Chapter Four

Strategies for Business Growth

and Recovery 4.1 Introduction
New entry is one of the basic acts of entrepreneurship and the moment an entrepreneur has
successfully entered the market, whether new or an existing one, the opportunity for him or her
to grow the business is generally provided. For example, introducing a new product into an
existing market provides the opportunity to garner market share from competitors, entry into a
new market provides the opportunity to service a new group of customers, and there is also the
opportunity for a new business to make and build upon its first sales. It is difficult to provide
any guidance on the timing and path of growth because a number of internal and external factors
affect the entrepreneurial growth decision. In this Chapter, the focus will be on how to plan for
growth, especially the factors that affect the decision for or against growth by the entrepreneur,
in addition to the reasons some small business entrepreneurs choose not to grow and expand
their business. It is also imperative to explain the phases in new enterprise growth and the
implications of growth for the firm and the entrepreneur in addition to how the challenges that
are associated with growth can be overcome.

4.2 Factors that Affect Growth Decisions

The decision regarding growth is a complex one. Basically, entrepreneurs are faced with the
first critical decision when it comes to growth: to grow or not to grow. The decision to grow
or not to grow the new business does not rest only on the entrepreneur but can be based on a
number of factors as explained by Allen (2006):
(1) Demand for product or service.
(2) Leadership effectiveness.
(3) Willingness of employees to grow.
(4) Commitment of primary stakeholders.
(5) Clear job description, and
(6) Vision or the degree of understanding of corporate vision by employees.

4.2.1 Demand for the product or service: Demand for the enterprise product or service may
compel the entrepreneur to keep up, or, by contrast, the market may not be big enough to
permit the company's growth. Usually, when a company gets to a point where it is ready
to grow to the next level, it will have a few employees and, of course, the founding team,
and may not even possess the required resources. Therefore, to take that next step, there is
a need to consider some benchmarks for successful growth.
4.2.2 Leadership effectiveness: Successful growth requires effective leadership. Entrepreneurs
are involved in every one of the activities of their business at start-up, but as the company begins
to grow, they find it necessary to delegate tasks to others. The more they delegate the more they
realize that their job has suddenly changed; from doing the tasks of the business to leading the
business. Leading a growing business involves provision of strategic leadership and tactical
guidance for the whole organization. Strategic leadership involves development of the
company's strategic goals, its vision and objectives, and ensuring that these goals are achieved.
The entrepreneur must ensure that he/she guides the company and its people through motivation
and coordination towards the attainment of its goals. This is important because everyone looks
up to the entrepreneur for the accomplishment of basic objectives such as growth, profitability
and survival. Effective leadership requires that the entrepreneur possesses the ability to inspire
people into action.
4.2.3 Willingness of employees to grow: A small or medium-size enterprise can successfully
grow and change if its people are willing or given opportunities to learn, grow and change.
Corporate growth usually results in redesigning or enlarging jobs of organizational members
and this means additional abilities and skills from them. Employees should therefore be
encouraged to stretch beyond what they knew when they were employed in the early days of
the company, to learn more aspects of the business, and to participate in how the business is
run.
4.24 Commitment of primary stakeholders: Successful growth requires the commitment of
primary stakeholders especially employees, customers, and financiers. Growth comes with
change; new practices and processes, new products and services, and new requirements for
finance. Effective growth requires support from these stakeholders. It is important for them
to see the benefits they would get from the growth of the business.
4.2.5 Clear job description and team work: Achievement of growth also depends on a clear
understanding by each member of the organization regarding his/her contribution to the
financial success of the company. Everyone in the organization must be responsible and
accountable for the prosperity of the entire company, and everyone must have a stake in that
prosperity. Because teamwork is very vital in achieving rapid growth, it is also important to
give responsibility and accountability for what they do so that these teams can operate
effectively.

4.26 Vision or the degree of understanding of corporate vision by employees: The

development of a strategic vision for a business is important for some reasons such as guide
for resource allocation, avoidance of drift, selection of marketing opportunities, and
identification of requirements for competitive success and advantages. Lack of vision for a
business, no matter how small the business, can spell disaster for the business. In the same
way, misunderstanding of a company's vision by its employee can create confusion and
divergence amongst them. In such situations, employees would find it difficult to define the
right customer for the company, and may lack guidelines for allocation of organizational
resources, especially the timing. The pursuit of growth without a clear vision is mostly the
result of low profit margin or flat earnings out of increasingly high sales. To grow a company
successfully and keep it healthy, its vision must be clear, motivating, and must be
communicated to all its members.

4.3 Problems and Implications of Growth

Growth, especially its rate, is generally associated with challenges. Growth rates affect
all aspects of an organization and the faster the rate of growth, the greater the potential
for difficulty due to pressure, conflict, crisis, confusion, and loss of control. The rate at
which this difficulty increases is usually faster than the rate of the business's growth. c
briefly explained as follows
4.3.1 Inability to Understand and Respond to the Businesses' Environment: The larger a
business is, the more complex its environment, and the lower the direct contact between the
owner or top managers and the realities of its environment. Such a challenge makes it difficult
for the business to gather timely and relevant information about its environment for the
purpose of making decisions. Corporate growth creates more managerial hierarchies and
expanded scope of activities that hinder flexibility and prompt response to environmental
changes.
4.3.2 Decision Making: Business growth poses two problems that are related to decision
making: location and emphasis. Location of decision making is concerned with delegation
while emphasis is concerned with the type of decision that requires much of the management
attention. Delegation of responsibility and operational authority by the owner and the
founding team of managers or top managers to subordinates becomes a problem in the area
of extent of delegation. This, by extension, is concerned with the challenge of how much
decision to be held back, that is, issues relating to centralization and decentralization. The
other challenge relates to the type of decision that should be given much attention by top
managers. A small business owner usually give attention to functional and tactical (short-
term) plans or decisions but as the business grows the need for strategic decisions become
apparent and top managers see it as a priority area. However, successful growth requires that
strategizing takes the back seat as a basic condition for enhancing rapid growth.
4.3.3 Opportunity Overload: Successful growth exposes a company to abundance of sales or
new market opportunities. This problem, as good as it may seem, is as challenging as lacking
enough sales or market opportunities. Managers of matured companies are mostly faced with
a classic problem of choosing from among these competing opportunities. It is important to
make critical but careful choices in this case because wrong choices would negatively affect
the company's profitability and survival.
4.3.4 Abundance of Capital: One of the challenges of most stable or established small or
medium-sized companies relate to difficulties in obtaining equity and debt financing.
However, most of the rapidly growing firms are not constrained by difficulties in raising
finance. The problem is, rather, how to evaluate investors as partners and the terms of the
deals with which they were presented. Choosing capital sourcing decisions relates to capital
structure decisions which is usually regulated through policy that usually reflects capital mix,
maturity and priority, and currency in case of foreign sourcing.
4.3.5 Misalignment of Cash burn and Collection Rates: Rapidly growing companies are
mostly confronted with problems of cash burn rates racing ahead of collections. This
misalignment can lead to chaos and collapse if not checked through effective integrated
accounting, inventory, purchasing, shipping, and invoicing systems and controls.
4.3.6 Facility Expansion: Expanding facilities and space is a problem and one of the most
disrupting events during the early explosive growth of an organization. Expansion of facilities
and space often result in surprises, delays, organizational difficulties and system interruptions
that managers of many of these companies are not really prepared for.
4.3.7 Pressures on the Entrepreneur and the Enterprise's Resources: Growth makes a company
or a business bigger. Initially, the organization begins to benefit from the advantages of size
such as production efficiency, enhancement of the firm legitimacy, and high attractiveness to
suppliers. However, as the organization grows, challenges occur which result in managerial
challenges of pressure on resources.
These pressures include pressures on existing financial and human resources, and entrepreneur's
time.
4.4 Strategies for Growing a Business
Once an entrepreneur has decided to grow his or her enterprise, the next concern would be the
choice of strategy for growth. This crucial decision relates to the strategic direction to follow in
expanding the scope of the business and its market. Strategic directions have been classified by
Ansoff (1965) into four: market penetration, market development, product development, and
diversification. However, in this Chapter, the growth strategies in terms of direction that would
be discussed include intensification, integration, diversification and internationalization.
4.4.1 Intensification Strategies.
Intensification strategies are also referred to as specialisation or intensive strategies.
Intensification strategies are strategies that involve the efforts of the small business owner in
directing resources to one or his/her primary business in terms of their respective technologies
individually or jointly. Intensification involves the commitment of businesses in doing what
the small business owner knows he or her (and the team) is best at doing. The various
intensification strategies are all linked to the idea of the product life cycle; they provide suitable
means of extending the life cycle once it reaches a stage of maturity and potential decline, or
replacement of a product that has declined or been abandoned. Intensification is the first-level
growth strategy that usually involves different steps. Intensification steps or strategies include
market penetration, market development, product development, and product innovation.

