Turnaround Management

Presented By : Albey Mathew 11BSP Chinmay Angchekar 11BSP Fiona Bhayani 11BSP1370 Khushbu Rajpuria 11BSP Neha Kalloli 11BSP1420 Pooja Bhadkamkar Varun Goel 11BSP1105

What is Turnaround?

Higher Cost of Wages & Materials. Decreased demand that can be the result of temporary

demand dips (Ex: Loss of Govt. Control or Recession in general)

Strikes of Employees Increased Competitive Pressures Management Problems Decreasing Market Shares Decreasing Consistent Rupee Sale Decreasing Profitability. Increasing dependence of Debt

Failure to Re-invest in the Business Diversification at the expense of the core business Lack of proper planning Inflexible Chief Executive Management Succession Problems Unquestioning Board of Directors A management team unwilling to learn from its B.O.D

Factors for the Corporate Decline

Industrial Financial Control : No adequate control and information about the firms cash inflows and outflows.

Ineffective Management : One Man Rule : All powers are vested in the CEO Combined Chairman & Chief Executive : Not only weakens

the process of Execution but also effective monitoring and control system.

Ineffective B.O.D : No proper powers vested Other Managerial Shortcomings : Most Managers manage to

sneak into organizations either through inheritance or other backdoor entries.

Competition : Accepted as a basic parameter in the light of Globalization and liberalization

High Cost Structures : Company’s liabilities to take advantages of economies of

scale of Production. Absolute Cost Disadvantage due to ineffective control of

strategic variables Under utilization of capacity owing to the lack of demand or

ill-maintainance of P&M. Unfavourable Govt. Policies

Changes in Demand and Supply : Shift of Consumer Preference Other Innovations Lack Of Marketing Effort : To keep up the tempo for the

sale for the Product, The product should be made presentable and attractive.

Big Profits and Acquisitions : Undertaking acquisitions or big projects without Resources or expertise to manage.

Irrational Financial Policy : High Debt Equity Ratio Inappropriate Cash Management

Over Trading : Overtrading is that situation in which the firm’s sale grows faster than it’s capacity to finance from internal sources and borrowings which results in obtainment of finance at a very high cost.

Turnaround Process

The process of turning a sick Unit into a viable or a Profitable Organization. Perpetual changes Attitudinal changes Human Change Leadership Change Outside Intervention

Grinyer and Spender Model

Tightening of Control Waste Reduction & Elimination Cost Cutting Changes in the Product Mix and Customer Mix. Fresh Deployment of Resources to meet new commitments

of the Organization.

Causes Of Decline (Slatter & Stuart)

Poor Management Inadequate Financial Control High Cost Structure Lack of Marketing Effort. Competitive Weakness Big Project Acquisitions.

Suggested Generic Strategies

New Management & Organizational Changes & 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.

Types of Turnaround Strategies

Options in Strategic Turnaround

Entering New Business

Competing in a new way

HoferStrategic Turnaround Operating

Turnaround

OPERATING TURNAROUND STRATEGIES

Revenue Increasing & Cost Cutting

Strategy

Asset Reduction Strategy

Combination Strategy

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

Fixed Cost may be reduced if the organisation takes a decision to sell a part of it’s asset holding.

If the firm is operating “substantially” but not extremely below the break-even point, the approximate 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 iii) Reducing the quality of the product.

Increased sale will improve the 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 strategy all the 3 strategies identified earlier i.e i)Asset reduction ii) Cost Reduction & iii) Revenue generating strategies have to be pursued simultaneously.

When the firm is operating at a 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 profit.

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

The Turnaround Process

The various stages of Turnaround are discussed by S.Chowdhury as follows

Stage I – DECLINE Decline starts from firm Equilibrium and reaches a nadir.

Two theoretical perspectives-

K-Extinction : It suggests that macro or external factors are responsible for decline.

R-Extinction : It suggests the decline in the firm is due to the reduction in resources within the firm.

STAGE 2 : RESPONSE INITIATION

Response Initiation is the stage where the firm’s performance reaches it’s nadir and the management begins to take corrective actions.

Categories 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 the cultural shift.

Operating responses focus on the way the firm conducts it’s businesses such as cost cutting, revenue generation etc. It is used when the decline is due to efficiency.

STAGE 3 : TRANSITION

According to Prof. S. 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 definitive purpose. According to some researchers, on an average, performance

improvement takes place after or around 7 years. Ex : Ford took 4 years to introduce it’s successful Sable line

in response to it’s declining market share.

STAGE 4 : OUTCOME

At this stage, turnaround activities continue for a number of years.

Here, the outcome of activities undertaken during the third stage is realized.

The fourth stage involves determining whether a turnaround has been accomplished.

The measures used to define the outcome are the same as those that are used to identify the decline at the first stage of the turnaround.

Apple Inc

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 in 2000, and now at $168 ~ Principal initiatives were award-winning designs and substantially 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

Key events and concepts in turnaround

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