Restructuring RI companies to create value

Restructuring RI companies to create value

By Bernd Waltermann

JAKARTA (JP): Indonesia's executives and policymakers face
difficult challenges in every dimension -- to simultaneously
restructure the financial sector, reinvent the structure and
practices of corporate enterprises and redefine government
agencies and their policies.

Companies are asked to review business portfolios, reduce
large debts, sell assets, stimulate international investment,
create a social safety net for workers and energize small and
medium enterprises to create jobs.

And they are asked to accomplish all this restructuring during
a time of low domestic demand, stagnant regional demand, tight
money and high interest rates and intense media and international
scrutiny on every position and action. And they are asked to do
it all quickly.

Given the uncertainty, how should an executive continue to
tackle restructuring under such a complex agenda of change? How
do they take wise action today that brings rewards tomorrow?

We think that progress has been made by accepting that the
world is now and forever different -- yesterday's models will not
carry Indonesia forward. We think that progress has been made by
accepting that restructuring will be a process, not a single
event, a continuous process that will occupy the management
agenda for the next two years to five years.

The ongoing task is then to continue refining a clear vision
and a detailed, realistic agenda for corporate restructuring --
for how companies will reshape to ensure they emerge with a set
of competitive, financially sound businesses in two years to
three years.

We want to share some perspectives on meeting the
restructuring challenges -- particularly the challenges of
restructuring diversified businesses.

We will use international examples to illustrate how others,
perhaps in less difficult situations, have managed corporate
restructuring, and then outline what we think is the agenda for
Indonesia's corporate change.

One example is the story of a complicated business in a tough
environment. The story began in 1929 with the consolidation of a
state-owned coal mining and energy interest. Over the years, the
company expanded and diversified, was partially privatized in
1965 and fully privatized in 1987.

It is now a global business organized as a management holding
company with sales of over US$45 billion and employing over
130,000 people worldwide.

This multibusiness group is a trading company, it has an
electricity company, an oil company, a transportation services
company, a chemical company and a telecommunications company.

It owns gas stations and real estate. It has more than 43
independent strategic businesses, each responsible for its own
earnings, cash flow and capital employed. It continues to rethink
its businesses and corporate structure.

This company is one of Germany's top conglomerates -- VEBA.
It is the third-largest company if measured by assets, and the
fourth-largest if measured by sales. It has beaten the market
index for a consecutive eight-year period. This company has been
continuously restructuring and refining its business to meet
competitive pressure and investor expectations.

Why do they succeed? In a few words: consistently creating
economic value. They focus on constantly being in businesses that
have leading market positions or are capable of achieving them.
They focus on businesses that earn an above average return on
capital. They also focus on having a portfolio of businesses that
spread activities between mature sectors and growth sectors and
fit soundly into the company's international growth strategy.

This company has created and put into operation a value
management culture, a culture that tests decisions against the
impact those decisions will have on creating economic value
through the business; from decisions on how to allocate capital
to what businesses to grow, enter or exit, to how to set targets
for restructuring.

When this business runs into problems, it uses a value
management perspective to make decisions.

As with other successful companies, VEBA has followed an
important principle: To grow, you must also cut back -- and
sometimes radically. For some Indonesian executives these are
appropriate words.

Since 1993, VEBA has divested businesses generating sales of
$5 billion and, thus, has achieved cost savings of almost $2
billion per year. It continues to make adjustments to its
portfolio.

The CEO of The Boston Consulting Group's client organizations
put it this way: "We will treat our business portfolio like a
diamond by giving it the right shine in the future by way of
acquisitions, joint ventures and, of course, divestments. We are
well aware that we will change the facets of our company with
each new cut that we give it. And this is a good thing."

The result of treating a portfolio like a diamond, of constant
attention to creating value, is a continuous history of returns
and success in building and growing a highly competitive company.

What are the characteristics of these companies?

A focus on value management, promoting transparency, ongoing
restructuring and cost management, growth by leveraging the
things they are really good at and an "active corporate center"
to drive high-impact initiatives across the various businesses
and subsidiaries.

It is particularly important in diversified businesses to use
the right measures. Simple accounting measures such as Return on
Sales and Return on Net Assets have major defects that send
misleading signals about business profitability.

In a diversified group it is particularly important to
understand how investments are performing relative to the cost of
capital.

It is very difficult to make portfolio decisions using
accounting measures, particularly in capital intensive business.
Older "core" businesses may have depreciated asset bases, carried
on the books at historical costs, and so have a high return on
assets.

In diversified businesses, you often have a mix of business
with different asset intensities. You must be able to compare one
business to another to make choices at a time of restructuring.
Use cash-based measures to make decisions.

To make good decisions, executives need to know which
businesses can earn returns above the cost of the investment, or
have the potential to, and which businesses destroy value. This
insight helps to quantify how much improvement is needed, to set
priorities and to focus effort and investment where it will
deliver the most impact.

All businesses can improve returns. During restructuring,
businesses must simultaneously attack overheads, assets and all
operational functions. Those who succeed analyze the work
activities to identify low-value tasks and waste in overhead
functions. There will probably be between 10 percent and 30
percent low-value activity to eliminate. They engage in process
redesign, after setting priorities on key processes, to build
efficiency and effectiveness in operations. They act to reduce.
They build asset productivity to get more sales and profit from
existing assets. They develop a plan that transitions the
organization in line with world benchmarks but recognizes your
skills.

Significant reductions in costs, errors and cycle-time are
possible. In our experience, cost reductions typically range from
15 percent to 40 percent in product development, product roll
out, manufacturing and in support activities like accounting and
controlling. Cycle times can be cut from 25 percent to 50
percent. Errors can be cut in half in manufacturing and order-to-
delivery. The best performers set aggressive targets and track
them.

Asset productivity comes from acting on fixed assets,
inventories and receivables. Although there will be opportunities
in all three areas, there will probably be more opportunity to
manage down fixed assets -- for example, by consolidating
locations -- than realized in the past.

Often it is important to build a network of ventures and
alliances to expand capabilities and grow new positions. Good
companies do not insist on doing it all themselves. They make
arrangements with expert players and built a position for the
future.

Successful companies -- whether focused businesses or
diversified conglomerates -- need an "active corporate center" to
help drive value creation.

Dr. Waltermann is a vice president of The Boston Consulting
Group and the president director of PT Boston Consulting
Indonesia.

Window: Why do they succeed? In a few words: consistently creating
economic value. They focus on constantly being in businesses that
have leading market positions or are capable of achieving them.