Market Penetration
A market-penetration strategy is any move that seeks to increase market share for present
products or services in present markets through greater marketing effort. Market penetration
strategy involves focusing intensely on existing markets with the enterprise's present products.
Businesses adopting this strategy rely heavily on promotional strategies which can increase the
rate of usage by existing consumers, attracting consumers or users of substitutes being offered
by competitors, and general increase in sales not only through stimulation of primary demands
but ensuring repeat purchases.
Increase in patronage of an enterprise's existing products in present markets can be achieved
through any of the following actions:
1. Increasing present customers rate of use:
a. Increasing the size of purchase.
b. Increasing the rate of product obsolescence to enhance frequent purchases.
c. Advertising other uses.
d. Giving price incentives for increased use.
2. Attracting competitor's customers:
a. Establishing sharper brand differentiation.
b. Increasing promotional effort.
c. Initiating price cuts.
3. Attracting nonusers to buy the product:
a. Inducing trial use through sampling, price incentives, and so on.
b. Increasing or reducing price.
c. Advertising new uses.
The two main advantages of market penetration as stated by Thompson and Martin (2005)
are (1) it is generally associated with low risk because the strategy is based on known skills
and capabilities, and (2) it enhances the development and improvement of the company's
production and marketing skills because these skills are concentrated on specialized
products and related consumers and not diversified products or unrelated consumers.
The five conditions that may make market penetration an appropriate strategy according to
Kiley and Eldridge (2003) are:
 When current markets are not saturated with a particular product or service.
When the usage rate of present customers could be increased significantly.
When the market shares of major competitors have been declining while total
industry sales have been increasing.
When the correlation between sales revenue and marketing expenditures
historically has been high.
When increased economies of sales provide major competitive advantages.
Market Development;
Market development consists of marketing present products, often with possible cosmetic
modification and range increases to customers in related market areas by adding channels of
distributions or by changing the content of promotion. The cultivation of new markets,
especially in other geographical locations where existing products are not yet popular, can be
achieved, according Kotler (2002), through any of the following actions:
1. Opening additional geographic market:
a. Regional expansion.
b. National expansion.
c. International expansion.
2. Attracting other market segments:
a. Developing product versions to appeal to consumers in other segments.
b. Entering other channels of distribution by attracting new marketing intermediaries.
c. Advertising in other media that have been rejected or neglected.
Market development commonly ranks second only to market penetration as the least costly
and least risky of all grand strategies. The six conditions, according to David (1985), which
may make market development an appropriate strategic option are:
When new channels of distribution are available that are reliable, inexpensive and
of good quality.
When an organisation is very successful at what it does.
When new untapped or unsaturated markets exist.
When an organisation has the needed capital and human resources to
manage expanded operations
When an organisation has excess production capacity.
When an organisation's basic industry is becoming rapidly global in scope.
Product Development
Product development is a strategy that seeks increased sales by improving or modifying present
products or services in existing markets, Product development is a limited extension of
organisational scope. In practice, even market penetration and market development will, to some
extent, require some product development. Product development involves an attempt to extend
or prolong the product life cycle. Typically, the second and revised editions of a successful
textbook are examples of product development. Other titles that show that a product has been
modified or improved upon are: new improved, 'extra', 'classique', 'super', and 'reloaded' or
'reborn'. Product development means changing some features of an existing product. Product
development consists of product improvements which add value. Therefore, it usually entails
large research and development expenditures because new manufacturing competences have to
be developed. It is riskier and more expensive than market penetration and market development
strategies.
Developing new products for present markets, as pinpointed by Kotler (2002), can be achieved
by relying on some of the following actions:
1. Developing new product features:
a. Adapt the product features to other ideas, development and requirements.
b. Modify the features e.g. change colour, motion, sound, odour, form and shape.
c. Magnify the features to make the product stronger, longer, and thicker or possess extra
value.
d. Minify the product by making it smaller, shorter or lighter.
e. Substitute e.g. other ingredients, process and power.
f. Rearrange the product layout, sequence, and components.
g. Combine e.g. blend, alloy, assortment, ensemble, combine units, purposes, appeals and
ideas.
2. Introducing quality variations
3. Developing additional models and sizes (product proliferation).
Grand product development strategy is concerned with extending an existing product's
life cycle. The five conditions, according to Kiley andl Eldridge (2003), when product
development may be an especially effective strategy to pursue are:
When an organisation has successful products that are in the maturity stage of
the product life cycle; the idea here is to attract satisfied customers to try
new(improved)products as a result of their positive experience with the
organisation's present products or services.
When an organisation competes in an industry that is characterized by rapid
technological developments.
When major competitors offer better-quality products at
comparable prices When an organisation competes in a high-
growth industry.
When an organisation has especially strong research and development capabilities.

Product Innovation Strategy

Product innovation involves the replacement of existing products with ones which are really
new. Innovation, unlike product development that involves modification, implies a new product
life cycle. Although, the line which differentiates a really new product from a modified product
is extremely difficult to quantify, however, if the new product is addressing the beginning of its
own life cycle, it is innovation but if it is addressing the life cycle of another product; it is
product development. A strategy of innovation involves the creation of a new product life cycle
thereby making similar existing products obsolete.
Thompson and Martin (2005) highlighted four ways through which an organisation can access
innovation:
i. Ideas from employees of the Research and Development department. It may be
argued that relying on their ideas is risky because these employees are not in
direct touch with customers, but they have the technical expertise required for
achieving product acceptance.
 ii. Ideas from people in various parts of the organisation working on special
projects. iii. Employees that are given freedom and encouragement to work on
special projects. iv. Every day events as people interact and discuss problems
and issues.
v. Ideas from sales people who regularly interact with customers.
Many companies find it profitable to choose innovation as a strategic option for growth.
This decision enables them to reap the initially high profits associated with customer
acceptance of a new product instead of seeking profitability in the face of stiffening
competition with similar existing products. Product innovation is a good move by companies
that intend to stay ahead of rivals and in certain industries innovation is used as a barrier
against competition. However, constant innovation is expensive and will require other
products to provide the cash flow and other strategies such as market development and
market penetration including some marketing strategies to succeed in the marketplace.

4.4.2 Integration Strategies

Integration involves expanding the company's range of activities backward into sources of
supply and/or forward toward consumers and end users of the final product through the value
chain, or in the stage of the value chain within the same industry. In the use of integration
strategies, the enterprise widens the scope of its business definition in a way that it will result
in serving the same set of customers. Integration basically means combining activities related
to the present activity of a firm. Such a relationship or combination may be done on the basis
of the value chain, that is, downstream (towards ultimate consumers) and upstream (backward
to raw materials). This form of integration is referred to as vertical integration. On the other
hand, integration can be adopted at the same level of production or marketing process. In this
case the company seeks ownership or control over competitors. This is called horizontal
integration.

Vertical Integration
Vertical integration involves a company's efforts directed towards producing new products
that serve its own needs and/or engage in new activity for the purpose of serving as a
customer for outputs. Hence, we have backward integration and forward integration.
Backward integration or linkages means retreating to the source of raw materials while
forward integration or linkages move the company nearer to the ultimate consumer/users.

