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1. Turnaround Strategies Turn around strategies derives their name from the action involved that is reversing a negative trend. There are certain conditions or indicators which point out that a turnaround is needed for an organization to survive. They are:
1. 2. 3. 4. 5. 6. 7.
Persistent Negative cash flows Negative Profits Declining market share Deterioration in Physical facilities Over manning, high turnover of employees, and low morale Uncompetitive products or services Mis-management
An organization which faces one or more of these issues is referred to as a ‘sick’ company. There are three ways in which turnarounds can be managed
The existing chief executive and management team handles the entire turnaround strategy with the advisory support of a external consultant.
In another case the existing team withdraws temporarily and an executive consultant or turnaround specialist is employed to do the job.
1985. which provides for a quasi-judicial body called the Board of Industrial and Financial Reconstruction (BIFR) which acts as the corporate doctor whenever companies fall sick. In other words. Retrenchment strategies are also characterized by the revenue generating. While cost cutting. divestment. A turnaround is typically accomplished through a two stage process. Many firms that have achieved a reversal of financial . or merging the sick organization with a healthy one. The critical role of retrenchment in providing a stable base from which to launch a recovery phase of the turnaround process is well established. it has to be first declared as a sick company. Before a turnaround can be formulated for an Indian company. The initial stage is focused on the primary objectives of survival and achievement of a positive cash flow. Retrenchment is an integral component of turnaround strategy. product elimination. Unchecked financial decline places the firm in a turnaround situation. the idea of revenue-generating is best captured by a strategy that is characterized by increased capacity utilization. product/market refocusing or cost cutting and asset reduction activities. The means to achieve this objective involves an emergency plan to halt the firm’s financial haemorrhage and a stabilization plan to streamline and improve core operations. its financial health is threatened.3. asset reduction and product/market refocusing are easy to visualize. If these factors continue to detrimentally impact the firm. The last method involves the replacement of the existing team specially the chief executive. and increased employee productivity. and downsizing the workforce. it involves the classic retrenchment activities: liquidation. Turnaround Process: The Turnaround Process begins with a depiction of external and internal factors as causes of a firm’s performance downturn. The declaration is done on the basis of the Sick Industrial Companies Act (SICA). A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions.
new markets. a clear strategy is needed for a firm. however. Recovery is said to have been achieved when economic measures indicate that the firm has regained its pre-downturn levels of performance. turnaround has most often been achieved through strategies based on a revenue driven reconfiguration of business assets. One possible explanation is that economic decline diminishes the firm’s resource slack. The question remains. as to why retrenchment is so frequently an appropriate first step in an overall turnaround process. retrenchment may be necessary to stabilize the situation by securing or providing slack regardless of the subsequent recovery strategy that is chosen. The means employed for achieving these objectives are acquisitions.or competitive decline inevitably refer to the presence of retrenchment as a precursor or prelude to the implementation of a successful recovery strategy. Resource flexibility provides additional slack and is achieved through asset redeployment Resource flexibility must be substituted for slack that has been largely depleted.the recovery response. The importance of the second stage in the turnaround situation is underscored by the fact that primary causes of the turnaround situation have been associated with this phase of the turnaround process. Consequently. and increased market penetration. Cost retrenchment helps to preserve the residual resources. new products. or when the heightened requirements of strategic redirection place additional demands on the firm for resources. These heightened requirements stem from concurrent demands on the firm to overcome the destructive momentum of the established strategy and to cover the high start-up costs of implementing the new strategic initiatives. Between these two stages. turnaround has been most frequently achieved through recovery responses that were heavily weighted toward efficiency maintenance strategies. For firms that declined primarily as a result of internal problems. As the financial decline stops. the firm must decide whether it will pursue recovery in its retrenchment reduced . The second phase involves a return-to-growth or recovery stage and the turnaround process shifts away from retrenchment and move towards growth and development and growth in market share. For firms that declined primarily as a result of external problems.
new manufacturing methods). new definition of business. financial and expense controls. the firm must choose either to continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a new recovery strategy that emphasizes growth. 3. Management (new head executive. The degree and duration of the retrenchment phase should be based on the firm’s financial health. efficiency or operating recovery strategies offer the best prospects for successful turnaround. O’Neill (1986) investigated the relationship of contextual factors to the effectiveness of four primary turnaround strategies: 1. Retrenchment (cost cutting and asset reducing) are sufficient under certain circumstances to re-establish the long term viability of the firm. It is at this point that the ultimate direction of the turnaround strategy becomes clear. acquisitions. Restructuring (change in organizational structure. His model predicted a negative relationship between growth strategies and turnaround success where there were strong competitive pressures. morale building among employees).form through a scaled-back version of its pre-existing strategy. Cutback (cost cutting. new top management team. add markets). Where firms were in weak market positions. 2. entering new product areas. Growth (new product promotion methods. or whether it will shift to a return-to-growth stage. Essentially. success was found for cutback and restructuring strategies. For firms competing in mature or declining industries. replacing losing subsidiaries). and 4. .
