Turnaround Strategy

The largest global layoff in corporate history has created a misunderstanding this to be the sole solution of turnaround. However, veterans of corporate turnaround are more than aware, this to be a small step in the strategy of turnaround though the impact is massive on the lives of the victims of layoff. Those still retained by the company may have their income flow perhaps discounted, but have the workload and stress that are equal in burden to those without work. Many articles have dwelt in depth on reasons of corporate crisis. But there is paucity of roadmap on turnaround itself and justifiable so, as the causes can never be the same. This is made complex by the reality that there is never a single cause of the crisis but a chain of event.

Boiled Frog attitude, Gambler IOU & Shortsightedness

‘Never saw it coming’ to ‘Country or Global Recession’ may be the top excuses given to the Board who can put the CEO on the defensive when reminded there are profitable companies in existence for two centuries, having experienced not only Great Depression, Financial crisis of 2008 and Two World Wars (factories bombed) but also progress in technology making obsolete their own initial product or service. If they survived, it is not mission impossible to avoid corporate death. But many managers back right into a crisis without recognizing that their situation is worsening. They’re often working under a set of paradigms that no longer apply and letting the power of inertia carry them along.” And if they don’t realize they’re facing a crisis, they won’t know that they need to undertake a turnaround, either. Such managers are like the metaphorical frog that doesn’t notice the water it’s in, is warming up until it’s too late. They could be also looking at the wrong data. Some took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. These types remind you of gamblers borrowing from the establishment signing IOUs under the hope that they will win back the losses the next round. ?Still others got so caught up in the pressure for short-term returns that they neglected to ensure their company’s long-term health—or even willfully sacrificed it. The Xerox Corporation is a living but barely alive example who invented the Desktop PC but sacrificed it on the altar of short term gains of core but dwindling area of operations.

These are the general observations one makes of the management of the company driven to crisis.

Signs of Company in crisis

Either as an insider or outsider of the company, there are sure signs you see for a company in crisis. You have to either take reigns in your hand to alter the course if you pull weight in the management or make your own plans as employee or vendor before the crisis blows up in your face. (Abandon ship)

The underlying principal in the approach is that each approach must give a solution in the short run and the long run. The first approach will make this clear.

I.???????Cash

Eyes must be on the cash generation in the short run as well as the long run. Successful turnaround companies have done just this as the first gasp of breath to fulfill the short run. Short term cash generation is by the layoff not only by saving salary and wages but also smaller properties are needed to house the staff and machinery. In case of surplus land and investments, these should go first. Options of contracting out are also available permitting sale of property whether of manufacturing or administrative building. Meeting vendors to seek voluntary haircut on payable or postponed payments helps the cash flow. Art of negotiation comes to play here. As with the creditors, the long outstanding Debtors need to be tackled to affect a cash inflow. This is easier said than done as this is sometimes the major cause of cash flow block.?In the long run, the areas of operation or products need to be scanned critically. Failure projects should not have emotional attachments. Jettison cash drainers. (more on this below) An alert here, that there are instances of high cash being offered in the market for the main or profit making product. Zandu Pharmaceuticals sold their Zandu Balm with the brand name. Thumbs up was sold to coca Cola when it had nearly fifty percent of India’s cola market. Therefore, for turnaround there is no standard formula to follow. ?

It all depends on the opportunity and amount of cash flow needed. One pharmaceutical company sold all its factories and went the contracting outside route to stay afloat while a bottling beverage company having its own brand did the reverse by accepting contract manufacturing. This provided influx in working capital as the material had to be given by the clients but kept the manufacturing infrastructure intact. Of course own brand supply dwindled which could be recouped later after recovery, by advertisement.

You can also look to the Government for cash flow boost. Tax deducted at source is substantial cash flow. One diversified company ‘Voltas’ did this precisely. They pitched to the Income Tax authorities to be saved from the TDS burden of 25% agreeing at a nominal level of 2% for a specific time period. Since the company was at a loss, the company would not have to pay tax and apply for refund of tax.?There was no sacrifice to the exchequer was the logic. Copies of letter to this effect issued by the Income Tax department were given to clients on which basis the client were unburdened of their duty as per conditions of the letter.

I.???????New products/core area

This approach needs usually an outsider’s view as managements are emotionally attached to projects they have initiated but failed. The signal of failure needs to be defined strictly like turnover of X amount was not achieved in Y period so it’s not a success product. Abandoning is not the only option. You can also monetize it by selling the license with patent if any. At this stage of crisis, any monetization helps. Your imagination is the only limit. Core areas of the company which created the reputation of the company should be identified but now, since the crisis is not absorbed by the core area of operation it needs to be evaluated ?strictly. Are the costs not in control? Can the costs be cut down in the existing set up or do we need to outsource etc. are key points to answer here. Thermax and Arvind (mentioned above) did this. But the answer you seek may not be exactly the same as that of these mentioned companies.

II.???????Who to retain

At the time of layoff, it’s a rumor mill that overpowers logic of the staff. It’s often felt the latest entrants are first to go and those with high salary burden. The ball of responsibility stops at the highest management of the company. They have proved not being able to perform in the way they have done so far. They need to hand over reins. This not only gives a fresh evaluation of corporate activity but also sends powerful signals to stakeholders that daring rescue mission is on the way and not mere publicity.?But to whom layoff is the moot question you need to answer and choose the new team carefully. Their appointment itself should instill confidence in all stakeholders. When you have selected products or areas to be retained and not sold off, you can select the person you want to retain based on their ability/ experience/ education/ support of new ideas for the retained or new areas.

III.???????Future vision

You have to think of the future of operations right at the same time you are solving the short term cash crisis. This is not just for speed but to satisfy the stake holders. How will you calm your lenders and compound terms with them unless they are convinced you will recover in future? Mere assurances are never enough. Your vendors will also find interest to support you by delaying getting paid in short run by you if they are convinced you will recover. Your solution may have risks therefore there cannot be one remedy. For example, if cutting cost by contracting overseas (say Vietnam) is your remedy, the figures may look nice but when after a trial run sample arrives, you may note lack of quality which your market may reject. If this was your sole solution, you have dug yourself deeper. A multi pronged approach needs to be applied each one serving as a backup for the other. Car companies which were on the brink have been saved by a new model which responded to the desires of the market on features and price. By the 1990s, Porsche was definitely cash-strapped. The 911 was a pretty slow sell, and their entry level models like the 944 and the 968 weren't exactly strong sellers either. For a while, they remained in business by building performance models for other brands, most notably Mercedes-Benz (500E) and Audi (RS2 Avant).?Porsche had not just one, but two aces up their sleeves. The first one arrived in the form of the Boxster in 1996. It was another entry-level model, but like the flagship 911, it was RWD and used a flat-6 engine. Things were looking up, and then they definitely skyrocketed after Porsche saw the potential of the luxury SUV market, leading to the first Cayenne in 2003.

Turnaround is not a simple exercise nor is it an impossible mission. You need to be innovative and think out of the box. You need to continually think about generating cash in the short run while planning for the long term.