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MMM9010 Competitive and Corporate Strategy
The Rationale behind a Turnaround
Strategy of a Firm
Authors: 090014147, 090000324Submission: 26th of April
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ContentTurnaround strategies .............................................................................................................................. 3
Leadership and management in turnarounds ....................................................................................... 4
The notion of turnarounds ....................................................................................................................... 5
Corporate Decline ................................................................................................................................ 5
Symptoms of corporate decline ........................................................................................................... 6
Causes of Decline ................................................................................................................................ 6
Retrenchment Problems ...................................................................................................................... 6
Recovery Strategy ............................................................................................................................... 7
Renewal Strategy ................................................................................................................................. 7
The reasons of a firm to turnaround ........................................................................................................ 8
The effectiveness of a turnaround strategy ............................................................................................ 10
Conclusion ............................................................................................................................................. 13
Appendix 1: Samsung ........................................................................................................................... 14
Appendix 2: HP ..................................................................................................................................... 16
Appendix 3: Possible outcomes of a turnaround strategy according to Luffman et al. ......................... 20
Appendix 4: General Motors ................................................................................................................. 20
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Ongoing globalisation has accelerated the pace of change for companies around the globe.
The economic environment as well as industries firms operate in are in flux, and new
competitors and other threats lurk everywhere. Especially the recent financial crisis and the
global recession it triggered have caused many companies struggling to survive. The rapid
change of the global economic environment (e.g. the credit crunch and the sharp fall in
demand of end-consumers for some products) disclosed shortcomings of several enterprises
and plunged them into crises. Many of them failed and had to be wound down, many are still
in a phase of decline and their future remains to be seen but some were able to come up with
a new strategy and a new organisational structure and are leaving the crisis stronger than
before. This might be traced back to their superior turnaround strategy.
A constant adaptation and re-examination of current strategies is no longer only a competitiveadvantage, but a necessity: It is not a question of whether firms should change, but of where,
how and in what direction they must change (De Wit and Meyer, 2004:163). This essay will
therefore focus on turnaround strategies and the thus related issues. First, the concept as well
as the main terms and stages will be introduced. This will be followed by a closer examination
of the reasons for turnarounds in two particular companies, namely Samsung and HP, and the
effectiveness of different strategies in differing situations, illustrated by examples of HP and
General Motors. Finally, a conclusion shall be given.
Turnaround strategies
A turnaround strategy is a reorientation of an organisation experiencing a crisis. Whereas the
general corporate strategy is described as the direction and scope of an organisation over the
long term, which achieves advantage in a changing environment through its configuration of
resources and competences with the aim of fulfilling stakeholder expectations (Johnson et
al., 2008:3), and is therefore able to evolve over time, a turnaround strategy is the reaction to a
sharp deterioration in performance and a worsening of the general state of the company to an
extent that becomes a threat to its survival (Luffman et al., 1996:140). White (2004) describes
a turnaround strategy as a radical change in a firms strategy with a possible alteration of its
structure and culture. Ideally, it should lead to a superior and sustainable performance in
future. However, it is conceived under enormous pressure and great difficulties, and it bringsthe additional need for fast reactions with it, which in practice makes it a big challenge to
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implement a successful turnaround. Although much research has been carried out about
turnaround strategies, the measures applied and the strategy chosen are specific to each
individual company and is derived from its main business, its competitive advantage and its
industry characteristics. Nevertheless, they share the feature of addressing areas which must
be developed to achieve a sustained recovery (Thompson, 1997:538). Turnaround strategies
are designed to bring quick results but also to contribute towards long-term growth.
