Unit 8

Industrial Growth and Industrial Sickness in India

8.0 Introduction
8.1 Meaning and Definitions of Industrial Growth
8.1.1 Features of Industrial Growth
8.1.2 Strategies for Industrial Growth
8.1.3 Impact of Industrial Growth
8.2 Meaning and Definitions of Industrial Sickness
8.2.1 Extent of Industrial Sickness
8.2.2 Causes of Industrial Sickness
8.2.3 Effects of Industrial Sickness
8.2.4 Remedial Measures to overcome Industrial Sickness
8.2.5 Industrial Sickness and Business Environment
8.3 Turnaround
8.3.1 Meaning
8.3.2 Strategies of Turnaround
8.4 Questions for self study

Objectives:

After studying this unit students will understand:

1. The importance of growth and how growth is essential for survival of business unit.
2. Positive and negative effect of Environment on the working of the business unit
s (Growth / Industrial Sickness)
3. Features, Strategies and Impact of Industrial Growth
4. Causes and Effects of Industrial Sickness
5. Remedial measures to overcome Industrial Sickness
6. Meaning of Turnaround and strategies of turnaround.
8.0 Introduction:

In a simple word, growth means increase in the size of the business unit. It can be in terms of

quantity and quality. Growth, expansion and diversification of business activities are natural

tendencies of majority of the business unit. Growth is useful for all units. Industrial development

and business growth are directly related. For industrial development it is essential that businesses

also should grow. Companies keep on modifying their products, market, and policies in order to

grow. In today’s competitive environment growth is essential. If business firm does not grow,

their survival will be in problem. Growth is economically and socially desirable. Grow or perish

are two alternatives available before business enterprises. Growth of an enterprise should be

always multi-dimensional. E.g. if there is expansion in the production, there should be

supporting increase in marketing activities and financial support. Growth is essential for raising

profitability of the firm. Business growth is a natural process of adaptation and development that

occurs under favorable conditions. Business growth cannot be achieved over night. It takes place

gradually. It is time consuming activity. The business has to adapt to several circumstances to

survive and grow.

8.1 Meaning and Definition of Industrial growth:

Industrial growth means increase in the number of business activities such as increase in

production, increase in sales, profit, promotion etc. Growth creates confidence in the minds of

employees, shareholders, customers’ investors etc. Growth is pervasive. It is not applicable to

any one particular type of organization. It takes place in all types of business organization such

as sole trading concern, partnership firm, joint stock companies, cooperative societies etc.

According to business dictionary.com growth is defined as, “The process of improving some
measure of enterprise’s success. Business growth can be achieved either by boosting the top line
or revenue of the business with greater product sales or service income, or by increasing the
bottom line or profitability of the operation by minimising costs.”
8.1.1 Features of Industrial Growth:

1. Biological and Physical Phenomenon: Growth is biological and physical phenomenon.

Growth is called as basic or organic or three fold objectives of the business. Like human body
business should grow. It should grow in terms of production, sales, profits and so on.

2. Beneficial to the Society: When a particular organisation grows it not only helps the unit
itself but it also provides number of benefit to the society. With the increase in production there
will be regular supply of goods and services, quality products will be made available at
reasonable price, creates more employment opportunities and raises social welfare.

3. Desirable: Growth is desirable tendency. Every business at whatever level it starts intends to
go for growth. Growth provides many benefits to the business unit. It is natural. Growth indicates
that the organisation is alert and is in the hope of progressing further.

4. Continuous Process: Growth is gradual but continuous process. They are willing to grow
quantitatively and qualitatively.

5. Modern Business Philosophy: Going big is the philosophy of the modern business unit.
Whenever opportunities arises business unit try to take full advantage of it and expand their
activities and area of operation.

6. Brings Progressive Change: Growth brings overall change in the outlook of the firm. The
change is in terms of quantity or quality. Only quantity change without quality is not of any
importance. Today consumers are highly aware of their rights and duties. The internet helps them
to find various sources from where they can buy a particular product. Hence business firms needs
to update their offerings on regular basis.

7. Grow or Perish: In modern business growth has become an essential activity. Even for
survival of the business growth is necessary. Growth suggests that enterprise is dynamic and
ready to adopt the desirable changes in their working. Expand or Perish is the rule in competitive
marketing.
8. Growth is Measurable: There are various indicators of growth. Growth can be measured.
Increase in net worth, increase in volume of sales, profit, value of production, and increase in
number of employees are the indicators of growth.

