turnaround strategies (1)
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TURNAROUND STRATEGIES
By Dr. R. Krishna
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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?
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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.
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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.
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Major categories used for
Analyzing Turnaround Cases
(Turnaround actions mentioned
46 in number)
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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
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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
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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)
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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)
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Predicting business failure and
tracking turnaroundEdward Altmans statistical tool
Multiple Discriminant Analysisto predict failure.
Tool: tested over 66 US
companies
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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.
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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
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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.
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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.
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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
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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..
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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