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BUSINESS TURNAROUND
The turnaround concept is not new to business. The term “turnaround” needs to be clarified as various applications exist; for example, in the United States of America, the shut-down and repair and maintenance of manufacturing plants are also referred to as turnarounds. (This study is concerned with business turnaround). A business turnaround event is triggered by deterioration in the performance (profits, financial difficulties) of a business, resulting in a business turnaround situation.
The term “turnaround” is used in various scenarios and is applied to numerous situations resulting in different outcomes. Section 1.7 contains a list of the terms used interchangeably in this study.
The word turnaround is used interchangeably with rescue, realignment, restructure, reorganisation and renewal. Some authors such as Mueller, et al. (2001), and Lohrke, et al. (2004), also use downsizing in discussions on turnaround. Although downsizing can be a response to decline in a business, downsizing is not always linked to decline. Freeman and Cameron (1993:13) state that downsizing and decline are two distinct constructs. They agree that a business can strategically downsize without experiencing decline. This study will, for the sake of consistency, refer to all these concepts as “turnaround”. In chapter 3, this study dealt conducted a secondary data analysis and the differing concepts were closely investigated and a clear distinction was drawn.
To illustrate the flow of the research process, figure 3.1 represents the steps in a turnaround situation from the time a turnaround event first occurs. A turnaround event is prompted by a condition of decline and/or distress within a business.
Accordingly, an early warning sign, or most likely a combination of early warning signs, will be evident. The next step is to verify the warning signs in order to establish the true value, asset value or liquidation value of the business. The decision outcome will then determine whether a turnaround will be attempted. If it is decided to commence with a turnaround, a turnaround plan will be drawn up which, if accepted, will lead to the final steps depicted in the last column. The relevant literature (As per Appendix C), indicates that very few sources on the subject of turnaround exist in the South African context. A local source of practitioner literature and industry information is the South African Turnaround Practitioners Association website, where South African turnaround practitioners publish industry-related articles. The industry is currently unregulated and, as such, these articles are unfortunately in some instances flawed by plagiarism, unsubstantiated data and untested assumptions, and are often not based on scientific principles. Turnaround planners, entrepreneurs and practitioners alike must be able to plan to re-enter markets at an opportune time. Financial distress unfortunately has a negative effect on suppliers and customers and the challenge is re-entry into the markets. A turnaround practitioner’s short-term strategy is to ensure immediate corrective measures and a short-term turnaround plan that will be managed on a project basis.
Longman and Mullins (2004:58) are of the opinion that effective project management requires “the right people and skills”. This statement emphasises the need for suitable experience and the appropriate academic background in a turnaround practitioner. Muir (2005:3) warns about the high cost involved in turnaround structuring.
A business can only embark on a turnaround attempt when the question: “Is the business worth saving”, is confirmed in the positive. These are, in a very broad sense, the essential aspects that need to be addressed by the turnaround practitioner and the entrepreneur’s strategic turnaround planning. Bowman, Singh, Useem and Bhadury (1999:49) attempted measuring these “models” but concluded that the negative performance effects of turnaround are the transfer of wealth, rather than value creation. The investigation into the literature suggests that there are various causes for business distress. Consensus seems to propose that poor cash flow management and control is the single most common financial cause of initial distress and subsequent failure.
However, company size does play a role, as Pant (1991:639) concludes that it is, in the short term, easier to improve the results of smaller rather than larger companies.
DEFINITION OF BUSINESS TURNAROUND
Turnaround management has evolved over a period of time, from a trial-and-error scenario to an important management science. As such, the definition of a turnaround has also been open to various debates and compositions. Eventually, a definition evolved and some authors added to the definition. However, as research theory developed, and legislation became more debtor friendly, the definition has seen various changes in order to adapt to the new findings and legislation. Some researchers, such as Thorne (2000:305), who place turnaround action on the same podium as business transformation, amplify the importance of business turnaround. Moreover, the importance of decision making during a turnaround event should not be taken frivolously by management. The importance of turnaround decision making under risk, is confirmed by Tversky and Kahneman (1974:1128; 1986:260) and Kahneman and Tversky (1979:264), who warn that decision makers follow a simple heuristic rule of thumb when making decisions under risk and uncertainty. It has been found that a relatively complex probabilistic approach is required under conditions of high risk, as decision makers tend to ignore the signals that clearly indicate the variables that should be considered when forced to make decisions. Ansoff (1975:22) describes the ignorance of weak signals by the entrepreneur as missing an opportunity or exposure to a threat. The instant realisation that dawn on the entrepreneur is labelled by Ansoff as the “moment of truth”. At this point neither the cause nor the response is comprehensible by the entrepreneur. In practice, this moment of truth refers to the “turnaround event”. A turnaround removes the entrepreneur (directors and/or management) from their comfort zone and places them in unknown territory. Bibeault (1982:1) describes a turnaround situation as an abnormal period in any company’s history. Turnaround situations require management approaches unique and distinctly different from those of stable or growth management. Consequently, old management tenets lose their validity. In reviewing related academic and practitioner literature to find common ground on the definition of business turnaround, the close association between business failure prediction and business rescue was evident. Figure 3.1 illustrates this association as a flow process, from early warning sign identification and verification as the departure point, to acceptance of decline/distress, to a turnaround response as the final stage. Filatotchev and Toms (2006:408) state that the conditions responsible for the financial downturn (identifying and verifying the early warning signs) will have to be mitigated to achieve stability in the business. According to Pretorius (2006:6), turnaround will allow business to achieve acceptable performance and emphasise the importance of identifying signs. Sudarsanam and Lai (2001:183) argue that the downward trend towards failure in business is attributable to poor implementation of turnaround strategies. McRann (2005:38) points out that there are natural ebbs and flows that are part of every business; thus it is not always clear if your business is going to hit a significant bump or if you need a major change in strategy. Simons (1999:85) maintains that it is in the good times that managers/entrepreneurs need to be more vigilant in identifying signs of impending danger. Simons (1999:86) concludes that “in dynamic markets, taking risks is an integral part of any successful strategy”. Entrepreneurs need to understand the conditions that create unacceptable levels of risk.
