Description
Presentation explain turnaround strategies at development bank of kenya limited.
TURNAROUND STRATEGIES AT DEVELOPMENT
BANK OF KENYA LIMITED
BY
DAYANA K. KAMUNDE
A MANAGEMENT RESEARCH PROJECT SUBMITTED IN PARTIAL
FULFILMENT OF THE REQUIREMENTS OF THE MASTER OF
BUSINESS ADMINISTRATION DEGREE, SCHOOL OF BUSINESS,
UNIVERSITY OF NAIROBI
SEPTEMBER 2010
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DECLARATION
I, the undersigned, declare that this is my original work and has not been submitted to any
other college, institution or university other than the University of Nairobi, School of
Business for academic credit.
Signed……………………………………………. Date……………………………..
Dayana Kanana Kamunde
D61/70538/2007
This project has been submitted for examination with the approval of the appointed
University supervisor.
Signed………………………………………………… Date…………………………..
Dr. Zachary B. Awino
Department of Business Administration
School of Business
University of Nairobi
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DEDICATION
To my husband and daughter for love, encouragement and moral support this project is
affectionately dedicated.
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ACKNOWLEDGEMENTS
I thank God almighty for the gift of life and good health. I am grateful to my Husband
Peter Mutuma for encouraging me to go back to school at a time when our daughter was
only three months old. I also wish to thank my entire family for their encouragement,
support and prayers. I also appreciate the invaluable input; tireless assistance and support
from my supervisor Dr. Zachary Awino for ensuring the project met the required
standards. Special thanks also go to Ann Gichuki for the moral support and prayers she
offered during the entire period.
This project would not have been possible without the cooperation of the senior
management of Development Bank who spared time from their busy schedule to
participate in the study. Last but not least I appreciate all those people who contributed to
this study on one way or the other to facilitate completion of this study. Thank you all
and God bless.
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TABLE OF CONTENTS
DECLARATION…………………………………………………………………….ii
DEDICATION……………………………………………………………………….iii
ACKNOWLEDGEMENTS……………………………………………………….…iv
LIST OF FIGURES……………………………………………………………….…vii
ABSTRACT………………………………………………………………………….viii
CHAPTER ONE: INTRODUCTION………………………………………………..1
1.1 Background of the study……………………………………………………1
1.1.1 Turnaround strategy……………………………….......................1
1.1.2 Banking industry in Kenya………………………………………4
1.1.3 Development bank of Kenya Ltd……………………………….6
1.2 Statement of the problem……………………………………………………7
1.3 Research Objective…………………………………………………….. ….10
1.4 Value of the study………………………………………………………….10
CHAPTER TWO: LITERATURE REVIEW……………………..………………..11
2.1 Introduction………………………………………………………………..11
2.2 Turnaround strategies………………………………………………………11
2.2.1 Components of turnaround strategy……………………………...16
2.2.2 Implementation and stabilization…………………………………18
2.2.3 Causes of decline…………………………………………………19
2.3 Internal signals of business decline………………………….......................20
2.4 Elements of external environment………………………………………….21
2.5 Determinants of successful turnaround strategy…………………………...22
2.5 Turnaround process model…………………………………………………25
CHAPTER THREE: RESEARCH METHODOLOGY……………………………27
3.1 Introduction…………………………………………………………………27
3.2 Research Design…………………………………………………………….27
3.3 Data Collection……………………………………………………………..27
3.4 Data Analysis……………………………………………………….............28
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CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION……………...29
4.0 Introduction…………………………………………………………………29
4.1 Respondents profile…………………………………………………………29
4.2 Causes of business decline………………………………………………….29
4.3 Turnaround strategies……………………………………………………….31
4.4 Discussions…………………………………………………………………..33
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 37
5.0 Introduction………………………………………………………………..37
5.1 Summary…………………………………………………………………...37
5.2 Conclusion………………………………………………………………….37
5.3 Limitations of the study……………………………………………………38
5.4 Suggestions for further study………………………………………………38
5.5 Recommendation…………………………………………………………..38
5.6 Implication on policy and practice…………………………………………39
REFERENCES……………………………………………………….........................35
APPENDIX A: INTERVIEW GUIDE……………………………………………..38
APPENDIX B: DEVELOPMENT BANK PROFITABILITY, DEPOSITS AND
ADVANCES 2001- 2008…………………………………………………………..…42
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LIST OF FIGURES
Figure1.1 Turnaround process model………………………………………………25
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ABSTRACT
Many firms experience trends of deteriorating financial performance at some point in the
organizational life cycle as a result of internal and external factors. Whatever the cause of
the decline, whether internal or external or both, management can respond by selecting
strategies that redirect the resources in an attempt to improve the firms competitive
position. The aim of the turnaround strategy is not only to halt the decline, but also to
generate the means for a substantial recovery. Therefore turnaround is considered to have
occurred when a firm recovers adequately and regains profitability.
Development Bank of Kenya Limited initially established in 1963 as a development
finance institution operating under the name Development Finance Company of Kenya
(DFCK). Its key objective was to fund long term project. Following the liberalization in
the financial industry in Kenya during the 1990’s, DFCK was transformed into a fully
fledged commercial bank in 1997 to Development Bank of Kenya Limited. This allowed
the bank to accept deposits from the open market and to broaden its scope of operations.
However, the bank’s lack of clear corporate strategy and other external factors resulted to
decline in profitability. This study sought to establish the turnaround strategies adopted to
successfully halt the decline and return the bank to profitability.
The study adopted a case study research design to gain an in depth understanding of the
strategies. Primary and secondary data were used. Primary data was collected by way of
pre-guided interview comprising of open ended questions. The respondents were drawn
from top management. This comprised of five managers heading various divisions in the
bank. These are Projects, Credit, Human Resource, Chief Operations and Business
Development. Secondary data was collected from Bank’s annual financial reports for
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various years and the Bank’s intranet. The research findings indicated that Development
Bank employed various strategies to confront declining performance. The process
involved top management change, which saw the exit of the previous CEO and other
changes at the board level. The process involved all the stakeholders to provide support
for the much needed changes. For any turnaround to be successful, the organization must
move fast to salvage the core of the business. Increasing efficiency is an important factor
as these actions improve profitability in the short run and allow the company to release
resources that may be used elsewhere. This can also play an important role in winning
back stakeholders support and help raise external resources to fund other strategies.
Key words: Turnaround, strategy, Development Bank of Kenya Limited.
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CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
Many firms experience trends of deteriorating financial performance at some point in
their organizational life cycle as a result of market erosion and decisions by the
management. Based on the deterministic perspective this organizational decline can be
attributed to environmental factors while voluntarisitic perspective attributes decline to
internal factors, particularly management actions and perception Rasheed (2008).
Whatever the cause of the decline, whether internal or external or both, management can
respond by selecting strategies that redirect resources in an attempt to improve their firms
competitive position.
1.1.1 Turnaround strategy
Different business environment will require different strategic options explored Gichuki
(2009). Strategy is the direction and scope of an organization over the long term, which
achieve advantage in a changing environment through its configuration of resources and
competences with the aim of fulfilling stakeholder’s expectations J ohnson, Scholes and
Whittington (2005). Hence strategy is about where the business is planning to get in the
long run (the direction), the markets in which the business should compete and the
activities involved in such markets (Markets; Scope). How the business can perform
better than competition in those markets i.e. the advantage. What resources (skills, assets,
finance, relationship, technical competence and facilities) are required in order to be able
to compete (resources). The external environment factors that affect the business ability
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to compete (environment) and the values and expectations of those who have power in
and round the business the (stakeholders).
According to J ohnson et al (2005), strategies exist at various levels in the organization.
Corporate Strategy is concerned with the overall purpose and scope of the business to
meet stakeholder’s expectations. This is a crucial level since it is heavily influenced by
investors in the business and acts to guide strategic decision making throughout the
business. Corporate strategy is often stated explicitly in a mission statement. Business
strategy is concerned more with how the business competes successfully in a particular
market. It concerns strategic decisions about choice of products, meeting customer needs,
gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational strategy is concerned with how each part of the business is organized to
deliver the corporate and business level strategic direction. Operational strategy therefore
focuses on issues of resources, processes, people etc.
The corporate level strategies choices are classified as growth, stability or retrenchment.
Firms experiencing negative trends of performance typically resort to retrenchment as the
likely turnaround strategy Pant (1991). Growth as a turnaround strategy has largely been
ignored. Not every growth strategy is good for every business. The key to finding the
right growth strategy is properly matching it to your company and its specific market
place. Diversification (new products/new market) is a high risk growth strategy, largely
because both the products and the market are unproven territory for the entrepreneur.
However, diversification may be a reasonable choice if the high risk is compensated by
the chance of the high return. Other advantages of diversification include the potential to
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gain a foothold in an attractive industry and reduction of the overall business portfolio
risk
Product development strategy may be appropriate if the firm’s strengths are related to its
specific customers rather than to the specific product itself. In this situation it can
leverage its strengths by developing a new product targeted to its existing customers.
Similar to the case of new market development, product development carries more risk
than simply attempting to increase market share. Market development options include the
pursuit of additional market segments or geographical regions. The development of new
markets for products may be a good strategy if the firm’s core competencies are related
more to the specific product than to its experience with specific market segment. Because
the firm is expanding into new market, a market development strategy typically has more
risk than a market penetration strategy.
The market penetration strategy is the least risky since it leverages many of the firms
existing resources and capabilities. In growing market, simply maintaining market share
will result in growth and their may exist opportunities to increase market share if
competitors reach capacity limits. However, market penetration has limits and once the
market approaches saturation another strategy must be pursued if the firm is to continue
to grow. Business owners or managers should be able to differentiate between when a
turnaround strategy is achievable and when it is not. Sometimes a business in crisis is too
far gone to be salvaged. Closing down a crises ridden business and liquidating its assets is
sometimes the best and wisest strategy. This strategy is of last resort (Gichuki, 2009).
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1.1.2 Banking industry in Kenya
The Banking industry in Kenya is governed by the Companies Act, the Banking Act, The
Central Bank of Kenya Act and the various prudential guidelines issued by the Central
Bank of Kenya (CBK). The Banking sector was liberalized in 1995 and exchange
controls lifted. The CBK, which falls under the Minister for Finance docket, is
responsible for formulating and implementing monetary policy and fostering the
liquidity, solvency and proper functioning of the financial system. As at 31 December
2009, the banking sector was composed of 46 institutions, 44 of which were commercial
banks and two Mortgage finance companies. In addition there was one licensed deposit
taking microfinance institution and 130 foreign exchange bureaus. Commercial Banks
and Mortgage Finance Companies are licensed and regulated under the Banking Act, Cap
488 and Prudential Guidelines issued there under. Deposit taking Microfinance
institutions on the other hand are licensed and regulated under the Microfinance Act and
Regulation issued there under. Foreign Exchange Bureaus are licensed under the Central
Bank of Kenya Act, Cap 491 and Foreign Bureau Guidelines issued there under (Bank
Supervision Report 2009).
Out of the 46 institutions, 33 were locally owned and 13 were foreign owned. The locally
owned financial institutions comprised of three banks with public shareholding, 28
privately owned commercial banks and two Mortgage Finance Companies (MFCs). The
foreign owned financial institutions comprised of 9 locally incorporated foreign banks
and 4 branches of foreign incorporated banks.
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The main challenges facing the banking sector in Kenya are regulations, for instance, the
finance Act 2008, which took effect on 1 J anuary 2009 requires banks and Mortgage
firms to build a minimum core capital of Kes. 1 Billion by December 2012. This
requirement is hoped to transform small banks into more stable organizations. The
implementation of this requirement poses a challenge to some of the existing banks and
may be forced to merge in order to comply. For example the recent merger between
Southern Credit and Equatorial Commercial bank. The global financial crises
experienced in late 2008 is expected to affect the banking industry in Kenya especially in
regard to deposits mobilization, reduction in trade volumes and the performance of assets.
The declining interest margins due to customer pressure leading to re-organizations.
Increased demand for non-traditional services such as the automation of large number of
services, and lastly the introduction of non-traditional players such as deposit taking
Microfinance institutions that pose stiff competition to commercial banks.
The Kenyan banking sector continued to exhibit resilience in 2009 in the midst of the
global financial turbulences. The global financial crises that escalated in late 2008 reared
its face on the Kenyan economy in the form of second, third round lags effects. However,
efforts by all players to stimulate the economy tampered the effects of the crisis in Kenya.
This is evidenced by the performance posted by Banks and mortgage finance companies
in 2009 which surpassed expectations (Bank Supervision Report, 2009).During 2009,
Kenyan banks continued to embrace new technology to improve their customer service
delivery. A considerable number of banks adopted the use of mobile banking technology
as a service delivery channel to enhance convenience to their customers. In an effort to
promote financial access to majority of Kenyans, the Central Bank and the banking sector
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has put in place a credit information sharing mechanism which will enable individuals to
use their information capital as “collateral” to access bank services. Further, the
amendment of the Banking Act to permit banks to use agents in their outreach will also
extend the formal financial services access frontier (CBK Supervision Annual Report
2009)
With globalization and increased accessibility to electronic delivery channels for products
and services, banks are continuously innovating to provide a wide range of electronic
products and services. The enhanced ICT platforms have enabled banks to introduce
internet and mobile banking services and products such as viewing of statements of
account, enquiries on status of cheques, cheque book requests, notification of entries into
account, funds transfer and payment of utility bills. Given the cut throat competition in
the banking sector, banks can no longer compete on price but on the extra value addition
services by leveraging on ICT based products that emphasize on convenience banking
and of course superior customer service.
1.1.3. Development Bank of Kenya Limited
Development Bank of Kenya Limited (DBK) was established in 1963 as a development
finance institution operating under the name Development Finance Company of Kenya
(DFCK). Its chief aim was to identify and fund commercially viable projects, with the
goal of developing the Kenyan industrial sector. The institution was initially formed as a
joint development between the Kenyan, British and German governments through their
respective development financing institutions. Over the years, Holland and the World
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Bank also acquired shareholdings. These institutions provided funding for the bank’s
projects through a mix of equity participation and debt structures.
