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C. Gopinath

Setting corporate strategy is tough. Most firms operate in more than one product/market environment and these markets move at varying speeds and have different complexities. So, the top management of an organisation is constantly faced with the decision of "what businesses should we be in".

THE year 2001 was bad for Motorola. Its sales shrunk 19 per cent to $30 billion (Rs 1,45,500 crore) from the previous year, on which it made a loss of $5.5 billion (Rs 26, 675 crore). The present CEO, Mr Christopher Galvin is suitably contrite when he says, "We find our financial performance as unacceptable as our stockholders do." He attributes the poor performance to having built-up manufacturing capacity and a high cost structure anticipating higher sales at a time when the telecom markets experienced a downturn, and falling demand of semiconductors. He says they have taken the necessary steps, which include improving the cost structure and instituting new efficiencies. He also promises growth driven by innovation, and "continuous re-evaluation of our strategies to ensure alignment with the direction of a dynamic environment."

Setting corporate strategy is tough. Most firms operate in more than one product/market environment and these markets move at different speeds and have different complexities. So, the top management of an organisation is constantly faced with the decision of "what businesses should we be in." They have to look at the future prospects of the different markets they are in and the firm's own skills to exploit the opportunities in those environments.

It is not easy to enter and exit businesses. These are major resource allocation decisions and one needs to take a pretty long-term view before entry or exit. This decision becomes even more complicated when some of those markets are turbulent. When technologies change rapidly, it requires different skills and different bases of competitive advantage to do well. It is difficult to forecast demand for products not knowing what they will be, and to guess the competitive strategies of other players. Motorola is operating in a turbulent environment of semiconductors and telecommunications that serve different markets. Motorola's performance shows that the company did not do a good job judging and moving between businesses.

No wonder some shareholders are concerned. One group, the `Carpenters Pension and Annuity Fund of Philadelphia and Vicinity' moved a resolution for consideration at the annual general meeting in May 2002 asking the board to disclose its role in the development and monitoring of the company's long-term strategic plan. The fund is rightly worried that the board may not be up to snuff when it comes to setting strategy. As expected, the company recommended against the proposal since it believed enough is already being disclosed.

The very fact that such a proposal is being made for consideration is indicative of the fact that investors are increasingly being concerned with how companies make strategy, and whether they are alive to the need to change strategies to stay aligned with the environment.

Corning and Fleet change their strategy

When you operate in more stable industries, such as cement, there is no need for rapid changes in strategy.

Assuming no changes in the regulatory environment (such as the Government fiddling with its tax policies), change in this industry is usually incremental. But anyone connected with information technology and telecommunications cannot afford to be asleep at the switch.

Corning is an interesting example of a company trying to keep pace with the rapid changes it perceives. Originally a glass-maker that was known for dishes used in the kitchen and for scientific purposes, the company began changing its strategy to enter the optical fibre and liquid crystal display screen markets around 1995. These businesses were linked to the faster growing telecom and computer industries and the company was still sticking to its core competence in glass molding.

Liquid crystal displays, which are thin glass panels used in a range of products such as laptop computers, video games, and control panels was growing at 30 per cent. (Conventional television tubes, which also Corning made, was growing at 8 per cent). By 1999, the company quit traditional businesses that accounted for almost half its sales. Total revenues fell from $5.3 billion (Rs 25,705 crore) in 1995 to $3.5 billion (Rs 16,975 crore) in 1998 as the company re-made itself. The company became the leading maker of optical fibre and telecom markets accounted for about 50 per cent of its sales.

The 1997 Asian currency crisis and falling optical fibre prices hurt profitability but Corning stuck to its businesses perceiving these to be short-term disturbances. It maintained its R&D spending on the newer technologies; for instance, the R&D of its photonics business which produces equipment to divide or combine light signals was consuming 30 per cent of the revenue it generated.

Corning was trying to take advantage of having a portfolio of businesses; some generate cash that go to support other areas, which consume a lot of the cash. Corning's older science products business, which makes flasks and plates used in scientific laboratories, was also being reinvented with demands for new types of containers and plates for biotech research. The business was growing at 100 per cent a year!

But times have changed. Excess capacity among telecommunication providers has resulted in their cutting back on purchases. The IT-industry is still reeling from the collapse of boom times and semiconductors are in a glut. So Corning is trying to quickly remake itself. It is new $600-million (Rs 2,910 crore) restructuring plan would cut 4,000 jobs. The company feels it is not an `optical' technology company but a diversified technology company. Thus, it plans to reduce dependence on telecommunication products for revenues from 70 per cent to under 60 per cent. Meanwhile, the CEO of the recent past has left and the previous CEO has come back to take charge of the restructuring.

Fleet provides a contrasting case of an organisation entering and exiting different related businesses. FleetBoston came into being in 1999 when two banks, Fleet Financial and the Bank of Boston merged. Fleet was in traditional banking and wanted to diversify into related businesses, and thought the best way to do that was to merge with someone who was already in those businesses.

Now, three years later, the new company is having second thoughts on the path it chose.

It has decided to get out of investment banking, international money management, and venture capital. It has already announced sale of about $10 billion (Rs 48,500 crore) worth of its subsidiaries that are in these businesses and return to traditional commercial and retail banking.

In essence, this announcement is an admission that the driving justification that it provided for the earlier merger has not worked. The head of Fleet has retired (with a fat severance package) and the former head of Bank of Boston who was the second-in-command now heads the combined unit. The company is giving up a failed strategy without any senior executive paying the price for it.

Companies can have second thoughts about their strategy choices. After all, it is somewhat of a gamble to decide on how the environment is going to shape into the future, and to position the company to be able to take advantage of the new opportunities. Not doing anything carries an opportunity cost. Sometimes the choices work and sometimes they do not. But the company needs to constantly re-evaluate its position and be brave enough to make the needed changes instead of adhering to a position that is no more tenable. And it is important for the shareholders to be vigilant and to raise uncomfortable questions at the annual general meeting to make sure that the top management and the shareholders are awake.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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