TURNAROUND STRATEGIES By Dr. R.

Krishna

Definition of Turnaround
Recovery from decline in performance
Decline relative to a benchmark like GNP growth or industry growth or previous performance of organization. Questions: how much is decline? How much is recovery? Over what period?

Accepted definition
Turnaround is recovery to profitability from a loss situation. To guard against transient or even fake turnarounds, a TA was successful if the company was profitable for at least two years after at least one year of losses. And the net profit had to be at least 2% of total revenues in at at least one of these two years. (By Pradip Khandwalla, IIM A, Professor Source: Turnaround Excellence : by PK.
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Hypothetical case of turnaround

Company X: In 1989: Profit : USD 2mn, Total revenues: USD 80 mn; In 1990: on total revenues : 100 mn, a net loss of USD 10 mn. In 1991: On Revenues of USD 120 mn, net loss of USD 10 mn. In 1992: Net Profit of USD 1 mn on total revenues of USD 100 mn In 1993: NP of 1.5 mn USD, total Revs: 150 mn USD In 1994: NP of USD 4 mn; total revenues USD 160 mn.
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Turnaround was complete as per the definition. Two years of profit, beyond the loss last year 1991.

Major categories used for Analyzing Turnaround Cases (Turnaround actions mentioned 46 in number)

1. Change in top management (UTI, Nirlon, Nocil, IDPL, Metal Box etc) and Other managerial changes 2. Expert diagnostic activity (Maruti, 3. Mindset changes (change in values) 4. Assistance from external stakeholders coopted in the turnaround(K-mart, Enron, Worldcom under Chapter 11) 5. Public communication of TA strategy 6. Communication to mobilize staff for TA 7. Financial Incentives for staff 8. Example setting by CEO 9. Disciplining the staff 10. New benefits for staff (Konkan Railways: Mr. Rajaraman-

Had to absorb 3000 people or face VRS; they accepted one level 7lower posts

12. Mass layoffs of 10% or over staff strength 13. Voluntary downsizing 14. Other cost reduction measures 15. Actions for operating excellence (productivity, efficiency, quality, wastages, scrap,layout, JIT, collections, customer listening skills, etc) 16. Actions for sales push 17. Actions for increasing other income (sales of assets not required not performing ) 18. Actions for controlling finances expenses/travel, purchases, inventory, ROI, RO A&P, what else?) 19. Changes in planning system produce only when orders are 8 received.

19. Changes in budgetary control systems performance monitoring 20. Changes in MIS 21. Changes in marketing system Dealer appraisals, dual system of distribution, debtors, cash and carry, L/Cs, etc 22. Changes in R&D management 23. Restructuring related changes ( in borrowings interest, principal, deferment, lower interest rates, additional refinance based on collaterals, mortgages, new business models, etc. Nirlon directors were asked to bring in money and quit or face Economic offence charges.) 24. Liquidation of current assets 25.Reduction of current liabilities 26. Raising fresh equity
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27. Fresh long term borrowing 28. Asset or other write offs 29. Steps for reducing long term debts 30. Raising funds short term borrowing (from vendors, channel members, etc) 31. Fixed asset surgery 32. Diversification 33. Vertical Integration 34. Product mix changes (based on profitability) 35. Mergers, Acquisitions and Joint Ventures 36. Strategic Shift ( Intel and IBM)
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30. Changes in competitive strategy (markets, applications, price, distribution, packaging, extensions, variants, etc) 31.Indigenization of imported technology 32. Change of Board mix of bankers, others lenders and management gurus and operating personnel.

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TRANSFORMATION OF LUFTHANSA: Hit a bad patch in 1990s. Successive losses reported in 1991, 1992, 1993. Causes: Intense price ware in the airline industry followed by a recession and the war in the Persian Gulf were key factors along with an excessive focus on technical excellence at a time when customer service was a critical competitive factor Also the wage costs were uncompetitive: Lufthansa wage rates were reportedly 30% higher than those of British Air. In 1991: Mr. Jurgen Weber, an insider was given charge as chairperson.

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ACTIONS THAT PULLED LUFTHANSA TO GLORY: 1. HIGHLY PARTICIPATIVE BY Jurgen and his colleagues 2. He addressed a meting of 20 carefully selected managers in June 1992. 3. He made a strong case for Lufthansas restructuring. 4. He asked managers to come up with recovery package within one week. 5. Late in 1992, he held a restructuring workshop was held for company mangers. 6. 123 key actions were developed, aimed at cutting nonpersonnel costs as well as personnel costs, and also raising revenues
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7. The aim was to reduce losses by DM 1,300 million 8. These actions where then presented as Program 93 to Lufthansas supervisory board (which reported to the Board) 9. A smaller team of mangers called the OPS team was appointed to oversee the implementation of Program 93. 10. It was also asked to spot further possibilities to cut costs and formulate cost cutting related contingency plans 11. The team had no authority, but had clout because it had Weber s full support 12. The team members acted as prodders of decisions by line managers in accordance to Program 93. 13. The OPS TEAM visited various departments and reached over a 100 managers during 1992-1993. 14. It communicated to them the change in Agenda and tried to 14 overcome resistance and cynicism.

