Bridging the Chasm


Private Equity, once a niche asset class, has over a period of 40+ years navigated a path toward acceptance and respectability. Across a wide range of stakeholders as diverse as institutional investors, investment bankers, lenders, and executives, private equity has successfully managed the leap from misunderstood upstart to respectable guardian of the status quo. Despite this impressive track record of acceptance, the core tenets of private equity remain misunderstood by many business leaders. A chasm has grown between the key tenets of private equity investors and the business leaders they rely on to execute their investment theses, with the inevitable result that value creation opportunities remain unrealized and otherwise promising leaders find themselves unable to thrive in the context of private equity ownership.

Return Drivers

While there are many metrics by which the relative success of an investment can be assessed, from the perspective of business leaders who aspire to succeed in the context of private equity ownership, understanding three elements common to all investments will be sufficient:

  • Investment Amount. The amount of equity capital devoted to an investment over the investment’s lifetime.


  • Investment Return. The amount of capital returned from an investment.


  • Timing. The timing of the above two elements.

From the perspective of a private equity investor, an optimal investment outcome will be one that yields compelling nominal returns on a sizeable equity investment, generated over a reasonable (i.e. within their targeted holding period) time frame.

Put simply, a $20 million profit will look very different through a private equity lens when generated on a $5 vs. a $50 million investment, and it would likewise be viewed very differently if the profit was generated in 1 year or 5.

Same Reality, Different Lens

I have served as an interim executive or financial advisor at several private equity portfolio companies, and my experience has been that many business leaders do not understand the above elements or have not thought through the implications of the private equity model. Often, I found myself deputized into an unofficial “translator” role, conducting an odd version of internal shuttle diplomacy as I sought to render intelligible the actions and expectations of private equity firms to a company leadership team and then communicating the insights and strategies of the leadership team in a manner most readily useful to their private equity partner.

The irony of this experience is that both private equity firms and the leadership teams they work with need each other. Their skills are complementary, and both groups are laser focused on value creation (though left to their own devices they will tend to reach the same destination through different paths).

Private equity firms are generally most comfortable driving value through deal structuring, strong governance, a keen sense of the capital markets, and an analytically rigorous focus on KPIs to assess performance vs. plan. This approach is a strength in terms of lending insight and context, but a weakness in that it can lead to blind spots related to idiosyncratic factors at the portfolio company level.

Business leaders, on the other hand, have a tendency to have a deeper but more narrow focus. The benefit of this approach is that business leaders are very attuned to the strengths of their own company and the opportunities before it. The chief weakness of this approach is that business leaders have a tendency to over-estimate their relative position in the market, and often inadvertently push for changes that would degrade investment returns.


Private Equity has become a fixture in the business landscape, largely because the discipline that it insists upon has been shown to be an incredibly effective driver of value creation. For business leaders seeking to ensure that they are prepared to thrive in the context of private equity ownership, the key is to understand the model and its implications. Those business leaders who align themselves to the private equity model by striving to become increasingly effective partners in value creation will find their collaboration efforts to be highly fruitful. Those who resist, however, will struggle.

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. He is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation. David can be contacted at:

Value Creation in a Downturn


Value creation is a mandate for leadership teams regardless of industry or company size. This mandate is both an economic necessity and a nod to the element of stewardship inherent in leading an organization: good leaders improve the companies they lead and work to ensure that they leave them financially stronger, in a more robust strategic position, and more valuable at the end of their tenure than at the beginning. The challenge for every leader is that the optimal mix and weighting of value creation levers changes over time, sometimes due to idiosyncratic factors, and sometimes due to sudden, exogenous shocks.

The impact of COVID-19 has been a severe negative shock to global growth prospects. Even worse, research suggests that below-trend growth could persist for years. There will of course be exceptions, and some quite notable, but for many companies and in some cases whole industries, the prospects for year-over-year revenue growth in 2020 are decidedly bleak. In some cases, the prospects for 2021, even accounting for the lower bar of comparison, are daunting. For many companies, pursuit of a growth-oriented value creation strategy in this environment is no longer viable.

Growth is a proven engine of value creation, and over the last decade it has been the lever on which leadership teams and capital providers have focused their efforts. But there are many ways to increase the value of a company, and as companies grapple with a radically altered business landscape, now is the time for leadership teams to reacquaint themselves with equally proven, though at times less sexy, value creation drivers.

While there are many value creation drivers, in looking to recast a strategy there are certain characteristics that should be sought out:

  • Actionable. Focus on measures that leadership can influence.
  • Scope of Impact. Focus on measures that will deliver a considerable impact to company performance when optimized.
  • Scalable. Focus on measures that scale.