9. Continuous Existence: Growth is an organic objective. Once the business is survived, it aims
to grow. But for survival growth is necessary. Growth gives the business continuous existence in
the market.

10. Proper Planning: Growth is not a natural process. Efforts are to be put in for growth of the

business unit. Business growth does not happen by itself. To grow business requires a blueprint

that provides clarity of further actions to be taken. The plan must also be dynamic and respond to

a changing environment. Effective planning with proper implementation and evaluation leads to

growth.

11. Benefits to All Concerned: Growth can be achieved through expansion and diversification,

mergers, amalgamation and takeovers. Business growth is beneficial to the society as it provide

employment opportunities, better quality of products to the customers, dividend to the

shareholders and prosperity and prestige in the market to the firm, better and improved standard

of living to the employees.

12. Corporate Image: Growth enables the business to create market opportunities, face

competition with appropriate marketing strategies by optimum utilization of available resources.

Growth also enables to undertake innovation which in turn enhances the corporate image of the

firm.
 8.1.2 Strategies for Industrial Growth:

“Strategy is about making choices, trade-offs; it's about deliberately choosing to be

different.” Michael porter

Strategy is an action plan prepared for achieving predetermined goals and objectives. Strategies give
direction to achieve the desired goals. It acts as tool for achieving goal. Alternative action plans are
prepared so that the targeted goal can be achieved in pre-determined time. While designing strategy firm
needs to take into account the environmental factors. Proper consideration of environmental factors
enables to design suitable strategies. Strategy is a well planned, deliberate and overall course of action to
achieve specific objectives. Growth strategies are broadly classified into two categories namely internal
and external growth strategy

Strategies of Industrial Growth

External Growth Strategies

Internal Growth Strategies

Merger
Expansion Diversification

Expansion of Size Horizontal Acquisitions

Scale of Operations Vertical Amalgamation

Establishment of New Plant Concentric Joint Venture

Conglomerate
I] Internal Growth Strategies:

Internal growth strategies bring growth within the enterprise. It uses internal resources for the
purpose of growth. It includes expansion and diversification of business. The profit earned is
reinvested in the business for the purpose of growth. Such growth may be in the form of
expansion in the size of the business or scale of operation or may be diversification of the
business activities.
Internal growth strategies are defensive in nature. They ensure survival and orderly progress
towards stability and expansion. A company use different techniques for expansion purpose.
Combined strategies may be used for this purpose.

A. EXPANSION:
Business expansion refers to the raising of market share, sales revenue or/and profit of the
business. The business can be expanded through product development, market development or
by expanding the line of the product etc. expansion facilitates optimum use of resources. Firm
enjoy benefit of large scale operations when they go for expansion.
Business can be expanded through:
a. Product Expansion / Expansion of Product Line: Here the present product or product line
is used as a base for expansion. New supplementary products are added to the existing
products. They may be directly or indirectly related with the existing products. Expansion
can also be done with the increase in the production of the product. Suitable alteration or
modification can also be brought in the existing products.
b. Market Penetration Strategy: Company may resort to penetration strategy. This strategy
involves selling of the products in the existing market at low price with improved
distribution network.
c. Market Development Strategy: This strategy involves extending the existing the products
to new market. The purpose is to reaching new customers or new segments. The new area is
captured to increase the sales.
B] DIVERSIFICATION:

Diversification is another form of internal growth strategy. In diversification, the firm brings in
new products in the market. The purpose of diversification is to allow the company to enter new
lines of business that are different from current operations. The company increases the number of
products. The company may supplement its existing services with some new ones. Expansion is
different from diversification. The basic purpose of diversification is to minimise the risk of the
business. When the existing products are not running satisfactorily firm may think of adding new
products to the existing product line. Eg. Manufacturer of two wheeler may enter into
manufacturing of tyres.
Diversification is entering into new market or new product. Eg. BHEL was originally
manufacturing equipments like switchgears and transformers but now manufacturing nuclear
power generation equipment.
a. Horizontal Diversification: Horizontal diversification involves addition of parallel products
to the existing product lines. The new product introduced in line with the existing product
line. The new product may use same technique, marketing and distribution network. Eg.
HMT diversification in manufacturing of different types of machines.
b. Vertical Diversification: Vertical diversification is the strategy where company go back one
stage. It’s going closer to the supply side raw material of product. New products i.e.
components / spare parts is produced which serves its own need in the current product
portfolio. Diversification can be backward or forward. When the company extends its
activities to manufacture the components it is backward and when the company enters into
distribution or retailing of the final product it is forward diversification. Eg. Automobile
industry.
c. Concentric Diversification: It is an extreme form of diversification. Here there is tenuous
link between the existing and new product at all. The new products may be related to the
existing ones in respect of marketing, technology. The firm diversifies into business which is
related with its present business. Eg. Car dealer may start finance company to finance the
purchase of car.
d. Conglomerate / Lateral Diversification : When a firm diversifies into business, which is
not related to its existing business both in terms of technology and marketing it is called as
conglomerate diversification. Firm involves itself into new kind of new business. There is no
relation between the new product and the existing product. It occurs when firm undertake
 different activities within one firm. It is more popular as compared to vertical and horizontal
diversification.
Eg. ITC a cigarette manufacturing company has entered into hotels, packaging and printing.
Essar Group – Shipping, Marine Construction, Steel and Entertainment (Zee)

