For a company that is on the decline and losing its competitive position, it is advisable to choose one of the following four strategies. A company with sufficient financial resources can apply an offensive strategy for overcoming the crisis: radically reduce costs or go for an original differentiation of goods; by investing money and talent in this, the company can turn the tide and within the next five years become one of the leaders. The company may also apply an active defense strategy using some elements of its previous strategy; however, it will have to fight hard to maintain sales volume, market share and competitive position at the current level. A company can choose an immediate exit strategy and leave the market either by selling the business or by stopping operations if there is no buyer. Finally, the company can choose the strategy of the last half, maintaining the reinvestment of funds in the business at a minimum level and achieving the maximization of profits in the short term, preparing to leave the market [15 pp.280–284].
Strategies for overcoming the crisis. When promising and deserving companies find themselves in a difficult situation, it is advisable to quickly identify and eliminate the causes of competitive and financial weakness. The primary task in developing a strategy for overcoming the crisis is to establish the causes of the company’s crisis. What is caused by it – an unexpected economic downturn, a weak competitive strategy, the unsuccessful implementation of a good strategy, high transaction costs, lack of necessary resources, too much debt? Is it possible to save the company or is the situation hopeless? It is very important to understand the causes of the crisis and the severity of their severity, as different causes require different rescue strategies.
The most common causes of a crisis situation are: borrowing too much; reassessment of sales growth potential; ignoring the decline in profits in the struggle to increase market share through a sharp decline in prices; too high proportion of fixed costs due to inefficient use of production capacities; failure to create cost-effective innovative technologies or models; excessive investment in unjustified technological projects; reassessment of own opportunities to penetrate new markets; frequent change of strategy; the actions of stronger rivals. To solve these problems and successfully lead the company out of the crisis, you can use the following actions:
Sale of part of the assets to receive cash and save the rest of the business; Revision of the current strategy; Taking comprehensive measures to dramatically increase revenues; Cost reduction; Simultaneous application of several of the above measures.
Sale of part of the assets. The strategy of selling off part of the assets brings success in a situation where it is vital for the company to get free cash; the two most realistic sources of these funds are the sale of part of the company’s assets (enterprises, equipment, land, patents, inventories, profitable divisions, etc.) and the introduction of extraordinary austerity measures (cessation of the production of unprofitable types of goods, closure or sale of obsolete enterprises, staff reduction, withdrawal from remote markets, reduction in the number of services to consumers). Sometimes companies in a crisis situation sell off part of the assets not so much in order to get rid of unprofitable operations and stop inefficient spending of cash, but in order to use the released funds to save and improve the remaining activities. In such cases, it comes down to moving assets from secondary to primary activities to create a base for updating the strategy.
Revision of the strategy. If poor results are due to an unsuccessful strategy, the strategy should be reviewed, in particular: change the competition strategy; review the internal organization of the business and functional strategies and bring it in line with the overall strategy; merge with another company on a merger basis and develop a new strategy based on the strengths of the new company; Reduce the range of products or the number of segments served to match the competitive capabilities and advantages of the company. The final decision is made after a thorough analysis of the industry situation, the main competitors and the company’s own competitive position, its resource base and intellectual capital.
A sharp increase in income. The goal of this strategy is to maximize sales. To implement it, price discounts, intensification of promotion efforts, expansion of the staff of sales workers, expansion of consumer service, rapid updating of product models are applied. Increasing the volume of revenues is used if it is not possible to reduce operating costs, and the break-even level has not yet been achieved, or if it is necessary to increase the utilization of production capacities to increase the profitability of current activities. If consumers are not too sensitive to price, since they are attracted primarily by the distinctive properties of the product, then the fastest means of increasing incomes will be to raise prices.
Reduce costs. The strategy of overcoming the crisis by reducing costs gives optimal results if it is possible to radically revise the value chain and cost structure of the company; if the inefficiency of operational activities is obvious and correctable; if the company’s costs are clearly overstated and there is a reserve for their reduction; if the volume of sales of the company ensures break-even activities.
