Description
The Department of Business Management places specific emphasis on integrity and ethical behaviour with regard to the preparation of all written work to be submitted for academic evaluation.
MODELING BUSINESS TURNAROUND STRATEGIES USING VERIFIER
DETERMINANTS FROM EARLY WARNING SIGNS THEORY
by
Gerhard Holtzhauzen
Submitted in fulfilment of the requirements for the degree
PhD in Entrepreneurship and Small Business Management in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
UNIVERSITY OF PRETORIA
STUDY LEADER: Dr Marius Pretorius
Associate Professor
Date of submission
April 2011
© © U Un ni iv ve er rs si it ty y o of f P Pr re et to or ri ia a
DEPARTMENT OF BUSINESS MANAGEMENT
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Student
I (full names & surname): Gerhardus Theodoris Daniel Holtzhauzen
Student number: 25429711
Declare the following:
1. I understand what plagiarism entails and am aware of the University’s policy in this regard.
2. I declare that this final research proposal is my own, original work. Where someone else’s
work was used (whether from a printed source, the Internet or any other source) due
acknowledgement was given and reference was made according to departmental
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3. I did not make use of another student’s previous work and submitted it as my own.
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his or her own work.
Signature: Student
ii
The management dilemma emanates from the inadequacy and weakly detailed
turnaround models available for use by entrepreneurs and turnaround practitioners in
South Africa. To add to this problem previous legislation did not provide any
protection to the debtor in any turnaround attempts. New debtor friendly legislation
comes into effect in 2011. This research aims to identify the verifiers for signs and
causes of potential failure. The construct verifier determinant is theoretically defined
and included into a practical turnaround framework.
The primary objectives of the study are to:
? Identify and theoretically define early warning sign “verifier determinants”
? To design and include “verifier determinants” as an integral part of a
turnaround plan that supports corrective action.
The secondary objectives of this study are to:
? Research the current formal turnaround practices, which are applied in the
United States of America, Canada, Australia, Africa and informal practices
evident in South Africa. These findings are aligned to include the changes
in the applicable South African legislation.
? Design and propose a framework for use by turnaround practitioners and
entrepreneurs alike (conforming to new legislation).
? Identify which “verifier determinants” will confirm the early warning and
apply this outcome to the design of a reliable turnaround framework,
acceptable to all creditors and financial institutions.
? The final objective is to contribute to the South African entrepreneurial,
turnaround body of knowledge, and future formal studies in this
academically ill-represented field.
EXECUTIVE SUMMARY
iii
The effectiveness of business turnaround depends on the chosen strategy. The
literature review in this proposal deals with the following aspects; venture risk
propensity, early warning signs and failure models, legal constraints / opportunities
and finally turnaround. Current formal turnaround routes are, due to various
negativities and high costs, often not practical and a more informal approach is
favoured.
Methodology:
? Through comprehensive literature research to identify and theoretically define
“verifier determinants” that confirm the early warning sign and causes.
? Apply in depth interviews to identify the use of verifier determinants by
specialist turnaround practitioners.
? Confirm the actual use and value of the verifier determinants by experts and
practitioners during turnarounds, Design and include “verifier determinants” as
an integral part of a turnaround framework that supports rehabilitation of the
business.
? Compare the formal turnaround practices, which are applied in other
jurisdictions such as the United States of America, Canada, Australia, Africa
will be investigated.
? Adapt the framework cognisant of Chapter six of the companies Act, Act 71 of
2008 requirements and recommend to formal and informal turnaround
practices relevant in South Africa.
For this study, a leading commercial bank was selected as the organisation of
choice, due to the accessibility to information, research data, and turnaround
respondents. For selecting the case studies used for evaluation during interviews,
the researcher relied on businesses that were already subjected to BASEL II Accord
categorisation criteria and had ex post facto histories. The study applied two
research methods. An interview method was used to identify actual verifier
determinants used in practice. The interrogation of the participants was done, using
the Repertory Grid method, thus forcing choices and explanation of interviewee
reasoning.
iv
Participants were purposely selected to ensure representation within the identified
risk categories. As result, a comprehensive turnaround framework is compiled.
The study aligns these findings with the new South African legislation, and designs a
turnaround framework for use by turnaround professional practitioners,
entrepreneurs and affected persons alike. This study introduced a number of new
constructs that can be used in a business turnaround context, namely:
? business triage
? verifier determinant
? turnaround framework, introducing the constructs “business triage” and
“verifier determinant” a timeline schedule for executing the rescue process
This study highlighted the importance of establishing the true value of a business in
the early stages of the turnaround process. Verifiers can be used successfully to
determine the extent of the problem (“depth of the rot”), the difficulties involved and
reduce time requirements for analysis.
v
In appreciation for the assistance, support and involvement of the following people,
my sincere gratitude to:
My supervisor, Prof Marius Pretorius, who has always encouraged and supported
me. His trust, patience, professional guidance, and unbelievable dedication allowed
me to explore various possibilities. Words cannot express my appreciation for his
effort. My sincere gratitude
Mrs. Rina Owen for the professional assistance with the statistical analysis. You
were never to busy to assist – thank you.
My colleagues and friends with a special mention to Marie Strydom, who encouraged
and supported me at different stages of the research process, what a privilege to
work with you.
My wife Elsa, you are my life. My part time studies were possible because of you.
Whilst I was busy with this research project, your effortless way of coping with all the
added responsibilities and still maintaining good sense, is incomparable.
My children, Danita and Hanre. Two very special individuals who fill our lives with
endless joy and love. Thank you for your support; filing was never my big forte. To
my two sons in law, thank you for your unbelievable support.
Gloria in Excelsis Deo
Gerhard Holtzhauzen
Kempton Park
April 2011
ACKNOWLEDGEMENT
vi
Contents
CHAPTER 1: INTRODUCTION AND STUDY DESIGN
1.1INTRODUCTION................................................................................................................................ 2
1.2CURRENT METHODS OF BUSINESS ASSESSMENT................................................................... 7
1.2.1 DUE DILIGENCE ................................................................................................................. 7
1.2.2 BUSINESS REVIEW............................................................................................................ 7
1.2.3 VALUATION METHODOLOGY ........................................................................................... 8
1.3TURNAROUND TRIAGE................................................................................................................... 9
1.4MOTIVE FOR THE STUDY............................................................................................................. 12
1.5VERIFIER DETERMINANT THEORY............................................................................................. 14
1.6RESEARCH OBJECTIVE ............................................................................................................... 17
1.6.1 PRIMARY OBJECTIVES ................................................................................................... 17
1.6.2 SECONDARY OBJECTIVES............................................................................................. 18
1.7PROBLEM STATEMENT................................................................................................................ 19
1.8TERMS USED INTERCHANGEABLY IN THIS THESIS................................................................ 20
1.9REFERENCING TECHNIQUE......................................................................................................... 21
1.10 CHAPTER OUTLINE................................................................................................................ 22
2.1INTRODUCTION.............................................................................................................................. 25
2.2RISK PROPENSITY OF ENTREPRENEURS................................................................................. 25
2.3PSYCHOLOGY OF BUSINESS TURNAROUND........................................................................... 27
2.4RISK PROPENSITY OF VENTURES.............................................................................................. 30
2.5QUO VADIS?................................................................................................................................... 33
2.6TURNAROUND IN SOUTH AFRICA – STATUS QUO................................................................... 34
2.7CONCLUSION................................................................................................................................. 36
3.1INTRODUCTION.............................................................................................................................. 38
3.2DEFINITIONS OF ORGANISATIONAL DECLINE ......................................................................... 41
3.2.1 EARLY WARNING SIGNS................................................................................................. 41
3.2.2 DECLINE............................................................................................................................ 43
3.2.3 DISTRESS ......................................................................................................................... 44
3.2.4 FAILURE............................................................................................................................ 45
3.3EARLY WARNING SIGNS LEARNING.......................................................................................... 45
3.4BASEL EXPLAINED ....................................................................................................................... 47
3.5ACADEMIC DEBATE ON ORGANISATIONAL DECLINE............................................................. 50
3.6WARNING SIGNS IN THE LITERATURE ...................................................................................... 54
3.6.1 MANAGEMENT EARLY WARNING SIGNS...................................................................... 55
3.6.2 FINANCIAL WARNING SIGNS.......................................................................................... 57
3.6.3 BANKING WARNING SIGNS ............................................................................................ 58
3.6.4 OTHER EARLY WARNING SIGNS................................................................................... 59
3.7SUMMARY OF EARLY WARNING SIGNS .................................................................................... 61
vii
3.8INTRODUCTION OF VERIFIER DETERMINANTS........................................................................ 62
3.9CONCLUSION................................................................................................................................. 66
4.1INTRODUCTION.............................................................................................................................. 68
4.2BUSINESS TURNAROUND............................................................................................................ 70
4.3DEFINITION OF BUSINESS TURNAROUND................................................................................ 74
4.4STRATEGIC VERSUS TURNAROUND STRATEGY..................................................................... 79
4.5DEVELOPMENT OF TURNAROUND STRATEGIES..................................................................... 85
4.5.1 INTRODUCTION................................................................................................................ 85
4.5.2 HOFER’S CONTRIBUTION (1980).................................................................................... 87
4.5.2.1 Summary of Hofer’s contribution........................................................................................ 90
4.5.3 BIBEAULT’S CONTRIBUTION (1982)(reprint 1999) ......................................................... 90
4.5.3.1 Summary of Bibeault’s contribution.................................................................................... 91
4.5.4 HAMBRICK AND SCHECTER’S CONTRIBUTION (1983)................................................ 91
4.5.4.1 Summary of Hambrick and Schecter’s contribution........................................................... 92
4.5.5 O’NEILL’S CONTRIBUTION (1986)................................................................................... 92
4.5.5.1 Summary of O’Neill’s contribution...................................................................................... 93
4.5.6 ZIMMERMAN’S CONTRIBUTION (1989) .......................................................................... 93
4.5.6.1 Summary of Zimmerman’s contribution ............................................................................. 94
4.5.7 BOYLE AND DESAI’S CONTRIBUTION (1991)................................................................ 95
4.5.7.1 Summary of Boyle and Desai’s contribution ...................................................................... 95
4.5.8 ROBBINS AND PEARCE’S CONTRIBUTION (1992) ....................................................... 95
4.5.8.1 Summary of Robbins and Pearce’s contribution................................................................ 97
4.5.9 FREDENBERGER AND BONNICI’S CONTRIBUTION (1994) ......................................... 98
4.5.9.1 Summary of Fredenberger and Bonnici’s contribution....................................................... 98
4.5.10 AROGYASWAMY, BARKER AND YASAI-ARDEKANI’S CONTRIBUTION (1995) .......... 98
4.5.10.1 Summary of Arogyaswamy, Barker and Yasai-Ardekani’s contribution............................. 99
4.5.11 LOHRKE, BEDEIAN AND PALMER’S CONTRIBUTION (2004) ..................................... 100
4.5.11.1 Summary of Lohrke, Bedeian and Palmer’s contribution................................................. 100
4.5.12 SMITH AND GRAVES’S CONTRIBUTION (2005) .......................................................... 101
4.5.12.1 Summary of Smith and Graves’s contribution.................................................................. 101
4.5.13 SHEPPARD AND CHOWDHURY’S CONTRIBUTION (2005) ........................................ 102
4.5.13.1 Summary of Sheppard and Chowdhury’s contribution..................................................... 103
4.5.14 PRETORIUS (2008) ......................................................................................................... 103
4.5.14.1 Summary of Pretorius’s contribution ................................................................................ 106
4.6TURNAROUND PLANNING ......................................................................................................... 106
4.6.1 INVESTIGATION PHASE.................................................................................................. 109
4.6.2 THE PLAN........................................................................................................................ 109
4.7CONCLUSION............................................................................................................................... 112
5.1INTRODUCTION TO A LITERATURE REVIEW OF LEGISLATION........................................... 115
5.2CURRENT (HISTORIC) SOUTH AFRICAN COMPANIES ACT, ACT 61 OF 1973..................... 117
5.2.1 INTRODUCTION.............................................................................................................. 117
5.2.2 SECTION 311 COMPROMISE........................................................................................ 120
viii
5.2.3 SECTION 427 JUDICIAL MANAGEMENT ...................................................................... 121
5.2.4 RECKLESS TRADING..................................................................................................... 122
5.3INTERNATIONAL LEGISLATION ................................................................................................ 128
5.3.1 INTRODUCTION.............................................................................................................. 128
5.3.2 UNITED STATES OF AMERICA.................................................................................... 130
5.3.3 UNITED KINGDOM......................................................................................................... 131
5.3.4 SWITZERLAND................................................................................................................ 131
5.3.5 BELGIUM......................................................................................................................... 132
5.3.6 GERMANY....................................................................................................................... 132
5.3.7 SPAIN............................................................................................................................... 132
5.3.8 SWEDEN.......................................................................................................................... 133
5.3.9 FINLAND.......................................................................................................................... 133
5.3.10 ITALY ............................................................................................................................... 133
5.3.11 NETHERLANDS............................................................................................................... 134
5.3.12 FRANCE........................................................................................................................... 134
5.3.13 CANADA .......................................................................................................................... 134
5.3.14 AUSTRALIA ..................................................................................................................... 134
5.4DEVELOPING A BANKRUPTCY RULE IN SOUTH AFRICA...................................................... 135
5.5NEW NATIONAL LEGISLATION: COMPANIES ACT, ACT 71 OF 2008.................................... 140
5.5.1 INTRODUCTION.............................................................................................................. 140
5.5.2 FINANCIAL DISTRESS ................................................................................................... 142
5.5.3 RECKLESS TRADING UNDER THE NEW COMPANIES ACT ...................................... 143
5.5.4 BEGINNING, DURATION AND ENDING OF BUSINESS RESCUE............................... 145
5.6LIABILITIES OF THE TURNAROUND PRACTITIONER............................................................. 146
5.6.1 LIABILITY OF LEGITIMACY............................................................................................ 146
5.6.2 LIABILITY OF LEADERSHIP........................................................................................... 148
5.6.3 LIABILITY OF DATA INTEGRITY.................................................................................... 149
5.6.4 LIABILITY OF STRATEGY OPTIONS............................................................................. 150
5.6.5 LIABILITY OF RESOURCE SCARCITY.......................................................................... 151
5.6.6 LIABILITY OF INTEGRATION......................................................................................... 153
5.7CONSIDERATION OF A BUSINESS TURNAROUND PLAN. ..................................................... 154
5.8SUMMARY..................................................................................................................................... 158
6.1INTRODUCTION............................................................................................................................ 162
6.1.1 PROBLEM DEFINITION.................................................................................................. 164
6.1.2 OBJECTIVES OF THE RESEARCH STUDY.................................................................. 165
6.1.2.1 Primary objective.............................................................................................................. 165
6.1.2.2 Secondary objectives ....................................................................................................... 165
6.1.3 PROPOSITIONS.............................................................................................................. 166
6.1.4 LITERATURE RESEARCH.............................................................................................. 166
6.1.5 IDENTIFICATION OF EARLY WARNING SIGNS........................................................... 168
6.1.6 IDENTIFICATION OF TURNAROUND STRATEGIES.................................................... 169
6.1.7 SAMPLE SELECTION FOR THIS STUDY...................................................................... 170
ix
6.2SIX REAL-LIFE CASES................................................................................................................ 172
6.2.1 CHOICE OF ORGANISATION......................................................................................... 172
6.2.2 CASE SELECTION FOR THIS STUDY........................................................................... 173
6.3INTERVIEWS – REPGRID METHODOLOGY .............................................................................. 175
6.3.1 INTERVIEW WITH PARTICIPANTS................................................................................ 175
6.3.2 INTERVIEW PROCESS................................................................................................... 177
6.3.3 INTERVIEW PREPARATION .......................................................................................... 178
6.3.4 IDENTIFICATION OF VERIFIER DETERMINANTS ....................................................... 179
6.3.5 THE INTERVIEW PROTOCOL........................................................................................ 179
6.4QUESTIONNAIRE INSTRUMENT ................................................................................................ 180
6.4.1 QUESTIONNAIRE DESIGN............................................................................................. 181
6.4.2 DETERMINATION OF VALUES FOR THE QUESTIONS............................................... 182
6.4.3 PILOT TESTING THE QUESTIONNAIRE....................................................................... 183
6.5DETERMINATION OF VERIFIER DETERMINANTS.................................................................... 183
6.5.1 SAMPLING METHODS AND RESPONSE RATE........................................................... 183
6.5.2 EXPERT GROUP............................................................................................................. 184
6.5.2.1 Identification ..................................................................................................................... 184
6.5.2.2 Sample frame................................................................................................................... 184
6.5.2.3 Sample size...................................................................................................................... 185
6.5.3 INCUMBENT GROUP...................................................................................................... 185
6.5.3.1 Identification ..................................................................................................................... 185
6.5.3.2 Sample frame................................................................................................................... 185
6.5.3.3 Sample size...................................................................................................................... 185
6.6DATA............................................................................................................................................. 185
6.6.1 DATA COLLECTION........................................................................................................ 186
6.6.1.1 Data measurement and instruments................................................................................ 186
6.6.2 DATA ANALYSIS AND INTERPRETATION.................................................................... 187
6.6.3 FACTOR ANALYSIS........................................................................................................ 187
6.6.4 TEST OF SIGNIFICANCE (t-TEST)................................................................................. 188
6.6.5 ANALYSIS OF VARIANCE (ANOVA) .............................................................................. 188
6.6.6 VALIDITY AND RELIABILITY.......................................................................................... 189
6.6.7 WILCOXON...................................................................................................................... 191
6.7CONCLUSION............................................................................................................................... 191
7.1INTRODUCTION............................................................................................................................ 194
7.1.1 CASE RESEARCH RESULTS......................................................................................... 195
7.2EMPIRICAL FINDINGS: DESCRIPTIVE STATISTICS................................................................. 197
7.2.1 SAMPLE AND RESPONSE RATE .................................................................................. 197
7.2.2 DEMOGRAPHICS............................................................................................................ 197
7.2.3 FACTOR ANALYSIS........................................................................................................ 204
7.3EMPIRICAL FINDINGS: INFERENTIAL STATISTICS................................................................. 210
7.3.1 MULTI-WAY ANALYSIS OF VARIANCE (ANOVA)......................................................... 210
7.3.2 WILCOXON TWO-SAMPLE TEST AND KRUSKAL-WALLIS TEST............................... 215
x
7.4CHAPTER SUMMARY.................................................................................................................. 222
8.1INTRODUCTION............................................................................................................................ 224
8.2SUMMARY OF THE MAIN FINDINGS.......................................................................................... 225
8.3RESEARCH OBJECTIVE ............................................................................................................. 228
Primary objectives................................................................................................................................ 228
Secondary objectives........................................................................................................................... 228
8.4IN PURSUIT OF THE PRIMARY OBJECTIVE............................................................................. 229
8.5IN PURSUIT OF THE SECONDARY OBJECTIVE....................................................................... 230
8.6THE SETTING UP PHASE............................................................................................................ 232
8.6.1 INVESTIGATION.............................................................................................................. 232
8.6.1.1 Triage questions............................................................................................................... 233
8.6.1.2 Data integrity and verifier determinants ........................................................................... 234
8.6.1.3 Business review and verifier determinants ...................................................................... 234
8.6.1.4 Final decision ................................................................................................................... 235
8.6.2 PLANNING PHASE.......................................................................................................... 235
8.6.2.1 Turnaround plan............................................................................................................... 236
8.6.2.2 Recovery strategy formulation ......................................................................................... 236
8.6.2.3 Objectives in planning ...................................................................................................... 236
8.6.2.4 Decision outcome............................................................................................................. 236
8.7TURNAROUND EXECUTION PHASE.......................................................................................... 237
8.7.1 STRATEGIC RESPONSE................................................................................................ 238
8.7.2 FINANCIAL RESPONSE ................................................................................................. 239
8.7.3 OPERATIONAL RESPONSE........................................................................................... 240
8.7.4 EXECUTION OUTCOME................................................................................................. 240
8.8BENEFITS OF THE STUDY.......................................................................................................... 240
8.9LIMITATIONS OF THE STUDY..................................................................................................... 241
8.10 FUTURE RESEARCH ............................................................................................................ 242
8.11 CONCLUSION........................................................................................................................ 243
APPENDIX A: EARLY WARNING SIGNS CATEGORIES................................................................ 343
APPENDIX B: BANKING SIGNS....................................................................................................... 396
APPENDIX C: PHASES IN TURNAROUND STRATEGIC PROCESS............................................. 400
APPENDIX D: TURNAROUND RESEARCH SUMMARISED BY PANDIT ...................................... 455
APPENDIX E: REAL LIFE CASE EXAMPLE.................................................................................... 457
APPENDIX F: QUESTIONNAIRE ...................................................................................................... 478
APPENDIX G: COMPANIES ACT, ACT 71 OF 2008........................................................................ 485
APPENDIX H: COMPANIES AMENDMENT BILL............................................................................. 506
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LIST OF FIGURES
Figure 3.1 Process flow leading up to a turnaround 39
Figure 3.2 Early Warning Signs elements and synonyms. 42
Figure 7.3 Service Period in Banking 200
Figure 7.5 Respondents Age Distribution 203
Figure 4.1 The strategies companies chose (Hofer, 1980:25).............................................................. 88
Figure 4.2 Hofer’s four turnaround strategy indicators (Hambrick & Schecter, 1983:236) ................... 89
Figure 4.3 The successful turnaround process (Zimmerman, 1989:117) ............................................. 94
Figure 4.4 Environment/response matrix (Boyle & Desai, 1991:38)..................................................... 96
Figure 4.5 A model of the turnaround process (Robbins & Pearce, 1992:291).................................... 97
Figure 4.6 Business turnarounds (Arogyaswamy et al. (1995:494))..................................................... 99
Figure 4.7 An expanded model of the turnaround process (Lohrke et al., 2004:73) .......................... 100
Figure 4.8 Turnaround process (Smith & Graves, 2005:308)............................................................. 102
Figure 4.9 Key events and core concepts in turnaround/failure (Sheppard & Chowdhury, 2005:245)
............................................................................................................................................................ 103
Figure 4.10 Turnaround situations and their unique preconditions matrix (Pretorius, 2008:23)......... 104
Figure 4.11 Strategies and practices to respond to the turnaround situations (Pretorius, 2008:24) .. 105
Figure 5.1 Section 129 rescue process timeline (adapted from Samuelson, 2010) ........................... 147
Figure 5.2- Legal impact on turnaround process flow......................................................................... 158
Figure 6.1 Interaction between role players and the performance cycle............................................ 163
Figure 6.2 Broad research flow........................................................................................................... 167
Figure 6.3 The detailed research process of this study...................................................................... 168
Figure 6.4 Structure informing the appropriate case selection ........................................................... 173
Figure 6.5 Research design showing stratified case selection........................................................... 174
Figure 6.6 Face validity and reliability................................................................................................. 190
Figure 7.1 Levels of management ...................................................................................................... 198
Figure 7.2 Service period in banking .................................................................................................. 200
Figure 7.3 Service period in current position ...................................................................................... 202
Figure 7.4 Respondent age distribution.............................................................................................. 203
Figure 7.5 Highest educational qualification ....................................................................................... 204
LIST OF TABLES
Table 1.1 Comparison of medical triage (Moskop & Iserson 2007:279) and business triage (own
compilation) ........................................................................................................................................... 10
Table 4.1 The evolution of turnaround modelling, strategic thinking and theory .................................. 86
Table 5.1 Liability, knowledge and skills requirements (Pretorius & Holtzhauzen, 2008:103) ........... 118
Table 6.1 Group categories................................................................................................................. 170
Table 6.2 Case demographics used in this study ............................................................................... 175
Table 6.3 Case study interview record sheet...................................................................................... 179
Table 6.4 The summated Likert scale used in this study (adapted from Cooper & Schindler, 2003:308)
............................................................................................................................................................ 182
Table 7.1 Factor importance ratings and rankings in relation to expertise classification.................... 198
ii
Table 7.2 Factor importance ratings and rankings in relation to management classification levels of
management ....................................................................................................................................... 199
Table 7.3 Factor importance ratings and rankings in relation to classification of length of service in
banking................................................................................................................................................ 201
Table 7.4 Factor importance ratings and rankings in relation to classification of ............................... 202
Table 7.5 Comparison between education level and management level of respondents .................. 203
Table 7.6 Description of factors .......................................................................................................... 205
Table 7.7 Univariate statistics for factor analysis................................................................................ 205
Table 7.8 Ranking comparison of factors ........................................................................................... 206
Table 7.9 Factor correlations .............................................................................................................. 206
Table 7.10 Variables in the managerial verifier factor ........................................................................ 207
Table 7.11 Variables in the financial verifier factor ............................................................................. 208
Table 7.12 Variables in the strategic verifier factor............................................................................. 209
Table 7.13 Variables in the operational/market verifier factor ............................................................ 209
Table 7.14 Variables in the banking verifier factor.............................................................................. 210
Table 7.15 ANOVA for Factor 1: managerial verifier determinants .................................................... 211
Table 7.16 ANOVA for Factor 2: financial verifier determinants......................................................... 212
Table 7.17 ANOVA for Factor 3: strategic verifier determinants......................................................... 213
Table 7.18 ANOVA for Factor 4: operational/marketing verifier determinants ................................... 214
Table 7.19 ANOVA for Factor 5: banking verifier determinants.......................................................... 215
Table 7.20 Means procedure for the incumbent and expert groups................................................... 216
Table 7.21 Testing managerial verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 217
Table 7.22 Testing financial verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 218
Table 7.23 Testing strategic verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 219
Table 7.24 Testing operational/market verifier determinants for influence between the incumbent and
expert groups ...................................................................................................................................... 220
Table 7.25 Testing banking verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 221
1
CHAPTER 1
Introduction and study design
1.1 Introduction
1.2 Current methods of business assessment
1.2.1 Due diligence
1.2.2 Business Review
1.2.3 Valuation methodology
1.3 Turnaround triage
1.4 Motive for the study
1.5 Verifier determinant theory
1.6 Research objective
1.7 Problem statement
1.8 Interchangeable terms used in this thesis
1.9 Referencing technique
1.10 Chapter outline
2
Hofer (1980:19)
1.1 INTRODUCTION
Turnaround management, as observed in the South African context, is a new
management discipline that is currently being robustly pursued by both business and
academics alike. In this regard, the imminent date for implementation of the long-
awaited rescue legislation has created many opportunities, which have resulted in a
rush for the most favourable positioning in this ‘newborn’ industry in South Africa. In
a proposed turnaround, the first salient decision to make is to either follow the formal
route, as prescribed by legislation in “Business Rescue and Compromise with
Creditors” Chapter 6 of the Companies Act (Act 71 of 2008) or to adopt an informal
approach to turnaround. The Companies Act, Act 61 of 1973, will be referred to as
the old Companies Act, and the Companies Act, Act 71 of 2008, will be referred to as
the new Companies Act.
The alternative of an informal approach to turnaround is prescribed by the
International Association of Restructuring, Insolvency and Bankruptcy Professionals
INSOL principles, as discussed by the United Nations Commission of International
Trade Law’s Multinational Judicial Colloquium (INSOL Professionals, 1995:35), and
the so-called London Approach.
“No matter what the state of the economy, no company is immune from internal
hard times – stagnation or declining performance”.
CHAPTER 1
INTRODUCTION AND STUDY DESIGN
Interchangeable use of the following words, depending on the original author
referenced, to describe “company”:
Company = Business = Organisation = Venture = Business
3
This study uses early warning sign theory to establish the verifier determinants that
can guide entrepreneurs and turnaround practitioners in the critical role of timely
planning for the current rescue and future sustainability of an enterprise. Although
extensively explored later in this study, for now a verifier determinant is defined as a
confirmation of an early warning sign.
Chapter 6 of the new Companies Act formalises business rescue via a formal
commercial process that includes a consultative process and a moratorium period,
and that maximises the likelihood of the company’s continued existence on a solvent
basis. Current formal turnarounds are based on those methodologies and/or actions
that have already been recorded and tested in courts of law via Sections 311 and
427 of the old Companies Act and South African Insolvency Law, Act 24 of 1936.
Consequently, this research identifies and discusses a number of models, or rather
turnaround actions, of turnaround planning. Currently, there is little by way of
guidelines or recorded turnaround plans in South Africa that addresses “verifier
determinants”.
Bolton’s London Approach (2003:52) has its main application in the bank syndicates
of informal consortia that attempt to restructure a business’s debt. He makes it
known that this process is “confined to bank lenders, conducted in secret
negotiations, and generally involves both a temporary stay on bank debt payments
and a pro-rata debt forgiveness (‘hair-cut’)”. Iskander, Meyerman, Gray and Hagen
(1999:43) advise that the London Approach has been in use in the United Kingdom
since 1989 and has become well known across the globe.
Although the method for investigating a business is not prescribed or explained by
law, the requirement to “investigate” the affairs of the company is a clear rule of law.
For example, Section 141(1) of the new Companies Act reads as follows: “As soon
as practicable after being appointed, a practitioner must investigate the company's
affairs, business, property, and financial situation, and after having done so, consider
whether there is any reasonable prospect of the company being rescued.”
4
With very limited time available to construct a business rescue plan, the practitioner
will need to develop a unique modelling process in order to be in a position to
formulate the rescue plan. A turnaround practitioner will most probably be appointed
whatever strategic approach the entrepreneur (board of directors and/or
shareholders) decides on. The appointment (formal or informal) of a turnaround
manager is made primarily by the board of a company and is sanctioned by the
stakeholders.
Section 128 of Chapter 6 of the new Act describes the stakeholders as affected
persons who are shareholders, all classes of creditors’ organised labour, staff and
any other party that may be affected. In formal proceedings, stakeholders will also be
in a position to appoint or to remove a practitioner through a court-driven process.
The following are examples of theories and models that address the actions of
turnaround practitioners:
Eisenhardt (1989a:58) encapsulates the agency theory. Agency theory concerns the
relationship between a principal and his/her agent. Effective turnaround
management requires quick decision making in the early stages of distraught
circumstances. The appointment of a turnaround practitioner is done with the
expectancy of a close relationship between a principal (shareholder/s, director/s
and/or stakeholder/s) and a manager (in a turnaround context this is the turnaround
practitioner). Eisenhardt (1989c:544) discusses the making of fast strategic decisions
in high-velocity environments. However, without a sound strategy, Hedley (1976:2) is
convinced that corporate survival itself may be called into question. It can thus be
deduced that the practitioner in his/her role as appointed agent must be in a position
where he/she is mandated by the principle of taking quick and decisive decisions.
This will include formulating short and medium-term strategies.
Hofer (1980:19), and Hambrick and Schecter (1983:235), on the other hand, debate
the steps taken at the commencement of a turnaround. They argue that a turnaround
starts with cost-cutting exercises, although they omit to discuss the very first step in
a turnaround event, that of analysing the business.
5
Other researchers and authors, such as O’Neill (1986), Boyle and Desai (1989,
1991), Gopal (1991),Hubbard, Lofstrom and Richard (1994), Oliver and Fredenberg
(1997), Castelli and Kontoyianni (1999), Theriot, Roopchand, Stigter and Bond
(2000),Collard (2002) and Fetterman (2003), concentrate on the analysis phase as
the initial step in the process of turnaround. They promote the importance of
understanding the turnaround event before embarking on steps commonly referred
to as “stopping the bleeding”. Bruton, Ahlstrom and Wan (2001:148) argue that the
business must stop the bleeding through retrenchments and immediate “cut-backs”.
Pearce and Robbins (1993:624) agree that stabilising the business (stopping the
bleeding) is the first stage of turnaround. Moreover, they emphasise the second
phase as being the “recovery response”. This recovery response in the turnaround
process highlights the effective correction of the root causes of the decline.
Meanwhile, Chapman (2003) criticises the relatively short period of one month
available to Australian companies to come up with a turnaround plan. This time
frame is closely related to the length of time prescribed for the rescue process (25
days) in South Africa, as described in Chapter 6 of the new Companies Act. Al-
Shaikh (1998:81) ponders on the steps in turnaround as being firstly the conducting
of feasibility studies and then securing support from interested authorities, such as
lenders and trade creditors.
The subtle balance required in the initial stage of a turnaround is critical for
managing a chaotic environment. Moncarz and Kron (1993:180) advocate the
identification of problem areas as the first step to turnaround. Balgobin and Pandit
(2001:304) state that the four elements aiding a successful turnaround strategy are:
? situation analysis
? gaining control
? managing shareholders
? improving motivation.
6
Cross (2002:41) advocates the initial analysis of a company’s performance
concerning its finances, operations and market. Fetterman (2003:11), Glantz
(2003:323), Scherrer (2003:27), Lohrke, Bedeian and Palmer (2004:172) and
Burbank (2005:56) agree that the first stage of a turnaround is a situation analysis.
Cole (1994:48) underpins the importance of data integrity in the initial stages of a
due diligence (see section 1.2.1).
Cole (1994:48) states that it is crucial to get entrepreneurs to understand that
providing high-quality information will speed up the process. This study concentrates
on the validation of the problem areas, or warning sign areas, identified. Gilmore and
Kazanjian (1989:81) distinguish between group and individual decision making. From
a turnaround perspective, both these types will have value, but as most turnarounds
require an autocratic approach the individual decision types will have more influence.
In the analysis phase, selecting the process format of the analysis is the most crucial
decision in a turnaround event: this decision is whether to attempt the turnaround or
not.
The turnaround practitioner in South Africa must, within 25 days of being appointed,
construct a turnaround plan, which must be adopted by all stakeholders within ten
days of publication of the plan. Figure 5.1 in chapter 5 illustrates the timeline
requirements of the Act. In this regard, Merrifield (1993:384) proposes a disciplined
analytical process before a turnaround process can commence. Although traditional
methods of analysing a business should suffice, the time constraint is an important
consideration.
The intention of this research is to design and develop a framework to enable
practitioners to function within this time constraint, as well as the prescriptions of
the new Companies Act.
7
1.2 CURRENT METHODS OF BUSINESS ASSESSMENT
1.2.1 DUE DILIGENCE
The most common and most generally accepted method for analysing and testing
the feasibility of a business is perhaps the “due diligence” method. A due diligence
process is used by business analysts to analyse and test the assiduousness of a
business venture and is the process predominantly applied in merger and acquisition
considerations. Cole (1994:46) lists the following critical due diligence elements:
? successor environmental liability
? integrity of business’s historical financial statements
? adequacy and sufficiency of assets
? intellectual property, patents and know-how
? technical expertise
? quality of all personnel and key management
? quality of projected cash flow and after-tax earnings
Hubbard, Lofstrom and Richard (1994:1) confirm the importance of a due diligence
process, but warn that companies have little guidance on what constitutes a good
due diligence process and are restricted to their own experience. It is imperative that
the due diligence process is done within a very short period as, in a turnaround
event, very little time is available to “fish” for information.
1.2.2 BUSINESS REVIEW
Akason and Kepler (1993:38) have set some guidelines for a management review,
which are also applicable to turnaround planning. They ponder on their finding that a
business review “goes far beyond mere due diligence processes” and differentiate a
due diligence from a business review by calling a due diligence a “cookbook
approach” or a reactive process using a checklist indicating "yes" or "no" decisions.
8
However, Akason and Kepler (1993:38) opines that a business review, if correctly
executed, covers everything in the business it is a “proactive process that generates
a live, working document that can be used in a value-creating manner” and can be
used as a management tool in the future.
1.2.3 VALUATION METHODOLOGY
The two most important questions that need to be answered when a turnaround
event occurs are the following:
1. In a distressed business scenario, should a turnaround be attempted or not?
2. In a distressed business scenario, will the turnaround have the desired
results?
Hence, the most important decision the practitioner must consider is whether there is
a reasonable prospect for continuing with the business. Accordingly, after a
turnaround practitioner has been appointed he/she must establish the feasibility of
turning the business around.
Chapter 6 of the new Act, requires the turnaround practitioner to “consider whether
there is any reasonable prospect of the company being rescued”
(researcher’s emphasis).
The answer to considering a “reasonable prospect” lies in evaluating the business as
a going concern. Grounded theory by Hershkowitz (2004) was used to investigate
various valuation methods and their applicability. Referring back to the two questions
mentioned at the beginning of this section, a solvency (liabilities exceeding assets)
versus liquidity (non-cash working capital cycle) or cash flow (ability to generate cash
to meet short-term obligations) valuation is suggested to satisfy question 1. Bolton
(2003:43) discusses the significance of a valuation as the first stage of a turnaround
event and identifies some important “transformation” steps in an attempt to preserve
the business:
9
? Preserve the liquidation value of the business.
? Maintain the going-concern value of the business.
? Form committees to conduct restructure negotiations.
? Negotiate new funds.
? Take note of modern reorganisation law.
The main inference from Section 141(1) of the new Companies Act is that the
turnaround practitioner has to confirm (with the stakeholders) the status (solvency
and liquidity position) of the business, regardless of which route he/she
anticipates embarking upon. Briggs (in Cross 2002:44) confirms that in a
turnaround situation there cannot be any sacred cows. She concludes with a
question to the entrepreneur: “Are you willing to sign a document that states
that everything is on the table? If not, I will leave now and you are on your
own.” In closing, the above methods are processes that have been tested and
proven in various applications but are now being applied to a turnaround event.
The main constraint of the measures discussed above is time – they are excellent
processes if the analyst has the luxury of time. In conclusion, it should be stated
that turnaround modelling should address, as its main departure point, the time
limitations imposed by Chapter 6 of the new Act.
1.3 TURNAROUND TRIAGE
In medical terms, Moskop and Iserson (2007:276) describe three basic steps for
traige:
? The scarcity of resources which will prompt a process of triage.
? The triage officer assesses patient’s medical needs by conducting a brief
examination.
? The triage officer then uses a set of criteria to implement a priority treatment
plan.
10
Moskop and Iserson (2007:276) conclude that, if the triage officers use an
established plan, it confirms that a group of persons must have developed the plan.
Crawford (1994:27) supports the triage approach when he states that the turnaround
practitioner must perform an on-site “brutally frank assessment of the company’s
condition”. He refers to this action as “on-site triage”.
This study refers to this very first stage in a turnaround situation as “turnaround
triage”. The term ‘triage’ has its foundation in World War I, and is derived from the
French word trier meaning ‘to sort’. As explained by Moskop and Iserson (2007:275),
triage was used exclusively by the medical fraternity. However, medical triage has a
very close affiliation to turnaround triage. Table 1.1 illustrates the difference between
medical triage and business triage as identified by this study.
Table 1.1 Comparison of medical triage (Moskop & Iserson 2007:279) and business triage (own
compilation)
MEDICAL versus BUSINESS TRIAGE
• MEDICAL TRIAGE
• a) Those patients who can be savedbut whose lives are
inimmediate danger, requiring treatment immediately or
within a fewhours (redtriage tag: “immediate”; priority
1)
• b) Those patients whose lives are not in immediate
danger but who need urgent but not immediate medical
care (yellowtriage tag: “delayed”; priority 2)
• c) Those patients requiring only minor treatment (green
triage tag: “minimal”; priority 3)
• d) Those patients who are psychologically traumatized
andmight need reassurance or sedation if acutely
disturbed (no specific triage tag)
• e) Those patients whose condition exceeds the available
therapeutic resources, who have severe injuries such as
irradiation or burns to such an extent and degree that
they cannot be saved inthe specific circumstances of
time andplace, or complex surgical cases that oblige the
physician to make a choice between them and other
patients (black triage tag: “expectant”; no priority)
• This last category, “expectant,” which encompasses
those who are dead or who are “beyond emergency
care,” carries the most emotional and ethical baggage for
individuals doing triage.
• BUSINESS TRIAGE
• a) Those businesses who can be saved but whose
sustainability is under immediate threat , (financially
distressed) requiring turnaround immediately or within a
limited time span (redtriage tag: “immediate”; priority 1)
• b) Those businesses whose sustainability is not under
immediate threat(financial distressedwithin next six
months) but who need urgent intervention but not
immediate turnaround(yellow triage tag: “delayed”;
priority 2)
• c) Those businesses requiring only minor intervention
(green triage tag:“minimal”; priority 3)
• d) Those businesses who are still profitable but
psychologically traumatizedandmight need new strategic
direction–informal turnaround(no specific triage tag)
• e) Those businesses whose financial distress exceeds the
liquidity and solvency tests , to such a degree that they
cannot be saved in the specific circumstances of time and
place (gone concern) (black triage tag: “expectant”; no
priority)
• This last category, “expectant,” which encompasses those
businesses who are gone concerns who are beyond
turnaround intervention.
11
Answers to the following three basic questions, in this specific order, are the most
important aspects to consider when contemplating a business turnaround:
? Is there a business? (Harker and Sharma, 2000:41)
? How sick is the business? (Castogiovannii, Balga and Kidwell, 1992:27)
? Is the business worth saving? (Quinn, Mutzberg and James, 1988:680)
Pretorius (2008a:23) discusses Porter’s five strategic forces in a turnaround context.
Figure 1.1 illustrates his views on turnaround theory, where turnaround situations are
depicted in the four quadrants.
Pretorius approaches the turnaround situation by placing the business under
consideration in one of the quadrants. The shaded oval drawn across the four
quadrants illustrates the concept of “business triage”.
The shaded area represents the turnaround area, which is to a greater or lesser
extent evident in each quadrant. To give an example, in the ‘performing well’
quadrant, the obvious mistake would be to ignore early warning signs. Who would
expect a business to experience distress in this quadrant?
Nevertheless, a turnaround intervention may at some time be necessary in this
quadrant, as such businesses are prone to overtrading. Overtrading is one of the
most dangerous situations a business can find itself in.
12
Figure 1.1 Verifier strategic practices associated with generic turnaround strategies and triage
(adapted from Pretorius, 2008:24)
1.4 MOTIVE FOR THE STUDY
The motive for this research vests in management’s dilemma, which the board of a
company may resolve according to Section 129(1) of the new Companies Act, that
is, that the company should voluntarily begin business rescue proceedings. If
management fails to adopt a resolution in this regard and if the board of a company
has reasonable grounds to believe that the company is financially distressed, the
board must set out its reasons for not adopting a resolution in terms of Section
129(7) of the Act.
The general deduction from this sequence of events is that entrepreneurs
(management and/or directors) will be forced to continuously analyse their
businesses.
Strategic practices associatedwith GenericTurnaround
Strategies
GrowthStrategy:
Pursue sales (penetrate andnew
markets)
Maximize market share
EntrenchCompetitive Advantage
Optimise capacity
Forcedinnovation:
Strategyrevision,
Boosting revenues,
Findnewproducts,
Alternative markets,
Alternative positioning
Efficiencystrategy:
Protect Competitive
Advantage,
Cost cutting,
Generate cash
Forceddifferentiation:
Product differentiation,
Business diversification,
Acquisition, merger
Formal – S155
Liquidation.
Circledarea represents turnaroundintervention: process of “Triage” to be implemented
Performing
well Distress
Under performance Crises
13
Currently, apart from the prescriptions of Chapter 6 of the new Companies Act, there
is no acknowledged turnaround model available to entrepreneurs and turnaround
practitioners that is appropriate for application within the time constraints of the Act.
To add to this problem, legislation in its current and future form does not provide
entrepreneurs with any protection concerning informal turnaround attempts. Chapter
6 of the new Companies Act, Act 73 of 2008, addresses the problem of formal
turnarounds, but this new Act still requires testing in the courts.
Section 128(b) (i–iii) of the Companies Act describes business turnaround as follows:
Section 128(b) "business rescue" means proceedings to facilitate the
rehabilitation of a company that is financially
-
distressed by providing for—
(i) the temporary supervision of the company, and of the management of its
affairs, business and property;
(ii) a temporary moratorium on the rights of claimants against the
company or in respect of property in its possession; and
(iii) the development and implementation, if approved, of a plan to
rescue the company by restructuring its affairs, business, property,
debt and other liabilities, and equity in a manner that maximises
the likelihood of the company continuing in existence on a
solvent basis or, if it is not possible for the company to so continue in
existence, results in a better return for the company's creditors or
shareholders than would result from the immediate liquidation of the
company.
This gives rise to the question: How can entrepreneurs react to early warning signs
in order to attempt corrective action and effect turnarounds in time, and if need be,
as per Section 129(1) of the Act, appoint a professional turnaround practitioner?
When a turnaround event in terms of Chapter 6 of the Act occurs, the dilemma facing
the entire body of role players and/or stakeholders is whether to commence with a
turnaround of the affected business or not.
14
Referring back to the three crucial questions stated earlier, the following questions
have to be answered:
? Is there a business?
? How sick is the business?
? Is the business worth saving?
Brenneman (1998:162) adds another valid question to the three questions above,
asking: “When did it last make money?”. The primary objective of a business venture
is to be profitable, thus to make money. In this regard, the affected persons will firstly
be management, as they have to decide on what Brenneman (1998:165) calls a “go
forward plan” or turnaround strategy. Moreover, all the creditors (all categories) will
have to be convinced that the business has the potential to survive after informal, or
formal, proceedings in terms of Chapter 6 of the Act.
Finally, if the feasibility of attempting a turnaround is challenged, the courts will have
to be satisfied that a business can in fact be turned around, before ruling in favour of
the turnaround.
1.5 VERIFIER DETERMINANT THEORY
Correctly identifying the causes of a business’s decline through the application of
early warning sign theory is of the utmost importance in effectively addressing the
question of whether or not to continue with a business turnaround strategy. At this
stage, the suggestion is that the turnaround decision is one of the very first steps in
the turnaround process.
The focus, however, is on the development of a plan by practitioners in conjunction
with management. This plan should be specifically designed to reorganise the
business.
15
Less evident are the measures to confirm the signs once identified. These events
are identified as “verifier determinants” (the construct). At this stage, this is still an
unfamiliar concept and is therefore explored by this study.
This study pursued the following course of action:
1. Theoretically define the construct “verifier determinant”.
2. Identify verifier determinants that will authenticate early warning signs in a
specific time frame.
3. Strategically identify and action corrective measures.
Propose concepts to be included in the turnaround model.
Figure 1.2 Verifier determinant theory as applied in this study
The importance of this study is emphasised by the uncertainties that the following
three statements present:
1. Entrepreneurs are not likely to know what the construct “verifier determinant”
is or whether it will confirm a specific set of early warning signs.
Earlywarning wign
identified
Verifier determinant
No
Yes
Focus of the study
Confirmthe early warning sign
No turnaround
Turnaround
situation
Note: Verifier determinants:
Confirms the causes of decline
Confirms the warning signs are correct
Confirms the issues to inform turnaround situations
16
2. The question to be asked is whether there is a common understanding among
lending practitioners (mainly bankers) of the construct “verifier determinant”?
3. Are verifier determinants in evidence in distressed businesses to initiate or to
take corrective action in good time? Measured by the number of businesses in
liquidation, the answer is clearly “no”.
Verifier determinants, once identified, impact significantly by authenticating warning
signs and can be used progressively in the diagnostic phase of the turnaround
process. The effectiveness of business turnarounds depends on the strategy chosen
and the verifier determinants will be an important strategy component.
The literature review in this research deals with the following aspects: early warning
signs, failure models, legal constraints/opportunities and, finally, turnaround. The
empirical study aims to propose a functional turnaround model as a basis for
attempting turnarounds. Figure1.3 outlines the topics discussed in each of the
chapters in this study.
Thus, chapter 2 deals with the high-risk propensity which is a characteristic of
entrepreneurs. Chapter 3 deals with the available literature on early warning signs;
this was scrutinised to ensure that all current and available literature is included.
Subsequently, the literature and theory on turnaround processes, strategy and
actions are investigated in chapter 4. Finally, chapter 5 covers the legal systems of
foreign countries, such as the United States of America and the European Union.
Accordingly, the laws of these countries and their interpretation are scrutinised.
Figure 1.3 graphically displays the process followed in the literature research and in
the chapter layout.
17
Figure 1.3 Literature chapters and topics covered in this study
1.6 RESEARCH OBJECTIVE
The following objectives of this research are outlined:
1.6.1 PRIMARY OBJECTIVES
? Identify and theoretically define early warning “verifier determinants”.
? Identify and include verifier determinants as an integral part of a
turnaround plan that supports corrective action.
Verifiers Definition
Chapter 1
EarlyWarning Sign and
Verifier Identification
Chapter 3
TurnaroundBusiness Plan
Strategic content
Turnaroundtheory
Framework
Chapter 4
MODEL DESIGN
RESEARCH
Turnaround
Legal considerations
Chapter 5
TurnaroundBusiness Plan
Implementationand
Execution
Riskpropensity of
entrepreneurs
Chapter 2
18
1.6.2 SECONDARY OBJECTIVES
? To research the current formal turnaround practices for verifiers, including
those of the United States of America, Canada, Australia and Africa, and
the informal practices evident in South Africa. These findings are aligned
to include the changes in the applicable South African legislation.
? To design and propose a framework for use by turnaround practitioners
and entrepreneurs alike.
? To identify which verifier determinants will confirm the early warning sign,
and apply this outcome to the design of a reliable turnaround framework
that is accepted by all creditors and financial institutions.
? To contribute to the South African entrepreneurial, turnaround fraternity,
and to future formal studies in this academically ill-represented field.
The research conducted an investigation into various early warning signs,
turnaround management, and legal constructs and elements. One of the major
changes in legislation that needs to be considered here is that the turnaround of a
troubled business must first be attempted before winding up or liquidating the
concern. King (2009) includes this provision in the King III report on corporate
governance.
Although not enforceable by law, the King II and III reports are considered the rule
for corporate governance in South Africa (Lawlor and Haynes, 2003:13). A
suggestion is that the new legislation follows a model such as Chapter 11
proceedings in the United States of America (Corporate Law Reform, 2004:42). The
intention to follow international legislation is manifested largely in Chapter 6 of the
Act. The main objective of new legislation must be that the entrepreneur and the
turnaround practitioner develop a turnaround plan that is specifically designed to
reorganise and rescue the business.
1.7 PROBLEM STATEMENT
The possibility of business failure in a high
entrepreneurs frequently need to face.
30 to 80% of all new businesses fail within two years of inception.
however, not limited to the first two years, as it can happen at any time during the
business’s life cycle. The early warning signs
the main topic of research in this area
Literature on early warnings signs
Nelson (1987), Boyle and Desai (1981), Scherre (2003),
the warning signs. What need
this study a ‘verifier determinant
cause of decline or distress
determinants confirm the associated causes and e
decline. Once identified and
turnaround situation. Ventures have different risk propensities and the question is
whether turnaround practitioners or
to confirm the distress causes
Figure 1.4 The role of verifier d
19
PROBLEM STATEMENT
The possibility of business failure in a high-risk environment is a fact
entrepreneurs frequently need to face. Pretorius (2004:260) mentions that between
of all new businesses fail within two years of inception.
ited to the first two years, as it can happen at any time during the
The early warning signs of business failure were and still are
in this area (see also section 3.2).
Literature on early warnings signs indicates that researchers, such as
Nelson (1987), Boyle and Desai (1981), Scherre (2003), also identified
What needs to be confirmed is the root causes of the decline.
verifier determinant’ is defined as the ‘root’ indicator that validates the
cause of decline or distress that underscores the early warning sign
the associated causes and early warning signs of business
dentified and confirmed, the verifier determinants inform the
Ventures have different risk propensities and the question is
turnaround practitioners or entrepreneurs can employ verifier determinants
causes in the businesses.
determinants in a turnaround situation
risk environment is a fact that
Pretorius (2004:260) mentions that between
of all new businesses fail within two years of inception. Decline is,
ited to the first two years, as it can happen at any time during the
were and still are
such as Lorange and
also identified the causes of
the root causes of the decline. In
indicator that validates the
underscores the early warning sign These verifier
rly warning signs of business
the verifier determinants inform the
Ventures have different risk propensities and the question is
verifier determinants
20
The entrepreneur’s enterprise is more vulnerable due to a lack of understanding of
the real value and efficient use of a well-constructed turnaround plan. This absence
of a turnaround plan inevitably leads to default on financial commitments and
possible business failure. Creditors place huge reliance on turnaround plans, as
these plans will determine future support. However, if the compiler is not careful,
under current legislation a proposed turnaround plan can be construed as an act of
insolvency. In view of this, the changes in South African corporate legislation are
expected to address some of these issues, but entrepreneurs and/or turnaround
practitioners need to create “faith” in the concept of a turnaround plan.
A sound knowledge of the financial statements, the business’s tax position and any
failed strategy is vital for achieving turnaround success. Hence, verifier determinants
confirm the integrity of the data to be used in a turnaround.
1.8 TERMS USED INTERCHANGEABLY IN THIS THESIS
Financial distress – distress, decline, failure
Turnaround – rescue, realignment, restructure, reorganisation, renewal
Stakeholders – shareholders, creditors, organised labour
Strategic planning – strategy-making, strategy format
Turnaround plan – the plan, strategic plan, rescue plan
Turnaround situation – turnaround event
Situation analysis – due diligence processes, feasibility, business review,
business audit, analytical process
Early warning signs – causes of decline, root causes of failure, variables of
success and/or decline
Business – company, venture, business, organisation
Problem statement: To identify verifier determinants that will confirm early
warning signs and causes, and inform turnaround plans through enhanced
situation analysis.
21
1.9 REFERENCING TECHNIQUE
The Harvard referencing system is used throughout this study.
22
1.10 CHAPTER OUTLINE
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Risk propensity of
entrepreneurial
ventures
Academic debate of
identification of
business decline
Theoretical
development on
turnaround
management
A literature review
on turnaround
legislative measures
This chapter explains the risk
propensity of entrepreneurs and their
physiological reaction to business
turnaround events. The chapter
concludes with a brief overview to
the South African status quo on
turnarounds.
This chapter outlines and explains
the evolvement of warning signs and
its field of application. Literature
content illustrates the debate on
business failure and decline.
The theoretical development flow of
turnaround theory and philosophy,
and the subsequent modelling of
turnaround processes are embodied
in this chapter.
This chapter deals with international
trends in business rescue legislation.
Discussions include the old and new
South African legislation. The rescue
requirements of Chapter 6 of the
Companies Act, Act 71 of 2008, are
discussed.
23
Chapter 6
Chapter 7
Chapter 8
Research design
and methodology
Research findings
Conclusion
This chapter explains the research
problem, the objectives of the study
and the hypotheses. Background to
the case study selection and the
questionnaire design is given.
This chapter reports the empirical
findings from the data compiled from
the questionnaires. The statistical
analysis is explained in detail
against the backdrop of
demographical information and
more descriptive inferences.
The closing chapter proposes a
framework for turnaround modelling,
based on the empirical findings. The
research is concluded by revisiting
the hypothesis and research
objectives. Future research areas
are also proposed.
24
CHAPTER 2
Risk propensity of entrepreneurial ventures
2.1 Introduction
2.2 Risk propensity of entrepreneurs
2.3 Psychology of business turnaround
2.4 Risk propensity of ventures
2.5 Quo vadis?
2.6 Turnaround in South Africa: status quo
2.7 Conclusion
25
Barker (2005:44)
2.1 INTRODUCTION
This chapter explains the risk propensity of entrepreneurs and their psychological
reaction to business turnaround events. The chapter concludes with a summarised
overview of the South African status quo on turnarounds.
2.2 RISK PROPENSITY OF ENTREPRENEURS
Business ventures are faced with the constant risk of decline. When the business is
deteriorating, entrepreneurs often do not understand the problem, nor do they take it
seriously, consequently, they do not take sufficient steps to address the problems.
Counterfactual thinking and cognitive studies should be applied to the identification
of deteriorating business activities. In addition, the psychological effect of
deterioration, failure and turnaround is increasingly being incorporated into
entrepreneurial cognitive studies. Sutton and Callahan (1987:412) investigated and
discussed the spoilt image of the business and its management as a result of
bankruptcy. For any economy, it is important that entrepreneurs re-enter the market.
In a Boston Consulting Group Report, Bose and Pal (2002:3) conclude that
“entrepreneurs who can transcend failure and learn from their experience have
proven to be precious assets to their country’s economy: they drive growth and they
create employment, and they do this more successfully than entrepreneurs who
have never failed”.
“When a company is in trouble, finding and understanding the sources of problems
is not as simple as looking into a mirror.”
CHAPTER 2
RISK PROPENSITY OF ENTREPRENEURIAL VENTURES
26
Amaral and Baptista (2007:2) state that an entrepreneur who re-enters the business
arena after a business failure (or for any other reason) is defined as a “habitual”
entrepreneur. According to these authors, a “…habitual entrepreneur is an individual
who has established and/or inherited and/or purchased more than one business, as
opposed to novice entrepreneurs who have established, inherited and/or only
purchased one business…”.
The concept of “risk taking” is closely associated with entrepreneurial behaviour. The
entrepreneur’s appetite to take on risk is illustrated through his/her management and
leadership styles. Hatch and Zweig (2000:69) ponder the entrepreneur’s
rationalisation of high risk taking, and their diminished perception of the risk.
Wickham (2004:17) indicates that entrepreneurial characteristics include
? the need for autonomy
? the need to be in control of a situation
? a desire to face risk
? creativity
? a need for independence
? the desire to show leadership qualities.
The process of entrepreneurship follows the various stages of the business life cycle.
Researchers, such as Flynn and Forman (2001:43), Terpstra and Olson (1993:14),
Kazanjian and Drazin (1990:138), and Platt and Platt (1994:117), conclude that an
array of different problems can face organisations in various stages of their life cycle.
Following the business life cycle, it is clear that the entrepreneur will be faced with
decline and/or failure somewhere in this cycle. Flynn and Forman (2001:54) argue
that business failure relates to the entrepreneur’s inability to adapt to the various
stages of the business life cycle. Researchers such as Altman (1983:18) and
Amburgey, Kelly and Barnett (1993:69) conclude that, in their research’s data
distribution with respect to the age of the business, the findings clearly indicate that
the risk of failure is business age dependant and that more than 50% of all failures
occur in the first five years.
27
Argenti (1976:15) identifies three categories of company:
? Type I businesses are launched but never take off and fail within a few years.
? Type II businesses are launched and soar to incredible levels and then
collapse.
? Type III businesses are launched and mature, and then trade optimally over
several years.
Amaral and Baptista (2007:4) argue that the entrepreneur’s survival is not dependant
on the business’s successes and/or failures and draw a distinction between business
survival and entrepreneurial survival. Holtz-Eakin, Joulfaian and Rosen (1994:53)
examined the phenomenon that some individuals/entrepreneurs survive and others
do not. Accordingly, they conclude that the undercapitalisation of ventures plays an
integral part in the survival of entrepreneurs. Lohrke, Bedeian and Palmer (2004:63)
discuss the important role of top management in periods of decline. They argue that
for management to be successful in situations of decline, they should establish the
cause of the performance lapse “...quickly and accurately...”. Identifying these
causes correctly will determine the decisions made for prompt recovery or
turnaround.
To ensure survival, entrepreneurs must be properly equipped to adopt a strategic
turnaround approach. Azoulay and Scott (2001:340) argue that entrepreneurs will
find it difficult or will be unable, to change their routines unless they firstly recognise
those routines as being imperfect. It is important that these imperfections should be
recognised in good time to ensure that the entrepreneur can still change them.
2.3 PSYCHOLOGY OF BUSINESS TURNAROUND
In the South African context, the entrepreneur usually “fails” in the business.
Moreover, the way creditors secure themselves inevitably leads to the entrepreneur
also being sequestrated as a result of mandatory personal suretyships.
28
The rehabilitation process, often protracted over ten years, effectively removes the
entrepreneur from the business scene. Pretorius (2004:261) argues that the
entrepreneur probably never contemplates failure, especially when starting a new
venture. Entrepreneurial studies done by Forbes (1999:415) and Gaglio (2004:535)
tend to focus on venture creation, opportunity identification and positive change and
neglected decline and distress as part of the business cycle. Owing to the stigma of
bankruptcy and failure, distress is often concealed from all the stakeholders. Argenti
(1997:442) identifies five categories of stakeholder in debating stakeholders’
approach to business; these are, investors, employees, customers, suppliers and the
relevant community. According to Sutton and Callahan (1987:412), demise cannot
be concealed for long and the facts can only be concealed for a limited period.
Unfortunately, concealing the facts will lead to less time and increased difficulty in
effecting a successful turnaround. It also has a serious psychological impact on the
entrepreneur, directors and management of the distressed business.
Argenti (1997:445) is of the opinion that stakeholder theory of running a business for
the benefit of all stakeholders is an impossible dream, a philosophically
misconceived idea. This is contrary to what the South African government is trying to
achieve by involving all role players (“shareholders” according to the Argenti
definition) in the rescue of a business. Midanek (2002:22) argues that an
entrepreneur’s ego sometimes gets in the way. However, to rise to a successful level
of top management or entrepreneurship requires confidence and a good measure of
ego strength. Midanek ponders on this characteristic and concludes that this
phenomenon, “high ego”, causes the entrepreneur or manager to “see” the bigger
picture. The driving force behind entrepreneurs is clearly identified by need theory,
as identified by McClelland (1961), achievement motivation (n-ach), authority/power
motivation (n-pow) and affiliation motivation (n-aff). Entrepreneurial organisations are
further characterised by strong leadership and direction from the entrepreneur.
Wickham (2004:135) argues that an organisation’s very survival depends on the
leadership structure living its goals, as well as a focus on competitive locations.
Using need theory, McClelland identifies the organisation as part of the motivational
force of managers or entrepreneurs.
29
According to Quinn et al. (1988:83), the entrepreneur is driven, above all, by his
need for achievement. The entrepreneur’s organisational goal is simply the
extension of his own goals. It is concluded that the dominant goal of the organisation
operating in the entrepreneurial mode is growth, which is the most tangible
manifestation of achievement. (A second motive closely related to behaviour in
organisational settings is the need for power [n-Pow].) It would appear that the
concept of a “high need for power” is associated with leadership and actual power,
but only when it occurs in combination with certain other factors, as was
demonstrated in the longitudinal study conducted by McClelland (in Robert,
1986:196). In his article “Characteristics of successful entrepreneurs”, Dollinger
(2003:38) states that, over the past few decades, entrepreneurial research has
identified a number of personality characteristics that differentiate entrepreneurs
from other people.
Similarly, McClelland (in Robert, 1986) identifies certain characteristics of
entrepreneurs. He sees the individual entrepreneur as a promoter of his/her own
career with a focus on strategies of advancement, and views entrepreneurs as
innovative, independent people and moderate risk takers, whose role as business
leaders conveys a source of formal authority.
Simons (1999:85) argues that businesses seldom consider risk management when
times are good, profits are up, optimism is on a high, and markets are growing. In
these favourable conditions, businesses tend to ignore early warning signs. It is also
not clear when a business is going to “hit a significant bump” or if a major change in
strategy is needed. Entrepreneurs need to understand the conditions that create
unacceptable levels of risk and decline.
Early warning signs, failure prediction and its causes have been researched
extensively over the past forty years. In light of the entrepreneur’s high propensity to
take risks, this study theoretically defines and uses verifier determinants in proposing
a turnaround plan.
30
2.4 RISK PROPENSITY OF VENTURES
Wickham (2004:134) emphasises the entrepreneur as the main focus point for
contingency in the entrepreneurial process. The decision-making process, and the
acceptance of risk, thus centres on the entrepreneur’s leadership ability. Pretorius
(2004:261) argues that achieving personal goals is the driving force for
entrepreneurs to start businesses. It can be argued that achieving personal goals is
therefore the reason why entrepreneurs are prepared to accept a high-risk
environment. A high propensity for risk-taking is therefore an entrepreneurial trait
(Gilmore, Carson & O’Donnell, 2004:350).
With the formation of a new venture, entrepreneurs usually rely firstly on their own
financial contribution, sacrificing earnings and non-fiscal benefits. Kerins, Smith and
Smith (2004:387) argue that an entrepreneur must commit significantly to financial,
human capital and opportunity costs. Kerins et al. (2004:403), conclude that
entrepreneurs have a much higher opportunity cost of capital than well-diversified
investors. Role players operating in the risk environment are entrepreneurs,
financiers, lawyers, suppliers and customers, who dictate financial, operational and
strategic planning.
It is within the borders of this environment that entrepreneurs develop personal
goals, create new ventures and operate their businesses. Entrepreneurs meet the
challenge to make decisions under ‘calculated’ risk scenarios and adopt a leadership
role in the process. Simons (1999:85) argues that the pressure to achieve
challenging goals can stimulate entrepreneurial creativity and innovation that lead to
superior financial performance. The deduction is then that the focus point of
entrepreneurial behaviour is the aspect of risk and leadership. Entrepreneurs will
obviously approach risk in different ways. According to Dollinger (2003:7),
entrepreneurship exists under conditions of risk and uncertainty. Wickham
(2004:196) holds the opinion that entrepreneurs make decisions under conditions of
ambiguity rather than risk, while Everett and Watson (1998:371) distinguish between
the economy-based risks, industry-based risks and business-based risks unique to
the business.
31
Changes in the first two risks, over which the entrepreneur has little or no control, are
usually dealt with under risk contingency plans. In dealing with business-based risks,
entrepreneurs react to distress in their business in different ways. Orme (2002:26)
opines that some entrepreneurs will withdraw from business activities, some will
enter a phase of denial and some will immediately accept the unique circumstances.
Richardson, Nwankwo and Richardson (1994:14) conclude that success and
arrogance are closely related to entrepreneurs failing. Koellinger, Minniti and Schade
(2007:512) researched the entrepreneurial overconfidence that leads to
entrepreneurs perceiving themselves as skilled, able and opportunistic in identifying
business opportunities. Unsuccessful entrepreneurs will go through various stages,
firstly one of denial (Francis & Desai, 2005:1203), and then finally acceptance.
Owing to the very characteristics of entrepreneurs, which among others, include
perseverance and goal achievement, entrepreneurs will try to continue with business
activities under conditions of distress. Simons (1999:87) warns that the pressures
(self-inflicted owing to fear of failure) to achieve challenging goals can bring
unintended risks. Entrepreneurs take calculated risks throughout the various stages
of the entrepreneurial process.
Van Vuuren (2005) describes the entrepreneurial process as consisting of the pre-
start-up phase, start-up and survival phase, which is 0 to 3 years, early growth 4 to
10 years, and the maturity phase 10 to 15 years. Finally, the harvest – or stability –
phase, 15 to 20 years. The risk propensities can be further categorised into possible
entrepreneurial behavioural risk patterns in the various stages of the entrepreneurial
cycle:
? Pre-start-up = appetite for risk
? 0–3 years = moderate/calculated risk-taking
? 4–10 years = calculated risk-taking
? 10–15 years = high risk factors, uncalculated risk-taking
? 15–20 years = low risk-taking
32
Garcia (2006:7) argues that many entrepreneurs are late in recognising that
“business-as-usual” practices need to change when their businesses start to
deteriorate; accordingly, entrepreneurs’ actions usually reflect defensive and
aggressive attitudes that are not conducive to the continuation of cordial business
relations with their creditors.
In her studies, Gaglio (2004:535) argues that opportunity identification through
entrepreneurial cognition and veridical (truthful) interpretation requires a correct
perception of the changing situation by the entrepreneur. Veridical interpretation
entails that the entrepreneur correctly establish the real causes of change. Gaglio
(2004:539) concludes that alert entrepreneurs may respond to change or surprise
earlier than non-alert entrepreneurs. The key to repositioning the business is for the
entrepreneur to accept that mistakes have been made and to understand where and
why these mistakes were made. Garcia (2006:4) argues that an ineffective response
to crisis causes a competitive disadvantage. Entrepreneurs need to re-strategise and
reorganise the business and maintain growth and profitability.
Orme (2004:26) argues that the entrepreneur goes through various phases of denial,
depression, anger and, finally, acceptance. Agreeing with this statement, Altman
(1984a:171) suggests that it is more sensible to detect impending failure well ahead
in order to be able to take corrective action. In support of Altman’s view, Chowdhury
and Lang (1993:8) state that, whilst failure is not inevitable, entrepreneurs and/or
managers can, through discretionary actions, stop and reverse decline in the
business. Lohrke et al. (2004) conclude that it is necessary to look beyond financial
decline to broader indices that trigger the turnaround process. Unfortunately, at the
current juncture, entrepreneurs face various challenges when attempting to turn
around their business. These challenges are, but are not limited to, legal,
management, financial and/or product constraints. Gopinath (1995a:76) concludes
that for banks (and turnaround managers) “strategies are dependent on the
perceptions of the causes of the problems”.
Seen in the light of the above discussion, there is always risk when entrepreneurs
start ventures. Moreover, there is also risk associated with turnaround situations;
hence, the proposed verifier determinants will assist in managing that risk.
33
2.5 QUO VADIS?
Internationally, business turnaround theory is embedded in legislation and a
comprehensive body of knowledge is available. The shortage of theory in South
Africa highlights the need for research on designing a business turnaround strategy,
tailor-made for the South African business environment. Most businesses
concentrate on creating innovative plans to ensure growth. A turnaround is
concerned mainly with the rescue, reorganisation, restructure and repair of
substance, which has malfunctioned in the business process. The administration of a
business is perceived to be visible, as management knows exactly what is to be
done – whereas a large portion of the turnaround vocation scope is hidden and
unknown.
During the normal business process, uncertainties within the operating environment
are imposed and dealt with. In a turnaround environment, there is an additional and
significant level of uncertainty. As a turnaround progresses, the surfacing of
unexpected negative information is considered as a turnaround trap, for example:
James (2002:49) reported that he, after commencing with a turnaround, discovered
that an important order had been cancelled five months earlier. As the order was
about 20% of annual turnover, the result was a horrendously overstocked situation.
The extent to which any decline has manifested itself in a business will only emerge
after the turnaround practitioner has commenced work. Newly discovered “decay”
and “rot” may lead to the failure of the turnaround plan.
This study investigates the management discipline of business turnaround both
currently and in the future. Business turnaround is a relatively new concept in the
field of South African business management science. Owing to its infancy, there is a
huge shortage of appropriate literature locally. Pretorius (2006:2) confirms that there
is a small body of knowledge in South Africa, although it is expanding.
Verifier determinants (which will be defined later) are used to confirm the early
warning signs that are used extensively to confirm causes, verify the correct sign and
substantiate issues to consider when compiling a strategic rescue plan.
34
The identification of verifier determinants will contribute to the uncovering of other
hidden critical issues. This research focuses on the design of turnaround strategies
by investigating and improving early warning signs theories. Warning sign verification
will be incorporated into the structuring of the turnaround strategy as an action and
timing tool. Both investors and creditors (including lenders) have a vested interest in
the early detection of financial distress. This is confirmed by Aziz and Dar (2004:25),
who reinforce the need for the early detection of financial distress to enable the
taking of corrective action in good time.
Using verifier determinants, the turnaround practitioner and/or the entrepreneur will
be able to apply the plan effectively as a business rescue tool. For the participating
creditor, it may restore credibility and validity in the mechanics and rationale of
business plan construction. Once credibility and validity of planning has been
restored, the use of the plan as an effective preventative (counter failure)
management tool can be reintroduced. With the concept of “verifier determinants”
built into the early warning diagnostic structure, the entrepreneur and turnaround
practitioner alike will be able to take corrective measures in time to prevent default
and/or further deterioration of the business.
2.6 TURNAROUND IN SOUTH AFRICA – STATUS QUO
Turnaround in South Africa, as an industry and as a business science, is still in an
early development phase. Although various informal turnarounds were, and still are,
contemplated, formal turnarounds (protected by law) will only commence from mid-
2011 onwards. The South African government is committed to including turnaround
in the revisions of the Companies and Insolvency Acts. Leuvennink (2004:4) reports
on Minister Brigitte Mabandla, the then Minister of Justice and Constitutional
Development, who requested that businesses should rather be rescued (turned
around) than liquidated. The Department of Trade and Industry, in its Guidelines to
Corporate Law Reform (2004:42), has clearly indicated the government’s concerns
regarding the winding up of companies. Statistics South Africa (2009:8) reports in
their February 2010 release that the number of civil cases (summonses) for debt in
South Africa increased from 254 426 in 2008 to 293 710 in 2009.
35
This substantial increase of 15,4% clearly demonstrates the need for corporate
reform. The South African government is also committed to enforcing corporate
governance through the implementation of the recommendations of the King II and III
reports. Drew, Kelley and Kendrick (2006:128) argue that strategic risk management
is not restricted to improvements in existing governance and ethics, but includes
those risks that threaten the long-term success and survival of a business.
The government’s promise to change legislation is now manifested in Chapter 6 of
the new Companies Act, which will allow and regulate turnaround practices once
implemented during the course of 2011. In terms of Section 128(2) of the 2008
Companies Act, the government may appoint a person or body (association) to
regulate the practice of persons as practitioners. The recently established
Turnaround Managers Association of Southern Africa (TMA [SA]), operating under
licence to TMA International in cooperation with the Association of Business
Administrators of South Africa (ABASA), is currently applying to government to take
up this regulatory role. Currently, neither facilities nor academic syllabi for
postgraduate accreditation for professional turnaround practitioners exist in South
Africa.
The need to introduce some minimum academically accredited qualification
standards for turnaround practitioners operating in the South African business
environment is now being addressed by the TMA (SA). TMA International, the
international body for the accreditation of turnaround practitioners is housed at the
University of Chicago, in the United States of America. The main shortcoming of this
from a South African perspective is that US legislation; insolvency, tax and corporate
law are paramount in the syllabus of this three-year course. Various turnaround
courses are presented by most of the tertiary institutions in South Africa, for example
the ComTURN (South Africa) programme presented by the University of Pretoria
under the auspices of the Chair in Entrepreneurship. There is a dire need to
accommodate South African rescue legislation and business turnaround culture in
the accreditation of existing and future South African turnaround practitioners as
being able to construct a turnaround plan is instrumental in fulfilling the requirements
of the new South African legislation.
36
It is the aim of this research to create a framework to equip entrepreneurs and
turnaround practitioners with adequate background knowledge to add to the current
body of knowledge and effectively create/use a turnaround plan. Any school that
proposes to undertake the accreditation of turnaround practitioners will be equipped
with formal guidelines to compile an acceptable, valid and reliable business
turnaround plan and incorporate it as such into the proposed syllabus. Current formal
turnaround routes (ss 311 and 427 of the old Companies Act) are, owing to various
negativities and high costs, not desirable and entrepreneurs still favour a more
informal approach. Hence, there is a multitude of dangers and constraints (acts of
insolvency s 8 of the Insolvency Act, Act 24 of 1936) that impact negatively on a
possible successful turnaround.
2.7 CONCLUSION
The successful running of a business is just a small part of the challenges facing
entrepreneurs. The psychological impact on the entrepreneur when facing decline,
distress and then turnaround should not be underestimated. It is therefore essential
that entrepreneurs are equipped with extensive, integrated and applied knowledge of
early warning signs that will enable them to spot the danger signs. Accordingly, they
need to be equipped to formulate and implement rescue plans for saving their
businesses. In conclusion, the deduction is that entrepreneurs demonstrate
behavioural patterns of high-risk acceptance. The chapter has identified and
addressed the need for an early warning control system in businesses.
37
CHAPTER 3
Academic debate on Identification of business decline
3.1 Introduction
3.2 Organisational decline definitions
3.2.1 Early warnings signs
3.2.2 Decline
3.2.3 Distress
3.2.4 Failure
3.3 Early warning signs learning
3.4 Basel explained
3.5 Academic debate on organisational decline
3.6 Identification of warning signs in literature
3.6.1 Management early warning signs
3.6.2 Financial early warning signs
3.6.3 Banking early warning signs
3.6. Other early warning signs
3.7 Summary of early warning signs
3.8 Introduction of verifier determinants
3.9 Conclusion
38
Singer (1995:325)
3.1 INTRODUCTION
This chapter outlines and explains the evolvement of warning signs and its field of
application. The literature content illustrates the debate on business failure and
decline, and the identification of the causes of decline and failure. In addition, the
Companies Act (Act 71 of 2008) and, specifically Chapter 6, of the Act incorporate a
few demanding prerequisites on the turnaround practitioner’s strategic ability.
Section 141 of this Act dictates that “as soon as” the turnaround practitioner has
complied with the liability of data integrity, he needs “… to consider whether there is
any reasonable prospect of the company being rescued …”. In establishing
whether a business has a reasonable chance of being rescued, and to be
sustainable afterwards, turnaround practitioners need to establish the root cause/s
for the decline and distress.
Filatotchev and Toms (2006:427) state that the conditions responsible for the
financial downturn will have to be mitigated to achieve stability. These “responsible
conditions” involve warning sign variables that have to be identified and then
stabilised. Grounded theory research on failure opens up a field where combinations
of variables in the failure prediction scenario are used as early warning signs. In this
study secondary data sources, local and international, were researched in the field of
early warning signs.
CHAPTER 3
ACADEMIC DEBATE ON IDENTIFICATION OF BUSINESS DECLINE
Constructs such as poor management, strategy, environment, and industry structure are in
themselves inadequate explanations of new venture failure or success.
Appendix A reports on early warning signs in detail in categories and by author
and serves as a basis for reasoning in this chapter.
39
In terms of turnaround and legal approaches to the investigative field of business
turnaround, literature referring to early warning signs is, as a single discussion
source, scarce. Early warning sign literature (grounded and other theory) is found
predominantly in business failure prediction research theory. Causes of business
failure or decline are also quite evident in turnaround theory, although the
information tends to generalise the causes of decline. By default, researchers’
investigative efforts were based on ex post facto information that had various
limitations. It is therefore not surprising to find that, in almost all the literature, early
warning signs are identified ex post facto during a post-mortem of the failed
business. The ex post perspective is confirmed by Joseph and Lipka (2006:296) in
their research on business failure.
Shepherd (2004:253) describes failures as an ex post facto phenomenon which is
difficult to subject to longitudinal studies. In reviewing related academic and
practitioner literature, the close association between business failure prediction and
business rescue is evident. Chowdhury and Lang (1993:8) propose, based on their
research and experience, that there is an association between the deteriorating
performance patterns and the probability of a performance turnaround. Figure 3.1
illustrates this association as a flow process, from identification to acceptance of
decline/distress and the adoption of a turnaround action.
Figure 3.1 Process flow leading up to a turnaround
Turnaround
Event/situation
Decline
Distress
Establish
true value
Turnaroun
ddecision
Verifier
Determinant
Identification
Early warning
signs:
Management
Strategic
Financial
Product/Market
Banking
Turnaround:
Reposition
Reorganise
Restructure
Rescue
Rejuvenate
Sustainable growth
and/or
Plan
Exit
turnaround
40
The prediction of business failure is dominated by quantitative methods, also
referred to as accounting methods. Early warning sign theories have evolved from
business failure prediction models, for example, Altman’s Z-score in 1968, to more
sophisticated models in use today. At the preliminary departure point in their search
for predictive methodology to prevent business failure, researchers concentrated on
failed businesses and focused mainly on quantitative ratio analysis. A need to
include qualitative warning signs variables in quantitative research approach was
identified. Researchers progressively acknowledge the significance of qualitative
variables in failure prediction.
Authors such as Altman (1968), Duchesneau and Gartner (1990), Pant (1991),
Lussier, (1995b), Dimitras, Zanakis and Zopounidis (1996), Altman and Narayanan
(1997), and Dimitras, Slowinski, Susmaga and Zopounidis (1999) increasingly used
non-accounting or qualitative information in their failure prediction modelling. Littler
and Sweeting (1987:166) point out that the reliance on qualitative information is a
key factor in any business assessment. Qualitative measurements were added to the
modelling and new predictive methods such as neural networks, as predictive tools
were introduced. Gordon and Langmaid (1988:2) conclude that the research findings
of quantitative measurement on its own are not conclusive enough, thereby
confirming a hybrid approach which advocates a combined qualitative and
quantitative construct. Dimitras et al. (1996:487) argue that entrepreneurs should be
aware of factors that lead to their business success. The mere absence of these
success factors will solicit warning signs.
The same principle applies in the identification of variables for successful or
performing businesses. The absence or negative level of these success variables is
then categorised as early warning signs. Cameron, Whetten and Kim (1987:135)
point out that “comparisons between growing, stable, and declining organisations”
indicate that the negative attributes predicted to be associated with decline are
actually characteristic of both stable and declining organisations. In addition to
literature specifically referring to early warning signs, 1) business failure prediction,
and 2) successful versus unsuccessful and performing versus non-performing
variables were also researched and included in the greater body of early warning
signs literature.
41
3.2 DEFINITIONS OF ORGANISATIONAL DECLINE
The aim of explaining these working definitions is to ensure the clarity of the relevant
concepts for use and measurement in this study.
3.2.1 EARLY WARNING SIGNS
In attempting to formulate a definition for “early warning signs”, it is important to
follow the development of the debate leading to the phenomenon of early warning
signs. Although Altman (1968:596) used variables like “weak” financial ratios as
indicators of potential failure, it was Ansoff (1975:23) who used the term “weak
signals” to describe discontinuities in organisational strategic change. Amburgey and
Kelly (1993:51) conclude that, in a dynamic organisation, change can be both
adaptive and disruptive.
Discontinuities do not emerge without warning and Ansoff’s (1975:21) concept of
“weak signals” is aimed at the early uncovering of the discontinuities or weak signals,
to prevent strategic “surprises” which could contribute to an event that will jeopardise
the business’s continued operations.
The mere existence of various uncertainties requires a sound knowledge of the
business’s demographics, geography and markets. Knowledge is gathered by
scanning the environment in which the business conducts its activities. Once
equipped with the required knowledge, using the scanning process will allow
identification of early warning signs. Ansoff (1975:26) maintains that weak signals
are detected by scanning the organisational environment.
Julien, Andriambeloson and Ramangalahy (2004:254) conclude that, in general
terms, weak signals are variables with which the entrepreneur has little contact and
of which he/she has little comprehension because of their enclosed idiom and very
different concerns. Weak signals can nonetheless present an array of innovative
information.
42
Hills, Shrader and Lumpkin (1999:3) are of the strong opinion that weak signals are
predominantly imperative in that they facilitate entrepreneurial thinking “beyond what
is known, look beyond what they are used to doing, and apart from the obvious
threats, help spot new opportunities for technological innovation”. Ilmola and Kuusi
(2004:911) conclude the debate on the nature of weak signals. They agree that “a
weak signal is, by definition, unstructured information and its implications to the
organisation are at an early stage very hard to define”. A weak signal represents
potential discontinuity, something that the organisation has not interpreted before.
In this context, Cannon and Edmondson (2005:303) argue that the small failures
within the business are often the “early warning signs”. They maintain that if these
early warning signs are detected and addressed, they “may be the key to avoiding
catastrophic failure in the future”. In order to formulate a definition, this study
considers and analyses the elements of the concept of “early warning signs” by
applying a synonymous approach to each element.
Figure 3.2 Early warning signs – elements and synonyms
ELEMENTS OF: EARLY WARNING SIGNS
Element: Early Element: Warning
Synonyms:
•Cipher
•Cryptogram
•Secret language
•Secret code
•Symbols
•Indicator
Element: Sign
Synonyms:
•Near the beginning
•In the early period
•Earlyon
•Beforethe actual event
Synonyms:
•Caution
•Caveat
•Advice
•Forewarning
•Admonition
•Notice
43
The lists of synonyms in figure 3.2 stimulate the thought processes, but also allow
the reader to form a comprehensive understanding of the construct “early warning
sign”. Owing to the preserved vagueness of the elements, it is understandable that
entrepreneurs will most probably underestimate the impact of ignoring these signals.
In an interview with the CEO of Syris Investments, Devereux (2010) defines early
warning signs as follows: “An internal or external extension of an event or factor or a
combination of all, that may directly or indirectly highlight the pending demise of a
business or business unit if they are not addressed and rectified in the course of
business.”
3.2.2 DECLINE
Cameron et al. (1987:136) argue that organisational decline represents a substantial
reduction in an organisation’s resource base occurring over a period of time.
Pretorius (2009:10) has drawn a clear distinction between distress and failure by
defining “decline” as follows:
Decline – A venture is in decline when its performance is worsening
(decreasing resource slack) over consecutive periods and it experiences
distress to continue operations. Intervention through alternative management
and financial injection could keep it operating albeit not in its current form and
depending on the severity of the distress (crisis). Decline is a natural
precursor in the process to failure.
Pretorius definition differs from the view of Cameron et al. by the inclusion of the
argument that the business “experiences distress”. The concept of “distress”, as
defined in the following section will, however, confront this definition with the
practicality of the law. For this reason, Cameron et al.’s definition of decline will
suffice.
44
3.2.3 DISTRESS
An understanding of the phrase “financial distress” is of the utmost importance in
future commercial action. Authors like Fredenberger, Dethomas and Ray (1993:326)
discuss the various positions of financial distress. Pindado, Rodrigues and de la
Torre (2008:996) conclude that a business is financially distressed in the year
following the occurrence of two events. These events are 1) if the earnings before
interest (EBITDA), and dividends were lower than its financial expenses for two
consecutive years – thus the business cannot generate sufficient funds from its
operations to service financial obligations; and 2) conditions in which there is a fall in
market value between two consecutive periods
Filatotchev and Toms (2006:408) argue that financial distress is an occurrence
where the business is unsuccessful in maintaining its capital, thereby reducing the
value of the financial stakeholder’s claims. The topic of financial distress is widely
canvassed by literature; however; this study accepts the definition of financial
distress as formulated in Chapter 6 of the new 2008 Companies Act.
Chapter 6 clearly defines two criteria for financial distress: the business is i) unable
to pay its debts and ii) becomes insolvent, but most importantly the Act adds a six-
month period in which these events can most likely take place. The unambiguous
definition of financial distress presented by Chapter 6 Section 128(1)(j) of the Act
reads as follows:
… “financially distressed’’, in reference to a particular company at any particular
time, means that—it appears to be reasonably unlikely that the company will be
able to pay all of its debts as they fall due and payable within the immediately
ensuing six months; or, it appears to be reasonably likely that the company will
become insolvent within the immediately ensuing six months … .
(Note: certain parts of this section are repeated in chapter 4 for the sake of
continuity.)
45
3.2.4 FAILURE
Various definitions for failure have been formulated over time by academia when
faced with the phenomenon of failure. Pretorius (2009:10) has done comprehensive
research in formulating a definition of failure which meets the requirements of this
study.
Failure – A venture fails when it involuntarily becomes unable to attract new
debt or equity funding to reverse decline, consequently, it cannot continue to
operate under the current ownership and management. Failure is the endpoint
at discontinuance (bankruptcy) and when reached, operations cease and
judicial proceedings take effect.
3.3 EARLY WARNING SIGNS LEARNING
In reviewing various literature sources, it becomes clear that business failure
prediction and early warning signs are closely related. Chowdhury and Lang (1993:8)
report on research and common experience that suggests an association between
the deteriorating performance patterns and the probability of a performance
turnaround. Although consensus confirms this interdependence, few authors such as
Cybinski (2001:33) indicate that a failure prediction model could be used as an early
warning tool. The apparent limitation of the literature is that researchers failed to link
or combine these two constructs.
Balcean and Ooghe (2006:87) conclude that failure prediction experiences various
problems attributable “to neglect of the multidimensional nature” of failure. The
multidimensional theory suggests that more than one “cause” for decline or failure
exists. Chowdhury and Lang (1993:15) suggest three actions: 1) accurate attribution
of causes; 2) timely action; and 3) adequate resources, for effecting a successful
turnaround. The detail about turnaround plan literature is in itself scarce and the
literature researched made little reference to rescue plan support.
46
Turnaround practitioners are reluctant to part with their knowledge and experience,
as they perceive the knowledge base as being a competitive trade advantage.
In defining corporate objectives, Argenti (1969:25) set the following objective, among
others: “to ensure our continued survival”. It is imperative that businesses survive to
ensure benefit to all stakeholders, personnel, shareholders, clientele and suppliers
(creditors). Argenti introduces the concept of “stakeholder theory”, as he argues that
a business cannot have its survival as an objective alone, and concludes that if a
business ceases to benefit anyone it will soon cease to survive. Argenti (1969:25)
defines the stakeholder approach as follows: “the stakeholder approach’ merely
asserted that ‘companies perform better the more closely they engage everyone
affected by their operations’.”
The stakeholder theory was, however, later (1997) rejected by Argenti in an article
titled “Stakeholder theory – the case against”.
In this conclusion, Argenti (1997:445) states that “the stakeholder theory is an idea
whose time has long passed”. In the South African context, government is, through
legislation, putting into practice stakeholder theory. In Chapter 6 of the Companies
Act, Section 128(1) defines “affected persons” as shareholders, creditors and
employees and/or their representatives. These stakeholders play an important role in
the proposed turnaround effort starting with input to, and approval of, the turnaround
plan. Altman (1984:171) concludes that the identification of business failure and the
early warning signs of impending financial distress are of international importance in
individual business performance.
Identifying early distress can lead to timely corrective action. Honjo (1998:566)
argues that a new business with sufficient funds can survive a period of negative
profits. If a new business wants to borrow funds it will have to convince a lender that
profitability and debt repayment are achievable within a certain period. Early warning
signs are used in risk profiling of potential debtors, price determination on products,
risk assessment of debtors’ books, identification of areas where the business is
lacking, and a whole host of other applications (Glantz, 2003:16).
47
Financial institutions are obliged to adopt some form of risk management process,
measured against early warning signs. Pousson (1991) and Altman (2003:10)
deliberate the point that financial institutions are the most frequent users of early
warning sign theory. Financial institutions firstly focus on failure prediction when
assessing new loans.
Pousson (1991; 2003:7) and Glantz (2003:17) are of the opinion that early warning
signs are used by financial institutions in managing risk through a sophisticated risk-
rating process in compliance with Basel II requirements. In this regard, Rose
(2009:17) states that a more rigorous evaluation of risk, inherent in product offerings
and credit default, is required to understand risk better.
3.4 BASEL EXPLAINED
In reporting on the high (excess) liquidity experienced by European banks during
2004 and the low demand for credit, Tully (2004:54) indicates that banks were
making concessions to lower-rated borrowers to win their business. Davey
(2004:28), who argues that in order to extend more credit finance brokers reduced
haircut requirements to attract and win business, supports this view. She concludes
that careful measurement of, among other things, risk management procedures must
be engaged.
The Basel Accord refers to the recommendations on banking law and regulations
issued by the Basel Committee on Banking Supervision. The main aim of the Accord
is to create International standards that banking regulars can adopt. The standard
will amongst other, regulate the minimum capital need to set aside for financial and
operational risk. The international sub-prime crisis during 2008 and 2009, however,
suggests that most banks did not employ adequate risk management processes.
Glantz and Mun (2008:1) state: “A key objective of Basel II is to revise the rules of
the 1988 Capital Accord in such a way as to align banks’ regulatory capital more
closely with risk.”
48
The Basel II accord aligns the modern credit risk practices of its members and its
foundation-based practices require that their estimates be based on the bank’s (or
capital market) experience.
Glantz (2003:7) argues that one of the main reasons for banks to adopt a credit
money model is to estimate the probability of default and loss against default. Aziz
and Dar (2004:2) argue that one of the major focuses of the Basel II regulations is to
minimise credit risk for the banks: default risk – the inability to repay a loan – being
the primary focal point. Basel II sternly divides risk into operational risk and financial
risk, while concentrating more on financial risk and thereby affecting credit
availability. In an academic response to Basel II, DanIelsson, Embrechts, Goodhardt,
Keating, Muennich, Renault and Shin (2001:3) argue that the regulations fail to
consider risk as an endogenous factor, applying statistical methods which are
inconsistent and place too onerous a reliance on the standard approach to risk
rating. Saurina and Truchardte (2004:122) discuss the negative impact of Basel II on
small business in the Spanish context. A main concern was the omission and failure
to recognise market volatility as an endogenous factor as emphasised by DanIelsson
et al. (2001:4).
The array of shortcomings forced the Basel Committee to revise the regulations and
create a more directive approach in the latest guidelines. Glantz (2003:233, 358),
Altman and Hotchkiss (2006:168), Agarwal and Tafler (2008:1), and Glantz and Mun
(2008:3) conclude that banks are obliged, under Basel II, to use an internal ratings-
based approach to set minimum capital requirements in the measurement of their
risk portfolios. Subsequently, the Basel II rules attracted a fair share of criticism,
which later prompted change.
Altman (2003:7) confirms the purpose of Basel II, as he states that one of the main
reasons for the construction of a credit-scoring model is to estimate the probability of
default and loss given default. These risk measurement models prove to be accurate
as the allocation of capital is at stake. Blokin and Iyer (2003:1) conclude that, from a
risk management perspective, certain borrower characteristics should be
incorporated into risk score models.
49
Banks subscribing to the standardised approach to measure credit risk will use their
historical databases to investigate and establish credit risk grading (Basel Committee
on Banking Supervision, 2005:98). Consequently, they will compile a unique model
for each individual bank, subject to Central Bank approval.
Davis (2009:4) is of the opinion that banks will be under scrutiny by authorities,
especially on the way they identify, assess and manage risks. Risks will therefore be
subject to close measurement and stress testing. In determining a risk rating on
specific credit lending in their portfolios, banks will have to know the risk
characteristics to determine possible loss given default (LGD) (Dev, Mingo and
Buckler 2009:38). Glantz (2003:311) proposes that once the LGD calculation is
done, the loan then be categorised into one of the following risk categories:
standard, special mention, sub-standard and doubtful. These categories are used in
this research and are further explained in chapter 5.
The Basel II requirements force banks to revisit the capital adequacy linked to the
concept of pricing for risk. In line with central bank requirements, risk-rating models
in banks were developed that link capital adequacy and pricing to a certain risk band.
Figure 3.3 Business decline: effect on Basel II rating
Decline
Basel rating
Substandard
/doubtful
Special
mention
Standard
Improvement
Deterioration
50
The risk rating will have the obligatory effect that, in a period of decline and/or
distress, the risk rating will be adjusted in line with the warning signs being triggered,
moving the liability into a higher risk category. This effect is illustrated in figure 3.3.
The higher the category, the stricter the capital requirements, and if no price
adjustment accompanies the risk change, a potential loss situation on a still
performing asset for the bank is very real. Banks will thus be forced to increase
pricing on distressed or declining businesses. Increased lender pricing is not
conducive to turnaround efforts. Chapter 6 of the new Companies Act will, however,
allow the practitioner powers to restrict such price adjustments.
3.5 ACADEMIC DEBATE ON ORGANISATIONAL DECLINE
The academic debate on business decline and failure opens with a discussion on the
path of decline and failure. Dimitras et al. (1996:488) describe the decline and failure
of a business as a continuous process, thereby placing even more emphasis on the
importance of timely dynamic early warning sign identification systems and
turnaround planning in business.
Bruno and Leidecker (1987:51) maintain that the following submissions on decline
and failure are valid:
? they happen over time
? identifiable factors are present
? these factors can be used to predict
? once identified these factors can lead to timely corrective action
? these factors can be both external and internal factors and need to be
analysed
? poor management associated with these factors will thus be detected
? specific factors will be evident in specific industries.
Hossari (2007:75) distinguishes between decline and failure and argues that the
pronouncement of failure is a sudden event.
51
However, the process of decline could extend over many years and the signs of
distress could manifest themselves in many forms. Pretorius (2009:10), who has
reported significantly on the differentiating factors of the constructs, ‘decline’ and
‘failure’, supports the distinction drawn by Hossari that companies who do not react
to early warning signs create the perception that failure is a sudden event. Ignorance
of early warning signs by management will have the effect that the business decline
is also ignored, and corrective action is procrastinated until it is too late.
Either companies do not detect early warning signs or, as Burbank (2005:55) argues,
the companies ignore signs and then fail without an attempt to implement corrective
action. This ignorance emphasises the importance of identifying the variables of
decline in a model, which can be used as part of management information systems.
Barker (2005:44) states the reality that of “understanding the causes of failure can
elude even the smartest manager”.
He discusses two facts as being problematic: the chief problem for managers is to
"see" decline and the subsequent problem is to (or at all) react timeously to the
decline. This confirms the views of Ansoff (1975:23) in his argument for
environmental scanning to grasp the impact of signals.
Historically, from Altman (1968:589) who composed the renowned Z-Score formulae
in 1968, researchers used financial ratio analysis as the main input variable for
modelling failure prediction. In developing the Z-score theory, Altman focused
specifically on predictive modelling using financial ratios, and failed and non-failed
company data through a multiple discriminant analysis. However, businesses fail for
a variety of internal and external factors and, according to Tang and Chi (2005:246),
most studies exclusively use financial ratio analyses as the basis for the study of
business failure.
Researchers such as Altman (1968:589; 1984a:177), Argenti (1976:13), Hamer
(1983:289), Frydman, Altman and Kao (1985:269), Boritz and Kennedy (1996:512),
Tsakonas, Dounis, Doumpos and Zopounidis (2006:452) use financial ratio analysis,
multivariate and discriminant analysis and the effectiveness of neural networks. Ahn,
Cho and Kim, (2000:66) used economic value add and algorithm techniques to
predict business failure.
52
The predictive power of cash flow projections was later also included in failure
prediction theory and Sharma (2001:3) compiled a comprehensive report on cash
flow research. In addition, Jooste (2004:171) researched the net impact of cash
flows’ predictive qualities. The intensity of the difference in net cash generated by
operating activities on the cash flow statement compared to the operating profits on
the income statement is, according to Kemp (2004:6), a clear warning sign of cash
disparity.
Ahn et al. (2000:65) argue that failure prediction models can be used as early
warning systems and confirm that the variables used in prediction models are in
themselves early warning signs. Dimitras et al. (1996:512) point out that although
neural networks perform well in predicting failure, they are no better than more
conventional models such as discriminant analysis and logit probit. McGurr and
DeVaney (1998:169) conclude that failure prediction models, developed using mixed
industry samples, are not as accurate as would be expected.
This accentuates the limited industrial business population available for research in a
South African failure environment. Agarwal and Taffler (2008:1550) use accounting-
based ratio analysis to draw a comparison between Altman, Taffler and market-
based models, as opposed to the traditional Z-score ratios. They extended their
analysis to compare the market shares, revenues and profitability of banks
employing these competing models. Their research concluded that the accounting-
based research approach has a significant economic benefit over the market-based
approach. To stay in line with accounting practices and reporting standards,
researchers were forced to adjust their financial ratio analyses to cater for these
frequent changes. Altman (1978:30) suggests that the following fundamental
elements be included (from the balance sheet) when calculating his Z-score
analysis:
? capitalisation of leases
? reserves and contingencies
? minority interests and other liabilities
? captive finance companies and other non-consolidated subsidiaries
53
? goodwill and intangibles
? capitalised research and development costs
? capitalised interest and certain other deferred charges.
Owing to the very nature and availability of financial warning signs, they are usually
the first signs to be investigated. The investigation happens using ratio analysis, and
the warning signs that manifest in a distress situation are the following:
? reductions in working capital and cash flows
? increase in fixed and variable expenses
? dropping gross margins
? significant differences between actual and projected results
? poor return on investment
? lack of action on negative variances in budgets.
The main users of prediction models, according to Dimitras et al. (1999:263), are
usually more confined to financial institutions, such as banks. These models are
generally based on historical financial performance and, although acknowledged as
important, very little research has addressed “other” warning signs. Altman
(1984:175) acknowledges that non-financial variables in business failure prediction
are an important measurement in prediction modelling. Some non-numerical signs
used by Altman regarding managerial practices are incompetence and inexperience
and others such as fraud and neglect.
The authors listed in Appendix A under financial warning signs carried out the most
salient work in financial analysis in business failure. Appendix A indicates the name
of the author and the period in which the research was conducted. The last column
represents the ratios used by the authors in the failure prediction methodology.
Sutton and Callahan (1987:406) conclude that it is expected that effective controls
will lead to business success.
54
The failure of a business influences the entire business’s existence with a resulting
high cost factor and negative impact on related businesss and organisations. Bruno
and Leidecker (1988:51) claim, however, that it will be more useful to have
knowledge of what “factors” lead to business distress. Appetiti (1984:269)
categorises businesses into two distinct categories namely “sound and unsound”
businesses. An unsound business is a business that cannot meet its obligations.
This aspect is confirmed in the definition for commercial insolvency in the South-
African context (s 339 of the old Companies Act) (Meskin, 2004:666). Section
128(1)(j) of Chapter 6 of the new Companies Act describes "financially distressed"
companies as any inference that a company at any time appears “to be reasonably
unlikely that the company will be able to pay all of its debts as they fall due and
payable within the immediately ensuing six months; or it appears to be reasonably
likely that the company will become insolvent within the immediately ensuing six
months”.
3.6 WARNING SIGNS IN THE LITERATURE
Early warning signs are discussed as all kinds of phenomena of events in business
that indicate the potential demise of that business. (Refer to the definition of “early
warning signs” arrived at in section 3.2.1). Warning signs are depicted as problems,
challenges and poor performance indicators. As such, authors use their own
explanation, phraseology or designation. Appendix A is a comprehensive summary
of the early warning signs literature.
Pousson (1991) classifies early warning signs largely into the following categories:
? financial warning signs, through ratio analysis
? business and operational warning signs, such as administration, market
and product analysis
? managerial signs such as strategic value add and behavioural analysis.
? banking signs, which are closely linked to behavioural signs.
? other, not so frivolous, or behavioural signs.
55
Robinson and Shell UK Ltd (1986:76) and Watson, Hogarth-Scott and Wilson
(1998:237) illustrate signs as “indicators” for good performance, thus decline versus
success. Lussier and Pfeifer (2001:236), on the other hand, maintain that signs are
variables for comparing success versus failure. Scherrer (2003:53) uses a widely
accepted approach to discuss warning signs and typifies them as the “internal
(controllable) and external (uncontrollable) cause” of decline.
3.6.1 MANAGEMENT EARLY WARNING SIGNS
In a path of organisational decline, Cameron et al. (1987:126) chose to call the
warning signs “decline attributes”. Owing to their very nature as an underlying
feature of a path of decline, these elements are occasionally not acknowledged or
addressed as warning signs. Ueda (2004:612) argues that if a banks identifies a bad
signal it will result in it believing that the entrepreneur is likely to turn out to be
unprofitable.
Very prominent in the literature is the identification of “weak”, “poor”, or “problematic”
management as an early warning sign. It is, however, very difficult to measure
problematic, weak or poor management. Substantial debate is evident in the
literature as attempts are made by various authors to clarify the phenomenon of
early warning signs resulting from mismanagement. Ivanova and Gibcus (2003:17)
refer to problematic management as “negative behavioural traits”. Back (2005:843),
on the other hand, refers to early warning signs as the “focus of financial difficulties
and behavioural issues”, while Carmichael and Stacey (2006:3) focus on
“managerial success variables” such as accountability, initiative, boundaryless
thinking and integrity. Bates (2005:345) focuses on the “skills set” of owners and
managerial “success variables” as warning signs. Some authors, such as Moy and
Luk (2003:207), refer to early warning signs as “obstacles” and “problem types” for
growth. In their article “The insolvent customer”, the Credit Research Foundation
(2004:11) reports that in a recent turnaround appointment in Canada, the turnaround
team’s assessment of the companies’ affairs indicated that the main contributor to
failure in the company was “poor management”.
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Miller (1977:44) identifies four “management syndromes” of business failure. They
are the impulsive syndrome, stagnant bureaucracy, the headless business and
swimming upstream. Hence, when planning a turnaround, the turnaround practitioner
thus needs to assess the management style of the entrepreneur. Consequently, it
may be deduced that, as there are many definitions and descriptions of early
warning signs, a working definition is desirable.
One of the main threats to business viability is management and/or directors who
contemplate fraud. In line with this, Bower and Gilson (2003:20) state that fraudulent
underreporting of expenses (and other financial performance measures) result in
extremely high costs in order to rectify the position. Fraudulent business practices
are not limited to misrepresentation but also include statutory non-compliance.
Mueller, McKinley, Mone and Barker (2001:25) maintain that, in the process of
rationalising the causes of organisational decline, management must form an opinion
on the stability of those causes and debate them. This is, however, a constricted,
simplistic view of early warning signs.
Singer (1995:325) concludes that “constructs such as poor management, strategy,
environment, and industry structure are in themselves inadequate explanations of
new venture failure or success”. Early warning signs shaped from a focus on the
skills set of owners contemplate, according to Lussier (1995a:8), “non-financial
business success versus failure variables”.
Banfield, Jennings and Beaver (1996:94) focus mainly on the up-skilling of
management, addressing need and demand. Three broad management areas that
need to be monitored were identified in Grant Thornton’s catalyst issues (2004a:1).
These are finances, operations and strategic planning. In the broader sense these
essential aspects need to be dealt with by the turnaround practitioner and
entrepreneur’s business and strategic turnaround planning.
Beaver and Jennings (2005:12) describe the management process as a progression
which has highly personalised preferences, prejudices, attitudes, skills demand, and
technical and educational needs. They also focus on control by the bureaucratic and
hierarchical environment over critical decision making. Management plays a
57
significant role in identifying and disclosing early signs of decline. It is, however,
clear that when early warning signs begin to appear, the business is already in a
sub-normal situation. Gilmore, Carson and O’Donnell (2004:349–357) refer to those
situations (where early warning signs appear) as “risky situations”.
Some authors suck as, Nutt (2004:13), Franks and Sussman (2005:30), Fraser
(2005:448), and Cressy (2006:113), debate fortune as playing a part in the failure of
a successful business; this phenomenon is described by Elenkov and Fileva
(2006:135) as “bad luck”. By contrast, Harvey (2002a:3) concentrates on examining
the “value-creating potential of primary activities” as early warning signs.
Pretorius (2008:412) discusses 1) human causes associated with failure in the
context of early warning signs; 2) internal and external causes associated with
failure; and 3) structural causes associated with failure. These causes relate to the
poor execution of business functions, of which Cameron et al. (1987:128) have
identified various “dysfunctions” of business decline.
These dysfunctional areas include reluctance to change, scapegoating, low morale
and conflict. Koellinger et al. (2007:520) investigated entrepreneurial behaviour,
characterised by overconfidence. This author maintains that identifying distress
warning signs in the business in good time is crucial if an attempt is to be made to
save the business. Family businesses have their own set of problems, which are
grouped in a separate set of early warning sign factors. These are, according to
Morris, Williams, Allen and Avila (1997:388), conflict within family circles, centralised
decision making and accountability. Sargeant (2005:21) discusses early warning
signs as “fundamental turnaround problems” in family businesses.
3.6.2 FINANCIAL WARNING SIGNS
Financing pressures, such as cash flow shortages, necessarily affect the way the
entrepreneur deals with the identification of warning signs. Discussing the external
funding of a business, Brooks (2002:25) argues that industry investors step back and
allow management the freedom to run the business. These types of investor expect
58
management to stick to the (pre-approved) business plan, meet financial objectives
and be able to pay dividends. This approach has the potential to force management
to ignore some “important dynamics” in the business.
McRann (2005:38) identifies seven short-term key signs that indicate that a business
may be in trouble. They are:
? declining sales
? reduced market penetration
? falling profit margins
? thin earnings before income taxes
? high employee turnover rate
? increasing customer complaints
? high-level employee dissatisfaction and defection.
The above-mentioned warning signs, although stated as separate issues, have a
severe impact on cash flow liquidity. Platt and Platt (1994:117) conclude that failure
is caused by a variety of events, including poor planning during the development
phase, a restricted capital base and poor managerial abilities.
3.6.3 BANKING WARNING SIGNS
In a banking environment, lenders, especially as the main transactional banker, will
have the added benefit of being in a position to observe banking warning signs. With
the enhancement of technology, the entrepreneur has access to his venture’s bank
accounts online. If proper risk-monitoring systems are in operation within the
business, the entrepreneur, through the risk management system, can be alerted to
heed banking warning signs. Banking warning signs are treated by most authors,
such as Pousson (1991), Bibeault (1999) and Glantz (2003), as industry specific,
with only lenders having a vested interest. A comprehensive literature research of
banking early warning signs was done in this study and a summary of the findings is
attached as Appendix B.
59
Bibeault (1992:369) reports on the slowness in the banks’ visitation programmes,
which in itself is a dysfunction of a bank’s own risk monitoring and not an early
warning signs as such. Banks tend to have behavioural monitoring and scoring as an
early warning sign approach. According to Back (2005:844), this approach is based
on historical behaviour and patterns and is mainly used to predict future behaviour.
These behaviour patterns include prior payment behaviour, payment delays and
payment disturbances.
Glantz (2003:237) proposes a different approach to the behavioural patterns by
adopting a more practical approach. He investigates the cash cycles of the business
by using the transactional bank account history to establish how effectively cash is
managed in the business. Entrepreneurs can use this method to evaluate their own
cash cycles and detect warning signs in terms of cash management. Banking
warning signs should not, however, be seen in isolation, as they are usually visible in
conjunction with other signs.
3.6.4 OTHER EARLY WARNING SIGNS
Holtz-Eakin et al. (1994:55) examined the phenomenon of why some individuals
survive as entrepreneurs and others do not. The results of their research are
consistent with the notion that liquidity or cash flow constraints have a noticeable, if
not severe, impact on the viability of an entrepreneurial enterprise and its ability to
survive.
Platt and Platt (1994:117) conclude that failure is caused by a variety of events,
including poor planning during the development phase. Arogyaswamy, Barker and
Yasai-Ardekani (1995:507) are of the opinion that the strategic orientation will be
determined and varied by the causes of the business’s decline. As Platt and Platt
(1994:126) report, some smaller businesses fail as a result of the failure of larger
related businesses, for example, in the agricultural industry. According to Singer
(1995:313), some entrepreneurs may start their business with some imperfections,
such as those related to production.
60
These imperfections will grow with the business but can unexpectedly surface at a
critical point, negatively affecting business performance.
The literature research confirms the views of Okuzumi (1990:62) that designated
organisational change is often a cause of business failure. In the rationalisation and
change process, psychological pressure is created by organisational decline. Mueller
et al. (2001:27) believe that entrepreneurs need to accept that they can learn from
failure (heed the warning signs). Baunard and Starbuck (2005:283) discovered that
learning from repeated success makes future failure very likely; consequently, they
focused on small business failures and investigated the power and influence of the
entrepreneur.
Kotter (2008:21) refers to the entrepreneur’s position after consecutive periods of
success as entering a state of complacency. The entrepreneur’s euphoria at success
can be overwhelming. Amburgey, Kelly and Barnett (1993:52) discuss early warning
signs as problems in strategy promotion, while Li and Sun (2008:870) focus on
financial distress prediction using “case-based reasoning”.
Although case-based reasoning is a new concept, no subsequent reference to it was
found in the literature. It was found that decline, distress and failure in the various
stages of a business’s life cycle have attracted a lot of attention from researchers.
Comprehensive research was done by Romanelli (1989), Mjaro (1992), Bates
(2002), and Burbank (2005), to determine where, at a point in time in their life cycle,
businesses are more likely to fail. Pompe and Bilderbeek (2005:867) distinguish
between new, “young” and old businesss and conclude that there is no significant
difference in the life cycle stage. They qualify their research by highlighting the
difficulty in obtaining predictive information from young businesss. Appendix A
reflects various authors who identify the specific ‘point’ in the business life cycle
where an event occurs that is a contributing factor to decline, distress and failure.
The process of managing constructs such as innovation and change creates a
factual challenge in recognising early warning signs through the business life cycle.
Strategic association is evident in life cycle theory and growth strategies.
61
Growth, specifically excessive growth, also referred to as overtrading, can
appropriately be described as the silent killer. Concern with low growth is real and
evidenced very early in the cycle, but excessive growth is not as comprehensible.
Thus, the euphoria of a growing business overshadows strategic planning for
sustainable growth.
3.7 SUMMARY OF EARLY WARNING SIGNS
Seminal work on early warning signs has been largely summarised by academics
such as Cannon and Edmundson (2005), Collard (2002), Hass and Shepherd
(2005), Lohrke et al. (2004), McGurr and DeVaney (1998), Moncraz and Kron
(1993), Pretorius (2009), Sharma (2001), Sharma and Mahajan (1980), Stead and
Smallman ( 1999) and Tang and Chi (2005).
The logical deduction is that the authors use the following terminology too arbitrarily
to apply them to describe “early warning signs”:
? success versus failure variables
? causes of decline and or failure
? warning indicators for business decline
? performing and non-performing variables
? root causes for decline or failure
? warning indicators
? material defects
? external and internal factors
? distress variables
? problems
? challenges.
Sudarsanam and Lai (2001:183) suggest “that [the] success of managerial
responses to performance decline is conditioned by their timing”.
62
Through managerial and entrepreneurial intervention, business structures can use
business turnaround plans to great advantage. Sreenivas (1997:25) identifies
business types associated with low and high failure rates. The classification of
warning signs made by Pousson (1991) are largely confirmed by this literature study
and the case research discussed in chapter 6 of this study. A real-life case research,
conducted with a sample of credit specialists in a banking environment, identified
various early warning sign categories.
Five main categories were identified by academics in the literature research and are
summarised in table format, with the heading “Early warning signs”, and attached as
Appendix A. Appendix A reflects an analysis of the literature from 1968, when
Altman (1968) focused on the modelling of financial ratios in his most famous Z-
Score formulae, to date.
Early warning signs identified in the literature are categorised into the following main
categories: management, strategic, financial and product/market. Banking signs are
not discussed by most authors (refer to Appendix A), as this topic clearly industry
specific and favoured by authors researching financial institutions. Owing to their
importance, banking signs are reflected separately in Appendix B.
3.8 INTRODUCTION OF VERIFIER DETERMINANTS
The importance of analysing the early warning signs of business failure in their
entirety is thus essential when a turnaround is proposed. It is a well-established fact
that warning signs are generally ignored when the business is still a going concern.
Ex post facto investigations into the causes of failure and decline are most prominent
in the postmortem phase of business assessment. The academic debates clearly
failed to “drill down” into the micro warnings and were mostly content to stop at the
macro identification of warning signs. This leads to vague and open-ended
descriptions such as, among others, ‘poor’, ‘weak’, ‘dysfunctional’ ‘unsuccessful’ and
‘unfocused’ management.
63
The same argument applies in the case of strategy, product, market and financial
factors. In a financially distressed turnaround situation macro warning signs are
easily observable; it is the micro warning signs that have to be verified by the
turnaround practitioner.
Improved reliability can be obtained by building early warning verifier determinants
into the strategic business plan to ‘verify’ warning signs, possibly through a regular
update, to ensure appropriate corrective action. Observations may contribute by
condensing the timeline during which early warning signs are identified. As this
research and thesis focus mainly on the early warning signs, their causes and the
identification of verifier determinants initiating the causes, previous theory is listed
according to the timelines and early warning signs identified. For a full schedule of
the timeline approach and early warning sign methods used, refer to the schedule
attached as Appendix A. A conclusion can be drawn that the causes of decline
and/or failure are clearly identified and well researched.
The words ‘verifier’ and ‘determinant’ are combined in the term ‘verifier determinant’.
These words are subsequently subjected to investigation with regards to meaning,
denotation and common understanding. In order to formulate a definition, this study
considered and analysed the elements of the term ‘verifier determinant’ by applying
a synonym approach to each element.
The lists of synonyms in figure 3.4 stimulates the thought process, but also allows
the reader to form a comprehensive understanding of the constructs of ‘verifier’ and
‘determinant’. The term ‘verifier determinant’ is most probably better described by the
French words confirmer déterminant. The meaning of verifier is to confirm, validate
and make sure that the early warning sign identified is in fact present. Determinants
reflect the agreement or consensus of the warning sign verifier.
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Figure 3.4 Synonyms of verifier and determinant
A verifier determinant is defined as the ‘root’ indicator that validates the cause, which
underscores/concludes the early warning sign (see figure 3.5). In chapter 1, ‘early
warning sign’ was identified as a construct and ‘verifier determinants’ as the
elements of this study.
Verifier / Verify Determinant
/Determine
Synonyms Synonyms
Confirm
Bear out
Prove
Authenticate
Validate
Substantiate
Corroborate
Make sure
Decide
Settle on
Conclude
Resolve
Establish
Agree on
Findabsent
Confirmér
French
French
AND
Déterminant
65
Figure 3.5 Working definition schema for verifier determinant
It is of great importance to establish the true value of the business in the early stages
of the turnaround process. Verifiers can be used successfully to determine the extent
of the problem (‘depth of the rot’), the difficulties concerned and the severity of the
problem. When verifiers are used, the time constraints inherent in a turnaround
situation can be alleviated by assisting to assess the real situation quickly. Verifiers
will lead to a better understanding of the cause of decline or distress and will be
beneficial to managers/owners and personnel in coping with the psychological
effects. If identified correctly, verifiers will be the key variable when deciding if a
turnaround is feasible or not.
Owing to a better understanding of the business through the identified verifiers, the
ultimate cost determination of a turnaround could be accomplished in a relatively
short period.
WORKINGDEFINITION OF A VERIFIER DETERMINANT
Verifier
determinant
Sign
Cause
Example: debtor book aging – late receipts
Construct to
verify a cause as “correct”
Example: cash flowshortage
Sign that indicates
“a cause may exists”
Example: default on loan payment
Underlyingreason for decline=
“responsiblefor”
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The most important part verifiers need to play is to prevent decline and distress in
businesses. Used as a longevity based management tool, verifier determinants can
contribute to the day-to-day management of a business.
3.9 CONCLUSION
Recent research serves to reiterate, consolidate and summarise the seminal work of
earlier authors, such as Altman (1968), Argenti (1969; 1978; 1997), Miller (1977), Al-
Bazzaz and Grinyer, (1980) Mayes and McKierman (1980), Hamer (1983),
Anderson and Zaithaml (1984), Cameron et al. (1987) and various others (see
Appendix A). Once a variable has been identified as an ‘early warning sign’, it is not
subject to change. The variables were, however, subjected to name changes, as the
authors attempted to put a unique or personal touch on them.
The only unpredictable constituent of early warning signs is how management
respond to the appearance of the sign. In assessing the academic debate on early
warning signs, it becomes evident that authors use various terminologies and
descriptive writing to explain the causes of business decline and/or failure.
This chapter suggested a working definition, of a verifier determinant, in this study,
which is derived at by using the same approach used to arrive at a definition for early
warning signs.
Verifier determinants and the sequence of events
When a business starts to decline in performance, early warning signs change
from being invisible to becoming visible, because of their mostly qualitative nature.
The application of verifier determinants is used to confirm the veracity of the early
warning signs – at the same time reducing the period of the turnaround and its
effect on the decline. Later, the verifier determinants can inform the turnaround
plan.
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CHAPTER 4
Theoretical development on turnaround management
4.1 Introduction
4.2 Business turnaround
4.3 Definition of business turnaround
4.4 Strategic vs turnaround strategies
4.5 Development of turnaround strategies
4.5.1 Introduction
4.5.2 Contribution of Hofer (1980)
4.5.3 Contribution of Bibeault (1982)
4.5.2.3 Contribution of Hambrick and Schekter (1983)
4.5.2.4 Contribution of O’Neill (1988)
4.5.2.5 Contibution of Zimmerman (1989)
4.5.2.6 Contribution of Boyle and Desai (1991)
4.5.2.7 Contribution of Robbins and Pearce (1992)
4.5.2.8 Contribution of Fredenberger and Bonnici (1994)
4.5.2.9 Contribution of Arogyaswamy, Barker and Yasai-Ardekani (1995)
4.5.2.10 Contribution of Lohrke and Bedeian and Palmer (2004)
4.5.2.11 Contribution of Smith and Graves (2005)
4.5.2.12 Contribution of Sheppard and Chowdhury (2005)
4.5.13 Contribution of Pretorius (2008)
4.5.4 Other contributions
4.6 Turnaround planning
4.7 Conclusion
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Whitney (1987:49)
McCann, Dermer, Hunter, MacDiarmid, Morgan, Örndahl, Robson and Wagman (2009:7)
4.1 INTRODUCTION
This chapter discusses the theoretical development of turnaround theory and
philosophy, and the subsequent modelling of turnaround processes. A
comprehensive literature review was undertaken and is summarised in a table
attached as Appendix B. The research identified certain behavioural trends, which
were used to compile a new strategic turnaround framework (see figure 8.1). The
formation and development of the learning discipline Business Turnaround
considered in a South African context is still in its infancy.
By comparison with the United States of America, South African literature on the
subject of business turnaround is, to say the least, scarce. As the business rescue
principle is incorporated into company legislation, it is hardly surprising that most of
the early research and comments vest in the legal fraternity. With the limited number
of “turnaround” students and academia currently involved in the formal study of this
discipline, the body of knowledge is not expanding rapidly enough. A unique source
of information and literature on turnaround is to be found on internet websites, in
publications such as turnaround practitioner notes, and auditing and legal business’s
circulars and publications.
“Turnarounds are superb management schools. Everything needs fixing. Nothing is sure except
the need to recover. The learning experience is intense. Never again will the turnaround leader
assume that customers always buy, vendors always ship, bankers always lend.”
CHAPTER 4
THEORETICAL DEVELOPMENT ON TURNAROUND MANAGEMENT
“What is the difference between running a business well under normal conditions and doing a
turnaround?”
“Turnarounds differ from managing a company well by the compression of time and the scarcity
of resources – there is no time and scarce human and financial resources.”
69
As a result, the national and international Turnaround Managers Association
websites were used to great effect in this research in addition to the academic
literature (see Appendixes A and B).
.
Owing to the diverse sources of literature available, categorising secondary data
sources in the different key sources was considered and subsequently deemed
prudent as a departure point. In addition, the various practices and models that are
available in the business environment and that will assist with the compilation of a
South African entrepreneurial approach to rescue/turnaround, were researched.
The most salient strategies, steps and processes for rescue/turnaround are
highlighted in this chapter. This chapter concentrates on the Turnaround section of
the turnaround process flow as indicated by figure 3.1. The determining of the ‘true’
value of a business in a decline and/or distress situation is of the utmost importance.
The value, the method used to determine the value, and the final foundation on
which the value is based determine the future of the business. Moreover, a valuation
will assist in answering the following questions: how, why and when do you exit a
business or, how, why and when do you proceed with a turnaround initiative?
Once the decision is made in favour of contemplating a turnaround, the planning
phase will commence by applying grounded theory and turnaround methodology.
The salient business turnaround model that has evolved over time is discussed in
this chapter.
The work of Hofer (1980), Bibeault (1982), Hambrick and Schecter (1983), O’Neill
(1986), Boyle and Desai (1991), Robbins and Pearce (1992), Fredenberger and
Bonnici (1994), Arogyaswamy et al. (1995), Sudaranam and Lai (2001), Lohrke et al.
(2004) and, finally, Sheppard and Chowdhury (2005) is incorporated and illustrated
in table 4.1.
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4.2 BUSINESS TURNAROUND
The turnaround concept is not new to business. The term “turnaround” needs to be
clarified as various applications exist; for example, in the United States of America,
the shut-down and repair and maintenance of manufacturing plants are also referred
to as turnarounds. (This study is concerned with business turnaround). A business
turnaround event is triggered by deterioration in the performance (profits, financial
difficulties) of a business, resulting in a business turnaround situation.
The term “turnaround” is used in various scenarios and is applied to numerous
situations resulting in different outcomes. Section 1.7 contains a list of the terms
used interchangeably in this study.
The word turnaround is used interchangeably with rescue, realignment, restructure,
reorganisation and renewal. Some authors such as Mueller, et al. (2001), and
Lohrke, et al. (2004), also use downsizing in discussions on turnaround. Although
downsizing can be a response to decline in a business, downsizing is not always
linked to decline. Freeman and Cameron (1993:13) state that downsizing and
decline are two distinct constructs. They agree that a business can strategically
downsize without experiencing decline. This study will, for the sake of consistency,
refer to all these concepts as “turnaround”. In chapter 3, this study dealt conducted a
secondary data analysis and the differing concepts were closely investigated and a
clear distinction was drawn.
To illustrate the flow of the research process, figure 3.1 represents the steps in a
turnaround situation from the time a turnaround event first occurs. A turnaround
event is prompted by a condition of decline and/or distress within a business.
Accordingly, an early warning sign, or most likely a combination of early warning
signs, will be evident. The next step is to verify the warning signs in order to
establish the true value, asset value or liquidation value of the business. The
decision outcome will then determine whether a turnaround will be attempted. If it is
decided to commence with a turnaround, a turnaround plan will be drawn up which, if
accepted, will lead to the final steps depicted in the last column.
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The relevant literature (As per Appendix C), indicates that very few sources on the
subject of turnaround exist in the South African context. A local source of practitioner
literature and industry information is the South African Turnaround Practitioners
Association website, where South African turnaround practitioners publish industry-
related articles. The industry is currently unregulated and, as such, these articles are
unfortunately in some instances flawed by plagiarism, unsubstantiated data and
untested assumptions, and are often not based on scientific principles. Turnaround
planners, entrepreneurs and practitioners alike must be able to plan to re-enter
markets at an opportune time. Financial distress unfortunately has a negative effect
on suppliers and customers and the challenge is re-entry into the markets.
A turnaround practitioner’s short-term strategy is to ensure immediate corrective
measures and a short-term turnaround plan that will be managed on a project basis.
Longman and Mullins (2004:58) are of the opinion that effective project management
requires “the right people and skills”. This statement emphasises the need for
suitable experience and the appropriate academic background in a turnaround
practitioner. Muir (2005:3) warns about the high cost involved in turnaround
structuring.
A business can only embark on a turnaround attempt when the question: “Is the
business worth saving”, is confirmed in the positive. These are, in a very broad
sense, the essential aspects that need to be addressed by the turnaround
practitioner and the entrepreneur’s strategic turnaround planning. Bowman, Singh,
Useem and Bhadury (1999:49) attempted measuring these “models” but concluded
that the negative performance effects of turnaround are the transfer of wealth, rather
than value creation. The investigation into the literature suggests that there are
various causes for business distress.
Consensus seems to propose that poor cash flow management and control is the
single most common financial cause of initial distress and subsequent failure.
However, company size does play a role, as Pant (1991:639) concludes that it is, in
the short term, easier to improve the results of smaller rather than larger companies.
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Current South African legislation does not allow the debtor (entrepreneur) any input
into the insolvency/judicial management process. In this respect, it is worth noting
that the Canadian Bankruptcy and Insolvency Act (Section 50.4(8) 1992) allows for a
stay of (moratorium on) proceedings, which, in turn, allows the insolvent party to
apply to the courts for a stay or extension for the duration of the moratorium.
Grant Thornton Catalyst Issues (2004b) states that Chapter 11 of the United States
of America’s insolvency law provides for a similar debtor-friendly approach, where
the courts appoint a trustee to draft a plan for the reorganisation/restructure of the
business (USC Bankruptcy Chapter 11, section 1104). In the case of the United
States of America, the appointment of a trustee is obligatory for all public companies.
The focus, however, is on the fact the trustee must develop a plan that is specifically
designed to reorganise the business.
The investigation looked at numerous turnaround avenues that are available to the
entrepreneur. When applicable to the research objective, these avenues were
applied to a unique turnaround model in order to achieve turnaround in the current
South African business environment. A turnaround is deemed viable only if it reflects
the potential for creditable, sustainable recovery.
Zopounidis and Doumpos (2002:371) suggest that, when attempting to solve
business problems, the alternative should be weighed up carefully. In this vein,
Whitney (1987:49) argues that, with a turnaround attempt, nothing is certain except
the need to recover. Thus, turnaround attempts are, without doubt, faced with
different alternatives and it is up to the planners to discriminate effectively between
the various options. In a study on airlines in distress by Gudmundsson (2004:462), it
was established that distressed airlines pursued “market power” tactics. Market
power approaches inevitably lead to overtrading. In contrast, the author found that
non-distressed airlines have productivity and greater performance as their strategic
focus. The Grant Thornton Catalyst Issues (2004a:1) is of the opinion that the
entrepreneur needs to be aware of the following four key stages in steering a
troubled business to safety:
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? stabilising the distressed situation by introducing vigorous cash flow
management (reducing cash losses and increasing cash flow)
? analysing and revisiting the business and/or strategic plan to determine
new directions and action in meeting business objectives
? financial restructuring to reposition a business in line with new
objectives
? organisational restructuring to strengthen the business.
The UNCITRAL guide points out that, if the business can be saved, creditors will
receive maximum value and job losses will be minimal. The aspect of job creation in
South Africa is a very politically sensitive and broadly discussed topic. Accordingly, a
rescue/turnaround supportive legislative strategy could address the issue of job
retention. Although South Africa’s insolvency legislation clearly favours a culture of
creditor-friendly regimes, it would seem that debtor-friendly approaches are not
necessarily afforded proper consideration by all role players and stakeholders.
Burdette (2004b:11) consequently concludes that “there appears to be general
consensus that South Africa needs, and wants, a modern and effective business
rescue model”.
Business, government and academics all seem to agree that the present South
African judicial management system, particularly as a business rescue system, has
to a large extent failed. In the recent past, government, represented by the
Departments of Justice and Trade and Industry, has made various attempts through
various appointed committees to design a business rescue model. (Committees such
as these would, inter alia, include the Centre for Advanced Corporate and Insolvency
Law [hereafter CACIL] at the University of Pretoria.) Winer, Levenstein and Gewer
(2005:3) argue that companies need to develop systems of internal control and risk
management, as these systems will result in more efficient reaction times when
financial distress signals begin to appear. The need for entrepreneurs to have a
creative input into the preparation of a workable business rescue and redesign
model, and to design a comprehensive and acceptable business rescue plan, is
fundamentally important.
74
Informal agreements or arrangements which, in turn, can lead to the implementation
of formal insolvency proceedings by such creditors accentuates the need for a
change in current legislation that would allow such entrepreneurs adequate leeway
to design proper rescue plans. In the South African context, Chapter 6 of the new
Companies Act dictates that the business rescue or turnaround as an intervention is
of a “temporary nature”. The Act is clear that a turnaround should be completed in a
period of six months. This infers that the business will have returned to normal after
six months. Hofer and Schendel (1978:73) opine that the return to “normality” is the
final stage in the turnaround process. The normality stage is commented on later in
this chapter.
The United States of America and Canada seem to be at the forefront of turnaround
legislation and models. In the United States of America, the well-known Chapter 11
proceedings are often debated and reported in the literature. The short-term aim of
turnaround will be to manage the distressed business out of commercial insolvency
and the longer-term aim will be to sustain technical solvency. Chapter 6 of the new
Companies Act dictates a framework as explained in table 5.1 in chapter 5 of this
study. The salient issues, as per the Act, were discussed under the various
turnaround stages indentified. In this chapter reference will be made to the
applicable sections of Chapter 6 of the new Companies Act.
4.3 DEFINITION OF BUSINESS TURNAROUND
Turnaround management has evolved over a period of time, from a trial-and-error
scenario to an important management science. As such, the definition of a
turnaround has also been open to various debates and compositions. Eventually, a
definition evolved and some authors added to the definition. However, as research
theory developed, and legislation became more debtor friendly, the definition has
seen various changes in order to adapt to the new findings and legislation. Some
researchers, such as Thorne (2000:305), who place turnaround action on the same
podium as business transformation, amplify the importance of business turnaround.
Moreover, the importance of decision making during a turnaround event should not
be taken frivolously by management.
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The importance of turnaround decision making under risk, is confirmed by Tversky
and Kahneman (1974:1128; 1986:260) and Kahneman and Tversky (1979:264), who
warn that decision makers follow a simple heuristic rule of thumb when making
decisions under risk and uncertainty. It has been found that a relatively complex
probabilistic approach is required under conditions of high risk, as decision makers
tend to ignore the signals that clearly indicate the variables that should be
considered when forced to make decisions. Ansoff (1975:22) describes the
ignorance of weak signals by the entrepreneur as missing an opportunity or
exposure to a threat. The instant realisation that dawn on the entrepreneur is
labelled by Ansoff as the “moment of truth”. At this point neither the cause nor the
response is comprehensible by the entrepreneur. In practice, this moment of truth
refers to the “turnaround event”. A turnaround removes the entrepreneur (directors
and/or management) from their comfort zone and places them in unknown territory.
Bibeault (1982:1) describes a turnaround situation as an abnormal period in any
company’s history. Turnaround situations require management approaches unique
and distinctly different from those of stable or growth management. Consequently,
old management tenets lose their validity. In reviewing related academic and
practitioner literature to find common ground on the definition of business
turnaround, the close association between business failure prediction and business
rescue was evident. Figure 3.1 illustrates this association as a flow process, from
early warning sign identification and verification as the departure point, to
acceptance of decline/distress, to a turnaround response as the final stage.
Filatotchev and Toms (2006:408) state that the conditions responsible for the
financial downturn (identifying and verifying the early warning signs) will have to be
mitigated to achieve stability in the business. According to Pretorius (2006:6),
turnaround will allow business to achieve acceptable performance and emphasise
the importance of identifying signs. Sudarsanam and Lai (2001:183) argue that the
downward trend towards failure in business is attributable to poor implementation of
turnaround strategies. McRann (2005:38) points out that there are natural ebbs and
flows that are part of every business; thus it is not always clear if your business is
going to hit a significant bump or if you need a major change in strategy.