In the research of preceding definitions on turnaround, a number of interesting approaches were observed. Transformation is positioned on the level of turnaround by Levy and Merry (1986, in Thorne, 2000:305), who state that “transformation is the response to the notion that the organization cannot continue functioning as before … in order to continue to exist it needs a drastic reshuffling in every dimension of its existence”. Ramakrishnan and Shah (1989:26) support the view that turnaround management “refers to a gamut of operations from identification of a problem to developing the plan needed to ameliorate them echo the turnaround process flow designed by this research”. The most popular approach in defining turnaround is the restoration of performance and success. Thain and Goldthorpe (1989:55) thus define a turnaround as “the reversal of performance from decline and failure to recovery and success”.
CHAPTER 1: INTRODUCTION AND STUDY DESIGN
1.1INTRODUCTION
1.2CURRENT METHODS OF BUSINESS ASSESSMENT
1.3TURNAROUND TRIAGE
1.4MOTIVE FOR THE STUDY
1.5VERIFIER DETERMINANT THEORY
1.6RESEARCH OBJECTIVE
1.7PROBLEM STATEMENT
1.8TERMS USED INTERCHANGEABLY IN THIS THESIS
1.9REFERENCING TECHNIQUE
1.10 CHAPTER OUTLINE
2.1INTRODUCTION
2.2RISK PROPENSITY OF ENTREPRENEURS
2.3PSYCHOLOGY OF BUSINESS TURNAROUND
2.4RISK PROPENSITY OF VENTURES
2.5QUO VADIS
2.6TURNAROUND IN SOUTH AFRICA – STATUS QUO
2.7CONCLUSION
3.1INTRODUCTION
3.2DEFINITIONS OF ORGANISATIONAL DECLINE
3.3EARLY WARNING SIGNS LEARNING
3.4BASEL EXPLAINED
3.5ACADEMIC DEBATE ON ORGANISATIONAL DECLINE
3.6WARNING SIGNS IN THE LITERATURE
3.7SUMMARY OF EARLY WARNING SIGNS
3.8INTRODUCTION OF VERIFIER DETERMINANTS
3.9CONCLUSION
4.1INTRODUCTION
4.2BUSINESS TURNAROUND
4.3DEFINITION OF BUSINESS TURNAROUND
4.4STRATEGIC VERSUS TURNAROUND STRATEGY
4.5DEVELOPMENT OF TURNAROUND STRATEGIES
4.6TURNAROUND PLANNING
4.7CONCLUSION
5.1INTRODUCTION TO A LITERATURE REVIEW OF LEGISLATION
5.2CURRENT (HISTORIC) SOUTH AFRICAN COMPANIES ACT, ACT 61 OF 1973
5.3INTERNATIONAL LEGISLATION
5.4DEVELOPING A BANKRUPTCY RULE IN SOUTH AFRICA
5.5NEW NATIONAL LEGISLATION: COMPANIES ACT, ACT 71 OF 2008
5.6LIABILITIES OF THE TURNAROUND PRACTITIONER
5.7CONSIDERATION OF A BUSINESS TURNAROUND PLAN
5.8SUMMARY
6.1INTRODUCTION
6.2SIX REAL-LIFE CASES
6.3INTERVIEWS – REPGRID METHODOLOGY
6.4QUESTIONNAIRE INSTRUMENT
6.5DETERMINATION OF VERIFIER DETERMINANTS
6.6DATA
6.7CONCLUSION
7.1INTRODUCTION
7.2EMPIRICAL FINDINGS: DESCRIPTIVE STATISTICS
7.3EMPIRICAL FINDINGS: INFERENTIAL STATISTICS
7.4CHAPTER SUMMARY
8.1INTRODUCTION
8.2SUMMARY OF THE MAIN FINDINGS
8.3RESEARCH OBJECTIVE
8.4IN PURSUIT OF THE PRIMARY OBJECTIVE
8.5IN PURSUIT OF THE SECONDARY OBJECTIVE
8.6THE SETTING UP PHASE
8.7TURNAROUND EXECUTION PHASE
8.8BENEFITS OF THE STUDY
8.9LIMITATIONS OF THE STUDY
8.10 FUTURE RESEARCH
8.11 CONCLUSION
