Competing for the Future

Breakthrough Strategies for

Seizing Control of an Industry &
Creating Tomorrow’s Markets
Leadership:Beyond
Restructuring
 In an effort to satisfy investor
requirements, ROI is usually the goal
 There are 2 components to this
calculation - a numerator (net income)
and a denominator (investment, net
assets, or capital employed)
 This leads to 2 options for top
management - numerator management
and denominator management
Numerator Management
 To grow the numerator (net income), top
management must have:
 a point of view about where new opportunities
lie
 must be able to anticipate changing customer
needs
 must have invested preemptively in building
new core competencies
 must provide clear and consistent leadership
Denominator Management
 Many managers realize that it is a lot
harder to raise net income, than to cut
assets and headcount.
 Under pressure for a quick ROI
improvement, executives reach for the
lever that will bring the quickest, surest
improvement in ROI - the denominator.
 Easy and quick, a red pencil is all that is
required.
Denominator Management
 The US and Britain have produced an
entire generation of denominator
managers.
 These managers can downsize, declutter,
delayer, and divest better than any
managers in the world!
 Even before the current wave of
downsizing, US and British companies had
the highest asset productivity ratios of
any companies in the world.
Denominator Management
 Denominator management is an
accountant’s shortcut to asset productivity.
 In a world where competitors are capable
of achieving 5, 10 or 15% real growth in
revenues, aggressive denominator
reduction, under a flat revenue stream, is
simply a way to sell market share
profitably. Market strategists term this a
“harvest strategy” and consider it a no-
brainier.
Efficiency & productivity
 A company must not only get to the
future first, it must get there for less.
 There is more than 1 path to productivity
improvement. While reducing the
denominator and keeping revenues
constant will increase productivity, so will
increasing revenue atop a slower growing
or constant capital and employment base.
Restructuring Results
 How do we know when we are done
restructuring? Where is the dividing line
between cutting fat and cutting muscle?
 Downsizing creates plummeting employee
morale. What employees hear is that
they are a firm’s most valuable assets;
what they know is that they’re the most
expendable assets (in denominator
companies) & feel like the builders of the
pharaohs’ tombs.
Restructuring Results
 Restructuring seldom results in
fundamental business improvement
(the chief tool of the denominator
manager). At best it buys time.
 One study of 16 large US companies
with at least 3 years experience of
restructuring found that although
share price improved initially, the
move was mostly temporary.
Restructuring Results
 Three years into restructuring, the share
price of the companies surveyed were, on
average, lagging even further behind
index growth rates than they had when
the restructuring began.
 Downsizing belatedly attempts to correct
the mistakes of the past; it is not about
creating the markets of the future.
Restructuring Results
 Downsizing can make a company
thinner; it doesn’t necessarily make
it healthier.
 Wall Street has again and again
shown itself quite content to watch a
firm profitably restructure itself out
of business, when top management
seems incapable of profitably
creating the future.
Restructuring Results
 Any company that is better at
denominator management than
numerator management - any
company that doesn’t have a track
record of ambitious, profitable,
organic growth - shouldn’t expect
Wall Street to cut it much slack.
Restructuring Results
 Wall Street seems to say: “Go ahead,
squeeze the lemon, get the
inefficiencies out, but give us the juice
(i.e. the dividends). We’ll take that
juice and give it to companies that are
better at making lemonade”.
 Reengineering is often combined with
restructuring - yet both are the penalty
a company must pay for not
anticipating the future.
TURNAROUND MANAGEMENT

 When a firm faces:

• Cash crisis or a
• consistent downtrend in its operating
profits or net worth
 Appropriate actions-Internal and external
are initiated to change the future prospects

 Process of bringing about a revival in the

firm’s fortunes is termed as “Turnaround
Management”.
3 phases of Turnaround Management.

1. The diagnosis of the impending

trouble or the danger signals

2. Choosing appropriate Turnaround

Strategy

3. Implementation of the change

process and its monitoring.
Phase I: Watching out for the danger signal

Following are universally accepted danger signals, which a

company should watch out for:
 Decreasing market share / Decreasing constant rupee
sales
 Decreasing profitability
 Increased dependence on debt / Restricted dividend
polices
 Failure to plough back the profits into business / Wrong
diversification at the expense of the core business.
 Lack of planning
 Inflexible CEO / Management succession problems /
Unquestioning Board of Directors
 A management team unwilling to learn from
competitors.
Phase II: Choosing appropriate Strategy

Hoffer, an expert management guru, classifies Turnaround

Management into two broad categories. They are:

1. Strategic Turnaround:-force the company to completely change

its
current way of operations. The choices under this method are
 A new way to compete in the existing business
 Entering into an altogether new business

 Under the first choice, the focus is either on increasing the

market share in a given product market frame work or in
repositioning the Product market relationship. The increase in
market share can be achieved by improving product quality
perception through dealer push or by a consumer pull.
 Alternatively entering a new business as a turnaround strategy
can be approached through the process of product portfolio
management.
 Phase II: Choosing appropriate Strategy
2. Operating Turnarounds
1 Asset reduction strategies:If a firm is operating much below the Breakeven
level, This will reduce the level of fixed costs and help in reducing the total costs
of the firm.

2 Revenue increasing strategies:If the firm is operating substantially but

not extremely below its breakeven level,then the appropriate turnaround strategy
is to generate extra revenues.

3. Cost cutting strategies: If the firm is operating around or above the

Breakeven level, cost reduction strategies are preferable as they are easy to carry
out and the firms’ profits rise once the unnecessary costs are cut down.

4 Combination strategies: Operating closer but below breakeven levels calls for
application of combination strategies. Under this method all the three namely cost
reducing, revenue generating and asset reduction actions are pursued
Simultaneously in an integrated and balanced manner.
Phase III: Implementation of the change process

 Implementation plays an important role

in any turnaround management.
 Needs to be pursued relentlessly and

with all-out effort to make it work.

 Commitment shown by the top
management as also the operating
management
The case of Hindustan Machine Tools

 HMT was formed to manufacture machine

tools with a foreign collaborator. After
nearly a decade of operation, it decided to
diversify into Watch industry. The effect
of this diversification was felt only after
57 years when the main business of HMT
crashed and the company started
incurring losses. The watch division came
to the rescue and it generated cash
profits to keep the company going.
The case of Bharat Heavy Electricals Limited

 The company was started with the objective of

producing power generating equipments and
virtually enjoyed monopoly. But as the years
went by because of the inability of the State
Electricity Boards and private sector to set up
new power plants, its capacity utilization fell
down tremendously. To offset this depression,
BHEL ventured into Telecommunications,
Metropolitan Transportation and Defense
production. Due to this timely diversification,
BHEL is now one of the rare profit making PSUs