tuen around stratedy

7/28/2019 tuen around stratedy

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MMM9010 Competitive and Corporate Strategy

The Rationale behind a Turnaround

Strategy of a Firm

Authors: 090014147, 090000324Submission: 26th of April


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ContentTurnaround strategies .............................................................................................................................. 3

Leadership and management in turnarounds ....................................................................................... 4

The notion of turnarounds ....................................................................................................................... 5

Corporate Decline ................................................................................................................................ 5

Symptoms of corporate decline ........................................................................................................... 6

Causes of Decline ................................................................................................................................ 6

Retrenchment Problems ...................................................................................................................... 6

Recovery Strategy ............................................................................................................................... 7

Renewal Strategy ................................................................................................................................. 7

The reasons of a firm to turnaround ........................................................................................................ 8

The effectiveness of a turnaround strategy ............................................................................................ 10

Conclusion ............................................................................................................................................. 13

Appendix 1: Samsung ........................................................................................................................... 14

Appendix 2: HP ..................................................................................................................................... 16

Appendix 3: Possible outcomes of a turnaround strategy according to Luffman et al. ......................... 20

Appendix 4: General Motors ................................................................................................................. 20


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Ongoing globalisation has accelerated the pace of change for companies around the globe.

The economic environment as well as industries firms operate in are in flux, and new

competitors and other threats lurk everywhere. Especially the recent financial crisis and the

global recession it triggered have caused many companies struggling to survive. The rapid

change of the global economic environment (e.g. the credit crunch and the sharp fall in

demand of end-consumers for some products) disclosed shortcomings of several enterprises

and plunged them into crises. Many of them failed and had to be wound down, many are still

in a phase of decline and their future remains to be seen but some were able to come up with

a new strategy and a new organisational structure and are leaving the crisis stronger than

before. This might be traced back to their superior turnaround strategy.

A constant adaptation and re-examination of current strategies is no longer only a competitiveadvantage, but a necessity: It is not a question of whether firms should change, but of where,

how and in what direction they must change (De Wit and Meyer, 2004:163). This essay will

therefore focus on turnaround strategies and the thus related issues. First, the concept as well

as the main terms and stages will be introduced. This will be followed by a closer examination

of the reasons for turnarounds in two particular companies, namely Samsung and HP, and the

effectiveness of different strategies in differing situations, illustrated by examples of HP and

General Motors. Finally, a conclusion shall be given.

Turnaround strategies

A turnaround strategy is a reorientation of an organisation experiencing a crisis. Whereas the

general corporate strategy is described as the direction and scope of an organisation over the

long term, which achieves advantage in a changing environment through its configuration of

resources and competences with the aim of fulfilling stakeholder expectations (Johnson et

al., 2008:3), and is therefore able to evolve over time, a turnaround strategy is the reaction to a

sharp deterioration in performance and a worsening of the general state of the company to an

extent that becomes a threat to its survival (Luffman et al., 1996:140). White (2004) describes

a turnaround strategy as a radical change in a firms strategy with a possible alteration of its

structure and culture. Ideally, it should lead to a superior and sustainable performance in

future. However, it is conceived under enormous pressure and great difficulties, and it bringsthe additional need for fast reactions with it, which in practice makes it a big challenge to


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implement a successful turnaround. Although much research has been carried out about

turnaround strategies, the measures applied and the strategy chosen are specific to each

individual company and is derived from its main business, its competitive advantage and its

industry characteristics. Nevertheless, they share the feature of addressing areas which must

be developed to achieve a sustained recovery (Thompson, 1997:538). Turnaround strategies

are designed to bring quick results but also to contribute towards long-term growth.