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Simons (1999:85) maintains that it is in the good times that managers/entrepreneurs
need to be more vigilant in identifying signs of impending danger. Simons (1999:86)
concludes that “in dynamic markets, taking risks is an integral part of any successful
strategy”. Entrepreneurs need to understand the conditions that create unacceptable
levels of risk.
In the research of preceding definitions on turnaround a number of interesting
approaches were observed. Transformation is positioned on the level of turnaround
by Levy and Merry (1986, in Thorne, 2000:305), who state that “transformation is the
response to the notion that the organization cannot continue functioning as before …
in order to continue to exist it needs a drastic reshuffling in every dimension of its
existence”. Ramakrishnan and Shah (1989:26) support the view that turnaround
management “refers to a gamut of operations from identification of a problem to
developing the plan needed to ameliorate them echo the turnaround process flow
designed by this research”. The most popular approach in defining turnaround is the
restoration of performance and success. Thain and Goldthorpe (1989:55) thus define
a turnaround as “the reversal of performance from decline and failure to recovery
and success”.
In the process of reversal of decline and failure, the turnaround management will
execute various action steps. Boyle and Desai (1991:33), describe turnaround
management actions as a process that involves the “establishing of accountability,
conduction diagnostic analysis, setting up an information system, preparing action
plans, taking action and evaluating results”. Confirming this approach, Robbins and
Pearce (1992:296) argue that a turnaround response consists of activities likely to
overcome the business’s troubles and return it to match or exceed prior
performance.
Balgobin and Pandit (2001:301) define a corporate turnaround “as simply the
recovery of a business’s economic performance following an existence-threatening
decline”. The phrase used, “decline that threatens its existence”, implies a distressed
situation which fuels the perception that turnaround is only associated with business
in distress.
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The research results clearly indicate that turnaround is not only limited to distressed
situations in business, but that the concept of turnaround incorporates various
elements such as downsizing and restructuring. Although downsizing can be a
response to decline in a business, downsizing is not always linked to decline.
Freeman and Cameron (1993:13) state that downsizing and decline are two distinct
constructs. They agree that a business can strategically downsize without
experiencing decline. In an expanded model of the turnaround process, Lohrke et al.
(2004:65) identify a three-phased process:
? turnaround situation
? turnaround response
? turnaround outcome
Sheppard and Chowdhury (2005:243) state that “a turnaround occurs when
businesss persevere through an existence-threatening performance decline and end
the threat with a combination of strategies involving skills, systems and capabilities
to achieve sustainable performance recovery”. A popular view regarding financial
distress is that expressed by Chathoth, Tse and Olsen (2006:604), who define a
turnaround as the “action taken to prevent the occurrence of financial disaster”, for
which the results are measured over a period of time.
A very recent definition which has substantial appeal was formulated by McCann et
al. (2009:7). They describe a turnaround as a “process to restore a failing company
to sustainable competitive vitality”. The centre point of all the definitions seems to be
the reversal, restoration and recovery of former glory. McCann et al.’s definition has
a more realistic approach in that its aim is to restore the business to a sustainable
competitive vitality. This implies that the business can be downsized, restructured
and aligned to form an economically viable enterprise, and not necessarily restore
performance to previous levels. This is a very important observation, as until now the
return to “normal” had not been clearly defined in any previous attempts. Clearly this
opens up a new construct in turnaround management, namely “sustainable
competitive viability”.
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Carapeto (2005:743) states that “a business reorganizes successfully when it
emerges from bankruptcy with either independence preserved, or else is acquired or
merged”. In contrast to the independence view, Pretorius (2008b:20) defines a
business that has been turned around as a recovery “from a decline that threatened
its existence to resume normal operations and achieve performance acceptable to its
stakeholders (constituents), through reorientation of positioning, strategy, structure,
control systems and power distribution”, again supporting normal operations.
The recovery process is not well defined, but Ketelhöhn, Jarillo and Kubes
(1991:117) consider a turnaround as being successful “if after the period of losses,
management could sustain at least two consecutive years of profit”. This equation,
however, fails to define the level of profit and the question remains. Various authors
such as Knot and Posen(2005), and Pearce and Robbins (2008), have discussed the
probability of mergers and acquisitions as a mechanism to turn a business around.
For that purpose some salient literature on the subject was included in the main body
of research. Castrogiovanni and Bruton (2000:27) quote Schendel, Patton and Riggs
(1975), who define a successful turnaround as the “reversal of a business’s pattern
of performance decline”. The UNCITRAL Guide (2005:7) defines business
turnaround, or reorganisation as the process “by which the financial well-being and
viability of a debtor’s business can be restored and the business continues to
operate, using various means possible including debt forgiveness, debt
rescheduling, debt-equity conversions and sale of the business (or part of it) as a
going concern”.
Chapter 6 of the new Companies Act closely follows the UNCITRAL Guide by
defining business rescue or turnaround in Section 128(1)(b) as "‘business rescue’
means proceedings to facilitate the rehabilitation of a company that is financially
-
distressed by providing for-- the temporary supervision of the company, and of the
management of its affairs, business and property …”; and, "… rescuing the
company" means achieving the goals set out in the definition of ‘business rescue’
in section (b)”.In this section of the Act "supervision" means the oversight imposed
on a company during its business rescue proceedings and “temporary” is submitted
to be a period of six months.
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In light of the entrepreneur’s high propensity to risk discussed in chapter 2, this study
theoretically defined and proposed early warning verifier determinants in modelling a
turnaround plan. The author of a turnaround plan has to introduce creativity into the
strategic turnaround plan to overcome this bias.
Majaro (1992:230) compiled a creativity checklist to ensure that strategic planning
includes creativity and innovation. Concepts such as the removal of barriers,
communication procedures and motivational stimuli will be further researched and it
is planned to include these concepts in the modelling of the turnaround plan. Von
Oetinger (2004:37) argues that innovation and creativity is “escaping from your
existing model”. Clearly, if the existing strategic business model leads to distress,
“escaping” from it is essential for survival. Furthermore, Merrifield (1993:384) argues
that central to the successful execution of a turnaround plan is the creation of
entrepreneurial initiatives.
Turnaround planning parameters should be officially researched but, as indicated,
will not follow the same conventional business planning structure, as the end goal
will be to return the business to commercial viability. Thus, changing the existing
(failing) strategic model is unavoidable. Owing to the historic non-reliance on and
negative perceptions of traditional business plans, a new creative approach to
compiling turnaround plans, that is, business strategising, was attempted to create a
functional framework for use by entrepreneurs and turnaround practitioners in South
Africa.
4.4 STRATEGIC VERSUS TURNAROUND STRATEGY
Porter (1979:137), who shaped the future of strategic management when he
introduced his five forces into the field of strategy research, did salient work on
strategic management. Later, Porter (2008:8) enhanced his five forces theory by
adding certain factors to the five forces.
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By introducing these factors for consideration, Porter qualifies some of the forces
such as “growth”, on which he now cautions the strategist. He states that “a narrow
focus on growth is one of the major causes of bad strategy decisions”.
Hedley (1976:10) ponders the complexity of the development and understanding of
strategic segmentation. It is concluded that the basis for strategic segmentation
usually involves a detailed assessment of “cast and value addition” in the business. It
is imperative that the segmentation of the business takes into account the life cycle
stage of the business.
Nag, Hambrick and Chen (2007:952) conclude that strategic management “acts as
an intellectual brokering entity, which thrives by enabling the simultaneous pursuit of
multiple research orientations by members who hail from a wide variety of
disciplinary and philosophical regimes”. In this context, Ketelhöhn (1995:74)
discusses the re-engineering of management strategies as processes emanating
from a “trial and error” continuum progression.
Oosthuizen (2009:14) debates the applicability of the traditional strategic positioning
approach and argues that no real need exists to discard the conventional strategic
planning approaches. This is contrary to Riana, Chanda and Metha’s (2003:83)
approach that the turnaround practitioner “unfolds” the turnaround strategy “step by
step” as the need arises to meet (short-term) objectives. The speed with which
turnaround strategies are formulated is confirmed by Mueller and Barker III
(1997:119), who argue that turnaround businesss develop decision-making
strategies that are “fast”.
They also conclude that these strategies, although swift, are influenced by external
perspectives. This view (influenced by external perspectives) is contradictory to the
agency theory approach which Eisenhardt (1989a:70) propagated against outside
intervention. If the agency theory is followed, the responsibility and accountability for
strategic decision making will rest with the turnaround practitioner alone. What is
critical in this stage of the turnaround is, according to Eisenhardt (1989a:60), to
acknowledge the principles of agency theory in designing the optimal contract.
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The complexity of a turnaround attempt is clarified by Zimmerman (1986:109) who is
clear that “in order for a company to turnaround, many things have to be done, and,
they have to be done together”. Chrisman, Hofer and Boulton (1988:413) state that
researchers have developed standard strategy classification schemes to address
extraordinary circumstances such as a business turnaround. The success of this
methodology is questioned as it is clear that a unique set of preconditions dictates a
specialised approach to turnaround. In confirmation, Chrisman et al. (1988:413)
conclude that an optimal strategic solution was, however, not achieved using the
standard strategy classification, as a turnaround event necessitates a unique
solution and strategic approach. The deduction here is that the turnaround
practitioner will have to establish a team of professionals to assist in the turnaround
execution.
Owing to the very tight timelines imposed on a turnaround event, it is also indicated,
or suggested, that a team approach is advisable. McCann et al. (2009:7) describe
the difference between normal business conditions and turnaround conditions as
follows: “… turnaround differs from managing a company well by the compression of
time and the scarcity resources, … there is no time and scarce human and financial
resources”. Hofer (1980:20) made a huge contribution in his time when he
distinguished between strategic turnarounds and operational turnarounds. Although
he discusses strategic and operational as two separate constructs, in strategising the
turnaround plan both constructs will form part of the strategic planning phase.
Sudarsanam and Lai (2001:183) distinguish between managerial, operational, asset
and financial restructuring.
These constructs were further analysed and dissected as Sudarsanam and Lai’s
research sample of turnaround businesses did not distinguish between informal
and/or formal Chapter 11 (United States Legislation) turnarounds. If the turnaround
were differentiated between the variables, it would have added valuable insights into
the understanding of formal versus informal turnarounds. Whichever causes for
decline and distress are identified, the turnaround solution decided on is of the
utmost importance, as poor implementation of a turnaround plan can lead to further
decline, with dire consequences.
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Three modes of restructuring are identified by Bowman et al. (1999:34): portfolio,
financial and organisational restructuring. Lieberman and Montgomery (1988:48)
argue that customer needs are very dynamic and opportunities are created through
“first mover advantages”. The same early mover principle applies to the opportunity
which is created for the management to turn a distressed business around. Joachim
and Wilcox (2000:15) conclude that, if the business owner is a strategic opportunist
and a fast mover, the business can survive. Chowdhury and Lang (1993:9) discuss
the vulnerability of businesses toward gradual decline when discussing the theory of
business turnaround. Hedley (1976:3) argues that “changes in the environment have
brought the (strategic) requirements into sharper focus, made the constraints more
severe”.
In conclusion, it can be deduced that, in a turnaround scenario, strategic modelling
will definitely differ from traditional strategic formulation, as strategic decisions have
to be made in a very short time.
Owing to the turnaround event, business decision making is far more situational and
complex than in normal situations. As a result of limited, and therefore untested,
data, the decisions made in a business turnaround are the best fit for the current
situation. Riana et al. (2003:89) confirm this approach; they conclude that
“turnaround managers ask for and frequently get total authority from the board to
take quick decisions. As a result they often shoot from the hip with little time spent on
collecting and analysing data and arriving at conclusions after careful consultations
that good business demands”.
A question that is on every creditor’s agenda is: What is the duration of business
rescue proceedings? Section 132(1) of the new Companies Act, is very clear as to
when a rescue begins and when it ends:
… business rescue proceedings begin when the company files a resolution to
place itself under supervision in terms of section 129(3); or applies to the court
for consent to file a resolution in terms of section 129(5)(1);
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a person applies to the court for an order placing the company under 45
supervision in terms of section 131(1);
or during the course of liquidation proceedings, or proceedings to enforce a
security interest, a court makes an order placing the company under
supervision…”
Section 132(2) makes the inference that the rescue proceedings will end with the
introduction of a notice that the plan has been substantially implemented. In practice,
the turnaround can take a lot longer and the intention of the legislature will have to
be subjected to a ruling by the court. Heller (1994:66), reporting on the turnaround in
Compaq, the computer manufacturer and supplier, stresses that it took the new chief
executive officer, Eckhard Pfeiffer, only two weeks to redesign Compaq “from top to
bottom”. Heller further states that Pfeiffer’s aim was a long-term successful solution.
Brenneman (1998:164) describes the most difficult part of a turnaround as “getting
all (everything) done fast, right away and all at once”.
Banks, as primary lenders to a business, play a large role when formulating a
business turnaround strategy. When banks are in a well-secured position, they will,
and can, close down the business if a turnaround plan is not compiled and presented
to them very quickly and to their satisfaction. According to Brown (2005:60), banks
need to see a clear directional focus in order to assess and approve debt
restructuring in a business turnaround situation.
There seems to be frequent and lively debate on the duration of a business
turnaround. Ketelhöhn et al. (1991:117) argue that the turnaround period could last
up to four years. They do, however, add the period of decline as the first year of the
turnaround process.
Ketelhöhn et al. (1991:117) describe these years as
? the first year of losses prompting the turnaround decision
? the second year as the breakeven year
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? the third year is for profits and confirmation of recovering profits
? the final year – year four is the year for consolidation and proof of
sustainability.
Kow (2004b:281) supports the view that the turnaround of a business is not a “quick
fix” scenario and that it will take a lot of hard work over an extended period of time.
The protracted period results because the turnaround practitioner, in his endeavours
to cut costs and improve mobility, always changes the business structure. A shorter
business turnaround term is discussed by Whitney (1987:49), who argues that the
turnaround practitioner does not have the “luxury of abundant time and resources”.
The amount of time required for a turnaround is of interest both for its practical
significance and for developing a research design.
None of the previous business turnaround researchers have stressed the sequential
aspects of their findings, but some patterns are evident. In studying business
turnaround, it was concluded by Hambrick (1983:235) and Friedenberger, Thomas
and Ray (1993:327) that a typical fundamental turnaround classification will be
financial, operational and strategic. They identify three stages of recovery:
? crisis
? stabilisation
? return-to-normal growth
o content of strategy
o process of turnaround.
Entrepreneurs often fail to take effective action to stop the decline owing to the fact
that they do not want to acknowledge the deterioration in their business.
Failure to identify the decline will lead to omission of the very first stage of a
business turnaround. Ramakrishnan and Shah (1989:26) describe turnaround
management as a range of operations “from the identification of the problem to
developing the plans needed to ameliorate it”.
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Balgobin and Pandit (2001:304) ponder on the fact that in successful turnarounds
the incoming turnaround management and/or practitioner formulates a strategic
recovery plan in a very short time span. These time constraints propose an
identification process that addresses the real issues in a turnaround event as soon
as possible.
Theriot, Roopchand, Stigter and Bond (2000:2) promulgate the use of Monte Carlo
simulation owing to its ability to address elements under situations of uncertainty and
variability. They list the following reasons for their argument:
? accuracy unequalled by analytical models
? explicit treatment of variability and uncertainty
? support for changes of key parameters over time
? explicit consideration of interaction and coupling
? flexibility in accommodating case-specific rules and constraints.
Owing to the specialised nature of the model, the actual duration of conducting a
simulation is nowhere debated, or commented on in the literature but it is perceived
to be time consuming.
4.5 DEVELOPMENT OF TURNAROUND STRATEGIES
4.5.1 INTRODUCTION
A whole host of turnaround models, strategies, steps, actions and process flows are
described in an attempt to design the ultimate turnaround framework. As such, the
works by various authors, such as listed in table 4.1, can be regarded as salient
contributions to turnaround research. In table 4.1, the authors included in this
discussion are contrasted using a shaded area.
As a result of a multitude of descriptive tables and figures, this research has only
concentrated on those models that can add value (although the others are no less
important) and these are indicated by background shading in the last column.
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Table 4.1 The evolution of turnaround modelling, strategic thinking and theory
Author Date Contribution Turnaround model
Carrington, J.H. and Aurelio,
J.M.
1976 Careful planning and open relationship with
stakeholders. Cost cutting and creditor
concessions
Hofer, C.W. 1980 The relationship between severity of decline and
appropriate recovery actions
Indentify four "gestalds"
Cost Reduction Activities
Revenue Increasing Activities
Market/product Refocusing Activities
Asset Reduction Activities
Moves to breakeven point
Bibeault, D.B. 1982 Identification of four key success factors for
turnaround success
New, competent management
Viable core operation
Adequate bridge financing
improved employee motivation
Hambrick, D.C and Schecter, S .
M
1983 Identification of three "gestalds" Asset and Cost Surgery
Selective market/product pruning
Piecemeal productivity
O'Neill, H.M. 1986 Identification of sub-strategies for turnaround
Zimmerman, F.M. 1989 Identification of successful turnaround Relating to the nature and severity of economic
difficulties
Relating to being a low cost producer
Relating to the differentiation of products
Relating to leadership and the turnaround
organization.
Boyle, R.D. and Desai, H.B. 1991 Introduce four cell approach to generic
turnaround
Internal
External
Administrative
Strategic
Castrogiovanni, G.J., Baliga,
B.R. and Kidwell, R.E.
1992 Concentrate on management change
Robbins, D.K. and Pearce II, J.A. 1992 Identification of retrenchment and recovery in
turnaround
Internal/External factors
Situation severity
Cost and asset reduction
Stability
Efficiency maintenance and entrepreneurial
expansion
Recovery
Dolan, P.F. 1993 Introduce four-phased rescue plan approach to
turnaround
Bankruptcy score
Diagnostic study
Turnaround plan
Monitor plan
Chowdhury, S.D. and Lang, J.R. 1993 Marshall financial support for a turnaround
Pearce II, J.A. and Robbins, K. 1993 Same model as 1992
Chowdhury, S.D., and Lang, J.R. 1994 Focus on operating turnarounds
Fredenberger, W.B. and
Bonnici, J.
1994 Introducing the life cycle extension theory
Barker III,V.L. and Mone, M.A. 1994 Oppose Robbins and Pearce II retrenchment
theory
Pearce II, J.A. and Robbins, K. 1994 Defending retrenchment theory
Arogyaswamy, K., Barker III,
V.L. and Yasai-Ardekani, M.
1995 Introducing a two-stage contingency model of
firm turnaround
Decline stemming strategies
Recovery strategies
Barker III,V.L. and Duhaime,
I.M.
1997 Investigate the extent of strategic change
Barker III,V.L. and Mone, M.A. 1998 Introduce strategic reorientation in turnaround
model
Harker, M. 1998 Focus on marketing strategies during turnaround
The Evolution of Turnaround modelling, strategic thinking and theory
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4.5.2 HOFER’S CONTRIBUTION (1980)
Hofer (1980:20) distinguishes between strategic and operational turnarounds. He
based his turnaround modelling on the patterns of decline in a business. These
patterns dictate which turnaround strategy is to be followed. Hofer (1980:21) opines
that before beginning a turnaround, the going concern value of the business must be
greater than its liquidation value. Figure 4.1 illustrates the concept of a “health
check”, which Hofer introduced to choose the correct turnaround strategy, choosing
between operational and/or strategic intervention. Where both the strategic and the
operational health are weak, a combination approach is advocated. Strategic
turnarounds will be strategies that call for entering new businesses or entering into
new ventures.
Harker, M. and Sharma, B. 1999 Focus on leadership strategies during turnaround
Castrogiovanni, G.J. and
Bruton, G.D.
2000 Retrenchment
Balgobin, R. and Pandit, N. 2001 Discuss stages in turnaround process
Barker III, V.L., Patterson, P.W.
and Mueller, G.C.
2001 Focus on management changes
Sudarsanam, S and Lai, J. 2001 Focus on restructuring strategies Operational restructuring
Managerial restructuring
Asset restructuring
Financial restructuring
Barker III, V.L. and Barr, P.S. 2002 Refer to 1998
Lohrke, F.T., Bedeian, A.G. and
Palmer, T.B.
2004 Introduce three phase turnaround process Turnarounds situation;
1) Decline
Turnaround response
2) Response Initiation
Turnaround outcome
3) Transition
4) Outcome
Kow, G. 2004 Identify elements of turnaround
Sheppard, J.P. and Chowdhury,
S.D.
2005 Introduce success and/or failure into model
Smith, M. and Graves, C. 2005 Turnaround as two key phases and a series of
integrated steps
Depicts the turnaround process as a series of
integrated steps
Two key phases – the decline stemming- and the
recovery phase.
Concentrate on the severity of the financial
distress, the amount of free assets available, size,
ability to stem the decline, stabilise,
retrenchment activities to improve efficiency and
cash flows
Pearce II, J.A. and Robbins, K. 2008 Acknowledge the role of strategic change and
growth in turnaround process
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Figure 4.1 The strategies companies chose (Hofer, 1980:25)
Hambrick and Schecter (1983:236) present Hofer’s four turnaround strategy
indicators: revenue generation, product/market refocusing, cost cutting and asset
reduction. Figure 4.2 illustrates the four strategies on a matrix where double signs
suggest a primary indicator and one sign a secondary indicator. The focus of the
turnaround will be directed at the two-sign indicators. Accordingly, the one-sign
indicators are a lesser component of the turnaround strategy. The deduction made
here is that, as the turnaround progresses, the Hofer matrix will have to be revisited
and repositioned, and the necessary adjustments to the strategic direction will have
to be made.
Hofer divides operational turnarounds (no strategy change at all) into four types:
? increasing revenues
? decreasing costs
Strong
Average
Weak
Operating
Strategic
Strong Average Weak
Current Strategic Health
Current
Operating
Health
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? decreasing assets
? embarking on a combination effort.
In later studies, Hofer (1989:39) investigated the nature of turnaround situations by
including a business review process which analyses the following variables:
? assessing current operating health
? financial condition
? market position
? technical stance
? production capabilities
? assessing current strategic health
? product/market matrix
? technological and production capabilities
? financial capabilities.
Figure 4.2 Hofer’s four turnaround strategy indicators (Hambrick & Schecter, 1983:236)
Strategic move Revenue
generation
Product/Market
Refocussing
Cost cutting Asset Reduction
Product/market Initiative
Sales from new products ++
Product R&D ++ -
Marketing ++ -
Product quality -- +
Price --
Market share ++ - -
Efficiency
Employee productivity + ++
Relative direct costs + --
Asset levels and use
Receivables/revenue + - --
Inventories/revenue + - - --
Plant and equipment newness --
Capacity utilization + - ++
Strategy
Expected Indicators of Hofer's Four Turnaround Strategies.
Two signs suggest a primary indicator (stressed by Hofer as integral to the strategy); one sign suggests a secondary indicator (an expected by-
product or lesser component of the strategy.
90
Hofer (1991:20) further discusses patterns of decline as causes of decline, both
strategic and operational, in comparison with the turnaround response – strategic
and operational.
4.5.2.1 Summary of Hofer’s contribution
Hofer (1980:25) introduced the business “health” concept as is depicted by figure
4.1. The two areas where a business’s current position is plotted are the operating
and the strategic areas. In plotting the business on a matrix, a clear indication of the
state of current operating health, or the state of current strategic health, will emerge.
Hofer advocated a relationship between severity of decline and appropriate recovery
actions , and Indentified four "gestals", they are:
? cost reduction activities
? revenue increasing activities
? market/product refocusing activities
? asset reduction activities.
4.5.3 BIBEAULT’S CONTRIBUTION (1982)(reprint 1999)
Bibeault (1998:263) structured his turnaround model using five distinctive phases.
The first stage is the “evaluation stage” where, as the name indicates, the business
review or analysis is contemplated. During the second phase, the “planning
strategies in turnaround situations”, Bibeault argues that the turnaround plan and the
tactics used need to follow the following stages:
? management change stage
? emergency stage
? stabilisation stage
? return to normal stage.
The third stage is the ‘emergency stage’ where, as the name indicates, the business
will do what is necessary to survive.
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This is a traumatic stage and the now generic phrase, “stop the bleeding”, is of the
essence. However, the actions taken will not necessarily lead to survival.
The fourth stage, the “stabilisation stage”, is the settling down phase after major
interventions. This stage reflects on the emergency actions and, although no less
important, at a more subdued pace. The final stage in Bibeault’s turnaround process
is “return to growth”. This will entail that the company’s financial position is restored
to such a level as to sustain normal growth. The host of referrals in the literature to
Bibeault’s contribution is a testimony to the salient work done by him, which
acknowledged by a host of turnaround academics, practitioners and business in
general.
4.5.3.1 Summary of Bibeault’s contribution
Bibeault’s identified four key success factors for turnaround success:
? new, competent management
? viable core operation
? adequate bridge financing
? improved employee motivation.
4.5.4 HAMBRICK AND SCHECTER’S CONTRIBUTION (1983)
Hambrick and Schecter (1983:245) discuss failed turnarounds and warn that “moving
too fast” can lead to further demise and ultimately failure. Hambrick and Schecter
(1983:247) introduced a cluster analysis in the research on turnarounds. In this
research, Hambrick and Schecter used published case histories from Fortune
Magazine. In their analysis they used Hofer’s four strategy approaches to derive at
three successful turnaround gestalts. Consequently, the application of the asset/cost
surgery would apply to businesses with low levels of capacity utilisation, selective
product/marketing pruning would be applied to businesses with high capacity
utilisation and the piecemeal strategy would apply to businesses that have high
market share.
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4.5.4.1 Summary of Hambrick and Schecter’s contribution
Hambrick and Schecter (1983:247) contributed to turnaround modeling by
identification of sub-strategies for business turnaround and three "gestalds" out of
Hofer’s four tier approach. They are:
? Asset/cost surgery,
? Selective product/marketing pruning
? Piecemeal strategy.
4.5.5 O’NEILL’S CONTRIBUTION (1986)
O’Neill (1986a:82) introduced sub-strategies to underscore the main turnaround
strategies implemented by Hofer (1980:25). O’Neill used a sample of nine
manufacturing and four service businesses, nine of which were turned around and
four of which were non-turnaround businesses. Using selective market and product
pruning, he identified a number of sub-strategies underscoring the main turnaround
strategy. These sub-strategies are the following:
? Management process
o turnaround effort usually preceded by management change
o redefinition of businesss business
o policy changes
o growth strategies
o attention to re-structuring
o planning.
? Key factors in turnaround
o competitive position
o product life cycle/ general market conditions
o industry type
o change in competitive patterns
o cause of decline
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o new strategic era.
4.5.5.1 Summary of O’Neill’s contribution
The main contribution is the identification of sub-strategies for turnaround. The sub
strategy approach broadens the scope of the investigative stage of the turnaround
process. It does not necessarily contribute a new formula to turnaround strategy but
emphasises the finer detail in the process.
4.5.6 ZIMMERMAN’S CONTRIBUTION (1989)
During 1986, Zimmerman (1986:113) investigated four turnaround businesses and
concluded that there is a call for control in business turnaround situations. He argues
that effective control can be achieved through the use of the right people, who will be
characterised by their willingness to play an active role in establishing control. He
conducted two studies: in study 1 the sample comprised four manufacturing
businesses, including two turnaround businesses, one marginal business and one
non-turnaround business. The data source used was public archives.
In study 2, the sample consisted of 15 mature manufacturing businesses, eight of
which were turnaround and seven non-turnaround businesses. Zimmerman used
financial records, manuscripts, case histories and interviews in his endeavour to
identify successful turnarounds.
In conclusion, Zimmerman (1986:113) summarised a turnaround as the following:
? a multifaceted process which has minimum requirements
? a referent organisation
? a new and additive view of the environment
? a systematic approach to the process of examining the environment
? the critical clarification and articulation of values
? old values are preserved as new values are added
? traditional morality and values influence turnarounds
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? the systematic withdrawal of resources improves organisational
performance.
Later, Zimmerman (1989:117) structured a turnaround process that dealt with the
planning of efficiencies, and he concluded that a moderate overhead structure is
required. The focus is clearly on production efficiency and operational issues, as
indicated by the lower left-hand column in figure 4.3. The process concludes with a
“successful turnaround”. The Zimmerman model mainly concentrates on operational
inefficiencies in the business, and if these inefficiencies are addressed, caters for
one outcome – a successful turnaround.
Figure 4.3 The successful turnaround process (Zimmerman, 1989:117)
4.5.6.1 Summary of Zimmerman’s contribution
Zimmerman contributed to business turnaround by introducing a model that relates
to the nature and severity of economic difficulties, a low cost producer, the
differentiation of products and leadership, and the turnaround organisation.
1. ProductionEfficiency
2. Inventory Efficiency
3. Modest Overhead
4. Designfor Manufacturability
1. Distinguishing Features
2. Reliability and Performance
3. Product Quality
4. Market Continuity
1. Focus on Operations
2. Managerial Stability
3. Experience in the Industry
4. Technical Experience
5. Knowledge exploration
6. Incremental Changes
7. Fair Play
(C)
APPROPRIATE
TURNAROUND
ORGANIZATION
(LEADERSHIP)
(B)
PRODUCT
DIFFERENTIATION
(A)
LOW COST
PRODUCTION
SUCCESSFUL
TURNAROUND
95
4.5.7 BOYLE AND DESAI’S CONTRIBUTION (1991)
Boyle and Desai (1991:33) researched and characterised the causes of failure in
small businesses, subsequently forming typologies from which to construct a generic
approach to turnaround. They grouped 24 failure factors into four categories. The
main aim of the grouping was to determine the origin of the warning signs – whether
they are internal or external to the business, and whether they require an
administrative or a strategic response. Figure 4.4 illustrates the response
requirements against the matrix of origin and locality.
4.5.7.1 Summary of Boyle and Desai’s contribution
Boyle and Desai contributed to turnaround modelling by introducing a four-cell
approach to generic turnaround. These four cells are depicted in figure 4.4. The main
attribute of this approach is that within these cells the variables are measured
against the following quadrant matrix:
? internal
? external
? administrative
? strategic.
4.5.8 ROBBINS AND PEARCE’S CONTRIBUTION (1992)
Robbins and Pearce (1992:296) maintain that, at the stabilisation stage, the recovery
must be matched to the causes of the decline, as this will be the test for
implementing return-to-growth, entrepreneurial and/or operating strategies. Robbins
and Pearce (1992:291) designed a two-stage turnaround response model including
governance factors, which they used on 32 textile mill businesses in their research.
The research was conducted using questionnaire and public/company archives.
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Figure 4.4 Environment/response matrix (Boyle & Desai, 1991:38)
The two stages identified are the turnaround situation and the turnaround response.
Within this two-stage model they included three sub-stages namely the “cause”, the
“retrenchment phase” and, finally, the “recovery phase”. The retrenchment phase
was further developed by Robbins and Pearce and led to various academic debates.
Pearce and Robbins (1993:614) extend the retrenchment theory, which they
describe as a “deliberate reduction in costs, assets, products, product lines, and
overhead” in the commencement stage of a turnaround. Castrogiovanni and Bruton
(2000:25) raise a counter argument, when they challenged the Robin and Pearce II
approach. They are against the generic approach of a retrenchment phase
applicable to all turnaround situations.
According to Castrogiovanni and Bruton (2000), a turnaround strategy should be
purpose made for a specific turnaround case, addressing the causes of decline. The
Robbins and Pearce II turnaround model, illustrated in figure 4.5, acknowledges
Cell I
Policies
Procedures
Rules
Systems
Cell II
Analysis
Planning
Positioning
Cell III
Risk management
Cell IV
Product Development
Diversification
Niching
Market Development
Market Penetration
Internal
External
Administrative
Strategic
RESPONSE
ENVIRONMENT
ENVIRONMENT/RESPONSEMATRIX
CLASSIFICATION OF GENERIC APPROACHESTOTURNAROUND
97
internal and external causes for decline. The focus of the model is retrenchment of
costs and assets. In itself retrenchment forms part of any successful turnaround but
it is not the only focus area of importance. The model finally allows for a recovery
phase.
Figure 4.5 A model of the turnaround process (Robbins & Pearce, 1992:291)
4.5.8.1 Summary of Robbins and Pearce’s contribution
Robbins and Pearce contributed significantly by identifying retrenchment and
recovery processes in turnaround situations. They also added internal and external
factors and concentrated on the situation severity, cost and asset reduction, and the
stability of the business during turnaround. Finally, they concentrated on the
recovery; when turned around the business focus is on efficiency maintenance and
entrepreneurial expansion.
3
UPONSTABILIZATION, A DECISION IS
NEEDED ON A RECOVERY STRATEGY THAT
MATCHES THE BLEND OF CAUSES OF THE
DECLINE, e.g.. DOMINANT EXTERNAL
CAUSES WITH ENTREPRENEURIALLY
DOMINANT STRATEGIES
EXTERNAL
FACTORS
INTERNAL
FACTORS
EFFICIENCY
MAINTENANCE
ENTREPRENEURIAL
EXPANSION
RECOVERY
STABILITY
COST REDUCTION
ASSET
REDUCTION
SITUATION
SEVERITY
TURNAROUNDSITUATION TURNAROUNDRESPONSE
CAUSE
RETRENCHMENT PHASE RECOVERY PHASE
(OPERATING)
(STRATEGIC)
1
ACOMBINATION OF EXTERNAL
ANDINTERNAL FACTORS LEADS
TO THE TURNAROUND SITUATION
2
SEVERE SITUATIONS
CALL FOR ASSET REDUCTIONS
INTHE RETRENCHMENT PHASE.
LESS SEVERE SITUATIONS MAY
BE STABILIZED BY COST
RETRENCHMENT ALONE
LOW
HIGH
DECISION
POINT
98
4.5.9 FREDENBERGER AND BONNICI’S CONTRIBUTION (1994)
Fredenberger and Bonnici (1994:60) argue that the turnaround process “if
successful, may be chartered as an inverse product life cycle”. Life cycle theories
entail the “extension” of the life of a product or, as the authors indicate, the life of a
business. They ponder on the information types that should be included in the
investigative stage, which forms the focus of their study, and list the following types:
? cost analysis
? expense analysis
? productivity and human resources
? productivity and physical resources
? productivity of market
? financial analysis
? working capital analysis.
4.5.9.1 Summary of Fredenberger and Bonnici’s contribution
In introducing the life cycle extension theory, Fredenberger and Bonnici align the
product life cycle theory with turnaround and argue that a turnaround is an extended
life added to the existing deteriorating life span of a business.
4.5.10 AROGYASWAMY, BARKER AND YASAI-ARDEKANI’S CONTRIBUTION
(1995)
Figure 4.6 concentrates on strategic reorientation and incremental strategic change.
Arogyaswamy et al. (1995:494) debate the constraints of turnaround modelling,
highlighting their major concerns:
? modelling focussing primarily on, retrenchment and efficiency
improvements as initial response to decline
? turnaround often does not model the most important contingencies
affecting the turnaround process
99
? turnaround models fail to capture the complexity of the turnaround
process.
The model concentrates on the interaction between variables and forces within the
business. It proposes that turnaround businesses demonstrate two distinct outcomes
in response to decline. The first response is “decline-stemming strategies that
reverse the dysfunctional consequences of decline”, and the second response,
which is in line with this research focus, “recovery strategies that position the
business to better compete in its industry”.
4.5.10.1 Summary of Arogyaswamy, Barker and Yasai-Ardekani’s contribution
They contributed by introducing a two-stage contingency model of business
turnaround:
? decline stemming strategies
? recovery strategies.
Figure 4.6 Business turnarounds (Arogyaswamy et al. (1995:494))
Strategic Reorientation
Incremental Strategic change and More
Effective Implementation of Existing Strategic
Orientation
Recovery Strategy
Emphasis
FIRMTURNAROUNDS
Efficiency Gains
ImprovedStakeholder
Relationships
Stabilization of Internal Climate & Decision
Process
Decline-stemming Tactics. Decline –stemming Tactics Decline-stemming goals
-If Downsizing, emphasis is on work
designs
-- Revenue increases
-Involving stakeholders in firm change
process
-Example: Giving unions and lenders
Board representation
-- Top management change
-- Decentralization and involving
employees in change process
-- Changing reward and control systems
-- Leadership communication emphasizing
the needfor new thinking and
organizational flexibility,
-Downsizing that reduces headcount
-- Assets and cost reduction
-- Recommitting powerful stakeholders to
the organization's strategy and mission
-Example: securing an expanded line of
credit from lenders.
-- Bargaining for better terms with weak
stakeholders
-Example: Obtaining wage concessions from
unions
-- Top management continuity
-- Tighter controls without over
centralization
-- Increase employee aspirations through
higher targets on reward and control
systems.
-- Leadership communication emphasizing
the continuing efficacy of traditional firm
values and strategies.
100
4.5.11 LOHRKE, BEDEIAN AND PALMER’S CONTRIBUTION (2004)
Lohrke et al. (2004:172) agree that the first stage of a turnaround is a situation
analysis (see fig. 4.7). These authors (2004) conclude that it is necessary to look
beyond financial decline to broader indices that trigger the turnaround process, and
thus introduced the Top Management Team (TMT) scanning behaviours.
Figure 4.7 An expanded model of the turnaround process (Lohrke et al., 2004:73)
4.5.11.1 Summary of Lohrke, Bedeian and Palmer’s contribution
Lohrke et al. introduced the Top Management Team (TMT) approach. In terms of
this approach they identify a three-phase turnaround process:
? turnaround situation
o decline
? turnaround response
o response initiation
Phase 1
Turnaround
Situation
Phase 2
Turnaround
Response
Phase 3
Turnaround
Outcome
External Factors
•Environmental
Munificence
•Environmental
Dynamism
Internal Factors
•Strategic
Misalignment
•Insufficient Slack
Resources
Decline
Severity
TMT Responses
Motivation Crisis Response
Attributions
Monitoring
Awareness Demographics
Scanning Behaviours
Cognitive complexities
Capability Demographics
Power
Consensus
Resources
Recovery
•Operating
•Strategic
Improved
Performance
Continued Decline
Industry Exit
Failure
Stabilization
TurnaroundStrategies
101
? turnaround outcome
o transition
o outcome.
4.5.12 SMITH AND GRAVES’S CONTRIBUTION (2005)
Smith and Graves (2005:308) attribute the distressed state of a business to the
severity of the problem. They ponder on the influence of the business size and the
free assets available. Under the heading “decline stemming strategies”, they discuss
the execution of the turnaround which evidently led to stabilisation, and address the
causes of decline and the business’s competitive position. Smith and Graves
(2005:316) developed a turnaround model to reduce the misclassifications brought
about by type I and type II errors, measuring the severity of distress.
The turnaround process (fig. 4.8) that they propose is quite comprehensive, and
addresses the turnaround situation in terms of the causes of decline. The second
stage in their model is to formulate decline-stemming strategies, which concentrate
on internal efficiencies and support. Then, before entering into the recovery phase of
the model, the causes of decline are revisited. The recovery decision will have two
proposed directions, firstly, maintenance and, secondly, reconfiguration. The final
phase is the extent of the recovery, which can be successful or not.
Smith (2005:73) argues that a liquidation analysis of the business’s balance sheet is
useful when considering a going concern. A range of researchers and authors, (as
indicated in appendix C), however, did not include the investigation of the affairs of
the business in their research as a first stage analysis of the turnaround event.
Nevertheless, the researchers that did include the investigation of the business’s
affairs have various approaches and terminology for this stage.
4.5.12.1 Summary of Smith and Graves’s contribution
Smith and Graves see turnaround as two key phases and a series of integrated
steps. The two key phases are the decline stemming and the recovery phase. These
102
concentrate on the severity of the financial distress, the amount of free assets
available, size, ability to stem the decline, stabilisation, retrenchment activities to
improve efficiency and cash flows.
Figure 4.8 Turnaround process (Smith & Graves, 2005:308)
4.5.13 SHEPPARD AND CHOWDHURY’S CONTRIBUTION (2005)
Sheppard and Chowdhury (2005:245) add a specific outcome to the turnaround
process. This can be either success or failure, as shown in figure 4.9. The perceived
shortcoming would be to have a step in the process that will highlight the probability
of failure early in the process.
DISTRESS
ED STATE
Case of
decline
EXTEND OF
RECOVERY/
TURNAROUND
STABILITY
Foundation
for recovery
strategy
Competitive
position
DECLINE
STEMMING
STRATEGIES
Free
assets
available
Firm
size
Severity
Internal climate
anddecision
processes
•Stabilize internal
climate and
improve decision
processes
Efficiency
•Improve efficiency
by implementing
productivity
and/or downsizing
strategies
Stakeholder
support
•Maintain/renew
support from
suppliers,
creditors,
shareholders,
customers
Maintenance of
efficiency
Entrepreneurial
reconfiguration
RECOVERY
STRATEGIES
ADOPTED
Turnaroundsituation
Decline stemmingstrategies
Recoverystrategies
Extendof
recovery
103
Figure 4.9 Key events and core concepts in turnaround/failure (Sheppard & Chowdhury,
2005:245)
4.5.13.1 Summary of Sheppard and Chowdhury’s contribution
The introduction of success and/or failure into a model.
4.5.14 PRETORIUS (2008)
Figure 4.10 illustrates the way in which Pretorius (2008a:23) perceives the unique
set of preconditions that prevail in the Porter strategic model. He opines that the
Porter model’s view of opportunity and competitive advantage are analogous to a
turnaround situation. Ormanidhi and Stringa (2008:62) also favour the Porter model
of generic competitive strategies to evaluate business. They argue that the use of
this model is complementary owing to the following qualities:
? its popularity, as it is substantially used
? the model has a well-defined structure
? the feasibility of the structure in empirical use
? concept clarity of the model
104
? the simplicity and generality of the model.
? owing to the high degree of detail the model complements other
models.
Pretorius splits the precondition for a turnaround event into four distinct categories:
performing well, underperformance, distress and, finally, decline. A turnaround
situation is determined by its own configuration of preconditions (see fig. 4.10) and
many additional lesser variables may play a role or act as triggers.
Businesses in the “performing well” quadrant, depicted on the top left of figure 4.10,
are not experiencing conditions that warrant a turnaround. Typically, they experience
good sales demand, growing market share and established competitive advantage.
Figure 4.10 Turnaround situations and their unique preconditions matrix (Pretorius, 2008:23)
Turnaround situations and their unique preconditions matrix
Performing well:
Good sales demand,
market share,
Established CA
Invisible rising
Cost/unit
Distress:
Dwindling sales, Losing market share,
Losing CA,
Demand changes
Competitive products
Sudden inventory growth
Expenses increase
Under performance:
Good sales demand
Pressure on contribution
Margin, lowcapacity
Utilisation, Pressure on
Relative productivity low,
Cash strapped
Crisis:
Rapidly dwindling sales,
Losing Market share,
Lost CA,
Demand changes,
Cash strapped
R
e
s
o
u
r
c
e
M
u
n
i
f
i
c
e
n
c
e
Resource
Abundance
Resource
Scarcity
Internal/Operational External/Strategic
Causality (Origen of distress)
105
The quadrant depicting “underperformance”, is disposing of scarce resources.
Capacity utilisation is low, and a poor positioning on competitive advantage is
evident. Consequently, a turnaround situation is inevitable to address the very
inefficiencies that create the underperformance.
The preconditions for the distress quadrant are characterised by abundant resources
but declining sales demand owing to a loss of competitive advantage.
Hence, a turnaround situation is inevitable to address the loss of market share,
quality and/or service issues causing the distress.
Decline quickly turns into a crisis and a definite turnaround event. However, a
turnaround intervention may be too late, depending on the severity of the crisis. As
part of a turnaround, liquidation or the selling of non-core divisions could be
contemplated.
Figure 4.11 Strategies and practices to respond to the turnaround situations (Pretorius,
2008:24)
Strategies and practices to respond to turnaround situations
Porter strategies for growth:
Pursue sales (penetrate and new
markets)
Maximize market share
Entrench CA
Optimise capacity,
Organic & Inorganic
Forced Repositioning strategy:
Strategy revision,
Alternative revenue streams
Find newproducts,
Alternative markets,
Forced to Innovate, diversity,
Differentiate, acquire
Efficiency strategy:
Protect/strengthen CA,
Cost cutting,
Capacity improvement,
Generate cash,
Outsource non essentials,
Productivity,Asset reduction
Last resort strategy:
Defensive merger,
Divestiture,
Liquidation,
Ask debt forgiveness
R
e
s
o
u
r
c
e
M
u
n
i
f
i
c
e
n
c
e
Resource
Abundance
Resource
Scarcity
Internal/Operational External/Strategic
Causality (Origen of distress)
106
4.5.14.1 Summary of Pretorius’s contribution
Pretorius (2008a:24) states that business turnaround essentially demands a new
choice of Porter’s generic strategic options as a focal point. In last resort strategy it
requires divestiture or liquidation and the start up of new ventures, which involves
determining the new positioning and where competitive advantage will be sought.
With abundant resources, Pretorius concludes that “Porter’s matrix is still core, but
when there is scarcity of resources, the focus moves towards finding efficiency first”.
4.6 TURNAROUND PLANNING
Seminal work has been done by Bibeault (1982), Hofer (1990), Barker ( 1998, 2005),
Brenneman (1996), Dolan (1983), Fredenburger (1994) and Pearce and Robbins
(2008) and, in the South African context, Harvey, (2002), Burdette (2004), Loubser
(2004) and Pretorius (2004). Pandit (1997:33) has grouped the salient research done
by researchers, academics and authors from 1976 up to 1995. Pandit’s table
classifies the theory into 1) unit of analysis; 2) sample characteristics; and 3) data
source(s). His summary of research progress is reflected in Appendix D. All the
authors, some to a lesser extent, agree on the investigation of the sources of
decline. Turnaround practitioners and other stakeholders are constantly challenged
with type I and type II errors. A type I error is to turn around a company that should
not be turned around, and type II error is to not turn a business around that should
have been turned around.
The alleviate this problem, Quinn et al. (1988:681) posed the following questions to
be answered when assessing a business turnaround:
? Is the business worth saving?
? Sustainable or disinvest or liquidate?
? State of current operating health?
? State of current strategic health?
107
Castrogiovanni, Baliga and Kidwell (1992:27) pose the following questions, which need
to be added to the questions posed by Quinn et al. (198:681):
? How sick is the business?
? In what stage of decline?
? CEO management involvement?
To arrive at appropriate answers to these questions, Gopal (1991: 81) proposes that
the analysis should include an investigation of the:
? strengths and weaknesses of the business
? market
? organisational structure and quality and quantity of manpower
? finances.
The importance of establishing the business’s value at an early stage of turnaround,
in this instance the investigative step in a turnaround, is confirmed by Brockman and
Turtle (2002:512) and Glantz (2003:314), maintain that an ideal situation for decision
making at this stage would be to compare a liquidation scenario valuation with a
going-concern (turnaround) scenario. Cocq, Legoux, De Loe, Oka and Zorn
(2006:43), who conclude that there seems to be consensus that some form of
feasibility and/or due diligence must be done in a very short space of time, confirm
this consideration.
Akason and Kepler (1993:38) discuss the difference between a business review and
the due diligence process. They conclude that the investigation should include:
? fully backed findings
? quantifications
? possible solutions
? guideline on managing a review which is also applicable to turnaround
planning.
108
The due diligence process was discussed in chapter 1 as a tool for investigating a
business’s activity effectively. In the context of business turnaround, where a merger
or acquisition is contemplated as part of the turnaround plan, Gillman (2001:7)
defines a due diligence as follows:
? the examination of a potential target for merger, acquisition, privatisation
or similar corporate transaction, normally by a buyer
? a reasonable investigation focusing on future material matters
? an examination being achieved by asking certain key questions, including,
do we buy, how do we structure the acquisition and how much do we pay?
? an examination aiming to make an acquisition decision via the principles of
valuation and shareholder analysis.
Business consultants, accountants and legal practitioners have embarked on their
own design and approach to formulating a due diligence process. The Axiomate
Group (2004) focus on the five key elements in a business infrastructure.
They are:
? technology
? finance and administration
? operations
? sales and marketing
? people, culture and organisation.
The importance of data integrity is underpinned by Cole (1994:48) in the early stages
of the due diligence process. Cole states that it is crucial to get entrepreneurs to
understand that providing high-quality information will speed up the process. This
imperative is also true for a turnaround intervention.
The first phase of business turnaround planning, the investigative phase, is
discussed briefly under the heading “Investigative phase”. The application of verifier
determinants during the investigative stage are of the utmost importance. Chapter 3
of the study has dealt comprehensively with the concept of verifier determinants.
109
Subsequently, the second phase of the turnaround planning is the actual drafting of
the plan.
4.6.1 INVESTIGATION PHASE
The investigative phase is paramount in most authors’ turnaround modelling
discussed earlier in this chapter. In Section 130 of Chapter 6 of the new Companies
Act is quite clear as to the responsibility of the turnaround practitioner. The
practitioner must establish whether there is no reasonable basis for believing that the
company is financially distressed, or that there is no reasonable prospect of rescuing
the company. Section 141 states that the practitioner must, as soon as the
investigation into the company’s affairs is completed, “consider whether there is any
reasonable prospect of the company being rescued”.
This section further dictates that if the turnaround practitioner detects any adverse
problems which will have an impact on the feasibility of doing a turnaround, the
practitioner must inform all stakeholders. The most important outcome of the
investigation phase when it is decided not to continue with a turnaround is depicted
at the bottom of figure 8.1 (p233). The business can arrange for a compromise in
terms of Section 150 of the Act, or the business can be liquidated as per Section
141(2)(b), which reads as follows: “… apply to the court for an order discontinuing the
business rescue proceedings and placing the company into liquidation.”
After due consideration of the responsibilities implied by the new Act, and predicting
a positive representation, a decision will be made to continue with a business
turnaround plan.
4.6.2 THE PLAN
The considerations that have to be included in the turnaround plan, as prescribed by
the new Act, are dealt with comprehensively in section 5.7 in the next chapter. For
the purposes of this chapter, reference is made to the salient research on the
subject. The second column of Appendix B illustrates the full literature response to
the planning phase.
110
The plan must demonstrate a defensible strategy in order for the courts and creditors
to favour turnaround proceedings. In Grant Thornton’s Catalyst Management Issues
(2005b:2), they conclude that the funding requirements, future cash flow and debt
repayment in relation to the turnaround plan must be “assessed with a high degree
of certainty”. Turnaround plans are clearly divergent (but not exclusive) from
conventional business plans. Start-up businesses have projections for future
possible performance issues, whilst existing businesses apply business plans to
create new ventures, acquisitions and a change in business strategy.
The lack of proper measurements to test the validity and reliability of business
turnaround plans by financial institutions and trade creditors has resulted in a
deterioration in the use of and reliance placed on business plans as a business
assessment tool. It is important that entrepreneurs identify the associated warning
signs in a timely fashion in order to re-strategise and reorganise the business and
steer it to safety. Entrepreneurs are reluctant and in many instances ill-equipped to
compile the turnaround plans needed to initiate negotiations with creditors. This
important management tool is then outsourced, and left to “professionals” to compile.
The environment in which an entrepreneur needs to promote his change
(turnaround) plan is predominantly a hostile environment. Nevertheless, Hall
(1980:75) concludes that survival is possible in a hostile environment if successful
survival strategies are planned and implemented. The mere fact that entrepreneurs
often do not compile their own turnaround plans lead to a total lack of understanding
of their own businesses and contributes further to the poor reliance placed on
turnarounds by creditors in general. Entrepreneurs seldom, if ever, apply turnaround
plans as a strategic management tool to enhance their businesses. Section 150 of
Chapter 6 of the new Companies Act requires that a business turnaround plan has to
be presented to all creditors concerned, including the courts, in order to convince
them to agree to a stay of proceedings.
Creditors have to be placed in a position to assess the turnaround plan before they
can be expected to support the turnaround attempt by either reducing their claims
and/or supporting it by extending lending or trade credit.
111
A turnaround plan will most probably not mirror a conventional business plan, as a
more vigorous approach to strategic change will be required.
Balgobin and Pandit (2001:304) identify four categories addressing the formulation of
a turnaround plan. They are “situation analysis, gaining control, managing
stakeholders and improving motivation”. Once approved, the entrepreneur’s
behaviour will have to adapt to the planned restrategising of the venture and they
need to be aware of the possible impact. For this reason, a willingness to change
needs to be present.
It is of the utmost importance that the personnel of the business are aware of the
turnaround situation and the planned turnaround execution. Balgobin and Pandit
(2001:314) argue that a turnaround plan which is communicated properly will reduce
confusion and protect key critical resources. Kow (2004a:242) confirms this view by
concluding that a communications plan must be part of the turnaround strategy in
order to ensure that the concerns of employees are dealt with. The turnaround
models in the literature (discussed under subsection 4.5), research did not include
communication as a specific step, although clearly a very important factor is
maintaining motivation levels.
The second and maybe the most important function of a proper turnaround plan is to
ensure that future investors (post commencement finance) are confident that the
business can return to sustainable competitive viability. Han, Huml, Kkaragal, Saito
and Sundjaja (2007:7) are of the opinion that investors tend to divest if the
turnaround plan lacks momentum and adequate execution. Cozijnsen, Vrakking and
Van Ifzerloo (2000:153) also believe that the turnaround plan should include and
consider the following variables:
? planning objectives
? organisational structures
? increased profits
? increased turnover
? increased efficiency
112
? improved effectiveness
? higher productivity
? increased market share
? improved environment
? quality improvement
? human objectives
? reduction of staff turnover
? increased employee satisfaction
? enhanced motivation of employees
? improvement of work environment.
Harker (1998:325) concludes that the foundation of a turnaround plan “is sound
market knowledge”. He states that there is a need for information and proper
analysis of variables before constructing a turnaround plan. Clearly, sifficient time
needs to be allotted to a business review in order to prepare and do a due diligence
before the plan is presented to all parties. In this study, the possible turnaround
models currently available to entrepreneurs in South Africa were investigated.
Findings indicate that two distinct directions can be followed, namely, formal and
informal turnaround.
The United Nations Commission on International Trade Guide (UNCITRAL)
(2001:10) clearly indicates that one of the objectives of restructuring a business is to
create a framework that will encourage entrepreneurs (businesses) to address their
financial distress factors at an early stage.
4.7 CONCLUSION
From the literature exploration it is evident that some authors, such as Altman and
Hotchkiss (2006), approach the study of turnaround management with a qualitative
data approach, although accounting data formed the basis for most of the empirical
research debated in the academic journal articles. Fortunately, a number of authors,
such as Bibeault (1982), O’Neill (1986), Riana et al. 2003) and McCann et al. (2009),
113
have a more pragmatic approach to turnaround and tend to drill down into the micro
or qualitative issues. The timing of a turnaround is one of the more contentious
issues addressed by stakeholders both internationally and nationally; and the main
differentiator between business strategy and turnaround strategy manifests itself in
the time factor. Turnaround is typified by very limited time as opposed to a business
strategy that is moving less urgently. The second differentiating factor is that of
resources, that is, scarce resources in turnaround, versus planned resources in
normal strategic planning.
A number of models and/or actions in turnaround planning were identified and
discussed in this chapter. Investigations into the new South African Companies Act,
Act 71 of 2008, established the format of turnaround plans under Chapter 6
proceedings which will be dealt with in chapter 5 section 5.7.
114
CHAPTER 5
Literature review of turnaround legislative measures
5.1 Introduction
5.2 Current (historic) South African Companies Act, Act 61 of 1973
5.2.1 Introduction
5.2.2 Section 311. Compromises
5.2.3 Section 427. Judicial management
5.2.4 Reckless trading
5.3 International Legislation
5.3.1 Introduction
5.3.2 United States of America
5.3.3 United Kingdom
5.3.4 Switzerland
5.3.5 Belgium
5.3.6 Germany
5.3.7 Spain
5.3.8 Sweden
5.3.9 Finland
5.3.10 Italy
5.3.11 Netherlands
5.3.12 France
5.3.13 Canada
5.3.14 Australia
5.4 Developing a bankruptcy rule in South Africa.
5.5 New national legislation, the Companies Act, Act 71 of 2008:
5.5.1 Introduction
5.5.2 Financial distress
5.5.3 Reckless trading under the new Companies Act
5.5.4 Beginning, duration and ending of business rescue
5.6 Liabilities of the turnaround practitioner
5.6.1 Liability of legitimacy
5.6.2 Liability of leadership
5.6.3 Liability of data integrity
5.6.4 Liability of strategy options
5.6.5 Liability of resource scarcity
5.6.6 Liability of integration
5.7. Consideration of a business turnaround plan
5.8 Summary
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Hamer (in Burdette, 2004:4)
5.1 INTRODUCTION TO A LITERATURE REVIEW OF
LEGISLATION
This chapter deals with international trends in business rescue legislation.
Discussions include the old and new South African legislation, with the rescue
requirements of Chapter 6 of the new Companies Act, Act 71 of 2008, being
discussed. The literature researched in this chapter is not an attempt to justify
statutory rules, nor is it meant to be a legal discussion or an attempt to arrive at a
legal solution, or an attempt to rewrite or criticise current, and very soon, historic
legislation (owing to the implementation of a new companies act during in 2011), it
merely attempts to give the reader a critical overview of South African legislation in a
turnaround context. The overview focuses on existing South African legislation and
various sources of data regarding company, insolvency and labour law are
investigated. In addition, the implications and possible constraints that this legislation
may have are investigated and discussed. In the South African context, auditing and
law businesss will, no doubt, play an important role in the execution of Chapter 6 of
the Act. The larger international businesss, such as Price Waterhouse Coopers,
KPMG and Deloitte and Touche, as well as various local legal businesss and private
practitioners, are currently in the process of positioning themselves to capitalise on
the potential opportunities that will be created by Chapter 6 of the new Act.
“… a business rescue regime has a far better chance of succeeding if the insolvency system in
which it is applied is debtor-friendly, as opposed to a creditor-friendly system of insolvency
where business rescue regimes are not applied successfully.”
CHAPTER 5
LITERATURE REVIEW OF TURNAROUND LEGISLATIVE MEASURES
116
The uncertainty in the appointment of a regulatory body has contributed to
competition between various disciplines in the professional and business arena for
this important position. The discussion in this chapter will deal with the turnaround
event and the methodology to be adopted by the turnaround practitioner.
Part one of the literature research began with the current juncture in South African
law, using the old Companies Act No. 61 of 1973, which was recently amended, as a
point of departure.
Part two reflects on international bankruptcy legislation research from similar debtor-
friendly regimes to obtain an understanding of global trends. Part three will deal with
the seminal work of South African authors and researchers, carried out against the
backdrop of development of a new South African bankruptcy process. In part four,
Chapter 6 of the new Companies Act, Act 71 of 2008 is investigated and commented
on. The research aims to identify possible associations between the practitioner’s
liabilities and the Act, as turnaround plans can be faced with various opportunities
and/or obstacles that facilitate or obstruct their effective execution. Part five reviews
the rescue plan as contained in Section 150 of Chapter 6 of the new Companies Act
(Act 71 of 2008).
As Chapter 6 of the new Act is a new law and is, to date, unchallenged, it opens up a
new management science in South Africa. This research included international
insolvency, bankruptcy and liquidations laws and common law. It goes without
saying that the legislation contained in Chapter 6 will, if required, be legally tested in
our courts. In terms of the new Act, closed corporations will be phased out as the Act
divides all companies into profit and non-profit companies, hence new closed
corporations will be incorporated (Brewis, 2009:3). This study therefore refrained
from referring to the rule of precedent or to any case law (except where applicable
and then specifically indicated), but attempted to analyse all applicable Acts.
Pretorius and Holtzhauzen (2008:93) argue that the word “turnaround” implies that a
declining business can be rescued, whilst a business that has actually failed cannot.
However, a turnaround manager will still be appointed, which creates an agency
relationship.
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According to Combs, Michael and Castrogiovanni (2004:910), an agency relationship
is formed when the principal (as one party) delegates authority to the agent (the
other party). The turnaround manager assumes six liabilities, which are identified by
Pretorius and Holtzhauzen (2008:94). These liabilities are the following: legitimacy;
resource scarcity; leadership capacity; strategy options; data integrity; and
integration (see table 5.1).
The turnaround practitioner must be able to address and resolve the various
liabilities; for this reason the education, knowledge and skills required of the
practitioner should be on a very senior and advanced level. In terms of the
legislation, the minister still has to appoint the regulatory body for turnaround
practitioners, but it is clear from deliberations with interested parties that the general
view is that superior quality management is required.
To be able to understand the liability burden fully, Pretorius and Holtzhauzen
(2008:103) have drawn up a matrix indicating the requirements with regard to each
liability identified. The prerequisite of employing a multi-skilled, educated
professional to discharge the turnaround practitioner’s responsibilities is emphasised
by the variables under the headings “Liability, “Knowledge” and “Skills” requirements.
In no particular order these are listed in table 5.1
5.2 CURRENT (HISTORIC) SOUTH AFRICAN COMPANIES ACT,
ACT 61 OF 1973
5.2.1 INTRODUCTION
Currently, the South African government is revisiting consumer and business
legislation as part of law reform to cater for job creation and job retention and a more
coherent society. Accordingly, the National Credit Act, Act No. 34 of 2005, protects
consumer rights. As the South African Insolvency Act, Act no 24 of 1936, is the only
Act dealing with bankruptcy.
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Roestoff and Renke (2005:96) argue that the main aim of the current Insolvency Act
is not to provide debtors with debt relief, but they are of the opinion that the
consumer law reform commission has adopted the United States’ approach of “a
new beginning”.
Table 5.1 Liability, knowledge and skills requirements (Pretorius & Holtzhauzen, 2008:103)
Liability Knowledge requirements Skills requirements
Legitimacy Legal framework of relevant acts
Financial
Personal credibility
Interpersonal skills
Reputational slack
Mustering support
Resource scarcity Sales and markets
Operations/logistics
Human resources
Management
Efficiencies/effectiveness
Environmental munificence
Diagnostic skills
Analysing skills
Conceptualising preconditions
Learning from experience
Ability to read preconditions
Strategic formulation
Leadership
capacity
Situational leadership
Experience in leading people
Influencing capability
Vision/direction
Seeing the big picture
Problem-solving skills
Style (severity dependent)
Creating a new culture
Strategy options Strategic management
Industry knowledge
Environmental interactivity
Cause-effect relationships
Innovative thinking
Advanced strategic
management skills
Entrepreneurial thinking
Data integrity Basic financial knowledge
Taxation implications
Financial ratios
Causes, signs and flags
Basic financial skills
Use of financial information
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Integration Wide understanding of general
business principles
Sales, marketing, operations and
strategy interactions
Ability to integrate
Ability to implement
The main aim of the consumer law reform is to combat over-indebtedness, but
Renke, Roestoff and Bekink (2006:91) are of the opinion that the National Credit Act,
will, apart from rendering consumer protection, also provide consumers with much-
needed credit education and adequate information to allow consumers to make
informed decisions.
The business rescue legislation contained in the new Companies Act is not dissimilar
to that contained in the National Credit Act (Act 34 of 2005). Current regulatory
pressures imposed by South African business legislation are described by Hall
(1980:75) as part of the hostile environment in which entrepreneurs operate. South
Africa is identified as a country with the most cumbersome labour laws.
Consequently, under normal circumstances it is difficult for a business to entertain an
informal turnaround process, as there is currently no legal avenue; fortunately this
situation will largely be rectified by the new Companies Act. As previously
mentioned, formal turnaround strategies are not part of current legislation and the
only option currently available is contained in Sections 311 and 427 of the old South
African Companies Act, Act 61 of 1973.
In terms of Section 311 (old Companies Act, Act 61 of 1973), a compromise is often
proposed to entrepreneurs as an alternative source of turnaround and (in terms of
Section 311, old Companies Act, Act 61 of 1973) a company may enter into a
compromise with its creditors to arrange debt restructuring. This is a court-driven
process where both the creditors and the court must sanction the eventual
compromise. Burdette (2004a:14) argues that this process is an expensive
procedure to implement.
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5.2.2 SECTION 311 COMPROMISE
The huge array of case law regarding these compromises is a clear indication that it
is not always a simple undertaking. An application for a Section 311 (Companies Act,
Act 61 of 1973) compromise relates to the distressed state that a company finds
itself in. In the event that a court does not grant an order for a Section 311
compromise, the creditors are not bound to enter into any other arrangement and
can file for liquidation.
Section 311 compromises are not uncommon practice in South Africa after
liquidation (see also acts of insolvency later on in this chapter).
Section: 311. Compromise and arrangement between company, its members
and creditors.
(1) Where any compromise or arrangement is proposed between a company and
its creditors or any class of them or between a company and its members or any
class of them, the Court may, on the application of the company or any creditor or
member of the company or, in the case of a company being wound up, of the
liquidator, or if the company is subject to a judicial management order, of the
judicial manager, order a meeting of the creditors or class of creditors, or of the
members of the company or class of members (as the case may be), to be
summoned in such manner as the Court may direct.
(2) If the compromise or arrangement is agreed to by-
(a) a majority in number representing three-fourths in value of the creditors or
class of creditors; or
(b) a majority representing three-fourths of the votes exercisable by the members
or class of members,
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At the present juncture, the only legal pre-liquidation “turnaround” option/alternative
available for the debtor is judicial management, as described in Section 427
(Companies Act, Act 61 of 1973).
5.2.3 SECTION 427 JUDICIAL MANAGEMENT
The conditions under which a court of law will consider placing a company under
judicial management are described by Section 427(1) (old Companies Act, Act 61 of
1973) which reads as follows:
Section 427. Circumstances in which company may be placed under judicial
management.
(1) When any company by reason of mismanagement or for any other
cause-
(a) is unable to pay its debts or is probably unable to meet its obligations; and
(b) has not become or is prevented from becoming a successful concern, and
there is a reasonable probability that, if it is placed under judicial
management, it will be enabled to pay its debts or to meet its obligations and
become a successful concern, the Court may, if it appears just and equitable,
grant a judicial management order in respect of that company.
(2) An application to Court for a judicial management order in respect of any
company may be made by any of the persons who are entitled under Section 346
to make an application to Court for the winding-up of a company, and the
provisions of Section 346(4)(a) as to the application for winding-up shall mutatis
mutandis apply to an application for a judicial management order.
(3) When an application for the winding-up of a company is made to Court under
this Act and it appears to the Court that if the company is placed under judicial
management the grounds for its winding-up may be removed and that it will
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become a successful concern and that the granting of a judicial management
order would be just and equitable, the Court may grant such an order in respect
of that company”.
The critical measure of whether a company can pay its debt, or is probably unable to
meet its debt repayments and thereby fails to become a successful business, is
dominant in the qualification for Section 427.
Courts can conclude that a debtor’s liabilities exceed the true value of its assets if
evidence of commercial insolvency can be found. Such a company will then be
factually insolvent. This phenomenon is referred to as the “insolvency rule” (Smart,
2006:17).
The main aim of judicial management is to restore the business to a position where it
is able to service its debt obligations. These formal measures do not have any
benefits for the entrepreneur but rather they favour the creditors. Nevertheless,
creditors place little reliance on these formal measures. Accordingly, Loubser
(2005:1) concludes that judicial management has, in general, not been accepted as
an effective corporate turnaround procedure, which attributes largely to the stringent
requirements (insolvency rule) evident in the old Companies Act (Act 61 of 1973).
From the aforementioned it can be deducted that technical or factual insolvency
occurs when the debtor’s liabilities in fact exceed the value of its assets (Meskin
1990:2–17). It can be thus be deduced that directors/entrepreneurs are at risk of
acquiring personal liabilities if they trade under conditions of insolvency and incur
additional debt. Meskin (2004:911) indicates the conditions under which a court of
law will consider action against director/s described in Section 424(1) and (3).
(Companies Act, Act 61 of 1973), which will be discussed in the next section.
5.2.4 RECKLESS TRADING
Trading under insolvent conditions is regarded as trading recklessly. Section 339 of
the Companies Act (Act 61 of 1973) describes conditions of insolvency.
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Meskin (2004:666) states, that, if a company is unable to pay its debt, the laws of
insolvency will apply. Commercial insolvency occurs when an individual or company
is unable to pay its debts when they are due and payable. This is one of the four
instances where, according to section 424 (Companies Act, Act 61 of 1973), a
director can be held personally liable. Winer, Levestein and Gewer (2005) argue that
it is becoming increasingly clear that directors/entrepreneurs need to understand the
subtle difference between factual (technical) and commercial insolvency when
conducting business.
Section 427(1) states the following: When it appears, whether it be in a winding-up,
judicial management or otherwise, that “[w]here any business of the company was or
is being carried on recklessly …” the court decides on application of the master, the
appointed liquidator, or, any of the creditors of the company, whether any person
who was knowingly a party to the carrying on of the business in aforesaid fashion,
could be held responsible in their personal capacity.
Section 427(3): “… where any business of a company is carried on recklessly …”
with the intent or for the purpose as mentioned in section (1) above, everybody who
was knowingly party to the conducting the business in this manner will be guilty of an
offence. Obviously it is for the courts to decide whether the director or person is
guilty and liable for reckless trading under circumstances of insolvency. It is
important to note that proof of a causal link between the relevant conduct and such
debts or liabilities is not required.
In the case of Ozinsky NO v Lloyd 1992 (3) SA 396 (C) at 413–414, the court (Van
Deventer J) stated (at 414): "… If a company continues to carry on business and to
incur debts when, in the opinion of reasonable businessmen, standing in the shoes
of the directors, there would be no reasonable prospect of the creditors receiving
payment when due, it will in general be a proper inference that the business is being
carried on recklessly …."
The dilemma facing entrepreneurs who are experiencing cash flow distress in their
business is how they will obtain additional debt (whether from normal creditors or
financial institutions).
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Australia has similarly styled legislation with regards to reckless trading under
Section 588G of the Australian Corporations Act. The aim of this legislation is to
protect creditors from directors’ and shareholders’ actions that were taken to reduce
the probability of them being paid. James, Ramsay and Siva (2004:12) argue that
shareholders and directors will be reluctant to perform certain actions that will
ultimately harm their reputations. If found guilty of reckless trading, the entrepreneur,
as a director, incurs considerable personal liability.
In the case of Philotex (Propriety) Limited & Others v J R Snyman & Others 1998
(334/93), the court stated: that “… when the business of the company has been
carried on recklessly, or with the intent to defraud creditors or for any fraudulent
purpose, any person who was knowingly a party to such conduct may be held
personally liable for the debts of the company…”.
It is therefore very risky to assume (when a business is having cash flow problems)
that there is a reasonable prospect that creditors will receive future payments.
Attempts by debtors (entrepreneurs) to steer their distressed businesses out of
trouble are often regarded by aggressive creditors (usually smaller creditors) as an
act of insolvency. The measure mentioned under informal turnarounds above is of
interest here, as creditors are quite successful when they approach our courts with
an application for liquidation and they can prove acts of insolvency. Entrepreneurs
can obviously seek permission to appeal and defend the attack against them, but
litigation is a costly exercise to enter into especially where signs of distress are
already in evidence.
Section 8 of the Insolvency Act (Act 24 of 1936) describes the eight acts of
insolvency. For the purposes of the discussion only the acts of insolvency relevant to
turnaround situations will be addressed.
Section 8(c) of the Insolvency Act (Act 24 of 1936) states that if a debtor makes or
attempts to make any disposition of any of his property which has or would have the
effect of creating prejudice or preference to one creditor above another, he commits
an act of insolvency.
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Thus, when an entrepreneur (debtor) disposes of any of his property, that is, selling
so-called unproductive assets, he may effectively be committing two acts of
insolvency. The first is the actual or attempted disposition of any property, which has
the effect of preferring/prejudicing creditor/s above another. The second is the actual
or attempted disposal of property. Had the attempt been successful, it would have
had the effect of preference. Entrepreneurs embarking on this avenue must be
aware that the intention with which the disposal was made, or attempted, is of no
consequence to the court.
Disposition of assets can be open to attack by the liquidator in a liquidation scenario.
Under Sections 26 to 33 of the Insolvency Act Act 24 iof 1936), disposition without
value, voidable preferences, undue preferences and collusive dealings are remedies
available to creditors.
In addition, Section 8(e) of the Insolvency Act (Act 24 of 1936) states that if a debtor
makes, or offers to make, any arrangement with any of his creditors for releasing him
wholly or partially from his debts he commits an act of insolvency.
Thus, when an entrepreneur (debtor) enters into an arrangement, which entails the
creditors releasing him wholly, or partially, from his debts, it is an act of insolvency.
The mere offering to make such an arrangement is also regarded as an act of
insolvency. The courts can treat such an arrangement or attempt as an
acknowledgement by the debtor that he is unable to pay his debts when they are in
fact due and payable.
Section 8(g) of the Insolvency Act (Act 24 of 1936) states that a debtor commits an
act of insolvency when he gives notice to any of his creditors that he is unable to pay
any of his debts. The written notice to creditors is a practice fairly commonly used by
businesses that are unaware of the dire consequences. Meskin (1990:5–99) states
that this act is committed when a debtor notifies his creditor in writing that he is
unable to pay all, or any one, of his debts. Entrepreneurs asking for time to pay a
debt, which is due and payable, need to be aware that this action will give rise to an
inference that he is unable to pay the debt.
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Section 8 of the Insolvency Act (Act 24 of 1936) states that a debtor commits an act
of insolvency as a trader if he gives notice in the Government Gazette, in terms of
sub-section (1) of Section 34, that he intends selling his business and will thereafter
be unable to pay all his debts. Any of the above actions, outside the current
legislative provisions, may thus lead to the formal processes of insolvency being
implemented. Informal turnarounds are less costly and do not require formal
contracts, proceedings or direct compliance.
Creditors, such as banks, can initiate it and, if successfully executed, restore creditor
faith in the entrepreneur and business. Trade creditors and financial institutions will,
however, be reluctant to extend any form of credit to businesses that are
experiencing the above-mentioned distress, purely as a result of the obvious risks
involved but also because of the lack of a proper turnaround plan.
Informal turnarounds could benefit the business with immediate cash, but a longer-
term solution would be more prudent. Moreover, downsizing the workforce is often
contemplated to enable the business to continue. However, this option brings its own
problems, as South Africa has some of the most stringent labour laws in the world.
Jacobs (2004:125) encourages entrepreneurs to become members of the
Confederation of Employers of South Africa (COFESA) in order to obtain support
with “legal jargon”.
The Labour Relations Act, Act 66 of 1995, contains very strict procedures that need
to be followed before retrenchments can be contemplated. Reducing the workforce
can be a costly exercise as the law dictates that severance packages must to be
paid. Marè (2004), commenting on Labour Law case law, addresses the issue of
retrenchments and concludes that “fair reasons” could exist that justify
retrenchments.
The preceding discussion alluded to the more obvious and crucial legislation.
Cognisance should, however, be taken of other legislation that will impact on
effective turnaround. Other legislation includes the National Credit Act, Act 34 of
2005, the Competition Board rules and corporate governance compliance (King II,
and III reports).
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Non-enumerable information such as credit information is important, but Altman
(1984:180) indicates that for information to be dependable more than one credit
source needs to be investigated. The treatment of credit information is addressed in
the new National Credit Act, Act 34 of 2005.
Lee (1998:640), in discussing the Korean Crisis, indicates that two elements have
contributed significantly to business sector failure: they are the lack of mechanisms
to manage corporate governance, and secondly, a too lenient government-led credit
allocation policy. The constraints and opportunities clearly suggest that turnaround
should be attempted in a period of decline rather than in a period of distress. Chapter
11 of the United States of America’s insolvency law provides for a more debtor-
friendly approach. It is worth noting that the Canadian Bankruptcy and Insolvency
Act (s 50.4(8) 1992) allows for a stay of (moratorium on) proceedings which, in turn,
allows the de facto insolvent party to apply to the courts for a stay or extension for
the duration of the moratorium.
Rajak and Henning (1999:286) observe that
“… all modern corporate rescues are united on one matter, the absence which,
possibly more than anything else, has helped to bring South Africa’s judicial
management to its present perceived impotence. This is the recognition that the
agreed plan by which the future relations between the debtor and its creditors
will be governed may well include the reduction of the debtors’ overall
indebtedness. To insist, as the South African rescue provision does, that a
protective moratorium is available only where “there is a reasonable probability
that if [the debtor] is placed under judicial management, it will be unable to pay
its debts or to meet its obligations” is to ignore the well-nigh universal reality of
creditors being prepared, for their own benefit to forgive part of the debt. It is
frequently the case that a creditor will benefit far more from having the debtor
back in the marketplace than from suing the debtor into extinction. A radically new
rescue provision should provide a mechanism under which a specified majority of
creditors can approve a plan under which the debtor may emerge from
protection and resume normal commercial dealings.”
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Members of the South African government task team for corporate reform (2004),
such as Daly and Burdette, have indicated that the new legislation should demand
the removal of the entrepreneur and/or management from the business, as they are
perceived as the root cause for the business failure.
This anticipated removal of the current management/entrepreneur highlights the
importance for an entrepreneur to be equipped with a turnaround model.
Nevertheless, the entrepreneur must understand what events turned prior success
into distress and failure. Pretorius (2004:265) points out that the perseverance
characteristic must not lead to the entrepreneur being stubborn about his situation.
Under current legislation, entrepreneurs will have to be cognisant of the increased
risk when contemplating “informal” turnarounds. Burdette (2004a:20) argues that
informal turnarounds are risky by their very nature because no moratorium is
granted, and other (normally smaller) creditors cannot be bound by the informal
arrangements. Informal agreements or arrangements, which can, in turn, lead to the
implementation of formal insolvency proceedings by such creditors, accentuates the
need for a change in current legislation that will allow such entrepreneurs adequate
leeway to design proper turnaround plans.
Entrepreneurs need to be equipped with extensive, integrated and applied
knowledge of early warning signal “verifier determinants” that will enable them to
spot the danger signs and empower them to design turnaround plans to save their
businesses.
5.3 INTERNATIONAL LEGISLATION
5.3.1 INTRODUCTION
Altman and Hotchkiss (2006:58–78) have done seminal work in comparing the
bankruptcy regimens of ten different countries with the United Kingdom and the
United States of America. In addition,
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Rajak and Henning (1999:262–287) have done substantial work in Australia and
Canada which has contributed to the background study in formulating South African
business rescue law. Franks, Nyborg and Torous (1996:91) compared the United
States, the United Kingdom and German insolvency codes and Omar (2006) carried
out substantial research with regard to European insolvency laws, specifically
Germany, England and Wales, Spain and France. Omar (2006:2) refers to the
rescue proceedings of Australia, Canada, France, Singapore, the United States and
South Africa as “modern” rescue processes and argues that many other jurisdictions
are in the process adapting similar processes. Although
Franks, et al. work is dated, it adds to a better understanding of the development of
rescue law. In a report on entrepreneurial re-starters, the Boston Consulting Group
(2002:16) investigated and commented on re-starter-friendly insolvency regimes.
Countries listed were the United States of America, the United Kingdom, France and
the Netherlands. These authors identified three factors of influence for recognising a
country as re-starter friendly:
? A legislative framework dictating the ease of the entrepreneur’s re-
entry, manoeuvrability in decline, exit and re-entering of markets.
? Financial environment that dictates the rules of financing of re-
starters.
? The social content reflecting on society attitudes towards risk and
failure.
In researching the international rescue arena, it is evident that in some countries, the
rescue legislation is incorporated in corporate law as is now proposed with Chapter 6
of the South African Companies Act (Act 71 of 2008). In some countries, such as the
United Kingdom, rescue proceedings are incorporated in insolvency law.
The question whether to house rescue proceedings in the Companies Act or in the
Insolvency Act was also a very salient issue debated by the Companies Act Law
Reform Team.
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5.3.2 UNITED STATES OF AMERICA
The form of administration in the United States is the infamous Chapter 11 debtor in
possession administration, Altman and Hotchkiss (2006:60), according to which an
automatic stay is part of the process. Jostarndt and Sautner (2008:2189) argue that
the United States of America has a commercial market that is more shareholder
(debtor) friendly with poor creditor protection. Last resort action can include write-
down of losses on over-indebted companies. Chapter 11 requires reorganisation
plans to be filed with the bankruptcy court and these plans are then available to the
public (Hubbard & Stephenson, 1997:548). Bower and Gilson (2003:20) raise the
possibility that Chapter 11 procedures can be used as a means to hide fraudulent or
reckless actions by management and directors. Subsequently, Chapter 11 was
amended to remove this possibility. In discussing turnaround plans, Hubbard and
Stephenson (1997:549) state that claimants are provided with sufficient information
to make informed decisions to assess the plan. The court will only confirm a plan
when all the classes of creditors are in agreement with it.
Reorganisations have a cost consequence in terms of direct costing, as well as a
substantial social cost. Chen, Weston and Altman (1995:57) criticise the (high) cost
of the bankruptcy reorganisation process, while Bower and Gilson (2003:20) argue
that the social cost of bankruptcy is “staggeringly’ high. Thus out-of-court
restructurings through debt restructuring are suggested to avoid the high cost of
Chapter 11 reorganisations.
Chen et a.l (1995:67) and Su (2007:33) argue that rights issue offerings appear to be
a popular tool for reorganisations. However, debt equity stock swaps are more
frequently used, as creditors are able to obtain shares at substantially discounted
rates. In discussing the methodology for identifying the characteristics of a
successful turnaround, Hespel and Golzgaker (2005:3) define a successful Chapter
11 reorganisation as follows: a successful reorganisation is “defined as emerging
from Chapter 11 protection and not filing for bankruptcy for at least four years”. A
subsequent merger or acquisition of the “reorganised “company as a result of the
fact that it could not sustain itself, will not contribute to the definition of a successful
turnaround.
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5.3.3 UNITED KINGDOM
Katz and Mumford (2005:136) are of the opinion that the United Kingdom “has a
plethora” of insolvency procedures from which a suitable process to follow must be
decided. These authors distinguish between administration and administrative
receivership as measures for business rescue vehicles. The forms of administration
available in the United Kingdom include a company voluntary arrangement, a
scheme of arrangement, an administrative receivership and an administration,
(Altman & Hotchkiss, 2006:60; Omar, 2006:9). Company voluntary administration
was, according to Omar (2006:9), designed to be “a cheap, quick, efficient method of
dealing with financial difficulties”.
In the United Kingdom a stay of proceedings is sanctioned by the court. Franks and
Sussman (2005:283) argue that the main focus when constructing a dynamic model
of bankruptcy law is the relationship between law and finance. The law should be
considered as a mechanism for standardising commercial agreements. Franks and
Sussman (2005:284) distinguish between a hard approach “protecting the liquidation
rights of the creditors” and a soft one “giving the company a better chance to
reorganise”. These authors argue that the court and the legislature will be in a
position to solve the problem of under-innovation, but that they are biased towards
the protection of private benefits. The treatment of minority creditors when
discharging debt by way of a restructuring plan was discussed by Smart (2006:54),
who concluded that the interests of minority creditors will have to be protected.
By introducing Chapter 6 of the new Companies Act, the South African legislature
has opened the debate on a debtor-friendly versus the historical creditor-friendly
regimes.
5.3.4 SWITZERLAND
In Switzerland, the administration takes the form of a composition which is subject to
a majority of creditors’ and court approval (Altman & Hotchkiss, 2006:72). The
rescue plan is subject to creditor approval and court sanction.
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5.3.5 BELGIUM
The Belgian form of administration is a judicial composition where the debtor acts in
good faith and applies to the court (Altman & Hotchkiss, 2006:72). A restructuring
plan is prepared and the approval of 50% of the creditors in value and number is
required.
5.3.6 GERMANY
Germany’s Insolvenzordnung, which came into effect in 1999, created a uniform
insolvency statute for all of Germany (Omar, 2006:5). Germany, like South Africa,
has traditionally been considered as a country with weak debtor and strong creditor
protection. Jostarndt and Sauter (2008:2189) state, however, that German
corporations will be actively engaged in turnaround activities well before actual
bankruptcy.
In Germany, an insolvency plan (Insolvenzplan) is filed and the court appoints an
administrator. Altman and Hotchkiss (2006:64) and Omar (2006:8) confirm that the
plan is subject to approval by the creditors. There is no automatic stay of
proceedings but courts can grant a stay. Distressed businesses are recapitalised by
way of fresh equity capital placed in rights issues or private and public placing.
5.3.7 SPAIN
In Spain, insolvency is a prerequisite for proceedings (Omar, 2006:13) and is similar
to the current Section 427 of the South African Companies Act (Act 61 of 1973).
The administration of business rescue in Spain takes the form of a court-appointed
insolvency administrator (Altman & Hotchkiss, 2006:77). The administrator will
prepare reports and plans and there is an automatic stay of proceedings.
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5.3.8 SWEDEN
In Sweden, administration takes the form of business reorganisations, which
commence with a board resolution and the filing of the resolution at court (Altman &
Hotchkiss, 2006:77). An administrator will draw up a plan, which, through an informal
agreement, is sanctioned by both creditors and the court.
5.3.9 FINLAND
Finnish insolvency law has been proven to be closely related to Chapter 6 of the new
South African Act.
Bergström, Eisenberg and Sundgren (2002:359–372) have researched the Finish
law on reorganisations and conclude that the Finnish insolvency regime is a debtor-
friendly regime similar to Chapter 11 of the United States. They further argue that if
creditors are well secured they will not be supportive of an attempt to reorganise the
business (Bergström et al,. 2002:360).
5.3.10 ITALY
In Italy, the form of administration deals with three sets of preconditions: concordata
preventive, amministrazione controltta and amminstrazione straordinaria,
(composition, and the extraordinary administrative directors control) (Altman &
Hotchkiss, 2006:68).
In all three of the aforementioned conditions, the administrator is appointed by the
court and is subjected to a rescue plan and approval from creditors. In the first
instance there is no automatic stay, but it can be requested. In the last two instances
there is an automatic stay of proceedings.
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5.3.11 NETHERLANDS
In the Netherlands proceedings lead to the appointment of an administrator by the
court. The focus is on the acceptance of a business rescue plan and a stay of
proceedings for two months (Altman & Hotchkiss, 2006:88).
5.3.12 FRANCE
Altman and Hotchkiss (2006:64) state that in France administration takes place
through the courts, which appoint an expert who will seek an informal and voluntary
arrangement (mandataire ad hoc). The French rescue process or sauvegarde is
conceived as being similar to a debtor in possession (Omar, 2006:20) which will then
have the inference that management will stay involved. The expert has limited
powers, however, and has to work with management. There is no automatic stay of
proceedings but the court can specifically order a stay.
5.3.13 CANADA
Corporate restructurings in Canada are governed by either the Companies’ Creditors
Arrangement Act (CCAA) or the proposal provisions of the Bankruptcy & Insolvency
Act (BIA). Known as “Chapter 11 without rules”, the CCAA is only available to
debtors with total debts of over $5 million (Canadian dollars). The Canadian
Parliament has passed acts to reform its bankruptcy and insolvency legislation on,
inter alia, commercial issues. In short, as discussed by Yamauchi (2006:179), the
amendments cater for a debtor-friendly environment where the distressed business’s
management retain control over the business.
5.3.14 AUSTRALIA
The Australian insolvency provisions are found in Chapter 5 of the Australian
Companies Act. These provisions allow for a practitioner to be appointed after a
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creditor “pool” agrees on voluntary arrangements to be confirmed by order of court.
A rescue plan is a requirement and has to be accepted by all parties.
Chapman (2003) deduces that reorganisations or rescues of businesses (in
Australia) are being complicated by senior creditors (usually secured) who have a
conflict of interest as a result of their secured position, and thereby tend to
procrastinate turnaround proceedings.
5.4 DEVELOPING A BANKRUPTCY RULE IN SOUTH AFRICA
South Africa’s young democracy is challenged by various socioeconomic variables
which require frequent attention. Housing poses a serious challenge but the main
focus of government is to create and maintain jobs. From a government perspective,
Chapter 6 of the Act is a mechanism to ensure the minimisation of job losses.
Government is committed to enhancing legislation to achieve these goals and
Chapter 6 is an excellent example.
The United Nations Commission on International Trade (UNCITRAL) and the
International Bar Association (IBA) (2000:22) have laid down the key elements of
draft legislation as a guideline for countries to follow and implement in their corporate
law reform efforts. The South African corporate law reform task team has used these
guidelines, together with some principles from INSOL, to draft Chapter 6 of the new
Companies Act.
Failure of the current judicial management as a turnaround mechanism prompted the
legislature to come up with workable alternatives. A system which allows and
extends legal protection to participants in an attempted turnaround was previously
markedly absent in South African legislation. Up to the present juncture, legislation
did not allow for a stay of proceedings or protection of property interests. With the
adoption of the King III corporate governance rules, management are obliged to
attempt business rescue before filing for winding up and, as such, rescue legislation
had to accept a more debtor-friendly approach.
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If directors do not consider or commence with a business rescue when in financial
distress, it will in general be a proper inference that the business is being carried on
recklessly. In the Grant Thornton Catalyst Management Issues (2005b:5), it is
concluded that it is the liability of the directors to ensure that they are fully skilled in
managing the affairs of a company.
The question, however, is against what standards are these skills to be measured.
Coetzee (2009:4) argues that the most important provision in the new Companies
Act is Section 76 where the dispensation of directors’ statutory fiduciary duties is
addressed under the heading “Standard of director’s conduct”. Consequently, taking
into account all the challenges that have been discussed above, the legislature had
the mammoth task of satisfying all role players’ requirements and complying with
UNCITRAL and INSOL guidelines and principles. The usefulness of these guidelines
was highlighted by The Honourable Justice Farley at the Multinational Judicial
Colloquium held by UNCITRAL and INSOL (1995:3). The biggest challenge,
however, is to move and encourage business South Africa to make the paradigm
shift from a creditor- to a debtor-friendly bankruptcy regime.
Chapter 6 of the new Companies Act was largely successful in addressing specific
issues:
? creating a debtor-friendly environment
? establishing an environment in which all creditors could cooperate
? creating a moratorium on all proceedings
? setting clear timelines for passing resolutions and cut-offs for compliance
? the introducing of a turnaround practitioner ensures proper management
and controls actions that could have adversely affected returns
? all affected parties to agree and commit to a rescue plan
? accorded additional funding priority status
In deliberating the judicial management system with the Van Wyk de Vries
Commission, the Masters of the Supreme Court called for the abolition of the judicial
management system owing to its low success rate (Burdette, 2004:9).
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The option of Section 427 proceedings, by its very nature, does not represent a
debtor-friendly environment and is for this very reason rarely a route of choice by
entrepreneurs. In this regard, Burdette (2004:4) refers to a point that was originally
made by Harmer, namely that “a business rescue regime has a far better chance of
succeeding if the insolvency system in which it is applied is debtor-friendly, as
opposed to a creditor-friendly system of insolvency where business rescue regimes
are not applied successfully”.
Entrepreneurs perceive compromise and/or judicial management of the business as
personal failure. For this very reason entrepreneurs are discouraged from actively
participating in turnarounds of this nature. Consequently, judicial management has a
negative psychological effect on entrepreneurs.
Burdette (2004:11) submits that the following problems exist with judicial
management:
? it is seen as an extraordinary measure
? the reasonable probability that the business will become a successful concern
? reliance placed on court proceedings
? the insolvency requirement
? use of liquidators as judicial managers
? it only applies to companies
? the absence of a timeline benchmark detailing specific performance periods
adds to the complexities experienced with judicial management.
Based on the problems stated above and the high cost implications for companies
already in distress, it can be concluded that entrepreneurs would rather opt for a less
expensive and less cumbersome route and attempt an informal turnaround. Informal
turnaround plans in various formats are contemplated by businesses in South Africa;
Burdette (2004:20) refers to these as "informal creditor workouts" which are being
used increasingly in the business environment.
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The entrepreneurs themselves, or the senior creditors (mostly banks) who stand to
lose the most, usually contemplate these informal turnarounds. James, Ramsey and
Livan (2004:32) report on the type of debt distribution in insolvencies in Australia and
indicate that bank- or financier-related debt amounts to 7,8% of the total average
debt. Unfortunately, in South Africa, no such statistics are available, but the major
banks are more involved in pre-insolvency turnaround attempts. The report on South
African insolvency legislation by the United States Agency for International
Development (USAID), prepared by Johnson and Meyerman (2011:16), concluded
that, according to the stakeholders interviewed, “approximately 75% of all
businesses encountering financial distress attempt to resolve the problem by
informal workout or a turnaround of the business”.
The report further concludes that business or banks, in conducting informal
workouts, may adopt methods similar to the London Approach. Bolton (2003:52),
discusses the London Approach and states that it has its main application in bank
syndicates of informal consortia that attempt to restructure a business’s debt.
Although some measures can be attempted formally, that is, by means of a court
order, entrepreneurs frequently attempted an informal approach. Sub-section 32 of
the United Nations Commission on International Trade, referred to in its abbreviated
form, UNCITRAL Guide (2001:12), mentions that the success rate of informal
creditor workouts will be determined to a large extent by the insolvency laws and
legal framework of a country. The guide identifies the following avenues for turning a
business around: debt forgiveness; debt rescheduling; debt equity conversions; and
sale of the business or parts of it. The International Association of Restructuring,
Insolvency and Bankruptcy Professionals, referred to in its abbreviated form, INSOL,
has suggested that turnaround principles are required to effectively and successfully
execute a business turnaround (rescue). These proposed principles are the
following:
? All creditors must be prepared to cooperate.
? Creditors should refrain from enforcing claims – agree to moratorium ( or
standstill).
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? Debtors should not to take action to adversely affect returns.
? Creditors should coordinate response to debtor.
? Debtor should provide all information – assets, liabilities, business.
? Proposals for resolving financial distress should reflect applicable law and
position of creditors.
? Information should be available to all creditors but treated confidentially.
? Additional funding should be accorded priority status.
In the South African context, Loubser (2005:5) has investigated various turnaround plans
and proposes the following two measures as key rescue methods:
? downsizing the workforce
? transferring the business or part thereof.
In an attempt to do an informal turnaround, cost-cutting measures are implemented
immediately. Pretorius (2004:281) discusses the following actions to improve short-term
cash flow:
? lowering of creditor collection days
? stretching debtor payment days
? increase in cash sales
? negotiating better terms with vendors and suppliers
? reducing debt and interest by:
? selling old inventory
? selling unproductive assets
? selling non-core business units.
These measures are short term in nature and a strategic plan needs to be designed
to ensure lasting measures are implemented. Short-term measures are often
implemented when creditors call for payment and the business’s cash flow cannot
meet these demands. The effect of this scenario is discussed later and referred to as
“constraints to informal turnarounds”.
140
While informal turnarounds are gaining popularity due to low cost, low profile social
responsibility and/or other advantages, there are a number of disadvantages when
applied under the current South African laws. The following are Acts that have the
potential to be construed as disadvantageous:
? Companies Act: Act 71 of 2008, reference to reckless trading
? Insolvency Act: Act 24 of 1936, reference to acts of insolvency
? Labour Acts: (Various Labour Acts relating to restrenchements) reference
to downsizing of labour force
The South African concept of limited liability structures, namely closed corporations
and companies, are most frequently under attack from a corporate governance
scrutiny. Financial institutions demand personal guarantees from shareholders and
members if financial assistance is to be considered. Where no direct sureties are
provided entrepreneurs or directors are held personally liable if found to be trading in
a reckless manner.
5.5 NEW NATIONAL LEGISLATION: COMPANIES ACT, ACT 71 OF
2008
5.5.1 INTRODUCTION
The literature research on Chapter 6 of the new Companies Act is not an attempt to
solicit legal argument as various areas of the Chapter are still being debated by
individuals in the legal fraternity and input from business is still awaited. In addition,
the regulatory aspects have not yet been concluded. It would, at this juncture, be
premature to discuss the various sections from a juristic point of view.
The research was therefore limited to the requirements for a literal interpretation of
Chapter 6. The research concentrated mainly on salient provisions that have obvious
benefits, or disadvantages, for the entrepreneur and his/her business.
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Moosa (2009:1) identifies four distinct advantages of this legislation:
Firstly, business rescue is a substantively non-judicial commercial process whereby
a board resolution is passed. Franks and Sussman (2005:287) share this view and
conclude that “bankruptcy, namely the course of action to be taken following a
default, is a commercial affair”. The process is formalised through the filing of the
resolution at the court.
It remains the responsibility of the persons affected by the bankruptcy (i.e.
shareholders, creditors and employees individually or through their representative
trade unions) to formulate contributions to a business rescue plan in order to save
the company.
Secondly, business rescue is an inclusive and consultative process involving all
affected persons as well as a business rescue practitioner (who will be a qualified
professional, experienced in turnarounds, as per the regulatory directives of the new
Companies Act).
Thirdly, the new Companies Act allows a stay of legal proceedings during business
rescue, through the allowance of a limited moratorium period.
Fourthly, the legislation allows for the company to be rescued and the likelihood of
the company’s continued existence on a solvent basis to be maximised. If the
continuation of the company cannot be achieved, it provides a better return for the
creditors or shareholders than would result from the liquidation of the company.
In certain respects the structured, formal process proposed in the Act is not
dissimilar to the typical negotiated rescue proceedings conducted informally when
major creditors of a distressed company act together to reach a commercial solution
to rescue the company.
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Judging from the above there is clear benefit in the broader notion of business
rescue. Unfortunately, as is the case with most new legislation, the devil lies in the
details. An assessment of some of these challenges forms the basis of this paper.
5.5.2 FINANCIAL DISTRESS
An understanding of the phrase “financial distress” is of utmost importance in future
commercial action. Chapter 6 of the new Companies Act clearly defines two criteria
for financial distress, that is, “unable to pay its debts” and “become insolvent”, but,
most importantly, it adds a six-month period in which these events can most likely
take place. This is the opposite of the judicial management requirement, where a
business must be insolvent before Section 427 (old Companies Act, Act 61 of 1973)
can be applied. A complete copy of Chapter 6 of the new Act is attached under
Appendix C. Chapter 6 of the new Companies Act supplies a clear definition of
financial distress, which reads as follows:
Section 128(1)(j) “… financially distressed’’, in reference to a particular company
at any particular time, means that it appears to be reasonably unlikely that the
company will be able to pay all of its debts as they fall due and payable within the
immediately ensuing six months; or it appears to be reasonably likely that the
company will become insolvent within the immediately ensuing six months...”
Chapter 6 of the new Companies Act is structured into five main sections which
guide the reader to a fair understanding of the total intended scope of this chapter of
the Act.
They are:
? business rescue proceedings
? the practitioner’s functions and terms of appointment
? the rights of affected persons during the rescue proceedings
? the development and approval of the business rescue plan
? compromise between company and creditors.
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As each topic has its own measure of importance these aspects are discussed under
their own headings.
5.5.3 RECKLESS TRADING UNDER THE NEW COMPANIES ACT
The new Companies Act has adopted the same tough stance on reckless trading as
is currently applicable, but has added more regulations which must be adhered to.
Various sections of the new Companies Act refer to trading under reckless
circumstances and strict adherence to corporate compliance rules is of utmost
importance. Section 22 of the Act prohibits reckless trading.
This important section reads as follows:
Section 22(1) … A company must not— carry on its business recklessly, with
gross negligence, with intent to defraud any person or for any fraudulent
purpose; or b) trade under insolvent circumstances … .
If the company’s board has reasonable grounds to believe that the company is
experiencing financial distress as defined by the new Companies Act, it has the
responsibility to adopt a resolution to institute rescue proceeding in terms of Section
129(1) of the Act, which reads as follows:
Subject to section (2)(a), the board of a company may resolve that the
company voluntarily begin business rescue proceedings and place the
company under supervision … .
If the business experiences financial distress or insolvent trading, or is likely to trade
under these conditions within the next six months, and the board does not adopt a
Section 129(1) resolution, the provisions of Section 129(7) must be introduced.
Section 129 (7) reads as follows:
… if the board of a company has reasonable grounds to believe that the
company is financially distressed, but the board has not adopted a resolution
contemplated in this section, the board must deliver a written notice to each
144
affected person, setting out the criteria referred to in Section 128(1) (e) that
are applicable to the company, and its reasons for not adopting a resolution
contemplated in this section … .
A clear distinction must be made between financial distress and reckless trading, as
Chapter 6 of the new Companies Act is not an instrument for avoiding the
ramifications of reckless, fraudulent or any other misconduct.
The mandate of the turnaround practitioner must include investigating the matters of
the business in order to establish the precise conditions under which the business
has been conducted. Section 141 reads as follows:
… as soon as practicable after being appointed, a practitioner must
investigate the company's affairs, business, property, and financial situation,
and after having done so, consider whether there is any reasonable prospect
of the company being rescued. And,
… reckless trading, fraud or other contravention of any law relating to the
company, the practitioner must- so inform the court, the company, and all
affected persons in the prescribed manner, and- forward the evidence to the
appropriate authority for further investigation and possible prosecution … .
If any misconduct (excluding conduct of a criminal nature) is evident in the
management of a business the court may, in terms of section 164(7)(b)(ii), make an
order to place a person under probation.
The exception to this rule is to be found under Section 162(7)(b)(ii), “… except in
terms of—a business rescue plan resulting from a resolution of the board in terms
of Section 129; or a compromise with creditors in terms of Section 155 …”.
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5.5.4 BEGINNING, DURATION AND ENDING OF BUSINESS RESCUE
Out of court business rescue proceedings start when a company resolution is filed at
the court. The company resolution is taken by the board of a company, when the
board is of the opinion that the business is experiencing financial distress according
to the definition in Chapter 2. Any affected party can apply through the court to
commence with business rescue and rescue proceedings will commence when the
order is granted.
Section 128 of Chapter 6 of the new Companies Act describes the affected parties
as
? shareholder or creditor
? trade union
? employee/s not represented by trade union.
After the adoption and filing of the resolution the company must publish a notice of
the resolution and appoint a turnaround practitioner. The qualifications, minimum
requirements and regulatory issues are still being debated by both government and
business and consequently have been excluded from the literature discussion.
Section. 129(3) … Within five business days after a company has adopted
and filed a resolution, as contemplated in section (1), or such longer time as
the Commission, on application by the company, may allow, the company
must-publish a notice of the resolution, and its effective date, in the
prescribed manner to every affected person, including with the notice a
sworn statement of the facts relevant to the grounds on which the board
resolution was founded: and
(c) appoint a business rescue practitioner who satisfies the requirements
of Section 138, and who has consented in writing to accept the
appointment… .
146
Business rescue proceedings end when the court sets aside the resolution or rescue
order and the turnaround practitioner files a notice to the effect that the rescue
proceedings have been terminated. However, from the outset the rescue
proceedings will not be implemented if it is obvious that the rescue plan will be
rejected. The commencement of a business rescue and the timeline that needs to be
adhered to is illustrated in figure 5.1. The left-hand side of the figure illustrates the
turnaround practitioner’s operational and strategic functions, while the second
horizontal column relates to a board resolution and the third column to a court order
for business rescue commencement. Timelines are indicated in the applicable
vertical columns. Strict adherence to the set timelines is vitally important, as non-
adherence could jeopardise the entire process and cause unnecessary delays. The
success of a turnaround is primarily dependant on the swiftness with which it is
executed.
5.6 LIABILITIES OF THE TURNAROUND PRACTITIONER
5.6.1 LIABILITY OF LEGITIMACY
The appointment of a turnaround practitioner and the delegation of powers to the
turnaround manager takes place as per Section 129(3)(b), which reads as follows:
“… appoint a business rescue practitioner who satisfies the requirements of
Section 138, and who has consented in writing to accept the appointment.”
The above quote refers to Section 138, which stipulates when a practitioner is
qualified to act as a practitioner. This section of the new Companies Act is currently
being revisited by the Department of Trade and Industry and all interested parties
have submitted comments and suggestions. The final requirements will be adopted
and published by government in due course.
Section 138 stipulates that a person who may be appointed as a practitioner to a
distressed company should be “… a member in good standing of a profession
147
subject to regulation by a regulatory authority …,” “… is not subject to an order of
probation …” , “.does not have any other relationship with the company …” and is
“… not related to a person who has the relationship …” (illustrated in fig. 4.2).
Figure 5.1 Section 129 rescue process timeline (adapted from Samuelson, 2010)
Company resolution to
begin business recue
proceedings
Financially Distressed:
Predominantly a
commercial process
Affected personapplies to
court to place company
under supervision
BUSINESS RESCUE - PROCESS
Publish noticeof
resolution to every
affectedperson+ appoint
business rescue
practitioner
Liabilities of Turnaround
Practitioner
Court appoints interim
practitionersubject to
ratification
Act stipulates minimum
periods to execute certain
action
Notice of appointment of
practitionerafter 2 day of
appointment:
After appointing
practitioner
Company must file notice
of appointment + publish
copy of noticeto each
affectedpersonwithin 5
business days after notice
filed
Objections must bemade
any time after adoption of
resolution until adoption
of business rescue plan
Company must notify
each affected personof
order within 5 business
days after date of order
Within 5 days of adopting
resolution, same to be
filed at court
First meeting of creditors and first meeting
employees representatives (must be convened
and presided over by practitionerwithin 10
business days of being appointed)
Consultative Process
After consulting with affected persons and management of
company business plan to bepreparedfor consideration
(must be published within25business days after practitioner
appointed)
At least 5 business days
before meeting
practitionermust deliver
notice of meeting to
affectedpersons
Meeting to determinefutureof company (to beconvened
within 10 business days after publicationof plan and voted
on
When business plan substantially
implementedpractitioner files notice of
substantial implementation
Failure to adopt business plan – call for
revised business plan requestedor filefor
termination of business recueproceedings
(revised business plan must bepublished
within 10 business days – then provisions
apply afresh to publishing of newor revised
business plan)
Participative Process
Feedback / Reporting
3 Months
Legitimacy- agency
theory
Legal framework
Resource scarcity –
financial, capacity,
Human, opportunity.
Strategic options
Leadership capacity-
management
Considerations
Dataintegrity
Integration
Practitionerappointment within 5
days of filing
Publish copy of notice
within 5 days after filing
of notice
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5.6.2 LIABILITY OF LEADERSHIP
According to the principles of the agency theory (Eisenhardt (1989a:58), the agent
(practitioner) is conferred with a leadership role by the board (principal). Chapter 6 is
unambiguous in terms of the practitioner’s leadership liability. This section of the new
Companies Act is also an admonition to business concerning the quality and
experience required from a practitioner when considering his/her appointment.
Section 137(2) During a company's business rescue proceedings, each
director of the company must continue to exercise the functions of director,
subject to the authority of the practitioner;
(h) has a duty to the company to exercise any management function within
the company in accordance with the express instructions or direction of the
practitioner, to the extent that it is reasonable to do so;
Section 137(3) During a company's business rescue proceedings, each
director of the company must attend to the requests of the practitioner at all
times, and provide the practitioner with any information about the company's
affairs as may reasonably be required.
Section 137(5) At any time during the business rescue proceedings, the
practitioner may apply to a court for an order removing a director … .
Section 140(1) During a company's business rescue proceedings, the
practitioner, in addition to any other powers and duties; has full
management control of the company in substitution for its board and pre-
existing management; may delegate any power or function of the
practitioner to a person who was part of the board or pre-existing
management of the company; has the responsibilities, duties and
liabilities of a director of the company, and, direct the management … .
At the start and for the duration of a business turnaround, the directors of the
company must cooperate with and give assistance to the turnaround practitioner.
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5.6.3 LIABILITY OF DATA INTEGRITY
Data integrity is most certainly the most important liability to address in the early
stages of a turnaround attempt. Verification and authentication of data is, under any
circumstances, a time-consuming process and the strict timelines imposed by
Chapter 6 of the new Companies Act do not allow for the investigation process to be
procrastinated in a turnaround situation.
The liability of data integrity is highly dependent on the turnaround manager’s ability
to apply the correct methodology to verify and authenticate data for decision making.
The most important decision to make is whether to attempt the rescue/turnaround.
This decision should include turnaround activities after the decision to turnaround
has been taken.
Section 142(1)… each director of a company must deliver to the practitioner all
books and records that relate to the affairs of the company … .
Section 142(2)... any director of a company who knows where other books
and records relating to the company are being kept, must inform the
practitioner … .
Section 141(1) ...after being appointed, a practitioner must investigate the
company's affairs, business, property, and financial situation, and after having
done so, consider whether there is any reasonable prospect of the company
being rescued.
Section 150(3) … The projected balance sheet and statement required by
sub-section (2)(c)(iv), must include a notice of any material assumptions on
which the projections are based; and may include alternative projections
based on varying assumptions and contingencies … and then, the most
onerous requirement.
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Section 150(4) … a proposed business rescue plan must conclude with a
certificate by the practitioner stating that (any) actual information provided
appears to be accurate, complete, and up to date; and projections provided
are estimates made in good faith on the basis of factual information and
assumptions as set out in the statement … .
5.6.4 LIABILITY OF STRATEGY OPTIONS
In order to achieve a successful turnaround, a turnaround practitioner must realign
company strategy. Chapter 6 of the new Companies Act incorporates a few
demanding prerequisites for the practitioner’s strategic abilities.
Section 141 dictates that as soon as the turnaround practitioner has complied with
the liability of data integrity, he needs to “… consider whether there is any
reasonable prospect of the company being rescued.
As part of assessing and realigning the strategic direction of the company, the
practitioner is allowed under Section 132(2) of the new Companies Act to either “…
subject to Sections 35A and 35B of the Insolvency Act, 1936 (Act No. 24 of 1936),
despite any provision of an agreement to the contrary, during business rescue
proceedings, the practitioner may cancel or suspend entirely, partially or
conditionally any provision of an agreement to which the company is a party at the
commencement of the business rescue period, other than an agreement of
employment …”. Or, in terms of Section 137, contemplate as part of the business
rescue plan, alterations to the classification or status of securities. Solomon and
Boltar (1998:26) argue that Section 136(2) has potentially drastic consequences.
The words “cancel” and “suspend” are not explained and reliance has to be placed
on their common, literal meaning.
A key part of a strategic approach is the drafting of a business plan. Section 140(1)
(d) requires the drafting of a rescue plan and its implementation. Section 150
stipulates the minimum requirements for a business plan.
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Most important is that in terms of Section 150(1), “… the practitioner, after
consulting the creditors, other affected persons, and the management of the
company, must prepare a business rescue plan for consideration and possible
adoption…”.
Once again the liability of data integrity is clearly illustrated by Section 150(2): “…
the business rescue plan must contain all the information reasonably required to
facilitate affected persons in deciding whether or not to accept or reject the plan
… .”
The rescue plan therefore has to be considered by all affected persons and, after it
has been accepted, the practitioner must see to its implementation.
The practitioner has the responsibility to inform all affected parties in terms of
Section 141 that if “… at any time during business rescue proceedings, the
practitioner concludes that— there is no reasonable prospect for the company to be
rescued…” and, “… apply to the court for an order discontinuing the business rescue
proceedings …”.
5.6.5 LIABILITY OF RESOURCE SCARCITY
Resource slack is arguably the key determinant of both decline severity and the
options for turnaround strategies chosen in response. Pretorius and Holtzhauzen
(2005:95) conclude that resource munificence refers to the level of resources
(scarcity or abundance) required to operate a venture successfully. Castrogiovanni
(1991:542), on the other hand, defines resource munificence as the critical resources
needed to operate a business. The liability facing the turnaround practitioner in
maintaining adequate resources while responding to decline is often problematic as
Section 134 imposes restrictions on the disposal of assets. During the period of
financial decline assets are “stripped” in order to generate much needed cash and
this process destroys the business’s resources over time. This phenomenon is
confirmed by Barker and Duhaime (1997:20).
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Protection of property interests
Section 134. Subject to sub-sections (2) and (3), during a company's
business rescue proceedings—(a) the company may dispose, or agree to
dispose., of property only in the ordinary course of its business; in a bona
fide transaction at arm's length for fair value approved in advance and in
writing by the practitioner; or in a transaction contemplated within, and
undertaken as part of the implementation of, a business rescue plan that has
been approved in terms of Section 152 … .
Funding of the turnaround attempt is of the utmost importance. Early detection and
engagement will allow the practitioner to align his strategy with resource scarcity.
Levinthal (1991) refers to declining organisational capital as the most important
determinant of business mortality. Accordingly, turnaround can only be effectively
executed if the minimum threshold for organisational working capital is met.
Pretorius and Holtzhauzen (2008:96) conclude that the level of a business’s
resources at the time of the turnaround attempt will affect the financially distressed
business’s capacity to “implement strategic change”. The dilemma facing
entrepreneurs, who are experiencing cash flow distress in their business, is how they
will obtain additional debt (normal creditors or financial institutions). As described in
Section 135, post-commencement funding may be secured and such funding will be
paid in order of preference.
Burdette (2004c:422) argues that a clear distinction needs to be drawn between the
cash that will be needed to continue trading until a plan is approved and the cash
flow that will be generated out of the operation once the plan is accepted and
implemented. It is envisaged that the leading creditor bank will assume the
responsibility for funding these interim periods as well as post-commencement
finance.
The interim period financing will be included in the securitisation, labelled “post
commencement finance”, only if it happens after the resolution has been filed.
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Section 135(2) … During its business rescue proceedings, the company may
obtain financing other than as contemplated is sub-section (1), and any such
financing—(a) may be secured to the tender by utilising any asset of the party
to the extent that it is not otherwise encumbered … .
5.6.6 LIABILITY OF INTEGRATION
To overcome the liability of legitimacy the turnaround practitioner will ensure the
integration of the turnaround actions and the support of all stakeholders or affected
persons. All the affected persons will have to be included in strategy formulation in
order to create some slack to free up working capital for funding the turnaround.
Sections 145 and 147 describe the participation process by creditors:
Section 145(3) … The creditors of a company are entitled to form a creditors'
committee, and through that committee are entitled to be consulted by the
practitioner during the development of the business rescue plan … .
Section 147(1) … Within 10 business days after being appointed, the
practitioner must convene, and preside over, a first meeting of creditors, at
which-(a) the practitioner must inform the creditors whether the practitioner
believes that there is a reasonable prospect of rescuing the company; and
(ii) may receive proof of claims by creditors; and (b) the creditors may
determine whether or not a committee of creditors should be appointed and,
if so, may appoint the members of the committee … .
The new Companies Act ensures that all affected parties are included and provision
is made for shareholders and employees, or their representatives, to attend rescue
meetings. Overcoming the liability of integration culminates in the finalisation of the
rescue plan as determined under Section 140(1)(d) of the Act: “… develop a
business rescue plan to be considered by affected persons … .”
154
Overall knowledge of the proposed cash-generating strategies is essential in
determining the future of the business, leading management to implement the rescue
plans on a wide set of disciplines suggests overcoming the liability of leadership.
Decisions of this nature will depend on the verification and authentication of the data
used in the decision-making process, thereby overcoming the liability of data
integrity.
The real danger of undetected and/or undisclosed data is that it is an unknown factor
which only surfaces after a turnaround has commenced.
Section 151(1) determines that the practitioner must convene a meeting of creditors
and other affected persons, as well as holders of voting interests as described by the
Act, for the purpose of assessing and considering the proposed rescue plan.
5.7 CONSIDERATION OF A BUSINESS TURNAROUND PLAN.
The aforementioned literature research confirms that in almost any debtor-friendly
bankruptcy regime, the prerequisite is the drafting, evaluation and acceptance of a
business rescue plan. The UNCITRAL Guide (2005:7) defines the turnaround or
reorganisation plan as “a plan by which the financial well-being and viability of the
debtor’s business can be restored”. Under Chapter 6 of the new Companies Act, the
business plan is discussed with a clear directive of what issues are to be addressed.
Section 152(5) the company, under the direction of the practitioner, must take all
necessary steps to (a) attempt to satisfy any conditions on which the business
rescue plan is contingent; and (b) implement the plan as adopted.
Development and approval of the business rescue plan is the primary task of the
practitioner, who, after consulting the creditors, other affected persons and the
management of the company, must prepare a business rescue plan for
consideration by the stakeholders.
155
The business turnaround plan must contain all the information required to assist
stakeholders in deciding whether or not to accept or reject the plan. Chapter 6
divides the turnaround plan into three distinct sections:
Part A – Background which must include at least a
… complete list of all the material assets of the company, as well as an
indication as to which assets were held as security by creditors when the
business rescue proceedings began; a complete list of the creditors of the
company when the business rescue proceedings began, as well as an
indication as to which creditors would qualify as secured, statutory preferent
and concurrent in terms of the laws of insolvency, and an indication of which
of the creditors have proved their claims; the probable dividend that would be
received by creditors, in their specific classes, if the company were to be
placed in liquidation; a complete list of the holders of the company's issued
securities; copy of the written agreement concerning the practitioner's
remuneration; and a statement whether the business rescue plan includes a
proposal made informally by a creditor of the company … .
Part B – Proposals which must include at least
… the nature and duration of any moratorium for which the business rescue
plan makes provision; the extent to which the company is to be released from
the payment of its debts, and the extent to which any debt is proposed to be
converted to equity in the company, or another company: the ongoing role of
the company, and the treatment of any existing agreements; the property of
the company that is to be available to pay creditors' claims in terms of the
business rescue plan; the order of preference in which the proceeds of
property will be applied to pay creditors if the business rescue plan is
adopted; the benefits of adopting the business rescue plan as opposed to the
benefits that would be received by creditors if the company were to be placed
in liquidation; and the effect that the business rescue plan will have on the
holders of each class the company's issued securities … .
156
Part C – Assumptions and conditions, which must include at least
… a statement of the conditions that must be satisfied, if any, for the business
rescue plan to come into operation; and be fully implemented; the effect, if
any, that the business rescue plan contemplates on the number of
employees, and their terms and conditions of employment: the circumstances
in which the business rescue plan will end: and a projected— balance sheet
for the company; and statement of income and expenses for the ensuing
three years, prepared on the assumption that the proposed business plan is
adopted … .
Benade, Henning, Du Plessis, Delport, De Koker and Pretorius (2003:4) highlight the
importance of all the South African Acts impacting on the entrepreneurial venture.
The prerequisites of the following Acts are also of importance when constructing the
turnaround plan in terms of Section 140 and are used as a frame of reference:
The Insolvency Act, Act 24 of 1936
The Insolvency Act is in the process of being redrafted to align insolvency law and
practice with Chapter 6 of the new Companies Act, Act 71 of 2008.
The Income Tax Act, Act 58 of 1962
Income tax seldom comes into play in a turnaround situation, as assessed losses are
a feature of a business experiencing financial distress. The realignment of a
business’s structure can, however, be tax beneficial. Section 44 to 46 of the tax act
addresses unbundling, amalgamations and de-grouping (Fluxman 2009:292–330).
Labour legislation
The various Acts governing labour in South Africa are listed below. These Acts, in
one form or another, influence the treatment of labour in a turnaround situation.
Labour and organised labour are included in the new Companies Act as affected
persons but a good working knowledge of the following Acts is a prerequisite for
constructing a rescue paln:.
? Basic Conditions of Employment Act 75 of 1997
157
? Labour Relations Act 66 of 1995
? Employment Equity Act 55 of 1998
? Skills Development Act 97 of 1998
? South African Qualifications Authority Act 58 of 1995
? Broad-based Black Economic Empowerment Act 53 of 2003
The process for determining the actual state of affairs of the business is not
discussed in the new Companies Act and no directive on methods to be used to
determine the feasibility of continuing with the business is given.
Various methods for turning a business around are available to turnaround
practitioners, but it is suggested that a combination of methods will, depending on
the prevailing circumstances, be most effective.
A due diligence process comprises the following:
? feasibility assessment with stress testing
? forecasts
? sustainability after rescue process
? corporate governance
? data integrity
? simulations, such as Monte Carlo simulation.
The various methods are addressed in more detail in chapter 8 (of this study) where
turnaround modelling is suggested. Although the new Companies Act is not
prescriptive on the method used to ascertain the state of affairs, it is quite clear on
the minimum requirements of forecasts required in the rescue plan.
Section 150(2)(c) Part C outlines the financial forecast requirements in the proposed
plan and Section 150(1) to (5) dictates the minimum requirements for a business
rescue plan. It is submitted that, when constructing the plan, all the affected persons
will not be sophisticated or skilled enough to make a workable input. This problem
adds to the turnaround practitioner’s liability impediment.
158
The practitioner, after consulting with the creditors, other affected persons and the
management of the company, must prepare a business rescue plan for consideration
and possible adoption. The new Companies Act is clear on the content required for
the rescue plan and divides the requirements into three parts, namely, background,
proposal and assumptions and conditions.
5.8 SUMMARY
It will take the South African courts some time to adjust to the proposed new way of
treating bankruptcy. Franks and Sussman (2005:385) tested the levels of innovations
in the United Kingdom courts after rescue law reforms and concluded that they have
taken a substantial period of time to bed down. The literature review confirmed the
following similarities between the various debtor-friendly regimes:
? rescue is seen as part of a business process
? a clear process for commencing with business rescue is evident
? a person is appointed who is responsible for the turnaround process
? a turnaround plan is central to all turnaround options and has to be
sanctioned by creditors.
Figure 5.2- Legal impact on turnaround process flow
Turnaround event
Decline
Distress
Establish
truevalue
Turnaround
decision
Verifier
Determinant
Identification
Early warning
signs:
Management
Strategic
Financial
Product/Market
Banking
Turnaround:
Reposition
Reorganise
Restructure
Rescue
Rejuvenate
Sustainablegrowth
and/or
Plan
Exit
turnaround
Legal scope of a turnaround
159
It is envisaged that the same process will play itself out in South Africa as Chapter 6
of the new Companies Act is tested in our courts. What will be of interest is how
business is going to react to the debtor-friendly regime. Figure 5.2 illustrates the
overall importance of the legal impact on the turnaround process.
As happens with the introduction of any new legislation, a great deal of speculation
has already been reported on by the South African media, with mixed reviews on the
viability, potentially problematic areas and the overall probability of success of
Chapter 6 of the new Companies Act.
160
CHAPTER 6
` Research methodology
6.1 Introduction
6.1.1 Problem definition
6.1.2 Objective of the research study
6.1.2.1 Primary objective
6.1.2.2 Secondary objective
6.1.3 Propositions
6.2 Literature research
6.2.1 Identification of early warning signs
6.2.2 Identification of turnaround models
6.2.3 Samples for this study
6.3 Six real-life cases
6.3.1 Choice of organisation
6.3.2 Case selection for this study
6.4 Interviews, repgrid methodology
6.4.1 Personal interviews
6.4.2 Interview process
6.4.3 Interview preparation
6.4.4 Identification of verifier determinants
6.4.5 The interview protocol
6.5 Questionnaire instrument
6.5.1 The design of the questionnaire
6.5.2 Determination of values for the questions
6.5.3 Pilot testing the questionnaire
6.6 Utilisation of verifier determinants
6.6.1 Sampling and response rate
6.6.2 Expert group
6.6.2.1 Identification
6.6.2.2 Sample frame
6.6.2.3 Sample size
6.6.3 Incumbent group
6.6.3.1 Identification
6.6.3.2 Sample frame
6.6.3.3 Sample size
161
6.7 Data
6.7.1 Data collection
6.7.1.1 Data measurement and instruments
6.7.2 Data analysis and interpretation
6.7.3 Factor analysis
6.7.4 t-Test
6.7.5 ANOVA
6.7.6 Validity and reliability
6.7.7 Wilcoxon
6.8 Conclusion
162
McRann (2005:38)
6.1 INTRODUCTION
The concept of verifier determinants is to confirm the existence of problems within
the business or the business environment. Environmental scanning units seem to be
unable to respond to what Ansoff (1975:25) calls “weak signals”. Stubbart (1982:143)
concludes “we have too many places to look and too few theories of how significant
environmental change can be linked to the business’s plans”.
The previous chapters shaped the foundation for an academic framework. In order to
achieve the research objective of identifying verifier determinants, various opinions
of the role players in a business environment must be presented.
The ideal research design will be of such a character that it articulates to all the role
players (bankers, entrepreneurs, creditors, consultants and courts) in the
performance cycle, as illustrated in figure 6.1. The performance cycle incorporates
four performance areas of importance: underperform, decline, distress and failure.
The aim of this chapter is to explain the research problem and the objectives of the
study and to give some background for the case selection and questionnaire design.
Reasons for selecting the methods used to gather data for the empirical analysis will
be explained.
“There are seven key signs that may indicate you are in trouble: declining sales, reduced market
penetration, falling margins, thin earnings before income taxes, high employee turnover rate,
increasing customer complaints and high-level employee defection. If you checked off one of these
key indicators, you need to dig deeper.”
CHAPTER 6
RESEARCH METHODOLOGY
163
Figure 6.1 Interaction between role players and the performance cycle
Cooper and Schindler (2003:13) maintain that good research generates dependable
data, which are derived from investigative practices that are conducted and recorded
professionally. They also suggest that "methodology" refers to the theory on the
research undertaken and the various steps taken to ensure the dependability of the
data. These would be systematic, detailed and transparent. They postulate that
research must be driven by ethics to ensure credibility. According to Mouton
(2001:56), research methodology focuses on the “individual steps” that make up the
processes and procedures to be engaged. Of importance is that while methodology
consists of these various methods, techniques and principles, it must be borne in
mind that they are interrelated. Thus "methodology" is not only concerned with the
manner in which information is acquired, but fundamental to this is the type of study
being undertaken. Mouton (2001:122) summarises this when he concludes that
research methodology describes the research procedure as including the overall
research design, the plan or structure and the sampling procedures, the data
collection, the field study methods and the analysis procedures.
Banks Entrepreneurs Creditors Consultants Courts
Failure Distress Decline Under perform
Likely to commit an act of insolvency Able to commit an act of insolvency
Roleplayers and the performancecycle
Business performancecycle
Business environment role-players
164
This chapter explicates the research approach to the study design and methodology.
Various research methodologies were used to ensure the validity and reliability of
data sets used.
6.1.1 PROBLEM DEFINITION
Cooper and Schindler (2003:69) argue that in formulating the research problem, the
first step will be to identify and fully describe the management dilemma and translate
the dilemma into a management question. According to Welman and Kruger
(2004:12), the research problem refers to some conjectural or practical difficulty for
which a resolution is desired. The research problem of this study is clearly
formulated in section 1.7.
Problem: There are few or no guidelines for entrepreneurs on “verifier determinants”
to confirm early warning signs and the specific turnaround faced by a venture.
The South African government, through the Department of Trade and Industry (DTI),
directly endorsed business rescue by the introduction of the new Companies Act.
This clearly indicates that the DTI is adamant about “getting it right”. In actual fact,
however, the Act is still subject to amendments and testing by the courts.
This study intends to have the following outcomes:
? Identify main categories of early warning signs
? Identify verifier determinants linked to each category.
In this study, the focus of the problem is:
? The absence of guidelines (verifier determinants) to confirm early
warning signs
? The absence of verifier determinants to assist in the specific
turnaround situation
165
6.1.2 OBJECTIVES OF THE RESEARCH STUDY
6.1.2.1 Primary objective
? To identify and theoretically define early warning “verifier determinants”
? To design and include “verifier determinants” as an integral part of a
turnaround framework that supports corrective action.
6.1.2.2 Secondary objectives
? To research the current formal turnaround practices for “verifiers”, which
are applied in the United States of America, Canada, Australia and Africa
and the informal practices evident in South Africa. These findings are
aligned so as to include the changes in the applicable South African
legislation.
? To design a framework for use by turnaround practitioners and
entrepreneurs alike.
? To identify which verifier determinants will prompt the early warning signs
to become visible, and apply this outcome to the design of a reliable
turnaround framework that is accepted by all creditors and financial
institutions.
? To contribute to the South African entrepreneurial, turnaround fraternity,
and future formal studies in this academically ill-represented field.
166
6.1.3 PROPOSITIONS
Cooper and Schindler (2003:50) note that a "proposition" is a statement about
observable phenomena that may be judged as "true" or "false". A proposition is
called a hypothesis if it is formulated for empirical testing.
As a declarative statement, a hypothesis is of a tentative and conjectural nature
(Cooper & Schindler, 1998:43). It was decided that research propositions would be
used in this study rather than hypotheses, leading to an ex post facto study. The
reason for this decision is that the data gathered by means of conducting personal
interviews and gathering questionnaire responses are explanatory in nature.
Conclusions drawn from the analysis will be more meaningful if approached from a
pragmatic point of view, since no other model of the same nature exists. The study is
very relevant and important, as South Africa is now entering the business turnaround
field and a Rubicon change from a creditor-friendly to a debtor-friendly regime. The
investigation ultimately aimed to provide a solution to the question whether to
attempt a turnaround or not. The research also contributes to the elimination of Type
1 or Type 2 errors. In order to find these answers the research process in this study
follows the path depicted in figure 6.2.
6.1.4 LITERATURE RESEARCH
Literature on turnarounds in developing countries such as South Africa is almost
non-existent. Understandably, turnaround practitioners protect their strategies as
intellectual property.
Figure 6.2 Broad research flow
The literature search in this study
Inform, Ebsco-host, Proquest,
published since 1985. For major works, the date was
when an article was referenced widely.
important, but relevance and contribution to the body of knowledge
prediction, early warning signs and turnaround strategy
Each article was scrutinised for
concepts and variances under different conditions and contexts.
research identified key concepts using grounded theory research
divided into three main categories
secondly, banking signs (see
Appendix C), illustrated by
167
Broad research flow
in this study involved all scientific resources from the ABI
host, Proquest, ScienceDirect, Blackwell and other databases for titles
For major works, the date was not a limitation, especially
when an article was referenced widely. Age of publication was also not considered
relevance and contribution to the body of knowledge
prediction, early warning signs and turnaround strategy were paramo
Each article was scrutinised for confirmation of concepts, as well as additional
concepts and variances under different conditions and contexts. When analysed
research identified key concepts using grounded theory research
divided into three main categories: firstly, “early warning signs” (see
see Appendix B), and lastly, turnaround
illustrated by figure 6.2.
involved all scientific resources from the ABI-
Blackwell and other databases for titles
not a limitation, especially
lso not considered
relevance and contribution to the body of knowledge on failure
were paramount.
ation of concepts, as well as additional
When analysed, this
research identified key concepts using grounded theory research, which were
see Appendix A),
urnaround strategies (see
168
Figure 6.3 The detailed research process of this study
Figure 6.3 illustrates the flow of this chapter, starting with the literature research,
then the interview process and, finally, the questionnaire design and instrument. The
statistical analysis flow concludes the process.
6.1.5 IDENTIFICATION OF EARLY WARNING SIGNS
Early warning signs (see Appendix A) are regarded as all types of event in business
that point to the potential demise of that business (refer to the definition of “early
warning signs” arrived at in section 3.2). Warning signs are portrayed in various
ways, as problems, challenges and poor performance indicators. Authors, such as
use their own explanation, phraseology or designation when referring to early
warning signs. This literature research classified early warning signs, in much the
same way as Pousson (1991), into the following categories:
? financial warning signs identified by ratio analysis
? business and operational warning signs, such as administration, market
and product analysis
6.2
Literature
(appendixes)
6.2.1
Identification
of Early
Warning Signs
6.2.2
Identification
of Turnaround
models
6.3
Six real life case
studies
6.4
Interviews
Repgrid
methodology
6.5
Questionnaire
Instrument
6.6.3
Incumbent
group
6.6.2
Expert
Group
6.6
Utilisationof verifier
determinants
6.7
Data
6.7.5
ANOVA
6.7.6
Validity &
reliability
6.7.7
Wilcoxon
ResearchProcess
6.7.3
Factor
Analysis
6.7.4
T-Test
169
? managerial signs, such as strategic value add and behavioural analysis
? banking signs, which are closely linked to behavioural signs
? other, behavioural signs.
The warning signs and their classification were tested and confirmed in the interview
process (section 6.4).
6.1.6 IDENTIFICATION OF TURNAROUND STRATEGIES
Owing to the diverse sources of literature available, it was firstly deemed necessary
and prudent to categorise secondary data sources into various key sources.
Secondly, various practices and models that were regarded as being of assistance in
compiling a South African entrepreneurial approach to rescue/turnaround were
investigated.
After reading and analysing the abstracts of the articles, those papers that discussed
turnaround-related issues were selected and tabled in Appendix C. Each article was
assessed, and the key concepts identified and reported. Subsequently, concepts
were categorised into sub-domains (categories) of turnaround-related issues and
reported on individually. As the categories became clearer, each individual article
was further explored for its key contributions.
Initially rejected articles were subsequently re-evaluated for potential contributions to
the sub-domains, based on the new insights gathered from the process. During the
grounded research process, the research identified conceptual linkages to use for
categories. Then these steps were repeated until the key constructs ultimately
crystallised. Eventually, a list of key references was assembled (see Appendix C).
Finally, a conceptual framework for classifying the turnaround structure that was
identified is proposed. Every article was scrutinised for confirmation of these
concepts, as well as for additional concepts and variances in terms of the different
turnaround approaches.
