3.2 What are the options available?

We have come to understand that the industry of supermarket and hypermarket are
decreasing with significant amount thanks to covid-19 pandemic and the change of consumer
behavior pattern which now prioritize for speed and comfort to which spur the growth of E-
groceries landscape in Indonesia. In addition to that, other type of retail which is minimarket
which are dominated by Alfamart and Indomaret are growing in each and every year, which
led to the smaller market share for supermarket and hypermarket like Giant. Facing those
challenges and presented by the fact that financially Giant continued to suffer year after year,
the management is faced with the questions of what to do with Giant business lines? What are
the options available?

To answer those questions, here we would like to provide you the framework and types of
corporate level strategy in analyzing the portfolio of business that HERO corporate has.
According to (Avishikta, n.d.), Corporate level strategy addresses the entire strategic scope of
a company. It is a ‘big picture’ view of the organization and includes in which, product or
service markets to compete and in which geographic region to operate. For a multi-business
corporate, the resource allocation process - how cash, staffing, fixed-asset, and other
resources are allocated in each of business – is established in corporate level. Corporate
strategy is an action taken to gain a competitive advantage through the selection and
management of business competing in several industries or product markets.

There are four major types of corporate level strategies, namely stability strategy, expansion
strategy, retrenchment strategy, and combination strategy. Those strategies are applicable to
in accordance with the stage, level, and problem the company is having.

Stability strategy

The first is stability strategy. When a company finds that it should continue in the existing
business and is doing reasonably well in that business but no scope for significant growth, the
stability is the strategy to be adopted. A stability strategy is a strategy that a firm pursues
when- 1. It continues to serve the customers in the same product or service, market, and
function sectors as defined in its business definition, or in very similar sectors. 2. Its main
strategic decisions focus on incremental improvement of functional performance. The
stability strategy is not a “do nothing” strategy. It may involve incremental improvements.
Long-term stability strategy also requires reinvestment, R&D, and innovation. However, the
business definition remains the same.

Reasons for adopting stability strategy:

1. The company is doing fairly well or perceives itself as successful and expects the same in
the future.

2. The stability strategy is less risky. Frequent changes involving new products or new ways
of doing things may lead to failure of the firm. The larger the firm and the more successful it
has been, the greater is the resistance to the risk.

3. The stability strategy can evolve because the managers prefer action to thought and do not
tend to consider any other alternatives. Many of the firms that follow stability strategy do this
unconsciously. Such companies react to the changes in the forces in the environment.

4. To follow a stability strategy, it is easier and more comfortable for all concerned as
activities take place in routines.

5. The management pursuing stability strategy does not have the mind-set of a strategist to
appraise the environmental opportunities and threats and take advantage of the opportunities.

6. The company that has core competence in the existing business does not want to take the
risk of diverting attention from the current business by opting for diversification.

7. It is a frequently employed strategy.

An organization adopts the stability strategy when it aims at an incremental improvement of

its functional performance but marginal changes to one or more of its businesses in terms of
their respective customer groups, customer functions or alternative technologies are required.
Its focus is confined to improving functional efficiencies in an increment way, through better
deployment and utilization of resources. The stability strategy does not mean an absence of
concern about business growth and improvement in profit. Firms adopting the stability route
do seek and plan for business growth and profit improvement with modest targets. Stability
strategy is effective when the firm is doing well, and the environment is relatively stable.
Stability strategy does not involve a redefinition of the business of the corporation. Since
products, markets and functions remain the same, the business definition also does not
change.

Expansion strategy

Expansion strategy ‘as a strategy that a firm pursues when- 1. It serves the public in
additional product or service sectors or adds markets or functions to its definition. 2. It
focuses its strategic decisions on major increases in the pace of activity within its present
business definition.’

This strategy involves redefining the business either adding to the scope of activity or
substantially increasing the efforts of the present business. When expansion strategy is
pursued, it could lead to addition of new products or new markets or functions. Even without
a change in business definition many firms undertake major increases in the pace of
activities.

Expansion strategy is often considered as “entrepreneurial” strategy where firms develop and
introduce new products and markets or penetrate markets to build share. Expansion is usually
thought as the way to improve performance. Strategists need to distinguish between desirable
and undesirable expansion.

Reasons for Adopting Expansion Strategy:

1. If business environments are volatile, expansion may be a necessary strategy for survival.

2. Many executives may feel more satisfied with the prospects of growth expansion.

3. Chief Executive Officer may feel pride in presiding over organizations perceived to be
growth oriented.

4. Some executives believe that expansion is in the benefit of the society.

5. Expansion provides more financial and other rewards.

6. Expansion enables to reap advantages from the experience curve and scale of operations.

Retrenchment strategy
Retrenchment strategy may require a firm to redefine its business and may involve
divestment of a major product line or an SBU, abandon some markets or reduce its functions.
Retrenchment in pace may necessitate a firm to use layoffs, reduce R&D or marketing or
other outlays, increase the collection of receivables etc.

