30 Sep 2015 19:53 IST

Why turnaround strategies are important

But at the heart of it, all that is required is a leader who can rally the people around and make them part of the turnaround process

Most of the literature on the field of strategy management focuses on strategising for existing profit making entities or some times new firms. However, ‘Turnaround Strategies’ don’t garner the same kind of interest. This, in a sense, is surprising as in most industries there are more under-performing and loss making firms than otherwise. And yet, turning them around doesn’t seem like a priority.

What is a ‘Turnaround’ strategy?

It is all about making an underperforming firm that is either declining from its historic highs and/or making out right losses and may be staring at bankruptcy to reverse the trend and become a superior profit making entity.

Why such special treatment?

Context is important to strategise. External contexts could be in the form of industries stage on the life cycle or degree of fragmentation, the kind of market structure etc.

Industries’ context can be classified based on Life Cycle: as being Emerging/Embryonic , Growing, Maturing and/or Declining industries. Strategy and leadership required is different in each stage for a firm in each of the contexts.

For example, a CEO who performs exceedingly well need not be equally successful in a matured or declining stage. Winston Churchill who was considered to be the best PM by the English during wartime (The Second World War) and became a national hero for winning the war, was promptly voted out in the next election. He was judged as unfit for peace time.

Other aspects of context: whether an industry is fragmented or concentrated. A firm need to startegise differently for these two. Same goes if you are competing in an oligopoly vs competitive industry.

The turnaround situation requires very different sets of action and mind set on the part of the top management and CEO. It is crisis management, and not all of us are good at it.

How do you go about building a turnaround (TA) strategy?

First and foremost, come up with a rough plan for the turn around. Such a plan should consist:

1. Improving cash flow: While profitability is important and needs to be established, solvency in the short run is more important. You have to survive today to reap benefits tomorrow. So one of the very first things that turnaround managers do is to arrest cash bleeding. You seek advance payments from customers, long credits from suppliers, seek moratorium from banks and lenders, get rid of non productive and other assets those will not be critical for short term survival.

Now, one may wonder as to why customers, suppliers, and lenders will cooperate. They don’t automatically do so. It requires a lot of persuasion/negotiation to make them realise that your long term survival is important to their own performance. They have stakes in your existence and by helping you today, they will recover their money, benefits in the long run. If they let you sink, you may sink with some of their money. This of course requires a credible plan and a credible/persuasive CEO.

2. Improve Viability: Having arrested cash drain, a TA leader will focus on quickly establishing viability by planning and establishing a quick ‘Break-Even’ plan. This involves cutting right corners in terms of cost, improve productivity and delivery etc. Cost cutting invariably becomes the corner stone for this as it is very much in the control of the CEO and the management.

Unwanted, non or low-value adding, long term discretionary costs are first ones to be cut. No R&D, no grand brand building/promotion, bare minimum over heads, salary cuts, no 5 star lunches, close cost monitoring, product mix optimisation, cutting all frills and so on are some of the most popular and frequently used measures to bring down the ‘Break-Even’ point.

It is easier said than done.

Some of the quick ways of improving the performance is to use a disaggregated approach to analysing data. Averages and percentages do not tell you the scope for improvement. It is like a class room of students with an average height of 5.5 feet but no one student is 5.5. An inventory of 15 days at the company wide level may look very efficient. However, you scratch the surface (meaning ‘disaggregate’ the data) and you are likely to find that it is 47 days (over inventory) in south India, and 5 days (potential loss of sales) in the north. This approach can be, and should be applied to every aspect of the business viz-a-viz, margins, outstanding dues, productivity, growth and so on.

The scope this could throw up to improve performance could be phenomenal.

All these require a leader who can rally the people around and make them part of the turn-round process. From the peon to the top management, employees have a stake and a credible leader with a reasonably viable plan can motivate them to make the necessary sacrifices and extra efforts to achieve the turnaround. They should become part of transforming the rough turnaround plan into a detailed and actionable one.

This is war time and, hence, requires a general who fights from the trenches in the battle front and not the one who just sits in the HQ making plans and strategising.

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