Unit 4

Performance Management

Q1) Explain the MoU Evaluation recommended by the Sengupta Committee.

A1) The Arjun Sengupta Committee favoured appropriate financial return for consideration of performance evaluation of CPSEs. It, generally, recommended for the financial ratio of Gross Margin on Assets. For ‘service enterprises’, however, it recommended the financial ratio of Gross Margin on Sales. In case of enterprises in the ‘core sector’ and operating under ‘price control’ (administered price mechanism), the Committee favoured normative financial return measurable in terms of the financial ratio of Net Profit on Net Worth. In regard to non-financial criteria for performance evaluation, the Committee favoured criteria, such as, increase in productivity, technical dynamism and project implementation. No weights were, however, assigned to the different parameters.

Q2) Give the Signalling system and Performance Evaluation.

A2) The MoU system in CPSEs prevalent since 1986 was revamped in 1989, and it moved closer to the “signalling system” of the Pakistani and the Korean models as developed by Prof. Leroy P. Jones (Director, Public Enterprises Programme, Boston University). The ‘performance contract’ under the MoU system, moreover, got de-linked from the medium-term agreement as recommended by Arjun Sengupta Committee. Under the new MoU system that was implemented from the financial year of 1989-90, performance evaluation came to be based on the annual targets agreed upon between the government and the CPSEs, rather than the five-year target. Another novel feature of the new system was finalization of MoU under the overall supervision of a third party, namely, the MoU Task Force constituted by the Department of Public Enterprises. The MoU Task Force is independent of both the administrative ministry and the CPSE. The new system provided for (five) different targets; the actual performance, in turn, is evaluated against the five targets on a 5-point scale of 1 (for ‘excellent’), 2 (for ‘very good’), 3 (for ‘good’), 4 (for ‘fair’) and 5 (for ‘poor’). The targets are fixed in two stages of (a) determining the basic target and (b) determining the percentage difference or the spread between one (target) level of performance and another. Each of the parameters is, furthermore, assigned weights to distinguish a more important evaluation parameter from a less important parameter (evaluation criterion). The final performance evaluation or ‘the composite score’ is arrived at by adding the weighted score of the actual achievements (at the end of the year) against each of the parameters, in comparison to the targets that have been finalized (in the beginning of the year) on the 5-point scale.

Under the existing MoU Guidelines of the Department of Public Enterprises (Government of India), moreover, the basic target is graded as ‘Good’ (having a score of 3). These targets should not to be less than the (actual) achievements of the previous year. If, however, a CPSE is operating at ‘full capacity utilization’, the basic (MoU) target is placed in ‘Very Good’ column (having a score of 2). Difference in target values between ‘Very Good’ and ‘Good’; ‘Good’ and ‘Fair’ and ‘Fair’ and ‘Poor’ columns is uniform at 5%. The difference between ‘Excellent’ and ‘Very Good’ targets is however, significantly higher than 5%. (>5% to 10%) and is left to the discretion of the MoU Task Force. The ‘composite score’ is thus an index of the performance of the enterprises. The grading of the ‘composite score’ is done in the following manner:

MoU Composite Score Grading

1.00-1.50                       Excellent

1.51-2.50                       Very Good

2.51-3.50                        Good

3.51-4.50                            Fair

4.51-5.00                              Poor

Q3) Explain the NCAER study on MoU and Performance Evaluation.

