CASE STUDY ON SAATCHI MODULE 3

Saatchi & Saatchi is a Communication Agency firm and in the line of business of Advertising, Marketing Strategy, Consumer Research and Forecasting etc.The company is functioning for the last 45 years and its Head Quarter is based in New York City. It has its presence in 82 countries of the world, having a staff of 7000 employees and 138 offices positioned in different locations. Its overall world wide ranking was 18 during 2001 and had 56 biggest clients. During 2001 it had a turnover of $7000 billion.

During recession period of 1990 its financial position gradually started crumbling and by 1995 it became bankcrupt.The old team was not in a position to revive the position any and it was proposed to handover the reins to a new persons. In 1995 Bob Seelert took over as Chairman and Kevin Roberts as CEO.The team started working putting new steam in the set up. The team devised the goals—Lead, Drive and Prosper.

The management persuade the team members that they are not so far apart in their viewpoints and address the key points. The phase involved with focus on development and market share.  The means employed were new ideas, new markets and increased market penetration. Revenue driven reconfiguration of business assets was the ideal solution. Efficiency maintenance strategies were carried out Recovery is said to have been achieved when economic measures indicated that the firm has regained pre—downturn levels of performance.

The company thought of a new recovery strategy that emphasized growth by reducing the manpower at some of the units.

Turnaround Situations: Severity and Speed of Strategic Response

The nature, extent and speed of the appropriate strategic response depend primarily on dimensions of the situation severity and causality. Severity of the turnaround situation is a measure of the firm’s financial health; it gauges the magnitude of the threat to company survival. Since the immediate concern to Saatchi was the extent to which the decline is a threat to its short-term survival, severity is the governing factor in estimating the speed with which the retrenchment response had been formulated and activated. Of course, performance that declined relative to that of competitors, but not absolutely, may necessitate almost no retrenchment. A reconsideration of strategy with a probable reconfiguration of assets would usually is deemed appropriate.

When severity is low, a firm has some financial cushion. Stability may he achieved through cost retrenchment alone. When the turnaround situation severity is high, a firm must immediately stabilize the decline. Cost reductions must be supplemented with more drastic asset reduction measures. Assets targeted for divestiture are those determined to be underproductive. In contrast, more productive resources are protected from cuts or reconfigured as critical elements of the future core business plan of the company, i.e., the intended recovery response.

A model of turnaround based on evidence that business firm turnaround characteristically involved a multi-stage process in which retrenchment could serve as either a grand or operating strategy. A link between severity of the downturn and the degree of cost and asset reductions that a firm should include in its recovery response. Cost and asset reduction activities as operating turnaround strategies. Operating strategies designed for cost reduction were done by Saatchi in such severe turnaround situations. Drastic cost reductions coupled with asset reductions were recommended for firms in more severe turnaround situations i.e. more severe problems require more drastic solutions. Usually, asset reduction is more drastic than cost reduction.

As the importance of external environmental factors assume importance relative to the internal factors, effective and innovative activities are more appropriate in the recovery phase of the turnaround process. Efficiency maintenance activities are more appropriate in such situations. In either case, the recovery phase of the turnaround process is likely to be more successful in accomplishing turnaround when it is preceded by retrenchment which results in the achievement of near-term financial stabilization. Innovative turnaround strategies involve doing thing differently whereas efficiency turnaround strategies entail doing the same things on a smaller or more efficient scale. Revenue generating through product reintroduction, increased advertising and selling efforts, and lower prices represent modifications in existing strategy and are innovative turnaround strategies.

Divestment

An organization divests when it sells a business unit to another firm that will continue to operate it. Threatened with bankruptcy between 1990 and 1995, Publicis Groupe SA acquired it recently. The new group has expanded it and diversified in many sectors. The divestment of Saatchi was a conscious decision. The company had reached a point where it required immediate attention, not only in financial terms but in terms of overall functioning. The group felt that it did not have the requisite skills in the specific area where Publicis operated and hence decided to hive it off.

Spin-Off

In a spin-off, a firm sets up a business unit as a separate business through a distribution of stock or a cash deal. This is one way to allow a new management team to try to do better with a business unit that is a poor or mediocre performer.

Restructuring the Business Operations

The company tries to survive by restructuring its management team, financial reengineering or overall business reengineering. Business reengineering involves throwing aside all old business processes and starting from scratch to design more efficient processes. This may cut costs and assist a turnaround situation. This is much easier to visualize in other processes where each step of assembly is examined for improvement or elimination. It would not be correct to find more efficient ways to perform processes that should be abandoned and hence, reengineering is strongly suggested in such cases.

Downsizing is the alternate term for a layoff.  Unless downsizing is tied to a rational strategy, problems can crop up. Cutting staff without changing the amount and type of work done simply means that the remaining employees must do more work, this will result in cost reduction but product quality and customer service may suffer. If the firm does not down size, its performance deteriorates. Hence any downsizing plan recommended should fit logically with the strategy proposed.

Evaluation

Organizations decline due to falling sales, declining profits and more importantly declining demand. In such situations, management must find a strategy that will stop the organization’s decline and put it back on a successful path. Retrenchment strategies normally followed by companies during their decline stage. Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are contributing to deteriorating performance. It is meant to replenish and revitalize the organizational resources and capabilities so that the organization can regain its competitiveness.

Retrenchment strategies call for two primary actions: cost cutting and restructuring. Retrenchment strategy alternatives include shrinking selectively, extracting cash for investment in other businesses, and divestment. The three major variants of retrenchment strategy are turnaround strategy, survival strategy and liquidation strategy. A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions. A turnaround is typically accomplished through a two stage process. The initial stage is focused on the primary objectives of survival and achievement of a positive cash flow and the second phase involves a return-to-growth or recovery stage where the turnaround process shifts away from retrenchment and moves toward growth and development and growth in market share.

When the company is on the verge of extinction, it can follow several routes for renewing the fortunes of the company and survive. An organization divests when it sells a business unit to another firm that will continue to operate it.  Spin-off is another version of survival strategy. In a spin-off, a firm sets up a business unit as a separate business through a distribution of stock or a cash deal. This is one way to allow a new management team to try to do better with a business unit that is a poor or mediocre performer. Sometimes a company tries to   survive by restructuring its management team, financial reengineering or overall business reengineering and downsizing its operations

References

1.      Altman, E.I. (1993). Corporate financial distress: A complete guide to predicting,

      avoiding & dealing with bankruptcy. New York: Wiley-Interscience.

2.      Bibeault, D. G. (1989). Corporate turnaround: How managers turn losers into

       winners. New York: McGraw-Hill.

3.      Goodman, S. J. (1982). How to manage a turnaround. New York: Free Press.

4.      Hall, W. K. (1980). Survival strategies in a hostile environment. Harvard Business Review