Anatomy of a Turnaround
by Jahna SR

Every industry has its share of companies that suffer performance problems; however just a small number of these companies bounce back to become corporate turnarounds. Mounting competition, precarious economic conditions and not to forget, tapering profits make the recovery of failing companies even more uncertain and difficult.

Research has established that many of the attempts by companies to revive from declining performance (called corporate turnaround in managerial parlance) fail, rather than succeed. The failure rate is quite high for companies attempting turnaround, but that doesn't mean that turnaround is an impossible task, it is just a bit difficult. A planned and systematized way of nursing the company back to health would ensure a prosperous future. In general it means that the way a company handles the turnaround process determines its success rate.

Stemming the Decline

A company's decline over a period of time necessitates a turnaround to stop further deterioration and to increase its prospects of survival. But before trying to plug the leak, the causes of it have to be pinpointed. Typically, a company's performance may decline due to its environment - the company might not be able to keep up with the changing business environment and thus may suffer a crippling decline. Regardless of the causes of the decline, if the company doesn't react in time to the situation, then its survival may be in danger. A turnaround aims at setting things right and make the company adapt to its business environment, including its competition.

If the company doesn't make any effort at turning itself around, a continuing decline may have the following consequences (as propounded by Kamala Arogyaswamy and Vincent L Barker III in their paper Firm Turnarounds: An integrative two-stage model:- Stakeholder support may erode, Internal inefficiencies may increase, organizational structure may deteriorate further reducing the chances of recovery, competition may take over, people anticipating doom may leave thereby making the company more vulnerable to the hostile business environment. When a combination of all these fatal problems drains the company's financial resources, the creditors as well as other stakeholders withdraw their support to the company. And, as a result of the loss of the support the company fails. The turnaround process contains the grave consequences of a continuous decline. Aided by the turnaround strategies, the turnaround company tries to restore stakeholder confidence and even attempts to get the internal irregularities to track to mitigate external competitive and environmental threats.

These researchers have identified three broad and related consequences of a decline in performance, which if left unattended can result in failure. As mentioned earlier the direct and immense consequence is the erosion of stakeholder support. The smooth and effective functioning of an organization is dependent on the continued participation of partners, principally external groups and individuals. As a consequence, maintenance of favorable relationships with external stakeholders who provide resources to the company becomes highly critical to company's survival. But, when the period of performance decline protracts, it very often tarnishes the image of the company and leads to the worsening of the company's relationship with external stakeholders. Various studies have shown that external auditors, bank lenders and prestigious executives in the labor market revise their relationships with companies that they perceive as declining. External stakeholders, who are keen on protecting their own self-interest, may change the nature of their relations with the company by either distancing themselves from the company, or reducing the quality of their participation, or in some cases, withdraw their support or start bargaining for better terms.

A more adverse effect of the deterioration of a declining company's image and relationships with external stakeholders is the survival threatening outcomes of further decrease in the company's revenues, increase in costs or reduction in management's suppleness in battling the decline. Revenue decreases often as customers shy away from the declining company out of fear that the company's products or services will not be delivered on schedule and other such apprehensions.

Then again, stakeholder support for the declining company comes at a higher price (in the form of higher interest rates for loans etc.) as stakeholders think that increased remuneration is the best way to mitigate their risk of being associated with a company of questionable future. Stakeholders may also impose restrictions on things like terms of credit lines to protect their own interests, making the operational requirements of the company more rigid and less survival-friendly.

There is a major crippler in declining firms - loss of efficiency, which augments the internal troubles of the company. Excessive costs or assets further reduce the chances of survival of the company. But more often than not, inefficiencies are a result of the decline rather than being the cause of it. Researchers have argued for long that in declining companies, their product or services fail to sell due to loss in demand as a consequence of which, sales plummet. And, because of such slack sales, resources are underutilized, giving rise to inefficiencies.