II] EXTERNAL GROWTH STRATEGY:

A] Mergers and Acquisitions (M&A)

Merger is a combination of two companies into one company, where one company loses its
existence or identity. This means the merging company goes out of existence but the merged
company operates with its original name. In merger, survival of both the companies is not
possible. Merger need not to be treated as business combination. It is an arrangement whereby
the assets of two companies become vested under the control of one company. Shareholders of
merging company are given the shares of merged company.

Merger of company is on permanent basis. The process of merger and acquisitions has gained
importance in today’s corporate world. It is one of the easiest ways to growth. Eg. Tata Steel
acquired Corus Group or In 2005 IDBI Bank Ltd was merged in IDBI.

Acquisition:

Acquisition is a growth strategy in which a strong company acquires all the assets and liabilities
of another company. When one company take over another company and clearly established
itself as the new owner, the purchase is called as an acquisition. Takeover is a form of
acquisition. Acquisitions can be Friendly acquisitions and Hostile Acquisitions. In friendly
acquisition the target company is formally informed about the acquisition and the agreement is
signed. In a hostile acquisition, the owner loses their ownership and control of the company
against their wishes.

There is minor difference between acquisition and takeover. In acquisition both the companies
are willing to merge. In a takeover, the willingness is absent in the seller’s management.
Takeover is with force while acquisition is with mutual consent and persuasion.
The dominant rationale (purpose) used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to improve financial
performance:

 Economy of scale: This refers to the fact that the combined company can often reduce its
fixed costs by removing duplicate departments or operations, lowering the costs of the
company relative to the same revenue stream, thus increasing profit margins.
 Economy of scope: This refers to the efficiencies primarily associated with demand-side
changes, such as increasing or decreasing the scope of marketing and distribution, of
different types of products.

 Increased revenue or market share: This assumes that the buyer will be absorbing a
major competitor and thus increase its market power (by capturing increased market
share) to set prices.

 Cross-selling: For example, a bank buying a stock broker could then sell its banking
products to the stock broker's customers, while the broker can sign up the bank's
customers for brokerage accounts. Or, a manufacturer can acquire and sell
complementary products.

 Synergy: For example, managerial economies such as the increased opportunity of

managerial specialization. Another example are purchasing economies due to increased
order size and associated bulk-buying discounts.

 Taxation: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability. In the United States and many other countries,
rules are in place to limit the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company.

 Geographical or other diversification: This is designed to smooth the earnings results

of a company, which over the long term smoothens the stock price of a company, giving
conservative investors more confidence in investing in the company. However, this does
not always deliver value to shareholders (see below).
  Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and
the interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources.

Types of Mergers

1. Horizontal Mergers
2. Vertical Mergers
3. Conglomerate Mergers

Horizontal Mergers

This type of merger involves two firms that operate and compete in a similar kind of business.
The merger is based on the assumption that it will provide economies of scale from the larger
combined unit.

Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. megamerger

The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham
PLC early this year announced plans to merge resulting in the largest drug manufacturing
company globally. The merger created a company valued at $182.4 billion and with a 7.3 per
cent share of the global pharmaceutical market. The merged company expected $1.6 billion in
pretax cost savings after three years. The two companies have complementary drug portfolios,
and a merger would let them pool their research and development funds and would give the
merged company a bigger sales and marketing force.

Vertical Mergers

Vertical mergers take place between firms in different stages of production/operation, either as
forward or backward integration. The basic reason is to eliminate costs of searching for prices,
contracting, payment collection and advertising and may also reduce the cost of communicating
and coordinating production. Both production and inventory can be improved on account of
efficient information flow within the organisation.

