Sara Lee Retrenchment Strategy Essay: A Critical Evaluation.

Retrenchment Strategy and Its Importance

Question:

Discuss about the Strategic Management for Innovation and Technology.

Strategic management is the process in which an organization develops and implements plans for achieving the organizational goals and objectives. A successful strategic management process must involve managers and employees. The context of strategic management is concerned with the character and direction of the enterprise. This case study discusses Sara Lee’s retrenchment strategy concept. This strategy is adopted when an organization aims to minimize its cost by reducing one or a few business operations for achieving a stable financial position. In the given case study, Sara Lee started a small company of wholesale distribution that became larger with time, geographically and operationally. However, it was analysed that the shareholder value did not increase. Therefore, Sara Lee decided to divest eight business units for increasing operating profit and sales. It divested the less profitable industries and shifted its focus on food and beverage. This report shall critically evaluate the strategic retrenchment aspects of the company. Moreover, an analysis about the implications of Sara Lee’s macro-environment using PESTEL framework shall be made. At the end of the section, a set of recommendations of the strategic planning cycle regarding the organization’s market and financial performance in Oman shall be determined.

Retrenchment Strategy is required by a company to reduce their expenditure in order to be more profitably stable. The financial stability is always the goal of a company and retrenchment strategy helps in achieving the same. This involves withdrawal of certain products or pulling out from a precise market and also sometimes discontinuing from the whole market. This is done to make a financial turnaround. Sara Lee Corporation also used these retrenchment strategies for stabilising their financial issues (Gamble and Thompson 2014).

Sara Lee developed these strategies to make sure that the companies focus is primarily on the optimum utilization of its resources to make it more profitably stable. They wanted to focus on the products which have been more profitable and would provide strength to the company’s financial status. Few years ago, the operating quality of the company was not as progressive as it was supposed to be. Sara Lee’s management then came up with the policy to support Sara Lee’s overall performance financially. Sara Lee divested some of their units from the market which included direct sales, meats in Europe and The United States, US retail coffee, Nuts and snacks (European) and other European products. The expected revenue to be obtained from the divested business was around $3 Bn. The net profit margins and operating margins from five out of eight businesses were negative. Four out of these five businesses had margin greater than negative 10%. Rest of the businesses also kept on declining and that is why the divestment strategy was developed. Sara Lee’s goal was to increase the profit margin, so they had to prioritise the sale of their beverages and goods used in households which were the areas where profit was marginally more.

Sara Lee's Retrenchment Strategy

They also did something very innovative and it was really influential in 2008. They launched “Project Accelerate”, a program framed for reduction of cost and increase their productivity. Sara Lee started focussing on their overhead cost, reframing their supply chain and outsourcing. This program was planned to save approximately $400 million by the end of 2012 and in 2010 only, this project saved approximately $180 million. Then the management decided to buy back shares worth $3 billion within a three year period. Sara Lee’s revenue at the end of year 2010 was around $10.8 billion and then they decided to disassociate their international body care and household business (Tangpong, Abebe, and Li 2015).

Their spinoff with Hanes brand Inc. was also a very bold move but eventually it was not as successful as it was projected by Sara Lee. The operating profit was still the support system of the company. This step could not strategically be called a deal breaker. The retrenchment plans was also a major part of their financial decisions. The company still lacked a lot of cash flow for their expansion programs and other projects. Other companies are also trying to compete with Sara Lee Corporation because they have been renewing the trends as far as the beverages and food products are concerned and Sara Lee has been struggling with the cash flow issues.

Sara Lee’s business units are affected by the external factors that can be analysed using the PESTEL framework:

Political Forces- Political forces can be defined as the regulatory forces and legislations that affect the company. Sara Lee has a vast portfolio of companies from different industries. They deal in food and beverage, food processing, household products and multiple other categories that are governed by different regulatory bodies. Moreover, Sara Lee has business in over 40 countries such as Europe, America, Oman and others. Due to increased globalization, the business pattern and revenue is dependent on the taxation system of different countries.

Economic Forces- The economic forces include the factors such as recession, unemployment, exchange rate fluctuations and other economic factors. It is analysed that the world is affected by global recession. The disposable income of the consumers has declined due to increased expenses. It is not pocket-friendly for the public to eat out which is why the consumers are turning to purchase food and grocery products. There is a need for more cash flow in the company for acquiring new trends from the food and beverage departments of other companies. However, there is economic slump experienced by Sara Lee that restricts growth.

PESTEL Analysis of Sara Lee

Social Forces- The social factors include the change in attitude, market trends, social trends, lifestyle and other socio-cultural factors. The people across the globe have changing demands and choices. In the current times, the people are switching to healthy and economical consumption of food that makes them purchase meet and other foods rather than eating out. Moreover, there is a need for products like frozen desserts, meats, bakery and coffee to make the range attractive. The consumers have high demand for the above mentioned food range as it is organic and suits the taste of consumers. The International Bakery experienced decline resulting in a loss of $726 million. This is because the consumers prefer having fresh bread in comparison to package bread. The demand for fresh bread is dominant in the European market. Further, the International Beverage segment grew that increases scope of opportunity for the beverages.

Technological Forces- The technological factors refer to the recent developments and innovations in the technological field for improving the products and services. In the technologically advancing field, there is a huge opportunity for Sara Lee to conduct its business operations through e-commerce. Moreover, Sara Lee can focus on the logistics and production technology in the food industry for delivering high quality products. Such technological advancement shall increase the efficiency and quality of the products. Moreover, the cost may be decreased by the application of latest technology thereby giving room to Sara Lee for increasing operating profits (Johnston and Marshall 2016).

