Types of Turnaround Management

The present business scenario is one wherein constant change is the name of the game. For any firm to survive in any industry there has to be constant monitoring and improvement of its systems and operations. When a firm faces severe cash crisis or a consistent downtrend in its operating profits or net worth, it is on its way to becoming insolvent. The slide cannot be prevented unless appropriate actions, both internal and external, are initiated to change the future prospects. This process of bringing about a revival in the firm’s fortunes is what is termed as “Turnaround Management”.

The various types of turnaround managements are as follows:-

·        The Management Process Turnaround-

 It means that the principal factors that were changed to accomplish the turnaround were management process. Since the reason for decline was management problems, the principal reason for turnaround must be correction of management weaknesses that caused decline. A management process turnaround, to be successful must include something much more fundamental than correcting management declines. Fundamentally, the whole culture of the organization must change.

·        The Economic or Business Cycle Turnaround-

The second major type of turnaround is the economic or business cycle turnaround which affects cyclical industries such as real estate .a great deal. Economic improvement, however, cam be a big boost in an otherwise dismal scene. Good management processes, rather than economics or industry trends, are the key.

·        The Competitive Environment Turnaround-

 The market forces i.e., demand, supply and the competition is the basis for this type of turnarounds. Although economic and competitive factory definitely affect the performance of the company, the economic cycle good performers astonishingly outperform the laggards.

·        The Product Breakthrough Turnaround-

 Product breakthroughs can take two major forms: (a) breakthroughs in consumer tastes and (b) technical or scientific breakthroughs. In both cases, timing is critical and reliance on a product can make or break.

·        Government-Related Turnaround-

 Usually, these turnarounds account for only a small fraction of total turnaround. These are related to a major change in government procurement policies i.e., the dissolution of contracts; a major shift in regulation, such as environmental controls; or direct government assistance

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Turnaround Management Strategies

A turnaround is to produce a noticeable and endurable improvement in performance, to turnaround the trend of results from down to up, from not good enough to clearly better, from underachieving to acceptable, to losing to winning. Turnaround management gained prominence when there were incidences of corporate decline at global scale that caused organizational failure. Turnaround can be explained as business firm that faces financial disaster or action taken to prevent the occurrence of that financial disaster.

There are 5 strategies related to turnaround management. These are:-

(a) Human Resource Strategies- The strategies of human resource play a vital role in turning around the sick complex organsiations. The turnaround action pertaining to human resource necessitates people intervention and involvement at all levels. Firms experiencing negative trends of performance typically resort to retrenchment as their most prominent turnaround strategy. The strategies pursued under human resource are: staff reductions, massive re-training of employees, changes in the managerial cadre, including professionalization, financial incentives for employees, information dissemination to all levels, organisational restructuring, including decentralization, and building a new culture within the organisation.

(b) Financial Strategies- The objective of financial strategy in turnaround management is to develop and use the financial competencies of the business as an asset to enhance the competitiveness of the business. Organisations adopt several such financial strategies as reduction in the par value of shares, obtaining loans at low rates of interest, postponement of maturity of debts, and conversion of debt into equity

(c) Marketing Strategies- The role and importance of innovative marketing strategies in corporate turn around has been highlighted by several researchers. The marketing oriented business is customer centric, generates and disseminates market intelligence. Switching from production orientation to market orientation is a critical element in the turnaround because lack of sensitivity towards customer needs and change of tastes were considered to be the major reasons for the decline in sales, fall in market share and accumulation of losses. Initially, it is an elimination process based on the simple criterion of financial performance.

(d) Production/Operations Strategies- Strategies must be selected with due consideration for the specific crisis situation. Scare resources, time pressure and other relevant factors viz., reasons for change, the ways of routine action and the cost of the change influence the type of the strategy. Operating strategies are cures for operating causes while strategic problems should be addressed by the strategic remedies. However, operational failures are rarely addressed with strategic turnaround actions.

