Description
IBM Corporation * Broken Strategy Broken Strategy * Premium prices way too long * Decentralization to a fault.
Kellogg Turnaround Management Conference
CORPORATE TURNAROUNDS
A A UE EA IO AND VALUE CREATION
Jerome York
CEO, Harwinton Capital LLC p
Kellogg Turnaround Management Conference
Outline
1. My experiences with turnaround situations and y e pe ie e i u a ou i ua io a
shareholder value creation:
• Chrysler
• IBM IBM
• Apple
• Tyco International
2. Summary – The key elements for a successful
turnaround
2
Kellogg Turnaround Management Conference
What Produces Restructuring Situations?
Th S t The Symptoms:
• Wrong Strategy?
• Wrong Business Model?
• Poor Execution?
3
Kellogg Turnaround Management Conference
What Produces Restructuring Situations?
Th Di The Disease:
• Poor Governance?
• Inadequate Management?
• Major Shift in Industry Conditions? j y
4
Kellogg Turnaround Management Conference
Chrysler Corporation
• Great Strategy: • Great Strategy:
~ Invented the Minivan
~ Bought Jeep early in the SUV revolution
• Business Model Too Slow and Costly:
~ Major changes to the product development process
M j d ti i d i i t ti t ( k b ) ~ Major reductions in administrative costs (aka bureaucracy)
• Operations Seriously Deficient in Passenger Cars:
~ Huge progress by Ford and the Japanese Huge progress by Ford and the Japanese
5
Kellogg Turnaround Management Conference
IBM Corporation
• Broken Strategy: • Broken Strategy:
~ Premium prices way too long
~ Decentralization to a fault
• Business Model Too Slow and Costly:
~ Bureaucracy precluded competing in short cycle
businesses businesses
~ SG&A + R&D $7 Billion (25%) too high
• Operations Seriously Antiquated in Many Areas: p y q y
~ Go-to-market, procurement, finance, product development,
even IT!
6
Kellogg Turnaround Management Conference
Apple, Inc.
• No Strategy: • No Strategy:
~ Key R&D resources being squandered on Newton
~ No plan to conquest Microsoft customers
• Business Model:
~ Serious distribution issues
L i d i i d ti t D ll ~ Losing dominance in education to Dell
• Operations Reasonably Decent, But:
~ Too much manufacturing in North America rather than Too much manufacturing in North America rather than
Asia
7
Kellogg Turnaround Management Conference
Tyco International, Ltd.
• Single Legged Strategy: • Single-Legged Strategy:
~ Acquisition Machine
• Business Model Had Excessive Balance Sheet Leverage: usi ess Mo e a E cessi e a a ce S ee e e age
~ Anything going wrong could result in a financial crisis
~ Accounting approaches very aggressive
• Operations Essentially Not a Priority:
~ Hundreds of acquisitions with no “back office” or
manufacturing consolidation g
8
Kellogg Turnaround Management Conference
What Are the Similarities/Dissimilarities?
The Symptoms he Symptom
Operations Business Model Strategy
Behind Except in
Mainframes Too Slow & Costly Severely Flawed IBM
Left Behind in Cars Too Slow & Costly Overall Good Chrysler
Largely Sub-Par Too Costly Good but Risky Tyco
Mfg. Footprint Issues Distribution Problems Essentially None Apple
2 of 4 3 of 4 2 of 4 Similarities:
g y y y y
9
Kellogg Turnaround Management Conference
What Are the Similarities/Dissimilarities?