A3) The Department of Public Enterprises assigned a study to the National Council of Applied Economic Research (NCAER) in 2003 to examine afresh the choice of criteria for performance evaluation and the allocation of weight to the different parameters. The NCAER finally came up with the following Principal Components of parameters for performance evaluation: Principal Components of Parameters Weight I. Financial Parameters 50% II. Non—financial Parameters 50% While the performance evaluation under the earlier system allocated 60% weight to ‘financial parameters’ and 40% weight to ‘non-financial parameters’, the NCAER recommended equal weights (50%) to both ‘financial’ and ‘non-financial’ parameters. In this respect, it is similar to the ‘balanced score card’ approach of performance evaluation. The ‘nonfinancial parameters’ were further sub-divided into ‘dynamic parameters’, ‘enterprise-specific parameters’ and ‘sector-specific parameters. Whereas the ‘static/ financial’ parameters generally relate to profit related, size related and productivity related parameters, the ‘dynamic’ parameters refer to project implementation, investment in R&D and extent of globalization, etc. Similarly, while the ‘sector-specific’ parameters refer to macro-economic factors like change in demand and supply, price fluctuations, variation in interest rates etc, that is, factors beyond the control of the management, the ‘enterprise-specific’ parameters relate to issues such as safety and pollution etc. Moreover, while the above-mentioned principal components were recommended to be the same for all CPSEs, the individual items suggested as criteria for performance evaluation under each of these principal components were indicated to be different for different CPSEs classified as (a) ‘social sector’, (b) ‘financial sector’, (c) ‘trading and consulting sector’ and (d) ‘other than financial trading/consulting and social sector’. Besides the above, the new approach allowed discretion to the Task Force to change the weights of the different criteria included under ‘dynamic’, ‘enterprise-specific’ and ‘sector-specific’ parameters depending on their perception of the CPSE under consideration. The Government subsequently accepted the recommendations of the NCAER and the new methodology for setting up performance targets came into force since financial year 2004- 05.

The MoU Task Force is an ad hoc body, which is constituted by the DPE every year. The honorary members of the Task Force comprise former Civil Servants, CMDs of Central Public Sector Enterprises, financial and technical professionals, Chartered Accountants and academics. They serve the various Syndicates, which are composed of CPSEs with greater homogeneity amongst themselves. Their main role is to oversee the MoU negotiations between the CPSEs and the administrative Ministries. The rich experience and knowledge of the TF members in different fields provides the necessary technical input in fixing more realistic targets. The DPE issues the Minutes of MoU negotiation meetings to the CPSEs (and the Ministry/Department concerned) for finalizing the MoUs, which have to be authenticated in the DPE to ensure that they are in accordance with the decisions on targets arrived at during the meetings. Subsequently, all MoUs have to be signed by the CMDs and the respective Secretaries of the concerned administrative Ministries before 31st March for implementation during the succeeding financial year.

Q4) What is High-powered committee?

A4) The High-Powered Committee (HPC) is the Apex body under MoU system for laying policy guidelines, approval of the benchmarks and indices recommended by IMC. HPC comprises the Cabinet Secretary as Chairman with following members:

1. CEO (NITI Aayog)
2. Finance Secretary
3. Secretary (Expenditure)
4. Secretary (Statistics & Programme Implementation)
5. Chairman (Public Enterprises Selection Board)
6. Chief Economic Advisor (Department of Economic Affairs)
7. Chairman (Tariff Commission)
8. Secretary (Public Enterprises)

Q5) Explain the MoU process in public enterprise.

A5) The MoU process starts with the issue of detailed Guidelines by the Department of Public Enterprises (DPE) on the basis of which the CPSEs submit their draft MoUs after approval by their respective Boards and the Administrative Ministries. The draft MoUs indicate various performance targets on a five-point scale for the ensuing financial year. These draft MoUs are then discussed, improved and finalized during the MoU negotiation meetings. The Task Force on MoU, a neutral and independent body of experts constituted by DPE assists the Department in the process of MoU negotiations. The MoU Task Force comprises of former Civil Servants, ex-CMDs of the Public Enterprises, finance professionals, domain experts and academicians. In 2013-14, the Task Force was divided into 13 Syndicate Groups covering different sectors. Each Syndicate normally consists of 5 members, with one of the members being the Convener. The rich experience and knowledge of the TF members in different fields provides the necessary technical input and enables in fixation of realistic targets.

The MoU negotiations meetings are attended by the Chief Executives of the CPSEs, Senior Officers from the administrative Ministries and the representatives of the nodal Government agencies such as Planning Commission and Ministry of Statistics & Programme Implementation. DPE issues the Minutes of MoU negotiation meetings to the CPSEs (and the Ministry/ Department concerned) for finalizing the MoUs which are then authenticated by DPE to ensure MoUs are in accordance with the decisions on targets as agreed upon during the MoU negotiation meetings. Subsequently, all MoUs have to be signed before 31st March for implementation during the succeeding financial year.

