How Firms Respond to Potential and Actual Changes

1. How Firms Respond to Potential and Actual Changes BUSS4

2. Response to Change • Business 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 term Tactics are short term Putting Beckham on the pitch may be tactical Getting a new goal keeper for the team would be strategic

3. 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

4. Marketing – Image shift • Some 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

5. 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!!

6. 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

7. Operations Strategy When 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

8. 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

9. 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