Restructuring RI companies to create value<\/p>\n
By Bernd Waltermann<\/p>\n
JAKARTA (JP): Indonesia's executives and policymakers face
\ndifficult challenges in every dimension -- to simultaneously
\nrestructure the financial sector, reinvent the structure and
\npractices of corporate enterprises and redefine government
\nagencies and their policies.<\/p>\n
Companies are asked to review business portfolios, reduce
\nlarge debts, sell assets, stimulate international investment,
\ncreate a social safety net for workers and energize small and
\nmedium enterprises to create jobs.<\/p>\n
And they are asked to accomplish all this restructuring during
\na time of low domestic demand, stagnant regional demand, tight
\nmoney and high interest rates and intense media and international
\nscrutiny on every position and action. And they are asked to do
\nit all quickly.<\/p>\n
Given the uncertainty, how should an executive continue to
\ntackle restructuring under such a complex agenda of change? How
\ndo they take wise action today that brings rewards tomorrow?<\/p>\n
We think that progress has been made by accepting that the
\nworld is now and forever different -- yesterday's models will not
\ncarry Indonesia forward. We think that progress has been made by
\naccepting that restructuring will be a process, not a single
\nevent, a continuous process that will occupy the management
\nagenda for the next two years to five years.<\/p>\n
The ongoing task is then to continue refining a clear vision
\nand a detailed, realistic agenda for corporate restructuring --
\nfor how companies will reshape to ensure they emerge with a set
\nof competitive, financially sound businesses in two years to
\nthree years.<\/p>\n
We want to share some perspectives on meeting the
\nrestructuring challenges -- particularly the challenges of
\nrestructuring diversified businesses.<\/p>\n
We will use international examples to illustrate how others,
\nperhaps in less difficult situations, have managed corporate
\nrestructuring, and then outline what we think is the agenda for
\nIndonesia's corporate change.<\/p>\n
One example is the story of a complicated business in a tough
\nenvironment. The story began in 1929 with the consolidation of a
\nstate-owned coal mining and energy interest. Over the years, the
\ncompany expanded and diversified, was partially privatized in
\n1965 and fully privatized in 1987.<\/p>\n
It is now a global business organized as a management holding
\ncompany with sales of over US$45 billion and employing over
\n130,000 people worldwide.<\/p>\n
This multibusiness group is a trading company, it has an
\nelectricity company, an oil company, a transportation services
\ncompany, a chemical company and a telecommunications company.<\/p>\n
It owns gas stations and real estate. It has more than 43
\nindependent strategic businesses, each responsible for its own
\nearnings, cash flow and capital employed. It continues to rethink
\nits businesses and corporate structure.<\/p>\n
This company is one of Germany's top conglomerates -- VEBA.
\nIt is the third-largest company if measured by assets, and the
\nfourth-largest if measured by sales. It has beaten the market
\nindex for a consecutive eight-year period. This company has been
\ncontinuously restructuring and refining its business to meet
\ncompetitive pressure and investor expectations.<\/p>\n
Why do they succeed? In a few words: consistently creating
\neconomic value. They focus on constantly being in businesses that
\nhave leading market positions or are capable of achieving them.
