IBSPGPM SEM IV(2013)

Business Strategy II-Turn Around management

Prof S V Bidwai

Syllabus

• Turn Around Management: Turnaround Indicators – Turnaround Stage Theory – Decline – Response Initiation – Transition – Outcome.

Watching Out for the danger signal

• Do companies turn sick overnight and qualify as

potential candidates for turnaround, or do they become

sick slowly, which can be stopped by timely corrective action?

Looking at some of the signals:

1. Higher costs of wages and raw materials

2. Decreased demand that can be the result of temporary demand dips (such as lost government contract) or more general recession.

3. Strikes of employees

4. Increased competitive pressures

4. Management problems

5. Decreasing market share

6. Decreasing consistent rupee sale

7. Decreasing profitability

9. Increasing dependence on debt

10. Failure to reinvest in the business

11. Diversification at the expense of the core business

12. Lack of proper planning

13. Inflexible chief executive

14. Management succession problems

15. Unquestioning Board of Directors

16. A management team unwilling to learn from its competitors

The Factors for the Corporate Decline

Apart from the common causes of sickness, a number of factors are attributed by different researchers for the corporate decline

a. Industrial Financial Control

Inadequate financial control leads to chaos in the organization . The organization is managed in a huff manner which fails to provide a correct picture of organisational functioning. The manager does not know which product or the market is losing, why it is losing?

Likewise, no adequate control on cash inflow and outflow which creates a number of problems for effective functioning of the organization.

Factors for the Corporate Decline

b. Ineffective Management

Management is ineffective on account of following factors:i)One man rule: All power is concentrated in the CEO, hence he keeps on repeating his past follies.

ii)Combined chairman and chief executive: When planning and execution are concentrated in a single hand, it weakens not only the process of execution but also effective monitoring and controlling system

iii)Ineffective Board of Directors: Most members of Board of Directors are merely rubber stamps to sign on dotted lines with the result that the organisation continues to faulter on all fronts.

Iv)Other managerial shortcomings: Most mangers manage to sneak into organisations either through inheritance or other backdoor entries.

Factors for the Corporate Decline

c. Competition

Competition has come to stay permanently in the light of liberalisation and globalisation accepted as the basic parameters of organisational functioning. It becomes a problem to those organisations which are inefficient and irrational. They do not keep pace with consumer’s preferences.

d. High Cost Structure

High cost structure compared to competitors is a distinct disadvantage to the organisation. It may be due to the following factors:

i. Company’s liabilities to take advantage of economies of scale of production

ii. Absolute cost disadvantage owing to ineffective control of strategic variables

iii. Under – utilisation of capacity owing to lack of demand or ill – maintenance of plant and machinery

iv. Other operating inefficiencies and

v. Unfavourable government policies

Factors for the Corporate Decline

e. Changes in market demand: Changes in market demand either due to shift of consumer preference or other innovations which led to the emergence of better product in the market.

f. Lack of Marketing Effort: Declining phase is associated with managerial complacency which is reflected in the form of lack of marketing effort. To keep up the tempo of sale for the product, the product ought to be so presented that it looks attractive and presentable.

g. Big profits and acquisitions: Some ambitious organisations undertake big projects for which they do not have either the resources or the expertise to manage. Consequently, the company’s funds gets blocked without adequate return on investment.

Likewise, the company when it devolves into the business of acquisition and the acquired company is already weak and inefficient; it is apt to result in losses.

Factors for the Corporate Decline

h. Irrational financial policy: Financial policy becomes irrational on account of the following factors:

i. High debt – equity ratio

ii. Use of inappropriate financing sources

iii. Inappropriate cash management

…

i.

i)Over – trading: Over-trading is that situation in which the firm’s sale grows faster than its capacity to finance from internal sources and borrowings. It results in the obtainment of finance at a very high cost. Such higher cost is not warranted by the price obtained by the organisation.

Irrational financial

policy

High debt – equity ratio

Use of inappropriate financing sources

Inappropriate cash

management

Turnaround process

Turning a sick unit into a viable or profitable organization is both challenging and daring.

Involves complex processes as it incorporates all those corrective actions, the absence of which have created the present state of sickness in the organization.

