The Painful Art of the Turnaround – Part 1

11 July 2013

This post is the first of three on turning around a smaller manufacturing business unit. For present purposes, the term “turnaround” may apply when a business unit is either generating financial losses, or is displaying a persisting trend of deteriorating financial performance. “Persisting trend” means a trend that can be distinguished from cyclic downturns, such as recession or fluctuations in the price of petroleum.

Turnaround is arguably the most demanding of management tasks. — C.H.


A Tough Situation


factory Closings TableThe opening years of the 21st century have been difficult for manufacturers, especially those in developed countries. In the U.S. alone, something like 50,000 manufacturing facilities have closed — net of new factories opened — since this century began. The table labeled “Size Distribution of Factories” [1] indicates that the carnage is spread across factories of all sizes. Measured by the number of factories closed, smaller factories led the way. In percentage terms, the bigger they were, the harder they fell. Since smaller firms often supply, and buy from, larger firms, there is no good news for anyone. And that’s just the more recent portion of a factory closings trend that dates back about three decades.


The global realities that have produced this melt-down aren’t likely to go away. The resulting turmoil could affect the stability of any firm. Since the unexpected can occur at any firm, all managers need be aware of what is involved in turning a business around.


Confronting Reality


Once a persisting pattern of deteriorating operational and financial performance becomes clear, its potential consequences will be recognized by many. Others, especially managers, may well be in denial. A crisis in organizational confidence isn’t unlikely. It is necessary to take specific actions to maintain — or regain — the viability of the business.


>> A turnaround leader must be designated. This may be the existing senior manager, or it may be somebody else [2]. In either case, the turnaround leader must have full authority, subject only to the board chairperson (or other designated representative of the ownership). The turnaround leader will need both business acumen and strong leadership skills. The ownership’s expectations of the turnaround leader need be clearly and explicitly spelled out up front. There is nothing honorary about the role of turnaround leader — it is nitty-gritty, hands-on, often painful and more than full time.


>> The turnaround leader will need access to — and must be willing to listen to — input from a cadre of experienced people, especially those with previous turnaround experience.


>> The firm’s cash position must be calculated and projected forward at least weekly, if not more often. The turnaround leader must always know when the firm will run out of cash. The cash projection sets the deadline for returning the business to a net cash positive position.


>> The turnaround leader’s initial task is to prohibit any cash expenditure without the leader’s explicit approval. Then the leader needs to find additional access to cash. Perhaps the ownership will provide more cash. Perhaps credit lines are available. Accounts receivable need be worked. Expenses need be deferred. Profitability by product must be re-examined. Terms with suppliers may be renegotiated. The list goes on. A substantial (and painful) retrenchment may well be necessary.


>> Once the firm’s future cash prospects are reasonably clear, the turnaround leader needs to ask the ownership to decide on a course of action: (a) improve the prospects of the business in order to operate the firm indefinitely; (b) prepare the business to be sold or merged into another business; or (c) prepare the business for liquidation.


Make a New Plan, Stan


Boone Pickens tells this about his dad: He said, “Son, a fool with a plan can beat a genius with no plan. Your mother and I are concerned because you might be a fool with no plan.”
[3]


Assuming that the ownership decides to operate the business, they will likely do so contingent on a sound plan for renaissance. I use the term “renaissance” because returning the firm to its former state isn’t enough. After turnaround, the firm must be in a position to compete successfully within today’s (and tomorrow’s) rapidly changing global business realities. That is, positioned to thrive in perpetuity.[4]


The plan for renaissance starts with a fresh business model (value proposition + a system for delivering the proposed value to targeted customers) [5]. A transition map follows. The transition map outlines the actions necessary to move the organization from its current state to a condition where the new business model is actually functioning. The transition may proceed through several stages of restructuring, stabilization and revival. The interests of all stakeholders (owners, creditors, customers, employees, suppliers and more) must be recognized.


The transition map is used to generate specific action plans [6], each with responsibilities, timeline, and cash costs limits defined. A no-nonsense reporting routine is established and executed rigorously. A sustained sequence of vigorous actions with corresponding evidences of progress will go far to reduce fear and improve the morale of all involved.


Caveat
: All business situations are different. Although most successful turnaround plans have much in common, there is no one-size-fits-all turnaround plan.


Part 2 of this post will discuss the plan, its construction and its implementation in more detail.


Chuck - AsilomarThoughtful comments and experience reports are always appreciated.


…  Chuck Harrington
(Chuck@JeraSustainableDevelopment.com)


P.S
: Contact me when your organization is serious about pursuing Sustainability … CH

 

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.


 

[1] The chart labeled “Size Distribution of Factories” is from Job Creation in the Manufacturing Revival, a Congressional Research Report for Congress, 19 June 2013, available at: http://www.fas.org/sgp/crs/misc/R41898.pdf

[2] In general, it is preferable to appoint an outside person, who needs not contend with matters of blame. For larger firms, where ownership and management are usually separated, this is almost always the case. In smaller firms, the ownership often is the management. The owner – manager often has personally endorsed many of the firm’s obligations. That makes a tough call. However, is unlikely that the firm will have more than one opportunity to turn around the business, short of bankruptcy. 

[4] Adam Werbach defines a sustainable business as one that is positioned to thrive in perpetuity. From Adam’s book, Strategy for Sustainability, Harvard Business Press, Boston (2009), page 9. 

[5] For more on business models, see Business Model Innovation, this blog:

http://blog.jerasustainabledevelopment.com/2013/03/27/business-model-innovation.aspx

 [6] Sandy Steinman’s new book, The Small Business Turnaround Guide, Morgan James Publishing, New York (2013), presents very practical insights as well as information on specific actions.