{"id":251,"date":"2014-05-13T17:45:07","date_gmt":"2014-05-13T17:45:07","guid":{"rendered":"http:\/\/opentextbc.ca\/strategicmanagement\/?post_type=chapter&p=251"},"modified":"2019-07-02T23:08:49","modified_gmt":"2019-07-02T23:08:49","slug":"strategies-for-getting-smaller","status":"publish","type":"chapter","link":"https:\/\/opentextbc.ca\/strategicmanagement\/chapter\/strategies-for-getting-smaller\/","title":{"raw":"Strategies for Getting Smaller","rendered":"Strategies for Getting Smaller"},"content":{"raw":"
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Learning Objectives<\/p>\r\n\r\n<\/header>\r\n

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  1. Understand why a firm would want to shrink or exit from a business.<\/li>\r\n \t
  2. Be able to distinguish retrenchment and restructuring.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n\u201cIn what industry or industries should our firm compete?\u201d is the central question addressed by corporate-level strategy. In some cases, the answer that executives arrive at involves exiting one or more industries.\r\n

    Retrenchment<\/h1>\r\nIn the early 20th\u00a0century, many military battles, such as those in World War I, \u00a0were fought in series of parallel trenches. If an attacking army advanced enough to force a defending army to abandon a trench, the defenders would move back to the next trench and try to refortify their position in order to stop the advance. This small retreat was preferable to losing the battle entirely. Trench warfare inspired the business term [pb_glossary id=\"3003\"]retrenchment[\/pb_glossary].<\/strong>\u00a0Firms following a retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms using this strategy hope to make just a small retreat rather than losing a battle for survival.\r\n\r\nRetrenchment is often accomplished through laying off employees. In a saturated and low margin\u00a0market such as groceries, retailers\u00a0looked to non-food merchandise to improve the bottom line.\u00a0The addition of more food aisles at non-traditional retailers such as discounters and pharmacies is squeezing conventional supermarket operators, forcing them to consider downsizing. The grocery sector grew at an unprecedented pace as U.S. discount titans and other chains added more food to their shelves in a bid to tempt customers to shop more frequently.\r\n\r\nIn 2014, Sobeys Inc. announced its plan to close about 50 stores -- about 60 percent of them in Western Canada.\u00a0 Empire Foods of Stellarton, Nova Scotia, owns Sobeys, Safeway, IGA and FreshCo stores, among others.\u00a0Store closings will\u00a0cut jobs \u2013 industry insiders estimate \u201cthousands\u201d of them \u2013 following\u00a0Sobeys recent $5.8 billion takeover of Safeway Canada. The downsizing of Sobeys will trigger $169.8 million in restructuring costs aimed at generating eventual savings and bolstering the bottom line. These moves underscore the pressures on grocers to find operating savings in a crowded field likely to face further retrenchment. Sobeys\u2019 store closures will remove 140,000 square meters \u2013 or 0.77 percent of grocery retail space \u2013 from a 180,000 square meter market. (Strauss, 2014)\r\n\r\nSobeys, which has vowed that its Safeway takeover will lower its costs by $200 million per year in three years, is on track to reduce expenses by $100 million in its first year.\u00a0In 2013,\u00a0Sobeys angered many of its suppliers when it told them it was retroactively cutting their prices by 1 percent and not accepting increases in 2014, with some exceptions, to generate savings. The company said the closures will slice its future sales by about $400 million a year or 1.9 percent of its total sales. The store closings represent 3.8 per cent of the company\u2019s overall store space, it said.\r\n\r\nEven Procter & Gamble, the world\u2019s largest consumer products maker, said in 2014 that it will jettison more than half its brands around the globe over the next year or two, leaving it with about 70 to 80 of its top performers when the nips and tucks are complete. The maker of CoverGirl, Pampers, and Tide declined to specify what exactly it will shed but noted they\u2019re smaller brands that collectively account for less than 10 percent of sales. (Globe and Mail, 2014)\r\n\r\n[caption id=\"attachment_1570\" align=\"aligncenter\" width=\"400\"]\"Trench<\/a> Figure 8.16: The term retrenchment has its origins in trench warfare, which is shown in this World War I photo taken in France.[\/caption]\r\n

    Restructuring<\/h1>\r\nExecutives sometimes decide that bolder moves than retrenchment are needed for their firms to survive and become successful in the future. [pb_glossary id=\"3004\"]Divestment[\/pb_glossary]<\/strong>\u00a0refers to selling off part of a firm\u2019s operations. In some cases, divestment reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can also be used to reverse backward vertical integration. General Motors (GM), for example, turned their parts supplier, called Delphi Automotive Systems Corporation, from a GM subsidiary into an independent firm. This was done via a [pb_glossary id=\"3005\"]spin-off[\/pb_glossary],<\/strong>\u00a0<\/strong>\u00a0which involves creating a new company whose stock is owned by investors (Figure 8.17 \"Spin Offs\"<\/a>). GM stockholders received 0.69893 shares of Delphi for every share of stock they owned in GM. A stockholder who owned 100 shares of GM received 69 shares of the new company plus a small cash payment in lieu of a fractional share.<\/a>\r\n\r\n[caption id=\"attachment_1571\" align=\"aligncenter\" width=\"400\"]\"Figure<\/a> Figure 8.17: Spin Offs [Image description]<\/a>[\/caption]Divestment also serves as a means to undo diversification strategies. Divestment can be especially appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a [pb_glossary id=\"3007\"]diversification discount[\/pb_glossary].<\/strong>\u00a0Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.\r\n\r\nFortune Brands provides a good example. Surprisingly, this company does not own Fortune<\/em> magazine, but it has been involved in a diverse set of industries. As of 2010, the firm consisted of three businesses: alcohol spirits (including Jim Beam and Maker\u2019s Mark), household goods (including Masterlock and Moen Faucets), and golf equipment (including Titleist clubs and balls as well as FootJoy shoes). In December 2010, Fortune Brand\u2019s CEO announced a plan to separate the three businesses to \u201cmaximize long-term value for our shareholders and to create exciting opportunities within our businesses (Sauerhaft, 2011).\u201d\u00a0Fortune Brands took the first step toward overcoming the diversification discount in May 2011 when it reached an agreement to sell its gold business to Fila. In June 2011, plans to spin off\u00a0the home products business were announced.\r\n\r\n[caption id=\"attachment_1572\" align=\"aligncenter\" width=\"400\"]\"Master<\/a> Figure 8.18: Fortune Brands hopes to unlock hidden shareholder value by divesting unrelated brands such as Masterlock.[\/caption]\r\n\r\nExecutives are sometimes forced to admit that the operations that they want to abandon have no value. If selling off part of a business is not possible, the best option may be [pb_glossary id=\"3008\"]liquidation[\/pb_glossary].<\/strong>\u00a0<\/strong>This involves simply shutting down portions of a firm\u2019s operations, often at a tremendous financial loss. GM has done this by scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford recently followed this approach by shutting down its Mercury brand. Such moves are painful because massive investments are written off, but becoming \u201cleaner and meaner\u201d may save a company from total ruin.\r\n
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    Key Takeaways<\/p>\r\n\r\n<\/header>\r\n

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