1. Can you think of
an organization that has implemented a ‘high risk strategy’ that has resulted
in success (why was it high risk at the time and why was it a success – was it
good luck or good judgement)?
Some criteria for assessing the acceptability of strategic options
2. Now, do the same for an organization who embarked on a high risk strategy that resulted in some sort of failure (why was it high risk and why did it fail – bad luck or poor judgement?)
Sources: http://indiatoday.intoday.in/story/meeting-between-kfa-management-striking-employees-fails/1/223225.html
Sources: http://www.indiatimes.com/india/kingfisher-grounded-mallya-flying-high-44563.html
Success of every organization depends upon its strategy.
There are some success criteria which helps us to determine or assess the
likely success of a strategic position. The success criteria which are used to
assess the success of strategic options are: Suitability, acceptability,
feasibility.
Suitability:
It mainly determines whether a strategy is able to address
the main issue that has been discovered in understanding the organization’s
strategic position. It requires assessing key drivers and expected changes in
the environment, exploiting strategic capabilities and being suitable in the
context of shareholder expectations and cultural influence.
Some examples of suitability
 |
| Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 10 |
Some criteria for assessing the acceptability of strategic options
 |
| Source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 10 |
It asks mainly two questions:
Does it exploit the opportunities in the environment and avoid the threats?
Does it capitalize on the organization’s strengths and strategic capabilities and avoid or remedy the weaknesses?
Does it exploit the opportunities in the environment and avoid the threats?
Does it capitalize on the organization’s strengths and strategic capabilities and avoid or remedy the weaknesses?
There is some evaluation tools used
to assess the suitability of strategic options. The evaluation tools for
assessing suitability are TOWS matrix, relative suitability, ranking strategic
options, decision trees and scenarios.
Acceptability:
The main concern of acceptability
is to ensure the expected outcomes is generated from a strategy. The outcomes
must be acceptable to all the stakeholders. There are three main key elements
of acceptability. They are:
Return
Risk
Stakeholder reactions
Return:
The expected benefits from a
strategy to the stakeholders are returns. For shareholders the return may be to
earn more profit, for manager it may to add value to the organization, for
society it might be social corporate responsibility and so on.
Return can be assessed using:
Profitability
Cost benefit
Real options
Shareholder value analysis
Risk:
The possibility and consequences of
failure of a strategy is known as risk. Risk will be high if an organization is
willing to undertake long term program of innovation like new product
development. Risk can be seen as threat as well as opportunity. The threat
needs to be eliminated with the help of opportunity.
Risk can be assessed using:
Financial ratio projections
Sensitivity analysis
Stakeholder reaction:
In order to understand
stakeholder’s reaction to new strategies strategic mapping should be performed.
Political dimensions of strategy can be used to assess the stakeholder
reactions.
Feasibility:
Feasibility is concerned with whether
an organization has the required capabilities, resources and competencies to
deliver a strategy. It mainly examines whether a strategy is practicable or
just hypothetical. Feasibility is also informed by the implementation of
strategy.
Two key questions:
Do the resources and competences currently exist to implement the strategy effectively?
If not, can they be obtained?
Two key questions:
Do the resources and competences currently exist to implement the strategy effectively?
If not, can they be obtained?
To
understand feasibility we need to use following approaches:
Financial feasibility
Resource deployment
In order to deliver a successful strategy, all the
three components (suitability, acceptability and feasibility) of success criteria
must be considered.
2. Now, do the same for an organization who embarked on a high risk strategy that resulted in some sort of failure (why was it high risk and why did it fail – bad luck or poor judgement?)
The best example of organization that embarked on high risk
strategy that resulted in failure is Kingfisher Airlines. Some of the high risk
strategies of Kingfisher Airlines were merger with Air Deccan, investment in
planes and excessive debt.
Kingfisher Airlines was launched in 2006, by its chairman Mr.
Vijay Mallya. After 2008, the strategy and the performance of Kingfisher have
been questioned.
The press
statement from Kingfisher Airlines, on 12th March 2012, highlights
the challenges:
“The flight loads have reduced because of our limited
distribution ability caused by IATA suspension. We are therefore combining some
of our flights. Also, some of the flights are being cancelled as a result of
employee agitation on account of delayed salaries. This situation has arisen as
a consequence of our bank accounts having been frozen by the tax authorities.
We are making all possible efforts to remedy this temporary situation.”
Kingfisher
is a good example of how company fails with its high risk strategy. In 2007,
Kingfisher Airlines acquired Air Deccan which was a low cost airline. For an
airline to fly internationally it requires five years of operations. For this
reason, Air Deccan was acquired by Kingfisher Airlines and entered into cheaper
market segment. It was a high risk strategy, because Kingfisher Airlines was
launched as a premium business class airline.
Launching as a premium business class airline was a high risk for Kingfisher Airlines. Mr. Mallya, highly successful in liquor business, didn’t comprehend the differences in customer preferences within the two industries. Customers may buy expensive alcohol, but not airline tickets, since the total cash outflow is higher. It is a price sensitive market. Therefore, KFA adopted a high risk strategy from the start as it failed to understand the market dynamics.
Launching as a premium business class airline was a high risk for Kingfisher Airlines. Mr. Mallya, highly successful in liquor business, didn’t comprehend the differences in customer preferences within the two industries. Customers may buy expensive alcohol, but not airline tickets, since the total cash outflow is higher. It is a price sensitive market. Therefore, KFA adopted a high risk strategy from the start as it failed to understand the market dynamics.
Kingfisher Airlines made the following announcement
in September 2008 financial results commentary:
“The merger of the two operating airlines into
one corporate entity has also enabled savings on operating costs such as
Engineering and Ground Handling, Insurance and Catering. Employee costs have
also been addressed through an integrated organization which enabled the
Company to terminate the contracts of most expatriate staff and impose a hiring
freeze on new appointments.“
After the merger it became the largest Indian
airlines with a market share of 27.5% and increment of domestic travel by 30%.
But it was not able to make profit. On the other hand, Jet Airways was making a
significant profit every quarter. With the merger, it also lost its brand image
of premium business class airlines. Hence, Kingfisher tried high risk strategy
and it failed. Neither the customers
were happy nor were the staffs of Kingfisher happy. It was not able to convince
its stakeholders. It was unable to make profit which is the main objective of
every organization.
In addition, the financial condition of Kingfisher
was also very bad. In the December 2011
quarter unaudited financial results, signed by the Chairman Mr. Mallya, the
following note is given:
"The Company has incurred substantial losses
and its net worth has been eroded. However, having regard to capital raising
plans, group support, the request made by the Company to its bankers
for further credit facilities, planned reconfiguration of aircraft and
other factors, these interim financial statements have been prepared on the
basis that the Company is a going concern and that no adjustments are
required to the carrying value of assets and liabilities".
 | |
| Figure. Lessors take back 34 aircrafts of Kingfisher Airlines |
Sources: http://www.topnews.in/lessors-take-back-34-aircrafts-kingfisher-airlines-2362917
 |
| Kingfisher Grounded |
Sources: http://freepressjournal.in/kingfisher-grounded/
 |
| Cash-strapped Kingfisher Airlines faces a potentially prolonged shutdown. |
 |
Kingfisher Grounded, Mallya Flying High! |
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