Different authors subdivide turnaround strategies in different stages. Hunger and Wheelen
(2007) for instance describe only two phases: contraction as the first and short term reaction,
meant to stop the bleeding, consist ing mainly of cutbacks across-the board to limit size of
and costs to the organisation. The second phase called consolidation aims at stabilising the
company and focuses on the reduction of costs of functional activities, e.g. overheads.However, in their approach, a turnaround is viewed as simply a type of retrenchment strategy
and not a stand alone and complete new alignment and orientation of the organisation, thus
reflecting an approach slightly different from other authors (e.g. De Wit and Meyer,
2004:163). Opposing to this, Johnson et al. (2008:523f) go more into detail when they
describe the main elements of a turnaround strategy as follows: crisis stabilisation (short term
focus on reducing costs and/or increasing sales), management changes, gaining of stakeholder
support, clarifying the target markets, financial restructuring and prioritisation of criticalimprovement areas. They do however not stress the timely order of events, thus indicating
that it might be more difficult in practice to distinguish between different phases. De Wit and
Meyer (2004) add to this when stressing the problem of pacing change correctly; they
describe disruptive and gradual change. Usually, they are not mutually exclusive but have to
be balanced well in order to achieve a sustainable turnaround.
A detailed and comprehensive approach is offered by McKiernan (2006:760) who describes
six stages, beginning with the causes stage, the triggers and the diagnosis stage, followed bythe retrenchment phase, recovery and renewal. Each of these stages brings its own challenges
and some shall be described in more detail below.
Leadership and management in turnaroundsThe behaviour of leaders and managers is crucial for the successful implementation of a
turnaround. White (2004) states that the success of a company is usually associated with two
people, the founder and the person mainly responsible for the turnaround. The outcome of the
turnaround depends to a large extent on their personal abilities. Cummings and Wilson
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(2003:398) characterise a so- called turnarounder as a leader who chop[s] and change[s] the
basic already established characteristics of the organisation, for example emphasize[s] one or
more areas of the core business and deemphasize[s] others. According to McKiernan
(2006:784), the personalities of the people on top of the organisation further influence the
capability of understanding the need for a turnaround and the speed and effectiveness with
which this turnaround is carried out. The more the important people within an organisation are
used to doing business in a certain way, the less likely they are to change their strategy, but
rather to search short-term operational solutions in order to react to the corporate decline. He
finds that, during a decline, managers tend to react with disbelief and stick to their standard
operations in order to try to improve short term results. Once they accepted the crisis, they
apply a more autocratic behaviour, which reflects the need for fast and tough decisions to be
made (McKiernan, 2006:786). Sometimes, however, the managers and leaders have become
so accustomed to the old way of doing business that they have to be replaced in order to allow
the organisation to change.
The notion of turnarounds
Although turnaround strategies are always specific to a particular company and its individual
situation, industry and economic surrounding, there are common stages that can be observed
in general.
Corporate DeclineAlthough it is important to recognize the decline in time, it should not be confused with a
temporary deterioration of the companys position due to the economic lifecycle . Luffman et
al. (1996:140ff) describe the decline of a company as a state when there is some doubt aboutits survival; usually this state can be traced back to the inability of the company to generate
sufficient profits. Mc Kiernan (2006:762f) defines it as an unintentional contraction of the
strategic discretion of the firms executives ; thus as being an external force that reduces the
freedom of action of the managers. He adds that declines can be broken down into four
groups: a deterioration in t he resources or stock variables a deterioration in performance or
flow variables a deteriorating ability to adapt to changing external and internal pressures
and as a stage in the organisational life cycle . Whereas the first two can be diagnosed on the basis of the financial data available, the latter two are more difficult to recognise.
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Symptoms of corporate declineIn general, there is the danger that symptoms are taken for causes, which might lead to a
flawed new orientation. It is crucial to distinguish the two, as the symptoms are only the
outside effects of the underlying causes, and it is essential to fight the causes and not the
symptoms in order to regain a sustainable strategy. Whereas Luffman et al. (1996:140-145)
describe the symptoms as becoming evident in the finance and marketing figures 1, McKiernan
(2006:764-766) divides them into two groups, namely public and private symptoms. The
public symptoms relate to financial information about the company and are thus visible to
outside parties (companies therefore tend to distort the picture to appear as favourable as
possible). Additionally, there are private symptoms that pertain to the human capital of the
firm e.g. personnel turnover. Those are more difficult to measure, but are also part of the
overall deterioration of the companys state.
