Turnaround Recovery Strategies
These are measures a company undertakes to bounce back from consistent performance declines
What are Turnaround Recovery Strategies?
Generally, a turnaround is a period of decline and recovery. As the name suggests, turnaround recovery strategies are measures a company undertakes to bounce back from consistent performance declines.
However, this can be used as a general term to indicate changes people make to take a positive turn after periods of negative performance.
Thus, they are also strategies a company employs to reduce the impact of deteriorating market conditions or a declining economy.
Furthermore, it can include strategies a company might take to return from a poor decision or plans an individual might use to adjust their portfolio during a financial crisis.
Overall, there are many reasons a company might use these strategies. For example, if a company notices something that is not working, it may create a plan of action using one or more.
There are four core strategies that a company can employ:
- Cost efficiency strategies
- Asset retrenchment strategies
- Focusing on core business activities
- Change in leadership
When are Turnaround Recovery Strategies used?
Many reasons a company might have to employ a turnaround recovery strategy. Some factors that indicate a company needs to adopt changes are:
1. Consistent losses
The company is losing money on each product made or turning over more losses than profits when the year ends.
2. Consistent negative cash flows (poor cash flow management)
Cash flow is the movement of money into and out of a company. Essentially, it is the flow of money through the company. A negative cash flow means more money is leaving the business than coming in.
While a negative cash flow is not a threat to the business in the short term, it is not sustainable and has adverse long-term effects. Especially as this means the company would never turn a profit.
3. Low employee retention (high churn rate)
Employee retention is adopting positive practices to keep employees with the organization and reduce turnover, which is when employees leave the company. However, a high employee churn rate indicates many people are going, which can be costly.
4. Decreased market share
Market share is the percentage of an industry or product offering a company controls or makes up in sales. A decreased market share indicates a company controls a smaller portion of the market than before.
This can be due to many reasons, including losing market share to competitors.
5. Decreased customer loyalty
Customer loyalty is when customers continue purchasing products from your company over competitors because of positive relations and experiences with the company. Conversely, a decrease in customer loyalty can be because of uncompetitive products and services.
6. Becoming stagnant
This is when the company experiences little to no growth.
7. Under or over-diversification
Diversification is when companies launch new products or enter new markets to be competitive.
Over-diversification is when the company does too much and risks spreading itself too thin. On the other hand, under-diversification is when a company does not make changes despite the market moving forward.
8. Poor management/leadership
This is when top management or leaders within a company are ineffective and unable to make decisions and give guidance. Having management problems can lead to many operational and efficiency issues.
This is not an exhaustive list, and there may be various reasons a company has to develop retrenchment strategies.
The emergence of these signs signals to management that changes are needed before the problem escalates. Companies may adopt low-risk changes before looking at alternatives if the situation worsens.
Implementing a successful turnaround recovery strategy can be very difficult as it requires a lot of human and working capital. But if the system is successful, it can stabilize the company and bring performance back to the desired target.
Types of Turnaround Recovery Strategies
Some of the types are:
1. Cost efficiency strategies
When faced with consistent negative performance, the first turnaround recovery strategy companies gravitate towards is cost efficiency. This is because they can be implemented quickly, garner results, and require little to no capital/resources.
These are various measures a company takes to generate some positives in the short term as more complex strategies are developed for the future. Often, these strategies work to improve cash flow.
Some cost efficiency strategies include:
- Reducing investment in Research & Development (R&D)
- Stretching accounts payable
- Reducing and collecting accounts receivable
- Cutting pay increases
- Reducing inventory
- Reducing market activity
By financially restructuring, a company can free up some cash and decrease the strains of repaying debt.
However, these measures also have some downsides as they can decrease employee morale leading to higher turnover and taking away from resources needed for a business's core activities.
2. Asset retrenchment strategies
An asset retrenchment strategy is implemented alongside or immediately after trying out cost efficiency strategies if the company is still in a state of decline. This strategy works by identifying areas of a company that is underperforming and appraising those areas.