As part of the overall cost-cutting strategy, special attention should be paid to reducing administrative costs, eliminating secondary or inefficient activities from the value chain, upgrading existing production facilities and equipment to increase productivity, temporarily withdrawing investment in secondary projects or activities, restructuring debt to reduce interest payments on debt obligations and deferring their repayment.
A comprehensive strategy. A comprehensive strategy for overcoming the crisis is used in difficult situations, when it is necessary to act quickly and in all areas of activity. In addition, this strategy is often used by new managers invited to the company on the terms of complete freedom of action to overcome the crisis. The more serious the problems facing the company, the more effective the integrated strategy.
Bringing a company out of a crisis is a risky venture and often ends in failure. Many struggling companies are too slow to launch anti-crisis measures. Others refuse to fight because of the lack of financial and managerial resources, due to the low growth rate of the industry and too fierce competition for market share. Often, competitors are too strong to be able to count on winning a long fierce struggle. Even in the case of successful overcoming of a crisis situation, a lot of effort and organizational changes are required before the competitiveness and profitability of the company are fully and permanently restored.
An immediate exit strategy. Sometimes the crisis is too deep or it is impractical to save the company because of the excessive cost of this event or the doubtfulness of stable profits in the future. In this case, the closure of the company and the liquidation of its assets is the best and wisest strategy, although the most unpleasant and painful, since it is associated with the dismissal of employees and the inevitable consequences for the region. Nevertheless, in hopeless situations, a timely liquidation is better suited to the interests of the owners than an inevitable bankruptcy. Delay in liquidation only leads to an unnecessary depletion of the company’s resources and a reduction in some of the assets that can still be saved, not to mention additional stress and a negative impact on the future career of all participants in this process. The main thing is to get a reasonable answer to the question of whether it is possible to get out of the crisis or not.
Strategies of the last half. This is a compromise between strategies for maintaining existing positions and an immediate exit strategy. At the stage of decline, companies often apply the strategy of the last harvest, when the company sacrifices the market position for the sake of immediately obtaining maximum profits. The main financial goal of such a strategy is to extract the maximum amount of cash from the fading company for subsequent use in other projects. Expenses in such a company are approved in the minimum required amounts. Capital expenditures for new equipment are stopped or allocated last
(unless there is an urgent need to replace the equipment); the focus is on extending the life of existing equipment and production facilities.
Gradually, the costs of promoting goods are reduced, the quality of products does not decrease too noticeably, the provision of secondary services to consumers ceases, etc. Such actions inevitably lead to a decrease in sales volumes and market share, but if the reduction in costs goes ahead, then profit after taxes and net cash flow increase (at least temporarily). The business will gradually fade away, but before that, everything that is possible will be extracted from it.
The strategy of the last half is suitable for a weak company in the following circumstances [36 p.17-18]:
When the prospects for the development of the industry in the long term are doubtful – such a situation is developing today in the tobacco industry, the production of video recorders and video cassettes (replaced by digital video players and digital disks); When resuscitation of the company will cost too much; when the best thing a company can expect is to break even – as happened with Polaroid, which faced a decline in demand for its cameras; When maintaining the existing market share is increasingly costly, as is the case with manufacturers of photographic films for conventional cameras; When the weakening of competitive efforts does not threaten an immediate decline in sales volumes , printer manufacturers are unlikely to face a significant drop in sales of dot matrix printers, even if they switch the advertising campaign to the promotion of laser models; When it is possible to move the released resources to a more promising industry, manufacturers of dot matrix printers prefer to pump all their resources into the production of inexpensive laser printers with high print quality; If the fading business is not among the main activities of a diversified company; it is better to gradually close secondary activities than to constantly feel their negative impact on the profitability of more important units; If the fading business does not add any distinctive features to the overall business model and image of the company (sustainable sales volume, prestige, balanced product range).
The more of these conditions are observed in the situation under consideration, the more expedient the strategy of the last half.
The strategy of the last half is best suited for diversified companies where there are side or secondary activities or units with weak competitive positions or operating in unattractive industries. Such companies have the opportunity to transfer cash flows from secondary and unpromising activities to units with higher profitability potential or direct them to the acquisition of new companies [15 pp.284–285].