Different authors subdivide turnaround strategies in different stages. Hunger and Wheelen

(2007) for instance describe only two phases: contraction as the first and short term reaction,

meant to stop the bleeding, consist ing mainly of cutbacks across-the board to limit size of

and costs to the organisation. The second phase called consolidation aims at stabilising the

company and focuses on the reduction of costs of functional activities, e.g. overheads.However, in their approach, a turnaround is viewed as simply a type of retrenchment strategy

and not a stand alone and complete new alignment and orientation of the organisation, thus

reflecting an approach slightly different from other authors (e.g. De Wit and Meyer,

2004:163). Opposing to this, Johnson et al. (2008:523f) go more into detail when they

describe the main elements of a turnaround strategy as follows: crisis stabilisation (short term

focus on reducing costs and/or increasing sales), management changes, gaining of stakeholder

support, clarifying the target markets, financial restructuring and prioritisation of criticalimprovement areas. They do however not stress the timely order of events, thus indicating

that it might be more difficult in practice to distinguish between different phases. De Wit and

Meyer (2004) add to this when stressing the problem of pacing change correctly; they

describe disruptive and gradual change. Usually, they are not mutually exclusive but have to

be balanced well in order to achieve a sustainable turnaround.

A detailed and comprehensive approach is offered by McKiernan (2006:760) who describes

six stages, beginning with the causes stage, the triggers and the diagnosis stage, followed bythe retrenchment phase, recovery and renewal. Each of these stages brings its own challenges

and some shall be described in more detail below.

Leadership and management in turnaroundsThe behaviour of leaders and managers is crucial for the successful implementation of a

turnaround. White (2004) states that the success of a company is usually associated with two

people, the founder and the person mainly responsible for the turnaround. The outcome of the

turnaround depends to a large extent on their personal abilities. Cummings and Wilson


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(2003:398) characterise a so- called turnarounder as a leader who chop[s] and change[s] the

basic already established characteristics of the organisation, for example emphasize[s] one or

more areas of the core business and deemphasize[s] others. According to McKiernan

(2006:784), the personalities of the people on top of the organisation further influence the

capability of understanding the need for a turnaround and the speed and effectiveness with

which this turnaround is carried out. The more the important people within an organisation are

used to doing business in a certain way, the less likely they are to change their strategy, but

rather to search short-term operational solutions in order to react to the corporate decline. He

finds that, during a decline, managers tend to react with disbelief and stick to their standard

operations in order to try to improve short term results. Once they accepted the crisis, they

apply a more autocratic behaviour, which reflects the need for fast and tough decisions to be

made (McKiernan, 2006:786). Sometimes, however, the managers and leaders have become

so accustomed to the old way of doing business that they have to be replaced in order to allow

the organisation to change.

The notion of turnarounds

Although turnaround strategies are always specific to a particular company and its individual

situation, industry and economic surrounding, there are common stages that can be observed

in general.

Corporate DeclineAlthough it is important to recognize the decline in time, it should not be confused with a

temporary deterioration of the companys position due to the economic lifecycle . Luffman et

al. (1996:140ff) describe the decline of a company as a state when there is some doubt aboutits survival; usually this state can be traced back to the inability of the company to generate

sufficient profits. Mc Kiernan (2006:762f) defines it as an unintentional contraction of the

strategic discretion of the firms executives ; thus as being an external force that reduces the

freedom of action of the managers. He adds that declines can be broken down into four

groups: a deterioration in t he resources or stock variables a deterioration in performance or

flow variables a deteriorating ability to adapt to changing external and internal pressures

and as a stage in the organisational life cycle . Whereas the first two can be diagnosed on the basis of the financial data available, the latter two are more difficult to recognise.


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Symptoms of corporate declineIn general, there is the danger that symptoms are taken for causes, which might lead to a

flawed new orientation. It is crucial to distinguish the two, as the symptoms are only the

outside effects of the underlying causes, and it is essential to fight the causes and not the

symptoms in order to regain a sustainable strategy. Whereas Luffman et al. (1996:140-145)

describe the symptoms as becoming evident in the finance and marketing figures 1, McKiernan

(2006:764-766) divides them into two groups, namely public and private symptoms. The

public symptoms relate to financial information about the company and are thus visible to

outside parties (companies therefore tend to distort the picture to appear as favourable as

possible). Additionally, there are private symptoms that pertain to the human capital of the

firm e.g. personnel turnover. Those are more difficult to measure, but are also part of the

overall deterioration of the companys state.

