S1E13 Business Turnaround

Business Turn Around is a process that can be applied whether it is an organisation, a division, or a small part of the business.  

In this Episode, Philip Belcher outlines the LSE Consulting Business Turn Around process that he has successfully applied to turn around and build businesses of all sizes.

For more information relating to the podcast and how you can gain access to advisory services to assist you with your business, see www.lseconsulting.net.au

Transcript

CEOT Ep 13 Business Turnaround with Philip Belcher

Welcome to the CEO Thinking podcast. I'm Phillip Belcher, a successful CEO and CEO mentor, advisor, and business consultant. On this podcast, I provide insights to inspire ideas for CEOs, directors, and senior managers to use as they lead their businesses to achieve outstanding results.

I've applied these ideas to start and grow, turnaround, and successfully exit businesses as well as to mentor my clients that have achieved great results. 

I regularly host eminent special guests who share their experiences and ideas to inspire CEO's. If my guests and I can use these ideas successfully, you can use them too.

On CEO thinking I've covered various aspects of business ranging from models that you can use to drive your business and spoken to people who have been highly successful in their businesses where they've given examples that you can leverage.

In this episode, I want to talk about business turnaround and the fundamentals that underpin an effective business turnaround. So why would you need a business ‘Turnaround’? 

As businesses develop, results can deteriorate for various reasons such as, but not limited to:

·       Changed business environments at a macro and industry level.

·       Technological advances outstripping the business’s ability to innovate. 

·       Loss of leadership, vision, and energy.

·       Cultural atrophy in the organisation that evolves from complacency and the belief that the business is unassailable.

·       Loss of key personnel, customers, suppliers, etcetera. 

All of these can impact on the business's ability to achieve the desired results and when these results deteriorate, decisive action is required. This is commonly known as a turnaround. 

The reason for a business is to provide a return to its stakeholders and that's especially the owners. Peter Drucker, the luminary on management, said that the purpose of a business is to create customers. Where a business falls short, or is forecast to fall short, of achieving its immediate-, medium-, and long-term objectives, action is required to turn the business around. A well-researched and defined plan has to be executed to turn the business around and in this episode, I'm going to delve into those areas and outline what's required in the plan and its execution. 

Business turnaround can be at any, or all, of multiple levels in a business. The turnaround may be required in a specific area that could be, for instance, the sales territory, or an individual product or service, etcetera. It may be in a line of business. It could be a territory or a region of the business. It may be a company within a conglomerate of the overall business, or it may be the total company. The turnaround process is essentially the same for any of these areas. 

A business turnaround is essentially a project. I've not covered Project Management on CEO Thinking and I will get an expert to come in and talk to us about project management. But just as an overview, projects run with a life cycle. 

The project life cycle really has four stages. 

1.      There's the initiation where you define what the project is all about. 

2.      There's the planning phase where you put together the plans that you will undertake.

3.      There's the execution phase where you actually implement and make the plans come to fruition. 

4.      And then finally, you close off the project where you deliver and hand over to whoever is then going to operate once the project is complete.

A business turnaround takes into account those four areas; initiation, planning, execution, and closure but they are quite specific, and I've now boiled those down into three key areas, and those three key areas are:

·       First of all, forming a team that will implement the business turnaround. 

·       Next undertaking analysis of the business and the various aspects of it. 

·       Then the planning and finally the execution of the business turnaround plan. 

In turning around businesses there's a wealth of reference material that you can refer to to underpin the actions that you will need to take. There's one that I've referred to over the years that's helped me along the way when I've been turning around the businesses and it's the rules that Jack Walsh used when he was working on turning around GE and it's from a book ‘Control Your Destiny or Somebody Else Will’ that was written by Tichy and Sherman back in 1993. 

And Jack Walsh's 6 rules are:

·       Control your destiny, or somebody else will. 

·       Face reality as it is, not as it was, or as you wish it were. 

·       Be candid with everyone. 

·       Don't manage, lead. 

·       Change before you have to. 

·       And finally, if you don't have a competitive advantage, don't compete. 

There is another body of thought that I've referred to on the way through that's been most helpful and that is the work that was done by Jim Collins. I have referred to this in other episodes from his book ‘Good to Great’ and subsequent books and that model has three key components to it and that is:

·       Disciplined people. 

·       Disciplined thought.

·       And Disciplined actions

By deploying actions in each of those areas, making the organisation move from what you would call inertia and turning it to a well-oiled machine that continues to build itself. 

So it has been decided that the business at whatever level requires a turnaround. Let's now get into the actions that you'll take to turn the business around. And as I stated earlier, the first one that you will need is a team. 

And to have a team, you're going to have to appoint a team leader, a ‘Turnaround leader’. That team leader is going to need to directly report to the highest necessary level inside the organisation. If it's a company turnaround this may mean that this team leader has to report to the board. 

