turnaround management-nov07

8/8/2019 Turnaround Management-nov07

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Turnaround ManagementProf Ashish K Mitra


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Turnaround Management

Turnaroundis an important aspect of strategicmanagement

Turnaround occurs when a firm survivesthrough an existence threatening performance

decline and emerges out of it while achievingsustainable performance recovery. (theopposite of performance recovery is failure andeventual death of the firm)

Achieving Turnaround requires a combination ofstrategies, systems, skills and capabilities.

Turnaround takes several years in most cases


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Nadir

Indeterminate

Success

Failure

Stage 1Decline

Stage 2ResponseInitiation

Stage 3Transition

Stage 4Outcome

Time

P

ERFORM

ANCE

Turnarounds : A 4 Stage Theory Perspective : Shamsud D Chowdhury


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Four stages & key attributes of a turnaround

Stage 1: Decline - Declining performance is thetrigger for turnaround.

K extinction perspective macro or external factorsare responsible for the decline.

R extinction perspective theory : decline due to areduction in resources within the firm

External factors or inadequacy ofinternal resourcesor both could be the source of decline.Triggers could

be more than one source like pressure from bank,creditors, stockholders, government, press etc whichmay even demand change of management or CEO


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Stage 2: Response initiation Turnaroundresponses could be strategic or/& operating

responses.Strategic responses ( to tackle structuralshifts in the market) could be changing oradjustingbusiness/ product portfolio including diversification,vertical integration, and divestment.Operatingresponses including aim at cost cutting, revenue

generation or removing inefficiencies. Domaindefinition, Scope, Strategic contours

Stage 3: Transition Turnaround is undertaken withdefinite purpose, ie; target and time scale in mind.This stage is the actual field implementation and a

substantial amount of time ( 4-7 yrs)has to pass beforethe results of turnaround show. Resourcecommitment, Policy / Program, structure, Reward

Stage 4: Outcome involves determining whether aturnaround has been accomplished by performance

measures. A cut off point of Performance measures


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Turn-Around Management often involves complexfinancial situations with respect to lenders, debt and

capital. Expertise in form of leadership and knowledge toassess and restructure financial agreements may be oneof the needs.

A company-wide assessment using a multidisciplinaryapproach is needed. This overall review incorporatesoperational, financial and organizational evaluations andexternal business and macro economic environment.

Among Operational responses , some involve

Productivity Engineering

Operations Troubleshooting Financial and Cost Management

Asset Management

Hands-on Management


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Some major Turn around cases in Strategy

Turning Around of Chrysler

IBM

Nissan


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Turning Around IBM

IBMs decline started in late 80s. During 1986-92, IBMs

overall market share in IT industry in US fell by 37%,global share by 30%.In 1993 reported a loss of $8.1 b

Reasons for IBMs decline more attributed to R-extinction than K-extinction factors

Company had 24 product units functioning

independently. CEO Aikers even announced a plan tosplitthe company into independent units. Mainframe &storage systems , which contribute 50% of revenuewere fast loosing ground, PC division was notgenerating profit.

IBM response initiation stage was marked at bothstrategic & Operational levels.

Strategically positioned its server family to meetneeds of ERP & e-Commerce applications.Moved fromProduct-centric to customer-centricin order toprovide complete solutions to its customers.


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Louis Gerstner brought a radical change in the workculture at IBM, undertook many cost cutting initiatives.

Sold some units ( Federal system, IBM property, IBM ArtCollection)

Transition stage included reversal of Aikers plan ofsplitting IBM in 11 entities.Integrated divisions to appearsingle face to customers.

Result & Performance driven culture. Life timeemployment policy abandoned. Performance & costmonitoring systems ( production scheduling, sales etc)introduced. Strong communication channel introducedwith internal and external stakeholders.

Appointed new head of PC unit from consumer industry.

Outcome by 2001, net profit at $7.7b, share price went upby 800%.


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IBM moved towards total solutionsprovider. Increase emphasis on softwareproducts, services , facilities managementfrom primary focus on Products only.

Acquired Large software companies likeLotus.

IBMs current revenues are more from

non-product sales


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Turnaround Specialist

Turnaround specialistbring fresh eye andcomplete objectivity. This professional is able tospot problems and create new solutions that may notbe visible to company insiders.

Has no political agenda or other obligation to biasthe decision-making process, allowing him or her totake the sometimes unpopular, yet necessary stepsfor survival.

Experience in crisis situations when a company is

facing bankruptcy or the loss of millions in revenue The turnaround specialist must deal equitably with

angry creditors, frightened employees, warycustomers and a nervous board of directors


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Incumbent management in Corporate troublesoften go through the processes : denial, anger,

bargaining, depression and then finallyacceptance. The last stage is whencorporations hire turnaround professionals,unless forced to do so earlier by a lender,equity sponsor, or bankruptcy court.

Corporate managers who recognize and

acknowledge the signs of trouble and get helpin the earlier stages have a much better chanceof a successful recovery for their corporation.


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Most businesses in distress will display more than one

of these common signs of trouble: Ineffective management style: The president and

founder of a company is unable to delegate authority.

Over diversification: too much diversificationcauses it to spread too thin. As a result, the business

becomes vulnerable to the competition.

Weak financial function: excessive debt andinadequate capital, operating with little or no marginfor error, credit overextended and excessive fixedassets and inventories.

