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  1. 1. WHERE ARE THE LIMITS FOR CORPORATE CRISIS MANAGEMENT ATTEMPTS? <ul><li>Dejan Kružić </li></ul><ul><li>Faculty of Economics, University of Split </li></ul><ul><li>Matice hrvatske 31, 21000 Split, Croatia </li></ul><ul><li>E-mail: [email_address] </li></ul>THE PHOENIX EFFECT (In ancient Egyptian mythology the Phoenix is a mythical sacred firebird. At the end of its life-cycle the Phoenix is burnt and is reduced to ashes, from which a new, young Phoenix arises) Mic '07 Portorož 22.11.2007.
  2. 2. Corporate collapse and managing the crisis <ul><li>Like in human life where there exists border between life and death , so, in the business lives of companies there is a line between success and failure. Corporate business failure is remarkably similar to human death. In some cases, extremely rarely, a human being is reanimated and comes back from clinical death to a world of life. Likewise, a failed company that has collapsed and is near extinction may be revived and overcome the multi - annual business crisis. </li></ul><ul><li>A crisis is the moment of truth for companies , so management is faced with some explorative questions: </li></ul><ul><li>What is to be done when the crisis strikes and when years-long classic therapy provides no positive results? </li></ul><ul><li>What behaviour is acceptable? </li></ul><ul><li>Where are the limits for regeneration attempt? </li></ul><ul><li>The crucial role in this issue is that crisis leadership is acting under emotional pressure of critical situation within a multidimensional framework of the crisis management process. </li></ul>
  3. 3. Conceptual framework <ul><li>Crucial concept in corporate renewal is breakeven analysis - it provides </li></ul><ul><li>information on whether a distressed enterprise is salvageable. Crisis- </li></ul><ul><li>based corporate renewal does not focus on achieving profit breakeven. </li></ul><ul><li>In a crisis, non-cash charges (such as depreciation and amortization) </li></ul><ul><li>are ignored. This leads to a lower breakeven output level. </li></ul><ul><li>A firm that achieves EBIT or EBITDA breakeven can be </li></ul><ul><li>reorganized instead of liquidated by creating a new capital </li></ul><ul><li>structure that includes no debt, if necessary. </li></ul><ul><li>Profit, cash and EBITDA breakeven provide three output goals to </li></ul><ul><li>direct the corporate renewal process - if none of them are </li></ul><ul><li>achievable, the firm cannot survive (Platt). </li></ul>
  4. 4. Crisis management in chronic crisis <ul><li>This paper will try to dispel the paradigm about managing the corporate crisis, according to which the bankruptcy is the only possible solution if the following facts are presented: </li></ul><ul><li>The company has a blocked account for a longer period, </li></ul><ul><li>Corporation has a total chronic insolvency and illiquidity problems, </li></ul><ul><li>The value of liabilities exceeds the value of corporation assets, </li></ul><ul><li>The article illustrates how an effective crisis reanimation management can : </li></ul><ul><li>after 8 years of blocked-frozen company account , </li></ul><ul><li>with the cumulative losses exceeding the value of corporate assets </li></ul><ul><li>lead to the survival and recovery of the company. Moreover, the successful corporate turnaround implies the Phoenix effect - corporate renewal with an increase in the number of employees and enhancement of the company's market share prices. </li></ul>
  5. 5. Corporate history <ul><li>In order to illustrate the possibility of how to save a firm that is undergoing a multi- </li></ul><ul><li>annual business crisis - a Croatian stock company with a rich business history </li></ul><ul><li>(established in 1947), which employed about 1150 people in 1990 will be taken as </li></ul><ul><li>an example. Corporate core business in 1990 includes: </li></ul><ul><li>Import & export of oil, aluminum and consumer goods, </li></ul><ul><li>Purchasing raw materials (leather and wool) on the domestic market and their selling on the international market, </li></ul><ul><li>Wholesaling and retailing of the whole range of consumer goods (food, drink, clothes and footwear, furniture, household appliances etc.), </li></ul><ul><li>Providing hotel accommodation in its own small hotel. </li></ul><ul><li>The analysed corporation owned 5 international companies, which helped it to </li></ul><ul><li>perform international business. The shareholder's book equity was approximately € </li></ul><ul><li>17 million. </li></ul>