Following the liberalization of the Kenyan financial industry during the 1990s, DFCK
was transformed into a fully fledged commercial bank in 1997and the name changed to
Development Bank of Kenya Limited (DBK).This allowed the bank to accept deposits
from the open market and broaden its scope of operations. Despite this, DBK’s lack of
clear corporate strategy and other external factors resulted in decline in deposits and
advances. In year 2000, the country experienced severe economic recession. The Gross
Domestic Product (GDP) declined to negative 0.3% compared to 1.4% growth in 1999.
This decline in growth reflected poor performance in most sectors of the economy.
1.2. Statement of the problem
Turnaround refers to recovery to profitability from a loss or declining situation. Top
management must rescue an ailing firm by responding successfully through strategies and
policies to external and internal factors causing the decline. The aim is not just to halt the
decline, but also to generate the means to substantial recovery. This process starts by
analysing the situation to determine causes of decline pointing out the strategy to be
adopted to stem the decline and the implementation path and program.
Development Bank of Kenya was formed to serve as a project financier. After
liberalization of the banking sector in the 1990’s the institution converted to a fully
fledged commercial bank in 1997. This allowed the bank to accept deposits from the
open market and broaden its scope of operations. However, DBK’s lack of a clear
corporate strategy and other external factors led to a steady decline in deposits and
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advances. This also led to the collapse of various institutions in the late 90s mainly due to
poor management of credit risk resulting in accumulation of huge non performing loans
and operational risks (The Banking Survey, 2007). Due to these setbacks, the Bank
embarked on a turnaround strategy in year 2004 and has made remarkable recovery and
regained the stakeholder’s confidence. In year 2008, the Bank attained a complete
turnaround recording a pre-tax profit of Kes. 169 million compared to Kes 80 million in
2000.The total assets increased to Kes. 6.5 billion in 2008, compared to Kes. 3.6 billion
in 2000.
A few studies on turnaround strategies in Kenya have been done. Situma (2006) studied
the adoption of turnaround strategy at Kenya Commercial Bank. She sought to
investigate the experience of turnaround at Kenya Commercial Bank (KCB). In addition
she had the objective of establishing the process employed in implementing turnaround
strategies in 2002. The research findings indicate that KCB used both entrepreneurial and
efficiency strategies in the turnaround process. All the stake holders were involved in the
process to provide support to ensure that the bank fully recovered from the decline
situation. Matundura (2008) studied implementing turnaround strategy at Kenya
Revenue Authority (KRA). He sought to establish the turnaround strategies that were
adopted by KRA, the factors that necessitated the implementation. His study found out
that a new management team with the right skills was hired. They also hired consultants
to help with the change process and several meetings were arranged between the
management and employees to prepare themselves for the change. The authority also
decentralised its operations. Saigilu (2008) focused on the effectiveness of turnaround
strategy at the Kenya Revenue Authority. The key objective of the study was to find out
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how effective the turnaround strategies were in achieving the targeted organizational
objectives. He found out that the turnaround strategies implemented were effective. In
fact it led to consistent increase in revenue collections. The service delivery at the
institution were also highly improved and led to building confidence among all the
stakeholders. Gichuki (2009) studied turnaround strategy at the Co-operative Bank of
Kenya. She sought to establish the cause of declining performance and how the
turnaround strategy was implemented. The research findings indicate that Co-operative
Bank employed various strategies to confront the decline. To steer the turnaround
process the bank instituted changes at the top management which saw the exit of the
previous CEO and other changes at board level. In addition the government as a
stakeholder absorbed bad debts.
Two of the mentioned studies were on a non-banking context Matundura (2008) and
Saigilu (2008). Both focused on Kenya Revenue Authority and their finding may not
apply in a bank. In addition their focus was on the implementation process and how
effective the turnaround strategies were in achieving the set targets. On the commercial
bank context, Situma (2006) and Gichuki (2009) studied the adoption of turnaround
strategies at Kenya Commercial Bank and Co-operative Bank of Kenya respectively.
Both studies were case studies and the findings cannot be generalized. In addition,
Development Bank of Kenya caters for a niche market. Its main focus remains long term
project finance targeting the corporate institutions, unlike Kenya Commercial Bank and
Co-operative Bank which serve both the retail and corporate clientele. Thus, this study
will help bring out differences arising from different environment and organizational
factors unique to each organization. This study seeks to investigate the turnaround
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strategy adopted at Development Bank of Kenya, how it was implemented and the
challenges faced in the implementation process. The researcher will try o answer the
following critical question; what turnaround strategies were adopted to confront the
decline and return to profitability?
1.3. Research Objective
The objective of this study is to establish the turnaround strategies adopted by
Development Bank of Kenya.
1.4. Value of the study
The study will also contribute to the body of knowledge. The study will bring out
differences arising from different environmental and organizational factors unique to
each organization. At the height of continued tough economic times, global economic
recession and credit crunch, some organizations might experience declining performance.
The research findings will be useful to such players who might embark on adopting
turnaround strategies.
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CHAPTER TWO: LITERATURE REVIEW
2.1. Introduction
This chapter is devoted to review literature related to the turnaround process, causes of
decline, components of turnaround, some turnaround strategies, factors determining
successful turnaround and the turnaround process model.
2.2. Turnaround strategies
Turnaround strategies are a set of consequential, directive, long term decisions and
actions targeted to the reversal of a perceived crisis that threatens the firm’s survival.
Pearce and Robinson (2000, p 265) states that a turnaround situation represents absolute
and relative-to-industry declining performance of a sufficient magnitude to warrant
explicit turnaround actions. Turnaround situation may be the result of years of gradual
slowdown or months of sharp decline.
Bibeault (1982), Pearce and Robbins (1993) view turnaround process as consisting two
stages: decline stemming and recovery strategies. The primary objective of decline
stemming strategies is to stabilize the company’s financial condition and includes actions
such as gathering stakeholder support, eliminating inefficiencies and stabilising the
company’s internal climate and decision process. The severity of the distressed state and
the resource slack available ultimately determines the extent to which the decline-
stemming strategies are applied and succeed. Once the company’s financial position has
stabilised, it must decide on its recovery strategy; whether or not it will continue to
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pursue profitability at its reduced size or implement growth-oriented (entrepreneurial-
oriented) strategies.
Operational restructuring entails cost reduction, revenue generation and operating- asset
reduction strategies to improve efficiency and margin by reducing direct cost and
slimming overheads in line with volume Slatter (1984). Operational restructuring is
generally the first turnaround strategy implemented by a financially distressed firm, as
there is no point in assessing the strategic health if the firm goes bankrupt in the near
term. Cost reduction may be sufficient where the firm is weak operationally. Efficiency
measures are directed at both maximizing output (revenue) and minimizing input
(resources such as inventory). Cost reduction may be sufficient where the firm is weak
operationally. Revenue generating strategies may be pursued focusing on the existing
product lines, initiating price-cuts or raising prices where products are price intensive)
and increasing marketing expenditure to stimulate demand (Hofer, 1980).
When a firm is operating well below capacity, asset reduction to improve utilization and
productivity of assets is imperative. Asset reduction can be an operational or strategic in
nature. Operating asset reduction refers to business-unit level sale, closures and
integration of surplus fixed assets such as plant, equipment and offices and reduction in
the short-term assets such as inventory and debtors. This is driven by the need to enhance
the efficiency of the firm’s current operations through improved asset utilization at the
operating level (Bibeault, 1982; Hofer, 1980; Schendel, Patton and Riggs, 1976).
Operational restructuring is primarily designed to generate, in the short term, cash flow
and profit improvement. It is of a fire-fighting nature and differs from restructuring aimed
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at the longer term competitive positioning and performance of the firm (Sudarsanam and
LAI, 2001).
Asset restructuring involves reorganizing the firm into self-contained strategic business
units; divestments of lines of businesses not fitting the core business, acquiring
companies that relate to and strengthen the core, discontinuing unpromising products,
forming strategic alliances, joint ventures and licensing agreements. In addition the
distressed firm may merge with other firms, be taken over in a hostile bid or be bought-
out by their own management (MBOs). Asset divestment is deemed imperative where the
firm is in severe distress and /or where strategic health is weak. (Hofer, 1980; Pearce 11
and Robbins, 1993). Asset reduction at the portfolio (Corporate) level covers divestment
of subsidiaries/ divisions. The objective of this level is to divest the non-profit generating
assets or even profitable assets for the purpose of raising cash to alleviate financial
distress and fund restructuring.
Asset investment covers business and corporate level investments and comprises both
internal capital expenditure and acquisitions. Capital expenditure is designed to achieve
efficiency/ productivity improvement e.g. building new plants and equipments Hambrick
and Schecter (1983) or computerized processing and monitoring equipment which speeds
productivity and market response, improves productivity and reduces costs. Such
expenditure complements, rather than conflicts with efficiency driven operational
restructuring described earlier. It may also enhance firms competitive advantage e.g.
when affirm achieves economy of scale by expanding its output. Since it involves cash
outflow, firms in decline can undertake such capital expenditure as an ensure their
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survival and ensure their recovery. Thus internal capital expenditure may be critical
component of the firm’s turnaround strategy. Firms may also seek to acquire firms that fit
their core competencies with long term profit potential. This stage is crucial for
turnaround by firms with inappropriate corporate strategy or mature or declining
products/markets where new strategic direction is imperative Hofer (1980); Pearce11 and
Robbins (1993); Scendel et al (1976). Acquisitions may thus contribute to successful
sharp bend a sustained good performance thereafter but need to be selected and managed
carefully (Sudarsanam and Lai, 2001).
Financial restructuring is the reworking of a firm’s capital structure to relieve the strain of
interest and debt repayments and is separated into equity based and debt based strategies.
Equity based strategies cover dividend cuts or omissions and equity issues. Firms in
financial distress tend to reduce or omit dividends due to liquidity constraints, restrictions
imposed by debt covenants, or strategic considerations such as improving firm’s
bargaining position with trade unions. Debt-based strategies refer to the extensive
restructuring of firm’s debt. Firms restructure their debt to avoid financial distress. Debt
restructuring is a transaction in which an existing debt is replaced by a new contract with
one or more of interest and principal reduced, maturity extended or debts –equity swap
(Sudarsanam and Lai, 2001).
Managerial restructuring comprises effecting top management changes. This is widely
quoted as a precondition for successful turnaround Sudarsanam and Lai (2001). When old
ways of operating need to undergo drastic change, it is difficult for incumbent top
management to change their habits and institute radical reforms. Changes in senior
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management team are seen as a means of restoring stakeholders’ confidence in the future
viability of the organisation, thereby ensuring their continued support. Also new senior
managers are able to offer fresh insights into the causes of decline and the skills and
motivation necessary to bring about organisational change Smith and Graves (2005). A
change in top management is tangible evidence to bankers, investors and employees that
something positive is being done to improve the firm’s performance, even thought the
cause of the poor performance may be beyond management’s control (Slatter, 1984).
Stakeholder management is key to a successful turnaround. The cooperation of each of
them- customers, vendors, employees, board of directors and others is essential. The
stakeholders have vested interest in the survival of the business. If not involved in the
process, they could frustrate any efforts to have a successful turnaround. Employee
participation is essential to turning a business around. When employees are included in
the restructuring plan, they tend to accept painful concessions as necessary to the
company’s survival. When restructuring is complete, the business is certainly indebted to
these people and should compensate them for their contributions (Scherrer, 2003).
The strategy used and the timing of the strategy determine the success of the turnaround.
Strategies can be combined and used in various sequences (e.g. an initial strategy may
require cost-cutting, and then be superseded by the revenue generating strategy but using
the inappropriate strategy can be a terminal error. The unique requirements of your
business and the turnaround situation will determine the strategies to be used. The
adoption of a turnaround strategy itself is no guarantee of recovery. For a strategy to be
effective, it may have to be carried out swiftly, intensively and competently. Poor
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implementation of turnaround strategies may exacerbate decline Cameron, Sutton and
Whetten (1988). Hoofman (1989) suggests that the difference between successful and
failed turnarounds lies more in the strategy implementation process than the content.
2.2.1. Components of turnaround strategy
The three key components of turnaround strategy are managing the turnaround,
stabilising the business and funding and recapitalisation. Managing the turnaround is in
terms of leadership, stakeholder management and the turnaround project management. A
turnaround situation requires robust leadership to drive the process, provide renewed
energy and excitement, rigour, discipline and urgency. Retaining the existing
management has the advantage of regaining knowledge of the company and the industry.
However, it is generally accepted turnaround management principle that the existing
management should only be retained if not in crisis denial, if it understands the reality
gap, is acutely aware of the causes of decline and if determined to restore the company’s
performance. Existing management, being the architects of the distressed situation, is
unlikely to succeed without new turnaround leadership or external support (J ohnson et al,
2005). Hofer (1980) claims that there is almost universal need to change the current top
management in a turnaround situation.
In a distressed company situation, Stakeholders typically have lost confidence and are
concerned about their own risk exposure to a failure of the company. Turnaround
management will fail unless stakeholder’s advocacy ensures that support for the
turnaround strategy is obtained and retained. Stakeholder management is aimed at
achieving awareness, involvement buy-in and ownership from all the constituencies
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affected by the distressed company’s turnaround situation. Rebuilding and retaining
stakeholder support are built on two change management principles, mobilising
stakeholders, especially employees around active participation towards achieving aligned
turnaround objectives and clear, unbiased and open communication and full disclosure
about the existing situation, turnaround strategy and action plans. Stakeholder
management typically involves progress reports, regular structured feedback to
shareholders, lenders and staff, notice board communications and newsletter (J onson et
al, 2005).