The fact that COVID-19 acted as the catalyst for the end of the most recent expansionary phase serves to obscure the reality that systemic weaknesses have been steadily building throughout the long expansionary phase that the U.S. and global economy enjoyed from the end of the global financial crisis to February of 2020. Middle market companies that respond to the shifting zeitgeist with a focus on pivoting to value creation drivers other than growth will be setting the stage for compelling value creation in the years to come.

Unit Economics

Generally, companies on a robust growth path will experience a steady decline in gross margins. There is no hard and fast business rule that dictates this trend, but companies and their leadership teams must understand the implications of their own strategy, and a strategy that seeks to maximize revenue growth is a strategy that, at the margin, will tend to be associated with gross margin erosion (absent technology driven network effects other structural idiosyncrasies).

The impact of flat or declining revenue can be offset, in part or in whole, by improving unit economics. When gross margin ([Revenue] – [Cost of Goods Sold] / [Revenue]) is rising, a company enjoys an increasing level of incremental benefit (profit) from each sale. Despite this fundamental benefit, it is organizationally very challenging to focus simultaneously on executing a successful growth strategy and driving persistent gross margin expansion.

Working Capital

Working capital management should appear high on any list of organizational value creation drivers. The impact of optimizing working capital does not appear on the income statement, but savvy leadership teams and capital providers understand that by offering the prospect of increases in both cash flow and capital efficiency, working capital is an attractive value creation driver at all points in the economic cycle.

Net Working Capital, or the net amount of capital used in the normal operations of a business, is calculated as the sum of total Current Assets (excluding cash and equivalents) less the sum of total Current Liabilities. Since any increase in Current Assets represents a use of cash, and any increase in Current Liabilities represents a source of cash, the goal is to reduce Accounts Receivable, Inventory, and Other Current Assets while increasing Accounts Payable and Other Current Liabilities. Working capital improvements cannot be accomplished in a vacuum, as the parties on the other sides of these initiatives are often important stakeholders for a company, but nevertheless, the basic arithmetic remains unchanged.

Analytic Insights

Mastering the implications of their own data remains perhaps the greatest untapped source of competitive advantage available to every company. Data is ubiquitous but as a result of that ubiquity it carries with it a low signal-to-noise ratio. Leadership teams must champion efforts, and ultimately structured processes, to generate insights that will point to opportunities for improvement. Once generated, insights should be regarded as maps to untapped pockets of value creation.


Growth cures many ills, but expansionary phases, whether at the macro or micro level, contain within themselves the seeds of their own dissolution. At the level of individual companies, long growth phases are often associated with sub-optimal levels of profitability, as the mandate to grow consumes the time and attention of leadership teams, and the discipline necessary to improve underlying operational efficiency becomes an early casualty of a company’s narrative of growth as the dominant value creation driver.

In the face of the massive economic disruptions arising from COVID-19, middle market companies and their leadership teams will find any growth oriented strategy severely tested. The end of positive momentum for revenue growth, even over an extended period, does not presage an end to value creation. Rather, in an economic environment that will prove hostile to the growth ambitions of many companies, middle market leadership teams must reset both strategy and operations in order to maximize a different set of actionable value creation drivers.

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:

Middle Market Transformation

Middle Market Transformation

“Change, when it comes, cracks everything open.”

Dorothy Allison, Bastard Out of Carolina

Middle Market in Flux

The successful design and execution of a middle market business transformation poses unique challenges for company leadership. In good times, when the cost of a strategic change initiative can most readily be afforded, and the risk most easily managed, there often seems to be no need, and hence little urgency on the part of company leadership. But in challenging times the cost and associated risks of business transformation can seem to be insurmountable obstacles, and company leadership may feel intense pressure to defer action for another month/quarter/year while performance steadily declines, rather than make the leap.

Leadership in the middle market is challenging in any time, but the middle market leaders of today must become quick studies in the key tenets of business transformation as they seek to make adjustments commensurate with the external changes facing them. Change has come to the business world in 2020, vast in scale and scope and breathtaking in its speed. It remains to be seen how many businesses will be equal to the challenge, but it is a certainty that some businesses will fail.

The most potent enemy of middle market business transformation is not fear, risk aversion, lack of strategic clarity, or the leadership challenge of implementing change. Rather, for middle market companies the most potent enemy of business transformation is the failure to recognize that change has come, and that the only viable strategy for a company is to meet external change with internal change.

While change itself is a constant, 2020 has been a year of profound and wrenching change for organizations everywhere. In the U.S. and elsewhere, the combination of governmental restrictions and a radical shift in the internal risk calculus of consumers has eviscerated the business models of companies across a broad swath of the economy. Sectors such as airlines, hotels, event planners, restaurants, bars, movie theatres, playhouses, retailers, commercial real estate, and more, all now face a radically altered outlook from that of only a few months ago. Companies in each of these sectors, and many others, are now confronted with the grim specter of a new status quo that is inimical to their viability.

