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Closed-Book Exam Ozzie Mascarenhas SJ
February 28, 2013 Section A: Answer any TWO questions from Section A for 5 marks each.
1. What is a Business Turnaround? What is a Business Turnaround Situation? Illustrate your answers.
What is a Business Turnaround? [Page 12] A failing business poses two main operational problems:
1. 2. How to resolve the day-to-day operational problems of cash flow management and How to restructure the debt and equity of the business until the corporation is back on its feet again.
Business Turnaround is the term that is used to refer to the process of solving both these operational problems in a business decline. Turnaround-rescue strategies deal with the first problem that primarily relates to cash flow management, and turnaround debt-equity-restructuring strategies deal with the second problem. Typically, business turnarounds deal with both rescue and restructuring strategies in relation to failing corporations. Under both strategies, turnaround management means improving the position of a given business as a low-cost provider of increasingly differentiated products and services in a highly competitive world (Zimmerman 1991:111). Restructuring is the term used to describe the process of developing a financial structure that will provide a basis for a turnaround (Gilson 2001). Declining companies like Air India, King Fisher, and Starbucks are experiencing both operational problems. What is a Business Turnaround Situation? [Page 111]: A turnaround situation implies a “survival-threatening performance decline over a period of years” (Barker and Duhaime 1997: 18). A turnaround situation occurs when the company experiences a sudden business reversal or has “hit the wall.” Hitting the wall is a rude awakening that occurs when a company, especially one that has enjoyed consistently high-level performance, suddenly confronts new factors such as confused leadership, ineffective management execution, and downturn in the economy, lack of product innovation or a missed market opportunity. Consequently, it experiences an inability to sustain profitable growth for a significant period of time (say, at least two years) (Hartman 2004: 5). Table 2.1 compares many management challenges specific to the healthy, high-growth and profitable companies in contrast to the sick, low-growth and unprofitable companies. In general, the larger the number of sick symptoms (listed in Table 2.1) an organization suffers from, the closer it is to a turnaround situation, and if not duly remedied, it will rush to its death. Apart from this list (Table 2.1) of sick symptoms, there is no fixed definition, necessary or sufficient conditions for a business turnaround situation. In general, several conditions become “jointly necessary” or “jointly sufficient” for a business 1
situations. antecedents. organizational sickness. of organizational underperformance. organizational crisis. For instance. causes and effects. 2. bankruptcy and death. In general. after the inflection point B). organizational decline. on the other hand. downturn. organizational bankruptcy and organizational death. corporate executives need not delay turning around a firm until sales are flat (phase CD) or declining (phases DE. organizational failure. in that order. [Page 11]: Any situation when an organization needs rescue is a turnaround situation. Hence. The best time to plan and execute turnaround strategies is when sales begin to increase decreasingly (i. insolvency. Table 2. organizational crisis. organizational distress. What is organizational underperformance? What is organizational decline? What is organizational downturn? How are they related to each other? Explain and Illustrate.1 profiles corporate high performance traits against corresponding underperformance symptoms. has gone beyond the stages of organizational underperformance. Such situations are: organizational underperformance. but not bankruptcy or death yet. We can best situate and examine the question of organizational underperformance against what is more obvious and studied .turnaround situation. That is.2 distinguishes several turnaround situations by necessary and sufficient conditions. determinants. [Page 15]: Theoretically. organizational sickness. any point beyond (or right of) B in Figure 1. corporate underperformance is an antecedent to corporate decline. What is organizational underperformance? [Page 17] Presumably. with some industry examples under each. Air India. King Fisher Airlines is experiencing all the above stages.. process and measures of underperformance from high performance as a contrasting phenomenon. organizational downturn. organizational distress. We can derive the definition.organizational high performance. organizational underperformance occurs for the opposite reasons: No clear definition of vision and mission No timeless core values No enduring purpose Compromising standards for the sake of expediency No well-planned long-term strategies Mostly ruled by tactics to make quick money Short-term gains at the expense of long-term losses Expansion into non-core business areas Over-diffusion of expertise and talent No great innovations or market breakthroughs Do not have a strong social mission or identity What is organizational decline? 2 . and facing currently. distress. concomitants. EF and FG) when it may be too late to bring about positive change. and may soon record organizational failure and experience organizational insolvency. by contrast. organizational decline. we could draw a profile. crisis.e. [Page 20] Based on seminal studies of organizational high performance. we need first to understand corporate underperformance in all its relevant dimensions. Table 1. organizational insolvency. organizational downturn.1 is a turnaround situation.