The efforts aimed at redefining the business and reducing the pace of activities can improve
performance of a firm. Retrenchment in combination with expansion is not uncommon.
“Retrenchment alone is probably the least frequently used generic strategy”

Retrenchment strategy involves a partial or total withdrawal either from products, markets, or
functions in one or more of a firm’s businesses.

Retrenchment strategy is generally followed during the period of decline of a business when
it is thought possible to bring profitability back to the firm. If the prospects of restoring
profitability are not good, abandoning market share, reducing expenses and assets can use
controlled divestment.

Reasons for following retrenchment strategy:

1. The firm is doing poorly.

2. If there is pressure from various groups of stakeholders to improve performance.

3. If better opportunities of doing business are available elsewhere a firm can better utilize its
strengths.

The retrenchment strategy is particularly followed for dealing with crises. For minor crises
pace retrenchment will be suitable, for moderate crises, divestiture of some division or units
may be inevitable whereas for serious crises, a liquidation strategy will be imperative.

Combination strategy

When an organization adopts a mix of stability, expansion, and retrenchment either

simultaneously or sequentially for the purpose of improving its performance, it is said to
follow the combination generic strategy. With combination strategies, the strategists
consciously apply several generic strategies to different parts of the firm or to different future
periods.
“The logical possibilities for a simultaneous approach are stability in some areas, expansion
in others; stability in some area, retrenchment in others; retrenchment in some areas,
expansion in other; and all three strategies in different areas of the company. The logical
possibilities for time-phased combinations are greater, especially when the products, markets,
and functions are considered and when the choice occurs through changing the pace or the
business definition.” For example, a paints company adopts combination strategies when it
augments its offering of decorative paints to provide a greater variety to its customers
(stability) and increases its product range to add industrial and automotive paints (expansion)
and closes down the paint-contracting division (retrenchment).

Reasons for following combination strategies:

1. When the organization is large and faces a fast-changing complex environment.

2. The company’s products are in different stages of the life cycle.

3. A combination strategy is suitable for a multiple-industry firm at the time of recession.

4. The combination strategy is best for firms, divisions of which perform unevenly or do not
have the same future potential.

Those are the four major types of corporate-level strategies. Back to analysis, it was clear that
there is a business segment in particular that the company is having difficult times with. So,
according to the corporate level strategies discussed before, the retrenchment strategy is the
strategy that the company should focus on in order to determine the future of a particular
business line which is Giant. And before we deep dive into the analysis, let’s get deeper
understanding about retrenchment strategy and what are the moves in the retrenchment
strategy that the company should consider.

Retrenchment situation and strategy forms

The retrenchment generic strategy is adopted when an organization intends substantially to

reduce the scope of its activity. For this purpose, the problem areas are identified, and the
causes of the problems are diagnosed. Then, steps are taken to solve the problems that result
in different types of retrenchment strategies.
Various external and internal developments threaten the prospects of industries and markets.
In declining industries companies face such risks as falling demand, emergence of more
attractive substitutes, adverse govt., policies, and customer needs and preferences are
undergoing changes. In addition to external developments, there are company specific
developments such as poor management, poor quality of functional management and wrong
strategies that cause company failures.

In such circumstances the industries, markets and companies encounter the danger of decline.
Several products such as black & white TV, VCRs, jute and jute products, calculators and
wooden toys have either disappeared or are facing decline, and the companies in these
industries and markets were forced to eliminate operations or shut down.

The decline manifests in several symptoms reflected in the performance indicators of

companies such as diminishing profitability, dwindling cash flow, reducing sales, shrinking
market share, and increasing debt.

A vigilant management can establish an effective monitoring and control system to timely
receive the signal of impending danger and check the malaise. In this situation recovery
becomes a possible strategic option.

Four types of recovery situations:

1. Realistically non-recoverable situation with little chance of survival as the company is not
competitive, the potential for improvement is low, there is a cost disadvantage, and the
demand for basic products or services is in a terminal decline.

2. Temporary recovery situation where there could be initially successful retrenchment but no
sustained turnaround. This could happen when the repositioning of the product is possible,
now forms of competitive advantages can be found, or cost reduction and revenue generation
are possible.

3. Sustained survival situation where a turnaround is achievable but little potential for future
growth exists. The industry may be in a process of slow decline. A company facing such a
situation could either divest or go in for a turnaround if it foresees a comfortable niche in the
industry where it perceives chances of being the industry leader.
4. Sustained recovery situation where a genuine and successful turnaround is possible owing
to new product development and/or market repositioning and if the industry is still attractive
enough. Possibly the decline was caused more by internal factors than external conditions.