The Disease
Japanese Competition
Lack of Good Independent, Strong
Industry Conditions Management Governance
Titanic Industry
Changes Rigidity to Past Strong Board, Decisive IBM
Japanese Competition
Teamwork
p , g
Board Chrysler
Hampered; in Awe of
Microsoft Domination
Lack of “Mac Passion”
Silicon Valley Vets,
but… Apple
g g y g ,
2.5 of 4 3.5 of 4 2 of 4 Similarities:
Largely Well-positioned
Acquisition Machine
Hampered; in Awe of
CEO Tyco
10
Kellogg Turnaround Management Conference
Ch l T d R l Chrysler Turnaround Results
• Initial Results:
~ Spectacular. Share price from low of $9 in 1990 to $45 in
1993 when turnaround “completed”
~ Chrysler purchased by Daimler-Benz in 1998 for $35 billion y p y
• Longer Term Results:
~ Major restructuring II in 2002 to 2004 period
~ Major restructuring III commenced in 2006
• Conclusions:
~ Fundamental competitive weakness versus the Asian ~ Fundamental competitive weakness versus the Asian
producers never adequately addressed
11
Kellogg Turnaround Management Conference
IBMT d R l IBM Turnaround Results
• Initial Results:
~ Spectacular. Share price from low of $10 in 1993 to
$124 currently
• Longer TermResults: • Longer Term Results:
~ Company has continuously transformed itself, growing its
services and software businesses, and shrinking its
hardware businesses hardware businesses
~ It has not let ?success? preclude it from taking periodic
retrenchment actions where needed
• Conclusions:
~ Growth in the services industry is slowing… Could
indicate additional restructuring to come
12
g
Kellogg Turnaround Management Conference
A l T d R l Apple Turnaround Results
• Initial Results:
~ Spectacular. Share price from low of $4 in 1997 to $20 in
2000, and now at $168
~ Principal initiatives were award-winning designs and p g g
substantially improved Mac operating system
• Longer Term Results:
~ Apple has invested in two huge initiatives both highly Apple has invested in two huge initiatives, both highly
successful:
– Its own B&M distribution – key to expanding Mac platform sales
– The music business, a transforming event for the music industry , g y
• Conclusions:
~ Continual innovation--the latest being the iPhone
13
Kellogg Turnaround Management Conference
T T d R l Tyco Turnaround Results
• Initial Results:
S t l Sh i f l f $9 i 2002 t $47 tl ~ Spectacular. Share price from low of $9 in 2002 to $47 currently
~ Multiple crises successfully addressed:
– Board and management credibility
Accounting and liquidity crises – Accounting and liquidity crises
– Legal and regulatory crises
• Longer Term Results:
~ Acquisition machine turned off; focus shifted to organic growth ~ Acquisition machine turned off; focus shifted to organic growth
and operational excellence
~ Decision made that best way to maximize shareholder value is to
break up the company p p y
• Conclusions:
~ Separation of $40 billion Tyco into three pieces should allow each
new company to better focus
14
p y
Kellogg Turnaround Management Conference
Key Turnaround Elements (in my experience)
1 S i i d d i i 1. Senior management passion and determination
2. Sell, sell, sell, explain, explain, explain it to the troops
3. Set the example. “Tone setters” are important
4. Benchmark everything
5. Take a highly structured approach
6. Measure and report status frequently 6. Measure and report status frequently
15
Kellogg Turnaround Management Conference
Role of Board of Directors (Governance)
in Situations Requiring Turnaround
• IBM:
~ After three years of precipitous deterioration, the board took drastic
action; new CEO and CFO appointed from outside the industry
• Chrysler:
~ One can conclude board wanted new CEO, but wanted an “orderly
transition”
• Apple: • Apple:
~ After two straight underperforming CEOs, board approached Steve Jobs
to return, which he agreed to do subject to major changes in board
composition
• Tyco:
~ Severe regulatory and legal situation forced the prior board to go outside
for new CEO, and dictated major change in board composition
16
Kellogg Turnaround Management Conference
• The World is Changing Rapidly
Wrap-Up
g g p y
1. Shifting Demographics
2. Emergence of China with others not far behind
3. Global Warming o a a i g
4. Transformation of American Business
• Steady-State is No Longer the Norm (if it ever really was)
• Turnarounds are Crucial Where Needed, But….
1. Cannot be considered to be “one time” events
2. Must be followed by continuous improvement approaches, and high levels
of strategic adaptability
3. Global competition is here to stay even if the lobbyists, politicians, etc., try
to stop it. Capital will flow to where it gets the best returns.
17
Kellogg Turnaround Management Conference
Economic Center of Gravity of the World
18
Kellogg Turnaround Management Conference
l h d Sovereign Wealth Funds
US Investment Activities:
Citigroup / Merrill Lynch / Morgan Stanley / Others Citigroup / Merrill Lynch / Morgan Stanley / Others
$21.5 Billion Invested in US in 2007 [A]
$22.6 Billion Invested in US in 2008 [A]
$(Billions)
Net Capital Outflows : 1995 2000 2006
Oil Exporting Countries 35 192 484
Eastern Asia 133 198 446
Rest of World 114 119 389
Total 282 509 1 319 Total 282 509 1,319
[A] Source: Wall Street Journal / Thompson Financial.
Source: McKinsey Global Institute.
19
Kellogg Turnaround Management Conference
Global Warming…AKA Global Crowding
Billions
10
12
Billions
o
n
6
8
d
P
o
p
u
l
a
t
i
o
2
4
W
o
r
l
d
0
1960 2000 2040
Year
20
Year
Kellogg Turnaround Management Conference
CORPORATE TURNAROUNDS
A A UE EA IO AND VALUE CREATION
Jerome York
CEO, Harwinton Capital LLC p
doc_838623333.pdf
IBM Corporation * Broken Strategy Broken Strategy * Premium prices way too long * Decentralization to a fault.
