ASSIGNMENT OF WEEK 17

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)?

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?

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? 

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 12^th 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.

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.

 Sources: http://indiatoday.intoday.in/story/meeting-between-kfa-management-striking-employees-fails/1/223225.html

Kingfisher Grounded, Mallya Flying High!

Sources: http://www.indiatimes.com/india/kingfisher-grounded-mallya-flying-high-44563.html

References:

A. Rappaport, Creating Shareholder Value: The new standard for business performance, 2nd edition, Free Press, 1998.

C. Walsh, Master the Management Metrics That Drive and Control Your Business, 4th rev. edition, FT/Prentice Hall, 2005.

D. Carey, ‘Making mergers succeed’, Harvard Business Review, vol. 78, no. 3 (2000), pp. 145–154.

G. Johnson and K. Scholes (eds), Exploring Techniques of Analysis and Evaluation in Strategic Management, Prentice Hall, 1998.
 

J. Carlos Jarillo, ‘On strategic networks’, Strategic Management Journal, vol. 9, no. 1 (1988), pp. 31–41.

Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 14 

L. Trigeorgis, Managerial Flexibility and Strategy in Resource Allocation, MIT Press, 2002.

P. Haspeslagh, T. Noda and F. Boulos, ‘It’s not just about the numbers’, Harvard Business Review, July–August (2001), pp. 65–73.

T. Copeland, T. Koller and J. Murrin, Valuation: Measuring and managing the value of companies, 3rd edition, Wiley, 2000.
 

T. Luehrman, ‘Strategy as a portfolio of real options’, Harvard Business Review, vol. 76, no. 5 (1998), pp. 89–99.

T. Copeland, ‘The real options approach to capital allocation’, Strategic Finance, vol. 83, no. 4 (2001), pp. 33–37.

T. Copeland and V. Antikarov, Real Options: A practitioner’s guide, Texere Publishing, 2001.