The most salient strategies, frameworks, steps and processes are highlighted in this
study, during which the research concentrated on the process flow, strategies and
170
execution of turnaround strategies. All literature containing the words “rescue”,
“turnaround”, “restructure”, “reorganisation”, “renewal” and “realignment” was
identified within the context of turnaround management. The literature was
summarised into the five distinct phases associated with the literature search. These
are depicted in Appendix C as follows: investigative, planning, strategic, financial and
operating phases.
6.1.7 SAMPLE SELECTION FOR THIS STUDY
The following sections provide details of the sample frame, the sample size, the
sampling method used and the response rate. Diamantopoulos and Schlegelmilch
(2000:10) describe a sample as “ a part of something larger”. Parasuraman, Grewal
and Krishnan (2004:357) define "sampling" as the selection of a fraction of the total
number of units of interest to decision makers for the ultimate purpose of being able
to draw conclusions about the entire body of units.
This fraction is then known as the "sample", which Cooper and Schindler (2003:179)
argue is part of the "target population", hence, the part or sample is carefully
selected to represent that population. For the purposes of this study three groups
were purposely selected. They are portrayed in table 6.4.
Table 6.1 Group categories
DEMOGRAPHIC SPECIALIST EXPERT INCUMBENT
BANKING
EXPERIENCE
20 Years 12 Years 5 Years
JOB FUNCTION
EXPERIENCE
15 Years 10 Years 5 Years
AGE 40+ Years 30+ Years 20+ Years
QUALIFICATIONS
Post graduate
degree and diploma
Graduate and
diploma
Graduate
MANDATE
Ultimate directional
mandate
Limited directional
mandate
Advise decision
makers
171
Note that the specialist group and the expert group are not the same, but consist of
two distinct groups.
The ‘specialist group’ consists of banking industry specialists. An industry specialist
can be described as an experienced banker with at least fifteen years’ experience in
the credit risk field, equipped with a relevant postgraduate qualification and
mandated within the organisation to make decisions resulting in significant
directional change in business such as turnaround. These individuals have been
exposed to many informal turnaround situations during their tenure in these
positions.
The ‘expert group’ consists of senior credit and credit risk incumbents in leadership
roles within the organisation. An expert can be described as an experienced banker
with at least ten years’ experience in the credit risk field, equipped with a relevant
postgraduate qualification and a limited mandate within the organisation to make
decisions resulting in significant directional change in business such as turnaround.
The expert group differs from the specialist group in that it has less experience and
exposure to the business restructuring field.
The ‘incumbent group’ consisted of managers in the credit environment who have
had exposure to the credit risk environment.
A manager is an experienced banker with at least five years’ experience in the credit
risk field equipped with a relevant graduate qualification and not mandated (higher
authority will make final decision but this group can advise/propose direction) within
the organisation to make decisions resulting in significant financial management
change in a business. The incumbent group differs from the specialist group as it has
less experience (5 years) and exposure to the business restructuring field.
172
6.2 SIX REAL-LIFE CASES
For the purposes of this study, real-life business profiles were used. The real-life
cases comprised a stratified random selection drawn from existing businesses in a
commercial banking environment. The businesses were geographically spread
throughout South Africa and the selection was not limited to one province only. The
choice of cases was of the utmost importance to ensure that selection bias was ruled
out. Research was conducted in an organisation with a comprehensive database of
business data, which made it relatively easy to randomly select the sample of real-
life cases with three Basel rating categories.
6.2.1 CHOICE OF ORGANISATION
For this study, one of the leading commercial banks was selected as the
organisation of choice, owing to the accessibility of information, research data and
participants. For selecting case studies, the researcher relied on businesses that
were already subjected to Basel II Accord categorisation criteria. For clarity on the
Basel II Accord, a short explanatory discussion is required (see chapter 3 section
3.4). This research chose to select case studies with an in-depth longitudinal
character. Cases were selected at random, ensuring that they had a couple of years’
historical financial and other relevant data. This was important to ensure equal
representation of the selected cases.
Research was conducted in an organisation with a comprehensive database of
business data, which made it relatively easy to purposely select a sample of real-life
case studies. Figure 6.4 illustrates why a banking institution is appropriately placed
to conduct this study. In a turnaround situation, a commercial bank is ‘both ways
exposed’, as the bank is a key component to any turnaround attempt, be it informal
or formal. The pivotal role of the commercial banks in an informal attempt to turn a
business around is a well-debated topic and the mere existence of the INSOL
principles and the London Approach bears testimony to this. In order to protect the
organisation, the business and individuals, all names, references to names,
addresses and anything that could lead to the organisation being identified were
173
removed. In protecting the real identity of the businesses in terms of the critical data,
such as financial statements, trends, management structures, history and actual
events, all references to the actual businesses and individuals involved were either
removed completely and/or given pseudonyms. This approach ensured that the case
study maintained its real-life character.
Figure 6.4 Structure informing the appropriate case selection
6.2.2 CASE SELECTION FOR THIS STUDY
Figure 6.5 illustrates the research design which comprised two phases: phase 1
comprised the case selection and the interview process, and phase 2 the
questionnaire and field study process.
BANK
OrganisationChoice
Both ways exposed
Entrepreneur Banker Practitioner
Rolein turnaround
Informal Formal
Key role
174
Figure 6.5 Research design showing stratified case selection
The Basel II risk rating was used in selecting two cases in each category. Within
each case, the following information was obtained from the business:
? Curricula vitae of managerial staff
? Historical files consisting of
o business background
o management succession
o market and product
o staff growth and considerations
o changes in industry type and business model
? Three years’ audited financial statements to establish growth
? Cash flow projections.
Case5 Case4 Case3 Case2 Case1 Case6
PhaseII: Questionnairedevelopment
Standard Special mention Sub standard
Identify Verifier determinants
PhaseI: Case selection
Using Basel II rating categorisation grouping
Categorisationof early warning signs
Questionselection
Demographic diversity selection
Researchdesign
Interviewprocess
Field study
175
Table 6.2 provides the demographic details of each of the cases selected for this
study. The business cases are categorised into industry type, legal style, annual
turnover, year of the latest financial information available, Basel II rating and, finally,
age of the business in years. The primary aim of the case research linked and the
interview process was to establish the perceptions of specialist management in
identifying early warning signs, causes and verifiers determinants as risk factors. An
example of one of the cases used in this study is available in Appendix D.
Table 6.2 Case demographics used in this study
6.3 INTERVIEWS – REPGRID METHODOLOGY
6.3.1 INTERVIEW WITH PARTICIPANTS
An interview has the benefit of direct, face-to-face interaction, so any ambiguities can
be clarified and explained in real time. The interview process was used to identify the
main constructs of early warning signs.
No CASE IDENTIFICATION TYPE STYLE ANN T/O YEAR
BASEL II
RATING
AGE YEARS
1
CASE A
Kwa-Zulu Natal
Cable Management and
Structural Support
Specialist
Company
Propriety
Limited
105,718,000 2006 Standard 3
2
CASE B
Limpopo
Transport & Civil
Construction
Sand Excavation &
Washing
Property owning and
letting
Company
Propriety
Limited
91,200,000 2006 Standard 11
3
CASE C
East Cauteng
Motor trade. New and
second hand dealership,
farming
Company
Propriety
Limited
157,239,000 2006 Special-mention 5
4
CASE D
Western Cape
Coating, impregnating
and laminating of foam
and textiles.
Convertors of textiles
and non-woven fabricks
for the footwear, motor
and allied industries.
Company
Propriety
Limited
96,552,000 2005 Special-mention 11
5
CASE E
Gauteng
Specialise in import and
sale of Continental Fish
and Delicacies
Company
Propriety
Limited
69,000,000 2005 Sub-standard 37
6
CASE F
Gauteng and Free State
Transport, Logistics and
warehouseing
Closed
Corporation
137,000,000 2006 Sub-standard 28
CASE SELECTION DEMOGRAPHICS
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Cooper and Schindler (2003:43) assert that a "construct" is a grouping of specific
concepts for expressing a specific issue or reality under discussion. As the rationale
for this stage was to ensure the optimum exploration of the specialists’ knowledge
and past credit experience (specialist cognitive survey); the research followed a case
learning process followed up with a structured interview. According to Wright (2006),
much can be learnt from the thinking of senior management on how they see, make
sense and interpret their experiences. During the interview, the abstracts of the
relevant case were analysed and those concepts that in fact represented early
warning sign and verifier determinant issues were identified.
The interview process required a high level of interaction between the researcher
and participants. This interaction was a significant prerequisite for proper
understanding of the case under study and to clear data of all ambiguities. The
interview process was based on the repertory grid method developed by Kelly in
1955, (Feixas, & Alvarez (2006)). This method was preferred above a conventional
rating scale questionnaire, as it allows the interviewee to provide unique insights into
constructs t`hat are topic related. Consequently, the research design for this study
entailed selecting cases with an in-depth longitudinal character. Cases were selected
purposely, ensuring that they complied with the minimum requirements and other
relevant data (see section 6.2). This was important to ensure equal representation of
the cases selected. However, the critical data, such as the financial statements,
trends, management structures, history and actual events, were not altered and
factual events are presented in each case. This approach ensured that the cases
maintained their real-life character. Each selected case was then discussed, and key
concepts were identified and reported.
Concepts were categorised into sub-domains (categories) of early warning sign- and
verifier determinant-related issues and reported individually, together with their
specific contributions. As the categories became clearer, each individual case and
interviewee insight was further explored for its key contributions. If the interviewees
required any guidance during the interview process, this was provided by asking a
series of leading questions. It was found that participants were relaxed when
answering the questions since they were based on their field of expertise.
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It is believed that these positive interview conditions led to unbiased conclusions
being drawn from the managers’ discussions of their perceptions and experience.
During the interview process, the interviewers looked for the conceptual linkages to
be used for the various categories. These steps, questioning, clarifying and re-
questioning, were followed during the interview methodology, where steps are
repeatedly executed until the key constructs were ultimately crystallised. After the
sixth interview, the interview process drifted towards a conclusion, as very little
additional ‘useful new information’ was obtained; this was in accordance with the
guidelines for the interview process. After the ninth interview the process ended.
This meant that the actual number of interviews became less important than initially
anticipated when embarking on the study. In order to find patterns in the data, this
research used the principles of neural networks to model relationships between
inputs and outputs in the chosen environment. The research focused on a
philosophical and cognitive analysis.
6.3.2 INTERVIEW PROCESS
As was indicated previously, the interview process was based on the repertory grid
method. Sampson (1972:79) argues that the repertory grid is a technique used to
identify the ways a person gives meaning to his or her experience. According to
Gaines and Shaw (2005:5–2), the repertory grid method consists of four constructs:
a topic, a set of elements, a set of constructs and a set of ratings of the elements
and constructs.
This method was preferred above a conventional rating scale questionnaire as it
allows the interviewee to provide unique insights into constructs, which are topic
related. The interviews were designed around real-life cases, which were
determined by the method described in section 6.3. The results were tested against
a comprehensive secondary literature research(see section 6.2.1 and Appendix A).
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6.3.3 INTERVIEW PREPARATION
Industry specialists with practical experience were identified in the target
organisation (a commercial bank) and these specialists were selected to participate
in the case study. Three case studies were selected at random for each specialist,
which resulted in each participant having a sample in which at least two of the main
categories of Basel II rating are represented. The case studies were distributed to
the participants two weeks prior to the scheduled interview. During this period the
interviewees were requested to prepare themselves adequately for the interview
process. This preparation was estimated to take at least three hours. The
interviewee was then invited to an interview and encouraged to bring the case
studies and all preparatory notes with them.
Eisenhardt (1989b:545)
The estimated time allotted for the interview was four hours, although first interview
took four and a half hours to complete. However, as the interviewers gained
experience in the interview process, the time spent on the interviews was reduced.
Subsequently, the average time per interview was calculated at three hours forty
minutes. Refer to Appendix D for a copy of the letter and case example sent to the
interviewee.
In order to keep the interview process unbiased, the interview content, such as the
process to be followed and questions to be asked, was not disclosed to the
participants prior to the interview. Interviewees were also reassured that there would
be total anonymity and that the results would only be used for the research project.
In this study, the last three interviews proved to contribute the same information
as the previous six interviews, with no new information being forthcoming, which
suggested that nine interviews were enough.
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6.3.4 IDENTIFICATION OF VERIFIER DETERMINANTS
Table 6.3 depicts the interviewer record sheet used during the interview. The three
cases were identified on the sheet as case A, B, or C. The repertory-grid choice as
to which two cases differ from the other one is clearly indicated in the column ‘link’.
Table 6.3 Case study interview record sheet
The interviewee’s cognitive experience and knowledge of the business case was
then recorded in the other three columns, the key constructs were identified, the
main early warning sign category was identified and subsequently, most importantly,
the verifier determinant was identified. This record sheet was used to annotate every
discussion topic and/or interview question asked.
6.3.5 THE INTERVIEW PROTOCOL
The interviewers asked a series of questions to lead the conversation (Cooper &
Schindler: 2003:325), for example:
Case Link Key constructs identified Main EWS category identified
Verifier deteminant
identified
Comments
CASE INTERVIEW RECORD SHEET
A
B
C
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In your opinion,
? which two cases are more similar (compared to the other one)?
? what early warning signs did you observe?
? why is the one different from the other two?
? what caused the signs?
? how did you verify the existence of the sign/cause?
? what is the main differentiating construct/s?
? does this construct fall into the category of an early warning sign or a
verifier determinant?
? the case which was not selected – why was it not selected?
The constructs and early warning signs were subjected to rigorous interrogation.
Interviewers focused the interviewee using additional questions to ensure that early
warning signs, causes and verifiers were discussed. The result was a clear
understanding of early warning signs in practice and the process identified a set of
verifier determinants, which was informed for the resulting questionnaire.
6.4 QUESTIONNAIRE INSTRUMENT
The results obtained from the interview process, and building on the literature
review, formed the basis of the questionnaire design (Appendix D). In order to
ensure completeness, this study has been documented, firstly, in terms of the
personal interviews based on the cases, and secondly, a questionnaire/or empirical
testing.
The raw data from the questionnaire responses were analysed using SAS and
BMDP1 software and included descriptive statistics, factor analysis, a t-test of
significance, and the analysis of variance.
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6.4.1 QUESTIONNAIRE DESIGN
The questionnaire was designed around the constructs determined by the interview
process with the group of specialists. These results were reciprocally confirmed by a
comprehensive secondary literature research (see section 6.2.1 and Appendix A). A
comprehensive questionnaire was developed aimed at credit practitioners in the
organisation. This resulted in a high level of agreement with the specialists, drawing
from their experience and learning and based on a set of cases.
Saunders, Lewis and Thornhill (2007:362) postulate that questions can be
distinguished in terms of "opinion", "behaviour" and "attribute", and this influences
the way in which questions are worded. According to these authors, "opinion”
variables record how respondents "feel" about something or what they "think" or
"believe" is true or false. In contrast, data on behaviours and attributes record what
the respondents "do" and "are".
The purpose of the questionnaire was to:
? involve the participant
? draw conclusions on managers’ perceptions of warning signs and their
evaluation of risk profiles
? establish respondents’ use of verifier determinants.
The questionnaire (Appendix F) was broken up into two major sections: a
demographic categorisation section (questions 51 to 60) and the actual Likert scale
questions (Appendix F, questions 1–50). Questions 1 to 50 were intended to identify
individual variables associated with each of the factor constructs identified by the
literature and the interviews.
The questions in the questionnaire were derived from
? the primary objective of the research
? the specialist cognitive survey and the literature review on business failure
and early warning signs.
?
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Thus, the sections of the questionnaire centred on the outcomes of the two-tier
preparatory research.
The questionnaire was sent to each manager in the incumbent group together with a
covering letter. The letter requested them to participate fully and there is little doubt,
although this cannot be verified except on the basis of the response rate, that the
respondents participated voluntarily.
6.4.2 DETERMINATION OF VALUES FOR THE QUESTIONS
Cooper and Schindler (2008:308) rightly point out that the Likert scale has "in-built
summated rating" and that the data are interval data, as illustrated in table 6.4.
Table 6.4 The summated Likert scale used in this study (adapted from Cooper & Schindler,
2003:308)
Strongly disagree Disagree Agree Strongly agree
1 2 3 4
The reason a four-point scale was chosen lies in the fact that it forces the direction of
the response. A four-point scale was preferred over a five-point one that gives an
option of “unsure”, as this was unwarranted in this study. A neutral option was
underirable in the anticipated small sample. The 4 point scale allowed convertion
scales into nominal scales.
The participant was asked to respond to each question by ticking the appropriate
box. Each of the boxes is given a numerical value to reflect its degree of attitudinal
favourableness and the scores may be totalled to measure the participant's opinion.
Cooper and Schindler (2003:253) contend that between 20 and 25 well-constructed
questions will be required for a reliable Likert-scale result. This study contained 50
questions to allow for the elimination of non-loading or double-loading variables in
the factor analysis.
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6.4.3 PILOT TESTING THE QUESTIONNAIRE
Preliminary questionnaires were sent to five managers in the credit and credit risk
environment who were selected at random from the list of business units available in
the organisation. The responses from the pilot test indicated that the respondents
understood the questionnaire and that it therefore did not need further editing.
6.5 DETERMINATION OF VERIFIER DETERMINANTS
Fraenkel and Wallen (2005:38) emphasise the fact that dependent variables are
those that the researcher chooses to study in order to assess the impact of other
variables on them. The independent variable in this study is a dichotomous variable
consisting out of an incumbent group and an expert group. The dependent variables
comprised the verifier determinants (constructs), each with its contributing variables.
6.5.1 SAMPLING METHODS AND RESPONSE RATE
The sample of credit risk incumbents was selected purposely. Certain criteria applied
in the selection process, making it a judgemental sample. In this case, the criterion
was that incumbents selected as respondents had exposure to the credit
environment. This is an example of non-probability sampling.
Cooper and Schindler (2003:201) also confirm that the use of purposive sampling is
appropriate for this type of research.
Possible challenges that could have arisen while conducting the research included
the following:
? Several research projects were launched simultaneously, which could have
influenced the respondents’ attitude to the research. (Moreover, the target
institution experienced an unexpected and unplanned ‘takeover’ threat after
the research commenced.)
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? Questionnaire fatigue could have played a role in the total responses
received.
? The research occurred mainly in the one banking institution to which the
researcher had access.
? The questionnaires were not area coded, consequently, there could have
been response bias, as one of the areas in the sample may have had
proportionately more responses than another.
The above challenges could have an influence on the response rate.
6.5.2 EXPERT GROUP
6.5.2.1 Identification
The expert group consisted of experienced senior bankers with at least ten years’
experience in the credit risk field with a relevant postgraduate qualification and a
limited directional mandate for making decisions resulting in significant directional
change in business, such as turnaround.
The fifty verifier determinants were subjected to the questionnaire process and the
replies from the expert group were grouped in terms of five factors, which
subsequently formed the independent variables from which data was drawn so that
statistical inferences could be made. The dependent variable is referred to as the
verifier determinant group.
6.5.2.2 Sample frame
The expert group sample frame consisted of senior credit risk experts in specifically
related functions within the business.
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6.5.2.3 Sample size
In this research, nine out of a possible 12 credit expert practitioners were willing to
participate. Thus, a response rate of 75% was obtained, which was deemed
adequate for the research.
6.5.3 INCUMBENT GROUP
6.5.3.1 Identification
The incumbent group consisted of managers in the credit environment who have had
exposure to the credit risk environment. An incumbent is an experienced banker with
at least five years’ experience in the credit risk field who is equipped with a relevant
postgraduate qualification, but is not mandated by the organisation to make
decisions resulting in significant financial management change in a business.
6.5.3.2 Sample frame
The sample frame of credit risk practitioners included those practitioners who are
currently working in business units in the field of credit risk.
6.5.3.3 Sample size
In this research, 200 out of a possible 245 credit risk incumbents fitted the criteria
and hence a sample size of 200 was decided on. The 200 practitioners selected are
trained and employed in the credit and credit risk division.
6.6 DATA
Before dealing with the units of analysis, it is important to find support for and to
justify the form of research undertaken, as it influences the selection of the units of
analysis. Babbie (2005:94) asserts that although it is useful to differentiate between
types of research, most studies use several of them as they often converge.
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Types of research include the explanatory, predictive, descriptive, exploratory and
reporting approaches. Owing to the research resources available, this research is
primarily focused on the explanatory approach and is accompanied by descriptive
aspects. The research methodology described below provides details of the data
required for the study and the methods used in collecting the data.
6.6.1 DATA COLLECTION
Blankenship and Breen (1993:122) state that there are certain fixed guidelines as to
which methods a researcher should use for collecting primary data, the most
important of which is that the researcher must collect data as accurately as possible.
The most popular methods for data collection are usually observation, the interview
and the questionnaire although these three methods are not necessarily mutually
exclusive and can be interrelated. However, the questionnaire is the centrepiece of
data collection as it stands on its own and the interview can be used as a basis for
the other forms of data collection. In-depth interviews with the specialists formed the
basis for the questionnaire development and design.
6.6.1.1 Data measurement and instruments
Parasuraman et al. (2004:266) define "measurement" as the assigning of numbers to
responses based on a set of guidelines. They believe that this has two potential
benefits: "First, one can summarise quantified responses from a sample more
efficiently and economically. Secondly, it enables the manipulation of quantified
responses by using a variety of mathematical techniques to get to a desired result.”
The results then require different levels of measurement and interpretation which will
also apply to the data. When measuring data, nominal, ordinal, interval and ratio
data are considered owing to their unique characteristics. In this study, the four-point
scale resulted in interval data that could be treated as ratio data during analysis.
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6.6.2 DATA ANALYSIS AND INTERPRETATION
Diamantopoulos and Schlegelmilch (2000:63) note that a careful re-examination of
the overall aim of the research provides an excellent point of departure for
developing analysis objectives. The overall formulation, it can be argued, is also
influenced by, among other issues, whether the data is univariate, bivariate or
multivariate. Subsequently, the responses to the completed questionnaires were
processed by the researcher. Data analysis includes checking the data for
comprehensiveness and consistency. Welman and Kruger (2004:201) concur that
one of the first tasks in analysing data is to formulate some kind of theoretical
statistical model. They postulate that the selection of the appropriate statistical
methods and/or software is dependent, among other things, on the level of
measurement. The statistical analysis for this research, using SAS software, was
performed by the Department of Statistics at the University of Pretoria.
6.6.3 FACTOR ANALYSIS
Exploratory factor analysis was used for interpreting the data in this research.
Cooper and Schindler (2003:562) assert that when the variables that are being
analysed are interrelated, some being dependent and others independent, then
factor analysis is appropriate for analysing the data. In fact, Cooper and Schindler
(2003:11) posit that factor analysis is one of the techniques applicable in multivariate
analysis where many variables are involved. In this instance, there were fifty
potential variables and thus this technique was used because the overall research is
multivariate. There are several approaches to factor analysis and, in this instance,
the model used was the maximum likelihood method. Kim and Mueller (1978:9) and
Cooper and Schindler (2003:613) agree that factor analysis identifies patterns or
underlying combinations in variables as potential factors. Thompson (2004:5) makes
the point that there are two forms of factor analysis: confirmatory and exploratory. In
this instance, exploratory factor analysis, as argued by Kim and Mueller (1978:9),
was used as the factors were assumed to be “not known”.
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Factor analysis is used for data reduction when patterns can be recognised in
developing specific constructs. This occurs when there are too many variables and
some reduction could benefit the exercise, with variables that belong together being
grouped into factors. Kim and Mueller (1978:9) are incisive and insist that factor
analysis is based on the fundamental assumption that some underlying factors,
which are smaller in number than the number of observed variables, are responsible
for the co-variation among the observed variables. Cronbach’s alpha coefficients,
which measure the reliability of a factor, are produced as a result of factor analysis.
In this study, a Cronbach’s alpha value of greater than 0,7 was an indication that the
items within a factor are reliable and measure the same underlying construct.
6.6.4 TEST OF SIGNIFICANCE (t-TEST)
The t-test interrogates the differences in the mean of a scale and the mid-points of
the factors in order to establish the level of significance of the difference, if any,
between them. Cooper and Schindler (2003:588) assert that a t-test determines the
significance of a sample distribution and a parameter.
6.6.5 ANALYSIS OF VARIANCE (ANOVA)
An analysis of variance (Anova) was performed using demographical data to see
whether the manager’s seniority, job experience and time in banking had any
influence on the dependant variables. Cooper and Schindler (2003:588) concur that
the Anova establishes whether means from different sets of data come from the
same sample which, in this case, establishes whether there is any difference in the
means of the factors. This would establish if there were any differences in the
interpretation of the variables in the different categories or factors. An analysis of
variance is also a test of significance between and within the different independent
variables in the same factor. Saunders et al. (2007:448) and Cooper and Schindler
(2003:552) agree that an Anova tests the similarity of several means or other
measures by using the variances between and within groups of data.
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If they are equal, it means that they come from the same population. Of major
concern to all scientists is the credibility of research findings. The credibility of the
research findings suggests the degree to which the research is reliable and valid. In
fact, the two are key to authentic research. It is therefore, natural that this research
must be tested for reliability and validity.
6.6.6 VALIDITY AND RELIABILITY
Cooper and Schindler (2003:232), Bordens and Abbot (2008:129), Saunders et al.
(2007:614) and Fraenkel and Wallen (2005:150) are relevant here, as they assert
that validity refers to the extent to which a test measures what we actually want to
measure. Hence, Frankfort-Nachmias and Nachmias (2000:149) indicate that validity
is concerned with the question: "am I measuring what I intend to measure?" Fraenkel
and Wallen (2005:150) explain that validity refers to the appropriateness, usefulness,
correctness and meaningfulness of the inferences.
Strube (2000:24) declares that "reliability" refers to the consistency of the results.
Accordingly, tests are applied to check whether the results will be the same should
the research be repeated by another scientist and in a different context or
environment (Saunders et al., 2003:101). Cooper and Schindler (2003:231) then
assert that reliability refers to the extent to which the procedure gives consistent
results as well as to the extent to which the results are free of random or unstable
error. In this instance, reliability relates to the accuracy and consistency of the
responses.
According to Saunders et al. (2007:149), reliability is assessed by posing the
following three questions:
? Will the measures yield the same result on another occasion?
? Will similar conclusions be reached by other observers?
? Is there transparency in how sense was made of the raw data?
190
Saunders et al. (2007:149) further point out that the threat to reliability is bias,
whether it is from the interviewer, participant or observer. This is aptly summarised
by Frankfort-Nachmias and Nachmias (2000:154), who explain that when measuring
intangibles more errors may be produced than when measuring physical
instruments. They also point out that momentary distraction on the part of the
participant could result in an error. Thus, it can be argued that reliability stresses the
consistency of outcomes and this occurs when the threats to reliability (e.g. bias and
distractions) are reduced, as elimination of all errors might not be possible. It should
also be added here that, when talking about "consistency", it follows that even if the
outcomes are wrong, for as long as they are consistent, they are reliable. Figure 6.6
illustrates the validity and reliability tests used in this study.
Figure 6.6 Face validity and reliability
There are three regular tests for reliability:
? The test-retest method, which requires administering the same instrument (i.e.
the questionnaire) twice and comparing the results. It is common, for instance,
to take a patient's temperature more than once in hospital. However, it differs
from situation to situation and the in-between periods will differ (the length of
time between testing) depending on the nature of the research.
? In terms of the equivalent forms method, two different measuring instruments
are used for the same research or experimentation. For example, two different
questionnaires could be used for the same sample.
Face validity =
= CronbachAlpha
= 0,7
= Wilcoxon Agreement betweenexpert and/or
incumbent groupsas to the
suitabilityof the construct(s)
Degree towhichinstruments are
homogeneousandreflect the
same underlyingconstruct(s)
ReliabilityAlpha =
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? The Kuder-Richardson approach in terms of which the mean, standard
deviation and the number of items are used to establish what is known as the
reliability coefficient.
? Fraenkel and Wallen (2005:161) claim that a reliability coefficient of 0,00
suggests a complete absence of a relationship between values.
6.6.7 WILCOXON
To test whether the factors are influenced significantly by the independent variable
‘group’, the Wilcoxon two-sample test and Kruskal-Wallis test were used. Owing to
the small sample size (21, that is, nine experts and 12 incumbents, see also table
7.20), a t-test and the Kruskal-Wallis test were conducted to confirm the results from
the Wilcoxon two-sample tests.
6.7 CONCLUSION
The techniques described in this chapter ensure that the research is scientific and
the findings are acceptable to the scientific community. The purposive and
judgemental sampling procedures ensured that respondents had sufficient
experience to respond meaningfully.
In this study, Cronbach’s alpha coefficients for the verifier determinant factors
were used. All the factors had a Cronbach’s alpha of 0.7 or higher.
In this study, validity was strived for during the interview process. The
interviewers interrogated the constructs, their signs, causes, relationships and
measurements as perceived, considered and applied by the specialists
192
Significantly, exploratory factor analysis was described, and was used to reveal the
underlying constructs and to test their reliability. The next chapter details the findings
flowing from the above techniques as used on the raw data.
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CHAPTER 7
Research findings
7.1 Introduction
7.1.1 Case research results
7.2 Empirical findings: descriptive statistics
7.2.1 Sample and response rate
7.2.2 Demographics
7.2.3 Factor analysis
7.3 Empirical findings: Inferential statistics
7.3.1 Analysis of variance
7.3.2 Wilcoxon
7.4 Chapter summary
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This method was preferred above a conventional rating scale questionnaire.
Pennanen (2010:7)
7.1 INTRODUCTION
Verifiers are used to confirm the existence of problems in the business or in the
business environment, as environmental scanning units seem to be unable to
respond to what Ansoff (1975:25) calls “weak signals”. Stubbart (1982:143)
concludes “we have too many places to look and too few theories of how significant
environmental change can be linked to the business’s plans”. The introduction of
verifier determinants is intended to fill the “gap” in this regard and to focus the
investigative stage of a turnaround situation.
The previous chapters shaped the foundation for an academic framework. In order to
achieve the research objective of identifying verifier determinants, different opinions
from a business, an accounting and a legal platform were presented. These opinions
are given within a framework of early warning sign identification and turnaround
practice. In the discussion with a selected specialist group, it became clear that
some of the opinions are similar, but with varying denotations and terminology.
Instances where the outlook on approaches is the same were grouped.
CHAPTER 7
RESEARCH FINDINGS
“Even the deepest turnaround talents are helpless if their skills are too limited”
“Knowledge of financial statements, crisis management, business strategy and many other
subjects are vital to achieve success”
“Though strong theoretical knowledge is valuable, understanding the
entrepreneur’s life is an absolute necessity”
Sections of the research findings are supplied in the various appendixes
attached to this document. These contain extensive lists and categories of
construct elements relevant to this study.
195
This chapter emphasises the empirical findings. In addition, the use of statistical
analysis is explained against a backdrop of demographic information and more
descriptive inferences.
The following descriptive statistics are presented in this chapter:
? exploratory factor analysis for identification of factors
? ANOVA tables – illustrate the relationships between the factors and the
independent variables
? the Wilcoxon two-sample test
? the Kruskal-Wallis test.
7.1.1 CASE RESEARCH RESULTS
Through the interview process, five main categories of early warning signs were
identified, namely:
? management warning signs
? financial warning signs
? operational/market warning signs
? strategic warning signs
? banking warning signs.
After all interviews had been conducted, the participants were asked to rank the
above categories of warning sign in order of importance. Participants agreed that
managerial warning signs were the most important, but also the most difficult to
identify and verify.
On a scale of 1 to 5 (5 being most important and 1 being least important),
participants ranked the categories as follows:
? (5) management signs
? (4) strategic signs
? (3) financial signs
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? (2) operational/market signs
? (1) banking signs
The specialist respondents could:
? identify early warning signs
? correctly identify and categorise Basel II
? correctly rank the cases
? identify causes quite accurately
? give a verifier determinant for each cause identified
Figure 7.1 Specialist group cognitive process (own compilation)
The participants identified several verifier determinants related to each category.
These showed a classic resemblance to the warning signs identified in the literature
reviewed. The participants were also able to identify the same elements that are
used in the Basel II findings, which demonstrates the participants’ high level of
knowledge. Moreover, the participants had no trouble in accurately placing the case
studies in low, medium, or high-risk categories.
Specialist group contribution
Verifier Determinants
Able to motivate thinking Cognitive judgement
Early Warning Signs
Causes
Categorise
Cognitive process: Main aim – to develop understanding
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This comparison validates the interview findings. Tables 7.10 to 7.14 contain the
variables identified by the specialists and were included in the questionnaire in order
to be evaluated by the respondents.
7.2 EMPIRICAL FINDINGS: DESCRIPTIVE STATISTICS
This section details the results of the field research. The sample is described below
in terms of the demographic information depicted in figures 7.1 to 7.5.
7.2.1 SAMPLE AND RESPONSE RATE
Questionnaires were distributed to 200 employees in the credit and the credit risk
environment. Of these respondents, 92 (i.e. 46%) returned a completed
questionnaire, giving a response rate of 46%, which was taken to be representative
of the population and was used in the statistical analysis described in this chapter.
7.2.2 DEMOGRAPHICS
The demographic results are presented below. Respondents were classified into two
groups namely ‘incumbent’ and ‘expert’. The incumbent group consists of credit
managers, senior credit managers, area credit managers, regional credit managers,
credit risk managers, senior credit risk managers and regional managers of credit
risk. The expert group consisted of industry experts with vast experience of
distressed business restructuring and credit lending. The majority of the respondents
83 (i.e. 90.2%) came from the incumbent group – see section 6.6.3. and table 7.1.
Table 7.1 Factor importance ratings and rankings in relation to expertise classification
A question was posed to both
respondents into three subsets
Figure 7.1 Levels of management
Refer to table 7.2
Groups N Obs
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
83 Incumbents
The MEANS Procedure: Two distinct groups: incumbents and experts
9 Experts
Middle
Management
53%
Senior
Management
14%
Question 52
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Factor importance ratings and rankings in relation to expertise classification
A question was posed to both the incumbent and expert groups, dividing the
respondents into three subsets, namely, junior, middle and senior m
anagement
Variable N Mean
Managerial Verifier Determinants 83 3.349
Financial Verifier Determinants 83 3.552
Strategic Verifier Determinants 83 3.310
Operational/Market Determinants 83 3.460
Banking Verifier Determinants 83 3.659
Managerial Verifier Determinants 9 3.306
Financial Verifier Determinants 9 3.454
Strategic Verifier Determinants 9 3.133
Operational/Market Determinants 9 3.233
Banking Verifier Determinants 9 3.741
The MEANS Procedure: Two distinct groups: incumbents and experts
Junior
Management
33%
Management
Question 52 - Management level
Factor importance ratings and rankings in relation to expertise classification
groups, dividing the
management.
Std Dev Ranking
0.393 2
0.317 4
0.476 1
0.437 3
0.352 5
0.423 3
0.177 4
0.224 1
0.427 2
0.188 5
The MEANS Procedure: Two distinct groups: incumbents and experts
Management level
199
Table 7.2 Factor importance ratings and rankings in relation to management classification
levels of management
Middle management contributed 53% of all respondents. This is to be expected
since the lending environment requires a certain level of expertise and middle
managers contribute significantly in terms of their knowledge and experience (refer
to figure 7.2), which was beneficial to this research. There was a definite difference
in the rankings in terms of management levels. Strategic verifier determinants were
ranked higher by senior management, while banking and financial verifier
determinants were more important to junior and middle management.
v53 N Obs Variable N Mean Std Dev Ranking
Managerial Verifier Determinants 28 3.372 0.355 2
Financial Verifier Determinants 28 3.610 0.286 4
Strategic Verifier Determinants 28 3.329 0.477 1
Operational/Market Determinants 28 3.557 0.373 3
Banking Verifier Determinants 28 3.685 0.355 5
Managerial Verifier Determinants 51 3.345 0.423 2
Financial Verifier Determinants 51 3.525 0.323 4
Strategic Verifier Determinants 51 3.261 0.494 1
Operational/Market Determinants 51 3.406 0.463 3
Banking Verifier Determinants 51 3.676 0.324 5
Managerial Verifier Determinants 13 3.288 0.377 1
Financial Verifier Determinants 13 3.468 0.273 4
Strategic Verifier Determinants 13 3.338 0.260 3
Operational/Market Determinants 13 3.308 0.446 2
Banking Verifier Determinants 13 3.590 0.383 5
The MEANS Procedure: Question - I am senior / middle/ junior management
Junior 28
Middle 51
Senior 13
Ranking: 5 = high importance, 1 = low importance
200
Figure 7.2 Service period in banking
A respondent with a high level of expertise is expected to have been substantially
exposed to the banking environment in which he/she operates. Hence, a high level
of expertise requires a certain number of years’ experience. The respondents to this
question depict this requirement, as the majority (84%) has more than 10 years’
banking experience. This does, however, need to be tested against the number of
years the respondents have been in their current positions.
The factor importance ratings and rankings in relation to classification of length of
service in banking, is illustrated in table 7.3 and depicted in figure 7.3.
1-10 Years
16%
11-20 Years
42%
21-50 Years
42%
Question 55 - Period in banking
201
Table 7.3 Factor importance ratings and rankings in relation to classification of length of
service in banking
There was a definite difference in the rankings in terms of management levels:
operational/market and strategic verifier determinants were ranked higher by those
who had been members of management longer, while banking and financial verifiers
determinants were important to all three categories of manager.
vv56 N Obs Variable N Mean Std Dev Ranking
Managerial Verifier Determinants 32 3.263 0.443 2
Financial Verifier Determinants 32 3.508 0.310 4
Strategic Verifier Determinants 32 3.147 0.485 1
Operational/Market Determinants 32 3.369 0.496 3
Banking Verifier Determinants 32 3.516 0.365 5
Managerial Verifier Determinants 39 3.408 0.336 2
Financial Verifier Determinants 39 3.562 0.335 4
Strategic Verifier Determinants 39 3.359 0.483 1
Operational/Market Determinants 39 3.421 0.448 3
Banking Verifier Determinants 39 3.756 0.308 5
Managerial Verifier Determinants 21 3.353 0.411 1
Financial Verifier Determinants 21 3.560 0.249 3
Strategic Verifier Determinants 21 3.390 0.321 2
Operational/Market Determinants 21 3.576 0.290 4
Banking Verifier Determinants 21 3.730 0.286 5
Ranking: 5 = high importance, 1 = low importance
The MEANS Procedure: Question- How long have you been in banking in years?
1-15 32
16-25 39
26+ 21
Figure 7.3 Service period in current
Of all the respondents, 66%
years, although they had sufficient
banking into account. However
lacking due to the relative short exposure to the job function
Table 7.4 Factor importance ratings and rankings in relation to classification of
service period in current position
11-20 years
6%
Question
vv54 N Obs
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
31 6-45
The MEANS Procedure: Question - How long have you been in this position in years?
61 0-5
202
urrent position
respondents, 66% had been in their current position for
sufficient experience when taking the number of years in
owever, their experience in their current position
due to the relative short exposure to the job function, refer to figure 7.4.
Factor importance ratings and rankings in relation to classification of
osition
1 - 10 years
90%
21-50 years
4%
Question 53 - Service period
in current position
Variable N Mean
Managerial Verifier Determinants 61 3.381
Financial Verifier Determinants 61 3.563
Strategic Verifier Determinants 61 3.328
Operational/Market Determinants 61 3.446
Banking Verifier Determinants 61 3.678
Managerial Verifier Determinants 31 3.274
Financial Verifier Determinants 31 3.503
Strategic Verifier Determinants 31 3.223
Operational/Market Determinants 31 3.423
Banking Verifier Determinants 31 3.645
The MEANS Procedure: Question - How long have you been in this position in years?
for less than five
experience when taking the number of years in
their current positions could be
, refer to figure 7.4..
Factor importance ratings and rankings in relation to classification of
Std Dev Ranking
0.422 2
0.320 4
0.478 1
0.457 3
0.330 5
0.327 2
0.279 4
0.420 1
0.407 3
0.362 5
The MEANS Procedure: Question - How long have you been in this position in years?
203
Other demographic information includes respondent’s age and education level. All
respondents were older than 25 years, which makes sense since a certain level of
expertise was required for inclusion. The majority of the respondents have a post-
matric qualification, which is in line with the job requirement and the responsibility
requirement.
Table 7.5 Comparison between education level and management level of respondents
Respondents having only a matric fall mainly into the junior management category,
which is to be expected. The category, middle management, contained the majority
of respondents with post-matric qualifications.
Figure 7.4 Respondent age distribution
Education Qualification Junior Middle Senior Total
Matric 12 2 1 15
Diploma 4 15 3 22
Degree 8 16 6 30
Post Degree 3 11 2 16
Total 27 44 12 83
Management Level
25 -35 Years
13%
36-45 Years
42%
46-65 Years
45%
Question 56. Respondent age distribution
204
Figure 7.5 Highest educational qualification
The significance of higher education is illustrated by the very low percentage of 18%
of respondents with a Grade 12 only as their highest qualification. The spread also
confirms the environment’s requirement for post-matric qualifications. Of significance
here is the number of respondents (49%) with graduate and postgraduate
qualifications.
7.2.3 FACTOR ANALYSIS
Questions 1 to 50 are the verifier determinants identified from the interview process.
These questions were grouped according to the constructs of early warning signs.
The constructs identified in the interview process and confirmed by the secondary
data research are reflected as the five factors (f1 to f5) shown in the table 7.6.
Matric
18%
NQF Level 5
2%
Diploma
22%
Degree
36%
Honours Degree
7%
Masters Degree
4%
MBA
2%
Other
9%
Question 57- Highest educational qualification
205
Table 7.6 Description of factors
Table 7.7 Univariate statistics for factor analysis
Factor no Questions
f1 v2-v13
f2 v14-v25
f3 v26-v35
f4 v36-v45
f5 v46-v51
Operational/Market Verifier Determinants
Banking Verifier Determinants
Factor analysis
Definitions
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
(Factor 1) (Factor 2) (Factor 3) (Factor 4) (Factor 5)
12 12 10 10 5
3.345 3.543 3.292 3.438 3.667
3.417 3.500 3.300 3.500 3.667
3.417 3.500 3.100 3.500 4.000
0.394 0.307 0.460 0.439 0.340
0.155 0.094 0.211 0.192 0.115
5 3 4 2 1
0.791 0.747 0.891 0.874 0.691
0.783 0.744 0.891 0.875 0.697
n=92
Variance
Cronbach's Alpha coefficient:
Raw
Cronbach's Alpha coefficient:
Standardised
Information
Number of items
Mean
Median
Mode
Standard Deviation
Specilist group ranking
%= most-, 1 = least important
206
Table 7.8 Ranking comparison of factors
The financial verifier determinants were favoured by most of the respondents as
being of high importance. This was to be expected as the research was conducted in
a financial institution. Furthermore, financial verifier determinants are largely
measurable. For the same reason, strategic verifier determinants were rated as
being of low importance by all respondents except for senior management. It can
thus be deduced that the more senior managers rely on experience in order to
“measure” the levels of strategic and managerial verifier determinants.
All five factors are highly correlated with each other as can be seen from the
correlations in table 7.9. The hypothesis that the factors are not correlated, is
rejected.
Specialist Expert Incumbent Junior Middle Senior
f1 High
f2 High High High High
f3 Low Low Low High
f4 Low Low
f5 Low
Specialist Expert Incumbent Banking 1-15 Banking 16-25 Banking26+
f1 High Low
f2 High High High High
f3 Low Low
f4 Low Low
f5 Low High
Specialist Expert Incumbent Period < 5 Period > 5
f1 High
f2 High High High High
f3 Low Low Low
f4 Low
f5 Low
Managerial Verifier Determinants
Managerial Verifier Determinants
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
207
Table 7.9 Factor correlations
The verifier variables which are included in each of the factor determinants
discussed are reflected in table 7.10. These determinants were arrived at from the
interview process with the specialist group. The interview process was successful in
eliciting statements from the specialist group in which the specific variables were
highlighted
Table 7.10 Variables in the managerial verifier factor
The 12 managerial variables identified by the specialist group are listed in table 7.10;
this reflects the statements in the questionnaire from question 2 to 13.
Pearson Correlation Coefficients,
N=92
Prob >[r] under HO: Rho=0
f1 f2 f3 f4 f5
Managerial Verifier Determinants
1.000
Financial Verifier Determinants
0.618
p F
Group 1 0.826 0.826 0.830 0.365
How long have you been in
this position in years?
1 0.413 0.413 0.420 0.521
How long have you been in
banking in years?
2 1.263 0.632 0.640 0.532
I am senior / middle/ junior
management.
2 1.883 0.941 0.950 0.392
The GLM Procedure
Dependent Variable: financial verifier determinant
213
Table 7.17 ANOVA for Factor 3: strategic verifier determinants
Table 7.17 shows that the strategic verifier determinants are significantly influenced
by the number of years in banking (p < 0,05). These verifier determinants are not
significantly influenced by any of the other independent variables on a 5% level of
significance (p < 0,05).
Source DF
Sum of
Squares
Mean Square F Value Pr > F
Model 6 9.781 1.630 1.750 0.119
Error 85 79.133 0.931
Corrected Total 91 88.914
R-Square Coeff Var Root MSE cf3 Mean
0.110 1.428 0.965 0.000
Source DF Type III SS Mean Square F Value Pr > F
Group 1 1.336 1.336 1.440 0.234
How long have you been in
this position in years?
1 1.593 1.593 1.710 0.194
How long have you been in
banking in years?
2 5.918 2.959 3.180 0.047
I am senior / middle/ junior
management.
2 1.179 0.590 0.630 0.533
Dependent Variable: strategic verifier determinant
The GLM Procedure
214
Table 7.18 ANOVA for Factor 4: operational/marketing verifier determinants
Table 7.18 shows that the operational/marketing verifier determinants are not
significantly influenced by any of the independent variables on a 5% level of
significance (p < 0,05)
Source DF
Sum of
Squares
Mean Square F Value Pr > F
Model 6 8.268 1.378 1.450 0.205
Error 85 80.646 0.949
Corrected Total 91 88.914
R-Square Coeff Var Root MSE cf4 Mean
0.093 3.153 0.974 0.000
Source DF Type III SS Mean Square F Value Pr > F
Group 1 1.280 1.280 1.350 0.249
How long have you been in
this position in years?
1 0.111 0.111 0.120 0.734
How long have you been in
banking in years?
2 4.418 2.209 2.330 0.104
I am senior / middle/ junior
management.
2 3.290 1.645 1.730 0.183
The GLM Procedure
Dependent Variable: operational/market verifier determinant
215
Table 7.19 ANOVA for Factor 5: banking verifier determinants
Table 7.19 shows that the banking verifier determinants are significantly influenced
by the number of years in banking (p < 0,05). These verifier determinants are not
significantly influenced by any of the other independent variables on a 5% level of
significance (p < 0,05).
7.3.2 WILCOXON TWO-SAMPLE TEST AND KRUSKAL-WALLIS TEST
To test whether the factors are influenced significantly by the independent variable
‘group’, the Wilcoxon two-sample test and Kruskal-Wallis test are used. Owing to the
small sample size (21), a t-approximation is shown in the Wilcoxon two-sample tests,
and the Kruskal-Wallis tests were conducted to confirm the results from the Wilcoxon
two-sample tests.
Source DF
Sum of
Squares
Mean Square F Value Pr > F
Model 6 9.834 1.639 1.760 0.117
Error 85 79.080 0.930
Corrected Total 91 88.914
R-Square Coeff Var Root MSE cf5 Mean
0.111 -1.817 0.965 0.000
Source DF Type III SS Mean Square F Value Pr > F
Group 1 0.339 0.339 0.360 0.548
How long have you been in
this position in years?
1 0.141 0.141 0.150 0.698
How long have you been in
banking in years?
2 8.594 4.297 4.620 0.013
I am senior / middle/ junior
management.
2 1.832 0.916 0.980 0.378
The GLM Procedure
Dependent Variable: banking verifier determinant
216
Table 7.20 Means procedure for the incumbent and expert groups
In table 7.20, the Kruskal-Wallis test yields a p-value of 0,642. This indicates that the
managerial verifier determinants are not significantly influenced by the incumbent
and expert group on a 5% level of significance. This confirms the results obtained
from the Wilcoxon two-sample tests.
Group Obs Variable
Managerial Verifier Determinants 12 3.424 0.377 2
Financial Verifier Determinants 12 3.604 0.293 5
Strategic Verifier Determinants 12 3.350 0.481 1
Operational/Market Determinants 12 3.483 0.501 3
Banking Verifier Determinants 12 3.583 0.399 4
Managerial Verifier Determinants 9 3.306 0.423 3
Financial Verifier Determinants 9 3.454 0.177 4
Strategic Verifier Determinants 9 3.133 0.224 1
Operational/Market Determinants 9 3.233 0.427 2
Banking Verifier Determinants 9 3.741 0.188 5
Ranking: 5 = high importance 1= low importantce
The Means Procedure
N
Incumbent 12
N Mean Std Dev Ranking
Expert 9
217
Table 7.21 Testing managerial verifier determinants for influence between the incumbent and
expert groups
Table 7.21 shows that the Kruskal-Wallis test yields a p-value of 0,642. This
indicates that the financial verifier determinants are not significantly influenced by the
incumbent or expert groups on a 5% level of significance. This confirms the results
obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 138.500 132.000 13.975 11.542
Expert 9 92.500 99.000 13.975 10.278
92.5
-0.429
0.334
0.668
0.336
0.672
Chi-Square 0.216
DF 1
Pr.Chi-
Square
0.642
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Managerial Verifier
Determinant
Wilcoxon Two-Sample Test
Average scores were used for ties
Normal Approximation
Statistic
One-sided Prize
Z
t Approximation
Two Sided Pr.|Z|
Two-Sided Pr. |Z|
One-Sided Pr . Z
Kruskal-Wallis Test
Z includes a continuity correction of 0.5
218
Table 7.22 Testing financial verifier determinants for influence between the incumbent and
expert groups
Table 7.22 shows that the Kruskal-Wallis test yields a p-value of 0,116. This
indicates that the financial verifier determinants are not significantly influenced by the
incumbent or the expert groups on a 5% level of significance. This confirms the
results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 154.000 132.000 13.989 12.833
Expert 9 77.000 99.000 13.989 8.556
77
-1.537
0.062
0.124
0.070
0.140
Chi-Square 2.473
DF 1
Pr.Chi-
Square
0.116
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Financial Verifier Determinant
Classified by Variable Group
Wilcoxon Two-Sample Test
Average scores were used for ties
Normal Approximation
Statistic
One-sided Pr.Z
Z
t Approximation
Two Sided Pr.|Z|
Two-Sided Pr. |Z|
One-Sided Pr . Z
Kruskal-Wallis Test
Z includes a continuity correction of 0.5
219
Table 7.23 Testing strategic verifier determinants for influence between the incumbent and
expert groups
Table 7.23 indicates that the Kruskal-Wallis test yields a p-value of 0,352. This
indicates that the strategic verifier determinants are not significantly influenced by
the incumbent or the expert groups on a 5% level of significance. This confirms the
results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 145.000 132.000 13.966 12.083
Expert 9 86.000 99.000 13.966 9.556
86.000
-0.895
0.185
0.371
0.191
0.381
Chi-Square 0.867
DF 1
Pr.Chi-
Square
0.352
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Strategic Verifier Determinant
Classified by Variable Group
Wilcoxon Two-Sample Test
Average scores were used for ties
Normal Approximation
Statistic
One-sided Pr.Z
Z
t Approximation
Two Sided Pr.|Z|
Two-Sided Pr. |Z|
One-Sided Pr . Z
Kruskal-Wallis Test
Z includes a continuity correction of 0.5
220
Table 7.24 Testing operational/market verifier determinants for influence between the
incumbent and expert groups
Table 7.24 shows that the Kruskal-Wallis test yields a p-value of 0,186. This
indicates that the operational/market verifier determinants are not significantly
influenced by either the incumbent or the expert groups on a 5% level of
significance. This confirms the results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 150.500 132.000 13.984 12.542
Expert 9 80.500 99.000 13.984 8.944
80.500
-1.287
0.099
0.198
0.106
0.213
Chi-Square 1.750
DF 1
Pr.Chi-
Square
0.186
Wilcoxon Scores (Rank Sums) for Variable: Operational/Market Verifier
Determinant
The NPAR1WAY Procedure
Wilcoxon Two-Sample Test
Average scores were used for ties
Statistic
Normal Approximation
Z
One-sided Pr.Z
Two Sided Pr.|Z|
t Approximation
One-Sided Pr . Z
Two-Sided Pr. |Z|
Z includes a continuity correction of 0.5
Kruskal-Wallis Test
221
Table 7.25 Testing banking verifier determinants for influence between the incumbent and
expert groups
Table 7.25 shows that the Kruskal-Wallis test yields a p-value of 0,536. This
indicates that the banking verifier determinants are not significantly influenced by the
either the incumbent or the expert group on a 5% level of significance. This confirms
the results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 123.500 132.000 13.748 10.292
Expert 9 107.500 99.000 13.748 11.944
107.500
0.582
0.280
0.561
0.284
0.567
Chi-Square 0.382
DF 1
Pr.Chi-
Sqaure
0.536
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Banking Verifier Determinant
Classified by Variable Group
Wilcoxon Two-Sample Test
Average scores were used for ties
Statistic
Normal Approximation
Z
One-sided Pr.Z
Two Sided Pr.|Z|
t Approximation
One-Sided Pr . Z
Two-Sided Pr. |Z|
Z includes a continuity correction of 0.5
Kruskal-Wallis Test
222
7.4 CHAPTER SUMMARY
In this chapter the results from the empirical study were presented and the five
factors that were identified were tested for significance. The inferential statistics were
presented using ANOVA tables and tests for any relationship between the factors
and the incumbent and expert groups were conducted by making use of the
Wilcoxon two-sample test and the Kruskal-Wallis test.
The next chapter explores the findings from the study by drawing conclusions from
the research and, consequently, making recommendations and suggestions for
future research opportunities. The main focus of the next chapter is, firstly, to discuss
the findings and, secondly, to propose a turnaround framework for use by
entrepreneurs, bankers and practitioners. The limitations of this study will also be
mentioned.
223
CHAPTER 8
Conclusion
8.1 Introduction
8.2 Summary of findings
8.3 Research objective
8.4 In pursuit of the prime objective
8.5 In pursuit of the secondary objective
8.6 Setting up phase
8.6.1 Investigation phase
8.6.1.1 Triage questions
8.6.1.2 Data integrity
8.6.1.3 Business plan
8.6.1.4 Final decision
8.6.2 Planning phase
8.6.2.1 Turnaround plan
8.6.2.2 Recovery strategy formulation
8.6.2.3 Objective in planning
8.6.2.4 Decision outcome
8.7 Turnaround execution phase
8.7.1 Strategic response
8.7.2 Financial response
8.7.3 Operational response
8.7.4 Benefits of the study
8.9 Limitation of the study
8.10 Future studies
8.11 Closing
224
Brenneman (1998:163, 164)
8.1 INTRODUCTION
The closing chapter comprises a summary of the conclusions and empirical findings
in terms of a turnaround framework. The research is concluded by revisiting the
research objectives and discussing the limitations of the research. In addition, the
contribution made by the study is identified and recommendations are made for
future research. This chapter concludes with a critical summary of the main
conclusions, definitions and frameworks.
In the previous chapters, the foundation for an academic framework was laid. In
order to achieve the research objective of identifying verifier determinants, various
opinions from a business, an accounting and a legal platform were presented. These
opinions are identified within a framework of early warning signs and turnaround
practice. In the discussions with a selected expert group, it became clear that some
of the experts’ opinions are similar, but have varying denotations and use different
terminology. Instances where the outlook on approaches was the same were
grouped.
CHAPTER 8
CONCLUSION
“The fact is, you can’t afford to think too much during a turnaround. Time is
tight; money is tighter. If you sit around devising elegant and complex strategies
and then try to execute them through a series of flawless decisions, you’re doomed.”
And
“Did you know that there are no rearview mirrors on an airplane? The runway
behind is irrelevant.”
225
8.2 SUMMARY OF THE MAIN FINDINGS
This study introduced a number of new constructs that can be used in a business
turnaround context, namely:
? business triage (section 1.3, fig. 1.1)
? verifier determinant (section 1.5, fig. 1.2)
? turnaround framework, introducing the constructs “business triage” and
“verifier determinant” (section 8.5, fig. 8.1)
? a timeline schedule for executing the rescue process (section 5.6.2, fig. 5.1).
Although the psychology of turnaround was not the focus of this study, the relevant
turnaround literature highlighted the importance of the psychological impact of
turnaround on entrepreneurs. The successful administration of a business is only a
small part of the challenges facing entrepreneurs, and the psychological impact that
the decline, distress and turnaround of a business has on the entrepreneur should
not be underestimated.
In order to save their businesses, entrepreneurs must be equipped with the
knowledge needed to formulate and implement rescue plans. In chapter 2, the
deduction was made that entrepreneurs operate under behavioural patterns of high-
risk acceptance. In line with this, this research has identified and addressed the need
for an early warning control system in businesses.
Formal rescue/turnaround routes are, owing to various negativities and high costs,
undesirable and entrepreneurs will favour a more informal approach. However, there
are a multitudes of dangers and constraints that can negatively affect a possible
successful rescue/turnaround. The introduction of a commercial process of business
rescue proceedings will hopefully address these constraints.
The literature study considered seminal work on early warning signs which was
summarised and analysed comprehensively in Appendix A.
226
The deduction made was that authors use an array of terminology to arbitrarily
describe early warning signs, inter alia:
:
? success versus failure variables
? causes of decline and/or failure
? warning indicators for business decline
? performing and non-performing variables
? root causes for decline or failure
? warning indicators
? material defects
? external and internal factors
? distress variables
? problems
? challenges.
Notwithstanding the various ways of describing early warning signs, the authors, as
per appendix A, seem to have consensus on the five main early warning sign
categories. The classification of warning signs identified by authors in the literature
was largely confirmed in a comprehensive literature and case research, which was
discussed in chapter 6 of this study. The case research conducted with a sample
group of credit specialists in a banking environment identified various early warning
sign categories. This group confirmed the main categories and explored the
variables associated with each.
Using the five main categories identified by academics and confirmed by the case
research, the literature research is summarised in Appendix A. Banking early
warning signs are not discussed by most authors, as they are clearly industry
specific and are favoured by authors researching financial institutions. These signs
are included as Appendix B. Owing to the fact that this research was conducted
within a financial institution, banking signs were reflected separately.
227
Turnaround management has evolved as more research data has become available
over time. From the literature explored in this research it is evident that most authors
approach the study of turnaround management from a non-accounting data
perspective, with some authors adopting a pragmatic approach to turnaround, which
tends to drill down into the fine details or qualitative issues.
The timing of a turnaround is one of the more contentious issues addressed by
stakeholders both internationally and nationally. Turnaround is typified by very
limited timeframes, while the very nature of business strategy planning and
execution means that they move at a more pedestrian pace.
The second differentiating factor identified by this research is the availability and
importance of resources; that is, in a turnaround situation resources are generally
scarce, whereas under normal circumstances they are usually planned for.
Most of the countries investigated have adopted some form of debtor-friendly
insolvency regime. Legislation and/or actions of a number of countries that have
adopted specific turnaround planning methodology were identified and discussed in
this study. Investigations into the South African Companies Act, Act 71 of 2008,
established the format of turnaround plans under Chapter 6 of the Act; proceedings
which were substantially dealt with in chapter 5 of this research. The literature review
confirmed the following similarities between the various debtor-friendly regimes:
? rescue is seen as part of a business process
? there is a clear process for commencing with business rescue
? a person is appointed who is responsible for the turnaround process
? a turnaround plan is central to all turnaround options and has to be
sanctioned by creditors.
It is envisaged that the same process will play itself out in South Africa as Chapter 6
of the Act is tested in the courts. It will take the South African courts some time to
adjust to the proposed new way of treating ‘bankruptcy’.
228
What will be of interest is how business is going to react to the debtor-friendly regime
and its implication for entrepreneurs and business alike.
8.3 RESEARCH OBJECTIVE
The following objectives were identified for this research:
Primary objectives
? To identify and theoretically define early warning verifier determinants.
? To design and include “verifier determinants” as an integral part of a
turnaround plan that supports corrective action.
Secondary objectives
? To research the current formal turnaround practices for verifiers that are
applied in the United States of America, Canada, Australia, Africa and the
informal practices evident in South Africa. These findings are aligned to
include the changes in the applicable South African legislation.
? To design and propose a framework for use by turnaround practitioners
and entrepreneurs alike.
? To identify which verifier determinants will confirm the early warning, and
apply this outcome to the design of a reliable turnaround framework that is
accepted by all creditors and financial institutions.
? To contribute to the South African entrepreneurial, turnaround fraternity,
and future formal studies in this academically ill-represented field.
This study contributes significantly to assisting entrepreneurs, banker officials and
turnaround managers with a framework for approaching turnaround.
229
8.4 IN PURSUIT OF THE PRIMARY OBJECTIVE
The research conducted an investigation into various early warning sign constructs
and elements, which should become a prerequisite for formal business turnarounds.
One of the major changes in the legislation is the stipulation that an attempt must be
made to turn around a troubled business before winding up or liquidating the
concern. King includes this provision in the King III report (2009) on corporate
governance.
The main objective of a turnaround/rescue must be that the entrepreneur and
turnaround practitioner together develop a turnaround plan that is specifically
designed to reorganise and rescue the business. This research has successfully
attained the first primary objective by theoretically defining early warning verifier
determinants. In this study a ‘verifier determinant’ is defined as the ‘root’ indicator
that validates the cause of decline or distress that underscores the early warning
sign.
This study used early warning sign theory to establish verifier determinants that can
guide entrepreneurs and turnaround practitioners in the timely planning of the current
rescue and future sustainability of an enterprise. Verifier determinants, once
identified, impact significantly on authenticating warning signs and can be used
progressively in the diagnostic phase of the turnaround process. The effectiveness of
business turnarounds depends on the chosen strategy, of which the verifier
determinants will be an important component.
As soon as they are identified and confirmed, the verifier determinants can assist in
defining a turnaround event. Verifier determinants are used to confirm early warning
signs, which will be used extensively to confirm causes, verify the correct warning
? The literal meaning of verifier is thus to confirm, validate and ensure that
the early warning sign identified is, in fact, present.
? The term ‘determinant’ reflects the agreement or consensus on the
warning. sign verifier.
230
sign and substantiate the issues to consider when compiling a strategic rescue plan.
The identification of verifier determinants will also contribute to the uncovering of
other hidden critical issues. The use of verifier determinants is essential when
attempting to classify the warning signs used in the enormous array of business
applications such as operational non-efficiencies. Verifier determinants can
contribute to the day-to-day monitoring of the business, if used as a prolonged
business activity.
The qualitative research contributed uniquely to the limitations of early warning signs
by developing the verifier determinants, each with its own set of variables. Tables
7.10 to 7.14 contain the unique variables that experienced turnaround participants
use to guide their decision making through the verification of early warning signs.
8.5 IN PURSUIT OF THE SECONDARY OBJECTIVE
This section now demonstrates that the second objective has been attained by
proposing a turnaround framework which includes verifier determinants as an
integral part of the turnaround plan. Figure 8.1 proposes verifier determinants as the
first step in this plan, during the actual investigation and planning, as well as in the
‘setting-up’ phase. The verifier determinants, used as an integral departure point in
the decision frame, should allow the stakeholders to reach a decision outcome within
a very short space of time. Verifier determinants used on a continuum (continuum in
a longevity process) throughout the turnaround phase will have the effect of
instituting corrective action, as and when strategic change is necessary. The
literature dealing with turnaround methods, strategy and processes was
comprehensively analysed and is summarised in Appendix C.
The research results confirmed Early Warning sign theory - but expand theory by
adding the Verifier Determinant as a construct. Verifier Determinants introduces
constructs that provides for illogical, subcontious, and judgemental information that is
not conteplated in the current early waring sign theory.
231
Figure 8.1 Turnaround strategic framework – process view
The framework in figure 8.1 shows the phases of a turnaround, each with its key
elements. Verifier determinants are crucial to both the investigation and the planning
phases but have also been shown to be valuable (if used) during the response
phases. The possible outcomes are shown at the bottom of the figure.
In the literature reviewed, authors tended to concentrate on one or more of the
constructs within the turnaround process. Some focus on the investigative stage
(section 8.6.1) of the turnaround, while others focus on the implementation (section
8.7) of measures to execute the plan.
The focus of the turnaround framework proposed in this study is to consolidate the
various viewpoints. In order to have a successful outcome, all the different constructs
must be combined in one turnaround framework and the disciplines must operate in
concert. Figure 8.1 illustrates the interaction by way of a flow from the setting-up
phase through to the execution phase.
TURNAROUND
SETTING UP PHASE
INVESTIGATION PLANNING STRATEGIC RESPONSE FINANCIAL RESPONSE OPERATIONAL RESPONSE
Appoint Practitioner
Investigation stage
-determine potential for
successful turnaround
Triage questions:
- is there a business?
- how sick is the business?
- Is the business worth
saving?
Data integrity
Business review:
-due diligence
-backed findings
-qualifications
Analytical process
-situation analysis
Turnaround plan:
-role-players input
-financial objectives
-possible solutions
Recovery strategy
formulation
-liquidity improvements
-financial restructuring
-operational
improvements
Objectives in planning:
-immediate
-short term
Medium term
Sustainability planning
TURNAROUNDSTRATEGICFRAMEWORK
Restructuring:
-operational efficiency
-centralisation of purchasing
department
-stock control management
-renegotiate supplier pricing
-newtarget management
Customer retention
-ensure quality
-reviewcredit terms
-service levels
-pricing
-sales support
-market orientation
Productivity
-employees
-value add principal
-JITprincipal
Financial restructuring:
-dividend cut/ omissions
-debt equity swaps
-loan termrenegotiation
-renegotiate covenants
-non-cash working capita
-adjustments to speed up
cash cycle
-retrenchment, staff
departmental.
Financial reporting:
-budgeting control
-cash flow management
-expense control reporting
-feedback sessions with
bankers and role players.
Cash generation
-sale of unproductive assets
Management change and
restructuring
Choose the right people
Culture change and image
reinforcement
Life cycle consideration
Employee involvement
Retrenchment:
-cost cutting
-improved efficiencies
Restructuring
-Asset restructuring
--debt equity swaps
Disinvestment strategy
-subsidiaries
-acquisition offering
TURNAROUND
EXECUTION PHASE
Decision outcome: continue, compromise, liquidate Execution outcome: compromise liquidate or handing back -“sustainable competitive viability”
Verifier determinants Verifier determinants
232
Figure 8.2 Turnaround strategic framework – setting-up phase focus
8.6 THE SETTING UP PHASE
The turnaround framework proposes two distinct phases in a turnaround situation.
These phases are the investigative phase and the planning phase, as illustrated by
figure 8.2 (abstracted from fig. 8.1). The investigative phase is critical in assessing
the business environment once a turnaround situation occurs and during the actual
turnaround execution. During this phase it is proposed that the verifier determinant
theory will have its main impact on the decision-making process.
8.6.1 INVESTIGATION
Before a turnaround practitioner effects any major changes to the business, he or
she must investigate and determine the business’s chance (viability) of survival.
TURNAROUND
SETTINGUP PHASE
INVESTIGATION
PLANNING
Appoint Practitioner
Investigation stage
-determine potential for
successful turnaround
Triage questions:
- is there a business?
- how sick is the
- Is the business worth saving?
Data integrity
Business review:
-due diligence
-backed findings
-qualifications
Analytical process
-situation analysis
Turnaround plan:
-role-players input
-financial objectives
-possible solutions
Recovery strategy formulation
-liquidity improvements
-financial restructuring
-operational improvements
Objectives in planning:
-immediate
-short term
Mediumterm
Sustainability planning
Decision outcome: continue, compromise,
liquidate
Verifier determinants
233
The business must appoint a turnaround practitioner within five days of filing the
rescue notice at the court and this practitioner then is obliged to embark immediately
on an investigation of the company’s affairs. The new Companies Act requires that
the turnaround practitioner must, as soon as possible, after his/her appointment;
report on the turnaround viability of the business. In this initial assessment the use of
verifier determinants is crucial to the investigation as they confirm problematic areas
in the affected business.
8.6.1.1 Triage questions
In order to determine the potential for successful turnaround, the practitioner will
have to do a quick assessment of the distressed business. What the turnaround
framework proposes is that an assessment of the business is carried out by using
the concept of triage, which was explained in section 1.3.
Figure 8.3 Role of verifier determinants in the triage process of the investigative phase
V
e
r
i
f
i
e
r
D
e
t
e
r
m
i
n
a
n
t
s
Is there a
business?
Howsick is
the business?
Is the business
worth saving?
Continuewith Turnaround Plan
Liquidate
Liquidate
Liquidate
no
yes
yes
yes
terminal
no
234
The answers to the following questions in the triage sequence are important:
? Is there a business?
If the answer is no, then liquidation is inevitable.
If the answer is yes, the health of the business has to be determined by asking the
next question:
? How sick is the business?
If the business is terminal, then a compromise or liquidation is probably inevitable. If
business health can be restored, the next question is then important:
? Is the business worth saving?
If a rescue is attempted, it should restore sustainable competitive viability.
8.6.1.2 Data integrity and verifier determinants
The practitioner will rely on information supplied by the business’s management.
Accordingly, it is proposed that, in testing the information’s integrity, verifier
determinants are used as an indicator for concentrating the focus on problem areas.
A sound knowledge of the financial statements, the business’s tax position and any
failed strategy is vital for achieving turnaround success. Hence, verifier determinants
confirm the integrity of the data to be used in a turnaround.
8.6.1.3 Business review and verifier determinants
It is proposed that the verifier determinants will focus the business review. By
identifying verifier determinates the practitioner can focus on the problematic areas
identified through the verifier process. Consequently, an adequate business review
will have to be conducted in order to persuade stakeholders to agree to the
practitioner’s proposal.
235
The minimum requirements of the review will be a proper due diligence, backed with
findings and qualifications. In doing this, a proper analysis process will have to be
followed and proposed as a situation analysis. In order to save time, verifier
determinants are used to examine the situation quickly before a detailed due
diligence is done. A due diligence process comprises the following:
? feasibility assessment with stress testing
? forecasts
? sustainability after rescue process
? corporate governance
? data integrity
? simulations, such as Monte Carlo simulation
8.6.1.4 Final decision
The final decision in the investigative stage is to whether to continue or not with a
turnaround of the business. Alternatively, a compromise may be entered into with the
affected persons, or the business may be liquidated. If the viability of a business is
suspect, liquidation is probably inevitable. If the decision is to continue with the
business turnaround the practitioner and management will enter the planning phase.
The verifier determinants will direct the planning towards the most salient causes of
distress which need to be addressed in the plan.
8.6.2 PLANNING PHASE
With reference to section 5.7 of this study, Section 150 of Chapter 6 of the new
companies Act stipulates the minimum requirements for a business rescue plan.
Accordingly, figure 8.2 illustrates the planning phase and elaborates on the various
actions that need to be carried out. Chapter 6 of the new companies Act is, however,
prescriptive on the content of the rescue plan, the minimum requirements for which
are set out and illustrated in figure 8.3.
236
8.6.2.1 Turnaround plan
Verifier determinants are of the utmost importance, as they will dictate the level of
the role players input, the financial objectives and the possible solutions. The
turnaround practitioner must prove to the body of affected persons that a turnaround
is viable and that it will save the business. Of secondary importance is whether the
creditors will be in the same or a better position after a turnaround than if the
business is liquidated.
Verifier determinants will, for example, be used in Part A to support one of the
sources of information, such as a dividend distribution. In Part B, the verifier
determinant will support proposals by highlighting the required proposal.
8.6.2.2 Recovery strategy formulation
The recovery formulation strategy needs to illustrate measures that will lead to
liquidity improvements, objective financial restructuring and operational
improvements.
8.6.2.3 Objectives in planning
The turnaround objectives must include immediate, short-term and medium-term
targets. These targets must be obtainable in order to ensure buy in from the affected
bodies. The primary objective of the plan is to prove sustainability during and,
especially, after the turnaround.
8.6.2.4 Decision outcome
After compiling the plan, the practitioner must distribute it to all the affected persons
who will have to vote for or against the plan. The plan should contain sufficient
information for making a decision on whether or not to continue with a turnaround
attempt. The comprehensiveness of the information in the plan should guide
stakeholders either to opt for a compromise or to liquidate the business.
237
8.7 TURNAROUND EXECUTION PHASE
Action taken in the execution phase of a turnaround will be predominantly dictated by
the business and industry in which the turnaround is being executed. Accordingly, a
host of variables and preconditions may influence the strategy to be followed. The
framework proposed in this study identifies the use of three response constructs,
namely, strategic, financial, and operational/market responses.
Appendix C summarises the various actions, strategies and steps that can help to
effect a successful turnaround. The most important responses are illustrated in figure
8.4 (abstracted from fig. 8.1). A turnaround response does not necessarily proceed
in a specific sequence; in reality everything happens more or less at the same time.
Figure 8.4 Turnaround plan – framework
Minimumrequirements of the plan
Part B: Proposals
Proposals are to be invited fromall
affected parties which will include the:
Nature and duration of moratorium
Extent of release of debt payments
Treatment of existing agreements
Available property
Order of preference of proceed
distribution
Benefits of adopting plan
Effect on class of securities
Part A: Background
The background sectionrequires a “historic
factual picture” of the financial state of
affairs at that time.
Sources of informationwill be:
Assets register
Creditors ageing
Dividend distribution
Shareholders allocation
Practitioners remuneration
Proposals included
Part C: Assumptions and conditions
The assumptions and conditions have
to be based on tested theoretical
evidence and academic methodology.
They are:
Statement of conditions
Impact on employees
Circumstances ending the plan
Financial statement projections
Projection supported byassumptions
made
Stress testing of variables
Practitioner certificate -information
integrity, good faith and factual
Publishing of plan
Assessment process:
Feasibility assessment with stress testing
Forecasts
Sustainability after rescue process
Corporate governance
Data integrity
Simulations
Valuation requirements:
Current value of exposure v/s net realisable securities
Value of third party claims – secured / unsecured
Liquidation value of third party claims
Concurrent value of claims
238
The main critical actions are proposed in the framework, namely, strategic, financial
and operational responses. The discussion is limited to the three main responses, as
each type of business will have to adapt to its own unique environment, level of
resources and conditions.
Figure 8.5 Turnaround strategic framework (own compilation)
8.7.1 STRATEGIC RESPONSE
The strategic response framework proposes a change in the top management
structure of the business, as it is imperative that this structure complements the
turnaround objectives. A change in CEO is almost inevitable, as a turnaround
practitioner is required to lead the business through the turnaround intervention. The
new Companies Act sees this intervention as being of a temporary nature – three to
six months. As an outsider, the turnaround practitioner should add autonomy to the
turnaround process.
STRATEGIC RESPONSE FINANCIAL RESPONSE OPERATIONAL RESPONSE
Restructuring:
-operational efficiency
-centralisation of purchasing department
-stock control management
-renegotiate supplier pricing
-newtarget management
Customer retention:
-ensure quality
-reviewcredit terms
-service levels
-pricing
-sales support
-market orientation
Productivity:
-employees
-value add principal
-JIT principal
Financial restructuring:
-dividend cut/ omissions
-debt equity swaps
-loan termrenegotiation
-renegotiate covenants
-non-cash working capita
-adjustments to speed up cash cycle
-retrenchment, staff departmental.
Financial reporting:
-budgeting control
-cash flowmanagement
-expense control reporting
-feedback sessions with bankers and
role players.
Cash generation:
-sale of unproductive assets
Management change and
restructuring
Choose the right people
Culture change and image
reinforcement
Life cycle consideration
Employee involvement
Retrenchment:
-cost cutting
-improved efficiencies
Restructuring:
-Asset restructuring
--debt equity swaps
Disinvestment strategy:
-subsidiaries
-acquisition offering
TURNAROUNDEXECUTION PHASE
Execution outcome: compromise liquidate or handing back -“sustainable
competitive viability”
Verifier determinants
239
During the second stage of planning, the right people must be chosen to fill the key
critical positions, that is, the hunt for heroes in the business – people who can make
things happen. Culture change and image reinforcement is crucial at this stage to
reinforce confidence in the affected parties, especially the staff. Culture change is
enforced as a consideration for the revival of the business life cycle..
In terms of response, the verifier determinants play a significant role as the
turnaround unfolds and new information surfaces. Subsequently, the verifier
determinant process is repeated as new data are uncovered. This stage of the
turnaround process would suggest that employees are involved in order to ensure as
smooth a transition as possible.
8.7.2 FINANCIAL RESPONSE
When attempting to find a financial solution, financial restructuring is unavoidable.
Creative financial re-engineering will see dividend cuts, debt restructuring and,
certainly, long-term debt renegotiation. It is also important to maintain existing
alliances with trade creditors. In the South African context, staff retrenchments are a
very sensitive issue and should only be considered as a last resort. This places an
additional burden on the practitioner as employees are “affected persons” in terms of
the new Companies Act.
Foremost in any financial action plan is that immediate steps should be taken to
generate cash, for example, unproductive assets should be sold. In addition,
financial reporting before and during the turnaround is essential for feedback,
transparency and decision making. The following information is critical:
? budgeting control statements
? cash flow management projections
? expense control reporting analysis.
240
8.7.3 OPERATIONAL RESPONSE
The operational response includes all the necessary steps that have to be taken to
retain and protect the business’s client base. To be able to do this, practitioners must
liaise with the client base and sort out any problems regarding quality, service levels,
sales support and market orientation.
Actions to restore operational efficiency should be carried out immediately. This can
be done by centralising the purchasing department and stock control management.
8.7.4 EXECUTION OUTCOME
Once the turnaround plan has been substantively implemented (the execution
phase), the outcome is ideally to hand back the business. Failing this, the
practitioner will have to negotiate a compromise with the stakeholders. It all else
fails, the outcome is unfortunately liquidation.
The main objective of a business turnaround is the restoration of the business to
sustainable competitive viability.
8.8 BENEFITS OF THE STUDY
This research has contributed to the process of turnaround management through the
following potential benefits:
Major direct benefits of the verifier determinants’ research:
? Verifier determinants confirm early warning signs. They are used as an
analysis tool for enhancing turnaround decision making – they act as a
confirmation.
? The proper application of verifier determinants can lead to
o confidence in the turnaround decision-making process
241
o identification of verifier results in problem understanding
o a system for decision making
o less time being spent on rejecting or accepting turnaround
decisions
o less probability of turnaround practitioners making type I or type II
errors
o a focused approach to resource allocation and efficiency
management
o the acceptance of overall turnaround strategy.
Indirect benefits of the verifier determinants’ research:
? Verifier determinants hone the judgement of the managerial team.
? They ensure the buy in of other role players (affected persons) –
organised labour, trade creators etc.
? Early warning systems can be very useful for those managers and
practitioners who have to prevent failure.
? Verifier determinants blend information for use in an intelligent,
strategic decision in the form of a business review.
? The reasons for turnaround are confirmed by proper analysis.
? Help failed entrepreneurs who want to re-enter business.
8.9 LIMITATIONS OF THE STUDY
Owing to the limitations placed on financial institutions concerning third-party
confidentiality, the study sample was limited to one financial institution where the
security, integrity of the data and anonymity of the sources could be controlled;
consequently, this has limited the extent of the sample groups.
A more comprehensive search including other financial institutions would have been
desirable but here is no reason to suspect that different data would have been
collected just because it was another institution. The specialists participating in the
interviews have substantial exposure to other banks.
242
Seventy percent of the specialists have work experience in other financial
institutions. The questionnaire response rate of 45% was, taking into consideration
the ‘captured’ population within which the research was conducted.
During the same period in which this research questionnaire was distributed, various
in-house research projects were launched (forced) which resulted in possible
questionnaire fatigue among the respondents, which could have had an impact on
the results. The low response rate, however, negatively affected the options for
factor analysis and statistical calculation, as the sample was too small for extensive
analysis.
The turnaround practitioner fraternity was significantly unhelpful. Most of the
practitioners who were approached to participate with the research were sceptical,
evasive and suspicious. Knowledge is seen as proprietary and as a trade secrets,
which is not shared with or disclosed to ‘competition’. The extensive interviews with
the specialists took over three hours per interview. Although extensive notes were
taken and discussion took place to identify verifier determinants, much of the detail
such as body language, action and reaction were not captured.
8.10 FUTURE RESEARCH
The field of business turnaround or business rescue is wide open for research owing
to its uniqueness as a new management discipline in South Africa. Turnaround
management encapsulates a host of disciplines such as accounting, income tax,
legal and project management. A great challenge for future studies will be to include
more financial institutions in the population.
As banks are working closer together through the application of INSOL principles,
there is an opportunity to involve other financial institutions in similar research. The
following areas for future research identified by this research have potential:
? the correlation of verifier determinant concept and data integrity
243
? a longitudinal study on the use of verifier determinants in a decision
framework
? Verifier determinants can be used with great success in building neural
networks for turnaround situation prediction. In cognitive science,
neural networks are used to model higher level reasoning such as
problem solving, and, in lower level reasoning, for modelling elements
such as vision and speech.
8.11 CONCLUSION
This study highlighted the importance of establishing the true value of a business in
the early stages of the turnaround process. Verifiers can be used successfully to
determine the extent of the problem (“depth of the rot”), the difficulties involved and
the lack of financial control. When verifiers are used, it can alleviate the time
constraints in a turnaround situation by assisting to assess the real situation quickly.
Verifiers will lead to a better understanding of the cause of decline or distress and
will be beneficial for coping with the psychological effects on managers/owners and
personnel.
If identified correctly, verifiers can be the key variables when deciding if a turnaround
is feasible or not. As a result of having a better understanding of the business using
the identified verifiers, the ultimate costs of a turnaround should be determined in a
relatively short period. The most important part verifiers need to play is to prevent
decline and distress in businesses. Some verifier determinants can contribute to the
day-to-day management of a business if used as a management tool on a
continuum.
244
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343
APPENDIX A: EARLY WARNING SIGNS CATEGORIES
344
AUTHOR DATE
EARLY WARNING SIGN CATEGORIES
MANAGEMENT STRATEGIC FINANCIAL PRODUCT/MARKET
(OPERATIONAL)
Altman, E.I. 1968 five ratios used:
Working Capital /
Total Assets (WC/TA)
Retained Earnings /
Total Assets (RE/TA)
EBIT / Total Assets
(EBIT/TA)
Market Value of
Equity / Book Value
of Total Debt
(MVE/BVA)
Sales / Total Assets
(S/TA)
Create Z-score
modelling (Z).
Argenti, J. 1969 continued survival
Akerlof, G.A. 1970 importance of skills
in management and
production
product quality in
emerging markets.
Argenti, J. 1976 management defects
autocratic style
no non-executive
board members
chief executive also
company chair
skills and knowledge
- unbalanced
financial function not
represented or weak
insufficient depth of
management skill
below board level
liquidity ratio
deteriorate,
leverage raises,
overtrading,
sales vs. financial
asset decline,
cash flow vs. debt,
price earnings ratio,
excessive dividends.
non-financial;
product quality falling,
offices need painting,
factory repair
neglected,
share market fall,
suspicious suppliers,
restricted delivery.
Carrington,
J.H. and
Aurelio, J.M.
1976 managerial
incompetence
managerial
deficiencies
inadequate cash to
cover liabilities.
Hedley, B. 1976 failure to reduce costs
along an appropriate
experience curve
slope
failure to grow as
rapidly as competirors
leading to
uncompetive cost
position
345
Altman, E.I.,
Haldeman. G.
and
Narayanan.
1977 Adjustment to Z-score
model - balance
sheet to include:
Capitalization of
leases
Reserves and
contingencies
Minority interest and
other liabilities
Captive finance
companies and other
non-consolidated
subsidiaries
Goodwill and
intangibles
Capitalized research
and development
costs
Capitalized interest
and certain other
deferred charges.
Hamermesh,
R.G.
1977 managerial
commitments
management style
organizational
structure
complexity of markets
Higgins, R.C. 1977 management style understanding of
growth
increased debt
Miller, D. 1977 behaviour of
managers
power-hoarding chief
executive
one or two people
afraid to delegate
managers decisions
reflects ignorance
signs of leadership
vacuum
decisions in one part
of the business
conflict with those in
other parts
serious shortage of
financial, managerial
or material
resources
new and
inexperienced
management team
growth strategy overly
ambitious,
overextension of
financial resources,
excessive leverage,
no strategic planning.
poorly defined
product - market
strategy,
tendency to be
committed to old
products, markets
and ways of doing
things,
elaborate standard
operating procedures
and extensively
documented formal
policies,
strategy taxing on
businesss resources.
failure caused within
company,
excessive leverage,
serious shortage of
financial,
serious shortage of
financial, managerial
or
material resources,
Miller, D. 1977 2) behaviour of
managers,
3) power-hoarding
chief executive,
4) one or two people
afraid to delegate,
8) managers
decisions reflects
ignorance ,
13) signs of
leadership vacuum,
14) decisions in one
part of the business
conflict with those in
other parts,
5) serious shortage
of financial,
managerial or
material resources,
16) new and
failure caused within
company,
growth strategy overly
ambitious,
overextension of
financial resources,
no strategic planning.
poorly defined
product - market
strategy,
tendency to be
committed to old
products, markets
and ways of doing
things,
elaborate standard
operating procedures
and extensively
documented fromal
policies,
overextension of
financial resources,
excessive leverage,
346
inexperienced
management team,
strategy taxing on
businesss resources.
Altman, E.I.
and Eisenbeis,
R.A.
1978 Discriminant Analysis
and five z-SCORE
ratios
Working Capital /
Total Assets WC/TA)
Retained Earnings /
Total Assets (RE/TA)
EBIT / Total Assets
(EBIT/TA)
Market Value of Total
Debt (MVATD)
Sales / Total Assets
S/TA).
Graham, K.R.
and Richards,
M.D.
1979 performance
deterioration
coalition change
presidential change
diversification
divesture
Al-Bazzaz, S.
and Grinyer,
P.M.
1980 strategic planning
size of company
higher vertical span of
control
lateral span of control
divisional structures
higher status of
company in group
hierarchy
number of dispertion
of sites
difficulties in
communication, co-
ordination and control
difficulty in response
to environmentl
change
Hall, W.K. 1980 slow erratic growth inflationary pressures
regulatory pressures
competition
Hofer, C.W. 1980 decreased profit
margins
increased wages
increased competition
raw material supply
management
difficulties
operational signs:
depressed price
levels
recessions
strikes and labour
excess plant capacity
347
Sharma, S. and
Mahajan, V.
1980 finacial ratios
(descprition of
financial performance
indicators
Profitability
return on assets
(ROA)
leverage ratios
debt service: earnings
before interest and
taxes/interest
coverage (EBIT/IC)
- cash flow: cash
flow/total debt
(CF/TD)
- capitalization:
market value of
equity/total capital
(MVE/TC)
liquidity ratio
current ratio: current
assets/current
liabilities (CA/CL)
cash turnover: net
sales/cash (NS/C)
receivables turnover:
net sales/receivables
(NS/R)
inventory turnover:
net sales/inventories
(NS/I)
sales per dollar
working capital: net
sales/(current assets-
current liabilities)
(NS/(CA-CL))
miscellaneous
retained
earnings/total assets
(RE/TA)
total assets (in
thousands of dollars)
(TA)
Gelb, B.D. 1982 strategic alignment to
change
Hubert, T. 1982 role by management financial ratio: paid-up
capital/total liabilities
financial ratio;
working capital/total
liabilities
Izan, H.Y. 1982 traditional financial
ratio analysis
industry comparative
techniques
financial ratios
Altman, E.I. 1983 business population
characteristics
price level changes.
age of business one
to five years.
credit availability,
capital market
activity,
economic growth
activity,
Chrisman, J.J.,
Bauerschmidt,
A. and Hofer,
C.W.
1982 entrepreneurial business strategy
resources
organizational
structure
industry structure
348
Dolan, P.F. 1983 bad management the domino effect. changes in federal
reserve policy
recession reducing
demand
interest rate hikes
structural change in
economy
higher fuel costs
lower productivity
growth rates
intense international
competition
rapid change in new
technology
deregulation of
certain industries
less government
support
international shift in
comparative
advantage
appreciation in
currency
Hambrick, D.C.
and Schecter,
S.M.
1983 early warning
signstested in
practice)
domain initiatives
enviromental carrying
capacity
slack
perfromance
Hamer, M.M. 1983 Financial ratio
analysis
profitability
net income/total
assets
income before
interest and taxes/
total assets
internal rate of return
to investor in common
stock
funds from
operations/total
liabilities
liquidity
working capital/ total
assets
current assets/current
liabilities
current
liabilities/current
assets
current aassets/total
assets
quick assets/total
assets
cash/total assets
quick assets/current
liabilities
cash/current liabilities
quick assets +
sales/12 devided by
(operating expenses+
interest-
amortizations)/12
net quick
349
assets/inventory
Hamer, M.M. 1983 leverage
total liabilities plus
preferred stock/totl
assets
total liabilities/total
assets
tangible net
worth/total liabilities
plus preferred
market value of
common & preferred
stock/totalliabiliites
market value of
common equity/total
liabilities plus
preferred
retained
earnings/total assets
negative owners
equity
turnover
sales/total assets
current assets/sales
quick assets/sales
working capital/sales
cash/sales
variability
std deviation of net
income
trend breaks in
income
slope of net income
std dev of net quick
assets/inventory
trend breaks in net
quick
assets/inventory
slope of net quick
asets/inventory
income (t) - income (t-
1)
Altman, E.I. 1984 managerial
incompetence,
lack of management
experience
unbalanced
experience
neglect.
under capitalization,
bad debts
slowdown of sales,
directly due to other
bankruptcies,
indirectly due to other
bankruptcies
excessive equipment
investment.
350
Anderson, C.R.
and Zaithaml,
C.P.
1984 industry,
product competition,
R&D,
production/
investment,
efficiency,
vertical integration
marketing.
distress variables:
buyer loyalty,
degree of product
differentiation,
price elasticity of
demand,
market share,
product quality,
marginal plant size,
declining importance
of advertising,
product
diversification,
decline in number of
outlets
contingency approach
- strength and
weaknesses.
spending patterns,
efficiencies and
growth decisions.
Appetti, S. 1984 liquidity,
turnover,
gearing,
operative structure
and capitalization and
profitability.
Izan, H.Y. 1984 industry comparitive
techniques
traditional financial
ratio analysis
financial ratios
Müller, R. 1985 trategic crisis:
threats to potential of
the business
Liquidity crisis:
threat of Insolvency
bankruptcy,
dissolution:
threat of dissolution,
inability to satisfy
creditors and
shareholders
perfromance crisis:
failure to achieve
sales and financial
targets
Sahlman, W.A.
and Stevenson,
H.H.
1985 risk in innovation
materialize
which effects capital
availability and
reduces expenditures
on future
development
customer
disapointments foater
conservative stance
exposure customer
financial weakness
exposure supplier
financial weakness
which increased
competitive pressure
to find the winners
which changes basis
of competition to price
which lowers margins
which causes more
risk of innovation to
materialize.
Schmalensee,
R.
1985 market share
Schwartz, K.B.
and Menon, K.
1985 management (poor)
Seabright, J.W. 1985 poor quality
poor customer
service
no control on parts
poor packaging
no control over
manufacturing
351
Hurst, D.K. 1986 strategic
management
O’Neill, H.M. 1986 poor management
management error
business life cycle
excessive labour
costs
growth strategies
cyclical patterns
political nature
competitors
suppier arrangements
lead to decline
change in habits of
consumers
choice of substitudes
insufficient or
ineffective
professional groups
Robinson,
S.J.Q. and
Shell UK Ltd.
1986 business life cycle
Schwartz, K.B.
and Menon, K.
1986 management
Singh, J.V.,
Tucker, D.J
and House,
R.J.
1986 liability of newness
legitamacy
Cameron, K.S.,
Whetten, D.A.
and Kim, M.U.
1987 scapegoating
resistance to change
low morale
loss of credibility
no prioritized cuts
conflict
decline
/stability/growth
type of control
turnover
path of organizational
decline
centralization
no long-term planning
innovation curtailed
size
loss of slack
fragmented pluralism
Keasey, K. and
Watson, R.
1987 managerial structure
inadequacy of
accounting
information system
and audit lags
manipulation of the
financial statements,
submission logs,
audit qualifications
and changes in
auditors
gearing
financial ratios
Littler, D.A. and
Sweeting, R.C.
1987 survival and growth
Lorange,P. and
Nelson, R.T.
1987 excess personnel
tolerance of
incompetence
cumbersome
administrative
procedure
disproportionate staff
power
replacement of
substance with form
scarcity of clear
goals and decision
benchmarks fear of
embarrassment and
conflict
loss of effective
communication.
352
Siomkos, G.
and
Shrivastava, P.
1987 declining demand
Whetten, D.A. 1987 growth and decline
processes
life cycle
growth factors
Whitney, J.O. 1987 cash managemnent cash managemnent
Bruno, A.V.
and Leidecker,
J.K.
1988 managerial /key
employee
ineffective team
personal problems
one track thinking
cultural / social
violated job
displacement norm
initial under
capitalization,
assuming debt to
early,
venture capital
relationship.
Product / Market
timing,
design,
distribution/ selling,
business definition,
overreliance on one
customer.
Chrisman, J.J.,
Hofer, C.W.
and Boulton,
W.R.
1988 early warning signs
variables
entrepreneurial
industry structure
business strategy
resources
organizational
structure
Hambrick, D.C.
and D’Aveni,
R.A.
1988 domain initiatives
enviromental carrying
capacity
slack
performance
Lieberman,
M.B. and
Montgomery,
D.B.
1988 need for profit
Melicher, R.W.
and Hearth, D.
1988 monitoring of
fluctuations on bond
costs
Quinn, J.B.,
Mutzberg, H.
and James,
R.M.
1988 historcal strategies
and policies placed
comany in unstable
position
reinvestment strategic
mistakes
external
uncontrolables
Robertson, J.
and Mills, R.
1988 financial ratios = Z-
score
D’Aveni, R.A. 1989 managerial decline -
different phases
sudden decline
gradual decline
lingering decline
Eisenhardt,
K.M.
1989 rationality and
bounded rationality
weakness
conflicting goals,
local rationality,
atisfying,problematic
search, SOPs,
decisions process
rational and
bureaucratic,
phases of decision
making in no order;
353
conceptual structure
for decision process,
examples of poor
and effective
decision making,
"groupthink
negative",
managers don't
follow normative
process; various
decision processes;
solution driven
decisions.
Gilmore, T.N.
and Kazanjian,
R.K.
1989 rapid growth and
inability to navigate.
cash flow. growth problems,
production,
talent,
planning and control,
Romaneli, E. 1989 interaction of
environment and
strategies.
availability of
resources,
demand and
competitive
conditions,
resource constraints,
competitive
concentration,
market breadth,
market
aggressiveness,
Thain, D.H.
and
Goldthorpe,
R.L.
1989 inadequite
infromationand
controls
negative
characteristics of
management
unwise financial
policies
unsuccessful, high
risk, major projects
high costs relative to
competitors
ineffective marketing
decrease in market
demand
adverse input costs
industry decline
caused by high cost
increased competirion
Covin, J.G. and
Slevin, D.P.
1990 fit between strategic
posture, organization
structure and industry
life cycle.
Grinyer, P.H.,
Mayes, D. and
McKierman, P.
1990 high gearing, superior competitors,
labour cost and
quality,
poor production,
capacity constraints.
Kazanjian, R.K.
and Drazin, R.
1990 stages of rate of
growth.
354
Okuzumi, H. 1990 difficulties in
maintaining
conformity
lack of linkage
between strategic
business units
difficulties in setting
evaluation standards
for qualitative targets
lack of effective
fusion between
strategic issues and
everyday operations
lack of system for
evaluationg degree of
strategic effect
attainmant
lack of smooth
resource allotment in
strategy promotion
Boyle, R.D.
and Desai,
H.B.
1991 organizational
structural change,
failure to manage
success,
poor delegation of
responsibility,
inability to transcend
stress points.
Human resources,
key employees quits,
inability of owner to
perform planning
and administrative
functions. External -
strategic.
human resources,
inability of owner to
perform planning,
administrative
functions,
lack of product /
market knowledge.
planning.
over optimism in
planning ,
lack of strategic
planning,
lack of market
information.
Financial Impact,
failure to analyze
financial statements,
inadequate capital
management,
improper
management of
accounts receivable,
declining profits,
underutilization of
assets,
pricing, discounts for
cash generation.
large increase in
debt,
raw materials , Wip,
inventories,
excessive spending.
Sales /Marketing,
declining market
share,
drop in prospects,
losing biggest
accounts.
economic downturn.
Castrogiovanni,
G.J.
1991 Environmental
munificence
Gopal, R. 1991 poor quality top
management
weak board
conservatism in
management
excessive
complacency
premature corporate
expantions
weak financial
management policies
unacceptable market
prices and costs
postponement or
cancellation of major
contracts
decrease in market
demand
changes in
government policies
and regulations
increased competition
increased input costs
non-availability or
shortage of raw
materials
inadequite insurance
for losses
Keasy, K. and
Watson, R.
1991 management
structure
financial ratios
inadequacy of
accounting
manipulation of
published accounts
gearing
355
Kelly, D. and
Amburgey, T.L
1991 change in strategic
orientation
environmental
change and the
probability of change
in core features
organizational age
and the probability of
change in core
features
organizational size
and the probability of
change in core
features
prior change in core
features and the
probability of change
in core features.
Pousson, J. 1991 Financial
deterioration:
sales slow or down
margins and/or profit
down
costs out of line
rising stock
financial performance
generally disapointing
cash trends disturbing
creative accounting
off-balance sheet
financing
qualified audit
statements
delayed financials
Weitzel, W.
and Jonsson,
E.
1991 management early
but unclear
management stages
in decline
blinded
inaction
faulty action
crisis
dissolution
Baum, J.A.C.
and Mezias,
S.J.
1992 Focus on localised
competition and
failure.
Bruno, A.V.,
McQuarrie,
E.F. and
Torgrimson,
C.G.
1992 managerial /key
employee,
ineffective team,
personal problems,
one track thinking.
cultural / social,
violated job,
displacement norm.
initial under
capitalization,
assuming debt to
early,
venture capital
relationship.
Product / Market
timing,
design,
distribution/ selling,
business definition,
overreliance on one
customer.
Chinta, R. 1992 deviation from
agreed sales plan
tunnel vision -
management
resistance to change
assive board
technology under
development -
unworkable
passive board
expenditure control.
Majaro, S. 1992 strategic
Robbins, D.K.
and Pearce II,
J.A.
1992 top management overexpansion
excessive leverage
356
Amburgey,
T.L., Kelly, D.
and Barnett,
W.P.
1993 resistance to
change,
frequency of change,
too many as
opposed to too little,
routinisation,
age,
resistance to change,
frequency of change,
too many as opposed
to too little,
routinisation,
age,
change and older
businesss,
change and younger
businesss,
time frame between
change,
change due to
perceived problems,
change despite
dysfunctional
consequences -
competency trap.
Anon. 1993 management not
responding to phone
calls,
financial symptoms;
rise in overdraft,
slowdown in
payables,
deterioration in the
following ratios
liquidity, profitability,
leverage, efficiency,
activity - and turnover
ratio.
data integrity.
non-financial
symptoms;
declining market
share,
fall in product or
service quality,
postponement of
factory maintenance,
negative reports n
press,
lay-off due to sales
decline.
Castrogiovanni,
G.J., Justis,
R.T. and
Julian, S.D.
1993 location
age
size
Gaskill, L.R.,
Van Auken,
H.E. and
Manning, R.A.
1993 management -
lack of insight,
inflexibility,
emphasis on
technical.
inadequate
knowledge of pricing
strategies,
ineffective
advertising/promotio
nal strategy,
failure to generate
long term business
plan,
failure to generate
personnel plan,
ineffective interior
store layout pattern,
lack of managerial
experience, skills
and training,
inflexible decision
making,
lack of experience in
product line,
failure to generate a
merchandise
assortment plan,
poor relations with
vendors,
difficulties in receiving
merchandise,
inability to compete in
trading area,
failure to offer
saleable merchandise
assortments,
premature business
growth/overextension,
inventory difficulties.
357
Moncarz, E.S.
and Kron, R.N.
1993 fraud
experience causes
incompetent
management
neglect causes
obsolescence of
building, property and
equipment
fraud
experience causes
incompetent
management
strategy causes
overexpension
buredensome
instutional debt
heavy operating
expenses
insuffcient capital
economic factor
causes
economic slowdown
increased competition
presures
industry weakness
inadequite sales
Pearce II, J. A.
and Robbins,
D.K.
1993 management
inefficient
management
insufficient financial
resources
poor turnaround
strategy
decline caused by
strategic responses
absolute products
intense price
competition
focus on growth
decline caused by
operating problems
production
bottlenecks
labor strife
cost control
plant modernization
Terpstra, D.E.
and Olson,
P.D.
1993 types of problems:
conceptualizing and
systematic study of
distinct problem
types.
Altman, E.I.,
Marco, G. and
Varetto, F.
1994 corporate distress
diagnosis
Fredenberger,
W.B. and
Bonnici, J.
1994 life cycle stage, faltering demand.
Holtz-Eakin, D.,
Joulfaian, D.
and Rosen
H.S.
1994 growth
entrepreneurial profile
liquidity constraints.
Mitchell, W. 1994 size
age
product life cycle
Pearce II, J. A.
and Robbins,
D.K.
1994 decreased profit
margins
increased wages
increased competition
raw material
Platt, H.D. and
Platt, M.B.
1994 poor planning during
development phase
limited capital base
corporate
dependency
inadequite
managerial abilities
Richardson, B.,
Nwankwo, S.
and
Richardson, S.
1994 psychological impact
of decline
358
Altman, E.I.
and Eom, Y.H.
1995 drop-off in growth,
leverage ratio;
debt/equity
newly listed
companies.
Twenty financial
ratios identified;
EBIT/TA
NI/TC,
Sales/TA,
LOG(Sales/TA),
Sales/TC,
EBIT/Sales,
NI/Sales,
LOG(TA),
EBIT/INT,
LOG(EBIT/INT),
CF/TL,
WC/LTD,
Current ratio,
WC/TA,
Retained
Earnings/TA,
Book Equity/TA,
Normalised Quick
Ratio,
EBIT/SIGMA,
Book /Equity/TL
market Equity/TL.
Arogyaswamy,
K., Baker III,
V.L. and Yasai-
Ardekani, M.
1995 decline - stemming
strategies that
reverse the
dysfunctional
consequences of
decline,
recovery strategies
that position the
business to better
compete in the
industry.
Brinkenhoff,
R.O. and
Montesino,
M.U.
1995 skills transfer
Datta, S. and
Iskandar-Datta,
M.E.
1995 management /
labour reasons
ambitious expansion
various managerial
blunders
labour costs
litigation reasons
avoiding lawsuits
litigation judgement
other reasons
changes in financial
reporting violations
fraud
miscellaneous
no reason
failure of financial
structuring
unable to obtain
financing
liquidity / cash flow
shortage
heavy debt
involuntary filing
creditors lawsuits
creditor pressure to
file
Market reasons
industry/ market
slump
competition
high interest rates
inability to sell assets
Gopinath, C. 1995 management, growth, operating,
growth,
sales related.
359
Grundy, T. 1995 cost management,
change
management,
mission and objective
driven strategy,
creepy business
complexity,
tactical pricing,
investment decisions,
acquisitions,
denial of corporate
error.
over-commitment, product/ brand and
technology.
Lussier, R.N. 1995 industry experience
management
experience
planning
professional
advisors
education
staffing
age
partners
minority
marketing
capital
record keeping and
financial control
product/service timing
economic timing
Singer, B. 1995 poor management
management error
strategy
environment
industry structure
Taggart, J.H. 1995 life cycle
cash strapped "dogs"
three dimensions
type of change in
niche configuration
continuity of
enviromental change
structural
competitiveness
Banfield, P.,
Jennings, P.L.
and Beaver, G.
1996 poor managerial
competence: staff
related warnings;
lack of personal and
job flexibility,
creation of personal
comfort zones,
breakdown in
personal relations,
lack of clarity in job
responsibilities,
absence of team
work and shared
responsibilities,
individual rather than
company
representation.
Dimitras, A.I.,
Zanakis, S.H.
and
Zopounidis, C.
1996 Focus on financial
ratios (493, 508) and
cost of failure (487)
Grafstrom, J. 1996 management system
for credit risk
360
Jo, H. and Lee,
J.
1996 entrepreneurial/
management
education
education
managerial
experience
entrepreneurial
experience
start-up experience
functional area
experience
experience in the
line of business
high-growth
experience
management level
growth rate of
employees
entrepreneurial
experience
categorised:
entrepreneurial
characteristics
management
strategy
environment
return on assets
return on sales
return on employees
growth rate of assets
Lussier, R.N. 1996 industry experience
management
experience
planning
professional
advisors
education
staffing
economic timing
age
partners
minority
marketing
capital
record keeping and
financial control
product/service timing
economic timing
Theng, L.G.
and Boon,
J,.W.
1996 entrepreneurial/
management
education
education
managerial
experience
entrepreneurial
experience
start-up experience
functional area
experience
experience in the
line of business
management level
endogenous factors
personal
shortcommings
short-sighted view
lack of knowledge
lack managerial
experience and skill
lack of initiative
lack of vitality and
enthusiasm
lack of
entrepreneurial
judgement
high-growth
experience
growth rate of assets
growth rate of
employees
lack of capital
lack of cash flow
analysis
lack of budgets and
forecasts
return on asset
return on sales
return on employees
inappropriate
marketing strategy
low labour producivity
Theng, L.G.
and Boon,
J,.W.
1996 high taxes
recession
tight labour market
high labour cost and
high interest rates
competition
government
regulations
361
Altman, E.I.
and
Narayanan, P.
1997 three variables
identified;
sales/debt,
net earnings/total
assets
long term debt/total
debt.
ratios used in failed
business testing;
asset turnover,
current ratio,
changes in working
capital,
sales/non-bank
working capital,
leverage,
Inventory/bank debt,
bank debt/total debt,
long-term debt/total
debt,
accounts receivable +
inventories/accounts
payable +
spontaneous
sources),
inventory turnover,
rate of return,
sales/debts
retained
earnings/total assets.
Daily, C.M. and
Johnson, J.L.
1997 management CEO
Ceo structural power
CEO ownership
prestige power
expert power
Gimeno, J,
Folta, T.B.,
Cooper, A.C.
and Woo, C.Y.
1997 management
considerations and
human capital.
Morris, M.H.,
Williams, R.O.,
Allen, J.A. and
Avila, R.A.
1997 differant set of
dynamics dictates
failure in a family
business.
Mueller, G.C.
and Barker III,
V.L.
1997 management.
Teece, D.J.,
Pisano, G. and
Shuen, A.
1997 strategic
management
Winn, J. 1997 excessive growth
362
Al-Shaikh, F.
N.
1998 management
weakness,
technical
incompetence,
lack of interpersonal
skills,
lack of management
and business
exposure.
strategic weakness,
lack of clear strategy
and direction,
inability to respond to
change and to
recognise new
competition
taking on to much at
a time.
lack of understanding
financial impact,
key strategic
decision,
inadequate financing,
too much debt
uncertainty in region,
privatisation,
technological
environment and
infrastructure lagging
behind,
government policies
and bureaucracies,
shortage of capital,
shortage of
managerial and
skilled labour
background,
qualification and
motivation of owners.
Ari?o, A. and
de la Torre.
1998 markets imperfect,
characteristics of
public goods,
resources are
business specific.
Barker III, V.L.
and Mone,
M.A.
1998 organization
structure,
changes in vertical
differentiation,
changes in horizontal
differentiation,
changes in integrity
mechanisms,
changes in control
systems,
changes in top
management
compensation.
marketing changes,
manufacturing
changes,
research and
development
changes,
financial policy
changes.
Brenneman, G. 1998 management,
management
turnover,
crisis, time
management limited
time and financial
resources.
company
dysfunctional,
no strategy in place,
crisis, time
management limited
time and financial
resources.
Chrisman, J.J.,
Bauerschmidt,
A. and Hofer,
C.W.
1998 entrepreneurial business strategy
organizational
structure
industry structure
resources
Gibson, B.N. 1998 Financial ratios.
Harker, M. 1998 marketing
Kale, S. and
Arditi, D.
1998 newness
adolescence
smallness
Lee, J. 1998 lack of effective
corporate governance
McGurr, P.T.
and DeVaney,
S.A.
1998 Financial ratios
cash flow
financial ratios+ cash
flow
Robinson, K.C. 1998 business /
management
performance
measure
business life cycle
Stoeberl, P.A.,
Parker, G.E.
and Joo, S-J.
1998 resistance to change
liability of newness
competition
363
Bibeault, D.B. 1999 management
turnover
mathematical z-score
Gambler's ruin
prediction
audirots going
concern opinions
adverse trend signals
declining margins
declining market
share
debt increasing
rapidly
working capital
declining
declining market
share
Combs, J.G.
and Ketchen,
D.J.Jr.
1999 growth
strategic
resources
Davis, S.E.M.
and Long, D.D.
1999 lack of effective
planning
Dimitras, A.I.,
Slowinski, R.,
Susmaga, R.
and
Zopounidis, C.
1999 Financial ratios (270)
FitzGerald, T. 1999 distracted
management,
it commerce
competition,
industry is
consolidating,
dividend payout to
high,
high executive
remuneration,
economic and
seasonal cycles,
fast growing costs,
poor cash flow
management,
slowing down
payment to vendors,
needed expenditures
delayed,
collections worse
than industry,d
dividend payout to
high,
high executive
remuneration,
economic and
seasonal cycles,
market is shrinking,
losing market share,
lower than expected
sales,
faster than industry
growth,
inventory out of
control,
low-margin
commodity products,
lost of large
customers.
Henderson,
A.D.
1999 age
size
life cycle
Laitinen, T. and
Chong, H.G.
1999 Incompetence in
management
management style
and personality of
CEO
education,
experience and
health
organisation and
management team
deficiencies in
accounting system
finance staff
other deficiencies
owners role in
business
conflicting targets
Owners role in
business
conflicting targets
deficiencies in
operations
general deficiencies
financial deficiencies
production activities
sales activities
attitude towards
customers
industrial factors
general economic
and political issues
Laitinen, T. and
Kankaanpää,
M
1999 Failure prediction
models
- human infromation
processing
364
Longenecker,
C.O.,
Simonetti, J.L.
and Sharkley,
T.W.
1999 communication
meltdown
lack of clear
direction
lack of efficient
planning
inability to change
complacency
towards goals
Robinson, K.C. 1999 business /
management
perfromance
measure
business life cycle
Whitaker, R.B. 1999 poor management cash flow
Zacharakis,
A.L., Meyer,
G.D. and
DeCastro.
1999 mixed problems
already in business
external market
change
failure to provide for
customer needs
mixed problems
already in business
not moving fast
enough
Ahn, B.S., Cho,
S.S.and Kim,
C.Y.
2000 integrity problem. Financial ratio set
Cozijnsen,
A.F., Vrakking,
W.F. and Van
Ifzerloo, M.
2000 failure to be
innovative on a
continuing basis.
Finkelstein, S.
and Sanford,
S.H.
2000 flawed business plan
and inability to
deviate.
R&D costly and time
consuming
flawed business plan
and inability to
deviate.
R&D costly and time
consuming,
product targets
overstated,
Harker, M. and
Sharma, B. T
2000 declining business
health
crisis
new climate
leader latitude
Kisfalvi, V. 2000 ability to change
flexibility
escalatory
commitment
perils of success
management
behaviour
Landrum, N.E. 2000 leadership change strategy change
Lussier, R.N.
and Pfeifer,
S.A.
2000 industry experience
management
experience
planning
professional
advisors
education
staffing
age
partners
minority
marketing
capital
record keeping and
financial control
product/service timing
economic timing
Pandit, N.R. 2000 severity of crisis
attitude of the
stakeholders
business's outer
context
business's historical
strategy.
exploytation
365
experimentation
Azoulay, P.
and Scott, S.
2001 efficiency,
entrepreneurial
talent,
entrepreneurial
ideas,
change.
Balgobin, R.
and Pandit, N.
2001 poor management, high cost structure. inadequate financial
control / policy,
external
decrease in demand,
increase in
competition,
increase in input
costs.
Bruton, G.B.
Ahlstrom, D.
and Wan,
J.C.C.
2001 life cycle
Cohen, J.F. 2001 failure to plan for
long term
sustainability
failure to plan for long
term sustainability
Cook, G.A.S.,
Pandit, N.R.
and Milman, D.
2001 internal
external
Cybinski, P. 2001 financial ratios export
factor
Flynn, D. and
Forman, A.M.
2001 Inability of
entrepreneur to adapt
to the business life
cycle.
Joseph, G. and
Lipka, R.
2001 Ex post facto -
financial information
366
Lin, Y.L. and
McClean, S.
2001 Profitability(rates of
return)
ret. on shareholder
equity., ret. on
shareh. cap.
ret. on long-term cap.,
ret. on cap. empl.
ret. on net fixed
assets., trad. profit
marg.
Profit marg.
op. profit marg., pre-
tax profit marg.
net profit marg. ,
earnings marg.
cash flow marg.
Efficiency
turn. assets/emp.,
turn./fixed assets
turn./non-current
assets., stock turn.
stock ratio (days).,
debts turn.
debts ratio (days).,
creds turn.
credrs ratio (days)
Gearing ratio
cap. gearing %. , inc.
gearing %
bor. ratio., inc.
gearing % (inc ass)
GCF/total liab. ,Pref
and loan/ equ. and
res.
loan cap./equity and
res.
liquidity rat.
working cap. rat.,
quick asset rat.
cash.crr. liab.
Productivity rat.
tax ratio., sales per
empl.
op profit per empl.,
cap empl/empl.
stock and WIP per
empl. average salary
per empl.
Per-share and yields-
EPS
Lussier, R.N.
and Pfeifer,
S.A.
2001 record keeping and
financial control
industry experience
management
experience
planning
professional
advisors
education
staffing
capital
product/service timing
economic timing
age
partners
minority
marketing
Mueller, G.C.,
McKinley, W.,
Mone, M.A.
and Barker III,
V.L.
2001 management
reaction to decline
Sharma, D.S. 2001 cash flow
367
Brooks, G. 2002 management
transitions: impact
on values, loyalty,
performance and
selection.
limitations to family
abilities.
financial difficulties,
cash pressure
Collard, J.M. 2002 is the owner or top
management over
extented?
is turnover rate
excessive?
are communication
ineffective?
are goals unclear?
are compensation
and incentive
programs yielding
unsatisfactory
results?
is new business
waning?
are key relationships
deteriorating?
does the company
create "products in
search of markets"?
does the operation
have a track record of
failed expansion
plans?
financial and
management reports
cover the wrong
information at the
wrong level?
Cross, L. 2002 mismanagement
poor accounting
practices
waste
failure of planned
expansion
client bankruptcies
lost of major
customer
increased competition
plunge in gross profit
margins
Harvey, N. 2002 inbound logistics
activities, such as
material handling,
ware-housing and
inventory control,
used to receive,
store, and
disseminate inputs to
a product.
operations
activities necessary to
convert the inputs
provided by inbound
logistics into final
prod¬uct form.
Machining,
packaging, assembly,
and equipment
maintenance are
examples of
operations activities.
outbound logistics
activities involved
with collecting,
storing, and
physically distributing
the final product to
the customers.
Examples of those
activities include
finished goods,
warehousing,
materials handling
and order processing.
marketing and sales
activities completed
to provide means
through which
customers can
368
purchase products
and to induce them to
do so. To effectively
market and sell
products, businesss
develop advertising
and promotional
campaigns, select
appropriate
distribution channels,
and select, develop,
and support their
sales force.
service
activities designed to
enhance or maintain
a product's value.
Businesss engage in
a range of service-
related activities,
including
installa¬tion, repair,
training and
adjustment.
Hill, J.
Nanecarrow, C.
and Wright,
L.T.
2002 weak general
mangement skills
understanding the
business's
environment
problems
encounerred in
developing their
business
overcomming
obstacles/barriers to
growth and crises
location or premises-
related
lack of finance
rapid early growth
lack of finance selling and sales
function
marketing mix
variables
sourcing and buying
personal strengths
and weaknesses
understanding
markets
competition
service and quality
family business
aspects
marketing planning
customers
gathering and using
information
understanding the
business's
environment
location or premises-
related
declining sales
competition
service
price
changing market
environment
changing customer
needs
James, D,N. 2002 experiencing
distress- executives
misdirect efforts,
cash flow
management,
poor decision
making,
undue pressure on
management,
growth,
expansion,
market capacity.
Keane, T.P. 2002 product failure
369
Markey, R. 2002 truth avoidance
the role of
management/leader
ship
application of the
wrong strategy
lack of "fit"
pursuit of growth for
growth's sake
shift in market
structure
Markman,G.D.
and Gartner,
W.B.
2002 hyper growth
Mellahi, K.,
Jackson, P.
and Sparks, L.
2002 to much reliance on
previous business
success
change not
welcomed
stuck to historical
policies and
procedures.
radical changes in
competitive
landscape
international entrants
changes consumeer
desires
limited advertising
failure to take debt /
credit card
lack of "out-of town"
stores
stagnant policy and
business model
long term adherence
to buy national policy
higher pricess and
loss of
competitiveness
cutting relation with
local suppliers
trade unions,
suppliers and press
lack of updated
technology
late mover to
innovation
stuck to historical
policies and
procedures.
Midanek, D.H. 2002 cash flow problems
sales flat or declining
customers defecting
staff defecting
expectancy and
actual discrepancies.
Persson, H. 2004 size debt
cost disadvantage
Steyn, W.,
Hamman, W.D.
and Smit,
E.v.d.M.
2002 high growth Cash flow : non-cash
working capital
370
Stokes, D. and
Blackburn, R.
2002 1.6) behaviour of the
owner-manager
trust/relationship
issues
equal partners/ wrong
partners /having
partners
minority shareholding
employing
friends/relatives
unsound contracts
accounting
finance problems
other enogenous
factors
finance/taxes
banks and borrwing
inland revenue
insufficient capital
insufficient
investment in
equipment
cash flow problems
failure o control
finances
over reliance on
overdraft
too much credit to
client
bad credit
management
exogenous factors
categories
marketing
problem areas
identified
Stokes, D. and
Blackburn, R.
2002 self management
lack of confidence/
overconfidence
dealing with aspects
working long hours
being ill/ worried
management of
people
staff problems
not manageing staff
lack of delegation
redundencies
insufficient staff
general
management
lack of experience
lack of contingency
plans
problem wth
suppliers
marketing
lack od sellectio of
custormers/ low
margin
conflict with
customers
competition
problem with
distributors
cost of advertising
and promotions
Zopounidis, C.
and Doumpos,
M.
2002 net income/gross
profit
gross profit/total asets
net income/total
assets
net income/net worth
current assets/current
liabilities
quick assets/current
liabilities
(long term
debt+current
liabilities)total assets
net worth/(net
worth+long term debt)
net worth/net fixed
assets
inventories/workin
capital
current liabiliites/total
assets
working capital/net
worth
371
Addis M 2003 lack of basic skills as
element for
competitiveness.
lack of personal
development.
problem with
occupational skills
and infromation
technology skills.
Bower, J. and
Gilson, S.
2003 fraud
Dollinger, M.J. 2003 anti trust problems a cash crunch caused
by overextention
a blind sppot such as
the uniquesness od
paradox
an overdiversified
portfolio causing
neglect of key areas
a strategic bind
life cycle curve:
structural
uncertainties
strategic uncertainties
resource
uncertainties
customer
uncertainties
controlling
uncertainties
372
Glantz, M 2003 owners no langer
takes pride in
business
does not know what
condition the
company is in and
the direction it is
headed
fails to take trade
discounts because
of poor inventory
turnover.
frequent
downturning of
financial reporting
sparked in an effort
hire a more :liberal"
accountant.
changes in financial
management.
sharp deterioration
of salaries, lower
standard of living
can be measures to
"save" distressed
business.
failure to look banker
in the eye, letting
business deteriorate
and dont return calls.
lunch orders
extravigant.
early warning signs;
management life
style
changes in manner
payables is paid.
loans to and from
managers and
affiliates
cash budgets not
realistic.
rotating bank debt
unusual items on
financials
losses, weak gross
margin, slow
accounts receivables
and reduced sales
intercompany
receivable/payables
not adequitely
explained.
cash balances
redused, overdrawn,
uncollected during
cycle.
cash flow problems -
cant cover debt
service.
withholding tax
liabilities to pay
creditors
creative accounting
changes in financial
management
comparison
receivables/payables
does not balance with
financials of same
period.
partial payment to
creditors
erratic interum
results.
late financials,
postpone
unfavourable news
unwillingness to
provide budgets,
projections, interum
results.
suppliers cut back
terms or COD.
concentration in
receivales/payables
financial ratio analysis
z-score
market/ product:
slow orders in
comparison with
previous
corresponding
periods.
factory operating well
below capacity
changes in inventory,
followed by excessive
inventory build-up or
the retention of
obsolete
merchandise.
changes suppliers
frequently
increase inventory to
one customer
changing
consentration from
good client to lesser
stature
company loses an
important supplier or
customer.
Hicks-Midanek,
D.
2003 management
capacity
market place
Ivanova, E. and
Gibcus, P.
2003 over confidenca in
decision making
unprepared when
makin decisions
ignorance
exclusivity
competitive
short-term focus
focussed on
immediate reference
points of value
ignorant of the
alternatives
easy influenced by
"big" event
Kanter, R.M. 2003 leadership
373
Liebenberg,
A.P. and Hoyt,
R.E.
2003 integral part of
enterprise risk
management process
high leverage driver
to appoint CRO
corporate governance
Maitlis, S. and
Lawrence, T.B.
2003 failure of strategy
Miller, D.,
Steier, L. and
Le Breton-
Miller, I.
2003 family business
succession, family
dynamics.
Moy, J.W. and
Luk, V.W.M.
2003 stress from
excessive workload
difficulty in time
management
lack of managerial
experience
inappropriate
marketing strategy
excessive risk
lack of government
support
stress from excessive
workload
excessive risk
insufficient bank
financing
high interest rate
lack of working capital
and/or cash flow
problems
excessive fixed
assets
high operating
expenses
poor control of quality
of products/services
inappropriate
marketing strategy
lack of long-term
planning and view
low sales volume
lack of technical
knowledge
high labour cost
tight labour market
difficulty in attracting
good personnel
lack of working capital
and/or cash flow
problems
strong competition
lack of technology
application in
operations
Riana, B,.
Chanda, P. and
Metha, D.P.
2003 difficulties in adapting
to change
rigid systems
lack of vision
declining profitability
working capital
problems
increased receivables
inability to plough
back into business
shift in customer
preference
inventory buid-up
frequent labour unrest
regular plant
breakdowns.
Scherrer, P.S. 2003 management by
exception rather
than flexible
planning
delegation without
inspection control -
no feedback
vertical organization
- no interaction
among departments
managers span of
control
employees with
more than one boss
chain of command
broken by
employess when
deemed necessary
formal
communication not
used
overreliance on
strategic plan, rote
behaviour not
creative thinking
overreliance on
management
overreliance on
strategic plan, rote
behaviour not reative
thinking
marketing wrong
product/ wrong
markets
aging production
techniques
inadequate research
and developement
inadequate pro
inappropriate
channels of
distribution
nonresponsive
fifancial information
systems
inadequate
understanding of
customers needs
marketing wrong
product/ wrong
markets
aging production
techniques
inadequate research
and developement
inadequate pro
inappropriate
channels of
distribution
nonresponsive
fifancial information
systems
loss of competitive
advantage
displacement by
competitors
changing technology
consumer, regularory,
and economic
changes
inadequate
understanding of
customers need
374
objectives
senior management
abuse outside
activities and co
perks
Timmons, J.A.
and Spinelle,
S.
2003 excessive growth
Vining, A.R. 2003 business
inefficiencies
Anon (j) 2004 importance of
diversification and
willingness to change
Anon (d) 2004 failure to integrate
different concepts in
the same
management
infromation system
(mismanagement)
1) failure to engage a
competent,
experienced
turnaround manager
to steer the
appropriate course for
the return to
profitability
2) failure to quickly
arrest cash
hemorrhaging
3) failure to engage
merchandisers to
refocus marketing
strategy
4) insufficient focus
on core business
strength
5) closing to few
stores and taking to
long to close them
7) disastrous
acquisitions.
rapid expansion
9) insuficient equity
base - too m uck
leverage
Anon (e) 2004 expensive labour
high rejection rate
throughout the
manufacturing
process
low emoployee
morale, absenteeism
and poor job quality
375
Anon (h) 2004 lack of action on
negative variances
from budgets
significant differences
between actual and
projected results
poor return on
investment
reductions in working
capital and cash flow
increases in fixed and
variable expenses
dropping gross
margins
Anon.(i) 2004 role of directors in
management of
companies.
commercial vs.
actual insolvency.
reckless trading.
Anon.(k) 2004 management defects
such as , skills,
knowledge and
talent,
improper cash flow
management,
inadequate budget
control,
insufficient response
to change,
outdated products,
low R+D budget,
ageing of
manufacturing
equipment,
antiquidated methods
of selling,
overtrading,
high level of non-
equity finance,
launching of large
project outside
available resources,
reasons for business
distress:
debtor became
distressed,
poor credit analysis,
poor collection follow-
up,
under-capitalized -
placing over reliance
on creditors,
overtrading,
high level of non-
equity finance,
launching of large
project outside
available resources,
losses due to product
changes; style,
knowledge and talent,
Aziz, M.A. and
Dar, H.A.
2004 Focus on financial
distress.
financial ratios,
cash flow
management
financial ratios
unexplained.
Brooks, M. 2004 management role
Campos, R. ,
Ruiz, F.J.,
Agell, N. and
Angulo, C.
2004 Early warning signs
identification through
the use of artificial
neural networks.
Charitou, A.,
Neophytou, E.
and
Charalambous,
C.
2004 Financial leverage:
REAT
SEQAT
SEQTL
TLAT
SEQDT
Operating cash flow
CFFOTL
CFFOLCT
Liquidity
CTACT
ACTLCT
WCAT
LCTAT
QALCT
376
Charitou, A.,
Neophytou, E.
and
Charalambous,
C.
2004 EBITTL
IBPPENT
EBITLCT
ROA
IBSALE
IBTL
WCFOAT
WCFOSALE
EBITPPEN
CHIB
Activity
NWSALE
Market
MKVALDT
MKVALSAQ
Conger, J.A.
and Nadler,
D.A.
2004 management
Craighead,
C.W., Karwan,
K.R. and Miller,
J.L.
2004 service failure
Daniel, F.,
Lohrke, F.T.,
Fornaciari, C.J.
and Turner Jr,
R.A.
2004 slack resources
rather than slack
efficiency
resource slack
availability
recoverability
potential
Dietrich, J.
Arcelus, F.J.
and Srinivasan,
G.
2004 focus on financial
ratios
WC/TA
EBIT/TA
EBT/CL
S/TA
RE/TA
EBT/Eq
CF/TL
TL/TA
CL/TA
WC/TL
logTgA
log EBIT/I
Eq/TL
Falkenberg,
A.D. and
Glamheden,
H.A.
2004 management tenure.
Gilmore, A.,
Carson, D. and
O’Donnell, A.
2004 company size,
entering into new
market / area,
management of risk,
through networking,
using managerial
competencies.
entrusting staff.
company size,
entering into new
market / area,
cash flow,
Gudmundsson,
S.V.
2004 productivity through networking,
using managerial
competencies.
377
Huson,
M.R.,Malatesta
, P.H. And
Parrino, R.
2004 management
Jooste, L. 2004 cash flow
Kemp, S. 2004 cash flow
rapid sales expantion
Kow, G. 2004 excessive growth
faster, bigger better.
Lin, L. and
Piesse, J.
2004 management
inefficiency
capital structure insolvency dverse economic
effects
- income volatility
Nutt, P.C. 2004 rush to judgement
failure - prone
practices
poor allocation of
resources
limited search trap
failed mojor
decisions
Orme, D. 2004 ineffective
mangement style
lack of operating
controls
operating without
buiness plan
outdated business
model
over diversification
explosive growth
family interest v/s
business requirement
weak financial
function
market lag
precarious customer
base
Orme, D. 2004 ineffective
mangement style
family interest v/s
business
requirement
operating without
buiness plan
over diversification
explosive growth
outdated business
model
weak financial
function
poor lender
relationship
lack of operating
controls
market lag
precarious customer
base
Persson, H. 2004
Pratten, F.D. 2004 growing competition increased cost due to
labor legislation
increased rents
reduction in sales
growing competition
Von Oetinger,
B.
2004 lack of innovation
lack of past
experience
Walshe, K.,
Harvey, G.,
Hyde, P. and
Pandit, N.
2004 symptoms, causes
chronic and acute
characteristics of
failure
types or categories of
failure
internal and external
characteristics of
failure
phases
decline and crisis
triggers for change
Anon (d) 2005 fiduciary duties, skill
and care, liabilities to
shareholders,
creditors, third
parties government
and public.
Anon. (a) 2005 directors
responsibilities
378
Anon. (b) 2005 ineffective
management style
overdiversification
precarious customer
base
family v/s business
matters1
operating without
business plan
weak financial
function
poor lender
relationship
explosive growth
lack of operating
controls
market lag
explosive growth
Back, P. 2005 character of
management;
reputation,
fair dealings history,
own financial
difficulties,
reputation of
dishonesty,
competence,
insufficiency.
number of changes in
directors,
age of business,
group membership,
size of business,
efficiency,
leverage.
non- financial var
number of payment
delays,
payment behaviour
variables,
existence of loans
secured on businesss
assets and reporting
lags,
Barker III, V.L. 2005 dysfunctional
organizational
cultures - financial
management.
media accounts,
verbal information.
multiple sources
internal;
weak strategy,
dysfunctional
organizational
cultures - financial
management.
accounting reports,
internal memos,
consultants reports,
multiple sources,
external
change in technology,
recession,
competitors.
Bates, T. 2005 focus on skills set of
owners as warning
sign.
Baunard, P.
and Starbuck,
W.H.
2005 essential for survival
and success in face
of changing
environment.
neglible long-run
effects on population
of businesss,
essential for survival
but creates no
competitive
advantages for
survivors,
cognition does not
afford a dependable
basis for learning.
attempted growth into
new domain,
transferring an old
model to a new
situations,
product launch,
new activity
reinforced by core
believes,
over estimation of
demand,
resurgence of a core
believe, and
escalation of
commitment in losing
business.
Beaver, G. and
Jennings, P.
2005 lack of management
skills,
lack of experience,
neglect,
fraud,
poor record keeping,
reckless money
management,
inability to cope with
growth.
poor location,
lack of formal
planning,
inability to cope with
growth.
lack of capital budget,
poor record keeping,
reckless money
management,
inadequate
accounting systems,
lack of marketing
skills,
inadequate provision
for contingencies,
excessive inventory
incompetence,
disaster,
insufficient marketing
talent,
indifferent employees
,
Bollen, L.H.H.,
Mertens,
G.M.H.,
Meuwissen,
R.H.G., Van
Raak, J.J.F.
and
Schelleman, C.
2005 managerial
control issues and
fraud
financial external
379
Burbank, R.K. 2005 management
shortcomings,
ineffective board of
directors / managers,
excess leverage, technology changes,
loss of market share,
industry weakness,
labour problems
economic conditions.
Cannon, M.D.
and
Edmondson,
A.C.
2005 failure to head the
importance of smaller
failure within business
Dehney, R.B.D.
and Miller, C.
2005 ongoing litigation and
law suites
Dietrich, J.
Arcelus, F.J.
and Srinivasan,
G.
2005 focus on financial
ratios
WC/TA
EBIT/TA
EBT/CL
S/TA
RE/TA
EBT/Eq
CF/TL
TL/TA
CL/TA
WC/TL
logTgA
log EBIT/I
Eq/TL
Garvin, D.A.
and Roberto,
M.
2005 dysfunctional
routines,
management.
Hass, W.J. and
Pryor IV, S.G.
2005 autocratic
management
politically motivated
decision making
managerial warning
signs:
management
promises unrealistic
improvement in
results
management throws
money after the
problem
management raises
prices to improve
profits
sales decline and
marketing budgets
are cut
bad business
practices like
creative accounting
and quarter-end
loading are used in
desperation
earnings disappoint
and management's
credibilty is lost
quality problems
declining growth rates
low employee morale
high employee
morale
declining productivity
growth of new
competition
customer loss
declines in gross
margin and market
share
380
Jas, P. and
Skelcher, C.
