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If a company is in financial crisis, the initial priorities in a turnaround involve dealing with threats to survival. These include crisis stabilisation, leadership reshuffling and stakeholder management, covered in the earlier blogs in this series.
Once these critical aspects are handled, the coin then flips from ‘survive’ to ‘thrive’ and a focus on strategy. Focusing on strategy allows a business to exploit available opportunities and set itself up for success during the crisis and further down the line.
It may seem illogical to focus on strategy when the future of a business is uncertain, but it’s actually during crisis when strategic focus is needed more than ever.
Redefine the core business
Redefining the core business (or businesses) – the primary area or activity the company was founded on – is the most fundamental form of strategic change.
While doing so presents significant risks, it can also offer numerous rewards, including increasing market share, attracting new customers, securing competitive advantage and unlocking valuable new sources of revenue (PWC).
In a crisis situation, the proceeding strategic analysis will have to be quick and dirty. During the process, the long-term goals and objectives change, the management mindset shifts and the business is reimagined.
A diversified multi-industry conglomerate may become an industry-specific focused business; a vertically integrated company may split, or a multi-process organisation could restructure around a single core process.
Downsize or right-size the business
Downsizing a business involves digging into its layers to determine where the real work is done and eliminating the unproductive workers and divisions. This requires a lot of detective work. How many layers are removed depends on the structure you’re looking to achieve.
Right-sizing, on the other hand, involves restructuring a business to make it more efficient, profitable and better able to meet its new objectives. Like downsizing, it may include terminating employees, but right-sizing isn’t just about reducing expenses; it’s about getting the business to its optimal size.
Ultimately, downsizing is a reactive or cost-cutting measure, whereas right-sizing is more proactive and getting the business to the right place for future success.
Strategic divestments
During crisis stabilisation (covered in part 1 of the blog series), divesting involves liquidating current assets or the disposal of surplus plant and machinery to make quick cash. However, at this point in turnaround, divesting is a little different.
Decisions may be made to cut out product lines, customers, or whole areas of the business, which are then liquidated or divested. The focus here is the disposal of significant parts of the company (division or operating subsidiaries).
This type of divestment is about eliminating unrelated, unprofitable or unmanageable operations. It may involve spinning off a portion of the company, selling it to another organisation, or closing it. Its purpose is to enable growth and secure a better competitive position.
Growth via acquisition
Acquisitions are most commonly used to turn around stagnant firms: firms not in a financial crisis but whose financial performance is poor. However, growing by the acquisition of firms in the same or related industries rather than organically means turnaround can be achieved faster.
Realistically, it’s a strategy available to few firms in a crisis situation because they lack the necessary financial resources to purchase. However, once their survival is assured, acquisition may be part of the strategy to achieve sustainable recovery.
Product-market refocusing
Less radical than a complete redefinition of the business, but still involving fundamental strategic change, is a refocusing of the product-market mix. This occurs at the operating-company or business–unit level and involves the firm deciding what mix of products or services it should be selling to what customer segments.
In many cases, businesses lose their focus and have spread themselves too thin by adding products and customers while continuing to compete in all their historical product or market segments. To figure out if this is the case, the Pareto (80:20 Rule) can be applied.
Pareto analysis quickly shows when there is an excessively broad product range and customer base – which consists of loss-making or low-margin business. Once identified, they can be dropped, and efforts refocused on more profitable products and customers.
Outsource processes
More and more Australian businesses are outsourcing non-primary business processes to third parties to reduce costs, improve efficiencies, eliminate growth bottlenecks and enable transformation – a strategy with benefits that also pay off in a turnaround.
During a crisis, the focus should be on profitable processes where the company has a relative advantage in the market. The remainder of the processes, from IT to HR or finance, can then be outsourced to third parties, including overseas providers, who can perform them more effectively.
Next step: Organisational change
Strategy refocus is key to getting back on track. It requires a bold, broad approach and, importantly, new strategy should be documented. Once redefined, changes that align with it can be made, including organisational change, covered in our next blog in the series.
If you have a client facing financial difficulties and needs to turn things around, contact us today to set up a meeting. We’re experts in leadership changes and in other turnaround strategies required to get them back on track.