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Argenti Trajectories

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  • Category: Debt

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Argenti operated at a lower level of abstraction and espoused different objectives than Penrose (examining decline, not growth), but his work is nevertheless a valuable methodological exemplar for us. His approach consisted of two steps. First, he identified the three archetypical collapse trajectories shown in figures below. Second, he developed archetypical ‘process stories’ which outline the sequence of events that drive these trajectories of collapse. Argenti’s motivation for developing such ‘storylines’ underpinning failure was dissatisfaction with the prevailing practice of identifying factors associated with decline: “… I have now come to believe that a mere list of causes and symptoms, no matter how coherent and comprehensive it may be, is not enough. What is missing from such an inventory – and indeed from all previous work in this field – is the dynamics of failure, the sequencing of events. We need a storyline that binds together all these causes and symptoms into a working model” [Corporate collapse : the causes and symptoms by John Argenti 1976, p. 121]

1. Type-1 Trajectory a. Implement appropriate systems, add managerial skills to the proprietor 2. Type-2 Trajectory a. Intervene at 8, 9 or 10 b. Some type of regulation necessary (eg: Consolidate) 3. Type-3 Trajectory a. Intervene before 12 b. Restructure; Divest; reduce gearing; cut back trading if needed c. Introduce structured strategic planning/management

Improvement possibilities

1. Starts with defective management structure 2. Follows up with poor accounting system 3. Gearing increased, adding to risk 4. ‘The BIG Project’ – costing underestimated 5. Apparent that ‘big project’ is a ‘flop’ 6. Cash flows negative – all ratios poor 7. Creative accounting 8. Stress 9. Business hazard 10. Crisis action – eg. Reduce price 11. Owner seeks another loan 12. Insufficient profit 13. Receiver called in to manage bankruptcy

Trajectory-1 Newly Formed Organizations

1. Starts out with same defects as Trajectory 1 2. Manager ‘knows everything’ and won’t accept advice 3. Fast growth due to energy & ability of entrepreneur 4. Sales grow; firm need additional capital injections 5. Margins do not fall due to owner’s persuasiveness; overtrading 6. More credit is offered by financial institutions 7. Credit offered by unscrupulous creditor who sells out 8. Instead of consolidating to protect risk, maximum profit/ sales continue to be pursued 9. Media becomes interested; pressure mounts 10. Organization should have a formal management system, but is still ruled by ONE person 11. Proprietor wealthy; firm has a good name; public demands quality 12. Turnover grows but not profitability 13. Creative accounting 14. The ‘Big (ridiculous) Project’ again 15. Technical overtrading 16. Bank notices downturn 17. Collapse inevitable 18. Receiver called in to manage bankruptcy

Trajectory-2 Young Organizations

1. Organization has good health; profitable; high morale; gearing low; turnover moderate 2. Some management defect occur (eg: strategically un-aligned) 3. Accounting function defect 4. Environment change 5. Normal business hazard survives unless: a. Pressure group imposes constraint b. Firm is over trading c. Firm is over geared d. Firm has major product failure 6. Profits fall severely 7. Financial ratios deteriorate predictably 8. Morale declines 9. Poor profits for two years since #5 10. Creative accounting begins 11. Gearing moves into ‘danger zone’; ‘waterlogged’ 12. Profits just cover interest payments 13. The ‘Big Project’ again 14. Sales & profits increase; bank gives another loan 15. The ‘Big Project’ runs into trouble 16. Cash crisis; firm cannot survive its loans 17. Receiver called in to manage bankruptcy

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