2005 Internal sources of
decline;
technical
poor management
cognisance
leadership capability
Internal sources of
decline;
poor management
cognisance
leadership capability
external sources of
decline;
reallocation of
resources
political and
management shifts
internal sources of
decline;
technical
poor management
cognisance
leadership capability
external sources of
decline;
reallocation of
resources
political and
management shifts
Kam, J. 2005 management
misperception of its
own competence
level
dealing with demand
and competition
having distracted
attention
acting impulsively
little consideration
for risk
being narcissistic
and myopic
decision fostered by
pride and over
confidence +
arrogance
breeding future from
previous success
inefficiency to
respond to
environmental
change
behavioural factors
strategic persistency
escalation of
commitment
threst-rigidity effect
organizational inertja
economic condition
unexpected jolts
brand switching
consumer taste
changes
competition
new entrants
organization destiny
technological
uncertainty caused by
product or process
innovation
capacity downsizing
change/ challenges of
market
business age, size,
degree of
specialization
decline in market
Knott, A.M. and
Posen, H.E.
2005 learning's out of
failure
Koopman, S.J.,
Lucas, A. and
Klaasen, P.
2005 cyclical movement in
default rates
McRann, B. 2005 slow growth
seasonable variation
product life cycle
short-term slowdown
Mellahi, K. 2005 failure of board to
detect warning signs
management
Miller, D. and
Le Breton-
Miller, I.
2005 long executive
apprenticeships and
tenures.
courage,
renewal,
cohersivetop team.
connection,
benevolent
partnering,
close to client,
sustained contacts,
good corporate
citizenship,
substantive mission
vs. financial results,
thematic,
competency- based
strategy,
focused, long-term
investment,
patient shareholders,
community,
clarion values,
assiduous selection
and socialization,
welfare state for
employees,
informality, initiative
and teamwork.
381
Pompe, P.M.
and Bilderbeek,
J.
2005 Profitability
gross operating
results/total assets
net operating
results/total assets
gross results/total
assets
profit before
taxes/total assets
profit after taxes/total
assets.
cash flow/total assets
profit after
taxes/equity
cash flow/equity
gross operating
results/working
assets
net operating results/
working assets.
Pompe, P.M.
and Bilderbeek,
J.
2005 gross operating
results/turnover
net operating results
/turnover
gross results/turnover
net results/turnover
profit before taxes
/turnover profit after
taxes/turnover cash
flow/turnover., gross
operating results
/added value
net operating results
/added value
gross results/added
value
net results/added
value
profit before taxes
/added value
profit after taxes
/added value
cash flow/added
value
equity/turnover
turnover/workingasset
turnover/fixed working
capital
turnover/current
working capital
turnover total assets
added value/total
assets
added value /turnover
added value/fixed
assets
financial charges
/added value
income taxes/added
value
personnel charges
/added value
added value/number
of persons employd
fixed working assets/
number of persons
employedpublication
382
Pompe, P.M.
and Bilderbeek,
J.
2005 working
capital/turnover
working capital/total
assets
current
assets/turnover
current assets/total
assets
current assets/short-
term debt
quick assets/turnover
quick assets/total
assets
quick assets/short-
term debt
quick assets/amounts
payable within one
year
(investments+cash)/tu
rnover
(investment+cash)/tot
al assets
(investments+cash)/a
mounts payable
within 1 year
(investments+cash-
finacial debts)/current
assets
cash/amount payable
within 1 year
cash/current assets
cost price of the
production/stocks
stocks/turnover
stocks/total assets
trade
debtors/turnover
trade debtors/total
assets
trade debts/goods
and services
purchased
trade debts/turnover
trade debts/total
assets
short-
termdebt/turnover
Pompe, P.M.
and Bilderbeek,
J.
2005 equity/total assets
equity/permanent
capital
short-term debt/total
assets
long-term debt/total
assets
(reserves+
accumulated profit or
loss)/total assets
profit after taxes/total
debt
cash flow/total debt
cashflow/long term
debt
net results/financial
charges
whether equity is
positive or negative
383
Probst, G. and
Raisch, S.
2005 autocratic leadership
excessive success
culture
common pattern
tentative change
weak organizational
leadership
lacking success
culture.
growth
uncontroled change
premature ageing
stagnant growth
Radipere, S.
and Van
Scheers, L.
2005 management
inefficiency
financial marketing
Sampath, R.
and Kambil, A.
2005 growth
Sargeant, J.R. 2005 no interum
management
financials
no annual financial
statements
no budget
no cash flow
statements
no work structure
lack of control
no clear managerial
responsibilities
no leader - lack of
role clarity
low managerial skills
no interum
management
financials
no annual financial
statements
no budget
no cash flow
statements
no work structure
lack of control
no clear managerial
responsibilities
no leader - lack of
role clarity
low managerial skills
Anon (b) 2006 always fire-fighting
delayed decisions -
let other decide
poor staff retention
tense work
atmosphere
spend time away
not addressing
problem present -
focus on "rosy"
future
large cash flow
fluctuations
large cash flow
surprises
no capital reserves
sales unpredictable
and irregular
no replace orders
few new customers
no word of mouth
customers
sales are falling
Carmichael, T.
and Stacey, A.
2006 managerial success
variables;
accountability
initiative
boundaryless
thinking
integrity
commitment
conceptual thinking
communication
knowledge expertise
customer focus
quality focus
empowerment
shared ownership
global worldview
speed
influence and team
building
Cressy, R. 2006 growth
risk
propensity for risk
384
Drew, S.A.,
Kelley, P.C.
and Kendrick,
T.
2006 senior levels
misjudgement of risk
mismanagement of
risk
unethical behaviour
excessive internal
rivalry
intolerance of failure
propensity for risk
taking
secretiveness
persecution of
people who speak
up
Elenkov, D.
and Fileva, T.
2006 bad luck
Farris, B., Lee,
H., Maitrelean,
J., Schouer, J.
and Seyffret,
N.
2006 lack of clear strategic
plan,
optimistic acquisition.
lack of promotional
strategy,
industry changes,
uncompetitive pricing,
poor market share,
and existing
underperforming staff.
Joseph, G. and
Lipka, R.
2006 Ex post facto -
financial infromation
Kampschroede
r, K.F., Ludwig,
N., Murray,
M.A. and
Padmanabhan.
2006 entrepreneurial failure
concerns
Lewin, B.P. 2006 CEO capabilities
weak monitoring -
risk reduction
sustainable growth
rate
sales growth rate
cash flow
sustainable growth
rate
Pearce II, J.A.
and Michael,
S.C.
2006 recession
Steyn Bruwer,
B.W. and
Hamman, W.D.
2006 cash
growth and cash
Taite, D. 2006 operational issues
corporate
governance
turnover
margin and profit
financing and cash
Tsakonas, A.,
Dounias, G.,
Doumpos, M.
and
Zopounidis, C.
2006 net income/gross
profit
gross profit/total
assets
net ncome/totalassets
net income/net worth
current assets/
current liabilities
quick/assets/current
liabilities
[long term debt+
current liabilities]/total
assets
net worth/[net worth
+long term debt]
net worth/net fixed
assets
inventories/working
capital
current liabilities/total
assets
working capital/net w
385
Agarwal, V.
and Taffler, R.
2007 Draw comparison
between Altman,
Taffler- and market
based models. Use
traditional Z-score
ratios
Amaral, A.M.
and Baptista,
R.
2007 novice vs.
experienced.
focus on re-entry of
entrepreneurs
Anon (d) 2007 absence of
management skills
emphasis on family
rather than
management
delays in
management
information systems
inappropraite
financing structures
mismatch assets and
liabilities
deteriorating margins
masked by increased
volumes
ineffective tax
structure
uncompetitive cost
base
poor information
systems
uncontrolled growth in
lending
shrinking markets
increased warranty
claims
staff turover
Berger, H. 2007 focus on
bureaucratic and
hierarchical
environment -
control over critical
decision making.
Values. Project
failure or success.
Boshoff, C. 2007 poor service delivery
Byers, M. 2007 regular trading
losses
not producing
accounting and
trading information
don't pay employees
in time
exhausted all
immediate sources of
cash
exceeding credit
terms with suppliers
regular trading losses
Calandro(Jr), J. 2007 Z-score
Gonzalez, L.
and James, C.
2007 Financial ratio
analysis
Han, C., Huml,
A., Kagalkar,
A., Saito, L.
and Sundjaja,
K.
2007 management capital expenditure -
expantion
cash-flow
working capital
negative
capital expenditure -
expantion
new competirion
existing competition
Jooste, L. 2007 Focus on the
predictive role of
cash- flow ratios
cash flow to sales
cash flow to assets
reinvestment
cask flow to total debt
critical needs
coverage
cash interest
coverage
dividend coverage
cash flow to income
386
Lamers, R. 2007 Cash flow problems
not paying statutory
creditors
not paying staff
business growth
disruption of business
working capital cycle
Longenecker,
C.O., Mitchell,
M.J. and Fink,
L.
2007 managerial failure
McCrea, E. and
Betts, S.
2007 strategy
Nag, R.,
Hambrick, D.C.
and Chen, M-J.
2007 management strategy
Okpara, J.O.
and Wynn, P.
2007 personnel
management issues
corruption
operations
planning
market research
financial analysis
infrastructure issues
accounting
finance
operating problems
marketing
inventory control
production
operations
technology
low demand
Strotmann, H. 2007 start-up size
type of establishment
industry growth
industry concentration
industry entry rate
technological regime
industry economies of
scale
industry heterogenety
Strotmann, H. 2007 start-up size
type of establishment
industry growth
industry concentration
industry entry rate
technological regime
industry economies of
scale
industry heterogenety
387
Van Caillie, D..
and Crutzen,
N.
2007 heavy amount of
charges
financial indicators of
profitability
poor/decrease in the
market share
insufficient cash flow
poor/decrease in
current ratio
weakening/deteriorati
on of resources base
poor/decrease in
investment rate
increase in level of
external debt
solvency decrease
increase in financial
charges
critical warning
signals - solvency
and liquidity
extremely low and
mistrust of partners
bankruptcy
insufficient sales
Van Scheers,
L. and
Radipere, S.
2007 managers not
managing
Altman, E.I. 2008 Z-score factors
(financial ratios)
Explanation of each
element and the final
ratio will lead to
identification:
working capital (WC),
total assets (TA),
retained earnings
(RE),
total debt (TD),
market value of equity
(MVE)
sales (S).
Anon 2008 Broken Promisses
unreturned telephone
calls
invcrease in
reference requests
changes in payment
patterns
changes in buying
patterns
cash flow excuses
Barker, A.,
Cassidy, L.,
Goodman, J.
Siegel, J. and
Ulin, E.
2008 gross margins erode
due to pricing
pressures,
operating margins
fall,
sales stagnated are
fixed operating costs.
Chenhall, R.H. 2008 management
Li, H. and Sun,
J.
2008 focus on financial
distress prediction
using case-based
reasoning (CBR)
388
Martin, R.D.
and Kimberly,
J.R.
2008 management
capability
weak cost control
and data
inefficiencies
wrong/costly strategy
acquisitions
change in legislation
increased cost market difficult to
operate
excess capacity
Martin, R.D.
and Kimberly,
J.R.
2008 management
capability
wrong/costly strategy
acquisitions
increased cost
weak cost control and
data inefficiencies
change in legislation
market difficult to
operate
excess capacity
Ooghe, H. and
De Prijcker, S.
2008 four failure
processes identified.
lack of management
and industry
experience
Inappropriate
management
mistrust of financiers
weak business plan
lack of strategic
advantage
heavy capital
expenditures
heavy capital
expenditures
insufficient cash
flow/profitability
liquidity problems
increase in Liabilities
= weaker solvency
low sales
underestimated
expenses
Ooghe, H. and
De Prijcker, S.
2008 ack of management
and industry
experience
Inappropriate
management
weak business plan
lack of strategic
advantage
heavy capital
expenditures
heavy capital
expenditures
underestimated
expenses
insufficient cash
flow/profitability
liquidity problems
increase in Liabilities
= weaker solvency
Low sales
Pindado, J.
Rodrigues, L .
and De la
Torre, C.
2008 Financial ratios
EBITDA/FE
(EBIT/RTA)
(FE/RTA)
(RE/RTA)
Pretorius, M. 2008 leadership
management
individual skills
behaviour
cognition and
learning
internal causes of
failure
external causes of
decline
administrative causes
of decline
strategic causes of
decline
increased
centralization
lack of long term
planning
curtailed innovation
departure key staff
loss of resource slack
fragmented pluralism
non-prioritised
cutbacks
Chandre, D.K.,
Ravi, V. and
Bose, I.
2009 financial statements
389
Chen, H.
Huang, S.Y.
and Lin, C.
2009 STLR
Current
assets/current liab.
(CA/CL)
(Cash+ cash
equivalents)/ current
liab.
CFR
Cash flow/ tot debts
(CF/TD)
Retained earnings/ tot
assets (RE/TA)
(Current assets -
current liab's.) / tot
assets ((CA-LA)/TA)
Total cash flow/ tot
assets (CF/TA)
CSLTSR
Total debt/ tot assets
(TD/TA)
Total debts / tot
equity(TD/TE)
Earnings before
int.and taxes /
(earnings before int.
and taxes - int.
expense (EBIT /
(EBIT-IE)
Operating income /
int. expense (OI/IE)
ROIR
Income before taxes /
average tot assets
(IBT / AOA)
Earnings before int.
and taxes / tot assets
(EBIT / TA)
Chen, H.
Huang, S.Y.
and Lin, C.
2009 Net sales / tot assets
(NS / TA)
OPR
(Sales - cost of sales)
/sales ((S-CS)/S)
Linguistic:
Short-term liq ratio
(STLR)
Cash flow ratio (CFR)
Capital structure and
long-term solvency
ratio (CSLTSR)
Return on investment
ratio (ROIR)
Asset utilisation ratio
(AUR)
Operating
performance ratio
(OPR)
Liquidity (LIQ)
Retained earnings
(RE)
Bankruptcy.E278
390
Chen, H.
Huang, S.Y.
and Lin, C.
2009 STLR
Current
assets/current liab.
(CA/CL)
(Cash+ cash
equivalents)/ current
liab.
CFR
Cash flow/ tot debts
(CF/TD)
Retained earnings/ tot
assets (RE/TA)
(Current assets -
current liab's.) / tot
assets ((CA-LA)/TA)
Total cash flow/ tot
assets (CF/TA)
CSLTSR
Total debt/ tot assets
(TD/TA)
Total debts / tot
equity(TD/TE)
Earnings before
int.and taxes /
(earnings before int.
and taxes - int.
expense (EBIT /
(EBIT-IE)
Operating income /
int. expense (OI/IE)
ROIR
Income before taxes /
average tot assets
(IBT / AOA)
Earnings before int.
and taxes / tot assets
(EBIT / TA)
Chen, H.
Huang, S.Y.
and Lin, C.
2009 5) AUR
- Net sales / tot
assets (NS / TA)
6) OPR
6.1) (Sales - cost of
sales) /sales ((S-
CS)/S)
Linguistic:
- Short-term liq ratio
(STLR)
- Cash flow ratio
(CFR)
- Capital structure
and long-term
solvency ratio
(CSLTSR)
- Return on
investment ratio
(ROIR)
- Asset utilisation ratio
(AUR)
- Operating
perfromance ratio
(OPR)
- Liquidity (LIQ)
- Retained earnings
(RE)
- Bankruptcy.
391
Chen, W. and
Du, Y.
2009 management
efficiency ability,
earning ability,
financial structure
ability,
debt repayment
ability,
Chi, L. 2009 managerial
incompetence,
managerial
deficiencies,
inadequate cash to
cover liabilities.
Davis, P. 2009
Glantz, M. 2009 management fails to
take trade discounts
because of poor
inventory turnover
frequent " down
tiering' of financial
reporting sparked in
an effort to bring on
a more "liberal"
accountant
changes in financial
management
does not allow
cushion for error
financials are
submitted late in an
attempt by
management or their
accountants to
postpone
unfavorable news
frequent " down
tiering' of financial
reporting sparked in
an effort to bring on a
more "liberal"
accountant
sharp reduction in
officers salaries
erratic interim results
signaling a departure
from ormal and
historical patterns
does not allow
cushion for error
financials are
submitted late in an
attempt by
management or their
accountants to
postpone unfavorable
news
cash balances reduce
substantially or are
overdrawn and
uncollected during
normal lquid periods
management fails to
take trade discounts
because of poor
inventory turnover
low probabiloities
operating cash flows
cover debt service
withholding tax
liability builds as
taxes are used to pay
other debt
frequent " down
tiering' of financial
reporting sparked in
an effort to bring on a
more "liberal"
accountant
changes in financial
management
total in receivables
and payables aging
schedules do not
agree with amounts
shown on the balance
sheet of the same
date.
sharp reduction in
officers salaries
erratic interim results
signaling a departure
from normal and
historical patterns
does not allow
cushion for error
lender taking
possession of
collateral
changes in inventory,
followed by excessive
inventory buildup or
the retention of
onsolete merchandise
change of suppliers
frequently, or
transient buying
results in higher raw
material costs.
financials are
submitted late in an
attempt by
management or their
change of suppliers
frequently, or
transient buying
results in higher raw
material costs.
392
accountants to
postpone unfavorable
news
Glantz, M. 2009 unwillingness to
provide budgets,
projections or intrim
information
letting the condition
of the business
deteriorate
management
'expensive' lunches
cash flow signals -
gross operating cash
flow is below new
income and net
operating cask flow
well below gross
operating cash flow
lender finances highly
speculative inventory
ahereby the borrower
is trying for a "home
run"
such as failure to look
the bankers in the
eye
taking longer to return
call or do not return at
all.
concentration of
payables and
receivables -
unsatisfactory
explanations
increased inventory to
one customer or
perilous reliance on
one account
changing from "good"
customer to one of
lessor stature
suppliers cut back
terms or request COD
loss of important
client or supplier
393
Glantz, M. 2009 cash flow problems
merchandise shipped
out at end of month or
year to window dress
the financials
unearned income -
shifting sales to future
periods via reserves,
income smoothing
gimmicks, creating
gains and losses by
selling, retiring debt
income contributing
less and less to
overall financing
dividens large in
proportion to net
income
depreciation is
greater than capital
expenditures -assets
running below optimal
levels evidenced by
weakening gross
profit margin
hiding losses inside
discounted operations
selling assets after
pooling
moving current
expenses to later
periods by improperly
capitalizing costs
amortizing costs too
slowly and failing to
write-off worthless
assets.
large overdue
receivables
overly dependent on
one or two customers
related-party
receivables
slow receivables
turnaover (annualize
frequently)
Glantz, M. 2009 right of return exists
unjustified LIFO to
FIFO changes
insufficient insurance
inclusion of inflation
profits in inventory
large, unexplained
increase in inventory
gross profit trends
bad but no
markdowns -
inclusion of improper
costs in inventory,
capitalized instead of
flow-through
deferred taxes are
running off
394
Glantz, M. 2009 fixed asset turnover
(sales/NFA) indicates
sharp increase and
tied to:
backlogs significantly
increased
GPM significantly
below historical and
industry
WIP inventory
embedded in very
weak inventory
turnover.
outdated equipement
high maintenance
and repair expense
declining output level
inadequite
depreciation charge
lengthening
depreciation period
large write-off of ssets
distirtions re: currency
translations
Halpern, P.,
Kieschnick, R.
and Rotenberg,
W.
2009 discipline imposed by
debt,
larger, less risky
businesss -public
debt
leverage buyouts,
leveraged
recapitalization,
high leverage
transactions.
inappropriate debt
loads,
Lin, L. 2009 Financial ratios
Muller, G.H.,
Steyn-Bruwer,
B.W. and
Hamman, W.D.
2009 size of company
structure
financial ratios
cash flow
profit ratios
Oosthuizen, H. 2009 strategic
Orpurt, S.F and
Zang, Y.
2009 cash flow
Zwaig, M. and
Pickett, M
2009 managerial
inadequite
management system
mediocre
management skill
certain personality
traits
management lacks
depth
relies on one
individual for
decision making
unbalanced
management team
lack of management
depth
weak financial and
organizational skills
poor understanding
of finance
habits and personal
traits
personal problems
frivolous spending
Financial signs
decline in sales
lower profits margins
sustained losses
increased
highly leveraged
balance sheet
reduced cash flow
relationship with bank
change in borrowing
request for security
breach of covenants
Operatinal signs
changes in senior
management
high employee
turnaver
resignation of
members
unsuccessful
expantion
insufficient cash flow
lack of clear direction
deterioration of
internal controls
decline in customer
service
quality compromise
one-time events
largebad debt
changes in market
place
change in supply
payments
inability to capatilze
on discounts
underpricing
contracts
395
Zwaig, M. and
Pickett, M
2009 payment patterns
purchasing patterns
industry trends
new developments in
customer base
law suitspersonal
problems
rumour mill
third party
endorsement
customer and
industry knowledge
396
APPENDIX B: BANKING SIGNS
397
Banking Warning Signs (own compilation)
AUTHOR DATE BANKING EARLY WARNING SIGNS
Pousson, J. 1991 ? broken promises
? surprises
? hardcore overdraft
? facilities fully utilised and frequently exceeded
? increase in status enquiries
? large cash withdrawals
? increase in short term requests
? unable to meet tax cheque/ wages
? regular stop payments
? no management accounts
? borrowings over limit
? changing conduct of account
? hard core overdraft
? build up / late payment of creditors
Brenneman,
G.
1998 ? poor service
? poor product,
Bibeault,
D.B.
1999 ? slowness in submitting financial exhibits by the borrower.
? declining deposit balances, overdrafts and /or returned
cheques
? failure to perform on other obligations, including personal
debt of principals
? inventories become swollen
? loan repayments become delinquent with the past due
periods increasing
? slowness in bank's ability to arrange plant visitations or
meetings with principals
? business becomes target of legal process or actions
? trade payables and/or accruals begin to build
? adverse information from competitors and customers of the
business concern
398
FitzGerald,
T.
1999 ? concerned bankers
? concern on performance
? poor lent profile
? low-margin commodity products
? lost of large customers
Glantz, M
(continue)
2003 ? unsustainable growth
? frequent visits to place of business reveals deteriorating
general appearance, building rolling stock and equipment.
? allow advances on overdraft for other purposes - to repay
own debt. (allow debit orders to go through)
? finance highly speculative inventory
Glantz, M. 2003 ? rotating bank debt
? poor examination of cash flow
? changes in financial management
? no cushion build in to loan for error.
Hicks-
Midanek, D.
2003 ? banking signs
? bank covenant failure
? liquidity conditions
? financing options
Moy, J.W.
and Luk,
V.W.M.
2003 ? insufficient bank financing
? high interest rate
? lack of working capital and/or cash flow problems
Orme, D. 2004 ? poor lender relationship
Back, P. 2005 ? prior payment behaviour;
? prior payment delays
? payment disturbances
? creditor lose confidence
? higher interest rate change
? debts not paid at time of maturity
? three or more payment delays
? banking relationship,
Lewin, B.P. 2006 ? breach of debt covenants
Byers, M. 2007 ? banking sign: frequent excesses on facility limits
399
Gonzalez, L.
and James,
C.
2007 ? banking relationship
Ooghe, H.
and De
Prijcker, S.
2008 ? mistrust of financiers
Davis, P. 2009 ? the way in which financial institutions identify , assess and
manage risks continues to fall under intense scrutiny
? risk measurement
? 3) stress testing
? evident that risk processes were sensible -sophisticated, but
sometimes poorly executed.
Glantz, M. 2009 ? at the end of the cycle, creditors are not completely paid
out. - this gives bankers the false sense of security but
company cannot borrow from trade for next cycle
? lender taking possession of collateral
? such as failure to look the bankers in the eye
? overdraft advances funds other purposes, pay own bank
debt
Halpern, P.,
Kieschnick,
R. and
Rotenberg,
W.
2009 ? changes in covenants,
400
APPENDIX C: PHASES IN TURNAROUND STRATEGIC PROCESS
401
AUTHOR DAT
E
TURNAROUND
SETTING UP PHASE
TURNAROUND
EXECUTION
INVESTIGATIO
N PHASE
PLANNING
PHASE
STRATEGIC
RESPONSE
FINANCIAL
RESPONSE
OPERATING
RESPONSE
New (Jr),
R.V.
1974 Turnaround
decision
Carrington,
J.H. and
Aurelio, J.M.
1976 Careful
planning.
1) create
attitude of
mutual trust,
2) develop a
careful financial
plan for survival,
3) disclose to
customers and
creditors,
4) determine if
business can
generate
enough cash to
remain solvent.
Retention of
business,
1) inject
additional
capital
2) borrow
money,
3) cut
expenses
(overheads),
4) employ
combination
of aforesaid,
5) withhold
statutory
creditors as
short term
measure.
Hedley, B. 1976 1) Productivity
improvement
due to
technologi¬cal
change and/or
'learning' effects
leading to
adoption of new
production
methods
2) Economies of
scale and of
specialization
3) Displacement
of less efficient
factors of pro-
duction,
especially
investment for
cost reduc¬tion
and capital-for-
labour
substitution
4) Modifications
and redesign of
product for
lower costs.
Hamermesh
, R.G.
1977 Staffing:
1) Intermediate staff
2) Intermediate
managers
3) Personnel changes
Focused
reorganization
Higgins,
R.C.
1977 Sustainable growth
Long term planning
on sustainable
growth.
402
Hofer, C.W. 1980 The nature of
turnaround
situations
1) assessing
current operating
health
1.1) financial
condition
1.2) market
position
1.3) technical
stance
1.4) production
capabilities
2) assessing
current strategic
health
2.1)
product/market
matrix
2.2)
technological
and production
capabilities
2.3) financial
capabilities
1) vertical integration
2) diversification
3) top management
changes
1) major plant
expenditures
2) functional are
emphasis
3) improved
efficiency ratios.
Christensen,
H.K.,
Cooper,
A.C. and
DeKluyver.
1982 1) Repositioning
2) Harvesting
3) Disinvestment
4) Liquidation
Gelb, B.D. 1982 Retain / divest
Anderton,
D.L.,
Conaty, J.
and Miller,
G.A.
1983 Turnaround:
structural constraints.
Industry ariables:
1) frequency of
product changes,
2) technology
change,
3) development
time for new
products
4) relative
compensation
average.
Product
competition
variables:
1) customization,
2) relative product
breadth,
3) product quality
average,
4) relative price
5) market share.
R&D variables:
1) new products
2) product R&D/
revenue average.
Production/invest
ment average;
1) total inventory/
revenue average,
2) P&E newness
average
3) investment
/revenue average.
403
Anderton,
D.L.,
Conaty, J.
and Miller,
G.A.
Efficiency
variables:
1) capacity usage
average,
2) employee
productivity
average
3) value added
/revenue average.
Vertical
integration
variables:
1)vertical
integration
backward,
2) vertical
integration
forward.
Marketing
variables:
1)Sales force/
revenue average,
2) media
advertising/reven
ue average,
3) relative sales
force expenses
4) relative media
advertising
expenses.
Dolan, P.F. 1983 Turnaround
action:
1) select an
alternative or
set of
alternatives
2) project
financial impact
of cash, include
balance sheet,
profit and loss
3) use ZETA
analysis on
projected data -
project score
4) evaluate
financial impact
of each
alternative on
the company's
ability to survive
Turnaround strategy
1) accelerating cash
flow
2) consolidating
product lines
3) closing facilities
4) reorganizing
5) restructuring the
capitalization
6) Liquidating assets,
7) reducing
unproductive assets,
8) speed up
turnaround time on
productive assets
9) divesting
subsidiaries
10) merging with
another business
Hambrick,
D.C. and
Schecter,
S.M.
1983 1) identify low
performers
2)asset and cost
surgery
3) selective product /
market pricing
4) piecemeal
productivity
404
Janzen, L.T. 1983 Planning:
1) formulate
long-range
objectives
2) formulate
short-time
strategy
3) concentrate
on modern
products
4) stop
production
5) establish
market
orientation
6) concentrate
on fast profit
increase
Perry, L.T. 1984 Turnaround
strategy:
people layoffs
Bellisario,
M.
1985 Set targets for
turnaround
1) New industrial
relations strategy
2) Renewal of
processes
3) Communication
4) Regular
transformation
5) Information
transparency
6) Information
processing
7) Fine tune
corporate structure
Renew:
1) products
2) production
processes
3) structures
Melin, L. 1985 Strategic measures:
New Owners
1) Increased
concentration on
R+D
2) Cutting down
of assortment
diversification
3) Market
expansion
4) Market
concentration
5) Capacity
increase
6) Capacity
decrease
7) Export of
knowhow
8)
Fusion/acquisition
of competitor.
Müller, R. 1985 1)Effective
management out of
own ranks
2)Strict, relaxed
leadership
3)Esprit de corps
4) Effective conflict
management
5) Back-up financial
institutions
6) Realistic
sustainable
restructuring concept
405
Seabright,
J.W.
1985 1) New organization
2)Training and
development
3) Merchandise
selection and control
4) Pricing policy
5) Quality control
6) Customer service
7) Financial
resources
Wernerfelt,
B.
1985 Turnaround:
brand loyalty
Dickson,
P.R. and
Giglierano,
J.J.
1986 Assessment of
turnaround
strategy against
cost
Turnaround strategic
planning and cost.
Jemison,
DB. and
Sitkin, S.B.
1986 Turnaround
plan:
1) acquisition
2) strategic fit
O’Neill, H.M. 1986
a
1) analysis of the
cause of
turnaround
2) analysis of
key factors
1) decide on
management
changes
2) design sub-
strategis
Management
process:
1) turnaround effort
usually preceded by
management change
1.2) redefinition of
businesss business
1.3) policy changes
1.4) growth strategies
1.5) attention to re-
structuring
1.6) planning
2) key factors in
turnaround
2.1) competitive
position
2.2) product life cycle/
general market
conditions
2.3) industry tyoe
2.4) change in
competitixe patterns
2.5) cause of decline
2.6) new strategic era
O'Neill, H.M. 1986
b
Turnaround
decision
Schwartz,
K.B. and
Menon, K.
1986 Turnaround strategy
-CEO replacement
Lorange,P.
and Nelson,
R.T.
1987 Unfreezing;
establishing the
likelihood of
decline
- top-down,
bottom-up
dialogue
Modiano, P. 1987 1) Renewal of
manufacturing
process
2) Product
redesigns
406
Siomkos, G.
and
Shrivastava,
P.
1987 Decision
making process
Whitney,
J.O.
1987 Intelligence from
the source
Plan for cash Change non-
cash working
capital into
cash
Chrisman,
J.J., Hofer,
C.W. and
Boulton,
W.R.
1988 Turnaround
strategy
definition and
plan
Harker, M. 1988 Turnaround
strategy:
marketing
Quinn, J.B.,
Mutzberg,
H. and
James, R.M.
1988 1) Is the
business worth
saving?
2) Sustainable or
disinvest or
liquidate
3) current
operating health
4) current
strategic health
Selection of
turnaround
strategy
Strategic turnaround
only if operstional
base is potentially
strong
1) Operational
turnarounds
2) revenue-
increasing
strategies
3) cost cutting
strategies
4) asset reduction
strategies
5) combination
strategies
Dutz, M. A. 1989 Mergers and
acquisitions
Eisenhardt,
K.M.
1989
a
Turnaround
practitioner
with regards agency
theory.
Eisenhardt,
K.M.
1989
b
Turnaround: problem
solving
in cognition.
407
Gilmore,
T.N. and
Kazanjian,
R.K.
1989 Turnaround
plan:
Decision types.
1) Planning and
decisions and
policies
2) strategic-,
3) business-,
4) product-
planning,
5) booking
forecast.
1) Engineering and
product development
decisions and
policies,
2) Product design
and development,
3) value engineering,
4) CAD/CAM
operations
Finance and
administration
decisions and
policies,
1) corporate
revenue
forecast,
2) managerial
reporting,
3) facilities
planning.
1) Manufacturing
decisions and
policies,
1.1)
manufacturing
product and
meeting ship
schedule,
1.2) inventory
ownership and
management,
1.3) costs of
goods sold
internally,
2) Quality
assurance
decisions and
policies,
2.1) product
reliability
program,
2.2) component
qualification,
2.3) workmanship
training program,
2.4) inspection.
3) Human
resources
decisions and
policies,
3.1)
compensation,
3.2) hiring.
4) Marketing and
sales decisions
and policies,
4.1) setting and
meeting sales
targets,
4.2) pricing,
4.3) marketing
research and
dissemination,
4.4) sales support
procedures.
Zimmerman,
F.M.
1989 1.Distinguishing
Features
2.Reliability and
Performance
3.Product
Quality
4.Market
Continuity
Appropriate
turnarounds
leadership
1. Managerial
Stability
2.Fair Play
Modest
Overhead
1.Production
Efficiency
2.Inventory
Efficiency
3.Design for
Manufacturability
4.Focus on
Operations
5.Experience in
the Industry
6.Technical
Experience
7.Knowledge
Exploration
8.Incremental
Changes
Boyle, R.D.
and Desai,
H.B.
1990 Analysis of
causes for failure
408
Duchesneau
, D.A. and
Gartner,
W.B.
1990 Turnaround
plan:
Extensive use
of
characteristics
and actions of:
1) lead
entrepreneurs
2) start-up
behaviours
3) behaviours
and strategy
Grinyer,
P.H.,
Mayes, D.
and
McKierman,
P.
1990 Change in
management
Production costs
Marketing
Okuzumi, H. 1990 Turnaround:
strategic
planning
Stopford,
J.M. and
Baden-
Fuller, C.
1990 Turnaround:
rejuvenation vs
turnaround
Boyle, R.D.
and Desai,
H.B.
1991 Analysis of
cauaes for
failure
Planning
Positioning
Policies
Procedures
Rules Systems
Risk
management
Product
development
Diversification
Niching
Market
development
Market
penetration
Gopal. R. 1991 Analysis:
1) Strenghts and
weaknessesof
the business
2) Market
3) Organizational
structure and
quality and
quantity of
manpower
4) Finances
Corporate and
strategic plan
Replacement of CEO
Streamline MIS
1) Funds
injection
2)
Centralization
of cash
management
3) Control
expenditure
4) Sale of
fixed assets
5)
Rescheduling
payments
6) Selective
orders
7) Value add
8)
Recruitment
ban and staf
reduction
9) Trading
Changes in
purchases and
recruitment
procedures
Ketelhohn,
W., Jarillo,
J.C. And
Kubes Z.J.
1991 1) Developed
clear longer
term vision
2) Doing things
new
3) Doing things
differently
4)Concentrate
on efficiency
improvements
Turnaround plan:
1) strategic process
2) appoint turnaround
specialist.
Stop cash
drain
409
Pant, L.W. 1991 Turnaround
financial:
1) pricing
policies
2) product line
3) advertising
4) R+D
5) investment
an production
capabilities
6) size
7) product line
diversification
Castrogiova
nni, G.J.,
Baliga, B.R.
and Kidwell
(JR), R.E.
1992 1) how sick is
the business
2) Stages of
decline
3) CEO
management
Plan around
stages of
decline
Management
replacement
CEO replacement
Chinta, R. 1992 Strategic Operations
Majaro, S. 1992 1)Develop a
vision
2) Develop a
mission
3) Identify and
develop shared
values
4) Managing
change
5) Develop
sustainable
competitive
advantage
6) New product
exploration and
development
Turnaround strategy
process and search
Robbins,
D.K. and
Pearce II,
J.A.
1992 Two-stage
turnaround response
model including
governance factors.
Retrenchment
Walker, R. 1992 Change in
management
Akason,
B.D. and
Kepler, J.P.
1993 Business review
v/s due
diligence.
1) Fully backed
findings
2)
Quantifications
3) Possible
solutions
4) Guideline on
managing a
review which is
also applicable
to turnaround
planning.
Strategic
decision making
in planning
phase.
Cascio,
W.F.
1993 Less bureaucracy
1) faster decision
making
2) smoother
communication
3) greater
entrepreneurship
Lower
overhead
Increase in
productivity
410
Castrogiova
nni, G.J.,
Justis, R.T.
and Julian,
S.D.
1993 Turnaround
strategies:
1) learning through
mistakes
Chowdhury,
S.D., and
Lang, J.R.
1993 External
financial
support
Fredenberg
er, W.B.,
Dethomas,
A. and Ray,
H.N.
1993 Return-to-normal:
growth
Crisis:
cash flow
Stabilization:
profit
Freeman,
S.J. and
Cameron,
K.S.
1993 1) Downsizing.
2) Differentiation
between decline,
reorganization.
Merrifield, D.
B.
1993 Disciplined
analytical
process
1) define
objectives
2) establish
management
3)
entrepreneurial
initiatives
1) internally
generated
developments
2) strategic alliances
3)joint ventures
4) consortia formation
5) minor equity
participation
6) licensing
arrangements
7) mergers and
acquisitions
Moncarz,
E.S. and
Kron, R.N.
1993 1) identify
problem areas
2) using
operational
analysis to
identify problem
areas
3) effectiveness
of management
team
4) analysis of
expenses
Pearce II, J.
A. and
Robbins,
D.K.
1993 1) change of
management
2) organizational
change and
decentralization
3) growth via
acquisitions
4) asset reduction
1) strong
central
financial
control
2) cost
reduction
3) investment
4) debt
restructuring
and other
financial
strategies
1) product/
market
reorientation
2) improved
marketing
Barker III,
V.L. and
Mone, M.A.
1994 1) Focus on
retrenchment and a
definition of a
turnaround situation.
2) Retrenchment not
a cause of turnaround
performance but
rather a consequence
of a steep
performance decline.
411
Bruton, G.B.
and Wan,
C.C.
1994 Operating
turnaround
through improved
efficiencies
Chowdhury,
S.D. and
Lang, J.R.
1994 Turnaround
plan
Strategic turnaround;
1) changing /
adjusting the current
business
2) grand, long term
moves /
diversification
3) vertical integration
4) new market share
initiatives
5) disinvestment
Revenue
generation
Operating
turnarounds
1) current conduct
of business
2 )short run
tactics
3) cost cutting
4) asset reduction
Cole, S.R. 1994 investigative
stage
Turnaround
plan:
Crawford, C. 1994 1) triage
2) holistic
apparoach
3) proper
diagnostics
Fredenberg
er, W.B. and
Bonnici, J.
1994 Informastion
types:
1) Cost analysis
2) Expense
analysis
3) Productivity
and human
resources
4) Productivity
and phisical
resources
5) Productivity of
market
financial analysis
6) Working
capital analysis
Hubbard,
G.,
Lofstrom, S.
and Richard,
T.
1994 Analytical stage
Pearce II,
J.A. and
Robbins,
D.K.
1994
a
Turnaround
strategy:
-
retrenchment
Pearce II,
J.A. and
Robbins,
D.K.
1994
b
Turnaround
strategy:
retrenchment
Arogyaswa
my, K.,
Barker III,
V.L. and
Yasai-
Ardekani, M.
1995 Successful
turnaround strategies:
1) retrenchment and
efficiency-
improvements,
2) critical
contingencies,
3) time-sequential
models complexity of
process.
412
Chen, Y.,
Weston, J.F.
and Altman,
E.I.
1995 Bankruptcy Process:
1) the time in
bankruptcy
2) the effects on
security prices
preceding, during,
and after the relevant
"bankruptcy
announcement" date.
3) default losses
4) application of
absolute priority
versus relative priority
rules.
5) managerial
incentives and the
effect on managerial
turnover and
executive
compensation
6) the role of
exchange offers
7) the performance of
the business after
emerging from
bankruptcy
proceedings.
Datta, S.
and
Iskandar-
Datta, M.E.
1995 Turnaround model:
Restructuring of:
1) management
2) financial
3) assets
4) governance
5) labour
Types of
financial
restructuring:
1) extension
of maturity
2) waive
covenants
3) provide
additional
debt
4) lenders
receive equity
/ warrants /
assets
5) reduce
payments
6) defer
payments
/interest
7) reduce
interest rates
8) pledge
assets
9) accept
restrictive
covenants
413
Detragiache,
E.
1995 Debate cost of
turnaround.
1) renegotiation
with creditors,
2) establish
worth as going
concern,
3) debt
forgiveness,
4) equity
participation,
5) address
agency problem
- debtors and
creditors,
6) Workout
proposal either
accepted or
rejected by
creditors.
7) Management
maintains
control of
business and
have "exclusive"
rights to
propose
restructuring
plan.
Gopinath, C. 1995 1) security,
2) severity.
3) cooperation,
4) turnaround
ability.
1) managerial
turnaround,
2) restructuring,
3) financial workout,
4) legal recovery,
5) exit.
Ketelhohn,
W.
1995 Turnaround plan:
- strategic
process
appoint
turnaround
specialist.
Turnaround plan:
1) strategic process
2) appoint turnaround
specialist.
Stop the
bleeding
Senbet,
L.W. and
Seward, J.K.
1995 1) Information
asymmetry
2) Conflicts of
interest and
coalition
formation,
Court supervised
methods of resolving
financial distress or
formal reorganization;
1) efficiency
characteristics of the
bankruptcy code,
2) empirical evidence,
3) direct costs,
4) indirect costs,
5) deviations from
absolute priority rule,
6) the role of market
mechanisms in formal
reorganizations,
7) pre-package
bankruptcies -
sect.1126(b).
1) debt
restructuring
and private
workouts,
2) potential
impediments
to privatization
of financial
distress,
3) free rider
problem -
exchange
offer,
4) empirical
evidence on
debt
restructuring,
5) interim
asset sale
market,
6) infusions of
new capital
414
Chowdhury,
S.D. and
Lang, J.R.
1996 Efficiency
1) better uses
of
organizational
resources
2) internal
processes
2.1) cost
cutting
2.2) asset
reduction
2.3) close
marginal
plants
2.4) down size
staff
2.5) rebuilt
inventory
slowly
2.6) stress-
cost cutting
discretionary
expenses
2.7) accounts
payable
2.8) inventory
level
2.9)
receivables
level
Entrepreneurial:
1) market
orientation
2) resource
acquisition
3) revenue
generation
4) customer
service
3) Turnaround
measure:
3.1) sales growth
3.2) cost of goods
3.3) employee
productivity
3.4) newness of
plant
3.5) plant level.
Detragiache,
E. And
Garella, P.g.
1996 Debt
restructuring-
multiple
creditors
Franks, J.
R., Nyborg,
K.G. and
Torous,
W.N.
1996 Focus on
comparing
plans of
distressed
businesss'
reorganization
1) within and
outside formal
bankruptcy
process,
2) creditors
claims,
3) deviation
from priority.
USA - Chapter
11, UK -
receivership
and Germany -
New Code
Jo, H. and
Lee, J.
1996 Turnaround:
Managerial/entrepren
eurial role
Martin, G. 1996 Leadership role in
mangement of
change
415
Barker III,
V.L. and
Duhaime, I.
M.
1997 Focus on strategic
change in turnaround
and the financial
context of
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Bruton, G.B.
Ahlstrom, D.
and Wan,
J.C.C.
1997 Rrecognise
problems
sooner business
recognizes the
decline, the
sooner the
turnaround will
begin - greater
the likelihood of
successful
turnaround.
1) Rretrench or
somehow stop the
bleeding,- cutbacks,
2) pursue efforts to
turn business around
3) management
replacement,
1) efficiency
problem =
operating
solution,
2) reconfiguration
of business =
strategic solution.,
Dialy, C.M.
and
Johnson,
J.L.
1997 Turnaround
CEO
role = financial
performance
2)power is typically
attributed to
legitimate authority
3) agency theory
Dodsworth,
J.A..
1997 Due diligence Turnaround
plan
Hart, O.,
Drago, R.
LaP., Lopez-
de-Silanes,
F. and
Moore,J.
1997 Not all
businesss will
survive the
procedure as
the winning
reorganisation
plan could be to
wind up and
dispose of
assets.
Focus on a new
proposal;
1) bankruptcy
procedure
2) structural
bargaining
Capital
markets that
does not
function well.
1) Inside
auctions of
RR.
2) Public
auction of RR
to attract
outside
capital.
3) Which
reorganization
offer to
accept.
416
Hubbard, J.
and
Stephenson,
K.
1997 Turnaround
plan:
chapter 11
approach
1) type of claims
2) all classes of
creditors
3) distribution
options
Olivier, J.E.
and
Fredenberg
er, W B.
1997 2) situation
analysis
3) emergency
action
Management change 1) business
restructuring
2) return to
normal
Pandit, N.R. 1997 Recovery
Strategy stage:
1) Causes of
decline
2) Severity of the
crisis
3) Attitude of
stakeholders
4) Industry
characteristics
5) Changes in
macroeconomic
environment
6) Business's
historical
strategy
Recover Stategy
Content:
1) Operational level
actions
2) Strategic level
actions
3) Recovery Strategy
Process:
4) Management
change stage
5) Retrenchment and
stabilisation stage
6) Growth stage
Sreenivas, I.
S.
1997 Turnaround
management
Winn, J. 1997 Turnaround:
growth
Al-Shaikh,
F. N.
1998 Conduct
feasibility
studies,
Support from
authorities
interested.
1) Reduction
of tax liability,
2) licences by
government,
3) government
subsidies,
4) export
grants
5) government
protection.
Ari?o, A.
and de la
Torre.
1998 Data collection
and analysis
417
Barker III,
V.L. and
Mone, M.A.
1998 Focus on managerial
context of
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) Changes in
organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Brenneman,
G.
1998 Turnaround
strategy:
1) corrective
action - getting
all done fast,
right away and
all at once.
2) can't afford to
think too much
during a
turnaround,
3) time is tight -
money is tighter,
4) no time to
devise elegant
and complex
strategies,
5) write down
everything that is
wrong,
6) change
culture - fun,
action and
restore
employees trust,
7) strategy to
understood and
coupled with key
measures,
1
1) go-forward
plan,
2) implement
plan
immediately -
sell to co-
workers,
3) track cash,
4) convince
creditors of go
forward plan,
5) discuss
creditors
contribution to
exercise plan,
6) plan
restructuring of
debts,
7) replace
management
teams,
8) lead people -
don't manage
them,
9) present a
muted front,
10) cut
bureaucracy
and costs,
11) chose the
right people,
1) create new culture,
2) do change full and
fast,
3) reduces costs,
4) test your product,
5) take care of best
customers,
6) create new image,
7) allow employee to
sort out strategy,
8) strong leadership
is imperative,
9) let people control
their own destiny,
10) superior
communication.
Hotchkiss,
E.S. and
Mooradian,
R.M.
1998 Mergers and
acquisitions
418
Lee, J. 1998 Turnaround:
Corporate
governance
Pearce II,
J.A. and
Robbins,
D.K.
1998 Strategic plan
include
bankruptcy
Strategic plan include
bankruptcy
Smith, W.J. 1998 define the
change plan
1) Change the
management
2) retrench for control
3) develop and re-
posture
4) return to growth
Zhang, C. 1998 Due diligence Turnaround
plan:
Bibeault,
D.B.
1999 Evaluation stage Turnaround
plan;
1)Turnaround
tactics
2) management
change stage
3) emergency
stage
4) stabilization
stage
5) return to
normal stage
1)Emergency
strategy;
liquidation/disinvestm
ent,
productelimination,
head
count cuts
2) Stabilization -
disinvestment,
product-mix
enhancement,
improve operations,
reposture the
business
3) Return-to-growth -
acquisitions, new
products, new
markets, increase
market position
Emergency
strategies;
disinvestment
cash flow
analysis and
control, debt
restructuring,
working
capital
inprovements,
profitability
analysis, cost-
reduction
suppor,
"creative"
acounting
elimination.
stabilization-
asset
redeployment,
retention
divestment
packages,
increasing
lisuidity,
financial,
liquidity
improvement,
balance sheet
clean-up,
control system
developement
, managerial
accounting
developement
. operations,
profit
improvement
programs,
developement
of
manaufacturin
g efficiencies,
1) Operations-
shutting down, 2)
reducing
manpower,
3) reducion
inventory
4) investment,
5) controlp
urchasing,
increaseing
productivity.
marketing-
pricingproduct
line,
promotion,
6)
place,.employees
in divested ops,
execurive
cutbacks, mid
level
cutbacks,rank-
and-file head
count reduction.
419
pricing,
promotion,
place
(distribution0
improving
people mix.
organizational
conflict,
compensation
plans to
support
turnaround
effort, get
people to
C39think
profit) - return-
to growth-
asset
redeployment,
creative
dinancing
schemes, tight
financial
discipline,
special
techniques,
developement
expenditures,
mamagement
by objectives,
marketing
starategies
and tactics,
management
developement
420
Bibeault,
D.B.
Objective addition to
stabilization
controls,
quarterly
planning
reviews.G38-
stabilization-
asset
redeployment,
retention
divestment
packages,
increasing
lisuidity,
financial,
liquidity
improvement,
balance sheet
clean-up,
control system
developement
, managerial
accounting
developement
. operations,
profit
improvement
programs,
developement
of
manaufacturin
g efficiencies,
pricing,
promotion,
place
(distribution0
improving
people mix.
organizational
conflict,
compensation
plans to
support
turnaround
effort, get
people to
think profit
2.3.3) - return-
to growth-
asset
redeployment,
creative
dinancing
schemes, tight
financial
discipline,
special
techniques,
developement
expenditurem
amagement
by objectives,
marketing
starategies
and tactics,
management
developement
421
programs.
Bibeault,
D.B.
2.4) review
and control.
2.4.1) -
emergency-
hands-on
managenment
, daily and
weekly cash
reports
2.4.2) -
stabilization-
managerial
accounting
emphasis,
weekly
operations re-
reviews,
monthly profit
and loss
reviews
2.4.3) - return-
to growth- in
addition to
stabilization
controls,
quarterly
planning
reviews.
422
Borain, A. 1999 Stabilization-
profit
improvement,
earn acceptable
ROI
Bowman,
E.H., Singh,
H., Useem,
M. and
Bhadury, R.
1999 1) Selling old
lines to acquire
new lines,
2) repurchasing
stock and
introducing
business units
to downsizing
work forces.
Three methods of
restructuring:
1) portfolio
restructuring,
2) financial
restructuring,
3) organizational
restructuring.
Accounting
performance.
Market performan
Castelli, V.
and
Kontoyianni
s, I.
1999 Analysis Turnaround
process:
1) Use of
simulations
2) Monte Carlo
3) Use of data
sets.
Longenecke
r, C.O.,
Simonetti,
J.L. and
Sharkley,
T.W.
1999 Turnaround strategy:
1) increase voice of
front-line
management
personnel in
organizational
improvement efforts
2) provide front-line
leaders with clear and
unambiguous goals
that do not lose sight
of profitability and
customer satisfaction.
3) effective planning
and real change go
hand in hand.
4) develop
organizational
proficiency at
corrective action and
make it easier for
people to get their
work done.
5) do not
underestimate the
power of highly
trained and motivated
people
6) improve effective
communication
7) focus on
leadership
Whitaker,
R.B.
1999 Turnaround:
1) change in
performance
2) change in
market value
Castrogiova
nni, G.J. and
Bruton, G.D.
2000 Turnaround
planning:
reconsidering
the role of
retrenchment.
Retrenchment
:
423
Cozijnsen,
A.F.,
Vrakking,
W.F. and
Van Ifzerloo,
M.
2000 Turnaround
Plan:
1) planning
objectives
2)
organizational
3) increased
profits
4) increased
turnover
5) increased
efficiency
6) improved
effectiveness
7) higher
productivity
8) increased
market share
9) improved
environment
10) quality
improvement
11) Human
objectives
12) reduction of
staff turnover
13) increased
employee
satisfaction
14) enhanced
motivation of
employees
15)-
improvement of
work
environment
Harker, M.
and
Sharma, B.
T
2000 Is there a
business?
1) destiny
planning
2)
developement
Turnaround actions:
1) conditioning
factors
2) action/interactional
strategies
2.1) inquiry
ncouragement
2.2) empowerment
2.3) developing
destiny
2.4) communicate
destiny
2.5) develope leaders
2.6) build respect and
trust
2.7) achieve and
reward
2.8) sustain and
strecth organization
3) consequences
3.1) destiny
developement
3.2) enhanced
involvement
3.3) empowerment
3.4) commitment
3.5) leader
amplification
3.6) develope
respect/trust
424
Kisfalvi, V. 2000 Turnaround strategy:
1) survival
2) autonamysuccess
and achievement
3) recognition
4) action
Pandit, N.R. 2000 Cost of
turnaround
Shepherd,
D.A.,
Douglas,
E.J. and
Shanley, M.
2000 Turnaround
psychology
risk reduction
strategies
Theriot, A.,
Roopchand,
D., Stigter,
H. and
Bond, H.
2000 Analysis:
1) Identification
of all elements,
design,
operations,
maintenance,
external
influencing and
factors that will
adversely impact
on business
plan.
2) Optimization
of planned
design,
operations,
maintenance
1) Input to
operations plan
that will manage
and control
residual risks to
plan
2) All to be
translated into
economic
impact on
turnaroud
project
Balgobin, R.
and Pandit,
N.
2001 1) Decline and
crisis,
2) Triggers for
change,
3) Stuation
analysis,
1) Recovery
strategy
formulation,
2) Developed a
turnaround plan,
3) Create a
crisis before
one hits you.
Turnaround process;
1) Retrenchment and
stabilisation,
2) Return to growth.
3) Strategy execution,
3.1) gaining control,
3.2) managing
stakeholders, and
improving motivation.
3.3) manager
changed with
turnaround;
3.4) be alert to the
possibility of decline,
425
Barker III,
V.L.,
Patterson,
P.W. and
Mueller,
G.C.
2001 Focus on managerial
context of
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) Changes in
organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Carrol, J.S.
and
Hatakenaka,
S.
2001 Turnaround:
staff issues
Chandra, V.,
Moorly, L.,
Nganou, J-
P.,
Rajaratnam,
B. and
Schaefer, K.
2001 Turnaround
strategy
formulation
1) cost of
turnaround.
2) SMME
accessibility
Cohen, J.F. 2001 Turnaround
Importance of
strategic
planning
Cook,
G.A.S.,
Pandit, N.R.
and Milman,
D.
2001 1) Informal
arrangements
2) Rehabilitation
structures
outlined by law
3) Liquidation
Ireland,
R.D., Hitt,
M.A., Camp,
S.M. and
Sexton, D.L.
2001 Turnaround
planning:
strategic
management
action
Mueller,
G.C.,
McKinley,
W., Mone,
M.A. and
Barker III,
V.L.
2001 Turnaround:
retrenchment
and practitioner
role.
426
Sudarsanam
, S. and Lai,
J.
2001 Turnaround
restructuring
strategies
1) operational
restructuring
2) asset
restructuring
3) asset sales
4) acquisitions
5) internal
capital
expenditure
6) managerial
restructuring
7) financial
restructuring
8) dividend cut/
omission
9) equity issue
10) debt
restructuring
Turnaround strategy:
1) restructuring
strategies
2) operational
restructuring
3) asset restructuring
4) asset sales
5) acquisitions
6) internal capital
expenditure
7) managerial
restructuring
1) financial
restructuring
2) dividend
cut/ omission
3) equity issue
4) debt
restructuring
United
Nations
General
Assembly.
2001 Plan and other
proposals
Barker III,
V.L. and
Barr, P.S.
2002 Focus on strategic
reorganization in
turnaround and the
financial context of:
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Bergstr?m,
C.,
Eisenberg,
T. and
Sundgren,
S.
2002 Focus on security
priority in turnarounds
and creditor
behaviour.
Discussion on Finnish
reorganisation law.
427
Brockman,
P. and
Turtle, H.J.
2002 1) Method to
value businesss,
2) Corporate
security values,
legally binding
barriers and
corporate
business
covenants
.
Collard, J.M. 2002 Diagnostic stage
1) Fact-finding:
2) Is busniess
viable
3) Purpose of
the business
4) Should it be
saved?
5) Why should it
be saved?
6) Core business
7) Sufficient
cash resources
8) Management
leadership
Chose course of
action
Cross, L. 2002 Analysis 1) Actual
restructuring
measures
2) Measure to
ensure long-
term profitable
growth.
1) Strategy to follow
2) Steps in
turnaround
2.1) devastating
events
2.2) call for help
2.3) turnaround
begins
2.4)stabilization
2.5) transformation
Frese, M.
Brantjes, A.
and Hoorn,
R.
2002 Opportunistic
scanning of
environment
Complete
planning
Critical point strategy Reactive
strategy
Reactive strategy
Ghosn, C. 2002 1) acquisition
diferences
2) management
change
3) cultural challenges
Disinvesting
"poor"
investments
focue on
performance
Hausman,
M.J.
2002 Due-diligence
Hill, J.
Nanecarrow,
C. and
Wright, L.T.
2002 Planning
consederation:
1) relocation
2) obtain
additional
finance
3) renowned
sales effort
4) restructure
staff
5) change
product profile
6) other creative
solutions
7) dabble in
specific
marketing
techniquies
8) investment in
equipment and
428
physical
resources
James, D,N. 2002 1) Routine for
rescue;
2) Commission a
solvency report,
Re-establish
company as
going concern,
1) selling of business
2) find hidden heroes,
3) if necessary sweep
the old leaders,
4) take decisions -
even wrong ones,
1) Focus on
turnaround
experiences.
2) Turnaround
actions:
3) generate
more cash,
4) help the
company to
stay solvent.
5) grab the
chequebooks,
6) get more
money than
you think you
need.
Pitchson, M. 2002 Profile:
1) Business
model and initial
evaluation
2) Initial cash
position
Future funding
potential
Goal to bring
company to
viability
Management review 1) Cash burn
2) Debt
negotiation
3) Results
Sprayregen,
J.H.M and
Friedland,
J.P.
2002 Pre-packaged
turnaround
Booker, M. 2003 Mamgement strategy Emergency-
survival return
to positive
cash flow
Borch, O.F.
and Brastad,
B.
2003 1) Return-to
growth- growth
and
developement,
growth in
market share
2) Business
strategy:
2.1) competitive
positioning,
2.2)
organizational,
2.3) political.
Strategic factors:
1) dynamic
development
capability,
2) cooperation
capability,
3) international
network capability,
4) political influence,
5) production
flexibility,
6) branding
differentiation
7) promotion
differentiation,
8) cost leadership,
9) niche focus.
Resource focused
organizational
sub-strategy.
1) competence,
2) routines,
3) personal
commitment, and
working culture.
429
Bruton, G.B.
Ahlstrom, D.
and Wan,
J.C.C.
2003 Retrenchment
:
Labour
Assets
Products
Overhead
Evans, J. 2003 Resource
allocation
Fetterman,
W.H.
2003 Turnaround
situation
analysis:
1) Introduction
and operational
understanding.
2) Assessment
Turnaround
plan
compilation.
1) New set of
operating
assumptions
2) Fewer
facilities
3) Different
management
new production
practices
4) Revised
process flow
5) Financial
requirements
1) management
change,
2) emergency action,
3) business
restructuring
4) return to normal.
Glantz, M 2003 1) Determine
why company is
filing for
Chapte11
- overleverage
- operating
performance
problems
- lawsuits
- get out of
leases of
contracts
- lack of
alternative
financing
2) Evaluate
depth and quality
on management.
- management
capacity and
depth to focus
on bankruptcy?
- maintain core
business
3) Determine
viability of
business
- impact of
negative
publicity
- will business be
able to emerge
out of Chapter
11?
- asset values as
going concern
4) Review
business's
prepetition
liabilities.
- review most
recent balance
sheet.
Analise
companies
projections
1) detailed
projections and
balancesheet
flows are
neceesry to
develpoe cash
flow projections.
2) estimate
borrowing
requirements
3) reconstruct
balance sheet
4) reconsider
position of debt
5) reconstruct
income
statement
6) develope pro
fprma what if
statements
7) compare
payments made
previous year
8) include
extras
9) analise
collateral and
liquidation
10) estimate
liquidation value
11) worst case
liquidation -
debt not to be
greater than
worst case
12) audit
company's
systems
integrity.
430
- determine
secured and
unsecured
liabilities
- secured vs
unsecured
securities under
chapter 11
5) assets
- most recent
assets
- determine
encumbered and
unencumbered
assets
- determine
priority of
securities
Glantz, M. 2003
Harvey, N. 2003 1) Evaluate
management
effectiveness
2) Install a
management
audit to
appraise: the
information —
the system and
control
procedures
— the
organisation
structure
— the technical
and
management
competence
1) Change the
management
system and
routine
2) Produce
integrated long-
term and short-
term plans
Change the
organisation structure
1) Cut salaries
and indirect
wages
2) Cut running
expenses
3) Cut fixed
costs
4) Change the
organisation
structure
nstall tight
budgeting: to
cut marginal
expenses, to
promote
marginal
opportunities
and to make
interactive
savings
5) Install the
tight budget
sequence
throughout the
company at all
levels
Buy services from
outside: research,
product
development,
data processing,
accounting,
graphics,
promotion, sales
support, public
relations, library
information,
market sta¬tistics,
personnel,
advertising, etc.
Use sources of
outside data as
well as internal
Figures
431
Harvey, N. 2003 Financial
accounting
(business
infrastructure)
• Correct
accounts for
inflation;
watch
machinery
deprecia¬tion,
stock
valuations,
land and
property
valuations, the
value of
borrowings
• Negotiate
credit terms
through
purchasing
department
• Delay
payment to
creditors
• Pursue
overdue
accounts
through better
control, better
communicatio
ns
• Negotiate
terms of
business
strictly
through sales
calling on
debtors'
bought ledger
departments
and financial
controllers
• Speed up
cash
management
by stage
payments,
rapid bank¬-
ing, flexible
sources of
finance, fast
invoicing
• Improve
security
• Cut
departmental
salaries and
wages
• Cut
departmental
expenses
• Cut
departmental
fixed costs
• Reduce
capital base
Purchasing:
(procurement)
• Identify the
company's
purchasing
Decision Making
Unit
• Examine over-
specification
• Improve supplier
search and
evaluation
procedure
• Promote
purchasing
function to
contribute to
management
decisions
• Apply a
weighting system
to purchases:
Degree of
essen¬tiality of
product
— Level of risk in
purchase
— Proportionate
cost against total
purchases
• Apply a
continuous
evaluation of
offers
• Concentrate
upon the high
value materials
and components
• Apply regular
stock checks
• Apply better
quality control on
goods inward
Survey existing
suppliers for cost
reduction ideas
Take discounts
for prompt
payment
432
through use of
flexible
assets,
leasing,
bought-out
services
Activity based
costing
• Replace
historical
accounting
with standard
costing
• Question
established
rule of thumb
allocations
• Use more
flexible
costing
approach
• Break down
variances
further
• Faster
reconciliation
with financial
accounts
• Cost
products and
product
groups down
to net profit
• Cost control
materials:
identify
wastage,
rejects,
breakages
systems
Harvey, N. 2003 • Introduce
cost
accountant to:
purchasing
department
and marketing
department
• Cost the
following to
net profit:
large orders,
customers,
markets,
depots and
sales areas
Negotiate new
terms
Alter product
design to allow for
standard parts
purchasing
Improve stock
control and re-
ordering system
Involve
purchasing in
product
elimination
decisions Place
guaranteed
orders in
exchange for bulk
prices Improve
supplier
evaluation for:
failure prevention
costs
— accident costs
— level of service
— accuracy
433
Harvey, N. 2003 • Allocate
factory
indirect costs
to products
• Alter stock
valuation
standards and
correct for
inflation
• Set labour
cost
standards
closer to
realised costs
than to ideal
• Identify
highly
productive
labour costs
• Alter transfer
pricing
Reduce
labour costs:
reducing
frequency of
performing the
task
— identifying
the highly
productive
tasks
— change
equipment or
personnel
— eliminate
idle time
— eliminate
overlapping
work
— eliminate
duplicate work
— eliminate
overtime
— establish
standards of
performance
Use supplier
development
techniques: in key
materials areas
— in high costs
areas
— in situations of
doubtful supply
— for unusual
demands
— for too distant
suppliers
— for non-
standard parts
— for excess
production
capacity
434
Harvey, N. 2003 Use less
space by
condensing
operation
Apply method
and work
study to
activities
Cut plant and
space costs
Cut indirect
salaries and
wages;
engineering,
other services
Replace fixed
costs with
flexible costs;
use outside
services
instead of
high cost
internal
services
Apply job
enrichment
programme to
work
Apply
productivity
bargaining:
incentive
schemes —
job evaluation
— fixed term
contracts
— labour
flexibility and
mobility
— change
working
methods A
When materials
are in short
supply consider
techniques of
purchasing:
coercion,
inducement,
education,
persuasion
Production
(operations)
Check tolerances
in specifications
and widen
Check quality
control limits and
widen
Limit disruption
to.work flow
Reduce prime
costs
Introduce value
analysis to
examine 'use' and
'cost' values
Introduce value
analysis engineer
to purchasing
depart¬ment
Introduce value
engineering to
new product
development and
to process
development
Kanter, R.M. 2003 Turnaround
plan:
The psychology
of turnaround:
- promoting
dialogue
- engendering
collaboration
- inspiring
initiative
Kor, Y.Y. 2003 Turnaround strategy:
1) management
replacement,
2) focus on
management,
3) retention of
management
experience,
4) management
competence.
Maitlis, S.
and
Lawrence,
T.B.
2003 Turnaround
strategy:
1) engaging with
and taking
position on the
1) assigning
responsibility
and
accountability
2) constructing
435
issue at hand
2) defining the
concept
the objec
Miller, D.,
Steier, L.
and Le
Breton-
Miller, I.
2003 Turnaround
plan:
what to look for
in family
business.
Riana, B,.
Chanda, P.
and Metha,
D.P.
2003 Turnaround:
plan, steps,
process.
1) leadership to
provide vision,
induces
creativity,
challenge
existing
assumptions
2) support by
financial
institutions
3) gaining trust
from suppliers
4) maximise
productivity
5) maximise
capital
utilisation
6) manpower
rationalization
7) stringent
working capital
management
8) stretching
targets-
maximise asset
capacity
9) streamlining
systems
10) inveting in
technology
upgrading
11) financial
restructuring
12) low cost
regime
Leadership role in
management of
change
Stop the
bleeding
Scherrer,
P.S.
2003 1) analysis of the
situation, one
week to one
month
2) Accuracy of
financial
statements
3) Determine
true value
4) Investigate
budgets and
projections
Creation of a
plan, one to two
weeks;
Strategic turnaround
redefines the
business
implementation of the
plan, six months to
one year
4) stabilization of the
business: six months
to one year
5) return to growth of
the business, one to
two years
Financial
turnaround
1)
Restructures
the financial
operation.
2) Revenue
generation
3) Cost-
cutting Asset
reduction
1) Operational
turnaround
changes
operations
2)
Productivity/mark
et refocusing
Anon 2004
a
Turnaround:
1) different skills
set requirement
2) skilled team
of individuals
436
Anon 2004
b
Turnaround
plan: (court
approval)
1) acting in
good faith
2) probability of
a viable
proposal if
extention
granted
3) no creditor
would be
materially
prejudiced
Anon 2004
c
Investigative
stage
Plan implementation.
Anon 2004
d
Analyzing the
business and/or
strategic plan
Plan to
determine how
business
objectives can
be met
1) stabilizing
the situation
by reducing
cash losses
and
increasing
cash flow
2)
repositioning
the company
through
financial
restructurion
Strengthening the
business through
orgznizarional
restructuring
Anon 2004
e
Turnaround
plan: creditor
intervention
and non-
approval.
Chapter 11.
Ballow, J.J.,
Burgman, R.
and Molnar,
M.J.
2004 Assesment of
asset types to
determine real
value
Busby, J.S.,
Hibberd,
R.E.,
Mileham,
A.R. and
Mullineus,
G.
2004 Turnaround
analysis
Craighead,
C.W.,
Karwan,
K.R. and
Miller, J.L.
2004 Turnaround strategy-
service orientation:
1) antecedents to
recovery expectations
2) loyalty
3) quality
4) severity
5) guarantees
437
Gaglio, C.M. 2004 Turnaround strategy:
1) Cognitive response
to change.
2) Optimal allocation
decision.
3) Entrepreneurial
behaviour.
4) Quick to grab and
comprehend new
opportunities.
5) Shy away from
trouble time - defence
meganism.
Gilley, K.M.,
McGee, J.E.
and
Rasheed,
A.A.
2004 Outsourcing
Gudmundss
on, S.V.
2004 Turnaround:
success factors
in airline - in
absence =
warning sign
Hershkowitz
, B.
2004 Valuation of
collateral
Huson,
M.R.,Malate
sta, P.H.
And Parrino,
R.
2004 Turnaround
plan:
1) management
succesion and
performance
CEO replacement
Kow, G. 2004
a
Sound
understanding of
capabilities
Turnaround strategy
elements:
1) an appropriate
strategy vision
2) an organizational
structure
3) a set of business
processes
4) a human resource
architecture that will
support the vision
5) technological
innovation that will
nourish organization
and enhances
product range
6) organizational
cultures that will
accept and commit to
effort.
Kow, G. 2004
a
Turnaround steps:
turning events to
structure
Lohrke, F.T.,
Bedeian,
A.G. and
Palmer, T.
B.
2004 Management
role:
1) quickly and
accurately
2) determine the
cause of
business
performance
lapse
Implement
decision
necessary for
prompt
recovery/turnaro
und
1) Process;
1.1) phase 1
1.2) phase 2
1.3) phase 3
2) Psychology of
turnaround
2.1) psychological
response
438
Longman, A.
and Mullins,
J.
2004 Turnaround
similarities with
project
management
McCarthy. 2004 Turnaround
dimentions:
1) people
2) change
Nutt, P.C. 2004 Turnaround
tactics:
1) idea
2) benchmarking
3) solicitation
4) innovation
5) innovation-
objectives and
multi options
Orme, D. 2004 1) situation
analysis
2) implement
emergency
action
Turnaround stages:
1) management
change
2) business
restructuring
3 ) return to normal
Turnaround
psychology
Sauner-
Leroy, J-B.
2004 Turnaround
psychology:
1) risk taking attitude
under uncertainty
2) Mangersment
3) banks/lemders
4) trade creditors
439
Shook, S.R.,
Vlosky, R.P.
and
Kallioranta,
S.M.
2004 1) expand market
reach
1.1) new markets
1.2) greater
market
penetration
2) increased
market velocity
2.1) shorter order
cycle due to suply
chain collabortion
3) achieved
competitive
advantages
3.1) improved or
enhanced
custome services
4) operational
efficiencies
4.1) reduced
sales cost
4.2) reduced
inventory
4.3) reduced
search time
4.4) lower costs
alternative to EDI
4.5) collaboration
5) scale and
spend
aggregation
5.1) economies of
scale
5.2) increased
leverage in
negotiatons
6) transaction
automation
6.1) reduced
order processing
costs
7)
disintermediation
7.1) lower prices
7.2) greater
power in the
supply chain
Walshe, K.,
Harvey, G.,
Hyde, P.
and Pandit,
N.
2004 Planning
phases
1) recovery
strategy
formulation
2) retrenchment
and stabilisation
3) return to
growth
Turnaround
interventions
1)
replacement
2)
retrenchment
3) renewal.
440
Wickham,
P.A.
2004 Turnaround
strategies:
1) business continues
to exist as a legal
entity under the
control of the
entrepreneur
1.1) business
performs well
financially but does
not meet the social
and self-
developement needs
of the entrepreneur
1.2) business fails to
achieve set of
strategic objectives
1.3) the busienss fails
to perform as well as
was planned but is
financially secure
1.4) the business fails
to perform as well as
was planned, and
needs additional
finance
2) the business
continues to exist as
an independent entity
but the entrepreneur
loses control
2.1) the business is
taken over as a going
concern by new
management
2.2) the business is
taken over with
restructuring
3) the business does
not continue to exist
as an indipendent
entity.
3.1) the business is
taken over as a going
concern and
absorbed into another
company
3.2) the business is
broken up and its
assets disposed of
Anon 2005 Analyzing the
situation
Turnaround strategy:
1) changing the
management
3) implementing and
emergency action
plan
4) restructuring the
business
5) returning to normal
Appel, M. 2005 Investigative
1) final business
review
determine
potential for
2) successful
turnaround
Determine key
turnaround
initiatives
1) Implementation of
key turnaround
initiatives
2) Selling the
company
441
Brodsky,J.A. 2005 Analysis:
1) What was
each business
2) Long and
short term issues
3) Have a
winning model
4) Deal on the
hook for funding
5) Should
funding still be
provided?
6) Structure of
organization
7) Reporting
lines
8) Employee
profile
9) Business plan
for each asset
Establish
business plan
for restructure
1) Retrenchment
2) Shut down on on
productivity
Safeguard
cash
resources
Funding
opportunities
Brown, S. 2005 Assessment of
business
Plan to
restructure and
turnaround
1) Alignment of
performance
incentives
2) Improving financial
controls
3) Enhancing
manufacturing
operations
1) Reduce
costs
2) Squeeze
working
capital
3) Generate
near-term
cash
4) Raise cash
by selling
assets
5) Refinance
senior debt.
Burbank,
R.K.
2005 Situation
analysis
1) management
change,
2) emergency action,
3) business
restructuring
4) return to normal.
Carapeto,
M.
2005 Turnaround
strategy:
Formal vs.
Informal
Dobson, P. 2005 Assessment of
talent
Management
1) development of
talent
2) support
existing senior
managers
Francis, J.D.
And Desai,
A.B.
2005 Outside support Expense
retrenchment
Operational
restructuring
Fraser, J.A. 2005 Debt
restructuring
Garvin, D.A.
and
Roberto, M.
2005 Setting the
stage:
communication
Creating the
frame:
plan and
acceptance
1) Managing the
mood:
2) Reinforcing good
habits
3) values
442
Hass, W.J.
and Pryor
IV, S.G.
2005 1) management must
have the enthusiasm
that inspires people
2) everyone in the
organization must
have a strong bais for
action
3) understanding to
cunsumer fully and
clearly
Jas, P. and
Skelcher, C.
2005 Turnaround in public
organization:
1) more complex
than business
environment
2) closure and
takeover risk
3) performance
measurement.
Kam, J. 2005 Turnaround
introduction
1)
Environmentail
scanning
2)
Managerialbeha
viour traits
Kiessling,
T.S. and
Richey, R.G.
2005 Turnaround
plan:
- acquisition
Kim, W.C
and
Mauborgne,
R.
2005 Turnaround
strategy:
Principles of
Blue Ocean
strategy
1) Formulation
principles
1.1) reconstruct
market
bounderies
1.2) focus on
the big picture,
not the numbers
1.3) reach
beyond existing
demand
1.4) get the
strategc
sequence right
Execution principles
1) overcome key
organizational
hurdles
2) build execution into
strategy
3) risk factor each
principle alternatives
4) search risk
5) planning risk
6) scale risk
7) business model
risk
8) rick factor each
principlel alternative
1) organizational
risk
2) management
risk
Four actions
framework
1) reduce
2) eliminate
3) create
4) raise
Loubser, A. 2005 Turnaround:
staff retrenchments
Mellahi, K. 2005 Turnaround strategy:
1) board
2) management
3) psychology of
turnaround
Morris, R. 2005 Turnaround
plan:
Drivers
1) time as driver
2) secured
lender driver
stakeholder
driver
3) trade creditor
443
driver
4) management
integrity
Muir, K. 2005 Turnaround
cost of
turnaround
Probst, G.
and Raisch,
S.
2005 Turnaround strategy:
1) sustainable growth
2) stable change
3) healthy
orgznizational culture
4) keeping the
balance
Turnaround
psychology
how to prevent failure
Rasheed,
H.S.
2005 Turnaround
strategies:
1) growth
2) retrenchments
3) strategy
formulation
Sargeant,
J.R.
2005 1) redefine rates of
management
2) upskill
management
Turnaround
strategy:
1) restructure
finance
agreements
Sheppard,
J.P. and
Chowdhury,
S.D.
2005 Turnaround
strategies:
1) decline
1.1) K-extinvtion
1.2) R-extinction
1.3) stimulus
2) response initiation
2.1) domain definition
2.2) scope overlap
2.3) strategic
contours
3) transition
3.1) elapsed time
3.2) resource
commitment
3.3) policy/programs
3.4) structure and
rewards
3.5) people
4) outcome
4.1) success/failure
444
Smith, M.
And Graves,
C.
2005 Distressed state:
1) severity
2) firn size
3) free assets
available
4) cause of
decline
5) competitive
position
Decline stemming
strategies
1) stakeholder
support
2) efficiency
3) internal climate
and decision
processes
4) stability
5) recovery strategies
adopted
6) maintenance of
efficiency
7) entreprneurial
reconfiguration
8) extent of recovery
turnaround
Winer, P.,
Levenstein,
E. and
Gewer, D
2005 Sale of business or
part as going concern
Turnaround
steps:
1) debt
forgiveness
2) debt
resheduling
3) debt equity
convertion
Boyne, G.
and Meier,
K.
2006 Modelling turnaround:
1) retrenchment,
2) repositioning,
3) reorganization.
Chathoth.
P.K., Tse,
E.C. and
Olsen, M.D.
2006 Stages in
turnaround:
1)
retrenchment
2) recovery
Cocq, M.,
Legoux, F.,
De Loe, P.,
Oka, G. and
Zorn, A.
2006 Liquidation and
going concern
value
Plan;
1) replace slow
moving
inventory with
higher turn
inventory
2) closing under
performing
stores
3) closing
distribution
centres
4) reduce SG+A
cost
5) value entity-
liquidation and
going concern
value
6) Proposed
Plan:
6.1) strategy
6.2)
implementation
6.3) free cash
flow valuation
Couwenberg
, O. and De
Jong, A.
2006 The role of banks in
turnaround
445
Falkenberg,
A.D. and
Glamheden,
H.A.
2006 Turnaround:
1) management
replacement /
favourable
composition of top
management teams.
2) tenure in top
management tend to
be negatively related
to turnaround
success,
3) management;
functional
heterogeneity /
functional
Farris,B.,
Lee, H.,
Maitrejean,
J.,Schauer,
J. And
Seyffert, N,
2006 1) Aggresive
cost control
2) Process
control
3) Maximise
return on
invested
capital
1) Customer -
faced approach to
growth
2) Company-wide
focus on
technology
3) Energized
associates /
employees
Filatotchev,
I. and Toms,
S.
2006 Asset valuation. Realignment.
Hart, M.L. 2006 Turnaround
plan:
- customer
retention
Holcomb,
T.R. and
Hitt, A.H.
2006 Strategic outsourcing Turnaround
strategy:
outsourcing
Lewin, B.P. 2006 Turnaround:
1) collaterized
debt & asset
specificity
Lewin, B.P. 2006 Turnaround
plan:
World bank
requirements;
Characteristic
s for
successful
out-of-court
financial
restructuring
1) number of
main banks
2) inability to
service debt
3) negotiate
an
arrangement
4)
sophisticated
refinancing
5) can be swift
move to
insolvency law
6) benefit for
all through
negotiation
7) no need for
446
relief from
trade debt
8) neutral or
favourable tax
treatment
Pearce II,
J.A. and
Michael,
S.C.
2006 Turnaround step
to be taken -
recession:
1) position the
company in
multiple markets
and geographies
2) plan to
confront
declining sales
1) promote the
business's
products and
services
2) maintain
advertising
3) introduce new
products
4) find
alternatives to
price cuts
5) attract new
customers
6) prepare for
economic
recovery
World Bank 2006 Reorganization
plan and
Process
Agarwal, V.
and Taffler,
R.
2007 Turnaround
assessment:
contingent
claims valuation
methodology.
1) Market share
%.
2) Share of
defaulters%.
3) Average credit
spread%.
4) Revenue in
monitory terms.
5) Loss in
monitory terms.
6) Profit in
monitory terms.
7) Return on
assets %.
8) Return on
risk-weighted
assets%
447
Benbrahim,
H., Bozotto,
R., Grossi,
L., Teillon,
G. and Ure,
J.
2007 1) The company
history and
situation analysis
data.
2) Head office
expenditure will
have to be cut
down to
acceptable
levels.
3) Recommend
that
management re-
assess this area
more
aggressively on
a value add
basis.
1) Focus on
Turnaround
plan and on
increasing
shareholders
equity and
returning
business to
profitability.
2) The focus on
increasing
shareholders’
equity and
returning to
profitability.
Co must take
immediate action to
close its
underperforming
footprint.
1) Business
will continue
to rely on
external
financing for
the
unforeseeable
future.
2) The
financial
reflects a
dismal
performance
for the last
fiscal.
3) The way
financial
reporting is
managed is
not conducive
to effective
cash flow
management.
4) The
outlying
offices are
treated as
income
centres only
and thus
distort the real
contribution
from these
business
units.
Blinkenberg,
C., Kadakia,
s., Yao, M.
And
Zangrilli, P.
2007 Analysis of the
business:
1) Financial
2) Market
Position
3) Operation
4) Strategy
5) Management
6) Corporate
Governance
7) Non-market
factors
Management
strategy and
benchmarks.
Byers, M. 2007 1) Strategic
performance
review
2) Viability
review
3) Management
assessment
Campbell,
N.D., Kirk,
C.H. and
Rogers,
T.M.
2007 Turnaround-
measures of
economic freedom
impacting on
entrepreneurial
activity.
De Wet,
J.H.vH. and
Du Toit, E.
2007 Turnaround
valuation
448
Du Plessis,
R. and
Matarirano,
G.
2007 Turnaround
plan
Fontannaz,
S. and
Oosthuizen,
H.
2007 Turnaround:
1) management
performance
2) sustainable growth
Fukui, Y.
and
Ushijima, T.
2007 Business
valuation.
Han, C.,
Huml, A.,
Kagalkar,
A., Saito, L.
and
Sundjaja, K.
2007 Refocus strategy 1) cost
reduction plan
2) expand
revenue
oppertunities
Longenecke
r, C.O.,
Mitchell,
M.J. and
Fink, L.
2007 Turnaround:
managerial impact
Shepherd,
D.A.
2007 Turnaround
psychology
Emotional cost of
failure
Baker, A.,
Cassidy, L.,
Goodman,
J., Siegel, J.
And Ulin, E.
2008 1) Focus on
what customers
want
2) Focus on
core operations
3)
Modernization
Improve
performanc
Carlson,
A.P.
2008 Strategic issues
involving:
Labour in turnaround
Choi, D.Y.
and
Edmund,
R.G.
2008 Turnaround:
corporate social
responsibility
King III on business
rescue
Epstein, D.,
Ostroff, S.,
Sand, M.,
Selvnvthan,
S. And
Twerdun, D.
2008 Problem solving
cognition
Debt
restructuring
449
Jostarndt, P.
and
Sautner, Z.
2008 Investigate;
1) how
ownership
structures
change when
businesss are in
distress.
2) whether
ownership
structure and
changes therein
are related to
management
turnover when
businesss are in
distress. - costs
of workouts.
Legal
requiremens:
1) differences
inb legal
requirements
Germany vs.
Use.
2) fresh equity
capital - placed
in rights issue
and private and
public placing.
3) debt
restructuring -
private
renegotiations.
4) equity write
down for over
indebted
company,
5) provision of
fresh money by
creditors,
6) mergers and
acquisitions -
take over's,
7) change of
management.
1) Focus on financial
distress and
management
turnover.
2) Business lifecycle.
3) Actual role of
creditors in
restructuring of
financially distressed
businesss.
Outcome of
turnaround;
1) private
investment
reduced
substantially,
2) bank
investment
increases
under
continuing
distress,
3) ownership
of directors
during
distress cycle,
non-executive
directors
increase,
4)
management
turnover due
to distress
increase 22%,
5) turnover in
CFO and
CEO
increases
rapidly in
response to
poor
performance.
Martin, R.D.
and
Kimberly,
J.R.
2008 1) Outside
management
2) alignment around
common principles
3) people centred
4) clear expectations
5) mission driven,
operations based,
corporate support.
6) authority preceeds
accountability
7) organizational due
process to govern
resolution of all
disagreements
8) dispute resolution -
all parties present.
9 creating vision and
objectives
imolement
information system
10) chart course of
business
11) the right team
12) complementary
background and
experience
13) drew upon
diverse skills and
perspectives
Curtail capital
expenditure
1) implement
financial
performance
plan
2) implement
revenue cycle
improvement
initiative
no nonsense
accountant
1) series of
signifficant layoffs
modest learning
curve
2) creating a
"burning platform"
3) metaphor -
burning platform
4) raise
awareness of
platform
5) three
messages:
organization
commitment to
turnaround, entire
organization will
partake,
management
confidence.
6) achieve or
exceed service
excellence goals
7) adhere to
organizational
effectiveness
principlels
8) set specific
goals and targets
450
Martin, R.D.
and
Kimberly,
J.R.
2008 1) balancing
accountability and
flexibility
2) articulate need to
move decisions
3) assign clear
responsibilities for
decision.
4) developing and
implementing work
plans and metrics
5) secure agreement
on benchmarks
6) set aggressive
targets
7) relentless
communication
8) keeping messages
simple and direct
9) constant reminders
10) call on quick
response
11) involving key
stakeholders
12) resolve in the
face of setbacks and
resistance
13) resistance to
change is inevitable
14) internal
resistance
15) getting the right
people on the bus.
Ormanidhi,
O. and
Strings, O.
2008 Turnaround strategy:
Pearce II, J.
A. and
Robbins K.
2008 Turnaround strategy:
Approaches top
deploy to reduce the
chances of a
recurance of the
turnaround situation
451
Pretorius, M. 2008
a
Turnaround strategy:
1)Underperformance
1.1) efficience
strategy
1.2)
protect/strengthen
1.3) cost cutting
1.4) capacity
improvement
1.5) generate cash
1.6) outsource
1.7) productivity
1.8) asset reduction
2) Distress
2.1) forced
repositioning strategy
2.2) strategy revision
2.3) alternative
revenue streams
2.4) find new
products
2.5) alternative
markets
2.6) forced to
innovare
2.7) diversify
2.8) differentiate
2.9) acquire
3) Crisis
3.1) last resort
strategy
3.2) defensive merger
3.3) divestiture
3.4) liquidation
3.5) debt forgiveness
Pretorius, M. 2008
b
Turnaround strategy:
1) strategic
reorientation
2) unused debt
capacity
3) leadership
4) liabilities of
turnaround managers
5) turnaround
psychology/cognition
Pretorius, M.
and
Holtzhauzen
, G.T.D.
2008 Turnaround
process:
1) liability- data
integrity
2) liability-
legitamacy
3) liability-
resource scarcity
4) liability-
strategy options
5) liability-
leadership
Varvarigos,
D.
2008 Turnaround
plan:
Human impact
on sustainable
growth
452
Behm, R.,
Bruno, A.,
Nue, T. and
Urbani, K.
2009 Analysis of
operating cash
1) SWOT
analyses
2) Strategy
ananlysis
principle
company
strategy
resent
strategic
initiatives
strategy
diamond
3) Industry
analysis
4) Comparable
company and
performance
analysis
5) Performance
ratios
solvency
covenants
6) Corporate
structure
7) Biographics of
management
8) Porter five
forces analysis
Restructure
plan:
1) liquidity
improvements
2) financial
restructuring
3) operational
improvements
4) tax
improvements
Chi, L. 2009 Debt
restructuring
Coetzee, J. 2009 Schemes of
arrangements.
Dev, A.,
Mingo, J.
and Buckler,
J.
2009 Turnaround
structure:
freeing up
capital and
liquidity.
453
Glantz, M. 2009 1) the situation
1.1) correct
problems that
can be corrected
and return the
company a
tradition banking
relationship
1.2) maximise
the potential for
ultimate
collection of
outstandings
1.3) workout
department of
bank more
experience
solving credit
probles
1.4) decision
must be fast,
usually without
conferring with
other
departments (the
legal dept
exception)
3) eleven big
questons
3.1) are day-
today cash
budgets
positive?
3.2) will business
be able to
extend trade
terms?
3.3) can
company file for
expedited tax
refund to provide
quick injection of
cash?
3.4) can outside
consultants
assist -
ccountant,
bankers,
turnaround
specialists.
3.5) are there
other sources of
cash, e.g.
guarantors, new
equity
The meeting
1) review all
information
dealing with
business
2) legal council
may be present
3) define role of
turnaround
group and its
interaction with
business
4) full disclosure
of relevant
information and
are based on
realistic
evaluation of
the abiliites of
both the
borrower and
workout to
resolve
problems
5) role
clarification
6) note
additional
sources of cash
flow generation
and/or
additional
colateral
avaialbility
7) updateand
keep credit
rating frequent
8) arrange
engagement
with bankers
454
Glantz, M. 2009 3.6) is the
company or any
part viable, so
restructuring is a
viable
alternative? -
shareholders
valuation and
simulation are
key
3.7) is there a
plan to repay
new money
within
reasonable time
frame, and will
portion of
imbedded debt
be repaid with it?
3.8) will new
money be LIFO
and senior to
embedded debt
(rule of thump:
new money
should not
exceed more thn
a third od
embedded debt?
3.9) does
business plan
alternative legal
moves,
preventing
restructuring?
3.10) if nove isn't
made quickly,
will decay cause
partial or full
dissapation os
assets, actions
by other
creditors, or
increased
carrying costsw
for the bank?
3.11) how should
the bank treat
new loans (new
money)? do
advances
anhance
collateral value?
McCann, P.,
Dermer,
S.W.,
Hunter, B.K,
MacDiarmid,
A., Morgan,
R. Örndahl,
M., Robson,
K. And
Wagman, F.
2009
455
APPENDIX D: TURNAROUND RESEARCH SUMMARISED BY PANDIT
456
O'Neill (1986b) Corporation 9 US manufacturing and 4 US service
firms, mixed: 9 T/A and 4 non T/A
Published case histories from
Fortune magazine
Pant (1991) Corporation 137 US manufacturing firms, mixed:
64 T/A, 73 non 1/A
Public archives (Compustat)
Ramakrishnan & Shah
(1989)
- - -
Reichert (1988) Corporation 1 large US leisure corporation. T/A Interview with CEO
Remick (1980) Turnaround
managers
- Anecdotal
Rose (1989) Corporation 1 UK retail firm. T/A Anecdotal/company archives
Robbins & Pearce (1992) Corporation 32 US textile mill product firms, T/A Questionnaire, public/company
archives
Schendel & Patton (1976) Corporation Mixed: 36 matched pairs of US
firms from 20 four digit classes
Public archives (Compustat).
Secondary qualitative sources
(annual reports etc.)
Schendel, Patton & Riggs
(1976)
Corporation 54 US manufacturing firms, T/A Public archives (Standard and
Poor's Compustat computer
tape)
Scherer (1989) Literature,
cases,
turnaround
managers
- Interviews with 80
turnaround managers; review
of 600 articles; review of 300
case studies
Seabright (1985) Corporation 1 UK retail furniture firm, T/A Company archives/anecdotal
Slatter (1984) Corporation 40 UK publicly quoted firms, mixed:
30 T/A, 10 non T/A
Public archives, questionnaires
Stopford & Baden-Fuller
(1990)
SBU 6 manufacturers in 4 industries
matched against 4 less successful
competitors and 5 equally successful
competitors
Several hundred interviews
Taylor (1982/3) - - Anecdotal
Main & Goldthorpe
(1989a,b,1990)
Corporation 27 Canadian firms, mixed Newspaper and investment
analysts reports,
questionnaires, interviews
Thietart (1988) SBU 217 SBU's in six strategic groups PIMS
Whitney (1987) - - Personal experience, anecdotal
Wyman (1989) - - Anecdotal
Zimmerman (1986) Corporation 4 US manufacturing firms, mixed:
2 T/A, 1 marginal case, 1 non T/A
Public archives
Zimmerman (1989) Corporation 15 mature US manufacturing firms,
mixed: 8 T/A, 7 non T/A
Financial records, manuscripts,
case histories, interviews
a E.g., sample size, successful and unsuccessful turnarounds (mixed) or just successful turnarounds (T/A).
457
APPENDIX E: REAL LIFE CASE EXAMPLE
458
RESEARCH PROJECT:
Dear participant,
OBJECTIVE
I am conducting research in the field of business failure and rescue. The main aim of this
research is to establish what behavioural and financial inferences impacts on the business.
The results of the interview will be applied in the design of primary research
questionnaires. Finally, all the research data will hopefully give us a better understanding of
the dynamics within a business environment.
WHAT IS YOUR ROLE?
Included in this e-mail are three real life cases. They resemble typical credit applications
(data from the organisation’s database was used), but account conduct through a
computer based enquiry is also attached. You need to study the three cases as if you were
assessing a review and request for additional facilities. Please feel free to make notes, as
you will be subjected to an interview where I am going to ask you to reply to and discuss
various issues and some of the dynamics of the business. Reading through the case
studies will take about 90 minutes; once again, I need to reiterate that you need to be well
prepared for the research to come to a meaningful conclusion. The interview is
estimated to take at least three to four hours. I will however contact you to make an
appointment when it suits you. Your anonymity is guaranteed and no reference will be made
to you is person.
THE INTERVIEW
Please bring the case studies and your notes to the interview. I will be using a Rep-grid
research methodology, which requires you to answer a set of questions and to debate
possible key constructs. There is no right or wrong answers and you will not be "tested" at
all. I am relying on your wealth of knowledge and expertise to arrive at meaningful
conclusions.
Thank you for your assistance
Gert Holtzhauzen (0833250150)
459
CASE
Group: Wilson Log Logistics (Pty) Ltd (“Wilson Log”)
Authority:
Risk Category:
Moodies Score: AFS 31/12/05 = 3.87 MA’s 30/6/06 = 4.13
Annual Review Date: June
M/A requirement: Quarterly
Date : 11th July 2007
Reason for paper Request to condone an excess on Wilson Log of up to R21.0m against a shared
OD/LG limit of R36m (total excess period of 5 days) until 16/07/2007
COMMENTS
Refer to the last annual review dated 2 June 2006 (copy minute attached).
We recently experienced an excess (June 2007) of up to R25.9m for 7 days that was tabled and condoned at
Credit Assessment Meeting. The latter indicated possibly looking at Debtor Discounting. The reason for the
excess was as a result of historical 7-day debtors requesting an extension in terms over their financial year-end.
The excess was timeously rectified.
We were now requested to condone an excess of up to R21.0m for 5 days. We were advised that they have of
late experienced “over trading” from their clients in the tyre industry (Tar Stone, Tube Master – Grobler Group
and Standard Tyres). The reason for the “over trading’ is currently unknown although the client advised that it
may be due to the shipping lines presently providing discounts.
The client has provided us with a cash flow statement that reflects that the excess will be cleared from debtor
collections on/by the 16 July 2007. Debtors to be collected, amongst others, include Toyota SA, Audi and Ford
SA.
The debtor book is currently R149.3m and the client continues to insure through Lourens.
We are in receipt of the 31.12.2006 annual audited financial statements and a meeting (including ACM and ASM)
has been set-up with the client for Monday (16 July 2007) to discuss the levels of excesses experienced and
determines their needs going forward. If need be, we will develop the Debtor Discounting scenario. This matter
will be clarified in our review.
In view of the client having conducted a satisfactory account since 1997, comfort in quality and quantum of
debtors and short-term nature, request that the excess be condoned. The annual review is to be submitted to
Credit assessment meeting as a matter of priority.
460
FAMILY TREE
FACILITIES:
Borrower (s) Name
Type of
Facility
Present
Limit
Proposed
Limit
Outstanding
@ 10/07/07
Rate
A. Lucrative Bank :
Bank Facilities
1. Wilson Log Logistics (Pty) Ltd
O/D#
O/D
O/D
L/G
Call
CFC $
CFC
36,000,000
‘1’
‘1’
‘1’
-
-
-
36,000,000
‘1’
‘1’
‘1’
-
-
-
17,547,325 Dt
20,171 Cr
41,464 Dt
2,330,750 Dt
46,444 Cr
621,600 Cr
465 Dt
Prime
Prime
Prime
R 0.69%
Prime
FEC @ 10% 250,000 250,000 Nil
2. 90 Degree Super Supply
Solutions ( Pty) Ltd
C/A NCA NCA 82,532 Cr Max
3. KL Malherbe Family Trust C/A NCA NCA 9,756 Cr Max
4. San Micheal A Tommi Importers
P/L
C/A NCA NCA 71 Cr Max
Sub Total Bank Facilities: 36,250,000 36,250,000 19 920 005 Dt
780 574 Cr
Asset Based Facilities
5. Wilson Log Logistics P/L
RCL 7,500,000 (a) 7,500,000 5,305,370 Dt P-1%
MTL
S/P
S/P
2,578,075 (b)
504,865 (c)
231,125
2,487,902
477,687
222,255
2,487,902 Dt
477,687 Dt
222,255 Dt
P+1%
P+1%
fleetfac** 35,000 35,000 26,499 Dt
Sub Total Asset Based Facilities: 10,849,065 10,722,844 8,519,713 Dt
Total 47,099 065 46,972,844 28 439 718 Dt
780 574 Cr
Other Facilities:
6. Lotglove Investments 8 P/L Homeloan 2,176,211 2,175,127 1,621,595 Dt P-2, 15%
Sub Total Other Facilities: 2,176,211 2,175,127 1,621,595 Dt
B. Other Lucrative Bank Group:
ACB Daily limit Daily limit
7. Wilson Log Logistics P/L (6,000,000) (6,000,000)
TOTAL Lucrative Bank GROUP 49,275,276 49,147,971 30 061 313 Dt
780 574 Cr
Notes:
# Condone temporary excess of up to R57.0 m until 16/07/2007.
461
SECURITY: A/V
A. Lucrative Bank:
Bank Facilities:
1. Wilson Log Logistics (Pty) Ltd
? “U” suretyships+ L/F by: K L Malherbe
J Malherbe
? Cession of debtors per 30/06/2007 after exclusions R135,320,866 @ 50%
? Cession of Lourens’s Credit Ins pol No. CB0407223A covering debtors
? Cession of MomLife pol No. 90393983 (D/V R 1,2 m) on life of Jl Malherbe
? Cession of Mom Life pol No. 90393977 (D/V R 1,2 m) on life of J Malherbe
? Cession of Safesure policy no.013076296 (DV R5 M) on the life of Jl Malherbe
? Cession of Safesure pol No.013076518 (DV R5, 513 M) on the life of J Malherbe
67 660 433
Tangible security held for bank facilities 67 660 433
Asset Based Facilities:
4. Wilson Log Logistics (Pty) Ltd: As per (1) above.
Tangible security held for ABF facilities
SECURITY FOR LUCRATIVE BANK FACILITIES
CHECKED AGAINST SECURITIES REGISTER on
11/07/07 by:
N Pete
Other Facilities:
6. Lotglove Investments 8 P/L
? 1
st
& 2
nd
CCMB’s totalling R2, 4M over Erf 38 Featherbeach Est F/V 6/03 R2, 4M @ 80%
? Cession of HOC (Held at CHL)
? Unlimited suretyship + L/F by JL Malherbe
? J Malherbe
1,920,000
Tangible security held for other facilities 1,920,000
B. Other Lucrative Bank Group:
OTHER BANKS: (including security held)
o R22 Million L/G facility at Lourens’s – secured by personal sureties and reversionary cession of
Debtors.
o Customs & Excise: deferred facility of up to 75% of monthly T/O.
o Personal banking is at CashCow bank where O/D facility is R50K
462
APPLICATION FOR FACILITIES
Date Prepared: 2
nd
June 2006 Authority:
Applicant: Wilson Log Logistics (Pty) Ltd (“Wilson Log”) Relationship:
Group #: Region:
Review: March annually
Management A/c’s: Quarterly
Background: Ownership/management:
Risk Category: With Security
Without Security
D
E
Manage as “C”
Directors:
J L Malherbe
J Malherbe
FAST Financial Risk Score 3.87 Financial Manager: Walter Coats
Basel Rating NGR14
Cash Management Category: N/A
Account Opened: 21/5/1997 Family Tree attached
Nature of Business:
Forwarding, Clearing, Warehousing + Distribution in all aspects.
code: 4150
GOI: R825 246 Auditors: B & E Auditors
Attachments : Yes No Yes No
Family Tree X Technical Committee Approval X
Financials Date CFP seen minute X
- Annual: 31/12/2005 X ITC Clear X
- Interim: 31/3/2006 X Facility Letter: May 2005 X
- Other: Budget 12/06 X Review Fee: R15,000 X
Purpose and Details of Application:
1. Annual Review of facilities against AFS per 31/12/2005 and M/A’s per 31/3/06.
2. Applications for:
? Increase in O/D limit from R25M to R36M;
? L/G’s outstanding of R3,295,750 to be a ‘stand alone’ arrangement (ie no longer sharing with O/D);
? 36 month loan of R3.5m to cover the cost of the upgrade and adaptation of new rented premises;
? S/P R1m for additional racking and shelving in the new rented premises.
3. To record Fleet facility arrangement in place of R15,000.
463
FAMILY TREE AS AT MAY 2006
50%
50%
100%
90% 10%
100%
Wilson Log Logistics (Pty) Ltd
(“Wilson Log”)
Salatio De Bono
(Italian listed company)
K L MALHERBE FAMILY TRUST
Trustees: J L Malherbe & J MalherbeBeneficiariesJ L Malherbe & J
Malherbe & their decendants
Lotglove Invs 8 (Pty) Ltd
(Property owning Featherbeach Erf 38 – clients residential property)
90 Degrees Super Supply Solutions (Pty) Ltd
(Development of computer programmes needed for
control of bonded warehouse processes)
J Burger
San Micheal A Tommi Importers P/L
(Importers & distributors of wine and olive oil)
464
3.
4.
5.
Notes:
1. L/G’s are in favour of Customs & Excise. FEC’s: Client is on Treasury, and also enjoys Direct Dealing.
SECURITY: A/V
A. Lucrative Bank:
Bank Facilities:
1. Wilson Log Logistics (Pty) Ltd
? “U” G’tee + L/F by: K L Malherbe
J Malherbe
Cession of debtors per 30/4/2006 R83,067,723 @ 40% for insured debtors and 25-to-33% for
uninsured debtors
? Cession of Lourens Credit Ins pol No. CB0407223A covering debtors
? Cession of MomLife pol No. 90393983 (D/V R 1,2 m) on life of J L Malherbe
? Cession of MomLife pol No. 90393977 (D/V R 1,2 m) on life of J Malherbe
? Cession of Old Mutual pol No.013076296 (DV R5M) on the life of J L Malherbe
? Cession of Old Mutual pol No.013076518 (DV R5,5M) on the life of J Malherbe
28,624,210
Tangible security held for bank facilities 28,624,210
Asset Based Facilities:
4. Wilson Log Logistics (Pty) Ltd: As per (1) above.
Tangible security held for ABF facilities
465
SECURITY FOR LUCRATIVE BANK FACILITIES
CHECKED AGAINST SECURITIES REGISTER on
05/04/06 by:
Other Facilities:
6. Lotglove Investments 8 P/L
? 1
st
& 2
nd
CCMB’s totalling R2,4M over Erf 37 Featherbeach Est F/V 6/03 R2,4M @ 80%
? Cession of HOC (Held at CHL)
? Unlimited G’tee + L/F by J L Malherbe
? J Malherbe
1,920,000
Tangible security held for other facilities 1,920,000
C. Other Lucrative Bank Group:
OTHER BANKS: (including security held)
o R22Million L/G facility at Lourens’s – secured by personal sureties and reversionary cession of
Debtors.
o Customs & Excise: deferred facility of up to 75% of monthly T/O.
466
TERM FACILITIES REVIEW:
Requirement:
Actual Per 31/12/05 Terms and Conditions
COVENANTS:
? Debtors R41,533,861 Debtors @ 40% to cover O/D at all times.
We propose this covenant be increased to
50%.
? Dividend payments Nil paid May be paid if gearing remains within our
required covenant.
? Gearing ratio 4.55 Not more than 3
? Interest coverage 8 Not less than 5
Have there been any events of default or breaches of covenants in the year under review? YES
If YES, supply particulars:
Gearing covenant exceeded. See main body of comments.
EXCHANGE CONTROL APPROVAL
- Bank
- Branch
- Expiry Date
- Total Approval
N/A
BORROWING POWERS
Limited:
NO If YES, supply particulars N/A
POWER TO ISSUE GUARANTEES?
YES
467
ASSET BASED FINANCING B/A Funding Approved NO
1. Application New Inc Review Other Rate
X X
2. Facilities Limit
(Net)
Change from
Last approval
a) Special Projects :
? Wilson Log Logistics (Pty) Ltd 1 000 000 +1 000 000
b) RCL
? Wilson Log Logistics (Pty) Ltd 3 500 000 Nil
c) Other : MTL 3 500 000 +3 500 000
8 000 000 +4 500 000
3. Details of Facilities New
New Existing
Type : MTL S/P RCL
Merchandise : Renovation of premises Shelving Veh & Equip
Supplier : N/A Approved Approved
Product : MTL I/S I/S
Period : 36 mnths 24 months 24 to 36 mths
Payment : D/O Debit Order Debit Order
VAT back
mnth 4
4. Terms and Conditions
a. Security -See page 4
b. Special Conditions for RCL: D/O, Insurance, max period for computer eqt 24 months
with a 20% deposit and VAT Back, equipment maximum period 36 months, VAT Back and
deposit negotiable, new vehicles up to 60 months.
5. Revolving Credit Lines
a. All ABF on balance sheet with Lucrative Bank? YES
6. General
a. Technical Managers’ approval regarding price and supplier required for all used
merchandise (other than Cars and LDV’s) where cost price in excess of R500,000.
b. Facilities are automatically cancelled on EXPIRY DATE
468
BACKGROUND:
Wilson Log Logistics (Pty) Ltd:
The company was established in 1995, and is a South African based third party logistics provider, operating though a
network of more than 140 offices worldwide.
Ownership of the company is held equally between local management members and a listed Italian company, Salatio de
Bono (more information below).
Wilson Log obtained the SABS and ISO 9002 in 1997.
Its major competitors are Koeglen & Nadel, ABC Freight, and Roos & Liebenberg.
The business operates out of leased premises in Eersterus, Johannesburg, very close to Jhb International Airport. In July
the clients will be moving to new rented premises near Edenglen as additional warehousing and office space is required.
They have signed a 10-year lease with the landlord and a performance guarantee was issued by Lourens.
To recap on the company’s services, they include: -
? Collection – Wilson Log takes control of the consignment throughout the logistics chain, from the supplier to the
recipient.
? Expediting and Forwarding (import/export) – Wilson Log has an advanced computer tracking system that can be
viewed on-line 24 hours a day. They also handle all documentation.
? Customs Clearance
? Warehousing (bond and free) management – Wilson Log control the inventory in both their bonded and non-bonded
warehouses by bar coding and scanning all consignments received. This enables goods to be tracked and traced at any
stage in the process. The company also has special clearance from the SARS to trade in bonded stock upon demand
on a weekly basis, while completing customs requirements.
? Local Distribution to main hub centres – The company delivers imports to the client if required, i.e. in the 3 major
centres, viz. Johannesburg, Cape Town and Durban. Deliveries outside of these regions are sub-contracted out.
? Exports into Africa.
Wilson Log has over some five years developed a highly efficient computerised record keeping system for bonded
warehousing, which allows clients to “patch” into the Customs computer system to download information & records –
Customs has approved this system. This is carried as an intangible asset in the balance sheet. Currently income from this
computer system is R300.000 pm from Wilson Log’s clients.
This system also gives Wilson Log a serious competitive edge in terms of having a close co-operation with Customs and
Excise fully to its clients’ benefit.
Wilson Log’s staff compliment stands at 211.
Salatio De Bono (“SDB”):
In existence for longer than 100 years. One of the leading Italian international freight forwarders. The company has
offices throughout the world and is listed on the New York stock exchange.
The benefits gained by Wilson Log in partnering up with SDB are immeasurable, and make it a force to be reckoned with.
SDB acquired a 20% share in Wilson Log in May 2000 for US$250 000, and a further 15% in 2001 for US$125 000. In Jan
2002 another 15% share was acquired for US$125 000.
The CEO of Salatio De Bono was looking for a good investment in his private capacity, and he invested R4M in Wilson Log
in April 2005. The loan is unsecured and bears interests at 9.5% pa repayable in 20 half yearly instalments commencing
October 2005. The Excon for this loan was attended to by ourselves.
FINANCIAL POSITION:
Wilson Log Logistics (PTY) LTD:
Audited AFS per 31/12/2005 :
? Wilson Log performed well in terms of turnover growth and profits achieved. A T/O growth (including customs &
excise duty T/O) of 42,6% was budgeted (to R900M), but actual achievement was a 50,55% growth (to R950M). The
reasons for this growth are: as key customers (viz Toyota SA, Audi, Ford, Tar Stone, Tube Master, Grobler Group and
Standard Tyres) grow, there is automatic growth for Wilson Log, and new meaningful business acquisitions were made
of Ford and Pick ‘n Mix. Exceptionally positive economic conditions for importers was another major contributing
factor to additional business, and we are well aware that the motor industry experienced good growth. Wilson Log is
fast becoming the preferred provider of logistics solutions to the motor industry in SA, and it has 4 of the top 10 tyre
companies worldwide on its books. Wilson Log now has at least 185 solid debtors.
? Typically all NPAT was retained in the business to fund growth. No dividend has been paid in the 5 years on record as
it is not client’s policy to pay dividends whilst the business is in the growth phase. They do however take a
management bonus for all shareholders, which for the year under review amounted to R1,522M.
? Capital base strong at R25M.
? Trade creditors figure [mainly monies owed to Customs & Excise] was very high at year-end. Client had received VAT
and duties from customers and deposited R17m on call before year-end, but only paid Customs & Excise in January
2006. This had a detrimental effect on the gearing, which if adjusted by the amount of cash on hand, reduces to 3.6.
This exceeds our covenant of 3, but is still better than the industry norm of about 5. We can see that a 6 day delay by
469
debtors in paying also played its part in this scenario. The swing factors contributed to a negative cash flow of R1,95M
over the year end. Given that timing issues negatively affected gearing and cash flow, we recommend that the
gearing covenant non-compliance situation be accepted. Subsequent MA’s @ 31/3/06 show an improvement in the
gearing ratio to 3.13. This is partly the result of new loans from directors of R3,334M (accumulated from own
resources and management fee being charged to Wilson Log by shareholders SDB and the Malherbes).
? Lourens insurance has covered R4,36m of the R13,2M owed by Maxi Footwear. The shortfall has not been written off
as recovery is expected because our clients hold personal sureties by all directors of Maxi and title deeds to various
properties, albeit Maxi seem to have overstated the property value and our client did not attend to the registration of
the bonds over these properties. The Maxi debt is not reflected in the debtors list used by us. It should also be
remembered that the cash flow implication of the Maxi debt has already been absorbed by Wilson Log, although there
will still be the negative effect on the financial statements (ie P&L and Cash Flow Report) should the Maxi amount
owed ultimately become a bad debt.
Projections 12 months to 31/12/06:
Clients have budgetted to break the Billion Rand mark at R1,027,923,884 and to achieve a 1,3% NPBT (this is all based on
the T/O inclusive of Customs Duty & VAT). This profit performance is slightly better than the previous years 0,87%
because of new business providing better client mix opportunities, an admin fee that has been implemented of R350 per
vehicle for clearing out of customs, which amounts to additional income of R600,000 per month, and economies of scale.
The budgeted growth is based on:
? contracts already signed (Ford and Toyota have signed contracts for use of the Customs & Excise clearing computer
system, Toyota has signed a forwarding contract from both Europe and Japan, and Phiat Air Imports [Parts &
accessories] and ‘Clouds of Living’ have committed to contracts).
? new business in the pipeline. Negotiations are underway currently with GM/Delta, Toyota, VW, and Citroen. The
country-wide warehousing & distribution contract for Yokohama is in the final stages of negotiation.
The focus is in five areas and Wilson Log would like to be known as the specialist/expert in these areas. They are:
? Automobiles
? Automotive Parts
? Footwear
? Light industry and
? Trade i.e. Shoprite Checkers.
The budgeted increase in T/O has already been achieved in terms of committed contracts, and the budgets will be
exceeded by the end of the financial year.
Due to the strong rand clients are finding it difficult to break into the export market. Approximately 23% of the turnover
consisted of the Toyota exports into Africa that contributed to the year on year growth in gross profit despite the decline in
turnover. Strategically it is important to diversify therefore there is a specific drive to focus on this sector of the market.
A breakdown of T/O by division shows the following:
3 months in 2006 2005
% of Total T/O % of Total T/O
Imports (49.32%) (52.56%)
Exports (0.83%) (1.37%)
WH & Dist. (4.40%) (4.37%)
CRS & Bond (45.46%) (41.70%)
SECURITY:
Approximately 50% of the debtor’s book is insured by Lourens’s, and as the debtor’s book is our primary security we
expand on the salient features of this insurance as follows:
? The policy is on aggregate loss basis, ie the first R500,000 of bad debt within a calendar year is for Wilson Log’s
account. Any amount over and above that will be covered in terms of the policy. This allows the premium to be
reduced and historically the customer has not had bad debts, making this option favourable.
? Debtors with payment terms of less than 7 days are excluded from the cover. This includes: Michelin, Peugeot, Pirelli,
Renault. This amount is revolving so a similar amount is outstanding at any one time.
? 85% of the credit limit allocated per customer will be paid on default of the debtor. Therefore, 15% is for Wilson Log’s
account (Vat is excluded).
? Wilson Log has a limit mandate i.r.o. its credit control process and can grant discretionary limits on behalf of Lourens
up to R200,000 per customer.
? However, any debtor below R50,000 is not covered, unless it is a timing difference and payment was already received.
? Lourens’s maximum liability in one year is R15 Million.
? Nichè International Brokers (Pty) Ltd to provide a monthly analysis of Wilson Log’s debtors per insured/not insured.
? We have also had the book assessed by Lucrative Debtor Discounting that found the book acceptable.
? In arriving at our AV on debtors we have been using the following calculation based on what is insured and not
insured. Debtors per 30/4/06:
470
Drs List Date Advance Value % Facility limit R25,000,000
Debtors Value Total book 30/04/2006 83,067,723.00
Credit balances (47,635.00) - R -
Excluded by ourselves - R -
No Lourens Cover 1,177,513.00 33% R 392,112
1 year - Secured 1,429 745 1,255 2,007 5,767
Loans > 1 year - Unsecured - - - 3,626 3,626
Ceded Loans: Directors - - 182 - 3,334
Deferred Tax - 455 523 1,431 -
Total Non-Current Liabilities 1,429 1,200 1,960 7,064 12,727
EQUITY
Share Premium 1,554 3,868 3,868 3,868 3,868
Retained Earnings 7,524 10,446 15,317 21,046 23,567
Total Equity 9,078 14,314 19,185 24,914 27,435
Total Equity and Creditors > 1 Year 10,507 15,514 21,145 31,978 40,162
Tangible Net Worth 6,684 9,418 15,334 19,017 22,342
473
Detailed Profit & Loss Account
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 2
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PRE...
Prepared By S Bezuid... S Bezuid...
Accountant BDO Spe... BDO Spe...
Source Currency: Target Currency:
Exchange Rate - - - - -
Turnover 69,931 107,948 164,731 202,570 55,860
COGS 43,302 74,268 118,872 144,847 40,079
Gross Profit (Loss) 26,629 33,680 45,859 57,723 15,781
Salaries & Wages 9,890 13,897 16,653 21,443 5,734
Administrative Expenses 8,028 10,172 13,851 18,043 5,187
Consulting&Mgt Fee (SDB) 1,393 1,561 1,678 2,222 952
Directors' Remuneration 519 447 1,048 1,081 215
Officers Compensation -Incentive Bonus - - 1,200 1,522 -
Bad Debt Expenses - 220 125 268 39
Social Responsibility Pts - 562 949 690 -
Customs Duty + VAT Recon 151,332 267,594 466,719 748,274 189,455
Custom Duty + VAT Paid (151,332) (267,594) (466,719) (748,274) (189,455)
Depreciation 1,801 1,521 2,004 2,845 949
Amortisation - 608 716 402 -
Total Operating Expenses 21,631 28,988 38,224 48,516 13,076
Operating Profit & (Loss) 4,998 4,692 7,635 9,207 2,705
Gain(Loss) on Disposals 181 - - - 25
Interest Received 55 377 587 294 477
Interest Paid: LT Loans 210 286 218 686 414
Interest Expense OD-Financial Inst. 263 297 685 454 272
Other Income(Expenses) 23 - 88 - -
Net Profit(Loss) before Taxation 4,784 4,486 7,407 8,361 2,521
Current Taxation 1,072 1,564 2,672 2,632 -
Net Profit(Loss) 3,712 2,922 4,735 5,729 2,521
Change in Accounting Policy - - 136 - -
Transferred to Retained Earnings 3,712 2,922 4,871 5,729 2,521
474
Reconciliations
WILSON LOG (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 3
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PREP'D
Prepared By S Bezuide... S Bezuide...
Source Currency: Target Currency:
Exchange Rate - - - - -
RECONCILIATION OF REVENUE RESERVES
BEGINNING RETAINED EARNINGS 7,524 10,446 15,317 21,046
Adjustments to Retained Earnings - 136 - -
Beginning Retained Earnings, Restated - 10,582 - -
Net Profit(Loss) 2,922 4,735 5,729 2,521
Ending Retained Earnings 10,446 15,317 21,046 23,567
RECONCILIATION OF EQUITY
BEGINNING CAPITAL AND RESERVES 9,078 14,314 19,185 24,914
Net Profit(Loss) 2,922 4,735 5,729 2,521
Adjustment to Profit & Loss Account (above) - 136 - -
Increase(Decrease) in:-
Ordinary Shares 2,314 - - -
Actual Ending Capital & Reserves 14,314 19,185 24,914 27,435
Increase(Decrease) in Capital & Reserves 5,236 4,871 5,729 2,521
RECONCILIATION OF WORKING CAPITAL
BEGINNING WORKING CAPITAL 4,165 5,668 11,273 16,705
Total Net Fixed Assets (1,002) (1,071) (3,355) (1,240)
Total Net Intangibles (2,502) 1,045 (2,046) 804
Other Operating Non-Current Assets - - - (635)
Increase (Decrease) in Non-Current Liabs:-
Loans > 1 year (684) 510 4,378 3,760
Subordinated Debt - 182 (182) 3,334
Deferred Tax 455 68 908 (1,431)
Increase(Decrease) in Capital & Reserves 5,236 4,871 5,729 2,521
Ending Working Capital 5,668 11,273 16,705 23,818
475
Ratios
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 4
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PRE...
Prepared By S Bezuid... S Bezuid...
Source Currency: Target Currency:
Exchange Rate - - - - -
OPERATING PERFORMANCE
Annual Turnover Growth (%) 54.36 52.60 22.97 10.30
Gross Profit Margin (%) 38.08 31.20 27.84 28.50 28.25
Operating Expenses/Turnover (%) 30.93 26.85 23.20 23.95 23.41
Net Operating Profit/Turnover (%) 7.15 4.35 4.63 4.55 4.84
Net Profit before Tax/Turnover (%) 6.84 4.16 4.50 4.13 4.51
Net Profit before Tax/Equity (%) 52.70 31.34 38.61 33.56 36.76
Net Profit before Tax/Total Assets (%) 11.50 9.25 8.04 7.51 9.08
Net Profit before Tax/Total Net Assets (%) 45.53 28.92 35.03 26.15 25.11
Operating Leverage (%) 33.31 28.07 24.33 25.09 24.60
OPERATING EFFICIENCY
Net Turnover to Total Assets 1.68 2.23 1.79 1.82 2.01
Trade Debtor Days (Net) 157.54 117.92 134.71 140.99 146.06
Stock Days - - - - -
Trade Creditor Days 230.85 141.64 185.09 180.94 80.35
Net Turnover to Net Fixed Assets 17.71 21.81 27.36 21.61 21.05
DEBT SERVICE COVERAGE
UCA Cash Flow Coverage 1.69 9.03 0.15 (77.07)
FRS1 Cash Coverage 1.81 9.02 1.40 (75.00)
Funds Flow Coverage 3.80 3.64 5.44 3.34 N/A
EBIT/Interest 11.11 8.69 9.20 8.33 4.67
Earnings Coverage 3.11 2.86 3.68 2.64 6.06
LIQUIDITY
Working Capital 4,165 5,668 11,273 16,705 23,818
Current 1.13 1.17 1.16 1.21 1.34
Quick 1.13 1.17 1.16 1.21 1.34
Acid Test Ratio 1.13 1.17 1.16 1.21 1.26
Turnover/Working Capital 16.79 19.05 14.61 12.13 9.38
CAPITAL STRUCTURE
Total Gearing 4.87 3.63 4.76 4.55 3.74
Adjusted Gearing 4.87 3.63 4.69 4.55 3.13
Off Balance Sheet Gearing 4.87 3.63 4.76 4.55 3.74
Sustainable Growth Rate 109.82 38.69 42.01 39.92 75.64
476
Detailed UCA Cash Flow Statement
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 5
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PREP'D
Prepared By S Bezuiden... S Bezuiden...
Source Currency: Target Currency:
Exchange Rate - - - - -
Turnover 107,948 164,731 202,570 55,860
Chg in Trade Debtors (4,691) (25,921) (17,451) (11,169)
Cash Collected from Turnover 103,257 138,810 185,119 44,691
COGS (74,268) (118,872) (144,847) (40,079)
Chg in Trade Creditors 1,434 31,459 11,525 (36,514)
Cash Paid to Suppliers (72,834) (87,413) (133,322) (76,593)
CASH FROM TRADING ACTIVITIES 30,423 51,397 51,797 (31,902)
Salaries & Wages (13,897) (16,653) (21,443) (5,734)
Administrative Expenses (10,172) (13,851) (18,043) (5,187)
Consulting&Mgt Fee (SDB) (1,561) (1,678) (2,222) (952)
Directors' Remuneration (447) (1,048) (1,081) (215)
Officers Compensation -Incentive Bonus - (1,200) (1,522) -
Bad Debt Expenses (220) (125) (268) (39)
Social Responsibility Pts (562) (949) (690) -
Chg in Prepayments - - - (4,680)
Chg in Accruals - 4,540 (1,048) (3,492)
Cash Paid for Operating Expenses (26,859) (30,964) (46,317) (20,299)
CASH AFTER OPERATIONS 3,564 20,433 5,480 (52,201)
Interest Received 377 587 294 477
Other Income(Expenses) - 88 - -
Total Other Income(Expense) 377 675 294 477
Chg in Directors Loans - - (110) 110
Chg in Suspense Acc - - - (472)
Chg in Other Current Liabilities: Provisions - - - 1,748
Chg in Other Assets/Liabilities - - (110) 1,386
Current Taxation (1,564) (2,672) (2,632) -
Chg in Income Taxes Payable 507 1,362 (3,225) (913)
Chg in Vat Payable - 669 (154) (187)
Chg in Deferred Tax 455 68 908 (1,431)
Cash Paid for Taxation (602) (573) (5,103) (2,531)
NET CASH AFTER OPERATIONS 3,339 20,535 561 (52,869)
Interest Paid: LT Loans (286) (218) (686) (414)
Interest Expense OD-Financial Inst. (297) (685) (454) (272)
Cash Paid for Interest & Dividends (583) (903) (1,140) (686)
NET CASH INCOME 2,756 19,632 (579) (53,555)
Current Portion - Long Term Debt (1,451) (1,389) (1,371) (671)
CASH AFTER DEBT AMORTISATION 1,305 18,243 (1,950) (54,226)
Chg in Plant & Equipment (47) (587) (917) -
Chg in Cell phones/Office Equip & Computers (1,534) (1,958) (1,196) 3,789
Chg in Delivery Vehicles (687) (527) (3,423) -
Chg in Furniture & Fittings (253) (150) (262) 1,304
Chg in Accumulated Depreciation (-) 1,519 2,151 2,443 (6,333)
Customs Duty + VAT Recon (267,594) (466,719) (748,274) (189,455)
Custom Duty + VAT Paid 267,594 466,719 748,274 189,455
Depreciation (1,521) (2,004) (2,845) (949)
Gain(Loss) on Disposals - - - 25
Chg in Net Fixed Assets (2,523) (3,075) (6,200) (2,164)
Chg in Deposit: Office Rent - - - (635)
Chg in Intang- purch software 356 3,545 - -
477
Chg in Intang- Internal Software (3,163) (773) (1,355) -
Chg in Leasehold Improvements (303) (577) (1,495) -
Chg in less: Accumulated Amort S/W 608 (1,343) 402 402
Chg in less: Accumulated Amort Leasehold - 193 402 402
Amortisation (608) (716) (402) -
Detailed UCA Cash Flow Statement
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 6
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PREP'D
Prepared By S Bezuiden... S Bezuiden...
Cash Received/(Paid) from
Plant and Investments (5,633) (2,746) (8,648) (1,995)
FINANCING SURPLUS (REQUIREMENTS) (4,328) 15,497 (10,598) (56,221)
Chg in Overdrafts - - - 33,510
Chg in Loans > 1 year - Secured (684) 510 752 3,760
Chg in Loans > 1 year - Unsecured - - 3,626 -
Current Portion - Long Term Debt 1,389 1,371 2,685 (2,014)
Chg in Ceded Loans: Directors - 182 (182) 3,334
Chg in Share Premium 2,314 - - -
Change in Accounting Policy - 136 - -
Total External Financing 3,019 2,199 6,881 38,590
CASH AFTER FINANCING (1,309) 17,696 (3,717) (17,631)
Add:
Cash 5,089 3,780 21,476 17,759
ENDING CASH AND EQUIVALENTS 3,780 21,476 17,759 128
478
APPENDIX F: QUESTIONNAIRE
479
EXPLORING THE IDENTIFICATION OF VERIFIER DETERMINANTS IN BUSINESS
DECLINE
Dear Respondent,
Thank you for giving up some of your precious time for this research without which success is
impossible.
The following questionnaire is part of a research study undertaken to investigate the
identification of verifier determinants. Your personal thinking is crucial. There are no right or
wrong answers but it is important to indicate your personal views and thinking irrespective of
what you may believe others may think.
It will be highly appreciated if you would answer the questions posed to you as honestly as
possible. All information will be treated as confidential and will only be used for risk modelling,
academic purposes and reported as mathematical averages, variances and correlations.
Thank you very much,
Researcher
Gert Holtzhauzen
Risk Executive
Nedbank
[email protected].
Tel : +27 11 294 7396
Mobile: +27 0833250150
Nedbank sponsor :
Andre Van Der Burgh
Executive Head : Specialised Projects
[email protected]
Tel. +27 12 807 2155
Mobile: 0836271628
PhD Supervisor
Prof. Marius Pretorius
Strategy, Leadership and Turnaround Department of Business Management University of
Pretoria South Africa
[email protected]
Tel: +27 12 420 3394
Mobile: +27 82 822 6333
PLEASE DO NOT USE GROUP DECISION-MAKING
The questions are based on consulting reports about the typical business scenario in specific
ventures.
Please tick the box which represents your answer with a cross “x”.
Questionnaire number
v1
480
? Sample Statement: An unprecedented number of credit notes to debtors may indicate poor product
quality, leading to cash flow problems.
? You are required to indicate the importance of the statement on the following scale.
1
Not
Important
2
Mildly
Important
3
Very
Important
4
Most
Important
Please tick the box which is most representative of your personal view and thinking.
481
Remember - consider your own thinking. Be as honest as possible. There is no right, wrong or expected answer.
When you visit a business where
there is suspicion of potential
decline, howimportant will the
following be to verify decline
1
Not
Important
2
Mildly
Important
3
Very
Important
4
Most
Important
V
1. No or limited management information
system in operation
2
2. Managers education does not
compliment business
3
3. Entrepreneur is “scapegoating”
(blaming)
4
4. Inflexibility when making decisions
regarding change
5
5. Entrepreneur absent from work and
important meetings
6
6. Impulsive decision making 7
7. Not able to recall management info
immediately (ask others)
8
8. Absence of up to date management
accounts
9
9. Important decision made on golf
course
1
0
10. Manager’s personal problems, health
or marriage, overshadow business
focus
1
1
11. Super cars and "toys" 1
2
12. Business has outgrown managers/
owners/ directors skills set
1
3
13. Labour cost excessive for business
type
1
4
14. Absence of or unrealistic cash flow
projections
1
5
15. A high risk project or one big project
dependence.
1
6
16. Late submission of financials in an
attempt to postpone unfavourable
news
1
7
17. Sensitivity on tax avoidance 1
8
18. Not analysing internal financial
information
1
9
19. Underutilisation of assets 2
0
20. Creative accounting 2
1
21. Pricing and discounts for cash
generation
2
2
22. Slowing down and stretching
payments to suppliers in an attempt to
generate cash
2
3
23. High executive remuneration 2
4
482
24. Dividend payouts unstructured and
considered too high
2
5
25 Forced growth through mergers and
acquisitions
2
6
26 Overambitious growth strategy 2
7
27 Not willing to deviate from strategic
plan
2
8
28 Non responsive to small inefficiencies. 2
9
29 Unclear strategy for product and
market
3
0
30 Inability to adapt to business life
cycles
3
1
31 Difficult fit between strategic posture,
organization structure and industry life
cycle
3
2
32 Overexpansion of capacity without
considering market
3
3
33 Lack of strategies to combat decline 3
4
34 Lack of fusion between strategic
issues and everyday operations
3
5
35 Inappropriate channels of distribution. 3
6
36 Aging production techniques 3
7
37 Not knowing about new technology in
his industry
3
8
38 Misinterpretation of competitive
advantage
3
9
39 Declining emphasis on advertising 4
0
40 Poor service or products 4
1
41 Reliance on one customer 4
2
42 Failure to respond to high cost in
comparison with competitors
4
3
43 Market forces ignored in planning 4
4
44 Core markets moving away from
location
4
5
45 Regular stop payments on creditor
obligations
4
6
46 Increase in short term requests for
cash flow purposes
4
7
47 Declining deposit balances, and/or
returned cheques.
4
8
48 Rounded amounts paid to creditors 4
9
49 Overdraft advance funds other
purposes, such as asset acquisition.
5
0
50 Funding structure does not
complement business model
5
1
483
51
My gender is male / female (Circle choice)
52
I am senior / middle / junior management (Circle choice)
53
How long have you been in this position _____....... years
54
I feel qualified to make these judgments. Yes / no
55
How ;long have you been in banking ____ years
56
My age is _____ years
57
My highest educational qualification is ________________
58
I work in the credit or credit risk ___________discipline
59
Completing this questionnaire was: very easy / easy /
52
53
54
55
56
57
58
59
60
484
difficult / very difficult for me. (Circle your choice)
THE END:
Thank you for sacrificing your time to complete this questionnaire. Your contribution is highly
valued and appreciated.
485
APPENDIX G: COMPANIES ACT, ACT 71 OF 2008
CHAPTER 6 OF THE ACT
BUSINESS RESCUE AND COMPROMISE WITH CREDITORS
486
IMPORTANT NOTICE ABOUT THE ACT, ACT 71 OF 2008.
This study was conducted, using the publication of Companies Act, Act 71 of 2008, as was
published during 2008. The subsequent Amendment Bills were included, and updated in this
study, up to the end of 2010. It is a known fact that the implementation of the Act was still
pending, subject to Presidential signs-off; at the time, this research thesis was submitted for
examination..
487
488
489
490
491
492
493
494
495
496
497
498
499
500
501
502
503
504
505
506
APPENDIX H: COMPANIES AMENDMENT BILL
507
508
509
510
511
512
doc_172723917.pdf
The Department of Business Management places specific emphasis on integrity and ethical behaviour with regard to the preparation of all written work to be submitted for academic evaluation.
MODELING BUSINESS TURNAROUND STRATEGIES USING VERIFIER
DETERMINANTS FROM EARLY WARNING SIGNS THEORY
by
Gerhard Holtzhauzen
Submitted in fulfilment of the requirements for the degree
PhD in Entrepreneurship and Small Business Management in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
UNIVERSITY OF PRETORIA
STUDY LEADER: Dr Marius Pretorius
Associate Professor
Date of submission
April 2011
© © U Un ni iv ve er rs si it ty y o of f P Pr re et to or ri ia a
DEPARTMENT OF BUSINESS MANAGEMENT
Declaration Regarding Plagiarism
The Department of Business Management places specific emphasis on integrity and ethical
behaviour with regard to the preparation of all written work to be submitted for academic evaluation.
Although academic personnel will provide you with information regarding reference
techniques as well as ways to avoid plagiarism, you also have a responsibility to fulfil in this regard.
Should you at any time feel unsure about the requirements, you must consult the lecturer concerned
before you submit any written work.
You are guilty of plagiarism when you extract information from a book, article or web page
without acknowledging the source and pretend that it is your own work. In truth, you are stealing
someone else’s intellectual property. This doesn’t only apply to cases where you quote verbatim, but
also when you present someone else’s work in a somewhat amended format (paraphrase), or even
when you use someone else’s arguments or ideas without the necessary acknowledgement. You are
also not allowed to use another student’s previous work. You are furthermore not allowed to let
anyone copy or use your work with the intention of presenting it as his/her own.