The execution of turnaround strategy faces immense complexities, pressure of limited
time, information and resources as well as uncertainty about the future. To maintain
control, the components of the turnaround plan across all the stages of the turnaround
process need to be broken down into smaller manageable time-phased activities, each
with associated costs and resources with allocated accountabilities. Meticulous project
management is required to track turnaround performance against targets and timelines
and to reschedule and reallocate.
According to J ohnson et al (2005), when a business is distressed, there is need to stabilize
it to ensure the short-term future of the business through cash management, cash
generation and cash conservation, demonstrating control, re-introducing predictability
and ensuring legal and fiduciary compliance. Stabilization is further achieved by
reintroducing predictability to the operations by setting performance targets, establishing
information systems and tracking progress. Stabilization requires rather autocratic
leadership style to impose discipline and conformance to new systems and controls.
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The distressed company under turnaround management typically faces a number of
financial issues. It requires funding to meet both its short-term commitments during
emergency management and to cover turnaround restructuring costs which may include
working capital for trade creditor and interest payments, restructuring cost such as
professional fees, closure and retrenchment cots, and investment in new technology and
systems. The balance sheet has to be restored to solvency and excessive gearing needs to
be corrected. A successful turnaround programme may often affect financial results on
the operating profit. This requires the capital structure to be aligned with the projected
level of operating profit and cash flow to avoid interest charges keeping the company on
the red. Refinancing therefore involves not only the injection of new funds in the form of
loan or equity finance but also changing the existing capital structure per se (J onson et al,
2005).
To achieve a successful turnaround a management team must first identify the causes and
the gravity of the decline, then stem out a firm’s decline by selecting appropriate
strategies for recovery Slatter (1984). This often requires increasing a firm’s efficiency,
stabilizing its internal operations and renewing stakeholders support. The appropriate
strategies for recovery will to a large extent depend on the company size, severity of the
decline, its stage on the company’s life cycle and availability of resources, the external
environment such as the actions of the competitors etc.
2.2.2 Implementation and stabilization
Two major elements of the early phase of the turnaround process are reorganizing the
business’s finances and analyzing its customers. Financial restructuring requires time, but
19
this investment of time will help stop the business decline. The turnaround process begins
by creating a budget and then strictly enforcing financial accountability. Standard costing
estimates are replaced by actual costs, and the use of contribution margins reveals the
products that contribute most to the fixed costs of the business.
During the initial stages of the turnaround process, the turnaround manager uses cash
flow analyses and financial projections on a frequent basis to help reorganize the
accounting system. In some situations, the cash flows will help with the development of
an operating plan for the business. A quality-operating plan is required by most lenders,
and the time line and the amount of cash inflow the plan generates will determine the
methods a business can survive. It is necessary to use financial projections of cash to
make a reasonable determination of how to dispense it (Scherrer, 2003). Analyzing the
business customers is another essential part of the turnaround process. To determine
which customers are profitable, the turnaround manager consults the customer
classification and aging accounts receivable. These two sources will reveal the less
productive accounts.
2.2.3. Causes of business decline
Organizational decline represents substantial resource losses over time (Cameron et al,
1987) and can be either a gradual process or a sudden, unexpected disruption (Tushman
& Anderson, 1986). Substantial organizational decline leads to crisis where the survival
of the firm is threatened. Managers tend to attribute performance decline and any
resulting organizational crises to the external factors beyond their control, such as
competition. Empirical studies, however, show that very few business failures are the
20
result of outside factors only (Boyle & Desai, 1991). Instead organizational failure is
frequently linked to internal problems like failure to update products, invest in core
competencies and control cost (Baum, 1989; Hedberg, Nystrom, & Starbuck, 1976;
Starbuck, Greve, & Hedberg, 1978).
Apart from internal factors, external factors like political, economic, social,
technological, ecological and legal also play a decisive role in the decline of an
organization. It includes the role of unions, governmental regulations, safety and health
improvement measures, consumer organization pressures, shortage of energy and raw
materials etc. Research shows that external causes play a minimal role compared to the
internal causes in shifting the fortunes of the organization.
2.3. Internal signals of business decline
According to Scherrer (2003) long before a business commences its decline, warning
signals start flashing, but managers often do not notice the red lights, or they ignore them.
When they finally do acknowledge something is amiss, some managers will treat the
problem as a temporary phenomenon putting out the fire but not remedying the hazard.
Business failure is marked by early signals of decline that often go unobserved or
ignored. A strong management team should be aware of any potential difficulties or
signals of trouble and should deal with them accordingly. Neglecting these warning
signals can cause irreparable damage to your business and rob it of its profit potential.
Managers often blame business decline to external market changes, unforeseen
competition, financial market instability and technological changes-uncontrolled
elements. While these excuses sound good, the major cause of business failure lie within
21
finance, operations and marketing-the internal elements of a business. The management
has direct control over these functions and are the force that drives them, yet 80 percent
of business failures are caused by management’s inability to control the internal elements
(Scherrer 2003).
There are three distinct phases of decline; early, mid-term and late. Each stage has its
own group of danger signals. For example, in the early stages of decline your business
may experience a shortage of cash. In the mid-term stage, you might find inventory
increasing and sales decreasing. In the late stage, the account payables might be 60 to 90
days late, account receivable could be over 90 days late, depleted working capital,
overdrawn bank account substitutes for credit line etc. All these symptoms will lead to
decrease in market share in key products line, poor internal accounting, non-seasonal
borrowing, increase in management of employee turnover, management conflict with
company goals and increase in trade inquiries. As problems increase within a business, its
reputation with suppliers, banks, employees and potential and current customers and
other stakeholders become severely diminished (Scherrer, 2003).
2.4 Elements of external environment
There are many external elements that can negatively affect a business such as increased
competition, rapidly changing technology and economic fluctuations. Within these
factors are other things like foreign competition, capital markets movements, legal
contrasts and non-responsive political solutions. A change in an external uncontrollable
element will be felt by all businesses in an industry, but the impact these changes have on
22
specific business depends on the strength and stability on the management team
(Scherrer, 2003).
A major problem with predicting the movement of uncontrollable elements is their
interaction with each other. External elements are closely interrelated and consequently,
anything affecting one element can have a secondary effect on another element. For
example, a cultural/social change in our society can result in a legal/political change.
These adjustments can affect our economic environment, which can lead to changes in
technological developments. The development in technology, in turn can affect the level
of competition. Many managers do not realize that they can plan for changes in the
external environment to safeguard their businesses. Foresight is essential in order to adapt
to changes in the external environment. Managers can safeguard their businesses by
planning for external changes in good time (Scherrer, 2003).by monitoring the changes,
strategies can be created to alleviate the negative effects the external environment has on
a business.
2.5. Determinants of Successful turnaround strategy
Turnaround may not be feasible under some circumstances. In other settings, the
organization might lack the capabilities or resources to implement appropriate turnaround
strategy correctly. Even if implemented correctly, in a feasible setting, organizational
outcome of a turnaround strategy still depend on emergent factors (such as competitor
actions), which can prevent or delay any turnaround. Factors that influence the choice of
strategy include severity of the distressed state, firm size and free resources available
(Smith and Graves, 2005).
23
Arogyaswamy and Yasai-Ardekani (1997) investigated the role that cutbacks, efficiency
improvements and investments in technology play in turnaround process. They found that
cutbacks and increase in efficiency were important factors for successful turnaround as
these actions improve profitability in the short run and allow the company to release
resources that may e used elsewhere. The can also play an important role in winning back
stakeholders support and help raise external resources to fund other strategies.
Pant (1991) found a statistically significant relationship between turnaround success and
size; that is turnaround companies were generally smaller than failed companies. He
suggests that smaller companies may be more successful in enacting successful
turnaround as they are able to adapt to their changing environment more easily than large
companies. However White (1984, 1989) argues that larger companies are better
equipped to raise the additional funds necessary to remain viable due to their previous
success in raising external capital. Taffler (1993) notes the prevalence of a stock market
strategy based on the investment in underperforming large companies, as recognition of
the perceived importance of firm size to corporate turnaround. Larger firms are likely to
have a higher probability of survival, as the potential losses to stakeholders re greater
than in smaller firms.
The top management develops and implements turnaround strategies that address the
imminent organizational crisis. Top management become the change agent to reverse the
organizational decline. Hofer (1980) claims that there is an almost universal need to
change the current top management in a turnaround situation. It’s believed that
incumbent managers are less motivated to engage in turnaround strategies, especially if
24
they are strongly committed to the firm’s current strategy or attribute the decline to
external causes only. In addition, changes of the top management team can provide
important signals to outside stakeholder that the firm is separating itself from past failed
strategies. Such signals can increase the willingness of the outside stakeholder to support
the struggling organization (Smith & Graves, 2005).
Smith & Graves (2005) argued that the amount of “free assets” was an important variable
in distinguishing between distressed companies that were successfully reorganized and
those that were liquidated. They argued that distressed companies with sufficient free
assets (i.e. an excess of assets over liabilities, or more specifically of tangible assets over
secured loans) are more likely to avoid bankruptcy because it increases their ability to
acquire the additional funds necessary to enact a successful turnaround and it encourages
continued support of existing lenders as sufficient assets are available to repay the loan if
required.
The severity of the financial distress influences the ability of the firm to enact a recovery.
Hofer (1980) and Robbins and Pearce (1992) argue that severely financially distressed
companies need to make aggressive cost and assets reductions in order to survive.
However, Slatter (1984) highlights, the aggressive reduction of costs and assets is no easy
task as there is often organizational resistance to such actions. The severity of the
distressed state will be determined by the components of the measure of distress, which
themselves identify the major sources of distress; the direction and extent of change in
severity may provide further support for likelihood of turnaround.
25
2.6. Turnaround process model
Based on existing turnaround models, their components and subsequent research, the
model depicted in Figure 1 evolves. This model depicts turnaround process as a series of
integrated steps within two key phases- the decline stemming phase and the recovery
phase. Ultimately, the severity of the financial distress, the amount of the free assets
available and the company size, influence the company’s ability to stem the decline. In
order to stabilize the company, senior management must strengthen stakeholder support,
undertake retrenchment activities to improve efficiency and cash flows, and improve the
internal management and decision –making processes. The aim of the recovery phase is
to ensure that the causes of the decline are addressed and overcome. Distress can be due
to external factors, internal factors or a combination of both. As a result, recovery
strategies adopted may focus on maintaining efficiency, an entrepreneurial
reconfiguration, or a combination of both. Although this model suggests that decline
stemming and recovery strategies should be executed sequentially, circumstances may
dictate that the two phases be executed concurrently in practice (Smith & Graves, 2005).
Turnaround is considered to have occurred when a venture has recovered from its decline
that threatened its existence to resume normal operations and achieve performance
acceptable to stakeholders, through reorientation of positioning, strategy, structure,
control systems and power distribution. This implies that a declining firm can be rescued,
while a firm that has failed cannot (Sudarsanam and Lai, 2001).
26
TT1: The Turnaround Process Model
27
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
This chapter deals with the research design and methodology used in the study. The
chapter has been organized into research design, data collection procedures and data
analysis techniques.
3.2 Research Design
The study will be conducted through a case study. A case study is an in-depth
investigation of a single individual, group or event to explore causation in order to find
underlying principles. This is considered appropriate since it will provide an in-depth
understanding of the DBK’s turnaround strategy instituted in 2004.
3.3 Data Collection
An interview guide will be used to collect data from the respondents. The researcher will
utilize both primary and secondary data. Primary data will be collected by way of a
personal interview guided by a prepared interview guide consisting of open ended
questions. The respondents will be drawn from the top level management since
turnaround is a corporate level strategy. They include the Managing Director, Chief
Operations Manager, Head of Human Resource, Head of Projects and Credit. Secondary
data will be sourced from brochures and financial reports to supplement the primary data.
28
3.4 Data Analysis
Data will be analyzed using content analysis because the study will seek to solicit data
that is qualitative in nature given that this will be a case study. Content analysis is a
process of inspecting, cleaning, transforming and modelling data with the goal of
highlighting useful information, suggesting conclusions and supporting decision.
Analysis of data collected will be comparing it with the theoretical approach and
documents cited in the literature review.
29
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSIONS
4.0 Introduction
This chapter outlines the research findings and discussions on turnaround strategies.
4.1 Respondents profile
Turnaround strategies are corporate level strategies. The respondents were chosen from
the top level management and comprised the Project manager, chief operations manager,
the Liability manager and the credit manager. They are all based at the head office and
have over five years of experience at the Bank.
4.2 Causes of business decline
The decline in business performance at Development Bank of Kenya Limited can be
attributed to both internal and external factors. The bank’s lack of clear corporate
structure was a major cause of decline. There was a noticeable decline in the demand for
new projects finance due to scarcity of profitable investment opportunities and
deterioration in the ability of the banks projects to service existing loans. The level of
non-performing advances for all banks increased from 36% of gross loans in 1999 to
39.2% in 2000 and this continued to impact adversely on the performance of the banking
sector. The Bank’s advances decreased by 12% from Kes. 2.6 billion in 1999 to Kes. 2.3
billion in 2000. The same year 2000, the bank released expensive deposits due to lack of
lending opportunity. The profit before taxation decreased from Kes. 133.8 million in
1999 to Kes. 80.7 million in year 2000. The decrease was mainly due to higher
30
provisions made for bad doubtful debts, which increased from Kes. 85.6 million in 1999
to Kes. 176.2 million in 2000 (DBK audited account year 2000).
In 2004, DBK underwent a major change in shareholding, with the divesture of Deutsche
Investitions (DEG) with a shareholding of 28.8%, Nederlands Financierings (FMO) with
a shareholding of 22.8% and International Finance Corporation (IFC) with a shareholding
of 7.2%. During year 2006, the Commonwealth Development Corporation (CDC) with a
shareholding of 10.7% sold its shares to Kenyan investment group Trans-Century
Limited. At present, the remaining 89.3% of the bank’s shares are warehoused with the
Kenyan government through Industrial & Commercial Development Corporation
(ICDC), although the process of disposing of these shares is underway.
