Beruflich Dokumente
Kultur Dokumente
by David Elliott
16 May 2007
In my first article, I will explore the reasons for corporate decline. The second article will go on to
consider what can and should be done about it.
Corporate decline and recovery should be viewed as an important topic. Case studies rarely present
the student with a rosy picture of a trouble-free organisation. Internal weaknesses are often apparent.
Strengths may be under-utilised. Externally, threats that the organisation has failed to respond to or
opportunities that it has failed to exploit may have led to present difficulties. The four italicised
words used in this paragraph identify the possible reasons for or causes of corporate decline.
SWOT analysis is a tool used to evaluate the current position of an organisation within its
environment prior to the design of suitable strategies. It could be argued that the preparation of a
SWOT, whether required explicitly by the question or not, is the best way to summarise the
information presented in the case study. The result is a brief but focused synopsis of the key points
contained in the text.
Students often complain that there are ‘too many points to learn and remember for the exam’. The
secret is to learn a few key models very well, and then look at how they can be applied to different
topics. Basing a discussion of the reasons for corporate decline on the SWOT is, of course, a case in
point.
The preparation of a full SWOT will involve the examination of a number of aspects of both the
internal organisation and the wider environment in which it operates. You ought to be familiar with
these, and with the models available to assist in its execution.
Economic causes
A downturn in the economy can lead to corporate failures across a number of industry sectors. Those
worst affected will be suppliers of goods with a high income-elasticity of demand. House-builders
and related industries (such as home furnishings) are good examples. Suppliers of basic necessities
will be less badly hit. The recent economic crisis in East Asia led to many cases of corporate decline
in the Asia-Pacific region. A World Bank Group report (1999) surveyed almost 4000 firms across
the five countries most affected and emphasised the role of governments in stimulating corporate
recovery through an appropriate package of macro-economic measures such as low interest rates.
Deflationary government fiscal policy (low government spending, high taxation and a planned
budget surplus) and central bank monetary policy (high interest rates, restriction of money supply
expansion and revaluation of the currency) can have a highly damaging impact on business. They
can adversely affect levels of demand both domestically and overseas, and impact on financial
strategy through increasing the cost of capital and reducing after-tax profits available for distribution
or retention.
Socio-cultural causes
Demographic changes can have an adverse impact on demand. Falling birth rates could indicate
problems ahead for producers and sellers of baby products and, later, toys. Emigrating populations
can reduce demand on a local basis. Culturally, changes in tastes and fashions can have a damaging
effect on organisations that fail to anticipate the changes. Clothing is an excellent case in point, and
Marks & Spencer is currently experiencing decline for this very reason. Even cars and furniture are
susceptible to changes in trends and tastes. Health scares such as the BSE crisis can affect sales (in
the case of beef). A change in attitudes is taking place in the United Kingdom at present in relation
to willingness to seek compensation from organisations for alleged wrongs. The potential costs of
this ‘compensation culture’ could be huge and may lead to some corporate casualties. The culture
has, to a certain extent, been imported from the United States. An increasing concern about
greenhouse gases and the ozone layer, testing of products on animals and generally greater social
awareness could spell disaster in the future for those firms unwilling to embrace this cultural shift.
Indirectly, cultural changes often lead to changes in legislation, such as the banning of CFCs.
Technological causes
New technology can lead to the emergence of substitutes. The cinema industry went into decline in
the early 1980s as a result of video. Traditional methods of delivering services have been turned
upside down by rapid developments in information technology. This erosion of entry barriers to
industries such as banking and insurance through easier access to distribution channels (the Internet
rather than a high street presence) and much lower start-up costs has created threats to the
established players which, if they do not respond to them, could lead to decline. Within any industry,
failure to exploit information technology and new production technology can lead to an organisation
falling behind its rivals and losing its competitive edge.
• Consolidation within the industry, through acquisitions and mergers, can leave smaller
organisations failing to benefit from the economies of scale enjoyed by the new, larger
competitors.
• Consolidation within the customers’ industry can leave a reduced number of larger customers
with increased bargaining power and the ability to drive down margins. The loss of a major
customer is more likely to have a catastrophic effect than the loss of a small customer.
• In a mature market the degree of rivalry may intensify, leading to price wars and advertising
wars. Both of these may lead to reduced margins.
• The bargaining power of suppliers may increase, again leading to a squeezing of margins.
This may occur when the organisation becomes dependent on a single or reduced number of
suppliers. The risk of single sourcing is well documented, but benefits can also accrue
through the creation of clustered firm networks and partnerships. When a fire severely
damaged one of Toyota’s supplier’s key plants, the way in which Toyota worked with the
supplier (Aisin Seiki) and five of its other suppliers to overcome the problem and avoid too
much disruption was a key factor in preventing a crisis.
• objectives;
• organisation structure;
• financial resources;
• marketing;
• production activities;
• research and development;
• personnel resources;
• systems and procedures.
