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Module 2

CORPORATE VIABILITY

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The Process for assessing

viability has 2 steps:

The ABCs of restoring

viability

Viability assessment

Corporate Viability

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A. The ABC’s of restoring viability

The Seven ABCs of restoring viability

1. Crisis stabilization2. Leadership3. Stakeholder support4. Strategic focus5. Organizational change6. Critical Process

improvement7. Financial restructuring

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1 Crisis stabilization• Taking control (top-down approach) and

restore predictability- managers are often paralyzed in this situation;

• Conserve cash- liquidate stocks, collect debtors, stretch creditors

• Asset reduction• Seek short term financing• First step cost reduction/ profit planning

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2 Leadership

• Change of CEO: often cited as the

cause for organizational decline (always

good to fire CEO?)

• Why fire CEO:

– S/he is part of the problem not solution

– Has great symbolic effect for turnaround

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• Change of other senior managers, why?– Resistance– Shock therapy/strong message– What are the challenges here?

• Attracting good managers (But FD is usually changed anyway)

• Motivate the workforce…energize…build hope

2 Leadership- contd.

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3 Stakeholder support• With employees- avoid the blame culture

• With suppliers – instill confidence

• With debt providers –give assurance

• Face facts, no obfusification (concealment)

• Communicate, communicate, communicate

• Be open about the current cash position

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4 Strategic Focus• Re inculcate entrepreneurship – mission -

focus/justifying the reason for the organization’s existence

• Formulate a robust and coherent strategy:– Ensure an attractive end state– Be aware of the constraints – Redefine business

• Divest?• Grow? (M&A)• Outsource?• Alliances?• Privatise?

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5 Organizational change

• Structure

• Technology

• People– Capabilities building– Terms and conditions– Mindsets/mental models/Transformation

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6 Critical process improvement

• Focus on cost, quality and time– Time: responsiveness and flexibility– Cost: simplify processes to reduce fixed and

variable costs– Reducing rework by ascertaining causes for

non-conformance

• Aim for quick wins

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7 Financial restructuring

• Factors:

– Cash flow problems – future liquidity – Excessive gearing (too much debt or little

equity)– Inappropriate debt structure {too much short

term debt/ insufficient long term}

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B. Viability assessment

1. Assess causes of decline2. Ascertain severity of the crisis3. Attitude of stakeholders4. Firm’s historical strategy and

internal ambience5. External environment and

industry characteristics6. Firm’s cost/price structure7. The Z-Score as a predictive tool

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Viability assessment

1 Common Causes of decline• Poor management/Mismanagement • Inadequate financial controls• High cost structure• Lack of business development• Competitive weakness• Big projects• Financial policy

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Viability assessment2 Severity of the crisis

• This is a function of the causes and the stage the crisis has reached

– E.g. the state of the economies of sub Sahara Africa

– Can use Root Cause Diagram / Fish Bone technique

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3 Attitude of Stakeholders

• The attitude of employees and creditors– Skeptical?– Supportive?– Suspicious?– forgiving?/tolerant?

CHANGE IN YOUR POCKET

STAKEHOLDER MAPPING

Viability assessment

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Viability assessment

4 Historical Strategy and Organisational climate

• Past strategy formulation and implementation must be reviewed

• 5WH Framework

Viability Assessment

5. External environment and Industry characteristics.

• PESTEL Analysis

• Five Forces Framework

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BusinessDevelopment?

6 Cost/price structure

Cost reductionStrategy?

Both?

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Cost + Profit = Price ,

or

Price – Profit = Cost ?

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7 The Z-Score-Corporate Failure Prediction

1 Originally developed in 1968 by E I Altiman2 Altiman used 22 accounting and non accounting Variables on failed and non-failed American Firms3 Five key indicators emerged These were used to derive a Z score

A Z score of 2.7 or more indicated non –failureA Z score of 1.8 or less indicated failure

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Z-score

Z = 1.2X + 1.4X +3.3X + 0.6X + 1.0X ₁ ₂ ₃ ₄ ₅Where:

X₁ = working capital / total assets= measures LIQUID ASSETS relative to firm’s sizeX =₂ retained earnings / total assets= measures CUMULATIVE PROFITABILITY

X₃ = earnings before interest and tax / total assets= measures OPERATING EFFICIENCY

X =₄ market value of equity/book value of total debt [ a form of gearing ratio]= measures STOCK

MARKETS i.e security price changes X =₅ sales / total assets= measures TURNOVER

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Z score - observation Altiman used a small sample of only American companies Z- score success rate – in USA, 72% of bankruptcies predicted 2 years before they actually occurred. Because of the use of Market value of equity, only Quoted companies can use the technique Z-scores are used widely in the banking sector, in risk assessment, loan grading and corporate finance Activities. They are also used by accountancy firms, fund Management houses, stockbrokers and credit insurers

• Z- score can not be used in every situation

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