SURVIVAL STRATEGY

When to adopt survival strategies? What are the routes of survival strategy? What is liquidation ?

 

SURVIVAL STRATEGY 

 

When the company is on the verge of extinction, it can follow several routes for renewing the fortunes of the company. These are discussed in the following sections. 

 

Divestment 

 

An organization divests when it sells a business unit to another firm that will continue to operate it. Threatened with bankruptcy between 1979 and 1982, Chrysler sold its U.S. Army tank division to General Dynamics, its Air Temp air conditioning unit to Fedders, and its European distribution units to Peugeot/Citroen. The purpose was to focus only on the U.S. auto market- its main market. In our country, the TATA group has, in some form or the other, been realigning its portfolio since the early 1990s. But in the past few years it had done this in a more structured manner. The divestment of Tomco and Tata Steel’s cement plant was a conscious decision. It was Tata Steel’s decision to concentrate on steel and get out of the cement business. As for Tomco, the company had reached a point where it required immediate attention, not only in financial terms but in terms of management as well. The group felt that it did not have the requisite managerial skills in the specific area where Tomco operated and hence decided to hive it off. 

 

Spin-Off

 

In a spin-off, a firm sets up a business unit as a separate business through a distribution of stock or a cash deal. This is one way to allow a new management team to try to do better with a business unit that is a poor or mediocre performer. For instance, Indian Rayon and Industries Ltd (IRIL), an Aditya Birla group enterprise, has decided to spin-off its insulators business under Jaya Shree Insulator Division, in favour of a new company - Vikram Insulators Private Ltd (VIPL). The net assets of Rs 92.98 crore of the insulators division were transferred in favour of VIPL and a 50:50 joint venture with the Japanese insulators giant - NGK Insulators Ltd - was forged. The joint venture with NGK Insulators Ltd was proposed in order to upgrade the quality of the existing insulators and to develop new and more technically advanced insulators. 

 

In consideration of transfer of the insulators business, VIPL would allot to IRIL 1.25 crore equity shares of Rs 10 each at par and debentures of (rupee equivalent) $ 25 million. On completion of the demerger, NGK would subscribe to 1.25 crore equity shares of Rs 10 each of VIPL for cash at a premium. This would result in equal shareholding for both IRIL and NGK and equal board representation in VIPL. 

 

With increased and complex demands of the power transmission system, the quality and technical requirements of insulators have become more stringent and rigid. The existing manufacturers of insulators in the country, including IRIL, did not have the technical capability of manufacturing insulators of such high quality and specification and hence the need for this new arrangement.

 

Restructuring the Business Operations 

 

The company tries to survive by restructuring its management team, financial reengineering or overall business reengineering. Business reengineering involves throwing aside all old business processes and starting from scratch to design more efficient processes. This may cut costs and assist a turnaround situation. This is much easier to visualize in a manufacturing process, where each step of assembly is examined for improvement or elimination. It would be foolish to find more efficient ways to perform processes that should be abandoned and hence, reengineering is strongly suggested in such cases.

 

Downsizing is a euphemism for a layoff. As the case of Kirloskar Pneumatic Company suggests, it is a good way to cut costs quickly. But unless downsizing is tied to a rational strategy, problems can crop up. Cutting staff without changing the amount and type of work done simply means that the remaining employees must do more work. This will result in cost reduction, but product quality and customer service may suffer. On the other hand, if the firm does not down size, its performance deteriorates. Hence any downsizing plan recommended should fit logically with the strategy proposed.