A natural and understandable reaction to the massive economic shock that the coronavirus pandemic and protection measures meant to address it have imposed on businesses is to hope for a deus ex machina. Something that will provide deliverance from the life and death struggle that the leadership teams of millions of organizations now find themselves engaged in. If only we could return to the halcyon days of 2019, if only this legislative relief would be extended, or changed, if only…

Hope is not a strategy.

It is a worthwhile thing to hope, and if your conscience leads you there, to pray, for change. But the role of company leadership is to calmly assess the challenges of the moment, objectively weigh the known and unknown risks, and design and implement a plan to win in the current environment.

The world has changed, and across the middle market survival and ultimate market success will go to those companies that recognize our current moment as one crying out for business transformation, and act accordingly.

A New Paradigm

In a recent research report: “Handicapping the Paths for Pandemic Recovery”, Moody’s Analytics notes the following:

  • Global GDP is forecast to see a peak to trough decline of 10%.
  • Unlike prior global downturns, there is not currently any country that appears well-positioned as a catalyst for global recovery.
  • Fiscal support by the U.S. government has already totaled 14% of GDP.
  • Moody’s projects a non-negligible risk of a double-dip recession in the U.S. if fiscal support is withdrawn too early.

If anything, the view from a U.S. middle market perspective is even worse. The “2nd Quarter 2020 Economic Outlook Survey”, released by AICPA, was full of sobering statistics that illustrate just how dire the outlook has become for the leadership teams at middle market companies:

  • 92% of respondents indicated that the pandemic has had a negative impact on their business.
  • 81% of companies have made downward revisions to their financial forecasts.
  • Nearly 50% of companies across all size ranges surveyed (<$10MM, $10MM – $100MM, $100MM – $1B, and >$1B) expect some contraction in their business over the next twelve months.
  • 25% of companies report having an excess of employees (versus 7% in Q1).

Middle Market Change

The greatest danger in the middle market today is that leadership teams will continue to labor under the old assumptions, disregarding mounting evidence that we are living through a paradigm shifting event. The world has changed. Economic activity has experienced a drastic decline, and the path out of that decline is unlikely to be the V-shaped recovery we all pine for. To assume that the strategic landscape for any middle market company will be unchanged by this crisis is naïve.

Absent knowledge of when a vaccine or effective treatment for COVID-19 will be broadly available, we are all nothing more than amateur economists choosing to assume a can opener as a way to keep opining, abiding by an unspoken agreement that we will not grapple head-on with the gaping hole in our own logic.

We simply do not know when this will end.

But the world will look different when it does.

Strategy is your own bespoke plan to win. What is your plan to win the environment as it will be, not as it was?

Competitive Landscape

Formerly struggling giants are collapsing into bankruptcy (JCPenney, Neiman Marcus, J. Crew), and a far larger number of middle market companies will pursue restructuring as an option (whether in or out of court) as well.

Companies are going out of business. Now. Business bankruptcies in the United States rose 48% in April. A broader measure of distress (one that might encompass businesses that shut down but did not file for bankruptcy, those in the process of pursuing bankruptcy-like solutions such as an Assignment for the Benefit of Creditors, as well as those being pressured into an out-of-court restructuring by their lenders) would undoubtedly show an even more profound increase.

According to Moody’s Analytics: “Of the 8 million business establishments operating prior to the crisis in the U.S., it would not be surprising if close to a million do not make it.”

Post pandemic, every company will be faced with an altered, and in some cases radically altered, competitive landscape.

Multinational Business Transformation

A crisis often provides the necessary external catalyst for leadership to acknowledge the need for business transformation. Unfortunately, even in the face of the current crisis many companies, particularly those in the middle market, are thinking too small in terms of the changes they are considering.

The reaction by many of the largest companies in the U.S. to the current crisis is instructive. To a large extent, these companies and their leadership teams have discerned a need to fundamentally rethink key aspects of their business. The business transformation efforts of these companies to date have signaled the breadth of the change that they view as necessary. By attacking their cost structures, bolstering their liquidity positions, reassessing their channels for customer interaction, and reviewing their talent management policies, some of the largest and wealthiest companies in the U.S. have signaled unambiguously that they view the current moment as one that requires business transformation on an ambitious scale.

A sample of companies and their business transformation efforts in the face of the coronavirus pandemic will illustrate the point:

  • Gap. The clothing retailer has been hard-hit by the pandemic. Management has reported that 90% of stores globally were closed starting March 19, leading to a 61% year over year decline in same store sales, partially offset by an aggregate 13% YoY increase in ecommerce sales. In May the company announced a private placement of debt facilities and amendment of the terms to its revolving line of credit. Gap is also in the midst of resetting its cost structure by engaging in contentious negotiations with its landlords.


