Tag Archives: Turnaround Management

Strategic Management: For Struggling Entrepreneurs, Managing to Avoid the Status Quo that can Lead to Distress

Strategic Management to Avoid Distress

The negative impact of the 2008 financial market decline and the 2008 and 2009 recession pushed many entrepreneurial controlled companies’ into the “zone of insolvency.” Although no clear test exists to establish when any company has entered the state of distress, the determination involves a combination of legal and financial tests. Let us not quibble over when a company entered the zone, a violation or close to violation of financial default covenants clearly indicates the company is in trouble.

For many entrepreneurs, access to working capital and permanent capital through traditional channels is extremely difficult, such as commercial loans, asset-based lending facilities, leasing, or private equity. The challenge is the ability to finance investments in new technology, facility infrastructure, and new products and/or services, which are essential to thrive even in difficult times.  The restoration of the balance sheets will be required. This will be neither an easy nor quick journey. To source new investments, other companies whose financial conditions are much stronger may face similar difficulties in raising fresh capital.

The response to this slow economic recovery depends on the specific financial circumstances of each company, basically the organization’s financial position (the balance sheet). While many entrepreneurs are embarking on a journey to restore their company’s balance sheets, others—including many who are enjoying their best financial performance in recent years—are playing offense by opportunistically acquiring distressed assets and investing in markets where competitors are struggling to keep pace on access, service and quality. Still others are attempting to follow a “sustainable bet” strategy by leveraging areas of excellence that positions their companies for long-term financial viability.

Leveraging turnaround strategies are more important than ever to consider. While the sense of urgency is greatest among those companies operating in the distress turnaround strategies are applicable to all entrepreneurs irrespective of their current financial condition. Following the status quo of all business models must be challenged and companies, whether small or large, should reassess their strategies for continuing relevance and likelihood of facilitating sustainable financial performance.

Implementing dramatic changes in operations, financing, service and product lines, and people will be essential, including innovation, to sustaining financial performance and mission-driven success.

Avoiding the Status Quo

The Entrepreneur Distress Avoidance Journey

Business owners should start the task of accelerating their financial recovery by assessing their companies’ situation and objectively answering some tough questions:

  • What is my company’s competitive position?  What are the realistic financial projections under a “status quo” scenario?
  • What level of financial performance improvement will be necessary to obtain access to fresh capital? Is it achievable?
  • What is my company’s range of options to achieve sustainable strong financial performance?

Once these answers are explored and known will the entrepreneur, the management team and the employees understand the magnitude of the change required to position the company for sustainable financial success. Clarity on the requirements for success will begin to form and a picture should emerge about the level and manner of change needed in the way the enterprise operates.

Creative Solutions

Financial restructuring mandates rethinking the usual turnaround strategies.  Taking a comprehensive perspective and approach to creating and implementing turnaround solutions should be done, beyond just concentrating on financial tactics i.e., debt modifications. Know that not all turnaround strategies fit all, however each strategy has its own merits for consideration. Keep an open mind and willingness to reject the status quo. For a company’s financial position to be restructured to levels expected by creditors, a serious evaluation of the turnaround strategy should be undertaken. The following are some potential turnaround strategies for consideration. Some are tested while others may not be frequently implemented and as you shall see others may be more innovative and emerging.

Financing Strategies

While the restructuring should not be limited to financing tactics, companies should vigorously pursue certain financing strategies. In a turnaround, all areas of the business should be evaluated as a potential source of capital. One area is working capital. Reviewing the payroll cycle. If the company is on a weekly payroll cycle change it to a bi-monthly cycle. This lessens the financial burden of financing payroll. Leverage certain assets as sources of capital such as receivables, inventories, and other unencumbered assets. Keep in mind fixed and certain intangible assets such as patents and trademarks. Historical precedent should not hamper the search for unencumbered resources.

Think “outside of the box”. Value exists all around the company. Recognize its existence and capitalize on its potential. The emerging Capital can be sourced from all assets, both tangible and intangible. Stated otherwise, all assets should be in play as a potential source of generating fresh capital.

The Way Forward

The financially distressed or at-risk companies must consider a planning process that will achieve consensus on the company’s baseline financial performance given current environmental factors and strategic priorities. This baseline should identify capital deficits and gaps in performance compared with credit market financial benchmarks.

Next, the company must develop a set of tactical options, encompassing the vital strategies to work toward achieving sustainable financial performance. Utilizing scenario planning with a combinations of options as well as varying assumptions responsive to key planning variables will enhance the decision making process.

