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Syllabus Turn Around Management: Turnaround Indicators Turnaround Stage Theory Decline Response Initiation Transition Outcome.
1. 2. 3. 4.
Higher costs of wages and raw materials Decreased demand that can be the result of temporary demand dips (such as lost government contract) or more general recession. Strikes of employees Increased competitive pressures
Management problems Decreasing market share Decreasing consistent rupee sale Decreasing profitability Increasing dependence on debt Failure to reinvest in the business Diversification at the expense of the core business Lack of proper planning Inflexible chief executive Management succession problems Unquestioning Board of Directors A management team unwilling to learn from its competitors
Management is ineffective on account of following factors: i)One man rule: All power is concentrated in the CEO, hence he keeps on repeating his past follies.
ii)Combined chairman and chief executive: When planning and execution are concentrated in a single hand, it weakens not only the process of execution but also effective monitoring and controlling system iii)Ineffective Board of Directors: Most members of Board of Directors are merely rubber stamps to sign on dotted lines with the result that the organisation continues to faulter on all fronts. Iv)Other managerial shortcomings: Most mangers manage to sneak into organisations either through inheritance or other backdoor entries.
d.
f.
complacency which is reflected in the form of lack of marketing effort. To keep up the tempo of sale for the product, the product ought to be so presented that it looks attractive and presentable.
g.
projects for which they do not have either the resources or the expertise to manage. Consequently, the companys funds gets blocked without adequate return on investment. Likewise, the company when it devolves into the business of acquisition and the acquired company is already weak and inefficient; it is apt to result in losses.
sources
i. High debt equity ratio
i)Over trading: Over-trading is that situation in which the firms sale grows faster
than its capacity to finance from internal sources and borrowings. It results in the obtainment of finance at a very high cost. Such higher cost is not warranted by the price obtained by the organisation.
Turnaround process
Turning a sick unit into a viable or profitable organization is both challenging and daring.
Involves complex processes as it incorporates all those corrective actions, the absence of which have created the present state of sickness in the organization.
Involves both perceptual and attitudinal changes among all employees operating at different levels.
The complexity of turnaround gets compounded by the process of human changeschange may lead to change in the leadership of the organization or Human in the organization.
Grinyer and Spender have given a model of the turnaround process. The process has three important components: Tightening of control Changes in the product mix and customer mix and Fresh deployment of resources to meet new commitments of the organization.
Effective controls have a positive impact on: cost reduction and wastage elimination.
The financial and administrative control systems are apt to improve the profitability position provided they are backed by proper quality of the products and the image of the organisation.
In addition, the company may require overhauling through a new product mix and even a market mix.
Adoption of Recipe
Development of Strategy
Implementation
Corporate Performance
Stage 3
Stage 2
Stage 1
If Unsatisfactory
Tighten
Controls
This process of bringing about a revival in the firms fortunes is what is termed as Turnaround Management.
Stages involved in Turnaround management: 1 The diagnosis of the impending trouble or the danger signals 2. Choosing appropriate Turnaround Strategy 3 Implementation of the change process and its monitoring.
Turnaround Manager
Product Viability
Strategic Turnaround
strategic turnaround choices may force the company to completely change its current way of operations New Business New way to compete
Operating turnarounds
Primarily 4 strategies qualify under operating turarounds:
Asset reduction strategies
Combination strategies
Combination Strategy
Chrysler Corporation
Great Strategy:
~ Invented the Minivan ~ Bought Jeep early in the SUV revolution
Cars:
~ Emphasis on smaller and more affordable cars ~ Spectacular. Share price from low of $9 in 1990 to $45 in 1993 when ~ Chrysler purchased by Daimler-Benz in 1998 for $35 billion
turnaround completed
Conclusions:
~ Fundamental competitive weakness versus the Asian producers never adequately addressed
IBM Corporation
Broken Strategy:
~ Premium prices way too long ~ Decentralization to a fault
Conclusions:
~ Growth in the services industry is slowing Could indicate additional restructuring to come Under the guidance of Prof. S.V.Bidwai
Apple, Inc.
