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.