(e) Corporate Planning Strategies- Planning is for future course of action either for short-term (annual planning) or a long- term focus (expansion, diversification, research and development and so on). In the context of turnaround management, sickness and downturn are attributed to improper planning. Changes in planning have been considered under long- term when the existing products and services had limited acceptability in the market. Strategic orientation i.e., re-focusing on the core activities, expansion and diversification of business activities are of long-term in nature.

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Techniques of Turnaround Management

There are different techniques that can be applied to cause a repositioning. The four main techniques are known as Retrenchment, Repositioning, Replacement and Renewal:

1.     Retrenchment

The Retrenchment strategy of the turnaround management describes wide-ranging short-term actions, to reduce financial losses, to stabilize the company and to work against the problems, that caused the poor performance. The essential content of the Retrenchment strategy is therefore to reduce scope and the size of a business through Shrinking Selective Strategy. This can be done by selling assets, abandoning difficult markets, stopping unprofitable production lines, downsizing and outsourcing. These procedures are used to generate resources, with the intention to utilize those for more productive activities, and prevent financial losses. Retrenchment is therefore all about an efficient orientation and a refocus on the core business. Despite that many companies are inhibited to perform cutbacks, some of them manage to overcome the resistance. As a result they are able get a better market position in spite of the reductions they made and increase productivity and efficiency. Most practitioners even mention, that a successful turnaround without a planned retrenchment is rarely feasible.

2.      Repositioning

The repositioning strategy, also known as "entrepreneurial strategy", attempts to generate revenue with new innovations and change in product portfolio and market position. This includes development of new products, entering new markets, exploring alternative sources of revenue and modifying the image or the mission of a company.

3.     Replacement

Replacement is a strategy, where top managers or the Chief Executive Officer (CEO) are replaced by new ones. This turnaround strategy is used, because it is theorized that new managers bring recovery and a strategic change, as a result of their different experience and backgrounds from their previous work. It is also indispensable to be aware, that new CEO’s can cause problems, which are obstructive to achieve a turnaround. For an example, if they change effective organized routines or introduce new administrative overheads and guidelines. Replacement is especially qualified for situations with opinionated CEO’s, which are not able to think impartial about certain problems. Instead they rely on their past experience for running the business or belittle the situation as short-termed. The established leaders fail therefore to recognize that a change in the business strategy is necessary to keep the company viable. There are also situations, where CEO’s do notice that a current strategy isn’t successful as it should be. But this hasn’t to imply, that they are capable or even qualified enough to accomplish a turnaround. Is a company against a Replacement of a leader, could this end in a situation, where the declining process will be continued. As result qualified employees resign, the organisation discredits and the resources left will run out as time goes by.

4.     Renewal

With a Renewal a company pursues long-term actions, which are supposed to end in a successful managerial performance. The first step here is to analyze the existing structures within the organization. This examination may end with a closure of some divisions, a development of new markets/ projects or an expansion in other business areas. A Renewal may also lead to consequences within a company, like the removal of efficient routines or resources. On the other hand are innovative core competencies implemented, which conclude in an increase of knowledge and a stabilization of the company value

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Process of Turnaround Management

Turnaround Management is about business restructure and renewal.  Often, a turnaround management strategy is employed when the business is under financial stress.  However, it is not necessary to wait until the situation becomes too dire to commence a turnaround strategy.  In fact it is preferable to commence the process before it could be too late.

To help understand how turnaround management works, below is an outline of the 5 step process involved.  Having a good understanding of this process will make it easier to identify if and when, it should be applied.

Step 1 – Define & Analyse

During this stage the definition of performance problems within the business are clearly outlined.  It is particularly important during this step that any areas of financial stress within the business are identified and a thorough analysis undertaken.

The objective of this is to arrest any further decline in the business while continuing to trade and avoid insolvency.

Step 2 – Scope & Strategy

Once the business has been stabilised, it is now time to commence a strategic planning process.  The first part of this is to scope the strengths, weaknesses, opportunities and threats (SWOT analysis) of the business.

