Description
Turnaround professionals know well that the earlier a company reacts to (the risk of) downfall, the better its future chances are.
Study on Strategic Risk Management
PART 1
Study on Strategic Risk Management
PART 1
CONTENTS
Preface
Introduction
Project de?nition and approach
Following the strategy process
Finding Three Trojan Horses
Identifying the next generation of Trojan Horses
Appendices:
- Stichting The Turnaround Finance Group
- Roland Berger Strategy Consultants
- De?nitions
- Sources
- Authors and contact information
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TROJAN HORSES OF DECLINE
PAGE 5
Equo ne credite, Teucri.
Virgil (70-19BC) – Aeneid, book II
PREFACE
Turnaround professionals know well that the earlier a company reacts to (the
risk of) downfall, the better its future chances are. Not surprisingly, this
widespread understanding was stated in the preface of “Turnaround”, the
?rst booklet of Stichting The Turnaround Finance Group (TFG), issued in
2005. Turnaround professionals also know, however, that early detection of
possible downfalls is complex, and not easily integrated into daily practices.
In light of this, we are very proud to present our second booklet, which
speaks directly to the process of early detection. This booklet proposes new
and useful ideas and/or instruments for the early detection of collapses as
well as ways to recapture and preserve corporate viability in the long run.
Through this, we hope to make a positive contribution to the debate on the
root causes of company downfalls.
This report is the result of an in-depth case study of 13 major Dutch
restructurings and bankruptcies, and was made possible thanks to the
close involvement of various participants of TFG. As such, this is the ?rst
major cooperation - with hopefully many more to follow - in research by
participants of TFG. We are indebted to all involved who offered their
voluntary assistance in the realization of this work, and especially to Rene
Seyger of Roland Berger Strategy Consultants for taking the initiative and
driving this study.
With this research project and booklet, TFG contributes to its mission to:
enhance the insight in turnaround processes and their success factors;
increase the accessibility of turnaround knowledge and professionals for
companies in need;
improve the acceptance and image of the profession;
and serve as a platform for professional institutions active in the
turnaround business, ranging from consultancy, interim management,
insolvency law, investing, specialist ?nancing and risk management.
Though we trust that we have found some interesting and relevant solutions
in the ongoing discussion on preventing corporate decline, we do not
pretend to have found “the one and only truth”. This research is - in other
words - a dynamic process. The booklet is therefore referred to as “Part
1”, as we aim to take the study to a further step, “Part 2”, involving even
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TROJAN HORSES OF DECLINE
more participants of TFG in order to deepen the insight and widen the base
of companies to be researched and analyzed. We cordially invite you to
participate in this ongoing process. After all, the key to successful research
and, more generally, to ?ourishing entrepreneurship, is being critical: asking
the right questions aimed at the right people, and of course - as the Trojans
tragically forgot - being open enough to see into the true nature of things.
Do not trust the Horse, Trojans!
Geert Jan Leest
Chairman
Stichting The Turnaround Finance Group
TROJAN HORSES OF DECLINE
PAGE 7
INTRODUCTION
In 2005, Roland Berger Strategy Consultants conducted an extensive study
on the success factors for restructuring projects in Europe. The analysis
included 2575 companies throughout Europe that have carried out a
restructuring project in the past three years.
It was found that liquidity crises often are preceded by earnings crises,
which in turn are preceded by strategic crises. Responding to the strategic
crisis addresses the root causes best and leaves management the most
room to maneuver. An important ?nding of this study, however, was that
companies respond slowly to crises—only 29% of companies reviewed
responded as soon as strategic problems arose. The majority, 71%, did not
respond until the strategic crisis had turned into an earnings or liquidity
crisis, increasing the urgency for action. Simultaneously, room for action
became more and more limited due to lack of time, cash, and credit
(as in ?nancing and trust), deteriorating the chances for a successful
turnaround. The following ?gure summarizes these ?ndings alongside their
consequences.
The period during which improvement and “turning around” can be
achieved is too often passed by. In fact, this study also found that on
average more than 16 months are lost due to failed identi?cation systems
and ignorance of early warning signs of a looming crisis. When strategic
crises can be identi?ed and when they are being adequately managed,
signi?cant value can be retained and earnings and liquidity crises can be
prevented.
Cause
Effect
S
C
O
P
E
F
O
R
A
C
T
I
O
N
N
E
E
D
F
O
R
A
C
T
I
O
N
Small
Large Small
Large
INSOLVENCY
Urgency
Time
Urgent
restructuring
cases
54%
Consequences
• The later the crisis,
need for action, and
the start of the
restructuring process
are identi?ed, the
higher pressure on
the company becomes
• Room for action becomes
increasingly limited
STRATEGIC
CRISIS
STRATEGIC
CRISIS
EARNINGS
CRISIS
EARNINGS
CRISIS
LIQUIDITY
CRISIS
LIQUIDITY
CRISIS
29%
17%
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TROJAN HORSES OF DECLINE
The next chart unequivocally illustrates the lost time for adequate action in
order to revitalize an ailing business.
The Roland Berger results correspond with key ?ndings of research
conducted by Leiden University on informal reorganization routes in the
Netherlands (Adriaanse, 2005). It was found that the most important
elements for unsuccessful restructurings lie in a passive attitude of
company management and its shareholders, as well as insuf?cient and late
action following the appearance of early warning signs. A downward spiral
then ensues.
In summary, research shows that signi?cant enterprise value can be retained
if strategic risks and their root causes are identi?ed at an early stage and/
or when restructuring is started far earlier. The research presented here,
therefore, provides insight into the root causes of strategic crises. This
insight should be bene?cial for all key decision makers, like boards of
management, ?nanciers, and supervisory board members. The following
graph summarizes the observations explained so far.
At the beginning of 2006, the Amsterdam of?ce of Roland Berger Strategy
Consultants, Stichting The Turnaround Finance Group and Leiden University
teamed up to further investigate the ?ndings of the Roland Berger
Restructuring Study. A plan was made to conduct detailed research into
recent restructuring projects and/or bankruptcies of large companies based
in the Netherlands. In order to ?nd answers to our questions the following
problem de?nition was chosen for our research project:
11%
21%
33%
57%
90%
100%
5+ years 4 years 3 years 2 years 1 years Start of
restructuring
Number of years between potential identi?cation
... until
restructuring
Source: Roland Berger Strategy Consultants
restructuring survey 2005
Ø 16 months
Causes
• Failed identi?cation
systems
• Early warning signs
of crisis are ignored (still
hoping for improvement)
• When there is a threat
of bankruptcy,
stakeholders resist
(e.g. through restricting
room for action)
TROJAN HORSES OF DECLINE
PAGE 9
Which root causes of decline are discovered in large Dutch companies that
have successfully or unsuccessfully battled a strategic, earnings and/or
liquidity crisis in recent history? Which lessons can be drawn – based on the
empirical ?ndings – with regard to recognizing and encountering strategic
risks at an early stage?
In other words, the research largely focused on increasing the understanding
of complexity management faces in designing a proper reaction to internal
and external sources of strategic risk and the problem that time is too often
wasted in responding to mounting threats.
Late detection:
focus on short
term ?nancial side
Early detection:
focus on long term
strategic side
(root causes)
Bene?t for key decision makers: Boards of Management,
Financiers and Supervisory Boards
• No room to maneuver
• Strong pressure on
company
• Main addresses are
the ?nancing banks
• Restructuring is very
expensive
• Potential negative
impact on employees
• Potential negative
in?uence on image
• More room to
maneuver and more
potential solutions
• Focus on the long
term strategic side of
the company
(sustainable
improvement)
• All stakeholders of the
company are equally
involved
Consequences Consequences
• Loss of value
TROJAN HORSES OF DECLINE
PAGE 11
PROJECT DEFINITION AND APPROACH
In order to answer the research questions, it was decided to conduct a brief
literature search on causes of corporate decline and to do a (more extensive)
case study research as this latter means of research offers an opportunity
par excellence to gain insight into common practice - although this kind
of research does not enable statistical generalizations (that is to say, all
companies in ?nancial distress). Due to this restriction we did not - and
still do not - pretend to have come up with a “panacea” for detecting all
increased strategic risks. We were aiming to provide relevant insights into
events that have lead to downfall and particularly into the lessons that can
be learned as a whole.