Objectives
A starting point might be to develop a mission statement. Such a document would formally set out
the organisation’s reasons for existence and provide a general sense of purpose to management and
staff. It may also contain core corporate values that can act as a filtering mechanism in the setting of
objectives and the design, evaluation and selection of strategy. Failure to establish a coherent
framework of objectives for all parts of the organisation, and at all management levels, can lead to a
lack of goal congruence and the taking of damaging, sub-optimal decisions.
Organisation structure
Structural weaknesses can have a far reaching impact on organisational performance. Excessive
centralisation may lead, amongst other things, to slow decision-making by out-of-touch managers,
far removed from the local conditions of the decision situation. But an organisation that decentralises
too much could find itself with other difficulties – such as a high cost structure brought about by
duplication of activities, or image casualty effected by uncoordinated local decisions.
Within the context of organisational structure, excessive bureaucracy can slow down decision-
making and create a role culture of inflexibility. But bureaucracy can work well in some situations.
Whether it is likely to be a factor in bringing about organisational decline depends very much on the
circumstances. Hierarchies that are too tall will lead to high management costs – but by taking de-
layering too far and chopping out management levels, spans of control will widen and this too can
cause huge problems. An organisation growing in terms of products or markets that fails to recognise
the need to change its functional structure to a divisional structure could also be a casualty.
Financial resources
Students will recall carrying out ratio analysis and interpretation of financial statements from
their Paper F7 studies. High gearing leads to high committed costs in terms of exposure to interest
payments and low interest cover. During an economic downturn, if operating profits fall, a high
proportion of debt to equity is bound to be a drain on cash flow. Over-trading, whereby the
organisation grows too quickly and cannot finance the growth from working capital can lead to cash
flow problems, as can an insistence on paying ever-increasing dividends to keep shareholders happy,
thereby starving the company of internal funds for investment.
The Boston Consulting Group (BCG) suggested that organisations should maintain a balanced
portfolio of businesses. Large investments will be needed for a Problem Child, in order to build
market share. Further investment will be needed to support and hold a Rising Star. In part, these
funds should be generated by Cash Cows. Too many cash-absorbing businesses (and not enough
cash-generating Cows) could lead to problems.
Many organisations run into difficulties after failing to appraise investment projects. The long-term
nature of many projects means that outcomes are difficult to forecast, and probabilities are usually
subjective. ‘Big projects gone wrong’ is a common cause of decline – a specific example being the
acquisition of a ‘loser’. Inappropriate evaluation of the acquired company (its strengths and
weaknesses) or an over-estimation of the potential synergy from the deal can lead to the organisation
paying too much and suffering the consequences. Acquisition of unrelated businesses (conglomerate
diversification) can be particularly risky.
Marketing
Despite Michael Porter’s inclusion of a ‘focus’ option in his model of generic strategies for
competitive advantage, excessive reliance on niche markets can lead to problems if that market
becomes saturated. Indeed, many organisations focus on markets that just aren’t big enough. Peters
and Waterman pointed out the need to be ‘close to the customer’ – psychologically, that is, not
physically. A lack of understanding of customer needs and expectations will lead to inappropriate
product design.
A lack of attention to the marketing mix, or ‘four Ps’ as it is often referred to, might include:
Production activities
Low productivity rates effected by low staff morale, a refusal to train workers and an inability to
attract or select good workers are all likely to contribute to uncompetitive product costs. Quality
problems caused by failing to get things right first time will lead to rework costs. And a failure to
spot poor quality before it reaches the customer can be catastrophic – leading to image casualty and
even lawsuits!
Personnel resources
Weaknesses in the organisation’s human resources will pervade many of the other issues already
discussed. Problems could emanate from:
The last point ought to be emphasised and, perhaps, illustrated. Novell (a US-based infotech
company) was almost destroyed by management’s decision to diversify away from its core business.
It had built a sizeable reputation for developing computer networking, but became fragmented and
unfocused when it moved the battle onto Microsoft’s home turf of personal computer software and
operating systems.
Managers must be provided with information to aid decision-making. Poor management information
systems will put the organisation at a strategic disadvantage and could lead to inappropriate
decisions. Inadequate marketing research would prevent a thorough understanding of customer
expectations. Overhead apportionment based on assumed cost-drivers such as floor area for
telephone charges and staff numbers for canteen expenses, combined with wholly unrealistic bases
of absorption like machine hours and labour hours, will lead to a failure to identify true product
costs. Some products, which are really quite profitable, may even be discontinued based on such
misleading accounting information. The solution, students of ICDM will be aware, would be to
embrace activity-based techniques.
Conclusion
The list of possible reasons for decline is almost endless. I started by using the SWOT model as a
basic framework, and then set out the key external and internal issues in the form of a few major
points or ‘headings’. In the context of an exam question, the extent to which you should then ‘drill
down’ within each point depends very much on the number of marks available.