Students who are guilty of plagiarism will forfeit all credit for the work concerned. In addition,
the matter can also be referred to the Committee for Discipline (Students) for a ruling to be made.
Plagiarism is considered a serious violation of the University’s regulations and may lead to suspension
from the University. The University’s policy regarding plagiarism is available on the Internet athttp://upetd.up.ac.za/authors/create/plagiarism/plagiarism.htm.
For the period that you are a student at the Department of Business Management, the under-
mentioned declaration must accompany all written work to be submitted. No written work will be
accepted unless the declaration has been completed and is included in the particular written
assignment.
Student
I (full names & surname): Gerhardus Theodoris Daniel Holtzhauzen
Student number: 25429711
Declare the following:
1. I understand what plagiarism entails and am aware of the University’s policy in this regard.
2. I declare that this final research proposal is my own, original work. Where someone else’s
work was used (whether from a printed source, the Internet or any other source) due
acknowledgement was given and reference was made according to departmental
requirements.
3. I did not make use of another student’s previous work and submitted it as my own.
4. I did not allow and will not allow anyone to copy my work with the intention of presenting it as
his or her own work.
Signature: Student
ii
The management dilemma emanates from the inadequacy and weakly detailed
turnaround models available for use by entrepreneurs and turnaround practitioners in
South Africa. To add to this problem previous legislation did not provide any
protection to the debtor in any turnaround attempts. New debtor friendly legislation
comes into effect in 2011. This research aims to identify the verifiers for signs and
causes of potential failure. The construct verifier determinant is theoretically defined
and included into a practical turnaround framework.
The primary objectives of the study are to:
? Identify and theoretically define early warning sign “verifier determinants”
? To design and include “verifier determinants” as an integral part of a
turnaround plan that supports corrective action.
The secondary objectives of this study are to:
? Research the current formal turnaround practices, which are applied in the
United States of America, Canada, Australia, Africa and informal practices
evident in South Africa. These findings are aligned to include the changes
in the applicable South African legislation.
? Design and propose a framework for use by turnaround practitioners and
entrepreneurs alike (conforming to new legislation).
? Identify which “verifier determinants” will confirm the early warning and
apply this outcome to the design of a reliable turnaround framework,
acceptable to all creditors and financial institutions.
? The final objective is to contribute to the South African entrepreneurial,
turnaround body of knowledge, and future formal studies in this
academically ill-represented field.
EXECUTIVE SUMMARY
iii
The effectiveness of business turnaround depends on the chosen strategy. The
literature review in this proposal deals with the following aspects; venture risk
propensity, early warning signs and failure models, legal constraints / opportunities
and finally turnaround. Current formal turnaround routes are, due to various
negativities and high costs, often not practical and a more informal approach is
favoured.
Methodology:
? Through comprehensive literature research to identify and theoretically define
“verifier determinants” that confirm the early warning sign and causes.
? Apply in depth interviews to identify the use of verifier determinants by
specialist turnaround practitioners.
? Confirm the actual use and value of the verifier determinants by experts and
practitioners during turnarounds, Design and include “verifier determinants” as
an integral part of a turnaround framework that supports rehabilitation of the
business.
? Compare the formal turnaround practices, which are applied in other
jurisdictions such as the United States of America, Canada, Australia, Africa
will be investigated.
? Adapt the framework cognisant of Chapter six of the companies Act, Act 71 of
2008 requirements and recommend to formal and informal turnaround
practices relevant in South Africa.
For this study, a leading commercial bank was selected as the organisation of
choice, due to the accessibility to information, research data, and turnaround
respondents. For selecting the case studies used for evaluation during interviews,
the researcher relied on businesses that were already subjected to BASEL II Accord
categorisation criteria and had ex post facto histories. The study applied two
research methods. An interview method was used to identify actual verifier
determinants used in practice. The interrogation of the participants was done, using
the Repertory Grid method, thus forcing choices and explanation of interviewee
reasoning.
iv
Participants were purposely selected to ensure representation within the identified
risk categories. As result, a comprehensive turnaround framework is compiled.
The study aligns these findings with the new South African legislation, and designs a
turnaround framework for use by turnaround professional practitioners,
entrepreneurs and affected persons alike. This study introduced a number of new
constructs that can be used in a business turnaround context, namely:
? business triage
? verifier determinant
? turnaround framework, introducing the constructs “business triage” and
“verifier determinant” a timeline schedule for executing the rescue process
This study highlighted the importance of establishing the true value of a business in
the early stages of the turnaround process. Verifiers can be used successfully to
determine the extent of the problem (“depth of the rot”), the difficulties involved and
reduce time requirements for analysis.
v
In appreciation for the assistance, support and involvement of the following people,
my sincere gratitude to:
My supervisor, Prof Marius Pretorius, who has always encouraged and supported
me. His trust, patience, professional guidance, and unbelievable dedication allowed
me to explore various possibilities. Words cannot express my appreciation for his
effort. My sincere gratitude
Mrs. Rina Owen for the professional assistance with the statistical analysis. You
were never to busy to assist – thank you.
My colleagues and friends with a special mention to Marie Strydom, who encouraged
and supported me at different stages of the research process, what a privilege to
work with you.
My wife Elsa, you are my life. My part time studies were possible because of you.
Whilst I was busy with this research project, your effortless way of coping with all the
added responsibilities and still maintaining good sense, is incomparable.
My children, Danita and Hanre. Two very special individuals who fill our lives with
endless joy and love. Thank you for your support; filing was never my big forte. To
my two sons in law, thank you for your unbelievable support.
Gloria in Excelsis Deo
Gerhard Holtzhauzen
Kempton Park
April 2011
ACKNOWLEDGEMENT
vi
Contents
CHAPTER 1: INTRODUCTION AND STUDY DESIGN
1.1INTRODUCTION................................................................................................................................ 2
1.2CURRENT METHODS OF BUSINESS ASSESSMENT................................................................... 7
1.2.1 DUE DILIGENCE ................................................................................................................. 7
1.2.2 BUSINESS REVIEW............................................................................................................ 7
1.2.3 VALUATION METHODOLOGY ........................................................................................... 8
1.3TURNAROUND TRIAGE................................................................................................................... 9
1.4MOTIVE FOR THE STUDY............................................................................................................. 12
1.5VERIFIER DETERMINANT THEORY............................................................................................. 14
1.6RESEARCH OBJECTIVE ............................................................................................................... 17
1.6.1 PRIMARY OBJECTIVES ................................................................................................... 17
1.6.2 SECONDARY OBJECTIVES............................................................................................. 18
1.7PROBLEM STATEMENT................................................................................................................ 19
1.8TERMS USED INTERCHANGEABLY IN THIS THESIS................................................................ 20
1.9REFERENCING TECHNIQUE......................................................................................................... 21
1.10 CHAPTER OUTLINE................................................................................................................ 22
2.1INTRODUCTION.............................................................................................................................. 25
2.2RISK PROPENSITY OF ENTREPRENEURS................................................................................. 25
2.3PSYCHOLOGY OF BUSINESS TURNAROUND........................................................................... 27
2.4RISK PROPENSITY OF VENTURES.............................................................................................. 30
2.5QUO VADIS?................................................................................................................................... 33
2.6TURNAROUND IN SOUTH AFRICA – STATUS QUO................................................................... 34
2.7CONCLUSION................................................................................................................................. 36
3.1INTRODUCTION.............................................................................................................................. 38
3.2DEFINITIONS OF ORGANISATIONAL DECLINE ......................................................................... 41
3.2.1 EARLY WARNING SIGNS................................................................................................. 41
3.2.2 DECLINE............................................................................................................................ 43
3.2.3 DISTRESS ......................................................................................................................... 44
3.2.4 FAILURE............................................................................................................................ 45
3.3EARLY WARNING SIGNS LEARNING.......................................................................................... 45
3.4BASEL EXPLAINED ....................................................................................................................... 47
3.5ACADEMIC DEBATE ON ORGANISATIONAL DECLINE............................................................. 50
3.6WARNING SIGNS IN THE LITERATURE ...................................................................................... 54
3.6.1 MANAGEMENT EARLY WARNING SIGNS...................................................................... 55
3.6.2 FINANCIAL WARNING SIGNS.......................................................................................... 57
3.6.3 BANKING WARNING SIGNS ............................................................................................ 58
3.6.4 OTHER EARLY WARNING SIGNS................................................................................... 59
3.7SUMMARY OF EARLY WARNING SIGNS .................................................................................... 61
vii
3.8INTRODUCTION OF VERIFIER DETERMINANTS........................................................................ 62
3.9CONCLUSION................................................................................................................................. 66
4.1INTRODUCTION.............................................................................................................................. 68
4.2BUSINESS TURNAROUND............................................................................................................ 70
4.3DEFINITION OF BUSINESS TURNAROUND................................................................................ 74
4.4STRATEGIC VERSUS TURNAROUND STRATEGY..................................................................... 79
4.5DEVELOPMENT OF TURNAROUND STRATEGIES..................................................................... 85
4.5.1 INTRODUCTION................................................................................................................ 85
4.5.2 HOFER’S CONTRIBUTION (1980).................................................................................... 87
4.5.2.1 Summary of Hofer’s contribution........................................................................................ 90
4.5.3 BIBEAULT’S CONTRIBUTION (1982)(reprint 1999) ......................................................... 90
4.5.3.1 Summary of Bibeault’s contribution.................................................................................... 91
4.5.4 HAMBRICK AND SCHECTER’S CONTRIBUTION (1983)................................................ 91
4.5.4.1 Summary of Hambrick and Schecter’s contribution........................................................... 92
4.5.5 O’NEILL’S CONTRIBUTION (1986)................................................................................... 92
4.5.5.1 Summary of O’Neill’s contribution...................................................................................... 93
4.5.6 ZIMMERMAN’S CONTRIBUTION (1989) .......................................................................... 93
4.5.6.1 Summary of Zimmerman’s contribution ............................................................................. 94
4.5.7 BOYLE AND DESAI’S CONTRIBUTION (1991)................................................................ 95
4.5.7.1 Summary of Boyle and Desai’s contribution ...................................................................... 95
4.5.8 ROBBINS AND PEARCE’S CONTRIBUTION (1992) ....................................................... 95
4.5.8.1 Summary of Robbins and Pearce’s contribution................................................................ 97
4.5.9 FREDENBERGER AND BONNICI’S CONTRIBUTION (1994) ......................................... 98
4.5.9.1 Summary of Fredenberger and Bonnici’s contribution....................................................... 98
4.5.10 AROGYASWAMY, BARKER AND YASAI-ARDEKANI’S CONTRIBUTION (1995) .......... 98
4.5.10.1 Summary of Arogyaswamy, Barker and Yasai-Ardekani’s contribution............................. 99
4.5.11 LOHRKE, BEDEIAN AND PALMER’S CONTRIBUTION (2004) ..................................... 100
4.5.11.1 Summary of Lohrke, Bedeian and Palmer’s contribution................................................. 100
4.5.12 SMITH AND GRAVES’S CONTRIBUTION (2005) .......................................................... 101
4.5.12.1 Summary of Smith and Graves’s contribution.................................................................. 101
4.5.13 SHEPPARD AND CHOWDHURY’S CONTRIBUTION (2005) ........................................ 102
4.5.13.1 Summary of Sheppard and Chowdhury’s contribution..................................................... 103
4.5.14 PRETORIUS (2008) ......................................................................................................... 103
4.5.14.1 Summary of Pretorius’s contribution ................................................................................ 106
4.6TURNAROUND PLANNING ......................................................................................................... 106
4.6.1 INVESTIGATION PHASE.................................................................................................. 109
4.6.2 THE PLAN........................................................................................................................ 109
4.7CONCLUSION............................................................................................................................... 112
5.1INTRODUCTION TO A LITERATURE REVIEW OF LEGISLATION........................................... 115
5.2CURRENT (HISTORIC) SOUTH AFRICAN COMPANIES ACT, ACT 61 OF 1973..................... 117
5.2.1 INTRODUCTION.............................................................................................................. 117
5.2.2 SECTION 311 COMPROMISE........................................................................................ 120
viii
5.2.3 SECTION 427 JUDICIAL MANAGEMENT ...................................................................... 121
5.2.4 RECKLESS TRADING..................................................................................................... 122
5.3INTERNATIONAL LEGISLATION ................................................................................................ 128
5.3.1 INTRODUCTION.............................................................................................................. 128
5.3.2 UNITED STATES OF AMERICA.................................................................................... 130
5.3.3 UNITED KINGDOM......................................................................................................... 131
5.3.4 SWITZERLAND................................................................................................................ 131
5.3.5 BELGIUM......................................................................................................................... 132
5.3.6 GERMANY....................................................................................................................... 132
5.3.7 SPAIN............................................................................................................................... 132
5.3.8 SWEDEN.......................................................................................................................... 133
5.3.9 FINLAND.......................................................................................................................... 133
5.3.10 ITALY ............................................................................................................................... 133
5.3.11 NETHERLANDS............................................................................................................... 134
5.3.12 FRANCE........................................................................................................................... 134
5.3.13 CANADA .......................................................................................................................... 134
5.3.14 AUSTRALIA ..................................................................................................................... 134
5.4DEVELOPING A BANKRUPTCY RULE IN SOUTH AFRICA...................................................... 135
5.5NEW NATIONAL LEGISLATION: COMPANIES ACT, ACT 71 OF 2008.................................... 140
5.5.1 INTRODUCTION.............................................................................................................. 140
5.5.2 FINANCIAL DISTRESS ................................................................................................... 142
5.5.3 RECKLESS TRADING UNDER THE NEW COMPANIES ACT ...................................... 143
5.5.4 BEGINNING, DURATION AND ENDING OF BUSINESS RESCUE............................... 145
5.6LIABILITIES OF THE TURNAROUND PRACTITIONER............................................................. 146
5.6.1 LIABILITY OF LEGITIMACY............................................................................................ 146
5.6.2 LIABILITY OF LEADERSHIP........................................................................................... 148
5.6.3 LIABILITY OF DATA INTEGRITY.................................................................................... 149
5.6.4 LIABILITY OF STRATEGY OPTIONS............................................................................. 150
5.6.5 LIABILITY OF RESOURCE SCARCITY.......................................................................... 151
5.6.6 LIABILITY OF INTEGRATION......................................................................................... 153
5.7CONSIDERATION OF A BUSINESS TURNAROUND PLAN. ..................................................... 154
5.8SUMMARY..................................................................................................................................... 158
6.1INTRODUCTION............................................................................................................................ 162
6.1.1 PROBLEM DEFINITION.................................................................................................. 164
6.1.2 OBJECTIVES OF THE RESEARCH STUDY.................................................................. 165
6.1.2.1 Primary objective.............................................................................................................. 165
6.1.2.2 Secondary objectives ....................................................................................................... 165
6.1.3 PROPOSITIONS.............................................................................................................. 166
6.1.4 LITERATURE RESEARCH.............................................................................................. 166
6.1.5 IDENTIFICATION OF EARLY WARNING SIGNS........................................................... 168
6.1.6 IDENTIFICATION OF TURNAROUND STRATEGIES.................................................... 169
6.1.7 SAMPLE SELECTION FOR THIS STUDY...................................................................... 170
ix
6.2SIX REAL-LIFE CASES................................................................................................................ 172
6.2.1 CHOICE OF ORGANISATION......................................................................................... 172
6.2.2 CASE SELECTION FOR THIS STUDY........................................................................... 173
6.3INTERVIEWS – REPGRID METHODOLOGY .............................................................................. 175
6.3.1 INTERVIEW WITH PARTICIPANTS................................................................................ 175
6.3.2 INTERVIEW PROCESS................................................................................................... 177
6.3.3 INTERVIEW PREPARATION .......................................................................................... 178
6.3.4 IDENTIFICATION OF VERIFIER DETERMINANTS ....................................................... 179
6.3.5 THE INTERVIEW PROTOCOL........................................................................................ 179
6.4QUESTIONNAIRE INSTRUMENT ................................................................................................ 180
6.4.1 QUESTIONNAIRE DESIGN............................................................................................. 181
6.4.2 DETERMINATION OF VALUES FOR THE QUESTIONS............................................... 182
6.4.3 PILOT TESTING THE QUESTIONNAIRE....................................................................... 183
6.5DETERMINATION OF VERIFIER DETERMINANTS.................................................................... 183
6.5.1 SAMPLING METHODS AND RESPONSE RATE........................................................... 183
6.5.2 EXPERT GROUP............................................................................................................. 184
6.5.2.1 Identification ..................................................................................................................... 184
6.5.2.2 Sample frame................................................................................................................... 184
6.5.2.3 Sample size...................................................................................................................... 185
6.5.3 INCUMBENT GROUP...................................................................................................... 185
6.5.3.1 Identification ..................................................................................................................... 185
6.5.3.2 Sample frame................................................................................................................... 185
6.5.3.3 Sample size...................................................................................................................... 185
6.6DATA............................................................................................................................................. 185
6.6.1 DATA COLLECTION........................................................................................................ 186
6.6.1.1 Data measurement and instruments................................................................................ 186
6.6.2 DATA ANALYSIS AND INTERPRETATION.................................................................... 187
6.6.3 FACTOR ANALYSIS........................................................................................................ 187
6.6.4 TEST OF SIGNIFICANCE (t-TEST)................................................................................. 188
6.6.5 ANALYSIS OF VARIANCE (ANOVA) .............................................................................. 188
6.6.6 VALIDITY AND RELIABILITY.......................................................................................... 189
6.6.7 WILCOXON...................................................................................................................... 191
6.7CONCLUSION............................................................................................................................... 191
7.1INTRODUCTION............................................................................................................................ 194
7.1.1 CASE RESEARCH RESULTS......................................................................................... 195
7.2EMPIRICAL FINDINGS: DESCRIPTIVE STATISTICS................................................................. 197
7.2.1 SAMPLE AND RESPONSE RATE .................................................................................. 197
7.2.2 DEMOGRAPHICS............................................................................................................ 197
7.2.3 FACTOR ANALYSIS........................................................................................................ 204
7.3EMPIRICAL FINDINGS: INFERENTIAL STATISTICS................................................................. 210
7.3.1 MULTI-WAY ANALYSIS OF VARIANCE (ANOVA)......................................................... 210
7.3.2 WILCOXON TWO-SAMPLE TEST AND KRUSKAL-WALLIS TEST............................... 215
x
7.4CHAPTER SUMMARY.................................................................................................................. 222
8.1INTRODUCTION............................................................................................................................ 224
8.2SUMMARY OF THE MAIN FINDINGS.......................................................................................... 225
8.3RESEARCH OBJECTIVE ............................................................................................................. 228
Primary objectives................................................................................................................................ 228
Secondary objectives........................................................................................................................... 228
8.4IN PURSUIT OF THE PRIMARY OBJECTIVE............................................................................. 229
8.5IN PURSUIT OF THE SECONDARY OBJECTIVE....................................................................... 230
8.6THE SETTING UP PHASE............................................................................................................ 232
8.6.1 INVESTIGATION.............................................................................................................. 232
8.6.1.1 Triage questions............................................................................................................... 233
8.6.1.2 Data integrity and verifier determinants ........................................................................... 234
8.6.1.3 Business review and verifier determinants ...................................................................... 234
8.6.1.4 Final decision ................................................................................................................... 235
8.6.2 PLANNING PHASE.......................................................................................................... 235
8.6.2.1 Turnaround plan............................................................................................................... 236
8.6.2.2 Recovery strategy formulation ......................................................................................... 236
8.6.2.3 Objectives in planning ...................................................................................................... 236
8.6.2.4 Decision outcome............................................................................................................. 236
8.7TURNAROUND EXECUTION PHASE.......................................................................................... 237
8.7.1 STRATEGIC RESPONSE................................................................................................ 238
8.7.2 FINANCIAL RESPONSE ................................................................................................. 239
8.7.3 OPERATIONAL RESPONSE........................................................................................... 240
8.7.4 EXECUTION OUTCOME................................................................................................. 240
8.8BENEFITS OF THE STUDY.......................................................................................................... 240
8.9LIMITATIONS OF THE STUDY..................................................................................................... 241
8.10 FUTURE RESEARCH ............................................................................................................ 242
8.11 CONCLUSION........................................................................................................................ 243
APPENDIX A: EARLY WARNING SIGNS CATEGORIES................................................................ 343
APPENDIX B: BANKING SIGNS....................................................................................................... 396
APPENDIX C: PHASES IN TURNAROUND STRATEGIC PROCESS............................................. 400
APPENDIX D: TURNAROUND RESEARCH SUMMARISED BY PANDIT ...................................... 455
APPENDIX E: REAL LIFE CASE EXAMPLE.................................................................................... 457
APPENDIX F: QUESTIONNAIRE ...................................................................................................... 478
APPENDIX G: COMPANIES ACT, ACT 71 OF 2008........................................................................ 485
APPENDIX H: COMPANIES AMENDMENT BILL............................................................................. 506
xi
LIST OF FIGURES
Figure 3.1 Process flow leading up to a turnaround 39
Figure 3.2 Early Warning Signs elements and synonyms. 42
Figure 7.3 Service Period in Banking 200
Figure 7.5 Respondents Age Distribution 203
Figure 4.1 The strategies companies chose (Hofer, 1980:25).............................................................. 88
Figure 4.2 Hofer’s four turnaround strategy indicators (Hambrick & Schecter, 1983:236) ................... 89
Figure 4.3 The successful turnaround process (Zimmerman, 1989:117) ............................................. 94
Figure 4.4 Environment/response matrix (Boyle & Desai, 1991:38)..................................................... 96
Figure 4.5 A model of the turnaround process (Robbins & Pearce, 1992:291).................................... 97
Figure 4.6 Business turnarounds (Arogyaswamy et al. (1995:494))..................................................... 99
Figure 4.7 An expanded model of the turnaround process (Lohrke et al., 2004:73) .......................... 100
Figure 4.8 Turnaround process (Smith & Graves, 2005:308)............................................................. 102
Figure 4.9 Key events and core concepts in turnaround/failure (Sheppard & Chowdhury, 2005:245)
............................................................................................................................................................ 103
Figure 4.10 Turnaround situations and their unique preconditions matrix (Pretorius, 2008:23)......... 104
Figure 4.11 Strategies and practices to respond to the turnaround situations (Pretorius, 2008:24) .. 105
Figure 5.1 Section 129 rescue process timeline (adapted from Samuelson, 2010) ........................... 147
Figure 5.2- Legal impact on turnaround process flow......................................................................... 158
Figure 6.1 Interaction between role players and the performance cycle............................................ 163
Figure 6.2 Broad research flow........................................................................................................... 167
Figure 6.3 The detailed research process of this study...................................................................... 168
Figure 6.4 Structure informing the appropriate case selection ........................................................... 173
Figure 6.5 Research design showing stratified case selection........................................................... 174
Figure 6.6 Face validity and reliability................................................................................................. 190
Figure 7.1 Levels of management ...................................................................................................... 198
Figure 7.2 Service period in banking .................................................................................................. 200
Figure 7.3 Service period in current position ...................................................................................... 202
Figure 7.4 Respondent age distribution.............................................................................................. 203
Figure 7.5 Highest educational qualification ....................................................................................... 204
LIST OF TABLES
Table 1.1 Comparison of medical triage (Moskop & Iserson 2007:279) and business triage (own
compilation) ........................................................................................................................................... 10
Table 4.1 The evolution of turnaround modelling, strategic thinking and theory .................................. 86
Table 5.1 Liability, knowledge and skills requirements (Pretorius & Holtzhauzen, 2008:103) ........... 118
Table 6.1 Group categories................................................................................................................. 170
Table 6.2 Case demographics used in this study ............................................................................... 175
Table 6.3 Case study interview record sheet...................................................................................... 179
Table 6.4 The summated Likert scale used in this study (adapted from Cooper & Schindler, 2003:308)
............................................................................................................................................................ 182
Table 7.1 Factor importance ratings and rankings in relation to expertise classification.................... 198
ii
Table 7.2 Factor importance ratings and rankings in relation to management classification levels of
management ....................................................................................................................................... 199
Table 7.3 Factor importance ratings and rankings in relation to classification of length of service in
banking................................................................................................................................................ 201
Table 7.4 Factor importance ratings and rankings in relation to classification of ............................... 202
Table 7.5 Comparison between education level and management level of respondents .................. 203
Table 7.6 Description of factors .......................................................................................................... 205
Table 7.7 Univariate statistics for factor analysis................................................................................ 205
Table 7.8 Ranking comparison of factors ........................................................................................... 206
Table 7.9 Factor correlations .............................................................................................................. 206
Table 7.10 Variables in the managerial verifier factor ........................................................................ 207
Table 7.11 Variables in the financial verifier factor ............................................................................. 208
Table 7.12 Variables in the strategic verifier factor............................................................................. 209
Table 7.13 Variables in the operational/market verifier factor ............................................................ 209
Table 7.14 Variables in the banking verifier factor.............................................................................. 210
Table 7.15 ANOVA for Factor 1: managerial verifier determinants .................................................... 211
Table 7.16 ANOVA for Factor 2: financial verifier determinants......................................................... 212
Table 7.17 ANOVA for Factor 3: strategic verifier determinants......................................................... 213
Table 7.18 ANOVA for Factor 4: operational/marketing verifier determinants ................................... 214
Table 7.19 ANOVA for Factor 5: banking verifier determinants.......................................................... 215
Table 7.20 Means procedure for the incumbent and expert groups................................................... 216
Table 7.21 Testing managerial verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 217
Table 7.22 Testing financial verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 218
Table 7.23 Testing strategic verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 219
Table 7.24 Testing operational/market verifier determinants for influence between the incumbent and
expert groups ...................................................................................................................................... 220
Table 7.25 Testing banking verifier determinants for influence between the incumbent and expert
groups ................................................................................................................................................. 221
1
CHAPTER 1
Introduction and study design
1.1 Introduction
1.2 Current methods of business assessment
1.2.1 Due diligence
1.2.2 Business Review
1.2.3 Valuation methodology
1.3 Turnaround triage
1.4 Motive for the study
1.5 Verifier determinant theory
1.6 Research objective
1.7 Problem statement
1.8 Interchangeable terms used in this thesis
1.9 Referencing technique
1.10 Chapter outline
2
Hofer (1980:19)
1.1 INTRODUCTION
Turnaround management, as observed in the South African context, is a new
management discipline that is currently being robustly pursued by both business and
academics alike. In this regard, the imminent date for implementation of the long-
awaited rescue legislation has created many opportunities, which have resulted in a
rush for the most favourable positioning in this ‘newborn’ industry in South Africa. In
a proposed turnaround, the first salient decision to make is to either follow the formal
route, as prescribed by legislation in “Business Rescue and Compromise with
Creditors” Chapter 6 of the Companies Act (Act 71 of 2008) or to adopt an informal
approach to turnaround. The Companies Act, Act 61 of 1973, will be referred to as
the old Companies Act, and the Companies Act, Act 71 of 2008, will be referred to as
the new Companies Act.
The alternative of an informal approach to turnaround is prescribed by the
International Association of Restructuring, Insolvency and Bankruptcy Professionals
INSOL principles, as discussed by the United Nations Commission of International
Trade Law’s Multinational Judicial Colloquium (INSOL Professionals, 1995:35), and
the so-called London Approach.
“No matter what the state of the economy, no company is immune from internal
hard times – stagnation or declining performance”.
CHAPTER 1
INTRODUCTION AND STUDY DESIGN
Interchangeable use of the following words, depending on the original author
referenced, to describe “company”:
Company = Business = Organisation = Venture = Business
3
This study uses early warning sign theory to establish the verifier determinants that
can guide entrepreneurs and turnaround practitioners in the critical role of timely
planning for the current rescue and future sustainability of an enterprise. Although
extensively explored later in this study, for now a verifier determinant is defined as a
confirmation of an early warning sign.
Chapter 6 of the new Companies Act formalises business rescue via a formal
commercial process that includes a consultative process and a moratorium period,
and that maximises the likelihood of the company’s continued existence on a solvent
basis. Current formal turnarounds are based on those methodologies and/or actions
that have already been recorded and tested in courts of law via Sections 311 and
427 of the old Companies Act and South African Insolvency Law, Act 24 of 1936.
Consequently, this research identifies and discusses a number of models, or rather
turnaround actions, of turnaround planning. Currently, there is little by way of
guidelines or recorded turnaround plans in South Africa that addresses “verifier
determinants”.
Bolton’s London Approach (2003:52) has its main application in the bank syndicates
of informal consortia that attempt to restructure a business’s debt. He makes it
known that this process is “confined to bank lenders, conducted in secret
negotiations, and generally involves both a temporary stay on bank debt payments
and a pro-rata debt forgiveness (‘hair-cut’)”. Iskander, Meyerman, Gray and Hagen
(1999:43) advise that the London Approach has been in use in the United Kingdom
since 1989 and has become well known across the globe.
Although the method for investigating a business is not prescribed or explained by
law, the requirement to “investigate” the affairs of the company is a clear rule of law.
For example, Section 141(1) of the new Companies Act reads as follows: “As soon
as practicable after being appointed, a practitioner must investigate the company's
affairs, business, property, and financial situation, and after having done so, consider
whether there is any reasonable prospect of the company being rescued.”
4
With very limited time available to construct a business rescue plan, the practitioner
will need to develop a unique modelling process in order to be in a position to
formulate the rescue plan. A turnaround practitioner will most probably be appointed
whatever strategic approach the entrepreneur (board of directors and/or
shareholders) decides on. The appointment (formal or informal) of a turnaround
manager is made primarily by the board of a company and is sanctioned by the
stakeholders.
Section 128 of Chapter 6 of the new Act describes the stakeholders as affected
persons who are shareholders, all classes of creditors’ organised labour, staff and
any other party that may be affected. In formal proceedings, stakeholders will also be
in a position to appoint or to remove a practitioner through a court-driven process.
The following are examples of theories and models that address the actions of
turnaround practitioners:
Eisenhardt (1989a:58) encapsulates the agency theory. Agency theory concerns the
relationship between a principal and his/her agent. Effective turnaround
management requires quick decision making in the early stages of distraught
circumstances. The appointment of a turnaround practitioner is done with the
expectancy of a close relationship between a principal (shareholder/s, director/s
and/or stakeholder/s) and a manager (in a turnaround context this is the turnaround
practitioner). Eisenhardt (1989c:544) discusses the making of fast strategic decisions
in high-velocity environments. However, without a sound strategy, Hedley (1976:2) is
convinced that corporate survival itself may be called into question. It can thus be
deduced that the practitioner in his/her role as appointed agent must be in a position
where he/she is mandated by the principle of taking quick and decisive decisions.
This will include formulating short and medium-term strategies.
Hofer (1980:19), and Hambrick and Schecter (1983:235), on the other hand, debate
the steps taken at the commencement of a turnaround. They argue that a turnaround
starts with cost-cutting exercises, although they omit to discuss the very first step in
a turnaround event, that of analysing the business.
5
Other researchers and authors, such as O’Neill (1986), Boyle and Desai (1989,
1991), Gopal (1991),Hubbard, Lofstrom and Richard (1994), Oliver and Fredenberg
(1997), Castelli and Kontoyianni (1999), Theriot, Roopchand, Stigter and Bond
(2000),Collard (2002) and Fetterman (2003), concentrate on the analysis phase as
the initial step in the process of turnaround. They promote the importance of
understanding the turnaround event before embarking on steps commonly referred
to as “stopping the bleeding”. Bruton, Ahlstrom and Wan (2001:148) argue that the
business must stop the bleeding through retrenchments and immediate “cut-backs”.
Pearce and Robbins (1993:624) agree that stabilising the business (stopping the
bleeding) is the first stage of turnaround. Moreover, they emphasise the second
phase as being the “recovery response”. This recovery response in the turnaround
process highlights the effective correction of the root causes of the decline.
Meanwhile, Chapman (2003) criticises the relatively short period of one month
available to Australian companies to come up with a turnaround plan. This time
frame is closely related to the length of time prescribed for the rescue process (25
days) in South Africa, as described in Chapter 6 of the new Companies Act. Al-
Shaikh (1998:81) ponders on the steps in turnaround as being firstly the conducting
of feasibility studies and then securing support from interested authorities, such as
lenders and trade creditors.
The subtle balance required in the initial stage of a turnaround is critical for
managing a chaotic environment. Moncarz and Kron (1993:180) advocate the
identification of problem areas as the first step to turnaround. Balgobin and Pandit
(2001:304) state that the four elements aiding a successful turnaround strategy are:
? situation analysis
? gaining control
? managing shareholders
? improving motivation.
6
Cross (2002:41) advocates the initial analysis of a company’s performance
concerning its finances, operations and market. Fetterman (2003:11), Glantz
(2003:323), Scherrer (2003:27), Lohrke, Bedeian and Palmer (2004:172) and
Burbank (2005:56) agree that the first stage of a turnaround is a situation analysis.
Cole (1994:48) underpins the importance of data integrity in the initial stages of a
due diligence (see section 1.2.1).
Cole (1994:48) states that it is crucial to get entrepreneurs to understand that
providing high-quality information will speed up the process. This study concentrates
on the validation of the problem areas, or warning sign areas, identified. Gilmore and
Kazanjian (1989:81) distinguish between group and individual decision making. From
a turnaround perspective, both these types will have value, but as most turnarounds
require an autocratic approach the individual decision types will have more influence.
In the analysis phase, selecting the process format of the analysis is the most crucial
decision in a turnaround event: this decision is whether to attempt the turnaround or
not.
The turnaround practitioner in South Africa must, within 25 days of being appointed,
construct a turnaround plan, which must be adopted by all stakeholders within ten
days of publication of the plan. Figure 5.1 in chapter 5 illustrates the timeline
requirements of the Act. In this regard, Merrifield (1993:384) proposes a disciplined
analytical process before a turnaround process can commence. Although traditional
methods of analysing a business should suffice, the time constraint is an important
consideration.
The intention of this research is to design and develop a framework to enable
practitioners to function within this time constraint, as well as the prescriptions of
the new Companies Act.
7
1.2 CURRENT METHODS OF BUSINESS ASSESSMENT
1.2.1 DUE DILIGENCE
The most common and most generally accepted method for analysing and testing
the feasibility of a business is perhaps the “due diligence” method. A due diligence
process is used by business analysts to analyse and test the assiduousness of a
business venture and is the process predominantly applied in merger and acquisition
considerations. Cole (1994:46) lists the following critical due diligence elements:
? successor environmental liability
? integrity of business’s historical financial statements
? adequacy and sufficiency of assets
? intellectual property, patents and know-how
? technical expertise
? quality of all personnel and key management
? quality of projected cash flow and after-tax earnings
Hubbard, Lofstrom and Richard (1994:1) confirm the importance of a due diligence
process, but warn that companies have little guidance on what constitutes a good
due diligence process and are restricted to their own experience. It is imperative that
the due diligence process is done within a very short period as, in a turnaround
event, very little time is available to “fish” for information.
1.2.2 BUSINESS REVIEW
Akason and Kepler (1993:38) have set some guidelines for a management review,
which are also applicable to turnaround planning. They ponder on their finding that a
business review “goes far beyond mere due diligence processes” and differentiate a
due diligence from a business review by calling a due diligence a “cookbook
approach” or a reactive process using a checklist indicating "yes" or "no" decisions.
8
However, Akason and Kepler (1993:38) opines that a business review, if correctly
executed, covers everything in the business it is a “proactive process that generates
a live, working document that can be used in a value-creating manner” and can be
used as a management tool in the future.
1.2.3 VALUATION METHODOLOGY
The two most important questions that need to be answered when a turnaround
event occurs are the following:
1. In a distressed business scenario, should a turnaround be attempted or not?
2. In a distressed business scenario, will the turnaround have the desired
results?
Hence, the most important decision the practitioner must consider is whether there is
a reasonable prospect for continuing with the business. Accordingly, after a
turnaround practitioner has been appointed he/she must establish the feasibility of
turning the business around.
Chapter 6 of the new Act, requires the turnaround practitioner to “consider whether
there is any reasonable prospect of the company being rescued”
(researcher’s emphasis).
The answer to considering a “reasonable prospect” lies in evaluating the business as
a going concern. Grounded theory by Hershkowitz (2004) was used to investigate
various valuation methods and their applicability. Referring back to the two questions
mentioned at the beginning of this section, a solvency (liabilities exceeding assets)
versus liquidity (non-cash working capital cycle) or cash flow (ability to generate cash
to meet short-term obligations) valuation is suggested to satisfy question 1. Bolton
(2003:43) discusses the significance of a valuation as the first stage of a turnaround
event and identifies some important “transformation” steps in an attempt to preserve
the business:
9
? Preserve the liquidation value of the business.
? Maintain the going-concern value of the business.
? Form committees to conduct restructure negotiations.
? Negotiate new funds.
? Take note of modern reorganisation law.
The main inference from Section 141(1) of the new Companies Act is that the
turnaround practitioner has to confirm (with the stakeholders) the status (solvency
and liquidity position) of the business, regardless of which route he/she
anticipates embarking upon. Briggs (in Cross 2002:44) confirms that in a
turnaround situation there cannot be any sacred cows. She concludes with a
question to the entrepreneur: “Are you willing to sign a document that states
that everything is on the table? If not, I will leave now and you are on your
own.” In closing, the above methods are processes that have been tested and
proven in various applications but are now being applied to a turnaround event.
The main constraint of the measures discussed above is time – they are excellent
processes if the analyst has the luxury of time. In conclusion, it should be stated
that turnaround modelling should address, as its main departure point, the time
limitations imposed by Chapter 6 of the new Act.
1.3 TURNAROUND TRIAGE
In medical terms, Moskop and Iserson (2007:276) describe three basic steps for
traige:
? The scarcity of resources which will prompt a process of triage.
? The triage officer assesses patient’s medical needs by conducting a brief
examination.
? The triage officer then uses a set of criteria to implement a priority treatment
plan.
10
Moskop and Iserson (2007:276) conclude that, if the triage officers use an
established plan, it confirms that a group of persons must have developed the plan.
Crawford (1994:27) supports the triage approach when he states that the turnaround
practitioner must perform an on-site “brutally frank assessment of the company’s
condition”. He refers to this action as “on-site triage”.
This study refers to this very first stage in a turnaround situation as “turnaround
triage”. The term ‘triage’ has its foundation in World War I, and is derived from the
French word trier meaning ‘to sort’. As explained by Moskop and Iserson (2007:275),
triage was used exclusively by the medical fraternity. However, medical triage has a
very close affiliation to turnaround triage. Table 1.1 illustrates the difference between
medical triage and business triage as identified by this study.
Table 1.1 Comparison of medical triage (Moskop & Iserson 2007:279) and business triage (own
compilation)
MEDICAL versus BUSINESS TRIAGE
• MEDICAL TRIAGE
• a) Those patients who can be savedbut whose lives are
inimmediate danger, requiring treatment immediately or
within a fewhours (redtriage tag: “immediate”; priority
1)
• b) Those patients whose lives are not in immediate
danger but who need urgent but not immediate medical
care (yellowtriage tag: “delayed”; priority 2)
• c) Those patients requiring only minor treatment (green
triage tag: “minimal”; priority 3)
• d) Those patients who are psychologically traumatized
andmight need reassurance or sedation if acutely
disturbed (no specific triage tag)
• e) Those patients whose condition exceeds the available
therapeutic resources, who have severe injuries such as
irradiation or burns to such an extent and degree that
they cannot be saved inthe specific circumstances of
time andplace, or complex surgical cases that oblige the
physician to make a choice between them and other
patients (black triage tag: “expectant”; no priority)
• This last category, “expectant,” which encompasses
those who are dead or who are “beyond emergency
care,” carries the most emotional and ethical baggage for
individuals doing triage.
• BUSINESS TRIAGE
• a) Those businesses who can be saved but whose
sustainability is under immediate threat , (financially
distressed) requiring turnaround immediately or within a
limited time span (redtriage tag: “immediate”; priority 1)
• b) Those businesses whose sustainability is not under
immediate threat(financial distressedwithin next six
months) but who need urgent intervention but not
immediate turnaround(yellow triage tag: “delayed”;
priority 2)
• c) Those businesses requiring only minor intervention
(green triage tag:“minimal”; priority 3)
• d) Those businesses who are still profitable but
psychologically traumatizedandmight need new strategic
direction–informal turnaround(no specific triage tag)
• e) Those businesses whose financial distress exceeds the
liquidity and solvency tests , to such a degree that they
cannot be saved in the specific circumstances of time and
place (gone concern) (black triage tag: “expectant”; no
priority)
• This last category, “expectant,” which encompasses those
businesses who are gone concerns who are beyond
turnaround intervention.
11
Answers to the following three basic questions, in this specific order, are the most
important aspects to consider when contemplating a business turnaround:
? Is there a business? (Harker and Sharma, 2000:41)
? How sick is the business? (Castogiovannii, Balga and Kidwell, 1992:27)
? Is the business worth saving? (Quinn, Mutzberg and James, 1988:680)
Pretorius (2008a:23) discusses Porter’s five strategic forces in a turnaround context.
Figure 1.1 illustrates his views on turnaround theory, where turnaround situations are
depicted in the four quadrants.
Pretorius approaches the turnaround situation by placing the business under
consideration in one of the quadrants. The shaded oval drawn across the four
quadrants illustrates the concept of “business triage”.
The shaded area represents the turnaround area, which is to a greater or lesser
extent evident in each quadrant. To give an example, in the ‘performing well’
quadrant, the obvious mistake would be to ignore early warning signs. Who would
expect a business to experience distress in this quadrant?
Nevertheless, a turnaround intervention may at some time be necessary in this
quadrant, as such businesses are prone to overtrading. Overtrading is one of the
most dangerous situations a business can find itself in.
12
Figure 1.1 Verifier strategic practices associated with generic turnaround strategies and triage
(adapted from Pretorius, 2008:24)
1.4 MOTIVE FOR THE STUDY
The motive for this research vests in management’s dilemma, which the board of a
company may resolve according to Section 129(1) of the new Companies Act, that
is, that the company should voluntarily begin business rescue proceedings. If
management fails to adopt a resolution in this regard and if the board of a company
has reasonable grounds to believe that the company is financially distressed, the
board must set out its reasons for not adopting a resolution in terms of Section
129(7) of the Act.
The general deduction from this sequence of events is that entrepreneurs
(management and/or directors) will be forced to continuously analyse their
businesses.
Strategic practices associatedwith GenericTurnaround
Strategies
GrowthStrategy:
Pursue sales (penetrate andnew
markets)
Maximize market share
EntrenchCompetitive Advantage
Optimise capacity
Forcedinnovation:
Strategyrevision,
Boosting revenues,
Findnewproducts,
Alternative markets,
Alternative positioning
Efficiencystrategy:
Protect Competitive
Advantage,
Cost cutting,
Generate cash
Forceddifferentiation:
Product differentiation,
Business diversification,
Acquisition, merger
Formal – S155
Liquidation.
Circledarea represents turnaroundintervention: process of “Triage” to be implemented
Performing
well Distress
Under performance Crises
13
Currently, apart from the prescriptions of Chapter 6 of the new Companies Act, there
is no acknowledged turnaround model available to entrepreneurs and turnaround
practitioners that is appropriate for application within the time constraints of the Act.
To add to this problem, legislation in its current and future form does not provide
entrepreneurs with any protection concerning informal turnaround attempts. Chapter
6 of the new Companies Act, Act 73 of 2008, addresses the problem of formal
turnarounds, but this new Act still requires testing in the courts.
Section 128(b) (i–iii) of the Companies Act describes business turnaround as follows:
Section 128(b) "business rescue" means proceedings to facilitate the
rehabilitation of a company that is financially
-
distressed by providing for—
(i) the temporary supervision of the company, and of the management of its
affairs, business and property;
(ii) a temporary moratorium on the rights of claimants against the
company or in respect of property in its possession; and
(iii) the development and implementation, if approved, of a plan to
rescue the company by restructuring its affairs, business, property,
debt and other liabilities, and equity in a manner that maximises
the likelihood of the company continuing in existence on a
solvent basis or, if it is not possible for the company to so continue in
existence, results in a better return for the company's creditors or
shareholders than would result from the immediate liquidation of the
company.
This gives rise to the question: How can entrepreneurs react to early warning signs
in order to attempt corrective action and effect turnarounds in time, and if need be,
as per Section 129(1) of the Act, appoint a professional turnaround practitioner?
When a turnaround event in terms of Chapter 6 of the Act occurs, the dilemma facing
the entire body of role players and/or stakeholders is whether to commence with a
turnaround of the affected business or not.
14
Referring back to the three crucial questions stated earlier, the following questions
have to be answered:
? Is there a business?
? How sick is the business?
? Is the business worth saving?
Brenneman (1998:162) adds another valid question to the three questions above,
asking: “When did it last make money?”. The primary objective of a business venture
is to be profitable, thus to make money. In this regard, the affected persons will firstly
be management, as they have to decide on what Brenneman (1998:165) calls a “go
forward plan” or turnaround strategy. Moreover, all the creditors (all categories) will
have to be convinced that the business has the potential to survive after informal, or
formal, proceedings in terms of Chapter 6 of the Act.
Finally, if the feasibility of attempting a turnaround is challenged, the courts will have
to be satisfied that a business can in fact be turned around, before ruling in favour of
the turnaround.
1.5 VERIFIER DETERMINANT THEORY
Correctly identifying the causes of a business’s decline through the application of
early warning sign theory is of the utmost importance in effectively addressing the
question of whether or not to continue with a business turnaround strategy. At this
stage, the suggestion is that the turnaround decision is one of the very first steps in
the turnaround process.
The focus, however, is on the development of a plan by practitioners in conjunction
with management. This plan should be specifically designed to reorganise the
business.
15
Less evident are the measures to confirm the signs once identified. These events
are identified as “verifier determinants” (the construct). At this stage, this is still an
unfamiliar concept and is therefore explored by this study.
This study pursued the following course of action:
1. Theoretically define the construct “verifier determinant”.
2. Identify verifier determinants that will authenticate early warning signs in a
specific time frame.
3. Strategically identify and action corrective measures.
Propose concepts to be included in the turnaround model.
Figure 1.2 Verifier determinant theory as applied in this study
The importance of this study is emphasised by the uncertainties that the following
three statements present:
1. Entrepreneurs are not likely to know what the construct “verifier determinant”
is or whether it will confirm a specific set of early warning signs.
Earlywarning wign
identified
Verifier determinant
No
Yes
Focus of the study
Confirmthe early warning sign
No turnaround
Turnaround
situation
Note: Verifier determinants:
Confirms the causes of decline
Confirms the warning signs are correct
Confirms the issues to inform turnaround situations
16
2. The question to be asked is whether there is a common understanding among
lending practitioners (mainly bankers) of the construct “verifier determinant”?
3. Are verifier determinants in evidence in distressed businesses to initiate or to
take corrective action in good time? Measured by the number of businesses in
liquidation, the answer is clearly “no”.
Verifier determinants, once identified, impact significantly by authenticating warning
signs and can be used progressively in the diagnostic phase of the turnaround
process. The effectiveness of business turnarounds depends on the strategy chosen
and the verifier determinants will be an important strategy component.
The literature review in this research deals with the following aspects: early warning
signs, failure models, legal constraints/opportunities and, finally, turnaround. The
empirical study aims to propose a functional turnaround model as a basis for
attempting turnarounds. Figure1.3 outlines the topics discussed in each of the
chapters in this study.
Thus, chapter 2 deals with the high-risk propensity which is a characteristic of
entrepreneurs. Chapter 3 deals with the available literature on early warning signs;
this was scrutinised to ensure that all current and available literature is included.
Subsequently, the literature and theory on turnaround processes, strategy and
actions are investigated in chapter 4. Finally, chapter 5 covers the legal systems of
foreign countries, such as the United States of America and the European Union.
Accordingly, the laws of these countries and their interpretation are scrutinised.
Figure 1.3 graphically displays the process followed in the literature research and in
the chapter layout.
17
Figure 1.3 Literature chapters and topics covered in this study
1.6 RESEARCH OBJECTIVE
The following objectives of this research are outlined:
1.6.1 PRIMARY OBJECTIVES
? Identify and theoretically define early warning “verifier determinants”.
? Identify and include verifier determinants as an integral part of a
turnaround plan that supports corrective action.
Verifiers Definition
Chapter 1
EarlyWarning Sign and
Verifier Identification
Chapter 3
TurnaroundBusiness Plan
Strategic content
Turnaroundtheory
Framework
Chapter 4
MODEL DESIGN
RESEARCH
Turnaround
Legal considerations
Chapter 5
TurnaroundBusiness Plan
Implementationand
Execution
Riskpropensity of
entrepreneurs
Chapter 2
18
1.6.2 SECONDARY OBJECTIVES
? To research the current formal turnaround practices for verifiers, including
those of the United States of America, Canada, Australia and Africa, and
the informal practices evident in South Africa. These findings are aligned
to include the changes in the applicable South African legislation.
? To design and propose a framework for use by turnaround practitioners
and entrepreneurs alike.
? To identify which verifier determinants will confirm the early warning sign,
and apply this outcome to the design of a reliable turnaround framework
that is accepted by all creditors and financial institutions.
? To contribute to the South African entrepreneurial, turnaround fraternity,
and to future formal studies in this academically ill-represented field.
The research conducted an investigation into various early warning signs,
turnaround management, and legal constructs and elements. One of the major
changes in legislation that needs to be considered here is that the turnaround of a
troubled business must first be attempted before winding up or liquidating the
concern. King (2009) includes this provision in the King III report on corporate
governance.
Although not enforceable by law, the King II and III reports are considered the rule
for corporate governance in South Africa (Lawlor and Haynes, 2003:13). A
suggestion is that the new legislation follows a model such as Chapter 11
proceedings in the United States of America (Corporate Law Reform, 2004:42). The
intention to follow international legislation is manifested largely in Chapter 6 of the
Act. The main objective of new legislation must be that the entrepreneur and the
turnaround practitioner develop a turnaround plan that is specifically designed to
reorganise and rescue the business.
1.7 PROBLEM STATEMENT
The possibility of business failure in a high
entrepreneurs frequently need to face.
30 to 80% of all new businesses fail within two years of inception.
however, not limited to the first two years, as it can happen at any time during the
business’s life cycle. The early warning signs
the main topic of research in this area
Literature on early warnings signs
Nelson (1987), Boyle and Desai (1981), Scherre (2003),
the warning signs. What need
this study a ‘verifier determinant
cause of decline or distress
determinants confirm the associated causes and e
decline. Once identified and
turnaround situation. Ventures have different risk propensities and the question is
whether turnaround practitioners or
to confirm the distress causes
Figure 1.4 The role of verifier d
19
PROBLEM STATEMENT
The possibility of business failure in a high-risk environment is a fact
entrepreneurs frequently need to face. Pretorius (2004:260) mentions that between
of all new businesses fail within two years of inception.
ited to the first two years, as it can happen at any time during the
The early warning signs of business failure were and still are
in this area (see also section 3.2).
Literature on early warnings signs indicates that researchers, such as
Nelson (1987), Boyle and Desai (1981), Scherre (2003), also identified
What needs to be confirmed is the root causes of the decline.
verifier determinant’ is defined as the ‘root’ indicator that validates the
cause of decline or distress that underscores the early warning sign
the associated causes and early warning signs of business
dentified and confirmed, the verifier determinants inform the
Ventures have different risk propensities and the question is
turnaround practitioners or entrepreneurs can employ verifier determinants
causes in the businesses.
determinants in a turnaround situation
risk environment is a fact that
Pretorius (2004:260) mentions that between
of all new businesses fail within two years of inception. Decline is,
ited to the first two years, as it can happen at any time during the
were and still are
such as Lorange and
also identified the causes of
the root causes of the decline. In
indicator that validates the
underscores the early warning sign These verifier
rly warning signs of business
the verifier determinants inform the
Ventures have different risk propensities and the question is
verifier determinants
20
The entrepreneur’s enterprise is more vulnerable due to a lack of understanding of
the real value and efficient use of a well-constructed turnaround plan. This absence
of a turnaround plan inevitably leads to default on financial commitments and
possible business failure. Creditors place huge reliance on turnaround plans, as
these plans will determine future support. However, if the compiler is not careful,
under current legislation a proposed turnaround plan can be construed as an act of
insolvency. In view of this, the changes in South African corporate legislation are
expected to address some of these issues, but entrepreneurs and/or turnaround
practitioners need to create “faith” in the concept of a turnaround plan.
A sound knowledge of the financial statements, the business’s tax position and any
failed strategy is vital for achieving turnaround success. Hence, verifier determinants
confirm the integrity of the data to be used in a turnaround.
1.8 TERMS USED INTERCHANGEABLY IN THIS THESIS
Financial distress – distress, decline, failure
Turnaround – rescue, realignment, restructure, reorganisation, renewal
Stakeholders – shareholders, creditors, organised labour
Strategic planning – strategy-making, strategy format
Turnaround plan – the plan, strategic plan, rescue plan
Turnaround situation – turnaround event
Situation analysis – due diligence processes, feasibility, business review,
business audit, analytical process
Early warning signs – causes of decline, root causes of failure, variables of
success and/or decline
Business – company, venture, business, organisation
Problem statement: To identify verifier determinants that will confirm early
warning signs and causes, and inform turnaround plans through enhanced
situation analysis.
21
1.9 REFERENCING TECHNIQUE
The Harvard referencing system is used throughout this study.
22
1.10 CHAPTER OUTLINE
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Risk propensity of
entrepreneurial
ventures
Academic debate of
identification of
business decline
Theoretical
development on
turnaround
management
A literature review
on turnaround
legislative measures
This chapter explains the risk
propensity of entrepreneurs and their
physiological reaction to business
turnaround events. The chapter
concludes with a brief overview to
the South African status quo on
turnarounds.
This chapter outlines and explains
the evolvement of warning signs and
its field of application. Literature
content illustrates the debate on
business failure and decline.
The theoretical development flow of
turnaround theory and philosophy,
and the subsequent modelling of
turnaround processes are embodied
in this chapter.
This chapter deals with international
trends in business rescue legislation.
Discussions include the old and new
South African legislation. The rescue
requirements of Chapter 6 of the
Companies Act, Act 71 of 2008, are
discussed.
23
Chapter 6
Chapter 7
Chapter 8
Research design
and methodology
Research findings
Conclusion
This chapter explains the research
problem, the objectives of the study
and the hypotheses. Background to
the case study selection and the
questionnaire design is given.
This chapter reports the empirical
findings from the data compiled from
the questionnaires. The statistical
analysis is explained in detail
against the backdrop of
demographical information and
more descriptive inferences.
The closing chapter proposes a
framework for turnaround modelling,
based on the empirical findings. The
research is concluded by revisiting
the hypothesis and research
objectives. Future research areas
are also proposed.
24
CHAPTER 2
Risk propensity of entrepreneurial ventures
2.1 Introduction
2.2 Risk propensity of entrepreneurs
2.3 Psychology of business turnaround
2.4 Risk propensity of ventures
2.5 Quo vadis?
2.6 Turnaround in South Africa: status quo
2.7 Conclusion
25
Barker (2005:44)
2.1 INTRODUCTION
This chapter explains the risk propensity of entrepreneurs and their psychological
reaction to business turnaround events. The chapter concludes with a summarised
overview of the South African status quo on turnarounds.
2.2 RISK PROPENSITY OF ENTREPRENEURS
Business ventures are faced with the constant risk of decline. When the business is
deteriorating, entrepreneurs often do not understand the problem, nor do they take it
seriously, consequently, they do not take sufficient steps to address the problems.
Counterfactual thinking and cognitive studies should be applied to the identification
of deteriorating business activities. In addition, the psychological effect of
deterioration, failure and turnaround is increasingly being incorporated into
entrepreneurial cognitive studies. Sutton and Callahan (1987:412) investigated and
discussed the spoilt image of the business and its management as a result of
bankruptcy. For any economy, it is important that entrepreneurs re-enter the market.
In a Boston Consulting Group Report, Bose and Pal (2002:3) conclude that
“entrepreneurs who can transcend failure and learn from their experience have
proven to be precious assets to their country’s economy: they drive growth and they
create employment, and they do this more successfully than entrepreneurs who
have never failed”.
“When a company is in trouble, finding and understanding the sources of problems
is not as simple as looking into a mirror.”
CHAPTER 2
RISK PROPENSITY OF ENTREPRENEURIAL VENTURES
26
Amaral and Baptista (2007:2) state that an entrepreneur who re-enters the business
arena after a business failure (or for any other reason) is defined as a “habitual”
entrepreneur. According to these authors, a “…habitual entrepreneur is an individual
who has established and/or inherited and/or purchased more than one business, as
opposed to novice entrepreneurs who have established, inherited and/or only
purchased one business…”.
The concept of “risk taking” is closely associated with entrepreneurial behaviour. The
entrepreneur’s appetite to take on risk is illustrated through his/her management and
leadership styles. Hatch and Zweig (2000:69) ponder the entrepreneur’s
rationalisation of high risk taking, and their diminished perception of the risk.
Wickham (2004:17) indicates that entrepreneurial characteristics include
? the need for autonomy
? the need to be in control of a situation
? a desire to face risk
? creativity
? a need for independence
? the desire to show leadership qualities.
The process of entrepreneurship follows the various stages of the business life cycle.
Researchers, such as Flynn and Forman (2001:43), Terpstra and Olson (1993:14),
Kazanjian and Drazin (1990:138), and Platt and Platt (1994:117), conclude that an
array of different problems can face organisations in various stages of their life cycle.
Following the business life cycle, it is clear that the entrepreneur will be faced with
decline and/or failure somewhere in this cycle. Flynn and Forman (2001:54) argue
that business failure relates to the entrepreneur’s inability to adapt to the various
stages of the business life cycle. Researchers such as Altman (1983:18) and
Amburgey, Kelly and Barnett (1993:69) conclude that, in their research’s data
distribution with respect to the age of the business, the findings clearly indicate that
the risk of failure is business age dependant and that more than 50% of all failures
occur in the first five years.
27
Argenti (1976:15) identifies three categories of company:
? Type I businesses are launched but never take off and fail within a few years.
? Type II businesses are launched and soar to incredible levels and then
collapse.
? Type III businesses are launched and mature, and then trade optimally over
several years.
Amaral and Baptista (2007:4) argue that the entrepreneur’s survival is not dependant
on the business’s successes and/or failures and draw a distinction between business
survival and entrepreneurial survival. Holtz-Eakin, Joulfaian and Rosen (1994:53)
examined the phenomenon that some individuals/entrepreneurs survive and others
do not. Accordingly, they conclude that the undercapitalisation of ventures plays an
integral part in the survival of entrepreneurs. Lohrke, Bedeian and Palmer (2004:63)
discuss the important role of top management in periods of decline. They argue that
for management to be successful in situations of decline, they should establish the
cause of the performance lapse “...quickly and accurately...”. Identifying these
causes correctly will determine the decisions made for prompt recovery or
turnaround.
To ensure survival, entrepreneurs must be properly equipped to adopt a strategic
turnaround approach. Azoulay and Scott (2001:340) argue that entrepreneurs will
find it difficult or will be unable, to change their routines unless they firstly recognise
those routines as being imperfect. It is important that these imperfections should be
recognised in good time to ensure that the entrepreneur can still change them.
2.3 PSYCHOLOGY OF BUSINESS TURNAROUND
In the South African context, the entrepreneur usually “fails” in the business.
Moreover, the way creditors secure themselves inevitably leads to the entrepreneur
also being sequestrated as a result of mandatory personal suretyships.
28
The rehabilitation process, often protracted over ten years, effectively removes the
entrepreneur from the business scene. Pretorius (2004:261) argues that the
entrepreneur probably never contemplates failure, especially when starting a new
venture. Entrepreneurial studies done by Forbes (1999:415) and Gaglio (2004:535)
tend to focus on venture creation, opportunity identification and positive change and
neglected decline and distress as part of the business cycle. Owing to the stigma of
bankruptcy and failure, distress is often concealed from all the stakeholders. Argenti
(1997:442) identifies five categories of stakeholder in debating stakeholders’
approach to business; these are, investors, employees, customers, suppliers and the
relevant community. According to Sutton and Callahan (1987:412), demise cannot
be concealed for long and the facts can only be concealed for a limited period.
Unfortunately, concealing the facts will lead to less time and increased difficulty in
effecting a successful turnaround. It also has a serious psychological impact on the
entrepreneur, directors and management of the distressed business.
Argenti (1997:445) is of the opinion that stakeholder theory of running a business for
the benefit of all stakeholders is an impossible dream, a philosophically
misconceived idea. This is contrary to what the South African government is trying to
achieve by involving all role players (“shareholders” according to the Argenti
definition) in the rescue of a business. Midanek (2002:22) argues that an
entrepreneur’s ego sometimes gets in the way. However, to rise to a successful level
of top management or entrepreneurship requires confidence and a good measure of
ego strength. Midanek ponders on this characteristic and concludes that this
phenomenon, “high ego”, causes the entrepreneur or manager to “see” the bigger
picture. The driving force behind entrepreneurs is clearly identified by need theory,
as identified by McClelland (1961), achievement motivation (n-ach), authority/power
motivation (n-pow) and affiliation motivation (n-aff). Entrepreneurial organisations are
further characterised by strong leadership and direction from the entrepreneur.
Wickham (2004:135) argues that an organisation’s very survival depends on the
leadership structure living its goals, as well as a focus on competitive locations.
Using need theory, McClelland identifies the organisation as part of the motivational
force of managers or entrepreneurs.
29
According to Quinn et al. (1988:83), the entrepreneur is driven, above all, by his
need for achievement. The entrepreneur’s organisational goal is simply the
extension of his own goals. It is concluded that the dominant goal of the organisation
operating in the entrepreneurial mode is growth, which is the most tangible
manifestation of achievement. (A second motive closely related to behaviour in
organisational settings is the need for power [n-Pow].) It would appear that the
concept of a “high need for power” is associated with leadership and actual power,
but only when it occurs in combination with certain other factors, as was
demonstrated in the longitudinal study conducted by McClelland (in Robert,
1986:196). In his article “Characteristics of successful entrepreneurs”, Dollinger
(2003:38) states that, over the past few decades, entrepreneurial research has
identified a number of personality characteristics that differentiate entrepreneurs
from other people.
Similarly, McClelland (in Robert, 1986) identifies certain characteristics of
entrepreneurs. He sees the individual entrepreneur as a promoter of his/her own
career with a focus on strategies of advancement, and views entrepreneurs as
innovative, independent people and moderate risk takers, whose role as business
leaders conveys a source of formal authority.
Simons (1999:85) argues that businesses seldom consider risk management when
times are good, profits are up, optimism is on a high, and markets are growing. In
these favourable conditions, businesses tend to ignore early warning signs. It is also
not clear when a business is going to “hit a significant bump” or if a major change in
strategy is needed. Entrepreneurs need to understand the conditions that create
unacceptable levels of risk and decline.
Early warning signs, failure prediction and its causes have been researched
extensively over the past forty years. In light of the entrepreneur’s high propensity to
take risks, this study theoretically defines and uses verifier determinants in proposing
a turnaround plan.
30
2.4 RISK PROPENSITY OF VENTURES
Wickham (2004:134) emphasises the entrepreneur as the main focus point for
contingency in the entrepreneurial process. The decision-making process, and the
acceptance of risk, thus centres on the entrepreneur’s leadership ability. Pretorius
(2004:261) argues that achieving personal goals is the driving force for
entrepreneurs to start businesses. It can be argued that achieving personal goals is
therefore the reason why entrepreneurs are prepared to accept a high-risk
environment. A high propensity for risk-taking is therefore an entrepreneurial trait
(Gilmore, Carson & O’Donnell, 2004:350).
With the formation of a new venture, entrepreneurs usually rely firstly on their own
financial contribution, sacrificing earnings and non-fiscal benefits. Kerins, Smith and
Smith (2004:387) argue that an entrepreneur must commit significantly to financial,
human capital and opportunity costs. Kerins et al. (2004:403), conclude that
entrepreneurs have a much higher opportunity cost of capital than well-diversified
investors. Role players operating in the risk environment are entrepreneurs,
financiers, lawyers, suppliers and customers, who dictate financial, operational and
strategic planning.
It is within the borders of this environment that entrepreneurs develop personal
goals, create new ventures and operate their businesses. Entrepreneurs meet the
challenge to make decisions under ‘calculated’ risk scenarios and adopt a leadership
role in the process. Simons (1999:85) argues that the pressure to achieve
challenging goals can stimulate entrepreneurial creativity and innovation that lead to
superior financial performance. The deduction is then that the focus point of
entrepreneurial behaviour is the aspect of risk and leadership. Entrepreneurs will
obviously approach risk in different ways. According to Dollinger (2003:7),
entrepreneurship exists under conditions of risk and uncertainty. Wickham
(2004:196) holds the opinion that entrepreneurs make decisions under conditions of
ambiguity rather than risk, while Everett and Watson (1998:371) distinguish between
the economy-based risks, industry-based risks and business-based risks unique to
the business.
31
Changes in the first two risks, over which the entrepreneur has little or no control, are
usually dealt with under risk contingency plans. In dealing with business-based risks,
entrepreneurs react to distress in their business in different ways. Orme (2002:26)
opines that some entrepreneurs will withdraw from business activities, some will
enter a phase of denial and some will immediately accept the unique circumstances.
Richardson, Nwankwo and Richardson (1994:14) conclude that success and
arrogance are closely related to entrepreneurs failing. Koellinger, Minniti and Schade
(2007:512) researched the entrepreneurial overconfidence that leads to
entrepreneurs perceiving themselves as skilled, able and opportunistic in identifying
business opportunities. Unsuccessful entrepreneurs will go through various stages,
firstly one of denial (Francis & Desai, 2005:1203), and then finally acceptance.
Owing to the very characteristics of entrepreneurs, which among others, include
perseverance and goal achievement, entrepreneurs will try to continue with business
activities under conditions of distress. Simons (1999:87) warns that the pressures
(self-inflicted owing to fear of failure) to achieve challenging goals can bring
unintended risks. Entrepreneurs take calculated risks throughout the various stages
of the entrepreneurial process.
Van Vuuren (2005) describes the entrepreneurial process as consisting of the pre-
start-up phase, start-up and survival phase, which is 0 to 3 years, early growth 4 to
10 years, and the maturity phase 10 to 15 years. Finally, the harvest – or stability –
phase, 15 to 20 years. The risk propensities can be further categorised into possible
entrepreneurial behavioural risk patterns in the various stages of the entrepreneurial
cycle:
? Pre-start-up = appetite for risk
? 0–3 years = moderate/calculated risk-taking
? 4–10 years = calculated risk-taking
? 10–15 years = high risk factors, uncalculated risk-taking
? 15–20 years = low risk-taking
32
Garcia (2006:7) argues that many entrepreneurs are late in recognising that
“business-as-usual” practices need to change when their businesses start to
deteriorate; accordingly, entrepreneurs’ actions usually reflect defensive and
aggressive attitudes that are not conducive to the continuation of cordial business
relations with their creditors.
In her studies, Gaglio (2004:535) argues that opportunity identification through
entrepreneurial cognition and veridical (truthful) interpretation requires a correct
perception of the changing situation by the entrepreneur. Veridical interpretation
entails that the entrepreneur correctly establish the real causes of change. Gaglio
(2004:539) concludes that alert entrepreneurs may respond to change or surprise
earlier than non-alert entrepreneurs. The key to repositioning the business is for the
entrepreneur to accept that mistakes have been made and to understand where and
why these mistakes were made. Garcia (2006:4) argues that an ineffective response
to crisis causes a competitive disadvantage. Entrepreneurs need to re-strategise and
reorganise the business and maintain growth and profitability.
Orme (2004:26) argues that the entrepreneur goes through various phases of denial,
depression, anger and, finally, acceptance. Agreeing with this statement, Altman
(1984a:171) suggests that it is more sensible to detect impending failure well ahead
in order to be able to take corrective action. In support of Altman’s view, Chowdhury
and Lang (1993:8) state that, whilst failure is not inevitable, entrepreneurs and/or
managers can, through discretionary actions, stop and reverse decline in the
business. Lohrke et al. (2004) conclude that it is necessary to look beyond financial
decline to broader indices that trigger the turnaround process. Unfortunately, at the
current juncture, entrepreneurs face various challenges when attempting to turn
around their business. These challenges are, but are not limited to, legal,
management, financial and/or product constraints. Gopinath (1995a:76) concludes
that for banks (and turnaround managers) “strategies are dependent on the
perceptions of the causes of the problems”.
Seen in the light of the above discussion, there is always risk when entrepreneurs
start ventures. Moreover, there is also risk associated with turnaround situations;
hence, the proposed verifier determinants will assist in managing that risk.
33
2.5 QUO VADIS?
Internationally, business turnaround theory is embedded in legislation and a
comprehensive body of knowledge is available. The shortage of theory in South
Africa highlights the need for research on designing a business turnaround strategy,
tailor-made for the South African business environment. Most businesses
concentrate on creating innovative plans to ensure growth. A turnaround is
concerned mainly with the rescue, reorganisation, restructure and repair of
substance, which has malfunctioned in the business process. The administration of a
business is perceived to be visible, as management knows exactly what is to be
done – whereas a large portion of the turnaround vocation scope is hidden and
unknown.
During the normal business process, uncertainties within the operating environment
are imposed and dealt with. In a turnaround environment, there is an additional and
significant level of uncertainty. As a turnaround progresses, the surfacing of
unexpected negative information is considered as a turnaround trap, for example:
James (2002:49) reported that he, after commencing with a turnaround, discovered
that an important order had been cancelled five months earlier. As the order was
about 20% of annual turnover, the result was a horrendously overstocked situation.
The extent to which any decline has manifested itself in a business will only emerge
after the turnaround practitioner has commenced work. Newly discovered “decay”
and “rot” may lead to the failure of the turnaround plan.
This study investigates the management discipline of business turnaround both
currently and in the future. Business turnaround is a relatively new concept in the
field of South African business management science. Owing to its infancy, there is a
huge shortage of appropriate literature locally. Pretorius (2006:2) confirms that there
is a small body of knowledge in South Africa, although it is expanding.
Verifier determinants (which will be defined later) are used to confirm the early
warning signs that are used extensively to confirm causes, verify the correct sign and
substantiate issues to consider when compiling a strategic rescue plan.
34
The identification of verifier determinants will contribute to the uncovering of other
hidden critical issues. This research focuses on the design of turnaround strategies
by investigating and improving early warning signs theories. Warning sign verification
will be incorporated into the structuring of the turnaround strategy as an action and
timing tool. Both investors and creditors (including lenders) have a vested interest in
the early detection of financial distress. This is confirmed by Aziz and Dar (2004:25),
who reinforce the need for the early detection of financial distress to enable the
taking of corrective action in good time.
Using verifier determinants, the turnaround practitioner and/or the entrepreneur will
be able to apply the plan effectively as a business rescue tool. For the participating
creditor, it may restore credibility and validity in the mechanics and rationale of
business plan construction. Once credibility and validity of planning has been
restored, the use of the plan as an effective preventative (counter failure)
management tool can be reintroduced. With the concept of “verifier determinants”
built into the early warning diagnostic structure, the entrepreneur and turnaround
practitioner alike will be able to take corrective measures in time to prevent default
and/or further deterioration of the business.
2.6 TURNAROUND IN SOUTH AFRICA – STATUS QUO
Turnaround in South Africa, as an industry and as a business science, is still in an
early development phase. Although various informal turnarounds were, and still are,
contemplated, formal turnarounds (protected by law) will only commence from mid-
2011 onwards. The South African government is committed to including turnaround
in the revisions of the Companies and Insolvency Acts. Leuvennink (2004:4) reports
on Minister Brigitte Mabandla, the then Minister of Justice and Constitutional
Development, who requested that businesses should rather be rescued (turned
around) than liquidated. The Department of Trade and Industry, in its Guidelines to
Corporate Law Reform (2004:42), has clearly indicated the government’s concerns
regarding the winding up of companies. Statistics South Africa (2009:8) reports in
their February 2010 release that the number of civil cases (summonses) for debt in
South Africa increased from 254 426 in 2008 to 293 710 in 2009.
35
This substantial increase of 15,4% clearly demonstrates the need for corporate
reform. The South African government is also committed to enforcing corporate
governance through the implementation of the recommendations of the King II and III
reports. Drew, Kelley and Kendrick (2006:128) argue that strategic risk management
is not restricted to improvements in existing governance and ethics, but includes
those risks that threaten the long-term success and survival of a business.
The government’s promise to change legislation is now manifested in Chapter 6 of
the new Companies Act, which will allow and regulate turnaround practices once
implemented during the course of 2011. In terms of Section 128(2) of the 2008
Companies Act, the government may appoint a person or body (association) to
regulate the practice of persons as practitioners. The recently established
Turnaround Managers Association of Southern Africa (TMA [SA]), operating under
licence to TMA International in cooperation with the Association of Business
Administrators of South Africa (ABASA), is currently applying to government to take
up this regulatory role. Currently, neither facilities nor academic syllabi for
postgraduate accreditation for professional turnaround practitioners exist in South
Africa.
The need to introduce some minimum academically accredited qualification
standards for turnaround practitioners operating in the South African business
environment is now being addressed by the TMA (SA). TMA International, the
international body for the accreditation of turnaround practitioners is housed at the
University of Chicago, in the United States of America. The main shortcoming of this
from a South African perspective is that US legislation; insolvency, tax and corporate
law are paramount in the syllabus of this three-year course. Various turnaround
courses are presented by most of the tertiary institutions in South Africa, for example
the ComTURN (South Africa) programme presented by the University of Pretoria
under the auspices of the Chair in Entrepreneurship. There is a dire need to
accommodate South African rescue legislation and business turnaround culture in
the accreditation of existing and future South African turnaround practitioners as
being able to construct a turnaround plan is instrumental in fulfilling the requirements
of the new South African legislation.
36
It is the aim of this research to create a framework to equip entrepreneurs and
turnaround practitioners with adequate background knowledge to add to the current
body of knowledge and effectively create/use a turnaround plan. Any school that
proposes to undertake the accreditation of turnaround practitioners will be equipped
with formal guidelines to compile an acceptable, valid and reliable business
turnaround plan and incorporate it as such into the proposed syllabus. Current formal
turnaround routes (ss 311 and 427 of the old Companies Act) are, owing to various
negativities and high costs, not desirable and entrepreneurs still favour a more
informal approach. Hence, there is a multitude of dangers and constraints (acts of
insolvency s 8 of the Insolvency Act, Act 24 of 1936) that impact negatively on a
possible successful turnaround.
2.7 CONCLUSION
The successful running of a business is just a small part of the challenges facing
entrepreneurs. The psychological impact on the entrepreneur when facing decline,
distress and then turnaround should not be underestimated. It is therefore essential
that entrepreneurs are equipped with extensive, integrated and applied knowledge of
early warning signs that will enable them to spot the danger signs. Accordingly, they
need to be equipped to formulate and implement rescue plans for saving their
businesses. In conclusion, the deduction is that entrepreneurs demonstrate
behavioural patterns of high-risk acceptance. The chapter has identified and
addressed the need for an early warning control system in businesses.
37
CHAPTER 3
Academic debate on Identification of business decline
3.1 Introduction
3.2 Organisational decline definitions
3.2.1 Early warnings signs
3.2.2 Decline
3.2.3 Distress
3.2.4 Failure
3.3 Early warning signs learning
3.4 Basel explained
3.5 Academic debate on organisational decline
3.6 Identification of warning signs in literature
3.6.1 Management early warning signs
3.6.2 Financial early warning signs
3.6.3 Banking early warning signs
3.6. Other early warning signs
3.7 Summary of early warning signs
3.8 Introduction of verifier determinants
3.9 Conclusion
38
Singer (1995:325)
3.1 INTRODUCTION
This chapter outlines and explains the evolvement of warning signs and its field of
application. The literature content illustrates the debate on business failure and
decline, and the identification of the causes of decline and failure. In addition, the
Companies Act (Act 71 of 2008) and, specifically Chapter 6, of the Act incorporate a
few demanding prerequisites on the turnaround practitioner’s strategic ability.
Section 141 of this Act dictates that “as soon as” the turnaround practitioner has
complied with the liability of data integrity, he needs “… to consider whether there is
any reasonable prospect of the company being rescued …”. In establishing
whether a business has a reasonable chance of being rescued, and to be
sustainable afterwards, turnaround practitioners need to establish the root cause/s
for the decline and distress.
Filatotchev and Toms (2006:427) state that the conditions responsible for the
financial downturn will have to be mitigated to achieve stability. These “responsible
conditions” involve warning sign variables that have to be identified and then
stabilised. Grounded theory research on failure opens up a field where combinations
of variables in the failure prediction scenario are used as early warning signs. In this
study secondary data sources, local and international, were researched in the field of
early warning signs.
CHAPTER 3
ACADEMIC DEBATE ON IDENTIFICATION OF BUSINESS DECLINE
Constructs such as poor management, strategy, environment, and industry structure are in
themselves inadequate explanations of new venture failure or success.
Appendix A reports on early warning signs in detail in categories and by author
and serves as a basis for reasoning in this chapter.
39
In terms of turnaround and legal approaches to the investigative field of business
turnaround, literature referring to early warning signs is, as a single discussion
source, scarce. Early warning sign literature (grounded and other theory) is found
predominantly in business failure prediction research theory. Causes of business
failure or decline are also quite evident in turnaround theory, although the
information tends to generalise the causes of decline. By default, researchers’
investigative efforts were based on ex post facto information that had various
limitations. It is therefore not surprising to find that, in almost all the literature, early
warning signs are identified ex post facto during a post-mortem of the failed
business. The ex post perspective is confirmed by Joseph and Lipka (2006:296) in
their research on business failure.
Shepherd (2004:253) describes failures as an ex post facto phenomenon which is
difficult to subject to longitudinal studies. In reviewing related academic and
practitioner literature, the close association between business failure prediction and
business rescue is evident. Chowdhury and Lang (1993:8) propose, based on their
research and experience, that there is an association between the deteriorating
performance patterns and the probability of a performance turnaround. Figure 3.1
illustrates this association as a flow process, from identification to acceptance of
decline/distress and the adoption of a turnaround action.
Figure 3.1 Process flow leading up to a turnaround
Turnaround
Event/situation
Decline
Distress
Establish
true value
Turnaroun
ddecision
Verifier
Determinant
Identification
Early warning
signs:
Management
Strategic
Financial
Product/Market
Banking
Turnaround:
Reposition
Reorganise
Restructure
Rescue
Rejuvenate
Sustainable growth
and/or
Plan
Exit
turnaround
40
The prediction of business failure is dominated by quantitative methods, also
referred to as accounting methods. Early warning sign theories have evolved from
business failure prediction models, for example, Altman’s Z-score in 1968, to more
sophisticated models in use today. At the preliminary departure point in their search
for predictive methodology to prevent business failure, researchers concentrated on
failed businesses and focused mainly on quantitative ratio analysis. A need to
include qualitative warning signs variables in quantitative research approach was
identified. Researchers progressively acknowledge the significance of qualitative
variables in failure prediction.
Authors such as Altman (1968), Duchesneau and Gartner (1990), Pant (1991),
Lussier, (1995b), Dimitras, Zanakis and Zopounidis (1996), Altman and Narayanan
(1997), and Dimitras, Slowinski, Susmaga and Zopounidis (1999) increasingly used
non-accounting or qualitative information in their failure prediction modelling. Littler
and Sweeting (1987:166) point out that the reliance on qualitative information is a
key factor in any business assessment. Qualitative measurements were added to the
modelling and new predictive methods such as neural networks, as predictive tools
were introduced. Gordon and Langmaid (1988:2) conclude that the research findings
of quantitative measurement on its own are not conclusive enough, thereby
confirming a hybrid approach which advocates a combined qualitative and
quantitative construct. Dimitras et al. (1996:487) argue that entrepreneurs should be
aware of factors that lead to their business success. The mere absence of these
success factors will solicit warning signs.
The same principle applies in the identification of variables for successful or
performing businesses. The absence or negative level of these success variables is
then categorised as early warning signs. Cameron, Whetten and Kim (1987:135)
point out that “comparisons between growing, stable, and declining organisations”
indicate that the negative attributes predicted to be associated with decline are
actually characteristic of both stable and declining organisations. In addition to
literature specifically referring to early warning signs, 1) business failure prediction,
and 2) successful versus unsuccessful and performing versus non-performing
variables were also researched and included in the greater body of early warning
signs literature.
41
3.2 DEFINITIONS OF ORGANISATIONAL DECLINE
The aim of explaining these working definitions is to ensure the clarity of the relevant
concepts for use and measurement in this study.
3.2.1 EARLY WARNING SIGNS
In attempting to formulate a definition for “early warning signs”, it is important to
follow the development of the debate leading to the phenomenon of early warning
signs. Although Altman (1968:596) used variables like “weak” financial ratios as
indicators of potential failure, it was Ansoff (1975:23) who used the term “weak
signals” to describe discontinuities in organisational strategic change. Amburgey and
Kelly (1993:51) conclude that, in a dynamic organisation, change can be both
adaptive and disruptive.
Discontinuities do not emerge without warning and Ansoff’s (1975:21) concept of
“weak signals” is aimed at the early uncovering of the discontinuities or weak signals,
to prevent strategic “surprises” which could contribute to an event that will jeopardise
the business’s continued operations.
The mere existence of various uncertainties requires a sound knowledge of the
business’s demographics, geography and markets. Knowledge is gathered by
scanning the environment in which the business conducts its activities. Once
equipped with the required knowledge, using the scanning process will allow
identification of early warning signs. Ansoff (1975:26) maintains that weak signals
are detected by scanning the organisational environment.
Julien, Andriambeloson and Ramangalahy (2004:254) conclude that, in general
terms, weak signals are variables with which the entrepreneur has little contact and
of which he/she has little comprehension because of their enclosed idiom and very
different concerns. Weak signals can nonetheless present an array of innovative
information.
42
Hills, Shrader and Lumpkin (1999:3) are of the strong opinion that weak signals are
predominantly imperative in that they facilitate entrepreneurial thinking “beyond what
is known, look beyond what they are used to doing, and apart from the obvious
threats, help spot new opportunities for technological innovation”. Ilmola and Kuusi
(2004:911) conclude the debate on the nature of weak signals. They agree that “a
weak signal is, by definition, unstructured information and its implications to the
organisation are at an early stage very hard to define”. A weak signal represents
potential discontinuity, something that the organisation has not interpreted before.
In this context, Cannon and Edmondson (2005:303) argue that the small failures
within the business are often the “early warning signs”. They maintain that if these
early warning signs are detected and addressed, they “may be the key to avoiding
catastrophic failure in the future”. In order to formulate a definition, this study
considers and analyses the elements of the concept of “early warning signs” by
applying a synonymous approach to each element.
Figure 3.2 Early warning signs – elements and synonyms
ELEMENTS OF: EARLY WARNING SIGNS
Element: Early Element: Warning
Synonyms:
•Cipher
•Cryptogram
•Secret language
•Secret code
•Symbols
•Indicator
Element: Sign
Synonyms:
•Near the beginning
•In the early period
•Earlyon
•Beforethe actual event
Synonyms:
•Caution
•Caveat
•Advice
•Forewarning
•Admonition
•Notice
43
The lists of synonyms in figure 3.2 stimulate the thought processes, but also allow
the reader to form a comprehensive understanding of the construct “early warning
sign”. Owing to the preserved vagueness of the elements, it is understandable that
entrepreneurs will most probably underestimate the impact of ignoring these signals.
In an interview with the CEO of Syris Investments, Devereux (2010) defines early
warning signs as follows: “An internal or external extension of an event or factor or a
combination of all, that may directly or indirectly highlight the pending demise of a
business or business unit if they are not addressed and rectified in the course of
business.”
3.2.2 DECLINE
Cameron et al. (1987:136) argue that organisational decline represents a substantial
reduction in an organisation’s resource base occurring over a period of time.
Pretorius (2009:10) has drawn a clear distinction between distress and failure by
defining “decline” as follows:
Decline – A venture is in decline when its performance is worsening
(decreasing resource slack) over consecutive periods and it experiences
distress to continue operations. Intervention through alternative management
and financial injection could keep it operating albeit not in its current form and
depending on the severity of the distress (crisis). Decline is a natural
precursor in the process to failure.
Pretorius definition differs from the view of Cameron et al. by the inclusion of the
argument that the business “experiences distress”. The concept of “distress”, as
defined in the following section will, however, confront this definition with the
practicality of the law. For this reason, Cameron et al.’s definition of decline will
suffice.
44
3.2.3 DISTRESS
An understanding of the phrase “financial distress” is of the utmost importance in
future commercial action. Authors like Fredenberger, Dethomas and Ray (1993:326)
discuss the various positions of financial distress. Pindado, Rodrigues and de la
Torre (2008:996) conclude that a business is financially distressed in the year
following the occurrence of two events. These events are 1) if the earnings before
interest (EBITDA), and dividends were lower than its financial expenses for two
consecutive years – thus the business cannot generate sufficient funds from its
operations to service financial obligations; and 2) conditions in which there is a fall in
market value between two consecutive periods
Filatotchev and Toms (2006:408) argue that financial distress is an occurrence
where the business is unsuccessful in maintaining its capital, thereby reducing the
value of the financial stakeholder’s claims. The topic of financial distress is widely
canvassed by literature; however; this study accepts the definition of financial
distress as formulated in Chapter 6 of the new 2008 Companies Act.
Chapter 6 clearly defines two criteria for financial distress: the business is i) unable
to pay its debts and ii) becomes insolvent, but most importantly the Act adds a six-
month period in which these events can most likely take place. The unambiguous
definition of financial distress presented by Chapter 6 Section 128(1)(j) of the Act
reads as follows:
… “financially distressed’’, in reference to a particular company at any particular
time, means that—it appears to be reasonably unlikely that the company will be
able to pay all of its debts as they fall due and payable within the immediately
ensuing six months; or, it appears to be reasonably likely that the company will
become insolvent within the immediately ensuing six months … .
(Note: certain parts of this section are repeated in chapter 4 for the sake of
continuity.)
45
3.2.4 FAILURE
Various definitions for failure have been formulated over time by academia when
faced with the phenomenon of failure. Pretorius (2009:10) has done comprehensive
research in formulating a definition of failure which meets the requirements of this
study.
Failure – A venture fails when it involuntarily becomes unable to attract new
debt or equity funding to reverse decline, consequently, it cannot continue to
operate under the current ownership and management. Failure is the endpoint
at discontinuance (bankruptcy) and when reached, operations cease and
judicial proceedings take effect.
3.3 EARLY WARNING SIGNS LEARNING
In reviewing various literature sources, it becomes clear that business failure
prediction and early warning signs are closely related. Chowdhury and Lang (1993:8)
report on research and common experience that suggests an association between
the deteriorating performance patterns and the probability of a performance
turnaround. Although consensus confirms this interdependence, few authors such as
Cybinski (2001:33) indicate that a failure prediction model could be used as an early
warning tool. The apparent limitation of the literature is that researchers failed to link
or combine these two constructs.
Balcean and Ooghe (2006:87) conclude that failure prediction experiences various
problems attributable “to neglect of the multidimensional nature” of failure. The
multidimensional theory suggests that more than one “cause” for decline or failure
exists. Chowdhury and Lang (1993:15) suggest three actions: 1) accurate attribution
of causes; 2) timely action; and 3) adequate resources, for effecting a successful
turnaround. The detail about turnaround plan literature is in itself scarce and the
literature researched made little reference to rescue plan support.
46
Turnaround practitioners are reluctant to part with their knowledge and experience,
as they perceive the knowledge base as being a competitive trade advantage.
In defining corporate objectives, Argenti (1969:25) set the following objective, among
others: “to ensure our continued survival”. It is imperative that businesses survive to
ensure benefit to all stakeholders, personnel, shareholders, clientele and suppliers
(creditors). Argenti introduces the concept of “stakeholder theory”, as he argues that
a business cannot have its survival as an objective alone, and concludes that if a
business ceases to benefit anyone it will soon cease to survive. Argenti (1969:25)
defines the stakeholder approach as follows: “the stakeholder approach’ merely
asserted that ‘companies perform better the more closely they engage everyone
affected by their operations’.”
The stakeholder theory was, however, later (1997) rejected by Argenti in an article
titled “Stakeholder theory – the case against”.
In this conclusion, Argenti (1997:445) states that “the stakeholder theory is an idea
whose time has long passed”. In the South African context, government is, through
legislation, putting into practice stakeholder theory. In Chapter 6 of the Companies
Act, Section 128(1) defines “affected persons” as shareholders, creditors and
employees and/or their representatives. These stakeholders play an important role in
the proposed turnaround effort starting with input to, and approval of, the turnaround
plan. Altman (1984:171) concludes that the identification of business failure and the
early warning signs of impending financial distress are of international importance in
individual business performance.
Identifying early distress can lead to timely corrective action. Honjo (1998:566)
argues that a new business with sufficient funds can survive a period of negative
profits. If a new business wants to borrow funds it will have to convince a lender that
profitability and debt repayment are achievable within a certain period. Early warning
signs are used in risk profiling of potential debtors, price determination on products,
risk assessment of debtors’ books, identification of areas where the business is
lacking, and a whole host of other applications (Glantz, 2003:16).
47
Financial institutions are obliged to adopt some form of risk management process,
measured against early warning signs. Pousson (1991) and Altman (2003:10)
deliberate the point that financial institutions are the most frequent users of early
warning sign theory. Financial institutions firstly focus on failure prediction when
assessing new loans.
Pousson (1991; 2003:7) and Glantz (2003:17) are of the opinion that early warning
signs are used by financial institutions in managing risk through a sophisticated risk-
rating process in compliance with Basel II requirements. In this regard, Rose
(2009:17) states that a more rigorous evaluation of risk, inherent in product offerings
and credit default, is required to understand risk better.
3.4 BASEL EXPLAINED
In reporting on the high (excess) liquidity experienced by European banks during
2004 and the low demand for credit, Tully (2004:54) indicates that banks were
making concessions to lower-rated borrowers to win their business. Davey
(2004:28), who argues that in order to extend more credit finance brokers reduced
haircut requirements to attract and win business, supports this view. She concludes
that careful measurement of, among other things, risk management procedures must
be engaged.
The Basel Accord refers to the recommendations on banking law and regulations
issued by the Basel Committee on Banking Supervision. The main aim of the Accord
is to create International standards that banking regulars can adopt. The standard
will amongst other, regulate the minimum capital need to set aside for financial and
operational risk. The international sub-prime crisis during 2008 and 2009, however,
suggests that most banks did not employ adequate risk management processes.
Glantz and Mun (2008:1) state: “A key objective of Basel II is to revise the rules of
the 1988 Capital Accord in such a way as to align banks’ regulatory capital more
closely with risk.”
48
The Basel II accord aligns the modern credit risk practices of its members and its
foundation-based practices require that their estimates be based on the bank’s (or
capital market) experience.
Glantz (2003:7) argues that one of the main reasons for banks to adopt a credit
money model is to estimate the probability of default and loss against default. Aziz
and Dar (2004:2) argue that one of the major focuses of the Basel II regulations is to
minimise credit risk for the banks: default risk – the inability to repay a loan – being
the primary focal point. Basel II sternly divides risk into operational risk and financial
risk, while concentrating more on financial risk and thereby affecting credit
availability. In an academic response to Basel II, DanIelsson, Embrechts, Goodhardt,
Keating, Muennich, Renault and Shin (2001:3) argue that the regulations fail to
consider risk as an endogenous factor, applying statistical methods which are
inconsistent and place too onerous a reliance on the standard approach to risk
rating. Saurina and Truchardte (2004:122) discuss the negative impact of Basel II on
small business in the Spanish context. A main concern was the omission and failure
to recognise market volatility as an endogenous factor as emphasised by DanIelsson
et al. (2001:4).
The array of shortcomings forced the Basel Committee to revise the regulations and
create a more directive approach in the latest guidelines. Glantz (2003:233, 358),
Altman and Hotchkiss (2006:168), Agarwal and Tafler (2008:1), and Glantz and Mun
(2008:3) conclude that banks are obliged, under Basel II, to use an internal ratings-
based approach to set minimum capital requirements in the measurement of their
risk portfolios. Subsequently, the Basel II rules attracted a fair share of criticism,
which later prompted change.
Altman (2003:7) confirms the purpose of Basel II, as he states that one of the main
reasons for the construction of a credit-scoring model is to estimate the probability of
default and loss given default. These risk measurement models prove to be accurate
as the allocation of capital is at stake. Blokin and Iyer (2003:1) conclude that, from a
risk management perspective, certain borrower characteristics should be
incorporated into risk score models.
49
Banks subscribing to the standardised approach to measure credit risk will use their
historical databases to investigate and establish credit risk grading (Basel Committee
on Banking Supervision, 2005:98). Consequently, they will compile a unique model
for each individual bank, subject to Central Bank approval.
Davis (2009:4) is of the opinion that banks will be under scrutiny by authorities,
especially on the way they identify, assess and manage risks. Risks will therefore be
subject to close measurement and stress testing. In determining a risk rating on
specific credit lending in their portfolios, banks will have to know the risk
characteristics to determine possible loss given default (LGD) (Dev, Mingo and
Buckler 2009:38). Glantz (2003:311) proposes that once the LGD calculation is
done, the loan then be categorised into one of the following risk categories:
standard, special mention, sub-standard and doubtful. These categories are used in
this research and are further explained in chapter 5.
The Basel II requirements force banks to revisit the capital adequacy linked to the
concept of pricing for risk. In line with central bank requirements, risk-rating models
in banks were developed that link capital adequacy and pricing to a certain risk band.
Figure 3.3 Business decline: effect on Basel II rating
Decline
Basel rating
Substandard
/doubtful
Special
mention
Standard
Improvement
Deterioration
50
The risk rating will have the obligatory effect that, in a period of decline and/or
distress, the risk rating will be adjusted in line with the warning signs being triggered,
moving the liability into a higher risk category. This effect is illustrated in figure 3.3.
The higher the category, the stricter the capital requirements, and if no price
adjustment accompanies the risk change, a potential loss situation on a still
performing asset for the bank is very real. Banks will thus be forced to increase
pricing on distressed or declining businesses. Increased lender pricing is not
conducive to turnaround efforts. Chapter 6 of the new Companies Act will, however,
allow the practitioner powers to restrict such price adjustments.
3.5 ACADEMIC DEBATE ON ORGANISATIONAL DECLINE
The academic debate on business decline and failure opens with a discussion on the
path of decline and failure. Dimitras et al. (1996:488) describe the decline and failure
of a business as a continuous process, thereby placing even more emphasis on the
importance of timely dynamic early warning sign identification systems and
turnaround planning in business.
Bruno and Leidecker (1987:51) maintain that the following submissions on decline
and failure are valid:
? they happen over time
? identifiable factors are present
? these factors can be used to predict
? once identified these factors can lead to timely corrective action
? these factors can be both external and internal factors and need to be
analysed
? poor management associated with these factors will thus be detected
? specific factors will be evident in specific industries.
Hossari (2007:75) distinguishes between decline and failure and argues that the
pronouncement of failure is a sudden event.
51
However, the process of decline could extend over many years and the signs of
distress could manifest themselves in many forms. Pretorius (2009:10), who has
reported significantly on the differentiating factors of the constructs, ‘decline’ and
‘failure’, supports the distinction drawn by Hossari that companies who do not react
to early warning signs create the perception that failure is a sudden event. Ignorance
of early warning signs by management will have the effect that the business decline
is also ignored, and corrective action is procrastinated until it is too late.
Either companies do not detect early warning signs or, as Burbank (2005:55) argues,
the companies ignore signs and then fail without an attempt to implement corrective
action. This ignorance emphasises the importance of identifying the variables of
decline in a model, which can be used as part of management information systems.
Barker (2005:44) states the reality that of “understanding the causes of failure can
elude even the smartest manager”.
He discusses two facts as being problematic: the chief problem for managers is to
"see" decline and the subsequent problem is to (or at all) react timeously to the
decline. This confirms the views of Ansoff (1975:23) in his argument for
environmental scanning to grasp the impact of signals.
Historically, from Altman (1968:589) who composed the renowned Z-Score formulae
in 1968, researchers used financial ratio analysis as the main input variable for
modelling failure prediction. In developing the Z-score theory, Altman focused
specifically on predictive modelling using financial ratios, and failed and non-failed
company data through a multiple discriminant analysis. However, businesses fail for
a variety of internal and external factors and, according to Tang and Chi (2005:246),
most studies exclusively use financial ratio analyses as the basis for the study of
business failure.
Researchers such as Altman (1968:589; 1984a:177), Argenti (1976:13), Hamer
(1983:289), Frydman, Altman and Kao (1985:269), Boritz and Kennedy (1996:512),
Tsakonas, Dounis, Doumpos and Zopounidis (2006:452) use financial ratio analysis,
multivariate and discriminant analysis and the effectiveness of neural networks. Ahn,
Cho and Kim, (2000:66) used economic value add and algorithm techniques to
predict business failure.
52
The predictive power of cash flow projections was later also included in failure
prediction theory and Sharma (2001:3) compiled a comprehensive report on cash
flow research. In addition, Jooste (2004:171) researched the net impact of cash
flows’ predictive qualities. The intensity of the difference in net cash generated by
operating activities on the cash flow statement compared to the operating profits on
the income statement is, according to Kemp (2004:6), a clear warning sign of cash
disparity.
Ahn et al. (2000:65) argue that failure prediction models can be used as early
warning systems and confirm that the variables used in prediction models are in
themselves early warning signs. Dimitras et al. (1996:512) point out that although
neural networks perform well in predicting failure, they are no better than more
conventional models such as discriminant analysis and logit probit. McGurr and
DeVaney (1998:169) conclude that failure prediction models, developed using mixed
industry samples, are not as accurate as would be expected.
This accentuates the limited industrial business population available for research in a
South African failure environment. Agarwal and Taffler (2008:1550) use accounting-
based ratio analysis to draw a comparison between Altman, Taffler and market-
based models, as opposed to the traditional Z-score ratios. They extended their
analysis to compare the market shares, revenues and profitability of banks
employing these competing models. Their research concluded that the accounting-
based research approach has a significant economic benefit over the market-based
approach. To stay in line with accounting practices and reporting standards,
researchers were forced to adjust their financial ratio analyses to cater for these
frequent changes. Altman (1978:30) suggests that the following fundamental
elements be included (from the balance sheet) when calculating his Z-score
analysis:
? capitalisation of leases
? reserves and contingencies
? minority interests and other liabilities
? captive finance companies and other non-consolidated subsidiaries
53
? goodwill and intangibles
? capitalised research and development costs
? capitalised interest and certain other deferred charges.
Owing to the very nature and availability of financial warning signs, they are usually
the first signs to be investigated. The investigation happens using ratio analysis, and
the warning signs that manifest in a distress situation are the following:
? reductions in working capital and cash flows
? increase in fixed and variable expenses
? dropping gross margins
? significant differences between actual and projected results
? poor return on investment
? lack of action on negative variances in budgets.
The main users of prediction models, according to Dimitras et al. (1999:263), are
usually more confined to financial institutions, such as banks. These models are
generally based on historical financial performance and, although acknowledged as
important, very little research has addressed “other” warning signs. Altman
(1984:175) acknowledges that non-financial variables in business failure prediction
are an important measurement in prediction modelling. Some non-numerical signs
used by Altman regarding managerial practices are incompetence and inexperience
and others such as fraud and neglect.
The authors listed in Appendix A under financial warning signs carried out the most
salient work in financial analysis in business failure. Appendix A indicates the name
of the author and the period in which the research was conducted. The last column
represents the ratios used by the authors in the failure prediction methodology.
Sutton and Callahan (1987:406) conclude that it is expected that effective controls
will lead to business success.
54
The failure of a business influences the entire business’s existence with a resulting
high cost factor and negative impact on related businesss and organisations. Bruno
and Leidecker (1988:51) claim, however, that it will be more useful to have
knowledge of what “factors” lead to business distress. Appetiti (1984:269)
categorises businesses into two distinct categories namely “sound and unsound”
businesses. An unsound business is a business that cannot meet its obligations.
This aspect is confirmed in the definition for commercial insolvency in the South-
African context (s 339 of the old Companies Act) (Meskin, 2004:666). Section
128(1)(j) of Chapter 6 of the new Companies Act describes "financially distressed"
companies as any inference that a company at any time appears “to be reasonably
unlikely that the company will be able to pay all of its debts as they fall due and
payable within the immediately ensuing six months; or it appears to be reasonably
likely that the company will become insolvent within the immediately ensuing six
months”.
3.6 WARNING SIGNS IN THE LITERATURE
Early warning signs are discussed as all kinds of phenomena of events in business
that indicate the potential demise of that business. (Refer to the definition of “early
warning signs” arrived at in section 3.2.1). Warning signs are depicted as problems,
challenges and poor performance indicators. As such, authors use their own
explanation, phraseology or designation. Appendix A is a comprehensive summary
of the early warning signs literature.
Pousson (1991) classifies early warning signs largely into the following categories:
? financial warning signs, through ratio analysis
? business and operational warning signs, such as administration, market
and product analysis
? managerial signs such as strategic value add and behavioural analysis.
? banking signs, which are closely linked to behavioural signs.
? other, not so frivolous, or behavioural signs.
55
Robinson and Shell UK Ltd (1986:76) and Watson, Hogarth-Scott and Wilson
(1998:237) illustrate signs as “indicators” for good performance, thus decline versus
success. Lussier and Pfeifer (2001:236), on the other hand, maintain that signs are
variables for comparing success versus failure. Scherrer (2003:53) uses a widely
accepted approach to discuss warning signs and typifies them as the “internal
(controllable) and external (uncontrollable) cause” of decline.
3.6.1 MANAGEMENT EARLY WARNING SIGNS
In a path of organisational decline, Cameron et al. (1987:126) chose to call the
warning signs “decline attributes”. Owing to their very nature as an underlying
feature of a path of decline, these elements are occasionally not acknowledged or
addressed as warning signs. Ueda (2004:612) argues that if a banks identifies a bad
signal it will result in it believing that the entrepreneur is likely to turn out to be
unprofitable.
Very prominent in the literature is the identification of “weak”, “poor”, or “problematic”
management as an early warning sign. It is, however, very difficult to measure
problematic, weak or poor management. Substantial debate is evident in the
literature as attempts are made by various authors to clarify the phenomenon of
early warning signs resulting from mismanagement. Ivanova and Gibcus (2003:17)
refer to problematic management as “negative behavioural traits”. Back (2005:843),
on the other hand, refers to early warning signs as the “focus of financial difficulties
and behavioural issues”, while Carmichael and Stacey (2006:3) focus on
“managerial success variables” such as accountability, initiative, boundaryless
thinking and integrity. Bates (2005:345) focuses on the “skills set” of owners and
managerial “success variables” as warning signs. Some authors, such as Moy and
Luk (2003:207), refer to early warning signs as “obstacles” and “problem types” for
growth. In their article “The insolvent customer”, the Credit Research Foundation
(2004:11) reports that in a recent turnaround appointment in Canada, the turnaround
team’s assessment of the companies’ affairs indicated that the main contributor to
failure in the company was “poor management”.
56
Miller (1977:44) identifies four “management syndromes” of business failure. They
are the impulsive syndrome, stagnant bureaucracy, the headless business and
swimming upstream. Hence, when planning a turnaround, the turnaround practitioner
thus needs to assess the management style of the entrepreneur. Consequently, it
may be deduced that, as there are many definitions and descriptions of early
warning signs, a working definition is desirable.
One of the main threats to business viability is management and/or directors who
contemplate fraud. In line with this, Bower and Gilson (2003:20) state that fraudulent
underreporting of expenses (and other financial performance measures) result in
extremely high costs in order to rectify the position. Fraudulent business practices
are not limited to misrepresentation but also include statutory non-compliance.
Mueller, McKinley, Mone and Barker (2001:25) maintain that, in the process of
rationalising the causes of organisational decline, management must form an opinion
on the stability of those causes and debate them. This is, however, a constricted,
simplistic view of early warning signs.
Singer (1995:325) concludes that “constructs such as poor management, strategy,
environment, and industry structure are in themselves inadequate explanations of
new venture failure or success”. Early warning signs shaped from a focus on the
skills set of owners contemplate, according to Lussier (1995a:8), “non-financial
business success versus failure variables”.
Banfield, Jennings and Beaver (1996:94) focus mainly on the up-skilling of
management, addressing need and demand. Three broad management areas that
need to be monitored were identified in Grant Thornton’s catalyst issues (2004a:1).
These are finances, operations and strategic planning. In the broader sense these
essential aspects need to be dealt with by the turnaround practitioner and
entrepreneur’s business and strategic turnaround planning.
Beaver and Jennings (2005:12) describe the management process as a progression
which has highly personalised preferences, prejudices, attitudes, skills demand, and
technical and educational needs. They also focus on control by the bureaucratic and
hierarchical environment over critical decision making. Management plays a
57
significant role in identifying and disclosing early signs of decline. It is, however,
clear that when early warning signs begin to appear, the business is already in a
sub-normal situation. Gilmore, Carson and O’Donnell (2004:349–357) refer to those
situations (where early warning signs appear) as “risky situations”.
Some authors suck as, Nutt (2004:13), Franks and Sussman (2005:30), Fraser
(2005:448), and Cressy (2006:113), debate fortune as playing a part in the failure of
a successful business; this phenomenon is described by Elenkov and Fileva
(2006:135) as “bad luck”. By contrast, Harvey (2002a:3) concentrates on examining
the “value-creating potential of primary activities” as early warning signs.
Pretorius (2008:412) discusses 1) human causes associated with failure in the
context of early warning signs; 2) internal and external causes associated with
failure; and 3) structural causes associated with failure. These causes relate to the
poor execution of business functions, of which Cameron et al. (1987:128) have
identified various “dysfunctions” of business decline.
These dysfunctional areas include reluctance to change, scapegoating, low morale
and conflict. Koellinger et al. (2007:520) investigated entrepreneurial behaviour,
characterised by overconfidence. This author maintains that identifying distress
warning signs in the business in good time is crucial if an attempt is to be made to
save the business. Family businesses have their own set of problems, which are
grouped in a separate set of early warning sign factors. These are, according to
Morris, Williams, Allen and Avila (1997:388), conflict within family circles, centralised
decision making and accountability. Sargeant (2005:21) discusses early warning
signs as “fundamental turnaround problems” in family businesses.
3.6.2 FINANCIAL WARNING SIGNS
Financing pressures, such as cash flow shortages, necessarily affect the way the
entrepreneur deals with the identification of warning signs. Discussing the external
funding of a business, Brooks (2002:25) argues that industry investors step back and
allow management the freedom to run the business. These types of investor expect
58
management to stick to the (pre-approved) business plan, meet financial objectives
and be able to pay dividends. This approach has the potential to force management
to ignore some “important dynamics” in the business.
McRann (2005:38) identifies seven short-term key signs that indicate that a business
may be in trouble. They are:
? declining sales
? reduced market penetration
? falling profit margins
? thin earnings before income taxes
? high employee turnover rate
? increasing customer complaints
? high-level employee dissatisfaction and defection.
The above-mentioned warning signs, although stated as separate issues, have a
severe impact on cash flow liquidity. Platt and Platt (1994:117) conclude that failure
is caused by a variety of events, including poor planning during the development
phase, a restricted capital base and poor managerial abilities.
3.6.3 BANKING WARNING SIGNS
In a banking environment, lenders, especially as the main transactional banker, will
have the added benefit of being in a position to observe banking warning signs. With
the enhancement of technology, the entrepreneur has access to his venture’s bank
accounts online. If proper risk-monitoring systems are in operation within the
business, the entrepreneur, through the risk management system, can be alerted to
heed banking warning signs. Banking warning signs are treated by most authors,
such as Pousson (1991), Bibeault (1999) and Glantz (2003), as industry specific,
with only lenders having a vested interest. A comprehensive literature research of
banking early warning signs was done in this study and a summary of the findings is
attached as Appendix B.
59
Bibeault (1992:369) reports on the slowness in the banks’ visitation programmes,
which in itself is a dysfunction of a bank’s own risk monitoring and not an early
warning signs as such. Banks tend to have behavioural monitoring and scoring as an
early warning sign approach. According to Back (2005:844), this approach is based
on historical behaviour and patterns and is mainly used to predict future behaviour.
These behaviour patterns include prior payment behaviour, payment delays and
payment disturbances.
Glantz (2003:237) proposes a different approach to the behavioural patterns by
adopting a more practical approach. He investigates the cash cycles of the business
by using the transactional bank account history to establish how effectively cash is
managed in the business. Entrepreneurs can use this method to evaluate their own
cash cycles and detect warning signs in terms of cash management. Banking
warning signs should not, however, be seen in isolation, as they are usually visible in
conjunction with other signs.
3.6.4 OTHER EARLY WARNING SIGNS
Holtz-Eakin et al. (1994:55) examined the phenomenon of why some individuals
survive as entrepreneurs and others do not. The results of their research are
consistent with the notion that liquidity or cash flow constraints have a noticeable, if
not severe, impact on the viability of an entrepreneurial enterprise and its ability to
survive.
Platt and Platt (1994:117) conclude that failure is caused by a variety of events,
including poor planning during the development phase. Arogyaswamy, Barker and
Yasai-Ardekani (1995:507) are of the opinion that the strategic orientation will be
determined and varied by the causes of the business’s decline. As Platt and Platt
(1994:126) report, some smaller businesses fail as a result of the failure of larger
related businesses, for example, in the agricultural industry. According to Singer
(1995:313), some entrepreneurs may start their business with some imperfections,
such as those related to production.
60
These imperfections will grow with the business but can unexpectedly surface at a
critical point, negatively affecting business performance.
The literature research confirms the views of Okuzumi (1990:62) that designated
organisational change is often a cause of business failure. In the rationalisation and
change process, psychological pressure is created by organisational decline. Mueller
et al. (2001:27) believe that entrepreneurs need to accept that they can learn from
failure (heed the warning signs). Baunard and Starbuck (2005:283) discovered that
learning from repeated success makes future failure very likely; consequently, they
focused on small business failures and investigated the power and influence of the
entrepreneur.
Kotter (2008:21) refers to the entrepreneur’s position after consecutive periods of
success as entering a state of complacency. The entrepreneur’s euphoria at success
can be overwhelming. Amburgey, Kelly and Barnett (1993:52) discuss early warning
signs as problems in strategy promotion, while Li and Sun (2008:870) focus on
financial distress prediction using “case-based reasoning”.
Although case-based reasoning is a new concept, no subsequent reference to it was
found in the literature. It was found that decline, distress and failure in the various
stages of a business’s life cycle have attracted a lot of attention from researchers.
Comprehensive research was done by Romanelli (1989), Mjaro (1992), Bates
(2002), and Burbank (2005), to determine where, at a point in time in their life cycle,
businesses are more likely to fail. Pompe and Bilderbeek (2005:867) distinguish
between new, “young” and old businesss and conclude that there is no significant
difference in the life cycle stage. They qualify their research by highlighting the
difficulty in obtaining predictive information from young businesss. Appendix A
reflects various authors who identify the specific ‘point’ in the business life cycle
where an event occurs that is a contributing factor to decline, distress and failure.
The process of managing constructs such as innovation and change creates a
factual challenge in recognising early warning signs through the business life cycle.
Strategic association is evident in life cycle theory and growth strategies.
61
Growth, specifically excessive growth, also referred to as overtrading, can
appropriately be described as the silent killer. Concern with low growth is real and
evidenced very early in the cycle, but excessive growth is not as comprehensible.
Thus, the euphoria of a growing business overshadows strategic planning for
sustainable growth.
3.7 SUMMARY OF EARLY WARNING SIGNS
Seminal work on early warning signs has been largely summarised by academics
such as Cannon and Edmundson (2005), Collard (2002), Hass and Shepherd
(2005), Lohrke et al. (2004), McGurr and DeVaney (1998), Moncraz and Kron
(1993), Pretorius (2009), Sharma (2001), Sharma and Mahajan (1980), Stead and
Smallman ( 1999) and Tang and Chi (2005).
The logical deduction is that the authors use the following terminology too arbitrarily
to apply them to describe “early warning signs”:
? success versus failure variables
? causes of decline and or failure
? warning indicators for business decline
? performing and non-performing variables
? root causes for decline or failure
? warning indicators
? material defects
? external and internal factors
? distress variables
? problems
? challenges.
Sudarsanam and Lai (2001:183) suggest “that [the] success of managerial
responses to performance decline is conditioned by their timing”.
62
Through managerial and entrepreneurial intervention, business structures can use
business turnaround plans to great advantage. Sreenivas (1997:25) identifies
business types associated with low and high failure rates. The classification of
warning signs made by Pousson (1991) are largely confirmed by this literature study
and the case research discussed in chapter 6 of this study. A real-life case research,
conducted with a sample of credit specialists in a banking environment, identified
various early warning sign categories.
Five main categories were identified by academics in the literature research and are
summarised in table format, with the heading “Early warning signs”, and attached as
Appendix A. Appendix A reflects an analysis of the literature from 1968, when
Altman (1968) focused on the modelling of financial ratios in his most famous Z-
Score formulae, to date.
Early warning signs identified in the literature are categorised into the following main
categories: management, strategic, financial and product/market. Banking signs are
not discussed by most authors (refer to Appendix A), as this topic clearly industry
specific and favoured by authors researching financial institutions. Owing to their
importance, banking signs are reflected separately in Appendix B.
3.8 INTRODUCTION OF VERIFIER DETERMINANTS
The importance of analysing the early warning signs of business failure in their
entirety is thus essential when a turnaround is proposed. It is a well-established fact
that warning signs are generally ignored when the business is still a going concern.
Ex post facto investigations into the causes of failure and decline are most prominent
in the postmortem phase of business assessment. The academic debates clearly
failed to “drill down” into the micro warnings and were mostly content to stop at the
macro identification of warning signs. This leads to vague and open-ended
descriptions such as, among others, ‘poor’, ‘weak’, ‘dysfunctional’ ‘unsuccessful’ and
‘unfocused’ management.
63
The same argument applies in the case of strategy, product, market and financial
factors. In a financially distressed turnaround situation macro warning signs are
easily observable; it is the micro warning signs that have to be verified by the
turnaround practitioner.
Improved reliability can be obtained by building early warning verifier determinants
into the strategic business plan to ‘verify’ warning signs, possibly through a regular
update, to ensure appropriate corrective action. Observations may contribute by
condensing the timeline during which early warning signs are identified. As this
research and thesis focus mainly on the early warning signs, their causes and the
identification of verifier determinants initiating the causes, previous theory is listed
according to the timelines and early warning signs identified. For a full schedule of
the timeline approach and early warning sign methods used, refer to the schedule
attached as Appendix A. A conclusion can be drawn that the causes of decline
and/or failure are clearly identified and well researched.
The words ‘verifier’ and ‘determinant’ are combined in the term ‘verifier determinant’.
These words are subsequently subjected to investigation with regards to meaning,
denotation and common understanding. In order to formulate a definition, this study
considered and analysed the elements of the term ‘verifier determinant’ by applying
a synonym approach to each element.
The lists of synonyms in figure 3.4 stimulates the thought process, but also allows
the reader to form a comprehensive understanding of the constructs of ‘verifier’ and
‘determinant’. The term ‘verifier determinant’ is most probably better described by the
French words confirmer déterminant. The meaning of verifier is to confirm, validate
and make sure that the early warning sign identified is in fact present. Determinants
reflect the agreement or consensus of the warning sign verifier.
64
Figure 3.4 Synonyms of verifier and determinant
A verifier determinant is defined as the ‘root’ indicator that validates the cause, which
underscores/concludes the early warning sign (see figure 3.5). In chapter 1, ‘early
warning sign’ was identified as a construct and ‘verifier determinants’ as the
elements of this study.
Verifier / Verify Determinant
/Determine
Synonyms Synonyms
Confirm
Bear out
Prove
Authenticate
Validate
Substantiate
Corroborate
Make sure
Decide
Settle on
Conclude
Resolve
Establish
Agree on
Findabsent
Confirmér
French
French
AND
Déterminant
65
Figure 3.5 Working definition schema for verifier determinant
It is of great importance to establish the true value of the business in the early stages
of the turnaround process. Verifiers can be used successfully to determine the extent
of the problem (‘depth of the rot’), the difficulties concerned and the severity of the
problem. When verifiers are used, the time constraints inherent in a turnaround
situation can be alleviated by assisting to assess the real situation quickly. Verifiers
will lead to a better understanding of the cause of decline or distress and will be
beneficial to managers/owners and personnel in coping with the psychological
effects. If identified correctly, verifiers will be the key variable when deciding if a
turnaround is feasible or not.
Owing to a better understanding of the business through the identified verifiers, the
ultimate cost determination of a turnaround could be accomplished in a relatively
short period.
WORKINGDEFINITION OF A VERIFIER DETERMINANT
Verifier
determinant
Sign
Cause
Example: debtor book aging – late receipts
Construct to
verify a cause as “correct”
Example: cash flowshortage
Sign that indicates
“a cause may exists”
Example: default on loan payment
Underlyingreason for decline=
“responsiblefor”
66
The most important part verifiers need to play is to prevent decline and distress in
businesses. Used as a longevity based management tool, verifier determinants can
contribute to the day-to-day management of a business.
3.9 CONCLUSION
Recent research serves to reiterate, consolidate and summarise the seminal work of
earlier authors, such as Altman (1968), Argenti (1969; 1978; 1997), Miller (1977), Al-
Bazzaz and Grinyer, (1980) Mayes and McKierman (1980), Hamer (1983),
Anderson and Zaithaml (1984), Cameron et al. (1987) and various others (see
Appendix A). Once a variable has been identified as an ‘early warning sign’, it is not
subject to change. The variables were, however, subjected to name changes, as the
authors attempted to put a unique or personal touch on them.
The only unpredictable constituent of early warning signs is how management
respond to the appearance of the sign. In assessing the academic debate on early
warning signs, it becomes evident that authors use various terminologies and
descriptive writing to explain the causes of business decline and/or failure.
This chapter suggested a working definition, of a verifier determinant, in this study,
which is derived at by using the same approach used to arrive at a definition for early
warning signs.
Verifier determinants and the sequence of events
When a business starts to decline in performance, early warning signs change
from being invisible to becoming visible, because of their mostly qualitative nature.
The application of verifier determinants is used to confirm the veracity of the early
warning signs – at the same time reducing the period of the turnaround and its
effect on the decline. Later, the verifier determinants can inform the turnaround
plan.
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CHAPTER 4
Theoretical development on turnaround management
4.1 Introduction
4.2 Business turnaround
4.3 Definition of business turnaround
4.4 Strategic vs turnaround strategies
4.5 Development of turnaround strategies
4.5.1 Introduction
4.5.2 Contribution of Hofer (1980)
4.5.3 Contribution of Bibeault (1982)
4.5.2.3 Contribution of Hambrick and Schekter (1983)
4.5.2.4 Contribution of O’Neill (1988)
4.5.2.5 Contibution of Zimmerman (1989)
4.5.2.6 Contribution of Boyle and Desai (1991)
4.5.2.7 Contribution of Robbins and Pearce (1992)
4.5.2.8 Contribution of Fredenberger and Bonnici (1994)
4.5.2.9 Contribution of Arogyaswamy, Barker and Yasai-Ardekani (1995)
4.5.2.10 Contribution of Lohrke and Bedeian and Palmer (2004)
4.5.2.11 Contribution of Smith and Graves (2005)
4.5.2.12 Contribution of Sheppard and Chowdhury (2005)
4.5.13 Contribution of Pretorius (2008)
4.5.4 Other contributions
4.6 Turnaround planning
4.7 Conclusion
68
Whitney (1987:49)
McCann, Dermer, Hunter, MacDiarmid, Morgan, Örndahl, Robson and Wagman (2009:7)
4.1 INTRODUCTION
This chapter discusses the theoretical development of turnaround theory and
philosophy, and the subsequent modelling of turnaround processes. A
comprehensive literature review was undertaken and is summarised in a table
attached as Appendix B. The research identified certain behavioural trends, which
were used to compile a new strategic turnaround framework (see figure 8.1). The
formation and development of the learning discipline Business Turnaround
considered in a South African context is still in its infancy.
By comparison with the United States of America, South African literature on the
subject of business turnaround is, to say the least, scarce. As the business rescue
principle is incorporated into company legislation, it is hardly surprising that most of
the early research and comments vest in the legal fraternity. With the limited number
of “turnaround” students and academia currently involved in the formal study of this
discipline, the body of knowledge is not expanding rapidly enough. A unique source
of information and literature on turnaround is to be found on internet websites, in
publications such as turnaround practitioner notes, and auditing and legal business’s
circulars and publications.
“Turnarounds are superb management schools. Everything needs fixing. Nothing is sure except
the need to recover. The learning experience is intense. Never again will the turnaround leader
assume that customers always buy, vendors always ship, bankers always lend.”
CHAPTER 4
THEORETICAL DEVELOPMENT ON TURNAROUND MANAGEMENT
“What is the difference between running a business well under normal conditions and doing a
turnaround?”
“Turnarounds differ from managing a company well by the compression of time and the scarcity
of resources – there is no time and scarce human and financial resources.”
69
As a result, the national and international Turnaround Managers Association
websites were used to great effect in this research in addition to the academic
literature (see Appendixes A and B).
.
Owing to the diverse sources of literature available, categorising secondary data
sources in the different key sources was considered and subsequently deemed
prudent as a departure point. In addition, the various practices and models that are
available in the business environment and that will assist with the compilation of a
South African entrepreneurial approach to rescue/turnaround, were researched.
The most salient strategies, steps and processes for rescue/turnaround are
highlighted in this chapter. This chapter concentrates on the Turnaround section of
the turnaround process flow as indicated by figure 3.1. The determining of the ‘true’
value of a business in a decline and/or distress situation is of the utmost importance.
The value, the method used to determine the value, and the final foundation on
which the value is based determine the future of the business. Moreover, a valuation
will assist in answering the following questions: how, why and when do you exit a
business or, how, why and when do you proceed with a turnaround initiative?
Once the decision is made in favour of contemplating a turnaround, the planning
phase will commence by applying grounded theory and turnaround methodology.
The salient business turnaround model that has evolved over time is discussed in
this chapter.
The work of Hofer (1980), Bibeault (1982), Hambrick and Schecter (1983), O’Neill
(1986), Boyle and Desai (1991), Robbins and Pearce (1992), Fredenberger and
Bonnici (1994), Arogyaswamy et al. (1995), Sudaranam and Lai (2001), Lohrke et al.
(2004) and, finally, Sheppard and Chowdhury (2005) is incorporated and illustrated
in table 4.1.
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4.2 BUSINESS TURNAROUND
The turnaround concept is not new to business. The term “turnaround” needs to be
clarified as various applications exist; for example, in the United States of America,
the shut-down and repair and maintenance of manufacturing plants are also referred
to as turnarounds. (This study is concerned with business turnaround). A business
turnaround event is triggered by deterioration in the performance (profits, financial
difficulties) of a business, resulting in a business turnaround situation.
The term “turnaround” is used in various scenarios and is applied to numerous
situations resulting in different outcomes. Section 1.7 contains a list of the terms
used interchangeably in this study.
The word turnaround is used interchangeably with rescue, realignment, restructure,
reorganisation and renewal. Some authors such as Mueller, et al. (2001), and
Lohrke, et al. (2004), also use downsizing in discussions on turnaround. Although
downsizing can be a response to decline in a business, downsizing is not always
linked to decline. Freeman and Cameron (1993:13) state that downsizing and
decline are two distinct constructs. They agree that a business can strategically
downsize without experiencing decline. This study will, for the sake of consistency,
refer to all these concepts as “turnaround”. In chapter 3, this study dealt conducted a
secondary data analysis and the differing concepts were closely investigated and a
clear distinction was drawn.
To illustrate the flow of the research process, figure 3.1 represents the steps in a
turnaround situation from the time a turnaround event first occurs. A turnaround
event is prompted by a condition of decline and/or distress within a business.
Accordingly, an early warning sign, or most likely a combination of early warning
signs, will be evident. The next step is to verify the warning signs in order to
establish the true value, asset value or liquidation value of the business. The
decision outcome will then determine whether a turnaround will be attempted. If it is
decided to commence with a turnaround, a turnaround plan will be drawn up which, if
accepted, will lead to the final steps depicted in the last column.
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The relevant literature (As per Appendix C), indicates that very few sources on the
subject of turnaround exist in the South African context. A local source of practitioner
literature and industry information is the South African Turnaround Practitioners
Association website, where South African turnaround practitioners publish industry-
related articles. The industry is currently unregulated and, as such, these articles are
unfortunately in some instances flawed by plagiarism, unsubstantiated data and
untested assumptions, and are often not based on scientific principles. Turnaround
planners, entrepreneurs and practitioners alike must be able to plan to re-enter
markets at an opportune time. Financial distress unfortunately has a negative effect
on suppliers and customers and the challenge is re-entry into the markets.
A turnaround practitioner’s short-term strategy is to ensure immediate corrective
measures and a short-term turnaround plan that will be managed on a project basis.
Longman and Mullins (2004:58) are of the opinion that effective project management
requires “the right people and skills”. This statement emphasises the need for
suitable experience and the appropriate academic background in a turnaround
practitioner. Muir (2005:3) warns about the high cost involved in turnaround
structuring.
A business can only embark on a turnaround attempt when the question: “Is the
business worth saving”, is confirmed in the positive. These are, in a very broad
sense, the essential aspects that need to be addressed by the turnaround
practitioner and the entrepreneur’s strategic turnaround planning. Bowman, Singh,
Useem and Bhadury (1999:49) attempted measuring these “models” but concluded
that the negative performance effects of turnaround are the transfer of wealth, rather
than value creation. The investigation into the literature suggests that there are
various causes for business distress.
Consensus seems to propose that poor cash flow management and control is the
single most common financial cause of initial distress and subsequent failure.
However, company size does play a role, as Pant (1991:639) concludes that it is, in
the short term, easier to improve the results of smaller rather than larger companies.
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Current South African legislation does not allow the debtor (entrepreneur) any input
into the insolvency/judicial management process. In this respect, it is worth noting
that the Canadian Bankruptcy and Insolvency Act (Section 50.4(8) 1992) allows for a
stay of (moratorium on) proceedings, which, in turn, allows the insolvent party to
apply to the courts for a stay or extension for the duration of the moratorium.
Grant Thornton Catalyst Issues (2004b) states that Chapter 11 of the United States
of America’s insolvency law provides for a similar debtor-friendly approach, where
the courts appoint a trustee to draft a plan for the reorganisation/restructure of the
business (USC Bankruptcy Chapter 11, section 1104). In the case of the United
States of America, the appointment of a trustee is obligatory for all public companies.
The focus, however, is on the fact the trustee must develop a plan that is specifically
designed to reorganise the business.
The investigation looked at numerous turnaround avenues that are available to the
entrepreneur. When applicable to the research objective, these avenues were
applied to a unique turnaround model in order to achieve turnaround in the current
South African business environment. A turnaround is deemed viable only if it reflects
the potential for creditable, sustainable recovery.
Zopounidis and Doumpos (2002:371) suggest that, when attempting to solve
business problems, the alternative should be weighed up carefully. In this vein,
Whitney (1987:49) argues that, with a turnaround attempt, nothing is certain except
the need to recover. Thus, turnaround attempts are, without doubt, faced with
different alternatives and it is up to the planners to discriminate effectively between
the various options. In a study on airlines in distress by Gudmundsson (2004:462), it
was established that distressed airlines pursued “market power” tactics. Market
power approaches inevitably lead to overtrading. In contrast, the author found that
non-distressed airlines have productivity and greater performance as their strategic
focus. The Grant Thornton Catalyst Issues (2004a:1) is of the opinion that the
entrepreneur needs to be aware of the following four key stages in steering a
troubled business to safety:
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? stabilising the distressed situation by introducing vigorous cash flow
management (reducing cash losses and increasing cash flow)
? analysing and revisiting the business and/or strategic plan to determine
new directions and action in meeting business objectives
? financial restructuring to reposition a business in line with new
objectives
? organisational restructuring to strengthen the business.
The UNCITRAL guide points out that, if the business can be saved, creditors will
receive maximum value and job losses will be minimal. The aspect of job creation in
South Africa is a very politically sensitive and broadly discussed topic. Accordingly, a
rescue/turnaround supportive legislative strategy could address the issue of job
retention. Although South Africa’s insolvency legislation clearly favours a culture of
creditor-friendly regimes, it would seem that debtor-friendly approaches are not
necessarily afforded proper consideration by all role players and stakeholders.
Burdette (2004b:11) consequently concludes that “there appears to be general
consensus that South Africa needs, and wants, a modern and effective business
rescue model”.
Business, government and academics all seem to agree that the present South
African judicial management system, particularly as a business rescue system, has
to a large extent failed. In the recent past, government, represented by the
Departments of Justice and Trade and Industry, has made various attempts through
various appointed committees to design a business rescue model. (Committees such
as these would, inter alia, include the Centre for Advanced Corporate and Insolvency
Law [hereafter CACIL] at the University of Pretoria.) Winer, Levenstein and Gewer
(2005:3) argue that companies need to develop systems of internal control and risk
management, as these systems will result in more efficient reaction times when
financial distress signals begin to appear. The need for entrepreneurs to have a
creative input into the preparation of a workable business rescue and redesign
model, and to design a comprehensive and acceptable business rescue plan, is
fundamentally important.
74
Informal agreements or arrangements which, in turn, can lead to the implementation
of formal insolvency proceedings by such creditors accentuates the need for a
change in current legislation that would allow such entrepreneurs adequate leeway
to design proper rescue plans. In the South African context, Chapter 6 of the new
Companies Act dictates that the business rescue or turnaround as an intervention is
of a “temporary nature”. The Act is clear that a turnaround should be completed in a
period of six months. This infers that the business will have returned to normal after
six months. Hofer and Schendel (1978:73) opine that the return to “normality” is the
final stage in the turnaround process. The normality stage is commented on later in
this chapter.
The United States of America and Canada seem to be at the forefront of turnaround
legislation and models. In the United States of America, the well-known Chapter 11
proceedings are often debated and reported in the literature. The short-term aim of
turnaround will be to manage the distressed business out of commercial insolvency
and the longer-term aim will be to sustain technical solvency. Chapter 6 of the new
Companies Act dictates a framework as explained in table 5.1 in chapter 5 of this
study. The salient issues, as per the Act, were discussed under the various
turnaround stages indentified. In this chapter reference will be made to the
applicable sections of Chapter 6 of the new Companies Act.
4.3 DEFINITION OF BUSINESS TURNAROUND
Turnaround management has evolved over a period of time, from a trial-and-error
scenario to an important management science. As such, the definition of a
turnaround has also been open to various debates and compositions. Eventually, a
definition evolved and some authors added to the definition. However, as research
theory developed, and legislation became more debtor friendly, the definition has
seen various changes in order to adapt to the new findings and legislation. Some
researchers, such as Thorne (2000:305), who place turnaround action on the same
podium as business transformation, amplify the importance of business turnaround.
Moreover, the importance of decision making during a turnaround event should not
be taken frivolously by management.
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The importance of turnaround decision making under risk, is confirmed by Tversky
and Kahneman (1974:1128; 1986:260) and Kahneman and Tversky (1979:264), who
warn that decision makers follow a simple heuristic rule of thumb when making
decisions under risk and uncertainty. It has been found that a relatively complex
probabilistic approach is required under conditions of high risk, as decision makers
tend to ignore the signals that clearly indicate the variables that should be
considered when forced to make decisions. Ansoff (1975:22) describes the
ignorance of weak signals by the entrepreneur as missing an opportunity or
exposure to a threat. The instant realisation that dawn on the entrepreneur is
labelled by Ansoff as the “moment of truth”. At this point neither the cause nor the
response is comprehensible by the entrepreneur. In practice, this moment of truth
refers to the “turnaround event”. A turnaround removes the entrepreneur (directors
and/or management) from their comfort zone and places them in unknown territory.
Bibeault (1982:1) describes a turnaround situation as an abnormal period in any
company’s history. Turnaround situations require management approaches unique
and distinctly different from those of stable or growth management. Consequently,
old management tenets lose their validity. In reviewing related academic and
practitioner literature to find common ground on the definition of business
turnaround, the close association between business failure prediction and business
rescue was evident. Figure 3.1 illustrates this association as a flow process, from
early warning sign identification and verification as the departure point, to
acceptance of decline/distress, to a turnaround response as the final stage.