Causes of DeclineOverall, the identification of the causes of the decline is essential; however that is much
harder to do in reality than in theory and hindsight (McKiernan, 2006:788). White (2004)
describes the main reasons for a turnaround as poor management at any level, overexpansion,
lack of financial control (with the result of high costs), new competitors, unforeseen changes
in tastes and/or organizational inertia. Opposing to this view, McKiernan (2006:768-771)
identifies the primary and main cause of decline of a company as the failure of an
organisation to learn and adapt to a changing environment, and only after that, as secondary
causes, to more detailed failures in the operational side of business, subdivided into financial
and managerial conduct and a change in demand conditions.
Retrenchment ProblemsEven though retrenchment is usually the first reaction of a company in decline (which is
logical as obtaining a positive cash flow is a clear necessity), it should be carefully tailored to
the individual needs of the company in question. It consists of either cost or asset reduction
with the aim of halting the decline and to give the management time to think about longer-
term objectives and a new strategic direction. Ideally, the retrenchment should already be
linked to the targeted turnaround strategy of the firm, e.g. if it is agreed to pursue growth,
costs will be cut in different areas as if an increase in efficiency within the existing structures
1 e.g. as a reduction in dividends, increasing debt, decreasing liquidity, no real increase in sales and a fallingmarket share
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is decided (McKiernan, 2006:790f). Possible problems are the danger of cutting too much
costs in areas essential to the business and of loosing people important to it (e.g. in marketing)
and a deterioration of employee s attitude who have to cope with the uncertainty that the cost
cutting brings with it.
Recovery StrategyRecovery describes the stage in which the company has reached a phase of stability through
the retrenchment process. The form of the recovery is again unique to each firm and depends
on numerous factors 2. McKiernan (2006:794) describes two main recovery strategies:
efficiency oriented strategies can consist e.g. of the liquidation of subsidiaries, divestment and
an overall improvement of efficiency and is applied when the causes for the decline are
internal. Entrepreneurial strategies, e.g. market penetration, new product developments and
acquisitions, are chosen when the decline was caused externally. It is important in this phase
that the management does not hold on to their old convictions of how to do business, but
allow a new strategy to be developed.
Leadership is here one of the critical elements of recovery ( McKiernan, 2006:797).
Whereas during a turnaround, a more autocratic style and good motivational skills, powerful
communication ability, flexibility, excellent diagnostic and analytical ability under time
constraints, ability to work to a punishing schedule under duress and fast implementation
skills (McKiernan, 2006:798ff) are needed, as soon as the company obtains stability a more
democratic and softer approach is more rewarding. This might be difficult to apply for the
same managers. As always, this is much easier in theory than in practice, as McKiernan
(2006:795) points out : In practice, the actual number of generic recovery strategies a firm
needs to employ is considerably greater than the actual number of causes of decline .
Recovery strategies can sometimes be helped by luck or external factors, as there might be a
boost for the turnaround of the company resulting from a change in conditions in the outside
environment of the firm, e.g. a cyclical upturn in demand or the exit of competitors.
Renewal StrategyAs the final stage, the renewal strategy shows if the turnaround has been successful or not.
McKiernan divides two main important parts of it: the regaining of a good recovery that can
be measured by indicators and the introduction of an organisational culture which is able to
steadily learn and improve. This point will further be discussed under the effectiveness of
turnaround strategies.
2 e.g. the degree of persistency of old beliefs and behaviour patterns, causes and scale of decline, the attitude of the most important stakeholders, the industrys and the firms characteristics and the overall economicenvironment
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The reasons of a firm to turnaround
Although the decline as such would be reason enough to rethink the current strategy and
reorganise the companys structure, it is normally a steady and ongoing process. Old routines
and operations are so persistent that a concrete reason is needed to finally trigger the change.
Generally, it can be said that a crisis hitting the firm and a deterioration of its performance
below a certain level that is internally accepted are the main reasons for a turnaround, as
stakeholders then tend to demand a far-reaching change in strategy and operations. The
performance can of course be measured in different ways, e.g. as mentioned above, Luffman
et al.(1996:140) describe the main reason for a turnaround as the inability to produce
sufficient profits; and Hunger and Wheelen (2007:99) add to this a weak competitive position
of a few or the complete range of products. Opposing to this view, McKiernan (2006:776)
refers to the reasons as triggers, and he argues that a deterioration of performance is never
enough as those levels tend to be shifted downwards to meet reality; only when it falls below
a level that was concretely aspirated, a change will be implemented. However, it depends on
the characteristics of the managers responsible if the need for change is spotted early enough
to enable the company to leave the crisis on time.