Then that leader needs to assemble a turnaround team, and that team may come from inside the organisation, it will most likely be cross functional, or it may include individuals who come from outside of the organisation. It's very important that this team, and in particular the team leader, have the adequate authority and support and resources. 

The team leader will need to demonstrate what Jim Collins calls level 5 leadership. Again, I refer back to ‘Good to Great’ where Jim Collins identified that key to every organisation that moved from being good and went to great, he was able to identify that these organisations had an individual that demonstrated what he called ‘Level 5 leadership’.

Let me go through what that Level 5 leadership is. A Level 5 leader displays humility and professional will. They set up their successors for greater success. They are modest, self-effacing, and understated, yet they are fanatically driven and have an incurable need to produce sustained results. They display workmanlike diligence, and they are more of a ‘plough horse’ than a ‘show horse’. When it comes to attributing success, they “look out the window”, in other words, they don't attribute it to themselves, they externalise it. And yet when things go badly or poorly, they “look in the mirror” and look at themselves and say “How do I take responsibility and change this situation”? 

Collins found that a third of the modern failures of corporations are due to boards appointing superstar CEOs. So these level 5 leaders are not superstars, as such, as I said earlier, they tend to demonstrate more the plough horse scenario of being hard working and diligent as opposed to the show pony who wants to look good and not necessarily take a lot of responsibility. 

To sum up a Level 5 leader, they demonstrate humility whilst having strong will to achieve. That's a Level 5 leader. 

So, the leader then has to put together the team, and it's important to have a team with the appropriate culture. The team members have to be passionate about achieving the turnaround. And there's another book that I'll refer to by a gentleman by the name of Malcolm Gladwell. And he wrote a book back in 2000 called ‘Tipping Point’, where he investigated what it was that took a particular situation from just existing to going through the tipping point to being something that was completely contagious and significant in the Community. He came up with what he called “The law of the few”, and he attributed the change from a small situation to something massive and achieving the tipping point to three aspects of individuals that created that tipping point and those individuals were: Connectors, Mavens, and Salespeople. And it's important if you're going to turn an organisation around that your team has a strong representation of each of those connectors, mavens, and salespeople. 

So let me just talk about what connectors, mavens and salespeople are.

Connectors are people who know many key influencers inside and outside the organisation. You will know when you talk to individuals that they will be able to say: “Oh yes I was talking to such and such a person in that particular area”, and “Oh yeah, but also I know another individual over here and in talking to both of those, I was able to form an opinion”. 

They know a lot of people and they are able to bring together people so that they can even connect individuals to work with each other. And they don't even need to be involved. 

Mavens, this is a Yiddish term and basically means ‘people who accumulate knowledge’. Now inside a team that's going to do a turnaround you need these mavens who are people who not only accumulate knowledge but are deeply knowledgeable on the subject matter at hand. 

You'll know people who are mavens. You may be at a party, and you'll just be talking to someone and you'll mention that you're interested in photography and quietly the individual you're talking to will say. “Yes, I'm a little bit into photography. I know something about photography” and then in the conversation you have with that person, you will find that no matter how deep you dig into that particular subject, you'll find that they'll say “Oh yes, well, I've used this aperture level “or “I've used this lens” and after a while you begin to find out that whilst they were quietly not saying how much they knew, the more you dig into it, the more they actually know. 

In a business turnaround situation, you need people that have that kind of depth of knowledge in the areas that you have to work in the organisation and perform the turnaround. 

And then finally, the Salespeople. These people are promoters, they are the kind of people who, when they get an idea and they get passionate about something, they want to tell everybody else about it and they want to promote that this is a good thing to do. We all know people like that. They may have just gone out and bought a new vehicle. And they just love that vehicle and they can't stop telling you enough about it. And whilst they don't really push you, if they could convince you to go and get one of them, they would be happier. These are persuasive people that will promote the turnaround. 

So again, having each of those kinds of individual in your team is very important. Having the connectors who can then get in touch with the people inside the organisation and join others to participate. The Mavens who are very knowledgeable about the various areas of business so that you can rely on them to not only have the knowledge and impart it into the team, but also to have the knowledge and help impart it into the Organisation. And then finally, the salespeople who are the promoters that persuade the others in the organisation of what the outcomes of the turnaround are.

The team has to have the appropriate authority. The leader and the team must be authorised to gain access to the necessary information and any other resources that they require in pursuit of the turnaround. They need the support, they've got to have the highest level of support inside the Organisation for management to enable the turnaround. For instance, if it's a company, the turnaround leader and the team will need to have the support of the board. 

And then finally they'll need resources. They'll need internal and external resources that may be required to affect the turnaround. 

The team has been formed and it's now time to move on to the next phase of the turnaround, a very important phase being the analysis. 

This starts off with the situation analysis. This digs into the organisation and looks at various areas. 

