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Friday, January 25, 2013

TURNAROUND STRATEGY


TURNAROUND STRATEGY
 

Turnaround is a strategy adopted by firms to arrest the decline and revive their growth. A turnaround situation exists when a firm encounters multiple years of declining Financial performance subsequent to a period of prosperity (Bibeault, 1982; Hambrick & Schecter, 1983; Schendel et al., 1976; Zammuto & Cameron, 1985). Turnaround situations are caused by combinations of external and internal factors (Finkin, 1985; Heany, 1985; Schendel et al., 1976) and may be the result of years of gradual slowdown or months of precipitous financial decline. The strategic causes of performance downturns include increased competition, raw material shortages, and decreased profit margins, while operating problems include strikes and labour problems, excess plant capacity and depressed price levels. The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity (Altman, 1983; Bibeault, 1982; Hofer, 1980). Low levels of severity are indicated by declines in sales or income margins, while extremely high severity would be signaled by imminent bankruptcy. The recognition of a relationship between cause and response is imperative for a turnaround process and hence, the importance of properly assessing the cause of the turnaround situation so that it could be the focus of the recovery response is very important. 
 

Turnaround Process 
 
The Turnaround Process begins with a depiction of external and internal factors as causes of a firm’s performance downturn. If these factors continue to detrimentally impact the firm, its financial health is threatened. Unchecked financial decline places the firm in a turnaround situation. A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions. A turnaround is typically accomplished through a two stage process. The initial stage is focused on the primary objectives of survival and achievement of a positive cash flow. The means to achieve this objective involves an emergency plan to halt the firm’s financial haemorrhage and a stabilization plan to streamline and improve core operations. In other words, it involves the classic retrenchment activities: liquidation, divestment, product elimination, and downsizing the workforce. Retrenchment strategies are also characterized by the revenue generating, product/market refocusing or cost cutting and asset reduction activities. While cost cutting, asset reduction and product/market refocusing are easy to visualize, the idea of revenue-generating is best captured by a strategy that is characterized by increased capacity utilization, and increased employee productivity.
 

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RETRENCHMENT STRATEGIES


RETRENCHMENT STRATEGIES

Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are contributing to deteriorating performance. It is meant to replenish and revitalize the organizational resources and capabilities so that the organization can regain its competitiveness. Retrenchment may be thought as a minor surgery to correct a problem. Managers often try a minimal treatment first-cost cutting or a small layoff-hoping that nothing more painful will be needed to turn the firm around. When performance measures reveal a more serious situation, more drastic action must be taken to restore performance.

Retrenchment strategies call for two primary actions:


1.   Cost cutting and
2.   Restructuring.

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Thursday, January 24, 2013

ORGANISATIONAL DECLINE CAUSES


CAUSES OF ORGANISATIONAL DECLINE OR DECAY:

Organizational Slack

Slack is uncommitted or committed (but underutilized) resources that are at the disposal of the organization. The existence of uncommitted slack (especially in the form of cash and liquid assets) is considered a necessary strategic factor for the survival of the declining organization because during decline, there are not enough sales to generate sufficient cash. On the other hand, slack may be a handicap during growth period and it may represent a high opportunity cost causing a drag on performance. While organizations in decline require high discretion and flexibility in using slack, in more stable or growing markets, high levels of slack (especially in the form of cash) may reduce performance. Hence, critical to the choice and the timing of retrenchment strategies and the likelihood of survival, is the amount of slack within the organization. Unfortunately this situation does not exist in many organizations facing decline or decay. In particular, while exercising retrenchment strategy as a strategic option, the existence of critical slack, will give the organization more flexibility in dealing with internal and external adversity.

Leadership

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Sunday, January 20, 2013

STRATEGIC ALLIANCE


STRATEGIC ALLIANCE

From software to steel, aerospace to apparel, the pace of strategic alliances worldwide is accelerating. A strategic alliance is an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short of a merger or a full partnership. Strategic alliances can be as simple as two companies sharing their technological and/or marketing resources. In contrast, they can be highly complex, involving several companies, located in different countries. Strategic alliances are becoming more and more prominent in the global economy.
 

Strategic alliances enable business to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. Teaming up with others adds complementary resources and capabilities, enabling participants to grow and expand more quickly and efficiently. Strategic alliances also benefit companies by reducing manufacturing costs, and developing and diffusing new technologies rapidly. Any firm opting for strategic alliance incurs certain costs and risks compared to a firm going alone. These risks include the loss of operational control and confidentiality of proprietary information and technology. In addition, the parties may deprive themselves of future business opportunities with competitors of their strategic partner. Alliances also raise the spectre of potential conflicts, loss of autonomy, difficulties in coordination and management, mismatch of cultures, etc.
 

TYPES OF STRATEGIC ALLIANCES 


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Thursday, January 3, 2013

M & A AND STEPS IN M & A

WHAT IS M & A ? WHY M & A ? STEPS IN M & A DEAL ?
 
 
MERGERS AND ACQUISITIONS (M&A) 

Mergers and acquisitions and corporate restructuring - or M&A for short - are a big part of the corporate finance. One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies -at least, that’s the reasoning behind M&A. This idea is particularly attractive to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
 
A corporate merger is essentially a combination of the assets and liabilities of two firms to form a single business entity. Although they are used synonymously, there is a slight distinction between the terms ‘merger’ and ‘acquisition’. Strictly speaking, only a corporate combination in which one of the companies survives as a legal entity is called a merger. In a merger of firms that are approximate equals, there is often an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain ratio. In other words, a merger happens when two firms, often about the same size, agree to unite as a new single company rather than remain as separate units. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered, and new company stock is issued in its place. When a company takes over another to become the new owner of the target company, the purchase is called an acquisition. From the legal angle, the ‘target company’ ceases to exist and the buyer “gulps down” the business and stock of the buyer continues to be traded.
 
 In summary, “acquisition” is generally used when a larger firm absorbs a smaller firm and “merger” is used when the combination is portrayed to be between equals. For the sake of discussion, the firm whose shares continue to exist (possibly under a different company name) will be referred to as the acquiring firm and the firm’s whose shares are being replaced by the acquiring firm will be referred to as the target firm. However, a merger of equals doesn’t happen very often in practice. Frequently, a company buying another allows the acquired firm to proclaim that it is a merger of equals, even though it is technically an acquisition. This is done to overcome some legal restrictions on acquisitions. 

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