The Evanescence of Strategy

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Every strategy has a sell-by date, and the costs of ignoring that reality are steep.  Recently General Electric took the radical step of terminating CEO and Chairman John Flannery after 13 months on the job (prior to this action GE had had a total of 11 CEOs and 10 Chairmen in its 126-year history) and replacing him with the company’s first outside CEO, Lawrence Culp.  The break with history was certainly necessary, as General Electric had seen its market capitalization decline by $100 billion in the past year, and $500 billion in the past 18 years.

GE Stock Performance
Value Destruction at GE

GE rose to prominence by constructing a set of self-reinforcing advantages that were largely industry agnostic. Under the leadership of Jack Welch the potential cacophony of multiple lines of business became a sublime orchestra, with GE Capital as the engine that powered the whole.  But the global financial crisis changed the outlook for massive financial businesses, and Welch’s successor, Jeff Immelt, spent much of his tenure untangling the byzantine, and formerly massively profitable, conglomerate.

What happened?

Strategy, a high-level plan to achieve one or more goals under conditions of uncertainty, is the answer to a question.  That question: what set of actions, utilizing what resources, will produce the best outcome.  A company’s strategy is its theory of self, its reason for being.  Unfortunately, few organizations, or the people leading them, can adjust to the cognitive dissonance of an ever-changing answer and all that that implies.

Since at least the Jack Welch era General Electric’s strategy was to compete only in sectors in which it could be a dominant player and rely on what was seen as an advantage in leadership training and internal capital allocation to drive efficiencies that would beat the market.  The strategy worked both long and well (the company first had to attain a market capitalization above $500 billion in order to lose that value), but over time challenges that were long apparent took on increasing importance.

  • Pace of Change.  As the pace of change across industries has ramped up, being a major player in disparate industries became a tax on leadership attention, making it impossible to focus or marshal the resources necessary to make sound strategic adjustments.
  • Leadership Training.  It may have been the case once upon a time that GE had an inherent advantage in leadership training, but with the workforce investing heavily in education and training, this one-time advantage has been negated.
  • Capital Allocation.  Jack Welch took the helm at General Electric after a period of flat equity returns, when many U.S. companies were bloated and inefficient.  In 1981, perhaps a case could have been made that GE could more efficiently allocate capital within the company than the capital markets were able to.  Increased competition, new classes of investor (private equity, activist, etc.), and heightened shareholder expectations have changed that state of affairs.

There is a strong case to be made that complexity killed GE, but the wonder is the extreme longevity that an outmoded strategy enjoyed.  Much like the wooly mammoths (or, for a separate example, the dodo) that lived as recently as four thousand years ago on a small island off the cost of Siberia, General Electric had been a living anachronism for years.  With new leadership, GE is making a break from its past and speeding the dissolution of its current, anachronistic form.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

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Distressed Retailers Groping for ViabilityAbraxas Group

Distressed Retailers Groping for Viability

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The challenges that retailers have faced in the past few years have been nearly biblical in size and scope.

• The unstoppable rise of ecommerce, driven by voracious competitor Amazon, has siphoned revenue growth from competitors great and small, and forced every retailer to reassess their vulnerabilities and contingency plans.
• Shifts in consumer tastes have left retailers struggling to reposition store footprints that are increasingly at odds with where and how their customers prefer to shop.
• Business model innovations, particularly among apparel retailers have forced legacy retailers to rethink historic approaches to sourcing that maximized volume procurement over speed and flexibility.
• And for private equity backed retailers, debt burdened capital structures have increasingly come to seem less like savvy aspects of financial engineering than millstones around the necks of companies robbed of the ability to pivot.

Perhaps most challenging: during this industry’s (most recent) hundred-year flood, the ominous specter of an emerging consensus has hung like a pall over executives, investors, vendors, and advisors: bankruptcy had become a death sentence for retail, a roach motel with straightforward entrance but no viable way out (at least as a going concern).

Recently, the clouds have lifted somewhat. Retailers Toys “R” Us, Payless, and Gymboree are each on a path to successfully emerge from a chapter 11 bankruptcy filing with a substantial percentage of their pre-bankruptcy store count intact.

Enlightened self-interest has driven retail stakeholders to reassess their approaches to the challenges inherent in supporting a distressed retailer and better align their tactics with the twin goals of minimizing losses and repositioning struggling retailers for long-term success. As a result, following years of disappointing retail restructurings, stakeholders are more actively supporting a purposeful restructuring process as the best option for a distressed retailer, holding the prospect of considerably higher recoveries than a fire-sale liquidation.

