Turnaround Management

Times of corporate distress present special strategic management challenges. In such situations, a firm may be in bankruptcy or nearing bankruptcy. Often turnaround consultants are brought into the company to devise and execute a plan of corporate renewal, assuming that the firm has enough potential to make it worth saving.

Before a viable turnaround strategy can be formulated, one must identify the root cause or causes of the crisis. Frequently encountered causes include:

• Revenue downturn caused by a weak economy
• Overly optimistic sales projections
• Poor strategic choices
• Poor execution of a good strategy
• High operating costs
• High fixed costs that decrease flexibility
• Insufficient resources
• Unsuccessful R&D projects
• Highly successful competitor
• Excessive debt burden
• Inadequate financial controls

While each case is unique, the turnaround process frequently involves the following stages:

1. Management change - consultants may be called in to manage the turnaround of the firm.

2. Situation analysis - a situation analysis is performed to evaluate the prospects of survival. Assuming the firm is worth turning around, depending on the root causes of the distress one or more of the following turnaround strategies may be selected and presented to the board:

   • Change of top management
   • Divestment of certain assets
   • Reformulation of strategy
   • Revenue increase
   • Cost reduction
   • Strategic acquisitions
   
   

3. Emergency action plan - achieve positive cash flow as soon as possible by eliminating departments, reducing staff, etc.

4. Business restructuring - once positive cash flow is achieved, the strategic plan is implemented, improving continuing operations, adjusting the product mix and repositioning products if necessary. The management team begins to focus on achieving sustained profitability.

5. Return to normalcy - the company becomes profitable and the changes are internalized. Employees regain confidence in the firm and emphasis is placed on growing the restructured business while maintaining a strong balance sheet.

Abandonment Strategy

In some cases the prospects of the firm may be too bleak to continue as an ongoing operation and an exit strategy may be appropriate. Different strategies may be pursued that vary in their immediacy. An immediate abandonment strategy exits the market by immediately liquidating or selling to another firm. In other situations, a harvest strategy is appropriate by which the firm plays the end-game, maximizing near-term cash flows at the expense of market position.