• Human change may lead to change in the leadership of the organization or even outside intervention to bring about the needed transformation.

Difficult to comprehend and to implement to bring about the needed change.

Involves both perceptual and attitudinal changes among all employees operating at different levels.

The complexity of turnaround gets compounded by the process of human changes in the organization.

Grinyer and Spender have given a model of the turnaround process.

The process has three important components:

Tightening of control Changes in the product mix and customer mix and Fresh deployment of resources to meet new commitments of the organization.

Effective controls have a positive impact on:• cost reduction and • wastage elimination.

The financial and administrative control systems are apt to improve the profitability position provided they are backed by proper quality of the products and the image of the organisation.

In addition, the company may require overhauling through a new product mix and even a market mix.

A Model of Turnaround Process

Reinforcement & elaboration of recipe If satisfactory

Adoption of Recipe Development of Strategy

Implementation Corporate Performance

Stage 3

Adopt new recipe, may be with new

Senior Management

Stage 2

Reconstruct Development

Strategy

Stage 1

Tighten

Controls

If Unsatisfactory

This process of bringing about a revival in the firm’s fortunes is what is termed as “Turnaround Management”.

Stages involved in Turnaround management:

1 The diagnosis of the impending trouble or the danger signals2. Choosing appropriate Turnaround Strategy3 Implementation of the change process and its monitoring.

Suggested generic strategies

For each of the causes mentioned above, generic strategies have been suggested seriatim according to the causes:

New management and organizational change and decentralization New management; improved financial control; decentralization Cost production; product market Improved marketing Product market; cost reduction, improved marketing, asset reduction growth via

acquisition Asset reduction Asset reduction; new financial strategy

Basic Requirements for a Successful turnaround are

» Determined motivating top manager

» Potential Viability of the Company’s business.

» Good planning & control of the whole operation with an integrated strategy.

» Full assurance of timely cash availability during the operation turnaround so that it does not stop in between.

Turnaround Manager

Leadership Quality is the most vital element for the successful turnaround manager.

The turnaround leaders should have the following Characters

Object OrientedSelf Confident Maintains positive outlook.Inspires confidence in others Innovative & creative. Highly visible and active

Potential Viability of Business

Viability of Closing sick

units

Product Viability

Viable Turn

around

Plant & Machinery Viability.

Planning & ControlNecessary for

any management process.

Done on regular basis,

Costs-important element of

control.

Control through financials

control

Availability of cash during Turnaround

Sick Company = No Cash Cash required for purchases, regular & extraordinary repairs etc. payment

to creditors. Funding through promoters, lenders Lenders to postpone their dues till such time turnaround has taken place. Improvement Plan & Cash-An operating plan of improvement is the key to

turnaround success. Cash is needed to support the plan.

Choosing an appropriate Strategy

Strategy

Strategic Turnaround

Operational turnaround

Strategic Turnaround

• strategic turnaround choices may force the company to completely change its current way of operations

New Business New way to compete

New Business Strategy

The case of Bharat Heavy Electricals Limited1. Started with the production power generating equipments and virtually enjoyed monopoly. 2. Its capacity utilisation fell down tremendously inability of the State Electricity Boards and private sector to set up new power plants,3. To offset this depression, BHEL ventured into

Telecommunications, Metropolitan Transportation and Defense production.

Due to this timely diversification, BHEL is now one of the rare profit making PSUs

Operating turnaroundsPrimarily 4 strategies qualify under operating turarounds:

Asset reduction strategies

Revenue increasing strategies

Cost cutting strategies

Combination strategies

Asset Reduction Strategies:

• If a firm is operating much below the Breakeven level, it must take steps to reduce its assets. This will reduce the level of fixed costs and help in reducing the total costs of the firm.

Revenue increasing strategies

• If the firm is operating substantially but not extremely below its breakeven level, then the appropriate turnaround strategy is to generate extra revenues

Combination Strategy• Operating closer but below breakeven levels calls for

application of combination strategies. Under this method all the three namely cost reducing, revenue generating and asset reduction actions are pursued simultaneously in an integrated and balanced manner.