K. were merged in the year 2000. Then it started leveraging the synergies between the two companies. Refrigeration and Transmission. By the end of 2000. Subsequently both the companies. KPC then shifted 90 people from Pune to Faridabad for about three months during which time the company saw to it that the production continued at Faridabad with these workers. Since the sales of the KPC were already bottoming out and the Khosla product line with its manufacturing facilities was added to its plant in Pune. Currently its activities are grouped into four major divisions: Air-Compressor. KPC & KG Khosla. the company also restructured its Pune plant by reducing the strength by 650 people. and then diversified into Airconditioning. Every time any business hits the bottom. It started operations with the manufacture of air compressors and pneumatic tools in collaboration with Broom and Wade Ltd. there are two perspectives – external and internal. the company was left with no other option except to cut costs across the board. it focused on managing the internal working of the company.. The VRS at Faridabad was introduced with a total understanding with the parting staff. even on the external front. Since the management had little control over external factors. the company had a chance to buy out one of their major competitors – K G Khosla. etc. the sales bottomed out and the management realized that the business could not grow any more. The final . The move started in 1994 when KG Khosla Company became sick and the ICICI requested the Kirloskars to manage this business. Airconditioning and Refrigeration.Kirloskar Pneumatic Company Limited-Turnaround Success Kirloskar Pneumatic Company Limited (KPC) was set up in 1958. During the recession in the late 1990s. U. style of business. This triggered a period of introspection and the company started looking inwards. Fortunately. Hydraulic Power Transmission and Process gas. the management of KPC had through an understanding with the staff at Faridabad plant of KG Khosla reduced the employee strength considerably. The first thing KPC management team did was to understand the business of KG Khosla their product lines. After this activity at Faridabad.
As a result. Persistent negative cash flows from a particular business create financial problems for the whole company. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a turnaround has been attempted but has proved to be unsuccessful. involve a process of gradually letting a company business wither away in a carefully controlled manner Reasons for Divestment 1. KPC turned around after successful implementation of all these well planned initiatives during the period 1999 – 2002. The third element of improvement was adding new product lines to its existing range while concentrating on improving the efficiency of its existing products. Harvesting strategies a variant of the divestment strategies.strength of employees at both the plants after this whole downsizing exercise finally stood at 800. Divestment Strategies A divestment strategy involves the sale or liquidation of a portion of business. creating a need for the divestment of that business. profit center or SBU. . 2. or a major division. 3. Similarly a project that proves to be in viable in the long term is divested 2. The company then turned its attention on restructuring its debt to bring the interest costs down. The business that has been acquired proves to be a mismatch and cannot be integrated within the company. Severity of competition and the inability of a firm to cope with it may cause it to divest.
TOMCO was divested and sold to Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas.4.competitive and would have required substantial investment to be sustained. A preferable option would be to divest 5. Liquidation Strategies A retrenchment strategy which is considered the most extreme and unattractive is the liquidation strategy. causing a firm to divest a part of its unprofitable business. They identified their non – core businesses for divestment. 7. Sometimes a business unit or a whole company becomes so weak that the owners cannot find an interested buyer. Similarly. termination of opportunities where a firm could pursue any future activities and the stigma of failure Liquidation is the final resort for a declining company. This is the ultimate stage in the process of renewing company. A better alternative may be available for investment. where mutual exchange of unprofitable divisions may take place. The cosmetics company Lakme was divested and sold to Hindustan Levers. it was found to be a non. E. Lastly a firm may divest in order to attract the provisions of the MRTP Act or owing to oversize and the resultant inability to manage a large business.g: TATA group is a highly diversified entity with a range of businesses under its fold. Divestment by one firm may be a part of merger plan executed with another firm. 3. 8. the pharmaceuticals companies of the Tatas. A simple shutdown will prevent owners from throwing good money after bad once it is clear that there is no future for the business.Merind and Tata pharma – were divested to Wockhardt. Technological up gradation is required if the business is to survive but where it is not possible for the firm to invest in it. . Divestment may be done because by selling off a part of a business the company may be in a position to survive 6. as besides being a non core business. which involves closing down a firm and selling its assets. It is considered as the last resort because it leads to serious consequences such as loss of employment for workers and other employees.
