1 Types, scope Strategies in crisis Turnaround and recoveryStrategic Change Input 7 Types, scope Strategies in crisis Turnaround and recovery
2 Strategies in the crisisSource: PWC, May 2014
3 Turnaround strategy and recoveryA turnaround strategy is formed & applied when the business has deteriorated substantially and would require speedy reaction, usually rapid cost reduction and revenue stabilization or increase Usually it follows two broad phases: Immediate actions to “stop bleeding” Recovery, built after stabilization
4 Causes of decline External Decline in demand Competitive pressureEnd of product life-cycle Technology changes Other (credit crunch, collapse of prices,..) Internal Poor management High cost structure Loose financial control Inadequate marketing Erosion of advantage Problems with big projects Mistaken acquisitions
5 Usual time paths of turnaroundsInaction by existing management Bad news are not communicated to, or recognized by top management Wrong interpretations e.g. transient, attributed to conditions Deterioration of performance, or moment of truth Cash flow crisis, severe liquidity problems Actions to stem “bleeding” Retrenchment, rationalization, back to a healthy core Eliminate non profitable products / activities Then start developing from the sustainable core
6 Turnaround strategies of successful cases (e. gTurnaround strategies of successful cases (e.g. Schoenberg et al, EBR, 25(3), 2013) Content or goals oriented 1. Cost reduction 2. Asset reduction 3. Focus on core activities 4. Building the future Process oriented 5. Management change 6. Change culture
7 1. Cost reduction Urgent to stabilize / improve cash flowsTo “stem bleeding”, fire fighting”, “belt-tightening”, “survival” Most common actions: Manage liquidity: stretch a/c payable, speed a/c receivable, reduce operating expenditure, reduce perks and pay, tighten stock/ inventory, reduce R&D, advertising, … Financial restructuring: debt restructuring, transform debt into equity, seek investors Risks: exacerbating the decline, damaging the core competitive advantage, declining employee morale, staff turnover should be halted after a suitable length of time.
8 2. Asset reduction Usually follows cost cuttingDivest underperforming assets, or valuable assets Sell the “silver” to get cash Explore an “assets light” strategy, e.g. Novotel Difficulties in selling Asset specificity, exit barriers Bad second hand market for assets Risk: Compromise future strategic options Forget the cost of replacing assets when business recovers
9 3. Focus on core business Usually enacted in parallel with asset reduction Eliminate non–profitable product lines / activities Divest, close up operations / products / assets accordingly Free up scarce resources for investment in core Focus on most viable product lines and profitable customers Invest economized resources to value - creating areas Refocus marketing to closer relationships with retained customers (better knowing their needs, innovative offers) Develop a clear competitive advantage based on better understanding of customer needs
10 4. Build the future Embarking on recovery from the healthy coreAdopt a cautious approach in development, keeping control of cash flows Broaden performing product lines Enter new markets, territories Try related diversification, including appropriate acquisitions Risk to revert to the “usual” way of doing business , after a “break” from the crisis
11 5. Top management change Changing CEO?CEO has changed in most turnarounds (75%) in crisis periods… for symbolic and substantive reasons Previous CEO and part of TMT are held responsible for inaction, poor timing, rejecting or having no new strategies, sticking to past solutions, may poor money into past “model” New CEO bring in new ideas, commitment to change New positive psychology, rallying employees to change… Risks: high levels of internal disruption, stress for employees , ambiguity Especially when both CEO and part of TMT is changed
12 6. Change culture Challenge given assumptions, past beliefs SignalingE.g. new leadership, retrenchment decisions, cuts, elimination of perks Management changes New logos, rebranding Adoption of “radical” metaphors
13 Feasibility of recovery depends onSeverity of deterioration, limits of historical “model” of business External conditions, phase of crisis, opportunity - industry attractiveness Internal obstacles including people Shareholder attitudes, support, lobbying Experience with strategic changes / turnarounds
14 Designing a turnaround programTurnaround is different when causes of decline are external (industry based) when the firm is less affected in comparison to competitors cost cutting with continuation of existing model may be enough (e.g. cheaper brands) do not overreact If causes are internal (firm based) a more radical turnaround program may be required When the firm declines more than competitors radical changes are needed Changes may include new CEO and part of TMT External CEO, rather than internal
15 Context specific strategyNot too defensive, overcutting – obsessed with loss minimization Not too offensive, keen to grow fast with risks not over Balanced, the “right” mix Remember: few companies come out of a recession more successful 85% of market leaders get dislodged during a recession
16 Joint value creation Close collaboration with clients, social representatives, other stakeholders can provide new opportunities Innovative ideas For joint value creation (Porter) Using their imagination some have turned a social problem into a business opportunity (Drucker, 1993)
17 Ecological values can lead change“Greening” of products and processes opens up new horizons Usually it is incremental, as the organization passes through stages of awareness and experience A promising strategic change if embodied in the business model Basis of differentiation, e.g. COCOMAT Extended into the external value chain, e.g. standards for suppliers
18 The business case of “greening”