Corporate restructuring toward growth: 'C' curve<\/p>\n
By Bernd Waltermann<\/p>\n
JAKARTA (JP): During this period of reshaping Indonesia's
\ncompanies and its economy, many executives look for lessons from
\ninternational experience on corporate restructuring to guide
\ntheir own management agenda.<\/p>\n
One set of useful lessons on corporate restructuring comes
\nfrom the United States and is illustrated in what The Boston
\nConsulting Group (BCG) calls the \"C\" curve.<\/p>\n
The first lesson is that to create value in a turnaround, most
\nbusinesses must first cut the capital employed in the business
\nand aggressively improve profitability -- before growing.<\/p>\n
The second lesson is that successful restructuring for value
\ntakes time, not one year but several years -- even in countries
\nwith healthy capital markets.<\/p>\n
The \"C\" curve illustrates these lessons through a sample of 58
\nU.S. companies that tried to restructure their businesses during
\nthe 1990s.<\/p>\n
Before beginning their turnaround programs, these companies
\nhad profits in the lowest 25 percent of all companies as measured
\nby after-tax return on average capital employed (ROACE). The top
\ncurve, the \"C\" curve, is the path followed by companies making
\nsuccessful turnarounds. The bottom curve is the path traced by
\ncompanies that started from the same position but were much less
\nsuccessful.<\/p>\n
The chart's horizontal axis shows the capital employed in the
\nbusiness versus the time from when restructuring started -- 1991.<\/p>\n
So a company moving to the left of \"1\" is shrinking the
\ncapital employed in the business. The vertical axis shows
\nprofitability as measured by ROACE. Moving up on the chart means
\ngetting more profitable.<\/p>\n
Successful turnarounds are defined by companies that increased
\ntheir historical below-market shareholder returns to above the
\nmarket average. Unsuccessful turnarounds are defined by companies
\nthat continued to deliver shareholder returns below the market
\naverage even after years of attempted restructuring.<\/p>\n
What happened in this sample of companies?<\/p>\n
According to BCG, \"C\" curve companies aggressively cut capital
\nemployed, create profitability and then capture new growth to
\ncreate value and compete. These successful turnarounds pursued a
\nvery clear program to \"clean up\" their portfolios, reducing
\ninvestment in low-return businesses and improving the
\nprofitability of their companies to acceptable levels before
\ngrowing.<\/p>\n
These companies created superior value for shareholders by
\nrestructuring the portfolio to deliver profitability, initially
\nshrinking their capital base typically by 20 percent to 30
\npercent and, at the same time, more than doubling profitability
\n(ROACE).<\/p>\n
In contrast, companies that failed in their restructuring made
\nonly marginal progress in improving profitability and did not
\nundertake restructuring actions that meaningfully reduced the
\ncapital base.<\/p>\n
In fact, the unsuccessful companies actually grew their low-
\nreturn portfolios, destroying shareholder value. The message is
\nclear in a turnaround as suggested by BCG: Seek profitability
\nbefore growth even when it means a significant reduction in
\ncapital employed. Follow the \"C\" curve to create profitability
\nand shareholder value.<\/p>\n
For the restructuring winners, three-quarters of the reduction
\nin capital employed came from the actual selling of assets, not
\nsimple write-offs or accounting magic. These management teams
\nmade hard choices about what businesses stayed in the portfolio
\nand what was divested. They made continual progress on driving
\nprofit improvement. They set a clear priority on improving
\nprofitability before pursuing growth.<\/p>\n
The other message is that restructuring takes time. It cannot
\nbe dictated or quickly achieved -- even in strong markets. For
\nthe successful turnarounds, the heavy restructuring period (when
\nprofitability was improving as the asset base shrank) typically
\nlasted two years to three years. It is important to set realistic
\nexpectations, as management teams and as policymakers.<\/p>\n
Management teams should take a hard look at the capital
\nemployed in businesses. They should understand what they need to
\ndo to get competitive levels of profitability and an asset base
\nthat creates economic value in the business. They are required to
\nset aggressive but realistic targets to guide your restructuring.<\/p>\n
The teams can expect to shrink in order to grow with
\nprofitability, expect to make portfolio choices across businesses
\nand within each business based on value management disciplines,
\nexpect a marathon, not a sprint, and follow the \"C\" curve to
\nrecovery.<\/p>\n
The goal of Indonesia's restructuring should be for Indonesian
\ncompanies to emerge from the crisis with higher profitability,
\nbetter capital allocation and capital efficiency and a value
\nmanagement approach to balancing profitability and growth for the
\nfuture.<\/p>\n
Hopefully many Indonesian companies will follow the \"C\" curve
\nin their own way to create value and competitiveness for
\nIndonesia's future.<\/p>\n
The writer is president director of PT Boston Consulting
\nIndonesia based in Jakarta.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/corporate-restructuring-toward-growth-c-curve-1447893297",
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"sponsor": "Okusi Associates",
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