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ABSTRACT
The purpose of this dissertation is to explore the fundamental process of corporate
renewal and re-structure, to prescribe a common set of actions leading to turnaround
success.
Business failure and winding-up are of growing concern in the business community
where the complexity of the environment and the tough global competition can turn into
distress.
The context of the research is the study of the advanced status of crisis for an
organisation, which cannot be any longer ignored without seriously compromising its
future: the so called ‘turnaround management’. While exploring turnaround
management, the work focuses in underpin the extent of quality leadership as key for
success.
Through an extensive study of relevant literature and the implementation of practical
research, this dissertation also aims to assess the validity of the main turnaround models
recommended by executives, professionals and academic writers. The latter is carried
out through the comparison of two Case Studies: Fiat & IBM Groups.
This research produced a number of key findings: recent surveys confirm a significant
increase of bankruptcies but even many successful turnaround cases. Successful
restructures like Apple or Nokia corporations are evidence of objective possibility to
become newly profitable if the right strategies are adopted.
v
The research conclusion recommends companies to enforce a structure able to actively
prevent changes in environment. This will help in limiting the risk to fall in distress.
Those organisations with a lack in their capacity may still steam the distress addressing
the remaining resources toward the correct actions following the turnaround
management best practice.
This research argues for a multi-pronged model to reduce the risk of business close
down. One that takes into account risk-assessment and problem correction models,
including management & company policies, implementation issues, priority definition
and, more than other factor the need for management of a new mind setting.
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CHAPTER 1
st
:
INTRODUCTION
1.1 INTRODUCTION.
The context of the research is the growing concern of the international community for
business failure and winding-up. The complexity of the environment and the tough
global competition, together with financially driven speculation, may significantly
impact over the wealth of an organisation. Commercial, operational and financial
problems can expose the companies to situations of severe distress.
The nose-dive process can be slow or extremely quick. Even when the business is
profitable and the organisation healthy, sudden changes in circumstances may turn a
steady business environment from being friendly to extremely hostile
Consequently, based on the assumption that as any individual corporations are mortal,
and can declare bankrupt or be recovered, the rising interest of business and academic
worlds for turnaround management and business renewal specialisations.
The study of turnaround management aims to define techniques, strategies and plans to
restore the solvency of troubled companies. It involves analysis of root causes of
failure, SWOT analysis and strategic restructure planning. It also includes the carefully
allocation of resources and continual review of progress. Thus, change in plans if
needed.
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After a careful review of literature and business cases, this research aims to explore the
fundamental process of corporate re-structure and then to prescribe a common set of
actions leading to turnaround success. The validity of the proposed turnaround model is
assessed through the comparison of two bespoken Case Studies: Fiat & IBM Groups.
Looking at some bankruptcies and turnaround cases of the last twenty years it is
possible to envisage the positive or negative extent of the leaders in the change process.
The work is also focusing in underpin the extent of quality leadership as key for
successful recovery; two bespoken and successful leaders have been selected and their
behaviours analysed: Mr. Gerstner former CEO of IBM group and Mr. Marchionne
CEO of Fiat group.
They are taken as example to draft a matrix of the most common action toward the
restructure of the business.
Turnaround process is studied through phases.
The first part of the work: ‘discovery phase’, introduce the acknowledgment of status of
distress. The research provides information about recurring symptoms preceding the
breakout and the necessary research of root cause of distress.
The core part of the research: ‘action phase’, deepen turnaround strategies and
turnaround models. This stage is the part of turnaround process that is stronger linked
with the possibility to reach successful turnaround or not. It is analysed the behaviour
held and the actions taken during IBM & Fiat turnaround.
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Then, it is discussed the extent of distress prevention and it is provided a useful tool
for the health assessment of the organisation: the Z-Score ratio.
The research ends analysing primary data, gathered through interviews, questionnaires
and conversation with executives involved in turnaround processes. The comparison of
the data assesses the validity of the models proposed.
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CHAPTER 2
nd
:
LITERATURE REVIEW
2.1 EXECUTIVE SUMMARY
The purpose of the chapter is to investigate published information available regarding
turnaround management. This literature review summarises the most recognised
theories adoptable to pursue business recovery, result assessment and distress
prevention.
Drawing on information stemming from the academic literature, the research
approaches turnaround as a cycle. Within the cycle are identified three main phases to
pursue business recovery:
1. The discovery phase
2. The action phase
3. Results assessment and distress prevention.
Exploring turnaround management, the work focuses in underpinning the extent of
quality leadership as drivers for success.
2.2 BACKGROUND
Background of the research is the study of the renewal process for the organisations
experiencing severe financial distress which may seriously compromise their future life.
This literature review complements the background research identifying the main
strategies, actions and tools to perform successful turnaround.
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Through the comparison of two cases study, IBM and Fiat Groups, and thanks to the
help of some turnaround executives the research builds a practical snapshot of the topic.
O’Neill (1986) confirmed the importance of investigate successful turnaround cases.