• Combination strategies have a direct favourable impact on cash flows as well as on profits.

Chrysler Corporation

• Great Strategy:~ Invented the Minivan~ Bought Jeep early in the SUV revolution

• Business Model Too Slow and Costly:~ Major changes to the product development process~ Major reductions in administrative costs (aka bureaucracy)

• Operations Seriously Deficient in Passenger Cars:~ Huge progress by Ford and the Japanese

Chrysler Turnaround Results• Initial Results:

~ Initial lay off - 5000 workers~ Emphasis on smaller and more affordable cars~ Spectacular. Share price from low of $9 in 1990 to $45 in 1993 when turnaround “completed”~ Chrysler purchased by Daimler-Benz in 1998 for $35 billion

• Longer Term Results:~ Major restructuring II in 2002 to 2004 period~ Major restructuring III commenced in 2006

• Conclusions:~ Fundamental competitive weakness versus the Asian producers never adequately addressed

IBM Corporation

• Broken Strategy:~ Premium prices way too long~ Decentralization to a fault

• Business Model Too Slow and Costly:~ Bureaucracy precluded competing in short cyclebusinesses~ SG&A + R&D $7 Billion (25%) too high

• Operations Seriously Antiquated in Many Areas:~ Go-to-market, procurement, finance, product development,even IT!

IBM Turnaround Results• Initial Results:

~ Product centric to customer centric ~ Reduction of workforce by 35,000~ Spectacular. Share price from low of $10 in 1993 to

$124 currently

• Longer Term Results:~ Company has continuously transformed itself, growing its services and software businesses, and

shrinking its hardware businesses~ It has not let success preclude it from taking periodicʺ ʺ

retrenchment actions where needed

• Conclusions:~ Growth in the services industry is slowing… Couldindicate additional restructuring to come

Under the guidance of Prof. S.V.Bidwai

Apple, Inc.

• No Strategy:~ Key R&D resources being squandered on Newton~ No plan to conquest Microsoft customers

• Business Model:~ Serious distribution issues~ Losing dominance in education to Dell

• Operations Reasonably Decent, But:~ Too much manufacturing in North America rather than Asia

Apple Turnaround Results

• Initial Results:~ Spectacular. Share price from low of $4 in 1997 to $20 in2000, and now at $168~ Principal initiatives were award-winning designs andsubstantially improved Mac operating system

• Longer Term Results:~ Apple has invested in two huge initiatives, both highly

successful:– Its own B&M distribution – key to expanding Mac platform sales– The music business, a transforming event for the music industry

• Conclusions:~ Continual innovation--the latest being the iPhone

Bajaj Automobiles Ltd. - Turnaround

Challenges Encountered: Wrong Attitude:

Bajaj was a scooter company and therefore the mobike department was given second-class treatment (it was only 10 per cent of their business in 1996), the quality of the products was poor, and they did not offer fuel efficiency the way the Japanese bikes did.

Too many suppliers:

The brothers discovered that they had over 1,000 vendors supplying them components, many of which were plain bad, Rajiv Bajaj decided to prune them down to a realistic 200.

Get the right products at the right price:

To bring in Japanese productivity tools to reduce costs just as the competitors were doing.

Importance to nitty-gritty details:

The CEO took up the cudgels by personally supervising even nitty-gritty details, from the styling and paint to the design of the console, the right grip and even the spark plug to use.

Setting an internal benchmark:They decided to set up a new mobike plant but not at their existing facility in Pune. Instead, they chose Chakan, an hour's drive from Pune.

Survey: Need for a Well-priced and a fuel-efficient product. A project for a bike is conceived depending on inputs from the marketing team.

The design department then comes up with eight-10 different designs that Rajiv and his team narrow down to three or four. Feedback on the styling is sought through market surveys and, finally, two prototypes of the bike are made. Rajiv & Co work on at least two to three variations of engines, of which one is selected. This took 24-30 months.

Results

• Bajaj is the market leader in the premium bike segment.– Total Sales – 2,78,000 in numbers in November 2009– 35% of total volumes exported– Discover sales 94,265 units– Pulsar sales above 50,000 units

Cost cutting strategies

• If the firm is operating around or above the breakeven level, cost reduction strategies are preferable as they are easy to carry out and the firms’ profits rise once the unnecessary costs are cut down.