These costs of a decline put the company's survival in jeopardy. At the outset, they create a work environment that limits the responsive ability of the company toward changes in external environment. The decline also restricts the usage of a company's repertoire of skills and knowledge accumulated during its life, to recoup. Meanwhile, the declining company's decision-making process could limit the top management's ability to come up with organizational changes to adapt to the environmental changes. Researchers have established that companies which have mechanistic structures and decision processes may find it difficult in making adaptive changes when faced with a changing environment. Therefore, they say, any mechanistic shift brought about by decline may further restrict the company's ability to adapt to the causes of the decline if such adaptation requires fundamental changes by the company.

Further, these consequences of decline can spill over to other areas also. Credit rating agencies, for instance, often downgrade the debt securities of declining companies. Once such a downgrade happens, stakeholder support is reduced, increasing the declining company's cost of borrowing, which in turn further decreases the company's efficiency. Likewise, the deterioration of a company's internal environment may reduce efficiency.

The Key is Timely Response

The probability of the success of a turnaround attempt is heavily dependent on the timing and extent of the response of the top management. True enough, Kamala Arogyaswamy and Vincent Barker III say that their analysis has indicated clearly that turnarounds for declining firms are more likely when management responds quickly to declining performance. They further say that because of management inertia and lack of pressure from owners or other stakeholders, significant time lags can exist between when a firm begins to decline and when management attempts a turnaround. And, longer time lags will usually lead to less successful turnaround attempts as the dysfunctions caused by decline gain in strength, the firm's resources deteriorate, and therefore implementing decline-stemming and recovery strategies becomes more difficult.

Any delay in response to a decline can deteriorate the company's situation further and at the same time reduce the probability of its success in turning around. Hence, the top management should be alert to quickly respond to detrimental changes in the company's performance. At times when the top management is the cause of decline, the role of the board becomes paramount. They have to judge the suitability of the existing management team to get the company back on track, and accordingly retain or replace the team. The board should always assume an active role in the running of the company. It should keep a watchful eye on the company for early warning signs such as complacent culture, excess workforce and the like. Indeed, managers and boards together can augment their companies' chances of recovery by being more sensitive to the early signs of decline. The early warning signals can be many and may even be quite obvious, but the management is often blind to them because of its complacency or due to lack of a proper monitoring system within the organization.

What Works?

Companies that have successfully reincarnated offer future turnaround candidates (the declining companies) pieces of their wisdom. Most of the turnaround success stories stress the importance of customer focus, management of costs, effective utilization of resources and the monitoring of the changes in the business environment. A few of the insights are elaborated below:

Lessons from the retail front

Companies exist for serving customers and those that neglect them, have to face falling demand that in turn reduces earnings. Indeed, customer is the 'king' and this is especially true in the case of retailing chains like Sears, where a neglect of its customers cost the company its profitability. But it did turn itself around, unsurprisingly by refocusing on its customers and made all its operations geared toward them. Even sales people and ambience were made customer-friendly to bring their lost customer base back to the stores.

Sears, Roebuck and Co. had set new paradigms in American retailing business and had once enjoyed numero uno status. However, owing to its flawed diversification strategy, which saw it venturing into several unrelated areas, America's biggest retailer lost its focus. The strategy shift saw the company becoming inward-centric, losing touch with its business environment, which had kept changing all along. The fallout was - it lost customers, frittered away market share and hence risked its survival.

The retailing major failed to sense the changing trend in selling and merchandising, the areas where its core competence lay. Over the years the granddaddy of retailing had lost focus and in the process forgot about its customer base. It didn't bother to change its merchandise as per the changes in customer preferences. As a result, it became vulnerable to discounters like Wal-Mart and specialty retailers like Home Depot, which focus on a wide selection of low-price merchandise in a single category.

The initiatives taken by the company in response to the challenges posed by the business environment were interesting. Sears stopped trying to be "all for all" and sell everything to everyone. Instead, it identified seven core segments as its focus areas. The company by now had understood who its competitors were and what was the market trend. For instance, it began paying more attention to women's apparel, which is considered a highly profitable segment of merchandising. One of the most remarkable features of the new strategy was the shift in focus from competing with discounters like Wal-Mart to focus on building a competitive edge through superior service. In fact, to ingrain the service philosophy, the company began an exercise whereby every employee's appraisal included a measurement for customer service and compensation depended on the performance on that parameter. The efforts paid off well and the company made a second successful turnaround in 1999.

