IN NEWS-
The Government had approved a Turnaround Plan (TAP) / Financial Restructuring Plan (FRP) for operational and financial turnaround of Air India. The TAP/FRP provides equity infusion of Rs.30,231 crores upto 2021 subject to achievement of certain milestones. The Company has made substantial progress in both operational as well as financial areas as per TAP Milestones. As a part of the turnaround strategy, the company, with the overall support of the government, has initiated a number of steps in order to cut costs and losses.
The Turnaround Strategy is a retrenchment strategy followed by an organization when it feels that the decision made earlier is wrong and needs to be undone before it damages the profitability of the company. Simply, turnaround strategy is backing out or retreating from the decision wrongly made earlier and transforming from a loss making company to a profit making company.
- Times of corporate distress present special strategic management challenges.
- In such situations, a firm may be in bankruptcy or nearing bankruptcy.
- Often turnaroundconsultants 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.
- Before a viable turnaround strategy can be formulated, one must identify the root cause or causes of the crisis.
According to Dictionary of Marketing (edited by P. H. Collin), Turnaround means ‘making a company profitable again’.
Frequently encountered causes include:
- 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 costs that decrease flexibility Insufficient resources
- Unsuccessful R&D projects
- Highly successful competitor
- Excessive debt burden
- Inadequate financial controls
Example: Dell is the best example of a turnaround strategy. In 2006. Dell announced the cost-cutting measures and to do so; it started selling its products directly, but unfortunately, it suffered huge losses. Then in 2007, Dell withdrew its direct selling strategy and started selling its computers through the retail outlets and today it is the second largest computer retailer in the world.
There are three phase in turnaround management:
1. Diagnosis of the problem faced by the company.
2. Choosing the appropriate turnaround strategy.
3. Implementation of the strategy.
Features of Turnaround:
1. Turnaround involves restructuring. It involves bringing back the sick industrial unit to its original position. Turnaround is aimed at reversing the trend of declining performance of the business firm.
2. Turnaround is applicable to sick industrial units who are passing through economic and financial distress.
3. Turnaround is a long-term strategy. A sick unit cannot be revived over night. Proper planning and implementation to convert a loss-making unit into a profitable one. It is a lengthy and a time consuming process.
4. A sick unit is not in a position to make optimum utilisation of the resources. Turnaround involves reorganizing of physical, financial and human resources by making optimum utilisation of the available resources.
5. Turnaround require co-operation of all the sections of the society such as shareholders, financial institutions, suppliers, employees, customers etc.
6. Capital is the lifeblood of every business. Turnaround requires money. Finance is required to implement the plans of restructuring. Sufficient finance is required to undertake further production and remove deficiencies of the business.
7. Turnaround is undertaken by both internal experts and outside consultants. A proper skill is required to undertake turnaround strategy.
Essentials of successful turnaround strategy:
Turnaround is a complex action, which requires execution of proper planning and support of various groups such as employees, customers, shareholders, financial institutions etc.
The following are the essentials of successful turnaround strategy:
1. Diagnosing the problem:
This is the first step in the restructuring implementation process. To implement turnaround strategy requires diagnosis of the sickness problem. Exact cause of the business failure is to be identified to frame plans for the revival process. Proper screening helps to trap the root cause of the industrial problem.
2. Proper planning and execution:
Once the evaluation has been completed, the next critical step in a turnaround in turnaround planning. Proper planning is too made regarding resources, time frame and policies to be executed. The sick company needs to hire a Corporate Turnaround Expert with many years of turnaround experience
3. Communication:
Communication is a key factor for success in a business. Turnaround requires rapid response from the shareholders, financial institutions, employees and the company management. Complete, clear and prompt communication is necessary to implement turnaround strategy.
4. Availability of funds:
The key elements of any turnaround are financial restructuring. Lack of investment leads to low crop yield and huge wastages. Availability of adequate funds brings the sick unit back to good health, by implementing sound financial management and control.
5. Co-operation:
Turnaround requires co-operation from various groups of the business such as employees, shareholders, management, investors, suppliers, creditors etc. It mainly requires the support of the employees as their workload increases.
6. Viability of business:
Turnaround should be applicable only if there are chances of revival of business firm. Sometimes business may not have bright future, but the survival of such unit may be difficult in the long run.
In such cases, implementation of turnaround strategy is not viable. In short viability of business is an essential requirement of a good turnaround strategy.
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