THE SCIENCE OF TURNING AROUND

Turnaround strategy is about doing different things and attempting to change companies’ fortunes by fundamental adjustments in strategy, such as acquisition and divestment. Operating turnarounds are about doing things differently in terms of processes such as manufacturing, so that the firm’s efficiency can be improved. Three categories of turnarounds are: Traditional asset cost surgery, Product-market pruning, and Piecemeal strategies.

The characteristics identified in successful turnaround strategies involve good management, which is seen to be critical to a sustained recovery. An appropriate organizational structure often means a much leaner one, with fewer layers in the hierarchy. Tightly controlled costs mean better controls, rather than cutting costs.

Turnaround may be executed at different stages depending on when a firm wakes up to a crisis.

TURNAROUND STAGES

1.    A firm showing early recovery - The firm is aware of its decline in performance and anticipates that on such a trend, it is likely to breech its managerial-determined minimum acceptable level of performance. Although the firm is far from extinction, actions are taken in advance, the crisis averted, and a path of sustained improvement achieved.

2.    A firm taking intermediate action to break through its line of minimum acceptable standards - Alarm bells are ringing and actions taken to recover. However, such actions are insufficient – perhaps superficial, addressing symptoms rather than causes – and the firm returns to its decline trajectory. At this point, the firm may countenance more sweeping changes to restore the firm to a trajectory of sustained improvement. However, should this step not be taken, it is likely that the firm will continue to oscillate around the line of minimum acceptable standards, with successive uplifts being more difficult to achieve than previously, before ultimately failing.

3.    A firm which is late in reacting to the crisis - The firm has breached its managerial determined minimum level of performance and has begun to approach the line of failure. It is the classic turnaround.  In this instance, the firm needs the spur of breaking its internal standards, as well as the threat of extinction to begin to take substantial action. By so doing, sustained recovery is achieved.

4.    A firm that does not perceive the threat of extinction, despite breaking its own minimum acceptable standards, or is unable to make any changes before termination.

POSSIBLE REASONS FOR DECLINE:

• Over-expansion:  firms that have expanded too far find that they are stretched in both managerial and financial terms.

• Inadequate financial controls and high costs: these often occur when a business grows beyond the capability of its original systems, so that costs spiral out of control.

• New competition entering the market: the arrival of a new competitor can substantially distort the competitive dynamics of a market and damage a firm’s health.

• Unforeseen demand shifts: the nature of the market may change dramatically. Where a firm has substantial and rigid asset configurations and is not agile, this can spell disaster. The area most on people’s minds at the moment is the potential impact of Covid19.

• Poor management: managers may have a false sense of confidence in their own abilities. This can arise from experiencing a period of success, causing an atmosphere of infallibility, and the screening of information. Of course, poor management may also just mean ‘poor management’.

TRIGGERS FOR ACTION

Whilst it may be clear that an organization is on a decline trajectory, it is vital that triggers are identified to bring about action. If triggers cannot be identified, then it is likely that nothing will change, despite the abundance of warning signs. In terms of early, intermediate, and late stage recoveries, the broad pattern, as one might expect, is for the early stages to have internal triggers and have a management able to perceive problems and opportunities. As we move to the late stages, all triggers are important with an increased external emphasis.

ACTIONS TAKEN

We often see that the major difference between sharpbenders and control companies in terms of action taken are management changes. They often devote considerable efforts to improving marketing and reducing production costs. Sharpbenders are more likely to invest to improve performance. If there are triggers in place then the sort of actions that might be taken to bring about a recovery are contained below:

CRISIS CONDITIONS – STRATEGIES - ACTIONS

A.   Conditions : Internal causes of turnaround / Need to diversify /Control and communications problems /Culture change/ Structure change

Strategy : Restructuring

Actions : Replace top managers / Use temporary structures /Alter organizational structure/Alter culture

B.    Conditions : Internal causes of decline/ Sales 60-80% of break-even

Strategy : Cost reduction

Actions : Reduce expenses/ Institute controls

C.    Over-expansion/low capacity use/ Sales 30-60% of break-even/ Rapid technological change /Rapid entry of new competitors

Strategy : Asset Redeployment

Action : Shutdown or relocate units

D.   Conditions : Over-expansion/ External causes of turnaround/ High capacity use/ Possessing operating and Strategic weaknesses

Strategy :  Selective product and/or market strategy

Action : Defensive - Decrease marketing effort/ Divest products

Offensive - Increase marketing/ Increase prices/ Improve quality, service

E.    Conditions : Over-expansion Improved short-run profitability /External causes for turnaround /Major decline in market share /Non-diversified firms faced with external causes of decline

Strategy : Repositioning

Action : Defensive - Niche / Market penetration / Decrease price/                       Divest products

             Offensive - Diversification into new products

Following are recommended to be considered when formulating a Turnaround Strategy:

• A proactive top-down style of management has been advocated as necessary and effective for turnarounds. For other strategy decisions, a bottom-up view, or indeed a middle-up-down perspective is more apt.

• Rapid change is critical to survival in a turnaround, although currently dominant in strategic management is the approach of studying processes rather than discrete events, which emphasizes the complexity and difficulty of change, so that it is perceived as a long and involved process.

• Structure comes before strategy in so far as changes are made for the company’s very survival before the luxury of a strategy can be considered. This is contrary to the strongly held view that structure follows strategy.