All businesses, at some time of other, even the most successful corporations, suffer either stagnation or decline. This becomes a cause of great anguish amongst investors and in the media. In the UK, Marks and Spencer often sees headlines about how it is in decline.
However, most of these organisations do not die. They either grow at a slower rate or they stop growing. In mature western markets we have got used to a mantra of ‘grow or die’. But this mantra is often a myth. Management adjusts to new circumstances, they accept growth will be slower and more difficult. They move from policies of aggressive growth to defensive positions to maintain existing share and margins.
However, in times of stagnation or decline within an organisation, the market still moves forwards. Managers have to ‘run to stand still’. Stagnation of output does not mean stagnation of inputs. More effort is required to maintain existing market position. Some managers may vegetate rather than apply additional effort.
Two factors affect business turnaround: the areas of the organisation affected and how time critical the turnaround needs to take place.
Most turnarounds affect:
- Organisational profitability and efficiency,
- Reclaiming market share, or
- Poor asset utilisation.
There are two types of organisational turnaround; strategic turnaround and operational turnaround.
There are two types of strategic turnaround:
- new strategies to compete in the same market
- strategies to enter new markets.
The latter of these two options is not for times of crisis.
So what options exist to change strategy within your existing market?
- Move to a larger strategic group within your market. This could be through acquiring competitors, mergers or vertical/horizontal integration.
- Compete more effectively within your existing your existing strategic group by modifying your competitive weaponry or core skills
- Move to a smaller strategic group within your industry, downsize or focus on a niche.
The second way to turnaround a business is to improve your operational effectiveness through:
- Increasing revenues (selling more)
- Decrease costs – through increased efficiency
- Decreasing your asset base – selling stuff
- A balanced combination of all three of the above.
Often the distinction between operational and strategic turnaround becomes blurred. Often changing at an operational level requires new strategies and changing strategy needs new operational tools.
So how do you choose which is the best approach to turnaround for your particular situation:
- Is the business worth saving or is it better to divest and do something else? An example in John Menzies, the Scottish equivalent of WH Smith. In the early 1990s, Menzies decided to get out of retailing. they sold their smaller stores to the McCall newsagent chain and their larger stores to WH Smith. The business of Menzies was then refocused on the distribution of computer peripherals.
- What is the operational health of the organisation. Can you continue to flog a dead horse?
- What is the strategic health of the organisation e.g. are you simply reheating the strategies of the past or are new dynamic strategies appearing.
Most turnaround situations are time critical. Often the survival of business is at stake.
So it is important to check the operational health of your business before looking for strategic changes. Is the business in imminent risk of bankruptcy, how much time do you have before bankruptcy, how big is the task of avoiding bankruptcy, what financial resources do you need in the short-term?
Once you have looked at the financial situation do the same for your market, technological and product positions. You need a full picture of your operational health before you start looking to new strategies.
If your strategy is strong, it could be wasted if your operations are weak.
If your operations are strong but your strategy is weak, you be wasting your efforts.
If both your strategy and operations are weak, You won’t last very long.
I suspect the second of these positions is the case with many SMEs. They have excellent operational ability but they do not think strategically. This lack of strategic thought means they are not prepared for market shock. However, strong operations may give you a grace period within which you can develop new market strategies.
When approaching strategic turnaround you need to assess what magnitude of strategic change is needed. Are you looking to maintain your current market position. Can you easily build defences to retain that position. Or do you need to develop a new market position e.g. moving from market follower to market challenger or from market challenger to market leader?
Some businesses may wish to jump two market positions e.g. from follower to leader. Often such a jump in market position is all but impossible unless the market leader slips or there is a major market or product change. For example for many years Nokia was the market leader for mobile phones but the arrival of the smartphone allowed Samsung and Apple to overtake them.
Often the best way to move market position is to niche hunt; to search for market segments that increase your strategic position. However, for some reason this approach is often ignored.
So if you feel your business needs to be turned around:
- Analyse your situation
- Calculate what you need to do
- Avoid knee jerk reactions
- Examine the conditions across your industry. It your industry too rigid? Is the whole industry in decline? Do shifts in market leadership happen regularly? Are your competitors asleep at the wheel?