Causes of DeclineOverall, the identification of the causes of the decline is essential; however that is much

harder to do in reality than in theory and hindsight (McKiernan, 2006:788). White (2004)

describes the main reasons for a turnaround as poor management at any level, overexpansion,

lack of financial control (with the result of high costs), new competitors, unforeseen changes

in tastes and/or organizational inertia. Opposing to this view, McKiernan (2006:768-771)

identifies the primary and main cause of decline of a company as the failure of an

organisation to learn and adapt to a changing environment, and only after that, as secondary

causes, to more detailed failures in the operational side of business, subdivided into financial

and managerial conduct and a change in demand conditions.

Retrenchment ProblemsEven though retrenchment is usually the first reaction of a company in decline (which is

logical as obtaining a positive cash flow is a clear necessity), it should be carefully tailored to

the individual needs of the company in question. It consists of either cost or asset reduction

with the aim of halting the decline and to give the management time to think about longer-

term objectives and a new strategic direction. Ideally, the retrenchment should already be

linked to the targeted turnaround strategy of the firm, e.g. if it is agreed to pursue growth,

costs will be cut in different areas as if an increase in efficiency within the existing structures

1 e.g. as a reduction in dividends, increasing debt, decreasing liquidity, no real increase in sales and a fallingmarket share


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is decided (McKiernan, 2006:790f). Possible problems are the danger of cutting too much

costs in areas essential to the business and of loosing people important to it (e.g. in marketing)

and a deterioration of employee s attitude who have to cope with the uncertainty that the cost

cutting brings with it.

Recovery StrategyRecovery describes the stage in which the company has reached a phase of stability through

the retrenchment process. The form of the recovery is again unique to each firm and depends

on numerous factors 2. McKiernan (2006:794) describes two main recovery strategies:

efficiency oriented strategies can consist e.g. of the liquidation of subsidiaries, divestment and

an overall improvement of efficiency and is applied when the causes for the decline are

internal. Entrepreneurial strategies, e.g. market penetration, new product developments and

acquisitions, are chosen when the decline was caused externally. It is important in this phase

that the management does not hold on to their old convictions of how to do business, but

allow a new strategy to be developed.

Leadership is here one of the critical elements of recovery ( McKiernan, 2006:797).

Whereas during a turnaround, a more autocratic style and good motivational skills, powerful

communication ability, flexibility, excellent diagnostic and analytical ability under time

constraints, ability to work to a punishing schedule under duress and fast implementation

skills (McKiernan, 2006:798ff) are needed, as soon as the company obtains stability a more

democratic and softer approach is more rewarding. This might be difficult to apply for the

same managers. As always, this is much easier in theory than in practice, as McKiernan

(2006:795) points out : In practice, the actual number of generic recovery strategies a firm

needs to employ is considerably greater than the actual number of causes of decline .

Recovery strategies can sometimes be helped by luck or external factors, as there might be a

boost for the turnaround of the company resulting from a change in conditions in the outside

environment of the firm, e.g. a cyclical upturn in demand or the exit of competitors.

Renewal StrategyAs the final stage, the renewal strategy shows if the turnaround has been successful or not.

McKiernan divides two main important parts of it: the regaining of a good recovery that can

be measured by indicators and the introduction of an organisational culture which is able to

steadily learn and improve. This point will further be discussed under the effectiveness of

turnaround strategies.

2 e.g. the degree of persistency of old beliefs and behaviour patterns, causes and scale of decline, the attitude of the most important stakeholders, the industrys and the firms characteristics and the overall economicenvironment


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The reasons of a firm to turnaround

Although the decline as such would be reason enough to rethink the current strategy and

reorganise the companys structure, it is normally a steady and ongoing process. Old routines

and operations are so persistent that a concrete reason is needed to finally trigger the change.

Generally, it can be said that a crisis hitting the firm and a deterioration of its performance

below a certain level that is internally accepted are the main reasons for a turnaround, as

stakeholders then tend to demand a far-reaching change in strategy and operations. The

performance can of course be measured in different ways, e.g. as mentioned above, Luffman

et al.(1996:140) describe the main reason for a turnaround as the inability to produce

sufficient profits; and Hunger and Wheelen (2007:99) add to this a weak competitive position

of a few or the complete range of products. Opposing to this view, McKiernan (2006:776)

refers to the reasons as triggers, and he argues that a deterioration of performance is never

enough as those levels tend to be shifted downwards to meet reality; only when it falls below

a level that was concretely aspirated, a change will be implemented. However, it depends on

the characteristics of the managers responsible if the need for change is spotted early enough

to enable the company to leave the crisis on time.