No Strategy:
~ Key R&D resources being squandered on Newton ~ No plan to conquest Microsoft customers
Business Model:
~ Serious distribution issues ~ Losing dominance in education to Dell
Conclusions:
~ Continual innovation--the latest being the iPhone
Challenges Encountered:
Wrong Attitude:
Bajaj was a scooter company and therefore the mobike department was given second-class treatment (it was only 10 per cent of their business in 1996), the quality of the products was poor, and they did not offer fuel efficiency the way the Japanese bikes did.
Too many suppliers:
The brothers discovered that they had over 1,000 vendors supplying them components, many of which were plain bad, Rajiv Bajaj decided to prune them down to a realistic 200.
Get the right products at the right price: To bring in Japanese productivity tools to reduce costs just as the competitors were doing. Importance to nitty-gritty details: The CEO took up the cudgels by personally supervising even nittygritty details, from the styling and paint to the design of the console, the right grip and even the spark plug to use.
Results
Bajaj is the market leader in the premium bike segment.
Total Sales 2,78,000 in numbers in November 2009 35% of total volumes exported Discover sales 94,265 units Pulsar sales above 50,000 units
Background: Hindustan Motors is an automobile manufacturer from India. It is part of the Birla group of
industries.
The company was the largest car manufacturer in India before the rise of Maruti Udyog (MUL).
It is the producer of the famous Ambassador car, widely used as a taxicab and as a government limousine.
One of the original three car manufacturers in India, founded in 1942, it was a leader in car sales until the 1980s, when the industry was opened up from protection.
Hindustan has a joint venture with Mitsubishi, producing versions of the Lancer and Pajero, but is best known for its own models.
Ambassador
Ambassador - the first car to be manufactured in India, has been ruling the Indian roads ever since its inception in 1948 and the only automobile to ply Indian roads for more than five decades now, has carved a special niche for itself in the passenger car segment.
It's dependability, spaciousness and comfort factor have made it the most preferred car for generations of Indians. The Ambassador's time-tested, accommodating and practical characteristics make it a truly Indianised car
However the Indian behemoth had a run for money when global players entered India
Porters Model Analysis
HM was unable to create barrier for potential new entrants, many foreign collaborated entrants like Maruti Suzuki, GM, Toyota launched and HM was unable to compete with their existing strategies
Bargaining Power of Suppliers: Even suppliers were not looked into deep, company was in a snail pace and couldnt take up the challenge of new potential entrants in the market, including the suppliers of its different parts
Threat of Substitute: HM was focused only to one segment till 1997 and with in that time MUL was able to bring out brands for each segment with in the nation. Substitute for the brand was quite visible in the economy Rivalry within the company also lead to downfall of the company and ultimately leading to less market share. Eg. Internal Problems, Union problems etc.
HM is just that elephant that is still valuable for many. At one time, the plant had about 15,000 workmen and engineers at one time. Today the number must be hardly couple of thousands.
Pay offs
Contd.....
Mitsubishi source components from Hindustan., sourcing components from a low cost base like India through partner Hindustan Motors will prove beneficial for Mitsubishi, especially when it is facing problems. Hindustan Motors already supplies engines and other auto components to M& M, GM and Ford in India. With Mitsubishi sourcing components, and HM possibly manufacturing some of them, the Indian partner would be able to use some of its idle capacity and shore up its bottom line.
Future Plans
Hindustan Motors planned to launch Mitsubishi's small-car model iCar in India by the end of 2009. Reuters noted that the Indian passenger vehicle market is forecast to nearly double to 2m units in annual sales by 2010 with small cars taking up over two-thirds of sales. A tax cut in economy is encouraging on small cars launches. HM will benefit with this. GM and Hindustan_Motors are toying with the idea of introducing CNG as a fuel option in order to boost sales. The companies have plans to introduce a CNG variant for the Optra and Lancer (old variant). The two variants will be introduced in CNG-centric areas including Mumbai, Delhi and Gujarat.
Implementation of Strategy
IR was considered to be heading towards bankruptcy, as per the report of Expert Group on Indian Railways submitted in July 2001 which studied the IR for nearly two years. They had stated,
Today IR is on the verge of a financial crisis... To put it bluntly, the business as usual low growth will
rapidly drive IR to fatal bankruptcy, and in sixteen years Government of India will be saddled with an additional financial liability of over Rs 61,000 crores On a pure operating level, IR is in a terminal debt trap.
