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 acompany 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 Turnarounds1 Asset reduction strategies:If a firm is operating much below the Breakevenlevel, This will reduce the level of fixed costs and help in reducing the total costsof the firm.

2 Revenue increasing strategies:If the firm is operating substantially butnot extremely below its breakeven level,then the appropriate turnaround strategyis 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 carryout and the firms’ profits rise once the unnecessary costs are cut down.

4 Combination strategies: Operating closer but below breakeven levels calls forapplication of combination strategies. Under this method all the three namely costreducing, revenue generating and asset reduction actions are pursuedSimultaneously 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 andwith 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