The account opening balances were all too high making the bank less competitive. The
potential clients preferred opening accounts with the competition since their terms were
more attractive. This in effect reduced the banks liquidity position as it maintained very
few accounts.
In year 2008, the Bank experienced a complete turnaround (in five years) by recording
growth in assets to Kes. 6.5 billion from Kes. 2.2 billion achieved in year 2004. This was
a substantial 195% increase. The loan book increased by to Kes. 3.4 billion (431%) in
2208 from Kes. 0.6 billion in 2004. On the backdrop of this phenomenal growth in the
asset book and concerted bad debts recovery effort, the non-performing portfolio declined
substantially. The deposit base rose to an all time high of Kes. 13.8 billion from Kes. 0.6
billion in 2004.The turnaround is measured by improvement in the company’s
31
profitability as detailed in the five year analysis (2004-2008) in Appendix A (DBK
Audited Report 2008).
4.3 Turnaround Strategies
Bibeault (1982), Pearce and Robbins (1993) view turnaround process as consisting two
stages; decline stemming and recovery strategies. The declining performance at
Development Bank of Kenya Limited was as a result of both internal and external causes.
As a result, the bank adopted various sets of strategies to curb the declining performance
and enhance its profitability.
The research findings indicate that the bank embarked on cost reduction measures
(operational restructuring) to improve efficiency and margin by reducing direct costs and
slimming overheads in line with volume. The Bank previous occupied four floors, the
head office was located on the, fourteenth, fifteenth and sixteenth floors, while the
banking hall remained on the ground floor. In order to reduce the overhead costs the bank
reorganized the sitting arrangements. This enabled them to release fourteenth floor,
which was later on leased to other tenants and was able to generate extra revenue for the
bank (The bank owns the building that houses it’s head office). Consequently, only the
top level management were allowed to park at the premises. Hence most of the parking
space that was initially given to other members of staff was leased out to external
customers and was able to generate extra revenue for the bank.
To enhance operational efficiency further, the bank embarked on major layoffs thus
reducing the salary expense. The bank also restructured the accounts by reducing the
32
opening balances for Current; Savings and Fixed deposit accounts from Kes. 100, 000,
Kes. 50,000 and Kes. 500,000 to Kes. 10,000, Kes. 5,000 and Kes. 100,000 respectively.
The bank tariffs were also reduced in line with competition. In effect the accounts
became more affordable and attractive to the market. A Business Development
department was also created whose core responsibility was new product development and
marketing. To improve on the liquidity further, the bank omitted payment of dividends in
year 2002 and 2003.
In the year 2002, Small Enterprise Finance Company Limited (SEFCO), a subsidiary of
the bank whose core business was micro finance ceased its operations. The subsidiary
was operating well below capacity. Only two members of staff remained after the closure
to follow up on debt recovery. The two employees were later on absorbed by the bank.
Top level management change is widely accepted as a precondition for successful
turnaround Sudarsanam and Lai (2001). The research findings indicate that the main
element of turnaround at Development Bank was change in top level management. There
was change in the CEO and two other directors in the board in year 2004. Change in top
level management is seen as a means of restoring stakeholders’ confidence in the future
viability of the organisation, thereby ensuring their support. New senior managers are
able to offer fresh insights into the causes of decline and skills and motivation necessary
to bring about organizational change Smith and Grave (2005).
33
Stakeholder management is a key to successful turnaround. The co-operation of each of
them customers, vendors, employees, board of directors and others is essential. If not
involved in the process they could frustrate any efforts to have a successful turnaround.
Employee participation is essential to turning a business around. Continuous open
communication of the ongoing changes was conveyed to all the stakeholders including
the existing clients, the government, creditors and the employees. This was done through
mails, memos and statement in the published accounts. To ensure employee participation,
various committees were formed to review and give feedback on various key issues
arising. The committees included the strategy, Human Resource, Automation, Assets and
Liabilities, Debt Collection, Executive Committee to mention but a few. Each committee
was charged with specific responsibilities. They were required to hold meeting at various
intervals and the minutes of their meetings shared with the rest.
4.4 Discussions
The researcher set out to establish the turnaround strategies adopted at Development
Bank of Kenya Limited. The research finding as discussed above support various
arguments in the turnaround literature on the causes of business decline. The causes of
business decline at Development Bank were both internal and external. Some of the
internal factors identified were the bank’s lack of clear corporate strategy. Some of the
external factors identified included increased competition, economic recession which led
to reduction in profitable projects and increase in non- performing loans. This concurs
with Gichuki (2009) and Scherrer (2003) who identified the same internal and external
factors to have contributed to business decline.
34
From the literature, long before a business commences its decline, warning signals start
flashing, but managers often do not notice the red lights, or they ignore them. When they
finally do acknowledge something is amiss, some managers will treat the problem as
temporary phenomenon putting out the fire but not remedying the hazard. From the
research findings, the business decline signals for Development Bank were felt long
before the actual decline. This is manifest in the early 2000 when the Bank could not
identify viable projects to finance. The bank actually returned most of the funds
allocated for the projects to the shareholders. The loan advances continued to reduce due
to attrition and the fact that there were no new loan booking. This in effect led to
shrinking profit margin. A strong management team should be aware of any potential
difficulties or signs of trouble and should deal with them accordingly. Neglecting these
warning signals can cause irreparable damage to the business and rob it of its profit
potential (Scherrer, 2003).
The research findings indicate that the main element of turnaround at Development Bank
was change of top management. Top management change is widely quoted as a
precondition for successful turnarounds Sudarsanam and Lai (2001).simply when old
ways of operating need to undergo drastic change. It is difficult for the incumbent top
management to change their habits and institute radical reforms. Often the stakeholders
will continue to give their support if they are confident that the management team can
manage the crisis at hand. A change in top management is tangible evidence that
something positive is being done to improve the firm’s performance even though the
cause of the poor performance may have been beyond management’s control
(Sudarsanam and Lai, 2001).
35
The strategic management literature provides empirical support for overlapping two-stage
approach to corporate turnarounds: the efficiency/operating turnaround strategy stage and
entrepreneurial/strategic stage Sudarsanam and Lai (2001). The efficiency/operating
turnaround stage aims to stabilize operations and restore profitability by pursuing strict
cost and operating- asset reduction. The entrepreneurial/ strategic stage aims to achieve
profitable long-term growth through restructuring the firm’s asset portfolio or
product/market refocusing. This literature supports the strategies that were adopted at
Development Bank. The laying off of employees led to reduction in salary and other
administration expenses. The reorganization of the offices and the initial sitting
arrangements led to generation of extra revenue as the offices were leased out to external
clients. In additional the reorganization of the bank account opening balances and the
revision of the tariff positioned the bank well within the competition. The bank was able
to open more accounts hence growth in deposits.
Stakeholder management is key to a successful turnaround. The cooperation of each of
them- customers, vendors, employees, board of directors and others is essential. The
stakeholders have vested interest in the survival of the business. If not involved in the
process, they could frustrate any efforts to have a successful turnaround. Employee
participation is essential to turning a business around. When employees are included in
the restructuring plan, they tend to accept painful concessions as necessary to the
company’s survival. When restructuring is complete, the business is certainly indebted to
these people and should compensate them for their contributions (Scherrer, 2003). The
research findings at Development Bank are in consonance with these observations.
36
The strategy used and the timing of the strategy determine the success of the turnaround.
Strategies can be combined and used in various sequences (e.g. an initial strategy may
require cost-cutting, and then be superseded by the revenue generating strategy but using
the inappropriate strategy can be a terminal error. The unique requirements of your
business and the turnaround situation will determine the strategies to be used. The
adoption of a turnaround strategy itself is no guarantee of recovery. For a strategy to be
effective, it may have to be carried out swiftly, intensively and competently. Poor
implementation of turnaround strategies may exacerbate decline Cameron, Sutton and
Whetten (1988). Hoofman (1989) suggests that the difference between successful and
failed turnarounds lies more in the strategy implementation process than the content.
37
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS.
5.0 Introduction
This chapter gives the summary, recommendation, limitations of the study, suggestions
for further study and the conclusion.
5.1 Summary
Development bank faced immense internal and external factors that led to declining
performance in year 2000. Some of the internal factors included the banks lack of clear
corporate strategy, non-performing loans, lack of profitable projects to finance, abrupt
change in the shareholding and the economic recession experienced in the country at the
time. To save the bank from collapsing, the management embarked on adopting various
turnaround strategies that would see it recover from the decline and assume normal and
profitable operations into the foreseeable future. The strategies adopted were effective
and led to improved performance by year 2008.
5.2 Conclusion
The objective of this research was to identify the turnaround strategies that were adopted
at the bank to counter the declining performance. From the research findings and in
consonance with the existing theory, no single strategy is able to confront decline. Firms
should adopt various combined strategies concurrently for a successful turnaround. The
38
strategies adopted by Development Bank were effective as they resulted in improved
performance.
5.3 Limitations of the study
The study was a case study, the research findings cannot be generalized to other firms in
the industry. Management is sensitive to environment and organizational factors. The
study was time limiting as it was conducted within a short period of time. Some of the
intended respondents like the CEO was not available for the interview. In addition those
interviewed did not have sufficient time to explain all the issues in greater detail due to
time factor. As such some of the information was derived from the published accounts
and other publications.
5.4 Suggestions for further study
Further research can be carried out on the challenges that were encountered in the
implementation process and how they were overcome. Government owned institutions
are perceived to have lengthy and unnecessary bureaucratic processes which at times
hamper the timely implementation of key strategies. As such the researcher should aim to
find out whether this perception was true in case of DBK, a government is owned
institution.
5.5 Recommendation
The research findings indicate that the bank adopted the series of integrated strategies
within two key phases- the decline stemming and the recovery phase. The severity of the
financial distress, the amount of free assets available and the company size influence the
39
company’s ability to stem the decline. In order to stabilize the bank, senior management
had to strengthen stakeholder support by providing continuous communication and
updates of any changes that were being undertaken. The bank also undertook
retrenchments, and other measures to improve efficiency and cash flows. The aim of the
recovery phase was to ensure that the causes of the decline were addressed and
overcome. The distress was due to both internal and external causes. As a result, recovery
strategies adopted focused on maintaining both efficiency, and entrepreneurial
reconfiguration. The top management change was able to restore the stakeholder’s
confidence and support. It’s therefore important for any company that wishes to
undertake any turnaround strategies to first seek to understand the cause of the decline,
which will guide them in the choice of strategies to adopt.
5.6 Implication on policy and practice
Critical in a turnaround is to offset any cash problems. The results of the study indicate
that the ability of firm to achieve successful turnaround largely depends on actions under
the control of managers, either in the pre-decline conditions or in specific responses to
decline. From the research findings, the most successful way of stemming decline is the
combination of cost cutting measures, developing unabsorbed slack resources and using
the firm’s assets astutely. Poor performing firms can break the decline by reducing
expenses such as salaries, marketing and inventories to free up cash. The need to improve
internal efficiency and productivity in a turnaround cannot be over emphasized.
Turnaround strategies are not singular actions but are interrelated with the prevalent
contextual factors. In addition the stakeholders support is critical in the turnaround.
40
REFERENCES
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integrative two-stage model. Journal of management studies, 34 (4), 493-525
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decline. Academy of Management J ournal, 30(1), 126-138.
Central Bank of Kenya –Bank Supervision Annual Report 2009
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Edition, New Delhi, Prentice Hall of India
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The Banking Survey Kenya 2007
APPENDIX: INTERVIEW GUIDE
SECTION 1
43
APPENDIX A: INTERVIEW GUIDE
SECTION 1
Position held in Bank ………………………………………………………….
Department …………………………………………………………………..
No. of years of experience at the Bank……………………………………………….
SECTION 2
1. What were the principal causes of business decline in year 2000?
a) Internal Causes
b) External causes
2. a) Has the Bank embarked on any cost reduction measures since year 2000?
Yes No
b) If yes mention at least three such measures.
i)
ii)
iii)
3. Has the bank closed/ sold any of its business units after year 2000?
Yes No
44
4. Has the Bank reorganized any of its products/ business units after year 2000?
Yes No
5. a) Has the Bank invested in new computer software or incurred any major Capital
Expenditure since year 2000?
Yes No
Please list any major investment after year 2000.
i)
ii)
iii)
iv)
6. Has the Bank omitted payments of any dividends since year 2000 to date?
Yes No
7. a) Has there been any top level management change since year 2000?
Yes No
b) Which year……………….
10. Has the Bank undertaken any major employee layoffs since year 2000?
Yes No
45
11. What has been the stakeholder’s reaction to the changes................................
……………………………………………………………………………………
…………………………………………………………………………………………
12. What mechanism was put in place to ensure their continued support?
…………………………………………………………………………………………….
………………………………………………………………………………………………
……………………………………………………………………………………………..
13. How was the information on the changes communicated to the employees?
………………………………………………………………………………………..
……………………………………………………………………………………….
…………………………………………………………………………………………
14. How were other employees in the organization involved in the turnaround?
………………………………………………………………………………………..
…………………………………………………………………………………………
…………………………………………………………………………………………
46
15. In your view were the strategies employed to curb the declining performance
effective?
Yes No
16. Any other comment?..................................................................................................
…………………………………………………………………………………………
Thank you.
47
APPENDIX B: DEVELOPMENT BANK PROFITABILITY,
DEPOSITS AND ADVANCES, 2001- 2008
2001 2002 2003 2004 2005 2006 2007 2008
Profits 108, 716 58,574 103,499 96,544 165,315 127,508 156,234 169,199
2001 2002 2003 2004 2005 2006 2007 2008
Deposits 751 714 952 622 1,129 1,774 2,732 3,774
Advances 1,823 1,385 982 646 1,072 1,577 2,477 3,438
doc_274778308.pdf
Presentation explain turnaround strategies at development bank of kenya limited.