Q6) Explain the MoU principles in public enterprise.

A6) The MoU system was revamped in 1989 and was modelled on ‘the signaling system’ using the five-point scale of performance measurement, that is, ‘excellent’, ‘very good’, ‘good’, ‘average’ and ‘poor’. This was further refined in 2004-05 utilising ‘the balanced score card’ methodology. Under the MoU Guidelines for the year 2013-14, ‘financial’ and ‘non-financial’ parameters were assigned equal weightage (50%) for all CPSEs except section 25 CPSEs and sick & Loss making CPSEs where they were assigned weightages of 40% and 60% respectively. The ‘financial’ parameters are both in the form of absolute values, such as gross margins (profits) and turnover as well as in terms of financial efficiency ratios. It is stipulated that financial parameters should be consistent with the proposed Annual Plan/Annual Budget and Corporate Plan of the CPSE. The ‘non-financial’ parameters (dynamic parameters) are of three kinds, namely, dynamic parameters, sector specific mandatory parameters and enterprise specific parameters. The dynamic parameters include project implementation, quality of products and services, customer satisfaction, Human Resource management, Research & Development, Capital Expenditure (CAPEX), Corporate Social Responsibility (CSR) & Sustainable Development (SD), extent of globalization, adoption of innovative practices etc. The ‘sector-specific’ parameters refer to macroeconomic factors like change in demand and supply, price fluctuations, variation in interest rates etc, while the ‘enterprise-specific’ parameters relate to issues such as safety and pollution etc. For MoU2013-14, Corporate Social Responsibility & Sustainable Development (8% weightage), R& D (5%weightage), were mandatory parameters. In the MoU 2013-14 negative marking was introduced to penalise noncompliance with DPE guidelines including those on Corporate Governance. The MoU guidelines 2013- 14 emphasized inclusion of project implementation, listing by CPSEs and CAPEX.

Q7) Explain performance management in Central public sector enterprises in India.

A7) Some parameters of CPSEs as on 31.3.2009 are- Total paid up capital in 246 CPSEs—Rs. 1,38,843 crores; Total Share application money pending allotment—Rs. 3,867 crores in 41 CPSEs; Total investment (equity plus long-term loans) in all CPSEs—Rs. 5,28,951 crores; Capital Employed (net block plus working capital) in all CPSEs—Rs. 7,94,105 Crore; Total turnover of all CPSEs during 2008-09—Rs. 12,63,405 crores; Total income of all CPSEs during 2008-09—Rs. 13,07,366 crores; Profit of profit making CPSEs during 2008-09—Rs. 98,652 crores; Loss of loss incurring CPSEs during 2008-09—Rs. 14,424 crores; Reserves & Surplus of all CPSEs—Rs. 5,35,840; Net worth of all CPSEs—Rs. 5,88,217 crores; Contribution of CPSEs to Central Exchequer by way of excise duty, customs duty, corporate tax, interest on Central Government loans, dividend and other duties and taxes in 2008-09—Rs. 1,51,728 crores; Foreign exchange earnings through exports of goods and services in 2008-09—Rs. 74,184 crores; Foreign exchange outgo on imports and royalty, know-how, consultancy, interest and other expenditure during 2008-09—Rs. 4,28,821 crores; Number of people employed by CPSEs—15.35 lakh (excluding casual workers and contract labours); Salary and wages in all CPSEs in 2008-09—Rs. 82,735 crores; Total Market Capitalisation (M_Cap) of 41 listed CPSEs, based on the stock price in Bombay Stock Exchange—Rs. 8,13,530 crores.

In terms of Gross Block, the top ten enterprises as on 31.3.2009 were Oil & Natural Gas Corporation Ltd., Bharat Sanchar Nigam Ltd., NTPC Ltd., Indian Oil Corporation Ltd., Power Grid Corporation of India Ltd., Steel Authority of India Ltd., Nuclear Power Corporation of India Ltd., NHPC Ltd., National Aviation Company of India Ltd., and Hindustan Petroleum Corporation Ltd. The gross block of these enterprises inclusive of Capital-work-in progress amounted to Rs. 6,73,864 crores. This was equal to 68.92 per cent of the total gross block in all CPSEs.

