Sustainable corporate turnarounds

Written by YRK Reddy | Updated: Jul 7 2007, 10:13am hrs
A pharmaceutical company struggling to keep the bankers at bay is suddenly blessed with an export order that will give it a new lease of life. A machine tool company that was shut for over a decade got hope when part of its land was sought by a reputed hotel for a phenomenal price. Stories of sudden turnarounds abound throughout India. Many sick state-level public enterprises have made a comeback and the number of loss-making central public enterprises has dwindled. The last three years of boom-time seems to have raised many firms from the dead. But will these companies survive the next downturn

Let no company be lulled into believing that an elixir has been found. There is good evidence that turnarounds can be short-lived if driven merely by external factors or a couple of staid internal tactics.

The problem with most comebacks is that they arise due to an episodic one-time windfall or something akin to a performance-enhancing drug. Typically, organisationsif they are not blessed by a windfall of good timesquickly attempt to downsize, restructure, retrench assets, cut costs and raise money by revaluing assets and the like to stay afloat and prolong life. These are akin to religious diets while on pilgrimage, laudable in themselves. The problem is that the binge starts soon thereafter. While there is great enthusiasm in cutting the flabat times, even the musclethe fat returns very quickly when demand picks up and good times return. The cycles of turnarounds so far indicate that while all companies are prepared to free-ride the good times, few are capable of surviving demand recessions and hyper competition. It would be apposite to recall a story told many times of Chryslers Bob Eaton who called a meeting of his senior executives in July 1993 to discuss the quarterly results. After the usual pats on the back, he recalled the accolades from the media each time Chrysler turned aroundin 1956, 1965, 1976, and 1983. He said he had a better idea: stop getting sick in the first place!

To gain a sustainable turnaround, companies need a slew of better strategies and sustained human resource aspirationor strategic intent. The assumptions of growing markets and perpetual good times are no good. They must gain a new perspective on corporate lifethat corporate assets, if not continuously refurbished and improved, can diminish in value; that creative destruction is a preferable option compared to maintaining useless assets and their attendant entrenched interests; that companies have limited life; and the challenge indeed is to prolong the lifespan.

Going by the research so far, even mega corporations do not seem to last more than 40-50 years. The smaller ones probably have an average life of less than two decades. Thus, while a company may be legally structured to last forever, the reality is more sobering. Only a handful of companies listed on our stock exchanges continue to be actively tradedmost are dead stocks.

Ideally, a turnaround phenomenon has to be like the mythological Phoenixsudden, glowing and emerging from the ashes by the dint of ones own effort. Such a turnaround uses entrepreneurial energy and innovative insights to arrive at out-of-the-box strategies and generates a spirit among all employees that defies the constraints of resources. It involves great human effort not merely to raise oneself from the morass on just one occasion, but ensure that the organisation has mastered what it takes to keep making winning strategic choices. Organisational learning, adaptability, knowledge management, creative thinking, strategic intent and strategy management are all closely connected in such an ideal situation. This is also the secret of survival.

Companies blessed with windfalls that have not got their own acts together should remember that several of the excellent companies of the 1980s floundered even before the much-acclaimed book that extolled their excellence reached all parts of the world.