2.3 KEY CONCEPTS IN TURNAROUND MANAGEMENT.
The reason that brings modern economists and executives to study turnaround
management is the acknowledgment that financial distress is the early stage of failures
(Simister, 2008).
Turnaround management is a relatively new discipline, with studies only being
undertaken seriously over the last fifteen-twenty years.
Goodman (1982) suggested that turnaround management should be studied: “to produce
a noticeable and durable improvement in performance and to turnaround the trend of
results from down to up”.
The early turnaround models were intended as an emergency attempt for situations of
financial distress. Nowadays, the emphasis is mainly on the radical assessment of the
existing business model as a way to guarantee the future life to the organisation.
The concept of durability has been also underlined by Turnaround Management
Association (2008).
TMA encourages organisations to proactively respond to the change in industry drivers
through the development of renovation and adaptability skills. These capabilities would
help the firms to adjust continuously their strategies restoring the original corporate
values when lost.
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Mezias and Glynn (1993) and Mainiero, (1994) describe corporate renewal as the
‘process of bringing any new problem-solving idea into use in an organisation’.
The basic assumption leading the implementation of any turnaround is the possibility of
the company to return to financial solvency and profitability.
For some authors, the potentiality to recover the financial viability is not an option.
Sudarsanam and Lai (2002) and Casey et al. (1986) suggest to early discriminate
between recoverable and not recoverable companies as a matter of priorities, in absence
of which, turnaround would become merely a valueless exercise.
Before beginning to implement a recovery strategy it is always worth analytically
considering the different options available, nevertheless the possibility of a winding-up.
When possibilities of success are limited or, in absence of any basic assumed
conditions, it could be preferable to close-down and then successively start-up a fresh
new business carrying forward assets and knowledge of the failure company. Swiss-Air,
for example, is a classical business case where this modality was chosen.
Casey et al. (1986), Campbell (1996), Routledge and Gadenne (2000) statistically
verified the importance of free assets available to distinguish companies potentially
recoverable from companies with the prospective of liquidation. However, several cases
have proved that statistics are not always correct; if the root causes of distress are
effectiv,may be possible even holding limited resources.
Conversely Liou and Smith (2006), recognise a generic confusion regarding the
circumstances where upturn is feasible. They suggest that the organisation able to
continuously innovate and refocus its strategy is more likely to avoid distress.
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After careful data analysis and, accordingly to with the theories cited, in chapter 4
th
&5
th
are proposed the most appropriate strategies to effectively review the economic model
of the company.
2.4 THE TURNAROUND PROCESS.
Behn (1983) stated:
‘In the past, the inevitability of growth-economic, population, and technological growth
made the task of cutback unimportant…moreover for most organisations…growth itself
was a primary goal’.
The old economical scenario described by Behn, was lead by a scarce supply and growing
demand of products and services. The needs to elaborate winning strategies, to enhance
cost-control or even to develop rescue plans were not seen as a matter of priority. The focus
was entirely on production outputs increase.
In such environment, Altman (1983), Nystrom & Starbuck, (1984) and Robbins (1993),
statistically demonstrated that turnaround resulted in failure far more often than in success.
On the contrary the modern business environment is extremely demanding and cost
oriented.
Through data gathered via US Bankruptcy Action, US Bankruptcy Court, UK Ministry
of Justice and UK Office for National Statistic have been elaborated statistics that allow
to appreciate the rising number of bankruptcies and the increase of debt leverages. The
worsening scenario is one of the main reasons why turnaround is studied.
In some case, the dimension of the company and the financial exposure of institutional
stakeholders represent a problem for national economy and employment.
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It is the case of some large American Corporations: for example Enron which fallen in a
giant scandal in 2001(McLean, 2003) or some years before IBM. The latter back in the
early 1990’s, went under the siege of a tremendous distress, solved only with the advent of
one of the world most recognised turnaround specialist, Mr. Gerstner. Both academic and
media worlds dedicated large attention to the Gerstner’s operate. While Garr (1999) defined
IBM as turnaround of the decade, Sager (1999) attributes the whole merit of the success to
the new appointed CEO. Slater (1999) shares a similar point of view; he produced
leadership and tactical lessons from the case.
Di Carlo (2002) presents the case study writing article and sharing insights.
The issue was similar for Italian economy when Fiat, the biggest Italian group, was forced
to find solutions and resolve the growing financial difficulties. Chowdhury (2002) studied
the case providing a comprehensive snapshot of the dimension of the crisis. Baglione
(2002) investigated how Italian public institutions would react to the potential close-
down/sell-off. The author also assessed the capital structure of the Italian group
underlining its tendency to swap short-term loans and overdrafts with long-term
liabilities.
The appointment of Mr. Marchionne signed the beginning of a new era for Italian car
maker. The Economist (2008) refers to these events as ‘miracle of Turin’. Gumbel (2009)
talk about Marchionne defining him ‘turnaround artista’.
Today, businesses recovered are not so rare. More than a few ex-troubled companies have
returned to a leading position after having been close to the collapse.
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