Hindustan Motors : Struggle for Survival

Background:

Hindustan Motors is an automobile manufacturer from India. It is part of the Birla group of industries.

The company was the largest car manufacturer in India before the rise of Maruti Udyog (MUL).

It is the producer of the famous Ambassador car, widely used as a taxicab and as a government limousine.

One of the original three car manufacturers in India, founded in 1942, it was a leader in car sales until the 1980s, when the industry was opened up from protection.

Hindustan has a joint venture with Mitsubishi, producing versions of the Lancer and Pajero, but is best known for its own models.

Ambassador

Ambassador - the first car to be manufactured in India, has been ruling the Indian roads ever since its inception in 1948 and the only automobile to ply Indian roads for more than five decades now, has carved a special niche for itself in the passenger car segment.

It's dependability, spaciousness and comfort factor have made it the most preferred car for generations of Indians.

The Ambassador's time-tested, accommodating and practical characteristics make it a truly Indianised car

However the Indian behemoth had a run for money when global players entered India

• Porters Model Analysis– HM was unable to create barrier for potential new entrants, many foreign

collaborated entrants like Maruti Suzuki, GM, Toyota launched and HM was unable to compete with their existing strategies

– Bargaining Power of Suppliers: Even suppliers were not looked into deep, company was in a snail pace and couldn’t take up the challenge of new potential entrants in the market, including the suppliers of its different parts

Threat of Substitute: HM was focused only to one segment till 1997 and with in that time MUL was able to bring out brands for each segment with in the nation. Substitute for the brand was quite visible in the economy

Rivalry within the company also lead to downfall of the company and ultimately leading to less market share. Eg. Internal Problems, Union problems etc….

External Environment Analysis

• HM’s share in automobiles is miniscule. Though the famous Ambassadors are still in production, HM is gradually becoming a ghost town.

• HM is an example of family enterprise the way it grows, flourishes, and dies. As most of the manufacturing divisions are closed, the machineries have been sold or shifted, and most of the land has shifted hand for building real estate or Software Park

• HM is just that elephant that is still valuable for many.

• At one time, the plant had about 15,000 workmen and engineers at one time. Today the number must be hardly couple of thousands.

• And who were responsible for this condition of HM?

– CITU, the trade union of CPM played the major role. Neither the Birla management had the guts and wills to make it a great automobile plant of the country, nor the government helped it out. Surprisingly HM never gave any dividends to its shareholders.

Indian economy opened up for foreign players - Daewoo, GM, Daimler Benz, Hyundai, Honda……entered India through joint ventures (JV) and partnerships with Indian firms.

HM was the worst affected due to its inflow of competitors. Forced to react due to its poor performance of its vehicles.

HM launched Nova (1990) with better interiors

HM launched 1800 ISZ(1993), better engine performance

Company also appointed consultants McKinsey & Co. for a restructuring plan to turn around its business

Turn Over Efforts

HM has a vast service network. The Passenger Car and Utility Vehicle market is being attended by a

115 strong dealer network, 50 Service and Parts dealers and Additional 60 exclusive Parts dealers. 4 Regional Offices and Nation-wide Territory Offices support it.

Two dealers serve the Earthmoving Equipment and Power Products market from 25 locations spread across the country.

2006, HM has invested a "significant" amount for three years to build up production capacity for auto components

Hindustan Motors also has an auto components subsidiary which makes automotive castings, forgings and stamping.

Over a period of time, sales from auto components could be as high as 30-40%

First mover advantage in several areas like Internet selling, sturdy car

Pay offs

• Mitsubishi source components from Hindustan., sourcing components from a low cost base like India through partner Hindustan Motors will prove beneficial for Mitsubishi, especially when it is facing problems.

• Hindustan Motors already supplies engines and other auto components to M& M, GM and Ford in India. With Mitsubishi sourcing components, and HM possibly manufacturing some of them, the Indian partner would be able to use some of its idle capacity and shore up its bottom line.

Contd.....

