Page 132 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes Types of Turnaround Strategies

Slater has classified the turnaround strategies into two broad categories. These are strategic
turnaround and operating turnaround. Whether a sick business needs strategic or operating
turn-around can be ascertained by analysing the current strategic and operating health of the
business. The operating turnarounds are easier to carry out and can be applied only when there
are average to strong strategic strengths (product-market relationship) in the business.
The strategic turnaround choices may involve either a new way to compete existing business or
entering an altogether new business. Entering a new business as a turnaround strategy can be
approached through the process of product portfolio management. The strategic turnaround
focuses either on increasing the market share in a given product-market framework or by
shifting the product-market relationship in a new direction by re-positioning.
The operating turnaround strategies are of four types. These are:
1. Revenue-increasing strategies
2. Cost-cutting strategies

3. Asset-reduction strategies
4. Combination strategies
The focus of all these choices is on short-term profit. Thus, if a sick firm is operating much below
its break-even, it must take steps to reduce the levels of fixed cost and help in reducing the total
costs of the firm. In real life, it is always a difficult choice to identify the assets which can be sold
without affecting the productivity of the business. To identify saleable assets, the firm may have
to keep in mind its strategic move in the next two to three years. The turnaround strategies
appropriate under different circumstances are:
If the sick firm is operating substantially but not extremely below its break-even point, then the
most appropriate turnaround strategy is the one which generates extra revenues. These may be
in the form of price reduction to increase sales, stimulating product demand through promotional
efforts or sometimes by introducing scaled down versions of the main products of the firm. The
increased quantities of product sales not only result in higher sales but also reduce the per unit
cost, thus leading to higher operating profits.

If the firm is operating closer but below break-even point then the turnaround strategy calls for
application of combination strategies. Under combination strategies cost-reducing, revenue
generating and asset-reduction actions are pursued simultaneously in an integrated and balanced
manner. The combination strategies have a direct favourable impact on cash flows as well as on
profits.

If the firm is operating around break-even point, it usually needs cost-reduction strategies, since
cost-reduction actions are easily carried out as compared to revenue generating actions, the
former is usually preferred for quick short-term profit increases.
Slater has, however, linked the choice of turnaround strategies to the causes of decline. The
recommended choice of strategies includes change in management and organisational processes,
improved financial controls, growth via acquisition and new financial strategies.
Closely associated to the choice of turnaround strategy is the concept of turnaround process. We
will focus on this aspect in the next section.

Turnaround Process

The process of turning a sick company into a profitable one is rather complex and difficult. It is
complex because a successful turnaround strategy demands corrective actions in many deficient
areas of the firm. It is necessary that all these actions are integrated and do not contradict each
other.

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