It is important during this stage to not only look internally (strengths and weaknesses) but to strategically analyse the external environment (opportunities and threats) as well.

From the SWOT analysis, the long term vision, mission and objectives for the business can be defined.  Knowing where the business is heading then allows the development of a strategic plan.

Step 3 – Link & Action

Now it is time to take the strategic plan and develop an action plan.  This is a list of actions and tasks complete with time frames that must be undertaken to ultimately achieve the business objectives.

The tasks are the daily, weekly and monthly activities to be done and with this strategic planning process, each one will be contributing to the overall mission.

Step 4 – Implement

This step is not just about implementing the action plan, but also ensuring coaching and support of all staff.  Without this critical step, all the planning can go to waste.

It is important that employees are aligned with the overall vision for the business.  This is achieved through communication, consultation and coaching on a regular basis.

Step 5 – Review

With all the planning and implementation in place, it is now time to conduct regular reviews.  This ensures not only that continual improvement is achieved but also helps to identify any corrective actions that may be needed.

In effect, turnaround management is very similar to the strategic planning process; however the first step of identifying areas of stress in the business is critical.  For any business where this stress is already occurring, applying the above process, in consultation with a turnaround management expert, will not only ensure the business turnaround but also the opportunity to improve and develop well into the future.

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Stages of Turnaround Management

Turning around a troubled entity is complex. There are many stakeholders: a nervous board, a thin-skinned management team and worried employees are just the beginning. There are customers who might run for the exits, partners second guessing their alliances. Public companies need to deal with the stock market expectations while private companies have private equity investors on their heels. If things are really bad, then the business needs to deal with lenders, creditors and potentially courts. Here are the five major stages of the turnaround process:

Stage 1: Situation Analysis

Your objective is to determine the severity of the situation. Is the business viable? Can it survive? Should it be saved? Are there sufficient cash resources to fuel the turnaround? This analysis should culminate in formulating a preliminary action plan that shows what is wrong, what potential solutions exist, key strategies to turn the entity in a positive direction, and a cash flow forecast (at least 13 weeks) to understand cash usage.

Important steps at this stage: Identify what product and business segments are most profitable, particularly at the gross margin level, and eliminate weak and nonperformers. Make certain that all functional areas (sales, production) are working to support the goals of their counterparts.

Stage 2: Management Change

It is important to select a CEO who can successfully lead the turnaround. This individual must have a proven track record and the ability to assemble a management team that can implement the strategies to turn the company around. This individual most often comes from outside the company and brings a special set of skills to deal with crisis and change. She will stabilize the situation, implement plans to transform the company, and then hire a replacement.

It is essential to eliminate obstructionists who may hamper the process. This could require replacing some or all of top management. This will undoubtedly mean also replacing some of the board members who did not keep a watchful eye.

Stage 3: Emergency Action

You have to gain control of the situation, particularly cash, and establish breakeven. Centralize cash management to ensure control. If you stop cash bleed, you enable the entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition. Usually you have to raise cash immediately. Review the balance sheet for internal sources of cash such as collecting accounts receivable, and renegotiating payments against accounts payable. Sell unprofitable business units, real estate, and unutilized assets. Secure asset-based loans if needed. Restructure debt to balance the amount of interest payments with a level a company can afford.

Lay off employees quickly and fairly. It is much better to cut deeply all at once, than to make small cuts repeatedly. Remaining employees can focus on work if they have (relative) job security.

Stage 4: Restructuring

The goal is to create profitability through remaining operations. Stress product line pricing and profitability. Restructure the business for increased profitability and return on assets and investments. At this stage your focus should change from cash flow crisis to profitability. Fix the capital structure and renegotiate the long and short term debt.

Incentive-based management will drive employees to get involved smartly. Create teams of employees to identify and rework inefficiencies and promote profitability. There are only two ways to increase sales. Sell existing product to new customers. Sell new products to existing customers.

Stage 5: Stabilization and Re-growth

Now its time to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.

