6/6/2022 2 Comments

Turnaround Strategy

Probably the most well-known turnaround success story is the rise of tech company Apple.

Apple went into a decade-long downward spiral after CEO Steve Jobs left the company in 1985 and lower-priced products from competitors, like Microsoft Windows, took over the personal computer market.

For 12 years, its innovation, popularity and sales continued to plummet, almost reaching bankruptcy until Jobs rejoined the company in 1997. The company was able to turn itself around with a successful rebrand and new technology like the first iMac.

Now, Apple is one of the most well-known and valuable companies in the world, raking in almost $300 billion in revenue each year. But what is a turnaround strategy and when should organisations consider it?

Turnaround Strategy

Turnaround Strategy is a strategy employed by organisations when the decision made earlier has missed the mark and needs to be undone before it damages the profitability of the company. Simply put, a turnaround strategy is backing out or retreating from the decision wrongly made earlier and transforming from a loss making company to a profit making company.

Many executives ask, "When should my organisation adopt a turnaround strategy?" The need for a turnaround strategy arises because of the changes in the external environment, change in government policies, saturated demand for the product/service, a threat from substitute products/services, changes in the tastes and preferences of the customers and many other factors.

The following indicators makes it mandatory for organisations to adopt this strategy for their survival:

Continuous losses
Poor management
Wrong corporate strategies
Persistent negative cash flows
High employee attrition rate
Poor quality of functional management
Declining market share
Uncompetitive products and services

Approaches to a Turnaround Strategy

Cost Efficiency Strategies

Cost efficiency strategies are implemented first in the recovery strategy. They are preferred turnaround recovery strategies that achieve cost efficiencies because they are easy to implement, require little capital, and their effects are almost immediate.

Cost-oriented turnaround strategies include reducing research and development, stretching accounts payable, eliminating pay increases, reducing accounts receivable, cutting inventory, investment diversification, and reducing marketing activities.

The measures can be accompanied by reduced pressure from debt repayments through financial restructuring. However, such an action carries some risk. If an organisation solely relies on cost-cutting as a turnaround recovery strategy, it will face risks such as increased staff turnover because of the reduced employee morale. Organisations should be aware that cost efficiency strategies can also damage the resources necessary to maintain their core focus.

Asset Retrenchment Strategies

Organisations that face performance decline usually pursue asset retrenchment actions after a cost-efficiency drive. Under the strategy, organisations evaluate underperforming areas to eliminate them or make them more efficient.

The usefulness of retrenching assets as a turnaround recovery strategy depends on an organisation’s ability to generate cash flow. For example, an organisation may dispose of its old assets to generate cash or invest in new ones.

Focus on Core Activities

Organisations can also resort to focus on their core activities as a turnaround recovery strategy. Under the increased focus, they can identify markets, customers that can potentially generate high profits, and adopt the measures as the main focus of the firm activities.

For example, organisations may re-focus on the Skills Development Plan (SDP) or other plans best known to them. They may develop a clear competitive strategy through focus.

Change of Leadership

Organisations often replace incumbent CEO's as a turnaround recovery strategy. During turnaround situations, most organisations appoint new chief executives from outside the company as a way of injecting a new way of thinking into the top management.

Some organisations may need to relook at reinventing and reorganising themselves (organisational restructuring) through assembling teams that will enable them to focus on new strategies to lead the turnaround.

Even the most successful businesses have failed at some point in time. However, if handled correctly, rock bottom could serve as the first stepping stone an organisation needs to begin climbing back up to the top. Let us help you mobilise for change, navigate uncertainty, and flex as needed, so you can achieve sustained, profitable growth—a feat only 1 in 11 companies manages to pull off.

2 Comments

Charlotte Fleet link

11/11/2022 00:25:51

Thanks for mentioning how a turnaround strategy can help an organization move from loss-making to profit-making. I imagine that a turnaround strategy would be much more effective with the help of a turnaround management service. That way, the organization can benefit from the service's experience and expertise in the matter.

Gestaldt Consultants link

11/11/2022 14:59:19

Correct, Charlotte. A turnaround strategy would be much more effective with the help of a turnaround management service or a strategy consultant (https://www.gestaldt.com/strategy-consulting.html).

In other instances, our turnaround professionals are engaged to restructure and reposition a company as a viable, competitive entity, but something goes awry during the process. More often than not, it comes down to a failure of execution of one or two simple keys, including the following:

• Failure to change. Executives or the board are not willing to make necessary and substantial changes. They will alter course at the periphery, but not at the core level, where it’s truly necessary. However, when a company is in distress, it is clear that the team of the past cannot successfully address the current challenges and those coming down the pike.

• Failure to estimate the working capital necessary to succeed. In a turnaround, cash is a priceless commodity. Unfortunately, many executives underestimate just how much capital requirement is necessary to get their companies back on solid financial footing.

• Failure to innovate. Products, especially in today’s technological environment, can become outdated or no longer perceived as essential. As a result, new strategies for innovation are required. Turnarounds are not all about cost cutting. To succeed, it’s critical that a company aim to grow organically and increase revenue, while at the same time trimming expenses.

• Failure to learn from others and evaluate culture. We strongly recommend that every executive and board member visit at least four different organizations per month. In doing so, they can view and learn from the good, bad and ugly of the marketplace. Just by walking into a facility and assessing the landscaping, the reception area, and the attitude and attire of employees, they can predict with a very high degree of precision the success for that organization.

• Failure to communicate to stakeholders. This includes employees, suppliers, wholesalers, customers, shareholders, and the press. Communication should never be a secondary consideration. In fact, next to cash, it’s one of the most important ingredients of a successful turnaround.

• Failure to share bad news. No one wants to share bad news. However, letting employees read about plant closings in the paper is a mistake. They should be told first and foremost what is happening and what to expect in the future. They will be far more likely to remain loyal when they know the facts.

• Failure to share the pain. Turnarounds are painful, plain and simple. That’s why it’s critical that executives lead by example. That means getting rid of the club memberships, first class air tickets and limo rides. Remember, in a turnover, every expense must be examined and none is too sacred to touch.

Charlotte, when it comes to turnarounds, there are never any guarantees for success, even when proper actions are taken. However, by avoiding the missteps above – and approaching the situation with a sense of urgency – a company can change course for the better, achieving profitability and realizing the next level.

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