Qualitative turnaround viability assessment
In our experience, qualitative turnaround viability assessment is the most important approach in making a decision regarding turnaround viability.
Quantitative turnaround viability assessment should be used to produce a business case, and to negotiate and plan, but only if underpinned by a positive qualitative viability assessment.
Viability factors
Turnaround viability depends on a number of factors (Stuart Slatter and David Lovett):
- Can causes of distress/decline be reversed?
- Can the financial crisis be eliminated?
- Can a rapid improvement in profit margins be achieved?
- Can favourable stakeholder attitudes be developed?
- Can internal constraints on turnaround potential be overcome?
- Can unfavourable industry characteristics be overcome?
Generic turnaround strategy to overcome causes of distress, to achieve a rapid improvement in financial performance, and to overcome internal constraints and unfavourable industry characteristics, is normally a mix of the following:
- Strategic repositioning
- Reorganisation
- Revenue enhancement
- Cutback action (cost and asset reduction)
In addition to turnaround strategy, the turnaround plan should provide explicitly for stabilising the business, funding to eliminate the financial crisis, and for stakeholder management.
Viability factors - a closer look
Nature and number of causes of distress/decline
Click on the thumbnail for an enlarged view of the causes of distress diagram.
For a turnaround to be viable, the causes of distress or decline should be both identifiable and reversible.
According to the research shown in the table, the most common causes of decline and distress is poor management and poor financial control as internal causes, and changes in market demand, increased competition and adverse movements in commodity prices as external causes.
High cost structure, poor marketing and big projects that have gone wrong - all internal causes - follow closely.
A 2002 survey by R3 in the UK indicated the following main causes of company failure:
- 29% loss of market.
- 22% management failure.
- 10% bad debts
- 20% lack of working capital.
Severity of the financial crisis
A turnaround cannot be viable unless short-term survivability can be ensured.
The nature of the financial crisis dictates which turnaround strategies should be used.
Crisis management, working capital management and financial restructuring should take precedence over cash consuming profit improvement strategies in the case of a severe cash crisis.
The balance sheet situation dictates trade-offs between short and longer term application of strategies - see phasing turnaround strategy.
Insolvency and poor prospects for quickly increasing operational cash flow necessitate a focus on balance sheet actions such as portfolio divestment, asset reduction and financial restructuring.
Cost/price structure
The income statement dictates whether the short-term focus should be on cost reduction and/or revenue enhancement (repricing and/or volume generation).
A rapid improvement in one or more of these is normally required for a turnaround to be viable.
Stakeholder attitudes
Stakeholder attitudes determine the political and emotional acceptability of various turnaround strategies.
Stakeholder support need to be retained or developed for a turnaround to succeed.
The various sets of stakeholders differ in understanding, confidence, objectives, bargaining power and ability to influence the outcome. They often have conflicting objectives.
Internal constraints
Unlike the entrepreneur starting a new venture, a turnaround is not a greenfield situation.
Generic turnaround strategies may be constrained by the company's historical strategy and its present internal structure and operations.
Typical internal constraints are the heritage of products, customers, assets, resources, know-how, politics, and contractual obligations.
Particular attention must be paid to identifying essential contracts, contracts with onerous conditions, assets encumbered and contingent liabilities.
Industry characteristics
Industry profitability and potential for developing a competitive advantage are dictated by Porter's 5 forces.
Can unfavourable industry characteristics be overcome?
Market size and growth rate, intensity of rivalry amongst existing competitors, buying power of buyers and suppliers, and threat of new entry and substitution may necessitate a new business model, or a turnaround strategy based on strategic repositioning.
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Qualitative turnaround viability assessment depends on how a turnaround situation stacks up to viability factors.