Example: Merger of Usha Martin and Usha Beltron

Usha Martin and Usha Beltron merged their businesses to enhance shareholder value, through
business synergies. The merger will also enable both the companies to pool resources and
streamline business and finance with operational efficiencies and cost reduction and also help in
development of new products that require synergies.

Conglomerate Mergers

Conglomerate mergers are affected among firms that are in different or unrelated business
activity. Firms that plan to increase their product lines carry out these types of mergers. Firms
opting for conglomerate merger control a range of activities in various industries that require
different skills in the specific managerial functions of research, applied engineering, production,
marketing and so on. This type of diversification can be achieved mainly by external acquisition
and mergers and is not generally possible through internal development. These types of mergers
are also called concentric mergers. Firms operating in different geographic locations also
proceed with these types of mergers. Conglomerate mergers have been sub-divided into:

 Financial Conglomerates
 Managerial Conglomerates

 Concentric Companies

C] Amalgamation:

In amalgamation, two or more companies joining together lose their independent status.
Amalgamation means bringing of two or more business into single entity. In this type of growth
strategy two or more companies come together to form a new company. For example Company
A and Company B may decide to amalgamate and new company will be formed called Company
C. In 1995, Hoechst AG took over the Marion Merell Dow of the US which brings two pharma
multinationals Hoechst and Roussel under a common management. The deal resulted in new
entity called Hoechst Marion Roussel (HMR)

D] Joint Venture (JV):

Strategic alliances or joint ventures allow you to partner with an existing business to share the
risks and opportunities in a new market. Joint venture is a union of two or more parties, who
contractually agree to contribute to a specific task for specified time period. Under JV two firms
join and form a separate legal entity and operate ar per partnership Act. The JV can be between
individuals or corporations.

While Strategic Alliance (SA) is mutual Coordination of strategic planning and management in
order to achieve long term objectives between two organizations. Under this, each organization
will work independently and no separate entity is formed. SA is considered as less risky due to
less legality.

A joint venture involves a potentially long term investment of funds, facilities and resources by
two or more companies to a combined venture, which benefits all companies. All involved will
have an equity stake in the new venture.

A joint venture may be formed to:

 run production facilities in another country

 establish a marketing and distribution presence

 Use complementary technologies held by each participant.

Joint ventures can also be used to get around country trade barriers. In some cases a joint venture
with a local company may be required to enter some overseas markets.

8.1.3 Impact of Industrial Growth

The growth is natural. Small businesses that are efficient, creative and are aware of changing market
trends are poised for growth. Growth impacts on the business organizational structure and the
business operations.
When a company go for growth it enjoys many benefits as noted below:

1. Structure: When organisation grows, there will be structural changes in the organisation.
Due to growth, there will be creation of new posts and departments as a result of
 specialization and expansion. More workers will also be employed resulting in greater
specialization or division of labour.
2. Internal Connectivity: With the expansion of the business there needs to cordial relations
among all the departments and functions. Growth leads to increase in the internal
communication systems (telephone, mail etc.) to accommodate this expansion. More factory
and office space, equipment and furniture will be required to facilitate expansion. For this
purpose adequate financial arrangements needs to be made.
3. Economies of Scale: Growth helps the organization to derive the benefit of large scale
operations. As the business expands it can take advantage of economies of scale. Economies
of scale refer to the benefits that firms are able to enjoy because of expansion.
4. Internal Economies of Scale: This refers to the benefits enjoyed by a firm because of its
own expansion. The available resources will be optimally used. This enhances the overall
efficiency and productivity of the organization.
5. Technical Economies of Scale:- Expanding businesses will need to purchase machinery and
equipment to supply the level of output required. With the use of machines productivity will
rise and the firm will experience technical savings as unit cost of production will decline. For
this purpose firms needs to make financial arrangements. Workers may have to provide
additional training to equip them with the new techniques.
6. Marketing Economies: Expanding businesses can take advantage of bulk buying and
receive discounts on raw materials. Company may go for innovative marketing and
promotion strategy. Dealer networks needs to strengthen by the firm to take the advantage of
increase in the size of the business.
7. Financial Economies: As the scale of operation enhances the requirement of finance goes
up. It attracts the financial companies and bank which take active interest in meeting the need
of the growing organization. This will benefit the growing organization, as they can negotiate
and get better terms from the financial institution. Larger firms will access loans more easily
and at a cheaper interest rate than small firms since they already have established reputations
and adequate collateral.
8. Managerial Economies: The growing company will be in a position to appoint the expert
staff. On the other side more employees will be interested to get themselves tied up with the
growing organization. The employment of experts who will specialize in various
management functions such as marketing, personnel, accounting and production will increase
efficiency and thus output.
9. External Economies of Scale: With the expansion and growth, company will be able to
manage its resources optimally. This will give them the advantage of external economies.
External economies refer to the benefits enjoyed by a business because it is part of a well-
organized industry and not because of its own expansion. Thus any businesses whether large
or small can reap these benefits as long as it is part of an industry enjoying these benefits.
Benefits include; government subsidies offered to particular industries, tax holidays and
reduced duties on items imported.

