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Signals of Turnaround - Turnaround Strategies & Corporate Restructuring
Strategic Management - Strategy Formulation
Signals of Turnaround - Turnaround Strategies & Corporate Restructuring
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We need to examine whether companies suddenly turn sick or qualify as potential candidates for turnaround.
Signals of Turnaround
We need to examine whether companies suddenly turn sick or qualify as potential candidates for turnaround. Sometimes the companies themselves may not be able to identify that they are turning into red. If recognized early prevention can be tried instead of curing the problem. Though the factors leading to industry varies from one firm to the other, there are some common signals of sickness which herald on the onset of sickness. Companies becoming sick would exhibit one or more of the following characteristics.
Decreasing market share This is the most significant symptom of a major sickness. A company, which is losing its market share to competition, needs to sit up and take careful note. Regular monitoring of market share helps companies to keep a tab on their performance in the market vis-a-vis their competitors. Any indication of declining market share should trigger-off immediate corrective action.
Decreasing constant rupee sales Sales figures, to be meaningful, should be adjusted for inflation. If constant rupees sales figures are showing a declining trend, then this is a danger signal to watch out.
Decreasing profitability Profit figures are a good indication of a company’s health. Care must be taken to interpret the profit figures correctly, so as to avoid any misjudgments. Decreasing profitability can show up as smaller profits in absolute terms or lower profits per rupee of sale or decreasing return on investment or smaller profit margins.
Increasing dependence on debt A company overly reliant on debts soon gets into a tight corner with very few options left. A substantial rise in the amount of debt, a lopsided debt to equity ratio and a lowered corporate credit rating may cause banks and other financial institutions to apply restrictions and become reluctant to lend more. Once financial institutions are hesitant to lend money, the company’s rating on the stock market also slides and it becomes very difficult for the company to raise funds from the public too.
Restricted dividend policies Dividends
frequently missed or restricted dividends signal danger. Often such companies may
have earlier paid substantially higher proportion of earnings as dividends
– when in fact they should have been reinvesting in the business. Current inability to pay dividends in an indication of the gravity of the situation.
Failure to reinvest sufficiently in the business For a company to stay competitive and keep on the fast growth track, it is essential to reinvest adequate amounts in plant, equipment and maintenance, when a business is growing, the combinations of new investments and reinvestments often warrants borrowing. Companies, which fail to recognize this fact and try to finance growth with only their internal funds, are applying brakes in the path of growth.
Diversification at the expense of the core business It is a well-observed fact that once companies reach a particular level of maturity in the existing business they start looking for diversifications. Often this is done at the cost of the core business, which then starts to deteriorate and decline. Diversification in new ventures should be sought as a supplement and not as a substitute for the primary core business.
Lack of planning In many companies, particularly those built by individual entrepreneurs, the concept of planning is generally lacking. This can often result in major setbacks as limited thought or planning go into the actions and their consequences.
Inflexible chief executives A chief executive who is unwilling to listen to fresh ideas from others is a signal of impending bad news. Even if the CEO recognizes the danger signals, his unwillingness to accept any proposal from his subordinates further blocks the path towards recovery.
Management succession problems When nearly all the top managers are in their mid-fifties there may be a serious vacuum at the second line of command. As these older managers retire or leave because of perception of decreasing opportunities there is bound to be serious management crisis.
Unquestioning board of directors Directors who have family, social or business ties with the chief executive or have served every long on the board, may no longer be objective in their judgment. Thus these directors serve limited purpose in terms of questioning or cautioning the CEO about his actions.
A Management team unwilling to learn from its competitors Companies in decline often adopt a closed attitude and are not willing to learn anything from their competitors. Companies, which have survived tough competitive times continuously, analyze their competitors’ moves.
Legal requirements for turnaround Turnaround is applicable to sick industrial units. An organization is sick when the accumulated losses at the end of a financial year exceed 50% of the peak net worth attained during the preceding five years. In order to an Indian company to quality for turnaround, it has to be first declared as a sick company. This declaration is required under the Sick industrial Companies (Special Provisions) Act (SICA), 1985 which provides for the Board for industrial and Financial Reconstruction (BIFR) to act as the ‘corporate doctor’ whenever companies fall sick. Though this act was initially envisaged to be applicable to private sector units only, as a part of restructuring of public sector enterprises, the SICA was amended to bring Central and State public sector units under its purview.
