Turnaround Management

Prof Ashish K Mitra

Turnaround Management
Turnaround is an important aspect of strategic management Turnaround occurs when a firm survives through an existence threatening performance decline and emerges out of it while achieving sustainable performance recovery. (the opposite of performance recovery is failure and eventual death of the firm) Achieving Turnaround requires a combination of strategies, systems, skills and capabilities. Turnaround takes several years in most cases

Turnarounds : A 4 Stage Theory Perspective : Shamsud D Chowdhury

Stage 1 Decline

Stage 2 Response Initiation

Stage 3 Transition

Stage 4 Outcome

P E R F O R M A N C E

Success

Failure Nadir Indeterminate

Time

 Economic volatility have created climate where no business can take economic stability for granted. Though external forces such as competitive strategies of immediate competitors and pressure from shareholders influence outcome of turnaround, top management can still control it to a great extent. Second stage is taking immediate corrective actions but transition stage is the most complex of all stages. Here the firm experiments with different strategies, structures, cultures, and technologies.

 Four stages & key attributes of a turnaround

Stage 1: Decline - Declining performance is the trigger for turnaround. K extinction perspective macro or external factors are responsible for the decline. R extinction perspective theory : decline due to a reduction in resources within the firm External factors or inadequacy of internal resources or both could be the source of decline. Triggers could be more than one source like pressure from bank, creditors, stockholders, government, press etc which may even demand change of management or CEO

 Stage 2: Response initiation Turnaround responses could be strategic or/& operating responses. Strategic responses ( to tackle structural shifts in the market) could be changing or adjusting business/ product portfolio including diversification, vertical integration, and divestment. Operating responses including aim at cost cutting, revenue generation or removing inefficiencies. Domain definition, Scope, Strategic contours Stage 3: Transition Turnaround is undertaken with definite 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 before the results of turnaround show. Resource commitment, Policy / Program, structure, Reward Stage 4: Outcome involves determining whether a turnaround has been accomplished by performance measures. A cut off point of Performance measures

 Turn-Around Management often involves complex financial situations with respect to lenders, debt and capital. Expertise in form of leadership and knowledge to assess and restructure financial agreements may be one of the needs. A company-wide assessment using a multidisciplinary approach is needed. This overall review incorporates operational, financial and organizational evaluations and external business and macro economic environment. Among Operational responses , some involve Productivity Engineering Operations Troubleshooting Financial and Cost Management Asset Management Hands-on Management

Some major Turn around cases in Strategy

Turning Around of Chrysler IBM Nissan

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 Rextinction than K-extinction factors Company had 24 product units functioning independently. CEO Aikers even announced a plan to split the company into independent units. Mainframe & storage systems , which contribute 50% of revenue were fast loosing ground, PC division was not generating profit. IBM response initiation stage was marked at both strategic & Operational levels. Strategically positioned its server family to meet needs of ERP & e-Commerce applications. Moved from Product-centric to customer-centric in order to provide complete solutions to its customers.

 Louis Gerstner brought a radical change in the work culture at IBM, undertook many cost cutting initiatives. Sold some units ( Federal system, IBM property, IBM Art Collection) Transition stage included reversal of Aikers plan of splitting IBM in 11 entities. Integrated divisions to appear single face to customers. Result & Performance driven culture. Life time employment policy abandoned. Performance & cost monitoring systems ( production scheduling, sales etc) introduced. Strong communication channel introduced with internal and external stakeholders. Appointed new head of PC unit from consumer industry. Outcome by 2001, net profit at $7.7b, share price went up by 800%.

 IBM moved towards total solutions provider. Increase emphasis on software products, services , facilities management from primary focus on Products only. Acquired Large software companies like Lotus. IBMs current revenues are more from non-product sales

Turnaround Specialist
Turnaround specialist bring fresh eye and complete objectivity. This professional is able to spot problems and create new solutions that may not be visible to company insiders. Has no political agenda or other obligation to bias the decision-making process, allowing him or her to take the sometimes unpopular, yet necessary steps for 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, wary customers and a nervous board of directors

 Incumbent management in Corporate troubles often go through the processes : denial, anger, bargaining, depression and then finally acceptance. The last stage is when corporations 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 help in the earlier stages have a much better chance of a successful recovery for their corporation.

 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 diversification causes 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 margin for error, credit overextended and excessive fixed assets and inventories. Poor lender relationships: weak financial position leads to the company developing an adversarial relationship with its lending institution. The company tries to hide financial information from the bank. This kind of lender relationship only leads to more trouble.