The structural challenges facing retail are likely to persist, but with renewed signs of aligned interests among stakeholders, it now appears likely that struggling retailers can navigate a restructuring without the process devolving into a value-destroying liquidation.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Burger King RevivalAbraxas Group

Burger King Revival

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For years, Burger King was the sick man of the quick service restaurant industry. A perennial laggard to McDonald’s in scale, the company was also widely seen as hamstrung by poor execution, a revolving door of leadership (Joe Nocera noted in 2012 that the company had had 13 chief executives in the prior 25 years), and an unclear strategic vision.

The company’s purchase for $1.5 billion by a private equity consortium of Bain Capital, Goldman Sachs and TPG in 2002 marked a brief resurgence, but when private equity firm 3G acquired the company in 2010 for $3.3 billion, Burger King was still seen as a troubled operator.

What a difference focused ownership can make. Burger King is now setting a grueling pace that its fellow quick service restaurant competitors are being pressured by Wall Street to match.

3G’s playbook has been heavy on the fundamentals, and laser focused on solid execution.

  • By refranchising restaurants, Burger King is challenging industry orthodoxy that a franchisor should operate a large number of its own restaurants. Also, divesting those company owned restaurants has allowed Burger King to offload the capex requirements for those locations onto franchisees, boosting free cash flow.
  • Increased focus has been placed on international expansion, an area where Burger King has long been seen to be badly trailing McDonald’s and others.
  • General and Administrative expenses have been rationalized, lending further operating leverage to the retooled business model.
  • Increased focused has been placed on advertising and marketing.

This approach is simple, but not easy. The focus and clarity of vision that 3G seems to have infused into Burger King is generating excitement on Wall Street, while driving competitors (in particular McDonald’s, Wendy’s, and Yum! Brands) to adopt similar tactics.

The example of Burger King highlights the value creation potential of an outside perspective paired with a simple yet audacious strategic plan. In a market awash in capital, private equity firms will increasingly seek to execute value creation strategies premised not on simple financial engineering but on re-envisioning their portfolio companies, as 3G has done with Burger King.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Interim Managers: Value Creation CatalystsAbraxas Group

Interim Managers: Value Creation Catalysts

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There is a tendency among the leadership ranks of most organizations to espouse the virtues of disruption, but only when that disruption is focused on somebody else.  When incumbent leadership is unable or unwilling to drive necessary change, creditors and other stakeholders are showing an increasing willingness to press for interim managers to supplement the senior management team and drive the change necessary to save what is often a faltering organization.

Recent news regarding two troubled organizations highlights the value interim managers can bring, especially in periods of distress:

  • RadioShack.  The struggling electronics retailer announced recently that CFO John Feray would resign, after only seven months on the job.  Mr. Ferary will be replaced by Holly Etlin of Alixpartners, would will assume the CFO role on an interim basis.  According to Michael Pachter of Wedbush Securities, Ms. Etlin’s appointment is a negative to shareholders, as she will “represent the creditors”.  Mr. Pachter’s comment is actually a strong endorsement: given the fiduciary duty of officers of a company operating in the zone of insolvency, Holly Etlin should be working for the benefit of creditors, not the shareholders who are almost certainly out of the money.
  • Detroit.  In his nearly 18 months as emergency manager of Detroit, Kevyn Orr has presided over the largest municipal bankruptcy in U.S. history ($18 billion) and pushed that contentious process toward what looks to be a remarkably successful resolution.  The Michigan law which allows for emergency managers dictates a term of 18 months, but in light of his successes many in Detroit are arguing for Orr’s continued involvement, if only to provide continuity throughout the bankruptcy and immediate post-bankruptcy period.

Experienced interim managers, such as Ms. Etlin and Mr. Orr, are professional change agents, responsible for both catalyzing and driving the change necessary for organizations to raise their level of performance.  In periods of turmoil, these change agents can be the difference between success or failure for struggling organizations.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Business Model Expiration DatesAbraxas Group

Business Model Expiration Dates

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For most companies, worries about the transience of advantage can seem hopelessly theoretical.  The goal for the majority of companies and their leadership teams is to achieve market dominance, not worry about the staying power of that dominance.  And for those lucky companies currently enjoying their time in the sun, time spent pondering the end of their hard-won market position can seem morbidly pessimistic.