Figure 4-1: Stages in the Raw Material to Consumer Value Chain

A vertical integration strategy involves expanding the domain of the organisation into supply
sources or to distributors. Vertical growth can be achieved by taking over a function
previously provided by a supplier or by a distributor through acquisition of a company which
supplies an organisation with inputs of raw materials or components, or serves as a customer
for the organisation's products or services.
Forward Integration
Forward integration involves gaining ownership or increased control over all or some levels of
marketing intermediaries such as distributors or retailers. Increasing numbers of manufacturers
(suppliers) today are

6
pursuing a forward integration strategy by establishing websites to sell products directly to
consumers. Examples of enterprises pursuing forward integration strategy is a big sugar cane
farmer that decided to establish a sugar processing company, a primary school owner that
decided to start a secondary school or college, and a manufacturer of school sandals that chose
to use direct channel for customers by establishing retail outlets in capital cities and major towns
of the nation.
While some manufacturers are moving closer to customers through total or partial ownership of
distributors/wholesalers and retailers, some suppliers or producers of raw materials and key
components are investing in manufacturing facilities to secure the strategic advantages of
forward integration. The strategic impetus for forward integration by manufactures is to gain
much greater control over their total marketing effort especially distribution thereby securing
lower cost. Lower cost often gives rise to lower prices which can create advantage for the
company.
The six conditions that may make the adoption of forward integration an especially effective
strategy as identified by David (1985) are:
When an organisation's present distributors are especially expensive, or unreliable,
or incapable of meeting the firm's distribution needs.
When the availability of qualified distributors is so limited as to offer a competitive
advantage to those firms that integrate forward.
When an organisation competes in an industry that is growing and is expected to
continue to grow markedly; this is a factor because forward integration reduces an
organisation's ability to diversify if its basic industry falters.
When an organisation has both the capital and human resources needed to manage
the new business of distributing its own products.
When the advantages of stable production are particularly high; this is a
consideration because an organisation can increase the predictability of the
demand for its output through forward integration.
When present distributors or retailers have high profit margins, this situation
suggests that company profitability could distribute its own products and price
them more competitively by integrating forward.
Backward Integration
Backward integration is a strategy of seeking ownership or increased control of a firm's
suppliers. Integrating backward can be adopted by both manufacturers and retailers since all
of them purchase needed materials from suppliers. Backward integration can be for
examples a fast food company that decided to establish its poultry farm to ensure regular
and desired quality supply of chickens, a proprietor of a Secondary school that chose to start
a primary school to ensure reliable quality of pupils coming into the college, or a flour
milling company that decided to establish its own wheat farms.
Backward integration, according to David (1985) may be an especially effective strategy
under the following conditions:
When an organisation's present suppliers are especially expensive, or
unreliable, or incapable of meeting the firm's needs for parts, components,
assemblies, or raw materials.
When the number of suppliers is small and the number of competitors is large.
When an organisation competes in an industry that is growing rapidly, this is a
factor because integrative-type strategies (forward, backward, and horizontal)
reduce an organisation's ability to diversify in a declining industry.
When an organisation has both capital and human resources to manage the new
business of supplying its own raw materials.
When the advantages of stable prices are particularly important; this is a factor
because an organisation can stabilize the cost of its raw materials and the
associated price of its product or products through backward integration.
When present suppliers have high profit margins, which suggests that the
business of supplying products or services in the given industry is a worthwhile
venture. When an organisation needs to acquire a needed resource quickly.
Horizontal Integration
Horizontal integration, unlike vertical integration, is when an organisation takes up the same
type of products at the same level of production or marketing process. Horizontal integration
strategy can be followed through cooperation or organic development. When a company makes
a conscious effort to spread out to other lines of business or businesses, which are related to
the existing business at the same stage in the value chain, a company can seek ownership of or
control over competitors by merging with or acquiring one or more similar firms operating at
the same stage of the production-marketing chain. Horizontal integration is frequently adopted
with a view to expand geographically because it eliminates competitors and provides the
acquiring firm with access to new markets. In addition, horizontal merger or acquisition may
be adopted to increase market share or to benefit from economies of scale.
Horizontal integration, according to David (1985) may be an appropriate strategy under the
following conditions:
When an organisation can gain monopolistic characteristics in a particular area
or region without being challenged by the Federal government for -tending
substantially to reduce competition.
When an organisation competes in a growing industry.
When increased economies of scale provide major competitive advantages.
When an organisation has both the capital and human talent needed to
successfully manage an expanded organisation.
When competitors are faltering due to a lack of managerial expertise or a need for
particular resources that an organisation possesses; note that horizontal integration
would not be appropriate if competitors are doing poorly, because in that case
overall industry sales are declining.
 4.4.3 Diversification Strategies
Diversification involves a substantial change in the business definition of a company in terms
of customer functions, customer groups, or alternative technologies of one or more of a firm's
business. Peters and Waterman's (1982) advice to companies is to-stick to the Knitting and
not to stray too far from the company's areas of competence. Diversification strategies are
strategic actions involving adding one or more new lines of business to the existing business.
When the new line of business added is within the same industry, it is called related or
concentric diversification, and when the new line of business added is from another industry,
it is called unrelated or conglomerate diversification. However, diversification often makes
the most sense when the company is competing in an industry that has become unattractive
(e.g. a declining industry or an industry with a sharply increasing cost).
Objectives of Diversification
So many reasons have been given for departing from a company's present business. Other
companies that refuse to diversify too, have reasons for their decision. Some objectives
behind the choice of diversification include:
1. Enhancement of organisational growth
2. Increase in earnings or return on investment
3. Increase in value of stock of a firm to attract investors for expansion of capital base
4. To achieve cross-business synergies
5. Enhancement of stability in profits and sales especially in unrelated diversification
that can handle fluctuations especially seasonal changes.
6. Increased speed in technology, resources, facilities, and manpower skills.
7. To gather and consolidate organisational strength through centralizing the business
thus reducing its weaknesses.