In terms of sector-wise and cognate group-wise cumulative investment in CPSEs, the service sector has highest share of 46.12 per cent in financial investment, followed by the electricity sector (26.19 per cent) and manufacturing (18.07 per cent).

Mining, under construction, and agriculture had a combined share of less than 10 per cent. While the CPSEs have monopoly in nuclear power generation, they have a major share in domestic/national output in coal, petroleum, power generation, telecommunication, and fertilizers.

The net profit of all CPSEs (aggregate net profit minus aggregate net loss) stood at Rs. 84,228 crores in 2008-09. Cognate group-wise, the best results were achieved by the ‘manufacturing’ sector followed by the ‘electricity’ sector. The other sectors of ‘mining’ and services recorded significant decline in profits.

In the manufacturing sector as well, CPSEs belonging to industries such as steel, petroleum refinery, medium and light engineering, and consumer goods recorded significant decline in their profits. CPSEs contribute to the Central Exchequer by way of dividend payment, interest on government loans and payment of taxes and duties.

Q8) Explain Human Resource strategies in public enterprises.

A8) The human resources have to actively partner with the business leadership and develop strategies to create capabilities within the organization to speed up the execution of corporate turnaround (Prasad Vara 2006). Literature on human resources strategies has a lot written on downsizing efforts, especially those adopting a top-down approach, simply focus on reducing the number of employees (Cameron 1994, Cascio 2003).  Firms experiencing negative trends of performance typically resort to retrenchment as the likely turnaround strategies (O’Neill 1986; Pant 1991, Robinson 1992, Smith 1995).  According to Mishra and Mishra (1994), the downsizing, which took place in the early 1980s, was mainly an effort to reduce the number of employees in order to stay competitive. That trend continued into the 1990s with firms attempting to cut costs to remain competitive in the global marketplace (Appelbaum et al., 1987a; Cameron et al., 1991).

Change in top management is another well identified human resource strategy. Leaders are often a contributing source of decline (Arogyaswamy et al., 1995). Executives either directly caused the problems at the heart of crisis or failed to recognize the problems early enough (Bibeault, 1982). The first step or first priority in a turnaround hence is the recognition that new management can make the difference (Barker and Mone, 1998, Jacoby, 2004. Murphy and Meyers, 2008). Top management change is widely quoted as a precondition for successful turnarounds (Bibeault, 1982; Hofer,1980, Schendel, Patton and Riggs 1976, Slatter, 1984). The nature of the top management team in a company is of greater significance for success or failure than any of the company’s products or skills or Physical assets (Murphy 2008).  Empowered employees are energetic, passionate and experience a feeling of ownership over jobs, Performance management leads to better results, Employees need to be encouraged and motivated to develop a customer satisfaction mindset (Prasad vara, 2006).

Q9) Explain financial strategies in public enterprises.

A9) The objective of financial strategy is to use the financial strength of the business as an asset and to restructure the business (Scherrer 2003) such as reduction in the par value of shares, reduction in rates of interest, postponement of maturity of debt, conversion of debt into equity (Kumar 2003). Robbins and Pearce (1992) also linked strategic choice for declining firms to financial performance. They suggested that as severity of decline increased, retrenchment strategies should progress from cost reduction to asset reduction strategies (Howard 2005). Research on turnaround suggests that the performance outcomes of asset and cost retrenchment are contingent on industry dynamics (Chowdhury and Lang 1996, Morrow et al., 2004). Turnarounds cannot be sensibly analysed without taking into account the context of the financial obligations and related governance arrangements. (Igor Filatotchev and Steve Toms 2006, Kumar 2003). Hofer (1980) and Robbins and Pearce (1992) argue that severely financially distressed companies need to make aggressive cost and asset reductions in order to survive. Slashing labour costs, production costs, selling and administrative expenses, R&D expenditures, and financing costs are common measures of corporate restructurings (Denis and Kruse, 2000, Beixin et al 2008). However, as Slatter (1984) highlights, the aggressive reduction of costs and assets is no easy task as there is often organizational resistance to such action.