and globalization of resources and opportunities. This definition seems to have prevailed in the management literature judged by its consistent use by subsequent researchers.[Page 30]: Organization decline occurs when an organization becomes less adapted to its environment. plant closing. Sutton and Whetten 1988). Mone. tough competition. [Page 34]: Organizational downturn can be either latent or manifest (Ford and Baucus 1987). technology shifts. Organizational decline.. sales. and resources are subsequently reduced within the organization (Cameron. 3 as of to in . but are often determined by market forces. reflects company-specific problems. brand equity or reputation) to cover the cost of inducements. layoffs.g. downsizing and cutbacks are intentional aspects of an organizational decline. especially if the industry in which the firms operate. organizational downturns are macro industry-nation-global specific events that impact sets of firms in a given industry and are linked to external problems such as industry contraction.g. in costs. sales.g. theft. Freeman and Cameron 1993. however. The reductions via downsizing are planned and intended. is additionally experiencing organizational downturns. Ford 1980a. increase in demand.. defects) are noticed. all other consequences such as organizational restructuring. How are they related to each other? Explain and Illustrate. market share. What is organizational downturn? [Page 33]: While organizational decline is a micro firm-specific phenomenon primarily caused by internal problems. That is..g. in costs. in sales. A decrease in the resource base. acquisitions and the like do not generate proportionately adequate returns (e. differs from organizational downsizing: the latter is defined intended reductions in personnel (e.. profits) or upward changes (e. wage increases. thus defined. quality defects. Cameron. bribery and sabotage.. inducements of price reductions. government overregulation or deregulation. market share. Earlier definitions organizational decline (e. Whetten 1980b) relate more downsizing than to decline. new government regulation. technological obsolescence. Mone 1998). promotions. Latent or potential organizational downturns exist (Ford and Baucus 1987): a) when decision makers in an organization ascertain or anticipate the corporation’s inabilities to satisfy their inducement aspirations relative to other organizations (e. subsidiaries. and b) when absolute downward growth rates (e. profits) or upward rates (e. Either case of latent downturn can cause a manifest organizational decline. The latter can be absolute or relative. For instance. competition). profits. global competition.g. corruption.. producing potential shifts in demand. 1980b. Manifest absolute organization downturn occurs: a) when absolute downward changes in performance (e. fraud. An erosion of organizational resource-base poses as a threat to an organization’s continued viability. industry stagnancy. R&D. while a decrease in the resource base of an organization seems to be unintentional. Manifest relative organization downturn occurs when there is detrimental change in the inducement-contribution ratio (March and Cyert 1958) as viewed from the corporations’ decision makers. tougher EPA standards.. crime) are observed over a long period. [Page 29]: Prolonged organizational underperformance leads to organizational decline. McKinley 1987.. disruptive events such as crime.g.g. McKinley and Barker (1998) define organizational decline as a decrease in organizational resources. demographic shifts. Thus. crime. and b) when the organization’s demographics change. Kim and Whetten (1987) delineate organizational decline as a decrease in the resource base of an organization. advertising.g. shrinking markets. while those organizational decline are unintended. rebates. consumer credit. while an organization decline can also result from exogenous contexts of industry contraction.
What is organizational distress? What is organizational insolvency? What is organizational death? How are they interconnected and why? Illustrate. 2003. They were under organizational distress measured by various performance metrics: significant loss in sales. budget cuts. however. What is organizational insolvency? From a cash flow perspective. [Page 34]: Reasons given by top managers for their firms’ downturns and declines will influence the subsequent strategies chosen to reverse the decline.942 billion that quickly plunged to $49. ROE and EPS. This. It can be ascertained by two standard liquidity ratios and one activity ratio: [Page 50]. 2002 was $113. ROS. p. insolvency.2 reported negative ROS.Symptoms of organizational underperformance and decline include protracted erosion of sales. All companies listed in Appendix 1. reduced customer base. SD = 25. When current ratio and quick ratio both tend to zero and when average collection period keeps increasing. In fact. may reflect a charge from the cumulative effect of change in accounting of at least 10% (Fortune. and death-threatening agony.121 billion (Mean = $11. and loss in sales and profits per employee. loss in profits. and accrued interest and amortization. wage and price inflation.969 billion (56%) to its shareholders in exactly one year! Its regular vital signs such as ROA. and hence. or substantially depleted product demand. they are among the worst 25 U.267) loss in profits to shareholders.2 lists 15 companies in worst distress compiled from the Fortune 500 list of 2003. 2003. What is organizational distress? [Page 45]: Organizational distress is a state of company-wide exhaustion or weakness with strain of any sort. organizational insolvency is one’s inability to meet short term payables (or current liabilities) such as accrued payroll. These 15 companies totaled $166. Appendix 1. survival-anguish. suppliers. organizational downturns are macro industry-nation-global specific events that impact sets of firms in a given industry and are linked to external problems such as national and global stagnation. The short-term consequences of organizational underperformance and decline are negative cash flow and inability to honor payables while the long-term implications are financial adversity. ROA.921 billion in profits (ranked 491). as far as 2002-2003 profits are concerned. ROA. a loss of $63. ROE and EPS have been negative both in 2001 and 2002. anxiety. ROI and EPS. S. loss in ROS. bankruptcy and organizational death. F22). Its market value on March 14. The worst loser in profits was AOL Time Warner that reported a gigantic loss of over $98 billion in 2002. and soon gets out of control. April 14. or vice versa. [Page 33]: While organizational decline is a micro firm-specific phenomenon primarily caused by internal problems. 3. loss in market value. performers. The two events are intimately connected . distress. The organization in distress suffers pain. accrued taxes. financial losses. 4 .organizational downturn may precede and cause organizational decline.973 billion by March 14. shrinking markets and global recession. then insolvency sets in. market share. loss in Fortune rank.865 billion. The company experienced poor performance also in 2001 and lost $4.
