turnaround

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Turn Around Management Strategies : 

Turn Around Management Strategies MBA – SEM IV 2011 Business Strategy- II Prof. Shreeniwas V. Bidwai

Turnaround Strategy : 

Turnaround Strategy What is Turnaround? Higher costs of wages and raw materials. Decreased demand that can be the result of temporary demand dips (such as lost government contract) or more general recession. Strikes of employees. Increased competitive pressures. Management problems. Decreasing market share. Decreasing consistent rupee sale. Decreasing profitability.

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Increasing dependence on debt. Failure to reinvest 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 competitors.

Factors For the Corporate Decline : 

Factors For the Corporate Decline a. Industrial Financial Control- No adequate control on cash inflow and outflow, does not know which product or the market is losing, why it is losing? b. Ineffective Management- One man rule: All power is concentrated in the CEO. Combined chairman and chief executive: It weakens not only the process of execution but also effective monitoring and controlling system. Ineffective Board of Directors: Most members of Board of Directors are merely rubber.

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Other managerial shortcomings: Most mangers manage to sneak into organizations either through inheritance or other backdoor entries. Competition Competition in the light of liberalization and globalization accepted as the basic parameters of organizational functioning.

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d. High Cost Structure High cost structure compared to competitors is a distinct disadvantage to the organization. Company’s liabilities to take advantage of economies of scale of production. Absolute cost disadvantage owing to ineffective control of strategic variables. Under – utilization of capacity owing to lack of demand or ill – maintenance of plant and machinery. Other operating inefficiencies and Unfavorable government policies.

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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. 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. Big profits and acquisitions: Undertake big projects without the resources or the expertise to manage. Likewise, the company when it involves into the business of acquisition and the acquired company is already weak and inefficient.

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h. Irrational financial policy: i. High debt – equity ratio. ii. Use of inappropriate financing sources. iii. Inappropriate cash management. 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.

TURNAROUND PROCESS : 

TURNAROUND PROCESS The process of turning a sick unit into a viable or profitable organization. Perceptual changes Attitudinal changes Human change Leadership change Outside intervention

GRINYER AND SPENDER MODEL : 

GRINYER AND SPENDER MODEL Tightening of control Waste reduction/elimination Cost cutting Changes in the product mix and customer mix and Fresh deployment of resources to meet new commitments of the organization.

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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

CAUSES OF DECLINE (Slatter and Stauart ) : 

CAUSES OF DECLINE (Slatter and Stauart ) Poor management. Inadequate financial control. High Cost Structure. Lack of Marketing effort. Competitive weakness. Big Projects Acquisitions.

SUGGESTED GENERIC STRATEGIES : 

SUGGESTED GENERIC STRATEGIES New management and organisational change and decentralisation. New management; improved financial control; decentralisation. 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 : 

TYPES OF TURNAROUND STRATEGIES

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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.

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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.

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Stage 1 Decline Stage 2 Response Initiation Stage 3 Transition Stage 4 Outcome Nadir Indeterminate Performance Success Failure Time Firm Equilibrium Firm The Turnaround Process

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The various stages of the turnaround process are discussed in detail below as per S. Chaudhary- 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.

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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.

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STAGE 3: TRANSITION According to 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 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.

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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 : 

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 : 

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 : 

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 : 

Key Events and Concepts in Turnaround STAGES

THANK YOU : 

THANK YOU