Finally, a strategy map, based on the results of the scenarios, should be developed to return the company to sustainable financial performance. The strategy map must address the risks, related critical success factors and key performance indices (KPIs) to achieving the improved financial performance. This will form the basis for the development of change management strategies, including a communication plan.

Sustaining for the Future

Question the sustainability of a strategy is always critical. Action is most important:

  • Refresh the strategy on ongoing basis. As the market is dynamic, accelerate changes at the company.
  • Focus on the company’s core business offering and eliminate non-core business. You cannot be all things and to all customers.
  • Target solid margin generating businesses. Do not focus on achieving to be the market leader, focus on sustain profitability. The ability to cost shift or obtain subsidies will likely diminish, so being profitable on your own is important.
  • Consider joint ventures, particularly where you believe services are essential but sufficient scale is difficult to achieve.

Crisis or Opportunity

While the financial crisis and recession impaired the financial condition of many entrepreneurial controlled companies, it created the opportunity to step back and rethink the business model. The disruption in the financial markets and bank’s unwillingness to lend also made it imperative to be able to access credit on the strength of the organization’s own creditworthiness. This is the time to embark on a journey of financial restructuring. Unfortunately this will take time and patience, but the turnaround can be accomplished. The old saying of “no margin, no mission” is now “no financial strength, no access to capital.” These strategies can help achieve the financial strength necessary to be able to access to fresh capital, which will make it possible to fund investments as a means of achieving sustainable financial performance.

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For free online accounting mini course “Cracking the Accounting Code” designed for entrepreneurs go to http://AccountingMiniCourse.com

For further information about strategic management for entrepreneurs to avoid distress, go to http://GaryRushin.com

 

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Causes of Business Failure and Poor Leadership

Many papers and books have been written to study the origin of business distresses, its causes, consequences, and eventually, the best way to manage these organizations to avoid failure. The best way to learn how to manage a business turnaround is to study how mistakes were committed and what strategies were used that resulted in a turnaround success. Knowing what factors, including internal and external forces, that resulted in financial distress and crisis, as well as, how to avoid future business failures are critical.

Some companies experience traumatic pain, whereas other companies attempt to change direction to lessen the impact to land between the extremes of success and failure. Depending on the level of distress, the turnaround intervention will differ. Every company has a unique set of conditions that serves as serious problems to overcome.

Based on the pie chart[i], common reasons of business distress come from two forces, internal causes and external causes. Figure 1, shows some of the common reasons for business distress. The reasons are not ranked in accordance of severity, however to highlight some of the common threads the caused most distress situations.

During any stage of the business life cycle, potential failure is a threat that businesses normally face. A key is to recognize signs, the signals that the business may need to be restructured in order to turn around the situation.  Each situation tends to be unique, but have common elements.

Inept Leadership/Management Caused Business Failures

What is the most important responsibility of leadership? Simply put, leadership is to identify the biggest challenges to forward progress and to devise a coherent approach to overcome them.  This rule includes providing vision and motivation and to act as the change agent. Sounds nice. But in today’s competitive and volatile business climate, one cannot afford poor leadership, as business is not as usual.

Let us strip away at the excuses, explanations, rationalizations, and justifications for business failure; in the majority of cases it is because of management. In an honest analysis, it is plausible to say, “poor leadership” can lead towards corporate insolvency. Leaders will accept the kudos of business success; however most will not take the blame for business distress, which goes with the territory.

As a restructuring professional, it is plainly true that the number one cause of business failure is management. And in most cases it is because the leaders are “in a state of denial.” The common leadership reasons for business failure, and the roles and responsibilities they play are as follows:

  • Lack of Character: Without strong character attributes encompassing ethics, a leader cannot effectively lead without the trust, confidence, and loyalty required by employees. For most, title means little when the leader garners character flaws. And respect is earned. So a leader must remember, that “when the fish stinks at the head”, the fish is bad. With the crisis of confidence in Corporate America brought about by the boards of Enron, WAMU, etc., character plays a key role in the viability of a business failure.
  • Lack of Vision: The CEO must clearly define and communicate the corporate vision. Without vision, a flawed vision, or a poorly communicated vision, executive leadership has a problem. Moreover, if the vision is not in alignment with the corporate strategies and targets, the business will shortly be in trouble.
  • Poor Branding Poor branding generally means poor leadership. Brand equity, if declining, must be blamed on the leadership.  You must question whether the leadership abdicated their responsibility while an erosion of brand equity is taking place. It is a failure in the alignment of vision with strategy for allowing the deteriorating of a brand’s promise.
  • Lack of Execution: It all comes down to execution; the implementation to ensure a certainty of execution is primary for executive leadership. Leadership must focus on deploying the necessary resources to ensure that the largest risks are adequately managed, and/or that the biggest opportunities are exploited to avoid failure.
  • Flawed Strategy: A flawed strategy simply reveals weak leadership. While there are exceptions to every rule, companies tend to succeed by design and fail by default. Show me a company with a flawed strategy and I’ll show you an incompetent leader.
  • Lack of Capital: Even well capitalized ventures fail and severely under-capitalized ventures grow into dominant brands. A lack of capital can provide a socially acceptable excuse for business failure, but it is not the reason businesses fail. Cumulating working capital and permanent working capital is ultimately the responsibility of leadership. The amount of capital required to fuel a business is based upon how the business is operated. The reality of capital constraints is a factor leadership must recognize. If leadership squanders the opportunity to obtain sufficient capital, irrespective to capital formation, the business will feel the results.
  • Poor Management: The choice of recruiting, mentoring, deploying, and retaining management talent is up to leadership. Thus it is leaders blame if is fails to act to correct mistakes, change direction, or effective execute of strategy.  It is the job of leadership to recruit, mentor, deploy, and retain management talent.
  • Lack of Sales: The lack of coherent strategy, pricing, positioning, branding, distribution, or compensation impacts revenue. A lack of sales is ultimately attributable to a lack of leadership.
  • Toxic Culture: Culture is important in business, whether it is a culture of working at Google, IBM, or at the Red Cross. It is up to leadership to recognize and “cut out” the individual or individuals that poisons a culture of a business. Nothing stifles productivity and creates conflict like a toxic culture. Hiring management or employees with different cultures must be examined to determine if issues will be developed.
  • No InnovationRemember, even Kodak was innovative, but have faltered from global competition. Leaders must create a culture of innovation or they will fall on the innovation sword. Innovation must be mission critical. As an example, textile maker, Milliken & Co., leveraged innovation to effectively compete. The strong bias for innovation by great leaders constantly recreates businesses and generates new opportunities. Leaders that are slow moving towards innovation will doomed the business.
  • Not Tackling the Market: Good leadership tracks sound market opportunities, however pursuing the wrong market, or even following the right market improperly will lead to disaster.  But also sizing a business too fast, too slow, or yet at worst not designing a scalable business correctly lacks leadership.
  • Poor Professional Advice: All entrepreneurs and CEOs require quality professional advice. “No man is an Island,” so there is no excuse to having a “blind spot” to support limitations or added recommendations to strengthen ones’ knowledge or wisdom in making informed decisions.  It is pure arrogances not to recognize the need for advice that has led many companies down the wrong path.
  • Failure to Attract and Retain Talent: Surrounding ones self with great talent attracts more talent. It is the leaderships’ blame if the company does not have good talent. This requires recognizing talent when you see it. Then it is equally important to retain it, as other opportunities may steer talent away. If that takes place, leadership is the blame.
  • Competitive Awareness: It is critical to understand the competitive landscape to navigate the enterprise successfully. Not understanding, acutely, what the competitors are doing can disable any competitive advantage the company may have, that can play an important role in business decline.

Consequently, the characteristics of the leader and that of his/her key management play an important role in the decline of the business. Be it pure incompetency and/or the lack of interest in the business can lead to distress. Five principal factor for business distress include:

  1. Autocratic rule: Many companies that went into distressed had dominant and autocratic leaders that made all major decisions in the company and did not tolerate dissent. Although this is not to say that autocratic leadership is bad, a fine line exist between leaders that bring success and leaders that lead to distress.
  2. Ineffective board: Be it board of directors or board of advisors, weak board members that lack true business acumen, ethics, and ability to stand up to management can lead to trouble. Actively engaging in the planning, resource allocation, policy-making, and approval process oversight of the company is the responsibility of the board. But unfortunately, many boards are made of the “buddies” of the CEO, “rubber stamps” management’s assertions, maintain passive oversight, and/or just sit on the board for the status and the perquisites that goes with the position.
  3. Poor management: For some companies, management act as mere administrators, maintaining the status quo, avoiding the ever-changing business environment. Most do not realize that management is about change, change to survive in the current business environment. Such inability to accept even the proposition of change has led to even great old brands being swept aside towards the rubbish bins of lost value followed shortly by the company.
  4. Lack of Management Depth: Many companies’ management lack adequate skills. The lack of management depth tends to be found in companies that have been slowing declining.
  5. Neglect of Core Business:  As companies evolve they diversify in to other areas. Such diversification can lead to business distressed. This is what happened when Gil Amelio, then CEO Apple Computer struggled in an attempt to compete with IBM in the mid 1990s. Apple operated four business units, Macintosh, Information Applications and Peripherals, and “Alternative Platforms.” With six types of Mac computers, the company was bleeding cash. Upon the return of Steve Jobs, he radically simplified the company to its core business slashing all business units to the Macintosh and selling only one type Macintosh computer[ii]. Diversification means stretched resources and focus that can lead neglect of the core business.