A retrenchment strategy can take any of the following forms:

1. Turnaround strategy

2. Divestment or divestiture strategy

3. Liquidation strategy

When business is in decline but is worth saving, the organization adopts a turnaround
strategy. While adopting a divestiture strategy, an organization cuts off the loss-making units,
divisions, or SBUs, curtails its product line, or reduces the functions performed. If none of
these remedies work, then it may opt to eliminate the activity totally, resulting in liquidation
strategy.

The following chapter will explain the analysis of which strategy form in the retrenchment
strategy should the company follow and implement.

3.3 Selected Strategy for Giant business line

Now the management has the options on the table and let’s go through them one by one.
Option one, turnaround strategy is the strategy to which the management still think that the
business still can be recovered by doing internal restructuring on the operations to be leaner
and hence more profitable. Yet if we looked at the data, from 2018 up to 2020 the company,
especially the Giant business was doing poor, as shown in the data of number of employees
which continued to decrease from 8,234 employees in 2018 down to 3,750 employees in
2020, down a significant 54.36%, and as a proportion to total employees it was down from
61.53% in 2018 to 45.85%. In addition to that, minimarkets are gaining market share and e-
groceries rise made traditional retail such as Giant became less desired. That was why we
think the company’s management did not take the turnaround strategy type.

Number of 2020 2019 2018

Employees Male Female Total Male Female Total Male Female Total
Store Support Centre 408 297 705 465 327 792 512 343 855
Hero 531 169 700 774 281 1055 840 307 1147
Giant 2808 942 3750 3699 1366 5065 5874 2360 8234
Guardian 319 1313 1632 348 1517 1865 323 1396 1719
 IKEA 502 268 770 424 236 660 337 194 531
DC & PDC 525 39 564 692 58 750 755 66 821
Regional Office 13 12 25 13 12 25 15 13 28
Property Store 31 1 32 31 1 32 47 1 48
Total 5137 3041 8178 6446 3798 10244 8703 4680 13383
Figure 1: Number of employees

Number of Employees 2020 2019 2018

Store Support Centre 8.62% 7.73% 6.39%

Hero 8.56% 10.30% 8.57%
Giant 45.85% 49.44% 61.53%
Guardian 19.96% 18.21% 12.84%
IKEA 9.42% 6.44% 3.97%
DC & PDC 6.90% 7.32% 6.13%
Regional Office 0.31% 0.24% 0.21%
Property Store 0.39% 0.31% 0.36%
Total 100.00% 100.00% 100.00%
Figure 2: Percentage employees by business lines and place
Option two, liquidation strategy. Now this strategy occurs when the entire business operation
is ceased or discontinued, and all of the assets are sold or dissolved. This might happen when
the company was having significant losses or pressure from shareholders to refocus on
profitable businesses and sold all of the assets. But the company did not take the liquidation
option because they have other business lines which are growing and the resources from poor
business, in this case Giant could be converted into the growing business lines.

That is why the company chose divestiture strategy which is getting rid the entire or part of
the unproductive business or product with the goal to refocus on profitable business rather
than spending resources on the unprofitable operation. This decision of the company to sell
some of Giants stores and convert some of its stores into IKEA stores and Hero supermarket
stores is in line the vision of the company to better utilize business spaces and strives to
improve accessibility. It also accordance to theory of resource allocation, which shown in
figure 2 that Giant took the most employees of total company employees; 61.53% in 2018
and 45.85% in 2020. Giant also took a large of fixed asset of the company in form of land
and buildings. So according to resource allocation management, it would be better if those
resources that took most of the company’s to be invested in the business which is growing
and profitable.
That is why on end of July 2021, the company announced that Giant business line will be
closed and some of the stores will be converted into IKEA and Hero supermarket stores and
the rest will be sold to the third parties. It was obvious that the downtrend of supermarket and
hypermarket and coupled with the covid pandemic resulted in significant loss to the
company. Figure 3 explains from the financial statement of HERO 2021, that the
discontinued business Giant had a huge expense and resulted in huge loss after tax of around
Rp 700 billion in 2020, which represented about 55.87% of the total losses the company
endured back in 2020.

Figure 3: loss of discontinued operation; Giant

Right now, as of end of 2021 the company is still having land and building held for sale from
Giant discontinued operation amounted to Rp 1.25 trillion (Figure 4), a huge amount of
money that can be reinvested to the businesses that are profitable and have a huge growth
potential such as IKEA and Guardian. In terms of human capital, the company is very sorry
that most of the Giant employees will be terminated after this event, but some will stay in the
company for the small conversion into IKEA business while the majority will be terminated
yet will be helped and supported by the company to look for a new job in the industry.

Figure 4: Asset held for sale of Giants

Source

https://www.yourarticlelibrary.com/strategic-management/types-of-corporate-level-
strategies/99697

https://bizfluent.com/info-7890404-corporate-retrenchment-strategy.html

https://www.hero.co.id/