When discussing real world examples of the appliance of turnaround strategies, the diversityof reasons might become a bit clearer. Two examples shall be used to give a more

comprehensive impression of different reasons for turnarounds, followed by different

strategies: Samsung, which focused on an internal reorganisation and HP that merged with

Compaq in order to join forces.

The Samsung Group is a well-known and highly diversified South-Korean conglomerate

(cheabol ). Nowadays, it is famous for high-end goods with an innovative design (Ichlwan et

al., 1999). The success of the company is based on its ability to change and to respond tochanges in its business environment properly. In 1996, the Samsung Group had to face two

unfavourable changes in its business surrounding: a crash in memory chips prices which hit it

hard as at that point of time nearly 90 per cent of the profits of the branch Samsung

Electronics were retrieved from the production of those, as well as the Asian financial crisis

starting just one year later; this naturally affected the whole conglomerate. As described by

the CEO of Samsung Electronics, it was a near -death experience (Edwards et al ., 2005). 3 In

response, Samsung Electronics started to implement a turnaround strategy. The main3 Significant devaluation of the won due to that financial crisis forced half of the top 30 cheabols in South-Koreainto bankruptcy or debt workouts (Wonghee and Nam, 2007)


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problems identified were poor supply chain management, a focus on growth at the cost of

profitability, a high level of debt and an excessive number of employees. Furthermore,

strategic decisions had been based on non-economic motivations 4. The turnaround strategy

applied addressed all aforementioned issues and was started with the process of financial

reconstruction. Samsung put much effort into the reduction of debt; a tighter financial control

was introduced. The company focused only on core business activities; in turn, non-

performing assets were sold and the number of employees was reduced by one third. Going

global was a part of new strategy; emphasis was put on the development of new products and

the diversification of the portfolio. The company re-focused and concentrated on high-end

customers, targeting overseas markets, mostly the US and China. A profits first strategy and

introduction of just-in-time technique were further important elements of the new strategy

(White, 2004, p. 754-759). It can be said that Samsung tailored the strategy to its specific

needs, and left the crisis successfully, as the results of this turnaround helped Samsung

Electronics to become a global giant in electronics. The changes that took place within the

company are displayed in greater detail in the figures in Appendix 1.

Hewlett and Packard (HP) is a global provider of computers and imaging solutions who, prior

to 2002, focused on making imaging and computer technology. During May 2002, however,

HP acquired Compaq, a leading provider of enterprise technology and solutions5

, to enlargeits product offerings and increase the overall scale. The aim was to combine the value and

performance of the two firms in order to complement each others weaknesses and to thus

attain a competitive position (HP website, 2010). Additionally, it would enable HP to gain

immediate access to new emerging markets. The reasons for that merger were a result of

deterioration in the HPs overall performance (Wall Street Journal, 2001); they especially

struggled to keep up with competition 6 and rising costs, economical external pressure and

internal problems like a need for cost cutting and lack of management skills. Following that

merger, a reorganisation was needed, consisting of downsizing of staff, elimination of

overlapping products, a change of the top management ( with brought HP a new CEO with a

4 The examples of cheabols chairmen suggests a recurring desire to prove their managerial skills by embarkingon ambitious expansions: it can be said that the phenomenal record of growth in the past was a result of chairmen taking big risks which paid off when many had judged them impossible. For example, Samsungsstrong competitive rivalry with Hyundai motivated its decision to enter the automobile industry. Topmanagement was prepared to incur huge losses in the hope of being able to curb Hyundais dominance in theautomobile industry. Kun- Hee Lee, the Samsungs chairman at that point of time, was disillusioned when he wasasked about the profitability of the company s expansion within the automobile indu stry: I know that we cannotmake money in the first five or six years even though we invest 10 billion dollars. (Wonghee, Nam, 2007)5 Compaq specialises on the manufacturing of hardware, software, tailored solutions and services and wholecomputers.6 There was an increase in competition of companies such as IBM, DELL as well as a suffering of sales due tothe impact of their size and the cash cow business of Canon and Lexmark


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new management style which proved to be very favourable for the company), a new focus on

the product innovation and customer loyalty as well as on long-term growth 7. The new HPQ

created from this merger agreement was an $87 billion global technology leader. This

company offered the industry's most complete set of IT products and services for all kinds of

customers, businesses and individuals. The combined company had number one worldwide

revenue positions in PCs, hand-helds, imaging and printing, IT services, storage and

management software.