Also know that hubris on the part of certain leaders have led companies down the wrong path to insolvency. Pursuing inappropriate, or high-risk strategies based on false premises, have brought down some of the most highly thought of companies.

  • Take the case of American International Group (AIG) that underwrote (what was considered very profitable) credit default swaps through its London based Financial Products Group. With the 2008 financial meltdown, the U.S. government was forced to bail out the company in order to protect the U.S. financial system.
  • Look at MF Global Holdings, then ran by former head of Goldman Sachs and former N.J. governor, John Corzine. In his veal for higher earnings to offset declining core revenue, and despite warnings from two chief risk officers, embraced Greek sovereign debt despite cautionary signs of the risk of default. Because the firm was unable to meet cash collateral calls made by counterparties, MF global was forced into bankruptcy     

[i] Richard P. Remelt, “Good Strategy Bad Strategy” Crown Business 2011.



[ii] James E. Schrager, Ed. “Turnaround Management: A Guide to Common Restructuring.” Institutional Investor 2002.

 

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What is a Corporate Restructuring or Turnaround?

First, there is no hard rule or definition as to what constitutes a corporate turnaround or a corporate restructuring. The generic term is a company or firm or business unit that exhibits financial performance that in the foreseeable future, unless short-term corrective action is not taken, may fail. Let us say:

  • Corporate restructuring is a tactic used in an attempt to correct a declining financial situation or climbing out of insolvency.

A corporate restructuring or turnaround may be simply defined as a company’s existence is threatened as it moves from economic performance to decline or zone of insolvency. The decline or bankruptcy may take several years, however when extreme events take place, a shorter time frame may put the enterprise into peril.

In some circumstances the term may mean a financial restructuring by reorganizing and/or cleaning up the balance sheet using financing methods that changes the capital structure of the organization.

Surprisingly, a turnaround can be a situation where a company may exist without having a cash crisis. When measuring a company’s performance, as measured by return on capital employed, the turnaround candidate can be an organization that is performing below what is expected for a business in which it is engaged.  It is about recognizing that a company often displays symptoms of failure prior to any crisis beginning. It could be businesses with underutilized assets and poor management. Many companies have survived or stagnated for years in spite of ineffective management. If such stagnation does not change, the crisis situation will succeed because management has not taken the necessary steps to turn the situation.

Crisis situations are often in stable and mature industries and sometime with competitive advantages. Such companies are also firms that are closely held or family controlled. To avoid placing the enterprise in a crisis, it is about early instituting turnaround and restructuring strategies to avoid company trauma. Too often even a growth-oriented company that has grown too fast and is very profitable may experience a severe cash crisis. Alternatively, a company can report a loss in one year does not constitute a turnaround issue. Such a loss may be expected in executing a competitive strategy. However, a loss in one operating unit may place the whole company into a death spiral.

A company can become insolvent if management takes no corrective actions. Even external events may postpone the inevitability on insolvency, but it will not avert it. The outcome of management’s corrective action either will be successful or unsuccessful in which case the insolvency will lead the company into bankruptcy.

Generally, a corporation’s life cycle can be looked at as a humped curve of four stages. From (stage-1) start-up the company grows to a point of (stage-2) maturity then begins to (stage-3) decline until it reaches (stage-4) the zone of insolvency“. Not all businesses follow such life-cycle curve, since organizations can be reborn or transformed anytime. Some companies, in fact, institute competitive strategies that change the shape of the curve to an S-Curve to progression. The corporate turnarounds logically addresses two issues:

  • The measurement of a turnaround performance, and
  • The characterization of a turnaround cycle, which is the decline phase followed by a recovery phase.

Defining turnarounds on the basis of profitability (return of assets or return on investment) alone is problematic. The accrual quality of the turnaround company’s accounting may be low and result in manipulated earnings management. Companies gradually lose competitiveness, but this is often not reflected in deterioration in profitability. Rather, earnings flat line then plummet or the time lag between competitiveness and earnings improvement exist. With management’s “window dressing” a lag in indices showing a distressed state, the signals of impending trouble can be masked.

Simply put, the framework of the turnaround is to avoid the company moving into the “zone of insolvency” and then ultimately into bankruptcy. Taking proactive strategies to control the business is the objective.

Related Posts:

Corporate Strategies—Avoiding the Flawed Strategy

Strategy: Good Strategy or Bad Strategy? 5 Lessons to Follow

 

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