8
8. To handle the problems of relying on a single product because no product lives
forever; they all have life-cycles.
9. Increase organisational efficiency and speed.
[Link] minimize risk by spreading it over several businesses.
11. To guard the company against unfavourable consequences from changes in
environmental factors.
When to Diversify
The pursuit of concentration (intensification and integration) strategies is preferred by some
companies. Companies as observed by Thompson et al (2004) that concentrate on a single
business can achieve enviable success over many decades without relying on diversification to
sustain their growth. This is because concentrating on a single line of business (totally or with
a small dose of diversification) has important advantages:
(l)a single-business company has less ambiguity about who it is, what it does, and where it is
headed,
(2) it can devote the full force of its resources to improving its competitiveness. Expanding
into geographic markets it doesn't serve, and responding to changing market conditions and
evolving customer preferences, and
(3) the more successful a single-business enterprise is, the more able it is to parlay its
accumulated know-how, competitive capabilities, and reputation into a sustainable position as
a leading company in its industry.
However, relying on a single line of business is associated with one big risk-having all of the
company's eggs in one industry basket. If the market is eroded by the appearance of new
technologies, new products, or fast-shifting buyer preferences, or if it otherwise becomes
competitively unattractive, the prospects of a company can quickly dim. Where there are high
risks that the market of a single-business company may dry up or when opportunities to increase
revenues and earnings in the company's mainstay business begin to peter out, managers, as
suggested by Thompson et al (2004), usually have to put diversifying into other businesses on
the front-burner for consideration.
Diminishing market opportunities and stagnating sales in a company's mainstay business
make diversification a very strong option for consideration. Once the decision to diversify
has been made, it is important for managers to consider the diversification path to follow.
Types of Diversification
Expansion through diversification can be achieved through two basic strategies-related and
unrelated. Related diversification is also referred to as concentric diversification. Unrelated
diversification can be in the form of horizontal or conglomerate diversification.
Related (Concentric) Diversification
Expansion through concentric diversification is when a company takes up an activity in
such a way that it is related to the existing business definition of one or more of the
company businesses. This relationship can be in terms of customer groups, customer
functions or alternative technologies. Therefore, concentric diversification may be of three
types: marketing-related, technology-related, and marketing and technology-related
concentric diversification. Examples of concentric diversification are a yogurt
manufacturing company that decides to add fruit juice producing business to its portfolio
(food industry), an insurance company that decides to establish a pension administration
or micro-financing to its existing business (finance), or a crop farmer entrepreneur that
chose to add animal farming to its business (farming/primary).
When a company picks industries related to the organisation's core business and what the
company already does, a-strategic fit can be achieved. A strategic fit exists when different
businesses have sufficiently related value chains that can enhance the achievement of some
benefits. For example, it becomes easier for a company to transfer skills and expertise from one
business to another or to combine related activities of separate businesses into a single operation,
and to reduce costs.
The six conditions when concentric diversification may be an effective strategy as suggested by
Muto (2001) are:
When an organisation competes in a no-growth industry.
When adding new, but related, products would significantly enhance the sales
of current products.
When new, but related, products could be offered at highly competitive prices.
When new, but related products have seasonal sales levels that counterbalance
an organisation's existing peaks and valleys.
When an organisation's products are currently in the declining stage of the
product's life cycle.
When an organisation has a strong management team.
 Unrelated (Horizontal) Diversification
Horizontal diversification refers to a strategy of adding new, unrelated products or services for
present customers. Horizontal diversification strategy is not as risky as conglomerate
diversification because the company is already familiar with its present customers. For example,
hospitals that creates miniature malls for banks, bookstores, coffee shops, restaurants,
drugstores and other retail stores within their buildings for enhancing the satisfaction of patients
and their visitors pursue horizontal diversification. David (1985) provided four guidelines that
can make horizontal diversification an especially effective strategy:
When revenues derived from an organisation's current products or services would
increase significantly by adding the new, unrelated products
When an organisation competes in a highly competitive and/or a no-growth industry,
as indicated by low industry profit margins and returns.
When an organisation's present channels of distribution can be used to market the new
products to current customers.
When the new products have countercyclical sales patterns compared to an
organisation's present products.

Unrelated (Conglomerate) Diversification

Conglomerate diversification occurs when a company takes up those activities which are
unrelated to the existing business definition of one or more of its businesses, either in terms
of their respective customer groups, customer functions or alternative technologies.
Conglomerate organisations are companies that have businesses from different industries in
their portfolios. Examples of small business conglomerate are a Microfinance bank that
decided to add real estate business and transportation to its core business, a hotelier that
chose to invest in air transport, wholesaling of electronics, and real estate businesses, or a
private school owner, that expanded its investment portfolio to include fast food chains,
animal farming, and shoe making businesses.
In achieving maximum benefits from unrelated diversification several businesses are
compared on the basis of their contributions to the overall profits and creation of surplus
funds. The development of a conglomerate portfolio can be compared to a stock portfolio
when a person or an organisation buys shares of various companies to fetch maximum
return on investment. Therefore, the major objective of conglomerate diversification is
achievement of maximum rate of return. There is usually no concern for creating any
strategic fits or a synergy in any aspect of the value chain activities.
The six conditions when conglomerate diversification may be an especially effective
strategy as identified by Muto (2001) are listed below:
i. When an organisation's basic industry is experiencing declining annual sales and
profits.
ii. When an organisation has the capital and managerial talent needed to compete
successfully in a new industry.
iii. When an organisation has the opportunity to purchase an unrelated business that is
an attractive investment opportunity.
iv. When there exists financial synergy between the acquired and acquiring firm (note
that a key difference between concentric and conglomerate diversification is that the
 former should be based on some commonality in markets, products, or technology,
whereas the later should be based more on profit considerations).
V. When existing markets for an organisation's present products are saturated.
vi. When antitrust or any other related legal action could be charged against an organisation
that historically has concentrated on a single industry.
Combination (Related-Unrelated) Diversification Strategies
There is no reason preventing a company from diversifying into both related and unrelated
businesses. Most companies are diversified and the business make-up of these diversified
companies varies considerably. Some diversified companies are really dominant-business
enterprises because in their portfolio, one major core business accounts for 50 to 80 percent of
total revenues and a collection of small related or unrelated businesses accounts for the
remainder. However, some diversified companies are narrowly diversified around a few Ovo to
five) related or unrelated businesses while some diversified companies are broadly diversified
and have a wide-range collection of either related businesses or unrelated businesses or a
mixture of both. In addition, a few multi-business enterprises have diversified into unrelated
areas but have a collection of related businesses within each area. Such a collection gives them
a business portfolio consisting of several unrelated groups of related businesses. Depending on
individual company's risk preferences and strategic vision, there is ample room for companies
to customize their diversification strategies to incorporate elements of both related and unrelated
diversification.
4.4.4 Internationalization Strategies
Many companies in the pursuit of growth are involved in international business in one way or
another. For such companies the adoption of international strategies cannot be ignored.
International business is business whose activities involve the crossing of national borders.
International business includes not only importation, exportation and foreign manufacturing
but also service industry in such areas such as transportation, tourism, banking, advertising,
construction, retailing, wholesaling, and mass communication.
Reasons for Going Abroad
Firms go abroad for several reasons. These reasons are linked to the desire to either increase
profits or sales or protect them from being eroded by competition. Attractive opportunities
in foreign countries have led many companies into international business. These
opportunities, in the form of cost reduction, sales and profits maximization, and other sources
of competitive advantages encourage firms to be involved in international business at varying
degrees. The motives for going abroad can be either to seize opportunities or to deal with
threats. Opportunity Reasons
The opportunity reasons for going abroad include opening up new markets, obtaining
greater profits, faster growth in new markets, obtaining new products for the domestic
market, and globalization of financial markets.
Opening up New Markets
One major responsibility of business managers is sales and profits maximization.
Therefore, managers are always under pressure to increase the sales and profits of their firms.
Such pressure is higher when the home country market is matured and saturated. Managers
are forced to search for new markets outside their home country. The search for new markets
in other countries is especially urgent when a firm finds out that the saturation of the home
market can result in unpleasant consequences such as underutilization and pileups.
Obtain Greater Profits
Profits may be obtained by either increasing total revenue or decreasing the cost of goods sold,
and most times a firm can do both. Higher profits can be obtained in foreign countries through
(1) greater revenue from selling the product at higher prices,(2)lower costs of goods sold from
economies of scale, cheaper labour and/or raw materials, energy and government incentives,
and (3) improved communication that enhances easy and effective interaction between
managers and employees in different locations thereby reducing travelling, and cost reduction
in operational activities such as logistic, marketing, and administrative expenses.
Faster Growth in New Markets
Many domestic companies have a strong growth orientation. These companies mostly enter
foreign markets because they can grow at a faster rate there than they can in the established
domestic market. Such faster growth can enhance a company's chances of achieving expansion
target and securing competitive advantages both at home and in foreign markets.

Obtaining New Products for the Domestic Market

Another basic strategic objective for going abroad by some organisations is to bring home a
product that is required in their domestic market. Many individuals from the home market
travel abroad and develop a desire for a product that they would like to have available in their
home market. Therefore, most domestic companies internationalise their operations to obtain
products for domestic consumers. The belief is that if they do not, their competitors will.
Threat Reasons
There are a number of threatening conditions that can trigger an indigenous business to
expand to foreign markets. Some of these reasons are explained below. Protection of Home
Market
A firm can go to a foreign market to protect its domestic market when it faces competition from
lower priced foreign products. Such a firm can move its production facilities to the countries
from which the competing products are coming so that it can enjoy similar advantages, such as
lower cost of labour, raw materials, or energy. It may decide to manufacture some components
abroad through the concept of twin-factories.

