So far in 2014, turnarounds have been discussed domestically at Radio Shack, Yahoo, Best Buy, Lowe’s and JCPenney, to name a few. Internationally, word of turnarounds have been reported at Sony, HTC, Carrefour… So what has caused this trend?
Simply stated, when business is good, it is very easy to overlook inefficiency and waste. But the macroeconomic weakness that is affecting the US is resulting in sales declines; while at the same time costs continue to rise. As a result, profits decline. A business may find itself in need of turnaround assistance based on unforeseen external factors, i.e. a natural disaster, competition, new regulation, new taxation assessed federally or at the local level. While internally, rapid unplanned growth can be very disruptive, if the focus turned away from profitability. This growth may have been attributed to organic growth or a merger or acquisition.
The most detailed and transparent turnaround discussed is the turnaround at Hewlett Packard –
Meg Whitman joined HP as the President and Chief Executive Officer in September 2011. After a year of assessing the HP situation, Ms. Whitman announced a Turnaround. At a Security Analyst Meeting (10/03/2012), Ms. Whitman attributed the need for a turnaround to several factors, including a change in the IT industry; constant change in executive leadership of the company; decentralized marketing; integration of acquired companies; misalignment of compensation and accountability; lack of metrics and scorecards to manage the business; lack of a cost containment focus; product gaps; and ineffective sales management. The turnaround which began in 2012 is expected to take hold by 2016.
The solution to counter this situation is a redesign, i.e. a focus on stream-lining processes and cost containment. Interestingly, the method to redesign a business is the implementation of standard business management “best practices.” But to fully implement a turnaround, innovation and growth will be required. Customers’ needs must be placed at the center of your decision making and a focus on business development will be required.
Start by assessing and understanding the amount of change required and develop approaches that will minimize the potential for disruption.
Superior management and flawless execution will be required. Each member of the management team should understand their responsibility and be committed to work together as a team to redesign to turnaround the underperforming business. A commitment to financial discipline and a returns based capital allocation strategy is required.
Going forward, managing the business should be accomplished from a data based perspective. Any decision regarding the use of funds and or the changing of strategies needs to be quantified. Opinions should be the basis for investigation, but data should be the reason for actions. An executive needs to be able to read financial and production numbers; as well as understand the significance of combining the data sets to grow. If you do not understand the drivers of revenues and expenses, or the significance of production data, any decision will be a best guess on how to proceed.
If you understand the current situation with respect to the market, competitors, customers and employees, you will be better able to develop detailed strategies that allow you to minimize weakness, maximize opportunities, and mitigate threats.
Managing cash flow is critical. The optimal approach is to employ conservative and sound financial and accounting policies; maintain a strong working capital position; and implement accurate and responsible reporting that looks at variances to established plans.
In a turnaround situation, a “best practice” is to document and review policies and procedures; to stream-line and remove inefficiencies; discontinue manual tasks through automation; and, enhance security through segregation of duties. The outcome will naturally be cost savings. Circumventing established policies and procedures exposes the firm to errors, unnecessary risks and costs associated with wasted time.
If you are in a business turnaround situation, it is very easy to think the proper decision is to slash the marketing budget to cut expenses. But, it is during these tough times that marketing and sales are the most important. As expenses keep increasing, revenues at the very least must keep pace, or profits suffer. Annually, new customers must be sourced.
The role of your marketing department is to collaborate on strategic campaigns and point of sale initiatives; while fostering a consistent and standard sales approach across all corporate communications and marketing efforts.
The redesign steps are as follows –
- Communicate the need to redesign to senior managers and the board of directors, to gain concurrence;
- Select a respected executive with the authority to cross department lines to lead the project. This individual will be the champion of the project and facilitate the integration of change;
- Perform a key assessment of the organization to prioritize the trouble spots;
- Set strategy and establish a cash flow plan for the next 12 months, based on the current situation;
- Communicate the strategy companywide, as well as the intentions to redesign companywide processes, to gain employee understanding and involvement in the process;
- Optimize support functions; and,
- Emphasize business development to grow.
Communicate with the Board of Directors, throughout the process.
The speed at which the process can be completed will be based on the amount of redesign required and the commitment of your management and staff to make required changes.
In 2014, Regis published Redesign to Turnaround Underperforming Small and Medium-Sized Businesses. To read chapter one of the manuscript, click Here. Recommendations so far have been positive. To order your copy, clickRegis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!