Turn-Around of a Company

[Submitted by CA. Jaydevan Iyer,
BSC, ACA, CMA]

August 7, 2006

Turning Around a Company from Loss to Profit,
Some thoughts based on a Case Study in a Textiles Company

I. TURN AROUND OF ABC LTD GROUP

The maximum number of sick units is in Textile and Engineering sector. Textile and engineering comprise approximately 57% of the total sick units. The essence of strategy formulation is in coping with the competition. Customers, suppliers, potential entrants and substitute products are our competitors in the industry. Knowledge of these underlying forces of competitive pressure provides the ground work for strategic agenda of action. They high light the critical strengths and weaknesses of the company So the starting point in any turn around mission is the analysis of the industry. This is extremely important if the company has to attract investment.

Before we enter in to any kind of turn around plans we have to understand the industrial scenario. A summary of the same is given below :

The company I have chosen for study is a Textile Company having a turn over of 30.00 crores in the year 2005-06. Immediately after the formation they have been trading on fabrics. It is located very near to a spinning mill where from it purchases yarn. They have cutting and sizing machines. The weaving is done by other group companies which they charge for. The textile industry has high government support in the form of interest subsidies and Capital Investment subsidies. In the
year 2005 the group formed another export company for exporting knitted bed sheets. They also started another company to manufacture garments. For both these companies the fabric is supplied by ABC LTD.

 
The revival strategy has implication on the interest cost , high level of inventories , productivity . morale of the people and growth .

II. SIGNALS OF CORPORATE SICKNESS (DIAGNOSIS OF THE TROUBLE)

Following are some of the symptoms exhibited by ABC LTD . It can not be called as sick but the symptoms calls for urgent remedial; action. On further investigation it was observed that

1. Meagre Profit in the business
2. Increasing dependence on Debt
3. Failure to Reinvest sufficiently in the business
4. Diversification at the expense of core business: Diversification has to be sought as a supplementary keeping the existing business in tact .
5. Lack of planning
6. Rigidity of the Top Management. Lack of interest in the fresh ideas from others.
7. Management succession problems : The original group chairman expired in the year 2002 and ever since there has been no one to give direction to the company.
8. Management unwilling to learn from competitors.
   ABC LTD group is showing many of the above symptoms . Hence the situation calls for immediate attention. Other wise it might lead to sickness. ABC LTD should have bench marking system to assess where they stand compared to their competitors . One has to Learn from competitors. The process which enables this is competitors intelligence. We need to collect intelligence material from our competitors and use it wisely.

III.. STRATEGIC ANALYSIS

• Strategic Analysis requires understanding the situation of the organization
• This provides a strategic choice
• What are they ?
• ABC LTD'S competitors do not enjoy the kind of set up which they have. The Board of directors will have to deliberate on this issue.
• They have creditors who gives us unlimited credit which other firms do not have. He probably gives the material to us at a lower rate.
• The factory is located strategically near a spinning mill because of which we can avoid huge transportation costs which the competitor is incurring.
• They have TUF subsidy
• They have interest subsidy
• They have the state of the art technology to manufacture
• They get power at subsidized rates being in a Category D Zone area

VI. NOW THE QUESTION

• Why are they not able to perform well ? With these kinds of advantages one should have been able to achieve cost leadership in the industry. Why the units are not able to do this ? summarized Balance Sheet and Profit and Loss Account of the Company for the year ended 31-03-2006.is to be studied.