When discussing real world examples of the appliance of turnaround strategies, the diversityof reasons might become a bit clearer. Two examples shall be used to give a more
comprehensive impression of different reasons for turnarounds, followed by different
strategies: Samsung, which focused on an internal reorganisation and HP that merged with
Compaq in order to join forces.
The Samsung Group is a well-known and highly diversified South-Korean conglomerate
(cheabol ). Nowadays, it is famous for high-end goods with an innovative design (Ichlwan et
al., 1999). The success of the company is based on its ability to change and to respond tochanges in its business environment properly. In 1996, the Samsung Group had to face two
unfavourable changes in its business surrounding: a crash in memory chips prices which hit it
hard as at that point of time nearly 90 per cent of the profits of the branch Samsung
Electronics were retrieved from the production of those, as well as the Asian financial crisis
starting just one year later; this naturally affected the whole conglomerate. As described by
the CEO of Samsung Electronics, it was a near -death experience (Edwards et al ., 2005). 3 In
response, Samsung Electronics started to implement a turnaround strategy. The main3 Significant devaluation of the won due to that financial crisis forced half of the top 30 cheabols in South-Koreainto bankruptcy or debt workouts (Wonghee and Nam, 2007)
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problems identified were poor supply chain management, a focus on growth at the cost of
profitability, a high level of debt and an excessive number of employees. Furthermore,
strategic decisions had been based on non-economic motivations 4. The turnaround strategy
applied addressed all aforementioned issues and was started with the process of financial
reconstruction. Samsung put much effort into the reduction of debt; a tighter financial control
was introduced. The company focused only on core business activities; in turn, non-
performing assets were sold and the number of employees was reduced by one third. Going
global was a part of new strategy; emphasis was put on the development of new products and
the diversification of the portfolio. The company re-focused and concentrated on high-end
customers, targeting overseas markets, mostly the US and China. A profits first strategy and
introduction of just-in-time technique were further important elements of the new strategy
(White, 2004, p. 754-759). It can be said that Samsung tailored the strategy to its specific
needs, and left the crisis successfully, as the results of this turnaround helped Samsung
Electronics to become a global giant in electronics. The changes that took place within the
company are displayed in greater detail in the figures in Appendix 1.
Hewlett and Packard (HP) is a global provider of computers and imaging solutions who, prior
to 2002, focused on making imaging and computer technology. During May 2002, however,
HP acquired Compaq, a leading provider of enterprise technology and solutions5
, to enlargeits product offerings and increase the overall scale. The aim was to combine the value and
performance of the two firms in order to complement each others weaknesses and to thus
attain a competitive position (HP website, 2010). Additionally, it would enable HP to gain
immediate access to new emerging markets. The reasons for that merger were a result of
deterioration in the HPs overall performance (Wall Street Journal, 2001); they especially
struggled to keep up with competition 6 and rising costs, economical external pressure and
internal problems like a need for cost cutting and lack of management skills. Following that
merger, a reorganisation was needed, consisting of downsizing of staff, elimination of
overlapping products, a change of the top management ( with brought HP a new CEO with a
4 The examples of cheabols chairmen suggests a recurring desire to prove their managerial skills by embarkingon ambitious expansions: it can be said that the phenomenal record of growth in the past was a result of chairmen taking big risks which paid off when many had judged them impossible. For example, Samsungsstrong competitive rivalry with Hyundai motivated its decision to enter the automobile industry. Topmanagement was prepared to incur huge losses in the hope of being able to curb Hyundais dominance in theautomobile industry. Kun- Hee Lee, the Samsungs chairman at that point of time, was disillusioned when he wasasked about the profitability of the company s expansion within the automobile indu stry: I know that we cannotmake money in the first five or six years even though we invest 10 billion dollars. (Wonghee, Nam, 2007)5 Compaq specialises on the manufacturing of hardware, software, tailored solutions and services and wholecomputers.6 There was an increase in competition of companies such as IBM, DELL as well as a suffering of sales due tothe impact of their size and the cash cow business of Canon and Lexmark
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new management style which proved to be very favourable for the company), a new focus on
the product innovation and customer loyalty as well as on long-term growth 7. The new HPQ
created from this merger agreement was an $87 billion global technology leader. This
company offered the industry's most complete set of IT products and services for all kinds of
customers, businesses and individuals. The combined company had number one worldwide
revenue positions in PCs, hand-helds, imaging and printing, IT services, storage and
management software.
