Column: Business Revival

BUSINESS REVIVAL
The Turnaround Imperative

Obsolete technology and low productivity are the prime factors holding Indian companies back from achieving international quality.

By Pradip Chanda

Pradip Chanda, Turnaround Consultant

Business has a covenant with society. As society makes the environment conducive to business, the latter must respond by improving the quality of life of the community-by making better products at lower prices, creating jobs, and paying better wages.

Business cannot do that by adopting an individualistic model of capitalism that aims to satisfy the shareholders' desire to maximise profits and ROI (Return On Investment). In our country, business houses must have a wider community-orientation and aim to satisfy the interests of all stakeholders. And that includes customers, employees, vendors, lenders, ancillary services, and equity investors. This is more true for the manufacturing sector, which according to recent reports, is declining, creating more redundancies than job opportunities.

Transferring production centres to China, Vietnam, and other low wage countries may be acceptable in Western economies, which have over the years built social safety nets. We cannot afford that. Our response has to be a commitment to improve our competitiveness. To achieve that, not only do we need fresh investments, but we must also maximise the returns on the investments already made-a large part of which are tied up in 'sick' and under-performing companies.

Turnarounds must, therefore, be high on our agenda. Turnarounds require major sacrifices from all stakeholders, and demand substantial resources. People often ask: ''Are these resources best utilised in a difficult turnaround, the success of which cannot be guaranteed, or is it better to let these companies die?''

Obsolete technology, over-manning, and low productivity are the prime factors holding Indian companies back from achieving international quality and cost of output. Their strident demands for an exit policy, which is being projected as an essential element of business restructuring, have succeeded in persuading the government to enact a new labour law that makes retrenchment and lay-offs easier.

Boards of large corporations consider turnaround-versus-closure or outsourcing options fairly routinely. A decision to divest non-performing SBUs (Strategic Business Units) is easy to make, as the trauma created by such moves can be contained within the corporation with minimal displacement, dislocation, and depreciation of resources.

But for stand-alone businesses it is a tougher call. The interests of stakeholders need to be protected. Closures will not do that. Certain external realities have to be factored in when the new strategies are formulated for stand alone under-performing companies.

For countries deficient in investment, replacement costs of technology and equipment are often beyond affordability. Where, for decades, industries have been created to tackle high unemployment, and make up for the absence of social security provisions, a regime of closures will go well beyond just causing only ''temporary'' pain. The ripple effect on ancillary industries can be devastating.

Mergers and strategic alliances may be the potential solution for some, but under-performing companies rarely have the bargaining chips to negotiate an equitable solution. That leaves only turnarounds. Turnaround managers question the premise that the market life cycle of a company's product portfolio, leading to an inevitable decline, is irreversible. Turnarounds focus on redefining businesses, improving productivity, retraining work forces, and competing on quality.

For an economy like ours, turnaround attempts are virtually mandated. The communities in which these businesses operate, and the direct and indirect workforce that makes a livelihood from these companies, needs them. If we ignore this, we do so at our own peril.

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