Future Plans

Hindustan Motors planned to launch Mitsubishi's small-car model iCar in India by the end of 2009.Reuters noted that the Indian passenger vehicle market is forecast to nearly double to 2m units in annual sales by 2010 with small cars taking up over two-thirds of sales. A tax cut in economy is encouraging on small cars launches. HM will benefit with this.

GM and Hindustan_Motors are toying with the idea of introducing CNG as a fuel option in order to boost sales. The companies have plans to introduce a CNG variant for the Optra and Lancer (old variant). The two variants will be introduced in CNG-centric areas including Mumbai, Delhi and Gujarat.

Implementation of Strategy

• Implementation plays an important role in any turnaround management.

• Identification of an appropriate strategy by itself will not guarantee

success.

Turnaround at Indian Railways

IR was considered to be heading towards bankruptcy, as per the report of Expert Group on Indian Railways submitted in July 2001 which studied the IR for nearly two years. They had stated,

“Today IR is on the verge of a financial crisis... To put it bluntly, the ‘business as usual low growth’ will rapidly drive IR to fatal bankruptcy, and in sixteen years Government of India will be saddled with an additional financial liability of over Rs 61,000 crores… On a pure operating level, IR is in a terminal debt trap.”

• Similarly partial adoption of a strategy is also not useful. The selected strategy needs to be pursued relentlessly and with allout effort to make it work.

• The success or otherwise of a Turnaround strategy depends

on the commitment shown by the top management as also the operating management

An Overview

• World Bank states that Indian Railways would soon file bankruptcy of US$ 16bn.

• Railways has no future and is in a debt trap• It cannot recover until ands unless it:–Downsizes–Disinvest– Increase passenger fares– Set up tariff regulators

Questions

Whether it was a turnaround?

• total revenues increased by a significant percentage in the last two years• The total earnings in 2004-05 increased by Rs 4465 crores, a 10.4% growth with respect to 2003-04. The total earnings in 2005-06 increased by Rs 7121

crores, a 15.0% growth with respect to 2004-05.• the net revenues continued a robust upward trend.

The essence of the ‘turnaround’ was in the fact that:

Performance of Indian Railways

Transformation of IR

• Pure and Simple– Commercial common sense combined with political savvy

• Sensing opportunity• One must understand – What is your business– It is not railways that has monopoly, but a business of transportation.– Diagnostic of business and competitiveness in the market place.

Year % of Market Share

1947 100%

1991 90%

2004 15%

What were the determinants of the 'turnaround'.

i. Goods earnings of Rs 5509 crores (17.9% increase on a base of Rs 30,778 crores)

ii. Passenger earnings of Rs 1013 crores (7.2% increase on a base of Rs 14,113 crores) and

iii. Others earnings including parcel, catering, advertising etc of Rs 599 crores (24.2% increase on a base of Rs 2479 crores) in 2005-06

Goods; 67%

Passenger; 28%

Others; 6%

Overall Strategy

In the freight business, there was focus on higher volumes, on the

premise that marginal revenues were significantly higher than marginal

costs.This was done with the objective of lowering the unit costs,

resulting in the record surplus.

The strategy for freight rates made a clean departure from the past by • freezing freight rate increases and • rationalising the commodity

classification to benefit the high value goods and charge more from the low rated commodities

Overall Strategy

In the other business areas of parcel, catering and advertising, the strategy of outsourcing through public private partnership and wholesaling rather than retailing was adopted.

Underlying all this was the strategy of increasing asset utilisation.

Growth Rate for Total Earnings and Total Working Expenses

Operating Ratio

Operating ratio is the key measure for assessing efficiency of any railways in the world. Indian Railways current operating ratio is 76%, which is the best in the world.

Demand Side• Dynamic

• Changes in rate during lean and peak season

• Differential• Customer centric policy

Supply Side• Faster

• Not speed but faster turnaround time of the train

• Heavier train• Load more on the same train

• LongerSatisfy demand only if you deliver people and goods on time and as per the requirement.

