Turnaround Management | Management Optional Notes for UPSC PDF Download

Turnaround Strategy

When a company goes from doing well to struggling financially for several years, it's called a turnaround situation.
This can happen because of different things going wrong both inside and outside the company, like increased competition or not managing resources well.

• Causes of Turnaround Situations:

  • Can result from a slow decline over many years or a sudden drop in finances over a few months.
  • Strategic causes include more competition, lack of raw materials, and reduced profit margins.
  • Operating problems involve strikes, labor issues, excess production capacity, and low prices.

• Understanding Situation Severity:

  • Immediate threat to a company's survival during a turnaround is called situation severity.
  • Low severity is shown by declining sales or income, while extremely high severity can lead to imminent bankruptcy.

• Importance of Recognizing Cause and Effect:

  • Recognizing the connection between the problem and the response is crucial for a successful turnaround.
  • Properly assessing the cause of the turnaround is vital to focus the recovery efforts.

• Highlight:

  • Turnaround situations happen when a successful company faces years of financial struggles.
  • Causes include both internal issues like competition and external problems like economic changes.
  • Recognizing how serious the problem is helps decide how urgently the company needs to act.
  • Understanding the cause of the issue is crucial for a successful recovery.

The Turnaround Process

• A turnaround situation occurs when a company experiences prolonged financial decline after a period of success due to internal and external factors.
• The severity of the decline prompts explicit turnaround actions to address the financial challenges.

Two-Stage Turnaround Process

• Stage 1: Survival and Positive Cash Flow
  • Initial focus on survival and achieving positive cash flow.
  • Emergency plans implemented to stop financial losses and stabilize core operations.
  • Common retrenchment activities include liquidation, divestment, product elimination, and downsizing the workforce.
• Stage 2: Return-to-Growth or Recovery
  • Shift towards growth and development, aiming to increase market share.
  • Strategies include acquisitions, introducing new products, entering new markets, and enhancing market penetration.

Turnaround Situations: Severity and Strategic Response

• Key Dimensions:

  • The success of a strategic response during a turnaround depends on two main factors: severity and causality.
  • Severity measures how critical a company's financial health is and the level of threat it poses to survival.

• Severity Impact on Response Speed:

  • When severity is low, the company has some financial stability, and cost cutting may be enough to achieve stability.
  • In high-severity situations, immediate action is crucial to prevent bankruptcy, requiring more drastic measures such as significant cost and asset reductions.

• Asset Management in Turnaround:

  • In severe situations, unproductive assets are targeted for divestiture, while more productive resources are safeguarded or reconfigured for the company's future plans.
  • Asset reduction is often more drastic than cost reduction in severe turnaround cases.

• Role of External Factors:

  • The importance of external factors increases during the recovery phase.
  • Innovative activities become more appropriate when external factors play a crucial role, focusing on doing things differently.
  • Conversely, in situations where internal factors are more significant, efficiency maintenance activities, doing the same things more efficiently, are suitable.

• Successful Turnaround Process:

  • A proactive and structured retrenchment, cutting back costs and resources, is essential for achieving near-term financial stabilization before entering the recovery phase.
  • Innovative strategies involve product or market-based activities, while efficiency strategies focus on production and management systems within the company.

• Contextual Factors and Turnaround Strategies:

  • O’Neill's investigation identified four primary turnaround strategies: management changes, cutback (cost cutting), growth (expanding and acquiring), and restructuring (organizational changes).
  • Success of growth strategies may be hindered in highly competitive markets, while cutback and restructuring strategies show promise in weak market positions.
  • In mature or declining industries, efficiency or operating recovery strategies offer the best chances for successful turnaround.