Turnaround Strategies (1)

8/12/2019 Turnaround Strategies (1)

1/29

1

TURNAROUND STRATEGIES

By Dr. R. Krishna


2/29

2

Definition of Turnaround

Recovery from decline in performance

Decline relative to a benchmark like GNP

growth or industry growth or previousperformance of organization.

Questions: how much is decline? How much isrecovery? Over what period?


3/29

3

Accepted definition

Turnaround is recovery to profitability from a losssituation.

To guard against transient or even faketurnarounds, a TA was successful if the companywas profitable for at least two years after at leastone year of losses.

And the net profit had to be at least 2% of totalrevenues in at at least one of these two years.

(By Pradip Khandwalla, IIM A, Professor

Source: Turnaround Excellence : by PK.


4/29

4

Hypothetical case of turnaround

Company X: In 1989: Profit : USD 2mn, Totalrevenues: USD 80 mn;

In 1990: on total revenues : 100 mn, a net loss ofUSD 10 mn.

In 1991: On Revenues of USD 120 mn, net loss ofUSD 10 mn.

In 1992: Net Profit of USD 1 mn on total revenuesof USD 100 mn

In 1993: NP of 1.5 mn USD, total Revs: 150 mnUSD

In 1994: NP of USD 4 mn; total revenues USD160 mn.


5/29


6/29

6

Major categories used for

Analyzing Turnaround Cases

(Turnaround actions mentioned

46 in number)


7/29

7

1. Change in top management (UTI, Nirlon, Nocil, IDPL, Metal Box

etc) and Other managerial changes

2. Expert diagnostic activity (Maruti,

3. Mindset changes (change in values)

4. Assistance from external stakeholders coopted in the

turnaround(K-mart, Enron, Worldcom under Chapter 11)

5. Public communication of TA strategy

6. Communication to mobilize staff for TA

7. Financial Incentives for staff

8. Example setting by CEO

9. Disciplining the staff

10. New benefits for staff (Konkan Railways: Mr. Rajaraman-

Had to absorb 3000 people or face VRS; they accepted one level lower


8/29


9/29

9

19. Changes in budgetary control systemsperformance

monitoring

20. Changes in MIS21. Changes in marketing systemDealer appraisals, dual

system of distribution, debtors, cash and carry, L/Cs, etc

22. Changes in R&D management

23. Restructuring related changes ( in borrowingsinterest,

principal, deferment, lower interest rates, additional refinance

based on collaterals, mortgages, new business models, etc.

Nirlon directors were asked to bring in money and quit or face

Economic offence charges.)

24. Liquidation of current assets

25.Reduction of current liabilities

26. Raising fresh equity


10/29

10

27. Fresh long term borrowing

28. Asset or other write offs29. Steps for reducing long term debts

30. Raising funds short term borrowing (from vendors, channel

members, etc)

31. Fixed asset surgery

32. Diversification

33. Vertical Integration

34. Product mix changes (based on profitability)

35. Mergers, Acquisitions and Joint Ventures

36. Strategic Shift ( Intel and IBM)


11/29

11

30. Changes in competitive strategy (markets, applications, price,

distribution, packaging, extensions, variants, etc)

31.Indigenization of imported technology

32. Change of Boardmix of bankers, others lenders and

management gurus and operating personnel.


12/29

12

TRANSFORMATION OF LUFTHANSA:

Hit a bad patch in 1990s. Successive losses reported in 1991, 1992,

1993.

Causes: Intense price ware in the airline industry followed by a

recession and the war in the Persian Gulf were key factors along

with an excessive focus on technical excellence at a time when

customer service was a critical competitive factor

Also the wage costs were uncompetitive: Lufthansa wage rates were

reportedly 30% higher than those of British Air.

In 1991: Mr. Jurgen Weber, an insider was given charge aschairperson.


13/29

13

ACTIONS THAT PULLED LUFTHANSA TO GLORY:

1. HIGHLY PARTICIPATIVE BY Jurgen and his colleagues

2. He addressed a meting of 20 carefully selected managers in

June 1992.

3. He made a strong case for Lufthansas restructuring.

4. He asked managers to come up with recovery package within

one week.

5. Late in 1992, he held a restructuring workshop was held for

company mangers.

6. 123 key actions were developed, aimed at cutting non-

personnel costs as well as personnel costs, and also raising

revenues


14/29

14

7. The aim was to reduce losses by DM 1,300 million

8. These actions where then presented as Program 93 to

Lufthansas supervisory board (which reported to the Board)

9. A smaller team of mangers called the OPS team was appointedto oversee the implementation of Program 93.

10. It was also asked to spot further possibilities to cut costs and

formulate cost cutting related contingency plans

11. The team had no authority, but had clout because it had Webers

full support

12. The team members acted as prodders of decisions by line

managers in accordance to Program 93.

13. The OPS TEAM visited various departments and reached over a

100 managers during 1992-1993.

14. It communicated to them the change in Agenda and tried to

overcome resistance and cynicism.


15/29

15

16. The New agenda laid stress on : ENTREPRENEURIAL

VALUES, CUSTOMER ORIENTATION, AND HIGHER

PRODUCTIVITY17. Meanwhile, some 25 managers who had attended a four week

training program and felt very concerned about Lufthansas decline

declared themselves the SAMURAI OF CHANGE (Samurai: were

dedicated Japanese warriors of yore with strict code of conduct).

18. They were commissioned by top managementto communicate

the gravity of the situation to LHs managers to stem losses

19. One of Samurais initiatives was the formation of cross-

functional teams to mount a co-coordinated assault on the

unfavorable US-German bilateral agreement governing air

transportation activities in each others countries.


