dazydelian banda1 Module 2 CORPORATE VIABILITY

dazydelian banda2 The Process for assessing viability has 2 steps:  The ABCs of restoring viability  Viability assessment Corporate Viability

dazydelian banda3 A. The ABC’s of restoring viability The Seven ABCs of restoring viability 1.Crisis stabilization 2.Leadership 3.Stakeholder support 4.Strategic focus 5.Organizational change 6.Critical Process improvement 7.Financial restructuring

dazydelian banda4 1 Crisis stabilization Taking control (top-down approach) and restore predictability- managers are often paralyzed in this situation; Conserve cash- liquidate stocks, collect debtors, stretch creditors Asset reduction Seek short term financing First step cost reduction/ profit planning

dazydelian banda5 2 Leadership Change of CEO: often cited as the cause for organizational decline (always good to fire CEO?) Why fire CEO: –S/he is part of the problem not solution –Has great symbolic effect for turnaround

dazydelian banda6 Change of other senior managers, why? –Resistance –Shock therapy/strong message –What are the challenges here? Attracting good managers (But FD is usually changed anyway) Motivate the workforce…energize…build hope 2 Leadership- contd.

dazydelian banda7 3 Stakeholder support With employees- avoid the blame culture With suppliers – instill confidence With debt providers –give assurance Face facts, no obfusification (concealment) Communicate, communicate, communicate Be open about the current cash position

dazydelian banda8 4 Strategic Focus Re inculcate entrepreneurship – mission - focus/justifying the reason for the organization’s existence Formulate a robust and coherent strategy: –E–Ensure an attractive end state –B–Be aware of the constraints –R–Redefine business Divest? Grow? (M&A) Outsource? Alliances? Privatise?

9 5 Organizational change Structure Technology People –C–Capabilities building –T–Terms and conditions –M–Mindsets/mental models/Transformation

dazydelian banda10 6 Critical process improvement Focus on cost, quality and time –T–Time: responsiveness and flexibility –C–Cost: simplify processes to reduce fixed and variable costs –R–Reducing rework by ascertaining causes for non-conformance Aim for quick wins

dazydelian banda11 7 Financial restructuring Factors: –C–Cash flow problems – future liquidity –E–Excessive gearing (too much debt or little equity) –I–Inappropriate debt structure {too much short term debt/ insufficient long term}

dazydelian banda12 B. Viability assessment  Assess causes of decline  Ascertain severity of the crisis  Attitude of stakeholders  Firm’s historical strategy and internal ambience  External environment and industry characteristics  Firm’s cost/price structure  The Z-Score as a predictive tool

dazydelian banda13 Viability assessment 1 Common Causes of decline Poor management/Mismanagement Inadequate financial controls High cost structure Lack of business development Competitive weakness Big projects Financial policy

dazydelian banda14 Viability assessment 2 Severity of the crisis This is a function of the causes and the stage the crisis has reached –E.g. the state of the economies of sub Sahara Africa –Can use Root Cause Diagram / Fish Bone technique

dazydelian banda15 3 Attitude of Stakeholders The attitude of employees and creditors –Skeptical? –Supportive? –Suspicious? –forgiving?/tolerant? CHANGE IN YOUR POCKET STAKEHOLDER MAPPING Viability assessment

dazydelian banda16 Viability assessment 4 Historical Strategy and Organisational climate Past strategy formulation and implementation must be reviewed 5WH Framework

Viability Assessment 5. External environment and Industry characteristics. PESTEL Analysis Five Forces Framework dazydelian banda17

dazydelian banda18 Business Development? 6 Cost/price structure Cost reduction Strategy? Both?

dazydelian banda19 Cost + Profit = Price, or Price – Profit = Cost ?

dazydelian banda20 7 The Z-Score-Corporate Failure Prediction 1 Originally developed in 1968 by E I Altiman 2 Altiman used 22 accounting and non accounting Variables on failed and non-failed American Firms 3 Five key indicators emerged These were used to derive a Z score A Z score of 2.7 or more indicated non –failure A Z score of 1.8 or less indicated failure

dazydelian banda21 Z-score Z = 1.2X ₁ + 1.4X ₂ +3.3X ₃ + 0.6X ₄ + 1.0X ₅ Where: X ₁ = working capital / total assets= measures LIQUID ASSETS relative to firm’s size X ₂ = retained earnings / total assets= measures CUMULATIVE PROFITABILITY X ₃ = earnings before interest and tax / total assets= measures OPERATING EFFICIENCY X ₄ = market value of equity/book value of total debt [ a form of gearing ratio]= measures STOCK MARKETS i.e security price changes X ₅ = sales / total assets= measures TURNOVER

dazydelian banda22 Z score - observation J Altiman used a small sample of only American companies J Z- score success rate – in USA, 72% of bankruptcies predicted 2 years before they actually occurred. J Because of the use of Market value of equity, only Quoted companies can use the technique J Z-scores are used widely in the banking sector, in risk assessment, loan grading and corporate finance Activities. They are also used by accountancy firms, fund Management houses, stockbrokers and credit insurers Z- score can not be used in every situation

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