Recent developments suggest that leadership teams from the scrappiest startup to the Fortune 100 would be better served by stepping back and considering the roots of advantage, how it has been attained in their industry/niche, and how market trends will impact the staying power of that advantage.

  • Media company Gannett (GCI) recently attracted the interest of investor Carl Icahn due to the company’s plan to spin-off its low-growth print operations.
  • Ecommerce startup Fab, which rode to a $1 billion valuation on the strength of its flash sales model, has recently stumbled, with multiple rounds of layoffs, as the company struggles to navigate a path to profitability.
  • Consumer Products giant Procter & Gamble (PG), driven by a tectonic shift in consumer shopping behavior, has announced a plan to divest as many as 100 brands.  There is some evidence from the company’s prior efforts at divesting brands that this approach is flawed, and may in fact only delay a more substantive shift in the company’s business model.
  • Energy company Kinder Morgan, which popularized the use of a tax-advantaged structure known as a Master Limited Partnership, recently announced a $70 billion plan to simplify the company, citing investor concerns around complexity and a high cost of capital.
  • Tech company Microsoft (MSFT), announced that it will cut up to 18,000 jobs in 2014 as it seeks to integrate its recent acquisition of Nokia and implement new CEO Satya Nadella’s revamp of both the company’s culture and market positioning.

Each of these companies are coming to terms with the need to fundamentally reimagine their business models as shifting market dynamics render prior competitive advantages moot.

The lesson, if there is one, is that there is no end in the struggle for market dominance, but only a continuous journey.  It is a lesson that all leadership teams should reflect on from time to time.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Failure to Recognize the ObviousAbraxas Group

Failure to Recognize the Obvious

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This article originally appeared in Business Insider

I had a chance to see “Page One” this weekend, the documentary on the troubles facing the New York Times.  Many have opined on the issues facing the New York Times, notably Henry Blodget here at Business Insider, but this documentary illustrated for me how well and truly screwed NYT may be.

A turnaround situation requires, more than anything else, honesty about the nature of the problem and at least a sense of what success looks like.  With revenues down over 24 percent from FY 2008 – LTM, the situation at NYT is clearly a turnaround situation.  And yet, over the course of a very well executed if muddled documentary, I was left with the strong impression that too few of NYT’s own people have a sense of how this ends, other than hoping that each round of layoffs will be the last, or patting themselves on the back for the admittedly impressive breadth and depth of their news coverage.

Death is Not the End

It was interesting in watching “Page One” to hear the vitriolic comments of NYT employees regarding a January 2009 Atlantic article written by Michael Hirschorn.  In the article, Hirschorn outlines the serious financial troubles facing NYT and suggests that the world might soon find the company consigned to the dustbin of history.  Hirschorn’s boldest prediction, that NYT could fail in 2009, has clearly been proven false, but on rereading the piece I am struck by just how much of his analysis remains relevant.

Hirschorn makes a number of fantastic points, notably:

  • “journalistic outlets will discover that the Web allows (okay, forces) them to concentrate on developing expertise in a narrower set of issues and interests, while helping journalists from other places and publications find new audiences.”
  • “over the long run, a world in which journalism is no longer weighed down by the need to fold an omnibus news product into a larger lifestyle-tastic package might turn out to be one in which actual reportage could make the case for why it matters, and why it might even be worth paying for. The best journalists will survive, and eventually thrive.”

Facing Up to the Challenge

As a public company valued at not quite 5.4x LTM EBITDA, the markets are telling NYT that something needs to change.  A quick look at the numbers suggests that the low-hanging fruit has already been consumed (see exhibits on key financial ratios, there is just not much left there) and it is time for serious discussion of the types of unpalatable options that make executives nauseous but have a tendency to save struggling companies.

Say Goodbye to the Past: Man, the 70s were great for the major papers.  NYT had the Pentagon Papers, Washington Post had Watergate, and journalism was on the march.  A lot has changed and it is time to get over it.

You Are Not a Public Trust; You are a Corporate Governance Basket Case: I am not a shareholder in NYT, but to hear Bill Keller, the Executive Editor at the time of Page One’s filming, explain that all options had been considered; including running the company as a nonprofit, made my blood run cold.  This is a publicly traded company, and regardless of the dual-class structure every investor who is not a Sulzberger has a reasonable expectation that management is focusing on turning this ship around, not turning it into a megalithic non-profit dedicated to the idea of its own greatness.