 Lack of operating controls operating without adequate reporting mechanisms. Management decisions based on old or inaccurate information can head the company in the wrong direction. Market lag : deficiency is technology; obsolete equipment or products and services . For others, the problem may lie in sales and marketing; the company hasn't kept pace with the needs of the marketplace. Explosive growth Companies achieving fast growth by concentrating on boosting sales overlook the effects of growth on the balance sheet. Leveraging a company to a high degree means that management must operate with little or no margin for error.

 For example, managing engineering operations for a company with 12 plants is much different than managing one with two plants. A company can grow beyond its ability to manage. Precarious customer base The business relies on a few big customers for most of its sales Family vs. business matters Family issues causing decisions to be made based on emotions, rather than sound business judgment. Sibling rivalry has ruined many privately-held companies. Nepotism can cause bright, skillful managers who aren't part of the family circle to take their talents elsewhere.

 Operating without a business plan Some times a growing company is operating without a business plan. Armed with 15 or 20 years experience in the business, management often operates by the seat of its pants. Its plan may change overnight because the plan is based on management's own "feel" for the market. In some cases the business plan exists in everyone's head rather than in writing. The result is that plans are carried out according to individual interpretation. Poor strategic choices or poor execution of a good strategy could be the source of company going down hill.

 Stage One : Changing the management Most CEOs don't relinquish power easily. egos make it hard for them to admit such a downturn is really happening or that they are unable to pull the company out of its nosedive. So, usually the first step is to put into place the top management team who will lead the turnaround effort. In many instances, the board of directors selects and hires the turnaround specialist, although others such as bankers and corporate attorneys may also be involved. During this stage or after Stage Twosituation analysissteps are taken to weed out or replace any top managers, which may include the CEO, CFO or weak board members, who might impede the effort.

 Stage Two : Analyzing the situation determine the chances of the business's survival, identify appropriate strategies and develop a preliminary action plan. Finding and diagnosing the scope and severity 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?

 The first three requirements for viability are

analyzed: One or more viable core businesses, adequate bridge financing and adequate organizational resources. Assessment of strengths and weaknesses follows in the areas of competitive position, engineering and R&D, finances, marketing, operations, organizational structure and personnel. The turnaround professional must deal with various groups. The first is angry creditors who may have been kept in the dark about the company's financial status. Employees are confused and frightened. Customers, vendors and suppliers are wary about the future of the firm. The turnaround specialist must be open and frank with

 Stage Three : Implementing an emergency action plan When the condition of the company is critical, Emergency surgery is performed to stop the bleeding and enable the organization to survive. At this time emotions run high; employees are laid off or entire departments eliminated. After sizing up the situation makes these cuts swiftly. A positive operating cash flow must be established and enough cash to implement the turnaround strategies must be raised. Frequently, the turnaround specialist will apply some quick, corrective surgery before placing them on the market.

 The plan typically includes other financial, marketing and operations actions to restructure 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 rewarded and those who don't are sanctioned. In a typical turnaround, the new company emerges from the operating table, a smaller organization but no longer losing cash.

 Stage Four : Restructuring the business Once the bleeding has stopped, turnaround efforts are directed toward making current operations effective and efficient. The company must be restructured to increase profits and return on assets and equity. Eliminating losses is one thing, but achieving an acceptable return on the firm's investment is another. The financial state of the core business of the company is particularly important. If the core business is irreparably damaged, then the outlook is bleak. If the remaining corporation is capable of longterm survival, it must now concentrate on sustained profitability and the smooth operation of existing

facilities.

 During the turnaround, the product mix may have changed, requiring the company to do some repositioning. The company may even withdraw from certain markets or target its products toward a different niche. The "people mix" becomes more important as the company is restructured for competitive effectiveness. Reward and compensation systems that reinforce the turnaround effort get people to think "profits" and "return on investment."

 Stage Five : Returning to normal In the final step, the company slowly returns to profitability. Institutionalizing an emphasis on profitability, return on equity and enhancing economic value-added. The company increases revenue by carefully adding new products and improving customer service. Strategic alliances with other world-class organizations are explored. Emphasis shifts from cash flow concerns to maintaining a strong balance sheet, longterm financing, and strategic accounting and control systems. Rebuilding momentum and morale is almost as important as rebuilding the ROI. It means a rebirth of the corporate culture and transforming the negative attitudes to positive, confident ones as the company maps out its future.

 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 return position. When this occurs, management may decide to 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 new heights under different ownership. Here, the turnaround manager can play a key role in identifying prospective purchasers and then negotiating a successful sale. Ironically, some companies never reach Stage Five because of significant success in the earlier steps. The turnaround becomes so successful that the company becomes a target of a takeover bid.

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