Defensive Strategies

In addition to integrative, intensive, and diversification strategies, organizations also could pursue defensive strategies such as retrenchment, divestiture, or liquidation.

1. Retrenchment

Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. Sometimes called a turnaround or reorganizational strategy, retrench­ment is designed to fortify an organization’s basic distinctive competence. During retrenchment, strategists work with limited resources and face pressure from shareholders, employees, and the media. Retrenchment can involve selling off land and buildings to raise needed cash, prun­ing product lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the number of employees, and instituting expense control systems.

Levi Strauss & Co. recently cut 20 percent of its nonretail and nonmanufacturing work­force as part of a retrenchment strategy aimed at streamlining the firm’s operations and generat­ing cost savings of nearly $200 million per year. The 160-year-old company headquartered in San Francisco is having trouble competing in the intensely competitive retail clothing industry, marked by fleeting fashions and “sale only” shoppers.

Cisco Systems recently removed 6,000 employees from its payrolls, comprising 8 percent of the company’s total workforce. The routing and switching system company is experiencing declining revenue and profits. The Turner Broadcasting division of Time Warner recently deleted 1,475 jobs, or 10 percent of its workforce. The Turner division generates about half of Time Warner’s operating profit and has more than 5,000 full-time employees in its home city of Atlanta. Staples closed 170 stores in North America in 2014, and closed another 55 stores in 2015.

In some cases, declaring bankruptcy can be an effective retrenchment strategy. Bankruptcy can allow a firm to avoid major debt obligations and to void union contracts. There are five major types of bankruptcy: Chapter 7, Chapter 9, Chapter 11, Chapter 12, and Chapter 13. The first type, Chapter 7 bankruptcy, is a liquidation procedure used only when a corporation sees no hope of being able to operate successfully or to obtain the necessary creditor agreement. All the organization’s assets are sold in parts for their tangible worth. Several hundred thousand compa­nies declare Chapter 7 bankruptcy annually.

Chapter 9 bankruptcy applies to municipalities. Detroit, Michigan, is the largest U.S. city to declare bankruptcy, but others include Stockton, California, and Birmingham, Alabama.

Chapter 11 bankruptcy allows organizations to reorganize and come back after filing a petition for protection. Quiznos recently filed Chapter 11 bankruptcy as its 2,100 stores simply cannot compete with rival Subway’s 41,000 stores. Quiznos collects a 7 percent royalty fee and another 4 percent advertising from is disgruntled franchisees, compared to the industry average 6 percent royalty fee and 2 percent marketing fee. The average Quiznos store has about $300,000 in annual revenue, down from $425,000 a few years ago.

Also, Sbarro recently filed Chapter 11 bankruptcy for a second time in less than three years. The pizza chain blamed its recent financial troubles on “an unprecedented decline in mall traf­fic.” Based in Melville, New York, Sbarro is a privately held firm with about 800 stores in more than 40 countries.

An artificial-sapphire producer for Apple, GT Advanced Technologies, recently filed for bankruptcy, soon after Apple decided to go with glass screens rather than sapphire. GT’s stock price dropped 93 percent the same day the bankruptcy news released. By using sapphire, Apple was hoping for a more scratch- and shatter-resistant cover for its smartphones, but decided instead to use hardened glass.

Chapter 12 bankruptcy was created by the Family Farmer Bankruptcy Act of 1986. This law provides special relief to family farmers with debt equal to or less than $1.5 million.

Chapter 13 bankruptcy is a reorganization plan similar to Chapter 11, but it is available only to small businesses owned by individuals with unsecured debts of less than $100,000 and secured debts of less than $350,000. The Chapter 13 debtor is allowed to operate the business while a plan is being developed to provide for the successful operation of the business in the future.

Five guidelines for when retrenchment may be an especially effective strategy to pursue are as follows:15

  1. An organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals over time.
  2. An organization is one of the weaker competitors in a given industry.
  3. An organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.
  4. An organization 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 organization’s strategic managers have failed (and possibly will be replaced by more competent individuals).
  5. An organization has grown so large so quickly that major internal reorganization is needed.

2. Divestiture

Selling a division or part of an organization is called divestiture. It is often used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an overall retrench­ment strategy to rid an organization of businesses that are unprofitable, that require too much capital, or that do not fit well with the firm’s other activities. Divestiture has also become a popu­lar strategy for firms to focus on their core businesses and become less diversified.

The largest consumer-products company in the world, Procter & Gamble (P&G), is in the process of divesting (selling) more than half of its brands (nearly 100) in order to focus on its core brands (about 80). With brands such as Pampers, Tide, Era, Cheer, Metamucil, Clairol, Wella, Oral-B, Duracell, Fixodent, Ivory, and Clearblue (pregnancy tests), P&G has 23 brands that have more than $1 billion annual sales each. Ivory might be divested, as Americans have increasingly opted for body washes and liquid hand soap over plain bar soaps.

