How Firms Respond to Potential and Actual Changes

BUSS4

Response to ChangeBusiness success depends on

how firms respond to potential and actual change

Responses to change will vary from short term actions to major changes in long term plans

Short term changes are known as tactical response

Long term changes are known as strategic

This section looks at strategic responses to change

Strategy is long termTactics are short termPutting Beckham on the pitch may be tacticalGetting a new goal keeper for the team would be strategic

Marketing Strategy Product Portfolio The response to change could be to

add to the portfolio or reduce it In times of recession a firm may

change an existing product to a lower cost version

Political change may bring the opportunity to break into a new market which could mean additions to the portfolio

India has just started to let foreign owned retail companies operate in India.

In 2008 they were not allowed however those businesses that were smart were making plans

India has let these businesses in but it decided to stop them buying existing Indian businesses so supermarkets will have to change plans and build their own stores and warehouses which will delay entry into the market

Marketing – Image shiftSome external

changes may need a change in corporate image

A UK company that is seeing increasing increases in global competition may decide to push the ‘Britishness’ of their brand

Examples of this are Burberry and Aston Martin

Financial Strategy Responding to changes usually requires cash Launching a new product or laying off people will need

cash How this cash is raised will depend on the current

gearing ratio (how much debt the company already has)

External change might lead to rationalisation (getting smaller)

This could mean selling fixed assets or the sale of a subsidiary company

Firms might want to protect their return on capital (ROCE)

Remember that investors like to see a good ROCE If you remove cash from the business by buying back

shares or returning cash to shareholders you can improve the return on capital without increasing profit

This reduction of the firm’s cash is quite risky You are making loans a higher proportion of capital

employed and increasing gearing Banks like Bear Stearns, Merrill Lynch and Lehman

brothers all spent billions buying back shares and all went bust in the financial meltdown in 2008!!

Stable finance for unstable times Some businesses are predictable and

stable Whether there is a boom, a slump, a

heatwave or a war people will keep spending their money at Tesco. They will keep buying brands like Ariel, Andrex, Marmite and McVitie

Others will always be affected by unstable times such as airlines, banks, restaurants etc

The only thing these businesses can do is keep liquidity high

At the moment with little confidence in the UK economy many UK businesses are hoarding cash just in case

Toyota has $10Bn of cash on its balance sheet – however deep the recession it will not be threatened with liquidation

Operations StrategyWhen change happens there are several strategies that Operations can use Update Facilities Consider a new location Subcontracting (contracting another

firm to do the work ) Nike and Gap tend to subcontract all of

their work They design and market the brand This could lead to quality problems and

issues of treating staff in an ethical way In 2007 Norfolk Turkey lost credibility

when it was found out that most of the turkeys came from eastern Europe.

Close facilities This decision can be expensive

Shutting down costs Redundancy costs

HR Strategy Really good workforce planning will

anticipate change ensuring that the firm has the right number of staff, with the right skills in the right places

This will be achieved through deciding on a long term approach to recruitment, using training and carefully shedding people

Retraining – may be able to adapt to change by retraining existing staff and keep staff very motivated

Flexibility – having staff with adaptable skills who embrace change Charles Handy (Business Management

Guru) said to keep a small permanent core of staff whose job it is to coordinate specialist contractors hired on fixed term contracts

Evaluation Sometimes it is worth not doing

anything and waiting to see what happens

In 2001 the dotcom boom drove many firms out of business as a result of their eagerness to respond rapidly to a perceived change that they had misjudged