So although the reasons as well as the applied strategies of these two companies were

different, both engaged in a turnaround strategy in order to improve their position; and both

did it successfully.

The effectiveness of a turnaround strategy

The difficulty in evaluating the effectiveness of a strategy certainly is the long-term focus

inherent to them. Surely the short-term results are important as stability has to be regained,

but a good and sufficient turnaround strategy requires the organisation to learn from the crisis

on the long-term. Again, different authors take complementing positions.

Thompson (1997:532-534) identifies four possible outcomes of a turnaround process, namely

non-recoverable situations, short-term survival, mere survival and sustainable recovery. Non-

recoverable situations are likely to occur when a company is not competitive and its potential

for improvement is low due to overall business conditions or externalities 8. Temporary

recovery is likely to occur when a company operates within unattractive and declining

industry. Even if costs are reduced and additional revenues are generated, due to the decline

of a whole sector, the company is unable to improve its financial position in the long-term. It

is then important that the company reinvests the cash generated from the retrenchment and

diversifies and expand new market segments. In the case of mere survival, turnaround is

achieved but there is little further growth. This outcome may be expected within industries

that are in slow decline or are generally unprofitable and competitive. Sustained recovery is

likely to be a result of a genuine and successful turnaround, e.g. development of a new

product or market re-positioning. This kind of recovery may happen when a company

7 A more detailed presentation can be found in Appendix 28 such as cost disadvantages caused by foreign competitors or decline in demand for major products


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operates in strong, effective market and problems were caused by poor management rather

than by decline in the whole industry.

Slatter (in Thompson 1997:532) adds three main conditions necessary to achieve a sustainable

recovery state to this, namely asset reduction in order to generate cash, a new strategic leader

and the implementation of better financial control systems. Shaughnessy and Harrigan (2009)

stress the importance of the commitment of many parties for the outcome of a turnaround

strategy, e.g. shareholders, suppliers, employees, distributors, creditors and customers. The

company, in order to complete a turnaround process, often needs additional funding which

again can be provided by stakeholders. Tolerant suppliers who may agree to extend credit,

motivated employees who are willing to implement necessary changes and loyal customers

should be considered as factors that may influence the final result of turnaround process and

should not be overlooked.

According to McKiernan (2006:800), the evaluation of a turnaround strategy consists of two

parts. On the one hand, there are characteristics which can be traced back to the actions taken

in the retrenchment and recovery phase; he therefore identifies seven performance indicators

for a good recovery and an effective turnaround: good management, appropriate organisation

structure, effective financial and other controls, sound product-market posture, good

marketing management, a maintained high quality, and tightly controlled costs. However, in

order to not only gain a short-term stability, the organisation must learn something from the

crisis to gain a sustainable recovery. The second and very important point is therefore the

establishment and nourishing of a learning culture, in which the organisation learns through

exploitationexplorationmutation and has to constantly maintain and develop the

routines within each (McKiernan, 2006:803 -805). As firms can no longer allow themselves

to be i nflexible, they must accept and adapt to the fact that change must become the norm

(ibid ).