We need to examine whether companies suddenly turn sick or qualify as potential candidates for turnaround. Sometimes the companies themselves may not be able to identify that they are turning into red. If recognized early prevention can be tried instead of curing the problem. Though the factors leading to industry varies from one firm to the other, there are some common signals of sickness which herald on the onset of sickness. Companies becoming sick would exhibit one or more of the following characteristics.
Decreasing market share This is the most significant symptom of a major sickness. A company, which is losing its market share to competition, needs to sit up and take careful note. Regular monitoring of market share helps companies to keep a tab on their performance in the market vis-a-vis their competitors. Any indication of declining market share should trigger-off immediate corrective action.
Decreasing constant rupee sales Sales figures, to be meaningful, should be adjusted for inflation. If constant rupees sales figures are showing a declining trend, then this is a danger signal to watch out.
Decreasing profitability Profit figures are a good indication of a company’s health. Care must be taken to interpret the profit figures correctly, so as to avoid any misjudgments. Decreasing profitability can show up as smaller profits in absolute terms or lower profits per rupee of sale or decreasing return on investment or smaller profit margins.
Increasing dependence on debt A company overly reliant on debts soon gets into a tight corner with very few options left. A substantial rise in the amount of debt, a lopsided debt to equity ratio and a lowered corporate credit rating may cause banks and other financial institutions to apply restrictions and become reluctant to lend more. Once financial institutions are hesitant to lend money, the company’s rating on the stock market also slides and it becomes very difficult for the company to raise funds from the public too.
– when in fact they should have been reinvesting in the business. Current inability to pay dividends in an indication of the gravity of the situation.
Failure to reinvest sufficiently in the business For a company to stay competitive and keep on the fast growth track, it is essential to reinvest adequate amounts in plant, equipment and maintenance, when a business is growing, the combinations of new investments and reinvestments often warrants borrowing. Companies, which fail to recognize this fact and try to finance growth with only their internal funds, are applying brakes in the path of growth.
Diversification at the expense of the core business It is a well-observed fact that once companies reach a particular level of maturity in the existing business they start looking for diversifications. Often this is done at the cost of the core business, which then starts to deteriorate and decline. Diversification in new ventures should be sought as a supplement and not as a substitute for the primary core business.
Lack of planning In many companies, particularly those built by individual entrepreneurs, the concept of planning is generally lacking. This can often result in major setbacks as limited thought or planning go into the actions and their consequences.
Inflexible chief executives A chief executive who is unwilling to listen to fresh ideas from others is a signal of impending bad news. Even if the CEO recognizes the danger signals, his unwillingness to accept any proposal from his subordinates further blocks the path towards recovery.
Management succession problems When nearly all the top managers are in their mid-fifties there may be a serious vacuum at the second line of command. As these older managers retire or leave because of perception of decreasing opportunities there is bound to be serious management crisis.
Unquestioning board of directors Directors who have family, social or business ties with the chief executive or have served every long on the board, may no longer be objective in their judgment. Thus these directors serve limited purpose in terms of questioning or cautioning the CEO about his actions.
A Management team unwilling to learn from its competitors Companies in decline often adopt a closed attitude and are not willing to learn anything from their competitors. Companies, which have survived tough competitive times continuously, analyze their competitors’ moves.
Legal requirements for turnaround Turnaround is applicable to sick industrial units. An organization is sick when the accumulated losses at the end of a financial year exceed 50% of the peak net worth attained during the preceding five years. In order to an Indian company to quality for turnaround, it has to be first declared as a sick company. This declaration is required under the Sick industrial Companies (Special Provisions) Act (SICA), 1985 which provides for the Board for industrial and Financial Reconstruction (BIFR) to act as the ‘corporate doctor’ whenever companies fall sick. Though this act was initially envisaged to be applicable to private sector units only, as a part of restructuring of public sector enterprises, the SICA was amended to bring Central and State public sector units under its purview.
Tags : Strategic Management - Strategy Formulation
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