Turnaround Management

Prof Ashish K Mitra

 Turnaround Management
• Turnaround is an important aspect of strategic
management
• Turnaround occurs when a firm survives
through an existence threatening performance
decline and emerges out of it while achieving
sustainable performance recovery. (the
opposite of performance recovery is failure and
eventual death of the firm)
• Achieving Turnaround requires a combination of
strategies, systems, skills and capabilities.
• Turnaround takes several years in most cases
 Turnarounds : A 4 Stage Theory Perspective : Shamsud D Chowdhury

Stage 1 Stage 2 Stage 3 Stage 4

Decline Response Transition Outcome
Initiation

P
E Success
R
F
O
R
M
A Failure
N
C Nadir
E Indeterminate

Time
• Economic volatility have created climate where
no business can take economic stability for
granted.
• Though external forces such as competitive
strategies of immediate competitors and
pressure from shareholders influence outcome of
turnaround, top management can still control it
to a great extent.
• Second stage is taking immediate corrective
actions but transition stage is the most complex
of all stages. Here the firm experiments with
different strategies, structures, cultures, and
technologies.
• Four stages & key attributes of a turnaround
– Stage 1: Decline - Declining performance is the
trigger for turnaround.
– K – extinction perspective – macro or external factors
are responsible for the decline.
– R – extinction perspective theory : decline due to a
reduction in resources within the firm
– External factors or inadequacy of internal resources
or both could be the source of decline. Triggers could
be more than one source like pressure from bank,
creditors, stockholders, government, press etc which
may even demand change of management or CEO
– Stage 2: Response initiation – Turnaround responses
could be strategic or/& operating responses. Strategic
responses ( to tackle structural shifts in the market) could
be changing or adjusting business/ product portfolio
including diversification, vertical integration, and
divestment. Operating responses including aim at cost
cutting, revenue generation or removing inefficiencies.
Domain definition, Scope, Strategic contours
– Stage 3: Transition – Turnaround is undertaken with
definite purpose, ie; target and time scale in mind. This
stage is the actual field implementation and a substantial
amount of time ( 4-7 yrs)has to pass before the results of
turnaround show. Resource commitment, Policy /
Program, structure, Reward
– Stage 4: Outcome – involves determining whether a
turnaround has been accomplished by performance
measures. A cut off point of Performance measures used
• Turn-Around Management often involves complex
financial situations with respect to lenders, debt and
capital. Expertise in form of leadership and knowledge to
assess and restructure financial agreements may be one
of the needs.
• A company-wide assessment using a multidisciplinary
approach is needed. This overall review incorporates
operational, financial and organizational evaluations and
external business and macro economic environment.
• Among Operational responses , some involve
– Productivity Engineering
– Operations Troubleshooting
– Financial and Cost Management
– Asset Management
– Hands-on Management
Some major Turn around cases in Strategy

• Turning Around of Chrysler

• IBM
• Nissan
 Turning Around IBM
• IBM’s decline started in late 80s. During 1986-92, IBMs
overall market share in IT industry in US fell by 37%, global
share by 30%. In 1993 reported a loss of $8.1 b
• Reasons for IBMs decline – more attributed to R-extinction
than K-extinction factors
• Company had 24 product units functioning independently.
CEO Aikers even announced a plan to split the company
into independent units. Mainframe & storage systems , which
contribute 50% of revenue were fast loosing ground, PC
division was not generating profit.
• IBM response initiation stage was marked at both strategic
& Operational levels.
• Strategically positioned its server family to meet needs of
ERP & e-Commerce applications. Moved from Product-
centric to customer-centric in order to provide complete
solutions to its customers.
• Louis Gerstner brought a radical change in the work
culture at IBM, undertook many cost cutting initiatives.
Sold some units ( Federal system, IBM property, IBM Art
Collection)
• Transition stage included reversal of Aiker’s plan of
splitting IBM in 11 entities. Integrated divisions to appear
single face to customers.
• Result & Performance driven culture. Life time
employment policy abandoned. Performance & cost
monitoring systems ( production scheduling, sales etc)
introduced. Strong communication channel introduced
with internal and external stakeholders.
• Appointed new head of PC unit from consumer industry.
• Outcome by 2001, net profit at $7.7b, share price went
up by 800%.
• IBM moved towards total solutions
provider. Increase emphasis on software
products, services , facilities management
from primary focus on Products only.
• Acquired Large software companies like
Lotus.
• IBM’s current revenues are more from
non-product sales
Turnaround Specialist

