Turnaround Management Nov12

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Turnaround Management

Prof Ashish K Mitra


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Turnaround Management

Turnaround is an important aspect of strategicmanagement

Turnaround occurs when a firm survivesthrough an existence threateningperformancedecl ineand 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, skillsand capabil i t ies.

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

NCE

Turnarounds : A 4 Stage TheoryPerspective : Shamsud D Chowdhury


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Economic volatility have created climate where

no business can take economic stability forgranted. Though external forces such as competitive

strategies of immediate competitors andpressure from shareholders influence outcome of

turnaround, top managementcan still control itto a great extent.

Second stage is taking immediate correctiveactionsbut transition stage is the most complex

of all stages. Here the firm experiments withdifferent strategies, structures, cultures, andtechnologies.


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Four stages & key attributes of a turnaround

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

Kextinctionperspectivemacro or external factorsare responsible for the decline.

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

External factorsor inadequacy of internal resourcesor bothcould be the source of decline. Triggerscouldbe 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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Turn-Around Management often involves complexfinancial situations with respect to lenders, debt and

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

A company-wide assessment using a multidisciplinaryapproachis needed. This overall review incorporates

operational, 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, IBMsoverall market share in IT industry in US fel l by 37%,global share by 30%. In 1993 reported a loss of $8.1 b

Reasons for IBMs declinemore attributed to R-extinction than K-extinction factors

Company had 24 product uni tsfunctioning

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

IBM response ini t iation stagewas marked at bothstrategic & Operational levels.

Strategically positioned its server familyto meetneeds of ERP & e-Commerce applications. Moved fromProduc t-centr ic to customer-centr ic

in order toprovide complete solutions to its customers.


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IBM moved towards total solutions

provider. 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 Specialis t

Turnaround specialistbring fresh eye andcomplete objectivity. This professional is able tospot problems and create new solutionsthat 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 managementin Corporate troubles

often 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 oneof thesecommon signs of trouble:

Ineffective management style:The president andfounder 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 and

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

Market lag :deficiency is technology; obsoleteequipment or products and services. For others, the

problem 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 acompany with 12 plants is much different than

managing 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. Nepotismcan 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 choicesor poor execution of agood strategycould be the source of companygoing down hill.


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Stage Two : Analyzing the situation

determine the chances of the business'ssurvival, identify appropriate strategiesand develop a preliminary action plan.

Finding and diagnosing the scope andseverity of the company's ills. Is it in imminent danger of failure?

Does it have substantial losses but its

survival is not yet threatened? Or is it merely in a declining business

position?


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The first three requirements for viabilityareanalyzed:

One or more viable core businesses, adequate bridgefinancing and adequate organizational resources.

Assessment of strengths and weaknessesfollows 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 emergencyaction plan

When the condition of the company is critical,Emergency surgery is performed to stop thebleedingand enable the organization to survive. Atthis time emotions run high; employees are laid off or

entire departments eliminated. After sizing up thesituation makes these cuts swiftly.

A positive operating cash flowmust beestablished and enough cash to implement the

turnaroundstrategies 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 who

change 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 efforts

are 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 corebusiness 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 existingfacilities.


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During the turnaround, the product mix may

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

profitability. Institutionalizing an emphasis onprofitability, return on equity and enhancingeconomic value-added. The company increasesrevenue by carefully adding new products andimproving 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 andcontrol systems.

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 aturnaround

A company may put a quick end to its disastrouslosses 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 companybecomes a target of a takeover bid.


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Turnaround Management Nov12

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