10. Face Competition: Growth helps firms to face competition effectively not only in the
domestic market but also in the international market. Expansion and diversification tools can
be used to tackle the competition effectively.

8.2 Meaning and Definitions of Industrial Sickness

Industrial sickness relates to uneconomic functioning of industrial units. The usage of industrial
sickness came into being during 1970s when large units were facing closure in West Bengal. In
the UK, over 10000 units sick every year. In the USA the figure might be on the higher side.
Industrial sickness is the natural phenomenon of the market economy. When the normal working
of the firm is not there then it faces the problem of sickness. A sick unit may not work to its full
capacity, may not earn reasonable amount of profit, sales may decline, customers may not
support and other such problems on continuous manner. Sickness may be born sickness or made
sickness. When the plant location itself is wrong it may face the problem of born sickness.

In march 2003, 1,71,396 units were sick unit. This indicates the dimension of sickness. It is
essential to make all efforts to revive a sick unit when it is possible to do so. Liquidation may be
used as option of last resort.
As per Reserve Bank of India, “A sick unit is one which has incurred a cash loss for last one
year, and in the judgement of the Bank, is likely to continue incurring cash losses for the current
year as well as in the following year and the unit has an imbalance in its financial structure, such
as current ratios is less than 1:1, and there is a worsening trend in debt-equity ratio.”
According to Sick Industrial Companies Act, 1985 (SICA), an industrial company was defined
as sick when:
i. it was in existence for not less than seven years;
 ii. its net worth was eroded by losses, and
iii. Incurred cash losses for the current year and preceding year.

8.2.1 Extent of Industrial Sickness:

Industrial sickness is growing at an annual rate of about 28 percent in terms of number of units.as
of today there are more than 300000 sick units with an outstanding bank credit of Rs.46,000
crore. Every year around 29000 units gets added up in the sick units. It means approximately 90
units per day fall sick.

Sickness in Public Sector Enterprises:

Some of the PSU are suffering losses from last 5 to 7 years on a continuous basis. The amount of
loss is much more than its net worth in few cases. The table showing sickness in India:

Sick units
Year Large and Medium Small Total
2000 3164 304235 307399
2005 5658 138041 143699
2008 4454 85187 89641
Source: Handbook o Statistics on the Indian Economy, 2009-10)

Table : Sickness in Public Sector Enterprises

Year No. Of Loss Making
Units
2002-03 105
2003-04 89
2004-05 73
2007-08 54
2008-09 55
2009-10 59
Source: Public Enterprises Survey, 2009-10

The above data clearly predict the extent of industrial sickness in India. Closure of such unit is
not desirable from socio-economic perspectives. Hence efforts should be put in for revival of
such sick units.
8.2.2 Causes of Industrial Sickness:

The causes for industrial sickness are broadly classified into two categories; internal causes and
external causes. Internal factors mainly related to the poor quality of top management, poor
quality of top management may be in the form of excessive conservatism, excessive
complacency, poor financial control, excessive centralisation etc.

Internal causes of industrial sickness are as below:

1. Improper Project Planning: It is the basic cause of sickness. Improper project planning bring
‘born’ sickness. If the project is started without project planning and feasibility study, then
the project is likely to be unsuccessful. The opportunity discovered may not be promising.
The unit may become sick in few years if the project evaluation is not done in a proper way.
2. Poor Financial Planning: Finance act as a blood for any organisation irrespective of its scale
of operation. The poor financial planning or structure leads to sickness.
3. Inefficient Working Capital: Working capital are required to meet day to day operation of the
firm. Inefficient planning and absence of effective costing leads to industrial sickness.
4. Mismanagement of Funds: If the fund available is not properly utilised it may also affect the
working of the organisation.
5. Faulty Location: Location is one of the important factors which needs proper selection.
While selecting location various factors like availability of raw material, local political
scenario, availability of labour and electricity etc needs to be considered. Faulty location
leads to inconvenience and margin of profit declines which ultimately results in sickness.
6. Ineffective Production Planning and Quality Control: If the production planning is not done
properly, then firm will not be able to meet the market demand neither they will be able to
plan its resources. Without proper planning the cost of production may be high. Quality
should be adhered. If there is absence of quality, it will affect the survival of the unit.
7. Other causes: Poor industrial relations, defective marketing and HR strategies, unwarranted
expansion and so on.