• Turnaround specialist bring fresh eye and

complete objectivity. This professional is able to
spot problems and create new solutions that may not
be visible to company insiders.
• Has no political agenda or other obligation to bias
the decision-making process, allowing him or her to
take the sometimes unpopular, yet necessary steps
for survival.
• Experience in crisis situations when a company is
facing bankruptcy or the loss of millions in revenue
• The turnaround specialist must deal equitably with
angry creditors, frightened employees, wary
customers and a nervous board of directors
• Incumbent management in Corporate troubles
often go through the processes : denial, anger,
bargaining, depression and then finally
acceptance. The last stage is when
corporations hire turnaround professionals,
unless forced to do so earlier by a lender,
equity sponsor, or bankruptcy court.
• Corporate managers who recognize and
acknowledge the signs of trouble and get help
in the earlier stages have a much better chance
of a successful recovery for their corporation.
• Most businesses in distress will display more than one
of these common signs of trouble:
• Ineffective management style: The president and
founder of a company is unable to delegate authority.
• Over diversification: too much diversification
causes it to spread too thin. As a result, the business
becomes vulnerable to the competition.
• Weak financial function: excessive debt and
inadequate capital, operating with little or no margin
for error, credit overextended and excessive fixed
assets and inventories.
• Poor lender relationships: weak financial position
leads to the company developing an adversarial
relationship with its lending institution. The company
tries to hide financial information from the bank. This
kind of lender relationship only leads to more trouble.
• Lack of operating controls operating without
adequate reporting mechanisms. Management
decisions based on old or inaccurate information can
head the company in the wrong direction.
• Market lag : deficiency is technology; obsolete
equipment or products and services . For others, the
problem may lie in sales and marketing; the company
hasn't kept pace with the needs of the marketplace.
• Explosive growth Companies achieving fast growth
by concentrating on boosting sales overlook the effects
of growth on the balance sheet. Leveraging a company
to a high degree means that management must
operate with little or no margin for error.
• For example, managing engineering operations for a
company with 12 plants is much different than
managing one with two plants. A company can grow
beyond its ability to manage.
• Precarious customer base The business relies on a
few big customers for most of its sales
• Family vs. business matters Family issues causing
decisions to be made based on emotions, rather than
sound business judgment. Sibling rivalry has ruined
many privately-held companies. Nepotism can cause
bright, skillful managers who aren't part of the family
circle to take their talents elsewhere.
•
• Operating without a business plan
• Some times a growing company is operating
without a business plan. Armed with 15 or 20
years experience in the business, management often
operates by the seat of its pants. Its plan may
change overnight because the plan is based on
management's own "feel" for the market. In some
cases the business plan exists in everyone's head
rather than in writing. The result is that plans are
carried out according to individual
interpretation.
• Poor strategic choices or poor execution of a good
strategy could be the source of company going down
hill.
• Stage One : Changing the management
• Most CEOs don't relinquish power easily. egos make
it hard for them to admit such a downturn is really
happening or that they are unable to pull the company
out of its nosedive.
• So, usually the first step is to put into place the top
management team who will lead the turnaround
effort. In many instances, the board of directors
selects and hires the turnaround specialist, although
others such as bankers and corporate attorneys may
also be involved.
• During this stage or after Stage Two—situation
analysis—steps are taken to weed out or replace any
top managers, which may include the CEO, CFO or
weak board members, who might impede the effort.
• Stage Two : Analyzing the situation
• determine the chances of the business's
survival, identify appropriate strategies
and develop a preliminary action plan.
• Finding and diagnosing the scope and