When a firm has a stable internal and external environment the firm will . and increase the sale of accessories and consumables This strategy may be relevant for a firm operating in a reasonably certain and predictable environment. No-Change Strategy It is a conscious decision to do nothing new. Stability strategy can be of three types –No Change Strategy. Some companies file for bankruptcy instead of liquidating. liquidation may be a traumatic experience. Under this option. The Act provides for a liquidator who takes control of the company. The firm will continue with its present business definition. For many executives who are closely associated firms. Profit Strategy. and finally distributes any surplus among the members according to their rights. Pause/ Proceed – with – caution Strategy. 1. 2. Legal aspects of liquidation: Under the Companies Act 1956. The psychological implications 1. The prospects of liquidation create a bad impact on the company’s reputation. and alternative technologies – either singly or collectively E. collect its assets. The court will liquidate its assets. it pays off its creditors as best as it can. The proceeds will be used to pay off the firm’s outstanding debts.g: A copier machine company provides better after sales service to its existing customer to improve its company product image. pay it debts. If the firm can emerge from bankruptcy. The Act defines winding up of a company as the process whereby its life is ended and its property administered for the benefit of its creditors and members. customer functions.Bankruptcy is a last resort when the business fails financially. liquidation is termed as winding up. The stability grand strategy is adopted by an organization when it attempts at an incremental improvement of its functional performance by marginally changing one or more of its businesses in terms of their respective customer groups. the firm reorganizes its operations while being protected from its creditors.
Several small and medium sized firm operating in a familiar market. increase productivity and adopt other measures to solve the temporary difficulties. while others have decided to provide outsourcing service to other organizations. The purpose is to allow all the people in the organization . The firm has no new strengths and weaknesses within the organization and there is no opportunities or threats in the external environment. Sometimes things do change and the firm is faced with the situation where it has to do something. The problem arises due to unfavorable situation like economic recession.continue with its present strategy. raise prices. competitive pressures and like. and industry down turn. A firm may assess the situation and assume that its problem are short lived and will go away with time. Till then a firm tries to sustain its profitability by adopting a profit strategy For instance in a situation when the profit is becoming lower firm takes measures to reduce investments. 3. cut costs. 2. Others have removed some of its non-core business to raise money.more often a niche market that is limited in scope – and offering products or services through a time tested technology rely on the No – Change Strategy. Taking into account this situation the firm decides to maintain its strategy. or by firms that have an intense pace of expansion and wish to rest for a while before moving ahead. Pause/ Proceed with Caution Strategy It is employed by the firm that wish to test the ground before moving ahead with a fullfledged grand strategy. government attitude. During this kind of situation that the firm assumes to be temporary it would adopt profit strategies Some firms to overcome these difficulties would sell off assets such as prime land in a commercial area and move to suburbs. Profit Strategy No firm can continue with the No – Change Strategy.
The rest is divided between financial institutions and the public.g: In the India shoe market dominated by Bata and Liberty. In late 2000. It is a deliberate and conscious attempt to postpone strategic changes to a more opportune time.to adapt to the changes. This was done as a part of financial restructuring to relieve the company of its outstanding liabilities. E. . The Thapar family is the largest shareholder in the company with a 45 per cent stake. followed by UK-based Tate & Lyle. a B M Thapar group company. Hindustan Levers better known for soaps and detergents. For Bilt Chemicals. respectively. which has a 40 per cent stake. following the sale of its starch and citric acid divisions to English India Clays and Bilt Chemicals. the two buyers would actually take over the liabilities of Bharat Starch thereby reducing a major part of the debt burden of the company. As part of the deal. it started selling a few thousand pairs in the cities to find out the market reaction. produces substantial quantity of shoes and shoe uppers for the export market. the takeover of the citric acid plant in Gujarat was a perfect fit since the company was planning to go in for expansions in the segment. This is a pause proceed with caution strategy before it goes full steam into another FMCG sector that has a lot of potential Liquidation of Bharat Starch A case in point is the liquidation of loss-making Bharat Starch.