TURNAROUND STRATEGIES AT DEVELOPMENT
BANK OF KENYA LIMITED
BY
DAYANA K. KAMUNDE
A MANAGEMENT RESEARCH PROJECT SUBMITTED IN PARTIAL
FULFILMENT OF THE REQUIREMENTS OF THE MASTER OF
BUSINESS ADMINISTRATION DEGREE, SCHOOL OF BUSINESS,
UNIVERSITY OF NAIROBI
SEPTEMBER 2010
i
ii
DECLARATION
I, the undersigned, declare that this is my original work and has not been submitted to any
other college, institution or university other than the University of Nairobi, School of
Business for academic credit.
Signed……………………………………………. Date……………………………..
Dayana Kanana Kamunde
D61/70538/2007
This project has been submitted for examination with the approval of the appointed
University supervisor.
Signed………………………………………………… Date…………………………..
Dr. Zachary B. Awino
Department of Business Administration
School of Business
University of Nairobi
iii
DEDICATION
To my husband and daughter for love, encouragement and moral support this project is
affectionately dedicated.
iv
ACKNOWLEDGEMENTS
I thank God almighty for the gift of life and good health. I am grateful to my Husband
Peter Mutuma for encouraging me to go back to school at a time when our daughter was
only three months old. I also wish to thank my entire family for their encouragement,
support and prayers. I also appreciate the invaluable input; tireless assistance and support
from my supervisor Dr. Zachary Awino for ensuring the project met the required
standards. Special thanks also go to Ann Gichuki for the moral support and prayers she
offered during the entire period.
This project would not have been possible without the cooperation of the senior
management of Development Bank who spared time from their busy schedule to
participate in the study. Last but not least I appreciate all those people who contributed to
this study on one way or the other to facilitate completion of this study. Thank you all
and God bless.
v
TABLE OF CONTENTS
DECLARATION…………………………………………………………………….ii
DEDICATION……………………………………………………………………….iii
ACKNOWLEDGEMENTS……………………………………………………….…iv
LIST OF FIGURES……………………………………………………………….…vii
ABSTRACT………………………………………………………………………….viii
CHAPTER ONE: INTRODUCTION………………………………………………..1
1.1 Background of the study……………………………………………………1
1.1.1 Turnaround strategy……………………………….......................1
1.1.2 Banking industry in Kenya………………………………………4
1.1.3 Development bank of Kenya Ltd……………………………….6
1.2 Statement of the problem……………………………………………………7
1.3 Research Objective…………………………………………………….. ….10
1.4 Value of the study………………………………………………………….10
CHAPTER TWO: LITERATURE REVIEW……………………..………………..11
2.1 Introduction………………………………………………………………..11
2.2 Turnaround strategies………………………………………………………11
2.2.1 Components of turnaround strategy……………………………...16
2.2.2 Implementation and stabilization…………………………………18
2.2.3 Causes of decline…………………………………………………19
2.3 Internal signals of business decline………………………….......................20
2.4 Elements of external environment………………………………………….21
2.5 Determinants of successful turnaround strategy…………………………...22
2.5 Turnaround process model…………………………………………………25
CHAPTER THREE: RESEARCH METHODOLOGY……………………………27
3.1 Introduction…………………………………………………………………27
3.2 Research Design…………………………………………………………….27
3.3 Data Collection……………………………………………………………..27
3.4 Data Analysis……………………………………………………….............28
vi
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION……………...29
4.0 Introduction…………………………………………………………………29
4.1 Respondents profile…………………………………………………………29
4.2 Causes of business decline………………………………………………….29
4.3 Turnaround strategies……………………………………………………….31
4.4 Discussions…………………………………………………………………..33
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 37
5.0 Introduction………………………………………………………………..37
5.1 Summary…………………………………………………………………...37
5.2 Conclusion………………………………………………………………….37
5.3 Limitations of the study……………………………………………………38
5.4 Suggestions for further study………………………………………………38
5.5 Recommendation…………………………………………………………..38
5.6 Implication on policy and practice…………………………………………39
REFERENCES……………………………………………………….........................35
APPENDIX A: INTERVIEW GUIDE……………………………………………..38
APPENDIX B: DEVELOPMENT BANK PROFITABILITY, DEPOSITS AND
ADVANCES 2001- 2008…………………………………………………………..…42
vii
LIST OF FIGURES
Figure1.1 Turnaround process model………………………………………………25
viii
ABSTRACT
Many firms experience trends of deteriorating financial performance at some point in the
organizational life cycle as a result of internal and external factors. Whatever the cause of
the decline, whether internal or external or both, management can respond by selecting
strategies that redirect the resources in an attempt to improve the firms competitive
position. The aim of the turnaround strategy is not only to halt the decline, but also to
generate the means for a substantial recovery. Therefore turnaround is considered to have
occurred when a firm recovers adequately and regains profitability.
Development Bank of Kenya Limited initially established in 1963 as a development
finance institution operating under the name Development Finance Company of Kenya
(DFCK). Its key objective was to fund long term project. Following the liberalization in
the financial industry in Kenya during the 1990’s, DFCK was transformed into a fully
fledged commercial bank in 1997 to Development Bank of Kenya Limited. This allowed
the bank to accept deposits from the open market and to broaden its scope of operations.
However, the bank’s lack of clear corporate strategy and other external factors resulted to
decline in profitability. This study sought to establish the turnaround strategies adopted to
successfully halt the decline and return the bank to profitability.
The study adopted a case study research design to gain an in depth understanding of the
strategies. Primary and secondary data were used. Primary data was collected by way of
pre-guided interview comprising of open ended questions. The respondents were drawn
from top management. This comprised of five managers heading various divisions in the
bank. These are Projects, Credit, Human Resource, Chief Operations and Business
Development. Secondary data was collected from Bank’s annual financial reports for
ix
various years and the Bank’s intranet. The research findings indicated that Development
Bank employed various strategies to confront declining performance. The process
involved top management change, which saw the exit of the previous CEO and other
changes at the board level. The process involved all the stakeholders to provide support
for the much needed changes. For any turnaround to be successful, the organization must
move fast to salvage the core of the business. Increasing efficiency is an important factor
as these actions improve profitability in the short run and allow the company to release
resources that may be used elsewhere. This can also play an important role in winning
back stakeholders support and help raise external resources to fund other strategies.
Key words: Turnaround, strategy, Development Bank of Kenya Limited.
1
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
Many firms experience trends of deteriorating financial performance at some point in
their organizational life cycle as a result of market erosion and decisions by the
management. Based on the deterministic perspective this organizational decline can be
attributed to environmental factors while voluntarisitic perspective attributes decline to
internal factors, particularly management actions and perception Rasheed (2008).
Whatever the cause of the decline, whether internal or external or both, management can
respond by selecting strategies that redirect resources in an attempt to improve their firms
competitive position.
1.1.1 Turnaround strategy
Different business environment will require different strategic options explored Gichuki
(2009). Strategy is the direction and scope of an organization over the long term, which
achieve advantage in a changing environment through its configuration of resources and
competences with the aim of fulfilling stakeholder’s expectations J ohnson, Scholes and
Whittington (2005). Hence strategy is about where the business is planning to get in the
long run (the direction), the markets in which the business should compete and the
activities involved in such markets (Markets; Scope). How the business can perform
better than competition in those markets i.e. the advantage. What resources (skills, assets,
finance, relationship, technical competence and facilities) are required in order to be able
to compete (resources). The external environment factors that affect the business ability
2
to compete (environment) and the values and expectations of those who have power in
and round the business the (stakeholders).
According to J ohnson et al (2005), strategies exist at various levels in the organization.
Corporate Strategy is concerned with the overall purpose and scope of the business to
meet stakeholder’s expectations. This is a crucial level since it is heavily influenced by
investors in the business and acts to guide strategic decision making throughout the
business. Corporate strategy is often stated explicitly in a mission statement. Business
strategy is concerned more with how the business competes successfully in a particular
market. It concerns strategic decisions about choice of products, meeting customer needs,
gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational strategy is concerned with how each part of the business is organized to
deliver the corporate and business level strategic direction. Operational strategy therefore
focuses on issues of resources, processes, people etc.
The corporate level strategies choices are classified as growth, stability or retrenchment.
Firms experiencing negative trends of performance typically resort to retrenchment as the
likely turnaround strategy Pant (1991). Growth as a turnaround strategy has largely been
ignored. Not every growth strategy is good for every business. The key to finding the
right growth strategy is properly matching it to your company and its specific market
place. Diversification (new products/new market) is a high risk growth strategy, largely
because both the products and the market are unproven territory for the entrepreneur.
However, diversification may be a reasonable choice if the high risk is compensated by
the chance of the high return. Other advantages of diversification include the potential to
3
gain a foothold in an attractive industry and reduction of the overall business portfolio
risk
Product development strategy may be appropriate if the firm’s strengths are related to its
specific customers rather than to the specific product itself. In this situation it can
leverage its strengths by developing a new product targeted to its existing customers.
Similar to the case of new market development, product development carries more risk
than simply attempting to increase market share. Market development options include the
pursuit of additional market segments or geographical regions. The development of new
markets for products may be a good strategy if the firm’s core competencies are related
more to the specific product than to its experience with specific market segment. Because
the firm is expanding into new market, a market development strategy typically has more
risk than a market penetration strategy.
The market penetration strategy is the least risky since it leverages many of the firms
existing resources and capabilities. In growing market, simply maintaining market share
will result in growth and their may exist opportunities to increase market share if
competitors reach capacity limits. However, market penetration has limits and once the
market approaches saturation another strategy must be pursued if the firm is to continue
to grow. Business owners or managers should be able to differentiate between when a
turnaround strategy is achievable and when it is not. Sometimes a business in crisis is too
far gone to be salvaged. Closing down a crises ridden business and liquidating its assets is
sometimes the best and wisest strategy. This strategy is of last resort (Gichuki, 2009).
4
1.1.2 Banking industry in Kenya
The Banking industry in Kenya is governed by the Companies Act, the Banking Act, The
Central Bank of Kenya Act and the various prudential guidelines issued by the Central
Bank of Kenya (CBK). The Banking sector was liberalized in 1995 and exchange
controls lifted. The CBK, which falls under the Minister for Finance docket, is
responsible for formulating and implementing monetary policy and fostering the
liquidity, solvency and proper functioning of the financial system. As at 31 December
2009, the banking sector was composed of 46 institutions, 44 of which were commercial
banks and two Mortgage finance companies. In addition there was one licensed deposit
taking microfinance institution and 130 foreign exchange bureaus. Commercial Banks
and Mortgage Finance Companies are licensed and regulated under the Banking Act, Cap
488 and Prudential Guidelines issued there under. Deposit taking Microfinance
institutions on the other hand are licensed and regulated under the Microfinance Act and
Regulation issued there under. Foreign Exchange Bureaus are licensed under the Central
Bank of Kenya Act, Cap 491 and Foreign Bureau Guidelines issued there under (Bank
Supervision Report 2009).
Out of the 46 institutions, 33 were locally owned and 13 were foreign owned. The locally
owned financial institutions comprised of three banks with public shareholding, 28
privately owned commercial banks and two Mortgage Finance Companies (MFCs). The
foreign owned financial institutions comprised of 9 locally incorporated foreign banks
and 4 branches of foreign incorporated banks.
5
The main challenges facing the banking sector in Kenya are regulations, for instance, the
finance Act 2008, which took effect on 1 J anuary 2009 requires banks and Mortgage
firms to build a minimum core capital of Kes. 1 Billion by December 2012. This
requirement is hoped to transform small banks into more stable organizations. The
implementation of this requirement poses a challenge to some of the existing banks and
may be forced to merge in order to comply. For example the recent merger between
Southern Credit and Equatorial Commercial bank. The global financial crises
experienced in late 2008 is expected to affect the banking industry in Kenya especially in
regard to deposits mobilization, reduction in trade volumes and the performance of assets.
The declining interest margins due to customer pressure leading to re-organizations.
Increased demand for non-traditional services such as the automation of large number of
services, and lastly the introduction of non-traditional players such as deposit taking
Microfinance institutions that pose stiff competition to commercial banks.
The Kenyan banking sector continued to exhibit resilience in 2009 in the midst of the
global financial turbulences. The global financial crises that escalated in late 2008 reared
its face on the Kenyan economy in the form of second, third round lags effects. However,
efforts by all players to stimulate the economy tampered the effects of the crisis in Kenya.
This is evidenced by the performance posted by Banks and mortgage finance companies
in 2009 which surpassed expectations (Bank Supervision Report, 2009).During 2009,
Kenyan banks continued to embrace new technology to improve their customer service
delivery. A considerable number of banks adopted the use of mobile banking technology
as a service delivery channel to enhance convenience to their customers. In an effort to
promote financial access to majority of Kenyans, the Central Bank and the banking sector
6
has put in place a credit information sharing mechanism which will enable individuals to
use their information capital as “collateral” to access bank services. Further, the
amendment of the Banking Act to permit banks to use agents in their outreach will also
extend the formal financial services access frontier (CBK Supervision Annual Report
2009)
With globalization and increased accessibility to electronic delivery channels for products
and services, banks are continuously innovating to provide a wide range of electronic
products and services. The enhanced ICT platforms have enabled banks to introduce
internet and mobile banking services and products such as viewing of statements of
account, enquiries on status of cheques, cheque book requests, notification of entries into
account, funds transfer and payment of utility bills. Given the cut throat competition in
the banking sector, banks can no longer compete on price but on the extra value addition
services by leveraging on ICT based products that emphasize on convenience banking
and of course superior customer service.
1.1.3. Development Bank of Kenya Limited
Development Bank of Kenya Limited (DBK) was established in 1963 as a development
finance institution operating under the name Development Finance Company of Kenya
(DFCK). Its chief aim was to identify and fund commercially viable projects, with the
goal of developing the Kenyan industrial sector. The institution was initially formed as a
joint development between the Kenyan, British and German governments through their
respective development financing institutions. Over the years, Holland and the World
7
Bank also acquired shareholdings. These institutions provided funding for the bank’s
projects through a mix of equity participation and debt structures.