This could be time to restructure long term-financing at more reasonable rates now that the company is stable and on a growth path

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Ingredients of Turnaround Management

The incidences of corporate decline have been increasing globally causing organizational failure and in this regard turnaround management to be one of the most important topics addressed by business education and research in recent years. A turnaround can refer either to a business firm that faces financial disaster or action taken to prevent the occurrence of that financial disaster. The true nature of turnaround is a firm whose recent past or projected future financial performance unacceptable to the owners / creditors. The turnaround malaise is dissected into its four stages of progressive virulence using the analogy of restoration of physical health to the restoration of fiscal health.

Due to management inefficiency, most of the corporate fail to identify the problems and therefore delay in taking precautionary measures affecting the owners, employees, customers, suppliers and the economy. To restore the organisation on its normal course, a corporate turnaround is essential. Organizational turnaround is influenced not only by good management practices but also by shifts in organization. The impact of such shifts on organizational performance especially in public sector organizations has neutral or negative effects on performance but the extent of organizational strategy as well as environment influence turnaround success.

Good management practices, favorable shifts in external environmental variables, and changes in organizational inertia are all contribute to turnaround success besides organizational performance which can be influenced strongly by both organizational choices and external constraints. It is therefore, apparent to study and differentiate the seeds of business decline of the declining firms viz., internal as well as external. While most of the external signals of business failure cannot be fully controlled by the firms on the other hand the internal events are believed to be extremely important because the management has a direct control over them.

Few of the key ingredients of turnaround are:

        i.            a dynamic change agent with a strong sense of mission, preferably from outside the organisation,

      ii.            credibility building through some outstanding performance,

    iii.            mobilization of the rank-and-file by getting them involved in the organisation's goals and activities,

    iv.            quick pay-off projects for some immediate relief,

      v.            reprieve from serious external pressures, especially those relating to industrial relations, finance, key inputs, stakeholders, etc.

    vi.            mobilization of external resources and utilisation of environmental opportunities,

  vii.            strengthening of mechanisms to influence the environment, such as marketing, and public relations,

viii.            selective changes in the product mix, concentrating on high pay-off products,

     ix.            selective strengthening of management functions and systems, especially the financial control system,

       x.            motivating managers through participation, autonomy, challenging tasks, accountability, example setting, etc.

     xi.            coordination through regular review meetings and face- to-face interaction and

   xii.            performance control through goalsetting and fixing of responsibility, often creating profit and cost centres

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Turnaround Management

Times of corporate distress present special strategic management challenges. In such situations a firm may be in bankruptcy or nearing bankruptcy. Often turnaround consultants are brought into the company to devise and execute a plan of corporate renewal, assuming that the firm has enough potential to make it worth saving.

Turnaround management is a process which aims at corporate renewal. It uses analysis and planning to save distressed companies and return them to solvency, and to identify the reasons for failing performance in the market, and rectify them. Turnaround management involves management review; root failure causes analysis, and SWOT analysis to determine why the company is failing. Once all these analysis is completed, a long term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency.

Before a viable turnaround strategy can be formulated, one must identify the root cause or causes of the crisis. Few of the causes which may create trouble for the company can be:

·        Revenue downturn caused by a weak economy

·        Overly optimistic sales projections

·        Poor strategic choices

·        Poor execution of a good strategy

·        High operating costs

·        High fixed cost that decreases flexibility

·        Insufficient resources

·        Unsuccessful R&D projects

·        Highly successful competitor

·        Excessive debt burden

·        Inadequate financial controls

Business restructuring and performance improvement require multidisciplinary resources and change management skills, acting quickly to minimize disruption to the operations.

Turnaround management is the systematic and rapid implementation of a range of measures to correct a seriously unprofitable situation. It might include dealing with a financial disaster or measures to avoid the highly likely occurrence of such a disaster.

 When firms are doing so badly that failure seems imminent then turnaround management can restore performance and profitability. The increasing competition, rapid advances in technology and rising complexity of the business conditions accompanied by blend of customers and employees, the challenges for any corporate have been rising. Only a timely response to this situation can save organizations.

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