Turnaround strategies can be applied when a business is in decline that is worth saving. It is important to recognize the conditions under which an otherwise successful business may go into decline. Such recognition can suggest the appropriate solutions that might aid recovery.
Factors leading to decline:
The following factors have been ascertained as leading to decline of a firm.
1. Poor management: Poor management covers a multitude of sins, ranging from sheer incompetence to neglect of core businesses and an insufficient number of good managers. The personal characteristics of the chief executive and key management play major role in causing decline. Apart from incompetence, the principal factors identified as poor management reasons for decline include the following.
(a) One man rule: One man rule often seems to be at the root of poor management. One study found that the presence of a dominant and autocratic chief executive with a passion for empire building strategies often characterizes failing companies. This is acceptable while the company is successful, but rapid decline ensues when the leadership is seen to fail.
(b) Combined chairman and chief executive role: In this case the activities of the CEO become unchecked.
(c) Ineffective boards of directors: The board constitution is important. Often, non-executive directors do not know enough about a business and/or do not participate. In addition, executive directors may be ineffective. They participate only when topics specifically affect their area of interest.
(d) Neglect of core business: When the core business matures and top management time becomes diverted by attempts at diversification, the core business gets neglected.
(e) Lack of management depth: In newly diversifying concerns, where traditional skills have tended to be functional and the firm lacks general management or succession skills, lack of management depths causes the business decline.
2. Inadequate financial control:
Lack of adequate financial control is another cause of decline of firms. Such a lack of control comes about because the control systems lack one or more of adequate cash-flow forecasts, costing systems, and budgetary controls. In smaller firms all three items may be missing and only statutory financial information is prepared. In larger firms the problem is more likely to be due to inadequate systems. Often, control systems are too complex, produce poorly presented information, and may even produce the wrong information. Many may not understand the information that they really need, or can be provided by the information system. Many senior managers do not understand how to use accounting information. In many corporations, centralization of power has been identified as a causal factor in decline and, in addition, the hierarchical level at which control is located may well be too high. Many companies do not undertake correct overhead cost allocation. Activity based costing is a modem tool, which tries to improve this problem.
3. Competition:
Price and product competitions that usually occur together are considered as common causes of corporate decline. Firms that fail to revitalize their product offerings in response to changing market needs and competition ultimately end up in decline. Poor product introduction strategies, mistaken beliefs about the viability of the old product, a lack of financial and technological resources to pursue the introduction of new products and a failure to develop new product ideas may be other causes associated with product competition. Severe price competition is also a common cause of decline in Western corporations, especially in those sectors targeted by Japanese and other Asian competitors. Though the price competition is more acute in un-differentiated product markets, it has also occurred in areas where product differentiation is important, such as automobiles and consumer electronics.
4. High cost structure:
Firms with a substantially higher cost structure as compared to major competitors usually experience a seriously competitive disadvantage. Major sources of cost disadvantage identified include: relative cost disadvantages, absolute cost disadvantages, cost disadvantages due to diversification strategy cost disadvantages due to management style and organizational structure, operating inefficiencies, and unfavorable government policies.
Relative cost disadvantages are associated with experience effects, and the economies of scale. Absolute cost disadvantages are due to a number of factors such as competitive cost disadvantage due to ownership or control of critical raw materials or components by competitors; access to cheaper labor, proprietary production know-how, and favorable site location.
Diversified firms may experience a cost disadvantage due to the allocation of corporate overheads especially in industries with shared costs, where overheads are allocated in an arbitrary fashion without an activity-based costing system. Some organizations deliberately lower costs by improving productivity, reducing labor costs via outsourcing, reducing central staff overheads, and the like. Those concerns that do not so reduce overheads may suffer serious cost disadvantages.
Operating inefficiencies are usually the result of poor management and can occur in any function of management Some businesses may decline as a result of direct and/or indirect government policies, such as subsidies, tax differentials, exchange rates, preferential procurement, environmental controls and social policies etc.
