Business Turnaround Strategies: A Lifeline for Struggling Businesses (Part 1)
What is a business turnaround?
In business, not every company sails smoothly. Economic downturns, mismanagement, changing market dynamics, changes in leadership and or a combination of unforeseen circumstances can threaten the very survival of a company. A business turnaround in these challenging situations acts as a lifeline. It is a series of well thought actions that a company takes to revitalize itself and improve its financial health after the loss period.
When the company’s performance, market conditions, or country’s economy are in the declining phase, then businesses employ various strategies to minimize the impact of which a turnaround strategy is among one of such strategies. It is a strategy where companies retreat and apply a process of restructuring to transform the company’s position from a loss to profitability and allows the company to stabilize its performance. The success of the strategy applied, relies on the commitment and dedication of the top management of which the implementing for a successful turnaround strategy is a complicated process that demands strong business core and a sound leadership team.
Understanding Turnaround Recovery Strategies
From time-to-time companies could suffer a decline in their annual reported earnings due to several factors which could cause a downturn in business for instance, high costs, weak internal financial controls, unforeseen demand shifts, poor and or over-management as well as new entrants into the market. Other danger signs include, but are not limited to, persistent negative cash flows, declining market share, negative profits, deterioration in physical activities, uncompetitive or mature products, as well as high staff turnover and low employee morale.
The period of decline and recovery in financial performance is called the turnaround and is measured based on net income and the company’s cash flow position. Companies identify management actions and decisions, as well as other factors during this time, that will impact profit before devising appropriate actions which could consist of various strategic elements.
The presence of warning signs of a financial downturn prompts executives to consider turnaround recovery strategies before the crisis escalates, by focussing on various change processes for performance improvement, which range from first adopting low-risk measures to more radical measures when the downturn and risk worsens.
Before determining the right turnaround strategy, it’s crucial to pinpoint the root causes of the downturn and understanding the core issues, whether it is a result of outdated technology, external global market conditions or any one of the other danger signs, for companies to address problems at their source.
Types of Turnaround Recovery Strategies
Cost efficiency strategies
Most companies first implement turnaround recovery strategies in the pursuit of cost efficiencies, which could entail a varied range of actions aimed at quick wins for the company, as it is easy to implement, does not require huge capital and the effects are almost immediate. These measures could improve a company’s cash flow or stabilize its finances before considering more complex strategies.
Cost-oriented turnaround strategies for considering could be reducing accounts receivable balances and improve the collection period, reduce inventory and implement a just-in-time mythology, delay or eliminate pay increases for the next year or more, eliminate or reduce research and development (R&D), stretching accounts payable and reducing advertising and marketing activities. Careful considerations are to be given to these cost cutting strategies as it could damage the resources necessary to maintain a company’s core focus and lead to a high staff turnover due to a low staff morale.
Asset retrenchment strategies
After a cost-efficiency drive, the next step for performance declining companies is usually to consider selling or retrenching assets, due to the ability to generate cash flow. This strategy allows companies to evaluate underperforming areas to eliminate them or make them more efficient and could consider disposing of its old assets to generate cash for operations and or to invest in new assets.
Focus on a company’s core activities
Another strategy companies could resort to is to focus on their core activities as a turnaround recovery strategy. Under the increased focus, companies identify markets, customers, and products that can potentially generate high profits, or they could focus on loyal customers or less price sensitive customer segments or product lines, by developing a clear competitive focus strategy and adopt these measures as the focus of the companies’ activities.
Change of leadership
Companies often replace incumbent CEOs as a turnaround recovery strategy, as during turnaround situations, appointing new chief executives from outside the company is a way of injecting a new way of thinking into the top management. The replacement of the CEO then serves as a signal of change, which could be accompanied be a complete overhaul of the entire top management team to avoid repetition of the company’s current negative position, with the expectation that the new senior management team will enable the company to focus on planning and implementing new strategies to lead the turnaround change.
A successful business turnaround strategy is a delicate balance between swift action and thoughtful planning. Never assume that there is only one right answer or strategy to a particular problem. Each business has its own unique set of problems that will have to be dealt with individually, however it takes resilience, agility, and a deep commitment from the entire organization and by following structured steps, transparent communication, and making and implementing sound decisions, businesses can recover and chart towards sustainable growth.