External Causes:
 1. Scarcity of Finance: Monetary policy of the RBI may act as hurdle in collection of funds
from the market. Sometimes, funds are available but at high interest rate which affects he
financial position leading to sickness.
2. Unfavourable Investment Climate: Fear of nationalisation, unfavourable investment
climate in the country due to political and economic factors brings sickness.
3. Industry Specific Factors: Stagnation or recession in the industry e.g. the textile industry,
competition faced by the unit e.g. Small units, rayon grade, pulp units, excess capacity in
the industry may cause sickness.
4. Entry of MNCs: Entry of MNCs and strict quality and hygiene specifications prescribed
and enforced by them have contributed to the sickness of several firms, particularly in the
MSME sector. E.g. metal cap industry 16 out of 20 SME units supplying metal caps to
bottlers of soft drinks have gone sick as they failed to meet the specifications for metal
caps prescribed by Coke and Pepsi.
5. Government Related Factors: These include taxation policy of the government and
certain rules and regulations. Frequent changes in the government policies affects the
unit; liberal imports; poor law and order situation ( as in parts of North and Eastern
India), political interference in the unit’s affairs (eg. Agro based industry or PSU) etc
affects the working of the units.
6. Inadequate Supply of Inputs: Shortage of essential inputs like raw materials and power
affect the normal working of the industrial units. This leads to their sickness in due
course.
7. Liberal Licensing Policy: Liberal Licensing policy leads to excessive competition
among existing units. Even competition from multinational corporations leads to sickness
in the small scale units supplying components to large scale units.

8.2.3 Effects of Industrial Sickness:

Sickness is undesirable. It not only affects the unit itself but may have direct and indirect
implications on the other units and the society. Industrial sickness is mainly the problem of 88
per cent terminally sick units, investment which is completely dead. Dead investment is a burden
on both banks and budget and ultimately consumers have to pay higher prices.

A. Effects on Employees:
1. Workers do not get their wages regularly and they may not other monetary benefits.
2. Workers may become unemployed. This affects their family as well.
3. Workers may have to accept new job at less wage rates as they are in need.
4. Workers may be asked to accept low wages / there might be reduction in their wages.
5. They may not get bonus or even though they get it will be at reduced rate.
6. Contract labour / temporary workers may be removed from the job.

B. Effects on Management:
1. Profits get reduced and management may find it difficult to manage the company.
2. The management may find it difficult to close as well as run the unit.
3. Creditors, banks and other may be behind the management for payment of their dues.
4. There is under-utilisation of plant capacity.
5. There will be lot of pressure on the management from all side.

C. Effects on the Government:

1. Sick units are required to be taken over by the government for the protection of the
workers.
2. Liabilities of the government increases.
3. It affects the revenue collection of the government.
4. Government faces pressure from all parties connected with sick units.

D. Effects on Shareholders:
1. There will be financial loss to the shareholders.
2. They get lower rate of dividend or may not get dividend.
3. The market value of their shares goes down.

E. Effects on Consumers:
1. Consumers of sick unit may not get products or services on regular basis.
2. Irregular supplies cause inconvenience to the consumers.
3. Consumers may have to pay high price as there will be shortage of goods in the market.

F. Effects on Financial Institutions:

1. Those firms who have provided financial assistance have to face serious consequences as
the sick units will not be able to pay loan instalments.
2. Even interest on loans may not be paid regularly by sick units. This puts heavy burden on the
financial resources of financial institutions.
 3. Financial institutions have to accept burden of sick units even when they are not responsible for
sickness.
G. Effects on the Society:
1. Regular supply of goods gets affected.
2. Large scale sickness may lead to economic recession
3. Investment climate gets affected; investors are not willing to offer their fund to
companies.