16. The New agenda laid stress on : ENTREPRENEURIAL VALUES, CUSTOMER ORIENTATION, AND HIGHER PRODUCTIVITY 17. Meanwhile, some 25 managers who had attended a four week training program and felt very concerned about Lufthansas decline declared themselves the SAMURAI OF CHANGE (Samurai: were dedicated Japanese warriors of yore with strict code of conduct). 18. They were commissioned by top management to communicate the gravity of the situation to LHs managers to stem losses 19. One of Samurais initiatives was the formation of crossfunctional teams to mount a co-coordinated assault on the unfavorable US-German bilateral agreement governing air transportation activities in each other s countries.
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19. With the help of Weber and German Chancellor Kohl, a codesharing agreement was later reached in 1994 that led to 1,000 additional bookings per day for LH on the shared network routes 20. Another cross-functional project was the evaluation of managers by their subordinates, and evolving of an open and fearless culture in which people could speak about what they thought ought to be done. 21. The Board many travelled all over the world to hold town meetings with the local LH staff to stress the imperative of improving service quality and invite a broader participation in the turnaround. 22. There was a persuasive approach to the Unions for a wage freeze till 1993. The concessions by the Union saved DM 500 mn
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23. Structure groups were set up in each Board led departments of the company. These groups had to be consulted on all important decisions, and consisted of three managers and three employee representatives 24. Over 200 new travel agencies were enrolled 25. A frequent flyer program was launched that had 800,000 members at the end of 1993. 26. The Nestor IT project was launched which could process information on over 1,000 catalogued routes 27. It could assemble information on flight patterns, competitors customers in order to compute the revenue and the yield efforts of various scenarios of flight scheduling (saved DM 300 mn) 28. Sophisticated software packages were developed in the areas of fleet capacity, network scheduling, pricing and yield 17 management.

29. A service quality index was developed to measure customer service and satisfaction and also used for rewards to employees 30. LH initiated a travel package that included a ticket to a concert 31. LH was reorganized, with decentralized area management and five new autonomous subsidiaries to deal with cargo, maintenance, ground service, etc. 32. The route sharing agreeement helped LH to fly to 26 US cities 33. Process re-engineering was carried out 34. Pay freeze from 1991 1993. Over 300 pilots and flight engineers agreed to work part time or take unpaid leave and over a hundred were contracted to other airlines 35. Hiring of flight attendants and cabin crews overseas a local rates (below german rates) was agreed to by the Unions. 18

40. Some maintenance and overhaul was shifted out to Ireland where it was cheaper 41. Ticket processing was shifted to New Delhi where wage rates were far lower 42. Excess capacity on US and NA routes were pared and outlays on data processing were slashed by nearly a third to save DM 335 mn. 43. No one was laid off, but some 8000 left voluntarily through early retirement packages. 44. The first step toward privatization were taken through a public issue 45. NET RESULT: A 1991 LOSS OF dm 426 MILLION ON REVENUES OF dm 16 BILLION WAS TURNED INOT A dm 312 MILLION PROFITIN 1994, AND dm 2,115 MN 19 PROFIT ON REVENUES OF dm 28 BN IN 1995.

TURNAROUND BUILDING BLOCKS: Tough actions : Managerial Overhaul; Asset cost surgery And Tighter controls and financial mending

Tender Action: Transformational changes; Restructuring and staff empowerment External Focus: Strategic shift; product market refocusing; sales push Internal Effectiveness focus: Actions for operations excellence And cost cutting (excluding through mass layoffs)
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Predicting business failure and tracking turnaround Edward Altmans statistical tool Multiple Discriminant Analysis to predict failure. Tool: tested over 66 US companies
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5 key financial ratios:

Working capital / total assets ratio Retained earnings / total assets ratio Ebit / total assets Market value of equity / book value of all liabilities ratio Sales / total assets ratio.

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5 ratios by Beaver (for SMEs)

Cash flow / total debt Net income to total assets Current minus long term liabilities to total assets Current ratio Debt equity ratio

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Trainable skills and traits for turnaround: Achievement drive Entrepreneurial behavior and calculated risk taking Communication skills- negotiation ability, persuasion, listening empathically Capacity to come up with fresh or innovative ideas, creativity Inter personal competence, ability to see other s point of view; give and receive feedback constructively and continuously Problem structuring and problem solving skills Leadership Stress Tolerance
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Trainable Turnaround thumb rules: Seize control of cash receipts and disbursements in the initial phase of TA. Talk to managers, cross sections of staff, customers, suppliers, etc. to get a feel for the key problems and to elicit suggestions Do a SWOT, Look for quick fixes: opportunities that can be quickly seized, costs that can be quickly and relatively harmlessly be cut. Follow the 80/20 rule Meet major external stakeholders, share facts and turnaround ideas; seek support and suggestions for TA Gave frequent regular meetings with managers to review operations, develop policies, evolve decisions and targets Set up cross functional task force to examine key problem areas 25 and recommend solutions.

Develop participatively new mission / vision for the organization and also some concrete objectives, that is in consultation with internal and external stakeholders. Keep communicating to them, especially the staff, the new mission / visions/goals of the company. Open channels for upward feedback Start some sort of MBO program; get mangers to fix key performance areas, concretize tasks to be achieved, etc Form new responsibility centers. Review performance.

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What is expected from the KFA case: Step One: History of KFA Industry Overview Market Analysis Market of KFA and some reports on its performance for the last three years KFAs take over of Deccan Airlines for USD 300 mn and its action on acquisition of DA the birth of KF Red KF Red its performance and market perceptions KFAs foray into the international markets and its expansion strategies and ambitions Cost structure of the Airline business and with specific emphasis of KFA KFs last three years financial statements and analysis
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Analysis of the Market share Study the decline from the financial results from when did it start? Did KFAs management overlook the negative performance due to its over confidence? Explain its buyout of huge aircrafts and its rationale for expansion Outline your turnaround strategies: Total debts : Net loss : Networth : Equity (current): Cost of operations breakdown the cost elements and analyze them for action Etc., Etc..

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You get a total of only 45 minutes Prepare a quick ppt and make the presentation This will be graded on 10 marks team work Thanks and all the best. 5th December, 2011 Dr. Krishna Ram

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