Following the liberalization of the Kenyan financial industry during the 1990s, DFCK
was transformed into a fully fledged commercial bank in 1997and the name changed to
Development Bank of Kenya Limited (DBK).This allowed the bank to accept deposits
from the open market and broaden its scope of operations. Despite this, DBK’s lack of
clear corporate strategy and other external factors resulted in decline in deposits and
advances. In year 2000, the country experienced severe economic recession. The Gross
Domestic Product (GDP) declined to negative 0.3% compared to 1.4% growth in 1999.
This decline in growth reflected poor performance in most sectors of the economy.
1.2. Statement of the problem
Turnaround refers to recovery to profitability from a loss or declining situation. Top
management must rescue an ailing firm by responding successfully through strategies and
policies to external and internal factors causing the decline. The aim is not just to halt the
decline, but also to generate the means to substantial recovery. This process starts by
analysing the situation to determine causes of decline pointing out the strategy to be
adopted to stem the decline and the implementation path and program.
Development Bank of Kenya was formed to serve as a project financier. After
liberalization of the banking sector in the 1990’s the institution converted to a fully
fledged commercial bank in 1997. This allowed the bank to accept deposits from the
open market and broaden its scope of operations. However, DBK’s lack of a clear
corporate strategy and other external factors led to a steady decline in deposits and
8
advances. This also led to the collapse of various institutions in the late 90s mainly due to
poor management of credit risk resulting in accumulation of huge non performing loans
and operational risks (The Banking Survey, 2007). Due to these setbacks, the Bank
embarked on a turnaround strategy in year 2004 and has made remarkable recovery and
regained the stakeholder’s confidence. In year 2008, the Bank attained a complete
turnaround recording a pre-tax profit of Kes. 169 million compared to Kes 80 million in
2000.The total assets increased to Kes. 6.5 billion in 2008, compared to Kes. 3.6 billion
in 2000.
A few studies on turnaround strategies in Kenya have been done. Situma (2006) studied
the adoption of turnaround strategy at Kenya Commercial Bank. She sought to
investigate the experience of turnaround at Kenya Commercial Bank (KCB). In addition
she had the objective of establishing the process employed in implementing turnaround
strategies in 2002. The research findings indicate that KCB used both entrepreneurial and
efficiency strategies in the turnaround process. All the stake holders were involved in the
process to provide support to ensure that the bank fully recovered from the decline
situation. Matundura (2008) studied implementing turnaround strategy at Kenya
Revenue Authority (KRA). He sought to establish the turnaround strategies that were
adopted by KRA, the factors that necessitated the implementation. His study found out
that a new management team with the right skills was hired. They also hired consultants
to help with the change process and several meetings were arranged between the
management and employees to prepare themselves for the change. The authority also
decentralised its operations. Saigilu (2008) focused on the effectiveness of turnaround
strategy at the Kenya Revenue Authority. The key objective of the study was to find out
9
how effective the turnaround strategies were in achieving the targeted organizational
objectives. He found out that the turnaround strategies implemented were effective. In
fact it led to consistent increase in revenue collections. The service delivery at the
institution were also highly improved and led to building confidence among all the
stakeholders. Gichuki (2009) studied turnaround strategy at the Co-operative Bank of
Kenya. She sought to establish the cause of declining performance and how the
turnaround strategy was implemented. The research findings indicate that Co-operative
Bank employed various strategies to confront the decline. To steer the turnaround
process the bank instituted changes at the top management which saw the exit of the
previous CEO and other changes at board level. In addition the government as a
stakeholder absorbed bad debts.
Two of the mentioned studies were on a non-banking context Matundura (2008) and
Saigilu (2008). Both focused on Kenya Revenue Authority and their finding may not
apply in a bank. In addition their focus was on the implementation process and how
effective the turnaround strategies were in achieving the set targets. On the commercial
bank context, Situma (2006) and Gichuki (2009) studied the adoption of turnaround
strategies at Kenya Commercial Bank and Co-operative Bank of Kenya respectively.
Both studies were case studies and the findings cannot be generalized. In addition,
Development Bank of Kenya caters for a niche market. Its main focus remains long term
project finance targeting the corporate institutions, unlike Kenya Commercial Bank and
Co-operative Bank which serve both the retail and corporate clientele. Thus, this study
will help bring out differences arising from different environment and organizational
factors unique to each organization. This study seeks to investigate the turnaround
10
strategy adopted at Development Bank of Kenya, how it was implemented and the
challenges faced in the implementation process. The researcher will try o answer the
following critical question; what turnaround strategies were adopted to confront the
decline and return to profitability?
1.3. Research Objective
The objective of this study is to establish the turnaround strategies adopted by
Development Bank of Kenya.
1.4. Value of the study
The study will also contribute to the body of knowledge. The study will bring out
differences arising from different environmental and organizational factors unique to
each organization. At the height of continued tough economic times, global economic
recession and credit crunch, some organizations might experience declining performance.
The research findings will be useful to such players who might embark on adopting
turnaround strategies.
11
CHAPTER TWO: LITERATURE REVIEW
2.1. Introduction
This chapter is devoted to review literature related to the turnaround process, causes of
decline, components of turnaround, some turnaround strategies, factors determining
successful turnaround and the turnaround process model.
2.2. Turnaround strategies
Turnaround strategies are a set of consequential, directive, long term decisions and
actions targeted to the reversal of a perceived crisis that threatens the firm’s survival.
Pearce and Robinson (2000, p 265) states that a turnaround situation represents absolute
and relative-to-industry declining performance of a sufficient magnitude to warrant
explicit turnaround actions. Turnaround situation may be the result of years of gradual
slowdown or months of sharp decline.
Bibeault (1982), Pearce and Robbins (1993) view turnaround process as consisting two
stages: decline stemming and recovery strategies. The primary objective of decline
stemming strategies is to stabilize the company’s financial condition and includes actions
such as gathering stakeholder support, eliminating inefficiencies and stabilising the
company’s internal climate and decision process. The severity of the distressed state and
the resource slack available ultimately determines the extent to which the decline-
stemming strategies are applied and succeed. Once the company’s financial position has
stabilised, it must decide on its recovery strategy; whether or not it will continue to
12
pursue profitability at its reduced size or implement growth-oriented (entrepreneurial-
oriented) strategies.
Operational restructuring entails cost reduction, revenue generation and operating- asset
reduction strategies to improve efficiency and margin by reducing direct cost and
slimming overheads in line with volume Slatter (1984). Operational restructuring is
generally the first turnaround strategy implemented by a financially distressed firm, as
there is no point in assessing the strategic health if the firm goes bankrupt in the near
term. Cost reduction may be sufficient where the firm is weak operationally. Efficiency
measures are directed at both maximizing output (revenue) and minimizing input
(resources such as inventory). Cost reduction may be sufficient where the firm is weak
operationally. Revenue generating strategies may be pursued focusing on the existing
product lines, initiating price-cuts or raising prices where products are price intensive)
and increasing marketing expenditure to stimulate demand (Hofer, 1980).
When a firm is operating well below capacity, asset reduction to improve utilization and
productivity of assets is imperative. Asset reduction can be an operational or strategic in
nature. Operating asset reduction refers to business-unit level sale, closures and
integration of surplus fixed assets such as plant, equipment and offices and reduction in
the short-term assets such as inventory and debtors. This is driven by the need to enhance
the efficiency of the firm’s current operations through improved asset utilization at the
operating level (Bibeault, 1982; Hofer, 1980; Schendel, Patton and Riggs, 1976).
Operational restructuring is primarily designed to generate, in the short term, cash flow
and profit improvement. It is of a fire-fighting nature and differs from restructuring aimed
13
at the longer term competitive positioning and performance of the firm (Sudarsanam and
LAI, 2001).
Asset restructuring involves reorganizing the firm into self-contained strategic business
units; divestments of lines of businesses not fitting the core business, acquiring
companies that relate to and strengthen the core, discontinuing unpromising products,
forming strategic alliances, joint ventures and licensing agreements. In addition the
distressed firm may merge with other firms, be taken over in a hostile bid or be bought-
out by their own management (MBOs). Asset divestment is deemed imperative where the
firm is in severe distress and /or where strategic health is weak. (Hofer, 1980; Pearce 11
and Robbins, 1993). Asset reduction at the portfolio (Corporate) level covers divestment
of subsidiaries/ divisions. The objective of this level is to divest the non-profit generating
assets or even profitable assets for the purpose of raising cash to alleviate financial
distress and fund restructuring.
Asset investment covers business and corporate level investments and comprises both
internal capital expenditure and acquisitions. Capital expenditure is designed to achieve
efficiency/ productivity improvement e.g. building new plants and equipments Hambrick
and Schecter (1983) or computerized processing and monitoring equipment which speeds
productivity and market response, improves productivity and reduces costs. Such
expenditure complements, rather than conflicts with efficiency driven operational
restructuring described earlier. It may also enhance firms competitive advantage e.g.
when affirm achieves economy of scale by expanding its output. Since it involves cash
outflow, firms in decline can undertake such capital expenditure as an ensure their
14
survival and ensure their recovery. Thus internal capital expenditure may be critical
component of the firm’s turnaround strategy. Firms may also seek to acquire firms that fit
their core competencies with long term profit potential. This stage is crucial for
turnaround by firms with inappropriate corporate strategy or mature or declining
products/markets where new strategic direction is imperative Hofer (1980); Pearce11 and
Robbins (1993); Scendel et al (1976). Acquisitions may thus contribute to successful
sharp bend a sustained good performance thereafter but need to be selected and managed
carefully (Sudarsanam and Lai, 2001).
Financial restructuring is the reworking of a firm’s capital structure to relieve the strain of
interest and debt repayments and is separated into equity based and debt based strategies.
Equity based strategies cover dividend cuts or omissions and equity issues. Firms in
financial distress tend to reduce or omit dividends due to liquidity constraints, restrictions
imposed by debt covenants, or strategic considerations such as improving firm’s
bargaining position with trade unions. Debt-based strategies refer to the extensive
restructuring of firm’s debt. Firms restructure their debt to avoid financial distress. Debt
restructuring is a transaction in which an existing debt is replaced by a new contract with
one or more of interest and principal reduced, maturity extended or debts –equity swap
(Sudarsanam and Lai, 2001).
Managerial restructuring comprises effecting top management changes. This is widely
quoted as a precondition for successful turnaround Sudarsanam and Lai (2001). When old
ways of operating need to undergo drastic change, it is difficult for incumbent top
management to change their habits and institute radical reforms. Changes in senior
15
management team are seen as a means of restoring stakeholders’ confidence in the future
viability of the organisation, thereby ensuring their continued support. Also new senior
managers are able to offer fresh insights into the causes of decline and the skills and
motivation necessary to bring about organisational change Smith and Graves (2005). A
change in top management is tangible evidence to bankers, investors and employees that
something positive is being done to improve the firm’s performance, even thought the
cause of the poor performance may be beyond management’s control (Slatter, 1984).
Stakeholder management is key to a successful turnaround. The cooperation of each of
them- customers, vendors, employees, board of directors and others is essential. The
stakeholders have vested interest in the survival of the business. If not involved in the
process, they could frustrate any efforts to have a successful turnaround. Employee
participation is essential to turning a business around. When employees are included in
the restructuring plan, they tend to accept painful concessions as necessary to the
company’s survival. When restructuring is complete, the business is certainly indebted to
these people and should compensate them for their contributions (Scherrer, 2003).
The strategy used and the timing of the strategy determine the success of the turnaround.
Strategies can be combined and used in various sequences (e.g. an initial strategy may
require cost-cutting, and then be superseded by the revenue generating strategy but using
the inappropriate strategy can be a terminal error. The unique requirements of your
business and the turnaround situation will determine the strategies to be used. The
adoption of a turnaround strategy itself is no guarantee of recovery. For a strategy to be
effective, it may have to be carried out swiftly, intensively and competently. Poor
16
implementation of turnaround strategies may exacerbate decline Cameron, Sutton and
Whetten (1988). Hoofman (1989) suggests that the difference between successful and
failed turnarounds lies more in the strategy implementation process than the content.
2.2.1. Components of turnaround strategy
The three key components of turnaround strategy are managing the turnaround,
stabilising the business and funding and recapitalisation. Managing the turnaround is in
terms of leadership, stakeholder management and the turnaround project management. A
turnaround situation requires robust leadership to drive the process, provide renewed
energy and excitement, rigour, discipline and urgency. Retaining the existing
management has the advantage of regaining knowledge of the company and the industry.
However, it is generally accepted turnaround management principle that the existing
management should only be retained if not in crisis denial, if it understands the reality
gap, is acutely aware of the causes of decline and if determined to restore the company’s
performance. Existing management, being the architects of the distressed situation, is
unlikely to succeed without new turnaround leadership or external support (J ohnson et al,
2005). Hofer (1980) claims that there is almost universal need to change the current top
management in a turnaround situation.
In a distressed company situation, Stakeholders typically have lost confidence and are
concerned about their own risk exposure to a failure of the company. Turnaround
management will fail unless stakeholder’s advocacy ensures that support for the
turnaround strategy is obtained and retained. Stakeholder management is aimed at
achieving awareness, involvement buy-in and ownership from all the constituencies
17
affected by the distressed company’s turnaround situation. Rebuilding and retaining
stakeholder support are built on two change management principles, mobilising
stakeholders, especially employees around active participation towards achieving aligned
turnaround objectives and clear, unbiased and open communication and full disclosure
about the existing situation, turnaround strategy and action plans. Stakeholder
management typically involves progress reports, regular structured feedback to
shareholders, lenders and staff, notice board communications and newsletter (J onson et
al, 2005).
