Organizations might follow a stability strategy for a variety of reasons:

• Why rock the boat?: If the company is doing reasonably well, managers may not like to take the risks or hassles associated with more aggressive growth.
  
  
• Why not stop for a while?: Stability allows the firm to stop for a while, re-examine what it has already done and proceed cautiously. An organization that has stretched its resources during a period of accelerated growth may want to attain stability before it attempts further accelerated growth.
  
  
• Why swallow risk?: If managers believe that growth prospects are low, they may follow a stability strategy with a view to holding on to their current market share. Stability strategy, is, however, not a ‘do-nothing’ strategy. To maintain its current position, the organization definitely needs to carry out marginal improvements in performance in line with changing trends.
  
  
• Where are the resources?: Introducing new products, entering new markets, undertaking major organizational changes – all require huge investments. Where there is an internal resource constraint, a stability strategy is preferred. If the organization’s strategic advantages lie in the current business and market, it pursues the stability strategy to exploit its competitive advantages fully.

Limitations of Stability Strategy

Stability strategies would work only when the firm is doing well and the environment is not excessively volatile. However, present-day organizations have to grapple with change continually. They have to operate in highly competitive and turbulent environments. So strategies of functioning along existing lines would work initially when the firm is able to carve out a niche for itself but would fail to work as new firms enter into the market or new developments in the business environment occur.

It is true that the future means change and adjustments to new situations and conditions. But it is better to indulge in proactive planning through strategic planning systems rather than living with low profits and low stockholder dividends year after year. Failure to improve profits over the long term means corporate death. The corporate graveyard is filled with the corpses of companies that failed to respond to changes in the environment.

So organizations must practice proactive planning. They must practice strategic planning in order to manage change successfully. The manager who is able to anticipate and prepare for possible changes in the business work has more control than the manager who does not plan ahead and is content with the present set-up and status quo arrangements. The consequences of taking a short-term perspective can be severe. Only a few years ago the U.S. auto industry was the marvel of the world. Textbooks cited it for its examples of good management practice.

But what has happened to the auto industry during the 1970s? Blinded by its success, it made the biggest mistake of all—it failed to adapt to the changing requirements and wants of the marketplace. Japanese and other foreign auto companies moved in to fill the market void (need for fuel-efficient cars). By the early 1980s General Motors and Ford were losing hundreds of millions of dollars and Chrysler was fighting off bankruptcy.

One of the important advantages of planning is that it helps a manager or organization to affect rather than accept the future. In a competitive environment, resting on past laurels would prove to be suicidal. No change strategies force managers to live with the wrong products and wrong markets. In volatile industries, a stability strategy can mean short-run success and long-run death. In order to progress in an orderly manner, every firm must employ appropriate growth strategies that help in improving present as well as future performance in the marketplace.

Retrenchment Strategy

Retrenchment strategy is a corporate-level, defensive strategy followed by a firm when its performance is disappointing or when its survival is at stake for a variety of reasons. Economic recessions, production inefficiencies, and innovative breakthroughs by competitors are only three causes.

Managers choose retrenchment when they think that the firm is neither competitive enough to succeed through a counterattack (on market forces affecting its sales negatively) nor nimble enough (effecting fast changes) to be a fast follower. However, retrenchment does not mean the death knell for every business under attack. Many healthy companies have faced life–threatening competitive situations in the past, successfully addressed their weaknesses, and restored themselves.

Retrenchment calls for radical surgery to cut the ‘extra fat’ – say, laying off employees, dropping items from a production line, eliminating low-margin customer groups, avoiding elaborate promotional efforts, etc. Apart from the above cost reductions, retrenchment calls for drastic steps to improve cash flows through the sale of assets. Retrenchment strategy, as such, is adopted out of necessity, not by deliberate choice. In actual practice, retrenchment may take one of the following forms:

• An outright sale to another company,
  
• Leveraged Buy-out (LBO), and
  
• Spin-off.

Reasons for Divestment

• Strong Focus: Spinning off unviable units may help a firm focus on its core business more closely and regain the lost ground quickly.
  
  
• Unlock Critical Funds: The firm can sell those assets whose values have plateaued or declined as a result of ignorance or neglect.
  
  
• Invest in Emerging Technologies: Firms can use the cash generated through spin-offs in emerging or future technologies that better leverage or revitalize their core competencies.
  
  
• A Maker of Policy: Sometimes the firm may spin off units in fields where it has no dominance. If the firm wants to be in the top slot, it must naturally get out of all those ventures where it is only a marginal player (like what K.M. Birla did in paper, sugar, and steel – all peripheral businesses in Birla’s kitty).
  
  
• From Red to Black: Assets bought at inflated prices might drain out cash flows, especially if they are funded through debt capital. Spinning off such assets would help a firm liquidate debts, improve the cash flow position and recharge its operations in areas where it has immense strength.
  
  
• Unviable Projects: If the business becomes unviable due to stiff competition or change in government policy it is better to get out quickly.

Turnaround Strategies

A turnaround is designed to reverse a negative trend and bring the organization back to normal health and profitability. The basic purpose of a turnaround is to transform the corporation into a leaner and more efficient firm. It usually involves getting rid of unprofitable products, trimming the workforce, pruning distribution outlets, and finding other useful ways of making the organization more efficient. If the turnaround is successful, the organization may then focus on a growth strategy.

Conditions for Turnaround Strategies

Firms often lose their grip over markets due to various internal and external factors. If they have to survive and flourish in a competitive environment, they have to identify the danger signals quite early and undertake rectification steps immediately. Such negative trends are not difficult to trace.

• Continuous cash flow problems.
  
• Declining profits; lower profit margins.
  
• Dwindling market share.
  
• High employee turnover.
  
• Low morale of employees.
  
• Underutilization of capacity.
  
• Raw material supply problems.
  
• Rising input prices.
  
• Strikes and lockouts.
  
• Increased competition, uncompetitive products or services.
  
• Recession.
  
• Mismanagement etc.

Action Plans for Turnaround

The action plans for achieving a turnaround aim at yielding immediate results focusing attention on certain key areas like quality improvement, cost reduction, new product development, rejuvenated marketing effort, etc. Such short-term action plans usually tackle the following issues:

• Change the leader.
  
  
• Change the prices – depending on the elasticity of demand.
  
  
• Focus attention on specific customers and specific products.
  
  
• Extend the product’s life through product improvements.
  
  
• Replace existing products with new ones.
  
  
• Focus on ‘power brands’ that are valued, and visible, and bring in most of the revenues of the firm; in short, rationalizing the product line.
  
  
• Liquidating assets for generating cash.
  
  
• Better internal coordination.
  
  
• Emphasis on selling, advertising, etc.