Turnaround strategy

Turnaround strategy objectives

The overall goal of turnaround strategy is to return an underperforming or distressed company to normal in terms of acceptable levels of profitability, solvency, liquidity and cash flow.

Turnaround strategy is described in terms of how the turnaround strategy components of managing, stabilising, funding and fixing an underperforming or distressed company are applied over the natural stages of a turnaround.

To achieve its objectives, turnaround strategy must reverse causes of distress, resolve the financial crisis, achieve a rapid improvement in financial performance, regain stakeholder support, and overcome internal constraints and unfavourable industry characteristics.

For more information on what makes turnaround strategy viable, see qualitative turnaround viability assessment.

Turnaround strategy as turnaround stages and turnaround strategy components

 

"Ah, Love! could thou and I with Fate conspire To grasp this sorry Scheme of Things entire! Would not we shatter it to bits - and then Re-mould it nearer to the Heart's Desire!"

- Omar Khayyam.

 

The CRS Turnaround's turnaround strategy model maps the turnaround strategy components to the natural stages of a turnaround.

Turnaround strategy components

The components of turnaround strategy are:

  • Stabilising the distressed company by ensuring the short-term future of the business through cash management, demonstrating control, re-introducing predictability and ensuring legal and fiduciary compliance.
  • Funding and recapitalising the distressed business.
  • Fixing the distressed company in strategic, organisational and operational terms.

 

Turnaround strategy components

View the turnaround strategy components diagram

 

Turnaround stages

 

View the turnaround stages diagram

Turnaround strategy phasing

CRS Turnaround's turnaround management philosophy revolves around short-term survivability (getting the business "out of the hole") while endeavouring not to compromise longer-term turnaround viability (how to "climb the mountain") thereafter.

In doing so, we find answers to the following questions:

 

Turnaround phasing

 

View the turnaround phasing diagram.

 

 

Turnaround strategies often fail since they focus on achieving a longer-term vision without getting out of the hole in the first place – thereby dying in the process.

Turnaround strategies also often fail because they focus on getting out of hole without a strategy for sustainable recovery.  Such turnarounds which focuses on short-time survivability or a financial turnaround alone tend to be short-lived.

To get out of the hole successfully, certain longer-term sacrifices often need to be made if the financial crisis is severe.

Seamlessly dovetailing the actions of getting out of the hole, and climbing the mountain, requires careful stakeholder management.

Generic turnaround strategies

The financial objectives of a turnaround is to achieve improved cash flow, profitability, solvency and financial returns.

The generic operational turnaround strategies associated with the value chain are:

Operational turnaround strategy

  • Revenue enhancement.
  • Cutback action, which has two dimensions - cost reduction and asset reduction.

Generic turnaround strategies

View the generic turnaround strategies diagram.

 

An operational turnaround strategy may be, and usually is underpinned by a further set of generic organisational and strategic turnaround strategies:

Financial turnaround strategy

This turnaround strategy refers to financial restructuring with a view to strengthening the balance sheet and/or provide funding.

Reorganisation turnaround strategy

Operational turnaround implies changes to the value chain, which in turn requires changes in the organisational structure of the underperforming or distressed business.   Reorganisation may also entail changes to the leadership team.

Strategic repositioning turnaround strategy

Improving effectiveness and efficiency may not be enough.  Often the turnaround is also based on chances the business domain and value proposition of the business.

 

These turnaround strategies are normally employed in combination rather than individually, as illustrated in the diagram on the left.

Operational turnaround strategy

The business case for different turnaround strategy-structure-value chain combinations dictates the degrees of freedom open to the turnaround practitioner

The Hofer model for selecting turnaround strategy model reproduced below indicates which operational turnaround strategies to employ with reference to how far the turnaround situation is from breakeven.

 

Hofer urnaround strategy model to fix the distressed company

View the diagram explaining the Hofer operational turnaround strategy model.

 

 

What is the ROI for each turnaround strategy or combination of strategies?  Can the turnaround strategy be funded given the degree of financial distress the business finds itself in?  How much time is stakeholders willing to give before wanting to see tangible results?  What are the risks?

If the distressed company is operating in any of corridors A, B or C it needs a turnaround strategy to reach corridor D where returns at least equal the opportunity cost of capital. 

This could be achieved through cost reduction.

However, if the distressed company is operating in corridors A or B, it needs revenue enhancing strategies in addition to cost reduction. 

This means beefing up its demand generation capability (segment, target, position, sell, after-sales service) and its demand fulfillment capability (inbound logistics, operations, outbound logistics, general service delivery capability). 

CRS Turnaround has had considerable successes in the past where turnaround strategies were based on improved sales and marketing in addition to a mere cost reduction focus.

Finally, if the distressed company is operating in corridor A, it needs asset reduction strategies in addition to revenue enhancing and cost reduction strategies.