A look at examples from real companies can again be quite helpful in order to show the

diversity of the outcomes of a turnaround strategy. In the case of HP, the merger was expected

to create cost synergies reaching approximately $2.5bn annually and deliver a significantly

improved cost structure. Looking at the short-term results and improvements (see Appendix3), the immediate results did not all look as favourable as hoped for. The gross as well as the


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operating profit margin had declined, mainly due to the external pressure HP had to deal with

as well as an increase in cost. However, the debt/equity ratio fell, too, as HPQ was able to

repay some of its debt, which is a sign for a regaining of the cost control; one of the indicators

McKiernan mentioned for an effective turnaround. When looking at the long-term results,

HPQ is currently performing pretty well. In 2006, it had shown an annual revenue of $91.7bn,

making it the world's largest technology company in terms of marketing and sales. It has

proven that the "massive integration" efforts after the merger were successful and led to

higher revenues and profits for the combined firm. HP had not only improved its position in

major core markets, but also, according to a IDC report, it had heavily benefited from the

cultural integration during that merger 9. The turnaround strategy applied has worked out and

been beneficial for the whole organisation. (Edgar-online).

However, turnaround strategies can also fail dramatically, as can be shown at the example of

General Motors (GM). It had incurred huge losses due to the financial crisis of 2007/8 which

resulted in a reluctance in the end-consumers to spend (a loss of $38.7bn in 2007 and was also

heavily indebted). Selling luxury products and fuel consuming vehicles, it was additionally hit

hard by the rising oil prices. A retrenchment strategy included selling the less successful

brands 10 and the dismissal of employees.

Several restructuring programmes in different areas and branches as well as several

turnaround strategies were proposed, but none of them resulted in the needed turnaround ( for

more details, see Appendix 4). Even state aid for some subsidiaries and the parental company

did not help to attain a healthy recovery. GM had to file for bankruptcy procedures in 2009

and are now owned by the Canadian and the US governments. They are continuing to cut jobs

and are planning to pay back the governments the credit and state aid they received, but they

still are suffering shortcomings and facing difficulties 11, and the final outcome remains to be

seen.

9 The infusion of Compaq's fast-paced culture helped to improve the business of HP dramatically10 E.g. the closure of the Vauxhall plant in Luton, the phasing out of Oldsmobile, sale of the defence unit GeneralDynamics, etc11 E.g. they had to recall many of their Chevrolets this year due to problems with the steering wheel


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Conclusion

Turnaround strategies are as diverse and manifold as the companies there are. Although

common features can be observed, it is very difficult to recognise the need for a turnaround in

time and restructure the whole organisation appropriately to regain a sustainable situation.

The development of a turnaround strategy is an interplay between numerous factors individual

to each business, so common rules and guidelines are hard to come by. The characteristics of

the CEO, the management team and the stakeholders are very influential as well as the

particular reasons for the corporate decline, the prevailing corporate culture or the

surrounding economic conditions at that point in time. This essay might have shown that,

although a lot of research has been carried out about turnaround strategy, the authors

sometimes disagree in main points; and the tailoring of the individual strategy is very difficult

in practice and not always crowned with success. Especially the latest global financial crisis

has demonstrated that it is not easy to react to critical situations and the future will hopefully

set more examples of successful and innovative ways of how companies can turn a bad

situation around and leave a dangerous decline to regain healthy growth and a sustainable

recovery.


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Appendix 1: Samsung

The results of its turnaround helped Samsung Electronics to become a global giant inelectronics. The changes that took place within the company are displayed in the figures

below.

Figure 1 Breakdown of sales (in KRW bn) increasing diversification of product portfoliosecures cash flows from different business sectors and markets

Source: Samsung Electronics Annual Report 1998, 1999, 2000

Figure 2 total sales (USD mn)

Source: Samsung Electronics Annual Report 1998, 1999, 2000, 2001, 2002, 2003, 2004

0

5000

10000

15000

20000

25000

1996 1997 1998

semiconductors

information andcommunications

multimedia nad homeappliences

0

10000

20000

30000

40000

1996 1997 1998 1999 2000 2001 2002 2003

sales total (USD millions)

sales total (USD millions)


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Figure 3 R&D expenses (KRW bn) shift from imitator to innovator, increase in R&Dexpenditure and the number of people involved in R&D process

Source: Samsung Electronics Annual Report 1997, 1998, 1999

Figure 4 debt to equity ratio reducing external debt as a result of strict financial control, profitability as a main aim

Source: Samsung Electronics Annual Report 1998, 1999, 2000, 2001, 2002

1277 1268

1664

0

200

400

600

800

10001200

1400

1600

1800

1996 1997 1998

R&D expenditure (bn KRW)

223%

147%

43%25%

14%0%

50%

100%

150%

200%

250%

1997 1998 1999 2000 2001


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Figure 5 Comparison of domestic and overseas sales going global, focus on overseasmarkets

Source: Samsung Electronics Annual Report 1995, 1996, 1997, 1998, 1999, 2000, 2001,2002, 2003

Appendix 2: HP

Reorganisation after the merger with Compaq

Cost cutting: layoffs of 15000 jobs.