Once an appraisal is conducted, it is up to the company to decide if the area can be made more efficient. If not, companies eliminate those areas and sell related assets to focus on other sites.
For an asset reduction to be successful and a reasonable turnaround strategy, it needs to generate cash flow from the sale of the assets.
For example, companies can make money on the sale of assets and invest that towards other, more efficient areas in the firm, which can result in positive cash flows.
However, this strategy can be hard to implement as selling certain assets can change the company's trajectory and risk future options.
3. Focus on a company's core activities
This turnover strategy focuses on a company's core business activities. It works by refocusing a company's core activities to areas that have the potential to generate higher profits.
These activities include identifying and entering new markets, developing new products, and targeting new customers. The company then adopts these measures as its primary focus, and it has the effect of creating a clear competitive strategy.
Examples include focusing on a new famous product line, less price-sensitive consumers, or loyal customers.
4. Change of leadership
Another turnaround recovery strategy that companies employ is replacing top management. This could mean the CEO, VPS, or managers.
Often, these new leaders are appointed from outside the company to bring a fresh perspective and new skills to the table and the company.
When the CEO is replaced, the next course of action is usually to change the top management team. The CEO might even bring on people they trust, which can help the turnaround strategy be successful.
A change in leadership signals to stakeholders that the company that change is coming as people believe that CEOs are responsible for the performance of a company, both good and bad.
Implementing Turnaround Recovery Strategies
The implementations are:
1. Defining Problem (looking for root cause)
First and foremost, a company needs to recognize the problem and find the root cause of the decline in performance. Then, it is essential to outline all the problem areas to develop a strong strategy.
Investigating operations can include:
- Analyzing internal capabilities.
- External factors (e.g., market conditions).
- Historical performance.
- Creating a SWOT analysis.
A SWOT analysis looks at a company from an internal (strengths and weaknesses) and external (threats and opportunities) standpoint.
The information and data collected in this stage will help management inform decisions and create an action plan moving forward.
2. Strategizing
At this stage, the company defined the problem and now has to develop a course of action. First, the management works to stabilize the business and determine the best recovery strategy to implement.
Here, a decision is between the different strategies mentioned. This stage can range from a few weeks to months, depending on the complexity of the problem.
3. Implementing
At this stage, the company works toward putting its strategy into action. Therefore, ensuring that employees and management are on board with the plan is essential to ease the implementation process. This stage can take a varied amount of time.
4. Monitoring
This occurs throughout and after the implementation process. Here, the company tracks the impacts of the implemented strategy and ensures that it is going according to plan.
5. Review
At this final stage, the strategy has been fully implemented, and the company is reviewing if its efforts were successful. Success can be different for every company. It can be measured by a specific goal, the desired profit, etc.
If a company feels that the strategy was unsuccessful, it may revisit the plan or start this process again to escalate the actions taken.
Real-World Examples of Turnaround Recovery Strategies
Many companies have used turnaround recovery strategies to bring their business back or return from a poor management decision. Apple is a company that successfully used one of the four recovery strategies, specifically a leadership change.
Apple is a leading technology company headquartered in California, United States, that works on consumer electronics, online services, and software. Apple was started in 1976 by Steve Jobs and Steve Wozniak.
In 1985, Steve Jobs left Apple and pursued other ventures, where he started a new company, NeXT. This was also a technology company, but it focused on servicing businesses and higher education platforms with computer workstations.
Over the next 12 years, Apple was not performing well, and right on the cusp of bankruptcy, the company bought NeXT to get Steve Jobs back on board. In 1997, Steve Jobs returned to Apple and was named interim CEO.
After being brought on, Steve Jobs led Apple to become one of the leading technology companies through innovation. This change in leadership brought about positive change and was a successful recovery strategy for Apple.
Other companies implementing successful turnaround recovery strategies include General Motors (GM), Dell, Harley-Davidson, FedEx, and more.
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