PETER DRUCKER

“Great people do not do great things, they identify simple and obvious things and execute them brilliantly and swiftly”

TYPES OF TURNAROUND STRATEGIES

• For sick unit operating much below the break – even point firm may reduce its average cost by reducing the fixed cost

• Fixed cost may be reduced if the organisation takes a decision to sell a part of its asset holding.

• If the firm is operating “substantially” but not extremely below the break – even point, the appropriate strategy will be one which generates extra revenues.

• This may be possibly through (i) price reduction through increased sale (ii) stimulating product demand through promotional efforts or (iii) reducing the quality of the product.

• Increased sale will improve revenue earning position of the firm by reducing the cost of production.

• If the firm is operating at a level slightly below the break even point, then the combination strategy will be suitable

• Under combination strategies all the three strategies identified earlier i.e. (i) asset reduction (ii) cost reduction and (iii) revenue generating strategies have to be pursued simultaneously.

• When the firm is operating at the break even level, it should follow the cost – cutting strategy. By reducing the cost of production, the firm will immediately switch over to the zone of generating the profit.

• Strategies ought to be selected in relation to the causes of sickness. New strategy may require a change in management and organizational processes which may result in a new set of financial control.

Model by Shamsud D Choudhary

Stage 1

Decline

Stage 2

Response

Initiation

Stage 3

Transition

Stage 4

Outcome

Nadir

Indeterminate

Perf

orm

ance Success

Failure

TimeFirm Equilibrium

Firm

The Turnaround Process(Prof Shamshad Chaudhary)

The various stages of the turnaround process are discussed in detail below-

STAGE 1: DECLINE• Decline starts from firm equilibrium and reaches a nadir.•Two theoretical perspectives- K-Extinction- It suggests macro or external factors

are responsible for the decline.

R-Extinction- It suggests the decline in the firm is due to a reduction in resources

within the firm.

STAGE 2: RESPONSE INITIATION• Response Initiation is the stage where the firm’s performance reaches its nadir and the management begins to take corrective actions.• Categorization of Responses- Strategic Responses involve changing or adjusting the businesses the firm is currently involved in, like diversification, vertical integration, etc. It is used when the decline is due to structural shift. Operating Responses focus on the way the firm conducts its businesses like cost cutting, revenue generation, etc. It is used when the decline is due to inefficiency.

STAGE 3: TRANSITION• According to Chowdhury, “a substantial amount of time has to pass before the results of turnaround strategies show”. •At this stage the firm experiments with different strategies, structures, cultures and technologies.• Also a turnaround is undertaken with a definite purpose.• According to some researchers, on an average, performance improvement takes place after or around 7 years.• For example, Ford took four years to introduce its successful Sable line in response to its declining market share.

STAGE 4: OUTCOME• At this stage, turnaround activities continue for a number of years.• Here the outcome of the activities undertaken during the third stage is realized.• The fourth stage involves determining whether a turnaround has been accomplished.• The measures used to determine the outcome are the same as those that are used to identify the decline at the first stage of the turnaround.

TURNING AROUND CHRYSLER

The outcome of the transition stage was seen in many performance measures. By 1982, signs of a healthy Chrysler could be seen. At the end of 1982, Chrysler generated a modest profit, and in 1983 made an operating profit of $ 925 million. By 1983, Chrysler offered 26 million, shares, and its stock price rose from $16 to $35 within weeks. Chrysler paid off its entire loan seven years before it was due. Chrysler’s achievements showed that it had accomplished a turnaround.

TURNING AROUND IBM

The outcome of the steps taken at the transition stage was seen after eight years in 2001. In that year, the company reported a new income of $7.7 billion. During the period 1993-2001, the share price of IBM shot up by nearly 800%.

TURNING AROUND NISSAN

The outcome of all these measures was that Nissan turned around faster than expected. In the fiscal year 2000, sales increased by 4%; 20 new models were launched; management was streamlined; purchasing costs were reduced by 11%, and the company earned 5.4% operating income on sales.

Key Events and Concepts in Turnaround

STAGES

Incidents Decline Response Initiation Transition Outcome

Key events K extinction Domain Definition Elapsed Time Success

R extinction Scope Overlap Resource Commitment Failure

Stimulus Strategic Contours Policy / Programs

Structure

Rewards

People

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