·       First of all, the available funds. What's the possible time frame that the team has, to turn this organisation around given the available funds? 

·       Then an analysis of the actual performance of the organisation versus the goals that were set in the initial instance. 

·       And then looking forward at the forecasts and how that will achieve the goals that are set.

Out of this analysis comes the statement of the difference, or what I would call the Delta statement, and that is, what the discrepancy is between the goals that were set and the achievements, and also the forecast and how that will be able to achieve the goals or the discrepancy between what's forecast and what’s required. 

The next step is to review the vision, the mission, the values, the core competence, the structure, and the culture of the organisation. Each of these need to be reviewed in terms of the current situation that the organisation finds itself in. 

Is the vision appropriate? Is the mission statement with each of its components marrying to the circumstances that the organisation finds itself? Are the values appropriate? Are the value statements overt and are they clear to the people in the organisation? Is it clear what the core competence of the organisation is? In other words, has that drifted from what it was when the organisation was set up in the 1st place to what it's exhibiting now? Is the structure appropriate? Does it have a clear structure, or is there a structure that's written down but then in an operational way the structure operates a different way to what's overtly stated? And then what is the culture of the organisation? Is it a high-performance culture? Is it one that is “Let's turn up, get paid and not work too hard”?, etcetera. What is the culture of the organisation? 

Once those analyses are taken, the next thing to do is to look at the macro analysis of the organisation and this is all the things that are outside of it. These are the economic factors that are happening at the time, the political factors, the social factors, the environmental factors, etcetera, things that are outside of the organisation, that generally are out of control of anyone within the business or the Organisation and those factors that will impact the business. 

Now Michael Porter in 1980 wrote a, what you would call a landmark text, and in there he talked about the five forces of an organisation. And I'll go through those, but it's important once you've looked at the macro factors outside of the organisation, then look at the five forces that are impacting the organisation specifically, and we'll go through those. 

So, first of all, there are the forces that an organisation has to contend with that are the typical industry rivalry, and this will look at the competitors to the organisation, what the differences are between what you're offering and what the competitors are offering, etc. 

But then there are the four external forces that are pushing in onto the organisation and its competitive market. 

The first one is the power of the buyers. In the organisation’s transactions, has the bargaining power of the buyers increased? Is there more in the way of buyer volumes? Have they got more information about what's going on? Are they challenging to say “Well, if you don't provide us properly, we will provide whatever the product or service is ourself?”. So, an analysis of the power of the buyers is a key factor in working out next what to do in the turnaround. 

Similarly, you've got to look at the suppliers and work out who are your critical suppliers and is there a disparity between the number of suppliers that you've got, and the critical offerings that you're taking to market. Is there a supplier that's got more power over you than you would want them to have? 

Are there substitute products? This is the next force. So, you may have been happily working along providing products and services, but there may have been an evolution of substitute products or services that will put pressure on you so that it's difficult to compete because these substitute products are actually taking away your purpose for existence. 

And then there's the 5th force, which is the threat of new entrants. So, you may be competing in a marketplace and happily understanding who the competitors are and working out how you compete against those but you may not see a new entrant, and they may be very powerful and may be well resourced, that is going to enter that market and disrupt it for everybody, including your organisation. 

So that five forces analysis is very important so that you can understand in the turnaround where you sit with relation to each of those five forces. A very important part of the analysis once you've done that five forces analysis is to look at the viability of the business in the face of all of that information, and it is important to confront the brutal facts. Is the business viable? 

This business viability will be based on the analysis. Is the business still viable? Now, it's important to avoid what is termed as “marketing myopia”. This was coined by a gentleman by the name of Theodore Levitt in a Harvard Business Review article in 1960, the article was called Marketing. Myopia. That boils down to having a small narrow view of the market that you're playing in, and I'll give an example of it. 

He gives the example of the buggy whip industry. At the turn of the 20th century, people generally had horses and they had carts, and there were a set of suppliers to that industry of horses and carts, and one of them were buggy whip makers. Now these people prided themselves on the quality of their product, their buggy whips. They prided themselves on their ability to market, and they competed with each other with the people who owned the horses and carts. They defined their market as horses and carts. Along came the inventors of the motor vehicle, and over a period of time the motor vehicle industry overtook the horse and cart industry, which meant that even although the buggy whip manufacturers were highly effective with their products and their marketing of buggy whips, they missed the fact that the industry that they were playing in was shrinking rapidly until in the end result the buggy whip industry became a cottage industry rather than a full industry because the horses and carts effectively disappeared.

It's important not to suffer marketing myopia. Take a very broad view of the market that you are servicing and then work out how you're going to compete in that market as it's expanded, as opposed to the very minor market that you may be playing in. 

