Case studies rarely present the students 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.
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.
External environmental causes of decline
It may be a little simplistic to assume that blame can be apportioned exclusively to the organisation’s environment when, in fact, weaknesses in, say, the management team or the organisational structure may have led to a compounding of the problems arising externally. Indeed, throughout our analysis we must bear in mind the linkages between issues and the possibility that it may have been a combination of various issues that led to the problems being experienced.
Political and legal causes
Changes in the law can affect organisations in many ways. A tightening of health and safety legislation may increase costs. Premises failing to meet the higher standards could be closed down. Particularly damaging might be the imposition of a complete ban on the organisation’s product, clearly made worse should they have failed to develop a product portfolio sufficiently broad to absorb such a loss. Tobacco companies are at present faced with the prospect of a ban on advertising, if not on their products.
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.
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.
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.
Michael Porter’s Five Forces Model
No external environmental analysis would be complete without a review of the impact of changes in the organisation’s micro-environment. The potential damage caused by a collapse in entry barriers has already been versed. But other changes within the industry can also contribute to the demise of some of its players.
- 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.
Internal causes of decline
Several frameworks are available to assist in the execution of an internal position audit. The potential for some of these internal issues to lead to corporate decline will now be considered:
- organisation structure;
- financial resources;
- production activities;
- research and development;
- personnel resources;
- systems and procedures.
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.
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.
Students will recall carrying out ratio analysis and interpretation of financial statements from their Accounting Framework 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.
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:
- Product – limited new product development or research, leading to an ageing portfolio.
- Promotion – a lack of marketing spend, leading to deterioration in brand profiles.
- Price – this has already been discussed.
- Place (distribution) – use of inappropriate channels, meaning that the target audience does not have access to products at the right time in the right place.
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!
Research and development
Having already mentioned the BCG Matrix and the need for a balanced portfolio, the importance of research and development will be clear – but not in all industries to the same extent. Again, the importance of looking at the context is emphasised. In pharmaceuticals, both blue-sky (pure) and applied research may be important, with huge expenditures each year. Failure to invest in this key factor for success may well be a reason for decline.
Weaknesses in the organisation’s human resources will pervade many of the other issues already discussed. Problems could emanate from:
- too many staff;
- not enough staff;
- poor quality staff – lacking knowledge and skills;
- low morale;
- an inappropriate culture – leading to dysfunctional behaviour.
And at a strategic level, difficulties will be encountered if there is:
- a lack of strategic capability – to recognise strengths, weaknesses, opportunities and threats;
- a failure to learn from past crises/mistakes;
- a failure to focus on core business (distractions) – recall how Peters and Waterman suggested that organisations should ‘stick to the knitting’.
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.
Systems and procedures
Existing and past students of Audit Framework will be familiar with the concept of internal controls. A lack of controls, both financial and otherwise, can lead to financial losses that may be difficult to recover. The Barings Bank scandal, involving trader Nick Leeson, is an excellent case in point.
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.