Filatotchev and Toms (2006:408) state that the conditions responsible for the
financial downturn (identifying and verifying the early warning signs) will have to be
mitigated to achieve stability in the business. According to Pretorius (2006:6),
turnaround will allow business to achieve acceptable performance and emphasise
the importance of identifying signs. Sudarsanam and Lai (2001:183) argue that the
downward trend towards failure in business is attributable to poor implementation of
turnaround strategies. McRann (2005:38) points out that there are natural ebbs and
flows that are part of every business; thus it is not always clear if your business is
going to hit a significant bump or if you need a major change in strategy.
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Simons (1999:85) maintains that it is in the good times that managers/entrepreneurs
need to be more vigilant in identifying signs of impending danger. Simons (1999:86)
concludes that “in dynamic markets, taking risks is an integral part of any successful
strategy”. Entrepreneurs need to understand the conditions that create unacceptable
levels of risk.
In the research of preceding definitions on turnaround a number of interesting
approaches were observed. Transformation is positioned on the level of turnaround
by Levy and Merry (1986, in Thorne, 2000:305), who state that “transformation is the
response to the notion that the organization cannot continue functioning as before …
in order to continue to exist it needs a drastic reshuffling in every dimension of its
existence”. Ramakrishnan and Shah (1989:26) support the view that turnaround
management “refers to a gamut of operations from identification of a problem to
developing the plan needed to ameliorate them echo the turnaround process flow
designed by this research”. The most popular approach in defining turnaround is the
restoration of performance and success. Thain and Goldthorpe (1989:55) thus define
a turnaround as “the reversal of performance from decline and failure to recovery
and success”.
In the process of reversal of decline and failure, the turnaround management will
execute various action steps. Boyle and Desai (1991:33), describe turnaround
management actions as a process that involves the “establishing of accountability,
conduction diagnostic analysis, setting up an information system, preparing action
plans, taking action and evaluating results”. Confirming this approach, Robbins and
Pearce (1992:296) argue that a turnaround response consists of activities likely to
overcome the business’s troubles and return it to match or exceed prior
performance.
Balgobin and Pandit (2001:301) define a corporate turnaround “as simply the
recovery of a business’s economic performance following an existence-threatening
decline”. The phrase used, “decline that threatens its existence”, implies a distressed
situation which fuels the perception that turnaround is only associated with business
in distress.
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The research results clearly indicate that turnaround is not only limited to distressed
situations in business, but that the concept of turnaround incorporates various
elements such as downsizing and restructuring. Although downsizing can be a
response to decline in a business, downsizing is not always linked to decline.
Freeman and Cameron (1993:13) state that downsizing and decline are two distinct
constructs. They agree that a business can strategically downsize without
experiencing decline. In an expanded model of the turnaround process, Lohrke et al.
(2004:65) identify a three-phased process:
? turnaround situation
? turnaround response
? turnaround outcome
Sheppard and Chowdhury (2005:243) state that “a turnaround occurs when
businesss persevere through an existence-threatening performance decline and end
the threat with a combination of strategies involving skills, systems and capabilities
to achieve sustainable performance recovery”. A popular view regarding financial
distress is that expressed by Chathoth, Tse and Olsen (2006:604), who define a
turnaround as the “action taken to prevent the occurrence of financial disaster”, for
which the results are measured over a period of time.
A very recent definition which has substantial appeal was formulated by McCann et
al. (2009:7). They describe a turnaround as a “process to restore a failing company
to sustainable competitive vitality”. The centre point of all the definitions seems to be
the reversal, restoration and recovery of former glory. McCann et al.’s definition has
a more realistic approach in that its aim is to restore the business to a sustainable
competitive vitality. This implies that the business can be downsized, restructured
and aligned to form an economically viable enterprise, and not necessarily restore
performance to previous levels. This is a very important observation, as until now the
return to “normal” had not been clearly defined in any previous attempts. Clearly this
opens up a new construct in turnaround management, namely “sustainable
competitive viability”.
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Carapeto (2005:743) states that “a business reorganizes successfully when it
emerges from bankruptcy with either independence preserved, or else is acquired or
merged”. In contrast to the independence view, Pretorius (2008b:20) defines a
business that has been turned around as a recovery “from a decline that threatened
its existence to resume normal operations and achieve performance acceptable to its
stakeholders (constituents), through reorientation of positioning, strategy, structure,
control systems and power distribution”, again supporting normal operations.
The recovery process is not well defined, but Ketelhöhn, Jarillo and Kubes
(1991:117) consider a turnaround as being successful “if after the period of losses,
management could sustain at least two consecutive years of profit”. This equation,
however, fails to define the level of profit and the question remains. Various authors
such as Knot and Posen(2005), and Pearce and Robbins (2008), have discussed the
probability of mergers and acquisitions as a mechanism to turn a business around.
For that purpose some salient literature on the subject was included in the main body
of research. Castrogiovanni and Bruton (2000:27) quote Schendel, Patton and Riggs
(1975), who define a successful turnaround as the “reversal of a business’s pattern
of performance decline”. The UNCITRAL Guide (2005:7) defines business
turnaround, or reorganisation as the process “by which the financial well-being and
viability of a debtor’s business can be restored and the business continues to
operate, using various means possible including debt forgiveness, debt
rescheduling, debt-equity conversions and sale of the business (or part of it) as a
going concern”.
Chapter 6 of the new Companies Act closely follows the UNCITRAL Guide by
defining business rescue or turnaround in Section 128(1)(b) as "‘business rescue’
means proceedings to facilitate the rehabilitation of a company that is financially
-
distressed by providing for-- the temporary supervision of the company, and of the
management of its affairs, business and property …”; and, "… rescuing the
company" means achieving the goals set out in the definition of ‘business rescue’
in section (b)”.In this section of the Act "supervision" means the oversight imposed
on a company during its business rescue proceedings and “temporary” is submitted
to be a period of six months.
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In light of the entrepreneur’s high propensity to risk discussed in chapter 2, this study
theoretically defined and proposed early warning verifier determinants in modelling a
turnaround plan. The author of a turnaround plan has to introduce creativity into the
strategic turnaround plan to overcome this bias.
Majaro (1992:230) compiled a creativity checklist to ensure that strategic planning
includes creativity and innovation. Concepts such as the removal of barriers,
communication procedures and motivational stimuli will be further researched and it
is planned to include these concepts in the modelling of the turnaround plan. Von
Oetinger (2004:37) argues that innovation and creativity is “escaping from your
existing model”. Clearly, if the existing strategic business model leads to distress,
“escaping” from it is essential for survival. Furthermore, Merrifield (1993:384) argues
that central to the successful execution of a turnaround plan is the creation of
entrepreneurial initiatives.
Turnaround planning parameters should be officially researched but, as indicated,
will not follow the same conventional business planning structure, as the end goal
will be to return the business to commercial viability. Thus, changing the existing
(failing) strategic model is unavoidable. Owing to the historic non-reliance on and
negative perceptions of traditional business plans, a new creative approach to
compiling turnaround plans, that is, business strategising, was attempted to create a
functional framework for use by entrepreneurs and turnaround practitioners in South
Africa.
4.4 STRATEGIC VERSUS TURNAROUND STRATEGY
Porter (1979:137), who shaped the future of strategic management when he
introduced his five forces into the field of strategy research, did salient work on
strategic management. Later, Porter (2008:8) enhanced his five forces theory by
adding certain factors to the five forces.
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By introducing these factors for consideration, Porter qualifies some of the forces
such as “growth”, on which he now cautions the strategist. He states that “a narrow
focus on growth is one of the major causes of bad strategy decisions”.
Hedley (1976:10) ponders the complexity of the development and understanding of
strategic segmentation. It is concluded that the basis for strategic segmentation
usually involves a detailed assessment of “cast and value addition” in the business. It
is imperative that the segmentation of the business takes into account the life cycle
stage of the business.
Nag, Hambrick and Chen (2007:952) conclude that strategic management “acts as
an intellectual brokering entity, which thrives by enabling the simultaneous pursuit of
multiple research orientations by members who hail from a wide variety of
disciplinary and philosophical regimes”. In this context, Ketelhöhn (1995:74)
discusses the re-engineering of management strategies as processes emanating
from a “trial and error” continuum progression.
Oosthuizen (2009:14) debates the applicability of the traditional strategic positioning
approach and argues that no real need exists to discard the conventional strategic
planning approaches. This is contrary to Riana, Chanda and Metha’s (2003:83)
approach that the turnaround practitioner “unfolds” the turnaround strategy “step by
step” as the need arises to meet (short-term) objectives. The speed with which
turnaround strategies are formulated is confirmed by Mueller and Barker III
(1997:119), who argue that turnaround businesss develop decision-making
strategies that are “fast”.
They also conclude that these strategies, although swift, are influenced by external
perspectives. This view (influenced by external perspectives) is contradictory to the
agency theory approach which Eisenhardt (1989a:70) propagated against outside
intervention. If the agency theory is followed, the responsibility and accountability for
strategic decision making will rest with the turnaround practitioner alone. What is
critical in this stage of the turnaround is, according to Eisenhardt (1989a:60), to
acknowledge the principles of agency theory in designing the optimal contract.
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The complexity of a turnaround attempt is clarified by Zimmerman (1986:109) who is
clear that “in order for a company to turnaround, many things have to be done, and,
they have to be done together”. Chrisman, Hofer and Boulton (1988:413) state that
researchers have developed standard strategy classification schemes to address
extraordinary circumstances such as a business turnaround. The success of this
methodology is questioned as it is clear that a unique set of preconditions dictates a
specialised approach to turnaround. In confirmation, Chrisman et al. (1988:413)
conclude that an optimal strategic solution was, however, not achieved using the
standard strategy classification, as a turnaround event necessitates a unique
solution and strategic approach. The deduction here is that the turnaround
practitioner will have to establish a team of professionals to assist in the turnaround
execution.
Owing to the very tight timelines imposed on a turnaround event, it is also indicated,
or suggested, that a team approach is advisable. McCann et al. (2009:7) describe
the difference between normal business conditions and turnaround conditions as
follows: “… turnaround differs from managing a company well by the compression of
time and the scarcity resources, … there is no time and scarce human and financial
resources”. Hofer (1980:20) made a huge contribution in his time when he
distinguished between strategic turnarounds and operational turnarounds. Although
he discusses strategic and operational as two separate constructs, in strategising the
turnaround plan both constructs will form part of the strategic planning phase.
Sudarsanam and Lai (2001:183) distinguish between managerial, operational, asset
and financial restructuring.
These constructs were further analysed and dissected as Sudarsanam and Lai’s
research sample of turnaround businesses did not distinguish between informal
and/or formal Chapter 11 (United States Legislation) turnarounds. If the turnaround
were differentiated between the variables, it would have added valuable insights into
the understanding of formal versus informal turnarounds. Whichever causes for
decline and distress are identified, the turnaround solution decided on is of the
utmost importance, as poor implementation of a turnaround plan can lead to further
decline, with dire consequences.
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Three modes of restructuring are identified by Bowman et al. (1999:34): portfolio,
financial and organisational restructuring. Lieberman and Montgomery (1988:48)
argue that customer needs are very dynamic and opportunities are created through
“first mover advantages”. The same early mover principle applies to the opportunity
which is created for the management to turn a distressed business around. Joachim
and Wilcox (2000:15) conclude that, if the business owner is a strategic opportunist
and a fast mover, the business can survive. Chowdhury and Lang (1993:9) discuss
the vulnerability of businesses toward gradual decline when discussing the theory of
business turnaround. Hedley (1976:3) argues that “changes in the environment have
brought the (strategic) requirements into sharper focus, made the constraints more
severe”.
In conclusion, it can be deduced that, in a turnaround scenario, strategic modelling
will definitely differ from traditional strategic formulation, as strategic decisions have
to be made in a very short time.
Owing to the turnaround event, business decision making is far more situational and
complex than in normal situations. As a result of limited, and therefore untested,
data, the decisions made in a business turnaround are the best fit for the current
situation. Riana et al. (2003:89) confirm this approach; they conclude that
“turnaround managers ask for and frequently get total authority from the board to
take quick decisions. As a result they often shoot from the hip with little time spent on
collecting and analysing data and arriving at conclusions after careful consultations
that good business demands”.
A question that is on every creditor’s agenda is: What is the duration of business
rescue proceedings? Section 132(1) of the new Companies Act, is very clear as to
when a rescue begins and when it ends:
… business rescue proceedings begin when the company files a resolution to
place itself under supervision in terms of section 129(3); or applies to the court
for consent to file a resolution in terms of section 129(5)(1);
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a person applies to the court for an order placing the company under 45
supervision in terms of section 131(1);
or during the course of liquidation proceedings, or proceedings to enforce a
security interest, a court makes an order placing the company under
supervision…”
Section 132(2) makes the inference that the rescue proceedings will end with the
introduction of a notice that the plan has been substantially implemented. In practice,
the turnaround can take a lot longer and the intention of the legislature will have to
be subjected to a ruling by the court. Heller (1994:66), reporting on the turnaround in
Compaq, the computer manufacturer and supplier, stresses that it took the new chief
executive officer, Eckhard Pfeiffer, only two weeks to redesign Compaq “from top to
bottom”. Heller further states that Pfeiffer’s aim was a long-term successful solution.
Brenneman (1998:164) describes the most difficult part of a turnaround as “getting
all (everything) done fast, right away and all at once”.
Banks, as primary lenders to a business, play a large role when formulating a
business turnaround strategy. When banks are in a well-secured position, they will,
and can, close down the business if a turnaround plan is not compiled and presented
to them very quickly and to their satisfaction. According to Brown (2005:60), banks
need to see a clear directional focus in order to assess and approve debt
restructuring in a business turnaround situation.
There seems to be frequent and lively debate on the duration of a business
turnaround. Ketelhöhn et al. (1991:117) argue that the turnaround period could last
up to four years. They do, however, add the period of decline as the first year of the
turnaround process.
Ketelhöhn et al. (1991:117) describe these years as
? the first year of losses prompting the turnaround decision
? the second year as the breakeven year
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? the third year is for profits and confirmation of recovering profits
? the final year – year four is the year for consolidation and proof of
sustainability.
Kow (2004b:281) supports the view that the turnaround of a business is not a “quick
fix” scenario and that it will take a lot of hard work over an extended period of time.
The protracted period results because the turnaround practitioner, in his endeavours
to cut costs and improve mobility, always changes the business structure. A shorter
business turnaround term is discussed by Whitney (1987:49), who argues that the
turnaround practitioner does not have the “luxury of abundant time and resources”.
The amount of time required for a turnaround is of interest both for its practical
significance and for developing a research design.
None of the previous business turnaround researchers have stressed the sequential
aspects of their findings, but some patterns are evident. In studying business
turnaround, it was concluded by Hambrick (1983:235) and Friedenberger, Thomas
and Ray (1993:327) that a typical fundamental turnaround classification will be
financial, operational and strategic. They identify three stages of recovery:
? crisis
? stabilisation
? return-to-normal growth
o content of strategy
o process of turnaround.
Entrepreneurs often fail to take effective action to stop the decline owing to the fact
that they do not want to acknowledge the deterioration in their business.
Failure to identify the decline will lead to omission of the very first stage of a
business turnaround. Ramakrishnan and Shah (1989:26) describe turnaround
management as a range of operations “from the identification of the problem to
developing the plans needed to ameliorate it”.
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Balgobin and Pandit (2001:304) ponder on the fact that in successful turnarounds
the incoming turnaround management and/or practitioner formulates a strategic
recovery plan in a very short time span. These time constraints propose an
identification process that addresses the real issues in a turnaround event as soon
as possible.
Theriot, Roopchand, Stigter and Bond (2000:2) promulgate the use of Monte Carlo
simulation owing to its ability to address elements under situations of uncertainty and
variability. They list the following reasons for their argument:
? accuracy unequalled by analytical models
? explicit treatment of variability and uncertainty
? support for changes of key parameters over time
? explicit consideration of interaction and coupling
? flexibility in accommodating case-specific rules and constraints.
Owing to the specialised nature of the model, the actual duration of conducting a
simulation is nowhere debated, or commented on in the literature but it is perceived
to be time consuming.
4.5 DEVELOPMENT OF TURNAROUND STRATEGIES
4.5.1 INTRODUCTION
A whole host of turnaround models, strategies, steps, actions and process flows are
described in an attempt to design the ultimate turnaround framework. As such, the
works by various authors, such as listed in table 4.1, can be regarded as salient
contributions to turnaround research. In table 4.1, the authors included in this
discussion are contrasted using a shaded area.
As a result of a multitude of descriptive tables and figures, this research has only
concentrated on those models that can add value (although the others are no less
important) and these are indicated by background shading in the last column.
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Table 4.1 The evolution of turnaround modelling, strategic thinking and theory
Author Date Contribution Turnaround model
Carrington, J.H. and Aurelio,
J.M.
1976 Careful planning and open relationship with
stakeholders. Cost cutting and creditor
concessions
Hofer, C.W. 1980 The relationship between severity of decline and
appropriate recovery actions
Indentify four "gestalds"
Cost Reduction Activities
Revenue Increasing Activities
Market/product Refocusing Activities
Asset Reduction Activities
Moves to breakeven point
Bibeault, D.B. 1982 Identification of four key success factors for
turnaround success
New, competent management
Viable core operation
Adequate bridge financing
improved employee motivation
Hambrick, D.C and Schecter, S .
M
1983 Identification of three "gestalds" Asset and Cost Surgery
Selective market/product pruning
Piecemeal productivity
O'Neill, H.M. 1986 Identification of sub-strategies for turnaround
Zimmerman, F.M. 1989 Identification of successful turnaround Relating to the nature and severity of economic
difficulties
Relating to being a low cost producer
Relating to the differentiation of products
Relating to leadership and the turnaround
organization.
Boyle, R.D. and Desai, H.B. 1991 Introduce four cell approach to generic
turnaround
Internal
External
Administrative
Strategic
Castrogiovanni, G.J., Baliga,
B.R. and Kidwell, R.E.
1992 Concentrate on management change
Robbins, D.K. and Pearce II, J.A. 1992 Identification of retrenchment and recovery in
turnaround
Internal/External factors
Situation severity
Cost and asset reduction
Stability
Efficiency maintenance and entrepreneurial
expansion
Recovery
Dolan, P.F. 1993 Introduce four-phased rescue plan approach to
turnaround
Bankruptcy score
Diagnostic study
Turnaround plan
Monitor plan
Chowdhury, S.D. and Lang, J.R. 1993 Marshall financial support for a turnaround
Pearce II, J.A. and Robbins, K. 1993 Same model as 1992
Chowdhury, S.D., and Lang, J.R. 1994 Focus on operating turnarounds
Fredenberger, W.B. and
Bonnici, J.
1994 Introducing the life cycle extension theory
Barker III,V.L. and Mone, M.A. 1994 Oppose Robbins and Pearce II retrenchment
theory
Pearce II, J.A. and Robbins, K. 1994 Defending retrenchment theory
Arogyaswamy, K., Barker III,
V.L. and Yasai-Ardekani, M.
1995 Introducing a two-stage contingency model of
firm turnaround
Decline stemming strategies
Recovery strategies
Barker III,V.L. and Duhaime,
I.M.
1997 Investigate the extent of strategic change
Barker III,V.L. and Mone, M.A. 1998 Introduce strategic reorientation in turnaround
model
Harker, M. 1998 Focus on marketing strategies during turnaround
The Evolution of Turnaround modelling, strategic thinking and theory
87
4.5.2 HOFER’S CONTRIBUTION (1980)
Hofer (1980:20) distinguishes between strategic and operational turnarounds. He
based his turnaround modelling on the patterns of decline in a business. These
patterns dictate which turnaround strategy is to be followed. Hofer (1980:21) opines
that before beginning a turnaround, the going concern value of the business must be
greater than its liquidation value. Figure 4.1 illustrates the concept of a “health
check”, which Hofer introduced to choose the correct turnaround strategy, choosing
between operational and/or strategic intervention. Where both the strategic and the
operational health are weak, a combination approach is advocated. Strategic
turnarounds will be strategies that call for entering new businesses or entering into
new ventures.
Harker, M. and Sharma, B. 1999 Focus on leadership strategies during turnaround
Castrogiovanni, G.J. and
Bruton, G.D.
2000 Retrenchment
Balgobin, R. and Pandit, N. 2001 Discuss stages in turnaround process
Barker III, V.L., Patterson, P.W.
and Mueller, G.C.
2001 Focus on management changes
Sudarsanam, S and Lai, J. 2001 Focus on restructuring strategies Operational restructuring
Managerial restructuring
Asset restructuring
Financial restructuring
Barker III, V.L. and Barr, P.S. 2002 Refer to 1998
Lohrke, F.T., Bedeian, A.G. and
Palmer, T.B.
2004 Introduce three phase turnaround process Turnarounds situation;
1) Decline
Turnaround response
2) Response Initiation
Turnaround outcome
3) Transition
4) Outcome
Kow, G. 2004 Identify elements of turnaround
Sheppard, J.P. and Chowdhury,
S.D.
2005 Introduce success and/or failure into model
Smith, M. and Graves, C. 2005 Turnaround as two key phases and a series of
integrated steps
Depicts the turnaround process as a series of
integrated steps
Two key phases – the decline stemming- and the
recovery phase.
Concentrate on the severity of the financial
distress, the amount of free assets available, size,
ability to stem the decline, stabilise,
retrenchment activities to improve efficiency and
cash flows
Pearce II, J.A. and Robbins, K. 2008 Acknowledge the role of strategic change and
growth in turnaround process
88
Figure 4.1 The strategies companies chose (Hofer, 1980:25)
Hambrick and Schecter (1983:236) present Hofer’s four turnaround strategy
indicators: revenue generation, product/market refocusing, cost cutting and asset
reduction. Figure 4.2 illustrates the four strategies on a matrix where double signs
suggest a primary indicator and one sign a secondary indicator. The focus of the
turnaround will be directed at the two-sign indicators. Accordingly, the one-sign
indicators are a lesser component of the turnaround strategy. The deduction made
here is that, as the turnaround progresses, the Hofer matrix will have to be revisited
and repositioned, and the necessary adjustments to the strategic direction will have
to be made.
Hofer divides operational turnarounds (no strategy change at all) into four types:
? increasing revenues
? decreasing costs
Strong
Average
Weak
Operating
Strategic
Strong Average Weak
Current Strategic Health
Current
Operating
Health
89
? decreasing assets
? embarking on a combination effort.
In later studies, Hofer (1989:39) investigated the nature of turnaround situations by
including a business review process which analyses the following variables:
? assessing current operating health
? financial condition
? market position
? technical stance
? production capabilities
? assessing current strategic health
? product/market matrix
? technological and production capabilities
? financial capabilities.
Figure 4.2 Hofer’s four turnaround strategy indicators (Hambrick & Schecter, 1983:236)
Strategic move Revenue
generation
Product/Market
Refocussing
Cost cutting Asset Reduction
Product/market Initiative
Sales from new products ++
Product R&D ++ -
Marketing ++ -
Product quality -- +
Price --
Market share ++ - -
Efficiency
Employee productivity + ++
Relative direct costs + --
Asset levels and use
Receivables/revenue + - --
Inventories/revenue + - - --
Plant and equipment newness --
Capacity utilization + - ++
Strategy
Expected Indicators of Hofer's Four Turnaround Strategies.
Two signs suggest a primary indicator (stressed by Hofer as integral to the strategy); one sign suggests a secondary indicator (an expected by-
product or lesser component of the strategy.
90
Hofer (1991:20) further discusses patterns of decline as causes of decline, both
strategic and operational, in comparison with the turnaround response – strategic
and operational.
4.5.2.1 Summary of Hofer’s contribution
Hofer (1980:25) introduced the business “health” concept as is depicted by figure
4.1. The two areas where a business’s current position is plotted are the operating
and the strategic areas. In plotting the business on a matrix, a clear indication of the
state of current operating health, or the state of current strategic health, will emerge.
Hofer advocated a relationship between severity of decline and appropriate recovery
actions , and Indentified four "gestals", they are:
? cost reduction activities
? revenue increasing activities
? market/product refocusing activities
? asset reduction activities.
4.5.3 BIBEAULT’S CONTRIBUTION (1982)(reprint 1999)
Bibeault (1998:263) structured his turnaround model using five distinctive phases.
The first stage is the “evaluation stage” where, as the name indicates, the business
review or analysis is contemplated. During the second phase, the “planning
strategies in turnaround situations”, Bibeault argues that the turnaround plan and the
tactics used need to follow the following stages:
? management change stage
? emergency stage
? stabilisation stage
? return to normal stage.
The third stage is the ‘emergency stage’ where, as the name indicates, the business
will do what is necessary to survive.
91
This is a traumatic stage and the now generic phrase, “stop the bleeding”, is of the
essence. However, the actions taken will not necessarily lead to survival.
The fourth stage, the “stabilisation stage”, is the settling down phase after major
interventions. This stage reflects on the emergency actions and, although no less
important, at a more subdued pace. The final stage in Bibeault’s turnaround process
is “return to growth”. This will entail that the company’s financial position is restored
to such a level as to sustain normal growth. The host of referrals in the literature to
Bibeault’s contribution is a testimony to the salient work done by him, which
acknowledged by a host of turnaround academics, practitioners and business in
general.
4.5.3.1 Summary of Bibeault’s contribution
Bibeault’s identified four key success factors for turnaround success:
? new, competent management
? viable core operation
? adequate bridge financing
? improved employee motivation.
4.5.4 HAMBRICK AND SCHECTER’S CONTRIBUTION (1983)
Hambrick and Schecter (1983:245) discuss failed turnarounds and warn that “moving
too fast” can lead to further demise and ultimately failure. Hambrick and Schecter
(1983:247) introduced a cluster analysis in the research on turnarounds. In this
research, Hambrick and Schecter used published case histories from Fortune
Magazine. In their analysis they used Hofer’s four strategy approaches to derive at
three successful turnaround gestalts. Consequently, the application of the asset/cost
surgery would apply to businesses with low levels of capacity utilisation, selective
product/marketing pruning would be applied to businesses with high capacity
utilisation and the piecemeal strategy would apply to businesses that have high
market share.
92
4.5.4.1 Summary of Hambrick and Schecter’s contribution
Hambrick and Schecter (1983:247) contributed to turnaround modeling by
identification of sub-strategies for business turnaround and three "gestalds" out of
Hofer’s four tier approach. They are:
? Asset/cost surgery,
? Selective product/marketing pruning
? Piecemeal strategy.
4.5.5 O’NEILL’S CONTRIBUTION (1986)
O’Neill (1986a:82) introduced sub-strategies to underscore the main turnaround
strategies implemented by Hofer (1980:25). O’Neill used a sample of nine
manufacturing and four service businesses, nine of which were turned around and
four of which were non-turnaround businesses. Using selective market and product
pruning, he identified a number of sub-strategies underscoring the main turnaround
strategy. These sub-strategies are the following:
? Management process
o turnaround effort usually preceded by management change
o redefinition of businesss business
o policy changes
o growth strategies
o attention to re-structuring
o planning.
? Key factors in turnaround
o competitive position
o product life cycle/ general market conditions
o industry type
o change in competitive patterns
o cause of decline
93
o new strategic era.
4.5.5.1 Summary of O’Neill’s contribution
The main contribution is the identification of sub-strategies for turnaround. The sub
strategy approach broadens the scope of the investigative stage of the turnaround
process. It does not necessarily contribute a new formula to turnaround strategy but
emphasises the finer detail in the process.
4.5.6 ZIMMERMAN’S CONTRIBUTION (1989)
During 1986, Zimmerman (1986:113) investigated four turnaround businesses and
concluded that there is a call for control in business turnaround situations. He argues
that effective control can be achieved through the use of the right people, who will be
characterised by their willingness to play an active role in establishing control. He
conducted two studies: in study 1 the sample comprised four manufacturing
businesses, including two turnaround businesses, one marginal business and one
non-turnaround business. The data source used was public archives.
In study 2, the sample consisted of 15 mature manufacturing businesses, eight of
which were turnaround and seven non-turnaround businesses. Zimmerman used
financial records, manuscripts, case histories and interviews in his endeavour to
identify successful turnarounds.
In conclusion, Zimmerman (1986:113) summarised a turnaround as the following:
? a multifaceted process which has minimum requirements
? a referent organisation
? a new and additive view of the environment
? a systematic approach to the process of examining the environment
? the critical clarification and articulation of values
? old values are preserved as new values are added
? traditional morality and values influence turnarounds
94
? the systematic withdrawal of resources improves organisational
performance.
Later, Zimmerman (1989:117) structured a turnaround process that dealt with the
planning of efficiencies, and he concluded that a moderate overhead structure is
required. The focus is clearly on production efficiency and operational issues, as
indicated by the lower left-hand column in figure 4.3. The process concludes with a
“successful turnaround”. The Zimmerman model mainly concentrates on operational
inefficiencies in the business, and if these inefficiencies are addressed, caters for
one outcome – a successful turnaround.
Figure 4.3 The successful turnaround process (Zimmerman, 1989:117)
4.5.6.1 Summary of Zimmerman’s contribution
Zimmerman contributed to business turnaround by introducing a model that relates
to the nature and severity of economic difficulties, a low cost producer, the
differentiation of products and leadership, and the turnaround organisation.
1. ProductionEfficiency
2. Inventory Efficiency
3. Modest Overhead
4. Designfor Manufacturability
1. Distinguishing Features
2. Reliability and Performance
3. Product Quality
4. Market Continuity
1. Focus on Operations
2. Managerial Stability
3. Experience in the Industry
4. Technical Experience
5. Knowledge exploration
6. Incremental Changes
7. Fair Play
(C)
APPROPRIATE
TURNAROUND
ORGANIZATION
(LEADERSHIP)
(B)
PRODUCT
DIFFERENTIATION
(A)
LOW COST
PRODUCTION
SUCCESSFUL
TURNAROUND
95
4.5.7 BOYLE AND DESAI’S CONTRIBUTION (1991)
Boyle and Desai (1991:33) researched and characterised the causes of failure in
small businesses, subsequently forming typologies from which to construct a generic
approach to turnaround. They grouped 24 failure factors into four categories. The
main aim of the grouping was to determine the origin of the warning signs – whether
they are internal or external to the business, and whether they require an
administrative or a strategic response. Figure 4.4 illustrates the response
requirements against the matrix of origin and locality.
4.5.7.1 Summary of Boyle and Desai’s contribution
Boyle and Desai contributed to turnaround modelling by introducing a four-cell
approach to generic turnaround. These four cells are depicted in figure 4.4. The main
attribute of this approach is that within these cells the variables are measured
against the following quadrant matrix:
? internal
? external
? administrative
? strategic.
4.5.8 ROBBINS AND PEARCE’S CONTRIBUTION (1992)
Robbins and Pearce (1992:296) maintain that, at the stabilisation stage, the recovery
must be matched to the causes of the decline, as this will be the test for
implementing return-to-growth, entrepreneurial and/or operating strategies. Robbins
and Pearce (1992:291) designed a two-stage turnaround response model including
governance factors, which they used on 32 textile mill businesses in their research.
The research was conducted using questionnaire and public/company archives.
96
Figure 4.4 Environment/response matrix (Boyle & Desai, 1991:38)
The two stages identified are the turnaround situation and the turnaround response.
Within this two-stage model they included three sub-stages namely the “cause”, the
“retrenchment phase” and, finally, the “recovery phase”. The retrenchment phase
was further developed by Robbins and Pearce and led to various academic debates.
Pearce and Robbins (1993:614) extend the retrenchment theory, which they
describe as a “deliberate reduction in costs, assets, products, product lines, and
overhead” in the commencement stage of a turnaround. Castrogiovanni and Bruton
(2000:25) raise a counter argument, when they challenged the Robin and Pearce II
approach. They are against the generic approach of a retrenchment phase
applicable to all turnaround situations.
According to Castrogiovanni and Bruton (2000), a turnaround strategy should be
purpose made for a specific turnaround case, addressing the causes of decline. The
Robbins and Pearce II turnaround model, illustrated in figure 4.5, acknowledges
Cell I
Policies
Procedures
Rules
Systems
Cell II
Analysis
Planning
Positioning
Cell III
Risk management
Cell IV
Product Development
Diversification
Niching
Market Development
Market Penetration
Internal
External
Administrative
Strategic
RESPONSE
ENVIRONMENT
ENVIRONMENT/RESPONSEMATRIX
CLASSIFICATION OF GENERIC APPROACHESTOTURNAROUND
97
internal and external causes for decline. The focus of the model is retrenchment of
costs and assets. In itself retrenchment forms part of any successful turnaround but
it is not the only focus area of importance. The model finally allows for a recovery
phase.
Figure 4.5 A model of the turnaround process (Robbins & Pearce, 1992:291)
4.5.8.1 Summary of Robbins and Pearce’s contribution
Robbins and Pearce contributed significantly by identifying retrenchment and
recovery processes in turnaround situations. They also added internal and external
factors and concentrated on the situation severity, cost and asset reduction, and the
stability of the business during turnaround. Finally, they concentrated on the
recovery; when turned around the business focus is on efficiency maintenance and
entrepreneurial expansion.
3
UPONSTABILIZATION, A DECISION IS
NEEDED ON A RECOVERY STRATEGY THAT
MATCHES THE BLEND OF CAUSES OF THE
DECLINE, e.g.. DOMINANT EXTERNAL
CAUSES WITH ENTREPRENEURIALLY
DOMINANT STRATEGIES
EXTERNAL
FACTORS
INTERNAL
FACTORS
EFFICIENCY
MAINTENANCE
ENTREPRENEURIAL
EXPANSION
RECOVERY
STABILITY
COST REDUCTION
ASSET
REDUCTION
SITUATION
SEVERITY
TURNAROUNDSITUATION TURNAROUNDRESPONSE
CAUSE
RETRENCHMENT PHASE RECOVERY PHASE
(OPERATING)
(STRATEGIC)
1
ACOMBINATION OF EXTERNAL
ANDINTERNAL FACTORS LEADS
TO THE TURNAROUND SITUATION
2
SEVERE SITUATIONS
CALL FOR ASSET REDUCTIONS
INTHE RETRENCHMENT PHASE.
LESS SEVERE SITUATIONS MAY
BE STABILIZED BY COST
RETRENCHMENT ALONE
LOW
HIGH
DECISION
POINT
98
4.5.9 FREDENBERGER AND BONNICI’S CONTRIBUTION (1994)
Fredenberger and Bonnici (1994:60) argue that the turnaround process “if
successful, may be chartered as an inverse product life cycle”. Life cycle theories
entail the “extension” of the life of a product or, as the authors indicate, the life of a
business. They ponder on the information types that should be included in the
investigative stage, which forms the focus of their study, and list the following types:
? cost analysis
? expense analysis
? productivity and human resources
? productivity and physical resources
? productivity of market
? financial analysis
? working capital analysis.
4.5.9.1 Summary of Fredenberger and Bonnici’s contribution
In introducing the life cycle extension theory, Fredenberger and Bonnici align the
product life cycle theory with turnaround and argue that a turnaround is an extended
life added to the existing deteriorating life span of a business.
4.5.10 AROGYASWAMY, BARKER AND YASAI-ARDEKANI’S CONTRIBUTION
(1995)
Figure 4.6 concentrates on strategic reorientation and incremental strategic change.
Arogyaswamy et al. (1995:494) debate the constraints of turnaround modelling,
highlighting their major concerns:
? modelling focussing primarily on, retrenchment and efficiency
improvements as initial response to decline
? turnaround often does not model the most important contingencies
affecting the turnaround process
99
? turnaround models fail to capture the complexity of the turnaround
process.
The model concentrates on the interaction between variables and forces within the
business. It proposes that turnaround businesses demonstrate two distinct outcomes
in response to decline. The first response is “decline-stemming strategies that
reverse the dysfunctional consequences of decline”, and the second response,
which is in line with this research focus, “recovery strategies that position the
business to better compete in its industry”.
4.5.10.1 Summary of Arogyaswamy, Barker and Yasai-Ardekani’s contribution
They contributed by introducing a two-stage contingency model of business
turnaround:
? decline stemming strategies
? recovery strategies.
Figure 4.6 Business turnarounds (Arogyaswamy et al. (1995:494))
Strategic Reorientation
Incremental Strategic change and More
Effective Implementation of Existing Strategic
Orientation
Recovery Strategy
Emphasis
FIRMTURNAROUNDS
Efficiency Gains
ImprovedStakeholder
Relationships
Stabilization of Internal Climate & Decision
Process
Decline-stemming Tactics. Decline –stemming Tactics Decline-stemming goals
-If Downsizing, emphasis is on work
designs
-- Revenue increases
-Involving stakeholders in firm change
process
-Example: Giving unions and lenders
Board representation
-- Top management change
-- Decentralization and involving
employees in change process
-- Changing reward and control systems
-- Leadership communication emphasizing
the needfor new thinking and
organizational flexibility,
-Downsizing that reduces headcount
-- Assets and cost reduction
-- Recommitting powerful stakeholders to
the organization's strategy and mission
-Example: securing an expanded line of
credit from lenders.
-- Bargaining for better terms with weak
stakeholders
-Example: Obtaining wage concessions from
unions
-- Top management continuity
-- Tighter controls without over
centralization
-- Increase employee aspirations through
higher targets on reward and control
systems.
-- Leadership communication emphasizing
the continuing efficacy of traditional firm
values and strategies.
100
4.5.11 LOHRKE, BEDEIAN AND PALMER’S CONTRIBUTION (2004)
Lohrke et al. (2004:172) agree that the first stage of a turnaround is a situation
analysis (see fig. 4.7). These authors (2004) conclude that it is necessary to look
beyond financial decline to broader indices that trigger the turnaround process, and
thus introduced the Top Management Team (TMT) scanning behaviours.
Figure 4.7 An expanded model of the turnaround process (Lohrke et al., 2004:73)
4.5.11.1 Summary of Lohrke, Bedeian and Palmer’s contribution
Lohrke et al. introduced the Top Management Team (TMT) approach. In terms of
this approach they identify a three-phase turnaround process:
? turnaround situation
o decline
? turnaround response
o response initiation
Phase 1
Turnaround
Situation
Phase 2
Turnaround
Response
Phase 3
Turnaround
Outcome
External Factors
•Environmental
Munificence
•Environmental
Dynamism
Internal Factors
•Strategic
Misalignment
•Insufficient Slack
Resources
Decline
Severity
TMT Responses
Motivation Crisis Response
Attributions
Monitoring
Awareness Demographics
Scanning Behaviours
Cognitive complexities
Capability Demographics
Power
Consensus
Resources
Recovery
•Operating
•Strategic
Improved
Performance
Continued Decline
Industry Exit
Failure
Stabilization
TurnaroundStrategies
101
? turnaround outcome
o transition
o outcome.
4.5.12 SMITH AND GRAVES’S CONTRIBUTION (2005)
Smith and Graves (2005:308) attribute the distressed state of a business to the
severity of the problem. They ponder on the influence of the business size and the
free assets available. Under the heading “decline stemming strategies”, they discuss
the execution of the turnaround which evidently led to stabilisation, and address the
causes of decline and the business’s competitive position. Smith and Graves
(2005:316) developed a turnaround model to reduce the misclassifications brought
about by type I and type II errors, measuring the severity of distress.
The turnaround process (fig. 4.8) that they propose is quite comprehensive, and
addresses the turnaround situation in terms of the causes of decline. The second
stage in their model is to formulate decline-stemming strategies, which concentrate
on internal efficiencies and support. Then, before entering into the recovery phase of
the model, the causes of decline are revisited. The recovery decision will have two
proposed directions, firstly, maintenance and, secondly, reconfiguration. The final
phase is the extent of the recovery, which can be successful or not.
Smith (2005:73) argues that a liquidation analysis of the business’s balance sheet is
useful when considering a going concern. A range of researchers and authors, (as
indicated in appendix C), however, did not include the investigation of the affairs of
the business in their research as a first stage analysis of the turnaround event.
Nevertheless, the researchers that did include the investigation of the business’s
affairs have various approaches and terminology for this stage.
4.5.12.1 Summary of Smith and Graves’s contribution
Smith and Graves see turnaround as two key phases and a series of integrated
steps. The two key phases are the decline stemming and the recovery phase. These
102
concentrate on the severity of the financial distress, the amount of free assets
available, size, ability to stem the decline, stabilisation, retrenchment activities to
improve efficiency and cash flows.
Figure 4.8 Turnaround process (Smith & Graves, 2005:308)
4.5.13 SHEPPARD AND CHOWDHURY’S CONTRIBUTION (2005)
Sheppard and Chowdhury (2005:245) add a specific outcome to the turnaround
process. This can be either success or failure, as shown in figure 4.9. The perceived
shortcoming would be to have a step in the process that will highlight the probability
of failure early in the process.
DISTRESS
ED STATE
Case of
decline
EXTEND OF
RECOVERY/
TURNAROUND
STABILITY
Foundation
for recovery
strategy
Competitive
position
DECLINE
STEMMING
STRATEGIES
Free
assets
available
Firm
size
Severity
Internal climate
anddecision
processes
•Stabilize internal
climate and
improve decision
processes
Efficiency
•Improve efficiency
by implementing
productivity
and/or downsizing
strategies
Stakeholder
support
•Maintain/renew
support from
suppliers,
creditors,
shareholders,
customers
Maintenance of
efficiency
Entrepreneurial
reconfiguration
RECOVERY
STRATEGIES
ADOPTED
Turnaroundsituation
Decline stemmingstrategies
Recoverystrategies
Extendof
recovery
103
Figure 4.9 Key events and core concepts in turnaround/failure (Sheppard & Chowdhury,
2005:245)
4.5.13.1 Summary of Sheppard and Chowdhury’s contribution
The introduction of success and/or failure into a model.
4.5.14 PRETORIUS (2008)
Figure 4.10 illustrates the way in which Pretorius (2008a:23) perceives the unique
set of preconditions that prevail in the Porter strategic model. He opines that the
Porter model’s view of opportunity and competitive advantage are analogous to a
turnaround situation. Ormanidhi and Stringa (2008:62) also favour the Porter model
of generic competitive strategies to evaluate business. They argue that the use of
this model is complementary owing to the following qualities:
? its popularity, as it is substantially used
? the model has a well-defined structure
? the feasibility of the structure in empirical use
? concept clarity of the model
104
? the simplicity and generality of the model.
? owing to the high degree of detail the model complements other
models.
Pretorius splits the precondition for a turnaround event into four distinct categories:
performing well, underperformance, distress and, finally, decline. A turnaround
situation is determined by its own configuration of preconditions (see fig. 4.10) and
many additional lesser variables may play a role or act as triggers.
Businesses in the “performing well” quadrant, depicted on the top left of figure 4.10,
are not experiencing conditions that warrant a turnaround. Typically, they experience
good sales demand, growing market share and established competitive advantage.
Figure 4.10 Turnaround situations and their unique preconditions matrix (Pretorius, 2008:23)
Turnaround situations and their unique preconditions matrix
Performing well:
Good sales demand,
market share,
Established CA
Invisible rising
Cost/unit
Distress:
Dwindling sales, Losing market share,
Losing CA,
Demand changes
Competitive products
Sudden inventory growth
Expenses increase
Under performance:
Good sales demand
Pressure on contribution
Margin, lowcapacity
Utilisation, Pressure on
Relative productivity low,
Cash strapped
Crisis:
Rapidly dwindling sales,
Losing Market share,
Lost CA,
Demand changes,
Cash strapped
R
e
s
o
u
r
c
e
M
u
n
i
f
i
c
e
n
c
e
Resource
Abundance
Resource
Scarcity
Internal/Operational External/Strategic
Causality (Origen of distress)
105
The quadrant depicting “underperformance”, is disposing of scarce resources.
Capacity utilisation is low, and a poor positioning on competitive advantage is
evident. Consequently, a turnaround situation is inevitable to address the very
inefficiencies that create the underperformance.
The preconditions for the distress quadrant are characterised by abundant resources
but declining sales demand owing to a loss of competitive advantage.
Hence, a turnaround situation is inevitable to address the loss of market share,
quality and/or service issues causing the distress.
Decline quickly turns into a crisis and a definite turnaround event. However, a
turnaround intervention may be too late, depending on the severity of the crisis. As
part of a turnaround, liquidation or the selling of non-core divisions could be
contemplated.
Figure 4.11 Strategies and practices to respond to the turnaround situations (Pretorius,
2008:24)
Strategies and practices to respond to turnaround situations
Porter strategies for growth:
Pursue sales (penetrate and new
markets)
Maximize market share
Entrench CA
Optimise capacity,
Organic & Inorganic
Forced Repositioning strategy:
Strategy revision,
Alternative revenue streams
Find newproducts,
Alternative markets,
Forced to Innovate, diversity,
Differentiate, acquire
Efficiency strategy:
Protect/strengthen CA,
Cost cutting,
Capacity improvement,
Generate cash,
Outsource non essentials,
Productivity,Asset reduction
Last resort strategy:
Defensive merger,
Divestiture,
Liquidation,
Ask debt forgiveness
R
e
s
o
u
r
c
e
M
u
n
i
f
i
c
e
n
c
e
Resource
Abundance
Resource
Scarcity
Internal/Operational External/Strategic
Causality (Origen of distress)
106
4.5.14.1 Summary of Pretorius’s contribution
Pretorius (2008a:24) states that business turnaround essentially demands a new
choice of Porter’s generic strategic options as a focal point. In last resort strategy it
requires divestiture or liquidation and the start up of new ventures, which involves
determining the new positioning and where competitive advantage will be sought.
With abundant resources, Pretorius concludes that “Porter’s matrix is still core, but
when there is scarcity of resources, the focus moves towards finding efficiency first”.
4.6 TURNAROUND PLANNING
Seminal work has been done by Bibeault (1982), Hofer (1990), Barker ( 1998, 2005),
Brenneman (1996), Dolan (1983), Fredenburger (1994) and Pearce and Robbins
(2008) and, in the South African context, Harvey, (2002), Burdette (2004), Loubser
(2004) and Pretorius (2004). Pandit (1997:33) has grouped the salient research done
by researchers, academics and authors from 1976 up to 1995. Pandit’s table
classifies the theory into 1) unit of analysis; 2) sample characteristics; and 3) data
source(s). His summary of research progress is reflected in Appendix D. All the
authors, some to a lesser extent, agree on the investigation of the sources of
decline. Turnaround practitioners and other stakeholders are constantly challenged
with type I and type II errors. A type I error is to turn around a company that should
not be turned around, and type II error is to not turn a business around that should
have been turned around.
The alleviate this problem, Quinn et al. (1988:681) posed the following questions to
be answered when assessing a business turnaround:
? Is the business worth saving?
? Sustainable or disinvest or liquidate?
? State of current operating health?
? State of current strategic health?
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Castrogiovanni, Baliga and Kidwell (1992:27) pose the following questions, which need
to be added to the questions posed by Quinn et al. (198:681):
? How sick is the business?
? In what stage of decline?
? CEO management involvement?
To arrive at appropriate answers to these questions, Gopal (1991: 81) proposes that
the analysis should include an investigation of the:
? strengths and weaknesses of the business
? market
? organisational structure and quality and quantity of manpower
? finances.
The importance of establishing the business’s value at an early stage of turnaround,
in this instance the investigative step in a turnaround, is confirmed by Brockman and
Turtle (2002:512) and Glantz (2003:314), maintain that an ideal situation for decision
making at this stage would be to compare a liquidation scenario valuation with a
going-concern (turnaround) scenario. Cocq, Legoux, De Loe, Oka and Zorn
(2006:43), who conclude that there seems to be consensus that some form of
feasibility and/or due diligence must be done in a very short space of time, confirm
this consideration.
Akason and Kepler (1993:38) discuss the difference between a business review and
the due diligence process. They conclude that the investigation should include:
? fully backed findings
? quantifications
? possible solutions
? guideline on managing a review which is also applicable to turnaround
planning.
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The due diligence process was discussed in chapter 1 as a tool for investigating a
business’s activity effectively. In the context of business turnaround, where a merger
or acquisition is contemplated as part of the turnaround plan, Gillman (2001:7)
defines a due diligence as follows:
? the examination of a potential target for merger, acquisition, privatisation
or similar corporate transaction, normally by a buyer
? a reasonable investigation focusing on future material matters
? an examination being achieved by asking certain key questions, including,
do we buy, how do we structure the acquisition and how much do we pay?
? an examination aiming to make an acquisition decision via the principles of
valuation and shareholder analysis.
Business consultants, accountants and legal practitioners have embarked on their
own design and approach to formulating a due diligence process. The Axiomate
Group (2004) focus on the five key elements in a business infrastructure.
They are:
? technology
? finance and administration
? operations
? sales and marketing
? people, culture and organisation.
The importance of data integrity is underpinned by Cole (1994:48) in the early stages
of the due diligence process. Cole states that it is crucial to get entrepreneurs to
understand that providing high-quality information will speed up the process. This
imperative is also true for a turnaround intervention.
The first phase of business turnaround planning, the investigative phase, is
discussed briefly under the heading “Investigative phase”. The application of verifier
determinants during the investigative stage are of the utmost importance. Chapter 3
of the study has dealt comprehensively with the concept of verifier determinants.
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Subsequently, the second phase of the turnaround planning is the actual drafting of
the plan.
4.6.1 INVESTIGATION PHASE
The investigative phase is paramount in most authors’ turnaround modelling
discussed earlier in this chapter. In Section 130 of Chapter 6 of the new Companies
Act is quite clear as to the responsibility of the turnaround practitioner. The
practitioner must establish whether there is no reasonable basis for believing that the
company is financially distressed, or that there is no reasonable prospect of rescuing
the company. Section 141 states that the practitioner must, as soon as the
investigation into the company’s affairs is completed, “consider whether there is any
reasonable prospect of the company being rescued”.
This section further dictates that if the turnaround practitioner detects any adverse
problems which will have an impact on the feasibility of doing a turnaround, the
practitioner must inform all stakeholders. The most important outcome of the
investigation phase when it is decided not to continue with a turnaround is depicted
at the bottom of figure 8.1 (p233). The business can arrange for a compromise in
terms of Section 150 of the Act, or the business can be liquidated as per Section
141(2)(b), which reads as follows: “… apply to the court for an order discontinuing the
business rescue proceedings and placing the company into liquidation.”
After due consideration of the responsibilities implied by the new Act, and predicting
a positive representation, a decision will be made to continue with a business
turnaround plan.
4.6.2 THE PLAN
The considerations that have to be included in the turnaround plan, as prescribed by
the new Act, are dealt with comprehensively in section 5.7 in the next chapter. For
the purposes of this chapter, reference is made to the salient research on the
subject. The second column of Appendix B illustrates the full literature response to
the planning phase.
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The plan must demonstrate a defensible strategy in order for the courts and creditors
to favour turnaround proceedings. In Grant Thornton’s Catalyst Management Issues
(2005b:2), they conclude that the funding requirements, future cash flow and debt
repayment in relation to the turnaround plan must be “assessed with a high degree
of certainty”. Turnaround plans are clearly divergent (but not exclusive) from
conventional business plans. Start-up businesses have projections for future
possible performance issues, whilst existing businesses apply business plans to
create new ventures, acquisitions and a change in business strategy.
The lack of proper measurements to test the validity and reliability of business
turnaround plans by financial institutions and trade creditors has resulted in a
deterioration in the use of and reliance placed on business plans as a business
assessment tool. It is important that entrepreneurs identify the associated warning
signs in a timely fashion in order to re-strategise and reorganise the business and
steer it to safety. Entrepreneurs are reluctant and in many instances ill-equipped to
compile the turnaround plans needed to initiate negotiations with creditors. This
important management tool is then outsourced, and left to “professionals” to compile.
The environment in which an entrepreneur needs to promote his change
(turnaround) plan is predominantly a hostile environment. Nevertheless, Hall
(1980:75) concludes that survival is possible in a hostile environment if successful
survival strategies are planned and implemented. The mere fact that entrepreneurs
often do not compile their own turnaround plans lead to a total lack of understanding
of their own businesses and contributes further to the poor reliance placed on
turnarounds by creditors in general. Entrepreneurs seldom, if ever, apply turnaround
plans as a strategic management tool to enhance their businesses. Section 150 of
Chapter 6 of the new Companies Act requires that a business turnaround plan has to
be presented to all creditors concerned, including the courts, in order to convince
them to agree to a stay of proceedings.
Creditors have to be placed in a position to assess the turnaround plan before they
can be expected to support the turnaround attempt by either reducing their claims
and/or supporting it by extending lending or trade credit.
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A turnaround plan will most probably not mirror a conventional business plan, as a
more vigorous approach to strategic change will be required.
Balgobin and Pandit (2001:304) identify four categories addressing the formulation of
a turnaround plan. They are “situation analysis, gaining control, managing
stakeholders and improving motivation”. Once approved, the entrepreneur’s
behaviour will have to adapt to the planned restrategising of the venture and they
need to be aware of the possible impact. For this reason, a willingness to change
needs to be present.
It is of the utmost importance that the personnel of the business are aware of the
turnaround situation and the planned turnaround execution. Balgobin and Pandit
(2001:314) argue that a turnaround plan which is communicated properly will reduce
confusion and protect key critical resources. Kow (2004a:242) confirms this view by
concluding that a communications plan must be part of the turnaround strategy in
order to ensure that the concerns of employees are dealt with. The turnaround
models in the literature (discussed under subsection 4.5), research did not include
communication as a specific step, although clearly a very important factor is
maintaining motivation levels.
The second and maybe the most important function of a proper turnaround plan is to
ensure that future investors (post commencement finance) are confident that the
business can return to sustainable competitive viability. Han, Huml, Kkaragal, Saito
and Sundjaja (2007:7) are of the opinion that investors tend to divest if the
turnaround plan lacks momentum and adequate execution. Cozijnsen, Vrakking and
Van Ifzerloo (2000:153) also believe that the turnaround plan should include and
consider the following variables:
? planning objectives
? organisational structures
? increased profits
? increased turnover
? increased efficiency
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? improved effectiveness
? higher productivity
? increased market share
? improved environment
? quality improvement
? human objectives
? reduction of staff turnover
? increased employee satisfaction
? enhanced motivation of employees
? improvement of work environment.
Harker (1998:325) concludes that the foundation of a turnaround plan “is sound
market knowledge”. He states that there is a need for information and proper
analysis of variables before constructing a turnaround plan. Clearly, sifficient time
needs to be allotted to a business review in order to prepare and do a due diligence
before the plan is presented to all parties. In this study, the possible turnaround
models currently available to entrepreneurs in South Africa were investigated.
Findings indicate that two distinct directions can be followed, namely, formal and
informal turnaround.
The United Nations Commission on International Trade Guide (UNCITRAL)
(2001:10) clearly indicates that one of the objectives of restructuring a business is to
create a framework that will encourage entrepreneurs (businesses) to address their
financial distress factors at an early stage.
4.7 CONCLUSION
From the literature exploration it is evident that some authors, such as Altman and
Hotchkiss (2006), approach the study of turnaround management with a qualitative
data approach, although accounting data formed the basis for most of the empirical
research debated in the academic journal articles. Fortunately, a number of authors,
such as Bibeault (1982), O’Neill (1986), Riana et al. 2003) and McCann et al. (2009),
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have a more pragmatic approach to turnaround and tend to drill down into the micro
or qualitative issues. The timing of a turnaround is one of the more contentious
issues addressed by stakeholders both internationally and nationally; and the main
differentiator between business strategy and turnaround strategy manifests itself in
the time factor. Turnaround is typified by very limited time as opposed to a business
strategy that is moving less urgently. The second differentiating factor is that of
resources, that is, scarce resources in turnaround, versus planned resources in
normal strategic planning.
A number of models and/or actions in turnaround planning were identified and
discussed in this chapter. Investigations into the new South African Companies Act,
Act 71 of 2008, established the format of turnaround plans under Chapter 6
proceedings which will be dealt with in chapter 5 section 5.7.
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CHAPTER 5
Literature review of turnaround legislative measures
5.1 Introduction
5.2 Current (historic) South African Companies Act, Act 61 of 1973
5.2.1 Introduction
5.2.2 Section 311. Compromises
5.2.3 Section 427. Judicial management
5.2.4 Reckless trading
5.3 International Legislation
5.3.1 Introduction
5.3.2 United States of America
5.3.3 United Kingdom
5.3.4 Switzerland
5.3.5 Belgium
5.3.6 Germany
5.3.7 Spain
5.3.8 Sweden
5.3.9 Finland
5.3.10 Italy
5.3.11 Netherlands
5.3.12 France
5.3.13 Canada
5.3.14 Australia
5.4 Developing a bankruptcy rule in South Africa.
5.5 New national legislation, the Companies Act, Act 71 of 2008:
5.5.1 Introduction
5.5.2 Financial distress
5.5.3 Reckless trading under the new Companies Act
5.5.4 Beginning, duration and ending of business rescue
5.6 Liabilities of the turnaround practitioner
5.6.1 Liability of legitimacy
5.6.2 Liability of leadership
5.6.3 Liability of data integrity
5.6.4 Liability of strategy options
5.6.5 Liability of resource scarcity
5.6.6 Liability of integration
5.7. Consideration of a business turnaround plan
5.8 Summary
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Hamer (in Burdette, 2004:4)
5.1 INTRODUCTION TO A LITERATURE REVIEW OF
LEGISLATION
This chapter deals with international trends in business rescue legislation.
Discussions include the old and new South African legislation, with the rescue
requirements of Chapter 6 of the new Companies Act, Act 71 of 2008, being
discussed. The literature researched in this chapter is not an attempt to justify
statutory rules, nor is it meant to be a legal discussion or an attempt to arrive at a
legal solution, or an attempt to rewrite or criticise current, and very soon, historic
legislation (owing to the implementation of a new companies act during in 2011), it
merely attempts to give the reader a critical overview of South African legislation in a
turnaround context. The overview focuses on existing South African legislation and
various sources of data regarding company, insolvency and labour law are
investigated. In addition, the implications and possible constraints that this legislation
may have are investigated and discussed. In the South African context, auditing and
law businesss will, no doubt, play an important role in the execution of Chapter 6 of
the Act. The larger international businesss, such as Price Waterhouse Coopers,
KPMG and Deloitte and Touche, as well as various local legal businesss and private
practitioners, are currently in the process of positioning themselves to capitalise on
the potential opportunities that will be created by Chapter 6 of the new Act.
“… a business rescue regime has a far better chance of succeeding if the insolvency system in
which it is applied is debtor-friendly, as opposed to a creditor-friendly system of insolvency
where business rescue regimes are not applied successfully.”
CHAPTER 5
LITERATURE REVIEW OF TURNAROUND LEGISLATIVE MEASURES
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The uncertainty in the appointment of a regulatory body has contributed to
competition between various disciplines in the professional and business arena for
this important position. The discussion in this chapter will deal with the turnaround
event and the methodology to be adopted by the turnaround practitioner.
Part one of the literature research began with the current juncture in South African
law, using the old Companies Act No. 61 of 1973, which was recently amended, as a
point of departure.
Part two reflects on international bankruptcy legislation research from similar debtor-
friendly regimes to obtain an understanding of global trends. Part three will deal with
the seminal work of South African authors and researchers, carried out against the
backdrop of development of a new South African bankruptcy process. In part four,
Chapter 6 of the new Companies Act, Act 71 of 2008 is investigated and commented
on. The research aims to identify possible associations between the practitioner’s
liabilities and the Act, as turnaround plans can be faced with various opportunities
and/or obstacles that facilitate or obstruct their effective execution. Part five reviews
the rescue plan as contained in Section 150 of Chapter 6 of the new Companies Act
(Act 71 of 2008).
As Chapter 6 of the new Act is a new law and is, to date, unchallenged, it opens up a
new management science in South Africa. This research included international
insolvency, bankruptcy and liquidations laws and common law. It goes without
saying that the legislation contained in Chapter 6 will, if required, be legally tested in
our courts. In terms of the new Act, closed corporations will be phased out as the Act
divides all companies into profit and non-profit companies, hence new closed
corporations will be incorporated (Brewis, 2009:3). This study therefore refrained
from referring to the rule of precedent or to any case law (except where applicable
and then specifically indicated), but attempted to analyse all applicable Acts.
Pretorius and Holtzhauzen (2008:93) argue that the word “turnaround” implies that a
declining business can be rescued, whilst a business that has actually failed cannot.
However, a turnaround manager will still be appointed, which creates an agency
relationship.
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According to Combs, Michael and Castrogiovanni (2004:910), an agency relationship
is formed when the principal (as one party) delegates authority to the agent (the
other party). The turnaround manager assumes six liabilities, which are identified by
Pretorius and Holtzhauzen (2008:94). These liabilities are the following: legitimacy;
resource scarcity; leadership capacity; strategy options; data integrity; and
integration (see table 5.1).
The turnaround practitioner must be able to address and resolve the various
liabilities; for this reason the education, knowledge and skills required of the
practitioner should be on a very senior and advanced level. In terms of the
legislation, the minister still has to appoint the regulatory body for turnaround
practitioners, but it is clear from deliberations with interested parties that the general
view is that superior quality management is required.
To be able to understand the liability burden fully, Pretorius and Holtzhauzen
(2008:103) have drawn up a matrix indicating the requirements with regard to each
liability identified. The prerequisite of employing a multi-skilled, educated
professional to discharge the turnaround practitioner’s responsibilities is emphasised
by the variables under the headings “Liability, “Knowledge” and “Skills” requirements.
In no particular order these are listed in table 5.1
5.2 CURRENT (HISTORIC) SOUTH AFRICAN COMPANIES ACT,
ACT 61 OF 1973
5.2.1 INTRODUCTION
Currently, the South African government is revisiting consumer and business
legislation as part of law reform to cater for job creation and job retention and a more
coherent society. Accordingly, the National Credit Act, Act No. 34 of 2005, protects
consumer rights. As the South African Insolvency Act, Act no 24 of 1936, is the only
Act dealing with bankruptcy.
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Roestoff and Renke (2005:96) argue that the main aim of the current Insolvency Act
is not to provide debtors with debt relief, but they are of the opinion that the
consumer law reform commission has adopted the United States’ approach of “a
new beginning”.
Table 5.1 Liability, knowledge and skills requirements (Pretorius & Holtzhauzen, 2008:103)
Liability Knowledge requirements Skills requirements
Legitimacy Legal framework of relevant acts
Financial
Personal credibility
Interpersonal skills
Reputational slack
Mustering support
Resource scarcity Sales and markets
Operations/logistics
Human resources
Management
Efficiencies/effectiveness
Environmental munificence
Diagnostic skills
Analysing skills
Conceptualising preconditions
Learning from experience
Ability to read preconditions
Strategic formulation
Leadership
capacity
Situational leadership
Experience in leading people
Influencing capability
Vision/direction
Seeing the big picture
Problem-solving skills
Style (severity dependent)
Creating a new culture
Strategy options Strategic management
Industry knowledge
Environmental interactivity
Cause-effect relationships
Innovative thinking
Advanced strategic
management skills
Entrepreneurial thinking
Data integrity Basic financial knowledge
Taxation implications
Financial ratios
Causes, signs and flags
Basic financial skills
Use of financial information
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Integration Wide understanding of general
business principles
Sales, marketing, operations and
strategy interactions
Ability to integrate
Ability to implement
The main aim of the consumer law reform is to combat over-indebtedness, but
Renke, Roestoff and Bekink (2006:91) are of the opinion that the National Credit Act,
will, apart from rendering consumer protection, also provide consumers with much-
needed credit education and adequate information to allow consumers to make
informed decisions.
The business rescue legislation contained in the new Companies Act is not dissimilar
to that contained in the National Credit Act (Act 34 of 2005). Current regulatory
pressures imposed by South African business legislation are described by Hall
(1980:75) as part of the hostile environment in which entrepreneurs operate. South
Africa is identified as a country with the most cumbersome labour laws.
Consequently, under normal circumstances it is difficult for a business to entertain an
informal turnaround process, as there is currently no legal avenue; fortunately this
situation will largely be rectified by the new Companies Act. As previously
mentioned, formal turnaround strategies are not part of current legislation and the
only option currently available is contained in Sections 311 and 427 of the old South
African Companies Act, Act 61 of 1973.
In terms of Section 311 (old Companies Act, Act 61 of 1973), a compromise is often
proposed to entrepreneurs as an alternative source of turnaround and (in terms of
Section 311, old Companies Act, Act 61 of 1973) a company may enter into a
compromise with its creditors to arrange debt restructuring. This is a court-driven
process where both the creditors and the court must sanction the eventual
compromise. Burdette (2004a:14) argues that this process is an expensive
procedure to implement.
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5.2.2 SECTION 311 COMPROMISE
The huge array of case law regarding these compromises is a clear indication that it
is not always a simple undertaking. An application for a Section 311 (Companies Act,
Act 61 of 1973) compromise relates to the distressed state that a company finds
itself in. In the event that a court does not grant an order for a Section 311
compromise, the creditors are not bound to enter into any other arrangement and
can file for liquidation.
Section 311 compromises are not uncommon practice in South Africa after
liquidation (see also acts of insolvency later on in this chapter).
Section: 311. Compromise and arrangement between company, its members
and creditors.
(1) Where any compromise or arrangement is proposed between a company and
its creditors or any class of them or between a company and its members or any
class of them, the Court may, on the application of the company or any creditor or
member of the company or, in the case of a company being wound up, of the
liquidator, or if the company is subject to a judicial management order, of the
judicial manager, order a meeting of the creditors or class of creditors, or of the
members of the company or class of members (as the case may be), to be
summoned in such manner as the Court may direct.
(2) If the compromise or arrangement is agreed to by-
(a) a majority in number representing three-fourths in value of the creditors or
class of creditors; or
(b) a majority representing three-fourths of the votes exercisable by the members
or class of members,
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At the present juncture, the only legal pre-liquidation “turnaround” option/alternative
available for the debtor is judicial management, as described in Section 427
(Companies Act, Act 61 of 1973).
5.2.3 SECTION 427 JUDICIAL MANAGEMENT
The conditions under which a court of law will consider placing a company under
judicial management are described by Section 427(1) (old Companies Act, Act 61 of
1973) which reads as follows:
Section 427. Circumstances in which company may be placed under judicial
management.
(1) When any company by reason of mismanagement or for any other
cause-
(a) is unable to pay its debts or is probably unable to meet its obligations; and
(b) has not become or is prevented from becoming a successful concern, and
there is a reasonable probability that, if it is placed under judicial
management, it will be enabled to pay its debts or to meet its obligations and
become a successful concern, the Court may, if it appears just and equitable,
grant a judicial management order in respect of that company.
(2) An application to Court for a judicial management order in respect of any
company may be made by any of the persons who are entitled under Section 346
to make an application to Court for the winding-up of a company, and the
provisions of Section 346(4)(a) as to the application for winding-up shall mutatis
mutandis apply to an application for a judicial management order.
(3) When an application for the winding-up of a company is made to Court under
this Act and it appears to the Court that if the company is placed under judicial
management the grounds for its winding-up may be removed and that it will
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become a successful concern and that the granting of a judicial management
order would be just and equitable, the Court may grant such an order in respect
of that company”.
The critical measure of whether a company can pay its debt, or is probably unable to
meet its debt repayments and thereby fails to become a successful business, is
dominant in the qualification for Section 427.
Courts can conclude that a debtor’s liabilities exceed the true value of its assets if
evidence of commercial insolvency can be found. Such a company will then be
factually insolvent. This phenomenon is referred to as the “insolvency rule” (Smart,
2006:17).
The main aim of judicial management is to restore the business to a position where it
is able to service its debt obligations. These formal measures do not have any
benefits for the entrepreneur but rather they favour the creditors. Nevertheless,
creditors place little reliance on these formal measures. Accordingly, Loubser
(2005:1) concludes that judicial management has, in general, not been accepted as
an effective corporate turnaround procedure, which attributes largely to the stringent
requirements (insolvency rule) evident in the old Companies Act (Act 61 of 1973).
From the aforementioned it can be deducted that technical or factual insolvency
occurs when the debtor’s liabilities in fact exceed the value of its assets (Meskin
1990:2–17). It can be thus be deduced that directors/entrepreneurs are at risk of
acquiring personal liabilities if they trade under conditions of insolvency and incur
additional debt. Meskin (2004:911) indicates the conditions under which a court of
law will consider action against director/s described in Section 424(1) and (3).
(Companies Act, Act 61 of 1973), which will be discussed in the next section.
5.2.4 RECKLESS TRADING
Trading under insolvent conditions is regarded as trading recklessly. Section 339 of
the Companies Act (Act 61 of 1973) describes conditions of insolvency.
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Meskin (2004:666) states, that, if a company is unable to pay its debt, the laws of
insolvency will apply. Commercial insolvency occurs when an individual or company
is unable to pay its debts when they are due and payable. This is one of the four
instances where, according to section 424 (Companies Act, Act 61 of 1973), a
director can be held personally liable. Winer, Levestein and Gewer (2005) argue that
it is becoming increasingly clear that directors/entrepreneurs need to understand the
subtle difference between factual (technical) and commercial insolvency when
conducting business.
Section 427(1) states the following: When it appears, whether it be in a winding-up,
judicial management or otherwise, that “[w]here any business of the company was or
is being carried on recklessly …” the court decides on application of the master, the
appointed liquidator, or, any of the creditors of the company, whether any person
who was knowingly a party to the carrying on of the business in aforesaid fashion,
could be held responsible in their personal capacity.
Section 427(3): “… where any business of a company is carried on recklessly …”
with the intent or for the purpose as mentioned in section (1) above, everybody who
was knowingly party to the conducting the business in this manner will be guilty of an
offence. Obviously it is for the courts to decide whether the director or person is
guilty and liable for reckless trading under circumstances of insolvency. It is
important to note that proof of a causal link between the relevant conduct and such
debts or liabilities is not required.
In the case of Ozinsky NO v Lloyd 1992 (3) SA 396 (C) at 413–414, the court (Van
Deventer J) stated (at 414): "… If a company continues to carry on business and to
incur debts when, in the opinion of reasonable businessmen, standing in the shoes
of the directors, there would be no reasonable prospect of the creditors receiving
payment when due, it will in general be a proper inference that the business is being
carried on recklessly …."
The dilemma facing entrepreneurs who are experiencing cash flow distress in their
business is how they will obtain additional debt (whether from normal creditors or
financial institutions).
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Australia has similarly styled legislation with regards to reckless trading under
Section 588G of the Australian Corporations Act. The aim of this legislation is to
protect creditors from directors’ and shareholders’ actions that were taken to reduce
the probability of them being paid. James, Ramsay and Siva (2004:12) argue that
shareholders and directors will be reluctant to perform certain actions that will
ultimately harm their reputations. If found guilty of reckless trading, the entrepreneur,
as a director, incurs considerable personal liability.
In the case of Philotex (Propriety) Limited & Others v J R Snyman & Others 1998
(334/93), the court stated: that “… when the business of the company has been
carried on recklessly, or with the intent to defraud creditors or for any fraudulent
purpose, any person who was knowingly a party to such conduct may be held
personally liable for the debts of the company…”.
It is therefore very risky to assume (when a business is having cash flow problems)
that there is a reasonable prospect that creditors will receive future payments.
Attempts by debtors (entrepreneurs) to steer their distressed businesses out of
trouble are often regarded by aggressive creditors (usually smaller creditors) as an
act of insolvency. The measure mentioned under informal turnarounds above is of
interest here, as creditors are quite successful when they approach our courts with
an application for liquidation and they can prove acts of insolvency. Entrepreneurs
can obviously seek permission to appeal and defend the attack against them, but
litigation is a costly exercise to enter into especially where signs of distress are
already in evidence.
Section 8 of the Insolvency Act (Act 24 of 1936) describes the eight acts of
insolvency. For the purposes of the discussion only the acts of insolvency relevant to
turnaround situations will be addressed.
Section 8(c) of the Insolvency Act (Act 24 of 1936) states that if a debtor makes or
attempts to make any disposition of any of his property which has or would have the
effect of creating prejudice or preference to one creditor above another, he commits
an act of insolvency.
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Thus, when an entrepreneur (debtor) disposes of any of his property, that is, selling
so-called unproductive assets, he may effectively be committing two acts of
insolvency. The first is the actual or attempted disposition of any property, which has
the effect of preferring/prejudicing creditor/s above another. The second is the actual
or attempted disposal of property. Had the attempt been successful, it would have
had the effect of preference. Entrepreneurs embarking on this avenue must be
aware that the intention with which the disposal was made, or attempted, is of no
consequence to the court.
Disposition of assets can be open to attack by the liquidator in a liquidation scenario.
Under Sections 26 to 33 of the Insolvency Act Act 24 iof 1936), disposition without
value, voidable preferences, undue preferences and collusive dealings are remedies
available to creditors.
In addition, Section 8(e) of the Insolvency Act (Act 24 of 1936) states that if a debtor
makes, or offers to make, any arrangement with any of his creditors for releasing him
wholly or partially from his debts he commits an act of insolvency.
Thus, when an entrepreneur (debtor) enters into an arrangement, which entails the
creditors releasing him wholly, or partially, from his debts, it is an act of insolvency.
The mere offering to make such an arrangement is also regarded as an act of
insolvency. The courts can treat such an arrangement or attempt as an
acknowledgement by the debtor that he is unable to pay his debts when they are in
fact due and payable.
Section 8(g) of the Insolvency Act (Act 24 of 1936) states that a debtor commits an
act of insolvency when he gives notice to any of his creditors that he is unable to pay
any of his debts. The written notice to creditors is a practice fairly commonly used by
businesses that are unaware of the dire consequences. Meskin (1990:5–99) states
that this act is committed when a debtor notifies his creditor in writing that he is
unable to pay all, or any one, of his debts. Entrepreneurs asking for time to pay a
debt, which is due and payable, need to be aware that this action will give rise to an
inference that he is unable to pay the debt.
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Section 8 of the Insolvency Act (Act 24 of 1936) states that a debtor commits an act
of insolvency as a trader if he gives notice in the Government Gazette, in terms of
sub-section (1) of Section 34, that he intends selling his business and will thereafter
be unable to pay all his debts. Any of the above actions, outside the current
legislative provisions, may thus lead to the formal processes of insolvency being
implemented. Informal turnarounds are less costly and do not require formal
contracts, proceedings or direct compliance.
Creditors, such as banks, can initiate it and, if successfully executed, restore creditor
faith in the entrepreneur and business. Trade creditors and financial institutions will,
however, be reluctant to extend any form of credit to businesses that are
experiencing the above-mentioned distress, purely as a result of the obvious risks
involved but also because of the lack of a proper turnaround plan.
Informal turnarounds could benefit the business with immediate cash, but a longer-
term solution would be more prudent. Moreover, downsizing the workforce is often
contemplated to enable the business to continue. However, this option brings its own
problems, as South Africa has some of the most stringent labour laws in the world.
Jacobs (2004:125) encourages entrepreneurs to become members of the
Confederation of Employers of South Africa (COFESA) in order to obtain support
with “legal jargon”.
The Labour Relations Act, Act 66 of 1995, contains very strict procedures that need
to be followed before retrenchments can be contemplated. Reducing the workforce
can be a costly exercise as the law dictates that severance packages must to be
paid. Marè (2004), commenting on Labour Law case law, addresses the issue of
retrenchments and concludes that “fair reasons” could exist that justify
retrenchments.
The preceding discussion alluded to the more obvious and crucial legislation.
Cognisance should, however, be taken of other legislation that will impact on
effective turnaround. Other legislation includes the National Credit Act, Act 34 of
2005, the Competition Board rules and corporate governance compliance (King II,
and III reports).
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Non-enumerable information such as credit information is important, but Altman
(1984:180) indicates that for information to be dependable more than one credit
source needs to be investigated. The treatment of credit information is addressed in
the new National Credit Act, Act 34 of 2005.
Lee (1998:640), in discussing the Korean Crisis, indicates that two elements have
contributed significantly to business sector failure: they are the lack of mechanisms
to manage corporate governance, and secondly, a too lenient government-led credit
allocation policy. The constraints and opportunities clearly suggest that turnaround
should be attempted in a period of decline rather than in a period of distress. Chapter
11 of the United States of America’s insolvency law provides for a more debtor-
friendly approach. It is worth noting that the Canadian Bankruptcy and Insolvency
Act (s 50.4(8) 1992) allows for a stay of (moratorium on) proceedings which, in turn,
allows the de facto insolvent party to apply to the courts for a stay or extension for
the duration of the moratorium.
Rajak and Henning (1999:286) observe that
“… all modern corporate rescues are united on one matter, the absence which,
possibly more than anything else, has helped to bring South Africa’s judicial
management to its present perceived impotence. This is the recognition that the
agreed plan by which the future relations between the debtor and its creditors
will be governed may well include the reduction of the debtors’ overall
indebtedness. To insist, as the South African rescue provision does, that a
protective moratorium is available only where “there is a reasonable probability
that if [the debtor] is placed under judicial management, it will be unable to pay
its debts or to meet its obligations” is to ignore the well-nigh universal reality of
creditors being prepared, for their own benefit to forgive part of the debt. It is
frequently the case that a creditor will benefit far more from having the debtor
back in the marketplace than from suing the debtor into extinction. A radically new
rescue provision should provide a mechanism under which a specified majority of
creditors can approve a plan under which the debtor may emerge from
protection and resume normal commercial dealings.”
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Members of the South African government task team for corporate reform (2004),
such as Daly and Burdette, have indicated that the new legislation should demand
the removal of the entrepreneur and/or management from the business, as they are
perceived as the root cause for the business failure.
This anticipated removal of the current management/entrepreneur highlights the
importance for an entrepreneur to be equipped with a turnaround model.
Nevertheless, the entrepreneur must understand what events turned prior success
into distress and failure. Pretorius (2004:265) points out that the perseverance
characteristic must not lead to the entrepreneur being stubborn about his situation.
Under current legislation, entrepreneurs will have to be cognisant of the increased
risk when contemplating “informal” turnarounds. Burdette (2004a:20) argues that
informal turnarounds are risky by their very nature because no moratorium is
granted, and other (normally smaller) creditors cannot be bound by the informal
arrangements. Informal agreements or arrangements, which can, in turn, lead to the
implementation of formal insolvency proceedings by such creditors, accentuates the
need for a change in current legislation that will allow such entrepreneurs adequate
leeway to design proper turnaround plans.
Entrepreneurs need to be equipped with extensive, integrated and applied
knowledge of early warning signal “verifier determinants” that will enable them to
spot the danger signs and empower them to design turnaround plans to save their
businesses.
5.3 INTERNATIONAL LEGISLATION
5.3.1 INTRODUCTION
Altman and Hotchkiss (2006:58–78) have done seminal work in comparing the
bankruptcy regimens of ten different countries with the United Kingdom and the
United States of America. In addition,
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Rajak and Henning (1999:262–287) have done substantial work in Australia and
Canada which has contributed to the background study in formulating South African
business rescue law. Franks, Nyborg and Torous (1996:91) compared the United
States, the United Kingdom and German insolvency codes and Omar (2006) carried
out substantial research with regard to European insolvency laws, specifically
Germany, England and Wales, Spain and France. Omar (2006:2) refers to the
rescue proceedings of Australia, Canada, France, Singapore, the United States and
South Africa as “modern” rescue processes and argues that many other jurisdictions
are in the process adapting similar processes. Although
Franks, et al. work is dated, it adds to a better understanding of the development of
rescue law. In a report on entrepreneurial re-starters, the Boston Consulting Group
(2002:16) investigated and commented on re-starter-friendly insolvency regimes.
Countries listed were the United States of America, the United Kingdom, France and
the Netherlands. These authors identified three factors of influence for recognising a
country as re-starter friendly:
? A legislative framework dictating the ease of the entrepreneur’s re-
entry, manoeuvrability in decline, exit and re-entering of markets.
? Financial environment that dictates the rules of financing of re-
starters.
? The social content reflecting on society attitudes towards risk and
failure.
In researching the international rescue arena, it is evident that in some countries, the
rescue legislation is incorporated in corporate law as is now proposed with Chapter 6
of the South African Companies Act (Act 71 of 2008). In some countries, such as the
United Kingdom, rescue proceedings are incorporated in insolvency law.
The question whether to house rescue proceedings in the Companies Act or in the
Insolvency Act was also a very salient issue debated by the Companies Act Law
Reform Team.
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5.3.2 UNITED STATES OF AMERICA
The form of administration in the United States is the infamous Chapter 11 debtor in
possession administration, Altman and Hotchkiss (2006:60), according to which an
automatic stay is part of the process. Jostarndt and Sautner (2008:2189) argue that
the United States of America has a commercial market that is more shareholder
(debtor) friendly with poor creditor protection. Last resort action can include write-
down of losses on over-indebted companies. Chapter 11 requires reorganisation
plans to be filed with the bankruptcy court and these plans are then available to the
public (Hubbard & Stephenson, 1997:548). Bower and Gilson (2003:20) raise the
possibility that Chapter 11 procedures can be used as a means to hide fraudulent or
reckless actions by management and directors. Subsequently, Chapter 11 was
amended to remove this possibility. In discussing turnaround plans, Hubbard and
Stephenson (1997:549) state that claimants are provided with sufficient information
to make informed decisions to assess the plan. The court will only confirm a plan
when all the classes of creditors are in agreement with it.
Reorganisations have a cost consequence in terms of direct costing, as well as a
substantial social cost. Chen, Weston and Altman (1995:57) criticise the (high) cost
of the bankruptcy reorganisation process, while Bower and Gilson (2003:20) argue
that the social cost of bankruptcy is “staggeringly’ high. Thus out-of-court
restructurings through debt restructuring are suggested to avoid the high cost of
Chapter 11 reorganisations.
Chen et a.l (1995:67) and Su (2007:33) argue that rights issue offerings appear to be
a popular tool for reorganisations. However, debt equity stock swaps are more
frequently used, as creditors are able to obtain shares at substantially discounted
rates. In discussing the methodology for identifying the characteristics of a
successful turnaround, Hespel and Golzgaker (2005:3) define a successful Chapter
11 reorganisation as follows: a successful reorganisation is “defined as emerging
from Chapter 11 protection and not filing for bankruptcy for at least four years”. A
subsequent merger or acquisition of the “reorganised “company as a result of the
fact that it could not sustain itself, will not contribute to the definition of a successful
turnaround.
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5.3.3 UNITED KINGDOM
Katz and Mumford (2005:136) are of the opinion that the United Kingdom “has a
plethora” of insolvency procedures from which a suitable process to follow must be
decided. These authors distinguish between administration and administrative
receivership as measures for business rescue vehicles. The forms of administration
available in the United Kingdom include a company voluntary arrangement, a
scheme of arrangement, an administrative receivership and an administration,
(Altman & Hotchkiss, 2006:60; Omar, 2006:9). Company voluntary administration
was, according to Omar (2006:9), designed to be “a cheap, quick, efficient method of
dealing with financial difficulties”.
In the United Kingdom a stay of proceedings is sanctioned by the court. Franks and
Sussman (2005:283) argue that the main focus when constructing a dynamic model
of bankruptcy law is the relationship between law and finance. The law should be
considered as a mechanism for standardising commercial agreements. Franks and
Sussman (2005:284) distinguish between a hard approach “protecting the liquidation
rights of the creditors” and a soft one “giving the company a better chance to
reorganise”. These authors argue that the court and the legislature will be in a
position to solve the problem of under-innovation, but that they are biased towards
the protection of private benefits. The treatment of minority creditors when
discharging debt by way of a restructuring plan was discussed by Smart (2006:54),
who concluded that the interests of minority creditors will have to be protected.
By introducing Chapter 6 of the new Companies Act, the South African legislature
has opened the debate on a debtor-friendly versus the historical creditor-friendly
regimes.
5.3.4 SWITZERLAND
In Switzerland, the administration takes the form of a composition which is subject to
a majority of creditors’ and court approval (Altman & Hotchkiss, 2006:72). The
rescue plan is subject to creditor approval and court sanction.
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5.3.5 BELGIUM
The Belgian form of administration is a judicial composition where the debtor acts in
good faith and applies to the court (Altman & Hotchkiss, 2006:72). A restructuring
plan is prepared and the approval of 50% of the creditors in value and number is
required.
5.3.6 GERMANY
Germany’s Insolvenzordnung, which came into effect in 1999, created a uniform
insolvency statute for all of Germany (Omar, 2006:5). Germany, like South Africa,
has traditionally been considered as a country with weak debtor and strong creditor
protection. Jostarndt and Sauter (2008:2189) state, however, that German
corporations will be actively engaged in turnaround activities well before actual
bankruptcy.
In Germany, an insolvency plan (Insolvenzplan) is filed and the court appoints an
administrator. Altman and Hotchkiss (2006:64) and Omar (2006:8) confirm that the
plan is subject to approval by the creditors. There is no automatic stay of
proceedings but courts can grant a stay. Distressed businesses are recapitalised by
way of fresh equity capital placed in rights issues or private and public placing.
5.3.7 SPAIN
In Spain, insolvency is a prerequisite for proceedings (Omar, 2006:13) and is similar
to the current Section 427 of the South African Companies Act (Act 61 of 1973).
The administration of business rescue in Spain takes the form of a court-appointed
insolvency administrator (Altman & Hotchkiss, 2006:77). The administrator will
prepare reports and plans and there is an automatic stay of proceedings.
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5.3.8 SWEDEN
In Sweden, administration takes the form of business reorganisations, which
commence with a board resolution and the filing of the resolution at court (Altman &
Hotchkiss, 2006:77). An administrator will draw up a plan, which, through an informal
agreement, is sanctioned by both creditors and the court.
5.3.9 FINLAND
Finnish insolvency law has been proven to be closely related to Chapter 6 of the new
South African Act.
Bergström, Eisenberg and Sundgren (2002:359–372) have researched the Finish
law on reorganisations and conclude that the Finnish insolvency regime is a debtor-
friendly regime similar to Chapter 11 of the United States. They further argue that if
creditors are well secured they will not be supportive of an attempt to reorganise the
business (Bergström et al,. 2002:360).
5.3.10 ITALY
In Italy, the form of administration deals with three sets of preconditions: concordata
preventive, amministrazione controltta and amminstrazione straordinaria,
(composition, and the extraordinary administrative directors control) (Altman &
Hotchkiss, 2006:68).
In all three of the aforementioned conditions, the administrator is appointed by the
court and is subjected to a rescue plan and approval from creditors. In the first
instance there is no automatic stay, but it can be requested. In the last two instances
there is an automatic stay of proceedings.
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5.3.11 NETHERLANDS
In the Netherlands proceedings lead to the appointment of an administrator by the
court. The focus is on the acceptance of a business rescue plan and a stay of
proceedings for two months (Altman & Hotchkiss, 2006:88).
5.3.12 FRANCE
Altman and Hotchkiss (2006:64) state that in France administration takes place
through the courts, which appoint an expert who will seek an informal and voluntary
arrangement (mandataire ad hoc). The French rescue process or sauvegarde is
conceived as being similar to a debtor in possession (Omar, 2006:20) which will then
have the inference that management will stay involved. The expert has limited
powers, however, and has to work with management. There is no automatic stay of
proceedings but the court can specifically order a stay.
5.3.13 CANADA
Corporate restructurings in Canada are governed by either the Companies’ Creditors
Arrangement Act (CCAA) or the proposal provisions of the Bankruptcy & Insolvency
Act (BIA). Known as “Chapter 11 without rules”, the CCAA is only available to
debtors with total debts of over $5 million (Canadian dollars). The Canadian
Parliament has passed acts to reform its bankruptcy and insolvency legislation on,
inter alia, commercial issues. In short, as discussed by Yamauchi (2006:179), the
amendments cater for a debtor-friendly environment where the distressed business’s
management retain control over the business.
5.3.14 AUSTRALIA
The Australian insolvency provisions are found in Chapter 5 of the Australian
Companies Act. These provisions allow for a practitioner to be appointed after a
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creditor “pool” agrees on voluntary arrangements to be confirmed by order of court.
A rescue plan is a requirement and has to be accepted by all parties.
Chapman (2003) deduces that reorganisations or rescues of businesses (in
Australia) are being complicated by senior creditors (usually secured) who have a
conflict of interest as a result of their secured position, and thereby tend to
procrastinate turnaround proceedings.
5.4 DEVELOPING A BANKRUPTCY RULE IN SOUTH AFRICA
South Africa’s young democracy is challenged by various socioeconomic variables
which require frequent attention. Housing poses a serious challenge but the main
focus of government is to create and maintain jobs. From a government perspective,
Chapter 6 of the Act is a mechanism to ensure the minimisation of job losses.
Government is committed to enhancing legislation to achieve these goals and
Chapter 6 is an excellent example.
The United Nations Commission on International Trade (UNCITRAL) and the
International Bar Association (IBA) (2000:22) have laid down the key elements of
draft legislation as a guideline for countries to follow and implement in their corporate
law reform efforts. The South African corporate law reform task team has used these
guidelines, together with some principles from INSOL, to draft Chapter 6 of the new
Companies Act.
Failure of the current judicial management as a turnaround mechanism prompted the
legislature to come up with workable alternatives. A system which allows and
extends legal protection to participants in an attempted turnaround was previously
markedly absent in South African legislation. Up to the present juncture, legislation
did not allow for a stay of proceedings or protection of property interests. With the
adoption of the King III corporate governance rules, management are obliged to
attempt business rescue before filing for winding up and, as such, rescue legislation
had to accept a more debtor-friendly approach.
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If directors do not consider or commence with a business rescue when in financial
distress, it will in general be a proper inference that the business is being carried on
recklessly. In the Grant Thornton Catalyst Management Issues (2005b:5), it is
concluded that it is the liability of the directors to ensure that they are fully skilled in
managing the affairs of a company.
The question, however, is against what standards are these skills to be measured.
Coetzee (2009:4) argues that the most important provision in the new Companies
Act is Section 76 where the dispensation of directors’ statutory fiduciary duties is
addressed under the heading “Standard of director’s conduct”. Consequently, taking
into account all the challenges that have been discussed above, the legislature had
the mammoth task of satisfying all role players’ requirements and complying with
UNCITRAL and INSOL guidelines and principles. The usefulness of these guidelines
was highlighted by The Honourable Justice Farley at the Multinational Judicial
Colloquium held by UNCITRAL and INSOL (1995:3). The biggest challenge,
however, is to move and encourage business South Africa to make the paradigm
shift from a creditor- to a debtor-friendly bankruptcy regime.
Chapter 6 of the new Companies Act was largely successful in addressing specific
issues:
? creating a debtor-friendly environment
? establishing an environment in which all creditors could cooperate
? creating a moratorium on all proceedings
? setting clear timelines for passing resolutions and cut-offs for compliance
? the introducing of a turnaround practitioner ensures proper management
and controls actions that could have adversely affected returns
? all affected parties to agree and commit to a rescue plan
? accorded additional funding priority status
In deliberating the judicial management system with the Van Wyk de Vries
Commission, the Masters of the Supreme Court called for the abolition of the judicial
management system owing to its low success rate (Burdette, 2004:9).
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The option of Section 427 proceedings, by its very nature, does not represent a
debtor-friendly environment and is for this very reason rarely a route of choice by
entrepreneurs. In this regard, Burdette (2004:4) refers to a point that was originally
made by Harmer, namely that “a business rescue regime has a far better chance of
succeeding if the insolvency system in which it is applied is debtor-friendly, as
opposed to a creditor-friendly system of insolvency where business rescue regimes
are not applied successfully”.
Entrepreneurs perceive compromise and/or judicial management of the business as
personal failure. For this very reason entrepreneurs are discouraged from actively
participating in turnarounds of this nature. Consequently, judicial management has a
negative psychological effect on entrepreneurs.
Burdette (2004:11) submits that the following problems exist with judicial
management:
? it is seen as an extraordinary measure
? the reasonable probability that the business will become a successful concern
? reliance placed on court proceedings
? the insolvency requirement
? use of liquidators as judicial managers
? it only applies to companies
? the absence of a timeline benchmark detailing specific performance periods
adds to the complexities experienced with judicial management.
Based on the problems stated above and the high cost implications for companies
already in distress, it can be concluded that entrepreneurs would rather opt for a less
expensive and less cumbersome route and attempt an informal turnaround. Informal
turnaround plans in various formats are contemplated by businesses in South Africa;
Burdette (2004:20) refers to these as "informal creditor workouts" which are being
used increasingly in the business environment.
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The entrepreneurs themselves, or the senior creditors (mostly banks) who stand to
lose the most, usually contemplate these informal turnarounds. James, Ramsey and
Livan (2004:32) report on the type of debt distribution in insolvencies in Australia and
indicate that bank- or financier-related debt amounts to 7,8% of the total average
debt. Unfortunately, in South Africa, no such statistics are available, but the major
banks are more involved in pre-insolvency turnaround attempts. The report on South
African insolvency legislation by the United States Agency for International
Development (USAID), prepared by Johnson and Meyerman (2011:16), concluded
that, according to the stakeholders interviewed, “approximately 75% of all
businesses encountering financial distress attempt to resolve the problem by
informal workout or a turnaround of the business”.
The report further concludes that business or banks, in conducting informal
workouts, may adopt methods similar to the London Approach. Bolton (2003:52),
discusses the London Approach and states that it has its main application in bank
syndicates of informal consortia that attempt to restructure a business’s debt.
Although some measures can be attempted formally, that is, by means of a court
order, entrepreneurs frequently attempted an informal approach. Sub-section 32 of
the United Nations Commission on International Trade, referred to in its abbreviated
form, UNCITRAL Guide (2001:12), mentions that the success rate of informal
creditor workouts will be determined to a large extent by the insolvency laws and
legal framework of a country. The guide identifies the following avenues for turning a
business around: debt forgiveness; debt rescheduling; debt equity conversions; and
sale of the business or parts of it. The International Association of Restructuring,
Insolvency and Bankruptcy Professionals, referred to in its abbreviated form, INSOL,
has suggested that turnaround principles are required to effectively and successfully
execute a business turnaround (rescue). These proposed principles are the
following:
? All creditors must be prepared to cooperate.
? Creditors should refrain from enforcing claims – agree to moratorium ( or
standstill).
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? Debtors should not to take action to adversely affect returns.
? Creditors should coordinate response to debtor.
? Debtor should provide all information – assets, liabilities, business.
? Proposals for resolving financial distress should reflect applicable law and
position of creditors.
? Information should be available to all creditors but treated confidentially.
? Additional funding should be accorded priority status.
In the South African context, Loubser (2005:5) has investigated various turnaround plans
and proposes the following two measures as key rescue methods:
? downsizing the workforce
? transferring the business or part thereof.
In an attempt to do an informal turnaround, cost-cutting measures are implemented
immediately. Pretorius (2004:281) discusses the following actions to improve short-term
cash flow:
? lowering of creditor collection days
? stretching debtor payment days
? increase in cash sales
? negotiating better terms with vendors and suppliers
? reducing debt and interest by:
? selling old inventory
? selling unproductive assets
? selling non-core business units.
These measures are short term in nature and a strategic plan needs to be designed
to ensure lasting measures are implemented. Short-term measures are often
implemented when creditors call for payment and the business’s cash flow cannot
meet these demands. The effect of this scenario is discussed later and referred to as
“constraints to informal turnarounds”.
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While informal turnarounds are gaining popularity due to low cost, low profile social
responsibility and/or other advantages, there are a number of disadvantages when
applied under the current South African laws. The following are Acts that have the
potential to be construed as disadvantageous:
? Companies Act: Act 71 of 2008, reference to reckless trading
? Insolvency Act: Act 24 of 1936, reference to acts of insolvency
? Labour Acts: (Various Labour Acts relating to restrenchements) reference
to downsizing of labour force
The South African concept of limited liability structures, namely closed corporations
and companies, are most frequently under attack from a corporate governance
scrutiny. Financial institutions demand personal guarantees from shareholders and
members if financial assistance is to be considered. Where no direct sureties are
provided entrepreneurs or directors are held personally liable if found to be trading in
a reckless manner.
5.5 NEW NATIONAL LEGISLATION: COMPANIES ACT, ACT 71 OF
2008
5.5.1 INTRODUCTION
The literature research on Chapter 6 of the new Companies Act is not an attempt to
solicit legal argument as various areas of the Chapter are still being debated by
individuals in the legal fraternity and input from business is still awaited. In addition,
the regulatory aspects have not yet been concluded. It would, at this juncture, be
premature to discuss the various sections from a juristic point of view.
The research was therefore limited to the requirements for a literal interpretation of
Chapter 6. The research concentrated mainly on salient provisions that have obvious
benefits, or disadvantages, for the entrepreneur and his/her business.
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Moosa (2009:1) identifies four distinct advantages of this legislation:
Firstly, business rescue is a substantively non-judicial commercial process whereby
a board resolution is passed. Franks and Sussman (2005:287) share this view and
conclude that “bankruptcy, namely the course of action to be taken following a
default, is a commercial affair”. The process is formalised through the filing of the
resolution at the court.
It remains the responsibility of the persons affected by the bankruptcy (i.e.
shareholders, creditors and employees individually or through their representative
trade unions) to formulate contributions to a business rescue plan in order to save
the company.
Secondly, business rescue is an inclusive and consultative process involving all
affected persons as well as a business rescue practitioner (who will be a qualified
professional, experienced in turnarounds, as per the regulatory directives of the new
Companies Act).
Thirdly, the new Companies Act allows a stay of legal proceedings during business
rescue, through the allowance of a limited moratorium period.
Fourthly, the legislation allows for the company to be rescued and the likelihood of
the company’s continued existence on a solvent basis to be maximised. If the
continuation of the company cannot be achieved, it provides a better return for the
creditors or shareholders than would result from the liquidation of the company.
In certain respects the structured, formal process proposed in the Act is not
dissimilar to the typical negotiated rescue proceedings conducted informally when
major creditors of a distressed company act together to reach a commercial solution
to rescue the company.
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Judging from the above there is clear benefit in the broader notion of business
rescue. Unfortunately, as is the case with most new legislation, the devil lies in the
details. An assessment of some of these challenges forms the basis of this paper.
5.5.2 FINANCIAL DISTRESS
An understanding of the phrase “financial distress” is of utmost importance in future
commercial action. Chapter 6 of the new Companies Act clearly defines two criteria
for financial distress, that is, “unable to pay its debts” and “become insolvent”, but,
most importantly, it adds a six-month period in which these events can most likely
take place. This is the opposite of the judicial management requirement, where a
business must be insolvent before Section 427 (old Companies Act, Act 61 of 1973)
can be applied. A complete copy of Chapter 6 of the new Act is attached under
Appendix C. Chapter 6 of the new Companies Act supplies a clear definition of
financial distress, which reads as follows:
Section 128(1)(j) “… financially distressed’’, in reference to a particular company
at any particular time, means that it appears to be reasonably unlikely that the
company will be able to pay all of its debts as they fall due and payable within the
immediately ensuing six months; or it appears to be reasonably likely that the
company will become insolvent within the immediately ensuing six months...”
Chapter 6 of the new Companies Act is structured into five main sections which
guide the reader to a fair understanding of the total intended scope of this chapter of
the Act.
They are:
? business rescue proceedings
? the practitioner’s functions and terms of appointment
? the rights of affected persons during the rescue proceedings
? the development and approval of the business rescue plan
? compromise between company and creditors.
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As each topic has its own measure of importance these aspects are discussed under
their own headings.
5.5.3 RECKLESS TRADING UNDER THE NEW COMPANIES ACT
The new Companies Act has adopted the same tough stance on reckless trading as
is currently applicable, but has added more regulations which must be adhered to.
Various sections of the new Companies Act refer to trading under reckless
circumstances and strict adherence to corporate compliance rules is of utmost
importance. Section 22 of the Act prohibits reckless trading.
This important section reads as follows:
Section 22(1) … A company must not— carry on its business recklessly, with
gross negligence, with intent to defraud any person or for any fraudulent
purpose; or b) trade under insolvent circumstances … .
If the company’s board has reasonable grounds to believe that the company is
experiencing financial distress as defined by the new Companies Act, it has the
responsibility to adopt a resolution to institute rescue proceeding in terms of Section
129(1) of the Act, which reads as follows:
Subject to section (2)(a), the board of a company may resolve that the
company voluntarily begin business rescue proceedings and place the
company under supervision … .
If the business experiences financial distress or insolvent trading, or is likely to trade
under these conditions within the next six months, and the board does not adopt a
Section 129(1) resolution, the provisions of Section 129(7) must be introduced.
Section 129 (7) reads as follows:
… if the board of a company has reasonable grounds to believe that the
company is financially distressed, but the board has not adopted a resolution
contemplated in this section, the board must deliver a written notice to each
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affected person, setting out the criteria referred to in Section 128(1) (e) that
are applicable to the company, and its reasons for not adopting a resolution
contemplated in this section … .
A clear distinction must be made between financial distress and reckless trading, as
Chapter 6 of the new Companies Act is not an instrument for avoiding the
ramifications of reckless, fraudulent or any other misconduct.
The mandate of the turnaround practitioner must include investigating the matters of
the business in order to establish the precise conditions under which the business
has been conducted. Section 141 reads as follows:
… as soon as practicable after being appointed, a practitioner must
investigate the company's affairs, business, property, and financial situation,
and after having done so, consider whether there is any reasonable prospect
of the company being rescued. And,
… reckless trading, fraud or other contravention of any law relating to the
company, the practitioner must- so inform the court, the company, and all
affected persons in the prescribed manner, and- forward the evidence to the
appropriate authority for further investigation and possible prosecution … .
If any misconduct (excluding conduct of a criminal nature) is evident in the
management of a business the court may, in terms of section 164(7)(b)(ii), make an
order to place a person under probation.
The exception to this rule is to be found under Section 162(7)(b)(ii), “… except in
terms of—a business rescue plan resulting from a resolution of the board in terms
of Section 129; or a compromise with creditors in terms of Section 155 …”.
145
5.5.4 BEGINNING, DURATION AND ENDING OF BUSINESS RESCUE
Out of court business rescue proceedings start when a company resolution is filed at
the court. The company resolution is taken by the board of a company, when the
board is of the opinion that the business is experiencing financial distress according
to the definition in Chapter 2. Any affected party can apply through the court to
commence with business rescue and rescue proceedings will commence when the
order is granted.
Section 128 of Chapter 6 of the new Companies Act describes the affected parties
as
? shareholder or creditor
? trade union
? employee/s not represented by trade union.
After the adoption and filing of the resolution the company must publish a notice of
the resolution and appoint a turnaround practitioner. The qualifications, minimum
requirements and regulatory issues are still being debated by both government and
business and consequently have been excluded from the literature discussion.
Section. 129(3) … Within five business days after a company has adopted
and filed a resolution, as contemplated in section (1), or such longer time as
the Commission, on application by the company, may allow, the company
must-publish a notice of the resolution, and its effective date, in the
prescribed manner to every affected person, including with the notice a
sworn statement of the facts relevant to the grounds on which the board
resolution was founded: and
(c) appoint a business rescue practitioner who satisfies the requirements
of Section 138, and who has consented in writing to accept the
appointment… .
146
Business rescue proceedings end when the court sets aside the resolution or rescue
order and the turnaround practitioner files a notice to the effect that the rescue
proceedings have been terminated. However, from the outset the rescue
proceedings will not be implemented if it is obvious that the rescue plan will be
rejected. The commencement of a business rescue and the timeline that needs to be
adhered to is illustrated in figure 5.1. The left-hand side of the figure illustrates the
turnaround practitioner’s operational and strategic functions, while the second
horizontal column relates to a board resolution and the third column to a court order
for business rescue commencement. Timelines are indicated in the applicable
vertical columns. Strict adherence to the set timelines is vitally important, as non-
adherence could jeopardise the entire process and cause unnecessary delays. The
success of a turnaround is primarily dependant on the swiftness with which it is
executed.
5.6 LIABILITIES OF THE TURNAROUND PRACTITIONER
5.6.1 LIABILITY OF LEGITIMACY
The appointment of a turnaround practitioner and the delegation of powers to the
turnaround manager takes place as per Section 129(3)(b), which reads as follows:
“… appoint a business rescue practitioner who satisfies the requirements of
Section 138, and who has consented in writing to accept the appointment.”
The above quote refers to Section 138, which stipulates when a practitioner is
qualified to act as a practitioner. This section of the new Companies Act is currently
being revisited by the Department of Trade and Industry and all interested parties
have submitted comments and suggestions. The final requirements will be adopted
and published by government in due course.
Section 138 stipulates that a person who may be appointed as a practitioner to a
distressed company should be “… a member in good standing of a profession
147
subject to regulation by a regulatory authority …,” “… is not subject to an order of
probation …” , “.does not have any other relationship with the company …” and is
“… not related to a person who has the relationship …” (illustrated in fig. 4.2).
Figure 5.1 Section 129 rescue process timeline (adapted from Samuelson, 2010)
Company resolution to
begin business recue
proceedings
Financially Distressed:
Predominantly a
commercial process
Affected personapplies to
court to place company
under supervision
BUSINESS RESCUE - PROCESS
Publish noticeof
resolution to every
affectedperson+ appoint
business rescue
practitioner
Liabilities of Turnaround
Practitioner
Court appoints interim
practitionersubject to
ratification
Act stipulates minimum
periods to execute certain
action
Notice of appointment of
practitionerafter 2 day of
appointment:
After appointing
practitioner
Company must file notice
of appointment + publish
copy of noticeto each
affectedpersonwithin 5
business days after notice
filed
Objections must bemade
any time after adoption of
resolution until adoption
of business rescue plan
Company must notify
each affected personof
order within 5 business
days after date of order
Within 5 days of adopting
resolution, same to be
filed at court
First meeting of creditors and first meeting
employees representatives (must be convened
and presided over by practitionerwithin 10
business days of being appointed)
Consultative Process
After consulting with affected persons and management of
company business plan to bepreparedfor consideration
(must be published within25business days after practitioner
appointed)
At least 5 business days
before meeting
practitionermust deliver
notice of meeting to
affectedpersons
Meeting to determinefutureof company (to beconvened
within 10 business days after publicationof plan and voted
on
When business plan substantially
implementedpractitioner files notice of
substantial implementation
Failure to adopt business plan – call for
revised business plan requestedor filefor
termination of business recueproceedings
(revised business plan must bepublished
within 10 business days – then provisions
apply afresh to publishing of newor revised
business plan)
Participative Process
Feedback / Reporting
3 Months
Legitimacy- agency
theory
Legal framework
Resource scarcity –
financial, capacity,
Human, opportunity.
Strategic options
Leadership capacity-
management
Considerations
Dataintegrity
Integration
Practitionerappointment within 5
days of filing
Publish copy of notice
within 5 days after filing
of notice
148
5.6.2 LIABILITY OF LEADERSHIP
According to the principles of the agency theory (Eisenhardt (1989a:58), the agent
(practitioner) is conferred with a leadership role by the board (principal). Chapter 6 is
unambiguous in terms of the practitioner’s leadership liability. This section of the new
Companies Act is also an admonition to business concerning the quality and
experience required from a practitioner when considering his/her appointment.
Section 137(2) During a company's business rescue proceedings, each
director of the company must continue to exercise the functions of director,
subject to the authority of the practitioner;
(h) has a duty to the company to exercise any management function within
the company in accordance with the express instructions or direction of the
practitioner, to the extent that it is reasonable to do so;
Section 137(3) During a company's business rescue proceedings, each
director of the company must attend to the requests of the practitioner at all
times, and provide the practitioner with any information about the company's
affairs as may reasonably be required.
Section 137(5) At any time during the business rescue proceedings, the
practitioner may apply to a court for an order removing a director … .
Section 140(1) During a company's business rescue proceedings, the
practitioner, in addition to any other powers and duties; has full
management control of the company in substitution for its board and pre-
existing management; may delegate any power or function of the
practitioner to a person who was part of the board or pre-existing
management of the company; has the responsibilities, duties and
liabilities of a director of the company, and, direct the management … .
At the start and for the duration of a business turnaround, the directors of the
company must cooperate with and give assistance to the turnaround practitioner.
149
5.6.3 LIABILITY OF DATA INTEGRITY
Data integrity is most certainly the most important liability to address in the early
stages of a turnaround attempt. Verification and authentication of data is, under any
circumstances, a time-consuming process and the strict timelines imposed by
Chapter 6 of the new Companies Act do not allow for the investigation process to be
procrastinated in a turnaround situation.
The liability of data integrity is highly dependent on the turnaround manager’s ability
to apply the correct methodology to verify and authenticate data for decision making.
The most important decision to make is whether to attempt the rescue/turnaround.
This decision should include turnaround activities after the decision to turnaround
has been taken.
Section 142(1)… each director of a company must deliver to the practitioner all
books and records that relate to the affairs of the company … .
Section 142(2)... any director of a company who knows where other books
and records relating to the company are being kept, must inform the
practitioner … .
Section 141(1) ...after being appointed, a practitioner must investigate the
company's affairs, business, property, and financial situation, and after having
done so, consider whether there is any reasonable prospect of the company
being rescued.
Section 150(3) … The projected balance sheet and statement required by
sub-section (2)(c)(iv), must include a notice of any material assumptions on
which the projections are based; and may include alternative projections
based on varying assumptions and contingencies … and then, the most
onerous requirement.
150
Section 150(4) … a proposed business rescue plan must conclude with a
certificate by the practitioner stating that (any) actual information provided
appears to be accurate, complete, and up to date; and projections provided
are estimates made in good faith on the basis of factual information and
assumptions as set out in the statement … .
5.6.4 LIABILITY OF STRATEGY OPTIONS
In order to achieve a successful turnaround, a turnaround practitioner must realign
company strategy. Chapter 6 of the new Companies Act incorporates a few
demanding prerequisites for the practitioner’s strategic abilities.
Section 141 dictates that as soon as the turnaround practitioner has complied with
the liability of data integrity, he needs to “… consider whether there is any
reasonable prospect of the company being rescued.
As part of assessing and realigning the strategic direction of the company, the
practitioner is allowed under Section 132(2) of the new Companies Act to either “…
subject to Sections 35A and 35B of the Insolvency Act, 1936 (Act No. 24 of 1936),
despite any provision of an agreement to the contrary, during business rescue
proceedings, the practitioner may cancel or suspend entirely, partially or
conditionally any provision of an agreement to which the company is a party at the
commencement of the business rescue period, other than an agreement of
employment …”. Or, in terms of Section 137, contemplate as part of the business
rescue plan, alterations to the classification or status of securities. Solomon and
Boltar (1998:26) argue that Section 136(2) has potentially drastic consequences.
The words “cancel” and “suspend” are not explained and reliance has to be placed
on their common, literal meaning.
A key part of a strategic approach is the drafting of a business plan. Section 140(1)
(d) requires the drafting of a rescue plan and its implementation. Section 150
stipulates the minimum requirements for a business plan.
151
Most important is that in terms of Section 150(1), “… the practitioner, after
consulting the creditors, other affected persons, and the management of the
company, must prepare a business rescue plan for consideration and possible
adoption…”.
Once again the liability of data integrity is clearly illustrated by Section 150(2): “…
the business rescue plan must contain all the information reasonably required to
facilitate affected persons in deciding whether or not to accept or reject the plan
… .”
The rescue plan therefore has to be considered by all affected persons and, after it
has been accepted, the practitioner must see to its implementation.
The practitioner has the responsibility to inform all affected parties in terms of
Section 141 that if “… at any time during business rescue proceedings, the
practitioner concludes that— there is no reasonable prospect for the company to be
rescued…” and, “… apply to the court for an order discontinuing the business rescue
proceedings …”.
5.6.5 LIABILITY OF RESOURCE SCARCITY
Resource slack is arguably the key determinant of both decline severity and the
options for turnaround strategies chosen in response. Pretorius and Holtzhauzen
(2005:95) conclude that resource munificence refers to the level of resources
(scarcity or abundance) required to operate a venture successfully. Castrogiovanni
(1991:542), on the other hand, defines resource munificence as the critical resources
needed to operate a business. The liability facing the turnaround practitioner in
maintaining adequate resources while responding to decline is often problematic as
Section 134 imposes restrictions on the disposal of assets. During the period of
financial decline assets are “stripped” in order to generate much needed cash and
this process destroys the business’s resources over time. This phenomenon is
confirmed by Barker and Duhaime (1997:20).
152
Protection of property interests
Section 134. Subject to sub-sections (2) and (3), during a company's
business rescue proceedings—(a) the company may dispose, or agree to
dispose., of property only in the ordinary course of its business; in a bona
fide transaction at arm's length for fair value approved in advance and in
writing by the practitioner; or in a transaction contemplated within, and
undertaken as part of the implementation of, a business rescue plan that has
been approved in terms of Section 152 … .
Funding of the turnaround attempt is of the utmost importance. Early detection and
engagement will allow the practitioner to align his strategy with resource scarcity.
Levinthal (1991) refers to declining organisational capital as the most important
determinant of business mortality. Accordingly, turnaround can only be effectively
executed if the minimum threshold for organisational working capital is met.
Pretorius and Holtzhauzen (2008:96) conclude that the level of a business’s
resources at the time of the turnaround attempt will affect the financially distressed
business’s capacity to “implement strategic change”. The dilemma facing
entrepreneurs, who are experiencing cash flow distress in their business, is how they
will obtain additional debt (normal creditors or financial institutions). As described in
Section 135, post-commencement funding may be secured and such funding will be
paid in order of preference.
Burdette (2004c:422) argues that a clear distinction needs to be drawn between the
cash that will be needed to continue trading until a plan is approved and the cash
flow that will be generated out of the operation once the plan is accepted and
implemented. It is envisaged that the leading creditor bank will assume the
responsibility for funding these interim periods as well as post-commencement
finance.
The interim period financing will be included in the securitisation, labelled “post
commencement finance”, only if it happens after the resolution has been filed.
153
Section 135(2) … During its business rescue proceedings, the company may
obtain financing other than as contemplated is sub-section (1), and any such
financing—(a) may be secured to the tender by utilising any asset of the party
to the extent that it is not otherwise encumbered … .
5.6.6 LIABILITY OF INTEGRATION
To overcome the liability of legitimacy the turnaround practitioner will ensure the
integration of the turnaround actions and the support of all stakeholders or affected
persons. All the affected persons will have to be included in strategy formulation in
order to create some slack to free up working capital for funding the turnaround.
Sections 145 and 147 describe the participation process by creditors:
Section 145(3) … The creditors of a company are entitled to form a creditors'
committee, and through that committee are entitled to be consulted by the
practitioner during the development of the business rescue plan … .
Section 147(1) … Within 10 business days after being appointed, the
practitioner must convene, and preside over, a first meeting of creditors, at
which-(a) the practitioner must inform the creditors whether the practitioner
believes that there is a reasonable prospect of rescuing the company; and
(ii) may receive proof of claims by creditors; and (b) the creditors may
determine whether or not a committee of creditors should be appointed and,
if so, may appoint the members of the committee … .
The new Companies Act ensures that all affected parties are included and provision
is made for shareholders and employees, or their representatives, to attend rescue
meetings. Overcoming the liability of integration culminates in the finalisation of the
rescue plan as determined under Section 140(1)(d) of the Act: “… develop a
business rescue plan to be considered by affected persons … .”
154
Overall knowledge of the proposed cash-generating strategies is essential in
determining the future of the business, leading management to implement the rescue
plans on a wide set of disciplines suggests overcoming the liability of leadership.
Decisions of this nature will depend on the verification and authentication of the data
used in the decision-making process, thereby overcoming the liability of data
integrity.
The real danger of undetected and/or undisclosed data is that it is an unknown factor
which only surfaces after a turnaround has commenced.
Section 151(1) determines that the practitioner must convene a meeting of creditors
and other affected persons, as well as holders of voting interests as described by the
Act, for the purpose of assessing and considering the proposed rescue plan.
5.7 CONSIDERATION OF A BUSINESS TURNAROUND PLAN.
The aforementioned literature research confirms that in almost any debtor-friendly
bankruptcy regime, the prerequisite is the drafting, evaluation and acceptance of a
business rescue plan. The UNCITRAL Guide (2005:7) defines the turnaround or
reorganisation plan as “a plan by which the financial well-being and viability of the
debtor’s business can be restored”. Under Chapter 6 of the new Companies Act, the
business plan is discussed with a clear directive of what issues are to be addressed.
Section 152(5) the company, under the direction of the practitioner, must take all
necessary steps to (a) attempt to satisfy any conditions on which the business
rescue plan is contingent; and (b) implement the plan as adopted.
Development and approval of the business rescue plan is the primary task of the
practitioner, who, after consulting the creditors, other affected persons and the
management of the company, must prepare a business rescue plan for
consideration by the stakeholders.
155
The business turnaround plan must contain all the information required to assist
stakeholders in deciding whether or not to accept or reject the plan. Chapter 6
divides the turnaround plan into three distinct sections:
Part A – Background which must include at least a
… complete list of all the material assets of the company, as well as an
indication as to which assets were held as security by creditors when the
business rescue proceedings began; a complete list of the creditors of the
company when the business rescue proceedings began, as well as an
indication as to which creditors would qualify as secured, statutory preferent
and concurrent in terms of the laws of insolvency, and an indication of which
of the creditors have proved their claims; the probable dividend that would be
received by creditors, in their specific classes, if the company were to be
placed in liquidation; a complete list of the holders of the company's issued
securities; copy of the written agreement concerning the practitioner's
remuneration; and a statement whether the business rescue plan includes a
proposal made informally by a creditor of the company … .
Part B – Proposals which must include at least
… the nature and duration of any moratorium for which the business rescue
plan makes provision; the extent to which the company is to be released from
the payment of its debts, and the extent to which any debt is proposed to be
converted to equity in the company, or another company: the ongoing role of
the company, and the treatment of any existing agreements; the property of
the company that is to be available to pay creditors' claims in terms of the
business rescue plan; the order of preference in which the proceeds of
property will be applied to pay creditors if the business rescue plan is
adopted; the benefits of adopting the business rescue plan as opposed to the
benefits that would be received by creditors if the company were to be placed
in liquidation; and the effect that the business rescue plan will have on the
holders of each class the company's issued securities … .
156
Part C – Assumptions and conditions, which must include at least
… a statement of the conditions that must be satisfied, if any, for the business
rescue plan to come into operation; and be fully implemented; the effect, if
any, that the business rescue plan contemplates on the number of
employees, and their terms and conditions of employment: the circumstances
in which the business rescue plan will end: and a projected— balance sheet
for the company; and statement of income and expenses for the ensuing
three years, prepared on the assumption that the proposed business plan is
adopted … .
Benade, Henning, Du Plessis, Delport, De Koker and Pretorius (2003:4) highlight the
importance of all the South African Acts impacting on the entrepreneurial venture.
The prerequisites of the following Acts are also of importance when constructing the
turnaround plan in terms of Section 140 and are used as a frame of reference:
The Insolvency Act, Act 24 of 1936
The Insolvency Act is in the process of being redrafted to align insolvency law and
practice with Chapter 6 of the new Companies Act, Act 71 of 2008.
The Income Tax Act, Act 58 of 1962
Income tax seldom comes into play in a turnaround situation, as assessed losses are
a feature of a business experiencing financial distress. The realignment of a
business’s structure can, however, be tax beneficial. Section 44 to 46 of the tax act
addresses unbundling, amalgamations and de-grouping (Fluxman 2009:292–330).
Labour legislation
The various Acts governing labour in South Africa are listed below. These Acts, in
one form or another, influence the treatment of labour in a turnaround situation.
Labour and organised labour are included in the new Companies Act as affected
persons but a good working knowledge of the following Acts is a prerequisite for
constructing a rescue paln:.
? Basic Conditions of Employment Act 75 of 1997
157
? Labour Relations Act 66 of 1995
? Employment Equity Act 55 of 1998
? Skills Development Act 97 of 1998
? South African Qualifications Authority Act 58 of 1995
? Broad-based Black Economic Empowerment Act 53 of 2003
The process for determining the actual state of affairs of the business is not
discussed in the new Companies Act and no directive on methods to be used to
determine the feasibility of continuing with the business is given.
Various methods for turning a business around are available to turnaround
practitioners, but it is suggested that a combination of methods will, depending on
the prevailing circumstances, be most effective.
A due diligence process comprises the following:
? feasibility assessment with stress testing
? forecasts
? sustainability after rescue process
? corporate governance
? data integrity
? simulations, such as Monte Carlo simulation.
The various methods are addressed in more detail in chapter 8 (of this study) where
turnaround modelling is suggested. Although the new Companies Act is not
prescriptive on the method used to ascertain the state of affairs, it is quite clear on
the minimum requirements of forecasts required in the rescue plan.
Section 150(2)(c) Part C outlines the financial forecast requirements in the proposed
plan and Section 150(1) to (5) dictates the minimum requirements for a business
rescue plan. It is submitted that, when constructing the plan, all the affected persons
will not be sophisticated or skilled enough to make a workable input. This problem
adds to the turnaround practitioner’s liability impediment.
158
The practitioner, after consulting with the creditors, other affected persons and the
management of the company, must prepare a business rescue plan for consideration
and possible adoption. The new Companies Act is clear on the content required for
the rescue plan and divides the requirements into three parts, namely, background,
proposal and assumptions and conditions.
5.8 SUMMARY
It will take the South African courts some time to adjust to the proposed new way of
treating bankruptcy. Franks and Sussman (2005:385) tested the levels of innovations
in the United Kingdom courts after rescue law reforms and concluded that they have
taken a substantial period of time to bed down. The literature review confirmed the
following similarities between the various debtor-friendly regimes:
? rescue is seen as part of a business process
? a clear process for commencing with business rescue is evident
? a person is appointed who is responsible for the turnaround process
? a turnaround plan is central to all turnaround options and has to be
sanctioned by creditors.
Figure 5.2- Legal impact on turnaround process flow
Turnaround event
Decline
Distress
Establish
truevalue
Turnaround
decision
Verifier
Determinant
Identification
Early warning
signs:
Management
Strategic
Financial
Product/Market
Banking
Turnaround:
Reposition
Reorganise
Restructure
Rescue
Rejuvenate
Sustainablegrowth
and/or
Plan
Exit
turnaround
Legal scope of a turnaround
159
It is envisaged that the same process will play itself out in South Africa as Chapter 6
of the new Companies Act is tested in our courts. What will be of interest is how
business is going to react to the debtor-friendly regime. Figure 5.2 illustrates the
overall importance of the legal impact on the turnaround process.
As happens with the introduction of any new legislation, a great deal of speculation
has already been reported on by the South African media, with mixed reviews on the
viability, potentially problematic areas and the overall probability of success of
Chapter 6 of the new Companies Act.
160
CHAPTER 6
` Research methodology
6.1 Introduction
6.1.1 Problem definition
6.1.2 Objective of the research study
6.1.2.1 Primary objective
6.1.2.2 Secondary objective
6.1.3 Propositions
6.2 Literature research
6.2.1 Identification of early warning signs
6.2.2 Identification of turnaround models
6.2.3 Samples for this study
6.3 Six real-life cases
6.3.1 Choice of organisation
6.3.2 Case selection for this study
6.4 Interviews, repgrid methodology
6.4.1 Personal interviews
6.4.2 Interview process
6.4.3 Interview preparation
6.4.4 Identification of verifier determinants
6.4.5 The interview protocol
6.5 Questionnaire instrument
6.5.1 The design of the questionnaire
6.5.2 Determination of values for the questions
6.5.3 Pilot testing the questionnaire
6.6 Utilisation of verifier determinants
6.6.1 Sampling and response rate
6.6.2 Expert group
6.6.2.1 Identification
6.6.2.2 Sample frame
6.6.2.3 Sample size
6.6.3 Incumbent group
6.6.3.1 Identification
6.6.3.2 Sample frame
6.6.3.3 Sample size
161
6.7 Data
6.7.1 Data collection
6.7.1.1 Data measurement and instruments
6.7.2 Data analysis and interpretation
6.7.3 Factor analysis
6.7.4 t-Test
6.7.5 ANOVA
6.7.6 Validity and reliability
6.7.7 Wilcoxon
6.8 Conclusion
162
McRann (2005:38)
6.1 INTRODUCTION
The concept of verifier determinants is to confirm the existence of problems within
the business or the business environment. Environmental scanning units seem to be
unable to respond to what Ansoff (1975:25) calls “weak signals”. Stubbart (1982:143)
concludes “we have too many places to look and too few theories of how significant
environmental change can be linked to the business’s plans”.
The previous chapters shaped the foundation for an academic framework. In order to
achieve the research objective of identifying verifier determinants, various opinions
of the role players in a business environment must be presented.
The ideal research design will be of such a character that it articulates to all the role
players (bankers, entrepreneurs, creditors, consultants and courts) in the
performance cycle, as illustrated in figure 6.1. The performance cycle incorporates
four performance areas of importance: underperform, decline, distress and failure.
The aim of this chapter is to explain the research problem and the objectives of the
study and to give some background for the case selection and questionnaire design.
Reasons for selecting the methods used to gather data for the empirical analysis will
be explained.
“There are seven key signs that may indicate you are in trouble: declining sales, reduced market
penetration, falling margins, thin earnings before income taxes, high employee turnover rate,
increasing customer complaints and high-level employee defection. If you checked off one of these
key indicators, you need to dig deeper.”
CHAPTER 6
RESEARCH METHODOLOGY
163
Figure 6.1 Interaction between role players and the performance cycle
Cooper and Schindler (2003:13) maintain that good research generates dependable
data, which are derived from investigative practices that are conducted and recorded
professionally. They also suggest that "methodology" refers to the theory on the
research undertaken and the various steps taken to ensure the dependability of the
data. These would be systematic, detailed and transparent. They postulate that
research must be driven by ethics to ensure credibility. According to Mouton
(2001:56), research methodology focuses on the “individual steps” that make up the
processes and procedures to be engaged. Of importance is that while methodology
consists of these various methods, techniques and principles, it must be borne in
mind that they are interrelated. Thus "methodology" is not only concerned with the
manner in which information is acquired, but fundamental to this is the type of study
being undertaken. Mouton (2001:122) summarises this when he concludes that
research methodology describes the research procedure as including the overall
research design, the plan or structure and the sampling procedures, the data
collection, the field study methods and the analysis procedures.
Banks Entrepreneurs Creditors Consultants Courts
Failure Distress Decline Under perform
Likely to commit an act of insolvency Able to commit an act of insolvency
Roleplayers and the performancecycle
Business performancecycle
Business environment role-players
164
This chapter explicates the research approach to the study design and methodology.
Various research methodologies were used to ensure the validity and reliability of
data sets used.
6.1.1 PROBLEM DEFINITION
Cooper and Schindler (2003:69) argue that in formulating the research problem, the
first step will be to identify and fully describe the management dilemma and translate
the dilemma into a management question. According to Welman and Kruger
(2004:12), the research problem refers to some conjectural or practical difficulty for
which a resolution is desired. The research problem of this study is clearly
formulated in section 1.7.
Problem: There are few or no guidelines for entrepreneurs on “verifier determinants”
to confirm early warning signs and the specific turnaround faced by a venture.
The South African government, through the Department of Trade and Industry (DTI),
directly endorsed business rescue by the introduction of the new Companies Act.
This clearly indicates that the DTI is adamant about “getting it right”. In actual fact,
however, the Act is still subject to amendments and testing by the courts.
This study intends to have the following outcomes:
? Identify main categories of early warning signs
? Identify verifier determinants linked to each category.
In this study, the focus of the problem is:
? The absence of guidelines (verifier determinants) to confirm early
warning signs
? The absence of verifier determinants to assist in the specific
turnaround situation
165
6.1.2 OBJECTIVES OF THE RESEARCH STUDY
6.1.2.1 Primary objective
? To identify and theoretically define early warning “verifier determinants”
? To design and include “verifier determinants” as an integral part of a
turnaround framework that supports corrective action.
6.1.2.2 Secondary objectives
? To research the current formal turnaround practices for “verifiers”, which
are applied in the United States of America, Canada, Australia and Africa
and the informal practices evident in South Africa. These findings are
aligned so as to include the changes in the applicable South African
legislation.
? To design a framework for use by turnaround practitioners and
entrepreneurs alike.
? To identify which verifier determinants will prompt the early warning signs
to become visible, and apply this outcome to the design of a reliable
turnaround framework that is accepted by all creditors and financial
institutions.
? To contribute to the South African entrepreneurial, turnaround fraternity,
and future formal studies in this academically ill-represented field.
166
6.1.3 PROPOSITIONS
Cooper and Schindler (2003:50) note that a "proposition" is a statement about
observable phenomena that may be judged as "true" or "false". A proposition is
called a hypothesis if it is formulated for empirical testing.
As a declarative statement, a hypothesis is of a tentative and conjectural nature
(Cooper & Schindler, 1998:43). It was decided that research propositions would be
used in this study rather than hypotheses, leading to an ex post facto study. The
reason for this decision is that the data gathered by means of conducting personal
interviews and gathering questionnaire responses are explanatory in nature.
Conclusions drawn from the analysis will be more meaningful if approached from a
pragmatic point of view, since no other model of the same nature exists. The study is
very relevant and important, as South Africa is now entering the business turnaround
field and a Rubicon change from a creditor-friendly to a debtor-friendly regime. The
investigation ultimately aimed to provide a solution to the question whether to
attempt a turnaround or not. The research also contributes to the elimination of Type
1 or Type 2 errors. In order to find these answers the research process in this study
follows the path depicted in figure 6.2.
6.1.4 LITERATURE RESEARCH
Literature on turnarounds in developing countries such as South Africa is almost
non-existent. Understandably, turnaround practitioners protect their strategies as
intellectual property.
Figure 6.2 Broad research flow
The literature search in this study
Inform, Ebsco-host, Proquest,
published since 1985. For major works, the date was
when an article was referenced widely.
important, but relevance and contribution to the body of knowledge
prediction, early warning signs and turnaround strategy
Each article was scrutinised for
concepts and variances under different conditions and contexts.
research identified key concepts using grounded theory research
divided into three main categories
secondly, banking signs (see
Appendix C), illustrated by
167
Broad research flow
in this study involved all scientific resources from the ABI
host, Proquest, ScienceDirect, Blackwell and other databases for titles
For major works, the date was not a limitation, especially
when an article was referenced widely. Age of publication was also not considered
relevance and contribution to the body of knowledge
prediction, early warning signs and turnaround strategy were paramo
Each article was scrutinised for confirmation of concepts, as well as additional
concepts and variances under different conditions and contexts. When analysed
research identified key concepts using grounded theory research
divided into three main categories: firstly, “early warning signs” (see
see Appendix B), and lastly, turnaround
illustrated by figure 6.2.
involved all scientific resources from the ABI-
Blackwell and other databases for titles
not a limitation, especially
lso not considered
relevance and contribution to the body of knowledge on failure
were paramount.
ation of concepts, as well as additional
When analysed, this
research identified key concepts using grounded theory research, which were
see Appendix A),
urnaround strategies (see
168
Figure 6.3 The detailed research process of this study
Figure 6.3 illustrates the flow of this chapter, starting with the literature research,
then the interview process and, finally, the questionnaire design and instrument. The
statistical analysis flow concludes the process.
6.1.5 IDENTIFICATION OF EARLY WARNING SIGNS
Early warning signs (see Appendix A) are regarded as all types of event in business
that point to the potential demise of that business (refer to the definition of “early
warning signs” arrived at in section 3.2). Warning signs are portrayed in various
ways, as problems, challenges and poor performance indicators. Authors, such as
use their own explanation, phraseology or designation when referring to early
warning signs. This literature research classified early warning signs, in much the
same way as Pousson (1991), into the following categories:
? financial warning signs identified by ratio analysis
? business and operational warning signs, such as administration, market
and product analysis
6.2
Literature
(appendixes)
6.2.1
Identification
of Early
Warning Signs
6.2.2
Identification
of Turnaround
models
6.3
Six real life case
studies
6.4
Interviews
Repgrid
methodology
6.5
Questionnaire
Instrument
6.6.3
Incumbent
group
6.6.2
Expert
Group
6.6
Utilisationof verifier
determinants
6.7
Data
6.7.5
ANOVA
6.7.6
Validity &
reliability
6.7.7
Wilcoxon
ResearchProcess
6.7.3
Factor
Analysis
6.7.4
T-Test
169
? managerial signs, such as strategic value add and behavioural analysis
? banking signs, which are closely linked to behavioural signs
? other, behavioural signs.
The warning signs and their classification were tested and confirmed in the interview
process (section 6.4).
6.1.6 IDENTIFICATION OF TURNAROUND STRATEGIES
Owing to the diverse sources of literature available, it was firstly deemed necessary
and prudent to categorise secondary data sources into various key sources.
Secondly, various practices and models that were regarded as being of assistance in
compiling a South African entrepreneurial approach to rescue/turnaround were
investigated.
After reading and analysing the abstracts of the articles, those papers that discussed
turnaround-related issues were selected and tabled in Appendix C. Each article was
assessed, and the key concepts identified and reported. Subsequently, concepts
were categorised into sub-domains (categories) of turnaround-related issues and
reported on individually. As the categories became clearer, each individual article
was further explored for its key contributions.
Initially rejected articles were subsequently re-evaluated for potential contributions to
the sub-domains, based on the new insights gathered from the process. During the
grounded research process, the research identified conceptual linkages to use for
categories. Then these steps were repeated until the key constructs ultimately
crystallised. Eventually, a list of key references was assembled (see Appendix C).
