This article also appeared in Business Insider
May 26, 2013
Your plan should foresee and provide for a next step in case of success or failure, or partial success. Your dispositions should be such as to allow this exploitation or adaption in the shortest possible time.
– B.H. Liddell Hart, Strategy
My partner and I speak with the owners of dozens of small and mid-sized companies every year, and work very closely with some of them, often during the most challenging periods of their professional lives.
The common theme that we see with those companies struggling with under-performance is the lack of a defined yet versatile strategy to return to success. Too often we find companies that have burdened themselves with some combination of the following:
- An incomplete or erroneous assessment of the original causes of distress. Without an understanding of where a company went wrong, we often see management teams and stakeholders struggle to find an appropriate redemptive course.
- Lack of consideration of the resources of the company in executing a turnaround. An understanding of the limitations imposed by cash flow, credit availability, supplier confidence (or lack thereof) and the threat of staff defections, among other factors, is key to developing an actionable turnaround plan.
- Fixation on easy, “feel good” solutions (land a new customer, sell a building, secure an emergency refinancing or asset sale, etc.). Solutions to difficult problems are often difficult, and even when the right solutions have been identified, a preconception of simplicity can prove to be toxic as struggling companies and their stakeholders face inevitable complications.
Putting Down the Safety Blanket
Change is frightening, and there is a natural tendency in many groups to defer to stars in order to lead organizations out of trouble. Sadly, this tendency is as flawed as it is natural.
Relying on a wealth of data that had not previously been available, this fallacy has been exposed and derided in professional basketball with the moniker “Hero Ball”. Hero Ball, in short, is the unsupported assumption (which inevitably influences strategy and tactics) that the most comforting approach (i.e., putting the ball in the hands of the biggest star) is invariably the approach most likely to ensure success. It is not.
In basketball, stars are sometimes poorly placed to take a winning shot. With companies, the same is often true. The safety blanket of perceived strengths keeps many companies from doing what they need to do as they instead continue to do what is most comfortable. The corollary to this is that some of the most impressive turnarounds of the past 30 years had their roots in a willingness to address and bolster areas of weakness.
- In 1979, the moment faltering automaker Chrysler began to turn the corner was the moment that it forced its lenders to consider the dire consequences of the bankruptcy filing it was working so hard to avoid. Had management failed to acknowledge its precarious situation, the salesmanship of Chairman Lee Iacocca would have been associated with a massive fire sale, rather than one of the preeminent industrial turnarounds in U.S. business history.
- The successful revitalization of Disney in the 1980s and 1990s came on the back of the financial discipline that Michael Eisner and Frank Wells brought to the listing company, which then allowed it to successfully grow and monetize its library of childhood classics.
- The turnaround of IBM in the 1990s relied on exiting lines of business deemed no longer strategic (for example the sale of the printing division, in 1991), a forthright assessment of the growth prospects of mature business lines (especially the mainframes business), and layoffs of 75,000 employees before the development of ancillary services that allowed the company to return to a growth footing took off.
Under-performance, and in more advanced cases outright distress, befalls companies in spite of their strengths. Because of this, it is rarely the case that a sales-oriented company that finds itself struggling will return to health by redoubling efforts in sales, a serial innovator will succeed by bringing to market a transformative product, or that a perpetual acquirer will find a new acquisition to address endemic ills. Distress is the market’s signal that a company has tilted too far out of balance, and while restoring balance is often painful, it is also the high probability route to long-term success.