An Overview
World Bank states that Indian Railways would soon file bankruptcy of US$ 16bn. Railways has no future and is in a debt trap It cannot recover until ands unless it: Downsizes Disinvest Increase passenger fares Set up tariff regulators
Questions
Whether it was a turnaround?
Transformation of IR
Pure and Simple
Commercial common sense combined with political savvy
1991
2004
90%
15%
ii.
iii. Others earnings including parcel, catering, advertising etc of Rs 599 crores (24.2% increase on a base of Rs 2479 crores) in 2005-06
Overall Strategy
In the freight business, there was focus on higher volumes, on the premise that marginal revenues were significantly higher than marginal costs.This was done with the objective of lowering the unit costs, resulting in the record surplus.
The strategy for freight rates made a clean departure from the past by
freezing freight rate increases and rationalising the commodity classification to benefit the high value goods and charge more from the low rated commodities
Overall Strategy
The strategy of higher volumes was also carried through in the passenger business. The concept of revenue management, where in differential prices could be charged for differential services like tatkal and superfast were leveraged.
In the other business areas of parcel, catering and advertising, the strategy of outsourcing through public private partnership and wholesaling rather than retailing was adopted.
Operating Ratio
Operating ratio is the key measure for assessing efficiency of any railways in the world. Indian Railways current operating ratio is 76%, which is the best in the world.
Demand Side
Dynamic Changes in rate during lean and peak season Differential Customer centric policy
Supply Side
Faster Not speed but faster turnaround time of the train Heavier train Load more on the same train Longer
Satisfy demand only if you deliver people and goods on time and as per the requirement.
Great people do not do great things, they identify simple and obvious things and execute them brilliantly and swiftly
PETER DRUCKER
Hofer
strategic turnaround
operating turnaround
For sick unit operating much below the break even point firm may reduce its average cost by reducing the fixed cost Fixed cost may be reduced if the organisation takes a decision to sell a part of its asset holding. If the firm is operating substantially but not extremely below the break even point, the appropriate strategy will be one which generates extra revenues. This may be possibly through (i) price reduction through increased sale (ii) stimulating product demand through promotional efforts or (iii) reducing the quality of the product. Increased sale will improve revenue earning position of the firm by reducing the cost of production.
If the firm is operating at a level slightly below the break even point, then the combination strategy will be suitable Under combination strategies all the three strategies identified earlier i.e. (i) asset reduction (ii) cost reduction and (iii) revenue generating strategies have to be pursued simultaneously. When the firm is operating at the break even level, it should follow the cost cutting strategy. By reducing the cost of production, the firm will immediately switch over to the zone of generating the profit. Strategies ought to be selected in relation to the causes of sickness. New strategy may require a change in management and organizational processes which may result in a new set of financial control.
Stage 1 Decline
Stage 3
Stage 4 Outcome
Transition
Performance
Success
Failure
Firm
The various stages of the turnaround process are discussed in detail belowSTAGE 1: DECLINE Decline starts from firm equilibrium and reaches a
nadir.
Two theoretical perspectivesK-Extinction- It suggests macro or external factors are responsible for the decline. R-Extinction- It suggests the decline in the firm is due to a reduction in resources within the firm.
STAGE 3: TRANSITION
STAGE 4: OUTCOME
TURNING AROUND CHRYSLER The outcome of the transition stage was seen in many performance measures. By 1982, signs of a healthy Chrysler could be seen. At the end of 1982, Chrysler generated a modest profit, and in 1983 made an operating profit of $ 925 million. By 1983, Chrysler offered 26 million, shares, and its stock price rose from $16 to $35 within weeks. Chrysler paid off its entire loan seven years before it was due. Chryslers achievements showed that it had accomplished a turnaround.
Key events
K extinction
Domain Definition
Elapsed Time
Success
R extinction
Scope Overlap
Resource Commitment
Failure
Stimulus
Strategic Contours
Policy / Programs
Structure
Rewards
People
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