Managing in a Turnaround Environment
Turnaround is the process of reviving and growing under-performing companies. Turnaround efforts are usually led by experienced turnaround managers, who are consultants brought into a company during its decline phase. The turnaround process has three phases, namely, the crises stage, stabilization stage, and recovery stage. Turnaround managers, already working under difficult conditions, face many challenges from factors both internal and external to their company.
A turnaround is a process whereby a company that has been experiencing an extended period of poor performance, is led to experience substantial and sustained positive performance. As a topic in the field of business management, turnaround is attracting increasing attention from researchers, educators, investors, managers and consultants. Developments in this area have led to the establishment of the discipline of turnaround management, the profession of turnaround managers, and the practice of turnaround investing.
Turnaround managers are consultants who are hired during financial crises, to save distressed companies from bankruptcy and turn around their fortunes. Turnaround managers join a company either as CEO or consultant, so that they can direct the turnaround process. This is largely preferable to the situation where a company's owners or senior mangers attempt to turn around their company themselves, since their lack of objectivity and emotional involvement often lead them to create new problems without resolving any of the old ones. Much depends on the turnaround manager: If he or she is not able to save a company from bankruptcy, or if the company's core business is not profitable, the company will be liquidated.
Even though turnarounds can be one of the best means by which a company can attain long-term sustainability, many of those in top positions in ailing companies find it difficult to even accept that they need a turnaround. This is one of the biggest obstacles to turnaround, and it is based on several factors:
- Firstly, many corporate executives believe that to initiate a turnaround is tantamount to admitting failure.
- Secondly, some corporate executives believe that turnarounds lead to mass redundancies, and this leads them to resist the idea of a turnaround. However, this is not the case: It is only those employees who do not add value in the workplace that will typically be laid off during the turnover process.
- Thirdly, there is a misconception that other companies will cease to do business with a company undergoing a turnaround. On the contrary, however, firms tend to be drawn to a company in turnaround, because the very fact that it has initiated a turnaround implies that it is a responsible and serious company.
Even when CEOs accept that their company needs a turnaround, they often take a long time to arrive at such a decision. Due to such hesitation, turnarounds are often initiated by third parties such as lenders (such as banks), bankruptcy attorneys, or investors who have a stake in the company.
Companies that need a turnaround most often experience under-performance in the areas of management, finances, competition, operations, and strategy. Management underperformance can usually be seen in areas such as leadership issues; skills issues; micromanagement instead of delegation; organizational structure issues; ineffective communication; misplaced compensation and incentives; and high employee turnover.
Financial underperformance is usually evident in excessively low sales volume; excessively low prices; excessively high expenses; poor balance sheet management; debt; and insufficient working capital. Competitive under-performance tends to be characterized by factors such as uncompetitive products; service and support issues; obsolescence; and quality issues. These can lead to a loss of established business and/or a failure to get new businesses.
Operational underperformance is characterized by lean manufacturing opportunities; poor capacity planning; poor scheduling; and process inefficiencies. The last area of underperformance, strategic underperformance, is characterized by market channel issues; supply chain tier issues; and scale issues.
A turnaround environment can be defined as the social, technological, economic and political environment in which a turnaround company functions. The internal turnaround environment consists of stakeholders such as customers, suppliers, employees, board of directors, and creditors; the external turnaround environment consists of factors and forces beyond the control of the company, including the economic environment, technical environment, legal environment, political environment and cultural environment. The nature of a company's internal and external turnaround environment has an effect on that company's decisions, turnaround strategies, processes and performance.
Needless to say, managing a turnaround is a challenging experience. For instance, those managing in a turnaround environment must do so under intense time pressure. Today's turnaround managers are being given less time to carry out their tasks, with some being expected to complete a turnaround in six months. Turnaround managers need special skills and competencies to effectively manage the unique planning and control processes that are required in managing and turning around a distressed and loss-making company. As if these challenges were not enough, turnaround managers also have to deal with opposition from within their assigned company, for instance from senior managers who resist replacement, or from employees who fear losing their jobs.
Stages of the Turnaround Process
The turnaround process comprises three stages: Crises, stabilization and recovery. Each stage has a different objective and requires a different type of action by the turnaround manager. The objectives and turnaround actions of each stage are depicted in the table below.
Turnaround Actions Crises Stage Objective Stabilization Stage Objective Recovery Stage Objective Financial Positive cash flow situation Operational Profit Strategic Growth
Pre-Turnaround Stage: Decline
Before the beginning of any turnaround, there is a significant phase that the company must have gone through, which is worth discussing here. This stage is called 'decline,' and it is characterized by sustained poor performance. Management perceptions and actions during this phase will determine whether or not a company requires a turnaround, since timely intervention can reverse the decline process. Even if a company does require a turnaround, management perceptions and actions during this phase will determine...
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