Task 11

Corporate failure

Predicting business failure

Assessment of prediction model
Performance improvement strategy

Exam focus point

Section A or B

Article: Business failure

1. Predicting business failure

Corporate decline arises from the decline in the industry and
from poor management.
Causes of business failure:
1.Human causes
2.Internal and external causes
3.Structural causes
4.Financial causes

1. Predicting business failure

Symptoms of business decline:

Quantitative models

Z-scores

Z-scores

Z-scores
The lower a firms score, the greater likelihood there is of it
going bankrupt.
Z-score>3.0: financially sound and relatively safe;
Z-score<1.8: likely to fail
1.8<Z-score<3.0: grey area
2.7-3.0: probably safe to predict survival
1.8-2.7: risk of going bankrupt unless dramatic action

Qualitative model: Argentis A score

Argentis A score

Argentis A score

Argentis A score

Argentis A score

Argentis A score
The higher a firms score the greater the likelihood of it failing
and going bankrupt.
A score>25: at risk (35-70);
0<A score<18: not at risk of failure
18<A score<25 grey area, warning signs of decline

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Dec 2012: 4

Other information

Other information
Information in chairmans report, directors report and
audit report.
Information in press
Credit ratings
Published information about environment or external
matters: new legislation, international events, new and
better product, rise in interest rate, change in foreign
exchange rates.

2. Assessment of prediction models

Weaknesses of using financial information to predict:
(a) Significant events can take place between the end of the
financial year and the publication of the accounts.
(b) The information is essentially backward looking and takes
no account of current and future situations.
(c) The underlying financial information may not be reliable.
The use of creative, or even fraudulent, accounting can be
significant in situations of corporate failure. Similarly, the
pressure to deliver earnings growth (and therefore short-term
results) may result in companies making poor decisions that
eventually lead to their downfall.

Value of Z-scores

Value of Z-scores

Value of Z-scores

Advantages of qualitative models

Disadvantages of qualitative models

Other corporate models

3. Performance improvement strategy

3. Performance improvement strategy

3. Performance improvement strategy

Gap analysis
Forecasts based on current performance may reveal a gap
between the firm's objectives and the likely outcomes.
New strategies (eg market penetration, market development,
product development, diversification, withdrawal) are
developed to fill the gap.

Gap analysis
Gap analysis involves comparing an organisation's ultimate
objective (most commonly expressed in terms of demand, but
may be reported in terms of profit, ROCE and so on) and the
expected performance of planned and current projects.
(a) Determine the organisation's targets for achievement
over the planning period
(b) Establish what the organisation would be expected to
achieve if it 'did nothing' (did not develop any new
strategies, but simply carried on in the current way with the
same products and selling to the same markets)
This difference is the gap. New strategies will then have to
be developed which will close this gap.

4.1

The comparison between an entitys ultimate objective and the expected performance from
projects both planned and under way, identifying means by which any identified difference,
analysis
orGap
gap, might
be filled.

4.2

Fixed period gap analysis

Objective
eg sales

Objective (F1)
Forecast gap
Forecast (F0)

Time

Gap analysis
Product-market mix: Ansoffs growth vector matrix
Product-market mix is a short-hand term for the
products/services a firm sells (or a service which a public
sector organisation provides) and the markets it sells them
to.
Business strategy and performance

Gap analysis
The Ansoff matrix identifies various options
Market penetration: current products, current markets
Market development: current products, new markets
Product development: new products, current markets
Diversification: new products, new markets
All of these can secure growth (growth strategy).

Gap analysis

Gap analysis
Market penetration
In pursuing a strategy based on market penetration,
management is attempting to sell greater volumes of existing
products into existing markets. This is a low-risk strategy
which is most unlikely to lead to high rates of growth. This
may involve increasing revenue by, for example, promoting
the product or repositioning the brand. However, the product
is not altered in any way and no attempt is made to find any
new customers. The emphasis is solely upon selling more of
the same products to the same customers.

Gap analysis
Market development
In pursuing a strategy based on market development,
management is attempting to sell the existing product range in
a new market. This means that the product remains the same
but it is marketed to a new audience. Exporting the product, or
marketing it in a new region, is an example of a market
development strategy.

Gap analysis
Product development
In pursuing a strategy based on product development,
management is attempting to sell a new product to existing
customers. Efforts are focused on the development and
innovation of new product offerings with which to replace
existing ones. New products are then marketed to existing
customers. This often occurs within the automobile market
where existing models are updated or replaced and then
marketed to existing customers.

Gap analysis
Diversification
Management is attempting to sell completely new products to
new customers. There are two types of diversification
related and unrelated diversification.
Related diversification means that management remains in
a market or industry with which it is familiar.
Unrelated diversification occurs where the investing
company has neither previous industry nor market
experience.

Gap analysis
The model has little predictive capability. However, in using a
model which focuses on alternative strategic options,
management will be able to assess the level of risk attached to
each potential strategic option. For example, the adoption of a
strategy of market penetration entails the lowest risk, whereas
a strategy based upon diversification has the highest risk
especially when the entry strategy is not based upon the core
competences of the organisation.

Gap analysis
Growth is often an important measure of corporate success.
So Ansoffs model can be useful for suggesting how
businesses can achieve growth.
The strategies in the Ansoff matrix are not mutually
exclusive. A firm can quite legitimately pursue a
penetration strategy in some of its markets, while aiming to
enter new markets.

