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Strategic Options based on TOWS Analysis - Corporate Strategies in the Slowdown
Some companies reengineer their finances during a slowdown to
merely survive. But almost all, and
this includes profitable companies, can do the same thing to improve their
financial efficiency.
It's all about debt: the equity market may be paralysed but
never has debt been as attractive a corporate financing option as it is today.
Companies in the red can restructure their debt - by either retiring it, or by
replacing older costlier debt, with newer cheaper one - to improve their health;
those in the black can do so to improve their profitability.
Better still, it is a great time to borrow - for the chief executive's
new jet, that long-delayed expansion plan, or that attractive acquisition.
Companies in trouble have realised the benefits of
re-engineering their finances at this point in time. Tata Engineering posted its highest loss ever in 50 years of
existence, Rs.500 crore, last year (2000-01).
Stung by the magnitude of that loss, the company has embarked on a debt
restructuring exercise. "We are
aiming to knock off Rs.500 crore of debt over two years," says Pravin Kadle,
Senior Vice-President, Tata Engineering. That, the company proposes to do by selling investments
(shares and bonds) on its books, real estate, and by hiving off some of its
manufacturing divisions into separate companies.
The supply chain is the first target of companies caught in a
slowdown. The benefits, in terms of
cost and productivity gains, are immediate.
"Companies become receptive (to SCM and other process improvement
techniques) when they realise they don't have what it takes to tackle the tough
times ahead," says Karl-Michael Mountri, Vice-President (Asia Pacific), Hyperion
Solutions, an US-based analytics solution provider.
Maruti Udyog has taken a more holistic view of supply chain
management. It has recently set up
a separate department, Material Control, which issues annual, monthly, and
weekly schedules through e-mail to all domestic vendors. An in-house IT department has been set up to take care of the
supply chain from customer orders to dispatches. The average inventory of domestic components has been reduced
to 1.5 days. Starting last month,
Maruti is giving its vendors 15-days schedules broken into each minute of the
chain. Up to 85 percent of the
components (a car has 8,000-10,000 components) go into the line without
inspection. "We are using
e-commerce and IT to shorten cycles and reduce inventory," says CEO Jagdish
Khattar. E-procurement alone saved
Rs.75 lakh in 2000-01.
Actually, for a company with adequate financial, marketing,
and human resources, a slowdown is an ideal time to launch products, enter new
markets, or diversify into new lines of businesses. "What would you rather do?" asks Kavan Mukhtyar, a partner at
consulting firm Frost & Sullvian. "Launch a product or get into a business when everyone else
is doing it or do so when every other company is in a defensive mode?"
That's really a no brainer.
That could explain the decision of the Aditya Birla Group
company Indian Rayon to acquire, in July 2001, a 50.35 percent stake in the
Bangalore-based PSI Data Systems for Rs.71 crore in cash. "The technology sector offers enormous
growth potential over the long-term," says the group's Chairman Kumar Mangalam
Birla.
That it surely does, but what's intriguing about the
acquisition is its timing: at the peak of the panic over the impact of the
slowdown in the US economy on Indian IT services companies. But having got his foot in when things
are bad, Birla will be able to build a team of software pros (there's a glut in
the market) for far less than it would have otherwise taken. That's a classic strategic response;
Emami's is a more tactical one. The
Rs.250-crore Kolkata-based personal care products company is considering
diversifying into medical transcription or similar low-end IT-enabled services.
Unrelated diversification is out for the Chennai-based Tube
Investments. But the company's
roll-forms division has launched newer, non-commodity offerings targeting the
automobile and the defence sectors and its steel tubes division is looking at
markets in South East Asia from the export point of view. Both are brave moves in the context of a
economic downturn, but these are the kind of efforts that help companies
outperform the market. Then,
there's always paranoia: if you don't launch a product or enter a business,
someone else could.
