18 July 2013
This post is the second of three on turning around a smaller manufacturing business unit. The previous post discussed the immediate tasks of a turnaround leader in a situation sufficiently severe as to threaten an organization’s viability. It also mentions the turnaround planning process. This post expands on turnaround planning. Next time, part three will address executing a turnaround plan. — C.H.
Surviving, Striving and Thriving
To be useful, a turnaround plan needs to address three phases: Surviving, Striving and Thriving. At first, focus must be on surviving a condition that threatens the organization’s viability. The survival phase, which was discussed in part one of this series of posts, is sharply focused on cash and on retrenchment. Once the threat to survival is stabilized (that is, the firm is net cash positive), attention can be extended to striving for competitiveness and profitability. When profitability is attained, transition to a sustainable condition of global competitiveness (that is, a level of profitability consistently above the cost of capital employed) can be pursued.
Striving to Compete
During take-off, the airplane pilot pushes the throttles all the way forward, to full power. The needle on the gauge crosses out of the green, through the yellow and into the red. Once the aircraft achieves a positive rate of climb, the throttles are reduced until the needle returns to the top of the green. Similarly, once an organization in turnaround achieves net positive cash flow, emphasis can be expanded to striving toward competitiveness.
In most cases, “competitiveness” does not mean return to some previous mode of operations. The fact that a turnaround is needed indicates that what was done in the past is less than optimal now, and likely to be even less optimal in the future. It is time to rethink the organization’s strategic posture, as expressed in its business model. A business model consists of two parts: (1) a Value Proposition — a package of tangibles (physical products) and intangibles (price, delivery, terms, warranties perceptions, relationships and much more) that a business unit offer to a specific set of target customers. And, (2) a Delivery System that reliably delivers on the entirety of the Value Proposition.
Simple, right? Sure is — once you decide which potential customers to target, what collection of tangibles and intangibles will win their business, and how to deliver on the value proposed (at a sufficient profit, of course). Here are some tools to help you:
>> Organizational Profile: It is useful to start by describing your organization and its operations in a concise way, so that everyone involved in the turnaround is working from common ground. In my view, the best way to do this is to answer the set of questions that Baldrige Award program applicants use to construct an Organizational Profile. The questions are available for free download . The questions are to be answered in 10 pages or less. Answering them is not easy. However, the answers will tell you a lot about your organization; especially the questions that you can’t answer.
>> Value Chain Analysis: The value chain for the industry in which you compete consists of a series of operations, starting with extracting raw materials from nature, through processing, fabricating and finishing operations at your firm (and, most likely, other firms), through to an end user, and on to final disposition of the product. Value (and cost) is added at each step along the way. The point of value chain analysis is to determine how much value is added at each step, and to determine which steps capture most of the value.
Here are three ideas to keep in mind: The first is that “value” means market value, not cost. The second is that the value added in any given step may be significantly disproportionate to the cost added in that step. The third is that the steps in which value is created may not be those in which it is captured. Value chain analysis provides insight as to which steps to might advantageously be outsourced.
>> Functional Competencies: There are a lot of business processes involved in manufacturing, from product design and engineering to procurement to staffing to equipment maintenance to sales, and so on. Make a list of the business processes (at least those you can think of, especially those that your Organizational Profile suggests are particularly important to your business). As best you can, evaluate your level of competence in each process on your list. Use a scale of one to nine, with five as what you perceive as normal in your industry. If your firm is in turnaround, there are probably not many eights or nines. Those below five are obvious problems. When you look at the numbers, remember that almost everybody has an optimism bias — reality is almost certainly worse than your numbers suggest.
Competencies assessment guides the construction of a Value Proposition by pointing out operational strengths and weaknesses. The Value Proposition must be deliverable. So, to the extent practicable, delivery on the Value Proposition should take advantage of strengths and avoid weaknesses. Weaknesses can always be remediated. However, doing so is often not easy, fast or cheap. Example: firms that lack strong sales forces might choose to sell through distributors, rather than directly to end-users.
>> Business Model Canvas: A business model canvas provides an organizational framework for constructing a business model. A creative commons download is available from Wikipedia .
>> A recent book, The Small Business Turnaround Guide , offers several useful tools.
The third and final part to The Painful Art of the Turnaround will address ways to execute a turnaround plan which, in essence, amounts to implementing a business model.
Thoughtful 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.
 The business model “canvas” is available for download at: http://en.wikipedia.org/wiki/File:Business_Model_Canvas_Poster.pdf
 Steinman, S., The Small Business Turnaround Guide, Morgan James Publishing, New York (2013)