Airbus Group NV is in the process of divesting its defense assets in order to focus solely on its commercial-airplane business. Airbus is selling its secure-communications business, Fairchild Controls, as well as Rostock System-Technik, AvDef, ESG, and its Atlas Elektronik naval-tech­nology joint venture with ThyseenKrupp AG. Airbus is also divesting its 46 percent nonvoting interest in Dassault Aviation SA that makes France’s Rafale combat jets and Falcon business jets.

A version of divestiture occurs when a corporation splits into two or more parts. For exam­ple, Hewlett-Packard (HP) recently separated its personal computer and printer businesses from its corporate hardware and services operations. Most often, divested segments become sepa­rate, publically traded companies. Many large conglomerate firms are employing this strategy. Sometimes this strategy is a prelude to the firm selling the separated part(s) to a rival firm, such as HP’s corporate hardware and services business perhaps merging with EMC Corporation. PepsiCo is under pressure to split its soft drinks division away from its snacks operations. Even General Electric is facing pressure from investors to spin off some of its diverse operations rang­ing from power plants to locomotives to MRI machines. Dupont is splitting off a segment that generates 20 percent of its revenue. Gannet Company, owner of USA Today and Wall Street Journal, recently split their print-publishing business from their television-film business.

In 2014 alone, corporations globally split off about $2 trillion worth of subsidiaries. Part of the reason for splitting diversified firms is that the homogenous parts are generally much more attractive for potential buyers. Most times, the acquiring firms desire to promote homogeneity to complement their own operations, rather than heterogeneity, and are willing to pay for homo­geneity. For example, Fiat Chrysler Automobiles NV recently “spun off’ its Ferrari segment into a separate IPO, possibly raising as much as $10 billion for Fiat. In the United States, Ferrari sports cars are priced between $190,000 and $400,000, with limited edition models exceeding $3 million each.

Germany’s huge power utility, E.ON SE, recently split into two companies, one focusing on the utility’s green energy initiatives, while the other company is comprised of the firm’s conven­tional power-generation operations. Germany is in the midst of an aggressive policy to phase out all of its nuclear energy power plants by 2025.

Here are some guidelines for when divestiture may be an especially effective strategy to pursue:16

  1. An organization has pursued a retrenchment strategy and failed to accomplish needed improvements.
  2. To be competitive, a division needs more resources than the company can provide.
  3. A division is responsible for an organization’s overall poor performance.
  4. A division is a misfit with the rest of an organization; this can result from radically differ­ent markets, customers, managers, employees, values, or needs.
  5. A large amount of cash is needed quickly and cannot be obtained reasonably from other sources.
  6. Government antitrust action threatens an organization.

3. Liquidation

Selling all of a company’s assets, in parts, for their tangible worth is called liquidation; it is associated with Chapter 7 bankruptcy. Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy. However, it may be better to cease operating than to continue losing large sums of money. For example, based in New York City, Crumbs Bake Shop, the nation’s largest cupcake company, filed for Chapter 7 bankruptcy liquidation of its 65 stores in 12 states and Washington, DC. Crumbs Bake Shop was famous for selling giant cupcakes in flavors such as Red Velvet, Cookie Dough, and Girl Scouts Thin Mints. The company notified all its 165 full-time employees and 655 part-time hourly employees that the business was closing. Crumbs’ last day on the Nasdaq was June 30, 2014, at a stock price of 11 cents.

The midwestern retailer, Alco Stores, in early 2015 liquidated (closed) all its stores after ear­lier operating under Chapter 11 bankruptcy. Founded in 1901 as a general-merchandising store in Abilene, Kansas, Alco had major offices both in Abilene and in Coppell, Texas. More than 3,000 employees lost their job as Alco liquidated its assets.

Based in Bonita Springs, Florida, one of the largest distributors of magazines in the United States, Source Interlink Distribution, recently liquidated, laying off its 6,000 employees and forgoing its $750 million a year in revenue. Source Interlink had played a major role in arranging for printed magazines to be distributed to retailers, large and small.

These three guidelines indicate when liquidation may be an especially effective strategy to 17 pursue:

  1. An organization has pursued both a retrenchment strategy and a divestiture strategy, and neither has been successful.
  2. An organization’s only alternative is bankruptcy. Liquidation represents an orderly and planned means of obtaining the greatest possible amount of cash for an organization’s assets. A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital.
  3. The stockholders of a firm can minimize their losses by selling the organization’s assets.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

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