Poor lender relationships:weak financial positionleads to the company developing an adversarialrelationshipwith its lending institution. The companytries to hide financial information from the bank. This

kind of lender relationship only leads to more trouble.


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Lack of operating controls operatingwithout

adequate reporting mechanisms. Managementdecisions based on old or inaccurate information canhead the company in the wrong direction.

Market lag : deficiency is technology; obsolete

equipment or products and services.

For others, theproblem may lie in sales and marketing; the companyhasn't kept pace with the needs of the marketplace.

Explosive growth Companies achieving fast growthby concentrating on boosting sales overlook the effects

of growth on the balance sheet. Leveraging a companyto a high degree means that management mustoperate with little or no margin for error.


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For example, managing engineering operations for a

company with 12 plants is much different thanmanaging one with two plants.A company can growbeyond its ability to manage.

Precarious customer base The business relies on afew big customers for most of its sales

Family vs. business matters Family issues causingdecisions to be made based on emotions, rather thansound business judgment.Sibling rivalryhas ruinedmany privately-held companies. Nepotism can cause

bright, skillful managers who aren't part of the familycircle to take their talents elsewhere.


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Operating without a business plan

Some times a growing company is operatingwithout a business plan. Armed with 15 or20 years experience in the business,management often operates by the seat of its

pants.

Its plan may change overnight becausethe plan is based on management's own "feel"for the market. In some cases thebusiness planexists in everyone's head rather than in writing.

The result is thatplans are carried outaccording to individual interpretation.

Poor strategic choices or poor execution of agood strategycould be the source of companygoing down hill.


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Stage One : Changing the management

Most CEOs don't relinquish power easily. egos makeit hard for them to admit such a downturn is reallyhappening or that they are unable to pull the companyout of its nosedive.

So, usually the first step is to put into place the top

management team who will lead the turnaroundeffort. In many instances, the board of directorsselects and hires the turnaround specialist, althoughothers such as bankers and corporate attorneys mayalso be involved.

During this stage or after Stage Twosituationanalysissteps are taken to weed out or replace anytop managers, which may include the CEO, CFO or

weak board members, who might impede the effort.


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The first three requirements for viabilityare

analyzed: One or more viable core businesses, adequate bridge

financing and adequate organizational resources.

Assessment ofstrengths and weaknesses follows in theareas of competitive position, engineering and R&D,

finances, marketing, operations, organizationalstructure and personnel.

The turnaround professional must deal with variousgroups. The first is angry creditors who may havebeen kept in the dark about the company's financial

status. Employees are confused and frightened.Customers, vendors and suppliers are wary about thefuture of the firm. The turnaround specialist must beopen and frank with


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Stage Three : Implementing an emergency

action plan When the condition of the company is critical,Emergency surgery is performed to stop thebleeding and enable the organization to survive. Atthis time emotions run high; employees are laid off orentire departments eliminated. After sizing up thesituation makes these cuts swiftly.

A positive operating cash flow must beestablished and enough cash to implement the

turnaround strategies must be raised. Frequently, theturnaround specialist will apply some quick, correctivesurgery before placing them on the market.


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The plan typically includes other financial,

marketing and operations actions torestructure debts, improve working capital,reduce costs, improve budgeting practices,correct pricing, prune product lines and

accelerate high potential products.

The status quo is challenged and those whochange as a result of the plans are rewardedand those who don't are sanctioned. In a

typical turnaround, the new companyemerges from the operating table, a smallerorganization but no longer losing cash.


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Stage Four : Restructuring the business

Once the bleeding has stopped, turnaround effortsare directed toward making current operationseffective and efficient. The company must berestructured to increase profits and return on assetsand equity.

Eliminating losses is one thing, but achieving anacceptable return on the firm's investment is another.

The financial state of the core business of thecompany is particularly important. If the core

business is irreparably damaged, then the outlook is

bleak. If the remaining corporation is capable of long-term survival, it must now concentrate on sustained

profitability and the smooth operation of existing

facilities.


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During the turnaround, the product mix may

have changed, requiring the company to dosome repositioning. The company may even

withdraw from certain markets or target itsproducts toward a different niche.

The "people mix" becomes more important asthe company is restructured for competitiveeffectiveness. Reward and compensationsystems that reinforce the turnaround effortget people to think "profits" and "return oninvestment."


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Stage Five : Returning to normal

In the final step, the company slowly returns toprofitability. Institutionalizing an emphasis onprofitability, return on equity and enhancingeconomic value-added. The company increasesrevenue by carefully adding new products and

improving customer service.

Strategic alliances withother world-class organizations are explored.Emphasis shifts from cash flow concerns tomaintaining a strong balance sheet, long-term financing, and strategic accounting and

control system

s. Rebuilding momentum and morale is almost asimportant as rebuilding the ROI. It means a rebirth ofthe corporate culture and transforming the negativeattitudes to positive, confident ones as the company

maps out its future.


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Judging the success or failure of a

turnaround A company may put a quick end to its disastrous

losses but never quite attain an acceptable returnposition.When this occurs, management may decideto sell the business to a company better able to

produce an acceptable return on the funds invested.In a sense, this is not failure at all

The company may very well thrive and reach newheights under different ownership. Here, theturnaround manager can play a key role in identifying

prospective purchasers and then negotiating asuccessful sale.

Ironically, some companies never reach Stage Fivebecause of significant success in the earlier steps. Theturnaround becomes so successful that the company

becomes a target of a takeover bid.


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turnaround management-nov07

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