Kellogg Turnaround Management Conference
CORPORATE TURNAROUNDS
A A UE EA IO AND VALUE CREATION
Jerome York
CEO, Harwinton Capital LLC p
Kellogg Turnaround Management Conference
Outline
1. My experiences with turnaround situations and y e pe ie e i u a ou i ua io a
shareholder value creation:
• Chrysler
• IBM IBM
• Apple
• Tyco International
2. Summary – The key elements for a successful
turnaround
2
Kellogg Turnaround Management Conference
What Produces Restructuring Situations?
Th S t The Symptoms:
• Wrong Strategy?
• Wrong Business Model?
• Poor Execution?
3
Kellogg Turnaround Management Conference
What Produces Restructuring Situations?
Th Di The Disease:
• Poor Governance?
• Inadequate Management?
• Major Shift in Industry Conditions? j y
4
Kellogg Turnaround Management Conference
Chrysler Corporation
• Great Strategy: • Great Strategy:
~ Invented the Minivan
~ Bought Jeep early in the SUV revolution
• Business Model Too Slow and Costly:
~ Major changes to the product development process
M j d ti i d i i t ti t ( k b ) ~ Major reductions in administrative costs (aka bureaucracy)
• Operations Seriously Deficient in Passenger Cars:
~ Huge progress by Ford and the Japanese Huge progress by Ford and the Japanese
5
Kellogg Turnaround Management Conference
IBM Corporation
• Broken Strategy: • Broken Strategy:
~ Premium prices way too long
~ Decentralization to a fault
• Business Model Too Slow and Costly:
~ Bureaucracy precluded competing in short cycle
businesses businesses
~ SG&A + R&D $7 Billion (25%) too high
• Operations Seriously Antiquated in Many Areas: p y q y
~ Go-to-market, procurement, finance, product development,
even IT!
6
Kellogg Turnaround Management Conference
Apple, Inc.
• No Strategy: • No Strategy:
~ Key R&D resources being squandered on Newton
~ No plan to conquest Microsoft customers
• Business Model:
~ Serious distribution issues
L i d i i d ti t D ll ~ Losing dominance in education to Dell
• Operations Reasonably Decent, But:
~ Too much manufacturing in North America rather than Too much manufacturing in North America rather than
Asia
7
Kellogg Turnaround Management Conference
Tyco International, Ltd.
• Single Legged Strategy: • Single-Legged Strategy:
~ Acquisition Machine
• Business Model Had Excessive Balance Sheet Leverage: usi ess Mo e a E cessi e a a ce S ee e e age
~ Anything going wrong could result in a financial crisis
~ Accounting approaches very aggressive
• Operations Essentially Not a Priority:
~ Hundreds of acquisitions with no “back office” or
manufacturing consolidation g
8
Kellogg Turnaround Management Conference
What Are the Similarities/Dissimilarities?
The Symptoms he Symptom
Operations Business Model Strategy
Behind Except in
Mainframes Too Slow & Costly Severely Flawed IBM
Left Behind in Cars Too Slow & Costly Overall Good Chrysler
Largely Sub-Par Too Costly Good but Risky Tyco
Mfg. Footprint Issues Distribution Problems Essentially None Apple
2 of 4 3 of 4 2 of 4 Similarities:
g y y y y
9
Kellogg Turnaround Management Conference
What Are the Similarities/Dissimilarities?
