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CASE : TURNAROUND
It was late. As the security guards prowled about the empty corridors, Raja Sekhar Reddy, the 35-year-old managing director of Reddy Metalum Ltd. (RML), sat in-his corner office, staring at the garlanded portrait of his father. It had been more than two hours since he had learnt that RML had made an operating loss of Rs. 2 crore against a projected profit of Rs. 80 lakh - in the last quarter. What had really shaken him, mused Reddy, was that not one of his trusted managers could give him a convincing - and plausible - reason for the loss. While the explanalions had ianged f1-011 I high Producible Costs to low selling prices, where - and why - had his carefully thought-out plans gone haywire?
Set up three decades ago by Reddy`s late father, Shankar Rajesh Reddy. the Rs. 100 crore RML manufactured the Metalum used by heavy industries in their manufacturing process. Metalum manufacturing -the basic raw material, Metalum ore, was found mainly in Bihar was a highly power-intensive process, requiring approximately 1,000 units of power to produce one tone of metal. While RML was headquartered at Bombay, the works were located at Pune. At the time of locating the works, it was felt that the easy availability of power at Pune and its proximity to large conservers of metal in Maharashtra, Gujarat and Karnataka gave the city an advantage over ore-rich Bihar.
RML started production in 1968, and two years down tits road, wins running at 100 per cent capacity. During the early 1970s, the company prospered, managing a gross profit margin of seven per cent.
of fixed interest Then, in the mid 1970s, RML faced two major threats : one a substantial rise in power costs which, considering the power-intensive nature of the industry, raised the company`s selling price of metal. And two, increased competition from new entrants in Bihar, who had significantly lower-cost structures than Ram’s thanks to lower raw ` material freight costs. To counter these
e value of shares threats, Reddy Sr. initiated an expansion plan that doubled RML`s capacity and reduced the overhead cost per tones. Although the company saw through the threats, it posted a much lower gross profit margin of around 1 .5 per cent during the 1980s.
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Questions:
Q.1 Distinguish between the Symptoms and Strategic problems faced by the company ?
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Q.2. What are the essential elements of the turnaround strategy ? Ans.
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Q.3 Give your assessment whether it will work describing the basis of your analysis.
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