  • Starbucks. The company that brought coffee culture to the United States is clearly less sanguine about our prospects for a rapid economic recovery, and it is acting accordingly. Leadership is accelerating rollout of the “Starbucks Pickup” store format, originally projected to take five years, and now slated for completion in 18 months. The company closed on a debt financing in May aimed at improving liquidity and has negotiated a relaxation of certain debt covenants with existing lenders. Additionally, Starbucks has contacted landlords for its corporate owned stores and is pursuing aggressive rental concessions.


  • Facebook. CEO Mark Zuckerberg has announced an intention to transition as many of 50% of roles to remote work in the next five to ten years. The challenges of rolling out this policy are considerable, especially as Facebook has stated that it intends to maintain a pay differential by location, which may be less defensible in a remote work environment.

Transformation in the Middle Market

The challenges of the moment are profound, and for middle market companies seeking to navigate a path through the global pandemic the energy involved in imaging a radical shift in business while simultaneously working to ensure viability on a day-to-day basis can seem too much. But such is leadership in the middle market. This is the moment for companies and their leadership teams to take bold action, move forward with aggressive business transformation initiatives and position themselves to not only survive the immediate crisis but also secure for themselves a prosperous future. The host of unknows facing us all is no excuse for inaction. When the history of the pandemic is written, this moment will be recognized as one that offered extreme value creation opportunities for those leaders bold enough to take action.

Middle market companies are not smaller versions of larger companies. Rather, they are sui generis, and should be viewed as such. Nonetheless, no middle market leadership team can afford to regard with complacency the signals from economic forecasts and multinational companies that indicate adjustment to a post COVID-19 world will require business transformation on an epic scale.

Effective business transformation requires not only a plan, but a mindset oriented toward change. Leadership teams in the middle market should look to answer the following questions about their own companies:

  1. What are the key assumptions about our business that we believed to be enduring at the start of 2020?
  2. Have recent events undercut our confidence in any of those assumptions?
  3. Are our current sources of competitive advantage stronger or weaker now than they were at the beginning of the year?
  4. How secure are our finances? Profitability, cash flow, liquidity? If we needed to raise capital quickly, do we have a sense of how much capital would be available, on what terms, and from whom?
  5. Is our company positioned to be an acquirer if a major competitor fails?
  6. How strong are our relationships with key stakeholders? Is there more that we can do to bolster these relationships?

The exercise of answering these questions, with a self-critical lens, will help middle market leadership teams identify areas of weakness to be addressed in a business transformation initiative.


We are in the midst of a period of undeniable economic and social change, and the impact of these changes will reverberate for years to come. Business models will be upended. Competitive dynamics will shift. This is a moment for forward-looking leadership teams to set their companies on an upward trajectory of value creation. But for those who do not act, history offers a bitter lesson: change is inevitable, and failure, no matter how remote the prospect is in our own minds, is always a possibility.

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:


Middle Market Strategy

This is the second in a series of articles focused on understanding and implementing business transformation.  See the first article in the series here.


Strategy, particularly in the middle market, is under attack from many sides.  The pace of disruption in many industries and sub-sectors and the threat of disruption in those corners in which the status quo remains dominant, has consumed the business press, investors and board members.  As a result, executives hear a steady drumbeat suggesting that the future is unknowable and that they must do something.  Such an environment is nothing short of toxic for productive decision-making.

The zeitgeist may be inimical to the measured development and execution of strategy, but the payoff for a well-designed and expertly executed strategy for middle market companies is as robust as ever; and may actually be trending upward.  Leadership teams able to discern, bolster, and exploit areas of competitive advantage while steering away from segments in which a company has no advantage will be able to attract the capital needed to pursue their growth opportunities; while companies that muddle along will find themselves capital constrained.  Executives understand that while we live in an age of abundant capital, that abundance has come with increasingly strict accountability from operationally savvy capital providers who are interested in results, not excuses.  A robust strategy offers leadership, boards of directors, investors, and other stakeholders a framework for filtering out the noise of the moment and remaining focused on the optimal value maximization path for an individual company.

What is Strategy?

Strategy is dying in the middle market due to neglect and underinvestment, which has resulted in a vicious cycle of poor outcomes leading to further neglect and underinvestment, etc.  One of the primary drivers of the current level of underinvestment in strategy across the middle market is a fundamental misunderstanding of what strategy is, can be, and historically has been.  Many of history’s most successful strategists have embraced a view of strategy as a vehicle for offering a clear-eyed path to the realization of a well-defined end goal through the adoption (or development) of a business model that maximizes a company’s idiosyncratic strengths.  Such a strategy must, simultaneously, be developed with an eye toward resource constraints, an embrace of the reality of uncertainty and volatility, and support for the tactical flexibility that will be necessary to address immediate implementation challenges. 