The execution of turnaround strategy faces immense complexities, pressure of limited
time, information and resources as well as uncertainty about the future. To maintain
control, the components of the turnaround plan across all the stages of the turnaround
process need to be broken down into smaller manageable time-phased activities, each
with associated costs and resources with allocated accountabilities. Meticulous project
management is required to track turnaround performance against targets and timelines
and to reschedule and reallocate.
According to J ohnson et al (2005), when a business is distressed, there is need to stabilize
it to ensure the short-term future of the business through cash management, cash
generation and cash conservation, demonstrating control, re-introducing predictability
and ensuring legal and fiduciary compliance. Stabilization is further achieved by
reintroducing predictability to the operations by setting performance targets, establishing
information systems and tracking progress. Stabilization requires rather autocratic
leadership style to impose discipline and conformance to new systems and controls.
18
The distressed company under turnaround management typically faces a number of
financial issues. It requires funding to meet both its short-term commitments during
emergency management and to cover turnaround restructuring costs which may include
working capital for trade creditor and interest payments, restructuring cost such as
professional fees, closure and retrenchment cots, and investment in new technology and
systems. The balance sheet has to be restored to solvency and excessive gearing needs to
be corrected. A successful turnaround programme may often affect financial results on
the operating profit. This requires the capital structure to be aligned with the projected
level of operating profit and cash flow to avoid interest charges keeping the company on
the red. Refinancing therefore involves not only the injection of new funds in the form of
loan or equity finance but also changing the existing capital structure per se (J onson et al,
2005).
To achieve a successful turnaround a management team must first identify the causes and
the gravity of the decline, then stem out a firm’s decline by selecting appropriate
strategies for recovery Slatter (1984). This often requires increasing a firm’s efficiency,
stabilizing its internal operations and renewing stakeholders support. The appropriate
strategies for recovery will to a large extent depend on the company size, severity of the
decline, its stage on the company’s life cycle and availability of resources, the external
environment such as the actions of the competitors etc.
2.2.2 Implementation and stabilization
Two major elements of the early phase of the turnaround process are reorganizing the
business’s finances and analyzing its customers. Financial restructuring requires time, but
19
this investment of time will help stop the business decline. The turnaround process begins
by creating a budget and then strictly enforcing financial accountability. Standard costing
estimates are replaced by actual costs, and the use of contribution margins reveals the
products that contribute most to the fixed costs of the business.
During the initial stages of the turnaround process, the turnaround manager uses cash
flow analyses and financial projections on a frequent basis to help reorganize the
accounting system. In some situations, the cash flows will help with the development of
an operating plan for the business. A quality-operating plan is required by most lenders,
and the time line and the amount of cash inflow the plan generates will determine the
methods a business can survive. It is necessary to use financial projections of cash to
make a reasonable determination of how to dispense it (Scherrer, 2003). Analyzing the
business customers is another essential part of the turnaround process. To determine
which customers are profitable, the turnaround manager consults the customer
classification and aging accounts receivable. These two sources will reveal the less
productive accounts.
2.2.3. Causes of business decline
Organizational decline represents substantial resource losses over time (Cameron et al,
1987) and can be either a gradual process or a sudden, unexpected disruption (Tushman
& Anderson, 1986). Substantial organizational decline leads to crisis where the survival
of the firm is threatened. Managers tend to attribute performance decline and any
resulting organizational crises to the external factors beyond their control, such as
competition. Empirical studies, however, show that very few business failures are the
20
result of outside factors only (Boyle & Desai, 1991). Instead organizational failure is
frequently linked to internal problems like failure to update products, invest in core
competencies and control cost (Baum, 1989; Hedberg, Nystrom, & Starbuck, 1976;
Starbuck, Greve, & Hedberg, 1978).
Apart from internal factors, external factors like political, economic, social,
technological, ecological and legal also play a decisive role in the decline of an
organization. It includes the role of unions, governmental regulations, safety and health
improvement measures, consumer organization pressures, shortage of energy and raw
materials etc. Research shows that external causes play a minimal role compared to the
internal causes in shifting the fortunes of the organization.
2.3. Internal signals of business decline
According to Scherrer (2003) long before a business commences its decline, warning
signals start flashing, but managers often do not notice the red lights, or they ignore them.
When they finally do acknowledge something is amiss, some managers will treat the
problem as a temporary phenomenon putting out the fire but not remedying the hazard.
Business failure is marked by early signals of decline that often go unobserved or
ignored. A strong management team should be aware of any potential difficulties or
signals of trouble and should deal with them accordingly. Neglecting these warning
signals can cause irreparable damage to your business and rob it of its profit potential.
Managers often blame business decline to external market changes, unforeseen
competition, financial market instability and technological changes-uncontrolled
elements. While these excuses sound good, the major cause of business failure lie within
21
finance, operations and marketing-the internal elements of a business. The management
has direct control over these functions and are the force that drives them, yet 80 percent
of business failures are caused by management’s inability to control the internal elements
(Scherrer 2003).
There are three distinct phases of decline; early, mid-term and late. Each stage has its
own group of danger signals. For example, in the early stages of decline your business
may experience a shortage of cash. In the mid-term stage, you might find inventory
increasing and sales decreasing. In the late stage, the account payables might be 60 to 90
days late, account receivable could be over 90 days late, depleted working capital,
overdrawn bank account substitutes for credit line etc. All these symptoms will lead to
decrease in market share in key products line, poor internal accounting, non-seasonal
borrowing, increase in management of employee turnover, management conflict with
company goals and increase in trade inquiries. As problems increase within a business, its
reputation with suppliers, banks, employees and potential and current customers and
other stakeholders become severely diminished (Scherrer, 2003).
2.4 Elements of external environment
There are many external elements that can negatively affect a business such as increased
competition, rapidly changing technology and economic fluctuations. Within these
factors are other things like foreign competition, capital markets movements, legal
contrasts and non-responsive political solutions. A change in an external uncontrollable
element will be felt by all businesses in an industry, but the impact these changes have on
22
specific business depends on the strength and stability on the management team
(Scherrer, 2003).
A major problem with predicting the movement of uncontrollable elements is their
interaction with each other. External elements are closely interrelated and consequently,
anything affecting one element can have a secondary effect on another element. For
example, a cultural/social change in our society can result in a legal/political change.
These adjustments can affect our economic environment, which can lead to changes in
technological developments. The development in technology, in turn can affect the level
of competition. Many managers do not realize that they can plan for changes in the
external environment to safeguard their businesses. Foresight is essential in order to adapt
to changes in the external environment. Managers can safeguard their businesses by
planning for external changes in good time (Scherrer, 2003).by monitoring the changes,
strategies can be created to alleviate the negative effects the external environment has on
a business.
2.5. Determinants of Successful turnaround strategy
Turnaround may not be feasible under some circumstances. In other settings, the
organization might lack the capabilities or resources to implement appropriate turnaround
strategy correctly. Even if implemented correctly, in a feasible setting, organizational
outcome of a turnaround strategy still depend on emergent factors (such as competitor
actions), which can prevent or delay any turnaround. Factors that influence the choice of
strategy include severity of the distressed state, firm size and free resources available
(Smith and Graves, 2005).
23
Arogyaswamy and Yasai-Ardekani (1997) investigated the role that cutbacks, efficiency
improvements and investments in technology play in turnaround process. They found that
cutbacks and increase in efficiency were important factors for successful turnaround as
these actions improve profitability in the short run and allow the company to release
resources that may e used elsewhere. The can also play an important role in winning back
stakeholders support and help raise external resources to fund other strategies.
Pant (1991) found a statistically significant relationship between turnaround success and
size; that is turnaround companies were generally smaller than failed companies. He
suggests that smaller companies may be more successful in enacting successful
turnaround as they are able to adapt to their changing environment more easily than large
companies. However White (1984, 1989) argues that larger companies are better
equipped to raise the additional funds necessary to remain viable due to their previous
success in raising external capital. Taffler (1993) notes the prevalence of a stock market
strategy based on the investment in underperforming large companies, as recognition of
the perceived importance of firm size to corporate turnaround. Larger firms are likely to
have a higher probability of survival, as the potential losses to stakeholders re greater
than in smaller firms.
The top management develops and implements turnaround strategies that address the
imminent organizational crisis. Top management become the change agent to reverse the
organizational decline. Hofer (1980) claims that there is an almost universal need to
change the current top management in a turnaround situation. It’s believed that
incumbent managers are less motivated to engage in turnaround strategies, especially if
24
they are strongly committed to the firm’s current strategy or attribute the decline to
external causes only. In addition, changes of the top management team can provide
important signals to outside stakeholder that the firm is separating itself from past failed
strategies. Such signals can increase the willingness of the outside stakeholder to support
the struggling organization (Smith & Graves, 2005).
Smith & Graves (2005) argued that the amount of “free assets” was an important variable
in distinguishing between distressed companies that were successfully reorganized and
those that were liquidated. They argued that distressed companies with sufficient free
assets (i.e. an excess of assets over liabilities, or more specifically of tangible assets over
secured loans) are more likely to avoid bankruptcy because it increases their ability to
acquire the additional funds necessary to enact a successful turnaround and it encourages
continued support of existing lenders as sufficient assets are available to repay the loan if
required.
The severity of the financial distress influences the ability of the firm to enact a recovery.
Hofer (1980) and Robbins and Pearce (1992) argue that severely financially distressed
companies need to make aggressive cost and assets reductions in order to survive.
However, Slatter (1984) highlights, the aggressive reduction of costs and assets is no easy
task as there is often organizational resistance to such actions. The severity of the
distressed state will be determined by the components of the measure of distress, which
themselves identify the major sources of distress; the direction and extent of change in
severity may provide further support for likelihood of turnaround.
25
2.6. Turnaround process model
Based on existing turnaround models, their components and subsequent research, the
model depicted in Figure 1 evolves. This model depicts turnaround process as a series of
integrated steps within two key phases- the decline stemming phase and the recovery
phase. Ultimately, the severity of the financial distress, the amount of the free assets
available and the company size, influence the company’s ability to stem the decline. In
order to stabilize the company, senior management must strengthen stakeholder support,
undertake retrenchment activities to improve efficiency and cash flows, and improve the
internal management and decision –making processes. The aim of the recovery phase is
to ensure that the causes of the decline are addressed and overcome. Distress can be due
to external factors, internal factors or a combination of both. As a result, recovery
strategies adopted may focus on maintaining efficiency, an entrepreneurial
reconfiguration, or a combination of both. Although this model suggests that decline
stemming and recovery strategies should be executed sequentially, circumstances may
dictate that the two phases be executed concurrently in practice (Smith & Graves, 2005).
Turnaround is considered to have occurred when a venture has recovered from its decline
that threatened its existence to resume normal operations and achieve performance
acceptable to stakeholders, through reorientation of positioning, strategy, structure,
control systems and power distribution. This implies that a declining firm can be rescued,
while a firm that has failed cannot (Sudarsanam and Lai, 2001).
26
TT1: The Turnaround Process Model
27
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
This chapter deals with the research design and methodology used in the study. The
chapter has been organized into research design, data collection procedures and data
analysis techniques.
3.2 Research Design
The study will be conducted through a case study. A case study is an in-depth
investigation of a single individual, group or event to explore causation in order to find
underlying principles. This is considered appropriate since it will provide an in-depth
understanding of the DBK’s turnaround strategy instituted in 2004.
3.3 Data Collection
An interview guide will be used to collect data from the respondents. The researcher will
utilize both primary and secondary data. Primary data will be collected by way of a
personal interview guided by a prepared interview guide consisting of open ended
questions. The respondents will be drawn from the top level management since
turnaround is a corporate level strategy. They include the Managing Director, Chief
Operations Manager, Head of Human Resource, Head of Projects and Credit. Secondary
data will be sourced from brochures and financial reports to supplement the primary data.
28
3.4 Data Analysis
Data will be analyzed using content analysis because the study will seek to solicit data
that is qualitative in nature given that this will be a case study. Content analysis is a
process of inspecting, cleaning, transforming and modelling data with the goal of
highlighting useful information, suggesting conclusions and supporting decision.
Analysis of data collected will be comparing it with the theoretical approach and
documents cited in the literature review.
29
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSIONS
4.0 Introduction
This chapter outlines the research findings and discussions on turnaround strategies.
4.1 Respondents profile
Turnaround strategies are corporate level strategies. The respondents were chosen from
the top level management and comprised the Project manager, chief operations manager,
the Liability manager and the credit manager. They are all based at the head office and
have over five years of experience at the Bank.
4.2 Causes of business decline
The decline in business performance at Development Bank of Kenya Limited can be
attributed to both internal and external factors. The bank’s lack of clear corporate
structure was a major cause of decline. There was a noticeable decline in the demand for
new projects finance due to scarcity of profitable investment opportunities and
deterioration in the ability of the banks projects to service existing loans. The level of
non-performing advances for all banks increased from 36% of gross loans in 1999 to
39.2% in 2000 and this continued to impact adversely on the performance of the banking
sector. The Bank’s advances decreased by 12% from Kes. 2.6 billion in 1999 to Kes. 2.3
billion in 2000. The same year 2000, the bank released expensive deposits due to lack of
lending opportunity. The profit before taxation decreased from Kes. 133.8 million in
1999 to Kes. 80.7 million in year 2000. The decrease was mainly due to higher
30
provisions made for bad doubtful debts, which increased from Kes. 85.6 million in 1999
to Kes. 176.2 million in 2000 (DBK audited account year 2000).
In 2004, DBK underwent a major change in shareholding, with the divesture of Deutsche
Investitions (DEG) with a shareholding of 28.8%, Nederlands Financierings (FMO) with
a shareholding of 22.8% and International Finance Corporation (IFC) with a shareholding
of 7.2%. During year 2006, the Commonwealth Development Corporation (CDC) with a
shareholding of 10.7% sold its shares to Kenyan investment group Trans-Century
Limited. At present, the remaining 89.3% of the bank’s shares are warehoused with the
Kenyan government through Industrial & Commercial Development Corporation
(ICDC), although the process of disposing of these shares is underway.
