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| Pradip Chanda, is a turnaround consultant
based in Delhi. He is the author of The Second Coming--Creativity
in Corporate Turnarounds |
Managers
run businesses, right? Not always. In most cases the reverse is
true: Businesses end up running managers. Instead of addressing
areas in which a company has lost its competitiveness, managers
are so overwhelmed by the company's history that they end up trying
to milk its 'equity' in market segments that no longer offer profitable
opportunities. The Indian corporate graveyard is full of instances
where the management's obsession with its traditional businesses
has driven the final nail in the company's coffin.
Indian managers are not unique in this respect. In fact, they have
eminent global counterparts.
Jack Welch, in his early days as Chairman of
GE, had to deal with one such obsession with the company's nuclear
reactor business. At his first business-review session at GE, one
unit presented a budget assuming that it would receive orders for
the installation of three new reactors every year. The steady build-up
of public opinion against nuclear power stations had in no way dampened
the optimism of the division's executives. However, whatever support
there was for nuclear power generation had dwindled after a recent
reactor accident in Pennsylvania. In fact, since that accident,
GE had received no orders for new reactors.
Welch had to ask the unit to redo its budget
on the assumption that GE would never get another order for nuclear
reactors in the US. The division turned around to make a profitable
business out of selling fuel and nuclear services to the previously
installed bases, 72 of them, and managed to survive the large manufacturing
infrastructure that had become a millstone.
Unfortunately, there seems to be little change
in the approach of managers in sick companies seeking to turn around.
Faced with excess capacity in a traditional market segment, managements
tend to focus entirely on improving capacity utilisation.
Nothing is inherently wrong with this bit of
reasoning, except that precious resources are frittered away in
manufacturing products that have few ready takers. Inventory piles
up, cash gets tied up, and pressure is built on the marketing team
to sell at any cost. That translates into dumping on dealers who
refuse to pay for stocks not ordered. The books reflect higher and
higher receivables and a discounting spiral starts, not as a tactical
tool to counter competition, but as a desperate measure to get some
cash back into the system. Finally, the bottomline goes into a tailspin.
It is, therefore, important to change the focus
to bringing the break-even point down to manageable levels. This
requires a two-pronged strategy: better revenue management and cost-cutting.
The problem gets exacerbated by increasing
volume through-put at lower prices and diminishing margins. The
most effective way to solve the problem would be to find niches
where the company's products may be sold at a small premium. Concentrating
on fault-free production processes that eliminate the need for reworking
and ensure delivery of products on time can help companies service
their markets better.
Simultaneous cost-cutting is equally urgent.
Sadly, the emphasis of cost-cutting is almost always directed towards
the legacy of costs related to excess capacity. In India, where
most companies have adopted labour-intensive technologies, this
means managing worker redundancies. Most managers find this unpalatable,
as they should, but are unable to take their mind off this issue
and look at other key areas of cost-management that could make significant
contributions.
In the garment trade, for example, cutting
back on the product range, and applying the Pareto Principle along
with a niche orientation can, and has, resulted in major savings.
Similarly, cutting back on distribution reach can improve the company's
efficiencies in markets closer home.
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