VI. THE REASONS

• The main reason for this is lack of financial discipline and high level of overheads including interest .High cost structure is a disadvantage to the company. One should not manufacture a product because one loves it. Love the company and not the product .Because a product has a limited life cycle. But the company has to go on. The Company was doing over trading, the sales grow faster than that can be supported by funds available. Because of this they were experiencing liquidity crisis. The figures in the financial statements are self explanatory.
• Inadequate financial controls and lack of financial discipline:
• Lack of Management Strength: Managers below the chief executive level often lack adequate management skills this may cause decline of a firm
• Lack of intelligent and smart marketing efforts
• There need to be better co ordination between marketing and other departments
• Financial Policy: High Debt equity ratio which makes it difficult to service the debt.
• Use of in appropriate financial resources: Funds from one company is used in another company for financing projects. The money has got blocked.
• Unusual dependency on major creditors for finance.
• Working capital funds have been used for financing fixed assets. The funds gets blocked there also.
• Accumulation high level of inventories , sundry creditors and debtors
• Delegation of authority not proper : No job profiles defined people do work with out any clear direction. The organizational mission is not conveyed to them.
• High Employee turn over give raise to loss of continuity and delay.

IX. TURN AROUND STRATEGIES

• The management will have to first take a decision whether they want to grow in the business.
• The Corporate Level Strategy has to be based on this perception of the management about the business
• This can be by way of increase in market share . This will need an increase in quality perception to be created in the minds of the customers.
• How can we do it ?
• By dealer Push : Push the product to the dealer and provide advertisement support
• Consumer Pull Strategy: Pull the customer to the product. This requires product differentiation and cost reduction because the company is not a market leader both in cost and quality. Improve the quality of the product. This is the best strategy.
   
• In this case of we will have to use both pull and push strategy.
• New uses for existing product : There is a need to do research and development on new uses for existing so that product life can be elongated.
• Product choice becomes an important factor in this analysis. If a product has reached maturity stage Milk the product and get out of the market. Marketing department will have to identify these products and discard them.
• All the above strategies will be effective only if management is ready to bring in fresh funds in to the business in the form of equity or loans.
• They can also approach a bank or financial institutions for funds.
• It is also possible to approach a Turn Around Fund. But before that the company will have to create a set up which make it well attractive to the fund concerned. This is a ground level work. The case of the company will have to be presented properly.
   
• One of the strategies used in this is asset reduction. This will not suit us because the company does not apparently have idle assets.
• We may have to classify each of our units as Strategic Business Units ( SBU) independently making profits and contribution to the overall business.
• Revenue increasing Strategies : At present operations are neck to neck .Introducing a scaled down version of the main product may be a strategy to increase revenue. This can lead to higher operating profits because this will increase the volume and hence reduce the unit cost of production.

XI. COST CUTTING STRATEGIES :

This will be an ideal strategy ABC LTD .But it has to be a combination of Revenue Generation and Cost Reduction strategies. This has to be pursued simultaneously in an integrated and balanced manner. This will have a favourable impact on profitability and cash flow. The Company, at present using Traditional Costing Methods in the business. It is time to turn to Activity Based Costing and Target Costing methods. There can be up gradation and also a change in the product mix

XII. COMBINATION OF STRAGIES :

All the strategies mentioned above can be used in combination also.

XIII. A WORD OF CAUTION

A turn around requires formulation and implementation of a new strategy

• The successful implementation of the turnaround strategy requires appropriate organizational structure , a participative type of decision making environment, effective administration and budgetary control ,training, performance evaluation career advancements and rewards.
• A turn around strategy must concentrate on profit generation and profit must be regarded as the legitimate goal.
• A turn around strategy once initiated has to be closely monitored

OTHER ASPECTS WE NEED TO DO

1. We need an overhaul of the management structure.
2. There has to be a strategic vision and a strategic business plan
3. Budgets should be introduced and discussed on a periodical basis
4. Traditional costing methods will not give accurate results in changing times. We need to introduce Activity Based Costing and Target Costing.
5. We need to do Customer Profitability Analysis to find out who are our profitable customers that add value to us. Other customers are not worth servicing
6. The need for a n external consultant can not be over ruled.
7. We need to do a value chain analysis .
8. The firm gain competitive advantage by performing the strategically important activities cheaply or better than our competitors .
9. There has to be a separate advertisement budget. Set the advertisement objective and then set the budget.

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