When a company’s performance, market conditions, or country’s economy are in the declining phase, then businesses employ various strategies to minimize its impact. Turnaround strategy is among one of them. Today, we’ll discuss what is turnaround strategy, its types, and various stages with real-life examples.
What is Turnaround Strategy?
A turnaround strategy is a form of retrenchment strategy when a company realizes that it has made wrong decisions earlier. Now, it needs to undo some of its works before it could impact the company’s profitability and income. It’s a strategy where you retreat and back from the earlier made wrong decision, and transform the company’s position from loss to profitability.
Now, the question is when the company should follow the turnaround strategy. It becomes necessary for the company to follow the turnaround strategy because of the changes in the external environment. Like government policies, the demand of the product in the market, threat of the substitute product, change in the preferences of customers, and the external environment.
When the company is going through the loss period, then it needs to follow the turnaround strategy. As they say “health is wealth,” which means that you can only make a profit when your business is healthy. However, turnaround is a very good measure in order to deal with the issues of industrial sickness.
Turnaround strategy is a process of restructuring and transforming the company from loss to profitability. It allows the company to stabilize its performance by getting back the industrial units to their original units. Now, the success of the strategy relies on the commitment and dedication of the top management.
When we talk about the survival of declining businesses and companies, turnaround strategy is very important for them. It brings positive changes to the company’s performance in order to get desired results. However, implementing a successful turnaround strategy is a complicated process that demands a strong business core and a sound management team.
Some of the other elements of the turnaround strategy are trust, capital, management, leadership, and the support of shareholders and employees.
Why do companies Use Turnaround Strategy?
Why businesses and companies should follow the turnaround strategy. Some of the reasons are as follows;
- Return on capital employed (ROCE) start declining
- There’s a change in the structure of competition and industry
- Performance measures start decreasing
- Profit and revenue stream is falling
- The company’s losses and costs are unbearable
- Net margin and gross profit is low
- Market share is low
Types of Turnaround Strategies
Some of the main types of turnaround strategies are as follows;
Cost Efficiency Strategies
Companies implement a turnaround strategy as a recovery protocol in order to achieve cost efficiency. The cost-efficiency requires a wide range of activities for a company to take in order to gain a quick win. Before developing a complex strategy, the measures would improve the company’s financial position and stabilize its cash flow.
Companies often apply a cost-efficiency strategy as a first step in the turnaround recovery strategy. Because it requires little capital, easy to implement, immediate effects, and companies could easily achieve cost efficiency.
It comprises of lower the research and development cost and marketing activities, investing in diversification, cutting inventory, decreasing account receivable and pay increments, and increasing account payables.
When you cut various costs, then the company is vulnerable to many risks like low morale and employee motivation level, high turnover rate, declining working conditions, and low job satisfaction level. Cost efficiency could badly impact a company’s resources that are vital to its growth and success.
Asset Retrenchment Strategies
If a company is facing an issue of low performance, then it should follow the asset retrenchment strategy after the cost-efficiency strategy. It’s such a strategy that allows companies to analyze their non-performing areas and remove them to become efficient.
The utility of asset retrenchment and turnaround strategy is when the company has a better cash flow system. For instance, a company earns cash by disposing of obsolete assets, and it allows the company to invest in new ventures with the same cash.
Focus on Your Business core Activities
The turnaround strategy allows you to focus on the core activities of your business. By concentrating on the main activities mean adopting new measures, recognizing the products that could potentially increase the cash flow, and identify the customer market.
Change of Leadership
Companies sometimes change their management and leadership as a turnaround strategy. They usually hire CEOs from outside the company in order to inject new and fresh blood into the company to change the way of its thinking and operations.
CEO has the complete responsibility and authority of company’s performance on its shoulder, when you hire someone from outside, then it sends a signal of change. The new leadership and management mean change in the company’s strategies.
Stages of Turnaround Management
Assessing the viability means conducting a detailed investigation of your business and its circumstances for 2 to 4 weeks. The analysis gathers plenty of information like;
- A swot analysis offers clarity
- Analyzing the viability of the current business
- Studying whether business issues are controllable or not
- Potential solutions
- The main cause of it
- Capabilities of the management
- Debtors and stakeholders
- Historical financial records like costing system, cash flow, balance sheet, P&L
The summary of the abovementioned elements offers decision-makers to consider priorities and risk factors. The board of directors has to make a decision based on the information.
Stabilizing & Developing Strategy
After recognizing the priorities and risks of your business, next, you have to develop a recovery strategy and stabilize the business position. The timeframe usually depends on the complexity of the business circumstances ranging from few weeks to 3 months. However, some of the main elements in the second stage are as follows;
- Crisis Stabilization: it means taking control of your finances by decreasing cost, cash management, and short term finances
- Improved Leadership: because of unstable management and lack of skill, the company needs a new management team
- The focus of Stakeholder: engaging with the stakeholders relies on the government officers, industry association, customers, employees, creditors, financiers, and etc.
- Strategic Focus: redefining the core activities of your business, divestment, M&A, and restructuring
- Organizational change: improving employees’ morale, communication, etc.
- Improving the Process: improving the company’s operations by addressing the main risky issues
- Restructuring Finances: it requires cash monitoring, tighter control, equity, securing short-term funds, selling not utilized assets, and generating cash flow.
Implementing & Monitoring
After stage two, the focus here is on the implementation and monitoring strategy, next you have to bring the board of directors and owners on one page in order to implement the strategy. It would make the management focus on its core skills, and it takes approximately 3 to 12 months.
Example of Turnaround Strategy
Dell declared that it would implement the cost-cutting strategy in 2006, and the company did by removing the middlemen and directly selling its products to the customers. The company had faced huge losses. In 2007, the company followed the turnaround strategy and started selling its computers through retailers and middlemen, and became the world’s largest computer retail brand.
Evernote is a software application that allows users to create lists, organize, and make notes. Stepan Pachikov laid the foundation of the company in 2008, and he decided to shut down the company after one year. Just before closing down, investors pledged to invest 500,000 dollars in the company in order to give it a chance. It turned out a success and the company attracted 20 million users.
The CEO of Apple, Steve Jobs left the company in 1985 due to the declining company position. The tech company kept on declining for the next 12 years and reached the level of bankruptcy. However, Steve Jobs rejoined the company in 1997 with a new strategy and enthusiasm, and it became the world’s leading Tech Company later.
Frederick Smith established FedEx in 1971 with 4 million dollars of his inheritance money, and he borrowed loans of 80 million dollars. He started the company based on his Yale University idea, and the company went under huge debt and close to bankruptcy, in the initial two years in business.
When funds were draining out, and he had 5000 dollars left in his pocket. He decided to gamble the last 5K in Las Vegas on the verge of bankruptcy. He went there and gambled 5K and converted it into 27,000 dollars. However, it allowed to save the company and raised 11 million dollars. FedEx delivered its first profit of 3.6 million dollars in 1976.
The revenue of FedEx reached 1 billion dollars seven years later. It was the first US Company to touch the one billion figure within its decade of a startup. The company has been growing and thriving since then.