The Disease
Japanese Competition
Lack of Good Independent, Strong
Industry Conditions Management Governance
Titanic Industry
Changes Rigidity to Past Strong Board, Decisive IBM
Japanese Competition
Teamwork
p , g
Board Chrysler
Hampered; in Awe of
Microsoft Domination
Lack of “Mac Passion”
Silicon Valley Vets,
but… Apple
g g y g ,
2.5 of 4 3.5 of 4 2 of 4 Similarities:
Largely Well-positioned
Acquisition Machine
Hampered; in Awe of
CEO Tyco
10
Kellogg Turnaround Management Conference
Ch l T d R l Chrysler Turnaround Results
• Initial Results:
~ Spectacular. Share price from low of $9 in 1990 to $45 in
1993 when turnaround “completed”
~ Chrysler purchased by Daimler-Benz in 1998 for $35 billion y p y
• Longer Term Results:
~ Major restructuring II in 2002 to 2004 period
~ Major restructuring III commenced in 2006
• Conclusions:
~ Fundamental competitive weakness versus the Asian ~ Fundamental competitive weakness versus the Asian
producers never adequately addressed
11
Kellogg Turnaround Management Conference
IBMT d R l IBM Turnaround Results
• Initial Results:
~ Spectacular. Share price from low of $10 in 1993 to
$124 currently
• Longer TermResults: • Longer Term Results:
~ Company has continuously transformed itself, growing its
services and software businesses, and shrinking its
hardware businesses hardware businesses
~ It has not let ?success? preclude it from taking periodic
retrenchment actions where needed
• Conclusions:
~ Growth in the services industry is slowing… Could
indicate additional restructuring to come
12
g
Kellogg Turnaround Management Conference
A l T d R l Apple Turnaround Results
• Initial Results:
~ Spectacular. Share price from low of $4 in 1997 to $20 in
2000, and now at $168
~ Principal initiatives were award-winning designs and p g g
substantially improved Mac operating system
• Longer Term Results:
~ Apple has invested in two huge initiatives both highly Apple has invested in two huge initiatives, both highly
successful:
– Its own B&M distribution – key to expanding Mac platform sales
– The music business, a transforming event for the music industry , g y
• Conclusions:
~ Continual innovation--the latest being the iPhone
13
Kellogg Turnaround Management Conference
T T d R l Tyco Turnaround Results
• Initial Results:
S t l Sh i f l f $9 i 2002 t $47 tl ~ Spectacular. Share price from low of $9 in 2002 to $47 currently
~ Multiple crises successfully addressed:
– Board and management credibility
Accounting and liquidity crises – Accounting and liquidity crises
– Legal and regulatory crises
• Longer Term Results:
~ Acquisition machine turned off; focus shifted to organic growth ~ Acquisition machine turned off; focus shifted to organic growth
and operational excellence
~ Decision made that best way to maximize shareholder value is to
break up the company p p y
• Conclusions:
~ Separation of $40 billion Tyco into three pieces should allow each
new company to better focus
14
p y
Kellogg Turnaround Management Conference
Key Turnaround Elements (in my experience)
1 S i i d d i i 1. Senior management passion and determination
2. Sell, sell, sell, explain, explain, explain it to the troops
3. Set the example. “Tone setters” are important
4. Benchmark everything
5. Take a highly structured approach
6. Measure and report status frequently 6. Measure and report status frequently
15
Kellogg Turnaround Management Conference
Role of Board of Directors (Governance)
in Situations Requiring Turnaround
• IBM:
~ After three years of precipitous deterioration, the board took drastic
action; new CEO and CFO appointed from outside the industry
• Chrysler:
~ One can conclude board wanted new CEO, but wanted an “orderly
transition”
• Apple: • Apple:
~ After two straight underperforming CEOs, board approached Steve Jobs
to return, which he agreed to do subject to major changes in board
composition
• Tyco:
~ Severe regulatory and legal situation forced the prior board to go outside
for new CEO, and dictated major change in board composition
16
Kellogg Turnaround Management Conference
• The World is Changing Rapidly
Wrap-Up
g g p y
1. Shifting Demographics
2. Emergence of China with others not far behind
3. Global Warming o a a i g
4. Transformation of American Business
• Steady-State is No Longer the Norm (if it ever really was)
• Turnarounds are Crucial Where Needed, But….
1. Cannot be considered to be “one time” events
2. Must be followed by continuous improvement approaches, and high levels
of strategic adaptability
3. Global competition is here to stay even if the lobbyists, politicians, etc., try
to stop it. Capital will flow to where it gets the best returns.
17
Kellogg Turnaround Management Conference
Economic Center of Gravity of the World
18
Kellogg Turnaround Management Conference
l h d Sovereign Wealth Funds
US Investment Activities:
Citigroup / Merrill Lynch / Morgan Stanley / Others Citigroup / Merrill Lynch / Morgan Stanley / Others
$21.5 Billion Invested in US in 2007 [A]
$22.6 Billion Invested in US in 2008 [A]
$(Billions)
Net Capital Outflows : 1995 2000 2006
Oil Exporting Countries 35 192 484
Eastern Asia 133 198 446
Rest of World 114 119 389
Total 282 509 1 319 Total 282 509 1,319
[A] Source: Wall Street Journal / Thompson Financial.
Source: McKinsey Global Institute.
19
Kellogg Turnaround Management Conference
Global Warming…AKA Global Crowding
Billions
10
12
Billions
o
n
6
8
d
P
o
p
u
l
a
t
i
o
2
4
W
o
r
l
d
0
1960 2000 2040
Year
20
Year
Kellogg Turnaround Management Conference
CORPORATE TURNAROUNDS
A A UE EA IO AND VALUE CREATION
Jerome York
CEO, Harwinton Capital LLC p
doc_838623333.pdf