Discuss Defensive Strategies

Louw and Venter (2013) state that, “corporate strategies provide direction and represent road maps that the organisation can use to achieve its strategic goals.” Top-level management or an organisation’s strategic management team are responsible for deciding which corporate strategy to employ. Before selecting, it is crucial that managers gauge their organisation’s strengths and weaknesses collectively. The group must also evaluate, as empirically as possible, the organisation’s genuine potential to take advantage of perceived market needs or its ability to manage the associated risks (Foss, 2005). The decision may be the difference between commercial prosperity and wide-ranging failure and therefore should not be taken lightly.

A range of factors influences an organisation’s corporate strategy formulation. However, having said this, choice of strategy ultimately stems from the organisation’s corporate goals. These are either to grow the business or defend it when it finds itself in a weak position (Louw and Venter, 2013). Thus leading to the two main corporate strategy options: growth strategies and defensive strategies. According to Suttle (2018), when an organisation wishes to grow its business, it will implement growth strategies that include, market penetration, market development, product development, diversification and integration. On the other hand, as mentioned by Louw and Venter (2013), “Defensive strategies are divided into two groups: turnaround or managing the end game.” The aim of this essay is to critically discuss defensive strategies through research, using relevant examples. Particularly focusing on the two types of defensive strategies and the corporate actions attendant with each.

When an organisation’s current business units face difficulties in growth potential, management may decide to implement defensive strategies (Gomes, 2010). The first type of defensive strategy, as mentioned above, is called turnaround. “Turnaround, a concept that is ever-present in organisational decline, is described as the recovery of a company’s performance after serious decline” (Santana, Valle and Galan, 2017). Habitual influences such as inefficiency, non-competitiveness and recession (Louw and Venter, 2013) incite turnaround. Turnaround strategies consist of retrenchment, recovery and revenue growth. These strategies are directed toward internal efforts in reversing organisational decline and therefore making the business more profitable.

Retrenchment strategies provide organisations with the chance to regroup in response to the persistent decline amongst business units. Management may deploy one or both of two corporate actions associated with this approach, namely cost cutting and reducing non-core assets (Louw and Venter, 2013). Conforming to Bravo and de Egaña (2017), cost cutting is defined as “a strategic alternative, which includes different combinations of reductions in a company’s physical, human and organisational systems, to adapt it to the competitive conditions of a business unit.” Organisations should assess which of their business units are not viable for long-lasting competiveness, and prioritise these for turnaround first, before cutting the number of their employees (Louw and Venter, 2013). This is because cutting key employees can result in the loss of essential capability. There are other means through which organisations can reduce their costs besides reducing the number of employees and business units. According to (Slezak, 2013), organisations can also curtail costs by reducing wages, leasing business equipment rather than purchasing and improving efficiency in order to increase productivity. Evidence of cost cutting within retrenchment strategy can be seen in the case of Ford Motor Company. As mentioned by Naughton and Behrmann (2017), the multinational automobile maker plan to cut roughly ten percent of employees worldwide as they wish to boost profit and a straggling stock price.

The second corporate action linked with retrenchment is that of reducing non-core assets. According to Louw and Venter (2013), non-core assets “involve selling vacant land, equipment, and buildings.” Although the money generated from such sales may help organisations pay off debts or embark on a new venture, this type of turnaround strategy is primarily concerned with helping the organisation to focus on its core business units (Louw and Venter, 2013). A less diversified organisation allows for more effective management and a better understanding of fundamental business units. Altron (JSE-listed Allied Electronics Corporation Limited) is an establishment devoted to information technology and telecommunications. As of 2017, Altron planned to sell off all non-core assets by the end of the financial year, ending in February 2018 in order to focus “on the company’s core operations which are turning a profit” (Gilbert, 2017).

Another turnaround strategy entails following a recovery plan. Recovery is the process of nurturing an organisation back to health. Research argues that changes in top-level management teams are an important force in stimulating change at declining organisations (Barker III, Patterson Jr and Mueller, 2002). Louw and Venter (2013) are in agreement with this. They state that the purpose of a recovery strategy, and the appropriate accompanying corporate action, is to “introduce new entrepreneurial blood in the form of turnaround specialists or a new leadership team.” South African Airways (SAA) appointed Vuyani Jarana as new chief executive officer (CEO) in late 2017 as part of their overall turnaround strategy. Former finance Minister Malusi Gigaba commented on this appointment by mentioning that Jarana had successfully turned around Stortech, a previously loss-making subsidiary of the Vodacom Group. He went on to say that he believes Jarana will be key in turning around SAA (eNCA, 2017).

The final type of turnaround strategy is revenue growth. Organisations can grow sales in a variety of ways. These include dropping prices, increasing promotions, modifying products and more focused customer service (Louw and Venter, 2013). However, continuous stability is required for sustained growth. “Increasing the activity levels of the business is the easiest way by far to increase sales” (Dowling, 2018). In particular and surprisingly, increasing investment in marketing is crucial to the corporate action of increasing sales. A strong focus of D&B’s (a global business information provider) turnaround strategy was reinvesting freed up cash from reorganisation to expand the business and increase its earnings per share (EPS) (Hanessian and Sierra, 2005).