Finally, a conceptual framework for classifying the turnaround structure that was
identified is proposed. Every article was scrutinised for confirmation of these
concepts, as well as for additional concepts and variances in terms of the different
turnaround approaches.
The most salient strategies, frameworks, steps and processes are highlighted in this
study, during which the research concentrated on the process flow, strategies and
170
execution of turnaround strategies. All literature containing the words “rescue”,
“turnaround”, “restructure”, “reorganisation”, “renewal” and “realignment” was
identified within the context of turnaround management. The literature was
summarised into the five distinct phases associated with the literature search. These
are depicted in Appendix C as follows: investigative, planning, strategic, financial and
operating phases.
6.1.7 SAMPLE SELECTION FOR THIS STUDY
The following sections provide details of the sample frame, the sample size, the
sampling method used and the response rate. Diamantopoulos and Schlegelmilch
(2000:10) describe a sample as “ a part of something larger”. Parasuraman, Grewal
and Krishnan (2004:357) define "sampling" as the selection of a fraction of the total
number of units of interest to decision makers for the ultimate purpose of being able
to draw conclusions about the entire body of units.
This fraction is then known as the "sample", which Cooper and Schindler (2003:179)
argue is part of the "target population", hence, the part or sample is carefully
selected to represent that population. For the purposes of this study three groups
were purposely selected. They are portrayed in table 6.4.
Table 6.1 Group categories
DEMOGRAPHIC SPECIALIST EXPERT INCUMBENT
BANKING
EXPERIENCE
20 Years 12 Years 5 Years
JOB FUNCTION
EXPERIENCE
15 Years 10 Years 5 Years
AGE 40+ Years 30+ Years 20+ Years
QUALIFICATIONS
Post graduate
degree and diploma
Graduate and
diploma
Graduate
MANDATE
Ultimate directional
mandate
Limited directional
mandate
Advise decision
makers
171
Note that the specialist group and the expert group are not the same, but consist of
two distinct groups.
The ‘specialist group’ consists of banking industry specialists. An industry specialist
can be described as an experienced banker with at least fifteen years’ experience in
the credit risk field, equipped with a relevant postgraduate qualification and
mandated within the organisation to make decisions resulting in significant
directional change in business such as turnaround. These individuals have been
exposed to many informal turnaround situations during their tenure in these
positions.
The ‘expert group’ consists of senior credit and credit risk incumbents in leadership
roles within the organisation. An expert can be described as an experienced banker
with at least ten years’ experience in the credit risk field, equipped with a relevant
postgraduate qualification and a limited mandate within the organisation to make
decisions resulting in significant directional change in business such as turnaround.
The expert group differs from the specialist group in that it has less experience and
exposure to the business restructuring field.
The ‘incumbent group’ consisted of managers in the credit environment who have
had exposure to the credit risk environment.
A manager is an experienced banker with at least five years’ experience in the credit
risk field equipped with a relevant graduate qualification and not mandated (higher
authority will make final decision but this group can advise/propose direction) within
the organisation to make decisions resulting in significant financial management
change in a business. The incumbent group differs from the specialist group as it has
less experience (5 years) and exposure to the business restructuring field.
172
6.2 SIX REAL-LIFE CASES
For the purposes of this study, real-life business profiles were used. The real-life
cases comprised a stratified random selection drawn from existing businesses in a
commercial banking environment. The businesses were geographically spread
throughout South Africa and the selection was not limited to one province only. The
choice of cases was of the utmost importance to ensure that selection bias was ruled
out. Research was conducted in an organisation with a comprehensive database of
business data, which made it relatively easy to randomly select the sample of real-
life cases with three Basel rating categories.
6.2.1 CHOICE OF ORGANISATION
For this study, one of the leading commercial banks was selected as the
organisation of choice, owing to the accessibility of information, research data and
participants. For selecting case studies, the researcher relied on businesses that
were already subjected to Basel II Accord categorisation criteria. For clarity on the
Basel II Accord, a short explanatory discussion is required (see chapter 3 section
3.4). This research chose to select case studies with an in-depth longitudinal
character. Cases were selected at random, ensuring that they had a couple of years’
historical financial and other relevant data. This was important to ensure equal
representation of the selected cases.
Research was conducted in an organisation with a comprehensive database of
business data, which made it relatively easy to purposely select a sample of real-life
case studies. Figure 6.4 illustrates why a banking institution is appropriately placed
to conduct this study. In a turnaround situation, a commercial bank is ‘both ways
exposed’, as the bank is a key component to any turnaround attempt, be it informal
or formal. The pivotal role of the commercial banks in an informal attempt to turn a
business around is a well-debated topic and the mere existence of the INSOL
principles and the London Approach bears testimony to this. In order to protect the
organisation, the business and individuals, all names, references to names,
addresses and anything that could lead to the organisation being identified were
173
removed. In protecting the real identity of the businesses in terms of the critical data,
such as financial statements, trends, management structures, history and actual
events, all references to the actual businesses and individuals involved were either
removed completely and/or given pseudonyms. This approach ensured that the case
study maintained its real-life character.
Figure 6.4 Structure informing the appropriate case selection
6.2.2 CASE SELECTION FOR THIS STUDY
Figure 6.5 illustrates the research design which comprised two phases: phase 1
comprised the case selection and the interview process, and phase 2 the
questionnaire and field study process.
BANK
OrganisationChoice
Both ways exposed
Entrepreneur Banker Practitioner
Rolein turnaround
Informal Formal
Key role
174
Figure 6.5 Research design showing stratified case selection
The Basel II risk rating was used in selecting two cases in each category. Within
each case, the following information was obtained from the business:
? Curricula vitae of managerial staff
? Historical files consisting of
o business background
o management succession
o market and product
o staff growth and considerations
o changes in industry type and business model
? Three years’ audited financial statements to establish growth
? Cash flow projections.
Case5 Case4 Case3 Case2 Case1 Case6
PhaseII: Questionnairedevelopment
Standard Special mention Sub standard
Identify Verifier determinants
PhaseI: Case selection
Using Basel II rating categorisation grouping
Categorisationof early warning signs
Questionselection
Demographic diversity selection
Researchdesign
Interviewprocess
Field study
175
Table 6.2 provides the demographic details of each of the cases selected for this
study. The business cases are categorised into industry type, legal style, annual
turnover, year of the latest financial information available, Basel II rating and, finally,
age of the business in years. The primary aim of the case research linked and the
interview process was to establish the perceptions of specialist management in
identifying early warning signs, causes and verifiers determinants as risk factors. An
example of one of the cases used in this study is available in Appendix D.
Table 6.2 Case demographics used in this study
6.3 INTERVIEWS – REPGRID METHODOLOGY
6.3.1 INTERVIEW WITH PARTICIPANTS
An interview has the benefit of direct, face-to-face interaction, so any ambiguities can
be clarified and explained in real time. The interview process was used to identify the
main constructs of early warning signs.
No CASE IDENTIFICATION TYPE STYLE ANN T/O YEAR
BASEL II
RATING
AGE YEARS
1
CASE A
Kwa-Zulu Natal
Cable Management and
Structural Support
Specialist
Company
Propriety
Limited
105,718,000 2006 Standard 3
2
CASE B
Limpopo
Transport & Civil
Construction
Sand Excavation &
Washing
Property owning and
letting
Company
Propriety
Limited
91,200,000 2006 Standard 11
3
CASE C
East Cauteng
Motor trade. New and
second hand dealership,
farming
Company
Propriety
Limited
157,239,000 2006 Special-mention 5
4
CASE D
Western Cape
Coating, impregnating
and laminating of foam
and textiles.
Convertors of textiles
and non-woven fabricks
for the footwear, motor
and allied industries.
Company
Propriety
Limited
96,552,000 2005 Special-mention 11
5
CASE E
Gauteng
Specialise in import and
sale of Continental Fish
and Delicacies
Company
Propriety
Limited
69,000,000 2005 Sub-standard 37
6
CASE F
Gauteng and Free State
Transport, Logistics and
warehouseing
Closed
Corporation
137,000,000 2006 Sub-standard 28
CASE SELECTION DEMOGRAPHICS
176
Cooper and Schindler (2003:43) assert that a "construct" is a grouping of specific
concepts for expressing a specific issue or reality under discussion. As the rationale
for this stage was to ensure the optimum exploration of the specialists’ knowledge
and past credit experience (specialist cognitive survey); the research followed a case
learning process followed up with a structured interview. According to Wright (2006),
much can be learnt from the thinking of senior management on how they see, make
sense and interpret their experiences. During the interview, the abstracts of the
relevant case were analysed and those concepts that in fact represented early
warning sign and verifier determinant issues were identified.
The interview process required a high level of interaction between the researcher
and participants. This interaction was a significant prerequisite for proper
understanding of the case under study and to clear data of all ambiguities. The
interview process was based on the repertory grid method developed by Kelly in
1955, (Feixas, & Alvarez (2006)). This method was preferred above a conventional
rating scale questionnaire, as it allows the interviewee to provide unique insights into
constructs t`hat are topic related. Consequently, the research design for this study
entailed selecting cases with an in-depth longitudinal character. Cases were selected
purposely, ensuring that they complied with the minimum requirements and other
relevant data (see section 6.2). This was important to ensure equal representation of
the cases selected. However, the critical data, such as the financial statements,
trends, management structures, history and actual events, were not altered and
factual events are presented in each case. This approach ensured that the cases
maintained their real-life character. Each selected case was then discussed, and key
concepts were identified and reported.
Concepts were categorised into sub-domains (categories) of early warning sign- and
verifier determinant-related issues and reported individually, together with their
specific contributions. As the categories became clearer, each individual case and
interviewee insight was further explored for its key contributions. If the interviewees
required any guidance during the interview process, this was provided by asking a
series of leading questions. It was found that participants were relaxed when
answering the questions since they were based on their field of expertise.
177
It is believed that these positive interview conditions led to unbiased conclusions
being drawn from the managers’ discussions of their perceptions and experience.
During the interview process, the interviewers looked for the conceptual linkages to
be used for the various categories. These steps, questioning, clarifying and re-
questioning, were followed during the interview methodology, where steps are
repeatedly executed until the key constructs were ultimately crystallised. After the
sixth interview, the interview process drifted towards a conclusion, as very little
additional ‘useful new information’ was obtained; this was in accordance with the
guidelines for the interview process. After the ninth interview the process ended.
This meant that the actual number of interviews became less important than initially
anticipated when embarking on the study. In order to find patterns in the data, this
research used the principles of neural networks to model relationships between
inputs and outputs in the chosen environment. The research focused on a
philosophical and cognitive analysis.
6.3.2 INTERVIEW PROCESS
As was indicated previously, the interview process was based on the repertory grid
method. Sampson (1972:79) argues that the repertory grid is a technique used to
identify the ways a person gives meaning to his or her experience. According to
Gaines and Shaw (2005:5–2), the repertory grid method consists of four constructs:
a topic, a set of elements, a set of constructs and a set of ratings of the elements
and constructs.
This method was preferred above a conventional rating scale questionnaire as it
allows the interviewee to provide unique insights into constructs, which are topic
related. The interviews were designed around real-life cases, which were
determined by the method described in section 6.3. The results were tested against
a comprehensive secondary literature research(see section 6.2.1 and Appendix A).
178
6.3.3 INTERVIEW PREPARATION
Industry specialists with practical experience were identified in the target
organisation (a commercial bank) and these specialists were selected to participate
in the case study. Three case studies were selected at random for each specialist,
which resulted in each participant having a sample in which at least two of the main
categories of Basel II rating are represented. The case studies were distributed to
the participants two weeks prior to the scheduled interview. During this period the
interviewees were requested to prepare themselves adequately for the interview
process. This preparation was estimated to take at least three hours. The
interviewee was then invited to an interview and encouraged to bring the case
studies and all preparatory notes with them.
Eisenhardt (1989b:545)
The estimated time allotted for the interview was four hours, although first interview
took four and a half hours to complete. However, as the interviewers gained
experience in the interview process, the time spent on the interviews was reduced.
Subsequently, the average time per interview was calculated at three hours forty
minutes. Refer to Appendix D for a copy of the letter and case example sent to the
interviewee.
In order to keep the interview process unbiased, the interview content, such as the
process to be followed and questions to be asked, was not disclosed to the
participants prior to the interview. Interviewees were also reassured that there would
be total anonymity and that the results would only be used for the research project.
In this study, the last three interviews proved to contribute the same information
as the previous six interviews, with no new information being forthcoming, which
suggested that nine interviews were enough.
179
6.3.4 IDENTIFICATION OF VERIFIER DETERMINANTS
Table 6.3 depicts the interviewer record sheet used during the interview. The three
cases were identified on the sheet as case A, B, or C. The repertory-grid choice as
to which two cases differ from the other one is clearly indicated in the column ‘link’.
Table 6.3 Case study interview record sheet
The interviewee’s cognitive experience and knowledge of the business case was
then recorded in the other three columns, the key constructs were identified, the
main early warning sign category was identified and subsequently, most importantly,
the verifier determinant was identified. This record sheet was used to annotate every
discussion topic and/or interview question asked.
6.3.5 THE INTERVIEW PROTOCOL
The interviewers asked a series of questions to lead the conversation (Cooper &
Schindler: 2003:325), for example:
Case Link Key constructs identified Main EWS category identified
Verifier deteminant
identified
Comments
CASE INTERVIEW RECORD SHEET
A
B
C
180
In your opinion,
? which two cases are more similar (compared to the other one)?
? what early warning signs did you observe?
? why is the one different from the other two?
? what caused the signs?
? how did you verify the existence of the sign/cause?
? what is the main differentiating construct/s?
? does this construct fall into the category of an early warning sign or a
verifier determinant?
? the case which was not selected – why was it not selected?
The constructs and early warning signs were subjected to rigorous interrogation.
Interviewers focused the interviewee using additional questions to ensure that early
warning signs, causes and verifiers were discussed. The result was a clear
understanding of early warning signs in practice and the process identified a set of
verifier determinants, which was informed for the resulting questionnaire.
6.4 QUESTIONNAIRE INSTRUMENT
The results obtained from the interview process, and building on the literature
review, formed the basis of the questionnaire design (Appendix D). In order to
ensure completeness, this study has been documented, firstly, in terms of the
personal interviews based on the cases, and secondly, a questionnaire/or empirical
testing.
The raw data from the questionnaire responses were analysed using SAS and
BMDP1 software and included descriptive statistics, factor analysis, a t-test of
significance, and the analysis of variance.
181
6.4.1 QUESTIONNAIRE DESIGN
The questionnaire was designed around the constructs determined by the interview
process with the group of specialists. These results were reciprocally confirmed by a
comprehensive secondary literature research (see section 6.2.1 and Appendix A). A
comprehensive questionnaire was developed aimed at credit practitioners in the
organisation. This resulted in a high level of agreement with the specialists, drawing
from their experience and learning and based on a set of cases.
Saunders, Lewis and Thornhill (2007:362) postulate that questions can be
distinguished in terms of "opinion", "behaviour" and "attribute", and this influences
the way in which questions are worded. According to these authors, "opinion”
variables record how respondents "feel" about something or what they "think" or
"believe" is true or false. In contrast, data on behaviours and attributes record what
the respondents "do" and "are".
The purpose of the questionnaire was to:
? involve the participant
? draw conclusions on managers’ perceptions of warning signs and their
evaluation of risk profiles
? establish respondents’ use of verifier determinants.
The questionnaire (Appendix F) was broken up into two major sections: a
demographic categorisation section (questions 51 to 60) and the actual Likert scale
questions (Appendix F, questions 1–50). Questions 1 to 50 were intended to identify
individual variables associated with each of the factor constructs identified by the
literature and the interviews.
The questions in the questionnaire were derived from
? the primary objective of the research
? the specialist cognitive survey and the literature review on business failure
and early warning signs.
?
182
Thus, the sections of the questionnaire centred on the outcomes of the two-tier
preparatory research.
The questionnaire was sent to each manager in the incumbent group together with a
covering letter. The letter requested them to participate fully and there is little doubt,
although this cannot be verified except on the basis of the response rate, that the
respondents participated voluntarily.
6.4.2 DETERMINATION OF VALUES FOR THE QUESTIONS
Cooper and Schindler (2008:308) rightly point out that the Likert scale has "in-built
summated rating" and that the data are interval data, as illustrated in table 6.4.
Table 6.4 The summated Likert scale used in this study (adapted from Cooper & Schindler,
2003:308)
Strongly disagree Disagree Agree Strongly agree
1 2 3 4
The reason a four-point scale was chosen lies in the fact that it forces the direction of
the response. A four-point scale was preferred over a five-point one that gives an
option of “unsure”, as this was unwarranted in this study. A neutral option was
underirable in the anticipated small sample. The 4 point scale allowed convertion
scales into nominal scales.
The participant was asked to respond to each question by ticking the appropriate
box. Each of the boxes is given a numerical value to reflect its degree of attitudinal
favourableness and the scores may be totalled to measure the participant's opinion.
Cooper and Schindler (2003:253) contend that between 20 and 25 well-constructed
questions will be required for a reliable Likert-scale result. This study contained 50
questions to allow for the elimination of non-loading or double-loading variables in
the factor analysis.
183
6.4.3 PILOT TESTING THE QUESTIONNAIRE
Preliminary questionnaires were sent to five managers in the credit and credit risk
environment who were selected at random from the list of business units available in
the organisation. The responses from the pilot test indicated that the respondents
understood the questionnaire and that it therefore did not need further editing.
6.5 DETERMINATION OF VERIFIER DETERMINANTS
Fraenkel and Wallen (2005:38) emphasise the fact that dependent variables are
those that the researcher chooses to study in order to assess the impact of other
variables on them. The independent variable in this study is a dichotomous variable
consisting out of an incumbent group and an expert group. The dependent variables
comprised the verifier determinants (constructs), each with its contributing variables.
6.5.1 SAMPLING METHODS AND RESPONSE RATE
The sample of credit risk incumbents was selected purposely. Certain criteria applied
in the selection process, making it a judgemental sample. In this case, the criterion
was that incumbents selected as respondents had exposure to the credit
environment. This is an example of non-probability sampling.
Cooper and Schindler (2003:201) also confirm that the use of purposive sampling is
appropriate for this type of research.
Possible challenges that could have arisen while conducting the research included
the following:
? Several research projects were launched simultaneously, which could have
influenced the respondents’ attitude to the research. (Moreover, the target
institution experienced an unexpected and unplanned ‘takeover’ threat after
the research commenced.)
184
? Questionnaire fatigue could have played a role in the total responses
received.
? The research occurred mainly in the one banking institution to which the
researcher had access.
? The questionnaires were not area coded, consequently, there could have
been response bias, as one of the areas in the sample may have had
proportionately more responses than another.
The above challenges could have an influence on the response rate.
6.5.2 EXPERT GROUP
6.5.2.1 Identification
The expert group consisted of experienced senior bankers with at least ten years’
experience in the credit risk field with a relevant postgraduate qualification and a
limited directional mandate for making decisions resulting in significant directional
change in business, such as turnaround.
The fifty verifier determinants were subjected to the questionnaire process and the
replies from the expert group were grouped in terms of five factors, which
subsequently formed the independent variables from which data was drawn so that
statistical inferences could be made. The dependent variable is referred to as the
verifier determinant group.
6.5.2.2 Sample frame
The expert group sample frame consisted of senior credit risk experts in specifically
related functions within the business.
185
6.5.2.3 Sample size
In this research, nine out of a possible 12 credit expert practitioners were willing to
participate. Thus, a response rate of 75% was obtained, which was deemed
adequate for the research.
6.5.3 INCUMBENT GROUP
6.5.3.1 Identification
The incumbent group consisted of managers in the credit environment who have had
exposure to the credit risk environment. An incumbent is an experienced banker with
at least five years’ experience in the credit risk field who is equipped with a relevant
postgraduate qualification, but is not mandated by the organisation to make
decisions resulting in significant financial management change in a business.
6.5.3.2 Sample frame
The sample frame of credit risk practitioners included those practitioners who are
currently working in business units in the field of credit risk.
6.5.3.3 Sample size
In this research, 200 out of a possible 245 credit risk incumbents fitted the criteria
and hence a sample size of 200 was decided on. The 200 practitioners selected are
trained and employed in the credit and credit risk division.
6.6 DATA
Before dealing with the units of analysis, it is important to find support for and to
justify the form of research undertaken, as it influences the selection of the units of
analysis. Babbie (2005:94) asserts that although it is useful to differentiate between
types of research, most studies use several of them as they often converge.
186
Types of research include the explanatory, predictive, descriptive, exploratory and
reporting approaches. Owing to the research resources available, this research is
primarily focused on the explanatory approach and is accompanied by descriptive
aspects. The research methodology described below provides details of the data
required for the study and the methods used in collecting the data.
6.6.1 DATA COLLECTION
Blankenship and Breen (1993:122) state that there are certain fixed guidelines as to
which methods a researcher should use for collecting primary data, the most
important of which is that the researcher must collect data as accurately as possible.
The most popular methods for data collection are usually observation, the interview
and the questionnaire although these three methods are not necessarily mutually
exclusive and can be interrelated. However, the questionnaire is the centrepiece of
data collection as it stands on its own and the interview can be used as a basis for
the other forms of data collection. In-depth interviews with the specialists formed the
basis for the questionnaire development and design.
6.6.1.1 Data measurement and instruments
Parasuraman et al. (2004:266) define "measurement" as the assigning of numbers to
responses based on a set of guidelines. They believe that this has two potential
benefits: "First, one can summarise quantified responses from a sample more
efficiently and economically. Secondly, it enables the manipulation of quantified
responses by using a variety of mathematical techniques to get to a desired result.”
The results then require different levels of measurement and interpretation which will
also apply to the data. When measuring data, nominal, ordinal, interval and ratio
data are considered owing to their unique characteristics. In this study, the four-point
scale resulted in interval data that could be treated as ratio data during analysis.
187
6.6.2 DATA ANALYSIS AND INTERPRETATION
Diamantopoulos and Schlegelmilch (2000:63) note that a careful re-examination of
the overall aim of the research provides an excellent point of departure for
developing analysis objectives. The overall formulation, it can be argued, is also
influenced by, among other issues, whether the data is univariate, bivariate or
multivariate. Subsequently, the responses to the completed questionnaires were
processed by the researcher. Data analysis includes checking the data for
comprehensiveness and consistency. Welman and Kruger (2004:201) concur that
one of the first tasks in analysing data is to formulate some kind of theoretical
statistical model. They postulate that the selection of the appropriate statistical
methods and/or software is dependent, among other things, on the level of
measurement. The statistical analysis for this research, using SAS software, was
performed by the Department of Statistics at the University of Pretoria.
6.6.3 FACTOR ANALYSIS
Exploratory factor analysis was used for interpreting the data in this research.
Cooper and Schindler (2003:562) assert that when the variables that are being
analysed are interrelated, some being dependent and others independent, then
factor analysis is appropriate for analysing the data. In fact, Cooper and Schindler
(2003:11) posit that factor analysis is one of the techniques applicable in multivariate
analysis where many variables are involved. In this instance, there were fifty
potential variables and thus this technique was used because the overall research is
multivariate. There are several approaches to factor analysis and, in this instance,
the model used was the maximum likelihood method. Kim and Mueller (1978:9) and
Cooper and Schindler (2003:613) agree that factor analysis identifies patterns or
underlying combinations in variables as potential factors. Thompson (2004:5) makes
the point that there are two forms of factor analysis: confirmatory and exploratory. In
this instance, exploratory factor analysis, as argued by Kim and Mueller (1978:9),
was used as the factors were assumed to be “not known”.
188
Factor analysis is used for data reduction when patterns can be recognised in
developing specific constructs. This occurs when there are too many variables and
some reduction could benefit the exercise, with variables that belong together being
grouped into factors. Kim and Mueller (1978:9) are incisive and insist that factor
analysis is based on the fundamental assumption that some underlying factors,
which are smaller in number than the number of observed variables, are responsible
for the co-variation among the observed variables. Cronbach’s alpha coefficients,
which measure the reliability of a factor, are produced as a result of factor analysis.
In this study, a Cronbach’s alpha value of greater than 0,7 was an indication that the
items within a factor are reliable and measure the same underlying construct.
6.6.4 TEST OF SIGNIFICANCE (t-TEST)
The t-test interrogates the differences in the mean of a scale and the mid-points of
the factors in order to establish the level of significance of the difference, if any,
between them. Cooper and Schindler (2003:588) assert that a t-test determines the
significance of a sample distribution and a parameter.
6.6.5 ANALYSIS OF VARIANCE (ANOVA)
An analysis of variance (Anova) was performed using demographical data to see
whether the manager’s seniority, job experience and time in banking had any
influence on the dependant variables. Cooper and Schindler (2003:588) concur that
the Anova establishes whether means from different sets of data come from the
same sample which, in this case, establishes whether there is any difference in the
means of the factors. This would establish if there were any differences in the
interpretation of the variables in the different categories or factors. An analysis of
variance is also a test of significance between and within the different independent
variables in the same factor. Saunders et al. (2007:448) and Cooper and Schindler
(2003:552) agree that an Anova tests the similarity of several means or other
measures by using the variances between and within groups of data.
189
If they are equal, it means that they come from the same population. Of major
concern to all scientists is the credibility of research findings. The credibility of the
research findings suggests the degree to which the research is reliable and valid. In
fact, the two are key to authentic research. It is therefore, natural that this research
must be tested for reliability and validity.
6.6.6 VALIDITY AND RELIABILITY
Cooper and Schindler (2003:232), Bordens and Abbot (2008:129), Saunders et al.
(2007:614) and Fraenkel and Wallen (2005:150) are relevant here, as they assert
that validity refers to the extent to which a test measures what we actually want to
measure. Hence, Frankfort-Nachmias and Nachmias (2000:149) indicate that validity
is concerned with the question: "am I measuring what I intend to measure?" Fraenkel
and Wallen (2005:150) explain that validity refers to the appropriateness, usefulness,
correctness and meaningfulness of the inferences.
Strube (2000:24) declares that "reliability" refers to the consistency of the results.
Accordingly, tests are applied to check whether the results will be the same should
the research be repeated by another scientist and in a different context or
environment (Saunders et al., 2003:101). Cooper and Schindler (2003:231) then
assert that reliability refers to the extent to which the procedure gives consistent
results as well as to the extent to which the results are free of random or unstable
error. In this instance, reliability relates to the accuracy and consistency of the
responses.
According to Saunders et al. (2007:149), reliability is assessed by posing the
following three questions:
? Will the measures yield the same result on another occasion?
? Will similar conclusions be reached by other observers?
? Is there transparency in how sense was made of the raw data?
190
Saunders et al. (2007:149) further point out that the threat to reliability is bias,
whether it is from the interviewer, participant or observer. This is aptly summarised
by Frankfort-Nachmias and Nachmias (2000:154), who explain that when measuring
intangibles more errors may be produced than when measuring physical
instruments. They also point out that momentary distraction on the part of the
participant could result in an error. Thus, it can be argued that reliability stresses the
consistency of outcomes and this occurs when the threats to reliability (e.g. bias and
distractions) are reduced, as elimination of all errors might not be possible. It should
also be added here that, when talking about "consistency", it follows that even if the
outcomes are wrong, for as long as they are consistent, they are reliable. Figure 6.6
illustrates the validity and reliability tests used in this study.
Figure 6.6 Face validity and reliability
There are three regular tests for reliability:
? The test-retest method, which requires administering the same instrument (i.e.
the questionnaire) twice and comparing the results. It is common, for instance,
to take a patient's temperature more than once in hospital. However, it differs
from situation to situation and the in-between periods will differ (the length of
time between testing) depending on the nature of the research.
? In terms of the equivalent forms method, two different measuring instruments
are used for the same research or experimentation. For example, two different
questionnaires could be used for the same sample.
Face validity =
= CronbachAlpha
= 0,7
= Wilcoxon Agreement betweenexpert and/or
incumbent groupsas to the
suitabilityof the construct(s)
Degree towhichinstruments are
homogeneousandreflect the
same underlyingconstruct(s)
ReliabilityAlpha =
191
? The Kuder-Richardson approach in terms of which the mean, standard
deviation and the number of items are used to establish what is known as the
reliability coefficient.
? Fraenkel and Wallen (2005:161) claim that a reliability coefficient of 0,00
suggests a complete absence of a relationship between values.
6.6.7 WILCOXON
To test whether the factors are influenced significantly by the independent variable
‘group’, the Wilcoxon two-sample test and Kruskal-Wallis test were used. Owing to
the small sample size (21, that is, nine experts and 12 incumbents, see also table
7.20), a t-test and the Kruskal-Wallis test were conducted to confirm the results from
the Wilcoxon two-sample tests.
6.7 CONCLUSION
The techniques described in this chapter ensure that the research is scientific and
the findings are acceptable to the scientific community. The purposive and
judgemental sampling procedures ensured that respondents had sufficient
experience to respond meaningfully.
In this study, Cronbach’s alpha coefficients for the verifier determinant factors
were used. All the factors had a Cronbach’s alpha of 0.7 or higher.
In this study, validity was strived for during the interview process. The
interviewers interrogated the constructs, their signs, causes, relationships and
measurements as perceived, considered and applied by the specialists
192
Significantly, exploratory factor analysis was described, and was used to reveal the
underlying constructs and to test their reliability. The next chapter details the findings
flowing from the above techniques as used on the raw data.
193
CHAPTER 7
Research findings
7.1 Introduction
7.1.1 Case research results
7.2 Empirical findings: descriptive statistics
7.2.1 Sample and response rate
7.2.2 Demographics
7.2.3 Factor analysis
7.3 Empirical findings: Inferential statistics
7.3.1 Analysis of variance
7.3.2 Wilcoxon
7.4 Chapter summary
194
This method was preferred above a conventional rating scale questionnaire.
Pennanen (2010:7)
7.1 INTRODUCTION
Verifiers are used to confirm the existence of problems in the business or in the
business environment, as environmental scanning units seem to be unable to
respond to what Ansoff (1975:25) calls “weak signals”. Stubbart (1982:143)
concludes “we have too many places to look and too few theories of how significant
environmental change can be linked to the business’s plans”. The introduction of
verifier determinants is intended to fill the “gap” in this regard and to focus the
investigative stage of a turnaround situation.
The previous chapters shaped the foundation for an academic framework. In order to
achieve the research objective of identifying verifier determinants, different opinions
from a business, an accounting and a legal platform were presented. These opinions
are given within a framework of early warning sign identification and turnaround
practice. In the discussion with a selected specialist group, it became clear that
some of the opinions are similar, but with varying denotations and terminology.
Instances where the outlook on approaches is the same were grouped.
CHAPTER 7
RESEARCH FINDINGS
“Even the deepest turnaround talents are helpless if their skills are too limited”
“Knowledge of financial statements, crisis management, business strategy and many other
subjects are vital to achieve success”
“Though strong theoretical knowledge is valuable, understanding the
entrepreneur’s life is an absolute necessity”
Sections of the research findings are supplied in the various appendixes
attached to this document. These contain extensive lists and categories of
construct elements relevant to this study.
195
This chapter emphasises the empirical findings. In addition, the use of statistical
analysis is explained against a backdrop of demographic information and more
descriptive inferences.
The following descriptive statistics are presented in this chapter:
? exploratory factor analysis for identification of factors
? ANOVA tables – illustrate the relationships between the factors and the
independent variables
? the Wilcoxon two-sample test
? the Kruskal-Wallis test.
7.1.1 CASE RESEARCH RESULTS
Through the interview process, five main categories of early warning signs were
identified, namely:
? management warning signs
? financial warning signs
? operational/market warning signs
? strategic warning signs
? banking warning signs.
After all interviews had been conducted, the participants were asked to rank the
above categories of warning sign in order of importance. Participants agreed that
managerial warning signs were the most important, but also the most difficult to
identify and verify.
On a scale of 1 to 5 (5 being most important and 1 being least important),
participants ranked the categories as follows:
? (5) management signs
? (4) strategic signs
? (3) financial signs
196
? (2) operational/market signs
? (1) banking signs
The specialist respondents could:
? identify early warning signs
? correctly identify and categorise Basel II
? correctly rank the cases
? identify causes quite accurately
? give a verifier determinant for each cause identified
Figure 7.1 Specialist group cognitive process (own compilation)
The participants identified several verifier determinants related to each category.
These showed a classic resemblance to the warning signs identified in the literature
reviewed. The participants were also able to identify the same elements that are
used in the Basel II findings, which demonstrates the participants’ high level of
knowledge. Moreover, the participants had no trouble in accurately placing the case
studies in low, medium, or high-risk categories.
Specialist group contribution
Verifier Determinants
Able to motivate thinking Cognitive judgement
Early Warning Signs
Causes
Categorise
Cognitive process: Main aim – to develop understanding
197
This comparison validates the interview findings. Tables 7.10 to 7.14 contain the
variables identified by the specialists and were included in the questionnaire in order
to be evaluated by the respondents.
7.2 EMPIRICAL FINDINGS: DESCRIPTIVE STATISTICS
This section details the results of the field research. The sample is described below
in terms of the demographic information depicted in figures 7.1 to 7.5.
7.2.1 SAMPLE AND RESPONSE RATE
Questionnaires were distributed to 200 employees in the credit and the credit risk
environment. Of these respondents, 92 (i.e. 46%) returned a completed
questionnaire, giving a response rate of 46%, which was taken to be representative
of the population and was used in the statistical analysis described in this chapter.
7.2.2 DEMOGRAPHICS
The demographic results are presented below. Respondents were classified into two
groups namely ‘incumbent’ and ‘expert’. The incumbent group consists of credit
managers, senior credit managers, area credit managers, regional credit managers,
credit risk managers, senior credit risk managers and regional managers of credit
risk. The expert group consisted of industry experts with vast experience of
distressed business restructuring and credit lending. The majority of the respondents
83 (i.e. 90.2%) came from the incumbent group – see section 6.6.3. and table 7.1.
Table 7.1 Factor importance ratings and rankings in relation to expertise classification
A question was posed to both
respondents into three subsets
Figure 7.1 Levels of management
Refer to table 7.2
Groups N Obs
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
83 Incumbents
The MEANS Procedure: Two distinct groups: incumbents and experts
9 Experts
Middle
Management
53%
Senior
Management
14%
Question 52
198
Factor importance ratings and rankings in relation to expertise classification
A question was posed to both the incumbent and expert groups, dividing the
respondents into three subsets, namely, junior, middle and senior m
anagement
Variable N Mean
Managerial Verifier Determinants 83 3.349
Financial Verifier Determinants 83 3.552
Strategic Verifier Determinants 83 3.310
Operational/Market Determinants 83 3.460
Banking Verifier Determinants 83 3.659
Managerial Verifier Determinants 9 3.306
Financial Verifier Determinants 9 3.454
Strategic Verifier Determinants 9 3.133
Operational/Market Determinants 9 3.233
Banking Verifier Determinants 9 3.741
The MEANS Procedure: Two distinct groups: incumbents and experts
Junior
Management
33%
Management
Question 52 - Management level
Factor importance ratings and rankings in relation to expertise classification
groups, dividing the
management.
Std Dev Ranking
0.393 2
0.317 4
0.476 1
0.437 3
0.352 5
0.423 3
0.177 4
0.224 1
0.427 2
0.188 5
The MEANS Procedure: Two distinct groups: incumbents and experts
Management level
199
Table 7.2 Factor importance ratings and rankings in relation to management classification
levels of management
Middle management contributed 53% of all respondents. This is to be expected
since the lending environment requires a certain level of expertise and middle
managers contribute significantly in terms of their knowledge and experience (refer
to figure 7.2), which was beneficial to this research. There was a definite difference
in the rankings in terms of management levels. Strategic verifier determinants were
ranked higher by senior management, while banking and financial verifier
determinants were more important to junior and middle management.
v53 N Obs Variable N Mean Std Dev Ranking
Managerial Verifier Determinants 28 3.372 0.355 2
Financial Verifier Determinants 28 3.610 0.286 4
Strategic Verifier Determinants 28 3.329 0.477 1
Operational/Market Determinants 28 3.557 0.373 3
Banking Verifier Determinants 28 3.685 0.355 5
Managerial Verifier Determinants 51 3.345 0.423 2
Financial Verifier Determinants 51 3.525 0.323 4
Strategic Verifier Determinants 51 3.261 0.494 1
Operational/Market Determinants 51 3.406 0.463 3
Banking Verifier Determinants 51 3.676 0.324 5
Managerial Verifier Determinants 13 3.288 0.377 1
Financial Verifier Determinants 13 3.468 0.273 4
Strategic Verifier Determinants 13 3.338 0.260 3
Operational/Market Determinants 13 3.308 0.446 2
Banking Verifier Determinants 13 3.590 0.383 5
The MEANS Procedure: Question - I am senior / middle/ junior management
Junior 28
Middle 51
Senior 13
Ranking: 5 = high importance, 1 = low importance
200
Figure 7.2 Service period in banking
A respondent with a high level of expertise is expected to have been substantially
exposed to the banking environment in which he/she operates. Hence, a high level
of expertise requires a certain number of years’ experience. The respondents to this
question depict this requirement, as the majority (84%) has more than 10 years’
banking experience. This does, however, need to be tested against the number of
years the respondents have been in their current positions.
The factor importance ratings and rankings in relation to classification of length of
service in banking, is illustrated in table 7.3 and depicted in figure 7.3.
1-10 Years
16%
11-20 Years
42%
21-50 Years
42%
Question 55 - Period in banking
201
Table 7.3 Factor importance ratings and rankings in relation to classification of length of
service in banking
There was a definite difference in the rankings in terms of management levels:
operational/market and strategic verifier determinants were ranked higher by those
who had been members of management longer, while banking and financial verifiers
determinants were important to all three categories of manager.
vv56 N Obs Variable N Mean Std Dev Ranking
Managerial Verifier Determinants 32 3.263 0.443 2
Financial Verifier Determinants 32 3.508 0.310 4
Strategic Verifier Determinants 32 3.147 0.485 1
Operational/Market Determinants 32 3.369 0.496 3
Banking Verifier Determinants 32 3.516 0.365 5
Managerial Verifier Determinants 39 3.408 0.336 2
Financial Verifier Determinants 39 3.562 0.335 4
Strategic Verifier Determinants 39 3.359 0.483 1
Operational/Market Determinants 39 3.421 0.448 3
Banking Verifier Determinants 39 3.756 0.308 5
Managerial Verifier Determinants 21 3.353 0.411 1
Financial Verifier Determinants 21 3.560 0.249 3
Strategic Verifier Determinants 21 3.390 0.321 2
Operational/Market Determinants 21 3.576 0.290 4
Banking Verifier Determinants 21 3.730 0.286 5
Ranking: 5 = high importance, 1 = low importance
The MEANS Procedure: Question- How long have you been in banking in years?
1-15 32
16-25 39
26+ 21
Figure 7.3 Service period in current
Of all the respondents, 66%
years, although they had sufficient
banking into account. However
lacking due to the relative short exposure to the job function
Table 7.4 Factor importance ratings and rankings in relation to classification of
service period in current position
11-20 years
6%
Question
vv54 N Obs
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
31 6-45
The MEANS Procedure: Question - How long have you been in this position in years?
61 0-5
202
urrent position
respondents, 66% had been in their current position for
sufficient experience when taking the number of years in
owever, their experience in their current position
due to the relative short exposure to the job function, refer to figure 7.4.
Factor importance ratings and rankings in relation to classification of
osition
1 - 10 years
90%
21-50 years
4%
Question 53 - Service period
in current position
Variable N Mean
Managerial Verifier Determinants 61 3.381
Financial Verifier Determinants 61 3.563
Strategic Verifier Determinants 61 3.328
Operational/Market Determinants 61 3.446
Banking Verifier Determinants 61 3.678
Managerial Verifier Determinants 31 3.274
Financial Verifier Determinants 31 3.503
Strategic Verifier Determinants 31 3.223
Operational/Market Determinants 31 3.423
Banking Verifier Determinants 31 3.645
The MEANS Procedure: Question - How long have you been in this position in years?
for less than five
experience when taking the number of years in
their current positions could be
, refer to figure 7.4..
Factor importance ratings and rankings in relation to classification of
Std Dev Ranking
0.422 2
0.320 4
0.478 1
0.457 3
0.330 5
0.327 2
0.279 4
0.420 1
0.407 3
0.362 5
The MEANS Procedure: Question - How long have you been in this position in years?
203
Other demographic information includes respondent’s age and education level. All
respondents were older than 25 years, which makes sense since a certain level of
expertise was required for inclusion. The majority of the respondents have a post-
matric qualification, which is in line with the job requirement and the responsibility
requirement.
Table 7.5 Comparison between education level and management level of respondents
Respondents having only a matric fall mainly into the junior management category,
which is to be expected. The category, middle management, contained the majority
of respondents with post-matric qualifications.
Figure 7.4 Respondent age distribution
Education Qualification Junior Middle Senior Total
Matric 12 2 1 15
Diploma 4 15 3 22
Degree 8 16 6 30
Post Degree 3 11 2 16
Total 27 44 12 83
Management Level
25 -35 Years
13%
36-45 Years
42%
46-65 Years
45%
Question 56. Respondent age distribution
204
Figure 7.5 Highest educational qualification
The significance of higher education is illustrated by the very low percentage of 18%
of respondents with a Grade 12 only as their highest qualification. The spread also
confirms the environment’s requirement for post-matric qualifications. Of significance
here is the number of respondents (49%) with graduate and postgraduate
qualifications.
7.2.3 FACTOR ANALYSIS
Questions 1 to 50 are the verifier determinants identified from the interview process.
These questions were grouped according to the constructs of early warning signs.
The constructs identified in the interview process and confirmed by the secondary
data research are reflected as the five factors (f1 to f5) shown in the table 7.6.
Matric
18%
NQF Level 5
2%
Diploma
22%
Degree
36%
Honours Degree
7%
Masters Degree
4%
MBA
2%
Other
9%
Question 57- Highest educational qualification
205
Table 7.6 Description of factors
Table 7.7 Univariate statistics for factor analysis
Factor no Questions
f1 v2-v13
f2 v14-v25
f3 v26-v35
f4 v36-v45
f5 v46-v51
Operational/Market Verifier Determinants
Banking Verifier Determinants
Factor analysis
Definitions
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
(Factor 1) (Factor 2) (Factor 3) (Factor 4) (Factor 5)
12 12 10 10 5
3.345 3.543 3.292 3.438 3.667
3.417 3.500 3.300 3.500 3.667
3.417 3.500 3.100 3.500 4.000
0.394 0.307 0.460 0.439 0.340
0.155 0.094 0.211 0.192 0.115
5 3 4 2 1
0.791 0.747 0.891 0.874 0.691
0.783 0.744 0.891 0.875 0.697
n=92
Variance
Cronbach's Alpha coefficient:
Raw
Cronbach's Alpha coefficient:
Standardised
Information
Number of items
Mean
Median
Mode
Standard Deviation
Specilist group ranking
%= most-, 1 = least important
206
Table 7.8 Ranking comparison of factors
The financial verifier determinants were favoured by most of the respondents as
being of high importance. This was to be expected as the research was conducted in
a financial institution. Furthermore, financial verifier determinants are largely
measurable. For the same reason, strategic verifier determinants were rated as
being of low importance by all respondents except for senior management. It can
thus be deduced that the more senior managers rely on experience in order to
“measure” the levels of strategic and managerial verifier determinants.
All five factors are highly correlated with each other as can be seen from the
correlations in table 7.9. The hypothesis that the factors are not correlated, is
rejected.
Specialist Expert Incumbent Junior Middle Senior
f1 High
f2 High High High High
f3 Low Low Low High
f4 Low Low
f5 Low
Specialist Expert Incumbent Banking 1-15 Banking 16-25 Banking26+
f1 High Low
f2 High High High High
f3 Low Low
f4 Low Low
f5 Low High
Specialist Expert Incumbent Period < 5 Period > 5
f1 High
f2 High High High High
f3 Low Low Low
f4 Low
f5 Low
Managerial Verifier Determinants
Managerial Verifier Determinants
Managerial Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
Financial Verifier Determinants
Strategic Verifier Determinants
Operational/Market Determinants
Banking Verifier Determinants
207
Table 7.9 Factor correlations
The verifier variables which are included in each of the factor determinants
discussed are reflected in table 7.10. These determinants were arrived at from the
interview process with the specialist group. The interview process was successful in
eliciting statements from the specialist group in which the specific variables were
highlighted
Table 7.10 Variables in the managerial verifier factor
The 12 managerial variables identified by the specialist group are listed in table 7.10;
this reflects the statements in the questionnaire from question 2 to 13.
Pearson Correlation Coefficients,
N=92
Prob >[r] under HO: Rho=0
f1 f2 f3 f4 f5
Managerial Verifier Determinants
1.000
Financial Verifier Determinants
0.618
p F
Group 1 0.826 0.826 0.830 0.365
How long have you been in
this position in years?
1 0.413 0.413 0.420 0.521
How long have you been in
banking in years?
2 1.263 0.632 0.640 0.532
I am senior / middle/ junior
management.
2 1.883 0.941 0.950 0.392
The GLM Procedure
Dependent Variable: financial verifier determinant
213
Table 7.17 ANOVA for Factor 3: strategic verifier determinants
Table 7.17 shows that the strategic verifier determinants are significantly influenced
by the number of years in banking (p < 0,05). These verifier determinants are not
significantly influenced by any of the other independent variables on a 5% level of
significance (p < 0,05).
Source DF
Sum of
Squares
Mean Square F Value Pr > F
Model 6 9.781 1.630 1.750 0.119
Error 85 79.133 0.931
Corrected Total 91 88.914
R-Square Coeff Var Root MSE cf3 Mean
0.110 1.428 0.965 0.000
Source DF Type III SS Mean Square F Value Pr > F
Group 1 1.336 1.336 1.440 0.234
How long have you been in
this position in years?
1 1.593 1.593 1.710 0.194
How long have you been in
banking in years?
2 5.918 2.959 3.180 0.047
I am senior / middle/ junior
management.
2 1.179 0.590 0.630 0.533
Dependent Variable: strategic verifier determinant
The GLM Procedure
214
Table 7.18 ANOVA for Factor 4: operational/marketing verifier determinants
Table 7.18 shows that the operational/marketing verifier determinants are not
significantly influenced by any of the independent variables on a 5% level of
significance (p < 0,05)
Source DF
Sum of
Squares
Mean Square F Value Pr > F
Model 6 8.268 1.378 1.450 0.205
Error 85 80.646 0.949
Corrected Total 91 88.914
R-Square Coeff Var Root MSE cf4 Mean
0.093 3.153 0.974 0.000
Source DF Type III SS Mean Square F Value Pr > F
Group 1 1.280 1.280 1.350 0.249
How long have you been in
this position in years?
1 0.111 0.111 0.120 0.734
How long have you been in
banking in years?
2 4.418 2.209 2.330 0.104
I am senior / middle/ junior
management.
2 3.290 1.645 1.730 0.183
The GLM Procedure
Dependent Variable: operational/market verifier determinant
215
Table 7.19 ANOVA for Factor 5: banking verifier determinants
Table 7.19 shows that the banking verifier determinants are significantly influenced
by the number of years in banking (p < 0,05). These verifier determinants are not
significantly influenced by any of the other independent variables on a 5% level of
significance (p < 0,05).
7.3.2 WILCOXON TWO-SAMPLE TEST AND KRUSKAL-WALLIS TEST
To test whether the factors are influenced significantly by the independent variable
‘group’, the Wilcoxon two-sample test and Kruskal-Wallis test are used. Owing to the
small sample size (21), a t-approximation is shown in the Wilcoxon two-sample tests,
and the Kruskal-Wallis tests were conducted to confirm the results from the Wilcoxon
two-sample tests.
Source DF
Sum of
Squares
Mean Square F Value Pr > F
Model 6 9.834 1.639 1.760 0.117
Error 85 79.080 0.930
Corrected Total 91 88.914
R-Square Coeff Var Root MSE cf5 Mean
0.111 -1.817 0.965 0.000
Source DF Type III SS Mean Square F Value Pr > F
Group 1 0.339 0.339 0.360 0.548
How long have you been in
this position in years?
1 0.141 0.141 0.150 0.698
How long have you been in
banking in years?
2 8.594 4.297 4.620 0.013
I am senior / middle/ junior
management.
2 1.832 0.916 0.980 0.378
The GLM Procedure
Dependent Variable: banking verifier determinant
216
Table 7.20 Means procedure for the incumbent and expert groups
In table 7.20, the Kruskal-Wallis test yields a p-value of 0,642. This indicates that the
managerial verifier determinants are not significantly influenced by the incumbent
and expert group on a 5% level of significance. This confirms the results obtained
from the Wilcoxon two-sample tests.
Group Obs Variable
Managerial Verifier Determinants 12 3.424 0.377 2
Financial Verifier Determinants 12 3.604 0.293 5
Strategic Verifier Determinants 12 3.350 0.481 1
Operational/Market Determinants 12 3.483 0.501 3
Banking Verifier Determinants 12 3.583 0.399 4
Managerial Verifier Determinants 9 3.306 0.423 3
Financial Verifier Determinants 9 3.454 0.177 4
Strategic Verifier Determinants 9 3.133 0.224 1
Operational/Market Determinants 9 3.233 0.427 2
Banking Verifier Determinants 9 3.741 0.188 5
Ranking: 5 = high importance 1= low importantce
The Means Procedure
N
Incumbent 12
N Mean Std Dev Ranking
Expert 9
217
Table 7.21 Testing managerial verifier determinants for influence between the incumbent and
expert groups
Table 7.21 shows that the Kruskal-Wallis test yields a p-value of 0,642. This
indicates that the financial verifier determinants are not significantly influenced by the
incumbent or expert groups on a 5% level of significance. This confirms the results
obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 138.500 132.000 13.975 11.542
Expert 9 92.500 99.000 13.975 10.278
92.5
-0.429
0.334
0.668
0.336
0.672
Chi-Square 0.216
DF 1
Pr.Chi-
Square
0.642
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Managerial Verifier
Determinant
Wilcoxon Two-Sample Test
Average scores were used for ties
Normal Approximation
Statistic
One-sided Prize
Z
t Approximation
Two Sided Pr.|Z|
Two-Sided Pr. |Z|
One-Sided Pr . Z
Kruskal-Wallis Test
Z includes a continuity correction of 0.5
218
Table 7.22 Testing financial verifier determinants for influence between the incumbent and
expert groups
Table 7.22 shows that the Kruskal-Wallis test yields a p-value of 0,116. This
indicates that the financial verifier determinants are not significantly influenced by the
incumbent or the expert groups on a 5% level of significance. This confirms the
results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 154.000 132.000 13.989 12.833
Expert 9 77.000 99.000 13.989 8.556
77
-1.537
0.062
0.124
0.070
0.140
Chi-Square 2.473
DF 1
Pr.Chi-
Square
0.116
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Financial Verifier Determinant
Classified by Variable Group
Wilcoxon Two-Sample Test
Average scores were used for ties
Normal Approximation
Statistic
One-sided Pr.Z
Z
t Approximation
Two Sided Pr.|Z|
Two-Sided Pr. |Z|
One-Sided Pr . Z
Kruskal-Wallis Test
Z includes a continuity correction of 0.5
219
Table 7.23 Testing strategic verifier determinants for influence between the incumbent and
expert groups
Table 7.23 indicates that the Kruskal-Wallis test yields a p-value of 0,352. This
indicates that the strategic verifier determinants are not significantly influenced by
the incumbent or the expert groups on a 5% level of significance. This confirms the
results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 145.000 132.000 13.966 12.083
Expert 9 86.000 99.000 13.966 9.556
86.000
-0.895
0.185
0.371
0.191
0.381
Chi-Square 0.867
DF 1
Pr.Chi-
Square
0.352
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Strategic Verifier Determinant
Classified by Variable Group
Wilcoxon Two-Sample Test
Average scores were used for ties
Normal Approximation
Statistic
One-sided Pr.Z
Z
t Approximation
Two Sided Pr.|Z|
Two-Sided Pr. |Z|
One-Sided Pr . Z
Kruskal-Wallis Test
Z includes a continuity correction of 0.5
220
Table 7.24 Testing operational/market verifier determinants for influence between the
incumbent and expert groups
Table 7.24 shows that the Kruskal-Wallis test yields a p-value of 0,186. This
indicates that the operational/market verifier determinants are not significantly
influenced by either the incumbent or the expert groups on a 5% level of
significance. This confirms the results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 150.500 132.000 13.984 12.542
Expert 9 80.500 99.000 13.984 8.944
80.500
-1.287
0.099
0.198
0.106
0.213
Chi-Square 1.750
DF 1
Pr.Chi-
Square
0.186
Wilcoxon Scores (Rank Sums) for Variable: Operational/Market Verifier
Determinant
The NPAR1WAY Procedure
Wilcoxon Two-Sample Test
Average scores were used for ties
Statistic
Normal Approximation
Z
One-sided Pr.Z
Two Sided Pr.|Z|
t Approximation
One-Sided Pr . Z
Two-Sided Pr. |Z|
Z includes a continuity correction of 0.5
Kruskal-Wallis Test
221
Table 7.25 Testing banking verifier determinants for influence between the incumbent and
expert groups
Table 7.25 shows that the Kruskal-Wallis test yields a p-value of 0,536. This
indicates that the banking verifier determinants are not significantly influenced by the
either the incumbent or the expert group on a 5% level of significance. This confirms
the results obtained from the Wilcoxon two-sample tests.
Group N
Sum of
Scores
Expected
Under HO
Std Dev
Under HO
Mean Score
Incumbent 12 123.500 132.000 13.748 10.292
Expert 9 107.500 99.000 13.748 11.944
107.500
0.582
0.280
0.561
0.284
0.567
Chi-Square 0.382
DF 1
Pr.Chi-
Sqaure
0.536
The NPAR1WAY Procedure
Wilcoxon Scores (Rank Sums) for Variable: Banking Verifier Determinant
Classified by Variable Group
Wilcoxon Two-Sample Test
Average scores were used for ties
Statistic
Normal Approximation
Z
One-sided Pr.Z
Two Sided Pr.|Z|
t Approximation
One-Sided Pr . Z
Two-Sided Pr. |Z|
Z includes a continuity correction of 0.5
Kruskal-Wallis Test
222
7.4 CHAPTER SUMMARY
In this chapter the results from the empirical study were presented and the five
factors that were identified were tested for significance. The inferential statistics were
presented using ANOVA tables and tests for any relationship between the factors
and the incumbent and expert groups were conducted by making use of the
Wilcoxon two-sample test and the Kruskal-Wallis test.
The next chapter explores the findings from the study by drawing conclusions from
the research and, consequently, making recommendations and suggestions for
future research opportunities. The main focus of the next chapter is, firstly, to discuss
the findings and, secondly, to propose a turnaround framework for use by
entrepreneurs, bankers and practitioners. The limitations of this study will also be
mentioned.
223
CHAPTER 8
Conclusion
8.1 Introduction
8.2 Summary of findings
8.3 Research objective
8.4 In pursuit of the prime objective
8.5 In pursuit of the secondary objective
8.6 Setting up phase
8.6.1 Investigation phase
8.6.1.1 Triage questions
8.6.1.2 Data integrity
8.6.1.3 Business plan
8.6.1.4 Final decision
8.6.2 Planning phase
8.6.2.1 Turnaround plan
8.6.2.2 Recovery strategy formulation
8.6.2.3 Objective in planning
8.6.2.4 Decision outcome
8.7 Turnaround execution phase
8.7.1 Strategic response
8.7.2 Financial response
8.7.3 Operational response
8.7.4 Benefits of the study
8.9 Limitation of the study
8.10 Future studies
8.11 Closing
224
Brenneman (1998:163, 164)
8.1 INTRODUCTION
The closing chapter comprises a summary of the conclusions and empirical findings
in terms of a turnaround framework. The research is concluded by revisiting the
research objectives and discussing the limitations of the research. In addition, the
contribution made by the study is identified and recommendations are made for
future research. This chapter concludes with a critical summary of the main
conclusions, definitions and frameworks.
In the previous chapters, the foundation for an academic framework was laid. In
order to achieve the research objective of identifying verifier determinants, various
opinions from a business, an accounting and a legal platform were presented. These
opinions are identified within a framework of early warning signs and turnaround
practice. In the discussions with a selected expert group, it became clear that some
of the experts’ opinions are similar, but have varying denotations and use different
terminology. Instances where the outlook on approaches was the same were
grouped.
CHAPTER 8
CONCLUSION
“The fact is, you can’t afford to think too much during a turnaround. Time is
tight; money is tighter. If you sit around devising elegant and complex strategies
and then try to execute them through a series of flawless decisions, you’re doomed.”
And
“Did you know that there are no rearview mirrors on an airplane? The runway
behind is irrelevant.”
225
8.2 SUMMARY OF THE MAIN FINDINGS
This study introduced a number of new constructs that can be used in a business
turnaround context, namely:
? business triage (section 1.3, fig. 1.1)
? verifier determinant (section 1.5, fig. 1.2)
? turnaround framework, introducing the constructs “business triage” and
“verifier determinant” (section 8.5, fig. 8.1)
? a timeline schedule for executing the rescue process (section 5.6.2, fig. 5.1).
Although the psychology of turnaround was not the focus of this study, the relevant
turnaround literature highlighted the importance of the psychological impact of
turnaround on entrepreneurs. The successful administration of a business is only a
small part of the challenges facing entrepreneurs, and the psychological impact that
the decline, distress and turnaround of a business has on the entrepreneur should
not be underestimated.
In order to save their businesses, entrepreneurs must be equipped with the
knowledge needed to formulate and implement rescue plans. In chapter 2, the
deduction was made that entrepreneurs operate under behavioural patterns of high-
risk acceptance. In line with this, this research has identified and addressed the need
for an early warning control system in businesses.
Formal rescue/turnaround routes are, owing to various negativities and high costs,
undesirable and entrepreneurs will favour a more informal approach. However, there
are a multitudes of dangers and constraints that can negatively affect a possible
successful rescue/turnaround. The introduction of a commercial process of business
rescue proceedings will hopefully address these constraints.
The literature study considered seminal work on early warning signs which was
summarised and analysed comprehensively in Appendix A.
226
The deduction made was that authors use an array of terminology to arbitrarily
describe early warning signs, inter alia:
:
? success versus failure variables
? causes of decline and/or failure
? warning indicators for business decline
? performing and non-performing variables
? root causes for decline or failure
? warning indicators
? material defects
? external and internal factors
? distress variables
? problems
? challenges.
Notwithstanding the various ways of describing early warning signs, the authors, as
per appendix A, seem to have consensus on the five main early warning sign
categories. The classification of warning signs identified by authors in the literature
was largely confirmed in a comprehensive literature and case research, which was
discussed in chapter 6 of this study. The case research conducted with a sample
group of credit specialists in a banking environment identified various early warning
sign categories. This group confirmed the main categories and explored the
variables associated with each.
Using the five main categories identified by academics and confirmed by the case
research, the literature research is summarised in Appendix A. Banking early
warning signs are not discussed by most authors, as they are clearly industry
specific and are favoured by authors researching financial institutions. These signs
are included as Appendix B. Owing to the fact that this research was conducted
within a financial institution, banking signs were reflected separately.
227
Turnaround management has evolved as more research data has become available
over time. From the literature explored in this research it is evident that most authors
approach the study of turnaround management from a non-accounting data
perspective, with some authors adopting a pragmatic approach to turnaround, which
tends to drill down into the fine details or qualitative issues.
The timing of a turnaround is one of the more contentious issues addressed by
stakeholders both internationally and nationally. Turnaround is typified by very
limited timeframes, while the very nature of business strategy planning and
execution means that they move at a more pedestrian pace.
The second differentiating factor identified by this research is the availability and
importance of resources; that is, in a turnaround situation resources are generally
scarce, whereas under normal circumstances they are usually planned for.
Most of the countries investigated have adopted some form of debtor-friendly
insolvency regime. Legislation and/or actions of a number of countries that have
adopted specific turnaround planning methodology were identified and discussed in
this study. Investigations into the South African Companies Act, Act 71 of 2008,
established the format of turnaround plans under Chapter 6 of the Act; proceedings
which were substantially dealt with in chapter 5 of this research. The literature review
confirmed the following similarities between the various debtor-friendly regimes:
? rescue is seen as part of a business process
? there is a clear process for commencing with business rescue
? a person is appointed who is responsible for the turnaround process
? a turnaround plan is central to all turnaround options and has to be
sanctioned by creditors.
It is envisaged that the same process will play itself out in South Africa as Chapter 6
of the Act is tested in the courts. It will take the South African courts some time to
adjust to the proposed new way of treating ‘bankruptcy’.
228
What will be of interest is how business is going to react to the debtor-friendly regime
and its implication for entrepreneurs and business alike.
8.3 RESEARCH OBJECTIVE
The following objectives were identified for this research:
Primary objectives
? To identify and theoretically define early warning verifier determinants.
? To design and include “verifier determinants” as an integral part of a
turnaround plan that supports corrective action.
Secondary objectives
? To research the current formal turnaround practices for verifiers that are
applied in the United States of America, Canada, Australia, Africa and the
informal practices evident in South Africa. These findings are aligned to
include the changes in the applicable South African legislation.
? To design and propose a framework for use by turnaround practitioners
and entrepreneurs alike.
? To identify which verifier determinants will confirm the early warning, and
apply this outcome to the design of a reliable turnaround framework that is
accepted by all creditors and financial institutions.
? To contribute to the South African entrepreneurial, turnaround fraternity,
and future formal studies in this academically ill-represented field.
This study contributes significantly to assisting entrepreneurs, banker officials and
turnaround managers with a framework for approaching turnaround.
229
8.4 IN PURSUIT OF THE PRIMARY OBJECTIVE
The research conducted an investigation into various early warning sign constructs
and elements, which should become a prerequisite for formal business turnarounds.
One of the major changes in the legislation is the stipulation that an attempt must be
made to turn around a troubled business before winding up or liquidating the
concern. King includes this provision in the King III report (2009) on corporate
governance.
The main objective of a turnaround/rescue must be that the entrepreneur and
turnaround practitioner together develop a turnaround plan that is specifically
designed to reorganise and rescue the business. This research has successfully
attained the first primary objective by theoretically defining early warning verifier
determinants. In this study a ‘verifier determinant’ is defined as the ‘root’ indicator
that validates the cause of decline or distress that underscores the early warning
sign.
This study used early warning sign theory to establish verifier determinants that can
guide entrepreneurs and turnaround practitioners in the timely planning of the current
rescue and future sustainability of an enterprise. Verifier determinants, once
identified, impact significantly on authenticating warning signs and can be used
progressively in the diagnostic phase of the turnaround process. The effectiveness of
business turnarounds depends on the chosen strategy, of which the verifier
determinants will be an important component.
As soon as they are identified and confirmed, the verifier determinants can assist in
defining a turnaround event. Verifier determinants are used to confirm early warning
signs, which will be used extensively to confirm causes, verify the correct warning
? The literal meaning of verifier is thus to confirm, validate and ensure that
the early warning sign identified is, in fact, present.
? The term ‘determinant’ reflects the agreement or consensus on the
warning. sign verifier.
230
sign and substantiate the issues to consider when compiling a strategic rescue plan.
The identification of verifier determinants will also contribute to the uncovering of
other hidden critical issues. The use of verifier determinants is essential when
attempting to classify the warning signs used in the enormous array of business
applications such as operational non-efficiencies. Verifier determinants can
contribute to the day-to-day monitoring of the business, if used as a prolonged
business activity.
The qualitative research contributed uniquely to the limitations of early warning signs
by developing the verifier determinants, each with its own set of variables. Tables
7.10 to 7.14 contain the unique variables that experienced turnaround participants
use to guide their decision making through the verification of early warning signs.
8.5 IN PURSUIT OF THE SECONDARY OBJECTIVE
This section now demonstrates that the second objective has been attained by
proposing a turnaround framework which includes verifier determinants as an
integral part of the turnaround plan. Figure 8.1 proposes verifier determinants as the
first step in this plan, during the actual investigation and planning, as well as in the
‘setting-up’ phase. The verifier determinants, used as an integral departure point in
the decision frame, should allow the stakeholders to reach a decision outcome within
a very short space of time. Verifier determinants used on a continuum (continuum in
a longevity process) throughout the turnaround phase will have the effect of
instituting corrective action, as and when strategic change is necessary. The
literature dealing with turnaround methods, strategy and processes was
comprehensively analysed and is summarised in Appendix C.
The research results confirmed Early Warning sign theory - but expand theory by
adding the Verifier Determinant as a construct. Verifier Determinants introduces
constructs that provides for illogical, subcontious, and judgemental information that is
not conteplated in the current early waring sign theory.
231
Figure 8.1 Turnaround strategic framework – process view
The framework in figure 8.1 shows the phases of a turnaround, each with its key
elements. Verifier determinants are crucial to both the investigation and the planning
phases but have also been shown to be valuable (if used) during the response
phases. The possible outcomes are shown at the bottom of the figure.
In the literature reviewed, authors tended to concentrate on one or more of the
constructs within the turnaround process. Some focus on the investigative stage
(section 8.6.1) of the turnaround, while others focus on the implementation (section
8.7) of measures to execute the plan.
The focus of the turnaround framework proposed in this study is to consolidate the
various viewpoints. In order to have a successful outcome, all the different constructs
must be combined in one turnaround framework and the disciplines must operate in
concert. Figure 8.1 illustrates the interaction by way of a flow from the setting-up
phase through to the execution phase.
TURNAROUND
SETTING UP PHASE
INVESTIGATION PLANNING STRATEGIC RESPONSE FINANCIAL RESPONSE OPERATIONAL RESPONSE
Appoint Practitioner
Investigation stage
-determine potential for
successful turnaround
Triage questions:
- is there a business?
- how sick is the business?
- Is the business worth
saving?
Data integrity
Business review:
-due diligence
-backed findings
-qualifications
Analytical process
-situation analysis
Turnaround plan:
-role-players input
-financial objectives
-possible solutions
Recovery strategy
formulation
-liquidity improvements
-financial restructuring
-operational
improvements
Objectives in planning:
-immediate
-short term
Medium term
Sustainability planning
TURNAROUNDSTRATEGICFRAMEWORK
Restructuring:
-operational efficiency
-centralisation of purchasing
department
-stock control management
-renegotiate supplier pricing
-newtarget management
Customer retention
-ensure quality
-reviewcredit terms
-service levels
-pricing
-sales support
-market orientation
Productivity
-employees
-value add principal
-JITprincipal
Financial restructuring:
-dividend cut/ omissions
-debt equity swaps
-loan termrenegotiation
-renegotiate covenants
-non-cash working capita
-adjustments to speed up
cash cycle
-retrenchment, staff
departmental.
Financial reporting:
-budgeting control
-cash flow management
-expense control reporting
-feedback sessions with
bankers and role players.
Cash generation
-sale of unproductive assets
Management change and
restructuring
Choose the right people
Culture change and image
reinforcement
Life cycle consideration
Employee involvement
Retrenchment:
-cost cutting
-improved efficiencies
Restructuring
-Asset restructuring
--debt equity swaps
Disinvestment strategy
-subsidiaries
-acquisition offering
TURNAROUND
EXECUTION PHASE
Decision outcome: continue, compromise, liquidate Execution outcome: compromise liquidate or handing back -“sustainable competitive viability”
Verifier determinants Verifier determinants
232
Figure 8.2 Turnaround strategic framework – setting-up phase focus
8.6 THE SETTING UP PHASE
The turnaround framework proposes two distinct phases in a turnaround situation.
These phases are the investigative phase and the planning phase, as illustrated by
figure 8.2 (abstracted from fig. 8.1). The investigative phase is critical in assessing
the business environment once a turnaround situation occurs and during the actual
turnaround execution. During this phase it is proposed that the verifier determinant
theory will have its main impact on the decision-making process.
8.6.1 INVESTIGATION
Before a turnaround practitioner effects any major changes to the business, he or
she must investigate and determine the business’s chance (viability) of survival.
TURNAROUND
SETTINGUP PHASE
INVESTIGATION
PLANNING
Appoint Practitioner
Investigation stage
-determine potential for
successful turnaround
Triage questions:
- is there a business?
- how sick is the
- Is the business worth saving?
Data integrity
Business review:
-due diligence
-backed findings
-qualifications
Analytical process
-situation analysis
Turnaround plan:
-role-players input
-financial objectives
-possible solutions
Recovery strategy formulation
-liquidity improvements
-financial restructuring
-operational improvements
Objectives in planning:
-immediate
-short term
Mediumterm
Sustainability planning
Decision outcome: continue, compromise,
liquidate
Verifier determinants
233
The business must appoint a turnaround practitioner within five days of filing the
rescue notice at the court and this practitioner then is obliged to embark immediately
on an investigation of the company’s affairs. The new Companies Act requires that
the turnaround practitioner must, as soon as possible, after his/her appointment;
report on the turnaround viability of the business. In this initial assessment the use of
verifier determinants is crucial to the investigation as they confirm problematic areas
in the affected business.
8.6.1.1 Triage questions
In order to determine the potential for successful turnaround, the practitioner will
have to do a quick assessment of the distressed business. What the turnaround
framework proposes is that an assessment of the business is carried out by using
the concept of triage, which was explained in section 1.3.
Figure 8.3 Role of verifier determinants in the triage process of the investigative phase
V
e
r
i
f
i
e
r
D
e
t
e
r
m
i
n
a
n
t
s
Is there a
business?
Howsick is
the business?
Is the business
worth saving?
Continuewith Turnaround Plan
Liquidate
Liquidate
Liquidate
no
yes
yes
yes
terminal
no
234
The answers to the following questions in the triage sequence are important:
? Is there a business?
If the answer is no, then liquidation is inevitable.
If the answer is yes, the health of the business has to be determined by asking the
next question:
? How sick is the business?
If the business is terminal, then a compromise or liquidation is probably inevitable. If
business health can be restored, the next question is then important:
? Is the business worth saving?
If a rescue is attempted, it should restore sustainable competitive viability.
8.6.1.2 Data integrity and verifier determinants
The practitioner will rely on information supplied by the business’s management.
Accordingly, it is proposed that, in testing the information’s integrity, verifier
determinants are used as an indicator for concentrating the focus on problem areas.
A sound knowledge of the financial statements, the business’s tax position and any
failed strategy is vital for achieving turnaround success. Hence, verifier determinants
confirm the integrity of the data to be used in a turnaround.
8.6.1.3 Business review and verifier determinants
It is proposed that the verifier determinants will focus the business review. By
identifying verifier determinates the practitioner can focus on the problematic areas
identified through the verifier process. Consequently, an adequate business review
will have to be conducted in order to persuade stakeholders to agree to the
practitioner’s proposal.
235
The minimum requirements of the review will be a proper due diligence, backed with
findings and qualifications. In doing this, a proper analysis process will have to be
followed and proposed as a situation analysis. In order to save time, verifier
determinants are used to examine the situation quickly before a detailed due
diligence is done. A due diligence process comprises the following:
? feasibility assessment with stress testing
? forecasts
? sustainability after rescue process
? corporate governance
? data integrity
? simulations, such as Monte Carlo simulation
8.6.1.4 Final decision
The final decision in the investigative stage is to whether to continue or not with a
turnaround of the business. Alternatively, a compromise may be entered into with the
affected persons, or the business may be liquidated. If the viability of a business is
suspect, liquidation is probably inevitable. If the decision is to continue with the
business turnaround the practitioner and management will enter the planning phase.
The verifier determinants will direct the planning towards the most salient causes of
distress which need to be addressed in the plan.
8.6.2 PLANNING PHASE
With reference to section 5.7 of this study, Section 150 of Chapter 6 of the new
companies Act stipulates the minimum requirements for a business rescue plan.
Accordingly, figure 8.2 illustrates the planning phase and elaborates on the various
actions that need to be carried out. Chapter 6 of the new companies Act is, however,
prescriptive on the content of the rescue plan, the minimum requirements for which
are set out and illustrated in figure 8.3.
236
8.6.2.1 Turnaround plan
Verifier determinants are of the utmost importance, as they will dictate the level of
the role players input, the financial objectives and the possible solutions. The
turnaround practitioner must prove to the body of affected persons that a turnaround
is viable and that it will save the business. Of secondary importance is whether the
creditors will be in the same or a better position after a turnaround than if the
business is liquidated.
Verifier determinants will, for example, be used in Part A to support one of the
sources of information, such as a dividend distribution. In Part B, the verifier
determinant will support proposals by highlighting the required proposal.
8.6.2.2 Recovery strategy formulation
The recovery formulation strategy needs to illustrate measures that will lead to
liquidity improvements, objective financial restructuring and operational
improvements.
8.6.2.3 Objectives in planning
The turnaround objectives must include immediate, short-term and medium-term
targets. These targets must be obtainable in order to ensure buy in from the affected
bodies. The primary objective of the plan is to prove sustainability during and,
especially, after the turnaround.
8.6.2.4 Decision outcome
After compiling the plan, the practitioner must distribute it to all the affected persons
who will have to vote for or against the plan. The plan should contain sufficient
information for making a decision on whether or not to continue with a turnaround
attempt. The comprehensiveness of the information in the plan should guide
stakeholders either to opt for a compromise or to liquidate the business.
237
8.7 TURNAROUND EXECUTION PHASE
Action taken in the execution phase of a turnaround will be predominantly dictated by
the business and industry in which the turnaround is being executed. Accordingly, a
host of variables and preconditions may influence the strategy to be followed. The
framework proposed in this study identifies the use of three response constructs,
namely, strategic, financial, and operational/market responses.
Appendix C summarises the various actions, strategies and steps that can help to
effect a successful turnaround. The most important responses are illustrated in figure
8.4 (abstracted from fig. 8.1). A turnaround response does not necessarily proceed
in a specific sequence; in reality everything happens more or less at the same time.
Figure 8.4 Turnaround plan – framework
Minimumrequirements of the plan
Part B: Proposals
Proposals are to be invited fromall
affected parties which will include the:
Nature and duration of moratorium
Extent of release of debt payments
Treatment of existing agreements
Available property
Order of preference of proceed
distribution
Benefits of adopting plan
Effect on class of securities
Part A: Background
The background sectionrequires a “historic
factual picture” of the financial state of
affairs at that time.
Sources of informationwill be:
Assets register
Creditors ageing
Dividend distribution
Shareholders allocation
Practitioners remuneration
Proposals included
Part C: Assumptions and conditions
The assumptions and conditions have
to be based on tested theoretical
evidence and academic methodology.
They are:
Statement of conditions
Impact on employees
Circumstances ending the plan
Financial statement projections
Projection supported byassumptions
made
Stress testing of variables
Practitioner certificate -information
integrity, good faith and factual
Publishing of plan
Assessment process:
Feasibility assessment with stress testing
Forecasts
Sustainability after rescue process
Corporate governance
Data integrity
Simulations
Valuation requirements:
Current value of exposure v/s net realisable securities
Value of third party claims – secured / unsecured
Liquidation value of third party claims
Concurrent value of claims
238
The main critical actions are proposed in the framework, namely, strategic, financial
and operational responses. The discussion is limited to the three main responses, as
each type of business will have to adapt to its own unique environment, level of
resources and conditions.
Figure 8.5 Turnaround strategic framework (own compilation)
8.7.1 STRATEGIC RESPONSE
The strategic response framework proposes a change in the top management
structure of the business, as it is imperative that this structure complements the
turnaround objectives. A change in CEO is almost inevitable, as a turnaround
practitioner is required to lead the business through the turnaround intervention. The
new Companies Act sees this intervention as being of a temporary nature – three to
six months. As an outsider, the turnaround practitioner should add autonomy to the
turnaround process.
STRATEGIC RESPONSE FINANCIAL RESPONSE OPERATIONAL RESPONSE
Restructuring:
-operational efficiency
-centralisation of purchasing department
-stock control management
-renegotiate supplier pricing
-newtarget management
Customer retention:
-ensure quality
-reviewcredit terms
-service levels
-pricing
-sales support
-market orientation
Productivity:
-employees
-value add principal
-JIT principal
Financial restructuring:
-dividend cut/ omissions
-debt equity swaps
-loan termrenegotiation
-renegotiate covenants
-non-cash working capita
-adjustments to speed up cash cycle
-retrenchment, staff departmental.
Financial reporting:
-budgeting control
-cash flowmanagement
-expense control reporting
-feedback sessions with bankers and
role players.
Cash generation:
-sale of unproductive assets
Management change and
restructuring
Choose the right people
Culture change and image
reinforcement
Life cycle consideration
Employee involvement
Retrenchment:
-cost cutting
-improved efficiencies
Restructuring:
-Asset restructuring
--debt equity swaps
Disinvestment strategy:
-subsidiaries
-acquisition offering
TURNAROUNDEXECUTION PHASE
Execution outcome: compromise liquidate or handing back -“sustainable
competitive viability”
Verifier determinants
239
During the second stage of planning, the right people must be chosen to fill the key
critical positions, that is, the hunt for heroes in the business – people who can make
things happen. Culture change and image reinforcement is crucial at this stage to
reinforce confidence in the affected parties, especially the staff. Culture change is
enforced as a consideration for the revival of the business life cycle..
In terms of response, the verifier determinants play a significant role as the
turnaround unfolds and new information surfaces. Subsequently, the verifier
determinant process is repeated as new data are uncovered. This stage of the
turnaround process would suggest that employees are involved in order to ensure as
smooth a transition as possible.
8.7.2 FINANCIAL RESPONSE
When attempting to find a financial solution, financial restructuring is unavoidable.
Creative financial re-engineering will see dividend cuts, debt restructuring and,
certainly, long-term debt renegotiation. It is also important to maintain existing
alliances with trade creditors. In the South African context, staff retrenchments are a
very sensitive issue and should only be considered as a last resort. This places an
additional burden on the practitioner as employees are “affected persons” in terms of
the new Companies Act.
Foremost in any financial action plan is that immediate steps should be taken to
generate cash, for example, unproductive assets should be sold. In addition,
financial reporting before and during the turnaround is essential for feedback,
transparency and decision making. The following information is critical:
? budgeting control statements
? cash flow management projections
? expense control reporting analysis.
240
8.7.3 OPERATIONAL RESPONSE
The operational response includes all the necessary steps that have to be taken to
retain and protect the business’s client base. To be able to do this, practitioners must
liaise with the client base and sort out any problems regarding quality, service levels,
sales support and market orientation.
Actions to restore operational efficiency should be carried out immediately. This can
be done by centralising the purchasing department and stock control management.
8.7.4 EXECUTION OUTCOME
Once the turnaround plan has been substantively implemented (the execution
phase), the outcome is ideally to hand back the business. Failing this, the
practitioner will have to negotiate a compromise with the stakeholders. It all else
fails, the outcome is unfortunately liquidation.
The main objective of a business turnaround is the restoration of the business to
sustainable competitive viability.
8.8 BENEFITS OF THE STUDY
This research has contributed to the process of turnaround management through the
following potential benefits:
Major direct benefits of the verifier determinants’ research:
? Verifier determinants confirm early warning signs. They are used as an
analysis tool for enhancing turnaround decision making – they act as a
confirmation.
? The proper application of verifier determinants can lead to
o confidence in the turnaround decision-making process
241
o identification of verifier results in problem understanding
o a system for decision making
o less time being spent on rejecting or accepting turnaround
decisions
o less probability of turnaround practitioners making type I or type II
errors
o a focused approach to resource allocation and efficiency
management
o the acceptance of overall turnaround strategy.
Indirect benefits of the verifier determinants’ research:
? Verifier determinants hone the judgement of the managerial team.
? They ensure the buy in of other role players (affected persons) –
organised labour, trade creators etc.
? Early warning systems can be very useful for those managers and
practitioners who have to prevent failure.
? Verifier determinants blend information for use in an intelligent,
strategic decision in the form of a business review.
? The reasons for turnaround are confirmed by proper analysis.
? Help failed entrepreneurs who want to re-enter business.
8.9 LIMITATIONS OF THE STUDY
Owing to the limitations placed on financial institutions concerning third-party
confidentiality, the study sample was limited to one financial institution where the
security, integrity of the data and anonymity of the sources could be controlled;
consequently, this has limited the extent of the sample groups.
A more comprehensive search including other financial institutions would have been
desirable but here is no reason to suspect that different data would have been
collected just because it was another institution. The specialists participating in the
interviews have substantial exposure to other banks.
242
Seventy percent of the specialists have work experience in other financial
institutions. The questionnaire response rate of 45% was, taking into consideration
the ‘captured’ population within which the research was conducted.
During the same period in which this research questionnaire was distributed, various
in-house research projects were launched (forced) which resulted in possible
questionnaire fatigue among the respondents, which could have had an impact on
the results. The low response rate, however, negatively affected the options for
factor analysis and statistical calculation, as the sample was too small for extensive
analysis.
The turnaround practitioner fraternity was significantly unhelpful. Most of the
practitioners who were approached to participate with the research were sceptical,
evasive and suspicious. Knowledge is seen as proprietary and as a trade secrets,
which is not shared with or disclosed to ‘competition’. The extensive interviews with
the specialists took over three hours per interview. Although extensive notes were
taken and discussion took place to identify verifier determinants, much of the detail
such as body language, action and reaction were not captured.
8.10 FUTURE RESEARCH
The field of business turnaround or business rescue is wide open for research owing
to its uniqueness as a new management discipline in South Africa. Turnaround
management encapsulates a host of disciplines such as accounting, income tax,
legal and project management. A great challenge for future studies will be to include
more financial institutions in the population.
As banks are working closer together through the application of INSOL principles,
there is an opportunity to involve other financial institutions in similar research. The
following areas for future research identified by this research have potential:
? the correlation of verifier determinant concept and data integrity
243
? a longitudinal study on the use of verifier determinants in a decision
framework
? Verifier determinants can be used with great success in building neural
networks for turnaround situation prediction. In cognitive science,
neural networks are used to model higher level reasoning such as
problem solving, and, in lower level reasoning, for modelling elements
such as vision and speech.
8.11 CONCLUSION
This study highlighted the importance of establishing the true value of a business in
the early stages of the turnaround process. Verifiers can be used successfully to
determine the extent of the problem (“depth of the rot”), the difficulties involved and
the lack of financial control. When verifiers are used, it can alleviate the time
constraints in a turnaround situation by assisting to assess the real situation quickly.
Verifiers will lead to a better understanding of the cause of decline or distress and
will be beneficial for coping with the psychological effects on managers/owners and
personnel.
If identified correctly, verifiers can be the key variables when deciding if a turnaround
is feasible or not. As a result of having a better understanding of the business using
the identified verifiers, the ultimate costs of a turnaround should be determined in a
relatively short period. The most important part verifiers need to play is to prevent
decline and distress in businesses. Some verifier determinants can contribute to the
day-to-day management of a business if used as a management tool on a
continuum.
244
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343
APPENDIX A: EARLY WARNING SIGNS CATEGORIES
344
AUTHOR DATE
EARLY WARNING SIGN CATEGORIES
MANAGEMENT STRATEGIC FINANCIAL PRODUCT/MARKET
(OPERATIONAL)
Altman, E.I. 1968 five ratios used:
Working Capital /
Total Assets (WC/TA)
Retained Earnings /
Total Assets (RE/TA)
EBIT / Total Assets
(EBIT/TA)
Market Value of
Equity / Book Value
of Total Debt
(MVE/BVA)
Sales / Total Assets
(S/TA)
Create Z-score
modelling (Z).
Argenti, J. 1969 continued survival
Akerlof, G.A. 1970 importance of skills
in management and
production
product quality in
emerging markets.
Argenti, J. 1976 management defects
autocratic style
no non-executive
board members
chief executive also
company chair
skills and knowledge
- unbalanced
financial function not
represented or weak
insufficient depth of
management skill
below board level
liquidity ratio
deteriorate,
leverage raises,
overtrading,
sales vs. financial
asset decline,
cash flow vs. debt,
price earnings ratio,
excessive dividends.
non-financial;
product quality falling,
offices need painting,
factory repair
neglected,
share market fall,
suspicious suppliers,
restricted delivery.
Carrington,
J.H. and
Aurelio, J.M.
1976 managerial
incompetence
managerial
deficiencies
inadequate cash to
cover liabilities.
Hedley, B. 1976 failure to reduce costs
along an appropriate
experience curve
slope
failure to grow as
rapidly as competirors
leading to
uncompetive cost
position
345
Altman, E.I.,
Haldeman. G.
and
Narayanan.
1977 Adjustment to Z-score
model - balance
sheet to include:
Capitalization of
leases
Reserves and
contingencies
Minority interest and
other liabilities
Captive finance
companies and other
non-consolidated
subsidiaries
Goodwill and
intangibles
Capitalized research
and development
costs
Capitalized interest
and certain other
deferred charges.
Hamermesh,
R.G.
1977 managerial
commitments
management style
organizational
structure
complexity of markets
Higgins, R.C. 1977 management style understanding of
growth
increased debt
Miller, D. 1977 behaviour of
managers
power-hoarding chief
executive
one or two people
afraid to delegate
managers decisions
reflects ignorance
signs of leadership
vacuum
decisions in one part
of the business
conflict with those in
other parts
serious shortage of
financial, managerial
or material
resources
new and
inexperienced
management team
growth strategy overly
ambitious,
overextension of
financial resources,
excessive leverage,
no strategic planning.
poorly defined
product - market
strategy,
tendency to be
committed to old
products, markets
and ways of doing
things,
elaborate standard
operating procedures
and extensively
documented formal
policies,
strategy taxing on
businesss resources.
failure caused within
company,
excessive leverage,
serious shortage of
financial,
serious shortage of
financial, managerial
or
material resources,
Miller, D. 1977 2) behaviour of
managers,
3) power-hoarding
chief executive,
4) one or two people
afraid to delegate,
8) managers
decisions reflects
ignorance ,
13) signs of
leadership vacuum,
14) decisions in one
part of the business
conflict with those in
other parts,
5) serious shortage
of financial,
managerial or
material resources,
16) new and
failure caused within
company,
growth strategy overly
ambitious,
overextension of
financial resources,
no strategic planning.
poorly defined
product - market
strategy,
tendency to be
committed to old
products, markets
and ways of doing
things,
elaborate standard
operating procedures
and extensively
documented fromal
policies,
overextension of
financial resources,
excessive leverage,
346
inexperienced
management team,
strategy taxing on
businesss resources.
Altman, E.I.
and Eisenbeis,
R.A.
1978 Discriminant Analysis
and five z-SCORE
ratios
Working Capital /
Total Assets WC/TA)
Retained Earnings /
Total Assets (RE/TA)
EBIT / Total Assets
(EBIT/TA)
Market Value of Total
Debt (MVATD)
Sales / Total Assets
S/TA).
Graham, K.R.
and Richards,
M.D.
1979 performance
deterioration
coalition change
presidential change
diversification
divesture
Al-Bazzaz, S.
and Grinyer,
P.M.
1980 strategic planning
size of company
higher vertical span of
control
lateral span of control
divisional structures
higher status of
company in group
hierarchy
number of dispertion
of sites
difficulties in
communication, co-
ordination and control
difficulty in response
to environmentl
change
Hall, W.K. 1980 slow erratic growth inflationary pressures
regulatory pressures
competition
Hofer, C.W. 1980 decreased profit
margins
increased wages
increased competition
raw material supply
management
difficulties
operational signs:
depressed price
levels
recessions
strikes and labour
excess plant capacity
347
Sharma, S. and
Mahajan, V.
1980 finacial ratios
(descprition of
financial performance
indicators
Profitability
return on assets
(ROA)
leverage ratios
debt service: earnings
before interest and
taxes/interest
coverage (EBIT/IC)
- cash flow: cash
flow/total debt
(CF/TD)
- capitalization:
market value of
equity/total capital
(MVE/TC)
liquidity ratio
current ratio: current
assets/current
liabilities (CA/CL)
cash turnover: net
sales/cash (NS/C)
receivables turnover:
net sales/receivables
(NS/R)
inventory turnover:
net sales/inventories
(NS/I)
sales per dollar
working capital: net
sales/(current assets-
current liabilities)
(NS/(CA-CL))
miscellaneous
retained
earnings/total assets
(RE/TA)
total assets (in
thousands of dollars)
(TA)
Gelb, B.D. 1982 strategic alignment to
change
Hubert, T. 1982 role by management financial ratio: paid-up
capital/total liabilities
financial ratio;
working capital/total
liabilities
Izan, H.Y. 1982 traditional financial
ratio analysis
industry comparative
techniques
financial ratios
Altman, E.I. 1983 business population
characteristics
price level changes.
age of business one
to five years.
credit availability,
capital market
activity,
economic growth
activity,
Chrisman, J.J.,
Bauerschmidt,
A. and Hofer,
C.W.
1982 entrepreneurial business strategy
resources
organizational
structure
industry structure
348
Dolan, P.F. 1983 bad management the domino effect. changes in federal
reserve policy
recession reducing
demand
interest rate hikes
structural change in
economy
higher fuel costs
lower productivity
growth rates
intense international
competition
rapid change in new
technology
deregulation of
certain industries
less government
support
international shift in
comparative
advantage
appreciation in
currency
Hambrick, D.C.
and Schecter,
S.M.
1983 early warning
signs
tested inpractice)
domain initiatives
enviromental carrying
capacity
slack
perfromance
Hamer, M.M. 1983 Financial ratio
analysis
profitability
net income/total
assets
income before
interest and taxes/
total assets
internal rate of return
to investor in common
stock
funds from
operations/total
liabilities
liquidity
working capital/ total
assets
current assets/current
liabilities
current
liabilities/current
assets
current aassets/total
assets
quick assets/total
assets
cash/total assets
quick assets/current
liabilities
cash/current liabilities
quick assets +
sales/12 devided by
(operating expenses+
interest-
amortizations)/12
net quick
349
assets/inventory
Hamer, M.M. 1983 leverage
total liabilities plus
preferred stock/totl
assets
total liabilities/total
assets
tangible net
worth/total liabilities
plus preferred
market value of
common & preferred
stock/totalliabiliites
market value of
common equity/total
liabilities plus
preferred
retained
earnings/total assets
negative owners
equity
turnover
sales/total assets
current assets/sales
quick assets/sales
working capital/sales
cash/sales
variability
std deviation of net
income
trend breaks in
income
slope of net income
std dev of net quick
assets/inventory
trend breaks in net
quick
assets/inventory
slope of net quick
asets/inventory
income (t) - income (t-
1)
Altman, E.I. 1984 managerial
incompetence,
lack of management
experience
unbalanced
experience
neglect.
under capitalization,
bad debts
slowdown of sales,
directly due to other
bankruptcies,
indirectly due to other
bankruptcies
excessive equipment
investment.
350
Anderson, C.R.
and Zaithaml,
C.P.
1984 industry,
product competition,
R&D,
production/
investment,
efficiency,
vertical integration
marketing.
distress variables:
buyer loyalty,
degree of product
differentiation,
price elasticity of
demand,
market share,
product quality,
marginal plant size,
declining importance
of advertising,
product
diversification,
decline in number of
outlets
contingency approach
- strength and
weaknesses.
spending patterns,
efficiencies and
growth decisions.
Appetti, S. 1984 liquidity,
turnover,
gearing,
operative structure
and capitalization and
profitability.
Izan, H.Y. 1984 industry comparitive
techniques
traditional financial
ratio analysis
financial ratios
Müller, R. 1985 trategic crisis:
threats to potential of
the business
Liquidity crisis:
threat of Insolvency
bankruptcy,
dissolution:
threat of dissolution,
inability to satisfy
creditors and
shareholders
perfromance crisis:
failure to achieve
sales and financial
targets
Sahlman, W.A.
and Stevenson,
H.H.
1985 risk in innovation
materialize
which effects capital
availability and
reduces expenditures
on future
development
customer
disapointments foater
conservative stance
exposure customer
financial weakness
exposure supplier
financial weakness
which increased
competitive pressure
to find the winners
which changes basis
of competition to price
which lowers margins
which causes more
risk of innovation to
materialize.
Schmalensee,
R.
1985 market share
Schwartz, K.B.
and Menon, K.
1985 management (poor)
Seabright, J.W. 1985 poor quality
poor customer
service
no control on parts
poor packaging
no control over
manufacturing
351
Hurst, D.K. 1986 strategic
management
O’Neill, H.M. 1986 poor management
management error
business life cycle
excessive labour
costs
growth strategies
cyclical patterns
political nature
competitors
suppier arrangements
lead to decline
change in habits of
consumers
choice of substitudes
insufficient or
ineffective
professional groups
Robinson,
S.J.Q. and
Shell UK Ltd.
1986 business life cycle
Schwartz, K.B.
and Menon, K.
1986 management
Singh, J.V.,
Tucker, D.J
and House,
R.J.
1986 liability of newness
legitamacy
Cameron, K.S.,
Whetten, D.A.
and Kim, M.U.
1987 scapegoating
resistance to change
low morale
loss of credibility
no prioritized cuts
conflict
decline
/stability/growth
type of control
turnover
path of organizational
decline
centralization
no long-term planning
innovation curtailed
size
loss of slack
fragmented pluralism
Keasey, K. and
Watson, R.
1987 managerial structure
inadequacy of
accounting
information system
and audit lags
manipulation of the
financial statements,
submission logs,
audit qualifications
and changes in
auditors
gearing
financial ratios
Littler, D.A. and
Sweeting, R.C.
1987 survival and growth
Lorange,P. and
Nelson, R.T.
1987 excess personnel
tolerance of
incompetence
cumbersome
administrative
procedure
disproportionate staff
power
replacement of
substance with form
scarcity of clear
goals and decision
benchmarks fear of
embarrassment and
conflict
loss of effective
communication.
352
Siomkos, G.
and
Shrivastava, P.
1987 declining demand
Whetten, D.A. 1987 growth and decline
processes
life cycle
growth factors
Whitney, J.O. 1987 cash managemnent cash managemnent
Bruno, A.V.
and Leidecker,
J.K.
1988 managerial /key
employee
ineffective team
personal problems
one track thinking
cultural / social
violated job
displacement norm
initial under
capitalization,
assuming debt to
early,
venture capital
relationship.
Product / Market
timing,
design,
distribution/ selling,
business definition,
overreliance on one
customer.
Chrisman, J.J.,
Hofer, C.W.
and Boulton,
W.R.
1988 early warning signs
variables
entrepreneurial
industry structure
business strategy
resources
organizational
structure
Hambrick, D.C.
and D’Aveni,
R.A.
1988 domain initiatives
enviromental carrying
capacity
slack
performance
Lieberman,
M.B. and
Montgomery,
D.B.
1988 need for profit
Melicher, R.W.
and Hearth, D.
1988 monitoring of
fluctuations on bond
costs
Quinn, J.B.,
Mutzberg, H.
and James,
R.M.
1988 historcal strategies
and policies placed
comany in unstable
position
reinvestment strategic
mistakes
external
uncontrolables
Robertson, J.
and Mills, R.
1988 financial ratios = Z-
score
D’Aveni, R.A. 1989 managerial decline -
different phases
sudden decline
gradual decline
lingering decline
Eisenhardt,
K.M.
1989 rationality and
bounded rationality
weakness
conflicting goals,
local rationality,
atisfying,problematic
search, SOPs,
decisions process
rational and
bureaucratic,
phases of decision
making in no order;
353
conceptual structure
for decision process,
examples of poor
and effective
decision making,
"groupthink
negative",
managers don't
follow normative
process; various
decision processes;
solution driven
decisions.
Gilmore, T.N.
and Kazanjian,
R.K.
1989 rapid growth and
inability to navigate.
cash flow. growth problems,
production,
talent,
planning and control,
Romaneli, E. 1989 interaction of
environment and
strategies.
availability of
resources,
demand and
competitive
conditions,
resource constraints,
competitive
concentration,
market breadth,
market
aggressiveness,
Thain, D.H.
and
Goldthorpe,
R.L.
1989 inadequite
infromationand
controls
negative
characteristics of
management
unwise financial
policies
unsuccessful, high
risk, major projects
high costs relative to
competitors
ineffective marketing
decrease in market
demand
adverse input costs
industry decline
caused by high cost
increased competirion
Covin, J.G. and
Slevin, D.P.
1990 fit between strategic
posture, organization
structure and industry
life cycle.
Grinyer, P.H.,
Mayes, D. and
McKierman, P.
1990 high gearing, superior competitors,
labour cost and
quality,
poor production,
capacity constraints.
Kazanjian, R.K.
and Drazin, R.
1990 stages of rate of
growth.
354
Okuzumi, H. 1990 difficulties in
maintaining
conformity
lack of linkage
between strategic
business units
difficulties in setting
evaluation standards
for qualitative targets
lack of effective
fusion between
strategic issues and
everyday operations
lack of system for
evaluationg degree of
strategic effect
attainmant
lack of smooth
resource allotment in
strategy promotion
Boyle, R.D.
and Desai,
H.B.
1991 organizational
structural change,
failure to manage
success,
poor delegation of
responsibility,
inability to transcend
stress points.
Human resources,
key employees quits,
inability of owner to
perform planning
and administrative
functions. External -
strategic.
human resources,
inability of owner to
perform planning,
administrative
functions,
lack of product /
market knowledge.
planning.
over optimism in
planning ,
lack of strategic
planning,
lack of market
information.
Financial Impact,
failure to analyze
financial statements,
inadequate capital
management,
improper
management of
accounts receivable,
declining profits,
underutilization of
assets,
pricing, discounts for
cash generation.
large increase in
debt,
raw materials , Wip,
inventories,
excessive spending.
Sales /Marketing,
declining market
share,
drop in prospects,
losing biggest
accounts.
economic downturn.
Castrogiovanni,
G.J.
1991 Environmental
munificence
Gopal, R. 1991 poor quality top
management
weak board
conservatism in
management
excessive
complacency
premature corporate
expantions
weak financial
management policies
unacceptable market
prices and costs
postponement or
cancellation of major
contracts
decrease in market
demand
changes in
government policies
and regulations
increased competition
increased input costs
non-availability or
shortage of raw
materials
inadequite insurance
for losses
Keasy, K. and
Watson, R.
1991 management
structure
financial ratios
inadequacy of
accounting
manipulation of
published accounts
gearing
355
Kelly, D. and
Amburgey, T.L
1991 change in strategic
orientation
environmental
change and the
probability of change
in core features
organizational age
and the probability of
change in core
features
organizational size
and the probability of
change in core
features
prior change in core
features and the
probability of change
in core features.
Pousson, J. 1991 Financial
deterioration:
sales slow or down
margins and/or profit
down
costs out of line
rising stock
financial performance
generally disapointing
cash trends disturbing
creative accounting
off-balance sheet
financing
qualified audit
statements
delayed financials
Weitzel, W.
and Jonsson,
E.
1991 management early
but unclear
management stages
in decline
blinded
inaction
faulty action
crisis
dissolution
Baum, J.A.C.
and Mezias,
S.J.
1992 Focus on localised
competition and
failure.
Bruno, A.V.,
McQuarrie,
E.F. and
Torgrimson,
C.G.
1992 managerial /key
employee,
ineffective team,
personal problems,
one track thinking.
cultural / social,
violated job,
displacement norm.
initial under
capitalization,
assuming debt to
early,
venture capital
relationship.
Product / Market
timing,
design,
distribution/ selling,
business definition,
overreliance on one
customer.
Chinta, R. 1992 deviation from
agreed sales plan
tunnel vision -
management
resistance to change
assive board
technology under
development -
unworkable
passive board
expenditure control.
Majaro, S. 1992 strategic
Robbins, D.K.
and Pearce II,
J.A.
1992 top management overexpansion
excessive leverage
356
Amburgey,
T.L., Kelly, D.
and Barnett,
W.P.
1993 resistance to
change,
frequency of change,
too many as
opposed to too little,
routinisation,
age,
resistance to change,
frequency of change,
too many as opposed
to too little,
routinisation,
age,
change and older
businesss,
change and younger
businesss,
time frame between
change,
change due to
perceived problems,
change despite
dysfunctional
consequences -
competency trap.
Anon. 1993 management not
responding to phone
calls,
financial symptoms;
rise in overdraft,
slowdown in
payables,
deterioration in the
following ratios
liquidity, profitability,
leverage, efficiency,
activity - and turnover
ratio.
data integrity.
non-financial
symptoms;
declining market
share,
fall in product or
service quality,
postponement of
factory maintenance,
negative reports n
press,
lay-off due to sales
decline.
Castrogiovanni,
G.J., Justis,
R.T. and
Julian, S.D.
1993 location
age
size
Gaskill, L.R.,
Van Auken,
H.E. and
Manning, R.A.
1993 management -
lack of insight,
inflexibility,
emphasis on
technical.
inadequate
knowledge of pricing
strategies,
ineffective
advertising/promotio
nal strategy,
failure to generate
long term business
plan,
failure to generate
personnel plan,
ineffective interior
store layout pattern,
lack of managerial
experience, skills
and training,
inflexible decision
making,
lack of experience in
product line,
failure to generate a
merchandise
assortment plan,
poor relations with
vendors,
difficulties in receiving
merchandise,
inability to compete in
trading area,
failure to offer
saleable merchandise
assortments,
premature business
growth/overextension,
inventory difficulties.
357
Moncarz, E.S.
and Kron, R.N.
1993 fraud
experience causes
incompetent
management
neglect causes
obsolescence of
building, property and
equipment
fraud
experience causes
incompetent
management
strategy causes
overexpension
buredensome
instutional debt
heavy operating
expenses
insuffcient capital
economic factor
causes
economic slowdown
increased competition
presures
industry weakness
inadequite sales
Pearce II, J. A.
and Robbins,
D.K.
1993 management
inefficient
management
insufficient financial
resources
poor turnaround
strategy
decline caused by
strategic responses
absolute products
intense price
competition
focus on growth
decline caused by
operating problems
production
bottlenecks
labor strife
cost control
plant modernization
Terpstra, D.E.
and Olson,
P.D.
1993 types of problems:
conceptualizing and
systematic study of
distinct problem
types.
Altman, E.I.,
Marco, G. and
Varetto, F.
1994 corporate distress
diagnosis
Fredenberger,
W.B. and
Bonnici, J.
1994 life cycle stage, faltering demand.
Holtz-Eakin, D.,
Joulfaian, D.
and Rosen
H.S.
1994 growth
entrepreneurial profile
liquidity constraints.
Mitchell, W. 1994 size
age
product life cycle
Pearce II, J. A.
and Robbins,
D.K.
1994 decreased profit
margins
increased wages
increased competition
raw material
Platt, H.D. and
Platt, M.B.
1994 poor planning during
development phase
limited capital base
corporate
dependency
inadequite
managerial abilities
Richardson, B.,
Nwankwo, S.
and
Richardson, S.
1994 psychological impact
of decline
358
Altman, E.I.
and Eom, Y.H.
1995 drop-off in growth,
leverage ratio;
debt/equity
newly listed
companies.
Twenty financial
ratios identified;
EBIT/TA
NI/TC,
Sales/TA,
LOG(Sales/TA),
Sales/TC,
EBIT/Sales,
NI/Sales,
LOG(TA),
EBIT/INT,
LOG(EBIT/INT),
CF/TL,
WC/LTD,
Current ratio,
WC/TA,
Retained
Earnings/TA,
Book Equity/TA,
Normalised Quick
Ratio,
EBIT/SIGMA,
Book /Equity/TL
market Equity/TL.
Arogyaswamy,
K., Baker III,
V.L. and Yasai-
Ardekani, M.
1995 decline - stemming
strategies that
reverse the
dysfunctional
consequences of
decline,
recovery strategies
that position the
business to better
compete in the
industry.
Brinkenhoff,
R.O. and
Montesino,
M.U.
1995 skills transfer
Datta, S. and
Iskandar-Datta,
M.E.
1995 management /
labour reasons
ambitious expansion
various managerial
blunders
labour costs
litigation reasons
avoiding lawsuits
litigation judgement
other reasons
changes in financial
reporting violations
fraud
miscellaneous
no reason
failure of financial
structuring
unable to obtain
financing
liquidity / cash flow
shortage
heavy debt
involuntary filing
creditors lawsuits
creditor pressure to
file
Market reasons
industry/ market
slump
competition
high interest rates
inability to sell assets
Gopinath, C. 1995 management, growth, operating,
growth,
sales related.
359
Grundy, T. 1995 cost management,
change
management,
mission and objective
driven strategy,
creepy business
complexity,
tactical pricing,
investment decisions,
acquisitions,
denial of corporate
error.
over-commitment, product/ brand and
technology.
Lussier, R.N. 1995 industry experience
management
experience
planning
professional
advisors
education
staffing
age
partners
minority
marketing
capital
record keeping and
financial control
product/service timing
economic timing
Singer, B. 1995 poor management
management error
strategy
environment
industry structure
Taggart, J.H. 1995 life cycle
cash strapped "dogs"
three dimensions
type of change in
niche configuration
continuity of
enviromental change
structural
competitiveness
Banfield, P.,
Jennings, P.L.
and Beaver, G.
1996 poor managerial
competence: staff
related warnings;
lack of personal and
job flexibility,
creation of personal
comfort zones,
breakdown in
personal relations,
lack of clarity in job
responsibilities,
absence of team
work and shared
responsibilities,
individual rather than
company
representation.
Dimitras, A.I.,
Zanakis, S.H.
and
Zopounidis, C.
1996 Focus on financial
ratios (493, 508) and
cost of failure (487)
Grafstrom, J. 1996 management system
for credit risk
360
Jo, H. and Lee,
J.
1996 entrepreneurial/
management
education
education
managerial
experience
entrepreneurial
experience
start-up experience
functional area
experience
experience in the
line of business
high-growth
experience
management level
growth rate of
employees
entrepreneurial
experience
categorised:
entrepreneurial
characteristics
management
strategy
environment
return on assets
return on sales
return on employees
growth rate of assets
Lussier, R.N. 1996 industry experience
management
experience
planning
professional
advisors
education
staffing
economic timing
age
partners
minority
marketing
capital
record keeping and
financial control
product/service timing
economic timing
Theng, L.G.
and Boon,
J,.W.
1996 entrepreneurial/
management
education
education
managerial
experience
entrepreneurial
experience
start-up experience
functional area
experience
experience in the
line of business
management level
endogenous factors
personal
shortcommings
short-sighted view
lack of knowledge
lack managerial
experience and skill
lack of initiative
lack of vitality and
enthusiasm
lack of
entrepreneurial
judgement
high-growth
experience
growth rate of assets
growth rate of
employees
lack of capital
lack of cash flow
analysis
lack of budgets and
forecasts
return on asset
return on sales
return on employees
inappropriate
marketing strategy
low labour producivity
Theng, L.G.
and Boon,
J,.W.
1996 high taxes
recession
tight labour market
high labour cost and
high interest rates
competition
government
regulations
361
Altman, E.I.
and
Narayanan, P.
1997 three variables
identified;
sales/debt,
net earnings/total
assets
long term debt/total
debt.
ratios used in failed
business testing;
asset turnover,
current ratio,
changes in working
capital,
sales/non-bank
working capital,
leverage,
Inventory/bank debt,
bank debt/total debt,
long-term debt/total
debt,
accounts receivable +
inventories/accounts
payable +
spontaneous
sources),
inventory turnover,
rate of return,
sales/debts
retained
earnings/total assets.
Daily, C.M. and
Johnson, J.L.
1997 management CEO
Ceo structural power
CEO ownership
prestige power
expert power
Gimeno, J,
Folta, T.B.,
Cooper, A.C.
and Woo, C.Y.
1997 management
considerations and
human capital.
Morris, M.H.,
Williams, R.O.,
Allen, J.A. and
Avila, R.A.
1997 differant set of
dynamics dictates
failure in a family
business.
Mueller, G.C.
and Barker III,
V.L.
1997 management.
Teece, D.J.,
Pisano, G. and
Shuen, A.
1997 strategic
management
Winn, J. 1997 excessive growth
362
Al-Shaikh, F.
N.
1998 management
weakness,
technical
incompetence,
lack of interpersonal
skills,
lack of management
and business
exposure.
strategic weakness,
lack of clear strategy
and direction,
inability to respond to
change and to
recognise new
competition
taking on to much at
a time.
lack of understanding
financial impact,
key strategic
decision,
inadequate financing,
too much debt
uncertainty in region,
privatisation,
technological
environment and
infrastructure lagging
behind,
government policies
and bureaucracies,
shortage of capital,
shortage of
managerial and
skilled labour
background,
qualification and
motivation of owners.
Ari?o, A. and
de la Torre.
1998 markets imperfect,
characteristics of
public goods,
resources are
business specific.
Barker III, V.L.
and Mone,
M.A.
1998 organization
structure,
changes in vertical
differentiation,
changes in horizontal
differentiation,
changes in integrity
mechanisms,
changes in control
systems,
changes in top
management
compensation.
marketing changes,
manufacturing
changes,
research and
development
changes,
financial policy
changes.
Brenneman, G. 1998 management,
management
turnover,
crisis, time
management limited
time and financial
resources.
company
dysfunctional,
no strategy in place,
crisis, time
management limited
time and financial
resources.
Chrisman, J.J.,
Bauerschmidt,
A. and Hofer,
C.W.
1998 entrepreneurial business strategy
organizational
structure
industry structure
resources
Gibson, B.N. 1998 Financial ratios.
Harker, M. 1998 marketing
Kale, S. and
Arditi, D.
1998 newness
adolescence
smallness
Lee, J. 1998 lack of effective
corporate governance
McGurr, P.T.
and DeVaney,
S.A.
1998 Financial ratios
cash flow
financial ratios+ cash
flow
Robinson, K.C. 1998 business /
management
performance
measure
business life cycle
Stoeberl, P.A.,
Parker, G.E.
and Joo, S-J.
1998 resistance to change
liability of newness
competition
363
Bibeault, D.B. 1999 management
turnover
mathematical z-score
Gambler's ruin
prediction
audirots going
concern opinions
adverse trend signals
declining margins
declining market
share
debt increasing
rapidly
working capital
declining
declining market
share
Combs, J.G.
and Ketchen,
D.J.Jr.
1999 growth
strategic
resources
Davis, S.E.M.
and Long, D.D.
1999 lack of effective
planning
Dimitras, A.I.,
Slowinski, R.,
Susmaga, R.
and
Zopounidis, C.
1999 Financial ratios (270)
FitzGerald, T. 1999 distracted
management,
it commerce
competition,
industry is
consolidating,
dividend payout to
high,
high executive
remuneration,
economic and
seasonal cycles,
fast growing costs,
poor cash flow
management,
slowing down
payment to vendors,
needed expenditures
delayed,
collections worse
than industry,d
dividend payout to
high,
high executive
remuneration,
economic and
seasonal cycles,
market is shrinking,
losing market share,
lower than expected
sales,
faster than industry
growth,
inventory out of
control,
low-margin
commodity products,
lost of large
customers.
Henderson,
A.D.
1999 age
size
life cycle
Laitinen, T. and
Chong, H.G.
1999 Incompetence in
management
management style
and personality of
CEO
education,
experience and
health
organisation and
management team
deficiencies in
accounting system
finance staff
other deficiencies
owners role in
business
conflicting targets
Owners role in
business
conflicting targets
deficiencies in
operations
general deficiencies
financial deficiencies
production activities
sales activities
attitude towards
customers
industrial factors
general economic
and political issues
Laitinen, T. and
Kankaanpää,
M
1999 Failure prediction
models
- human infromation
processing
364
Longenecker,
C.O.,
Simonetti, J.L.
and Sharkley,
T.W.
1999 communication
meltdown
lack of clear
direction
lack of efficient
planning
inability to change
complacency
towards goals
Robinson, K.C. 1999 business /
management
perfromance
measure
business life cycle
Whitaker, R.B. 1999 poor management cash flow
Zacharakis,
A.L., Meyer,
G.D. and
DeCastro.
1999 mixed problems
already in business
external market
change
failure to provide for
customer needs
mixed problems
already in business
not moving fast
enough
Ahn, B.S., Cho,
S.S.and Kim,
C.Y.
2000 integrity problem. Financial ratio set
Cozijnsen,
A.F., Vrakking,
W.F. and Van
Ifzerloo, M.
2000 failure to be
innovative on a
continuing basis.
Finkelstein, S.
and Sanford,
S.H.
2000 flawed business plan
and inability to
deviate.
R&D costly and time
consuming
flawed business plan
and inability to
deviate.
R&D costly and time
consuming,
product targets
overstated,
Harker, M. and
Sharma, B. T
2000 declining business
health
crisis
new climate
leader latitude
Kisfalvi, V. 2000 ability to change
flexibility
escalatory
commitment
perils of success
management
behaviour
Landrum, N.E. 2000 leadership change strategy change
Lussier, R.N.
and Pfeifer,
S.A.
2000 industry experience
management
experience
planning
professional
advisors
education
staffing
age
partners
minority
marketing
capital
record keeping and
financial control
product/service timing
economic timing
Pandit, N.R. 2000 severity of crisis
attitude of the
stakeholders
business's outer
context
business's historical
strategy.
exploytation
365
experimentation
Azoulay, P.
and Scott, S.
2001 efficiency,
entrepreneurial
talent,
entrepreneurial
ideas,
change.
Balgobin, R.
and Pandit, N.
2001 poor management, high cost structure. inadequate financial
control / policy,
external
decrease in demand,
increase in
competition,
increase in input
costs.
Bruton, G.B.
Ahlstrom, D.
and Wan,
J.C.C.
2001 life cycle
Cohen, J.F. 2001 failure to plan for
long term
sustainability
failure to plan for long
term sustainability
Cook, G.A.S.,
Pandit, N.R.
and Milman, D.
2001 internal
external
Cybinski, P. 2001 financial ratios export
factor
Flynn, D. and
Forman, A.M.
2001 Inability of
entrepreneur to adapt
to the business life
cycle.
Joseph, G. and
Lipka, R.
2001 Ex post facto -
financial information
366
Lin, Y.L. and
McClean, S.
2001 Profitability(rates of
return)
ret. on shareholder
equity., ret. on
shareh. cap.
ret. on long-term cap.,
ret. on cap. empl.
ret. on net fixed
assets., trad. profit
marg.
Profit marg.
op. profit marg., pre-
tax profit marg.
net profit marg. ,
earnings marg.
cash flow marg.
Efficiency
turn. assets/emp.,
turn./fixed assets
turn./non-current
assets., stock turn.
stock ratio (days).,
debts turn.
debts ratio (days).,
creds turn.
credrs ratio (days)
Gearing ratio
cap. gearing %. , inc.
gearing %
bor. ratio., inc.
gearing % (inc ass)
GCF/total liab. ,Pref
and loan/ equ. and
res.
loan cap./equity and
res.
liquidity rat.
working cap. rat.,
quick asset rat.
cash.crr. liab.
Productivity rat.
tax ratio., sales per
empl.
op profit per empl.,
cap empl/empl.
stock and WIP per
empl. average salary
per empl.
Per-share and yields-
EPS
Lussier, R.N.
and Pfeifer,
S.A.
2001 record keeping and
financial control
industry experience
management
experience
planning
professional
advisors
education
staffing
capital
product/service timing
economic timing
age
partners
minority
marketing
Mueller, G.C.,
McKinley, W.,
Mone, M.A.
and Barker III,
V.L.
2001 management
reaction to decline
Sharma, D.S. 2001 cash flow
367
Brooks, G. 2002 management
transitions: impact
on values, loyalty,
performance and
selection.
limitations to family
abilities.
financial difficulties,
cash pressure
Collard, J.M. 2002 is the owner or top
management over
extented?
is turnover rate
excessive?
are communication
ineffective?
are goals unclear?
are compensation
and incentive
programs yielding
unsatisfactory
results?
is new business
waning?
are key relationships
deteriorating?
does the company
create "products in
search of markets"?
does the operation
have a track record of
failed expansion
plans?
financial and
management reports
cover the wrong
information at the
wrong level?
Cross, L. 2002 mismanagement
poor accounting
practices
waste
failure of planned
expansion
client bankruptcies
lost of major
customer
increased competition
plunge in gross profit
margins
Harvey, N. 2002 inbound logistics
activities, such as
material handling,
ware-housing and
inventory control,
used to receive,
store, and
disseminate inputs to
a product.
operations
activities necessary to
convert the inputs
provided by inbound
logistics into final
prod¬uct form.
Machining,
packaging, assembly,
and equipment
maintenance are
examples of
operations activities.
outbound logistics
activities involved
with collecting,
storing, and
physically distributing
the final product to
the customers.
Examples of those
activities include
finished goods,
warehousing,
materials handling
and order processing.
marketing and sales
activities completed
to provide means
through which
customers can
368
purchase products
and to induce them to
do so. To effectively
market and sell
products, businesss
develop advertising
and promotional
campaigns, select
appropriate
distribution channels,
and select, develop,
and support their
sales force.
service
activities designed to
enhance or maintain
a product's value.
Businesss engage in
a range of service-
related activities,
including
installa¬tion, repair,
training and
adjustment.
Hill, J.
Nanecarrow, C.
and Wright,
L.T.
2002 weak general
mangement skills
understanding the
business's
environment
problems
encounerred in
developing their
business
overcomming
obstacles/barriers to
growth and crises
location or premises-
related
lack of finance
rapid early growth
lack of finance selling and sales
function
marketing mix
variables
sourcing and buying
personal strengths
and weaknesses
understanding
markets
competition
service and quality
family business
aspects
marketing planning
customers
gathering and using
information
understanding the
business's
environment
location or premises-
related
declining sales
competition
service
price
changing market
environment
changing customer
needs
James, D,N. 2002 experiencing
distress- executives
misdirect efforts,
cash flow
management,
poor decision
making,
undue pressure on
management,
growth,
expansion,
market capacity.
Keane, T.P. 2002 product failure
369
Markey, R. 2002 truth avoidance
the role of
management/leader
ship
application of the
wrong strategy
lack of "fit"
pursuit of growth for
growth's sake
shift in market
structure
Markman,G.D.
and Gartner,
W.B.
2002 hyper growth
Mellahi, K.,
Jackson, P.
and Sparks, L.
2002 to much reliance on
previous business
success
change not
welcomed
stuck to historical
policies and
procedures.
radical changes in
competitive
landscape
international entrants
changes consumeer
desires
limited advertising
failure to take debt /
credit card
lack of "out-of town"
stores
stagnant policy and
business model
long term adherence
to buy national policy
higher pricess and
loss of
competitiveness
cutting relation with
local suppliers
trade unions,
suppliers and press
lack of updated
technology
late mover to
innovation
stuck to historical
policies and
procedures.
Midanek, D.H. 2002 cash flow problems
sales flat or declining
customers defecting
staff defecting
expectancy and
actual discrepancies.
Persson, H. 2004 size debt
cost disadvantage
Steyn, W.,
Hamman, W.D.
and Smit,
E.v.d.M.
2002 high growth Cash flow : non-cash
working capital
370
Stokes, D. and
Blackburn, R.
2002 1.6) behaviour of the
owner-manager
trust/relationship
issues
equal partners/ wrong
partners /having
partners
minority shareholding
employing
friends/relatives
unsound contracts
accounting
finance problems
other enogenous
factors
finance/taxes
banks and borrwing
inland revenue
insufficient capital
insufficient
investment in
equipment
cash flow problems
failure o control
finances
over reliance on
overdraft
too much credit to
client
bad credit
management
exogenous factors
categories
marketing
problem areas
identified
Stokes, D. and
Blackburn, R.
2002 self management
lack of confidence/
overconfidence
dealing with aspects
working long hours
being ill/ worried
management of
people
staff problems
not manageing staff
lack of delegation
redundencies
insufficient staff
general
management
lack of experience
lack of contingency
plans
problem wth
suppliers
marketing
lack od sellectio of
custormers/ low
margin
conflict with
customers
competition
problem with
distributors
cost of advertising
and promotions
Zopounidis, C.
and Doumpos,
M.
2002 net income/gross
profit
gross profit/total asets
net income/total
assets
net income/net worth
current assets/current
liabilities
quick assets/current
liabilities
(long term
debt+current
liabilities)total assets
net worth/(net
worth+long term debt)
net worth/net fixed
assets
inventories/workin
capital
current liabiliites/total
assets
working capital/net
worth
371
Addis M 2003 lack of basic skills as
element for
competitiveness.
lack of personal
development.
problem with
occupational skills
and infromation
technology skills.
Bower, J. and
Gilson, S.
2003 fraud
Dollinger, M.J. 2003 anti trust problems a cash crunch caused
by overextention
a blind sppot such as
the uniquesness od
paradox
an overdiversified
portfolio causing
neglect of key areas
a strategic bind
life cycle curve:
structural
uncertainties
strategic uncertainties
resource
uncertainties
customer
uncertainties
controlling
uncertainties
372
Glantz, M 2003 owners no langer
takes pride in
business
does not know what
condition the
company is in and
the direction it is
headed
fails to take trade
discounts because
of poor inventory
turnover.
frequent
downturning of
financial reporting
sparked in an effort
hire a more :liberal"
accountant.
changes in financial
management.
sharp deterioration
of salaries, lower
standard of living
can be measures to
"save" distressed
business.
failure to look banker
in the eye, letting
business deteriorate
and dont return calls.
lunch orders
extravigant.
early warning signs;
management life
style
changes in manner
payables is paid.
loans to and from
managers and
affiliates
cash budgets not
realistic.
rotating bank debt
unusual items on
financials
losses, weak gross
margin, slow
accounts receivables
and reduced sales
intercompany
receivable/payables
not adequitely
explained.
cash balances
redused, overdrawn,
uncollected during
cycle.
cash flow problems -
cant cover debt
service.
withholding tax
liabilities to pay
creditors
creative accounting
changes in financial
management
comparison
receivables/payables
does not balance with
financials of same
period.
partial payment to
creditors
erratic interum
results.
late financials,
postpone
unfavourable news
unwillingness to
provide budgets,
projections, interum
results.
suppliers cut back
terms or COD.
concentration in
receivales/payables
financial ratio analysis
z-score
market/ product:
slow orders in
comparison with
previous
corresponding
periods.
factory operating well
below capacity
changes in inventory,
followed by excessive
inventory build-up or
the retention of
obsolete
merchandise.
changes suppliers
frequently
increase inventory to
one customer
changing
consentration from
good client to lesser
stature
company loses an
important supplier or
customer.
Hicks-Midanek,
D.
2003 management
capacity
market place
Ivanova, E. and
Gibcus, P.
2003 over confidenca in
decision making
unprepared when
makin decisions
ignorance
exclusivity
competitive
short-term focus
focussed on
immediate reference
points of value
ignorant of the
alternatives
easy influenced by
"big" event
Kanter, R.M. 2003 leadership
373
Liebenberg,
A.P. and Hoyt,
R.E.
2003 integral part of
enterprise risk
management process
high leverage driver
to appoint CRO
corporate governance
Maitlis, S. and
Lawrence, T.B.
2003 failure of strategy
Miller, D.,
Steier, L. and
Le Breton-
Miller, I.
2003 family business
succession, family
dynamics.
Moy, J.W. and
Luk, V.W.M.
2003 stress from
excessive workload
difficulty in time
management
lack of managerial
experience
inappropriate
marketing strategy
excessive risk
lack of government
support
stress from excessive
workload
excessive risk
insufficient bank
financing
high interest rate
lack of working capital
and/or cash flow
problems
excessive fixed
assets
high operating
expenses
poor control of quality
of products/services
inappropriate
marketing strategy
lack of long-term
planning and view
low sales volume
lack of technical
knowledge
high labour cost
tight labour market
difficulty in attracting
good personnel
lack of working capital
and/or cash flow
problems
strong competition
lack of technology
application in
operations
Riana, B,.
Chanda, P. and
Metha, D.P.
2003 difficulties in adapting
to change
rigid systems
lack of vision
declining profitability
working capital
problems
increased receivables
inability to plough
back into business
shift in customer
preference
inventory buid-up
frequent labour unrest
regular plant
breakdowns.
Scherrer, P.S. 2003 management by
exception rather
than flexible
planning
delegation without
inspection control -
no feedback
vertical organization
- no interaction
among departments
managers span of
control
employees with
more than one boss
chain of command
broken by
employess when
deemed necessary
formal
communication not
used
overreliance on
strategic plan, rote
behaviour not
creative thinking
overreliance on
management
overreliance on
strategic plan, rote
behaviour not reative
thinking
marketing wrong
product/ wrong
markets
aging production
techniques
inadequate research
and developement
inadequate pro
inappropriate
channels of
distribution
nonresponsive
fifancial information
systems
inadequate
understanding of
customers needs
marketing wrong
product/ wrong
markets
aging production
techniques
inadequate research
and developement
inadequate pro
inappropriate
channels of
distribution
nonresponsive
fifancial information
systems
loss of competitive
advantage
displacement by
competitors
changing technology
consumer, regularory,
and economic
changes
inadequate
understanding of
customers need
374
objectives
senior management
abuse outside
activities and co
perks
Timmons, J.A.
and Spinelle,
S.
2003 excessive growth
Vining, A.R. 2003 business
inefficiencies
Anon (j) 2004 importance of
diversification and
willingness to change
Anon (d) 2004 failure to integrate
different concepts in
the same
management
infromation system
(mismanagement)
1) failure to engage a
competent,
experienced
turnaround manager
to steer the
appropriate course for
the return to
profitability
2) failure to quickly
arrest cash
hemorrhaging
3) failure to engage
merchandisers to
refocus marketing
strategy
4) insufficient focus
on core business
strength
5) closing to few
stores and taking to
long to close them
7) disastrous
acquisitions.
rapid expansion
9) insuficient equity
base - too m uck
leverage
Anon (e) 2004 expensive labour
high rejection rate
throughout the
manufacturing
process
low emoployee
morale, absenteeism
and poor job quality
375
Anon (h) 2004 lack of action on
negative variances
from budgets
significant differences
between actual and
projected results
poor return on
investment
reductions in working
capital and cash flow
increases in fixed and
variable expenses
dropping gross
margins
Anon.(i) 2004 role of directors in
management of
companies.
commercial vs.
actual insolvency.
reckless trading.
Anon.(k) 2004 management defects
such as , skills,
knowledge and
talent,
improper cash flow
management,
inadequate budget
control,
insufficient response
to change,
outdated products,
low R+D budget,
ageing of
manufacturing
equipment,
antiquidated methods
of selling,
overtrading,
high level of non-
equity finance,
launching of large
project outside
available resources,
reasons for business
distress:
debtor became
distressed,
poor credit analysis,
poor collection follow-
up,
under-capitalized -
placing over reliance
on creditors,
overtrading,
high level of non-
equity finance,
launching of large
project outside
available resources,
losses due to product
changes; style,
knowledge and talent,
Aziz, M.A. and
Dar, H.A.
2004 Focus on financial
distress.
financial ratios,
cash flow
management
financial ratios
unexplained.
Brooks, M. 2004 management role
Campos, R. ,
Ruiz, F.J.,
Agell, N. and
Angulo, C.
2004 Early warning signs
identification through
the use of artificial
neural networks.
Charitou, A.,
Neophytou, E.
and
Charalambous,
C.
2004 Financial leverage:
REAT
SEQAT
SEQTL
TLAT
SEQDT
Operating cash flow
CFFOTL
CFFOLCT
Liquidity
CTACT
ACTLCT
WCAT
LCTAT
QALCT
376
Charitou, A.,
Neophytou, E.
and
Charalambous,
C.
2004 EBITTL
IBPPENT
EBITLCT
ROA
IBSALE
IBTL
WCFOAT
WCFOSALE
EBITPPEN
CHIB
Activity
NWSALE
Market
MKVALDT
MKVALSAQ
Conger, J.A.
and Nadler,
D.A.
2004 management
Craighead,
C.W., Karwan,
K.R. and Miller,
J.L.
2004 service failure
Daniel, F.,
Lohrke, F.T.,
Fornaciari, C.J.
and Turner Jr,
R.A.
2004 slack resources
rather than slack
efficiency
resource slack
availability
recoverability
potential
Dietrich, J.
Arcelus, F.J.
and Srinivasan,
G.
2004 focus on financial
ratios
WC/TA
EBIT/TA
EBT/CL
S/TA
RE/TA
EBT/Eq
CF/TL
TL/TA
CL/TA
WC/TL
logTgA
log EBIT/I
Eq/TL
Falkenberg,
A.D. and
Glamheden,
H.A.
2004 management tenure.
Gilmore, A.,
Carson, D. and
O’Donnell, A.
2004 company size,
entering into new
market / area,
management of risk,
through networking,
using managerial
competencies.
entrusting staff.
company size,
entering into new
market / area,
cash flow,
Gudmundsson,
S.V.
2004 productivity through networking,
using managerial
competencies.
377
Huson,
M.R.,Malatesta
, P.H. And
Parrino, R.
2004 management
Jooste, L. 2004 cash flow
Kemp, S. 2004 cash flow
rapid sales expantion
Kow, G. 2004 excessive growth
faster, bigger better.
Lin, L. and
Piesse, J.
2004 management
inefficiency
capital structure insolvency dverse economic
effects
- income volatility
Nutt, P.C. 2004 rush to judgement
failure - prone
practices
poor allocation of
resources
limited search trap
failed mojor
decisions
Orme, D. 2004 ineffective
mangement style
lack of operating
controls
operating without
buiness plan
outdated business
model
over diversification
explosive growth
family interest v/s
business requirement
weak financial
function
market lag
precarious customer
base
Orme, D. 2004 ineffective
mangement style
family interest v/s
business
requirement
operating without
buiness plan
over diversification
explosive growth
outdated business
model
weak financial
function
poor lender
relationship
lack of operating
controls
market lag
precarious customer
base
Persson, H. 2004
Pratten, F.D. 2004 growing competition increased cost due to
labor legislation
increased rents
reduction in sales
growing competition
Von Oetinger,
B.
2004 lack of innovation
lack of past
experience
Walshe, K.,
Harvey, G.,
Hyde, P. and
Pandit, N.
2004 symptoms, causes
chronic and acute
characteristics of
failure
types or categories of
failure
internal and external
characteristics of
failure
phases
decline and crisis
triggers for change
Anon (d) 2005 fiduciary duties, skill
and care, liabilities to
shareholders,
creditors, third
parties government
and public.
Anon. (a) 2005 directors
responsibilities
378
Anon. (b) 2005 ineffective
management style
overdiversification
precarious customer
base
family v/s business
matters1
operating without
business plan
weak financial
function
poor lender
relationship
explosive growth
lack of operating
controls
market lag
explosive growth
Back, P. 2005 character of
management;
reputation,
fair dealings history,
own financial
difficulties,
reputation of
dishonesty,
competence,
insufficiency.
number of changes in
directors,
age of business,
group membership,
size of business,
efficiency,
leverage.
non- financial var
number of payment
delays,
payment behaviour
variables,
existence of loans
secured on businesss
assets and reporting
lags,
Barker III, V.L. 2005 dysfunctional
organizational
cultures - financial
management.
media accounts,
verbal information.
multiple sources
internal;
weak strategy,
dysfunctional
organizational
cultures - financial
management.
accounting reports,
internal memos,
consultants reports,
multiple sources,
external
change in technology,
recession,
competitors.
Bates, T. 2005 focus on skills set of
owners as warning
sign.
Baunard, P.
and Starbuck,
W.H.
2005 essential for survival
and success in face
of changing
environment.
neglible long-run
effects on population
of businesss,
essential for survival
but creates no
competitive
advantages for
survivors,
cognition does not
afford a dependable
basis for learning.
attempted growth into
new domain,
transferring an old
model to a new
situations,
product launch,
new activity
reinforced by core
believes,
over estimation of
demand,
resurgence of a core
believe, and
escalation of
commitment in losing
business.
Beaver, G. and
Jennings, P.
2005 lack of management
skills,
lack of experience,
neglect,
fraud,
poor record keeping,
reckless money
management,
inability to cope with
growth.
poor location,
lack of formal
planning,
inability to cope with
growth.
lack of capital budget,
poor record keeping,
reckless money
management,
inadequate
accounting systems,
lack of marketing
skills,
inadequate provision
for contingencies,
excessive inventory
incompetence,
disaster,
insufficient marketing
talent,
indifferent employees
,
Bollen, L.H.H.,
Mertens,
G.M.H.,
Meuwissen,
R.H.G., Van
Raak, J.J.F.
and
Schelleman, C.
2005 managerial
control issues and
fraud
financial external
379
Burbank, R.K. 2005 management
shortcomings,
ineffective board of
directors / managers,
excess leverage, technology changes,
loss of market share,
industry weakness,
labour problems
economic conditions.
Cannon, M.D.
and
Edmondson,
A.C.
2005 failure to head the
importance of smaller
failure within business
Dehney, R.B.D.
and Miller, C.
2005 ongoing litigation and
law suites
Dietrich, J.
Arcelus, F.J.
and Srinivasan,
G.
2005 focus on financial
ratios
WC/TA
EBIT/TA
EBT/CL
S/TA
RE/TA
EBT/Eq
CF/TL
TL/TA
CL/TA
WC/TL
logTgA
log EBIT/I
Eq/TL
Garvin, D.A.
and Roberto,
M.