Gap analysis

BCG portfolio matrix

The Boston Consulting Group matrix helps the management
of an organisation assess its products, services and strategic
business units in terms of their market potential. This is
measured in terms of market share and market growth and
can therefore suggest the attractiveness of entering or
remaining in an industry or sector.
The matrix allows a company to assess the balance and
development of its portfolio of products or business units.

BCG portfolio matrix

Analysis can take place at two levels
(a) Product/service level: the brands or products/services
offered by the firm are examined to determine their current
position and prospects.
(b) Corporate level: the strategic business units of the
diversified firm are examined for their interrelationships and
balance.

BCG portfolio matrix

BCG portfolio matrix

Horizontal axis: Relative market share
An organisation should compare its sales from a product or service in a
specified market to the sales earned by the entity with the largest
market share, not the total sales in the market as a whole.

BCG portfolio matrix

If an organisation is the market leader, it compares its market share to
the entity with the next largest market share.
A relative market share of >1 indicates that a product or strategic

business unit is the market leader, and this is used as the dividing line
between high and low relative market share.

BCG portfolio matrix

Vertical axis: Market growth.
Measures market growth, not an individual firms growth.
The rate of market growth can often depend on the stage an industry is at

in its life cycle; with new markets often growing rapidly while mature ones
grow hardly at all.

As a guide 10% is often used as a dividing line between high and low
growth.

BCG portfolio matrix

(a) Stars
Stars are products or business units which have a high relative market
share in a high growth market.
In the short term, stars may require significant investment in excess of the

cash they generate (eg marketing expenditure) in order to maintain their

market position. However, stars promise high returns in the future.

BCG portfolio matrix

(b) Cash Cows
Over time, as markets become more mature and market growth slows,
stars will become cash cows. (In effect, cash cows are fallen stars).
Cash cows are products or business units with a high market share in a
low growth (mature) market.
They generate more cash than they incur, and finance growth of rising
stars and problem children.(cost control and cash generation )

BCG portfolio matrix

(c) Question Marks
Question marks are products or business units with a low share
of a high growth market.
In order to convert into star management need to invest large
amount to develop and advertise product.

Risky .
Cash negative.

BCG portfolio matrix

(d) Dogs
Dogs are products or business units with a low share of a low growth
market.
They too may be a drain on cash, and may use up a disproportionate

amount of a companys time and resources.

Discontinue.

BCG portfolio matrix

Four strategies:
(a) Build
This involves increasing the market share, even at the expense of shortterm profits. A 'build' strategy might be to turn a question mark into a

star. A penetration pricing policy or investment in stabilising quality

and brand loyalty may be required to turn .

BCG portfolio matrix

Four strategies:
(b) Hold
This involves preserving market share and ensuring that cash cows
remain cash cows. Additional investment in customer retention through

competitive pricing and marketing may be required.

BCG portfolio matrix

Four strategies:
(c) Harvest
This involves using funds to promote products which have the
potential to become future stars or to support existing stars.

BCG portfolio matrix

Four strategies:
(d) Divest
This involves eliminating dogs and question marks which are under
performing.

BCG portfolio matrix

The suggested strategies for each type of product or business unit are:
(a) Star: Build
(b) Cash cow: Hold, or Harvest if weak.
(c) Question marks: Build (if it seems likely they can increase their
market share) or Harvest (if it seems likely they will be squeezed out of
the expanding market by rivals)
(d) Dog: Divest, or Hold.

BCG portfolio matrix

A firm should have a balanced portfolio of products or business units.
It needs enough cash generating products (cash cows) to support the
cash requirements of question marks or stars (which are cash negative
due to the levels of investment they require), and it should have a
minimum of dogs.

BCG portfolio matrix

Advantages:
Look at their portfolio of products or SBUs as a whole.
Long-term strategic management.
Assessing performance.

BCG portfolio matrix

Weakness:
Too simplistic in the four classifications used.
A high market share is assumed to indicate competitive strength and
lower costs ?
High market growth is deemed to indicate an attractive industry.
Cash is the critical resource for organisations
Market definition
Relationship between divisions and behavioural implication.

Life cycle and survive

The product life cycle model suggests that a product goes
through stages launch, growth, maturity and decline
each of which has different financial and operating
characteristics.
In todays competitive environment, the combination of
high levels of technological innovation plus increasingly
sophisticated customer demands is leading to the
shortening of product life cycles.

Life cycle and survive

Life cycle and survive

Life cycle and survive

Life cycle and survive

Life cycle and survive

Life cycle and survive

Life cycle and survive

Jun 2011:4

Jun 2011:4

Jun 2011:4

Jun 2011:4

Jun 2011:4

Jun 2011:4

Jun 2011:4

Jun 2011:4

Ten commandments

Turnaround strategy
Crisis stabilisation: reducing cost and increasing revenues.
Management changes
Communication with stakeholders
Attention to target markets
Concentration of effort
Financial restructuring
Prioritisation

Turnaround strategy
The first two stages of the turnaround process clearly identify the need
to increase revenues and reduce costs. However, by doing so, they also
suggest the need for suitable performance measures and a suitable
performance management system to be in place to assess how well
these goals are being achieved.
Linking strategy and targets
Accountability
Employees rewards