Fifteen companies were selected; this number was based on the (limited)
time-scope of the project and on the fact that in a case study approach
reasonable validity can in principle be attributed to the syntheses of factual
?ndings with that number. A company quali?ed for the study if: (a) the
company had experienced a major fall in operating (sales) and/or net income
in a relatively short period of time; (b) the company (or a major part of it)
was experiencing losses in a certain period; and/or (c) the company had
ended up in a state of insolvency (with or without bankruptcy). Then it was
found out if (additional) relevant and suf?cient public information was
available. The study material consisted largely of public annual reports,
public reports by trustees, (public) study reports, ?nancial newspaper
articles, and (other) internet sources. Where possible in the time frame,
case ?nding were checked with (former) advisors, investors, (interim)
managers, ?nanciers, administrators or trustees. Due to the limitations set
forth, ultimately 13 companies remained part of the selection. The following
research structure was chosen and each case was described using the same
format:
General description of company and its activities
Recent history of the business activities
Development in the operating income and solvency ratio
Strategic choices (focus) of management
Signaled causes of the collapse
Internal and external analysis (signaled developments outside yet
in?uencing the company)
Identi?cation root causes of the downfall
Synthesis of results (iterative)
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TROJAN HORSES OF DECLINE
Although all companies were reviewed using the above structure, it was
decided to share general conclusions gathered from them as a whole, not
the individual cases. Where possible the cases are illustrated through
anonymous examples. Among the 13 companies were:
NAME BUSINESS ACTIVITIES
Atag Kitchen design and manufacturing
Daf Truck manufacturer
Fokker Airplane manufacturer
Getronics Service provider in ICT
Geveke Trading and distribution technical products and machinery
Hagemeyer Electro technical wholesaler
Numico
Research, development and sales baby food and clinical
nutrition
Oilily Clothing design and manufacturing
Steps Fashion retailer women’s wear
Vilenzo Design, marketing and sales fashion brands
The names of three other companies involved cannot be disclosed at this
stage for con?dentiality reasons. Note that some of the bankrupt companies
were (partly) restarted following collapse under more or less the same name.
TROJAN HORSES OF DECLINE
PAGE 13
FOLLOWING THE STRATEGY PROCESS
Our research began by ?nding out if theoretical models/literature could
provide us with more insight into the process of downfall and also if it could
help us in detecting root causes. We discovered that traditional research
basically neglects the dynamics of a downfall situation as well as the
preceding processes.
In literature, strategic risk management is regarded as a key to managing
the so-called risks of decline. For instance, in a study addressing “strategic
risks that can disrupt or even destroy your business” Slywotzky & Drzik
(2005) thoroughly investigate modern risk management. In the article,
seven types of strategic risk are identi?ed: Industry, Technology, Brand,
Competitor, Customer, Project, and Stagnation. Although highly instructive
on an academic level, it left us with the question of how to recognize these
risks in practice and - as importantly - when strategic risks do increase
how to design a proper reaction on a company level in order to effectively
manage these risks and prevent bankruptcy.
Investigating speci?c literature on root causes of decline also did not
address the complexity and dynamism the research team members
experience in daily operations. Lists of causes (categories) were common,
such as: Weak management, Business economical reasons, Bankruptcy of
holding company, Arguments on board level, Fraud, Financing problems,
Lack of experience, expertise and/or education, Personal circumstances,
Competition, Out-of-date operational management, Market circumstances,
Level of costs too high, Over-invested, Under-invested, Over-?nanced, and
Killer contracts.
1
These lists, however, only identify single reasons as root
1. See for instance CBS 2005 and Adriaanse 2005 for a detailed overview
ROOT
CAUSES?
Incompetent management
Killer contracts
"Under-
invested"
"Over-invested"
Level of costs too high
Market circumstances
Out-of-date operational
management
Competition
Personal circumstances
Lack of experience,
expertise and/or education
Fraud
Financing
problems
Arguments on board level
Bankruptcy holding
company
Business economical
reasons
"Over-?nanced"
Weak management
PAGE 14
TROJAN HORSES OF DECLINE
causes and, additionally, no cross-analyses seem to be made between
found causes. Moreover, we believed that the mentioned causes often were
“triggers” rather than real root causes. Such literature provided insuf?cient
insight. The following graph describes the complexness of ?nding root
causes and the impossibility of summarizing root causes in a short list.
In summary, in available management literature we did not ?nd a direct
answer or model providing insight into the root causes of decline or
literature that dealt suf?ciently with the existing complexity and dynamism
of operational reality.
Strategic analysis covers the complexity and dynamism of strategic risk
management. In developing a strategy, all relevant components - their
dynamic contexts and interdependencies - must be addressed. For this
reason, we decided to select a classic strategy process as the basis for
further analysis.
TROJAN HORSES OF DECLINE
PAGE 15
FINDING THREE TROJAN HORSES
In general, a classical strategy project consists of three steps:
A thorough understanding of the current situation is required to de?ne
the starting point. The real forces behind changes in industry or drivers
of growth need to be identi?ed. Any strategy needs to be based on a
solid understanding of current reality;
Choices need to be made. Strategic choices determine the development
route for any company. The choices are based on understanding how
current reality works, the ambitions of management and insight into
what changes might occur as a consequence of the strategic choices;
The impact of strategic choices on the business model of the company
needs to be established. The business model de?nes the way an
organization earns its money. It also de?nes the requirements for the
organization in order to achieve the objectives set.
When an organization has de?ned its new strategic direction and has
implemented the required changes, it usually takes between several months
to a few years before the effects of the changes become apparent. This is
what we started to call the “incubation period” of the strategy, which will
?nally lead to improved performance as designed by the strategy process.
The following ?gure summarizes the described strategy process that was
then used to study the selected cases.
Based on the synthesis of the case studies that followed, we identi?ed
that the risk pro?le of a company is highly determined by the extent to
which the three outlined building blocks above are designed and managed.
Inconsistencies therein may lead to strategies which are founded on a faulty
understanding of current reality, leading to an adapted business model
which may con?ict with market reality. On the other hand, changing a
business model based on strategic choices which are not correct may also
introduce the same con?ict.
1.
2.
3.
Improved
performance
Understanding of
the drivers of
current reality
Ambitions
and strategic
choices
Business model
adaptations
Incubation
period
Consistency is the cornerstone of a company's risk pro?le
Is my business
model still
suitable?
What is
happening
outside?
What is my
vision of the
future?
PAGE 16
TROJAN HORSES OF DECLINE
These con?icts or inconsistencies we called Trojan Horses. These Trojan
Horses relate to management’s certainty - supported by their track record
- that their understanding of current reality or strategic choices is correct.
Management unknowingly initiates the decline, convinced that they act in
the best interest of the company. In our analysis we did not focus, therefore,
on management mistakes. Instead, we focused on the elements they felt
forced their decisions.
Trojan Horses may lead a company slowly into decline, as during the
incubation period not all performance indicators will show a consistent
(downward) direction. It is therefore up to management to identify
the real changes. Given that there are multiple indicators and existing
signals, identifying the changes or shifts is not an easy task. Smaller
initial inconsistencies combined with a long incubation period will lead to
structurally eroding performance over time.
In the cases studied, a “trigger” (often external) usually made the
consequences of inconsistency apparent. For example, a certain drop in
sales - as found in many cases - shows that the competitiveness of the
company has eroded structurally and management has not been able to
cope with it. The drop in market demand, in this case, must therefore only
be regarded as a trigger. The factors which caused the inability to cope with
the decline is, in fact, the root cause.
Based on analysis of the case studies, three distinct categories of
inconsistencies were identi?ed:
False drivers: a common understanding of the way a market works,
which turns out not to be valid (anymore). Three different types of
false drivers (dominant market logic, shareholder alignment, perceived
stability) have been identi?ed;
Adaptation pitfalls: changes in the organization which have not been
consistently implemented. Two types of adaptation pitfalls (rapid change
of business model, rapid diversi?ed growth) have been identi?ed;
Time cushion: reading the signals in the incubation period selectively
to ?nd con?rmation of the expected (hoped for) outcome. The
unpredictability of the time cushion was striking (from 16 months
incubation time to sudden exposure to a trigger.
These three categories of Trojan Horses are explicated below in which
reference is made to ?ndings in speci?c cases. The following chart
illustrates:
1.
2.
3.
TROJAN HORSES OF DECLINE
PAGE 17
1.
TROJAN HORSES: FALSE DRIVERS
The ?rst category of Trojan Horses are the False drivers. Three types have
been identi?ed: dominant logic of the market, shareholder force, and
perceived stability.
The ?gure below lists prime examples of how False drivers manifest.
Dominant Logic of the Market
The dominant logic of the market deals with generally accepted rules for
how a market works or how successful companies operate. These generally
accepted rules may apply to some companies; however they are not the
main forces behind success.