Protection of Foreign Markets

The adoption of most international markets entry strategies aside from exporting is majorly
focused at the protection of foreign markets. Most firms that realized that importers of their
products delay payments due to difficulties in obtaining foreign exchange from the
government's Central Bank prefer to establish production facilities in such countries. This is
necessary because when such conditions become endemic the firms export revenue may decline
because of continued delay in payments, and most times importers due to such delay in
obtaining or lack of foreign exchange, may look for alternative sources of the product or a close
substitute. Another reason, apart from lack of or delay in obtaining foreign exchange that can
move a company from exporting to manufacturing in a foreign market is the establishment of
a company for production of similar products in the foreign market by a competitor. For
strategic purposes, even when a company's export business is growing and payments are
prompt, a firm may be forced to quickly establish a manufacturing facility in a foreign country
the moment a local production is started in such a country. The decision to start production in
such a market is to avoid the risk of losing such a market completely. Many governments,
especially those in developing countries will not only prohibit importation of substitute
products but may not permit more than two or three other companies to enter their countries so
as to maintain a sufficient market for these local firms. The aim of such governments is
basically to protect their indigenous industries so a firm must convert from exporting to foreign
manufacturing before ban on importation and stoppage of production permit or license in the
foreign nation.
Acquisition of Raw Materials
Another strategic aim for going abroad is to guarantee supply of raw materials. This is
especially common with firms in developed countries where suppliers of raw materials are
not sufficient. To ensure a steady supply of raw materials, most manufacturers in the
industrialized countries must invest in developing countries, where a lot of new mineral
deposits are being found. Such deposits are then imported to the home country for
transformation.
Acquisition of Managerial Know-How and Capital
There are other reasons firms go abroad. These include acquisition of technology and
management know-how, to ensure geographical diversification and to take advantage of
political stability in foreign countries.
4.5 Strategies for Going Abroad
The strategies for going abroad include exporting, franchising, licensing, contract
manufacturing, joint venture and strategic alliances, and wholly-owned subsidiaries. These
strategies are explained in turns in the subsections that follow.

Exporting
Exporting involves continuous effort in marketing a company's product to customers abroad.
Exporting a company's product is usually the first step in reaching foreign markets. Success in
exporting often encourages them to try other entry strategies. Many small businesses in Nigeria
have started exporting agricultural products like gingers, cashew seeds, garlic, cocoa beans, cola
nuts, rice to other countries. Foreign markets can be reached through any of the three major
exporting alternatives:
Export-trading companies-An Export-Trading Company (ETC) buys products from domestic
producers and resells them abroad.
Export-management companies-An Export-Management Company (EMC) provides the first-
time exporter with expertise in locating foreign buyers, handling necessary paperwork, and
ensuring that its goods meet local labelling and testing laws.

Offset agreement- An agreement that teams a small company with a major international
company. The smaller firm essentially serves as a subcontractor on a large foreign project.

Advantages of Exporting
Exporting strategy has the following advantages amongst others;
1. It does not require the cost of establishing operations in the host countries.
2. It is a company's first exposure/experience to foreign markets, therefore, it can be used to
test the risks and evaluate potentials of such markets.
3. It is flexible because the company can shift gears painlessly since export agreements can
generally be terminated fairly quickly with minimum or zero financial implications.
4. The initial feedback from exporting-foreign customers can be used to modify the
company's products thus enhancing expansion of overseas business.
 5. The company maintains its quality control standards over production processes and
finished goods inventory.
6. The company is able realise location and experience curve economies.

Disadvantages of Exporting
Some of the disadvantages of exporting are stated below:
1. It is sometimes associated with high costs of transportation, setting up a distribution
system, advertising, and possible tariffs placed on incoming goods.
2. The exporter has less control over the marketing and distribution of its products in the host
country.
3. The exporter must pay the distributor and/or allow the distributor to add to the price to
recoup its costs and make a profit.
4. Communication can be difficult or expensive because of the distance from customers.
5. Exporting is associated with trade barriers, such as, exchange rate, differences in weight
and measures, custom requirements, and so on.
6. The exporting company often encounters problems with local marketing agents.

Franchising
A contractual arrangement where a wholesaler or retailer (the franchisee) agrees to meet the
operating requirements of a manufacturer or other franchiser is called franchising. The
franchisee receives the right to sell the products and use the franchiser's name, as well as a
variety of marketing, management, and other services. Franchising is popular both
domestically and internationally especially among fast-food companies.

Advantages of Franchising
Companies operating franchising strategy enjoy the following advantages:
1. Risk reduction by offering a time-proven concept to the franchisee and products that can be
quickly brought to the market.
2. Costs reduction through standardized operations - economies of scale and zero development
costs.
3. Increase operating efficiencies.
4. Provides greater international recognisability.
5. Reduction of scope of franchiser's managerial activities.

Disadvantages of Franchising
Some major disadvantages of franchising include:
1. Franchising success depends on its willingness to balance standard practices with local
customer preferences.
2. Lack of quality control as some franchisees may not maintain the established product quality
standards.
3. Franchising can make it difficult for the company to take profits out of one country to support
competitive attacks in another country.
Foreign Licensing
 Foreign Licensing is a contractual agreement that allows a foreign firm to purchase the right to
manufacture and sell the firm's products within a host country or a set of approved or agreed
countries. The licenser is normally paid a royalty on each unit produced and sold. However, the
licensee bears the risks and the costs of investments in facilities for manufacturing, marketing,
and distributing the goods and services. Apart from exporting, licensing is possibly the least
costly form of international expansion.

Advantages of Licensing
Some of the advantages of foreign licensing are:
1. Unlike exporting and franchising, licensing provides access to local partners marketing
information and distribution channels.
2. Licensing provides protection from various legal barriers especially export barriers.
3. It is more attractive than some other entry strategies such as foreign direct investment
because it does not require capital outlays from the franchiser.
4. It allows quick and easy entrance to a foreign market with a known product or concept.
5. Adaptability and acceptance of the concept is easy to achieve.
6. It is associated with low development costs and risks.

Disadvantages of Licensing
Licensing is associated with some of these disadvantages: There is possibility of license-
abuse by the company in any host country, which can have adverse effects on the
international reputation of the company.

2. It does not give a company the tight control over manufacturing, marketing, and strategic
functions in foreign countries that are necessary for the realization of experience.
3. There is risk associated with licensing technological know-how to foreign companies
because a firm can quickly lose control over it.
4. Inability to realize location and experience curve economies.
5. Inability to engage in global strategic coordination.
6. The foreign partner (licensee) often gains the experience and evolves into a major
competitor after the contract expires.

Joint Ventures and Strategic Alliances

When two or more companies from different countries join to undertake a major project is
known as a joint venture. The benefits of international joint ventures include;

1 Shared technology,
2 Shared marketing and management expertise between partners,
3 Entry into markets where foreign companies are not allowed unless their goods are
produced locally,
4 Risks and costs are shared especially when the development costs and risks of opening
a foreign market are high,
5 Achievement of economies of scale in production and/or marketing thereby enhancing
strategic advantage in the market place.
The major drawbacks of joint ventures are:
1. Difficulties in achieving effective co-ordination between independent companies, each
with different motives and sometimes conflicting objectives.
2. Allies may have to overcome language and cultural barriers.
3. The costs of communication, trust-building, and co-ordination are high in terms of
management.
4. Clashes of egos and company culture may arise which can have adverse effects on the
hoped-for benefits.
5. Team-spirit may also be difficult to achieve if the key employees on whom the success
or failure depends lack or have little personal chemistry.
6. One partner can go off on its own as a competitor after learning the other's technology
and practices.
7. A shared technology may become obsolete.
8. The joint venture may become too large to be as flexible as needed.
9. Inability to engage in global strategic coordination.
10. Inability to realise location and experience economies.