5. Fluctuations in market demand:
An important casual factor in decline can be a reduction in demand or a change in the pattern of demand, to which the firm fails to respond or simply cannot respond. A drop in demand can be due to market obsolescence, such as buggy whips and gas lamps; cyclical demand, such as recession, which may cause serious but probably temporary decline, and seasonal decline, such as for ice cream in winter. This is not usually fatal unless the firm is in a weak financial condition. Failures to monitor secular decline trends regrettably often occur because the firm does not really want to see and acknowledge that this is happening, because of the resulting change in strategic behavior and the adjustment it may entail. Cyclical decline failures are often the result of price wars in which competitors attempt to grow or maintain market share. Insurance is a classic example of an industry with such a pattern.
6. Adverse movements in commodity prices:
Major changes in commodity prices that can occur suddenly have been responsible for many business failures. Examples include changes in the price of oil, as in the case of the and second oil-price shocks, rapid changes in the prices of metals such as copper, aluminum, and steel; and significant movements in exchange rates, as with the rapid appreciation of the yen in the late 1980s, and again the mid 1990s.
7. Inefficient Marketing:
Most firms suffer serious decline due to managerial problems throughout their organizations, especially acute in the sales and marketing functions. Such problems occur as a result of poorly motivated sales force and weak sales force management., ineffective and wasted advertising, efforts not targeted on key customer and products, poor after -sales service ,poor product quality, lack of research/knowledge of customer buying habits, loss of access to distribution channels, lack of marketing orientation
8. Large size of projects:
Many large projects failed because costs were underestimated and/or revenues overestimated. Such projects can go wrong due to underestimates of capital requirements, start up difficulties, capacity expansion and high market entry costs.
9. Acquisition:
Acquisition plays an important role in corporate strategy, especially for firms attempting to diversify. However, most acquisitions are considered to be failures. The major causes of decline for the acquiring company include the acquisition of loss making firms with weak competitive positions in their own markets, paying an unjustifiably high purchase price for the acquired firm, and poor post-acquisition management and control.
10. Financial Policy:
Three direct causes of failure due to financial policy are high debt-equity ratio, conservative financial policies and inappropriate financing sources.
Factors leading to decline:
The following factors have been ascertained as leading to decline of a firm.
1. Poor management: Poor management covers a multitude of sins, ranging from sheer incompetence to neglect of core businesses and an insufficient number of good managers. The personal characteristics of the chief executive and key management play major role in causing decline. Apart from incompetence, the principal factors identified as poor management reasons for decline include the following.
(a) One man rule: One man rule often seems to be at the root of poor management. One study found that the presence of a dominant and autocratic chief executive with a passion for empire building strategies often characterizes failing companies. This is acceptable while the company is successful, but rapid decline ensues when the leadership is seen to fail.
(b) Combined chairman and chief executive role: In this case the activities of the CEO become unchecked.
(c) Ineffective boards of directors: The board constitution is important. Often, non-executive directors do not know enough about a business and/or do not participate. In addition, executive directors may be ineffective. They participate only when topics specifically affect their area of interest.
(d) Neglect of core business: When the core business matures and top management time becomes diverted by attempts at diversification, the core business gets neglected.
(e) Lack of management depth: In newly diversifying concerns, where traditional skills have tended to be functional and the firm lacks general management or succession skills, lack of management depths causes the business decline.
2. Inadequate financial control:
Lack of adequate financial control is another cause of decline of firms. Such a lack of control comes about because the control systems lack one or more of adequate cash-flow forecasts, costing systems, and budgetary controls. In smaller firms all three items may be missing and only statutory financial information is prepared. In larger firms the problem is more likely to be due to inadequate systems. Often, control systems are too complex, produce poorly presented information, and may even produce the wrong information. Many may not understand the information that they really need, or can be provided by the information system. Many senior managers do not understand how to use accounting information. In many corporations, centralization of power has been identified as a causal factor in decline and, in addition, the hierarchical level at which control is located may well be too high. Many companies do not undertake correct overhead cost allocation. Activity based costing is a modem tool, which tries to improve this problem.