Thus. decline. skills and capabilities and achieves sustainable 5 . mergers or name changes are not to be construed as deaths since the full set of the organization’s activities continues intact. A successful turnaround occurs “when a firm undergoes a survival threatening performance decline over a period of years but is able to reverse the performance decline. and the organization would not be revived in the near future. Bankruptcy and organizational death will quickly follow. A turnaround is a process of reversing organizational underperformance or decline. and the like. Sutton (1987) was one of the first to analyze how dying organizations make the transition to death. Organizations are cycles of events. What is organizational death? [Page 47]: Organizational death is insolvency. thus averting consequent organizational distress. business turnarounds occur “when a firm perseveres through an existing threatening performance dec line. Chapter 7 or 11 bankruptcy filing. Thus. Because business turnarounds deal with organizational survivals. coupled with organizational sickness and crises can generate organizational distress and strain and can render dayto-day production. crisis or death. labor malaise and union strike. Much has been written why organizations die or get bankrupt but little is written on the process of organizational death (Whetten 1987).Inventory)/ (Current liabilities) (Accounts receivable)/Average daily sales Average Collection Period Measures firm’s ability to cover its current liabilities Measures firm’s ability to cover its short term liabilities without selling its inventories Measures average time to receive payment after a credit sale Organizational insolvency can occur for other non-cash crisis reasons such as lack of innovation and technological patents. What is a Business turnaround Process? Explain and Illustrate. Business turnaround deals with reversing corporate organizational under-performance. we should now be better situated to explore the concept of business turnarounds. excess bad debts. [Page 45]: Prolonged organizational underperformance. even though under a different name or label. customer boycotts. insolvency or bankruptcy. crisis. no new product development or launches. Hence. overburdened with litigation costs and punitive damages. distress. 4. turnaround is viewed as a performance issue in strategic management. organizational decline and downturn. one definition of an unambiguous organizational death is that the set of activities that defined the organization did not exist anymore. If we view an organization as a social construction of reality. sickness. agitation from local communities. How are they interconnected and why? Illustrate. systems. [Page 59]: Given our discussions on organizational underperformance. ends the threat with a combination of strategies. distribution. excess plant underutilization. plants closings owing to ecological nonsustainability. technological obsolescence.Current Ratio Quick Ratio (Current assets)/(Current liabilities) (Current assets . then we can define it as dead if its participants perceive that it does not exist. liquidation and closure. and the complementary notion of bankruptcy. promotion. end the threat to firm survival and achieve sustained profitability” (Barker and Duhaime 1997: 18). and retailing operations inefficient and ineffective. and death. sickness.
Schematically: 6 . The obverse of performance recovery is organizational failure and eventual death. and hence. [Page 55]: Bankrupt firms are not the same as discontinued firms. Those who seek bankruptcy may either choose to liquidate the firm (via Chapter 7 provisions) or seek to reorganize it (under Chapter 11 provisions).g. such as loss of capital. 5. Discontinued firms are those that entrepreneurs voluntarily discontinue operations of for a variety of reasons. Edward Altman (1968) estimated the impact of five financial ratios on the probability that a firm will declare bankruptcy. In general. transfer ownership and control (Bibeault 1999:9-10). In this sense.recovery” (Chowdhury 2002: 250). creditors generally attempt to avoid forcing a firm into bankruptcy if it appears to have opportunities for future success. a firm may be declared legally bankrupt. Satyam manages to turnaround successfully. What is Bankruptcy? What is strategic bankruptcy? When and why do you file for bankruptcy? What is Bankruptcy? [Page 53]: Bankruptcy in the legal sense occurs when the firm cannot pay its bills or when its liabilities exceed the fair market value of its assets. inadequate profits. and even more. bankruptcy law and strategic bankruptcy]. almost an equal number are discontinued. discontinued firms are not tantamount to failure or bankruptcy. and ill health or retirement. However. Every year several hundred firms are started. Section B: Answer any THREE questions from Section B for 10 marks each. Those firms seeking out-of-court restructuring can also choose to either reorganize or liquidate. Reorganizing under both cases has two fundamental options: a) reduce or reschedule debt payments and b) sell assets or issue new equity (Gilson 2001: 24). Fortune 500) firms seek bankruptcy while smaller firms (who cannot afford heavy bankruptcy court fees and prolonged litigations) seek out-of-court restructuring. As long as the creditors are paid in full. In either of these situations. will not be tallied by Duns & Bradstreet. first my merging with Mahendra IT. by Ramalinga Raju still freely volunteering to steer the company from its bankruptcy to rescue and survival. Financially distressed firms seek either bankruptcy or out-of-court restructuring settlements. What is strategic bankruptcy? [Chapter 13 provides a more detailed presentation on bankruptcy. Most external observers of a firm rely on these financial indicators to predict decline and bankruptcy.. [Page 54]: Strategic bankruptcy deals with when. and second. how and what type of bankruptcy does one file when facing organizational insolvency (such as described above). large (e. a financial company that keeps tabs on bankrupt firms. why.