A key example of dominant logic - discovered through the case study
research - is the unquestioned need to become a global player, irrespective
of industry. A major goal of companies in the automotive industry since the
Consistency is the cornerstone of a company's risk pro?le
Trojan Horse: Adaptation pitfalls
• Rapid change of business model
• Rapid diversi?ed growth
Trojan Horse: False drivers
• Dominant market logic
• Shareholder alignment
• Perceived stability
Trojan Horse: Time cushion
• 16 months incubation time
• Sudden exposure to trigger
2
1
3
Improved
performance
Understanding of
the drivers of
current reality
Ambitions
and strategic
choices
Business model
adaptations
Incubation
period
Is my business
model still
suitable?
What is
happening
outside?
What is my
vision of the
future?
Dominant logic of the market Shareholder alignment Perceived Stability
• When you don't operate on
an international level you
won't make it
• Companies are forced to grow
• Market growth is structural
instead of temporary
• We have to enlarge our
portfolio and structural
diversi?cation
• Driven by perceived
shareholder value
• Focus of shareholders on
acquisitions
• Implicit faith of shareholders
in growth- blind optimism
• Insuf?cient pressure on
management to turn around
• Governance not functioning
• "Lion sleeps tonight"
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TROJAN HORSES OF DECLINE
90s, for instance, has been to become a global player, leading to signi?cant
investment loss in un-attractive markets. Now over ten years later, most
automobile manufacturers are convinced that competition is only focused on
continents.
Another example within the automotive industry has been the need to
provide a full range of trucks and vans, leading to a signi?cant takeover in
the early 90s. The development of an own van - based on truck principles -
combined with the deterioration of the market made the truck manufacturer
vulnerable.
Other illustrations of dominant logic deal with the assessment of market
changes. Assessment whether these market changes are structural or
represent the peak of a hype.
The last dominant logic we have identi?ed has been the re?ex to hedge
company risks by expanding the portfolio of activities. Hedging businesses
or business cycles seldom proves effective.
Shareholder alignment
The in?uence of shareholders over publicly-listed companies is increasing.
Many good reasons are behind this trend. However, the case studies indicate
that the in?uence of shareholders may be misinterpreted.
Shareholders in general have been known to push for growth. Many
businesses however follow long term economic cycles. Short term pressure
on growth may compel management to look for unrelated sources of growth.
This has led - as found in some case studies - to large unrelated takeovers
which were often divested within 12 to 18 months. Business rational for
the takeovers was determined only afterwards. The takeovers were driven by
opportunity, not by strategy.
To assess the performance of a company, overly-simpli?ed parameters are
often used. When growth was a key issue during the 90s, performance was
frequently measured by the number of acquisitions, increasing the sales
volume. The returns seemed less important, leading to serious problems for
a number of the investigated companies.
A slightly different model was identi?ed in a case where the acquisitions
made were received very well on the stock exchange. Share price rose
disproportionately based on perceived con?dence that the company
was doing extremely well. This situation provided leverage for the next
acquisition. Organic growth of the business was not a ?rst priority. Solvency
of the company reduced signi?cantly after overall growth deteriorated. When
TROJAN HORSES OF DECLINE
PAGE 19
growth continues these companies seem invincible; when growth stagnates
consequences prove fatal.
Perceived stability
Perceived stability is also a principal Trojan Horse. Shareholders,
management and their non-executive boards determine that the company
is in a stable situation - stability in market position, brand image,
competitiveness and so forth. Often these companies are (still) growing.
We analyzed companies where the returns however were not growing. Their
competitiveness eroded gradually. As this process turns out to be very
slow and silent - thus in combination with a long time cushion - it is hard
to identify but has signi?cant impact. Governance should be tighter and
should focus on the drivers of growth of both revenues and pro?t. Perceived
stability is usually not true stability.
2. TROJAN HORSES: ADAPTATION PITFALLS
These are strategic choices that lead to adaptations to a new business
model or (lack of) adaptations in a model. A business model is de?ned as
the way an organization earns its money.
Examples of required changes of business models can be found in the
fashion industry. During the 80s, the general business model changed from
production to satisfy local demand to design and marketing. Increasing the
number of collections and promoting these in retail channels became the
name of the game. Factories became liabilities instead of assets.
Two types of adaptation pitfalls have been de?ned: changing of business
model and (implementing) rapid diversi?ed growth. Examples of each type
are depicted in the ?gure below.
• From industrial-portfolio to
?nancial investment company
and vice versa
• From local to international
• From production to marketing
• From production to
design/innovation
Change of business model Rapid diversi?ed growth
• Over-stretching in acquisitions
• Continuous acquisitions
(highly diversi?ed portfolio
through acquisitions)
• No focus on return – there is
enough money in the family
• Impulse acquisition,
seduction
PAGE 20
TROJAN HORSES OF DECLINE
Change of Business Model
In our analysis, we found several examples of companies changing their
business model from managing an industrial portfolio to becoming an
investment company. These companies did not master the necessary skills
to be successful. Operational synergies within the portfolio were overrated
or hard to achieve. Finally—under ?nancial pressure—portfolios were
diminished and attention was refocused on operational management of the
companies in the portfolio.
Rapid diversi?ed growth
The second speci?c type of Trojan Horse within this category is coping with
growth. Examples have been found of companies overstretching capacity to
grow by means of acquisitions. The organizations were not able to absorb
and deal with all required changes.
A different type of Trojan Horse is the “seduction of take over”. Cases have
been analyzed where large (overly ambitious) takeovers signi?cantly changed
the geographic portfolio. In the end, such takeovers were (too) dif?cult for
management to handle. It was also found in one case that the pro?le of a
takeover candidate ultimately proved to not match the current business.
Executing such ambitious (unsuccessful) growth strategies may force a
company into a standstill.
This type of Trojan Horse becomes even more dif?cult to handle if
shareholders (Category 1) also force growth. In the execution or integration,
a con?ict between the models becomes hard to avoid. A time cushion can
delay the exposure, but not the ?nal result.
3. TROJAN HORSE: THE TIME CUSHION
A time cushion can delay the exposure of an outcome. Based on the
literature research (Roland Berger Study, 2005) and case study research, we
have been able to determine that the time cushion can range from several
years before the outcome cannot be denied to only a few months. When
market demand signi?cantly drops and the company is vigorously pursuing
growth, the vulnerability of the company increases and leads to a time
cushion of only three months, in certain cases. Management then needs to
take intrusive measures, even before enough evidence can be deducted from
management accounts.
TROJAN HORSES OF DECLINE
PAGE 21
Understanding the impact and length of a time cushion is essential. An
explanation and some examples of time cushions are depicted in the ?gure
below.
• A downfall is not always noticed at once or at a
speci?c moment in time (on average 16 months
incubation time);
• When strategic choices are made it takes time for
the consequences to mature, thus creating a time
cushion;
• This time cushion varies from no time at all to
several years before the downfall is recognized and
leads to a sudden exposure to a trigger.
s e l p m a x E n o i t a n a l p x E
Extremely rapid
• When opening new stores/departments a speci?c
timeframe is necessary to create stability and
market share
• When the market suddenly collapses at the start-up
phase, the company has to react quickly to survive
Several years
• Often within family businesses a couple of years can
pass by before the management is willing to let go of
(ending) succes formulas of the past
• Lacking pressure from outside makes it possible for
the business to stumble on
Improved
performance
Understanding of
the drivers of
current reality
Ambitions and
strategic
choices
Business
model
adaptations
Incubation
period
TROJAN HORSES OF DECLINE
PAGE 23
IDENTIFYING THE NEXT GENERATION OF TROJAN HORSES
Our research example consisted largely of companies that were in crisis
at the end of the 90s: a period in which economic growth, mergers and
acquisitions, as well as technological developments were the order of the
day. After some years of economic decline, global economies are now
starting to gear up again. Private equity is a “hot” topic and newspapers
frequently report on current mergers and takeovers. Generally speaking, a
sense of optimism and enthusiasm has returned to the boardrooms of small
and large (public) companies. Unfortunately - as we have seen - false drivers
as well as adaptation pitfalls and time cushions also appear when optimism
hits economy. Are we going back to the future?
It is also important to keep in mind that, due to recent corporate scandals,
corporate governance rules are being tightened. Although this seems
effective in battling corporate fraud, there is nonetheless a potential risk
of this phenomenon: company management can be become too reluctant
to take necessary entrepreneurial steps due to perceived uncontrolled risks
and director’s liabilities. Have we encountered upon a new form of dominant
logic of the market - the “Entrepreneurial Spirit Killer”?