3. Competition:
Price and product competitions that usually occur together are considered as common causes of corporate decline. Firms that fail to revitalize their product offerings in response to changing market needs and competition ultimately end up in decline. Poor product introduction strategies, mistaken beliefs about the viability of the old product, a lack of financial and technological resources to pursue the introduction of new products and a failure to develop new product ideas may be other causes associated with product competition. Severe price competition is also a common cause of decline in Western corporations, especially in those sectors targeted by Japanese and other Asian competitors. Though the price competition is more acute in un-differentiated product markets, it has also occurred in areas where product differentiation is important, such as automobiles and consumer electronics.
4. High cost structure:
Firms with a substantially higher cost structure as compared to major competitors usually experience a seriously competitive disadvantage. Major sources of cost disadvantage identified include: relative cost disadvantages, absolute cost disadvantages, cost disadvantages due to diversification strategy cost disadvantages due to management style and organizational structure, operating inefficiencies, and unfavorable government policies.
Relative cost disadvantages are associated with experience effects, and the economies of scale. Absolute cost disadvantages are due to a number of factors such as competitive cost disadvantage due to ownership or control of critical raw materials or components by competitors; access to cheaper labor, proprietary production know-how, and favorable site location.
Diversified firms may experience a cost disadvantage due to the allocation of corporate overheads especially in industries with shared costs, where overheads are allocated in an arbitrary fashion without an activity-based costing system. Some organizations deliberately lower costs by improving productivity, reducing labor costs via outsourcing, reducing central staff overheads, and the like. Those concerns that do not so reduce overheads may suffer serious cost disadvantages.
Operating inefficiencies are usually the result of poor management and can occur in any function of management Some businesses may decline as a result of direct and/or indirect government policies, such as subsidies, tax differentials, exchange rates, preferential procurement, environmental controls and social policies etc.
5. Fluctuations in market demand:
An important casual factor in decline can be a reduction in demand or a change in the pattern of demand, to which the firm fails to respond or simply cannot respond. A drop in demand can be due to market obsolescence, such as buggy whips and gas lamps; cyclical demand, such as recession, which may cause serious but probably temporary decline, and seasonal decline, such as for ice cream in winter. This is not usually fatal unless the firm is in a weak financial condition. Failures to monitor secular decline trends regrettably often occur because the firm does not really want to see and acknowledge that this is happening, because of the resulting change in strategic behavior and the adjustment it may entail. Cyclical decline failures are often the result of price wars in which competitors attempt to grow or maintain market share. Insurance is a classic example of an industry with such a pattern.
6. Adverse movements in commodity prices:
Major changes in commodity prices that can occur suddenly have been responsible for many business failures. Examples include changes in the price of oil, as in the case of the and second oil-price shocks, rapid changes in the prices of metals such as copper, aluminum, and steel; and significant movements in exchange rates, as with the rapid appreciation of the yen in the late 1980s, and again the mid 1990s.
7. Inefficient Marketing:
Most firms suffer serious decline due to managerial problems throughout their organizations, especially acute in the sales and marketing functions. Such problems occur as a result of poorly motivated sales force and weak sales force management., ineffective and wasted advertising, efforts not targeted on key customer and products, poor after -sales service ,poor product quality, lack of research/knowledge of customer buying habits, loss of access to distribution channels, lack of marketing orientation
8. Large size of projects:
Many large projects failed because costs were underestimated and/or revenues overestimated. Such projects can go wrong due to underestimates of capital requirements, start up difficulties, capacity expansion and high market entry costs.
9. Acquisition:
Acquisition plays an important role in corporate strategy, especially for firms attempting to diversify. However, most acquisitions are considered to be failures. The major causes of decline for the acquiring company include the acquisition of loss making firms with weak competitive positions in their own markets, paying an unjustifiably high purchase price for the acquired firm, and poor post-acquisition management and control.
10. Financial Policy:
Three direct causes of failure due to financial policy are high debt-equity ratio, conservative financial policies and inappropriate financing sources.
No comments:
Post a Comment