Asset-reduction strategies have been recommended for failing companies in order to improve cash flow (Hofer, 1980, Taylor 1982, Hambrick and Schecter, 1983, Robbins and Pearce, 1992). As companies with high fixed costs become vulnerable to market changes.  Hoffman (1989) also states that cost cutting is the key to successful turnaround. These two strategies are viewed as retrenchment strategies (Hambrick 1985). Research identifies financial restructuring as an integral component of turnarounds (Brown et al., 1993, DeAngelo and DeAngelo, 1990, Franks 199, Igor 2006). 

Q10) Explain marketing strategies in public enterprise.

A10) Marketing is a very useful strategy for turnarounds (Hofe 1980, Griyner et.al.,1988, Goldston,1992). In the company turnaround literature, while a number of writers emphasize the importance of marketing in the rescue of ailing businesses (Goldston, 1992, Grinyer et al. 1988, Hofer, 1980). Little attention has been directed at the value of market intelligence and planning in the company turnaround process. (Harker 2001).  The marketing-oriented business is customer focused and a generator and disseminator of market intelligence which is widely used throughout the firm (Jaworski 1993) such firms are able to sense and respond to market forces with greater precision than more inward-looking rivals (Day 1994). However, there is scant attention in the literature on the role of marketing and sales in the company turnaround process (Goldston 1992).

Q11) What are the four important elements in sales function?

A11) Sales function is another key process and involved four important elements which were more apparent in the successful firms such as

1) environmental comprehension;

2) market selection;

3) innovative market offers; and

4) managed relationships.

(Bibeault 1982, Finkin 1998, Harker 1998).  Much has been written about marketing orientation in the management and marketing literature (Jaworski 1993, Slater 1999), and customer focus was an important feature of the successful turnaround companies Customer focus permeated the whole company and was fully supported by top management. The turnaround companies' customer efforts were orchestrated by new key account sales people who worked tirelessly to build the respect and trust so essential toa sound relationship (Swan 1988, Harker 1996). Poor quality of product being a cause of failure, Successful businesses compete on quality not costs, developing strategies for competitive advantage (Rosairo 2004). Repositioning has also been described as an ‘entrepreneurial’ turnaround strategy. Market penetration and niche positioning turned out to be valuable strategies for the successful companies (Hofer, 1980). 

Q12) Explain Production/Operation Strategies in public enterprises.

A12) Hofer (1980) in a study of twelve cases of badly performing organizations, where he found for operating problems, the solution is operating remedies and for strategic problems, strategic remedies. Thus, Organisations that are failing due to operational causes opt for operational turnaround strategies and strategic causes opt for strategic turnaround and rarely were operational failure addressed with strategic turnaround actions. (Hambrick and Schecter1983).

Q13) Explain General Strategy in public enterprises.

A13) Contraction and consolidation are used when a corporation’s problems are not pervasive (Pearce and Robinson, 1992). However, researchers have largely ignored the possibility that firms may choose a growth strategy when experiencing declining performance. Chowdhury and Lang (1996) considered entrepreneurial moves, which typically involve growth strategies, as an alternative to retrenchment for small manufacturing firms. Corporate restructuring is another turnaround strategy which often involves refocusing or eliminating non-core businesses. (Beixin et al 2008).  However, much of the empirical research for large firms has focused on diversification strategy (Ramanujan, 1989, Rasheed 2005).

Arogyaswamy and Yasai-Ardekani (1997) investigated the role that cutbacks, efficiency improvements and investment in technology play in the turnaround process as these actions improve profitability in the short run and allow the company to release resources that may be used elsewhere. They can also play an important political role in winning back stakeholder support and help raise external resources to fund other strategies (Smith Malcholm 2005). Having a competitive advantage through the use of innovative technology enables a company to gain market share quickly, and with new product exclusivity protected by patents, massive research and development costs can be recovered (Kow,2004).

Q14) What is a Corporate Turnaround?