8.2.4 Remedial Measures to overcome Industrial Sickness:

Industrial sickness has widespread effect on socio-economic development of the nation. Hence
all efforts should be made to avoid becoming a unit a sick unit. For this certain precautions needs
to be taken:

1. Strict Supervision on Fund: Sometimes the management diverts the fund to other related
concerns this leads to financial difficulties to a sound concern and push it towards sickness.
For this, strict control should be there on use of fund. There should be provision of penalty
for those who are involved in such mismanagement of fund. Recovery should be made from
the management.
2. Role of Government: The number of industrial unit in the country has increased to
approximate 10 times since independence. The major reasons behind this increase are
positive role of the government in the form of infrastructural facilities, specialised financial
institutions and package of incentives etc. On the other hand government’s vacillating
policies, incompetence in managing core sector, excessive protection to domestic units,
corruption are responsible for some units becoming sick units. Penalising managements that
wilfully make units sick is the first step government should take to control sickness. Under
the SIC Act, 1985 the government has set up a Board for Industrial and Financial
Reconstruction (BIFR). The management of the sick unit should intimate BIFR their
potential sickness. There should be early warning system.
3. Nationalisation of Sick Units: Government should take over the sick unit through
nationalisation and run as public sector units. This is necessary for the protection of the
workers who are employed in such units.
4. Management of Sick Units with the cooperation of workers : It is necessary that the
workers of the sick units should provide all support for the revival of sick units. They should
not put pressure on the management for their demand. It is possible to revive the sick units by
entrusting the management of such units to professional managers or workers.
5. Active Participation of Financial Institution: Financial institution such as IDBI, ICICI and
BIFR has to play an important role in the revival of sick unit. Financial institutions can help
the sick units in the following ways:
a. Provision of finance
b. Liberal repayment facilities of loan
c. Managerial consultancy
d. Proper follow-up of rehabilitation programme
e. Proper monitoring
6. Closing of Sick Units: If the unit is beyond revival the let the unit die natural death. It is not
advisable to run such units as uneconomic units. A labour rehabilitation fund should be
created and workers should be compensated.
7. Other Preventive Measures:
a. Sickness can be avoided by proper project planning and feasibility study.
b. Proper financial planning, cordial industrial relations and effective use of
available resources.
c. Employees should render cooperation
d. Financial institution should have proper control on the industrial units etc.
Prevention is always better than cure.
8.2.5 Industrial Sickness and Business Environment:

Business environment is the surrounding situation. It consists of factors and forces which affect
the working of the organisation. Internal factors are controllable and external are uncontrollable.
While establishing units proper analysis of environment is essential to avoid sickness. SWOT
analysis may help to curtail the sickness. Government has taken various measures to control
sickness. There are certain factors which are beyond the control of the organisation which will
have positive and/or negative implications on the working of the organisation.

For controlling the sickness, government has passed the SICA act in 1986 with the assent of
President. The objectives of the acts are:
1. Afford maximum protection of employment
2. Optimum use of funds
3. Releasing amount due to the bank
4. Replacing the existing time consuming machinery with more efficient machinery.
BIFR was established with effect from January 12, 1987. Medium and large scale companies,
whose net worth has been eroded by 50 per cent or more, will be obliged to report this fact to the
board. The board has been given wide ranging powers in respect of the approval of rehabilitation
packages for sick industrial companies. Since inception up to December 2004, the BIFR received
cases o f5147 of which 259 are under revival, 436 cases have been reviewed, winding up has
been recommended in 1302 cases and 1377 have been dismissed. Now Government has washed
off its hands and lending banks write off debts as NPAs. Owners / managers of sick units are left
to fend for themselves.

8.3 Turnaround

8.3.1 Meaning
Turnaround is a remedial measure for removing industrial sickness. Turnaround strategy is
applicable to loss making company. It is the act of making company profitable again. For this
purpose effective strategies and action plans needs to be devised. Attempt is made to remove
weaknesses and to bring the company in normal condition. The basic purpose is to reverse the
position of the firm from loss making to again profit making. Turnaround is a remedy. According
to Dictionary of Marketing (edited by P. H. Collin) turnaround means “making company
profitable again’. It is a technique of bringing failing companies back to life.

Turnaround strategy is revival measure for overcoming the problem of industrial sickness. It is
essential for survival of failing companies. A successful turnaround is a complex procedure.

8.3.2 Strategies of Turnaround

Strategy is an action plan. Turnaround is applicable when the business unit is declared as sick
unit. One cannot allow its own company to close down. All efforts will be made to revive the
business unit and to bring back its glory. Turnaround is needed when:

b. Continuous negative cash flows.

c. Declining profits / earning capacity over the years.
d. Declining market share.
e. High labour turnover.
f. Frequent breakdown due to poor maintenance.
g. Increase in the stock of inventories.
h. Unused plant capacity.
i. Declining profits / sales.