The account opening balances were all too high making the bank less competitive. The
potential clients preferred opening accounts with the competition since their terms were
more attractive. This in effect reduced the banks liquidity position as it maintained very
few accounts.
In year 2008, the Bank experienced a complete turnaround (in five years) by recording
growth in assets to Kes. 6.5 billion from Kes. 2.2 billion achieved in year 2004. This was
a substantial 195% increase. The loan book increased by to Kes. 3.4 billion (431%) in
2208 from Kes. 0.6 billion in 2004. On the backdrop of this phenomenal growth in the
asset book and concerted bad debts recovery effort, the non-performing portfolio declined
substantially. The deposit base rose to an all time high of Kes. 13.8 billion from Kes. 0.6
billion in 2004.The turnaround is measured by improvement in the company’s
31
profitability as detailed in the five year analysis (2004-2008) in Appendix A (DBK
Audited Report 2008).
4.3 Turnaround Strategies
Bibeault (1982), Pearce and Robbins (1993) view turnaround process as consisting two
stages; decline stemming and recovery strategies. The declining performance at
Development Bank of Kenya Limited was as a result of both internal and external causes.
As a result, the bank adopted various sets of strategies to curb the declining performance
and enhance its profitability.
The research findings indicate that the bank embarked on cost reduction measures
(operational restructuring) to improve efficiency and margin by reducing direct costs and
slimming overheads in line with volume. The Bank previous occupied four floors, the
head office was located on the, fourteenth, fifteenth and sixteenth floors, while the
banking hall remained on the ground floor. In order to reduce the overhead costs the bank
reorganized the sitting arrangements. This enabled them to release fourteenth floor,
which was later on leased to other tenants and was able to generate extra revenue for the
bank (The bank owns the building that houses it’s head office). Consequently, only the
top level management were allowed to park at the premises. Hence most of the parking
space that was initially given to other members of staff was leased out to external
customers and was able to generate extra revenue for the bank.
To enhance operational efficiency further, the bank embarked on major layoffs thus
reducing the salary expense. The bank also restructured the accounts by reducing the
32
opening balances for Current; Savings and Fixed deposit accounts from Kes. 100, 000,
Kes. 50,000 and Kes. 500,000 to Kes. 10,000, Kes. 5,000 and Kes. 100,000 respectively.
The bank tariffs were also reduced in line with competition. In effect the accounts
became more affordable and attractive to the market. A Business Development
department was also created whose core responsibility was new product development and
marketing. To improve on the liquidity further, the bank omitted payment of dividends in
year 2002 and 2003.
In the year 2002, Small Enterprise Finance Company Limited (SEFCO), a subsidiary of
the bank whose core business was micro finance ceased its operations. The subsidiary
was operating well below capacity. Only two members of staff remained after the closure
to follow up on debt recovery. The two employees were later on absorbed by the bank.
Top level management change is widely accepted as a precondition for successful
turnaround Sudarsanam and Lai (2001). The research findings indicate that the main
element of turnaround at Development Bank was change in top level management. There
was change in the CEO and two other directors in the board in year 2004. Change in top
level management is seen as a means of restoring stakeholders’ confidence in the future
viability of the organisation, thereby ensuring their support. New senior managers are
able to offer fresh insights into the causes of decline and skills and motivation necessary
to bring about organizational change Smith and Grave (2005).
33
Stakeholder management is a key to successful turnaround. The co-operation of each of
them customers, vendors, employees, board of directors and others is essential. If not
involved in the process they could frustrate any efforts to have a successful turnaround.
Employee participation is essential to turning a business around. Continuous open
communication of the ongoing changes was conveyed to all the stakeholders including
the existing clients, the government, creditors and the employees. This was done through
mails, memos and statement in the published accounts. To ensure employee participation,
various committees were formed to review and give feedback on various key issues
arising. The committees included the strategy, Human Resource, Automation, Assets and
Liabilities, Debt Collection, Executive Committee to mention but a few. Each committee
was charged with specific responsibilities. They were required to hold meeting at various
intervals and the minutes of their meetings shared with the rest.
4.4 Discussions
The researcher set out to establish the turnaround strategies adopted at Development
Bank of Kenya Limited. The research finding as discussed above support various
arguments in the turnaround literature on the causes of business decline. The causes of
business decline at Development Bank were both internal and external. Some of the
internal factors identified were the bank’s lack of clear corporate strategy. Some of the
external factors identified included increased competition, economic recession which led
to reduction in profitable projects and increase in non- performing loans. This concurs
with Gichuki (2009) and Scherrer (2003) who identified the same internal and external
factors to have contributed to business decline.
34
From the literature, long before a business commences its decline, warning signals start
flashing, but managers often do not notice the red lights, or they ignore them. When they
finally do acknowledge something is amiss, some managers will treat the problem as
temporary phenomenon putting out the fire but not remedying the hazard. From the
research findings, the business decline signals for Development Bank were felt long
before the actual decline. This is manifest in the early 2000 when the Bank could not
identify viable projects to finance. The bank actually returned most of the funds
allocated for the projects to the shareholders. The loan advances continued to reduce due
to attrition and the fact that there were no new loan booking. This in effect led to
shrinking profit margin. A strong management team should be aware of any potential
difficulties or signs of trouble and should deal with them accordingly. Neglecting these
warning signals can cause irreparable damage to the business and rob it of its profit
potential (Scherrer, 2003).
The research findings indicate that the main element of turnaround at Development Bank
was change of top management. Top management change is widely quoted as a
precondition for successful turnarounds Sudarsanam and Lai (2001).simply when old
ways of operating need to undergo drastic change. It is difficult for the incumbent top
management to change their habits and institute radical reforms. Often the stakeholders
will continue to give their support if they are confident that the management team can
manage the crisis at hand. A change in top management is tangible evidence that
something positive is being done to improve the firm’s performance even though the
cause of the poor performance may have been beyond management’s control
(Sudarsanam and Lai, 2001).
35
The strategic management literature provides empirical support for overlapping two-stage
approach to corporate turnarounds: the efficiency/operating turnaround strategy stage and
entrepreneurial/strategic stage Sudarsanam and Lai (2001). The efficiency/operating
turnaround stage aims to stabilize operations and restore profitability by pursuing strict
cost and operating- asset reduction. The entrepreneurial/ strategic stage aims to achieve
profitable long-term growth through restructuring the firm’s asset portfolio or
product/market refocusing. This literature supports the strategies that were adopted at
Development Bank. The laying off of employees led to reduction in salary and other
administration expenses. The reorganization of the offices and the initial sitting
arrangements led to generation of extra revenue as the offices were leased out to external
clients. In additional the reorganization of the bank account opening balances and the
revision of the tariff positioned the bank well within the competition. The bank was able
to open more accounts hence growth in deposits.
Stakeholder management is key to a successful turnaround. The cooperation of each of
them- customers, vendors, employees, board of directors and others is essential. The
stakeholders have vested interest in the survival of the business. If not involved in the
process, they could frustrate any efforts to have a successful turnaround. Employee
participation is essential to turning a business around. When employees are included in
the restructuring plan, they tend to accept painful concessions as necessary to the
company’s survival. When restructuring is complete, the business is certainly indebted to
these people and should compensate them for their contributions (Scherrer, 2003). The
research findings at Development Bank are in consonance with these observations.
36
The strategy used and the timing of the strategy determine the success of the turnaround.
Strategies can be combined and used in various sequences (e.g. an initial strategy may
require cost-cutting, and then be superseded by the revenue generating strategy but using
the inappropriate strategy can be a terminal error. The unique requirements of your
business and the turnaround situation will determine the strategies to be used. The
adoption of a turnaround strategy itself is no guarantee of recovery. For a strategy to be
effective, it may have to be carried out swiftly, intensively and competently. Poor
implementation of turnaround strategies may exacerbate decline Cameron, Sutton and
Whetten (1988). Hoofman (1989) suggests that the difference between successful and
failed turnarounds lies more in the strategy implementation process than the content.
37
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS.
5.0 Introduction
This chapter gives the summary, recommendation, limitations of the study, suggestions
for further study and the conclusion.
5.1 Summary
Development bank faced immense internal and external factors that led to declining
performance in year 2000. Some of the internal factors included the banks lack of clear
corporate strategy, non-performing loans, lack of profitable projects to finance, abrupt
change in the shareholding and the economic recession experienced in the country at the
time. To save the bank from collapsing, the management embarked on adopting various
turnaround strategies that would see it recover from the decline and assume normal and
profitable operations into the foreseeable future. The strategies adopted were effective
and led to improved performance by year 2008.
5.2 Conclusion
The objective of this research was to identify the turnaround strategies that were adopted
at the bank to counter the declining performance. From the research findings and in
consonance with the existing theory, no single strategy is able to confront decline. Firms
should adopt various combined strategies concurrently for a successful turnaround. The
38
strategies adopted by Development Bank were effective as they resulted in improved
performance.
5.3 Limitations of the study
The study was a case study, the research findings cannot be generalized to other firms in
the industry. Management is sensitive to environment and organizational factors. The
study was time limiting as it was conducted within a short period of time. Some of the
intended respondents like the CEO was not available for the interview. In addition those
interviewed did not have sufficient time to explain all the issues in greater detail due to
time factor. As such some of the information was derived from the published accounts
and other publications.
5.4 Suggestions for further study
Further research can be carried out on the challenges that were encountered in the
implementation process and how they were overcome. Government owned institutions
are perceived to have lengthy and unnecessary bureaucratic processes which at times
hamper the timely implementation of key strategies. As such the researcher should aim to
find out whether this perception was true in case of DBK, a government is owned
institution.
5.5 Recommendation
The research findings indicate that the bank adopted the series of integrated strategies
within two key phases- the decline stemming and the recovery phase. The severity of the
financial distress, the amount of free assets available and the company size influence the
39
company’s ability to stem the decline. In order to stabilize the bank, senior management
had to strengthen stakeholder support by providing continuous communication and
updates of any changes that were being undertaken. The bank also undertook
retrenchments, and other measures to improve efficiency and cash flows. The aim of the
recovery phase was to ensure that the causes of the decline were addressed and
overcome. The distress was due to both internal and external causes. As a result, recovery
strategies adopted focused on maintaining both efficiency, and entrepreneurial
reconfiguration. The top management change was able to restore the stakeholder’s
confidence and support. It’s therefore important for any company that wishes to
undertake any turnaround strategies to first seek to understand the cause of the decline,
which will guide them in the choice of strategies to adopt.
5.6 Implication on policy and practice
Critical in a turnaround is to offset any cash problems. The results of the study indicate
that the ability of firm to achieve successful turnaround largely depends on actions under
the control of managers, either in the pre-decline conditions or in specific responses to
decline. From the research findings, the most successful way of stemming decline is the
combination of cost cutting measures, developing unabsorbed slack resources and using
the firm’s assets astutely. Poor performing firms can break the decline by reducing
expenses such as salaries, marketing and inventories to free up cash. The need to improve
internal efficiency and productivity in a turnaround cannot be over emphasized.
Turnaround strategies are not singular actions but are interrelated with the prevalent
contextual factors. In addition the stakeholders support is critical in the turnaround.
40
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Auditing Journal Vol.20. No.3, (2005) p. 304-320
Sudarsanam, S., & Lai, J . Corporate Financial Distress and Turnaround Strategies: An
Empirical Analysis. British Journal of Management, Vol.12, 183-199 (2001).
The Banking Survey Kenya 2007
APPENDIX: INTERVIEW GUIDE
SECTION 1
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APPENDIX A: INTERVIEW GUIDE
SECTION 1
Position held in Bank ………………………………………………………….
Department …………………………………………………………………..
No. of years of experience at the Bank……………………………………………….
SECTION 2
1. What were the principal causes of business decline in year 2000?
a) Internal Causes
b) External causes
2. a) Has the Bank embarked on any cost reduction measures since year 2000?
Yes No
b) If yes mention at least three such measures.
i)
ii)
iii)
3. Has the bank closed/ sold any of its business units after year 2000?
Yes No
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4. Has the Bank reorganized any of its products/ business units after year 2000?
Yes No
5. a) Has the Bank invested in new computer software or incurred any major Capital
Expenditure since year 2000?
Yes No
Please list any major investment after year 2000.
i)
ii)
iii)
iv)
6. Has the Bank omitted payments of any dividends since year 2000 to date?
Yes No
7. a) Has there been any top level management change since year 2000?
Yes No
b) Which year……………….
10. Has the Bank undertaken any major employee layoffs since year 2000?
Yes No
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11. What has been the stakeholder’s reaction to the changes................................
……………………………………………………………………………………
…………………………………………………………………………………………
12. What mechanism was put in place to ensure their continued support?
…………………………………………………………………………………………….
………………………………………………………………………………………………
……………………………………………………………………………………………..
13. How was the information on the changes communicated to the employees?
………………………………………………………………………………………..
……………………………………………………………………………………….
…………………………………………………………………………………………
14. How were other employees in the organization involved in the turnaround?
………………………………………………………………………………………..
…………………………………………………………………………………………
…………………………………………………………………………………………
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15. In your view were the strategies employed to curb the declining performance
effective?
Yes No
16. Any other comment?..................................................................................................
…………………………………………………………………………………………
Thank you.
47
APPENDIX B: DEVELOPMENT BANK PROFITABILITY,
DEPOSITS AND ADVANCES, 2001- 2008
2001 2002 2003 2004 2005 2006 2007 2008
Profits 108, 716 58,574 103,499 96,544 165,315 127,508 156,234 169,199
2001 2002 2003 2004 2005 2006 2007 2008
Deposits 751 714 952 622 1,129 1,774 2,732 3,774
Advances 1,823 1,385 982 646 1,072 1,577 2,477 3,438
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