“Mental models are images. and every aspect of the world” (Senge et al. and they must understand the dynamics. the liability per bankrupt company has been growing at 16. Chapter 7 Bankruptcy filings of public companies have grown the fastest at 9. attorney fees. and the like. BTM models are also mental models. Particularly. there are a variety of alternatives to bankruptcy that corporations must be aware of before they file for bankruptcy. avoid Chapter 11 at all costs. customary court costs for recording and transcribing the proceedings. For many people in financial trouble. Moreover. emotions. governments. assumptions. 6. [Page 55]: Even though Chapter 11 protects you from your aggressive creditors for a while until you reorganize. There may be several other ways of resolving one’s financial trouble without resorting to bankruptcy. it consumes time.73 percent. energy.15 percent each year since 1980. choices and options that are available throughout and within the bankruptcy process. churches. accounting fees. institutions. Hence. other people. the number of bankruptcy corporate filings in the United States continues to rise through good and bad economic times (Grant 2003). 7 . bankruptcy is both undesirable and unnecessary (Strohm 1997: 8). However. bankruptcy is not the only option of the debtor when in financial and fiscal trouble. anxiety and fear – all of which deter you from turning your business around. larger publicly held firms seek Chapter 11 protection (Bibeault 1999: 10). A BTM model is a mental image or copy of the failing institution that we have and the way we plan to rescue and revive the company at the quickest time possible. auctioneer and other liquidation fees. It is a preliminary representation of something. 1994: 235). [Page 57]: Judged by 1980-2000 bankruptcy data in the USA. work departments. judged by assets lost for Chapter 11 bankruptcy filings of public companies.17 percent during 1980-2001. while Chapter 11 bankruptcy filings for nonpublic companies have grown the least at 2. However. political parties. Hence. That is.Options of Financially Distressed Firms Usually larger firms in bankruptcy courts: Bankruptcy Protection Provisions Chapter 7 for Liquidation Chapter 11 for Reorganization Financial Strategies Total liquidation Foreign joint ventures excluded Reduce or reschedule debt Sell assets and/or issue new equity Total liquidation Foreign joint ventures excluded Reduce or reschedule debt Sell assets and/or issue new equity Usually smaller firms out of bankruptcy courts Chapter 7 for Liquidation Chapter 11 for Reorganization When and why do you file for bankruptcy? Bankruptcy is a flexible and powerful tool for negotiating periods of financial distress. families. A model is a small copy or imitation of an existing object or project made to scale. The ailing business can ill-afford these fees. and stories that we carry in our minds of ourselves. referee and trustee fees. There is no rule of thumb or an easy formula about how far into debt one can be before considering bankruptcy. serving as an action plan based on which a larger action or institution is constructed. What is a Business Turnaround Management (BTM) Model? Describe Hartman’s Model of BTM. Philosophers. asset appraisal fees. and social associations. we have mental models of our institutions such as corporations. Generally. A general rule is that bankruptcy should be a last resort. Chapter 11 protection involves filing fees with the Bankruptcy Court. Each case is different. it is an expensive process.
have discussed mental models for millennia. when the rest of the world keeps on changing. Some basic properties of our mental models include: We are our mental models. Identify and focus on a few business initiatives that reinforce the core business mission. Balance the risk of guaranteed return vs. What we carry in our heads. and formulate effective business strategies that relentlessly link them to the core values. they cannot be good or bad. Unquestioned models can be disastrous. if we believe that people are basically trustworthy. and critical capabilities. are their images. We are bound by them. We do not carry our family. Accordingly. [Page 124]: To summarize Hartman’s ruthless execution. they are active. All three components help the turnaround managers to what he calls “strategic recalibration. Strategic calibration. They shape our perceptions. Use rigorous metrics on things that really matter. governance. we will talk to new acquaintances much more freely than if we believed that people are not trustworthy. We navigate through the complex environment of our world with cognitive “mental maps. an astute turnaround manager should concentrate on these four goals (Hartman 2004: 31): Goal 1: FOCUS: Determine what really matters. 28). We make sense of the world around us and take action through our mental models. strategic investment. and thus. hence. Mental models select what we see. Introduce incentives that strongly link to performance. Our mental models affect us as to what we see and how we see reality. Eliminate deadwood. All mental models are simplifications of reality around us. For example. our organizations and our corporations in our minds. Realign and allocate resources to various initiatives. Close non-performing programs. assumptions and stories. they should rearrange their portfolios of business initiatives. [Page 123]: Hartman’s Ruthless Execution Turnaround Model Based on decades of turnaround experiences. hence. and the models remain unexamined.” Mental models shape how we act. they shape how we act. We are often unaware of our mental models. our work. Sequence tasks in phases based on affordability and business absorption. Goal 3: RESOURCE ALLOCATION: Match assets to expected returns. the gap between our mental models and reality widens. Hartman (2004) frames the strategies of his “ruthless execution” turnaround model in three major categories: leadership. and condition how we see. They determine our selective observations. 8 . leading to increasingly counterproductive decisions and actions. Mental models determine what we see. Goal 2: BALANCE: Invest for today and tomorrow. As the world keeps on changing.starting from Plato and Aristotle. they remain unchanged. Set a course for the direction of the troubled company should take. implies many sub-strategies: a) b) c) d) e) The turnaround managers should identify and focus on key battlefields. Allocate resources based on strategic priorities. vision and goals. Set benchmarks and milestones and institute quarterly reviews against them. right or wrong. representations. however. Goal 4: MEASUREMENT: Everyone should be made accountable. Balance the mix of performance-driven and growthoriented initiatives. Balance between performance-oriented and growth-oriented efforts.” – the act of validating the direction and focus a company is going to take in encountering a business reversal (Hartman 2004: 15. however.