The question is, can the business adapt and compete in the changing circumstances? Does it have the capacity to endure and turnaround? If the business doesn't have the resources or the ability to successfully compete, unfortunately, a decision will need to be made to exit the business, either through a trade sale or in dire circumstances close the business and sell off the assets. If it comes down to that decision, expert advice with regards to the health of the business must be sought and that will not be talked about any further in this particular area of turnaround. 

Now, if it's decided that the business is viable, a turnaround strategy and execution now must be enacted. 

You've done the analysis and decided that the business is viable and can sustain the turnaround. The next step is to plan and then execute the plan. 

The first step is to develop a business strategy. That entails an internal and external analysis of the business for its strengths, its weaknesses, and the opportunities, and threats. I have covered this in earlier episodes, but do review SWOT analysis and doing internal and external analysis of the business. 

Based on the previous analysis determine a strategy. The strategy that you determine will be the make or break of the turnaround. Based on the previous analysis, you can observe what it was in the business that was working well, and also what it is in the business that's not working well. You can then make your decisions as to what you will focus on and what you will de-focus on. 

I strongly recommend that you revisit strategy and the difference between the various types of strategies that you would deploy. Also looking at whether you will be a highly differentiated business or whether you choose to be a low-cost producer. 

There are ample texts on strategy for business. Start with Michael Porter and then read Jack Trout's work and seek out other works on strategy that you can apply to the business. Then use a balanced scorecard approach to determine the targets and actions in each of the four main areas that the balanced score card undertakes.

That balanced scorecard I have covered that earlier, that's from the authors Kaplan and Norton. And those four aspects are financial, customer, which includes the product price, place positioning, promotion, pricing, packaging, process, which is the marketing process. Systems and processes, which are the operational processes, and then the learning and growth aspects which are structure, leadership, culture, and staff development. 

Once you've got the balanced scorecard plan built or your balanced scorecard strategy built, you then need to allocate time frames and goals for each of the areas that you will implement under the various aspects of the financial customer processes, and people, then you need to execute the strategy. 

Now, to execute the strategy, it's important to inspire the people in the organisation towards the vision of the company with its turnaround implemented. Next, allocate the necessary resources. Build scoreboards to track the progress of the initiatives and the results that are being undertaken for the turnaround. Implement processes to keep the team on track, including information sharing, non-intrusive update meetings, workshops to devise new actions, etc. 

Create a positive culture that encourages contribution and removes negativity. Celebrate the successes along the way and reward achievements. Even although those rewards may be small things like time off or small gifts, etcetera, make sure that you do celebrate the successes and reward the achievements. 

Once the turnaround is business as usual, disband any turnaround specific teams. And if the turnaround is not satisfactorily achieved, return to the analysis phase that I've spoken about earlier and then conduct a revised situation analysis and then go around the loop again to make the turnaround effective. 

So, let's summarise, turnaround. Business turnarounds are possible. It's important to recognise that although many organisations do disband and can't be turned around, there are ample examples of turnarounds that have been highly successful. 

And just to mention a few. Apple is a classic example where Steve Jobs was able to turn that organisation around. I mentioned Jack Welch earlier. He was able to turnaround GE at that time in history. Chrysler had a massive turnaround under a gentleman by the name of Lee Iacocca. Of course, the automotive industry has moved on since then, but Lee Iacocca was able to turn that organisation around back in the 80s and keep it sustainable for some period of time. And on it goes. There are turnarounds that have happened, and you will be able to find them, and no doubt have your own example. 

It is important to know that a big vision for the business is necessary to ensure that the turnaround is successful. Little incremental parts to see if you can just keep the business ticking along will not result in a satisfactory turnaround. The leader, and the people who are supporting the leader, need to have a big vision for the business to make the turnaround successful. 

Strong Level 5 leadership is essential. I mentioned the names of Steve Jobs, Jack Welch, Lee Iacocca, et al. There are individuals who have made turnarounds in companies, and we would not even know their names, and yet Jim Collins in Good to Great, was able to name many of them. They demonstrated Level 5 leadership and created significant turnarounds. 

A project management approach will underpin the success of a turnaround. The key points that I've talked about are:

·       Form the turnaround team and make sure that you've got a Level 5 leader at the head of it. 

·       Then perform the analysis of all of the aspects of the business and face the brutal facts as you uncover them. Once you've uncovered all the brutal facts, then take the third step and that is…

·       Plan and execute your strategy using a balanced scorecard approach. 

Going back to Jim Collins and finishing on this, to create something that goes from good or underperforming to something that goes to great requires a culture of disciplined people, disciplined thought, and disciplined actions. And that is the foundation of turnaround success. 

Thanks for joining me for this episode of the CEO Thinking Podcast. 

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·       Finally, to help you use the ideas to drive your business go to LSEConsulting.net.au for the show notes and other resources you can use. 

I'm Philip Belcher and I'll look forward to talking to you in the next episode.