Strategy is dying in the middle market due to neglect and under-investment

Strategy Embodies:

  • A Goal: Plan to achieve an objective outcome or set of outcomes that incorporates resource limitations, known obstacles (competitors, market volatility, etc.) and the likelihood of unknown challenges. 
    • Example: Alfred Sloan organizing General Motors to offer a car for every price point, leading to a century of dominance in the U.S. auto market (“a car for every purse and purpose”).
  • A Business Model: Testable hypothesis of the key drivers of a business and a commitment to foster continued improvement in those drivers. 
    • Example: Jorgen Vig Knudstorp’s turnaround of Lego Group.
  • Self-Awareness: A value creation mindset focused on an understanding of the character of a business. Having the right question while knowing that the answer is likely to change.
    • Example: Satya Nadella repositioning Microsoft for a cloud-centric future.

Today, strategy for too many middle market companies is developed in a time-constrained, under-resourced, closed process featuring too little information pertaining to market factors, competitive strengths and weaknesses, methodology and cadence for testing key assumptions, etc.  This sad state of affairs has come about because strategy has erroneously been reinterpreted into a strategic planning exercise that is invariably poorly understood or entirely unknown outside the c-suite.  Insufficient thought is given to key assumptions (both implicit and explicit) and neither leadership nor investors are well-positioned to properly assess performance as validating or invalidating any element of the plan other than the financial forecast (the review of which is of limited value without reference to key assumptions).  These plans, which often look impressive, quickly fall apart as it becomes apparent that the resulting document is neither strategic, nor a plan. A wish list of objectives followed by a 5-year projection may yield an impressive presentation, but when faced with the challenges of competing and winning in an ever-shifting market landscape, such a plan quickly becomes a millstone around the necks of leadership. 

Strategy is a process, not an endpoint, and embracing that sensibility will consistently yield superior results to those willing to make the necessary investments in time and attention.  A robust strategy will address the ambiguity and volatility inherent in any business endeavor through rigorous and systematic testing.  Variance reporting, standard for the majority of middle market companies, can be repositioned to serve dual roles: reporting on both financial performance while also serving as a running commentary on the soundness of the assumptions underlying organizational strategy.  The process of developing, reporting, testing and refining key assumptions is a pathway to a virtuous cycle of improvement, as leadership gains greater insight into a company’s unique set of capabilities and positional advantages, while also providing insight into how best to address evolving competitive dynamics.  Successful strategy is an iterative process, and today’s flawed assumptions, once tested and refined, offer the prospect of a more robust strategy tomorrow.

While strategy can begin as a shared hypothetical construct, it must ultimately be put in motion.  As a result, the challenges of implementation must be carefully considered in strategy development.  Put simply, strategy is not tactics, and tactics are not strategy.  But either one in the absence of the other will yield disappointing results over the long-term.  Strategy should guide tactics without being overly prescriptive.  When launching a new strategy, leadership should emphasize tactical flexibility as the optimal approach to addressing emerging threats and opportunities within the overall framework of a value maximizing plan.

The key decision makers in a business usually reach their positions through careers marked with far more successes than failures.  This common background can and often does blind leaders to a key facet of strategy: the model is wrong.  Financial forecasts, though robust and always striving for accuracy, are realistically going to be, at best, directionally correct.  Middle market business leaders must keep in mind that a model is simply an analytic framework for thinking about the current and future state of a business.  When viewed through this lens, the key insight can be restated as follows: models are generally wrong, but good models are useful.  Explicit assumptions and regular review of same will help drive an increasingly nuanced view of the business as actual performance is measured and assessed against the forecast (focusing not only on what was wrong, but why). 

Companies seeking to maximize value should impose on themselves the discipline of a rigorous approach to not only developing but iterating their strategy.  The strength and potential advantage to a middle market company inherent in any strategy is that its strategy represents a testable and revisable hypothesis regarding the optimal value maximizing path for that company, and that company alone.  Strategy is a company’s plan to win, and nothing about today’s market dynamics suggests any diminishment in the value of such a plan.