A14) A corporate turnaround may be defined simply as the recovery of a firm’s economic performance following an existence threatening decline’ (Pandit, 2000, Walshe 2004). Khandwalla(1992) defines a corporate decline as “a loss situation” and  turnaround as “equivalent to reaching at least a breakeven from a loss situation”. Turnaround is usually experienced by mature organizations (Miler and Friesen, 1984; Pascal, 1999).  Turnaround researchers have identified a number of turnaround actions/strategies. These actions are classified into strategic and operational actions (Schendel, Patton and Riggs 1976, Hofer 1980), entrepreneurial and efficiency actions (Hambrick and Scheter,1983).  Khandwalla’s (1992), analysis of the turnaround actions leads to four broad themes under the functional areas that are found across studies-Human resources strategies, Product/market strategies, financial strategies, production, operations and Technology strategies.

Q15) In terms of Gross Block, which were the top ten enterprises as on 31.3.2009?

A15) In terms of Gross Block, the top ten enterprises as on 31.3.2009 were Oil & Natural Gas Corporation Ltd., Bharat Sanchar Nigam Ltd., NTPC Ltd., Indian Oil Corporation Ltd., Power Grid Corporation of India Ltd., Steel Authority of India Ltd., Nuclear Power Corporation of India Ltd., NHPC Ltd., National Aviation Company of India Ltd., and Hindustan Petroleum Corporation Ltd. The gross block of these enterprises inclusive of Capital-work-in progress amounted to Rs. 6,73,864 crores. This was equal to 68.92 per cent of the total gross block in all CPSEs.

Q16) Explain in details the turnaround of public enterprises.

A16) A corporate turnaround may be defined simply as the recovery of a firm’s economic performance following an existence threatening decline’ (Pandit, 2000, Walshe 2004). Khandwalla(1992) defines a corporate decline as “a loss situation” and  turnaround as “equivalent to reaching at least a breakeven from a loss situation”. Turnaround is usually experienced by mature organizations (Miler and Friesen, 1984; Pascal, 1999).  Turnaround researchers have identified a number of turnaround actions/strategies. These actions are classified into strategic and operational actions (Schendel, Patton and Riggs 1976, Hofer 1980), entrepreneurial and efficiency actions (Hambrick and Scheter,1983).  Khandwalla’s (1992), analysis of the turnaround actions leads to four broad themes under the functional areas that are found across studies-Human resources strategies, Product/market strategies, financial strategies, production, operations and Technology strategies.

1. Human Resource strategies:

The human resources have to actively partner with the business leadership and develop strategies to create capabilities within the organization to speed up the execution of corporate turnaround (Prasad Vara 2006). Literature on human resources strategies has a lot written on downsizing efforts, especially those adopting a top-down approach, simply focus on reducing the number of employees (Cameron 1994, Cascio 2003).  Firms experiencing negative trends of performance typically resort to retrenchment as the likely turnaround strategies (O’Neill 1986; Pant 1991, Robinson 1992, Smith 1995).  According to Mishra and Mishra (1994), the downsizing, which took place in the early 1980s, was mainly an effort to reduce the number of employees in order to stay competitive. That trend continued into the 1990s with firms attempting to cut costs to remain competitive in the global marketplace (Appelbaum et al., 1987a; Cameron et al., 1991).

Change in top management is another well identified human resource strategy. Leaders are often a contributing source of decline (Arogyaswamy et al., 1995). Executives either directly caused the problems at the heart of crisis or failed to recognize the problems early enough (Bibeault, 1982). The first step or first priority in a turnaround hence is the recognition that new management can make the difference (Barker and Mone, 1998, Jacoby, 2004. Murphy and Meyers, 2008). Top management change is widely quoted as a precondition for successful turnarounds (Bibeault, 1982; Hofer,1980, Schendel, Patton and Riggs 1976, Slatter, 1984). The nature of the top management team in a company is of greater significance for success or failure than any of the company’s products or skills or Physical assets (Murphy 2008).  Empowered employees are energetic, passionate and experience a feeling of ownership over jobs, Performance management leads to better results, Employees need to be encouraged and motivated to develop a customer satisfaction mindset (Prasad vara, 2006)