So although the reasons as well as the applied strategies of these two companies were
different, both engaged in a turnaround strategy in order to improve their position; and both
did it successfully.
The effectiveness of a turnaround strategy
The difficulty in evaluating the effectiveness of a strategy certainly is the long-term focus
inherent to them. Surely the short-term results are important as stability has to be regained,
but a good and sufficient turnaround strategy requires the organisation to learn from the crisis
on the long-term. Again, different authors take complementing positions.
Thompson (1997:532-534) identifies four possible outcomes of a turnaround process, namely
non-recoverable situations, short-term survival, mere survival and sustainable recovery. Non-
recoverable situations are likely to occur when a company is not competitive and its potential
for improvement is low due to overall business conditions or externalities 8. Temporary
recovery is likely to occur when a company operates within unattractive and declining
industry. Even if costs are reduced and additional revenues are generated, due to the decline
of a whole sector, the company is unable to improve its financial position in the long-term. It
is then important that the company reinvests the cash generated from the retrenchment and
diversifies and expand new market segments. In the case of mere survival, turnaround is
achieved but there is little further growth. This outcome may be expected within industries
that are in slow decline or are generally unprofitable and competitive. Sustained recovery is
likely to be a result of a genuine and successful turnaround, e.g. development of a new
product or market re-positioning. This kind of recovery may happen when a company
7 A more detailed presentation can be found in Appendix 28 such as cost disadvantages caused by foreign competitors or decline in demand for major products
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operates in strong, effective market and problems were caused by poor management rather
than by decline in the whole industry.
Slatter (in Thompson 1997:532) adds three main conditions necessary to achieve a sustainable
recovery state to this, namely asset reduction in order to generate cash, a new strategic leader
and the implementation of better financial control systems. Shaughnessy and Harrigan (2009)
stress the importance of the commitment of many parties for the outcome of a turnaround
strategy, e.g. shareholders, suppliers, employees, distributors, creditors and customers. The
company, in order to complete a turnaround process, often needs additional funding which
again can be provided by stakeholders. Tolerant suppliers who may agree to extend credit,
motivated employees who are willing to implement necessary changes and loyal customers
should be considered as factors that may influence the final result of turnaround process and
should not be overlooked.
According to McKiernan (2006:800), the evaluation of a turnaround strategy consists of two
parts. On the one hand, there are characteristics which can be traced back to the actions taken
in the retrenchment and recovery phase; he therefore identifies seven performance indicators
for a good recovery and an effective turnaround: good management, appropriate organisation
structure, effective financial and other controls, sound product-market posture, good
marketing management, a maintained high quality, and tightly controlled costs. However, in
order to not only gain a short-term stability, the organisation must learn something from the
crisis to gain a sustainable recovery. The second and very important point is therefore the
establishment and nourishing of a learning culture, in which the organisation learns through
exploitationexplorationmutation and has to constantly maintain and develop the
routines within each (McKiernan, 2006:803 -805). As firms can no longer allow themselves
to be i nflexible, they must accept and adapt to the fact that change must become the norm
(ibid ).