Another hot topic and potential Trojan Horse to be aware of is
“Outsourcing”. Currently it is seen as a true gain when parts or total
departments of the company are outsourced. Low labour costs seem a large
gain but in the long run these will eventually shift to European standards.
Furthermore, a potential pitfall is the loss of control and synergy when
several departments (that are interlinked and/or partly in?uence each
other) are separated geographically. In some business models it could be
necessary (looking backward) to be in near proximity (of internal parts and
competitors) to fully excel and operate ef?ciently – are we shifting away our
key strengths?
Based on our current insights we know that designing and implementing
an effective Strategic Risk Management System will certainly decrease the
potential risk of downfall and will also help companies to take necessary
(potentially) risk-increasing entrepreneurial steps. After determining these
three categories of Trojan Horses and rejecting the assumption that triggers
are the root causes, we are left with the following fundamental questions:
what should be the answer in practice? what are the lessons for the
future? Principally, what should management and its advisers do in order
to effectively identify the next generation of Trojan Horses and to manage
strategic risks?
PAGE 24
TROJAN HORSES OF DECLINE
In our opinion, the answer lies in “effective questioning”. For that reason,
the following eight questions should permanently be on the agenda of every
board of directors and advisory board:
What are the current external voices/Trojan Horses?
To what external voices am I responding or have I responded to recently?
In what kind of business model is the company operating now?
What kind of business model/mechanisms do my strategic choices
require?
What is the company risk pro?le in general?
How will the company risk pro?le change when certain strategic choices
are made?
What possible triggers should the company consider and be aware of?
What is a realistic worst case scenario?
By asking and reviewing these questions regularly, a dynamic system of
Strategic Risk Management is automatically built into a company. In that
way - we ?rmly believe - the chances of leaving doors open for Trojan Horses
are diminished and, if they do appear, such a system will be better prepared
to “roll them out” of harm’s way.
1.
2.
3.
4.
5.
6.
7.
8.
APPENDICES
TROJAN HORSES OF DECLINE
PAGE 27
STICHTING THE TURNAROUND FINANCE GROUP
The non-pro?t organization Stichting The Turnaround Finance Group was
founded in the Netherlands in 2004. Its mission can be summarized as
follows:
enhancing the insight in turnaround processes and its success factors;
increasing the accessibility of turnaround knowledge and professionals for
companies in need;
improving the acceptance and image of the profession;
serving as a platform for professional institutions active in the turnaround
business, ranging from consultancy, interim management, insolvency law,
investing, specialist ?nancing, and risk management.
A website (www.turnaround?nance.nl) was successfully launched from the
start to serve as a central meeting point for parties active and interested in
the turnaround business. Resources available on this site include relevant
articles, contact and background information, as well as useful web links.
Additionally, several exciting (study) meetings took place and in October
2005, the ?rst TFG booklet called Turnaround - Doing business in heavy
weather (translation) was published and presented at the yearly Turnaround
Finance Dinner. At this dinner meeting, the ?rst Dutch Turnaround Finance
Group Award was also awarded. This prize will be presented annually for
“best turnaround of the year”.
For more information, please refer to the website of The Turnaround
Finance Group. The organization may be contacted at any time via info@
turnaround?nance.nl or by using the inquiry form provided on the site. The
Turnaround Finance Group facilitates contact between member parties and
the business community and is for that reason explicitly not involved in
consulting or ?nancing services to companies in (potential) distress.
Stichting The Turnaround Finance Group is af?liated with The Turnaround
Finance Group based in the United Kingdom. More information on TFG UK
can be found at www.turnaround?nance.com.
•
•
•
PAGE 28
TROJAN HORSES OF DECLINE
ROLAND BERGER STRATEGY CONSULTANTS
Founded in 1967, Roland Berger Strategy Consultants has grown to become
one of the world’s leading strategy consultancy ?rms. With 32 of?ces in 23
countries, the company operates successfully in the global market. In 2004,
the 1,630-strong workforce generated approximately EUR 530 million in
sales. The strategy consultancy is an independent partnership, owned solely
by its currently more than 130 Partners. The Netherlands is home to the
headquarters of many multinational companies. Roland Berger supported
those companies for many years before establishing its Amsterdam
of?ce in 2002. This was the next logical step to serve the interests of its
Netherlands-based clients.
Roland Berger supports leading international corporations, non-pro?t
organizations and public institutions in all management issues—ranging
from strategic alignment and introducing new business models and
processes, to organizational structures and IT strategy, as well as corporate
restructuring.
Roland Berger is based on global Competence Centers that are organized
along functional and industry lines. This allows the company to offer tailor-
made solutions devised by interdisciplinary teams of experts drawn from
different Competence Centers. At Roland Berger, customized, creative
strategies are developed together with its clients. Providing support in the
implementation phase is particularly important to the company. Roland
Berger’s consulting advice boosts the value of the clients’ companies—with
creative strategies that work.
www.rolandberger.com
TROJAN HORSES OF DECLINE
PAGE 29
DEFINITIONS
In the research study, the following working de?nitions were used:
Business model – the way an organization earns its money
Company in ?nancial dif?culty – a company in which the current and/or future
cash ?ow is insuf?cient to ful?ll current and/or future obligations
Company risk pro?le – outline of speci?c strategic risks a company faces due
to (lack of) action and/or developments in the market
External drivers – external voices that in?uence a company’s (lack of)
strategic choices
Strategy – long term plan of a company regarding its function in the (global)
economy in which its mission and goals are de?ned as the road map to be
followed and the means used to accomplish the set goals
Strategic choices – choices made by company management in order to reach
the set goals
Strategic risks – all events taking place and choices made which potentially
endanger the continuity of the company in the long run
Strategic risk management – implicit or explicit plan or actions of a company
in order to be able to systematically deal with increased strategic risks
Trojan Horses – inconsistency in understanding the drivers of current reality,
ambitions and strategic choices and business model adaptation leading to a
signi?cant increased risk pro?le of the company
Turnaround – comprehensive plan pursued to reconstruct/revitalize a
company in ?nancial dif?culties through dealing with strategic, operational,
and ?nancial issues
PAGE 30
TROJAN HORSES OF DECLINE
SOURCES
Adriaanse, J.A.A., G.J. Leest, Turnaround. Doing business in heavy
weather (translation), Stichting The Turnaround Finance Group,
www.turnaround?nance.nl, 2005.
Adriaanse, J.A.A., Restructuring in the Shadow of the Law. Informal
Reorganisation in the Netherlands, (diss. Leiden), Deventer: Kluwer, 2005.
Central Bureau of Statistics (CBS), Dutch Bankruptcy Statistics,
www.cbs.nl.
Couwenberg, O., Resolving Financial Distress in the Netherlands (diss.
Groningen), 1997.
Roland Berger Strategy Consultants, Restructuring in Europe 2005 - Study,
Düsseldorf, www.rolandberger.com, November 2005.
Slywotzky, A.J., J. Drzik, Countering the Biggest Risk of All, Harvard
Business Review, www.hbr.org, April 2005.
Painting front cover: The Procession of the Trojan Horse in Troy (1773) by
Giovanni Domenico Tiepolo (1727-1804).
Files of researched companies including public annual reports, reports by
trustees, (public) study reports, ?nancial newspaper articles and (other)
internet resources.
TROJAN HORSES OF DECLINE
PAGE 31
AUTHORS AND CONTACT INFORMATION
Roland Berger Strategy Consultants
Ir. Rene R. Seyger
Partner
Strawinskylaan 581
1080 XX Amsterdam
020-7960600
[email protected]
www.rolandberger.com
Leiden University
Faculty of Law
Department of Business Economics
Research Group on Insolvency Law and Turnaround Management
Dr. Jan Adriaanse
PO Box 9520, 2300 RA
Leiden, The Netherlands
071-5277851
[email protected]
www.law.leidenuniv.nl
Stichting The Turnaround Finance Group
Drs. Geert Jan Leest
Chairman
Info@turnaround?nance.nl
www.turnaround?nance.nl
All published facts on speci?c companies are based on publicly available information and were
checked intensively, however we cannot fully guarantee the validity of information as found and
used.
© Stichting The Turnaround Finance Group / Roland Berger Strategy Consultants / J.A.A.
Adriaanse
Stichting The Turnaround Finance Group
University of Leiden
Roland Berger Strategy Consultants
www.turnaround?nance.nl
This publication was made possible by:
Telephone: 020 553 9111
www.atradius.nl
doc_845136083.pdf
Turnaround professionals know well that the earlier a company reacts to (the risk of) downfall, the better its future chances are.