The Challenge of Disruption

There are few phrases more time-worn, and more likely to be proven foolish, than “This Time It’s Different”.  Change is certainly all around us, but in the embrace of change and innovation it is easy to lose sight of the things that endure.  The planes that we fly in and the cars that we drive are based on principles well-known and understood a century ago.  Equity and bond issues to fund new enterprises were familiar in the time of Isaac Newton.  Double-entry bookkeeping is over 500 years old.  Organized research and development efforts are at least as old as Archimedes’ lab, and likely far older.  And the interplay of trade with national ambition surely dates back to a time long before the advent of recorded history.  A disciplined approach to strategy embraces the insight that while we may be surrounded by change, many technological, philosophical, and organizational innovations have endured for a surprisingly long time.  The powerful force of change must be judged against a silent backdrop of an equilibrium consisting of a number of surprisingly enduring innovations. 

Disruption in the popular lexicon is often associated with technology, but more important than new technology, the pairing of technology with business model innovation is the engine that powers industry-shaking disruption.  This pairing is especially challenging to market incumbents as it often forces them to prioritize and accelerate their investment in technological acumen while simultaneously fighting a rearguard action to preserve the viability of their business models.     

Source: London School of Economics

Change is, by its very nature, Janus-faced, with new capabilities and business models on one hand, and dislocation and value destruction on the other.  While the pace is uncertain, change is inevitable; and when change does come, there are warnings.  The tragedy is that few incumbents are able to sift through the noise, overcome their skepticism, and recognize the severity of the threat before significant value destruction becomes inevitable.  An organization with a holistic approach to strategy is far better equipped to identify disruption early, assess risks objectively, and respond appropriately.

Source: Wikimedia

When an organization finds itself in the midst of disruption, it is easy for all stakeholders to lose perspective.  This is due to the fact that disruption represents very different, but equally terrifying, threats to the varying constituencies in a company:

  • Leadership: Challenges ability to achieve performance goals
  • Capital Providers: Threatens to undermine investment thesis, resulting in significantly diminished upside or outright losses
  • Employees: Endangers career prospects as opportunities for advancement shrink
  • Suppliers: Imposes significant opportunity costs through lost growth prospects
Source: McKinsey & Company

Like all boogey-men, disruption is most frightening when it is least examined.  The fear of many executives is that change will fall upon them with no warning, and considerable value will be destroyed before a response is possible.  Upon more careful examination, disruption is revealed to be a serious, though manageable, threat.  Research indicates that attentive and agile incumbents can deliver significant value to investors by identifying and being responsive to disruptive threats early.  Incumbents seeking to initiate preemptive disruption upon themselves may act with urgency, but to be effective, their efforts must be guided by a well-considered strategy.

Source: BCG Henderson Institute

Sound strategy is grounded in an understanding of one’s relative advantages and disadvantages, and as such, any discussion of disruption must be accompanied by an acknowledgment of incumbent advantage.  Technology and business model disruption is threatening to incumbents exactly because it seeks to undercut advantages built and bolstered over time, but those advantages do not give way all at once.  Rather, the example of Walmart illustrates that incumbent advantages, when coupled with prudent preemptive disruption efforts, can extend and expand the market dominance of incumbents. All strategic advantages are temporary, and no business model is perpetually viable.  In a sense, disruption should be regarded as inevitable; but that fact should not give rise to fatalism.  A robust strategy, envisioned by leadership as an evolving understanding of the business that will incorporate new insights while providing a guiding framework to maximize value, is a powerful bulwark against the challenges imposed by disruption.  Though change via disruption is inevitable, it is within the power of a leadership team to determine how an organization will face change, when and in whatever form it comes.

Strategy is a company’s plan to win, and nothing about today’s market dynamics suggests any diminishment in the value of such a plan.


When strategy becomes an item on the agenda for a leadership team, something crucial is lost.  Strategy should be the lifeblood of an organization, a guiding star along an idiosyncratic path of value maximization.  Moreover, strategy is best embodied in a mindset, a view of an organization that embraces the unknowable and the uncontrollable but maintains that what is known is sufficient to divine an optimal path. And while the contours of that path may change, the process by which the path has been chosen, and the tools employed to assess progress and test assumptions, is robust.  When strategy is embraced as a mindset, leaders are empowered to filter out the noise of the moment, capital providers can take comfort that value creation does not rely solely on favorable market conditions, employees understand that their organization has a view of itself and its place in the market, and suppliers and other outside partners understand that they are partnered with an organization focused on being its best self and never a pale imitation of a competitor.  This is a vision of strategy that is enduring, and one that will lead every organization down a bespoke path of optimization and value creation, regardless of the nature of the competition.

Disruption threatens in every market niche, either as a grim reality or as an overdue but fearfully expected visitor.  However, while disruption, i.e. change writ large, may be inevitable, the winners and losers are not.  Disrupters can be right but early, incumbents can accurately discern a disruptive threat and neutralize it, and/or incumbents can reposition themselves in an altered ecosystem.  When viewed through this lens, disruption is not a threat to strategy but a proof of its utility, as only a holistic view of a company’s optimal value maximizing path can permit a reasoned and objective assessment of disruptive threats and inform responses that are appropriate in size and scope.