the nine strategies are: a) b) c) d) e) f) g) h) Get to the Point of Pain: Diagnose the problem. in its departments and divisions. Low-Cost Operation: This strategy primarily focuses on improving the firm’s e ffectiveness as a low-cost operator. and both mistakes are costly.7. complaints handling and redress. 9 . The process is supposed to rep eat itself. JIT for materials. and the “phoenix effect” now comes to mean rising from the ashes to immortality. Get the most from Assets: Scrutinize your working capital to identify superfluous or underutilized assets.g. product development. others too little. Compare and contrast the BTM Models of Zimmerman (1991). Handle Debt: Study your debt structure and review your debt obligations. selling and administrative (SAE) costs below industry levels). As a process. Carter Pate and Harlan Platt (2002) in their book. marketing and distribution). Pate and Platt (2002). inventory efficiency (e. liken their turnaround model or the corporate renewal process to a phoenix effect.g. high reliability and performance. repletion). Find out what hurts. Get the most from your Products: Target and study your customers. design. and retain it. and modest overhead (e. use orientation to differentiate your products and services from those of the competitors. Appropriate Turnaround Organization: This strategy calls for effective leadership. identify the immediate problem and determine what is ailing the corporate entity.. Most successful turnarounds include all three strategies and stages. and c) appropriate turnaround organization. [Page 122]: Zimmerman’s Turnaround Model Zimmerman (1991: 11-18) considers three key factors in successful turnarounds: a) a low-cost operation. warranties and guarantees. for shelving. Some companies take on too much. the fabled phoenix was a beautiful golden purple male bird that lived in the desert for exactly 500 years and then immolated itself on a funeral pyre. depending upon the unique situation of the company. Manage Scale: Monitor and achieve economies of scale. Briefly. Turnaround leaders should have significant experience in the industry they serve. The Phoenix Effect. in its technical and operational functions. b) product differentiation. Determine the Scope: Scope is the range of businesses and locations in which a company operates. debt covenants and contracts. dependable and exceptional product quality and market continuity that implies continual market supply of information. and Stalk and Lachenauer (2004). product differentiation involves distinguishing features. Get the most from your Employees: identify your best talent. whereupon another phoenix arose from the ashes. instruction and motivation on the products so that buyers can make comparative brand judgments.. production. Orient the Business: in a crowded market place. brands and stores. for finished goods. Product Differentiation: This strategy focuses on the differentiation of products and services. but with different combinations and sequences. Pate and Platt BTM Model: The Phoenix Effect [Pages 122-123]: In Egyptian mythology. develop. Low-cost operation involves operational efficiency (low cost innovation. Their model envisions nine revitalizing strategies that can resurrect virtually any company from the ashes.
