9Strategy II(Turnaround)

8/13/2019 9Strategy II(Turnaround)

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Turnaround Strategies



Terms used

• Turnaround situation represents absoluteand relative-to-industry decliningperformance of a magnitude to warrant a

explicit turnaround action

• The immediacy of the resulting threat tocompany survival posed by theturnaround situation is known as situationseverity



Possible actions• Sell off assets to generate cash and/or reduce

debt

• Revise existing strategy

• Launch efforts to boost revenues

• Cut costs

• Combination of efforts



Defining sick companies

• Accumulated losses at financial yearend exceed 50 % peak networth

• SICA, 1985

• BIFR

• SARFAESI Act, 2002



Choices forSick Companies /Companies facing decline

Harvest Divest / Liquidate Turnaround



Main elements

• Crisis stabilisation

• Management of change

• Gaining stakeholder support

• Clarifying the target markets

• Re-focusing

• Financial restructuring

• Prioritizing critical improvementareas



Harvest Strategy

• Steers middle course between statusquo and exiting quickly

• Involves gradually sacrificing market

position in return for bigger near-term cash flow/profit

• Objectives

–Short-term - Generate largest feasiblecash flow

–Long-term - Exit market



Types of Harvest Strategies

• Reduce operating expenses to rock-bottom

• Hold reinvestment to minimum

• Place little priority on new capitalinvestments

• Emphasize stringent internal cost controls

• Trim advertising and promotion expenses• Do not replace employees who leave

• Shave equipment maintenance



When should a harveststrategy be considered

• Industry’s long-term prospects areunattractive

• Building up business would be too costly• Market share is increasingly costly to

maintain• Reduced levels of competitive effort will

not trigger immediate fall-off in sales• Firm can re-deploy freed-up resources

in higher opportunity areas• Business is not a major component of

diversified firm’s portfolio of businesses



Some successful divestments

• Asian Paints

• Hindustan Unilever• TOMCO

• Indian Organic Chemicals

-------------------------------------------Focus on core competence



Liquidation Strategy

• Wisest strategic option in certain situations

– Lack of resources

– Dim profit prospects

– May serve stockholder interests better thanbankruptcy

• Unpleasant strategic option

– Hardship of job eliminations

– Effects of closing on local community



Liquidation

• Legal aspects

– Liquidator

– Collects assets, pays off debt &distributes surplus (if any)

– Company dissolves



Understanding turnarounds

• Involves concerted effort over a period oftime to fortify a firm’s distinctivecompetencies, returning it to profitability

• Change management with emphasis onrapid reconstruction, where in its absence,a business could face closure, enterterminal decline or be taken over



Conditions necessitating

• Negative cash flows

• Negative profits• Declining market share

• Uncompetitive products or services

• Employee turnover / low morale• Mis-management



Key elements

– Prepotent role of CEO

• Creating consensus

• Diagnosis of situation

• Setting direction & momentum for change

– Variety of actions crammed in short time

• Cost cutting

• Control over operations, cash & finances

• Changing product mix / strategy mix

• Team building, communications, performanceincentives



Causes of organisationaldecline

• Internal factors–Wrong strategy

–Mis-management

• External factors–Recession

– Intensified competition–Change in government policy

–Technological change



Response elements

• Strategic

• Operational

• Stakeholders engagement



• Role of creativity –

nearly inexhaustible capacity toimprovise solutions

• Each (successful or unsuccessful)

turnaround is an experiment, whichcan trigger many learnings

9Strategy II(Turnaround)

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