A look at examples from real companies can again be quite helpful in order to show the
diversity of the outcomes of a turnaround strategy. In the case of HP, the merger was expected
to create cost synergies reaching approximately $2.5bn annually and deliver a significantly
improved cost structure. Looking at the short-term results and improvements (see Appendix3), the immediate results did not all look as favourable as hoped for. The gross as well as the
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operating profit margin had declined, mainly due to the external pressure HP had to deal with
as well as an increase in cost. However, the debt/equity ratio fell, too, as HPQ was able to
repay some of its debt, which is a sign for a regaining of the cost control; one of the indicators
McKiernan mentioned for an effective turnaround. When looking at the long-term results,
HPQ is currently performing pretty well. In 2006, it had shown an annual revenue of $91.7bn,
making it the world's largest technology company in terms of marketing and sales. It has
proven that the "massive integration" efforts after the merger were successful and led to
higher revenues and profits for the combined firm. HP had not only improved its position in
major core markets, but also, according to a IDC report, it had heavily benefited from the
cultural integration during that merger 9. The turnaround strategy applied has worked out and
been beneficial for the whole organisation. (Edgar-online).
However, turnaround strategies can also fail dramatically, as can be shown at the example of
General Motors (GM). It had incurred huge losses due to the financial crisis of 2007/8 which
resulted in a reluctance in the end-consumers to spend (a loss of $38.7bn in 2007 and was also
heavily indebted). Selling luxury products and fuel consuming vehicles, it was additionally hit
hard by the rising oil prices. A retrenchment strategy included selling the less successful
brands 10 and the dismissal of employees.
Several restructuring programmes in different areas and branches as well as several
turnaround strategies were proposed, but none of them resulted in the needed turnaround ( for
more details, see Appendix 4). Even state aid for some subsidiaries and the parental company
did not help to attain a healthy recovery. GM had to file for bankruptcy procedures in 2009
and are now owned by the Canadian and the US governments. They are continuing to cut jobs
and are planning to pay back the governments the credit and state aid they received, but they
still are suffering shortcomings and facing difficulties 11, and the final outcome remains to be
seen.
9 The infusion of Compaq's fast-paced culture helped to improve the business of HP dramatically10 E.g. the closure of the Vauxhall plant in Luton, the phasing out of Oldsmobile, sale of the defence unit GeneralDynamics, etc11 E.g. they had to recall many of their Chevrolets this year due to problems with the steering wheel
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Conclusion
Turnaround strategies are as diverse and manifold as the companies there are. Although
common features can be observed, it is very difficult to recognise the need for a turnaround in
time and restructure the whole organisation appropriately to regain a sustainable situation.
The development of a turnaround strategy is an interplay between numerous factors individual
to each business, so common rules and guidelines are hard to come by. The characteristics of
the CEO, the management team and the stakeholders are very influential as well as the
particular reasons for the corporate decline, the prevailing corporate culture or the
surrounding economic conditions at that point in time. This essay might have shown that,
although a lot of research has been carried out about turnaround strategy, the authors
sometimes disagree in main points; and the tailoring of the individual strategy is very difficult
in practice and not always crowned with success. Especially the latest global financial crisis
has demonstrated that it is not easy to react to critical situations and the future will hopefully
set more examples of successful and innovative ways of how companies can turn a bad
situation around and leave a dangerous decline to regain healthy growth and a sustainable
recovery.
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Appendix 1: Samsung
The results of its turnaround helped Samsung Electronics to become a global giant inelectronics. The changes that took place within the company are displayed in the figures
below.
Figure 1 Breakdown of sales (in KRW bn) increasing diversification of product portfoliosecures cash flows from different business sectors and markets
Source: Samsung Electronics Annual Report 1998, 1999, 2000
Figure 2 total sales (USD mn)
Source: Samsung Electronics Annual Report 1998, 1999, 2000, 2001, 2002, 2003, 2004
0
5000
10000
15000
20000
25000
1996 1997 1998
semiconductors
information andcommunications
multimedia nad homeappliences
0
10000
20000
30000
40000
1996 1997 1998 1999 2000 2001 2002 2003
sales total (USD millions)
sales total (USD millions)
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Figure 3 R&D expenses (KRW bn) shift from imitator to innovator, increase in R&Dexpenditure and the number of people involved in R&D process
Source: Samsung Electronics Annual Report 1997, 1998, 1999
Figure 4 debt to equity ratio reducing external debt as a result of strict financial control, profitability as a main aim
Source: Samsung Electronics Annual Report 1998, 1999, 2000, 2001, 2002
1277 1268
1664
0
200
400
600
800
10001200
1400
1600
1800
1996 1997 1998
R&D expenditure (bn KRW)
223%
147%
43%25%
14%0%
50%
100%
150%
200%
250%
1997 1998 1999 2000 2001
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Figure 5 Comparison of domestic and overseas sales going global, focus on overseasmarkets
Source: Samsung Electronics Annual Report 1995, 1996, 1997, 1998, 1999, 2000, 2001,2002, 2003
Appendix 2: HP
Reorganisation after the merger with Compaq
Cost cutting: layoffs of 15000 jobs.
