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Turnaround Strategies

Terms used
Turnaround situation represents absolute and relative-to-industry declining performance of a magnitude to warrant a explicit turnaround action The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity

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 year end exceed 50 % peak networth SICA, 1985 BIFR SARFAESI Act, 2002

Choices for Sick 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 improvement areas

Harvest Strategy
Steers middle course between status quo and exiting quickly Involves gradually sacrificing market position in return for bigger nearterm cash flow/profit Objectives
Short-term - Generate largest feasible cash flow Long-term - Exit market

Types of Harvest Strategies


Reduce operating expenses to rockbottom Hold reinvestment to minimum Place little priority on new capital investments Emphasize stringent internal cost controls Trim advertising and promotion expenses Do not replace employees who leave Shave equipment maintenance

When should a harvest strategy be considered


Industrys long-term prospects are unattractive 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 firms portfolio of businesses

Divestment
Reasons for divestment

Approaches to divestment
Spin-off into an independent company Outright sale of the unit

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 than bankruptcy 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 of time to fortify a firms distinctive competencies, returning it to profitability

Change management with emphasis on rapid reconstruction, where in its absence, a business could face closure, enter terminal 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, performance incentives

Causes of organisational decline


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 to improvise solutions Each (successful or unsuccessful) turnaround is an experiment, which can trigger many learnings