A Strategic Alliances is a long-term partnership between two or more companies established

to assist each company build competitive market advantages. The benefits of such alliance are
provision of access to markets, capital, and technical expertise. Strategic alliances, by their
nature, can be flexible, and they may be effective between companies of different sizes.
Guidelines for Achieving Maximum Benefits from Strategic Alliances
The benefits of strategic alliances are better maximized when companies adopt the strategy
for combating competitive disadvantage rather than gaining competitive advantage. To gain
the most from strategic alliance, companies must observe the following:
1. Select a compatible partner then ensure that you build strong communication bridges and
trust and you may not expect immediate pay offs,
2. Be sure only an ally whose products and market strongholds complement rather than
compete directly with the company's own products and customer base is chosen.
3. Learn a partner's technology and management practices fastly and thoroughly; transfer
relevant and valuable ideas and practices into one's own operations promptly.
4. Avoid dividing competitively sensitive information to a partner.
5. See the alliance as a temporary arrangement (5 to 10 years),but may continue longer if it
is beneficial, otherwise do not hesitate to go it alone when the payoffs run out.

International Acquisition
Expanding free trade in global markets and increasing international economic cooperation
have led to significant increase in cross-border acquisitions. Acquisition involves purchasing
another company already operating in that area and it is associated with some benefits.
Acquisitions can provide quick access to an

16
international market. Cross-border acquisition may provide the fastest, and often the largest,
initial international expansion than any of the alternatives. Acquisition can also offer an
effective way to hurdle such entry barriers as acquiring technological experience,
establishing supplier relationships, becoming big enough to match rivals' efficiency and unit
costs, having to spend large sums on introductory promotional efforts to gain market
visibility and brand recognition, and securing adequate distribution.
Acquisition is associated with so many challenges. These challenges are related to finding the
right kind of company to acquire, getting adequate information about acquisition candidates,
legal constraints, and the various problems that can hinder acquisition success. It is sometimes
difficult to find the right kind of company. An acquisition-minded organisation usually faces
the bid dilemma about whether to pay a premium price for a successful company or to buy a
struggling company at a bargain price. It is often better to acquire a capable and a strongly
positioned company, even when the organisation has little knowledge of the industry, unless the
price of such acquisition is prohibitive or not economically wise in relation to cost of entry.
However, acquiring a struggling company can be the better long-term investment if the acquirer
sees promising ways to transform such a weak company into a strong one and has the resources
to do it.
Information about the acquisition candidates cannot be ignored because selection, price, and
other important decisions rest on the available information. Where there is insufficient
information about a potential candidate, organisations are usually sceptical about the wellbeing
of such candidate. Legal constraints pose challenges to acquisition decisions too. In some
countries, government restriction on ownership limits foreign ownership. Organisations do not
have any other option than to choose any other appropriate joint ownership or partnerships
entry strategy, or to rely on exporting.

Wholb' Owned Subsidiary

The establishment of a new, wholly owned subsidiary is also called a Greenfield venture. A
company owned in a foreign country by another company called the parent company is
expected to operate like a domestic firm with its functional activities under the control of the
foreign subsidiary management. However, the legal requirements of both the home and host
countries would have to be observed. This is often complex and a potentially costly process.
For example, to obtain a GSM license in Ghana, Globalcom paid S50.1million in June 2008.
Other costs of entry would include cost of infrastructures, training, building marketing
channels and other permits by state governments. The fact that the company maintains
complete control over any technology or expertise it may possess is one major advantage.
Therefore, if the investment is successful, it has a potential to provide above-average returns.
Apart from the huge financial costs involved in acquiring property, building new
manufacturing facilities, establishing distribution networks, and learning and implementing
appropriate marketing strategies to compete in the new market, this alternative is time
consuming.

Advantages of the Wholb' Owned Subsidiary

1. The company has complete control over its manufacturing and marketing activities.
2. It is easy to customize a company's product to meet the requirements of the customers or
markets in the host country.
3. Profits need not be shared with anyone outside the company.
 4. The company can enjoy location advantages in the form of access to lower cost of labour,
energy, and other natural resources.
5. Inter-organisational conflicts that can be associated with international partnership are
eliminated.
6. Internal co-ordination can be effectively achieved unlike exporting, strategic alliance, and
to some extent licensing that requires increased management efforts due to expansion in
the functional scope.
7. Barriers such as distance, language, cultural and other export/import drawbacks are greatly
minimized or totally eliminated.
8. The company is able to protect trade secrets and technology.
9. Ability to engage in global strategic coordination.

Disadvantages of the Wholb' Owned Subsidiary

The following disadvantages are however, associated with establishing foreign subsidiaries
abroad: 1. It requires very huge capital outlay for manufacturing facilities and other
requirements.
2. It is associated with high risks such as expropriation-taking over a firm's assets by the foreign
government if relations with host country falter.
3. The establishment of a new, wholly owned subsidiary in a host country can be a lengthy
process and more time consuming than the other modes of entering foreign markets.
4. It can only achieve little strategic co-ordination across country boundaries.
5. It is not tied tightly to competitive advantage because its primary orientation is
responsiveness to local country.
6. The breeding of-bad will because profits are not shared with local people is another terrible
disadvantage.

4.6 Recovery Strategies

The strategies that can be relied upon to protect an organisation in crisis through
reconstruction are referred to in this book as consolidation and recovery strategies. These
strategies are basically concerned with securing the prosperity and preserving the success of
a crisis-ridden organisation, or exiting the business quickly but wisely. Consolidation and
recovery strategies are concerned with blocking the channels of financial linkages
(unnecessary expenditures) and/or calling back funds from investments that are considered
weak or wasteful. The funds that are recovered from sale of assets or businesses are reinvested
to develop or enhance competitive advantage and support those remaining areas of the
business that are considered essential. This is the reason why Thompson (2004) coins an
umbrella term disinvestment' which encompasses all aspects of consolidating and recovering
businesses that are worth saving. Consolidation and recovery strategies are surgical moves to
solve fundamental problems confronting an organisation. This involves an attempt to find out
the problem areas and diagnose the causes of the problems so that appropriate steps can be
taken to solve the problems.
These steps result in different kinds of strategies (recovery or exit) depending on the situations.
The strategies for recovering or exiting a bad business that are comprehensively considered in
this Chapter are retrenchment/turnaround, captive company, divestment, liquidation, and
bankruptcy.

4.6.1 Retrenchment and Turnaround Strategics

18

Corporate retrenchment strategy involves reducing the scope of a business to improve

efficiency while turnaround strategy is concerned with the improvement of operational
efficiency. Retrenchment and turnaround strategies are remedial actions taken when a
company experiences declining profits as a result of economic recession, production
inefficiency or competitor innovation. The aim of retrenchment is to ensure a company
concentrates its efforts on a few core businesses by reducing the scale of operations to a
position where the company has a solid consolidated and competitive base. However,
turnaround strategy focuses on the consolidation of the pruned organisation.
Retrenchment and turnaround involve regrouping an organisation through cost, expenses and
asset reduction to reverse declining sales and profits. Retrenchment and turnaround, because
they constitute interwoven phases of the curative process of a sick company, are often used
interchangeably. A sick company would not be able to turn around successfully, that is,
improve its operational efficiency except it sheds its unwanted weight. The two phases of a
turnaround, therefore, can be likened to contraction and consolidation. Contraction is the
initial effort to quickly-stop the bleeding with a general, across-the-board cut back in size and
costs. Consolidation involves the implementation of a programme to stabilize the now-learner
corporation. Such a programme is aimed at streamlining the company through effective plans
to reduce unnecessary overload and to make functional activities cost-justified.
Retrenchment is concerned with pruning the operations of a company of its diversified
activities so that it can focus on its core business area. However, reducing the scope, assets
or costs of a sick company is not enough to ensure its survival and recovery.