Study on Strategic Risk Management
PART 1
Study on Strategic Risk Management
PART 1
CONTENTS
Preface
Introduction
Project de?nition and approach
Following the strategy process
Finding Three Trojan Horses
Identifying the next generation of Trojan Horses
Appendices:
- Stichting The Turnaround Finance Group
- Roland Berger Strategy Consultants
- De?nitions
- Sources
- Authors and contact information
•
•
•
•
•
•
•
TROJAN HORSES OF DECLINE
PAGE 5
Equo ne credite, Teucri.
Virgil (70-19BC) – Aeneid, book II
PREFACE
Turnaround professionals know well that the earlier a company reacts to (the
risk of) downfall, the better its future chances are. Not surprisingly, this
widespread understanding was stated in the preface of “Turnaround”, the
?rst booklet of Stichting The Turnaround Finance Group (TFG), issued in
2005. Turnaround professionals also know, however, that early detection of
possible downfalls is complex, and not easily integrated into daily practices.
In light of this, we are very proud to present our second booklet, which
speaks directly to the process of early detection. This booklet proposes new
and useful ideas and/or instruments for the early detection of collapses as
well as ways to recapture and preserve corporate viability in the long run.
Through this, we hope to make a positive contribution to the debate on the
root causes of company downfalls.
This report is the result of an in-depth case study of 13 major Dutch
restructurings and bankruptcies, and was made possible thanks to the
close involvement of various participants of TFG. As such, this is the ?rst
major cooperation - with hopefully many more to follow - in research by
participants of TFG. We are indebted to all involved who offered their
voluntary assistance in the realization of this work, and especially to Rene
Seyger of Roland Berger Strategy Consultants for taking the initiative and
driving this study.
With this research project and booklet, TFG contributes to its mission to:
enhance the insight in turnaround processes and their success factors;
increase the accessibility of turnaround knowledge and professionals for
companies in need;
improve the acceptance and image of the profession;
and serve as a platform for professional institutions active in the
turnaround business, ranging from consultancy, interim management,
insolvency law, investing, specialist ?nancing and risk management.
Though we trust that we have found some interesting and relevant solutions
in the ongoing discussion on preventing corporate decline, we do not
pretend to have found “the one and only truth”. This research is - in other
words - a dynamic process. The booklet is therefore referred to as “Part
1”, as we aim to take the study to a further step, “Part 2”, involving even
•
•
•
•
PAGE 6
TROJAN HORSES OF DECLINE
more participants of TFG in order to deepen the insight and widen the base
of companies to be researched and analyzed. We cordially invite you to
participate in this ongoing process. After all, the key to successful research
and, more generally, to ?ourishing entrepreneurship, is being critical: asking
the right questions aimed at the right people, and of course - as the Trojans
tragically forgot - being open enough to see into the true nature of things.
Do not trust the Horse, Trojans!
Geert Jan Leest
Chairman
Stichting The Turnaround Finance Group
TROJAN HORSES OF DECLINE
PAGE 7
INTRODUCTION
In 2005, Roland Berger Strategy Consultants conducted an extensive study
on the success factors for restructuring projects in Europe. The analysis
included 2575 companies throughout Europe that have carried out a
restructuring project in the past three years.
It was found that liquidity crises often are preceded by earnings crises,
which in turn are preceded by strategic crises. Responding to the strategic
crisis addresses the root causes best and leaves management the most
room to maneuver. An important ?nding of this study, however, was that
companies respond slowly to crises—only 29% of companies reviewed
responded as soon as strategic problems arose. The majority, 71%, did not
respond until the strategic crisis had turned into an earnings or liquidity
crisis, increasing the urgency for action. Simultaneously, room for action
became more and more limited due to lack of time, cash, and credit
(as in ?nancing and trust), deteriorating the chances for a successful
turnaround. The following ?gure summarizes these ?ndings alongside their
consequences.
The period during which improvement and “turning around” can be
achieved is too often passed by. In fact, this study also found that on
average more than 16 months are lost due to failed identi?cation systems
and ignorance of early warning signs of a looming crisis. When strategic
crises can be identi?ed and when they are being adequately managed,
signi?cant value can be retained and earnings and liquidity crises can be
prevented.
Cause
Effect
S
C
O
P
E
F
O
R
A
C
T
I
O
N
N
E
E
D
F
O
R
A
C
T
I
O
N
Small
Large Small
Large
INSOLVENCY
Urgency
Time
Urgent
restructuring
cases
54%
Consequences
• The later the crisis,
need for action, and
the start of the
restructuring process
are identi?ed, the
higher pressure on
the company becomes
• Room for action becomes
increasingly limited
STRATEGIC
CRISIS
STRATEGIC
CRISIS
EARNINGS
CRISIS
EARNINGS
CRISIS
LIQUIDITY
CRISIS
LIQUIDITY
CRISIS
29%
17%
PAGE 8
TROJAN HORSES OF DECLINE
The next chart unequivocally illustrates the lost time for adequate action in
order to revitalize an ailing business.
The Roland Berger results correspond with key ?ndings of research
conducted by Leiden University on informal reorganization routes in the
Netherlands (Adriaanse, 2005). It was found that the most important
elements for unsuccessful restructurings lie in a passive attitude of
company management and its shareholders, as well as insuf?cient and late
action following the appearance of early warning signs. A downward spiral
then ensues.
In summary, research shows that signi?cant enterprise value can be retained
if strategic risks and their root causes are identi?ed at an early stage and/
or when restructuring is started far earlier. The research presented here,
therefore, provides insight into the root causes of strategic crises. This
insight should be bene?cial for all key decision makers, like boards of
management, ?nanciers, and supervisory board members. The following
graph summarizes the observations explained so far.
At the beginning of 2006, the Amsterdam of?ce of Roland Berger Strategy
Consultants, Stichting The Turnaround Finance Group and Leiden University
teamed up to further investigate the ?ndings of the Roland Berger
Restructuring Study. A plan was made to conduct detailed research into
recent restructuring projects and/or bankruptcies of large companies based
in the Netherlands. In order to ?nd answers to our questions the following
problem de?nition was chosen for our research project:
11%
21%
33%
57%
90%
100%
5+ years 4 years 3 years 2 years 1 years Start of
restructuring
Number of years between potential identi?cation
... until
restructuring
Source: Roland Berger Strategy Consultants
restructuring survey 2005
Ø 16 months
Causes
• Failed identi?cation
systems
• Early warning signs
of crisis are ignored (still
hoping for improvement)
• When there is a threat
of bankruptcy,
stakeholders resist
(e.g. through restricting
room for action)
TROJAN HORSES OF DECLINE
PAGE 9
Which root causes of decline are discovered in large Dutch companies that
have successfully or unsuccessfully battled a strategic, earnings and/or
liquidity crisis in recent history? Which lessons can be drawn – based on the
empirical ?ndings – with regard to recognizing and encountering strategic
risks at an early stage?
In other words, the research largely focused on increasing the understanding
of complexity management faces in designing a proper reaction to internal
and external sources of strategic risk and the problem that time is too often
wasted in responding to mounting threats.
Late detection:
focus on short
term ?nancial side
Early detection:
focus on long term
strategic side
(root causes)
Bene?t for key decision makers: Boards of Management,
Financiers and Supervisory Boards
• No room to maneuver
• Strong pressure on
company
• Main addresses are
the ?nancing banks
• Restructuring is very
expensive
• Potential negative
impact on employees
• Potential negative
in?uence on image
• More room to
maneuver and more
potential solutions
• Focus on the long
term strategic side of
the company
(sustainable
improvement)
• All stakeholders of the
company are equally
involved
Consequences Consequences
• Loss of value
TROJAN HORSES OF DECLINE
PAGE 11
PROJECT DEFINITION AND APPROACH
In order to answer the research questions, it was decided to conduct a brief
literature search on causes of corporate decline and to do a (more extensive)
case study research as this latter means of research offers an opportunity
par excellence to gain insight into common practice - although this kind
of research does not enable statistical generalizations (that is to say, all
companies in ?nancial distress). Due to this restriction we did not - and
still do not - pretend to have come up with a “panacea” for detecting all
increased strategic risks. We were aiming to provide relevant insights into
events that have lead to downfall and particularly into the lessons that can
be learned as a whole.