domestic versus foreign outsourcing. such as SPCA. the indicator of tomorrow’s success or failure. importing versus producing abroad. A good leader masters today’s vital business signs. Low cost operation 2. constantly impatient with the status quo. c) Avoid Attacking Directly: Direct attack is more costly and uncertain. 10 . Will the actions hurt sensibilities of certain legitimate advocacy groups. Stalk and Lachenauer BTM Model: The Hardball Killer Strategies [Page 124]: Stalk and Lachenauer (2004a. both today and tomorrow. even though legal. and Stalk and Lachenauer (2004). and the like. so rich in possibilities. Hardball play is not about accounting shenanigans. Will competitors be directly hurt by the action? Then refrain from direct attack. Table 2. Orient the business Identify and resolve pain Justify business scope Business differentiation More comprehensive and systematic than the previous two models. and always fired with a sense of urgency. For instance buying your competitor’s suppliers. How you are doing is where you are going. may infuriate your customers. Appropriate turnaround organization Major Model Stage Focus Comparison with other BTM Models Previous BTM models focused on stopping the cash bleeding Zimmerman (1991: 11-18) Cost efficiency Cost containment Revenue generation Effective leadership Pate and Platt’s The Phoenix Effect Model 1. Product differentiation 3. Is the proposed action good for the customer? Hardball players never attain SCA by weakening or harming their customers. but want decisive or sustained competitive advantage (SCA) that competitors cannot match or replicate. A good leader never dwells on past glory. there are more economies of scale and force in an indirect attack. Get to the point of pain 2.5: Comparing Models of Business Turnaround Management [Page 126] Model Authors Business Turnaround Model Stages 1. 2004b) propose a “hardball manifesto” that could serve as an effective turnaround strategy. b) Convert Competitive Advantage to Decisive Advantage: Hardball players are not satisfied with CA which can be fleeting. where your competitor does not expect you. contract manipulation or predatory pricing (Stalk and Lachenauer 2004b: 12). ACLU and green environmentalists? Then hurting them is bad PR. Compare and contrast the BTM Models of Zimmerman (1991). just in time production and JIT inventory. Pate and Platt (2002). d) Exploit Employee’s Will to Win: Hardball requires guts as well as smarts.i) Produce the Product: Explore alternative modes of production such as owning versus leasing versus renting equipment or facilities. e) Know the Caution Zone: Good hardball players play the edges. probing that narrow strip of territory. Determine the scope 3. and thus competitive advantage (CA). To achieve SCA hardball players must be a hardball team that is action-oriented. the siren call of complacency. It lays down five principles: a) Focus relentlessly on competitive advantage: Hardball players strive continuously to widen the performance gap between themselves and the competitors.
Avoid direct attacks 4. and net decreases among at least three variables from the following: employees. Milk the assets 7. b) reduced marketing expenditures/sales. Stir employees’ will to win 5. Convert CA to decisive advantage 3. inventory/sales. Focus on competitive advantage (CA) 2. enhanced employee productivity. Over-focus on the competition. which normally are made public at the end of the fiscal year. Know the caution zone Closer to the Ruthless Execution than the Phoenix Effect Model. 11 . and why? [Pages 128-129]: Recent large-sample-based turnaround studies have focused on short-term operational changes and financial measures to execute and assess business turnarounds. A good sequence is: 1-7-8-9-2-4-5-6-3 Stalk and Lachenauer’s Hardball Killer Strategies Model (2004a. receivables/sales.b) 1. CGS/sales. Thietart (1988) found that positive financial returns resulted from various operations that cut costs and increased productivity. 8. What financial measures would you use to assess a business turnaround.(2002) 4. SGA expense/sales. Using VALUELINE data of manufacturing firms. Get the most from products 9. For instance. and increased plant and equipment investment. receivables. and CGS and SGA expenses. control and enhance your CA Transform CA to sustained CA or SCA Build SCA on your own scale and scope than by attacking competition Build and focus on team skills Avoid illegal and unethical living on the margin The sequence of the nine stages is questionable. Handle debt 6. b) inventory/sales. Killer strategies evoke direct attack on the competition. Using financial measures for assessing business turnarounds is problematic on several grounds: a) Changes in the financial ratios are captured primarily from financial statements. c) reduced receivables/sales and d) reduced inventory/sales. Get the most from employees 8. Optimize production Optimize economies of scale Optimize debt restructuring Divest unused assets Optimize skills management Product differentiation Optimize ownership Know. this delay may be too late for assessing certain turnaround activities. Hambrick and Schecter (1983) studied turnaround attempts of strategic business units (SBUs) that controlled mature industrial products. Ramanujam (1984) studied turnarounds from COMPUSTAT data and found that improvement in financial ratios was strongly associated with decreased: a) CGS/sales. Studying PIMS data of SBU turnarounds across varying industry environments. were also connected to increases in market share brought about by new products. c) receivables/sales and d) increased sales. Based on PIMS data. They found that performance (ROI) increases for declining SBUs were brought about by: a) reduced R&D expenditures/sales. however. ROI increases. inventory. Manage scale 5. Arogyaswami (1992) linked positive financial performance with decreases in at least three variables among the following: employee expenses/sales.