Elimination of overlapping products: Products that appear on the product lists of two or more
separate groups of countries are eliminated for the purpose of combining the groups in a
single multilateral organisation.
Top management change: CEO change with the objective of meeting the challenge for change
and to keep HP on its goal to become the world's leading information technology company,
Chairman and CEO Carly Fiorina stepped down in February 2005, and Mark Hurd was named
CEO and president in March).
Psychological Strategy : "not to deal with the past, but to look to the future, based on
metrics and other performance.
Invent new technology and services: To create social benefits and customer lives.
Increased customer loyalty
0
10000
20000
30000
40000
50000
60000
1995 1996 1997 1998 1999 2000 2001 2002 2003
Domestic vs Overseas Sales
sales domestic thousands USD) sales export (thousands USD)
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Solving technological issues: implementation of user testing and bench marking.
More focus on long-term growth opportunities: R&D investments, technologies for being
constantly connected, always personal mobile experiences, and an abrupt change from
analogue to digital.
The most important factor of HP's turnaround however is Hurd's personality and management
style. The friendly style and hierarchical communication approach played a vital role.
STRATEGIC ANALYSIS:
Industry Challenges:
HP's key element in global citizenship is to design products and services that are socially andenvironmentally responsible throughout the product's life cycle. Central to this challenge is
managing product design to meet various regulations that affect the design of their products.
These regulations can be inconsistent from one jurisdiction to another, may not always be
clearly defined, or may not easily accommodate design lead times. HP actively works with
governments, industry partners and other stakeholders to attempt to harmonize these
regulations and achieve their shared environmental goals in a manner that is consistent with
technological innovation.
HPs business strategy and mission statement is t o provide customers with superior products,
services and overall experiences by providing leading-edge technologies that work seamlessly
together. HP seeks to be a leader in each of the specific product and service categories in
which they compete and to expand actively into new and adjacent markets. To achieve this,
they use a so-called adaptive enterprise platform, revolving around the four points of
emphasizing standardization, virtualization, simplification and modularity and integration.
Designing with these principles is supposed to provide the most cost-effective infrastructures
that can flexibly adapt to changing business dynamics.
World class cost structures and processes across their entire portfolio of businesses :
HP focused on leveraging their scale to maximize purchasing efficiency and leveraging their global footprint to maximize technical expertise and cost structure improvements available in
different regions around the world.
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They compete based on :
Technology, performance, price, quality, reliability, brand, distribution, range of products
and services, account relationships, customer service and support and etc.
Effectiveness of the turnaround
During 2001, when the CEO of HP argued that the combined company would be able to meet
the customer demand for solutions capability on a truly global basis. She also claimed that
the firm would be able to lead with its products from top to bottom, from low end to high
end. As her crowning argument, she pointed that the merger made sense because it would
create synergies that are attracting. The new HPQ created from this definitive merger
agreement was an $87 billion global technology leader. This company offered the industry'smost complete set of IT products and services for all kinds of customers: businesses and
individuals. The combined company held number one worldwide revenue positions in PCs,
hand-helds, imaging and printing, IT services, storage and management software.
The merger was expected to create cost synergies reaching approximately $2.5 billion
annually and deliver significantly improved cost structure. Based on both companies' past
data , the new HP would have approximate pro forma assets of $56.4 billion, annual revenues
of $87.4 billion and annual operating earnings of $3.9 billion. It would also have operations in
more than 160 nations and over 145,000 employees worldwide. In the meanwhile HP had
encountered the biggest problem during the process of buying Compaq, was the decision of
which of the tech giants computer products to keep and which ones to eliminate. Together,
HP and Compaq produced many kinds of common products, many products are based on
proprietary technology. Business analysts agreed that the merged company wouldn't be able
to sell all of the products. The merger would result in HP shareholders having 64% of the
stock in the newly formed concern. HP-Compaq would be the world's leading company in allsorts of computer hardware (ranging from Printers, Personal Computers and Unix Servers).