Strategy is more than strategic planning.  Organizations that invest in a holistic and rigorous approach to strategy are positioning themselves for long-term success and value creation, regardless of threats. 

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:

Stakeholder Support

A business transformation presents an abundance of challenges for any leadership team, regardless of tolerance for conflict.  In the business press, financial issues often take center stage in reporting on a business transformation, and with good reason.  The task of systematically resetting the capital structure and profit potential of an enterprise is an enormous endeavor, and when that task is combined with intense time pressure, it is easy to see how financial concerns naturally take the forefront, particularly in the discussions of outside observers.  The challenge in focusing too narrowly on financial issues in a business transformation is that such a focus obscures a key driver of success: fostering stakeholder support by rebuilding relationships and crafting a narrative of future success that effectively sets the stage for productive collaboration moving forward. 

It is difficult for many leaders to intuit the crucial importance of stakeholder support, and as a result that importance is felt most keenly when it is absent.  By their nature, relations with stakeholders are often marked by long stretches of monotony interspersed with intense periods of rancor.  The time commitment necessary for productive relationship building with multiple stakeholders has none of the glamour of the 11th hour restructuring that saves a company, or the heroic return to profitability following years of losses that the most dramatic business transformations are known for.  And yet, as the work of professor Michael Jensen at Harvard Business School suggests, value maximization is inextricably tied to cultivation of stakeholder support.  Simply put, the headline grabbing value maximization results of a successful business transformation are impossible without stakeholder support. 

The stakeholders in every situation are varied, but the overriding theme in the early stages of a business transformation is their sense of anger and betrayal.  Capital providers feel misled by performance that has fallen short of forecasts and are impatient for a credible pathway to an acceptable level of profitability or a palatable option to cut their losses and exit the investment.  Employees are demoralized by poor performance and frustrated by management’s inability to solve the problems that are overwhelming the company.  Suppliers are furious at a lack of communication as they nervously assess their exposure while hoping for a return to better days.  Each stakeholder group has a good deal to gain from a successful business transformation, but the reality is that, for any transformation effort to truly be successful, each stakeholder group is going to need to grapple with a set of hard truths first.  

Earning stakeholder support in the context of a business transformation is very much a process of guiding stakeholders through the acknowledgement of hard truths and on to a workable framework for a forward-looking relationship with the company.  Over time I have come to see this process as one of the defining crucibles of transformational leadership.


We can safely generalize stakeholder constituencies into the following groups: Capital Providers, Employees, and Suppliers.  Each of these broad constituencies has a unique set of concerns, risk tolerances, and levers at their disposal to help or harm a nascent business transformation.  It is the role of leadership in a business transformation to manage each constituency for the maximum benefit of the enterprise.

With each of these constituencies a few key principles apply:

Rebuilding Trust

Capital Providers: This group, which comprises lenders ranging from banks to private credit funds and shareholders ranging from family owners to private equity firms, is broad but has a common interest in earning an attractive risk-adjusted return on investment.  The challenge with this group is in respecting a party’s risk/return preferences and structuring a formal proposal that will result in a palatable long-run equilibrium.  Banks, almost always at the low end of the risk/return spectrum, will seek a path to reduce their exposure in a business transformation, while private equity firms, at the opposite end of the spectrum, will be more amenable to deploying additional capital at an attractive return.

The hard truth for this stakeholder constituency is the definitive end to prior forecasts and a resetting of the baseline, both short and long-term.  In the short-term, this resetting of the baseline will often involve a violation of lending covenants, a worrisome level of liquidity (cash plus untapped borrowing capacity), and a need on the part of capital providers for intensive monitoring (often weekly, but usually no less than monthly).  In the mid-term, a restructuring is often necessary, which raises the specter of considerable losses to all capital providers, but most often to equity investors and subordinated debt providers.  Given these dynamics, trust is low, all analysis is heavily scrutinized, and it is of the utmost importance that leadership at the company under-promise and over-deliver.

Capital Providers

Employees: As a group, employees are the stakeholder group most open to a plan that will return the company to success, but most resistant to the idea that they (individually) had a role in the company’s troubles.  Executive team members are often defensive and unrealistic in assessing their performance prior to the launch of a formal business transformation initiative and are noteworthy in their frequent attempts to envision a successful business transformation that somehow leaves their personal status quo unchanged.  The hurdle with this constituency is to address layoffs, reassignments and key promotions quickly, and instill a sense that, following a brief but intensive transition period, their efforts will again be the prime determinant of their future success at the company.   