changes in corporate policy for entering new markets. d) Cutback strategies such as layoffs (retrenchment). 2.g. entering new markets. innovations. If the industry that the declining firm is inserted in is stable or growing. 3. 1. the latter two are activity ratios and not financial ratios). Extent of the firm’s performance decline. Some of these are (Barker and Duhaime 1997): a) The organizational need for strategic change: this. successful strategic turnarounds that dramatically increased sales may not reflect in the financial ratios. all of which are quality moves that do not reflect directly in the financial statements or in financial ratios. while slack financial resources may have great impact in implementing strategic change. GE and many other dramatic turnarounds. reducing assets (asset-reductions). Grinyer and McKiernan 1992). Slack financial resources may have the greatest effect in enacting strategic change. The latter need key strategic moves such as enhanced R&D. is not bound by existing firm policies. b) The organizational capacity to enact change: several factors determine this capacity. This was the case with Chrysler. The latter phenomenon may not stimulate the need for strategic change. The replacement of the CEO and/or chairman had better chances for strategic change and successful turnarounds than otherwise.b) Changes in the financial ratios are captured primarily from financial statements by observing changes in the amount or productivity of funds expended for some activity. is determined by: 1. Sears and Roebuck. especially as outsiders. 12 . designing new products. cyclical downturns. but not necessarily long term turnaround strategies. 2. and the like. CGS and SGA (cost reductions) may be short-term rescue strategies. Lack of adequate resource may stifle capacity to change. while the firm is declining (possibly owing to mal-adaptation to the industry environment). The new management. What are the factors that facilitate successful business turnarounds and why? [Page 132]: There are several factors that enable and ensure a successful turnaround. A fresh top management can bring new understanding. Mayes and McKiernan 1988. and new strategic alliances. and can freshly energize organizational members to strive for higher performance. new joint ventures. Extremely poor performance can force management to seek quick turnaround action. assuming a later response would exhaust slack financial resources required for change (Grinyer. accounts receivables turnover. gross profit margins. dynamism and direction to the firm. as managers may patiently wait for the upturn of such economic or fiscal cycles. K-Mart. and average collection period. Successful managerial responses to organizational decline may include qualitative changes (e.. Hence. c) Very few financial or accounting ratios include sales (exceptions are ROS. If the decline is brought about and corrected by external factors such as economic recession. or switching to new distribution channels all of which do not reflect in the financial statements) that financial ratios may not necessarily reflect (Barker and Duhaime 1997). 9. ecological regulation. Early response to decline is more likely to lead to successful strategic change. in turn. Replacing the CEO and other top management. 3.
c) Prospect Theory. Information crises such as theft of proprietary information. losses loom larger than gains).. supply breakdowns and product failures. and Reputation crises such as rumor mongering. Escalation of commitment is a repeated tendency for decision-makers to persist allocating investments (e. exodus of key employees. smearing. cyber-attacks and tampering with company records. For instance. Thus. fires.. Scholars invoke three theories in explaining executive escalation of commitment to failing causes: a) Expectancy theory: executives assume that additional resource allocations will lead to goal attainment. b) Self-justification theory: executives are conditioned by previous similar courses of action and are unwilling to admit them as wrong decisions.What are the current theories of successful Business Turnaround Management and why? 1. and blizzards. if they do not. 5. Normal accidents (system-wise breakdown) are of three types: economic crises such as recessions. a culture and long history that makes a firm desensitized to environmental challenges may dampen strategic change. capital. 5. 4. governance structure. 3.g. and Personnel crises such as strikes. workplace violence or vandalism Abnormal crises (deliberate ill-willed human interventions) are of three types: criminal crises such as corporate frauds.6 distinguishes seven types of crises that may impact a business reversal: 1. Natural disasters (acts of God): e. 174]: A current theory of explaining unsuccessful turnarounds is the Escalation of Commitment to a failing course of action (see Brockner 1992). and choice about whether to continue. 2. The value function is more steep in the domain of the losses than gains (i. tornadoes. time. This tendency persists with additional investments despite negative feedback from various stakeholders and increasing uncertainty surrounding the likelihood of goal attainment. stock market crashes and hostile takeovers. floods. they are expenses. History. 2. skills) on failing courses of action in the hope of attaining some goal or goals. 174]: Based on Mitroff and Alpaslan (2003).e. When the resources allocated lead to goal attainment. earthquakes.. Large firms spell inertia and bureaucracy that can slow strategic change. [Page 135-137. Physical crises such as industrial accidents. slander or logo tampering 13 . executives continue to invest in failing projects in the hope of turning the situation around. diversity or size may increase or decrease a firm’s capacity to implement strategic change. then the resources are viewed as investments. 6.4. Large corporations. kidnappings or hostage situations and acts of terrorism. however. rather than accept the sure loss were they to stop allocating resources at that point. Outsider-controlled boards provide better links to critical resources required for strategic change than insider-dominated corporate boards (Mueller and Barker 1995).g. culture. a principle known as loss-aversion. Escalation of commitment persists in a series of allocations that are expenses. product tampering. 7. may command more resources required for strategic change or for overcoming entry and mobility barriers (Porter 1980). [Pages 137-140. Changes (positive or negative) of wealth from some reference point are highly salient to decision makers. Table 2. 10.