Fifteen companies were selected; this number was based on the (limited)
time-scope of the project and on the fact that in a case study approach
reasonable validity can in principle be attributed to the syntheses of factual
?ndings with that number. A company quali?ed for the study if: (a) the
company had experienced a major fall in operating (sales) and/or net income
in a relatively short period of time; (b) the company (or a major part of it)
was experiencing losses in a certain period; and/or (c) the company had
ended up in a state of insolvency (with or without bankruptcy). Then it was
found out if (additional) relevant and suf?cient public information was
available. The study material consisted largely of public annual reports,
public reports by trustees, (public) study reports, ?nancial newspaper
articles, and (other) internet sources. Where possible in the time frame,
case ?nding were checked with (former) advisors, investors, (interim)
managers, ?nanciers, administrators or trustees. Due to the limitations set
forth, ultimately 13 companies remained part of the selection. The following
research structure was chosen and each case was described using the same
format:
General description of company and its activities
Recent history of the business activities
Development in the operating income and solvency ratio
Strategic choices (focus) of management
Signaled causes of the collapse
Internal and external analysis (signaled developments outside yet
in?uencing the company)
Identi?cation root causes of the downfall
Synthesis of results (iterative)
•
•
•
•
•
•
•
•
PAGE 12
TROJAN HORSES OF DECLINE
Although all companies were reviewed using the above structure, it was
decided to share general conclusions gathered from them as a whole, not
the individual cases. Where possible the cases are illustrated through
anonymous examples. Among the 13 companies were:
NAME BUSINESS ACTIVITIES
Atag Kitchen design and manufacturing
Daf Truck manufacturer
Fokker Airplane manufacturer
Getronics Service provider in ICT
Geveke Trading and distribution technical products and machinery
Hagemeyer Electro technical wholesaler
Numico
Research, development and sales baby food and clinical
nutrition
Oilily Clothing design and manufacturing
Steps Fashion retailer women’s wear
Vilenzo Design, marketing and sales fashion brands
The names of three other companies involved cannot be disclosed at this
stage for con?dentiality reasons. Note that some of the bankrupt companies
were (partly) restarted following collapse under more or less the same name.
TROJAN HORSES OF DECLINE
PAGE 13
FOLLOWING THE STRATEGY PROCESS
Our research began by ?nding out if theoretical models/literature could
provide us with more insight into the process of downfall and also if it could
help us in detecting root causes. We discovered that traditional research
basically neglects the dynamics of a downfall situation as well as the
preceding processes.
In literature, strategic risk management is regarded as a key to managing
the so-called risks of decline. For instance, in a study addressing “strategic
risks that can disrupt or even destroy your business” Slywotzky & Drzik
(2005) thoroughly investigate modern risk management. In the article,
seven types of strategic risk are identi?ed: Industry, Technology, Brand,
Competitor, Customer, Project, and Stagnation. Although highly instructive
on an academic level, it left us with the question of how to recognize these
risks in practice and - as importantly - when strategic risks do increase
how to design a proper reaction on a company level in order to effectively
manage these risks and prevent bankruptcy.
Investigating speci?c literature on root causes of decline also did not
address the complexity and dynamism the research team members
experience in daily operations. Lists of causes (categories) were common,
such as: Weak management, Business economical reasons, Bankruptcy of
holding company, Arguments on board level, Fraud, Financing problems,
Lack of experience, expertise and/or education, Personal circumstances,
Competition, Out-of-date operational management, Market circumstances,
Level of costs too high, Over-invested, Under-invested, Over-?nanced, and
Killer contracts.
1
These lists, however, only identify single reasons as root
1. See for instance CBS 2005 and Adriaanse 2005 for a detailed overview
ROOT
CAUSES?
Incompetent management
Killer contracts
"Under-
invested"
"Over-invested"
Level of costs too high
Market circumstances
Out-of-date operational
management
Competition
Personal circumstances
Lack of experience,
expertise and/or education
Fraud
Financing
problems
Arguments on board level
Bankruptcy holding
company
Business economical
reasons
"Over-?nanced"
Weak management
PAGE 14
TROJAN HORSES OF DECLINE
causes and, additionally, no cross-analyses seem to be made between
found causes. Moreover, we believed that the mentioned causes often were
“triggers” rather than real root causes. Such literature provided insuf?cient
insight. The following graph describes the complexness of ?nding root
causes and the impossibility of summarizing root causes in a short list.
In summary, in available management literature we did not ?nd a direct
answer or model providing insight into the root causes of decline or
literature that dealt suf?ciently with the existing complexity and dynamism
of operational reality.
Strategic analysis covers the complexity and dynamism of strategic risk
management. In developing a strategy, all relevant components - their
dynamic contexts and interdependencies - must be addressed. For this
reason, we decided to select a classic strategy process as the basis for
further analysis.
TROJAN HORSES OF DECLINE
PAGE 15
FINDING THREE TROJAN HORSES
In general, a classical strategy project consists of three steps:
A thorough understanding of the current situation is required to de?ne
the starting point. The real forces behind changes in industry or drivers
of growth need to be identi?ed. Any strategy needs to be based on a
solid understanding of current reality;
Choices need to be made. Strategic choices determine the development
route for any company. The choices are based on understanding how
current reality works, the ambitions of management and insight into
what changes might occur as a consequence of the strategic choices;
The impact of strategic choices on the business model of the company
needs to be established. The business model de?nes the way an
organization earns its money. It also de?nes the requirements for the
organization in order to achieve the objectives set.
When an organization has de?ned its new strategic direction and has
implemented the required changes, it usually takes between several months
to a few years before the effects of the changes become apparent. This is
what we started to call the “incubation period” of the strategy, which will
?nally lead to improved performance as designed by the strategy process.
The following ?gure summarizes the described strategy process that was
then used to study the selected cases.
Based on the synthesis of the case studies that followed, we identi?ed
that the risk pro?le of a company is highly determined by the extent to
which the three outlined building blocks above are designed and managed.
Inconsistencies therein may lead to strategies which are founded on a faulty
understanding of current reality, leading to an adapted business model
which may con?ict with market reality. On the other hand, changing a
business model based on strategic choices which are not correct may also
introduce the same con?ict.
1.
2.
3.
Improved
performance
Understanding of
the drivers of
current reality
Ambitions
and strategic
choices
Business model
adaptations
Incubation
period
Consistency is the cornerstone of a company's risk pro?le
Is my business
model still
suitable?
What is
happening
outside?
What is my
vision of the
future?
PAGE 16
TROJAN HORSES OF DECLINE
These con?icts or inconsistencies we called Trojan Horses. These Trojan
Horses relate to management’s certainty - supported by their track record
- that their understanding of current reality or strategic choices is correct.
Management unknowingly initiates the decline, convinced that they act in
the best interest of the company. In our analysis we did not focus, therefore,
on management mistakes. Instead, we focused on the elements they felt
forced their decisions.
Trojan Horses may lead a company slowly into decline, as during the
incubation period not all performance indicators will show a consistent
(downward) direction. It is therefore up to management to identify
the real changes. Given that there are multiple indicators and existing
signals, identifying the changes or shifts is not an easy task. Smaller
initial inconsistencies combined with a long incubation period will lead to
structurally eroding performance over time.
In the cases studied, a “trigger” (often external) usually made the
consequences of inconsistency apparent. For example, a certain drop in
sales - as found in many cases - shows that the competitiveness of the
company has eroded structurally and management has not been able to
cope with it. The drop in market demand, in this case, must therefore only
be regarded as a trigger. The factors which caused the inability to cope with
the decline is, in fact, the root cause.
Based on analysis of the case studies, three distinct categories of
inconsistencies were identi?ed:
False drivers: a common understanding of the way a market works,
which turns out not to be valid (anymore). Three different types of
false drivers (dominant market logic, shareholder alignment, perceived
stability) have been identi?ed;
Adaptation pitfalls: changes in the organization which have not been
consistently implemented. Two types of adaptation pitfalls (rapid change
of business model, rapid diversi?ed growth) have been identi?ed;
Time cushion: reading the signals in the incubation period selectively
to ?nd con?rmation of the expected (hoped for) outcome. The
unpredictability of the time cushion was striking (from 16 months
incubation time to sudden exposure to a trigger.
These three categories of Trojan Horses are explicated below in which
reference is made to ?ndings in speci?c cases. The following chart
illustrates:
1.
2.
3.
TROJAN HORSES OF DECLINE
PAGE 17
1.
TROJAN HORSES: FALSE DRIVERS
The ?rst category of Trojan Horses are the False drivers. Three types have
been identi?ed: dominant logic of the market, shareholder force, and
perceived stability.
The ?gure below lists prime examples of how False drivers manifest.
Dominant Logic of the Market
The dominant logic of the market deals with generally accepted rules for
how a market works or how successful companies operate. These generally
accepted rules may apply to some companies; however they are not the
main forces behind success.