Resources that are freed up must be properly reallocated from one strategic thrust to another.
This is the concern of turnaround - reversing a negative trend. Turnaround strategies involve
the adoption of a new strategic position for a product or service, and typically lead on from
retrenchment. The key issue in retrenchment concerns how much reduction is needed,
whether it is minor or drastic, and how quickly the company must act. Downsizing must be
carefully carried out because it is all too easy to cut back and slim down an organisation to
a size where it does not have the solid base required for subsequent expansion.
Such company has been downsized but not-rightsized
Managers, in ensuring effective turnaround, must be cautious in the
following areas: Cutting in the right' areas and not
destroying important competences Cutting back to a
carefully determined core, and then
Creating new competitive advantages to build upon this core and generate new
growth.
The differences between retrenchment and turnaround strategies relate to time horizon and
effects on customers. Retrenchment strategies are usually developed and implemented within
a short-time period since they are mostly designed to yield immediate results. However,
turnaround strategies are likely to address those areas which must be developed if there is to
be a sustained recovery. Turnaround strategies are designed to bring quick results and at the
same time contribute towards longer-term growth through changes in the overall marketing
efforts such as repositioning existing products and development of new ones. Retrenchment
strategies, because they relate basically to the internal functioning of organisations, do not
affect customers directly, but turnaround strategies are designed to improve the effectiveness
of the organisation's marketing. As a result, they are addressing customers' needs and
consumers directly. Therefore, some degree of caution is required in implementing turnaround
actions.
Retrenchment and turnaround strategies are needed when a business worth rescuing goes
into crisis; the objective is to arrest and reverse the resources of competitive and financial
weakness as quickly as possible. In order to formulate a suitable turnaround strategy, the
first task of management is to diagnose what lies at the root of poor performance.

RetrenchmenüTurnaround Actions
There are no standard models of how a company should respond to a decline. Several steps and
actions can be taken because every situation is unique. However, in most successful turnaround
situations, a number of common features are present. They include crisis stabilisation, changing
the leadership and top management, redefining strategic focus, building credibiliw, neutralizing
external pressures, and combination efforts.

Crisis Stabilisation
The aim at this point is to regain control, using the existing management, over the deteriorating
position. This requires a short-term focus on cost reduction and/or revenue increase.

Cutting Costs: Cost-reducing turnaround strategies can be achieved through reduction of

workforce (such as layoffs), pruning of marginal products from the product line, investments
in labour-saving equipment, accelerated financial controls, and other belt-tightening measures.
In addition to these measures, a troubled company can increase its emphasis on paring
administrative overheads, elimination of nonessential and low-value-added activities in the
company's value chain, modernization of existing plant and equipment to attain greater
productivity, delay of nonessential capital expenditures, and debt restructuring to reduce
interest costs and stretch out payments.
Cost-reducing turnaround strategies work best under the following conditions:
When the ailing business's value chain and cost structure are flexible enough to
permit radical surgery.
When inefficiencies in operation are identifiable and correctable.
When the company's costs are clearly bloated and points where savings can be
quickly achieved exists.
When the company is relatively close to its break-even point.

Boosting Revenues: The aim of revenue-increasing turnaround efforts is generating

increased sales volume. The basic options for building revenue are price cuts, increased
promotion, a larger and better sales force, added customer services, and quickly achieved
product improvements.
Acceleration of revenues and sales volumes are necessary if any or some of the following
conditions exists:
When there is little or no room in the operating budget to cut expenses and still
break even. When the key to restoring profitability is increased utilization of
existing capacity. However, when buyer demand is not price sensitive because
of differentiating features, the quickest way to boost short-term revenues may be
to raise prices rather than relying on volume-building price-cuts.

Selling Off Assets: An organisation in crisis can also sell all unwanted assets as long as it can
find buyers for such assets-The purpose of such sales is to raise cash to save the remaining (or
recoverable) part of the business. Asset-reduction moves are essential when cash flow is a
critical consideration and when the most practical ways to generate cash are (1) through sale of
some of the firm's assets (plant and equipment, land, patents, inventories, or profitable
subsidiaries), (2) closing or selling older plants, (3) withdrawing from outlying markets and, (4)
cutting back customers' services. It is important to distinguish unwanted assets from
unprofitable assets. Assets that no longer fit in with the redefined strategic focus of the company
may be very profitable because their sale can bring the company much needed cash. Crisis-
ridden companies often sell off assets not only to unload losing operations and to stem cash
drains but mostly to raise funds to save and strengthen the remaining business activities. This
usually involves the sale of non-core business assets to support strategy renewal in the firm's
core businesses.
However, turnaround actions are more than cost-cutting and/or revenue-boosting exercises
most of the time especially when crises emanate from external environments. In such cases,
cost reduction and revenue boosting actions are not sufficient for the achievement of renewed
growth. Other turnaround actions are therefore important.

Changing the Leadership and Top Management

New leadership or new management is an essential element of most retrenchment and
turnaround situations. This is because the old leadership and top management bear the stigma
of failure. The Chief Executive Officer (CEO) or the Managing Director and sometimes the
General Manager (as the case may be in small businesses) is the organisational leader and
builder, a mentor, the chief architect of organisational purpose Therefore, his or her role in
strategic management is the most important among the roles played by different strategists.
The top management consists of managers at the highest level of the managerial hierarchy.
They perform a variety of roles by assisting the board and the CEO in the formulation,
implementation, and evaluation of strategy. To resolve a crisis, the new leader and senior
managers must be able to make difficult decisions, motivate lower-level managers, listen to
the views of others, and delegate power when appropriate.

Redefining Strategic Focus

When weak performance is caused by bad strategy, the task of strategy overhaul, revising or
changing the strategy, can be adopted along any of several paths:
(1) Shifting to a new competitive approach to reclaim the firm's market position,
(2) Overhauling internal operations and functional area strategies to better support the
same overall business strategy;
 (3) Merging with or acquiring another company in the industry and forging a new
strategy keyed to the newly consolidated company's strengths; and
(4) Retrenching into a reduced core of products and customers more closely matched
to the company's strengths.
Redefining a company's strategy can take place at both business and corporate levels. For
examples, a failed cost leader may reorient toward a more focused or differentiated strategy and
a diversified company can identify the business in the portfolio that have the best long-term
profit and growth prospects and concentrates investment there. The most appropriate strategy-
revision path depends on the prevailing industry conditions, the company's particular strengths
and weaknesses, its competitive capabilities in relation to rival companies, and the severity of
the crisis. For a prudent selection of the most appealing path, the company must conduct a
situation analysis of its industry, major competitors, its own competitive position and its skills
including resources.
Building Credibility
The cooperation of primary stakeholders: customers, employees, suppliers, shareholders, and
creditors are very vital in ensuring the survival of a sick company and to achieve recovery
speedily. In a crisis period, the confidence and support of these stakeholders and other
stakeholders such as governments must be secured. Credibility-building efforts require that the
company avoid any mistake in its choice of surgical or non-surgical path. The surgical approach
to turnaround involves a tough attitude at all levels of the organisation. The new leadership
introduces some fundamental changes, centralizes functions, fires employees, and closes down
plants and divisions. However, the non-surgical (humane) approach involves understanding the
problems, eliciting opinions, adopting a conciliatory attitude, and arriving at negotiated
settlements among different factions. The emphasis of non-surgical approach to turnaround is
on behavioural change for improving work culture and morale. Non-surgical approach has a
greater potential to succeed in the long run and because of its involvement of all major
stakeholders in resolving the crisis, it can greatly enhance the credibility building of the
company.
In addition, building corporate credibility is often achieved through the advisory support of a
specialist external consultant for the existing chief executive and his team, or temporary
withdrawal of the existing team to allow an executive consultant or a turnaround specialist hired
do the job, or absolute replacement of the existing team, especially the chief executive, or
merging the sick organisation with a healthy and credible one.

Neutralising External Pressures

During turnaround, strategists work with limited resources and face pressure from shareholders,
employees, and the media. Shareholders want quick restoration of the business or any action
that can guarantee their claims. Employees on their part press for job security through the union,
and the media probe into the problems of the company and the remedial actions being taken by
the organisation. The management currently in charge of the company's affairs must seek for
shareholders' understanding and cooperation through consultation. Employees needed to be
orientated to accommodate the temporary hardship because it is better for a few workers to be
laid off than for all to be fired due to a worst situation. In order to avoid public knowledge or
wrong publication of the problem, the media should be properly managed.
The five conditions that may make retrenchment/turnaround an appropriate strategic option,
according to David (1985), are:
 When an organisation has a clearly distinctive competence but has failed to meet
its objectives and goals consistently over time.
When an organisation is one of the weaker competitors in a given industry.
When an organisation is plagued by inefficiency, low profitability, poor-
employee morale, and pressure from stockholders to improve performance.
When an organisation has failed to capitalize on external opportunities,
minimize external threats, take advantage of internal strengths, and overcome
internal weaknesses over time; that is, when the organisation's strategic managers
have failed (and possibly will be replaced by more competent individuals).
When an organisation has grown so large so quickly that major internal
reorganization is needed.