Adopt a Bold Strategy and Hunker Down: This is not a call to buy something.  Rather, divest everything that is non-core, put together a clear-eyed view of where this company will be in five years, and then execute.  The people at NYT are an erudite lot: think Fabian strategy, think the Siege of Constantinople in 626, think Stamford Bridge.

Revolution is Not a Tea Party, and Neither is Business

Sam Zell got kicked around briefly in “Page One”, and I think somewhat unfairly, when a clip was shown of him at a meeting with Tribube employees exhorting them to change the company.  Yes, Tribune became a fabulous mess, but Zell was right: in the end a company must be able to afford its cost structure, or else reduce it.  This basic law of business does not include a special dispensation for newspapers with foreign offices and numerous Pulitzer Prize winners.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

The Change Agents We NeedAbraxas Group

The Change Agents We Need

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The leader of men in warfare can show himself to his followers only through a mask, a mask that he must make for himself, but a mask made in such form as will mark him to men of his time and place as the leader they want and need.

― John Keegan

The middle market has seen considerable change in recent years, and these changes have led to an evolving shift in how capital providers view distressed situations among their portfolio companies. Increasingly, capital providers (including banks, commercial finance companies, subordinated debt lenders, private equity firms and fundless sponsors) are seeking out versatile professionals able to serve as Chief Restructuring Officers in order to manage a distress situation from the inside, and steer a troubled company to an optimal outcome.  In many middle market companies a CRO will often find him/herself to be the lone advisor on-site, and as such these professionals must embrace the role of change agent.

The emerging generation of CROs will need to possess the following traits:

1) Focus on Substance over Form.  Too often distressed situations devolve as a result of an overly restrictive view of form success will take.  An experienced CRO will recognize that a sale of the company, refinancing, or balance sheet restructuring are all likely to generate superior value to a liquidation, and as a result will pursue a flexible strategy to position stakeholders for the highest value outcomes while not excluding the possibility of lower-value (but still viable) solutions.

2) Strong Communication Skills.  A distressed situation is always a tenuous balancing act, with multiple constituencies angling for position.  Skilled CROs understand the need for clear and consistent communication to all stakeholders, both within the company and without.  Inevitably certain constituencies will receive more or less information, but the messaging should be clear and the focus should be on executing toward an identified goal.

3) Comfort with both Strategy and Tactics.  In the middle market the day of the armchair CRO is coming to an end.  Small and midsize companies experiencing distress can no longer afford to have turnaround advisors dictate broad strategy while the company internally struggles with execution issues.  Today’s distressed situations call for advisors able and willing to first develop a viable strategy and then take a central tactical role (i.e. leading the charge) in executing that strategy.

The role of Chief Restructuring Officer is becoming increasingly central in driving distressed situations to a successful conclusion.  However, changes in the capital provider universe as well as an increase in the general tempo of distressed situations has given rise to a need for a more versatile, independent type of CRO than those who previously served the market.  Increasingly stakeholders must look not only for a CRO, but for a CRO with the right mix of skills, in order to steer a distressed company to a successful outcome.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

The Transience of AdvantageAbraxas Group

The Transience of Advantage

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This article also appeared in Business Insider

Round the decay of that colossal wreck, boundless and bare, the lone and level sands stretch far away

– Percy Bysshe Shelly, “Ozymandias”

In recent weeks we have seen two developments that, to us, capture the shifting nature of all competitive advantages.

  • Microsoft (MSFT), which rode to tech dominance in the 1980s and 1990s on the back of its wildly successful Windows operating system and Office suite for productivity software, is working on a comprehensive restructuring to streamline the company.
  • Detroit released a restructuring proposal laying out the dire financial condition of the city, and the concessions creditors will be asked to take.

Microsoft: A Tech Giant Beset By Challenges

Microsoft provides a study in the difficulty all wildly successful companies have in searching for a second act.  After leading the PC era with the dominant operating system and the dominant productivity suite, Microsoft began to lose its footing as the locus of innovation moved to the internet.  In the era of prepackaged software, Microsoft became the unquestioned winner.  Now, however, Microsoft is challenged by a set of competitors whose very business models present a set of asymmetric challenges.