The key to Sears' turnaround was the management's recognition of the fact that the company's primary customer was no longer the man of the family but the woman. And, that everything from store design and brand selection to prices and marketing efforts had to reflect that reality. The message from Sears' turnaround is 'understand your customer'.

Marks and Spencer is a similar story - it has created a central marketing division to find out what customers want so that it could have an idea what products they needed to stock and how much to stock, which would enable them to order more of the stock that is popular. This way demand is met and wastage of stock is less because they order less of the 'out of favor' stock.

The turnaround was an attempt at realigning its business structure and organization. The company split up its business into 3 parts UK retail, overseas retail, and financial services so that each can be operated more efficiently and individual problems can be detected and removed. The store understood the importance of thinking from the customer's perspective which it had lost somewhere during its existence. To keep up with the times, it revamped the stores to reflect a new look - a more brighter and colorful one. The company even went online to look mod and to increase its turnover through the use of e-commerce.

Another important requisite to stay successful is 'Eye for detail'. Both Sears and M&S centralized billing and made other adjustments to ease customer purchases. Sears introduced credit cards for customers. These measures helped both retail giants to facilitate customer purchases by easing the process.

The IBM Way

Culture makes a company complacent, which in turn leads to failure. Successful turnaround companies had to change their culture, often spearheaded by the leadership of the company. When Gerstner took over, IBM was full of shortsighted middle managers and executives. Upon his arrival Gerstner rebuilt the leadership team and give the workforce a renewed sense of purpose. As he says in his book, in the process, Gerstner defined a strategy for the computing giant and remade the ossified culture bred by the company's own success.

At IBM, Gerstner reoriented the company to rapidly changing marketplace and the customers. Gerstner's experience at American Express came in handy here. He authorized purchases of IBM equipment at Amex and thus understood the difference a customer perspective can make. In his book, "Who Says Elephants Can't Dance? ", Gerstner, says that almost everyone watching the rapid demise of this American icon presumed Gerstner had joined IBM to preside over its continued dissolution into a confederation of autonomous business units. This strategy, he says, well underway when he arrived, would have effectively eliminated the corporation that had invented many of the industry's most important technologies.

Instead, Gerstner took hold of the company and demanded the managers work together to re-establish IBM's mission as a customer-focused provider of computing solutions. Moving ahead of his critics, Gerstner made the hold decision to keep the company together, slash prices on his core product to keep the company competitive, and almost defiantly announced, "The last thing IBM needs right now is a vision."

Just as important is tracking competitive moves, as they often might reflect changes in business environment and consumer behavior, which the company might have missed. The benefits of technology can be discounted. Keeping track of the latest technology and using the most suitable ones to benefit the company is the key to continuous success. For instance, customer Database maintenance is facilitated through technology, operations can be streamlined using latest technology and costs savings can be achieved thus. Product innovation, the life-blood of organizations, is also a function of technology.

Turning around a troubled company is by no means an easy task. It requires skill, foresight, and perseverance - traits that are rare today. That is why there are more failures than successes. And, that is why there is a lot to be learned from companies that have turned around successfully.

True that it is human to err, and because companies are run by humans, it is common for them to err. But it is also true that the companies that learn from their mistakes are the ones who live, decline and turnaround and live again.


Jahna SR heads JS Associates, a consultancy engaged in coaching executives based in Chennai, India. The firm also prepares fresh management graduates for undertaking corporate jobs. Jahna places heavy emphasis on people-orientation and believes that most organizational problems have their roots in people-problems, and these can be resolved by a free and fair talk with the concerned employees. She can be contacted at jahnasr@rediffmail.com.

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Copyright 2004 by Jahna SR. All rights reserved.

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