2005 dysfunctional
routines,
management.
Hass, W.J. and
Pryor IV, S.G.
2005 autocratic
management
politically motivated
decision making
managerial warning
signs:
management
promises unrealistic
improvement in
results
management throws
money after the
problem
management raises
prices to improve
profits
sales decline and
marketing budgets
are cut
bad business
practices like
creative accounting
and quarter-end
loading are used in
desperation
earnings disappoint
and management's
credibilty is lost
quality problems
declining growth rates
low employee morale
high employee
morale
declining productivity
growth of new
competition
customer loss
declines in gross
margin and market
share
380
Jas, P. and
Skelcher, C.
2005 Internal sources of
decline;
technical
poor management
cognisance
leadership capability
Internal sources of
decline;
poor management
cognisance
leadership capability
external sources of
decline;
reallocation of
resources
political and
management shifts
internal sources of
decline;
technical
poor management
cognisance
leadership capability
external sources of
decline;
reallocation of
resources
political and
management shifts
Kam, J. 2005 management
misperception of its
own competence
level
dealing with demand
and competition
having distracted
attention
acting impulsively
little consideration
for risk
being narcissistic
and myopic
decision fostered by
pride and over
confidence +
arrogance
breeding future from
previous success
inefficiency to
respond to
environmental
change
behavioural factors
strategic persistency
escalation of
commitment
threst-rigidity effect
organizational inertja
economic condition
unexpected jolts
brand switching
consumer taste
changes
competition
new entrants
organization destiny
technological
uncertainty caused by
product or process
innovation
capacity downsizing
change/ challenges of
market
business age, size,
degree of
specialization
decline in market
Knott, A.M. and
Posen, H.E.
2005 learning's out of
failure
Koopman, S.J.,
Lucas, A. and
Klaasen, P.
2005 cyclical movement in
default rates
McRann, B. 2005 slow growth
seasonable variation
product life cycle
short-term slowdown
Mellahi, K. 2005 failure of board to
detect warning signs
management
Miller, D. and
Le Breton-
Miller, I.
2005 long executive
apprenticeships and
tenures.
courage,
renewal,
cohersivetop team.
connection,
benevolent
partnering,
close to client,
sustained contacts,
good corporate
citizenship,
substantive mission
vs. financial results,
thematic,
competency- based
strategy,
focused, long-term
investment,
patient shareholders,
community,
clarion values,
assiduous selection
and socialization,
welfare state for
employees,
informality, initiative
and teamwork.
381
Pompe, P.M.
and Bilderbeek,
J.
2005 Profitability
gross operating
results/total assets
net operating
results/total assets
gross results/total
assets
profit before
taxes/total assets
profit after taxes/total
assets.
cash flow/total assets
profit after
taxes/equity
cash flow/equity
gross operating
results/working
assets
net operating results/
working assets.
Pompe, P.M.
and Bilderbeek,
J.
2005 gross operating
results/turnover
net operating results
/turnover
gross results/turnover
net results/turnover
profit before taxes
/turnover profit after
taxes/turnover cash
flow/turnover., gross
operating results
/added value
net operating results
/added value
gross results/added
value
net results/added
value
profit before taxes
/added value
profit after taxes
/added value
cash flow/added
value
equity/turnover
turnover/workingasset
turnover/fixed working
capital
turnover/current
working capital
turnover total assets
added value/total
assets
added value /turnover
added value/fixed
assets
financial charges
/added value
income taxes/added
value
personnel charges
/added value
added value/number
of persons employd
fixed working assets/
number of persons
employedpublication
382
Pompe, P.M.
and Bilderbeek,
J.
2005 working
capital/turnover
working capital/total
assets
current
assets/turnover
current assets/total
assets
current assets/short-
term debt
quick assets/turnover
quick assets/total
assets
quick assets/short-
term debt
quick assets/amounts
payable within one
year
(investments+cash)/tu
rnover
(investment+cash)/tot
al assets
(investments+cash)/a
mounts payable
within 1 year
(investments+cash-
finacial debts)/current
assets
cash/amount payable
within 1 year
cash/current assets
cost price of the
production/stocks
stocks/turnover
stocks/total assets
trade
debtors/turnover
trade debtors/total
assets
trade debts/goods
and services
purchased
trade debts/turnover
trade debts/total
assets
short-
termdebt/turnover
Pompe, P.M.
and Bilderbeek,
J.
2005 equity/total assets
equity/permanent
capital
short-term debt/total
assets
long-term debt/total
assets
(reserves+
accumulated profit or
loss)/total assets
profit after taxes/total
debt
cash flow/total debt
cashflow/long term
debt
net results/financial
charges
whether equity is
positive or negative
383
Probst, G. and
Raisch, S.
2005 autocratic leadership
excessive success
culture
common pattern
tentative change
weak organizational
leadership
lacking success
culture.
growth
uncontroled change
premature ageing
stagnant growth
Radipere, S.
and Van
Scheers, L.
2005 management
inefficiency
financial marketing
Sampath, R.
and Kambil, A.
2005 growth
Sargeant, J.R. 2005 no interum
management
financials
no annual financial
statements
no budget
no cash flow
statements
no work structure
lack of control
no clear managerial
responsibilities
no leader - lack of
role clarity
low managerial skills
no interum
management
financials
no annual financial
statements
no budget
no cash flow
statements
no work structure
lack of control
no clear managerial
responsibilities
no leader - lack of
role clarity
low managerial skills
Anon (b) 2006 always fire-fighting
delayed decisions -
let other decide
poor staff retention
tense work
atmosphere
spend time away
not addressing
problem present -
focus on "rosy"
future
large cash flow
fluctuations
large cash flow
surprises
no capital reserves
sales unpredictable
and irregular
no replace orders
few new customers
no word of mouth
customers
sales are falling
Carmichael, T.
and Stacey, A.
2006 managerial success
variables;
accountability
initiative
boundaryless
thinking
integrity
commitment
conceptual thinking
communication
knowledge expertise
customer focus
quality focus
empowerment
shared ownership
global worldview
speed
influence and team
building
Cressy, R. 2006 growth
risk
propensity for risk
384
Drew, S.A.,
Kelley, P.C.
and Kendrick,
T.
2006 senior levels
misjudgement of risk
mismanagement of
risk
unethical behaviour
excessive internal
rivalry
intolerance of failure
propensity for risk
taking
secretiveness
persecution of
people who speak
up
Elenkov, D.
and Fileva, T.
2006 bad luck
Farris, B., Lee,
H., Maitrelean,
J., Schouer, J.
and Seyffret,
N.
2006 lack of clear strategic
plan,
optimistic acquisition.
lack of promotional
strategy,
industry changes,
uncompetitive pricing,
poor market share,
and existing
underperforming staff.
Joseph, G. and
Lipka, R.
2006 Ex post facto -
financial infromation
Kampschroede
r, K.F., Ludwig,
N., Murray,
M.A. and
Padmanabhan.
2006 entrepreneurial failure
concerns
Lewin, B.P. 2006 CEO capabilities
weak monitoring -
risk reduction
sustainable growth
rate
sales growth rate
cash flow
sustainable growth
rate
Pearce II, J.A.
and Michael,
S.C.
2006 recession
Steyn Bruwer,
B.W. and
Hamman, W.D.
2006 cash
growth and cash
Taite, D. 2006 operational issues
corporate
governance
turnover
margin and profit
financing and cash
Tsakonas, A.,
Dounias, G.,
Doumpos, M.
and
Zopounidis, C.
2006 net income/gross
profit
gross profit/total
assets
net ncome/totalassets
net income/net worth
current assets/
current liabilities
quick/assets/current
liabilities
[long term debt+
current liabilities]/total
assets
net worth/[net worth
+long term debt]
net worth/net fixed
assets
inventories/working
capital
current liabilities/total
assets
working capital/net w
385
Agarwal, V.
and Taffler, R.
2007 Draw comparison
between Altman,
Taffler- and market
based models. Use
traditional Z-score
ratios
Amaral, A.M.
and Baptista,
R.
2007 novice vs.
experienced.
focus on re-entry of
entrepreneurs
Anon (d) 2007 absence of
management skills
emphasis on family
rather than
management
delays in
management
information systems
inappropraite
financing structures
mismatch assets and
liabilities
deteriorating margins
masked by increased
volumes
ineffective tax
structure
uncompetitive cost
base
poor information
systems
uncontrolled growth in
lending
shrinking markets
increased warranty
claims
staff turover
Berger, H. 2007 focus on
bureaucratic and
hierarchical
environment -
control over critical
decision making.
Values. Project
failure or success.
Boshoff, C. 2007 poor service delivery
Byers, M. 2007 regular trading
losses
not producing
accounting and
trading information
don't pay employees
in time
exhausted all
immediate sources of
cash
exceeding credit
terms with suppliers
regular trading losses
Calandro(Jr), J. 2007 Z-score
Gonzalez, L.
and James, C.
2007 Financial ratio
analysis
Han, C., Huml,
A., Kagalkar,
A., Saito, L.
and Sundjaja,
K.
2007 management capital expenditure -
expantion
cash-flow
working capital
negative
capital expenditure -
expantion
new competirion
existing competition
Jooste, L. 2007 Focus on the
predictive role of
cash- flow ratios
cash flow to sales
cash flow to assets
reinvestment
cask flow to total debt
critical needs
coverage
cash interest
coverage
dividend coverage
cash flow to income
386
Lamers, R. 2007 Cash flow problems
not paying statutory
creditors
not paying staff
business growth
disruption of business
working capital cycle
Longenecker,
C.O., Mitchell,
M.J. and Fink,
L.
2007 managerial failure
McCrea, E. and
Betts, S.
2007 strategy
Nag, R.,
Hambrick, D.C.
and Chen, M-J.
2007 management strategy
Okpara, J.O.
and Wynn, P.
2007 personnel
management issues
corruption
operations
planning
market research
financial analysis
infrastructure issues
accounting
finance
operating problems
marketing
inventory control
production
operations
technology
low demand
Strotmann, H. 2007 start-up size
type of establishment
industry growth
industry concentration
industry entry rate
technological regime
industry economies of
scale
industry heterogenety
Strotmann, H. 2007 start-up size
type of establishment
industry growth
industry concentration
industry entry rate
technological regime
industry economies of
scale
industry heterogenety
387
Van Caillie, D..
and Crutzen,
N.
2007 heavy amount of
charges
financial indicators of
profitability
poor/decrease in the
market share
insufficient cash flow
poor/decrease in
current ratio
weakening/deteriorati
on of resources base
poor/decrease in
investment rate
increase in level of
external debt
solvency decrease
increase in financial
charges
critical warning
signals - solvency
and liquidity
extremely low and
mistrust of partners
bankruptcy
insufficient sales
Van Scheers,
L. and
Radipere, S.
2007 managers not
managing
Altman, E.I. 2008 Z-score factors
(financial ratios)
Explanation of each
element and the final
ratio will lead to
identification:
working capital (WC),
total assets (TA),
retained earnings
(RE),
total debt (TD),
market value of equity
(MVE)
sales (S).
Anon 2008 Broken Promisses
unreturned telephone
calls
invcrease in
reference requests
changes in payment
patterns
changes in buying
patterns
cash flow excuses
Barker, A.,
Cassidy, L.,
Goodman, J.
Siegel, J. and
Ulin, E.
2008 gross margins erode
due to pricing
pressures,
operating margins
fall,
sales stagnated are
fixed operating costs.
Chenhall, R.H. 2008 management
Li, H. and Sun,
J.
2008 focus on financial
distress prediction
using case-based
reasoning (CBR)
388
Martin, R.D.
and Kimberly,
J.R.
2008 management
capability
weak cost control
and data
inefficiencies
wrong/costly strategy
acquisitions
change in legislation
increased cost market difficult to
operate
excess capacity
Martin, R.D.
and Kimberly,
J.R.
2008 management
capability
wrong/costly strategy
acquisitions
increased cost
weak cost control and
data inefficiencies
change in legislation
market difficult to
operate
excess capacity
Ooghe, H. and
De Prijcker, S.
2008 four failure
processes identified.
lack of management
and industry
experience
Inappropriate
management
mistrust of financiers
weak business plan
lack of strategic
advantage
heavy capital
expenditures
heavy capital
expenditures
insufficient cash
flow/profitability
liquidity problems
increase in Liabilities
= weaker solvency
low sales
underestimated
expenses
Ooghe, H. and
De Prijcker, S.
2008 ack of management
and industry
experience
Inappropriate
management
weak business plan
lack of strategic
advantage
heavy capital
expenditures
heavy capital
expenditures
underestimated
expenses
insufficient cash
flow/profitability
liquidity problems
increase in Liabilities
= weaker solvency
Low sales
Pindado, J.
Rodrigues, L .
and De la
Torre, C.
2008 Financial ratios
EBITDA/FE
(EBIT/RTA)
(FE/RTA)
(RE/RTA)
Pretorius, M. 2008 leadership
management
individual skills
behaviour
cognition and
learning
internal causes of
failure
external causes of
decline
administrative causes
of decline
strategic causes of
decline
increased
centralization
lack of long term
planning
curtailed innovation
departure key staff
loss of resource slack
fragmented pluralism
non-prioritised
cutbacks
Chandre, D.K.,
Ravi, V. and
Bose, I.
2009 financial statements
389
Chen, H.
Huang, S.Y.
and Lin, C.
2009 STLR
Current
assets/current liab.
(CA/CL)
(Cash+ cash
equivalents)/ current
liab.
CFR
Cash flow/ tot debts
(CF/TD)
Retained earnings/ tot
assets (RE/TA)
(Current assets -
current liab's.) / tot
assets ((CA-LA)/TA)
Total cash flow/ tot
assets (CF/TA)
CSLTSR
Total debt/ tot assets
(TD/TA)
Total debts / tot
equity(TD/TE)
Earnings before
int.and taxes /
(earnings before int.
and taxes - int.
expense (EBIT /
(EBIT-IE)
Operating income /
int. expense (OI/IE)
ROIR
Income before taxes /
average tot assets
(IBT / AOA)
Earnings before int.
and taxes / tot assets
(EBIT / TA)
Chen, H.
Huang, S.Y.
and Lin, C.
2009 Net sales / tot assets
(NS / TA)
OPR
(Sales - cost of sales)
/sales ((S-CS)/S)
Linguistic:
Short-term liq ratio
(STLR)
Cash flow ratio (CFR)
Capital structure and
long-term solvency
ratio (CSLTSR)
Return on investment
ratio (ROIR)
Asset utilisation ratio
(AUR)
Operating
performance ratio
(OPR)
Liquidity (LIQ)
Retained earnings
(RE)
Bankruptcy.E278
390
Chen, H.
Huang, S.Y.
and Lin, C.
2009 STLR
Current
assets/current liab.
(CA/CL)
(Cash+ cash
equivalents)/ current
liab.
CFR
Cash flow/ tot debts
(CF/TD)
Retained earnings/ tot
assets (RE/TA)
(Current assets -
current liab's.) / tot
assets ((CA-LA)/TA)
Total cash flow/ tot
assets (CF/TA)
CSLTSR
Total debt/ tot assets
(TD/TA)
Total debts / tot
equity(TD/TE)
Earnings before
int.and taxes /
(earnings before int.
and taxes - int.
expense (EBIT /
(EBIT-IE)
Operating income /
int. expense (OI/IE)
ROIR
Income before taxes /
average tot assets
(IBT / AOA)
Earnings before int.
and taxes / tot assets
(EBIT / TA)
Chen, H.
Huang, S.Y.
and Lin, C.
2009 5) AUR
- Net sales / tot
assets (NS / TA)
6) OPR
6.1) (Sales - cost of
sales) /sales ((S-
CS)/S)
Linguistic:
- Short-term liq ratio
(STLR)
- Cash flow ratio
(CFR)
- Capital structure
and long-term
solvency ratio
(CSLTSR)
- Return on
investment ratio
(ROIR)
- Asset utilisation ratio
(AUR)
- Operating
perfromance ratio
(OPR)
- Liquidity (LIQ)
- Retained earnings
(RE)
- Bankruptcy.
391
Chen, W. and
Du, Y.
2009 management
efficiency ability,
earning ability,
financial structure
ability,
debt repayment
ability,
Chi, L. 2009 managerial
incompetence,
managerial
deficiencies,
inadequate cash to
cover liabilities.
Davis, P. 2009
Glantz, M. 2009 management fails to
take trade discounts
because of poor
inventory turnover
frequent " down
tiering' of financial
reporting sparked in
an effort to bring on
a more "liberal"
accountant
changes in financial
management
does not allow
cushion for error
financials are
submitted late in an
attempt by
management or their
accountants to
postpone
unfavorable news
frequent " down
tiering' of financial
reporting sparked in
an effort to bring on a
more "liberal"
accountant
sharp reduction in
officers salaries
erratic interim results
signaling a departure
from ormal and
historical patterns
does not allow
cushion for error
financials are
submitted late in an
attempt by
management or their
accountants to
postpone unfavorable
news
cash balances reduce
substantially or are
overdrawn and
uncollected during
normal lquid periods
management fails to
take trade discounts
because of poor
inventory turnover
low probabiloities
operating cash flows
cover debt service
withholding tax
liability builds as
taxes are used to pay
other debt
frequent " down
tiering' of financial
reporting sparked in
an effort to bring on a
more "liberal"
accountant
changes in financial
management
total in receivables
and payables aging
schedules do not
agree with amounts
shown on the balance
sheet of the same
date.
sharp reduction in
officers salaries
erratic interim results
signaling a departure
from normal and
historical patterns
does not allow
cushion for error
lender taking
possession of
collateral
changes in inventory,
followed by excessive
inventory buildup or
the retention of
onsolete merchandise
change of suppliers
frequently, or
transient buying
results in higher raw
material costs.
financials are
submitted late in an
attempt by
management or their
change of suppliers
frequently, or
transient buying
results in higher raw
material costs.
392
accountants to
postpone unfavorable
news
Glantz, M. 2009 unwillingness to
provide budgets,
projections or intrim
information
letting the condition
of the business
deteriorate
management
'expensive' lunches
cash flow signals -
gross operating cash
flow is below new
income and net
operating cask flow
well below gross
operating cash flow
lender finances highly
speculative inventory
ahereby the borrower
is trying for a "home
run"
such as failure to look
the bankers in the
eye
taking longer to return
call or do not return at
all.
concentration of
payables and
receivables -
unsatisfactory
explanations
increased inventory to
one customer or
perilous reliance on
one account
changing from "good"
customer to one of
lessor stature
suppliers cut back
terms or request COD
loss of important
client or supplier
393
Glantz, M. 2009 cash flow problems
merchandise shipped
out at end of month or
year to window dress
the financials
unearned income -
shifting sales to future
periods via reserves,
income smoothing
gimmicks, creating
gains and losses by
selling, retiring debt
income contributing
less and less to
overall financing
dividens large in
proportion to net
income
depreciation is
greater than capital
expenditures -assets
running below optimal
levels evidenced by
weakening gross
profit margin
hiding losses inside
discounted operations
selling assets after
pooling
moving current
expenses to later
periods by improperly
capitalizing costs
amortizing costs too
slowly and failing to
write-off worthless
assets.
large overdue
receivables
overly dependent on
one or two customers
related-party
receivables
slow receivables
turnaover (annualize
frequently)
Glantz, M. 2009 right of return exists
unjustified LIFO to
FIFO changes
insufficient insurance
inclusion of inflation
profits in inventory
large, unexplained
increase in inventory
gross profit trends
bad but no
markdowns -
inclusion of improper
costs in inventory,
capitalized instead of
flow-through
deferred taxes are
running off
394
Glantz, M. 2009 fixed asset turnover
(sales/NFA) indicates
sharp increase and
tied to:
backlogs significantly
increased
GPM significantly
below historical and
industry
WIP inventory
embedded in very
weak inventory
turnover.
outdated equipement
high maintenance
and repair expense
declining output level
inadequite
depreciation charge
lengthening
depreciation period
large write-off of ssets
distirtions re: currency
translations
Halpern, P.,
Kieschnick, R.
and Rotenberg,
W.
2009 discipline imposed by
debt,
larger, less risky
businesss -public
debt
leverage buyouts,
leveraged
recapitalization,
high leverage
transactions.
inappropriate debt
loads,
Lin, L. 2009 Financial ratios
Muller, G.H.,
Steyn-Bruwer,
B.W. and
Hamman, W.D.
2009 size of company
structure
financial ratios
cash flow
profit ratios
Oosthuizen, H. 2009 strategic
Orpurt, S.F and
Zang, Y.
2009 cash flow
Zwaig, M. and
Pickett, M
2009 managerial
inadequite
management system
mediocre
management skill
certain personality
traits
management lacks
depth
relies on one
individual for
decision making
unbalanced
management team
lack of management
depth
weak financial and
organizational skills
poor understanding
of finance
habits and personal
traits
personal problems
frivolous spending
Financial signs
decline in sales
lower profits margins
sustained losses
increased
highly leveraged
balance sheet
reduced cash flow
relationship with bank
change in borrowing
request for security
breach of covenants
Operatinal signs
changes in senior
management
high employee
turnaver
resignation of
members
unsuccessful
expantion
insufficient cash flow
lack of clear direction
deterioration of
internal controls
decline in customer
service
quality compromise
one-time events
largebad debt
changes in market
place
change in supply
payments
inability to capatilze
on discounts
underpricing
contracts
395
Zwaig, M. and
Pickett, M
2009 payment patterns
purchasing patterns
industry trends
new developments in
customer base
law suitspersonal
problems
rumour mill
third party
endorsement
customer and
industry knowledge
396
APPENDIX B: BANKING SIGNS
397
Banking Warning Signs (own compilation)
AUTHOR DATE BANKING EARLY WARNING SIGNS
Pousson, J. 1991 ? broken promises
? surprises
? hardcore overdraft
? facilities fully utilised and frequently exceeded
? increase in status enquiries
? large cash withdrawals
? increase in short term requests
? unable to meet tax cheque/ wages
? regular stop payments
? no management accounts
? borrowings over limit
? changing conduct of account
? hard core overdraft
? build up / late payment of creditors
Brenneman,
G.
1998 ? poor service
? poor product,
Bibeault,
D.B.
1999 ? slowness in submitting financial exhibits by the borrower.
? declining deposit balances, overdrafts and /or returned
cheques
? failure to perform on other obligations, including personal
debt of principals
? inventories become swollen
? loan repayments become delinquent with the past due
periods increasing
? slowness in bank's ability to arrange plant visitations or
meetings with principals
? business becomes target of legal process or actions
? trade payables and/or accruals begin to build
? adverse information from competitors and customers of the
business concern
398
FitzGerald,
T.
1999 ? concerned bankers
? concern on performance
? poor lent profile
? low-margin commodity products
? lost of large customers
Glantz, M
(continue)
2003 ? unsustainable growth
? frequent visits to place of business reveals deteriorating
general appearance, building rolling stock and equipment.
? allow advances on overdraft for other purposes - to repay
own debt. (allow debit orders to go through)
? finance highly speculative inventory
Glantz, M. 2003 ? rotating bank debt
? poor examination of cash flow
? changes in financial management
? no cushion build in to loan for error.
Hicks-
Midanek, D.
2003 ? banking signs
? bank covenant failure
? liquidity conditions
? financing options
Moy, J.W.
and Luk,
V.W.M.
2003 ? insufficient bank financing
? high interest rate
? lack of working capital and/or cash flow problems
Orme, D. 2004 ? poor lender relationship
Back, P. 2005 ? prior payment behaviour;
? prior payment delays
? payment disturbances
? creditor lose confidence
? higher interest rate change
? debts not paid at time of maturity
? three or more payment delays
? banking relationship,
Lewin, B.P. 2006 ? breach of debt covenants
Byers, M. 2007 ? banking sign: frequent excesses on facility limits
399
Gonzalez, L.
and James,
C.
2007 ? banking relationship
Ooghe, H.
and De
Prijcker, S.
2008 ? mistrust of financiers
Davis, P. 2009 ? the way in which financial institutions identify , assess and
manage risks continues to fall under intense scrutiny
? risk measurement
? 3) stress testing
? evident that risk processes were sensible -sophisticated, but
sometimes poorly executed.
Glantz, M. 2009 ? at the end of the cycle, creditors are not completely paid
out. - this gives bankers the false sense of security but
company cannot borrow from trade for next cycle
? lender taking possession of collateral
? such as failure to look the bankers in the eye
? overdraft advances funds other purposes, pay own bank
debt
Halpern, P.,
Kieschnick,
R. and
Rotenberg,
W.
2009 ? changes in covenants,
400
APPENDIX C: PHASES IN TURNAROUND STRATEGIC PROCESS
401
AUTHOR DAT
E
TURNAROUND
SETTING UP PHASE
TURNAROUND
EXECUTION
INVESTIGATIO
N PHASE
PLANNING
PHASE
STRATEGIC
RESPONSE
FINANCIAL
RESPONSE
OPERATING
RESPONSE
New (Jr),
R.V.
1974 Turnaround
decision
Carrington,
J.H. and
Aurelio, J.M.
1976 Careful
planning.
1) create
attitude of
mutual trust,
2) develop a
careful financial
plan for survival,
3) disclose to
customers and
creditors,
4) determine if
business can
generate
enough cash to
remain solvent.
Retention of
business,
1) inject
additional
capital
2) borrow
money,
3) cut
expenses
(overheads),
4) employ
combination
of aforesaid,
5) withhold
statutory
creditors as
short term
measure.
Hedley, B. 1976 1) Productivity
improvement
due to
technologi¬cal
change and/or
'learning' effects
leading to
adoption of new
production
methods
2) Economies of
scale and of
specialization
3) Displacement
of less efficient
factors of pro-
duction,
especially
investment for
cost reduc¬tion
and capital-for-
labour
substitution
4) Modifications
and redesign of
product for
lower costs.
Hamermesh
, R.G.
1977 Staffing:
1) Intermediate staff
2) Intermediate
managers
3) Personnel changes
Focused
reorganization
Higgins,
R.C.
1977 Sustainable growth
Long term planning
on sustainable
growth.
402
Hofer, C.W. 1980 The nature of
turnaround
situations
1) assessing
current operating
health
1.1) financial
condition
1.2) market
position
1.3) technical
stance
1.4) production
capabilities
2) assessing
current strategic
health
2.1)
product/market
matrix
2.2)
technological
and production
capabilities
2.3) financial
capabilities
1) vertical integration
2) diversification
3) top management
changes
1) major plant
expenditures
2) functional are
emphasis
3) improved
efficiency ratios.
Christensen,
H.K.,
Cooper,
A.C. and
DeKluyver.
1982 1) Repositioning
2) Harvesting
3) Disinvestment
4) Liquidation
Gelb, B.D. 1982 Retain / divest
Anderton,
D.L.,
Conaty, J.
and Miller,
G.A.
1983 Turnaround:
structural constraints.
Industry ariables:
1) frequency of
product changes,
2) technology
change,
3) development
time for new
products
4) relative
compensation
average.
Product
competition
variables:
1) customization,
2) relative product
breadth,
3) product quality
average,
4) relative price
5) market share.
R&D variables:
1) new products
2) product R&D/
revenue average.
Production/invest
ment average;
1) total inventory/
revenue average,
2) P&E newness
average
3) investment
/revenue average.
403
Anderton,
D.L.,
Conaty, J.
and Miller,
G.A.
Efficiency
variables:
1) capacity usage
average,
2) employee
productivity
average
3) value added
/revenue average.
Vertical
integration
variables:
1)vertical
integration
backward,
2) vertical
integration
forward.
Marketing
variables:
1)Sales force/
revenue average,
2) media
advertising/reven
ue average,
3) relative sales
force expenses
4) relative media
advertising
expenses.
Dolan, P.F. 1983 Turnaround
action:
1) select an
alternative or
set of
alternatives
2) project
financial impact
of cash, include
balance sheet,
profit and loss
3) use ZETA
analysis on
projected data -
project score
4) evaluate
financial impact
of each
alternative on
the company's
ability to survive
Turnaround strategy
1) accelerating cash
flow
2) consolidating
product lines
3) closing facilities
4) reorganizing
5) restructuring the
capitalization
6) Liquidating assets,
7) reducing
unproductive assets,
8) speed up
turnaround time on
productive assets
9) divesting
subsidiaries
10) merging with
another business
Hambrick,
D.C. and
Schecter,
S.M.
1983 1) identify low
performers
2)asset and cost
surgery
3) selective product /
market pricing
4) piecemeal
productivity
404
Janzen, L.T. 1983 Planning:
1) formulate
long-range
objectives
2) formulate
short-time
strategy
3) concentrate
on modern
products
4) stop
production
5) establish
market
orientation
6) concentrate
on fast profit
increase
Perry, L.T. 1984 Turnaround
strategy:
people layoffs
Bellisario,
M.
1985 Set targets for
turnaround
1) New industrial
relations strategy
2) Renewal of
processes
3) Communication
4) Regular
transformation
5) Information
transparency
6) Information
processing
7) Fine tune
corporate structure
Renew:
1) products
2) production
processes
3) structures
Melin, L. 1985 Strategic measures:
New Owners
1) Increased
concentration on
R+D
2) Cutting down
of assortment
diversification
3) Market
expansion
4) Market
concentration
5) Capacity
increase
6) Capacity
decrease
7) Export of
knowhow
8)
Fusion/acquisition
of competitor.
Müller, R. 1985 1)Effective
management out of
own ranks
2)Strict, relaxed
leadership
3)Esprit de corps
4) Effective conflict
management
5) Back-up financial
institutions
6) Realistic
sustainable
restructuring concept
405
Seabright,
J.W.
1985 1) New organization
2)Training and
development
3) Merchandise
selection and control
4) Pricing policy
5) Quality control
6) Customer service
7) Financial
resources
Wernerfelt,
B.
1985 Turnaround:
brand loyalty
Dickson,
P.R. and
Giglierano,
J.J.
1986 Assessment of
turnaround
strategy against
cost
Turnaround strategic
planning and cost.
Jemison,
DB. and
Sitkin, S.B.
1986 Turnaround
plan:
1) acquisition
2) strategic fit
O’Neill, H.M. 1986
a
1) analysis of the
cause of
turnaround
2) analysis of
key factors
1) decide on
management
changes
2) design sub-
strategis
Management
process:
1) turnaround effort
usually preceded by
management change
1.2) redefinition of
businesss business
1.3) policy changes
1.4) growth strategies
1.5) attention to re-
structuring
1.6) planning
2) key factors in
turnaround
2.1) competitive
position
2.2) product life cycle/
general market
conditions
2.3) industry tyoe
2.4) change in
competitixe patterns
2.5) cause of decline
2.6) new strategic era
O'Neill, H.M. 1986
b
Turnaround
decision
Schwartz,
K.B. and
Menon, K.
1986 Turnaround strategy
-CEO replacement
Lorange,P.
and Nelson,
R.T.
1987 Unfreezing;
establishing the
likelihood of
decline
- top-down,
bottom-up
dialogue
Modiano, P. 1987 1) Renewal of
manufacturing
process
2) Product
redesigns
406
Siomkos, G.
and
Shrivastava,
P.
1987 Decision
making process
Whitney,
J.O.
1987 Intelligence from
the source
Plan for cash Change non-
cash working
capital into
cash
Chrisman,
J.J., Hofer,
C.W. and
Boulton,
W.R.
1988 Turnaround
strategy
definition and
plan
Harker, M. 1988 Turnaround
strategy:
marketing
Quinn, J.B.,
Mutzberg,
H. and
James, R.M.
1988 1) Is the
business worth
saving?
2) Sustainable or
disinvest or
liquidate
3) current
operating health
4) current
strategic health
Selection of
turnaround
strategy
Strategic turnaround
only if operstional
base is potentially
strong
1) Operational
turnarounds
2) revenue-
increasing
strategies
3) cost cutting
strategies
4) asset reduction
strategies
5) combination
strategies
Dutz, M. A. 1989 Mergers and
acquisitions
Eisenhardt,
K.M.
1989
a
Turnaround
practitioner
with regards agency
theory.
Eisenhardt,
K.M.
1989
b
Turnaround: problem
solving
in cognition.
407
Gilmore,
T.N. and
Kazanjian,
R.K.
1989 Turnaround
plan:
Decision types.
1) Planning and
decisions and
policies
2) strategic-,
3) business-,
4) product-
planning,
5) booking
forecast.
1) Engineering and
product development
decisions and
policies,
2) Product design
and development,
3) value engineering,
4) CAD/CAM
operations
Finance and
administration
decisions and
policies,
1) corporate
revenue
forecast,
2) managerial
reporting,
3) facilities
planning.
1) Manufacturing
decisions and
policies,
1.1)
manufacturing
product and
meeting ship
schedule,
1.2) inventory
ownership and
management,
1.3) costs of
goods sold
internally,
2) Quality
assurance
decisions and
policies,
2.1) product
reliability
program,
2.2) component
qualification,
2.3) workmanship
training program,
2.4) inspection.
3) Human
resources
decisions and
policies,
3.1)
compensation,
3.2) hiring.
4) Marketing and
sales decisions
and policies,
4.1) setting and
meeting sales
targets,
4.2) pricing,
4.3) marketing
research and
dissemination,
4.4) sales support
procedures.
Zimmerman,
F.M.
1989 1.Distinguishing
Features
2.Reliability and
Performance
3.Product
Quality
4.Market
Continuity
Appropriate
turnarounds
leadership
1. Managerial
Stability
2.Fair Play
Modest
Overhead
1.Production
Efficiency
2.Inventory
Efficiency
3.Design for
Manufacturability
4.Focus on
Operations
5.Experience in
the Industry
6.Technical
Experience
7.Knowledge
Exploration
8.Incremental
Changes
Boyle, R.D.
and Desai,
H.B.
1990 Analysis of
causes for failure
408
Duchesneau
, D.A. and
Gartner,
W.B.
1990 Turnaround
plan:
Extensive use
of
characteristics
and actions of:
1) lead
entrepreneurs
2) start-up
behaviours
3) behaviours
and strategy
Grinyer,
P.H.,
Mayes, D.
and
McKierman,
P.
1990 Change in
management
Production costs
Marketing
Okuzumi, H. 1990 Turnaround:
strategic
planning
Stopford,
J.M. and
Baden-
Fuller, C.
1990 Turnaround:
rejuvenation vs
turnaround
Boyle, R.D.
and Desai,
H.B.
1991 Analysis of
cauaes for
failure
Planning
Positioning
Policies
Procedures
Rules Systems
Risk
management
Product
development
Diversification
Niching
Market
development
Market
penetration
Gopal. R. 1991 Analysis:
1) Strenghts and
weaknessesof
the business
2) Market
3) Organizational
structure and
quality and
quantity of
manpower
4) Finances
Corporate and
strategic plan
Replacement of CEO
Streamline MIS
1) Funds
injection
2)
Centralization
of cash
management
3) Control
expenditure
4) Sale of
fixed assets
5)
Rescheduling
payments
6) Selective
orders
7) Value add
8)
Recruitment
ban and staf
reduction
9) Trading
Changes in
purchases and
recruitment
procedures
Ketelhohn,
W., Jarillo,
J.C. And
Kubes Z.J.
1991 1) Developed
clear longer
term vision
2) Doing things
new
3) Doing things
differently
4)Concentrate
on efficiency
improvements
Turnaround plan:
1) strategic process
2) appoint turnaround
specialist.
Stop cash
drain
409
Pant, L.W. 1991 Turnaround
financial:
1) pricing
policies
2) product line
3) advertising
4) R+D
5) investment
an production
capabilities
6) size
7) product line
diversification
Castrogiova
nni, G.J.,
Baliga, B.R.
and Kidwell
(JR), R.E.
1992 1) how sick is
the business
2) Stages of
decline
3) CEO
management
Plan around
stages of
decline
Management
replacement
CEO replacement
Chinta, R. 1992 Strategic Operations
Majaro, S. 1992 1)Develop a
vision
2) Develop a
mission
3) Identify and
develop shared
values
4) Managing
change
5) Develop
sustainable
competitive
advantage
6) New product
exploration and
development
Turnaround strategy
process and search
Robbins,
D.K. and
Pearce II,
J.A.
1992 Two-stage
turnaround response
model including
governance factors.
Retrenchment
Walker, R. 1992 Change in
management
Akason,
B.D. and
Kepler, J.P.
1993 Business review
v/s due
diligence.
1) Fully backed
findings
2)
Quantifications
3) Possible
solutions
4) Guideline on
managing a
review which is
also applicable
to turnaround
planning.
Strategic
decision making
in planning
phase.
Cascio,
W.F.
1993 Less bureaucracy
1) faster decision
making
2) smoother
communication
3) greater
entrepreneurship
Lower
overhead
Increase in
productivity
410
Castrogiova
nni, G.J.,
Justis, R.T.
and Julian,
S.D.
1993 Turnaround
strategies:
1) learning through
mistakes
Chowdhury,
S.D., and
Lang, J.R.
1993 External
financial
support
Fredenberg
er, W.B.,
Dethomas,
A. and Ray,
H.N.
1993 Return-to-normal:
growth
Crisis:
cash flow
Stabilization:
profit
Freeman,
S.J. and
Cameron,
K.S.
1993 1) Downsizing.
2) Differentiation
between decline,
reorganization.
Merrifield, D.
B.
1993 Disciplined
analytical
process
1) define
objectives
2) establish
management
3)
entrepreneurial
initiatives
1) internally
generated
developments
2) strategic alliances
3)joint ventures
4) consortia formation
5) minor equity
participation
6) licensing
arrangements
7) mergers and
acquisitions
Moncarz,
E.S. and
Kron, R.N.
1993 1) identify
problem areas
2) using
operational
analysis to
identify problem
areas
3) effectiveness
of management
team
4) analysis of
expenses
Pearce II, J.
A. and
Robbins,
D.K.
1993 1) change of
management
2) organizational
change and
decentralization
3) growth via
acquisitions
4) asset reduction
1) strong
central
financial
control
2) cost
reduction
3) investment
4) debt
restructuring
and other
financial
strategies
1) product/
market
reorientation
2) improved
marketing
Barker III,
V.L. and
Mone, M.A.
1994 1) Focus on
retrenchment and a
definition of a
turnaround situation.
2) Retrenchment not
a cause of turnaround
performance but
rather a consequence
of a steep
performance decline.
411
Bruton, G.B.
and Wan,
C.C.
1994 Operating
turnaround
through improved
efficiencies
Chowdhury,
S.D. and
Lang, J.R.
1994 Turnaround
plan
Strategic turnaround;
1) changing /
adjusting the current
business
2) grand, long term
moves /
diversification
3) vertical integration
4) new market share
initiatives
5) disinvestment
Revenue
generation
Operating
turnarounds
1) current conduct
of business
2 )short run
tactics
3) cost cutting
4) asset reduction
Cole, S.R. 1994 investigative
stage
Turnaround
plan:
Crawford, C. 1994 1) triage
2) holistic
apparoach
3) proper
diagnostics
Fredenberg
er, W.B. and
Bonnici, J.
1994 Informastion
types:
1) Cost analysis
2) Expense
analysis
3) Productivity
and human
resources
4) Productivity
and phisical
resources
5) Productivity of
market
financial analysis
6) Working
capital analysis
Hubbard,
G.,
Lofstrom, S.
and Richard,
T.
1994 Analytical stage
Pearce II,
J.A. and
Robbins,
D.K.
1994
a
Turnaround
strategy:
-
retrenchment
Pearce II,
J.A. and
Robbins,
D.K.
1994
b
Turnaround
strategy:
retrenchment
Arogyaswa
my, K.,
Barker III,
V.L. and
Yasai-
Ardekani, M.
1995 Successful
turnaround strategies:
1) retrenchment and
efficiency-
improvements,
2) critical
contingencies,
3) time-sequential
models complexity of
process.
412
Chen, Y.,
Weston, J.F.
and Altman,
E.I.
1995 Bankruptcy Process:
1) the time in
bankruptcy
2) the effects on
security prices
preceding, during,
and after the relevant
"bankruptcy
announcement" date.
3) default losses
4) application of
absolute priority
versus relative priority
rules.
5) managerial
incentives and the
effect on managerial
turnover and
executive
compensation
6) the role of
exchange offers
7) the performance of
the business after
emerging from
bankruptcy
proceedings.
Datta, S.
and
Iskandar-
Datta, M.E.
1995 Turnaround model:
Restructuring of:
1) management
2) financial
3) assets
4) governance
5) labour
Types of
financial
restructuring:
1) extension
of maturity
2) waive
covenants
3) provide
additional
debt
4) lenders
receive equity
/ warrants /
assets
5) reduce
payments
6) defer
payments
/interest
7) reduce
interest rates
8) pledge
assets
9) accept
restrictive
covenants
413
Detragiache,
E.
1995 Debate cost of
turnaround.
1) renegotiation
with creditors,
2) establish
worth as going
concern,
3) debt
forgiveness,
4) equity
participation,
5) address
agency problem
- debtors and
creditors,
6) Workout
proposal either
accepted or
rejected by
creditors.
7) Management
maintains
control of
business and
have "exclusive"
rights to
propose
restructuring
plan.
Gopinath, C. 1995 1) security,
2) severity.
3) cooperation,
4) turnaround
ability.
1) managerial
turnaround,
2) restructuring,
3) financial workout,
4) legal recovery,
5) exit.
Ketelhohn,
W.
1995 Turnaround plan:
- strategic
process
appoint
turnaround
specialist.
Turnaround plan:
1) strategic process
2) appoint turnaround
specialist.
Stop the
bleeding
Senbet,
L.W. and
Seward, J.K.
1995 1) Information
asymmetry
2) Conflicts of
interest and
coalition
formation,
Court supervised
methods of resolving
financial distress or
formal reorganization;
1) efficiency
characteristics of the
bankruptcy code,
2) empirical evidence,
3) direct costs,
4) indirect costs,
5) deviations from
absolute priority rule,
6) the role of market
mechanisms in formal
reorganizations,
7) pre-package
bankruptcies -
sect.1126(b).
1) debt
restructuring
and private
workouts,
2) potential
impediments
to privatization
of financial
distress,
3) free rider
problem -
exchange
offer,
4) empirical
evidence on
debt
restructuring,
5) interim
asset sale
market,
6) infusions of
new capital
414
Chowdhury,
S.D. and
Lang, J.R.
1996 Efficiency
1) better uses
of
organizational
resources
2) internal
processes
2.1) cost
cutting
2.2) asset
reduction
2.3) close
marginal
plants
2.4) down size
staff
2.5) rebuilt
inventory
slowly
2.6) stress-
cost cutting
discretionary
expenses
2.7) accounts
payable
2.8) inventory
level
2.9)
receivables
level
Entrepreneurial:
1) market
orientation
2) resource
acquisition
3) revenue
generation
4) customer
service
3) Turnaround
measure:
3.1) sales growth
3.2) cost of goods
3.3) employee
productivity
3.4) newness of
plant
3.5) plant level.
Detragiache,
E. And
Garella, P.g.
1996 Debt
restructuring-
multiple
creditors
Franks, J.
R., Nyborg,
K.G. and
Torous,
W.N.
1996 Focus on
comparing
plans of
distressed
businesss'
reorganization
1) within and
outside formal
bankruptcy
process,
2) creditors
claims,
3) deviation
from priority.
USA - Chapter
11, UK -
receivership
and Germany -
New Code
Jo, H. and
Lee, J.
1996 Turnaround:
Managerial/entrepren
eurial role
Martin, G. 1996 Leadership role in
mangement of
change
415
Barker III,
V.L. and
Duhaime, I.
M.
1997 Focus on strategic
change in turnaround
and the financial
context of
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Bruton, G.B.
Ahlstrom, D.
and Wan,
J.C.C.
1997 Rrecognise
problems
sooner business
recognizes the
decline, the
sooner the
turnaround will
begin - greater
the likelihood of
successful
turnaround.
1) Rretrench or
somehow stop the
bleeding,- cutbacks,
2) pursue efforts to
turn business around
3) management
replacement,
1) efficiency
problem =
operating
solution,
2) reconfiguration
of business =
strategic solution.,
Dialy, C.M.
and
Johnson,
J.L.
1997 Turnaround
CEOrole = financial
performance
2)power is typically
attributed to
legitimate authority
3) agency theory
Dodsworth,
J.A..
1997 Due diligence Turnaround
plan
Hart, O.,
Drago, R.
LaP., Lopez-
de-Silanes,
F. and
Moore,J.
1997 Not all
businesss will
survive the
procedure as
the winning
reorganisation
plan could be to
wind up and
dispose of
assets.
Focus on a new
proposal;
1) bankruptcy
procedure
2) structural
bargaining
Capital
markets that
does not
function well.
1) Inside
auctions of
RR.
2) Public
auction of RR
to attract
outside
capital.
3) Which
reorganization
offer to
accept.
416
Hubbard, J.
and
Stephenson,
K.
1997 Turnaround
plan:
chapter 11
approach
1) type of claims
2) all classes of
creditors
3) distribution
options
Olivier, J.E.
and
Fredenberg
er, W B.
1997 2) situation
analysis
3) emergency
action
Management change 1) business
restructuring
2) return to
normal
Pandit, N.R. 1997 Recovery
Strategy stage:
1) Causes of
decline
2) Severity of the
crisis
3) Attitude of
stakeholders
4) Industry
characteristics
5) Changes in
macroeconomic
environment
6) Business's
historical
strategy
Recover Stategy
Content:
1) Operational level
actions
2) Strategic level
actions
3) Recovery Strategy
Process:
4) Management
change stage
5) Retrenchment and
stabilisation stage
6) Growth stage
Sreenivas, I.
S.
1997 Turnaround
management
Winn, J. 1997 Turnaround:
growth
Al-Shaikh,
F. N.
1998 Conduct
feasibility
studies,
Support from
authorities
interested.
1) Reduction
of tax liability,
2) licences by
government,
3) government
subsidies,
4) export
grants
5) government
protection.
Ari?o, A.
and de la
Torre.
1998 Data collection
and analysis
417
Barker III,
V.L. and
Mone, M.A.
1998 Focus on managerial
context of
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) Changes in
organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Brenneman,
G.
1998 Turnaround
strategy:
1) corrective
action - getting
all done fast,
right away and
all at once.
2) can't afford to
think too much
during a
turnaround,
3) time is tight -
money is tighter,
4) no time to
devise elegant
and complex
strategies,
5) write down
everything that is
wrong,
6) change
culture - fun,
action and
restore
employees trust,
7) strategy to
understood and
coupled with key
measures,
1
1) go-forward
plan,
2) implement
plan
immediately -
sell to co-
workers,
3) track cash,
4) convince
creditors of go
forward plan,
5) discuss
creditors
contribution to
exercise plan,
6) plan
restructuring of
debts,
7) replace
management
teams,
8) lead people -
don't manage
them,
9) present a
muted front,
10) cut
bureaucracy
and costs,
11) chose the
right people,
1) create new culture,
2) do change full and
fast,
3) reduces costs,
4) test your product,
5) take care of best
customers,
6) create new image,
7) allow employee to
sort out strategy,
8) strong leadership
is imperative,
9) let people control
their own destiny,
10) superior
communication.
Hotchkiss,
E.S. and
Mooradian,
R.M.
1998 Mergers and
acquisitions
418
Lee, J. 1998 Turnaround:
Corporate
governance
Pearce II,
J.A. and
Robbins,
D.K.
1998 Strategic plan
include
bankruptcy
Strategic plan include
bankruptcy
Smith, W.J. 1998 define the
change plan
1) Change the
management
2) retrench for control
3) develop and re-
posture
4) return to growth
Zhang, C. 1998 Due diligence Turnaround
plan:
Bibeault,
D.B.
1999 Evaluation stage Turnaround
plan;
1)Turnaround
tactics
2) management
change stage
3) emergency
stage
4) stabilization
stage
5) return to
normal stage
1)Emergency
strategy;
liquidation/disinvestm
ent,
productelimination,
head
count cuts
2) Stabilization -
disinvestment,
product-mix
enhancement,
improve operations,
reposture the
business
3) Return-to-growth -
acquisitions, new
products, new
markets, increase
market position
Emergency
strategies;
disinvestment
cash flow
analysis and
control, debt
restructuring,
working
capital
inprovements,
profitability
analysis, cost-
reduction
suppor,
"creative"
acounting
elimination.
stabilization-
asset
redeployment,
retention
divestment
packages,
increasing
lisuidity,
financial,
liquidity
improvement,
balance sheet
clean-up,
control system
developement
, managerial
accounting
developement
. operations,
profit
improvement
programs,
developement
of
manaufacturin
g efficiencies,
1) Operations-
shutting down, 2)
reducing
manpower,
3) reducion
inventory
4) investment,
5) controlp
urchasing,
increaseing
productivity.
marketing-
pricingproduct
line,
promotion,
6)
place,.employees
in divested ops,
execurive
cutbacks, mid
level
cutbacks,rank-
and-file head
count reduction.
419
pricing,
promotion,
place
(distribution0
improving
people mix.
organizational
conflict,
compensation
plans to
support
turnaround
effort, get
people to
C39think
profit) - return-
to growth-
asset
redeployment,
creative
dinancing
schemes, tight
financial
discipline,
special
techniques,
developement
expenditures,
mamagement
by objectives,
marketing
starategies
and tactics,
management
developement
420
Bibeault,
D.B.
Objective addition to
stabilization
controls,
quarterly
planning
reviews.G38-
stabilization-
asset
redeployment,
retention
divestment
packages,
increasing
lisuidity,
financial,
liquidity
improvement,
balance sheet
clean-up,
control system
developement
, managerial
accounting
developement
. operations,
profit
improvement
programs,
developement
of
manaufacturin
g efficiencies,
pricing,
promotion,
place
(distribution0
improving
people mix.
organizational
conflict,
compensation
plans to
support
turnaround
effort, get
people to
think profit
2.3.3) - return-
to growth-
asset
redeployment,
creative
dinancing
schemes, tight
financial
discipline,
special
techniques,
developement
expenditurem
amagement
by objectives,
marketing
starategies
and tactics,
management
developement
421
programs.
Bibeault,
D.B.
2.4) review
and control.
2.4.1) -
emergency-
hands-on
managenment
, daily and
weekly cash
reports
2.4.2) -
stabilization-
managerial
accounting
emphasis,
weekly
operations re-
reviews,
monthly profit
and loss
reviews
2.4.3) - return-
to growth- in
addition to
stabilization
controls,
quarterly
planning
reviews.
422
Borain, A. 1999 Stabilization-
profit
improvement,
earn acceptable
ROI
Bowman,
E.H., Singh,
H., Useem,
M. and
Bhadury, R.
1999 1) Selling old
lines to acquire
new lines,
2) repurchasing
stock and
introducing
business units
to downsizing
work forces.
Three methods of
restructuring:
1) portfolio
restructuring,
2) financial
restructuring,
3) organizational
restructuring.
Accounting
performance.
Market performan
Castelli, V.
and
Kontoyianni
s, I.
1999 Analysis Turnaround
process:
1) Use of
simulations
2) Monte Carlo
3) Use of data
sets.
Longenecke
r, C.O.,
Simonetti,
J.L. and
Sharkley,
T.W.
1999 Turnaround strategy:
1) increase voice of
front-line
management
personnel in
organizational
improvement efforts
2) provide front-line
leaders with clear and
unambiguous goals
that do not lose sight
of profitability and
customer satisfaction.
3) effective planning
and real change go
hand in hand.
4) develop
organizational
proficiency at
corrective action and
make it easier for
people to get their
work done.
5) do not
underestimate the
power of highly
trained and motivated
people
6) improve effective
communication
7) focus on
leadership
Whitaker,
R.B.
1999 Turnaround:
1) change in
performance
2) change in
market value
Castrogiova
nni, G.J. and
Bruton, G.D.
2000 Turnaround
planning:
reconsidering
the role of
retrenchment.
Retrenchment
:
423
Cozijnsen,
A.F.,
Vrakking,
W.F. and
Van Ifzerloo,
M.
2000 Turnaround
Plan:
1) planning
objectives
2)
organizational
3) increased
profits
4) increased
turnover
5) increased
efficiency
6) improved
effectiveness
7) higher
productivity
8) increased
market share
9) improved
environment
10) quality
improvement
11) Human
objectives
12) reduction of
staff turnover
13) increased
employee
satisfaction
14) enhanced
motivation of
employees
15)-
improvement of
work
environment
Harker, M.
and
Sharma, B.
T
2000 Is there a
business?
1) destiny
planning
2)
developement
Turnaround actions:
1) conditioning
factors
2) action/interactional
strategies
2.1) inquiry
ncouragement
2.2) empowerment
2.3) developing
destiny
2.4) communicate
destiny
2.5) develope leaders
2.6) build respect and
trust
2.7) achieve and
reward
2.8) sustain and
strecth organization
3) consequences
3.1) destiny
developement
3.2) enhanced
involvement
3.3) empowerment
3.4) commitment
3.5) leader
amplification
3.6) develope
respect/trust
424
Kisfalvi, V. 2000 Turnaround strategy:
1) survival
2) autonamysuccess
and achievement
3) recognition
4) action
Pandit, N.R. 2000 Cost of
turnaround
Shepherd,
D.A.,
Douglas,
E.J. and
Shanley, M.
2000 Turnaround
psychology
risk reduction
strategies
Theriot, A.,
Roopchand,
D., Stigter,
H. and
Bond, H.
2000 Analysis:
1) Identification
of all elements,
design,
operations,
maintenance,
external
influencing and
factors that will
adversely impact
on business
plan.
2) Optimization
of planned
design,
operations,
maintenance
1) Input to
operations plan
that will manage
and control
residual risks to
plan
2) All to be
translated into
economic
impact on
turnaroud
project
Balgobin, R.
and Pandit,
N.
2001 1) Decline and
crisis,
2) Triggers for
change,
3) Stuation
analysis,
1) Recovery
strategy
formulation,
2) Developed a
turnaround plan,
3) Create a
crisis before
one hits you.
Turnaround process;
1) Retrenchment and
stabilisation,
2) Return to growth.
3) Strategy execution,
3.1) gaining control,
3.2) managing
stakeholders, and
improving motivation.
3.3) manager
changed with
turnaround;
3.4) be alert to the
possibility of decline,
425
Barker III,
V.L.,
Patterson,
P.W. and
Mueller,
G.C.
2001 Focus on managerial
context of
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) Changes in
organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Carrol, J.S.
and
Hatakenaka,
S.
2001 Turnaround:
staff issues
Chandra, V.,
Moorly, L.,
Nganou, J-
P.,
Rajaratnam,
B. and
Schaefer, K.
2001 Turnaround
strategy
formulation
1) cost of
turnaround.
2) SMME
accessibility
Cohen, J.F. 2001 Turnaround
Importance of
strategic
planning
Cook,
G.A.S.,
Pandit, N.R.
and Milman,
D.
2001 1) Informal
arrangements
2) Rehabilitation
structures
outlined by law
3) Liquidation
Ireland,
R.D., Hitt,
M.A., Camp,
S.M. and
Sexton, D.L.
2001 Turnaround
planning:
strategic
management
action
Mueller,
G.C.,
McKinley,
W., Mone,
M.A. and
Barker III,
V.L.
2001 Turnaround:
retrenchment
and practitioner
role.
426
Sudarsanam
, S. and Lai,
J.
2001 Turnaround
restructuring
strategies
1) operational
restructuring
2) asset
restructuring
3) asset sales
4) acquisitions
5) internal
capital
expenditure
6) managerial
restructuring
7) financial
restructuring
8) dividend cut/
omission
9) equity issue
10) debt
restructuring
Turnaround strategy:
1) restructuring
strategies
2) operational
restructuring
3) asset restructuring
4) asset sales
5) acquisitions
6) internal capital
expenditure
7) managerial
restructuring
1) financial
restructuring
2) dividend
cut/ omission
3) equity issue
4) debt
restructuring
United
Nations
General
Assembly.
2001 Plan and other
proposals
Barker III,
V.L. and
Barr, P.S.
2002 Focus on strategic
reorganization in
turnaround and the
financial context of:
1) turnaround
attempts.
1.1) marketing
changes,
1.2) manufacturing
changes,
1.3) research and
development
changes,
1.4) financial policy
changes.
2) organization
structure,
2.1) changes in
vertical differentiation,
2.2) changes in
horizontal
differentiation,
2.3) changes in
integrity mechanisms,
2.4) changes in
control systems,
2.5) changes in top
management
compensation.
Bergstr?m,
C.,
Eisenberg,
T. and
Sundgren,
S.
2002 Focus on security
priority in turnarounds
and creditor
behaviour.
Discussion on Finnish
reorganisation law.
427
Brockman,
P. and
Turtle, H.J.
2002 1) Method to
value businesss,
2) Corporate
security values,
legally binding
barriers and
corporate
business
covenants
.
Collard, J.M. 2002 Diagnostic stage
1) Fact-finding:
2) Is busniess
viable
3) Purpose of
the business
4) Should it be
saved?
5) Why should it
be saved?
6) Core business
7) Sufficient
cash resources
8) Management
leadership
Chose course of
action
Cross, L. 2002 Analysis 1) Actual
restructuring
measures
2) Measure to
ensure long-
term profitable
growth.
1) Strategy to follow
2) Steps in
turnaround
2.1) devastating
events
2.2) call for help
2.3) turnaround
begins
2.4)stabilization
2.5) transformation
Frese, M.
Brantjes, A.
and Hoorn,
R.
2002 Opportunistic
scanning of
environment
Complete
planning
Critical point strategy Reactive
strategy
Reactive strategy
Ghosn, C. 2002 1) acquisition
diferences
2) management
change
3) cultural challenges
Disinvesting
"poor"
investments
focue on
performance
Hausman,
M.J.
2002 Due-diligence
Hill, J.
Nanecarrow,
C. and
Wright, L.T.
2002 Planning
consederation:
1) relocation
2) obtain
additional
finance
3) renowned
sales effort
4) restructure
staff
5) change
product profile
6) other creative
solutions
7) dabble in
specific
marketing
techniquies
8) investment in
equipment and
428
physical
resources
James, D,N. 2002 1) Routine for
rescue;
2) Commission a
solvency report,
Re-establish
company as
going concern,
1) selling of business
2) find hidden heroes,
3) if necessary sweep
the old leaders,
4) take decisions -
even wrong ones,
1) Focus on
turnaround
experiences.
2) Turnaround
actions:
3) generate
more cash,
4) help the
company to
stay solvent.
5) grab the
chequebooks,
6) get more
money than
you think you
need.
Pitchson, M. 2002 Profile:
1) Business
model and initial
evaluation
2) Initial cash
position
Future funding
potential
Goal to bring
company to
viability
Management review 1) Cash burn
2) Debt
negotiation
3) Results
Sprayregen,
J.H.M and
Friedland,
J.P.
2002 Pre-packaged
turnaround
Booker, M. 2003 Mamgement strategy Emergency-
survival return
to positive
cash flow
Borch, O.F.
and Brastad,
B.
2003 1) Return-to
growth- growth
and
developement,
growth in
market share
2) Business
strategy:
2.1) competitive
positioning,
2.2)
organizational,
2.3) political.
Strategic factors:
1) dynamic
development
capability,
2) cooperation
capability,
3) international
network capability,
4) political influence,
5) production
flexibility,
6) branding
differentiation
7) promotion
differentiation,
8) cost leadership,
9) niche focus.
Resource focused
organizational
sub-strategy.
1) competence,
2) routines,
3) personal
commitment, and
working culture.
429
Bruton, G.B.
Ahlstrom, D.
and Wan,
J.C.C.
2003 Retrenchment
:
Labour
Assets
Products
Overhead
Evans, J. 2003 Resource
allocation
Fetterman,
W.H.
2003 Turnaround
situation
analysis:
1) Introduction
and operational
understanding.
2) Assessment
Turnaround
plan
compilation.
1) New set of
operating
assumptions
2) Fewer
facilities
3) Different
management
new production
practices
4) Revised
process flow
5) Financial
requirements
1) management
change,
2) emergency action,
3) business
restructuring
4) return to normal.
Glantz, M 2003 1) Determine
why company is
filing for
Chapte11
- overleverage
- operating
performance
problems
- lawsuits
- get out of
leases of
contracts
- lack of
alternative
financing
2) Evaluate
depth and quality
on management.
- management
capacity and
depth to focus
on bankruptcy?
- maintain core
business
3) Determine
viability of
business
- impact of
negative
publicity
- will business be
able to emerge
out of Chapter
11?
- asset values as
going concern
4) Review
business's
prepetition
liabilities.
- review most
recent balance
sheet.
Analise
companies
projections
1) detailed
projections and
balancesheet
flows are
neceesry to
develpoe cash
flow projections.
2) estimate
borrowing
requirements
3) reconstruct
balance sheet
4) reconsider
position of debt
5) reconstruct
income
statement
6) develope pro
fprma what if
statements
7) compare
payments made
previous year
8) include
extras
9) analise
collateral and
liquidation
10) estimate
liquidation value
11) worst case
liquidation -
debt not to be
greater than
worst case
12) audit
company's
systems
integrity.
430
- determine
secured and
unsecured
liabilities
- secured vs
unsecured
securities under
chapter 11
5) assets
- most recent
assets
- determine
encumbered and
unencumbered
assets
- determine
priority of
securities
Glantz, M. 2003
Harvey, N. 2003 1) Evaluate
management
effectiveness
2) Install a
management
audit to
appraise: the
information —
the system and
control
procedures
— the
organisation
structure
— the technical
and
management
competence
1) Change the
management
system and
routine
2) Produce
integrated long-
term and short-
term plans
Change the
organisation structure
1) Cut salaries
and indirect
wages
2) Cut running
expenses
3) Cut fixed
costs
4) Change the
organisation
structure
nstall tight
budgeting: to
cut marginal
expenses, to
promote
marginal
opportunities
and to make
interactive
savings
5) Install the
tight budget
sequence
throughout the
company at all
levels
Buy services from
outside: research,
product
development,
data processing,
accounting,
graphics,
promotion, sales
support, public
relations, library
information,
market sta¬tistics,
personnel,
advertising, etc.
Use sources of
outside data as
well as internal
Figures
431
Harvey, N. 2003 Financial
accounting
(business
infrastructure)
• Correct
accounts for
inflation;
watch
machinery
deprecia¬tion,
stock
valuations,
land and
property
valuations, the
value of
borrowings
• Negotiate
credit terms
through
purchasing
department
• Delay
payment to
creditors
• Pursue
overdue
accounts
through better
control, better
communicatio
ns
• Negotiate
terms of
business
strictly
through sales
calling on
debtors'
bought ledger
departments
and financial
controllers
• Speed up
cash
management
by stage
payments,
rapid bank¬-
ing, flexible
sources of
finance, fast
invoicing
• Improve
security
• Cut
departmental
salaries and
wages
• Cut
departmental
expenses
• Cut
departmental
fixed costs
• Reduce
capital base
Purchasing:
(procurement)
• Identify the
company's
purchasing
Decision Making
Unit
• Examine over-
specification
• Improve supplier
search and
evaluation
procedure
• Promote
purchasing
function to
contribute to
management
decisions
• Apply a
weighting system
to purchases:
Degree of
essen¬tiality of
product
— Level of risk in
purchase
— Proportionate
cost against total
purchases
• Apply a
continuous
evaluation of
offers
• Concentrate
upon the high
value materials
and components
• Apply regular
stock checks
• Apply better
quality control on
goods inward
Survey existing
suppliers for cost
reduction ideas
Take discounts
for prompt
payment
432
through use of
flexible
assets,
leasing,
bought-out
services
Activity based
costing
• Replace
historical
accounting
with standard
costing
• Question
established
rule of thumb
allocations
• Use more
flexible
costing
approach
• Break down
variances
further
• Faster
reconciliation
with financial
accounts
• Cost
products and
product
groups down
to net profit
• Cost control
materials:
identify
wastage,
rejects,
breakages
systems
Harvey, N. 2003 • Introduce
cost
accountant to:
purchasing
department
and marketing
department
• Cost the
following to
net profit:
large orders,
customers,
markets,
depots and
sales areas
Negotiate new
terms
Alter product
design to allow for
standard parts
purchasing
Improve stock
control and re-
ordering system
Involve
purchasing in
product
elimination
decisions Place
guaranteed
orders in
exchange for bulk
prices Improve
supplier
evaluation for:
failure prevention
costs
— accident costs
— level of service
— accuracy
433
Harvey, N. 2003 • Allocate
factory
indirect costs
to products
• Alter stock
valuation
standards and
correct for
inflation
• Set labour
cost
standards
closer to
realised costs
than to ideal
• Identify
highly
productive
labour costs
• Alter transfer
pricing
Reduce
labour costs:
reducing
frequency of
performing the
task
— identifying
the highly
productive
tasks
— change
equipment or
personnel
— eliminate
idle time
— eliminate
overlapping
work
— eliminate
duplicate work
— eliminate
overtime
— establish
standards of
performance
Use supplier
development
techniques: in key
materials areas
— in high costs
areas
— in situations of
doubtful supply
— for unusual
demands
— for too distant
suppliers
— for non-
standard parts
— for excess
production
capacity
434
Harvey, N. 2003 Use less
space by
condensing
operation
Apply method
and work
study to
activities
Cut plant and
space costs
Cut indirect
salaries and
wages;
engineering,
other services
Replace fixed
costs with
flexible costs;
use outside
services
instead of
high cost
internal
services
Apply job
enrichment
programme to
work
Apply
productivity
bargaining:
incentive
schemes —
job evaluation
— fixed term
contracts
— labour
flexibility and
mobility
— change
working
methods A
When materials
are in short
supply consider
techniques of
purchasing:
coercion,
inducement,
education,
persuasion
Production
(operations)
Check tolerances
in specifications
and widen
Check quality
control limits and
widen
Limit disruption
to.work flow
Reduce prime
costs
Introduce value
analysis to
examine 'use' and
'cost' values
Introduce value
analysis engineer
to purchasing
depart¬ment
Introduce value
engineering to
new product
development and
to process
development
Kanter, R.M. 2003 Turnaround
plan:
The psychology
of turnaround:
- promoting
dialogue
- engendering
collaboration
- inspiring
initiative
Kor, Y.Y. 2003 Turnaround strategy:
1) management
replacement,
2) focus on
management,
3) retention of
management
experience,
4) management
competence.
Maitlis, S.
and
Lawrence,
T.B.
2003 Turnaround
strategy:
1) engaging with
and taking
position on the
1) assigning
responsibility
and
accountability
2) constructing
435
issue at hand
2) defining the
concept
the objec
Miller, D.,
Steier, L.
and Le
Breton-
Miller, I.
2003 Turnaround
plan:
what to look for
in family
business.
Riana, B,.
Chanda, P.
and Metha,
D.P.
2003 Turnaround:
plan, steps,
process.
1) leadership to
provide vision,
induces
creativity,
challenge
existing
assumptions
2) support by
financial
institutions
3) gaining trust
from suppliers
4) maximise
productivity
5) maximise
capital
utilisation
6) manpower
rationalization
7) stringent
working capital
management
8) stretching
targets-
maximise asset
capacity
9) streamlining
systems
10) inveting in
technology
upgrading
11) financial
restructuring
12) low cost
regime
Leadership role in
management of
change
Stop the
bleeding
Scherrer,
P.S.
2003 1) analysis of the
situation, one
week to one
month
2) Accuracy of
financial
statements
3) Determine
true value
4) Investigate
budgets and
projections
Creation of a
plan, one to two
weeks;
Strategic turnaround
redefines the
business
implementation of the
plan, six months to
one year
4) stabilization of the
business: six months
to one year
5) return to growth of
the business, one to
two years
Financial
turnaround
1)
Restructures
the financial
operation.
2) Revenue
generation
3) Cost-
cutting Asset
reduction
1) Operational
turnaround
changes
operations
2)
Productivity/mark
et refocusing
Anon 2004
a
Turnaround:
1) different skills
set requirement
2) skilled team
of individuals
436
Anon 2004
b
Turnaround
plan: (court
approval)
1) acting in
good faith
2) probability of
a viable
proposal if
extention
granted
3) no creditor
would be
materially
prejudiced
Anon 2004
c
Investigative
stage
Plan implementation.
Anon 2004
d
Analyzing the
business and/or
strategic plan
Plan to
determine how
business
objectives can
be met
1) stabilizing
the situation
by reducing
cash losses
and
increasing
cash flow
2)
repositioning
the company
through
financial
restructurion
Strengthening the
business through
orgznizarional
restructuring
Anon 2004
e
Turnaround
plan: creditor
intervention
and non-
approval.
Chapter 11.
Ballow, J.J.,
Burgman, R.
and Molnar,
M.J.
2004 Assesment of
asset types to
determine real
value
Busby, J.S.,
Hibberd,
R.E.,
Mileham,
A.R. and
Mullineus,
G.
2004 Turnaround
analysis
Craighead,
C.W.,
Karwan,
K.R. and
Miller, J.L.
2004 Turnaround strategy-
service orientation:
1) antecedents to
recovery expectations
2) loyalty
3) quality
4) severity
5) guarantees
437
Gaglio, C.M. 2004 Turnaround strategy:
1) Cognitive response
to change.
2) Optimal allocation
decision.
3) Entrepreneurial
behaviour.
4) Quick to grab and
comprehend new
opportunities.
5) Shy away from
trouble time - defence
meganism.
Gilley, K.M.,
McGee, J.E.
and
Rasheed,
A.A.
2004 Outsourcing
Gudmundss
on, S.V.
2004 Turnaround:
success factors
in airline - in
absence =
warning sign
Hershkowitz
, B.
2004 Valuation of
collateral
Huson,
M.R.,Malate
sta, P.H.
And Parrino,
R.
2004 Turnaround
plan:
1) management
succesion and
performance
CEO replacement
Kow, G. 2004
a
Sound
understanding of
capabilities
Turnaround strategy
elements:
1) an appropriate
strategy vision
2) an organizational
structure
3) a set of business
processes
4) a human resource
architecture that will
support the vision
5) technological
innovation that will
nourish organization
and enhances
product range
6) organizational
cultures that will
accept and commit to
effort.
Kow, G. 2004
a
Turnaround steps:
turning events to
structure
Lohrke, F.T.,
Bedeian,
A.G. and
Palmer, T.
B.
2004 Management
role:
1) quickly and
accurately
2) determine the
cause of
business
performance
lapse
Implement
decision
necessary for
prompt
recovery/turnaro
und
1) Process;
1.1) phase 1
1.2) phase 2
1.3) phase 3
2) Psychology of
turnaround
2.1) psychological
response
438
Longman, A.
and Mullins,
J.
2004 Turnaround
similarities with
project
management
McCarthy. 2004 Turnaround
dimentions:
1) people
2) change
Nutt, P.C. 2004 Turnaround
tactics:
1) idea
2) benchmarking
3) solicitation
4) innovation
5) innovation-
objectives and
multi options
Orme, D. 2004 1) situation
analysis
2) implement
emergency
action
Turnaround stages:
1) management
change
2) business
restructuring
3 ) return to normal
Turnaround
psychology
Sauner-
Leroy, J-B.
2004 Turnaround
psychology:
1) risk taking attitude
under uncertainty
2) Mangersment
3) banks/lemders
4) trade creditors
439
Shook, S.R.,
Vlosky, R.P.
and
Kallioranta,
S.M.
2004 1) expand market
reach
1.1) new markets
1.2) greater
market
penetration
2) increased
market velocity
2.1) shorter order
cycle due to suply
chain collabortion
3) achieved
competitive
advantages
3.1) improved or
enhanced
custome services
4) operational
efficiencies
4.1) reduced
sales cost
4.2) reduced
inventory
4.3) reduced
search time
4.4) lower costs
alternative to EDI
4.5) collaboration
5) scale and
spend
aggregation
5.1) economies of
scale
5.2) increased
leverage in
negotiatons
6) transaction
automation
6.1) reduced
order processing
costs
7)
disintermediation
7.1) lower prices
7.2) greater
power in the
supply chain
Walshe, K.,
Harvey, G.,
Hyde, P.
and Pandit,
N.
2004 Planning
phases
1) recovery
strategy
formulation
2) retrenchment
and stabilisation
3) return to
growth
Turnaround
interventions
1)
replacement
2)
retrenchment
3) renewal.
440
Wickham,
P.A.
2004 Turnaround
strategies:
1) business continues
to exist as a legal
entity under the
control of the
entrepreneur
1.1) business
performs well
financially but does
not meet the social
and self-
developement needs
of the entrepreneur
1.2) business fails to
achieve set of
strategic objectives
1.3) the busienss fails
to perform as well as
was planned but is
financially secure
1.4) the business fails
to perform as well as
was planned, and
needs additional
finance
2) the business
continues to exist as
an independent entity
but the entrepreneur
loses control
2.1) the business is
taken over as a going
concern by new
management
2.2) the business is
taken over with
restructuring
3) the business does
not continue to exist
as an indipendent
entity.
3.1) the business is
taken over as a going
concern and
absorbed into another
company
3.2) the business is
broken up and its
assets disposed of
Anon 2005 Analyzing the
situation
Turnaround strategy:
1) changing the
management
3) implementing and
emergency action
plan
4) restructuring the
business
5) returning to normal
Appel, M. 2005 Investigative
1) final business
review
determine
potential for
2) successful
turnaround
Determine key
turnaround
initiatives
1) Implementation of
key turnaround
initiatives
2) Selling the
company
441
Brodsky,J.A. 2005 Analysis:
1) What was
each business
2) Long and
short term issues
3) Have a
winning model
4) Deal on the
hook for funding
5) Should
funding still be
provided?
6) Structure of
organization
7) Reporting
lines
8) Employee
profile
9) Business plan
for each asset
Establish
business plan
for restructure
1) Retrenchment
2) Shut down on on
productivity
Safeguard
cash
resources
Funding
opportunities
Brown, S. 2005 Assessment of
business
Plan to
restructure and
turnaround
1) Alignment of
performance
incentives
2) Improving financial
controls
3) Enhancing
manufacturing
operations
1) Reduce
costs
2) Squeeze
working
capital
3) Generate
near-term
cash
4) Raise cash
by selling
assets
5) Refinance
senior debt.
Burbank,
R.K.
2005 Situation
analysis
1) management
change,
2) emergency action,
3) business
restructuring
4) return to normal.
Carapeto,
M.
2005 Turnaround
strategy:
Formal vs.
Informal
Dobson, P. 2005 Assessment of
talent
Management
1) development of
talent
2) support
existing senior
managers
Francis, J.D.
And Desai,
A.B.
2005 Outside support Expense
retrenchment
Operational
restructuring
Fraser, J.A. 2005 Debt
restructuring
Garvin, D.A.
and
Roberto, M.
2005 Setting the
stage:
communication
Creating the
frame:
plan and
acceptance
1) Managing the
mood:
2) Reinforcing good
habits
3) values
442
Hass, W.J.
and Pryor
IV, S.G.
2005 1) management must
have the enthusiasm
that inspires people
2) everyone in the
organization must
have a strong bais for
action
3) understanding to
cunsumer fully and
clearly
Jas, P. and
Skelcher, C.
2005 Turnaround in public
organization:
1) more complex
than business
environment
2) closure and
takeover risk
3) performance
measurement.
Kam, J. 2005 Turnaround
introduction
1)
Environmentail
scanning
2)
Managerialbeha
viour traits
Kiessling,
T.S. and
Richey, R.G.
2005 Turnaround
plan:
- acquisition
Kim, W.C
and
Mauborgne,
R.
2005 Turnaround
strategy:
Principles of
Blue Ocean
strategy
1) Formulation
principles
1.1) reconstruct
market
bounderies
1.2) focus on
the big picture,
not the numbers
1.3) reach
beyond existing
demand
1.4) get the
strategc
sequence right
Execution principles
1) overcome key
organizational
hurdles
2) build execution into
strategy
3) risk factor each
principle alternatives
4) search risk
5) planning risk
6) scale risk
7) business model
risk
8) rick factor each
principlel alternative
1) organizational
risk
2) management
risk
Four actions
framework
1) reduce
2) eliminate
3) create
4) raise
Loubser, A. 2005 Turnaround:
staff retrenchments
Mellahi, K. 2005 Turnaround strategy:
1) board
2) management
3) psychology of
turnaround
Morris, R. 2005 Turnaround
plan:
Drivers
1) time as driver
2) secured
lender driver
stakeholder
driver
3) trade creditor
443
driver
4) management
integrity
Muir, K. 2005 Turnaround
cost of
turnaround
Probst, G.
and Raisch,
S.
2005 Turnaround strategy:
1) sustainable growth
2) stable change
3) healthy
orgznizational culture
4) keeping the
balance
Turnaround
psychology
how to prevent failure
Rasheed,
H.S.
2005 Turnaround
strategies:
1) growth
2) retrenchments
3) strategy
formulation
Sargeant,
J.R.
2005 1) redefine rates of
management
2) upskill
management
Turnaround
strategy:
1) restructure
finance
agreements
Sheppard,
J.P. and
Chowdhury,
S.D.
2005 Turnaround
strategies:
1) decline
1.1) K-extinvtion
1.2) R-extinction
1.3) stimulus
2) response initiation
2.1) domain definition
2.2) scope overlap
2.3) strategic
contours
3) transition
3.1) elapsed time
3.2) resource
commitment
3.3) policy/programs
3.4) structure and
rewards
3.5) people
4) outcome
4.1) success/failure
444
Smith, M.
And Graves,
C.
2005 Distressed state:
1) severity
2) firn size
3) free assets
available
4) cause of
decline
5) competitive
position
Decline stemming
strategies
1) stakeholder
support
2) efficiency
3) internal climate
and decision
processes
4) stability
5) recovery strategies
adopted
6) maintenance of
efficiency
7) entreprneurial
reconfiguration
8) extent of recovery
turnaround
Winer, P.,
Levenstein,
E. and
Gewer, D
2005 Sale of business or
part as going concern
Turnaround
steps:
1) debt
forgiveness
2) debt
resheduling
3) debt equity
convertion
Boyne, G.
and Meier,
K.
2006 Modelling turnaround:
1) retrenchment,
2) repositioning,
3) reorganization.
Chathoth.
P.K., Tse,
E.C. and
Olsen, M.D.
2006 Stages in
turnaround:
1)
retrenchment
2) recovery
Cocq, M.,
Legoux, F.,
De Loe, P.,
Oka, G. and
Zorn, A.
2006 Liquidation and
going concern
value
Plan;
1) replace slow
moving
inventory with
higher turn
inventory
2) closing under
performing
stores
3) closing
distribution
centres
4) reduce SG+A
cost
5) value entity-
liquidation and
going concern
value
6) Proposed
Plan:
6.1) strategy
6.2)
implementation
6.3) free cash
flow valuation
Couwenberg
, O. and De
Jong, A.
2006 The role of banks in
turnaround
445
Falkenberg,
A.D. and
Glamheden,
H.A.
2006 Turnaround:
1) management
replacement /
favourable
composition of top
management teams.
2) tenure in top
management tend to
be negatively related
to turnaround
success,
3) management;
functional
heterogeneity /
functional
Farris,B.,
Lee, H.,
Maitrejean,
J.,Schauer,
J. And
Seyffert, N,
2006 1) Aggresive
cost control
2) Process
control
3) Maximise
return on
invested
capital
1) Customer -
faced approach to
growth
2) Company-wide
focus on
technology
3) Energized
associates /
employees
Filatotchev,
I. and Toms,
S.
2006 Asset valuation. Realignment.
Hart, M.L. 2006 Turnaround
plan:
- customer
retention
Holcomb,
T.R. and
Hitt, A.H.
2006 Strategic outsourcing Turnaround
strategy:
outsourcing
Lewin, B.P. 2006 Turnaround:
1) collaterized
debt & asset
specificity
Lewin, B.P. 2006 Turnaround
plan:
World bank
requirements;
Characteristic
s for
successful
out-of-court
financial
restructuring
1) number of
main banks
2) inability to
service debt
3) negotiate
an
arrangement
4)
sophisticated
refinancing
5) can be swift
move to
insolvency law
6) benefit for
all through
negotiation
7) no need for
446
relief from
trade debt
8) neutral or
favourable tax
treatment
Pearce II,
J.A. and
Michael,
S.C.
2006 Turnaround step
to be taken -
recession:
1) position the
company in
multiple markets
and geographies
2) plan to
confront
declining sales
1) promote the
business's
products and
services
2) maintain
advertising
3) introduce new
products
4) find
alternatives to
price cuts
5) attract new
customers
6) prepare for
economic
recovery
World Bank 2006 Reorganization
plan and
Process
Agarwal, V.
and Taffler,
R.
2007 Turnaround
assessment:
contingent
claims valuation
methodology.
1) Market share
%.
2) Share of
defaulters%.
3) Average credit
spread%.
4) Revenue in
monitory terms.
5) Loss in
monitory terms.
6) Profit in
monitory terms.
7) Return on
assets %.
8) Return on
risk-weighted
assets%
447
Benbrahim,
H., Bozotto,
R., Grossi,
L., Teillon,
G. and Ure,
J.
2007 1) The company
history and
situation analysis
data.
2) Head office
expenditure will
have to be cut
down to
acceptable
levels.
3) Recommend
that
management re-
assess this area
more
aggressively on
a value add
basis.
1) Focus on
Turnaround
plan and on
increasing
shareholders
equity and
returning
business to
profitability.
2) The focus on
increasing
shareholders’
equity and
returning to
profitability.
Co must take
immediate action to
close its
underperforming
footprint.
1) Business
will continue
to rely on
external
financing for
the
unforeseeable
future.
2) The
financial
reflects a
dismal
performance
for the last
fiscal.
3) The way
financial
reporting is
managed is
not conducive
to effective
cash flow
management.
4) The
outlying
offices are
treated as
income
centres only
and thus
distort the real
contribution
from these
business
units.
Blinkenberg,
C., Kadakia,
s., Yao, M.
And
Zangrilli, P.
2007 Analysis of the
business:
1) Financial
2) Market
Position
3) Operation
4) Strategy
5) Management
6) Corporate
Governance
7) Non-market
factors
Management
strategy and
benchmarks.
Byers, M. 2007 1) Strategic
performance
review
2) Viability
review
3) Management
assessment
Campbell,
N.D., Kirk,
C.H. and
Rogers,
T.M.
2007 Turnaround-
measures of
economic freedom
impacting on
entrepreneurial
activity.
De Wet,
J.H.vH. and
Du Toit, E.
2007 Turnaround
valuation
448
Du Plessis,
R. and
Matarirano,
G.
2007 Turnaround
plan
Fontannaz,
S. and
Oosthuizen,
H.
2007 Turnaround:
1) management
performance
2) sustainable growth
Fukui, Y.
and
Ushijima, T.
2007 Business
valuation.
Han, C.,
Huml, A.,
Kagalkar,
A., Saito, L.
and
Sundjaja, K.
2007 Refocus strategy 1) cost
reduction plan
2) expand
revenue
oppertunities
Longenecke
r, C.O.,
Mitchell,
M.J. and
Fink, L.
2007 Turnaround:
managerial impact
Shepherd,
D.A.
2007 Turnaround
psychology
Emotional cost of
failure
Baker, A.,
Cassidy, L.,
Goodman,
J., Siegel, J.
And Ulin, E.
2008 1) Focus on
what customers
want
2) Focus on
core operations
3)
Modernization
Improve
performanc
Carlson,
A.P.
2008 Strategic issues
involving:
Labour in turnaround
Choi, D.Y.
and
Edmund,
R.G.
2008 Turnaround:
corporate social
responsibility
King III on business
rescue
Epstein, D.,
Ostroff, S.,
Sand, M.,
Selvnvthan,
S. And
Twerdun, D.
2008 Problem solving
cognition
Debt
restructuring
449
Jostarndt, P.
and
Sautner, Z.
2008 Investigate;
1) how
ownership
structures
change when
businesss are in
distress.
2) whether
ownership
structure and
changes therein
are related to
management
turnover when
businesss are in
distress. - costs
of workouts.
Legal
requiremens:
1) differences
inb legal
requirements
Germany vs.
Use.
2) fresh equity
capital - placed
in rights issue
and private and
public placing.
3) debt
restructuring -
private
renegotiations.
4) equity write
down for over
indebted
company,
5) provision of
fresh money by
creditors,
6) mergers and
acquisitions -
take over's,
7) change of
management.
1) Focus on financial
distress and
management
turnover.
2) Business lifecycle.
3) Actual role of
creditors in
restructuring of
financially distressed
businesss.
Outcome of
turnaround;
1) private
investment
reduced
substantially,
2) bank
investment
increases
under
continuing
distress,
3) ownership
of directors
during
distress cycle,
non-executive
directors
increase,
4)
management
turnover due
to distress
increase 22%,
5) turnover in
CFO and
CEO
increases
rapidly in
response to
poor
performance.
Martin, R.D.
and
Kimberly,
J.R.
2008 1) Outside
management
2) alignment around
common principles
3) people centred
4) clear expectations
5) mission driven,
operations based,
corporate support.
6) authority preceeds
accountability
7) organizational due
process to govern
resolution of all
disagreements
8) dispute resolution -
all parties present.
9 creating vision and
objectives
imolement
information system
10) chart course of
business
11) the right team
12) complementary
background and
experience
13) drew upon
diverse skills and
perspectives
Curtail capital
expenditure
1) implement
financial
performance
plan
2) implement
revenue cycle
improvement
initiative
no nonsense
accountant
1) series of
signifficant layoffs
modest learning
curve
2) creating a
"burning platform"
3) metaphor -
burning platform
4) raise
awareness of
platform
5) three
messages:
organization
commitment to
turnaround, entire
organization will
partake,
management
confidence.
6) achieve or
exceed service
excellence goals
7) adhere to
organizational
effectiveness
principlels
8) set specific
goals and targets
450
Martin, R.D.
and
Kimberly,
J.R.
2008 1) balancing
accountability and
flexibility
2) articulate need to
move decisions
3) assign clear
responsibilities for
decision.
4) developing and
implementing work
plans and metrics
5) secure agreement
on benchmarks
6) set aggressive
targets
7) relentless
communication
8) keeping messages
simple and direct
9) constant reminders
10) call on quick
response
11) involving key
stakeholders
12) resolve in the
face of setbacks and
resistance
13) resistance to
change is inevitable
14) internal
resistance
15) getting the right
people on the bus.
Ormanidhi,
O. and
Strings, O.
2008 Turnaround strategy:
Pearce II, J.
A. and
Robbins K.
2008 Turnaround strategy:
Approaches top
deploy to reduce the
chances of a
recurance of the
turnaround situation
451
Pretorius, M. 2008
a
Turnaround strategy:
1)Underperformance
1.1) efficience
strategy
1.2)
protect/strengthen
1.3) cost cutting
1.4) capacity
improvement
1.5) generate cash
1.6) outsource
1.7) productivity
1.8) asset reduction
2) Distress
2.1) forced
repositioning strategy
2.2) strategy revision
2.3) alternative
revenue streams
2.4) find new
products
2.5) alternative
markets
2.6) forced to
innovare
2.7) diversify
2.8) differentiate
2.9) acquire
3) Crisis
3.1) last resort
strategy
3.2) defensive merger
3.3) divestiture
3.4) liquidation
3.5) debt forgiveness
Pretorius, M. 2008
b
Turnaround strategy:
1) strategic
reorientation
2) unused debt
capacity
3) leadership
4) liabilities of
turnaround managers
5) turnaround
psychology/cognition
Pretorius, M.
and
Holtzhauzen
, G.T.D.
2008 Turnaround
process:
1) liability- data
integrity
2) liability-
legitamacy
3) liability-
resource scarcity
4) liability-
strategy options
5) liability-
leadership
Varvarigos,
D.
2008 Turnaround
plan:
Human impact
on sustainable
growth
452
Behm, R.,
Bruno, A.,
Nue, T. and
Urbani, K.
2009 Analysis of
operating cash
1) SWOT
analyses
2) Strategy
ananlysis
principle
company
strategy
resent
strategic
initiatives
strategy
diamond
3) Industry
analysis
4) Comparable
company and
performance
analysis
5) Performance
ratios
solvency
covenants
6) Corporate
structure
7) Biographics of
management
8) Porter five
forces analysis
Restructure
plan:
1) liquidity
improvements
2) financial
restructuring
3) operational
improvements
4) tax
improvements
Chi, L. 2009 Debt
restructuring
Coetzee, J. 2009 Schemes of
arrangements.
Dev, A.,
Mingo, J.
and Buckler,
J.
2009 Turnaround
structure:
freeing up
capital and
liquidity.
453
Glantz, M. 2009 1) the situation
1.1) correct
problems that
can be corrected
and return the
company a
tradition banking
relationship
1.2) maximise
the potential for
ultimate
collection of
outstandings
1.3) workout
department of
bank more
experience
solving credit
probles
1.4) decision
must be fast,
usually without
conferring with
other
departments (the
legal dept
exception)
3) eleven big
questons
3.1) are day-
today cash
budgets
positive?
3.2) will business
be able to
extend trade
terms?
3.3) can
company file for
expedited tax
refund to provide
quick injection of
cash?
3.4) can outside
consultants
assist -
ccountant,
bankers,
turnaround
specialists.
3.5) are there
other sources of
cash, e.g.
guarantors, new
equity
The meeting
1) review all
information
dealing with
business
2) legal council
may be present
3) define role of
turnaround
group and its
interaction with
business
4) full disclosure
of relevant
information and
are based on
realistic
evaluation of
the abiliites of
both the
borrower and
workout to
resolve
problems
5) role
clarification
6) note
additional
sources of cash
flow generation
and/or
additional
colateral
avaialbility
7) updateand
keep credit
rating frequent
8) arrange
engagement
with bankers
454
Glantz, M. 2009 3.6) is the
company or any
part viable, so
restructuring is a
viable
alternative? -
shareholders
valuation and
simulation are
key
3.7) is there a
plan to repay
new money
within
reasonable time
frame, and will
portion of
imbedded debt
be repaid with it?
3.8) will new
money be LIFO
and senior to
embedded debt
(rule of thump:
new money
should not
exceed more thn
a third od
embedded debt?
3.9) does
business plan
alternative legal
moves,
preventing
restructuring?
3.10) if nove isn't
made quickly,
will decay cause
partial or full
dissapation os
assets, actions
by other
creditors, or
increased
carrying costsw
for the bank?
3.11) how should
the bank treat
new loans (new
money)? do
advances
anhance
collateral value?
McCann, P.,
Dermer,
S.W.,
Hunter, B.K,
MacDiarmid,
A., Morgan,
R. Örndahl,
M., Robson,
K. And
Wagman, F.
2009
455
APPENDIX D: TURNAROUND RESEARCH SUMMARISED BY PANDIT
456
O'Neill (1986b) Corporation 9 US manufacturing and 4 US service
firms, mixed: 9 T/A and 4 non T/A
Published case histories from
Fortune magazine
Pant (1991) Corporation 137 US manufacturing firms, mixed:
64 T/A, 73 non 1/A
Public archives (Compustat)
Ramakrishnan & Shah
(1989)
- - -
Reichert (1988) Corporation 1 large US leisure corporation. T/A Interview with CEO
Remick (1980) Turnaround
managers
- Anecdotal
Rose (1989) Corporation 1 UK retail firm. T/A Anecdotal/company archives
Robbins & Pearce (1992) Corporation 32 US textile mill product firms, T/A Questionnaire, public/company
archives
Schendel & Patton (1976) Corporation Mixed: 36 matched pairs of US
firms from 20 four digit classes
Public archives (Compustat).
Secondary qualitative sources
(annual reports etc.)
Schendel, Patton & Riggs
(1976)
Corporation 54 US manufacturing firms, T/A Public archives (Standard and
Poor's Compustat computer
tape)
Scherer (1989) Literature,
cases,
turnaround
managers
- Interviews with 80
turnaround managers; review
of 600 articles; review of 300
case studies
Seabright (1985) Corporation 1 UK retail furniture firm, T/A Company archives/anecdotal
Slatter (1984) Corporation 40 UK publicly quoted firms, mixed:
30 T/A, 10 non T/A
Public archives, questionnaires
Stopford & Baden-Fuller
(1990)
SBU 6 manufacturers in 4 industries
matched against 4 less successful
competitors and 5 equally successful
competitors
Several hundred interviews
Taylor (1982/3) - - Anecdotal
Main & Goldthorpe
(1989a,b,1990)
Corporation 27 Canadian firms, mixed Newspaper and investment
analysts reports,
questionnaires, interviews
Thietart (1988) SBU 217 SBU's in six strategic groups PIMS
Whitney (1987) - - Personal experience, anecdotal
Wyman (1989) - - Anecdotal
Zimmerman (1986) Corporation 4 US manufacturing firms, mixed:
2 T/A, 1 marginal case, 1 non T/A
Public archives
Zimmerman (1989) Corporation 15 mature US manufacturing firms,
mixed: 8 T/A, 7 non T/A
Financial records, manuscripts,
case histories, interviews
a E.g., sample size, successful and unsuccessful turnarounds (mixed) or just successful turnarounds (T/A).
457
APPENDIX E: REAL LIFE CASE EXAMPLE
458
RESEARCH PROJECT:
Dear participant,
OBJECTIVE
I am conducting research in the field of business failure and rescue. The main aim of this
research is to establish what behavioural and financial inferences impacts on the business.
The results of the interview will be applied in the design of primary research
questionnaires. Finally, all the research data will hopefully give us a better understanding of
the dynamics within a business environment.
WHAT IS YOUR ROLE?
Included in this e-mail are three real life cases. They resemble typical credit applications
(data from the organisation’s database was used), but account conduct through a
computer based enquiry is also attached. You need to study the three cases as if you were
assessing a review and request for additional facilities. Please feel free to make notes, as
you will be subjected to an interview where I am going to ask you to reply to and discuss
various issues and some of the dynamics of the business. Reading through the case
studies will take about 90 minutes; once again, I need to reiterate that you need to be well
prepared for the research to come to a meaningful conclusion. The interview is
estimated to take at least three to four hours. I will however contact you to make an
appointment when it suits you. Your anonymity is guaranteed and no reference will be made
to you is person.
THE INTERVIEW
Please bring the case studies and your notes to the interview. I will be using a Rep-grid
research methodology, which requires you to answer a set of questions and to debate
possible key constructs. There is no right or wrong answers and you will not be "tested" at
all. I am relying on your wealth of knowledge and expertise to arrive at meaningful
conclusions.
Thank you for your assistance
Gert Holtzhauzen (0833250150)
459
CASE
Group: Wilson Log Logistics (Pty) Ltd (“Wilson Log”)
Authority:
Risk Category:
Moodies Score: AFS 31/12/05 = 3.87 MA’s 30/6/06 = 4.13
Annual Review Date: June
M/A requirement: Quarterly
Date : 11th July 2007
Reason for paper Request to condone an excess on Wilson Log of up to R21.0m against a shared
OD/LG limit of R36m (total excess period of 5 days) until 16/07/2007
COMMENTS
Refer to the last annual review dated 2 June 2006 (copy minute attached).
We recently experienced an excess (June 2007) of up to R25.9m for 7 days that was tabled and condoned at
Credit Assessment Meeting. The latter indicated possibly looking at Debtor Discounting. The reason for the
excess was as a result of historical 7-day debtors requesting an extension in terms over their financial year-end.
The excess was timeously rectified.
We were now requested to condone an excess of up to R21.0m for 5 days. We were advised that they have of
late experienced “over trading” from their clients in the tyre industry (Tar Stone, Tube Master – Grobler Group
and Standard Tyres). The reason for the “over trading’ is currently unknown although the client advised that it
may be due to the shipping lines presently providing discounts.
The client has provided us with a cash flow statement that reflects that the excess will be cleared from debtor
collections on/by the 16 July 2007. Debtors to be collected, amongst others, include Toyota SA, Audi and Ford
SA.
The debtor book is currently R149.3m and the client continues to insure through Lourens.
We are in receipt of the 31.12.2006 annual audited financial statements and a meeting (including ACM and ASM)
has been set-up with the client for Monday (16 July 2007) to discuss the levels of excesses experienced and
determines their needs going forward. If need be, we will develop the Debtor Discounting scenario. This matter
will be clarified in our review.
In view of the client having conducted a satisfactory account since 1997, comfort in quality and quantum of
debtors and short-term nature, request that the excess be condoned. The annual review is to be submitted to
Credit assessment meeting as a matter of priority.
460
FAMILY TREE
FACILITIES:
Borrower (s) Name
Type of
Facility
Present
Limit
Proposed
Limit
Outstanding
@ 10/07/07
Rate
A. Lucrative Bank :
Bank Facilities
1. Wilson Log Logistics (Pty) Ltd
O/D#
O/D
O/D
L/G
Call
CFC $
CFC
36,000,000
‘1’
‘1’
‘1’
-
-
-
36,000,000
‘1’
‘1’
‘1’
-
-
-
17,547,325 Dt
20,171 Cr
41,464 Dt
2,330,750 Dt
46,444 Cr
621,600 Cr
465 Dt
Prime
Prime
Prime
R 0.69%
Prime
FEC @ 10% 250,000 250,000 Nil
2. 90 Degree Super Supply
Solutions ( Pty) Ltd
C/A NCA NCA 82,532 Cr Max
3. KL Malherbe Family Trust C/A NCA NCA 9,756 Cr Max
4. San Micheal A Tommi Importers
P/L
C/A NCA NCA 71 Cr Max
Sub Total Bank Facilities: 36,250,000 36,250,000 19 920 005 Dt
780 574 Cr
Asset Based Facilities
5. Wilson Log Logistics P/L
RCL 7,500,000 (a) 7,500,000 5,305,370 Dt P-1%
MTL
S/P
S/P
2,578,075 (b)
504,865 (c)
231,125
2,487,902
477,687
222,255
2,487,902 Dt
477,687 Dt
222,255 Dt
P+1%
P+1%
fleetfac** 35,000 35,000 26,499 Dt
Sub Total Asset Based Facilities: 10,849,065 10,722,844 8,519,713 Dt
Total 47,099 065 46,972,844 28 439 718 Dt
780 574 Cr
Other Facilities:
6. Lotglove Investments 8 P/L Homeloan 2,176,211 2,175,127 1,621,595 Dt P-2, 15%
Sub Total Other Facilities: 2,176,211 2,175,127 1,621,595 Dt
B. Other Lucrative Bank Group:
ACB Daily limit Daily limit
7. Wilson Log Logistics P/L (6,000,000) (6,000,000)
TOTAL Lucrative Bank GROUP 49,275,276 49,147,971 30 061 313 Dt
780 574 Cr
Notes:
# Condone temporary excess of up to R57.0 m until 16/07/2007.
461
SECURITY: A/V
A. Lucrative Bank:
Bank Facilities:
1. Wilson Log Logistics (Pty) Ltd
? “U” suretyships+ L/F by: K L Malherbe
J Malherbe
? Cession of debtors per 30/06/2007 after exclusions R135,320,866 @ 50%
? Cession of Lourens’s Credit Ins pol No. CB0407223A covering debtors
? Cession of MomLife pol No. 90393983 (D/V R 1,2 m) on life of Jl Malherbe
? Cession of Mom Life pol No. 90393977 (D/V R 1,2 m) on life of J Malherbe
? Cession of Safesure policy no.013076296 (DV R5 M) on the life of Jl Malherbe
? Cession of Safesure pol No.013076518 (DV R5, 513 M) on the life of J Malherbe
67 660 433
Tangible security held for bank facilities 67 660 433
Asset Based Facilities:
4. Wilson Log Logistics (Pty) Ltd: As per (1) above.
Tangible security held for ABF facilities
SECURITY FOR LUCRATIVE BANK FACILITIES
CHECKED AGAINST SECURITIES REGISTER on
11/07/07 by:
N Pete
Other Facilities:
6. Lotglove Investments 8 P/L
? 1
st
& 2
nd
CCMB’s totalling R2, 4M over Erf 38 Featherbeach Est F/V 6/03 R2, 4M @ 80%
? Cession of HOC (Held at CHL)
? Unlimited suretyship + L/F by JL Malherbe
? J Malherbe
1,920,000
Tangible security held for other facilities 1,920,000
B. Other Lucrative Bank Group:
OTHER BANKS: (including security held)
o R22 Million L/G facility at Lourens’s – secured by personal sureties and reversionary cession of
Debtors.
o Customs & Excise: deferred facility of up to 75% of monthly T/O.
o Personal banking is at CashCow bank where O/D facility is R50K
462
APPLICATION FOR FACILITIES
Date Prepared: 2
nd
June 2006 Authority:
Applicant: Wilson Log Logistics (Pty) Ltd (“Wilson Log”) Relationship:
Group #: Region:
Review: March annually
Management A/c’s: Quarterly
Background: Ownership/management:
Risk Category: With Security
Without Security
D
E
Manage as “C”
Directors:
J L Malherbe
J Malherbe
FAST Financial Risk Score 3.87 Financial Manager: Walter Coats
Basel Rating NGR14
Cash Management Category: N/A
Account Opened: 21/5/1997 Family Tree attached
Nature of Business:
Forwarding, Clearing, Warehousing + Distribution in all aspects.
code: 4150
GOI: R825 246 Auditors: B & E Auditors
Attachments : Yes No Yes No
Family Tree X Technical Committee Approval X
Financials Date CFP seen minute X
- Annual: 31/12/2005 X ITC Clear X
- Interim: 31/3/2006 X Facility Letter: May 2005 X
- Other: Budget 12/06 X Review Fee: R15,000 X
Purpose and Details of Application:
1. Annual Review of facilities against AFS per 31/12/2005 and M/A’s per 31/3/06.
2. Applications for:
? Increase in O/D limit from R25M to R36M;
? L/G’s outstanding of R3,295,750 to be a ‘stand alone’ arrangement (ie no longer sharing with O/D);
? 36 month loan of R3.5m to cover the cost of the upgrade and adaptation of new rented premises;
? S/P R1m for additional racking and shelving in the new rented premises.
3. To record Fleet facility arrangement in place of R15,000.
463
FAMILY TREE AS AT MAY 2006
50%
50%
100%
90% 10%
100%
Wilson Log Logistics (Pty) Ltd
(“Wilson Log”)
Salatio De Bono
(Italian listed company)
K L MALHERBE FAMILY TRUST
Trustees: J L Malherbe & J MalherbeBeneficiariesJ L Malherbe & J
Malherbe & their decendants
Lotglove Invs 8 (Pty) Ltd
(Property owning Featherbeach Erf 38 – clients residential property)
90 Degrees Super Supply Solutions (Pty) Ltd
(Development of computer programmes needed for
control of bonded warehouse processes)
J Burger
San Micheal A Tommi Importers P/L
(Importers & distributors of wine and olive oil)
464
3.
4.
5.
Notes:
1. L/G’s are in favour of Customs & Excise. FEC’s: Client is on Treasury, and also enjoys Direct Dealing.
SECURITY: A/V
A. Lucrative Bank:
Bank Facilities:
1. Wilson Log Logistics (Pty) Ltd
? “U” G’tee + L/F by: K L Malherbe
J Malherbe
Cession of debtors per 30/4/2006 R83,067,723 @ 40% for insured debtors and 25-to-33% for
uninsured debtors
? Cession of Lourens Credit Ins pol No. CB0407223A covering debtors
? Cession of MomLife pol No. 90393983 (D/V R 1,2 m) on life of J L Malherbe
? Cession of MomLife pol No. 90393977 (D/V R 1,2 m) on life of J Malherbe
? Cession of Old Mutual pol No.013076296 (DV R5M) on the life of J L Malherbe
? Cession of Old Mutual pol No.013076518 (DV R5,5M) on the life of J Malherbe
28,624,210
Tangible security held for bank facilities 28,624,210
Asset Based Facilities:
4. Wilson Log Logistics (Pty) Ltd: As per (1) above.
Tangible security held for ABF facilities
465
SECURITY FOR LUCRATIVE BANK FACILITIES
CHECKED AGAINST SECURITIES REGISTER on
05/04/06 by:
Other Facilities:
6. Lotglove Investments 8 P/L
? 1
st
& 2
nd
CCMB’s totalling R2,4M over Erf 37 Featherbeach Est F/V 6/03 R2,4M @ 80%
? Cession of HOC (Held at CHL)
? Unlimited G’tee + L/F by J L Malherbe
? J Malherbe
1,920,000
Tangible security held for other facilities 1,920,000
C. Other Lucrative Bank Group:
OTHER BANKS: (including security held)
o R22Million L/G facility at Lourens’s – secured by personal sureties and reversionary cession of
Debtors.
o Customs & Excise: deferred facility of up to 75% of monthly T/O.
466
TERM FACILITIES REVIEW:
Requirement:
Actual Per 31/12/05 Terms and Conditions
COVENANTS:
? Debtors R41,533,861 Debtors @ 40% to cover O/D at all times.
We propose this covenant be increased to
50%.
? Dividend payments Nil paid May be paid if gearing remains within our
required covenant.
? Gearing ratio 4.55 Not more than 3
? Interest coverage 8 Not less than 5
Have there been any events of default or breaches of covenants in the year under review? YES
If YES, supply particulars:
Gearing covenant exceeded. See main body of comments.
EXCHANGE CONTROL APPROVAL
- Bank
- Branch
- Expiry Date
- Total Approval
N/A
BORROWING POWERS
Limited:
NO If YES, supply particulars N/A
POWER TO ISSUE GUARANTEES?
YES
467
ASSET BASED FINANCING B/A Funding Approved NO
1. Application New Inc Review Other Rate
X X
2. Facilities Limit
(Net)
Change from
Last approval
a) Special Projects :
? Wilson Log Logistics (Pty) Ltd 1 000 000 +1 000 000
b) RCL
? Wilson Log Logistics (Pty) Ltd 3 500 000 Nil
c) Other : MTL 3 500 000 +3 500 000
8 000 000 +4 500 000
3. Details of Facilities New
New Existing
Type : MTL S/P RCL
Merchandise : Renovation of premises Shelving Veh & Equip
Supplier : N/A Approved Approved
Product : MTL I/S I/S
Period : 36 mnths 24 months 24 to 36 mths
Payment : D/O Debit Order Debit Order
VAT back
mnth 4
4. Terms and Conditions
a. Security -See page 4
b. Special Conditions for RCL: D/O, Insurance, max period for computer eqt 24 months
with a 20% deposit and VAT Back, equipment maximum period 36 months, VAT Back and
deposit negotiable, new vehicles up to 60 months.
5. Revolving Credit Lines
a. All ABF on balance sheet with Lucrative Bank? YES
6. General
a. Technical Managers’ approval regarding price and supplier required for all used
merchandise (other than Cars and LDV’s) where cost price in excess of R500,000.
b. Facilities are automatically cancelled on EXPIRY DATE
468
BACKGROUND:
Wilson Log Logistics (Pty) Ltd:
The company was established in 1995, and is a South African based third party logistics provider, operating though a
network of more than 140 offices worldwide.
Ownership of the company is held equally between local management members and a listed Italian company, Salatio de
Bono (more information below).
Wilson Log obtained the SABS and ISO 9002 in 1997.
Its major competitors are Koeglen & Nadel, ABC Freight, and Roos & Liebenberg.
The business operates out of leased premises in Eersterus, Johannesburg, very close to Jhb International Airport. In July
the clients will be moving to new rented premises near Edenglen as additional warehousing and office space is required.
They have signed a 10-year lease with the landlord and a performance guarantee was issued by Lourens.
To recap on the company’s services, they include: -
? Collection – Wilson Log takes control of the consignment throughout the logistics chain, from the supplier to the
recipient.
? Expediting and Forwarding (import/export) – Wilson Log has an advanced computer tracking system that can be
viewed on-line 24 hours a day. They also handle all documentation.
? Customs Clearance
? Warehousing (bond and free) management – Wilson Log control the inventory in both their bonded and non-bonded
warehouses by bar coding and scanning all consignments received. This enables goods to be tracked and traced at any
stage in the process. The company also has special clearance from the SARS to trade in bonded stock upon demand
on a weekly basis, while completing customs requirements.
? Local Distribution to main hub centres – The company delivers imports to the client if required, i.e. in the 3 major
centres, viz. Johannesburg, Cape Town and Durban. Deliveries outside of these regions are sub-contracted out.
? Exports into Africa.
Wilson Log has over some five years developed a highly efficient computerised record keeping system for bonded
warehousing, which allows clients to “patch” into the Customs computer system to download information & records –
Customs has approved this system. This is carried as an intangible asset in the balance sheet. Currently income from this
computer system is R300.000 pm from Wilson Log’s clients.
This system also gives Wilson Log a serious competitive edge in terms of having a close co-operation with Customs and
Excise fully to its clients’ benefit.
Wilson Log’s staff compliment stands at 211.
Salatio De Bono (“SDB”):
In existence for longer than 100 years. One of the leading Italian international freight forwarders. The company has
offices throughout the world and is listed on the New York stock exchange.
The benefits gained by Wilson Log in partnering up with SDB are immeasurable, and make it a force to be reckoned with.
SDB acquired a 20% share in Wilson Log in May 2000 for US$250 000, and a further 15% in 2001 for US$125 000. In Jan
2002 another 15% share was acquired for US$125 000.
The CEO of Salatio De Bono was looking for a good investment in his private capacity, and he invested R4M in Wilson Log
in April 2005. The loan is unsecured and bears interests at 9.5% pa repayable in 20 half yearly instalments commencing
October 2005. The Excon for this loan was attended to by ourselves.
FINANCIAL POSITION:
Wilson Log Logistics (PTY) LTD:
Audited AFS per 31/12/2005 :
? Wilson Log performed well in terms of turnover growth and profits achieved. A T/O growth (including customs &
excise duty T/O) of 42,6% was budgeted (to R900M), but actual achievement was a 50,55% growth (to R950M). The
reasons for this growth are: as key customers (viz Toyota SA, Audi, Ford, Tar Stone, Tube Master, Grobler Group and
Standard Tyres) grow, there is automatic growth for Wilson Log, and new meaningful business acquisitions were made
of Ford and Pick ‘n Mix. Exceptionally positive economic conditions for importers was another major contributing
factor to additional business, and we are well aware that the motor industry experienced good growth. Wilson Log is
fast becoming the preferred provider of logistics solutions to the motor industry in SA, and it has 4 of the top 10 tyre
companies worldwide on its books. Wilson Log now has at least 185 solid debtors.
? Typically all NPAT was retained in the business to fund growth. No dividend has been paid in the 5 years on record as
it is not client’s policy to pay dividends whilst the business is in the growth phase. They do however take a
management bonus for all shareholders, which for the year under review amounted to R1,522M.
? Capital base strong at R25M.
? Trade creditors figure [mainly monies owed to Customs & Excise] was very high at year-end. Client had received VAT
and duties from customers and deposited R17m on call before year-end, but only paid Customs & Excise in January
2006. This had a detrimental effect on the gearing, which if adjusted by the amount of cash on hand, reduces to 3.6.
This exceeds our covenant of 3, but is still better than the industry norm of about 5. We can see that a 6 day delay by
469
debtors in paying also played its part in this scenario. The swing factors contributed to a negative cash flow of R1,95M
over the year end. Given that timing issues negatively affected gearing and cash flow, we recommend that the
gearing covenant non-compliance situation be accepted. Subsequent MA’s @ 31/3/06 show an improvement in the
gearing ratio to 3.13. This is partly the result of new loans from directors of R3,334M (accumulated from own
resources and management fee being charged to Wilson Log by shareholders SDB and the Malherbes).
? Lourens insurance has covered R4,36m of the R13,2M owed by Maxi Footwear. The shortfall has not been written off
as recovery is expected because our clients hold personal sureties by all directors of Maxi and title deeds to various
properties, albeit Maxi seem to have overstated the property value and our client did not attend to the registration of
the bonds over these properties. The Maxi debt is not reflected in the debtors list used by us. It should also be
remembered that the cash flow implication of the Maxi debt has already been absorbed by Wilson Log, although there
will still be the negative effect on the financial statements (ie P&L and Cash Flow Report) should the Maxi amount
owed ultimately become a bad debt.
Projections 12 months to 31/12/06:
Clients have budgetted to break the Billion Rand mark at R1,027,923,884 and to achieve a 1,3% NPBT (this is all based on
the T/O inclusive of Customs Duty & VAT). This profit performance is slightly better than the previous years 0,87%
because of new business providing better client mix opportunities, an admin fee that has been implemented of R350 per
vehicle for clearing out of customs, which amounts to additional income of R600,000 per month, and economies of scale.
The budgeted growth is based on:
? contracts already signed (Ford and Toyota have signed contracts for use of the Customs & Excise clearing computer
system, Toyota has signed a forwarding contract from both Europe and Japan, and Phiat Air Imports [Parts &
accessories] and ‘Clouds of Living’ have committed to contracts).
? new business in the pipeline. Negotiations are underway currently with GM/Delta, Toyota, VW, and Citroen. The
country-wide warehousing & distribution contract for Yokohama is in the final stages of negotiation.
The focus is in five areas and Wilson Log would like to be known as the specialist/expert in these areas. They are:
? Automobiles
? Automotive Parts
? Footwear
? Light industry and
? Trade i.e. Shoprite Checkers.
The budgeted increase in T/O has already been achieved in terms of committed contracts, and the budgets will be
exceeded by the end of the financial year.
Due to the strong rand clients are finding it difficult to break into the export market. Approximately 23% of the turnover
consisted of the Toyota exports into Africa that contributed to the year on year growth in gross profit despite the decline in
turnover. Strategically it is important to diversify therefore there is a specific drive to focus on this sector of the market.
A breakdown of T/O by division shows the following:
3 months in 2006 2005
% of Total T/O % of Total T/O
Imports (49.32%) (52.56%)
Exports (0.83%) (1.37%)
WH & Dist. (4.40%) (4.37%)
CRS & Bond (45.46%) (41.70%)
SECURITY:
Approximately 50% of the debtor’s book is insured by Lourens’s, and as the debtor’s book is our primary security we
expand on the salient features of this insurance as follows:
? The policy is on aggregate loss basis, ie the first R500,000 of bad debt within a calendar year is for Wilson Log’s
account. Any amount over and above that will be covered in terms of the policy. This allows the premium to be
reduced and historically the customer has not had bad debts, making this option favourable.
? Debtors with payment terms of less than 7 days are excluded from the cover. This includes: Michelin, Peugeot, Pirelli,
Renault. This amount is revolving so a similar amount is outstanding at any one time.
? 85% of the credit limit allocated per customer will be paid on default of the debtor. Therefore, 15% is for Wilson Log’s
account (Vat is excluded).
? Wilson Log has a limit mandate i.r.o. its credit control process and can grant discretionary limits on behalf of Lourens
up to R200,000 per customer.
? However, any debtor below R50,000 is not covered, unless it is a timing difference and payment was already received.
? Lourens’s maximum liability in one year is R15 Million.
? Nichè International Brokers (Pty) Ltd to provide a monthly analysis of Wilson Log’s debtors per insured/not insured.
? We have also had the book assessed by Lucrative Debtor Discounting that found the book acceptable.
? In arriving at our AV on debtors we have been using the following calculation based on what is insured and not
insured. Debtors per 30/4/06:
470
Drs List Date Advance Value % Facility limit R25,000,000
Debtors Value Total book 30/04/2006 83,067,723.00
Credit balances (47,635.00) - R -
Excluded by ourselves - R -
No Lourens Cover 1,177,513.00 33% R 392,112
1 year - Secured 1,429 745 1,255 2,007 5,767
Loans > 1 year - Unsecured - - - 3,626 3,626
Ceded Loans: Directors - - 182 - 3,334
Deferred Tax - 455 523 1,431 -
Total Non-Current Liabilities 1,429 1,200 1,960 7,064 12,727
EQUITY
Share Premium 1,554 3,868 3,868 3,868 3,868
Retained Earnings 7,524 10,446 15,317 21,046 23,567
Total Equity 9,078 14,314 19,185 24,914 27,435
Total Equity and Creditors > 1 Year 10,507 15,514 21,145 31,978 40,162
Tangible Net Worth 6,684 9,418 15,334 19,017 22,342
473
Detailed Profit & Loss Account
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 2
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PRE...
Prepared By S Bezuid... S Bezuid...
Accountant BDO Spe... BDO Spe...
Source Currency: Target Currency:
Exchange Rate - - - - -
Turnover 69,931 107,948 164,731 202,570 55,860
COGS 43,302 74,268 118,872 144,847 40,079
Gross Profit (Loss) 26,629 33,680 45,859 57,723 15,781
Salaries & Wages 9,890 13,897 16,653 21,443 5,734
Administrative Expenses 8,028 10,172 13,851 18,043 5,187
Consulting&Mgt Fee (SDB) 1,393 1,561 1,678 2,222 952
Directors' Remuneration 519 447 1,048 1,081 215
Officers Compensation -Incentive Bonus - - 1,200 1,522 -
Bad Debt Expenses - 220 125 268 39
Social Responsibility Pts - 562 949 690 -
Customs Duty + VAT Recon 151,332 267,594 466,719 748,274 189,455
Custom Duty + VAT Paid (151,332) (267,594) (466,719) (748,274) (189,455)
Depreciation 1,801 1,521 2,004 2,845 949
Amortisation - 608 716 402 -
Total Operating Expenses 21,631 28,988 38,224 48,516 13,076
Operating Profit & (Loss) 4,998 4,692 7,635 9,207 2,705
Gain(Loss) on Disposals 181 - - - 25
Interest Received 55 377 587 294 477
Interest Paid: LT Loans 210 286 218 686 414
Interest Expense OD-Financial Inst. 263 297 685 454 272
Other Income(Expenses) 23 - 88 - -
Net Profit(Loss) before Taxation 4,784 4,486 7,407 8,361 2,521
Current Taxation 1,072 1,564 2,672 2,632 -
Net Profit(Loss) 3,712 2,922 4,735 5,729 2,521
Change in Accounting Policy - - 136 - -
Transferred to Retained Earnings 3,712 2,922 4,871 5,729 2,521
474
Reconciliations
WILSON LOG (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 3
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PREP'D
Prepared By S Bezuide... S Bezuide...
Source Currency: Target Currency:
Exchange Rate - - - - -
RECONCILIATION OF REVENUE RESERVES
BEGINNING RETAINED EARNINGS 7,524 10,446 15,317 21,046
Adjustments to Retained Earnings - 136 - -
Beginning Retained Earnings, Restated - 10,582 - -
Net Profit(Loss) 2,922 4,735 5,729 2,521
Ending Retained Earnings 10,446 15,317 21,046 23,567
RECONCILIATION OF EQUITY
BEGINNING CAPITAL AND RESERVES 9,078 14,314 19,185 24,914
Net Profit(Loss) 2,922 4,735 5,729 2,521
Adjustment to Profit & Loss Account (above) - 136 - -
Increase(Decrease) in:-
Ordinary Shares 2,314 - - -
Actual Ending Capital & Reserves 14,314 19,185 24,914 27,435
Increase(Decrease) in Capital & Reserves 5,236 4,871 5,729 2,521
RECONCILIATION OF WORKING CAPITAL
BEGINNING WORKING CAPITAL 4,165 5,668 11,273 16,705
Total Net Fixed Assets (1,002) (1,071) (3,355) (1,240)
Total Net Intangibles (2,502) 1,045 (2,046) 804
Other Operating Non-Current Assets - - - (635)
Increase (Decrease) in Non-Current Liabs:-
Loans > 1 year (684) 510 4,378 3,760
Subordinated Debt - 182 (182) 3,334
Deferred Tax 455 68 908 (1,431)
Increase(Decrease) in Capital & Reserves 5,236 4,871 5,729 2,521
Ending Working Capital 5,668 11,273 16,705 23,818
475
Ratios
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 4
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PRE...
Prepared By S Bezuid... S Bezuid...
Source Currency: Target Currency:
Exchange Rate - - - - -
OPERATING PERFORMANCE
Annual Turnover Growth (%) 54.36 52.60 22.97 10.30
Gross Profit Margin (%) 38.08 31.20 27.84 28.50 28.25
Operating Expenses/Turnover (%) 30.93 26.85 23.20 23.95 23.41
Net Operating Profit/Turnover (%) 7.15 4.35 4.63 4.55 4.84
Net Profit before Tax/Turnover (%) 6.84 4.16 4.50 4.13 4.51
Net Profit before Tax/Equity (%) 52.70 31.34 38.61 33.56 36.76
Net Profit before Tax/Total Assets (%) 11.50 9.25 8.04 7.51 9.08
Net Profit before Tax/Total Net Assets (%) 45.53 28.92 35.03 26.15 25.11
Operating Leverage (%) 33.31 28.07 24.33 25.09 24.60
OPERATING EFFICIENCY
Net Turnover to Total Assets 1.68 2.23 1.79 1.82 2.01
Trade Debtor Days (Net) 157.54 117.92 134.71 140.99 146.06
Stock Days - - - - -
Trade Creditor Days 230.85 141.64 185.09 180.94 80.35
Net Turnover to Net Fixed Assets 17.71 21.81 27.36 21.61 21.05
DEBT SERVICE COVERAGE
UCA Cash Flow Coverage 1.69 9.03 0.15 (77.07)
FRS1 Cash Coverage 1.81 9.02 1.40 (75.00)
Funds Flow Coverage 3.80 3.64 5.44 3.34 N/A
EBIT/Interest 11.11 8.69 9.20 8.33 4.67
Earnings Coverage 3.11 2.86 3.68 2.64 6.06
LIQUIDITY
Working Capital 4,165 5,668 11,273 16,705 23,818
Current 1.13 1.17 1.16 1.21 1.34
Quick 1.13 1.17 1.16 1.21 1.34
Acid Test Ratio 1.13 1.17 1.16 1.21 1.26
Turnover/Working Capital 16.79 19.05 14.61 12.13 9.38
CAPITAL STRUCTURE
Total Gearing 4.87 3.63 4.76 4.55 3.74
Adjusted Gearing 4.87 3.63 4.69 4.55 3.13
Off Balance Sheet Gearing 4.87 3.63 4.76 4.55 3.74
Sustainable Growth Rate 109.82 38.69 42.01 39.92 75.64
476
Detailed UCA Cash Flow Statement
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 5
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PREP'D
Prepared By S Bezuiden... S Bezuiden...
Source Currency: Target Currency:
Exchange Rate - - - - -
Turnover 107,948 164,731 202,570 55,860
Chg in Trade Debtors (4,691) (25,921) (17,451) (11,169)
Cash Collected from Turnover 103,257 138,810 185,119 44,691
COGS (74,268) (118,872) (144,847) (40,079)
Chg in Trade Creditors 1,434 31,459 11,525 (36,514)
Cash Paid to Suppliers (72,834) (87,413) (133,322) (76,593)
CASH FROM TRADING ACTIVITIES 30,423 51,397 51,797 (31,902)
Salaries & Wages (13,897) (16,653) (21,443) (5,734)
Administrative Expenses (10,172) (13,851) (18,043) (5,187)
Consulting&Mgt Fee (SDB) (1,561) (1,678) (2,222) (952)
Directors' Remuneration (447) (1,048) (1,081) (215)
Officers Compensation -Incentive Bonus - (1,200) (1,522) -
Bad Debt Expenses (220) (125) (268) (39)
Social Responsibility Pts (562) (949) (690) -
Chg in Prepayments - - - (4,680)
Chg in Accruals - 4,540 (1,048) (3,492)
Cash Paid for Operating Expenses (26,859) (30,964) (46,317) (20,299)
CASH AFTER OPERATIONS 3,564 20,433 5,480 (52,201)
Interest Received 377 587 294 477
Other Income(Expenses) - 88 - -
Total Other Income(Expense) 377 675 294 477
Chg in Directors Loans - - (110) 110
Chg in Suspense Acc - - - (472)
Chg in Other Current Liabilities: Provisions - - - 1,748
Chg in Other Assets/Liabilities - - (110) 1,386
Current Taxation (1,564) (2,672) (2,632) -
Chg in Income Taxes Payable 507 1,362 (3,225) (913)
Chg in Vat Payable - 669 (154) (187)
Chg in Deferred Tax 455 68 908 (1,431)
Cash Paid for Taxation (602) (573) (5,103) (2,531)
NET CASH AFTER OPERATIONS 3,339 20,535 561 (52,869)
Interest Paid: LT Loans (286) (218) (686) (414)
Interest Expense OD-Financial Inst. (297) (685) (454) (272)
Cash Paid for Interest & Dividends (583) (903) (1,140) (686)
NET CASH INCOME 2,756 19,632 (579) (53,555)
Current Portion - Long Term Debt (1,451) (1,389) (1,371) (671)
CASH AFTER DEBT AMORTISATION 1,305 18,243 (1,950) (54,226)
Chg in Plant & Equipment (47) (587) (917) -
Chg in Cell phones/Office Equip & Computers (1,534) (1,958) (1,196) 3,789
Chg in Delivery Vehicles (687) (527) (3,423) -
Chg in Furniture & Fittings (253) (150) (262) 1,304
Chg in Accumulated Depreciation (-) 1,519 2,151 2,443 (6,333)
Customs Duty + VAT Recon (267,594) (466,719) (748,274) (189,455)
Custom Duty + VAT Paid 267,594 466,719 748,274 189,455
Depreciation (1,521) (2,004) (2,845) (949)
Gain(Loss) on Disposals - - - 25
Chg in Net Fixed Assets (2,523) (3,075) (6,200) (2,164)
Chg in Deposit: Office Rent - - - (635)
Chg in Intang- purch software 356 3,545 - -
477
Chg in Intang- Internal Software (3,163) (773) (1,355) -
Chg in Leasehold Improvements (303) (577) (1,495) -
Chg in less: Accumulated Amort S/W 608 (1,343) 402 402
Chg in less: Accumulated Amort Leasehold - 193 402 402
Amortisation (608) (716) (402) -
Detailed UCA Cash Flow Statement
WILSON LOG LOGISTICS (P/L) (150) Prepared: 06:29, 06/06/2006
Industry Classification: SIC Code: Page 6
Amounts Printed in: Thousands ESM Version K
Statement Date 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/03/2006
No. of Months 12 12 12 12 3
Audit Method Unqualif'd Unqualif'd Unqualif'd Unqualif'd CO.PREP'D
Prepared By S Bezuiden... S Bezuiden...
Cash Received/(Paid) from
Plant and Investments (5,633) (2,746) (8,648) (1,995)
FINANCING SURPLUS (REQUIREMENTS) (4,328) 15,497 (10,598) (56,221)
Chg in Overdrafts - - - 33,510
Chg in Loans > 1 year - Secured (684) 510 752 3,760
Chg in Loans > 1 year - Unsecured - - 3,626 -
Current Portion - Long Term Debt 1,389 1,371 2,685 (2,014)
Chg in Ceded Loans: Directors - 182 (182) 3,334
Chg in Share Premium 2,314 - - -
Change in Accounting Policy - 136 - -
Total External Financing 3,019 2,199 6,881 38,590
CASH AFTER FINANCING (1,309) 17,696 (3,717) (17,631)
Add:
Cash 5,089 3,780 21,476 17,759
ENDING CASH AND EQUIVALENTS 3,780 21,476 17,759 128
478
APPENDIX F: QUESTIONNAIRE
479
EXPLORING THE IDENTIFICATION OF VERIFIER DETERMINANTS IN BUSINESS
DECLINE
Dear Respondent,
Thank you for giving up some of your precious time for this research without which success is
impossible.
The following questionnaire is part of a research study undertaken to investigate the
identification of verifier determinants. Your personal thinking is crucial. There are no right or
wrong answers but it is important to indicate your personal views and thinking irrespective of
what you may believe others may think.
It will be highly appreciated if you would answer the questions posed to you as honestly as
possible. All information will be treated as confidential and will only be used for risk modelling,
academic purposes and reported as mathematical averages, variances and correlations.
Thank you very much,
Researcher
Gert Holtzhauzen
Risk Executive
Nedbank
[email protected].
Tel : +27 11 294 7396
Mobile: +27 0833250150
Nedbank sponsor :
Andre Van Der Burgh
Executive Head : Specialised Projects
[email protected]
Tel. +27 12 807 2155
Mobile: 0836271628
PhD Supervisor
Prof. Marius Pretorius
Strategy, Leadership and Turnaround Department of Business Management University of
Pretoria South Africa
[email protected]
Tel: +27 12 420 3394
Mobile: +27 82 822 6333
PLEASE DO NOT USE GROUP DECISION-MAKING
The questions are based on consulting reports about the typical business scenario in specific
ventures.
Please tick the box which represents your answer with a cross “x”.
Questionnaire number
v1
480
? Sample Statement: An unprecedented number of credit notes to debtors may indicate poor product
quality, leading to cash flow problems.
? You are required to indicate the importance of the statement on the following scale.
1
Not
Important
2
Mildly
Important
3
Very
Important
4
Most
Important
Please tick the box which is most representative of your personal view and thinking.
481
Remember - consider your own thinking. Be as honest as possible. There is no right, wrong or expected answer.
When you visit a business where
there is suspicion of potential
decline, howimportant will the
following be to verify decline
1
Not
Important
2
Mildly
Important
3
Very
Important
4
Most
Important
V
1. No or limited management information
system in operation
2
2. Managers education does not
compliment business
3
3. Entrepreneur is “scapegoating”
(blaming)
4
4. Inflexibility when making decisions
regarding change
5
5. Entrepreneur absent from work and
important meetings
6
6. Impulsive decision making 7
7. Not able to recall management info
immediately (ask others)
8
8. Absence of up to date management
accounts
9
9. Important decision made on golf
course
1
0
10. Manager’s personal problems, health
or marriage, overshadow business
focus
1
1
11. Super cars and "toys" 1
2
12. Business has outgrown managers/
owners/ directors skills set
1
3
13. Labour cost excessive for business
type
1
4
14. Absence of or unrealistic cash flow
projections
1
5
15. A high risk project or one big project
dependence.
1
6
16. Late submission of financials in an
attempt to postpone unfavourable
news
1
7
17. Sensitivity on tax avoidance 1
8
18. Not analysing internal financial
information
1
9
19. Underutilisation of assets 2
0
20. Creative accounting 2
1
21. Pricing and discounts for cash
generation
2
2
22. Slowing down and stretching
payments to suppliers in an attempt to
generate cash
2
3
23. High executive remuneration 2
4
482
24. Dividend payouts unstructured and
considered too high
2
5
25 Forced growth through mergers and
acquisitions
2
6
26 Overambitious growth strategy 2
7
27 Not willing to deviate from strategic
plan
2
8
28 Non responsive to small inefficiencies. 2
9
29 Unclear strategy for product and
market
3
0
30 Inability to adapt to business life
cycles
3
1
31 Difficult fit between strategic posture,
organization structure and industry life
cycle
3
2
32 Overexpansion of capacity without
considering market
3
3
33 Lack of strategies to combat decline 3
4
34 Lack of fusion between strategic
issues and everyday operations
3
5
35 Inappropriate channels of distribution. 3
6
36 Aging production techniques 3
7
37 Not knowing about new technology in
his industry
3
8
38 Misinterpretation of competitive
advantage
3
9
39 Declining emphasis on advertising 4
0
40 Poor service or products 4
1
41 Reliance on one customer 4
2
42 Failure to respond to high cost in
comparison with competitors
4
3
43 Market forces ignored in planning 4
4
44 Core markets moving away from
location
4
5
45 Regular stop payments on creditor
obligations
4
6
46 Increase in short term requests for
cash flow purposes
4
7
47 Declining deposit balances, and/or
returned cheques.
4
8
48 Rounded amounts paid to creditors 4
9
49 Overdraft advance funds other
purposes, such as asset acquisition.
5
0
50 Funding structure does not
complement business model
5
1
483
51
My gender is male / female (Circle choice)
52
I am senior / middle / junior management (Circle choice)
53
How long have you been in this position _____....... years
54
I feel qualified to make these judgments. Yes / no
55
How ;long have you been in banking ____ years
56
My age is _____ years
57
My highest educational qualification is ________________
58
I work in the credit or credit risk ___________discipline
59
Completing this questionnaire was: very easy / easy /
52
53
54
55
56
57
58
59
60
484
difficult / very difficult for me. (Circle your choice)
THE END:
Thank you for sacrificing your time to complete this questionnaire. Your contribution is highly
valued and appreciated.
485
APPENDIX G: COMPANIES ACT, ACT 71 OF 2008
CHAPTER 6 OF THE ACT
BUSINESS RESCUE AND COMPROMISE WITH CREDITORS
486
IMPORTANT NOTICE ABOUT THE ACT, ACT 71 OF 2008.
This study was conducted, using the publication of Companies Act, Act 71 of 2008, as was
published during 2008. The subsequent Amendment Bills were included, and updated in this
study, up to the end of 2010. It is a known fact that the implementation of the Act was still
pending, subject to Presidential signs-off; at the time, this research thesis was submitted for
examination..
487
488
489
490
491
492
493
494
495
496
497
498
499
500
501
502
503
504
505
506
APPENDIX H: COMPANIES AMENDMENT BILL
507
508
509
510
511
512
doc_172723917.pdf