 

Case Study- Gillette India-Restructuring for Growth 

 

Gillette India has achieved its growth target in the most profitable manner through strategic restructuring and functional excellence. The strategic restructuring focused on its business portfolio to identify the businesses it would like to continue and the ones it wishes to exit. Consequent to strategic restructuring, Gillette exited the Geep Battery business and the Braun business. Likewise, it discontinued all the non-profitable and non-strategic business lines in its existing portfolio. The company also developed strategic governing statements for each of the business, which made each business extremely focused. Advertising spend was focused on the right strategic product. Advertising or sales promotion, which gave short-term benefits, was discontinued. The company also focused on improving short-term gross profit margins of its core businesses. Comprehensive profit improvement plans were put in place through promotions, SKU rationalizations, cost reduction and improved asset management. Functional excellence initiatives ensured that each and every process within the organization is benchmarked against peer group companies and process improved through a well-defined action plan.

 

Post Restructuring Scenario 

 

After the divestiture of Geep battery business, grooming business (blades and razors) has emerged as the single largest business – accounting for 70% of turnover. Focus has been on the premium double edge, which was declining earlier, but with focused support and advertising this product made a strong rebound. Mach III the flagship brand of the company continues to perform extremely well with its niche premium positioning. Overall, the blades and razors business has registered a 22% growth. In addition, a new product called Vector Plus has been introduced in India. The product, which is an outcome of three years of development at its Boston Research and Development Facility, is based on the Indian consumer habits. 

 

In personal care business, the main focus was on the tube shaped gel and the Gillette Series products in aerosol, gel, foam, after-shave and splash. This segment has registered a growth of 400%. Activities aimed at preventing the growth gray market have also aided growth in this segment. The oral care strategy for India has been revised to target the mass segment. Two products have been launched - Oral-B Classic and Oral-B Plus, both positioned in the popular price segment. This business has grown by 34% during 1999. 

 

The alkaline battery segment (Duracell), accounts for a small part of turnover, but company enjoys a very high market share in the category. The strategy here would be wait and watch till the alkaline category starts growing. This business has grown at about 11% year on year. 

 

Financial Results 

All these restructuring initiatives resulted in: 

1. The company reporting the highest ever profit of Rs.170 million by Gillette in India. Net profit during the nine month ended September 2003 stood at Rs.437 million.
2. Operating margins jumped from a low 10% in second quarter of 2002 to 26% in second quarter of 2003. Besides the divestment of the low margin battery business, the strengthening of the Indian rupee also aided profitability, as 40% of Gillette products sold in Indian market are imported products.
3. Core grooming business registered a healthy topline growth of 11% and gross margins also improved.
4. Inventory came down by 14% and receivables have also been bought down.
5. Ad-spend in first nine months of the year of 2003 was Rs.211 million (7.7% of net sales). The company planned to increase ad-spend in the fourth quarter of 2003 and 2004. Surplus cash freed through sale of assets and working capital improvement was proposed to be reinvested in brand building. 

 

 

LIQUIDATION STRATEGY

 

Liquidation is the final resort for a declining company. This is the ultimate stage in the process of renewing company. Sometimes a business unit or a whole company becomes so weak that the owners cannot find an interested buyer. A simple shutdown will prevent owners from throwing good money after bad once it is clear that there is no future for the business. In such a situation, liquidation is the best option. A case in point is the liquidation of loss-making Bharat Starch, a B M Thapar group company, following the sale of its starch and citric acid divisions to English India Clays and Bilt Chemicals, respectively. This was done as a part of financial restructuring to relieve the company of its outstanding liabilities. As part of the deal, the two buyers would actually take over the liabilities of Bharat Starch thereby reducing a major part of the debt burden of the company. The Thapar family is the largest shareholder in the company with a 45 per cent stake, followed by UK-based Tate & Lyle, which has a 40 per cent stake. The rest is divided between financial institutions and the public. For Bilt Chemicals, the takeover of the citric acid plant in Gujarat was a perfect fit since the company was planning to go in for expansions in the segment. 

 

Bankruptcy is a last resort when the business fails financially. The court will liquidate its assets. The proceeds will be used to pay off the firm’s outstanding debts. Some companies file for bankruptcy instead of liquidating. Under this option, the firm reorganizes its operations while being protected from its creditors. If the firm can emerge from bankruptcy, it pays off its creditors as best as it can.