Environmental Forces- There is increasing trend towards environmental sustainability. There is a wide scope for Sara Lee to create Corporate Social Responsibility or CSR products. The consumers prefer to consumer products that are sourced ethically or promote Corporate Social Responsibility. The eco-friendly products can help in increasing environmental sustainability in the organization.

Legal Forces- The legal forces include the compliance procedures that can guide the legality of the company. The legal bodies make Sara Lee vulnerable as retrenchment shall increase unemployment level among the workers. The Workers Union, Remuneration Act and Fair Wage acts may apply to ensure satisfaction among the unemployed workers. Therefore, there is threat for Sara Lee if the legal compliances are not met with (Grant 2016).

The strategic planning cycle is defined as a set of formal planning procedures that are necessary to overcome operational problems. Before implementing a strategic decision, there is a number of decisions to be resolved. Sara Lee must select an external consultant who shall act as a strategic planning facilitator. The first step is to propose a mission. This shall align with the organizational competitive interests and advantages. It should also be noted that the need to review objectives arises from signals that may be different from, and independent of, the signals that cause a review of strategy. Each of the two cycles may take place at different times and over different periods of time (Fisher and Oberholzer-Gee 2013).

Strategic Planning Cycle for Sara Lee

First, Sara Lee on the go as any other company and it was a minor company that is doing extensive supply that slowly raised to a sequence of connected and unconnected commercial. The Sara Lee Corporation was an American purchaser stock association arranged in Downers Grove, Illinois. It had operations in more than 40 countries and sold its things in more than180 nations around the globe. The company after several years as mentioned earlier expanded into a food processing, retail food and household products to more than forty countries as mentioned earlier. For conducting the retrenchment strategy effectively, the employees must be chosen so that they are laid off strategically in a cost-efficient manner. Sara Lee must choose an appropriate timing to make the announcement (Frynas and Mellahi 2015). Firms may pursue a divestment strategy by spinning off a portion of the business and allowing it to operate as an independent business entity. But those that affect strategic decisions may be examined before, during or after the determination of objectives, the diagram is neutral on that point. It does show that strategic decisions cannot be taken until both the objectives and the factors affecting strategic decisions have been determined (Abebe and Tangpong 2018).

The first stage is start engagement and commitment in which the employees must be engaged and commitment must be generated. Purpose and target setting involves setting of target mainly for the purpose of retrenchment. In the next step, analyzing and generating options, alternatives to retrenchment shall be determined. The issue that is confronting Sara Lee is that level board separation system and geologically spread operations has administration attempting to work viably. Declining benefits around the world, Sara Lee's Retrenchment is strip eight of its specialty units to raise productivity through working benefits and deals (Harrison and John 2013).

Sara Lee has several positions that it can take that can strategically grow its profitability. The company currently has limited margins on its bakery line, especially from its dessert items. Since Sara Lee has significant market share with its packaged bread in North America, the company should eliminate its dessert sales and the sale of single-serving coffeemakers. Growth in this segment is very slow, and is not growing within the foodservice industry either. By selling off its dessert brands, Sara Lee can invest the profits of the sale into other innovations in its other business units. Sara Lee International should expand its household and body care brands into the Oman (Tangpong, Abebe, and Li 2015).

Conclusion

Sara Lee started a small company of wholesale distribution that became larger with time, geographically and operationally. Retrenchment Strategy is required by a company to reduce their expenditure in order to be more profitably stable. They wanted to focus on the products which have been more profitable and would provide strength to the company’s financial status. Sara Lee’s goal was to increase the profit margin, so they had to prioritise the sale of their beverages and goods used in households which were the areas where profit was marginally more. The retrenchment plans was also a major part of their financial decisions. The company still lacked a lot of cash flow for their expansion programs and other projects. There is a need for more cash flow in the company for acquiring new trends from the food and beverage departments of other companies. Sara Lee can focus on the logistics and production technology in the food industry for delivering high quality products.

References

Abebe, M.A. and Tangpong, C., 2018. Founder?CEOs and corporate turnaround among declining firms. Corporate Governance: An International Review.

Fisher III, W. W., and Oberholzer-Gee, F. 2013. Strategic management of intellectual property. California management review, 55(4), 157-183.

Frynas, J. G., and Mellahi, K. 2015. Global strategic management. Oxford University Press, USA.

Gamble, J. and Thompson, A.A., 2014. Essentials of strategic management. Irwin Mcgraw-Hill.

Grant, R. M. (2016). Contemporary Strategy Analysis Text Only. John Wiley & Sons.

Harrison, J. S., and John, C. H. S. (2013). Foundations in strategic management. Cengage Learning.

Johnston, M. W., and Marshall, G. W. (2016). Sales force management: Leadership, innovation, technology. Routledge.

Mann, M. and Byun, S.E., 2017. To retrench or invest? Turnaround strategies during a recessionary time. Journal of Business Research, 80, pp.24-34.

Tangpong, C., Abebe, M. and Li, Z., 2015. A temporal approach to retrenchment and successful turnaround in declining firms. Journal of Management Studies, 52(5), pp.647-677.

Tangpong, C., Abebe, M. and Li, Z., 2015. A temporal approach to retrenchment and successful turnaround in declining firms. Journal of Management Studies, 52(5), pp.647-677.