\nThey focus on businesses that earn an above average return on
\ncapital. They also focus on having a portfolio of businesses that
\nspread activities between mature sectors and growth sectors and
\nfit soundly into the company's international growth strategy.<\/p>\n
This company has created and put into operation a value
\nmanagement culture, a culture that tests decisions against the
\nimpact those decisions will have on creating economic value
\nthrough the business; from decisions on how to allocate capital
\nto what businesses to grow, enter or exit, to how to set targets
\nfor restructuring.<\/p>\n
When this business runs into problems, it uses a value
\nmanagement perspective to make decisions.<\/p>\n
As with other successful companies, VEBA has followed an
\nimportant principle: To grow, you must also cut back -- and
\nsometimes radically. For some Indonesian executives these are
\nappropriate words.<\/p>\n
Since 1993, VEBA has divested businesses generating sales of
\n$5 billion and, thus, has achieved cost savings of almost $2
\nbillion per year. It continues to make adjustments to its
\nportfolio.<\/p>\n
The CEO of The Boston Consulting Group's client organizations
\nput it this way: \"We will treat our business portfolio like a
\ndiamond by giving it the right shine in the future by way of
\nacquisitions, joint ventures and, of course, divestments. We are
\nwell aware that we will change the facets of our company with
\neach new cut that we give it. And this is a good thing.\"<\/p>\n
The result of treating a portfolio like a diamond, of constant
\nattention to creating value, is a continuous history of returns
\nand success in building and growing a highly competitive company.<\/p>\n
What are the characteristics of these companies?<\/p>\n
A focus on value management, promoting transparency, ongoing
\nrestructuring and cost management, growth by leveraging the
\nthings they are really good at and an \"active corporate center\"
\nto drive high-impact initiatives across the various businesses
\nand subsidiaries.<\/p>\n
It is particularly important in diversified businesses to use
\nthe right measures. Simple accounting measures such as Return on
\nSales and Return on Net Assets have major defects that send
\nmisleading signals about business profitability.<\/p>\n
In a diversified group it is particularly important to
\nunderstand how investments are performing relative to the cost of
\ncapital.<\/p>\n
It is very difficult to make portfolio decisions using
\naccounting measures, particularly in capital intensive business.
\nOlder \"core\" businesses may have depreciated asset bases, carried
\non the books at historical costs, and so have a high return on
\nassets.<\/p>\n
In diversified businesses, you often have a mix of business
\nwith different asset intensities. You must be able to compare one
\nbusiness to another to make choices at a time of restructuring.
\nUse cash-based measures to make decisions.<\/p>\n
To make good decisions, executives need to know which
\nbusinesses can earn returns above the cost of the investment, or
\nhave the potential to, and which businesses destroy value. This
\ninsight helps to quantify how much improvement is needed, to set
\npriorities and to focus effort and investment where it will
\ndeliver the most impact.<\/p>\n
All businesses can improve returns. During restructuring,
\nbusinesses must simultaneously attack overheads, assets and all
\noperational functions. Those who succeed analyze the work
\nactivities to identify low-value tasks and waste in overhead
\nfunctions. There will probably be between 10 percent and 30
\npercent low-value activity to eliminate. They engage in process
\nredesign, after setting priorities on key processes, to build
\nefficiency and effectiveness in operations. They act to reduce.
\nThey build asset productivity to get more sales and profit from
\nexisting assets. They develop a plan that transitions the
\norganization in line with world benchmarks but recognizes your
\nskills.<\/p>\n
Significant reductions in costs, errors and cycle-time are
\npossible. In our experience, cost reductions typically range from
\n15 percent to 40 percent in product development, product roll
\nout, manufacturing and in support activities like accounting and
\ncontrolling. Cycle times can be cut from 25 percent to 50
\npercent. Errors can be cut in half in manufacturing and order-to-
\ndelivery. The best performers set aggressive targets and track
\nthem.<\/p>\n
Asset productivity comes from acting on fixed assets,
\ninventories and receivables. Although there will be opportunities
\nin all three areas, there will probably be more opportunity to
\nmanage down fixed assets -- for example, by consolidating
\nlocations -- than realized in the past.<\/p>\n
Often it is important to build a network of ventures and
\nalliances to expand capabilities and grow new positions. Good
\ncompanies do not insist on doing it all themselves. They make
\narrangements with expert players and built a position for the
\nfuture.<\/p>\n
Successful companies -- whether focused businesses or
\ndiversified conglomerates -- need an \"active corporate center\" to
\nhelp drive value creation.<\/p>\n
Dr. Waltermann is a vice president of The Boston Consulting
\nGroup and the president director of PT Boston Consulting
\nIndonesia.<\/p>\n
Window: Why do they succeed? In a few words: consistently creating
\neconomic value. They focus on constantly being in businesses that
\nhave leading market positions or are capable of achieving them.<\/p>",
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