Operations in a Highly Competitive Industry - Case Study Example

DIVESTMENT Operations in a highly competitive industry require close monitoring and examination of the businessunits to determine their profitability. Chief executives have the duty of becoming answerable to the investors for their returns on investment. McDonald strategic consideration of divesting some business unit has been driven by the need to enhance the company’s performance and boost the sliding sales. Divesting can be defined as a retrenchment strategy that is pursued b the business to downsize their business activities and involves elimination, closing, spinning off, or selling of some units to get rid of the non-performing segment. McDonald decision had been driven by various reasons. First, the low performance of the units propels the decision to dispose them. Through this, the company will get to concentrate on the production of the products that accounts for a significant proportion of their return. McDonald was concerned about the slow performance and growth of the products therefore considered divestment necessary. The availability of other better areas to invest is also another reason why MacDonald considers the divestment essential. P & G has considered the disposal of Braun, Iams pet food, Duracell batteries and Pringles potato snacks and aimed to acquire consumer products portfolio of Schering-plough, Wyeth and Sara lee corps international household units. This therefore implies that McDonald intention is to maximize the most lucrative business and dispose the slow performing areas to improve the companies dwindling financial performance (Jargon & Chon, 2012). This strategy is therefore growth-oriented ad justifiable. In addition, McDonald decision is because of the lack of strategic fit of some of the proposed divestment units. For instance, Duracell that was acquired in 2005 is now considered a questionable fit in P & G board because of the low priced labeled batteries. There is also a complain that the prices experience a high level of fluctuation which made the profit of the business very volatile. Besides, Braun that realizes an annual sale of $1.3 billion is considered outside the P &G core businesses. The management is thus assessing Braun’s technologies application in other segments. McDonald reason of branding the company so that it is associated with particular products is also important. After the divestments, the company aims at focusing their effort in the production of the core products. Moreover, the decision to divest can be caused by the demand and pressure from the investors. The investors in some cases would put the company management into task of proving their performance as can be reflected by the returns on their capital. This is why the company, the CEO faced mounting pressure. Finally, P & G divestment decisions could be motivated by the need to increase investments. Firms in some instances reach a point where maintenance of its operations will demand acquisition of big investment in equipments, research and development, advertising and others to remain more viable and strategically positioned. This justifies McDonald proposal to buy Sara Lee, which deals with the households’ products, which was popular in Europe. I thus agree with the decision of McDonald to divest the business segments that were acquired earlier to enable growth in the company investments. This would enhance the returns of the business and increase the ever-fluctuating financial records that has been posted by the business. The investment decision would as well ensure that the business survives the recession that is experienced in the business performance i.e. from the divestment decisions, the company could smooth the impact of business cycle on the business. Furthermore, the divestment will enabled & G to acquire cash required n undertaking other profitable ventures. However, Mc Donald must be vigilant and asses the acquisition candidates to ensure that they are in line with companies core business and that the decisions will not make the company regret thereafter. Question 2 In a bid to gain competencies in their activities, business leaders implement corporate strategies that would allow them compete favorably and increase their efficiencies. Corporate strategy is the broad scope of the business activities together with the matching them to the organization environment. A good corporate strategy should give a long-term perspective of the business and outlines the core objective of the actions. By buying the Pringles potato crisps from Procter and gamble, Kellogg pursues a growth oriented corporate strategy. This strategy involves the expansion of the business activities or the increase in the number of products that the company is trading on with the aim of improving performance which would be translated in increased returns. Kellogg, a cereal business, by acquiring a snacks business has ventured into the growth strategy. This growth strategy is that of diversification in which he business invests in different products to reduce many risks. This is a conglomerate strategy because the acquisition is on a completely different line of product. Numerous benefits will accrue to Kellogg from acquiring the Pringles potato crisps. To begin with, Kellogg diversification strategy will shield the business from risk of loss in trading income particular line of business. After the acquisition, Kellogg will reduce the risk of loss if the cereal segment performs adversely. This would further reduce Bryant worry on the future of cereal business terming it long-term growth business. However, the CEO was first to say that by moving engaging in snacks business, the company was not running away from anything (Jargon & Chon, 2012). The fact that Kellogg was a large snack business also makes the acquisition justified. Moreover, acquiring Pringles from P& G expanded Kellogg’s business in the international market. This expansion strategy will make Kellogg operate in the international arena and increase its turnover. At the same time, international operation will also be advantageous in diversifying risk that could arise because of low sales in some regions (Jargon & Chon, 2012). Kellogg will thus record voluminous sales even when particular regions are adversely affected. Value will also be added to Kellogg’s shares after the acquisition. Immediately after the acquisition, plans were publicly known the share prices of Kellogg increased by 5% because of the expected future increase in Kellogg’s profit. This would make potential investors willing to invest in the company and increase their financial base (Jargon & Chon, 2012). Through the Kellogg will be in a position to spread their operations in Asia, Latin America, and Europe. In addition, the value of Kellogg will be enhanced with the expected increase in cash inflows from the new product line. Since the firm value is the present value of the expected future cash flows, aim to increase the cash flows from the sales will result into an increase in the firms value. This would thus increase the returns to the shareholders in term of capital gain and increased dividends. Whereas the growth strategy is value additive, the management must assess the potential increase in risks and should be keen not to inflate the future operations. The international operation would make the business susceptible to foreign exchange risks and political risks. Investment appraisal of the acquisition should also be done to ensure that the decision made is positive in the long-run. In conclusion, the disposal or acquisition of a business segment requires close evaluation and should be conducted by management experts. Since the decision involve a colossal sum of money and are irreversible, they can lead to losses if not properly scanned. To compete successively, a business must assiduously integrate environmental changes in making their ultimate decision. Reference Jargon, J & Chon, G 2012, A Hunch for Crunch: Kellogg Adds Snacks. The Wall Street Journal ,16 February, P. 15. Read More