DECLINE AND TURNAROUND DECLINE AND TURNAROUND MANAGEMENTMANAGEMENT

Turnaround is of considerable Turnaround is of considerable importance to strategic importance to strategic management.management.However the process by However the process by which firms move away from which firms move away from deterioration in performance deterioration in performance to enduring success has not to enduring success has not received sufficient attention received sufficient attention in management literature.in management literature.

The frame work of the The frame work of the Turnaround Process:Turnaround Process:

Turnaround Process model of Turnaround Process model of Shamsud ChowdhuryShamsud Chowdhury( ( Turnarounds: A stage theory Turnarounds: A stage theory perspective)perspective)

The turnaround occurs when “ a The turnaround occurs when “ a firm perseveres through an firm perseveres through an existence threatening existence threatening performance decline; performance decline; ends the threat with a ends the threat with a combination of strategies, combination of strategies, systems, skills & capabilities; andsystems, skills & capabilities; andachieves sustainable performance achieves sustainable performance recovery. The reverse is failure recovery. The reverse is failure and eventual death.and eventual death.

The definition identifies four key The definition identifies four key attributes of a turnaround:attributes of a turnaround:

1.Declining performance is the 1.Declining performance is the trigger for turnaround.trigger for turnaround.2.Turnaround involves a series of 2.Turnaround involves a series of activities.activities.3. A turnaround is undertaken 3. A turnaround is undertaken with a definite purpose.with a definite purpose.4.Turn around activities continue 4.Turn around activities continue for a number of years.for a number of years.

Shamsud Chowdhury Shamsud Chowdhury suggested the use of a stage suggested the use of a stage theory to study the theory to study the turnaround process.turnaround process.

The four stages mentioned The four stages mentioned are: are: Decline stageDecline stageResponse initiation stageResponse initiation stageTransition stageTransition stageOutcome stageOutcome stage

Stage-1- Decline:Stage-1- Decline:1. Decline starts from firm equilibrium 1. Decline starts from firm equilibrium and reaches a nadir.and reaches a nadir.This is based on :This is based on :

K- extinction perspective :K- extinction perspective : Macro or Macro or external factors related to the industry external factors related to the industry in general is responsible for the decline.in general is responsible for the decline.

R- extinction theory:R- extinction theory: The decline is due The decline is due to reduction in resources within the to reduction in resources within the firm , independent of the external firm , independent of the external environment.environment.

It is necessary toIt is necessary to1. identify the various factors that 1. identify the various factors that contribute to each type of declinecontribute to each type of decline2 identify the sources of intervention 2 identify the sources of intervention that trigger action.that trigger action.

Usually more than one source of Usually more than one source of intervention or stimuli can be identified intervention or stimuli can be identified in a turnaround situation e.g. banks, in a turnaround situation e.g. banks, creditors, stockholders , government, creditors, stockholders , government, etc.etc.

Stage-2 Response Initiation:Stage-2 Response Initiation:TTurnaround responsesurnaround responses can be can be categorized into Strategic and operating categorized into Strategic and operating responses:responses:

Strategic response Strategic response :Changing or :Changing or adjusting the business the firm is adjusting the business the firm is currently involved in. Examples are currently involved in. Examples are diversification, vertical integration , diversification, vertical integration , divestment etc.divestment etc.

Operating response:Operating response: How the firm How the firm conducts its business. These include conducts its business. These include short-run tactics aimed at cost cutting short-run tactics aimed at cost cutting and revenue generationand revenue generation

The type of turnaround The type of turnaround response used depends on the response used depends on the cause of a firm’s decline.cause of a firm’s decline.

a) If the decline is due to a) If the decline is due to structural shifts in a market, a structural shifts in a market, a strategic response should be strategic response should be used.used.

b) If the decline is due to b) If the decline is due to inefficiency an operating inefficiency an operating response should be usedresponse should be used

Stage-3 Transition :Stage-3 Transition :A substantial amount of time A substantial amount of time has to pass before the results has to pass before the results of turnaround strategies show.of turnaround strategies show.

Stage-4 Outcome :Stage-4 Outcome :To determine whether a turnaround To determine whether a turnaround has been accomplished-has been accomplished-A cut-off point of measure of A cut-off point of measure of performance can be used to performance can be used to measure this.measure this.The measures used to determine The measures used to determine outcome should be same as was outcome should be same as was used to determine the declineused to determine the declinee.g. the same ratios in ratio analysis e.g. the same ratios in ratio analysis should be used before and after the should be used before and after the turnaround to measure the turnaround to measure the accomplishmentaccomplishment