Elimination of overlapping products: Products that appear on the product lists of two or more

separate groups of countries are eliminated for the purpose of combining the groups in a

single multilateral organisation.

Top management change: CEO change with the objective of meeting the challenge for change

and to keep HP on its goal to become the world's leading information technology company,

Chairman and CEO Carly Fiorina stepped down in February 2005, and Mark Hurd was named

CEO and president in March).

Psychological Strategy : "not to deal with the past, but to look to the future, based on

metrics and other performance.

Invent new technology and services: To create social benefits and customer lives.

Increased customer loyalty

0

10000

20000

30000

40000

50000

60000

1995 1996 1997 1998 1999 2000 2001 2002 2003

Domestic vs Overseas Sales

sales domestic thousands USD) sales export (thousands USD)


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Solving technological issues: implementation of user testing and bench marking.

More focus on long-term growth opportunities: R&D investments, technologies for being

constantly connected, always personal mobile experiences, and an abrupt change from

analogue to digital.

The most important factor of HP's turnaround however is Hurd's personality and management

style. The friendly style and hierarchical communication approach played a vital role.

STRATEGIC ANALYSIS:

Industry Challenges:

HP's key element in global citizenship is to design products and services that are socially andenvironmentally responsible throughout the product's life cycle. Central to this challenge is

managing product design to meet various regulations that affect the design of their products.

These regulations can be inconsistent from one jurisdiction to another, may not always be

clearly defined, or may not easily accommodate design lead times. HP actively works with

governments, industry partners and other stakeholders to attempt to harmonize these

regulations and achieve their shared environmental goals in a manner that is consistent with

technological innovation.

HPs business strategy and mission statement is t o provide customers with superior products,

services and overall experiences by providing leading-edge technologies that work seamlessly

together. HP seeks to be a leader in each of the specific product and service categories in

which they compete and to expand actively into new and adjacent markets. To achieve this,

they use a so-called adaptive enterprise platform, revolving around the four points of

emphasizing standardization, virtualization, simplification and modularity and integration.

Designing with these principles is supposed to provide the most cost-effective infrastructures

that can flexibly adapt to changing business dynamics.

World class cost structures and processes across their entire portfolio of businesses :

HP focused on leveraging their scale to maximize purchasing efficiency and leveraging their global footprint to maximize technical expertise and cost structure improvements available in

different regions around the world.


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They compete based on :

Technology, performance, price, quality, reliability, brand, distribution, range of products

and services, account relationships, customer service and support and etc.

Effectiveness of the turnaround

During 2001, when the CEO of HP argued that the combined company would be able to meet

the customer demand for solutions capability on a truly global basis. She also claimed that

the firm would be able to lead with its products from top to bottom, from low end to high

end. As her crowning argument, she pointed that the merger made sense because it would

create synergies that are attracting. The new HPQ created from this definitive merger

agreement was an $87 billion global technology leader. This company offered the industry'smost complete set of IT products and services for all kinds of customers: businesses and

individuals. The combined company held number one worldwide revenue positions in PCs,

hand-helds, imaging and printing, IT services, storage and management software.

The merger was expected to create cost synergies reaching approximately $2.5 billion

annually and deliver significantly improved cost structure. Based on both companies' past

data , the new HP would have approximate pro forma assets of $56.4 billion, annual revenues

of $87.4 billion and annual operating earnings of $3.9 billion. It would also have operations in

more than 160 nations and over 145,000 employees worldwide. In the meanwhile HP had

encountered the biggest problem during the process of buying Compaq, was the decision of

which of the tech giants computer products to keep and which ones to eliminate. Together,

HP and Compaq produced many kinds of common products, many products are based on

proprietary technology. Business analysts agreed that the merged company wouldn't be able

to sell all of the products. The merger would result in HP shareholders having 64% of the

stock in the newly formed concern. HP-Compaq would be the world's leading company in allsorts of computer hardware (ranging from Printers, Personal Computers and Unix Servers).