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Fig (1) : Revenue, assets and operating earnings (Dollars in Billion)
Source: http://www.hp.com/hpinfo/newsroom/press/2001/index.html, press release issued onSeptember 3, 2001
Ratio analysis:
The Gross-Profit Margin, in 2002 was 28.34%, by 2006, however, it had comparatively
decreased to 24.29%. HPQ earned a gross profit of 24.29 in 2006. The decline was slow but
steady, mainly due a reduction in the price of its computers in order to compete with Dell. The
Operating-Profit Margin, in 2002 was 6.64%, whereas in 2006, it had declined to 5.47% due
to change in management structure. It mainly involves new costs. The Debt/Equity ratio in
2002 was 28.34, whereas, in 2006 it plummeted down to 17.66. During that time HPQ repaid
some of its debts. The Current Ratio in 2002 was 1.53, in 2006, however, it decreased to
1.45. This is very slight decrease, and HPQ was still in a position to pay-off it's short-term
debts as and when they fell due. It decreased due to spending more of it's revenue on
expanding its businesses. (yahoo finance, 2010)
HPQ today:
Today, HPQ is performing much better than anyone had envisioned. In 2006, it had shown
$91.7 billion in annual revenue as compared to $91.4 billion for IBM which is more
interesting, making it the world's largest technology company in terms of marketing and sales.
It had been clearly shown that both the firms had finally undertaken "massive integration"
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
HP COMPAQ COMBINED
Revenue
Assets
Operating earnings
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efforts and moved the joined company proceeded to higher revenues and profit .
Furthermore, HP had improved its position in major core markets .Moreover according to a
IDC report HPQ had heavily benefited from cultural integration. The infusion of Compaq's
fast-paced culture helped to improvise it's business dramatically.
Appendix 3: Possible outcomes of a turnaround strategy according toLuffman et al.
The possible outcomes of implementation of turnaround strategy are plotted in the figure below.
Figure 1 Types of recovery situations
Source: Luffman G., Lea E., Sanderson S., Kenny B. (1996). Strategic management. Ananalytical introduction. Oxford, Blackwell Publishers, p. 144
Appendix 4: General Motors
Description of the situation prior to GMs bankruptcy:
turnaround strategiesadopted
sustainable recovery
mere survival
short-term survival
failed turnaround
financial position
non-crisis
crisis
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In 2007, GM generated the biggest loss in the company history ($38.7bn) and it was heavilyindebted. Sales decreased due to a rise in petrol prices and a crisis-owed reluctance to spendas well as the credit crunch forced the company to restructure. The reaction of the companywas the s ale of the brand Hummer and the cutting of 47.000 jobs, as well as an applicationfor government support. However the situation worsened when the subsidiary Saab went
bankrupt and Opel needed state aid ( to the amount of 3.3bn) . A further loss was incurred in2008 ($30.9bn), the state aid of $13.4bn proved to be not sufficient. Share price fell by87.21%. Plans were made to abandon Pontiac and to focus on the core brands GMC, Buick,Cadillac and Chevrolet, but selling Saab, Hummer and Saturn. (Financial Times, 2010)
In 2009 finally, GM had to face insolvency. As it was too big to fail, two governmentsintervened, and two new companies were created: the first was basically a transformation of General Motors Corporation to Motors Liquidation Company, and another one called GeneralMotors Company (of which the USA obtained 60.8% and Canada 11.7). Motors Liquidation
Company sold all the relatively successful brands to General Motors Company which will bekept, and the less successful branches were liquidated (General Motors, 2010).
The outcome still remains to be seen. Currently, GM is still cutting jobs, and even though plans exist to pay the governments the aid received back, they still are suffering shortcomingsand facing difficulties, e.g. they had to recall many of their Chevrolets this year due to
problems with the steering wheel. (Financial Times, 2010)
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Word Count: 4.388
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