severity of the company's ills.
– Is it in imminent danger of failure?
– Does it have substantial losses but its
survival is not yet threatened?
– Or is it merely in a declining business
position?
• The first three requirements for viability are
analyzed:
• One or more viable core businesses, adequate bridge
financing and adequate organizational resources.
• Assessment of strengths and weaknesses follows in the
areas of competitive position, engineering and R&D,
finances, marketing, operations, organizational
structure and personnel.
• The turnaround professional must deal with various
groups. The first is angry creditors who may have
been kept in the dark about the company's financial
status. Employees are confused and frightened.
Customers, vendors and suppliers are wary about the
future of the firm. The turnaround specialist must be
open and frank with
• Stage Three : Implementing an emergency
action plan
• When the condition of the company is critical,
Emergency surgery is performed to stop the
bleeding and enable the organization to survive. At
this time emotions run high; employees are laid off or
entire departments eliminated. After sizing up the
situation makes these cuts swiftly.
• A positive operating cash flow must be
established and enough cash to implement the
turnaround strategies must be raised. Frequently, the
turnaround specialist will apply some quick, corrective
surgery before placing them on the market.
• The plan typically includes other financial,
marketing and operations actions to
restructure debts, improve working capital,
reduce costs, improve budgeting practices,
correct pricing, prune product lines and
accelerate high potential products.
• The status quo is challenged and those who
change as a result of the plans are rewarded
and those who don't are sanctioned. In a
typical turnaround, the new company
emerges from the operating table, a smaller
organization but no longer losing cash.
• Stage Four : Restructuring the business
• Once the bleeding has stopped, turnaround efforts
are directed toward making current operations
effective and efficient. The company must be
restructured to increase profits and return on assets
and equity.
• Eliminating losses is one thing, but achieving an
acceptable return on the firm's investment is another.
• The financial state of the core business of the
company is particularly important. If the core
business is irreparably damaged, then the outlook is
bleak. If the remaining corporation is capable of long-
term survival, it must now concentrate on sustained
profitability and the smooth operation of existing
facilities.
• During the turnaround, the product mix may
have changed, requiring the company to do
some repositioning. The company may even
withdraw from certain markets or target its
products toward a different niche.
• The "people mix" becomes more important as
the company is restructured for competitive
effectiveness. Reward and compensation
systems that reinforce the turnaround effort
get people to think "profits" and "return on
investment."
• Stage Five : Returning to normal
• In the final step, the company slowly returns to
profitability. Institutionalizing an emphasis on
profitability, return on equity and enhancing economic
value-added. The company increases revenue by carefully
adding new products and improving customer service.
Strategic alliances with other world-class organizations
are explored. Emphasis shifts from cash flow
concerns to maintaining a strong balance sheet,
long-term financing, and strategic accounting
and control systems.
• Rebuilding momentum and morale is almost as
important as rebuilding the ROI. It means a rebirth of
the corporate culture and transforming the negative
attitudes to positive, confident ones as the company
maps out its future.
• Judging the success or failure of a
turnaround
• A company may put a quick end to its disastrous losses
but never quite attain an acceptable return position. When
this occurs, management may decide to sell the business to
a company better able to produce an acceptable return on
the funds invested. In a sense, this is not failure at all
• The company may very well thrive and reach new heights
under different ownership. Here, the turnaround manager
can play a key role in identifying prospective purchasers
and then negotiating a successful sale.
• Ironically, some companies never reach Stage Five
because of significant success in the earlier steps. The
turnaround becomes so successful that the company
becomes a target of a takeover bid.
• TMA
• CTP