9. 3. 22.and high-level jobs with outstanding internal talent whenever possible. Create and maintain top-of-the-line training and development programs. Improve productivity at a rate that is roughly twice the industry’s average. Do not hesitate to cannibalize existing products. Keep senior management actively involved in the selection and development of people. Design jobs that will intrigue and challenge your best performers. and your competitors’ breakaway product). 7. Make your organization easy to work in and work with. new technologies. 25. Put your best people closest to the action – to where the customers are. Fill mid.g. Joyce. Continually fine tune your strategy based on changes in the marketplace (e. Constantly strive to eliminate all forms of excess and waste. 14 . based on what your customers.. Reward achievement with pay based on performance. government regulations. Simplify. Deliver products and services that consistently meet customers’ expectations. 177-178]: Nohria. 17. 11.g. Promote cooperation and the exchange of information across the whole company. and Roberson (2003) also identify a list of executive behaviors under four secondary management practices that were characteristic of wining companies they studied: Talent: 20.. 21. Nohria. 8. Inspire all managers and employees to do their best. Pay psychological rewards (e. recognition. Execution: 6. Establish systems for the seamless sharing of knowledge. partners. 12. Relentlessly pursue disruptive technologies to develop innovative new products and services. investors want. monitor social trends. 14. Develop strategy from the outside in. 19. 4. 23. 18.11. Grow your core business. Joyce and Roberson (2003) model of Business Turnaround Management. Structure: 16. promotion) in addition to financial ones. Establish and abide by clear company values. 5. and Roberson (2003) identify a list of executive behaviors under four primary management practices that were characteristic of wining companies as follows: Strategy: 1. [Pages 149-151. Empower employees and managers to make independent decisions and to find ways to improve operations – including their own. satisfying work environment. Clearly communicate your strategy within the organization and to all external stakeholders. Keep focused.Describe and illustrate the Nohria. Joyce. 15. Build a strategy around a clear value proposition for the customer. Culture: 10. but keep raising the performance 13. Put decision-making authority close to the front lines so employees can react quickly to changing market conditions. Innovation: 24. 2. Create a challenging. and beware the unfamiliar.
and g) New technology creating price pressure. but not profitable enough because the flow of cash is unacceptable. c) Equipment failure that threaten productivity. and then do the following analysis A. Mergers and Partnerships: 31. King Fisher. Enter new businesses that leverage existing customer relationships and complement core strengths. and are difficult to detect. and closing deals. B. Turnaround managers look for both symptoms and causes of symptoms. the following are expected: A. Identify these symptoms and their causes in the failing company you have chosen above. The firm may be profitable. b) Deteriorating capital base. screening. Encourage management to strengthen its connections with people at all levels in the company. Inspire management to hone its capacity to spot opportunities and problems early. 32. C. Trace them in any ONE of the failing companies indicated above. Develop a system for identifying. Caplan (2003: 9-15) lists seven signs of sickness or trouble that can threaten a business: 15 . d) Poor employee morale. not just those dedicated to designing new products and services. and C: Air India King Fisher Airlines Satyam before it merged with Mahendra & Mahendra in 2009. Serious forms of organizational sickness are usually defined in terms of profitability. Closely link the pay of your leadership to its performance. Leadership: 27. When partnering. Caplan (2003: 9-15) lists seven signs of sickness or trouble that can threaten a business: a) Little or no revenue growth. Whatever case [Air India. Appoint a board of directors whose members have a substantial stake in the company’s success. move into new businesses that make the best use of both partners’ talents. 12. Symptoms provide clues as to what might be wrong with the firm. 33. BTM Case workout: Choose any One of the following Failing Companies of India. There is credible evidence that the cash or profit flow is soon going to be unacceptable. We should also clearly distinguish between symptoms from causes of corporate sickness or decline. f) Failure or closing of major customers. or Satyam] the student chooses to analyses. 28. 10 marks. Symptoms are merely telltale signs or danger signals that perceptive investors. Section C: Answer as indicated.26. Identify these cash flow problems and their causes in the failing company you have chosen. 30. Apply new technologies to enhance all operating processes. e) Unpaid taxes. but they do not provide a guideline for management action. A. 29. Causes are the sources of symptoms. customers and analysts quickly perceive. B.
Symptoms provide clues as to what might be wrong with the firm. [Facts. Cash flow problems: [Facts. but not profitable enough because the flow of cash is unacceptable. but they do not provide a guideline for management action. [Facts. figures and events from the case selected] b) Deteriorating capital base. Causes of cash flow problems: [Facts. and are difficult to detect. figures and events from the case selected] f) Failure or closing of major customers. figures and events from the case selected] B: Symptoms of business failure are different from causes of corporate sickness or decline. Causes are the sources of symptoms. figures and events from the case selected] g) New technology creating price pressure. figures and events from the case selected]. figures and events from the case selected] C: The firm may be profitable.a) Little or no revenue growth. figures and events from the case selected]. [Facts. [Facts. Identify these cash flow problems and their causes in the failing company you have chosen. customers and analysts quickly perceive. Symptoms of corporate sickness: [Facts. [Facts. Symptoms are signs or danger signals that perceptive investors. 16 . figures and events from the case selected]. figures and events from the case selected] c) Equipment failure that threaten productivity. Causes of Corporate Sickness: [Facts. [Facts. figures and events from the case selected] d) Poor employee morale. [Facts. There is credible evidence that the cash or profit flow is soon going to be unacceptable. figures and events from the case selected] e) Unpaid taxes.
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