16/29

16

19. With the help of Weber and German Chancellor Kohl, a code-

sharing agreement was later reached in 1994 that led to 1,000

additional bookings per day for LH on the shared network routes

20. Another cross-functional project was the evaluation of managers

by their subordinates, and evolving of an open and fearless culture

in which people could speak about what they thought ought to be

done.21. The Boardmany travelled all over the world to hold town

meetings with the local LH staff to stress the imperative of

improving service quality and invite a broader participation in the

turnaround.22. There was a persuasive approach to the Unions for a wage

freeze till 1993. The concessions by the Union saved DM 500 mn


17/29

17

23. Structure groups were set up in each Board led departments of

the company. These groups had to be consulted on all

important decisions, and consisted of three managers and three

employee representatives

24. Over 200 new travel agencies were enrolled

25. A frequent flyer program was launched that had 800,000

members at the end of 1993.

26. The Nestor IT project was launched which could process

information on over 1,000 catalogued routes

27. It could assemble information on flight patterns, competitorscustomers in order to compute the revenue and the yield efforts

of various scenarios of flight scheduling (saved DM 300 mn)

28. Sophisticated software packages were developed in the areas

of fleet capacity, network scheduling, pricing and yieldmana ement.


18/29

18

29. A service quality index was developed to measure customer

service and satisfaction and also used for rewards to employees

30. LH initiated a travel package that included a ticket to a concert

31. LH was reorganized, with decentralized area management and

five new autonomous subsidiaries to deal with cargo,

maintenance, ground service, etc.

32. The route sharing agreeement helped LH to fly to 26 US cities

33. Process re-engineering was carried out

34. Pay freeze from 19911993. Over 300 pilots and flight

engineers agreed to work part time or take unpaid leave and over a

hundred were contracted to other airlines

35. Hiring of flight attendants and cabin crews overseas a local

rates (below german rates) was agreed to by the Unions.


19/29

19

40. Some maintenance and overhaul was shifted out to Ireland

where it was cheaper

41. Ticket processing was shifted to New Delhi where wage rateswere far lower

42. Excess capacity on US and NA routes were pared and

outlays on data processing were slashed by nearly a third to

save DM 335 mn.

43. No one was laid off, but some 8000 left voluntarily through

early retirement packages.

44. The first step toward privatization were taken through a

public issue

45. NET RESULT: A 1991 LOSS OF dm 426 MILLION ON

REVENUES OF dm 16 BILLION WAS TURNED INOT A

dm 312 MILLION PROFITIN 1994, AND dm 2,115 MN

PROFIT ON REVENUES OF dm 28 BN IN 1995.


20/29

20

TURNAROUND BUILDING BLOCKS:

Tough actions : Managerial Overhaul; Assetcost surgery

And Tighter controls and financial mending

Tender Action: Transformational changes; Restructuring andstaff empowerment

External Focus: Strategic shift; product market refocusing;

sales push

Internal Effectiveness focus: Actions for operations excellence

And cost cutting (excluding through mass layoffs)


21/29

21

Predicting business failure and

tracking turnaroundEdward Altmans statistical tool

Multiple Discriminant Analysisto predict failure.

Tool: tested over 66 US

companies


22/29

22

5 key financial ratios:

Working capital / total assets ratio

Retained earnings / total assets ratio

Ebit / total assets

Market value of equity / book value of all

liabilities ratio

Sales / total assets ratio.


23/29

23

5 ratios by Beaver (for SMEs)

Cash flow / total debt

Net income to total assets

Current minus long term liabilities to total

assets

Current ratio

Debt equity ratio


24/29


25/29

25

Trainable Turnaround thumb rules:

Seize control of cash receipts and disbursements in the initial

phase of TA.

Talk to managers, cross sections of staff, customers, suppliers,

etc. to get a feel for the key problems and to elicit suggestions

Do a SWOT, Look for quick fixes: opportunities that can bequickly seized, costs that can be quickly and relatively harmlessly

be cut. Follow the 80/20 rule

Meet major external stakeholders, share facts and turnaround

ideas; seek support and suggestions for TA

Gave frequent regular meetings with managers to review

operations, develop policies, evolve decisions and targets

Set up cross functional task force to examine key problem areas

and recommend solutions.


26/29

26

Develop participatively new mission / vision for the organization

and also some concrete objectives, that is in consultation with

internal and external stakeholders. Keep communicating to them,especially the staff, the new mission / visions/goals of the

company. Open channels for upward feedback

Start some sort of MBO program; get mangers to fix key

performance areas, concretize tasks to be achieved, etcForm new responsibility centers. Review performance.


27/29

27

What is expected from the KFA case:

Step One:

History of KFAIndustry Overview

Market Analysis

Market of KFA and some reports on its performance for the

last three years

KFAs take over of Deccan Airlines for USD 300 mn and its

action on acquisition of DAthe birth of KF Red

KF Redits performance and market perceptions

KFAs foray into the international markets and its expansion

strategies and ambitionsCost structure of the Airline business and with specific

emphasis of KFA

KFs last three years financial statements and analysis


28/29

28

Analysis of the Market share

Study the decline from the financial resultsfrom whendid it start?

Did KFAs management overlook the negative

performance due to its over confidence? Explain its buy-

out of huge aircrafts and its rationale for expansion

Outline your turnaround strategies:

Total debts :

Net loss :

Networth :Equity (current):

Cost of operationsbreakdown the cost elements and

analyze them for action

Etc., Etc..


29/29

29

You get a total of only 45 minutes

Prepare a quick ppt and make the presentationThis will be graded on 10 marksteam work

Thanks and all the best.

5thDecember, 2011

Dr. Krishna Ram

Turnaround Strategies (1)

Documents

Transcript of Turnaround Strategies (1)