The Effectiveness of a Firms Corporate Strategy - Case Study Example

Introduction

The corporate strategy entails all the actions that a firm undertakes to ensure that its objectives and missions are achieved. These activities cover all resource allocation decisions across a company’s structure. This paper analyzes three businesses in different growth stages and their various strategic decisions processes.

It is worth noting that in the three cases, corporate strategy touched on three key decision levels: corporate level, business level, and functional level. Under the corporate level, the companies made decisions about their overall direction and mission. Within the business level, decisions were made on which lines of product or service a company should pursue and the specific actions needed to achieve their target. Functional level decisions covered the operational measures that affected the day to day activities.

A Case Study of Amazon.com

When Amazon was formed in the year 1994, its core business was selling books online. Three market observations advised the idea of selling books online. First, the number and variety of books demanded far outstripped the stocking capacity of any brick and mortar bookstore that existed at the time. Secondly, the existing market for books was so large that any new entrant would still get some fair share of the market. Finally, no particular publisher was large enough to control the market; thus, there were minimal barriers to entry (Palepu, 2001).

As the company expanded, it made two major changes in its corporate strategy. The first change in its strategy was to have a self-distribution channel. Secondly, it diversified into other non-books products. To finance the company’s growth and the changes in policy, Amazon relied on various types of funding. It started with private equity investment as a source of financing. This source of funding was followed by the issuance of convertible preference shares before putting up the company’s shares for sale through an initial public offering. Further, it raised extra funds through debt issue as well as from employees’ stock options (Palepu, 2001).

Amazon’s strategy and financing options had implications on the company’s customer service approach, pricing as well as financial performance. The company had to enhance its customer service experience by offering exceptional service to capture a significant market base. They also had to adopt aggressive pricing strategy. This pricing strategy meant that even though they did not offer the lowest price, they were not adversely affected by price wars by being relatively cheaper than most of their competitors (Palepu, 2001).

The implications of the strategy changes on the financial performance elicited mixed reactions from various industry stakeholders. The overall sales grew largely buoyed by the growth in customer base. However, the increase in associated expenses ate into the increased sales making the firm to report losses. Capital expenditure associated with expansion made the company record negative cash flow positions. The negative cash flows brought in questions of whether the company’s debt was sustainable (Palepu, 2001).

In light of the concerns about Amazon’s cash flow position and subsequent collapse of some of its strategic partners, the firm undertook some further strategic changes to its operations. Some of these changes included streamlining a number of its departments by laying off some staff. The company also closed a number of their distribution facilities while transferring some management and risks of selected businesses like the toy business to other firms (Palepu, 2001).

A case of Study of Boston Chicken Inc.

Scott Beck formed Boston Chicken in 1989 as a fast food outlet that specialized in rotisserie chicken amongst other fast food meals. The firm focused on convenience and low pricing as its market entry strategy. The company relied on a management team that had a wealth of experience in the fast food industry to gain further market traction. The company’s expansion strategy was largely hinged on the franchising approach (Healy, 1999).

The success of the firm’s franchising plan was attributed to four key focus areas. First was the concentration on area developer organizations. Unlike most of the contemporary franchising approaches in the same industry, Boston Chicken focused on large developers who had the financial muscle to open between 50 and 100 outlets. These large developers would pay Boston chicken a one-time franchise fee and royalties on their sales (Healy, 1999).

The second tactic was the investment in robust communications infrastructure. The firm invested heavily in software that provided real time statistics for ease of management. Third focus point was the investment in real estate professionals who ensured that there was adequate physical infrastructure in the areas where the firm was keen on expanding. Finally, the company embarked on improving operational efficiency. This improvement was made through signing long-term deals with suppliers as well as setting up regional flagship stores that would be primary suppliers to all the other outlets within that region (Healy, 1999).

Through this approach, Boston Chicken was able to open more than 700 outlets majority of which were franchises. This robust growth made some analysts conclude that the firm had bright prospects. However, other analysts cast doubt on the consistency of the company’s future cash flows which were mostly made up of royalties. Their concerns were drawn from a review of the overall performance of the franchises, noting that they were paying too much in royalties while at the same time being heavily levered with debts from Boston Chicken (Healy, 1999).

A Case of Study of Harnischfeger Corporation

Harnischfeger Corporation was a leading manufacturer of construction equipment founded in 1884. Its area of concentration was construction, mining, electrical and material handling equipment. It was a market leader in almost all its areas of focus. Its market dominance was as a result of the robust growth in the 1970’s. Much of it expansion was financed through debt finance and at one point it recorded the highest debt to equity ratios as compared to most of its industry peers (Palepu, 1997).

In the 1980’s, there was a global recession that led to a slow-down in most industries. This recession resulted in the sales decline across all industries and Harnischfeger’s sales were adversely affected. The firm recorded losses and was unable to honor most of its covenants with its lenders. As a result, most of its debts became due on demand (Palepu, 1997).

The tight financial position forced the firm to embark on a corporate recovery plan that focused on four areas. First was the restructuring of the company’s top management. This restructuring would enable the firm get a new set of leaders to steer the business towards a new desired direction. The second was a reduction in the company’s operating costs which were expected to lower Harnischfeger’s break even position (Palepu, 1997).

The third recovery action was to reorganize the firm’s business. The reorganization entailed scaling down less profitable lines, outsourcing some services and embracing technology. Finally, the company was to engage its lenders on a debt restructuring plan to make the firm’s loan obligations affordable as well as aligning them to the cash flows of the business (Palepu, 1997).

Common Themes

The three companies reviewed were involved in corporate strategy decisions in three different scenarios. In all the cases cash flow, debt and growth management decisions, which cut across the three key decision levels, were highly emphasized. Cash flow management, which is a functional level decision, was deemed essential for all firms irrespective of their growth phase. For businesses in high growth phases like Boston Chicken and Amazon, cash flow management was needed to ensure that the companies balance between funding their operational activities as well as the capital expenditure and expansion activities. For those businesses in a recovery phase like Harnischfeger, it was important to align the firm’s cash flow to its bail out options for a successful recovery (Palepu, 2001).

With regards to debt management, a right balance between debt and equity contribution was needed for an optimal capital structure. Debt management is considered a business level decision. Too much debt for expansion like in the case of Amazon and Boston Chicken casts doubts in the sustainability of a firm’s growth. The correct balance is also required to ensure a company doesn’t struggle with debt obligation during a recession as was the case of Harnischfeger (Palepu, 2001).

Growth and expansion strategy is a corporate level decision. While expansion is needed to ensure increased revenues, it comes with its fair share of challenges. Expansion into unprofitable lines like was the case of Harnischfeger can negatively affect the performance of the entire business. Equally, the rapid expansion brings in management problems as was witnessed in Amazon toys line (Palepu, 2001).

Conclusion

From the three reviewed cases, it was evident that for a firm’s corporate strategy to be effective, it has to cover all the three key decision levels. There is a broad range of management items in the three tiers but in the analyzed cases focus was on cash flow, debt and growth management. The difference was in the degree to which these priority areas were emphasized.

In the case of Harnischfeger, debt management carried substantial weight as the company tried various ways of reducing their loan obligations. Amazon had significant challenges on their cash flow position and emphasis was placed on measures to better this position. Boston Chicken’s expansion and growth strategy were put to question mainly due to the stability of most of their franchises. It, therefore, follows that an effective corporate strategy needs to encompass the three decision levels. However, the magnitude attached to each level does not necessarily need to be equal.