  6. 6. Corporate anamnesis <ul><li>T he period 1990 - 2000 were characterized by a continuous decay : unsuccessfully carried out processes of company transformation from socially-owned to public and finally private ownership, intensified by incapability of management to respond to radically changed market circumstances, have led to a significant loss of market segment, serious cumulated losses and the absence of core businesses. It was all further intensified by a constant insolvency and the blocked - frozen company account, which was a company's situation that has been going on since 1994. </li></ul><ul><li>In 2000, before the new CMT assumed the office, the company employed only 90 people . Analysed corporation didn't have a core business , but only hiring a part of its commercial real estates generating minimal and insufficient revenue. </li></ul><ul><li>Diagnosis of the company's health indicates an extremely difficult situation - lack of core business and the blocked account for six years had resulted in the fact that the cumulative losses and corporate liabilities had been significantly higher than the company assets. </li></ul>
  7. 7. Fundamental questions <ul><li>According to the previously indicated diagnosis, the crisis management is faced </li></ul><ul><li>with the following fundamental questions: </li></ul><ul><ul><li>What is to be done when years-long classic therapy provides no positive results? </li></ul></ul><ul><ul><li>Where are the limits for regeneration attempt? </li></ul></ul><ul><li>bearing in mind that encountered situation in the analysed company requires </li></ul><ul><li>the crisis management to initiate the bankruptcy process (*). In recent literature we </li></ul><ul><li>did not find decisive answers to stated questions . Since the best practice that </li></ul><ul><li>could help in answering the previously stated questions is non-existent, the CMT </li></ul><ul><li>decided not to initiate bankruptcy petition but set off for an journey with </li></ul><ul><li>highly uncertain outcome. </li></ul><ul><li>(*) Croatian Bankruptcy Act recognizes three reasons for bankruptcy : insolvency, over-indebtedness and threatening insolvency. If the enterprise is insolvent or over-indebted the management should suggest initiating bankruptcy proceeding without delay and not later than 21 days upon occurrence of bankruptcy reasons. </li></ul>
  8. 8. Managing the unthinkable <ul><li>In analysed company CMT try to do something what was, in that moment, impossible to </li></ul><ul><li>imagine: </li></ul><ul><li>Regenerate the business in a relatively short period, </li></ul><ul><li>Free a part of the frozen company assets , </li></ul><ul><li>Unblock the frozen corporate account, </li></ul><ul><li>Restore the liquidity of the company, </li></ul><ul><li>Pay off the suppliers and creditors, </li></ul><ul><li>i.e. introduce a radical and almost impossible change with turnaround in the encountered </li></ul><ul><li>conditions. </li></ul><ul><li>Strained financial resources, demoralized executives, fearful employees, unhappy </li></ul><ul><li>customers, tense bankers, angry investors, and competitors waiting to pounce - these are </li></ul><ul><li>the classic challenges of turnarounds in troubled companies . If the CMT doesn't succeed </li></ul><ul><li>in recovering the company its managers will gain the &quot;reputation&quot; of losers , and </li></ul><ul><li>probably even assume legal responsibility for not initiating bankruptcy proceeding. </li></ul>
  9. 9. T he essence of turnaround : entrepreneurship <ul><li>After completing the diagnosis , CMT started with the stage of implementation its new measures for improvement of company performance . By using the destroyed and frozen resources of the company, with extremely little chance for survival, the activities of CMT is focused on seeking short-term performance enhancements that could enable the business to generate cash flow and avoid corporate tragedy: </li></ul><ul><li>Mobilise some of the resources which were not used, </li></ul><ul><li>Increase the engagement level of current employees by creating new business </li></ul><ul><li>activities, </li></ul><ul><li>Sell non-core corporate assets, </li></ul><ul><li>Decrease the level of corporate indebtedness by radical measures of debt collection, </li></ul><ul><li>File a series of lawsuits and initiate a number of out-of-court agreements on a partial disbursement of creditors and rescheduling of debt, </li></ul><ul><li>Establish a new organisational structure and change payroll computation, </li></ul><ul><li>Successfully prevent requirements for initiating the bankruptcy process, </li></ul><ul><li>what results in a reduction of the creditors' pressure on the corporation . </li></ul>