4.6.2 Captive Company Strategy

A captive company strategy involves giving up independence in exchange for security. A
full-blown turnaround may not be appropriate for a company with a weak competitive
position. The reason may be that the industry is not sufficiently attractive to justify such an
effort from either the current management or investors. A company in a weak competitive
position needs some serious action because it experiences poor sales and increasing losses.
The management of such company searches for an angel' by offering to be a captive
company to one of its major customers in order to ensure the company's survival mostly
with a long-term contract. By doing this, the company may be able to reduce costs through
reduction in the scope of its functional activities especially marketing. In essence, the weaker
company gains certainly in sales and production in exchange for becoming heavily
dependent on another firm for at least 75% of its sale.

4.6.3 Divestment Strategies

Divestment (also called divestiture, sell-out, or cutback) strategies involve the sale or
liquidation of a portion of a company or a major division, profit centre or strategic business
unit (SBU). Divestment is mostly preferred when retrenchment or turnaround have been
attempted but have proved to be unsuccessful. In some situations, the option of a turnaround
may even be ignored if it is obvious that divestment is the only answer. As a part of a
rehabilitating or restructuring plan, divestment can be proactive, that is, the company is not
under real pressure necessarily to do so. It can also be more essential and reactive where
retrenchment failed to solve the business's problems.

When a particular line of business loses its profitability (terminally), the most attractive
solution usually is to sell it. It is wise to divest poor performers-dogs-and-nssf in a diversified
firm's portfolio quickly to avoid further loss. If a company with a weak status in an industry
is unable to raise itself up by its bootstraps or to find a customer to which it can become a
captive company, it may have no option but to sell out. The sell-out strategy is appropriate if
management can still obtain a good price for its shareholders and the employees can keep
their jobs by selling the entire business to another firm. The rationale is that another company
will have the necessary resources and determination to return the company's profitability.
The idea behind divestment is to sell the business unit to the highest bidder. Three types of
buyers are possible: independent investors, other companies, and the management of the unit
to be divested. Selling off a unit to its management is normally referred to as management
buyout (MBo). Existing managers often feel that they could manage their business more
profitably if they were freed from any constraints imposed by the parent organisation and were
completely free to ny out their ideas of changes.

Reasons for Divestment

A divestment strategy may be adopted due to various reasons:
1. When a company needs to raise money quickly because a better investment alternative has
been identified, it may divest a unit that is not yielding enough or any profits.
2. When a business that had been acquired proves to be a mismatch and cannot be integrated
within the company or has a poor strategic fit with the rest of the portfolio.
3. Persistent negative cash flows from a particular business create financial problems for the
whole company, creating the need for divestment of that business.
4. When selling a particular business unit will enhance the survival chance of a company, such
a unit can be divested instead of holding back the whole organisation (when the unit is
responsible for an organisation's overall poor performance).
5. When competition becomes so severe that it becomes very difficult for a company to cope,
it may choose to divest some of its units instead of complete liquidation.
6. When a divestment move is part of a merger plan executed with another firm in an exchange
of a mutual strategic interest.
7. When technological upgrading is required if the business is to survive and there is no other
economical source of finance, the best option is to divest a part of a business.
8. When the retrenchment strategy was unable to accomplish needed improvement.

4.6.4 Liquidation Strategies

Liquidation involves the sale of a complete business, either as a single going concern or
piecemeal to different buyers, or sometimes auctioning the assets. It is the most unpleasant
and painful step, especially for a single business enterprise where it means the organisation
ceases to exist. For a multi-business or a multi-industry company to liquidate one of its lines
of business is less traumatic. Liquidation is generally considered as an unpopular choice
because it is associated with serious consequences. These consequences include loss of
employment for workers and other employees, plant closings, destruction of reputations and
ruin of management careers.
Liquidation, unlike bankruptcy which seeks to perpetuate a company, is the termination of a
firm. When the industry is unattractive and the company is too weak to be sold as a going
concern, management may prefer to convert as many saleable assets as possible to cash, which
is then distributed to the shareholders after all obligations are paid. Liquidation is a prudent
strategy for distressed companies that have few escape routes, all of which are problematic. The
advantage of liquidation over bankruptcy is that the board of directors who represent the
shareholders together with the top management make the decision instead of turning them over
to the bankruptcy court, which may choose to ignore shareholders completely.
The decision to liquidate a complete business may well be in the best long-term interests of the
stakeholders as a whole. This is because it saves a company from inevitable bankruptcy. The
negative effects of liquidation become more severe when actions are delayed by the company's
management due to unguarded emotions and foolish pride. Most managers of failing companies
delay liquidation by nying to save a company in a hopeless situation through turnaround
strategies. However, managers of failing businesses should always ny to differentiate between
when a turnaround is achievable and when it is not.
Liquidation can be planned or forced on the company. Although liquidation is unattractive to
all stakeholders as a strategic alternative, when a business is better off dead than to remain alive,
it is a good proposition. On the other hand, instances where a successful entrepreneur whose
business has grown to a size where he or she has obtained all the benefits that they sought,
liquidation may be the only option if he or she does not have a natural successor. The two
situations described here make liquidation inevitable therefore, an abandonment plan is
desirable. Planned liquidation would involve a systematic plan to reap the maximum benefits
for the shareholders and others before such benefits are lost to bankruptcy.

4.6.5 Bankruptcy Strategy

Instead of giving up to liquidation, the top management of some companies in the worst possible
situations and poor competitive positions, prefer to pursue a bankruptcy strategy. Bankruptcy
involves surrendering the management of the company to the courts in return for some
settlement of the company obligations. Such financially desperate companies file for liquidation
bankruptcy or a reorganization bankruptcy. Liquidation bankruptcy involves a company
agreement to a complete distribution of their assets to creditors, most of whom receive a small
fraction of the amount they are owed. Liquidation is what the layperson views as bankruptcy:
the business cannot pay its debts, so it must close its doors. Investors lose their money,
employees lose their jobs, and managers lose their credibility. In owner-managed firms,
company and personal bankruptcy commonly go hand in hand. Reorganisation bankruptcy
involves the refusal of a company to surrender until one final option is exhausted - to recapture
its viability. The company attempts to persuade its creditors to temporarily freeze their claims
while it undertakes to reorganise and rebuild the company's operations more profitable The
appeal of a reorganization bankruptcy is based on the company's ability to convince creditors
that it can succeed in the marketplace by adopting a new strategic plan and that when the plan
produces profits, the company will be able to repay its creditors, probably in full.
Reorganisation bankruptcy relies on the selection of one or some consolidation or recovery
strategies even when such an option is less desirable. This requires careful consideration of the
causes of the company's decline and the severity of the problem it now faces. Many top managers
unfortunately are not willing to admit that their organisation has serious weaknesses or problems
for fear that they may be personally blamed. It is worse when top management do not even
perceive that crises are developing. To avoid blame or acceptance of failure, when these top
managers eventually notice trouble, they are prone to attribute the problems to temporary
environmental disturbances and as noted by Wheelen and Hunger (2008), they tend to follow
profit strategies. The reason is that when things are going terribly wrong, top management is
greatly tempted to avoid liquidation in the hope for a miracle. Such a position, as suggested by
Kanter (2003), pushes top management into a cycle of decline, in which it goes through a process
of secrecy and denial, followed by blame and scorn, avoidance and turf protection, ending with
passivity and helplessness.