Revenue enhancement as a turnaround strategy

Revenue enhancement focusses on increasing sales through improvement of systems, processes and technology in the primary value chain activities:

  • Customer management processes such as sales and marketing, and after-sales service to increase turnover through more effective sales force performance, new products, improved functionality and range of products, new markets, better promotion, etc.
  • Operations management processes - inbound logistics, operations, outbound logistics - to increase performance on quality and lead time, thereby raising customer satisfaction through increased service delivery capability.
  • Innovation processes - Research and Development to increase the ability to offer the market new products.

The lead time for revenue enhancement is normally longer than that of cost reduction.

If the business is in a financial crisis and revenue enhancement cannot be funded, revenue enhancement often follows after cost reduction and/or asset reduction initiatives have generated cash.

Increasing sales are required if the distressed company operate below breakeven.

Revenue enhancement takes longer to have effect than cost reduction though.

Cost reduction as a turnaround strategy:

Cost reduction is the turnaround strategy having the fastest impact on the bottom line. 

Overhead and direct costs in the primary value chain and support functions are normally reduced to a level that can be borne by the level of sales that will remain after cost cutting.

Overhead cost reduction takes place in chunks.  Removing more and more chunks eventually means that some business units or product lines cannot be supported anymore, and the sales associated with those fall away too.

Cost reduction often involves retrenchment of employees, especially in turnaround situations where salaries and wages represent a large portion of the cost structure.

We don't believe in cutting costs to the bone - thereby inhibiting the organisation's ability to create, fulfil and administer demand.

Asset reduction as a turnaround strategy

Working capital reduction is common to any turnaround.

However, if the distressed company is too far below breakeven, working capital reduction, revenue enhancement and cost reduction strategies alone will not suffice.

In this situation, the turnaround strategy is normally to shrink the business into profitability. 

In such cases, cutback action takes the form of shrinking into profitability by means of portfolio disinvestment. 

This involves closure or sale of business units, divisions, operations and assets, and outsourcing of value chain activities in order to focus on the remaining profitable or potentially profitable business units or sections of the value chain. 

Such downscoping represents a kind of strategic repositioning by itself.

As with cost reduction , closure and outsourcing of business units involves retrenchment of employees.

Portfolio disinvestment through selling off assets is often used as mechanism to raise cash for the turnaround.


For more information on revenue enhancement and cutback action, see operations consulting.

Reorganisation as a turnaround strategy:

In our experience, reorganisation always forms part of turnaround management

Reorganisation deals with all the people issues in the business.  It entails restructuring, restaffing, reskilling and turnaround leadership revitalisation to yield improved leadership, management, organisational structure, organisational alignment and culture.

Reorganisation is invariably required to ensure success of the other turnaround strategies viz. strategic repositioning, revenue enhancement, cost reduction or asset reduction.

Depending on the turnaround situation, reorganisation can be limited to leadership alignment, and better management systems for planning and control of the company.

Often, however, the extent of reorganisation required goes as far as changes in top management and in the organisational structure.


For more information on reorganisation, see organisational consulting.

Strategic repositioning as a turnaround strategy:

Strategic repositioning holds the most potential but is the most neglected turnaround strategy according to academic research.

When properly employed, strategic repositioning yields the most spectacular and sustainable turnaround results.

Strategic repositioning changes the mission and customer value proposition of the distressed company by changing what products are offered to what markets and in which fashion.

In doing so it changes the revenue - cost - asset structure of the business, yielding improved profitability and return on capital employed.  It may do so by either growing, shrinking or refocusing the business.

For the single business unit business, strategic repositioning entails a compete rethink of why it is in business and how it is to achieve a sustainable competitive advantage. 

For the multi-business unit or multi-product line situation, strategic repositioning may additionally entail portfolio disinvestment, as in asset reduction, to focus on the core business.

Conversely, it may entail growing the portfolio to enhance sales and profitability.  Growth, however, normally requires investment inter alia in new technology and people, and switching costs exist.  If the business is in severe distress, lack of turnaround funding often prohibits this line of action.

Strategic repositioning is therefore in practice more often employed after cost reduction has been successful, if at all.


For more information on strategic repositioning, see strategy consulting.

The impact of stakeholder support on turnaround strategy

Stakeholders are seldom interested in a turnaround plan that may look good on paper, but which won't show results in the foreseeable future.

Stakeholders often require short-term results first before finally approving a longer-term plan.

In turnaround management it is therefore imperative to resolve the financial crisis, and rapidly show an impact on cash flow and the bottom line to prove survivability.

Selection of turnaround strategies therefore has to heed turnaround phasing requirements, typically:

  • Stabilise the business, and execute first-stage restructuring such as reorganisation, cost reduction and working capital reduction using short-term or internally generated finance.
  • Having gained the support and confidence of stakeholders, embark on the major restructuring programme involving revenue enhancement and strategic repositioning using finance of a longer-term nature.

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Turnaround strategy is described in terms of how the turnaround strategy components of managing, stabilising, funding and fixing an underperforming or distressed company are applied over the natural stages of a turnaround.