  10. 10. Critical ingredient for corporate renewal <ul><li>A successful implementation of the before stated activities is only a necessary but not a sufficient prerequisite . Additional prerequisite is initiation of a new core business, without which the chances for success are reduced so much that there is no need to even start the regeneration- reanimation of business process. </li></ul><ul><li>CMT found the response to the chronic crises problems in entrepreneurial </li></ul><ul><li>challenge : creative response to the encountered conditions - a different approach to the market and establishing new activities - starting from the beginning and implementing a new core business in the organisation structure of a dying company - which had a blocked account for more than six years and an estimated debts exceeding its assets value. </li></ul>
  11. 11. Business regeneration - empirical findings <ul><li>CMT managed to initiate a new activity only two months after it assumed office. The results achieved by the CMT in their first nine months of running the business (in 2000 turnover was increased by 55% in relation to the year 1999, and expenses by 28% ) were one of the key-factors directing the company towards the main goal - survival and for motivating and achieving further business turnaround. The CMT create an atmosphere of faith in success and brought about a significant increase of workers', shareholders', business partners' and the public trust in the new management. </li></ul><ul><li>The CMT's efforts to introduce a visible changes in the business and financial </li></ul><ul><li>conditions of the company, contributed to the improvements in the corporate culture </li></ul><ul><li>(the feelings of loser's mentality, poverty and fear prevail in an enterprise which has </li></ul><ul><li>been making losses for years) by gradually turning losers into potential winners. A </li></ul><ul><li>good start of the CMT resulted in the initial success of the company and a reduced </li></ul><ul><li>economic attack, enabled the CMT to move to establishing of elements of the anti- </li></ul><ul><li>crisis strategy based on implementation of the new core business by entering a new </li></ul><ul><li>field of activities . </li></ul>
  12. 12. From crisis to opportunity-turnaround <ul><li>Implementation of the new strategies and increase of business efficiency in 2001, enabled the analysed company to achieve (in relation to the previous year): an revenue increasing by 16% and, at the same time, a decrease of business expenses , new job creation ( speed up of 20 %) , unfreezing the frozen account level by 40%, a positive financial results in current year, and partially solving the problems related to major creditors (not yet a final settlement). </li></ul><ul><li>At this stage of an almost certain recovery (but still insufficient for solving the problem of unfreezing the corporate account) and directing the activities towards business stabilisation, a &quot;blurred&quot; vision and the fundamental goal of the company which were previously restricted to survival are now becoming clearer . </li></ul><ul><li>The main goal of the CMT is still: </li></ul><ul><li>Unfreezing the company account , (and) </li></ul><ul><li>Getting out of the insolvency . </li></ul>
  13. 13. The Phoenix arose <ul><li>Further development of the battle for survival stage is characterised by the already described activities carried out in 2000-2001 directed towards unfreezing the corporate account, as well as by the daily fighting with the possibility of a new crisis occurrence and the possibility of initiation of bankruptcy proceeding. </li></ul><ul><li>In October 2002 the CMT managed to unfreeze the corporate account - for the first time after eight and a half years, or after 3100 days - and, in the same year, to earn a respectable net income (app. 2,5 millions of Euros) enabling employment for an additional 19% of new workforce. </li></ul><ul><li>Since there was no recurrence of freezing the company account after the account had been successfully unblocked , it is possible to place the whole stage of the battle for survival, as the part of chronic crisis stage, in the period between February 2000 and October 2002, in other words it lasted about 32 months. The battle for survival stage can be divided into following 3 phases: </li></ul><ul><li>I. Preparing and giving the diagnosis (that took about a month) </li></ul><ul><li>II. Realisation of the initial (but not sufficient) successes (lasting about 10 months) </li></ul><ul><li>III. Achieving a radical turnaround (lasting about 21 months). </li></ul>
  14. 14. The Phoenix arose Some indicators of corporate health (December, 31st) 6.8-7.5 1.7-2.1 0.0 0.0 Market share price - €/ share 13.7 13.7 13.7 26.9 Book share price - €/ share 0,0 0,0 6.6 2.2 Blocked company account (mill. €) 0,0 0,0 7.6 13.8 Unrecorded & off-bal. sheet liabilities (mill. €) 6.3 7.4 9.5 14.7 Total assets (mill. €) 9.2 8.7 8.7 17.1 Shareholders book equity (mill. €) 2006. 2002. 2000. 1999.  