2.     Financial strategies

The objective of financial strategy is to use the financial strength of the business as an asset and to restructure the business (Scherrer 2003) such as reduction in the par value of shares, reduction in rates of interest, postponement of maturity of debt, conversion of debt into equity (Kumar 2003). Robbins and Pearce (1992) also linked strategic choice for declining firms to financial performance. They suggested that as severity of decline increased, retrenchment strategies should progress from cost reduction to asset reduction strategies (Howard 2005). Research on turnaround suggests that the performance outcomes of asset and cost retrenchment are contingent on industry dynamics (Chowdhury and Lang 1996, Morrow et al., 2004). Turnarounds cannot be sensibly analysed without taking into account the context of the financial obligations and related governance arrangements. (Igor Filatotchev and Steve Toms 2006, Kumar 2003). Hofer (1980) and Robbins and Pearce (1992) argue that severely financially distressed companies need to make aggressive cost and asset reductions in order to survive. Slashing labour costs, production costs, selling and administrative expenses, R&D expenditures, and financing costs are common measures of corporate restructurings (Denis and Kruse, 2000, Beixin et al 2008). However, as Slatter (1984) highlights, the aggressive reduction of costs and assets is no easy task as there is often organizational resistance to such action.

Asset-reduction strategies have been recommended for failing companies in order to improve cash flow (Hofer, 1980, Taylor 1982, Hambrick and Schecter, 1983, Robbins and Pearce, 1992). As companies with high fixed costs become vulnerable to market changes.  Hoffman (1989) also states that cost cutting is the key to successful turnaround. These two strategies are viewed as retrenchment strategies (Hambrick 1985). Research identifies financial restructuring as an integral component of turnarounds (Brown et al., 1993, DeAngelo and DeAngelo, 1990, Franks 199, Igor 2006). 

3.     Marketing strategies:

Marketing is a very useful strategy for turnarounds (Hofe 1980, Griyner et.al.,1988, Goldston,1992). In the company turnaround literature, while a number of writers emphasize the importance of marketing in the rescue of ailing businesses (Goldston, 1992, Grinyer et al. 1988, Hofer, 1980). Little attention has been directed at the value of market intelligence and planning in the company turnaround process. (Harker 2001).  The marketing-oriented business is customer focused and a generator and disseminator of market intelligence which is widely used throughout the firm (Jaworski 1993) such firms are able to sense and respond to market forces with greater precision than more inward-looking rivals (Day 1994). However, there is scant attention in the literature on the role of marketing and sales in the company turnaround process (Goldston 1992)

Sales function is another key process and involved four important elements which were more apparent in the successful firms such as

1) environmental comprehension;

2) market selection;

3) innovative market offers; and

4) managed relationships.

(Bibeault 1982, Finkin 1998, Harker 1998).  Much has been written about marketing orientation in the management and marketing literature (Jaworski 1993, Slater 1999), and customer focus was an important feature of the successful turnaround companies Customer focus permeated the whole company and was fully supported by top management. The turnaround companies' customer efforts were orchestrated by new key account sales people who worked tirelessly to build the respect and trust so essential toa sound relationship (Swan 1988, Harker 1996). Poor quality of product being a cause of failure, Successful businesses compete on quality not costs, developing strategies for competitive advantage (Rosairo 2004). Repositioning has also been described as an ‘entrepreneurial’ turnaround strategy. Market penetration and niche positioning turned out to be valuable strategies for the successful companies (Hofer, 1980). 

4.     Production/Operation Strategies

Hofer (1980) in a study of twelve cases of badly performing organizations, where he found for operating problems, the solution is operating remedies and for strategic problems, strategic remedies. Thus, Organisations that are failing due to operational causes opt for operational turnaround strategies and strategic causes opt for strategic turnaround and rarely were operational failure addressed with strategic turnaround actions. (Hambrick and Schecter1983)

5.     General Strategy

Contraction and consolidation are used when a corporation’s problems are not pervasive (Pearce and Robinson, 1992). However, researchers have largely ignored the possibility that firms may choose a growth strategy when experiencing declining performance. Chowdhury and Lang (1996) considered entrepreneurial moves, which typically involve growth strategies, as an alternative to retrenchment for small manufacturing firms. Corporate restructuring is another turnaround strategy which often involves refocusing or eliminating non-core businesses. (Beixin et al 2008).  However, much of the empirical research for large firms has focused on diversification strategy (Ramanujan, 1989, Rasheed 2005).