  • Amazon (AMZN): When Jeff Bezos first set out to disrupt book retailers, Microsoft was already a giant.  Now, however, Amazon is a massive and proven disruptor that has successfully moved beyond books to become the default ecommerce option for many shoppers.  Perhaps more worrying to Microsoft, the Amazon Web Services offering has taken off, presenting long-term challenges to the entire IT industry.
  • Apple (AAPL): As an integrated hardware and software company with a robust developer network, Apple is now the company Microsoft hopes to be when it grows up.  This reversal presents an object lesson in the shifting nature of any advantage.
  • Google (GOOG): In many ways Google is the competitive threat that Microsoft was best prepared to address.  The challenge may have been as simple as the way the Google chose to optimize itself around selling ads, while Microsoft always believed in getting paid directly for the software it produced.  Nonetheless, Google’s strong market share in search has given it the financial heft to pursue long-term strategies (the most charitable way to describe the acquisition of still-struggling Motorola).

Detroit: Reduced Horizons and the Challenge of Multiple Stakeholders

Detroit rose to prominence as the hub of perhaps the most exciting industry of the first half of the 20th century.  Sadly, the very concentration that allowed the city area to rise became a milestone around its neck as the auto industry faltered, struggling with a succession of external shocks and self-inflicted wounds.  Today, Detroit is a city incapable of providing an acceptable level of service to its citizens, and only a drastic restructuring will allow the city’s restructuring team, led by emergency manager Kevin Orr, to right the ship.

One of the best things about distressed situations is that as the level of distress rises, there is an increasing openness to solutions that would have been taboo in normal times.  Emergency Manager Kevin Orr has been very consistent in expressing the untenable situation Detroit finds itself in.

A review of Detroit’s restructuring proposal indicates that the fundamentals for Detroit have long been moving in the wrong direction:

  • Population, nearly 1,850,000 in 1950, has since declined 63 percent, to 685,000.
  • The unemployment rate has nearly tripled since 2000, rising to 18.3% from 6.3%.
  • Property tax collections have been hit by a withering combination of declining assessed values (down $1.6 billion from 2008 to 2012) and falling collection rates (68.3% in 2011, down from 76.6% in 2008).
  • A growing operating deficit; excluding debt issuance, the accumulated deficit from FY 2007 to FY 2013 is $700 million.
  • The city’s Fitch credit rating has dropped from A in 2003 to CCC as of June 2012.

Conclusion

Percy Shelly may not have understood just how well the lesson of his poem could be applied to the financial matters.  Success is never guaranteed, and dominance is always little more than a temporary market aberration.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Becoming a Data-Driven OrganizationAbraxas Group

Becoming a Data-Driven Organization

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This article originally appeared in the Loftis Consulting Blog

The unrelenting pace of 21st century commerce has resulted in a flood of data that threatens to overwhelm small businesses.  Every company generates a vast quantity of data on sales, marketing, production, ordering, and every aspect of operations.  Most companies are doing nothing with this data, and the failure to make use of it is expanding what is for many small businesses their biggest competitive disadvantage.

Today it is essential for companies to know themselves better than they ever have before.  Management should identify a limited number of key performance indicators (KPIs) that capture the performance of the company, and focus on rigorously tracking those KPIs.  This data-driven approach can initially seem onerous, but the superior insight it provides makes it well worth any initial inconvenience.

Our clients have reaped significant benefits from efforts to shift their organizations to a data-driven mode.  Those benefits include:

  • Early Warning Capability: Poor financial performance is often not the first but the last sign of a problem.  Regular reporting of KPIs can highlight trouble before it impacts the bottom line.
  • Opportunities: Nothing bolsters the case for growth opportunities like data.  Website traffic and keyword search data is valuable market intelligence and analysis of that information has helped our clients identify unvoiced client needs and allowed them to reap the sales benefits of meeting those needs.
  • Profitability: Analysis of raw sales data has permitted Gross margin analyses by customer, region and salesperson in order to identify unattractive customers, unprofitable regions and under-performing salespeople.

We are in a new world, a world driven by data.  With every aspect of a company’s operations producing data, the insights that can be gleaned from capturing, analyzing and acting on that data are increasingly becoming a valuable asset.  Conversely, failure to make use of the data your company generates will hinder profitability, inhibit your ability to react to changes as quickly as competitors and increase the likelihood that growth opportunities will be missed.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.