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Fig (1) : Revenue, assets and operating earnings (Dollars in Billion)

Source: http://www.hp.com/hpinfo/newsroom/press/2001/index.html, press release issued onSeptember 3, 2001

Ratio analysis:

The Gross-Profit Margin, in 2002 was 28.34%, by 2006, however, it had comparatively

decreased to 24.29%. HPQ earned a gross profit of 24.29 in 2006. The decline was slow but

steady, mainly due a reduction in the price of its computers in order to compete with Dell. The

Operating-Profit Margin, in 2002 was 6.64%, whereas in 2006, it had declined to 5.47% due

to change in management structure. It mainly involves new costs. The Debt/Equity ratio in

2002 was 28.34, whereas, in 2006 it plummeted down to 17.66. During that time HPQ repaid

some of its debts. The Current Ratio in 2002 was 1.53, in 2006, however, it decreased to

1.45. This is very slight decrease, and HPQ was still in a position to pay-off it's short-term

debts as and when they fell due. It decreased due to spending more of it's revenue on

expanding its businesses. (yahoo finance, 2010)

HPQ today:

Today, HPQ is performing much better than anyone had envisioned. In 2006, it had shown

$91.7 billion in annual revenue as compared to $91.4 billion for IBM which is more

interesting, making it the world's largest technology company in terms of marketing and sales.

It had been clearly shown that both the firms had finally undertaken "massive integration"

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

HP COMPAQ COMBINED

Revenue

Assets

Operating earnings


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efforts and moved the joined company proceeded to higher revenues and profit .

Furthermore, HP had improved its position in major core markets .Moreover according to a

IDC report HPQ had heavily benefited from cultural integration. The infusion of Compaq's

fast-paced culture helped to improvise it's business dramatically.

Appendix 3: Possible outcomes of a turnaround strategy according toLuffman et al.

The possible outcomes of implementation of turnaround strategy are plotted in the figure below.

Figure 1 Types of recovery situations

Source: Luffman G., Lea E., Sanderson S., Kenny B. (1996). Strategic management. Ananalytical introduction. Oxford, Blackwell Publishers, p. 144

Appendix 4: General Motors

Description of the situation prior to GMs bankruptcy:

turnaround strategiesadopted

sustainable recovery

mere survival

short-term survival

failed turnaround

financial position

non-crisis

crisis


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In 2007, GM generated the biggest loss in the company history ($38.7bn) and it was heavilyindebted. Sales decreased due to a rise in petrol prices and a crisis-owed reluctance to spendas well as the credit crunch forced the company to restructure. The reaction of the companywas the s ale of the brand Hummer and the cutting of 47.000 jobs, as well as an applicationfor government support. However the situation worsened when the subsidiary Saab went

bankrupt and Opel needed state aid ( to the amount of 3.3bn) . A further loss was incurred in2008 ($30.9bn), the state aid of $13.4bn proved to be not sufficient. Share price fell by87.21%. Plans were made to abandon Pontiac and to focus on the core brands GMC, Buick,Cadillac and Chevrolet, but selling Saab, Hummer and Saturn. (Financial Times, 2010)

In 2009 finally, GM had to face insolvency. As it was too big to fail, two governmentsintervened, and two new companies were created: the first was basically a transformation of General Motors Corporation to Motors Liquidation Company, and another one called GeneralMotors Company (of which the USA obtained 60.8% and Canada 11.7). Motors Liquidation

Company sold all the relatively successful brands to General Motors Company which will bekept, and the less successful branches were liquidated (General Motors, 2010).

The outcome still remains to be seen. Currently, GM is still cutting jobs, and even though plans exist to pay the governments the aid received back, they still are suffering shortcomingsand facing difficulties, e.g. they had to recall many of their Chevrolets this year due to

problems with the steering wheel. (Financial Times, 2010)


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Word Count: 4.388

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