A key example of dominant logic - discovered through the case study
research - is the unquestioned need to become a global player, irrespective
of industry. A major goal of companies in the automotive industry since the
Consistency is the cornerstone of a company's risk pro?le
Trojan Horse: Adaptation pitfalls
• Rapid change of business model
• Rapid diversi?ed growth
Trojan Horse: False drivers
• Dominant market logic
• Shareholder alignment
• Perceived stability
Trojan Horse: Time cushion
• 16 months incubation time
• Sudden exposure to trigger
2
1
3
Improved
performance
Understanding of
the drivers of
current reality
Ambitions
and strategic
choices
Business model
adaptations
Incubation
period
Is my business
model still
suitable?
What is
happening
outside?
What is my
vision of the
future?
Dominant logic of the market Shareholder alignment Perceived Stability
• When you don't operate on
an international level you
won't make it
• Companies are forced to grow
• Market growth is structural
instead of temporary
• We have to enlarge our
portfolio and structural
diversi?cation
• Driven by perceived
shareholder value
• Focus of shareholders on
acquisitions
• Implicit faith of shareholders
in growth- blind optimism
• Insuf?cient pressure on
management to turn around
• Governance not functioning
• "Lion sleeps tonight"
PAGE 18
TROJAN HORSES OF DECLINE
90s, for instance, has been to become a global player, leading to signi?cant
investment loss in un-attractive markets. Now over ten years later, most
automobile manufacturers are convinced that competition is only focused on
continents.
Another example within the automotive industry has been the need to
provide a full range of trucks and vans, leading to a signi?cant takeover in
the early 90s. The development of an own van - based on truck principles -
combined with the deterioration of the market made the truck manufacturer
vulnerable.
Other illustrations of dominant logic deal with the assessment of market
changes. Assessment whether these market changes are structural or
represent the peak of a hype.
The last dominant logic we have identi?ed has been the re?ex to hedge
company risks by expanding the portfolio of activities. Hedging businesses
or business cycles seldom proves effective.
Shareholder alignment
The in?uence of shareholders over publicly-listed companies is increasing.
Many good reasons are behind this trend. However, the case studies indicate
that the in?uence of shareholders may be misinterpreted.
Shareholders in general have been known to push for growth. Many
businesses however follow long term economic cycles. Short term pressure
on growth may compel management to look for unrelated sources of growth.
This has led - as found in some case studies - to large unrelated takeovers
which were often divested within 12 to 18 months. Business rational for
the takeovers was determined only afterwards. The takeovers were driven by
opportunity, not by strategy.
To assess the performance of a company, overly-simpli?ed parameters are
often used. When growth was a key issue during the 90s, performance was
frequently measured by the number of acquisitions, increasing the sales
volume. The returns seemed less important, leading to serious problems for
a number of the investigated companies.
A slightly different model was identi?ed in a case where the acquisitions
made were received very well on the stock exchange. Share price rose
disproportionately based on perceived con?dence that the company
was doing extremely well. This situation provided leverage for the next
acquisition. Organic growth of the business was not a ?rst priority. Solvency
of the company reduced signi?cantly after overall growth deteriorated. When
TROJAN HORSES OF DECLINE
PAGE 19
growth continues these companies seem invincible; when growth stagnates
consequences prove fatal.
Perceived stability
Perceived stability is also a principal Trojan Horse. Shareholders,
management and their non-executive boards determine that the company
is in a stable situation - stability in market position, brand image,
competitiveness and so forth. Often these companies are (still) growing.
We analyzed companies where the returns however were not growing. Their
competitiveness eroded gradually. As this process turns out to be very
slow and silent - thus in combination with a long time cushion - it is hard
to identify but has signi?cant impact. Governance should be tighter and
should focus on the drivers of growth of both revenues and pro?t. Perceived
stability is usually not true stability.
2. TROJAN HORSES: ADAPTATION PITFALLS
These are strategic choices that lead to adaptations to a new business
model or (lack of) adaptations in a model. A business model is de?ned as
the way an organization earns its money.
Examples of required changes of business models can be found in the
fashion industry. During the 80s, the general business model changed from
production to satisfy local demand to design and marketing. Increasing the
number of collections and promoting these in retail channels became the
name of the game. Factories became liabilities instead of assets.
Two types of adaptation pitfalls have been de?ned: changing of business
model and (implementing) rapid diversi?ed growth. Examples of each type
are depicted in the ?gure below.
• From industrial-portfolio to
?nancial investment company
and vice versa
• From local to international
• From production to marketing
• From production to
design/innovation
Change of business model Rapid diversi?ed growth
• Over-stretching in acquisitions
• Continuous acquisitions
(highly diversi?ed portfolio
through acquisitions)
• No focus on return – there is
enough money in the family
• Impulse acquisition,
seduction
PAGE 20
TROJAN HORSES OF DECLINE
Change of Business Model
In our analysis, we found several examples of companies changing their
business model from managing an industrial portfolio to becoming an
investment company. These companies did not master the necessary skills
to be successful. Operational synergies within the portfolio were overrated
or hard to achieve. Finally—under ?nancial pressure—portfolios were
diminished and attention was refocused on operational management of the
companies in the portfolio.
Rapid diversi?ed growth
The second speci?c type of Trojan Horse within this category is coping with
growth. Examples have been found of companies overstretching capacity to
grow by means of acquisitions. The organizations were not able to absorb
and deal with all required changes.
A different type of Trojan Horse is the “seduction of take over”. Cases have
been analyzed where large (overly ambitious) takeovers signi?cantly changed
the geographic portfolio. In the end, such takeovers were (too) dif?cult for
management to handle. It was also found in one case that the pro?le of a
takeover candidate ultimately proved to not match the current business.
Executing such ambitious (unsuccessful) growth strategies may force a
company into a standstill.
This type of Trojan Horse becomes even more dif?cult to handle if
shareholders (Category 1) also force growth. In the execution or integration,
a con?ict between the models becomes hard to avoid. A time cushion can
delay the exposure, but not the ?nal result.
3. TROJAN HORSE: THE TIME CUSHION
A time cushion can delay the exposure of an outcome. Based on the
literature research (Roland Berger Study, 2005) and case study research, we
have been able to determine that the time cushion can range from several
years before the outcome cannot be denied to only a few months. When
market demand signi?cantly drops and the company is vigorously pursuing
growth, the vulnerability of the company increases and leads to a time
cushion of only three months, in certain cases. Management then needs to
take intrusive measures, even before enough evidence can be deducted from
management accounts.
TROJAN HORSES OF DECLINE
PAGE 21
Understanding the impact and length of a time cushion is essential. An
explanation and some examples of time cushions are depicted in the ?gure
below.
• A downfall is not always noticed at once or at a
speci?c moment in time (on average 16 months
incubation time);
• When strategic choices are made it takes time for
the consequences to mature, thus creating a time
cushion;
• This time cushion varies from no time at all to
several years before the downfall is recognized and
leads to a sudden exposure to a trigger.
s e l p m a x E n o i t a n a l p x E
Extremely rapid
• When opening new stores/departments a speci?c
timeframe is necessary to create stability and
market share
• When the market suddenly collapses at the start-up
phase, the company has to react quickly to survive
Several years
• Often within family businesses a couple of years can
pass by before the management is willing to let go of
(ending) succes formulas of the past
• Lacking pressure from outside makes it possible for
the business to stumble on
Improved
performance
Understanding of
the drivers of
current reality
Ambitions and
strategic
choices
Business
model
adaptations
Incubation
period
TROJAN HORSES OF DECLINE
PAGE 23
IDENTIFYING THE NEXT GENERATION OF TROJAN HORSES
Our research example consisted largely of companies that were in crisis
at the end of the 90s: a period in which economic growth, mergers and
acquisitions, as well as technological developments were the order of the
day. After some years of economic decline, global economies are now
starting to gear up again. Private equity is a “hot” topic and newspapers
frequently report on current mergers and takeovers. Generally speaking, a
sense of optimism and enthusiasm has returned to the boardrooms of small
and large (public) companies. Unfortunately - as we have seen - false drivers
as well as adaptation pitfalls and time cushions also appear when optimism
hits economy. Are we going back to the future?
It is also important to keep in mind that, due to recent corporate scandals,
corporate governance rules are being tightened. Although this seems
effective in battling corporate fraud, there is nonetheless a potential risk
of this phenomenon: company management can be become too reluctant
to take necessary entrepreneurial steps due to perceived uncontrolled risks
and director’s liabilities. Have we encountered upon a new form of dominant
logic of the market - the “Entrepreneurial Spirit Killer”?