It's all right to depend on organic growth when the going is
good; it's almost criminal to ignore inorganic growth opportunities when things
turn bad. A slowdown also presents
another kind of M&A opportunity: large profitable companies realising that they
want out because the future doesn't look too good. Nicholas Piramal, which has
traditionally grown through acquisitions, found one such in Rhone Poulenc, whose
foreign parent Aventis Pharma simply wanted out. The merged entity, which will still be
called Nicholas Piramal, will boast a turnover of close to Rs.800 crore, net
profit of Rs.10 crore, a product portfolio of 240, 16 products in ORG-MARG's top
300 OTC (Over The Counter) brands, and a field force of 450. Exults Ajay Piramal, Chairman, Nicholas
Piramal: "Our strengths in adding significant value through mergers and
acquisitions are now well documented.
We will continue to look at any attractive opportunity to grow
inorganiacally."
The recent merger of BPL Communications with the
Birla-Tata-AT&T combine to create the country's largest cellular service
provider was motivated, in part, by the state of the economy. The government's decision to allow basic telephony companies
provide mobile services on the Wireless in Local Loop (WILL) platform had
already hit existing cellular telephony companies like the two parties involved
in the merger, hard.
Says V.Krishnamurthy, the Vice Chairman of JM Morgan Stanley
that served as the financial advisor to BPL in the merger: "The consolidationis
for reasons of scale, (creating) a larger resource base, and cost
effectiveness". Those reasons hold
true for several potential M&As.
Enter the real world of manufacturing - steel, cement,
aluminum etc. - where companies are struggling to come to grips with tapering
growth (and even degrowth in some cases).
With sheer survival top of mind, most manufacturers are ruthlessly
cutting costs. That may not be the
most profound of observations, but hang on, what's this? Many of these manufacturers of commodities are actually
expanding capacities. Harakiri? Not really, "Investing during a slow
down makes ample sense. Because by
the time your expansions are complete, demand should have picked up as the
industry enters an upcycle," says Darshan Mehta, Managing Director, Anagram
Stock Broking.
Admittedly, it's a strategy that comes with its fair share of
risk. What, you might well ask,
happens if the upcycle doesn't materialise by the time your plant comes on
stream? The best example of
expansion gone sour is that the Larsen & Toubro which, in the early nineties,
frenetically put up new cement capacities, in the hope that their commissioning
would coincide with improved prospects for that industry. That upturn didn't quite happen, and L&T
suffered heavily because of its cement operations. What's more, if a company decides to expand, you can bet that
its competitors are thinking along similar lines.
A possible result?
Overcapacity, as happened when the steel companies (Jindal, Essar, Lloyds,
Ispat) put up mega capacities of flat steel products in the early nineties.
Yet, expanding during a slow-down can work wonders - as long
as the creation of new capacities is accompanied by all the other things you
should be doing during periods of low growth: Like reducing production costs,
adding value and modernising.
Adapted from: `The Economic Times', 10-16 August, 2001
In other words, managers determine that their company's
existing inventory of resources, capabilities, and core competencies are being
under-used in crafting strategy for a single business and that they can leverage
this inventory by diversifying, using these resources, capabilities, and core
competencies to create value across multiple businesses or product markets.
Various types of diversification strategies are defined in
table:
|
STRATEGY
|
DEFINITION
|
|
Forward Integration
|
Gaining ownership or increased control over distributors
or retailers.
|
|
Backward Integration
|
Seeking ownership or increased control of a company's
suppliers
|
|
Horizontal Integration
|
Seeking ownership or increased control over competitors
|
|
Market Penetration
|
Seeking increased market share for present products or
services in present markets through greater marketing efforts.
|
|
Market Development
|
Introducing present products or services into new
geographic area
|
|
Product Development
|
Seeking increased sales by improving present products or
services or developing new ones.
|
|
Concentric Diversification
|
Adding new, but related, products or services
|
|
Conglomerate Diversification
|
Adding new, unrelated products or services
|
|
Horizontal Diversification
|
Adding new, unrelated products or services for present
customers
|
|
Joint Venture
|
Two or more sponsoring companies forming a separate
organization for cooperative purposes
|
|
Retrenchment
|
Regrouping through cost and asset reduction to reverse
declining sales and profits
|
|
Divestiture
|
Selling a division or part of an organization
|
|
Liquidation
|
Selling all of a company's assets, in parts, for their
tangible worth
|
Table:
Alternative Strategies Explained
One key to determining the appropriate level of
diversification is that a company should ensure that the diversification level
chosen is appropriate in light of the company's resources (especially
financial), core competencies, and external opportunities and threats.