  15. 15. Conclusion <ul><li>T he paper illustrates that the limits for decision about initiating bankruptcy proceeding can be postponed and that is never too late to initiate it, providing that the company has a management capable of tackling the business crisis. </li></ul><ul><li>Presented case suggests that: </li></ul><ul><li>Management should never give up from the anti-crisis battle, </li></ul><ul><li>There are no miraculous solutions, </li></ul><ul><li>The battle for survival should always be attempted, regardless the fact that </li></ul><ul><li>positive outcome may verge on miracle. </li></ul><ul><li>Finally, paper documented that when company in years-long crisis successfully regenerate business process and pay debts out of court procedure, the market share price increases emphatically . </li></ul>
  16. 16. Bibliography <ul><li>Ashcroft, S.L. (1997): Crisis Management – Public Relations, Journal of Managerial Psychology , Vol. 12. No. 5, pp. 325 – 332. </li></ul><ul><li>Bibeault, B.D. (1999): Corporate Turnaround: How Managers Turn Losers Into Winners , BeardBooks, Washington, DC. </li></ul><ul><li>Fink, S. (2002): Crisis Management: Planning for the Inevitable , iUniverse, Lincoln. </li></ul><ul><li>Gilson, C. S. (2001): Creating Value through Corporate Restructuring , John Wiley & Sons. </li></ul><ul><li>Hancock, W. (2002): Security Crisis Management - The Basics, Computers & Security , Vol. 21, No.5, pp. 397 - 403. </li></ul><ul><li>King, G. (2000): Crises Management and Team Effectiveness: A Closer Examination, Journal of Business Ethics (NL), Vol. 41 (3) pp. 235-250. </li></ul><ul><li>Mitroff, I. (2004): Crisis Leadership: Planning for the Unthinkable , John Wiley & Sons. </li></ul><ul><li>Mitroff, I., Anagos, G. (2001): Managing Crises Before They Happen: What Every Executive and Manager Needs to Know About Crisis Management , AMACOM, New York. </li></ul><ul><li>Platt, H.D. (1998): Principles of Corporate Renewal , University of Michigan press. </li></ul><ul><li>Slatter, S. et al. (2006): Leading Corporate Turnaround: How Leaders Fix Troubled Companies , John Wiley & Sons. </li></ul><ul><li>Sutton, G. (2002): The Six - Month Fix: Adventures in Rescuing Failing Companies , John Wiley & Sons, New York. </li></ul><ul><li>Ulmer, R.R. et al. (2006): Effective Crisis Communication: Moving From Crisis to Opportunity , Sage Publications. </li></ul><ul><li>Whitney, O.J. (1999): Taking Charge: Management Guide to Troubled Companies and Turnarounds , BeardBooks, Washington, DC. </li></ul>