Any business unit who faces one or more than one problems as stated above will be termed as
sick unit or an uneconomic unit. It fails to earn profit but suffer losses. The purpose of
rehabilitation (Turnaround) package is to improve the overall efficiency of the unit. The
turnaround package is introduced when the negative symptoms are clearly noticed by the firm.
Turnaround strategy is implemented when there is scope for revival of the unit.

There are three alternative methods available for the execution of turnaround strategy:

1. Execution of turnaround package by the existing Chief Executive and other executives by
forming committee.
2. Appointment of management consultant to guide the existing CE and other executives in
the process of turnaround.
3. Appointment of new chief executive and to handover the responsibility of execution of to
him.

Implementation of Turnaround Strategy:

Introduction and implementation of turnaround strategy is time consuming and tedious activity.
It requires in-depth study of the surrounding situation. When efforts are made to convert loss
making unit to again profit making, the support of each and every member is essential. Proper
action plans needs to be framed. Arrangements need to be made at three levels :

a. Creating background
b. Selection of strategy
c. Follow-up stage

A. Creating Background for the Introduction of Turnaround Package: For making the
turnaround successful, suitable structural changes needs to be done in the organisation. For
this alternative methods may be used like :

j. Execution of turnaround package by the existing Chief Executive and other

executives by forming committee: Existing CE and team of management will be
given the task of turnaround package. They may get external support of the
 consultant. The joint committee is formed under the CE to find out various causes
of illness. Such committee is called as Turnaround Committee. This committee
prepares the detail plan of strategy.
ii. Appointment of management consultant / expert for the execution of
turnaround package: In the second option the existing team will be removed
temporarily. In their place expert/ consultant are appointed to look after the whole
job of converting company into again profit making one. It the responsibility of
the external expert to do the job of reviving the unit. It works with open mind.
They are not related with the old management. The committee will get support of
the existing staff if they take them into confidence. It is always advisable to
appoint expert rather than giving task to the internal employees. Once the
company come back to its original position i.e. after completion of the project he
will go back to his original position. Till conversion the entire control of unit will
be in the hand of the experts. The existing management is kept away till the
execution of turnaround package.

iii. Removal / Replacement of the CE till the completion of Turnaround Process:

The third alternative is replacement of the existing team till the completion of the
process of turnaround. The new executive will be appointed and he will be given
the charge.

B] Selecting Suitable Strategy for the introduction of Turnaround:

Depending on the business situation, suitable strategy will be selected. Very often Chief
Executives is replaced. There are two major alternative strategies:

1. Surgical Approach 2. Humane Approach

1.Surgical Approach: Under this strategy strict follow-up and action will be taken by the chief
executive. He will use his power, authority and exert all control to bring the company into profit
making zone. The new CE has to assert his authority by issuing orders and directives changes.
He keeps close watch on each and every activity. He may close the unit or division or plant
which is uneconomic. The surgical approach may be opposed by the subordinates but needs to be
used strictly.

2. Humane Approach: The CE may use humane approach for implementation of turnaround
strategy. Chief Executives tries to understand the different problems objectively, collects opinion
and try to find our remedial measure to overcome it. He makes negotiations and settle all the
disputes peacefully. He try to solve the problem in a democratic manner. Humane approach is
better than the surgical approach. For this the leadership at the top level must be of a high quality
with vision, maturity, professional skills and experience.

C] Followup:

1. Financial Backing: Turnaround process will not run without financial support. Extra finance
provision needs to be made by the top management.

2. Identifying the Problem: The problems faced by the enterprise must be clearly identified the
the team. This will give positive results.

3. Action Plan: After identification of the problem, comprehensive plan should be prepared to
tackle the problems. For this effective strategy is must.

4. Execution of Action Plan: Lastly, the action plan prepared should be implemented
effectively. Expert leadership will enable its proper execution.

The turnaround strategy is a team activity. It will be successful only when there is team work and
willing cooperation and participation of each and every member of the organisation.

8.4 Questions for self study.

1.What do you mean by Industrial Growth. What are the features of industrial growth?
2.How the environment may have positive and negative effect on the working of the
business unit?
3. Explain importance of growth and how growth is essential for survival of business unit.
4 What are the Positive and negative effect of Environment on the working of the business unit
5.What are the Features of Industrial Growth?
7What is the Impact of Industrial Growth?
7.Causes and Effects of Industrial Sickness
8.Give Remedial measures to overcome Industrial Sickness
9.What do you mean by Turnaround?
10.What are the different strategies of turnaround?