Another hot topic and potential Trojan Horse to be aware of is
“Outsourcing”. Currently it is seen as a true gain when parts or total
departments of the company are outsourced. Low labour costs seem a large
gain but in the long run these will eventually shift to European standards.
Furthermore, a potential pitfall is the loss of control and synergy when
several departments (that are interlinked and/or partly in?uence each
other) are separated geographically. In some business models it could be
necessary (looking backward) to be in near proximity (of internal parts and
competitors) to fully excel and operate ef?ciently – are we shifting away our
key strengths?
Based on our current insights we know that designing and implementing
an effective Strategic Risk Management System will certainly decrease the
potential risk of downfall and will also help companies to take necessary
(potentially) risk-increasing entrepreneurial steps. After determining these
three categories of Trojan Horses and rejecting the assumption that triggers
are the root causes, we are left with the following fundamental questions:
what should be the answer in practice? what are the lessons for the
future? Principally, what should management and its advisers do in order
to effectively identify the next generation of Trojan Horses and to manage
strategic risks?
PAGE 24
TROJAN HORSES OF DECLINE
In our opinion, the answer lies in “effective questioning”. For that reason,
the following eight questions should permanently be on the agenda of every
board of directors and advisory board:
What are the current external voices/Trojan Horses?
To what external voices am I responding or have I responded to recently?
In what kind of business model is the company operating now?
What kind of business model/mechanisms do my strategic choices
require?
What is the company risk pro?le in general?
How will the company risk pro?le change when certain strategic choices
are made?
What possible triggers should the company consider and be aware of?
What is a realistic worst case scenario?
By asking and reviewing these questions regularly, a dynamic system of
Strategic Risk Management is automatically built into a company. In that
way - we ?rmly believe - the chances of leaving doors open for Trojan Horses
are diminished and, if they do appear, such a system will be better prepared
to “roll them out” of harm’s way.
1.
2.
3.
4.
5.
6.
7.
8.
APPENDICES
TROJAN HORSES OF DECLINE
PAGE 27
STICHTING THE TURNAROUND FINANCE GROUP
The non-pro?t organization Stichting The Turnaround Finance Group was
founded in the Netherlands in 2004. Its mission can be summarized as
follows:
enhancing the insight in turnaround processes and its success factors;
increasing the accessibility of turnaround knowledge and professionals for
companies in need;
improving the acceptance and image of the profession;
serving as a platform for professional institutions active in the turnaround
business, ranging from consultancy, interim management, insolvency law,
investing, specialist ?nancing, and risk management.
A website (www.turnaround?nance.nl) was successfully launched from the
start to serve as a central meeting point for parties active and interested in
the turnaround business. Resources available on this site include relevant
articles, contact and background information, as well as useful web links.
Additionally, several exciting (study) meetings took place and in October
2005, the ?rst TFG booklet called Turnaround - Doing business in heavy
weather (translation) was published and presented at the yearly Turnaround
Finance Dinner. At this dinner meeting, the ?rst Dutch Turnaround Finance
Group Award was also awarded. This prize will be presented annually for
“best turnaround of the year”.
For more information, please refer to the website of The Turnaround
Finance Group. The organization may be contacted at any time via info@
turnaround?nance.nl or by using the inquiry form provided on the site. The
Turnaround Finance Group facilitates contact between member parties and
the business community and is for that reason explicitly not involved in
consulting or ?nancing services to companies in (potential) distress.
Stichting The Turnaround Finance Group is af?liated with The Turnaround
Finance Group based in the United Kingdom. More information on TFG UK
can be found at www.turnaround?nance.com.
•
•
•
PAGE 28
TROJAN HORSES OF DECLINE
ROLAND BERGER STRATEGY CONSULTANTS
Founded in 1967, Roland Berger Strategy Consultants has grown to become
one of the world’s leading strategy consultancy ?rms. With 32 of?ces in 23
countries, the company operates successfully in the global market. In 2004,
the 1,630-strong workforce generated approximately EUR 530 million in
sales. The strategy consultancy is an independent partnership, owned solely
by its currently more than 130 Partners. The Netherlands is home to the
headquarters of many multinational companies. Roland Berger supported
those companies for many years before establishing its Amsterdam
of?ce in 2002. This was the next logical step to serve the interests of its
Netherlands-based clients.
Roland Berger supports leading international corporations, non-pro?t
organizations and public institutions in all management issues—ranging
from strategic alignment and introducing new business models and
processes, to organizational structures and IT strategy, as well as corporate
restructuring.
Roland Berger is based on global Competence Centers that are organized
along functional and industry lines. This allows the company to offer tailor-
made solutions devised by interdisciplinary teams of experts drawn from
different Competence Centers. At Roland Berger, customized, creative
strategies are developed together with its clients. Providing support in the
implementation phase is particularly important to the company. Roland
Berger’s consulting advice boosts the value of the clients’ companies—with
creative strategies that work.
www.rolandberger.com
TROJAN HORSES OF DECLINE
PAGE 29
DEFINITIONS
In the research study, the following working de?nitions were used:
Business model – the way an organization earns its money
Company in ?nancial dif?culty – a company in which the current and/or future
cash ?ow is insuf?cient to ful?ll current and/or future obligations
Company risk pro?le – outline of speci?c strategic risks a company faces due
to (lack of) action and/or developments in the market
External drivers – external voices that in?uence a company’s (lack of)
strategic choices
Strategy – long term plan of a company regarding its function in the (global)
economy in which its mission and goals are de?ned as the road map to be
followed and the means used to accomplish the set goals
Strategic choices – choices made by company management in order to reach
the set goals
Strategic risks – all events taking place and choices made which potentially
endanger the continuity of the company in the long run
Strategic risk management – implicit or explicit plan or actions of a company
in order to be able to systematically deal with increased strategic risks
Trojan Horses – inconsistency in understanding the drivers of current reality,
ambitions and strategic choices and business model adaptation leading to a
signi?cant increased risk pro?le of the company
Turnaround – comprehensive plan pursued to reconstruct/revitalize a
company in ?nancial dif?culties through dealing with strategic, operational,
and ?nancial issues
PAGE 30
TROJAN HORSES OF DECLINE
SOURCES
Adriaanse, J.A.A., G.J. Leest, Turnaround. Doing business in heavy
weather (translation), Stichting The Turnaround Finance Group,
www.turnaround?nance.nl, 2005.
Adriaanse, J.A.A., Restructuring in the Shadow of the Law. Informal
Reorganisation in the Netherlands, (diss. Leiden), Deventer: Kluwer, 2005.
Central Bureau of Statistics (CBS), Dutch Bankruptcy Statistics,
www.cbs.nl.
Couwenberg, O., Resolving Financial Distress in the Netherlands (diss.
Groningen), 1997.
Roland Berger Strategy Consultants, Restructuring in Europe 2005 - Study,
Düsseldorf, www.rolandberger.com, November 2005.
Slywotzky, A.J., J. Drzik, Countering the Biggest Risk of All, Harvard
Business Review, www.hbr.org, April 2005.
Painting front cover: The Procession of the Trojan Horse in Troy (1773) by
Giovanni Domenico Tiepolo (1727-1804).
Files of researched companies including public annual reports, reports by
trustees, (public) study reports, ?nancial newspaper articles and (other)
internet resources.
TROJAN HORSES OF DECLINE
PAGE 31
AUTHORS AND CONTACT INFORMATION
Roland Berger Strategy Consultants
Ir. Rene R. Seyger
Partner
Strawinskylaan 581
1080 XX Amsterdam
020-7960600
[email protected]
www.rolandberger.com
Leiden University
Faculty of Law
Department of Business Economics
Research Group on Insolvency Law and Turnaround Management
Dr. Jan Adriaanse
PO Box 9520, 2300 RA
Leiden, The Netherlands
071-5277851
[email protected]
www.law.leidenuniv.nl
Stichting The Turnaround Finance Group
Drs. Geert Jan Leest
Chairman
Info@turnaround?nance.nl
www.turnaround?nance.nl
All published facts on speci?c companies are based on publicly available information and were
checked intensively, however we cannot fully guarantee the validity of information as found and
used.
© Stichting The Turnaround Finance Group / Roland Berger Strategy Consultants / J.A.A.
Adriaanse
Stichting The Turnaround Finance Group
University of Leiden
Roland Berger Strategy Consultants
www.turnaround?nance.nl
This publication was made possible by:
Telephone: 020 553 9111
www.atradius.nl
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