Arogyaswamy and Yasai-Ardekani (1997) investigated the role that cutbacks, efficiency improvements and investment in technology play in the turnaround process as these actions improve profitability in the short run and allow the company to release resources that may be used elsewhere. They can also play an important political role in winning back stakeholder support and help raise external resources to fund other strategies (Smith Malcholm 2005). Having a competitive advantage through the use of innovative technology enables a company to gain market share quickly, and with new product exclusivity protected by patents, massive research and development costs can be recovered (Kow,2004).

Q17) Explain the MoU Taskforce.

A17) The MoU Task Force is an ad hoc body, which is constituted by the DPE every year. The honorary members of the Task Force comprise former Civil Servants, CMDs of Central Public Sector Enterprises, financial and technical professionals, Chartered Accountants and academics. They serve the various Syndicates, which are composed of CPSEs with greater homogeneity amongst themselves. Their main role is to oversee the MoU negotiations between the CPSEs and the administrative Ministries. The rich experience and knowledge of the TF members in different fields provides the necessary technical input in fixing more realistic targets. The DPE issues the Minutes of MoU negotiation meetings to the CPSEs (and the Ministry/Department concerned) for finalizing the MoUs, which have to be authenticated in the DPE to ensure that they are in accordance with the decisions on targets arrived at during the meetings. Subsequently, all MoUs have to be signed by the CMDs and the respective Secretaries of the concerned administrative Ministries before 31st March for implementation during the succeeding financial year.

Q18) Explain the institutional machinery for performance evaluation.

A18) Performance evaluation at the end of the year indicates the extent to which the mutually agreed targets between the CPSEs and the administrative ministries were achieved. The methodology of performance evaluation has, however, undergone several changes over the years as discussed below.

MoU Evaluation recommended by the Sengupta Committee-

The Arjun Sengupta Committee favoured appropriate financial return for consideration of performance evaluation of CPSEs. It, generally, recommended for the financial ratio of Gross Margin on Assets. For ‘service enterprises’, however, it recommended the financial ratio of Gross Margin on Sales. In case of enterprises in the ‘core sector’ and operating under ‘price control’ (administered price mechanism), the Committee favoured normative financial return measurable in terms of the financial ratio of Net Profit on Net Worth. In regard to non-financial criteria for performance evaluation, the Committee favoured criteria, such as, increase in productivity, technical dynamism and project implementation. No weights were, however, assigned to the different parameters.

Q19) Explain the existing MoU Guidelines of the Department of Public Enterprises.

A19) Under the existing MoU Guidelines of the Department of Public Enterprises (Government of India), moreover, the basic target is graded as ‘Good’ (having a score of 3). These targets should not to be less than the (actual) achievements of the previous year. If, however, a CPSE is operating at ‘full capacity utilization’, the basic (MoU) target is placed in ‘Very Good’ column (having a score of 2). Difference in target values between ‘Very Good’ and ‘Good’; ‘Good’ and ‘Fair’ and ‘Fair’ and ‘Poor’ columns is uniform at 5%. The difference between ‘Excellent’ and ‘Very Good’ targets is however, significantly higher than 5%. (>5% to 10%) and is left to the discretion of the MoU Task Force. The ‘composite score’ is thus an index of the performance of the enterprises. The grading of the ‘composite score’ is done in the following manner:

MoU Composite Score Grading

1.00-1.50                       Excellent

1.51-2.50                       Very Good

2.51-3.50                        Good

3.51-4.50                            Fair

4.51-5.00                              Poor

Q20) Who generally attends the MoU negotiations meetings?

A20) The MoU negotiations meetings are attended by the Chief Executives of the CPSEs, Senior Officers from the administrative Ministries and the representatives of the nodal Government agencies such as Planning Commission and Ministry of Statistics & Programme Implementation. DPE issues the Minutes of MoU negotiation meetings to the CPSEs (and the Ministry/ Department concerned) for finalizing the MoUs which are then authenticated by DPE to ensure MoUs are in accordance with the decisions on targets as agreed upon during the MoU negotiation meetings. Subsequently, all MoUs have to be signed before 31st March for implementation during the succeeding financial year.