The hard truth for this stakeholder constituency is that the status quo is at an end, permanently.  People will lose their jobs, and for those who remain there will be considerable changes: departments will be reshuffled, executive departures and new promotions will scramble old power dynamics, former sacred cow divisions or projects will be objectively reassessed.  The promise here is that the change is premised on making the company better, the challenge is in recognizing that such an outcome will be secondary to those facing an individual loss in power, status, or control. 

Suppliers: This broad stakeholder group encompasses landlords, key supply chain partners, and miscellaneous service providers large and small.  The key dynamic for this group is the overwhelming desire to maintain and grow their commercial relationship with the company, mediated in part by concern over their current level of financial exposure and a desire for clarity on the path forward. 

The hard truth for this stakeholder constituency is that every business transformation takes time, and so the fix is unlikely to be immediate.  Past due balances are more likely to be worked down over time rather than paid off immediately.  In some cases, this disappointing news must be delivered simultaneously with a request for additional concessions.  The key here is to focus on the plan that is being executed, and appeal to greed (growing with the company post-transformation), over the fear of current levels of financial exposure.

Employees and Suppliers

Time and Attention

The investment in leadership time and attention necessary to rebuild stakeholder support is considerable.  In the short-term, even formerly low-value stakeholder communications should be handled by executive leadership.  Routine interactions such as vendor calls, quarterly financial reviews with capital providers, and employee townhalls should be recast as opportunities to reinforce the message that a business transformation is in progress, get real-time feedback on how the process appears to those outside the c-suite, and provide a forum to address questions and concerns promptly. 

Leaders executing a business transformation must recognize that they swim in a sea of skepticism, and that the way to change that condition is to address the skepticism patiently, clearly, and often.  Results ultimately carry the day in any business transformation initiative, but in the early stages the process can also be envisioned as a series of interlocking public relations campaigns to different stakeholders.

Capital provider communications can most effectively be recast through upgraded report quality and an accelerated reporting cadence.  If updates had been quarterly under normal circumstances, consider a weekly or semi-monthly update call along with appropriate financial reporting.  Look to provide additional metrics, featuring an appropriate mix of leading and lagging indicators, and tell a consistent story.  Once the transformation has gained traction, invite capital providers to an on-site presentation of the long-term strategy.  The goal here is to provide visibility into near-term performance, provide advance warning of any issues, showcase improved performance, and build excitement for the future. 

Employee communications offer the prospect of the rich bounty of energy and goodwill that comes from an energized, enthusiastic workforce.  Unfortunately, the risk of declining morale and skepticism is ever-present.  Communication to this group must represent a mix of styles: townhalls, small group gatherings, email, etc.  Few people are equally disposed to all methods of communication, and leaders in a business transformation should keep that in mind when crafting an approach aimed at winning, and keeping, the hearts and minds of this group.

Vendor communications are a risk area for all but the most iron-willed leaders in a business transformation.  Accusations and threats are to be expected in the early days, as months or years of pent-up frustration are released, ironically on the very leaders with the discipline to hear out angry vendors.  The key with this group is consistency and access; setting a rhythm of weekly updates with critical vendors and providing them with an executive level point of contact goes a long way toward reestablishing a positive working relationship.   

The investment in time and attention necessary to rebuild stakeholder support is considerable.  In the short-term, even formerly routine stakeholder communications should be handled by executive leadership.  While this approach might initially seem to represent a questionable allocation of precious time, when considering the crucial importance of stakeholder support, the cost is low. 


Business transformations strain the political skills of even the most persuasive leaders.  The dynamic challenge of setting expectations, addressing past missteps and rebuilding trust, all while driving cultural, financial, operational, and strategic change, is daunting.  But with stakeholder support even the most challenging business transformation becomes less so, and without it even seemingly minor situations can falter.

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:

Interim Managers: Value Creation Catalysts

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:

Working Capital Management

Working Capital Management often represents the most substantial performance improvement opportunities available to a company.  While optimizing levels of accounts receivable, inventory, and accounts payable will not show improvement on a P&L, the reality is that the cash flow generated from working capital management represents a lower cost source of funding than additional debt or equity, and as such robust working capital management generally conveys a strategic advantage over less disciplined competitors.

1) Size of the Opportunity.  A recent survey of 1,000 major U.S. companies found a potential cumulative cash flow improvement of $1 trillion through working capital management.

2) Early Warning System.  Careful attention to working capital sensitizes companies to subtle changes in their operations (slow-paying customers, falling demand for key items, trouble in the supply chain, etc.), and so gives attentive managers advance notice that something may be wrong.

3) Maximizing Value.  Strong working capital management is a discipline that is hard to develop, and easy to lose.  For those companies that stay focused, though, the increase in enterprise value can be substantial.

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:

Against Corporate “Hero Ball”

This article also appeared in Business Insider

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.

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: