Description
During this such a detailed paper about to fish or cut bait deciding when to turnaround.
To Fish or Cut Bait:
Deciding When to Turnaround
OPEN FOR DI SCUSSI ON
One of the most critical decisions you will face
regardless of the size or lifecycle stage of your company
is whether to continue to invest in a product line or
geographic market, or whether to sell the company itself
or wind down operations. Turnarounds are challenging
under the best of circumstances, but investing in a
turnaround that is doomed for failure only compounds
an already difficult situation.
There are four key questions that need to be answered
before beginning the turnaround process:
?
Does the product or service uniquely address a
customer need so that it gives the company a
sustainable advantage in that market?
?
Is the business model through which you are
offering the product or service viable, or at least
adjustable?
?
Does the management team exist or can it be
adapted to lead the organization through the turn
around effort?
?
Is there financial support for a turnaround process,
in either internal or external capital markets?
?
Are you uniquely addressing
customer needs?
Of these questions, perhaps the most obvious and yet
the most important question is the first. Unless you can
honestly and objectively answer Yes to this question, the
answers to the other three are irrelevant. And yet, we
have seen many turnaround situations that are stillbirths
because no one in the organization could give a simple
and compelling answer to this question at the outset.
In one example, the company was offering a “me-too”
product with no unique benefits or features to its target
customers. In this situation, there should at least be a
cost advantage but actually the company’s product was
more expensive. Management was ready to ask the
board for a significant investment of time and financial
resources to improve the product, but could not describe
the compelling benefit or feature they would achieve
even after the investment.
In another example, common to technology companies,
the company was offering a truly remarkable and state-
of-the-art technology. Unfortunately, it was difficult and
expensive to implement, involved significant operational
risk, and was not going to provide its customers with a
payback for at least five years.
In one last example, another company continued to
invest to grow revenues in emerging markets whose
potential size was huge. The daunting challenge was
that the cost-benefit analysis for the service offering did
not work in markets with low labor costs. As unappeal-
ing as it might seem, in these markets the slower, less
efficient staffing solution was actually the more cost-
effective answer.
?
THE SIXTY-SECOND TEST
It can be extremely difficult for management or even
investors to be brutally honest about the product or
service offering. We sometimes naïvely ask senior
executives “How are you uniquely addressing customer
needs?” only to hear total silence. An excellent
challenge for the management team or the board is to
articulate a brief but compelling answer.
For example, “We offer customers a similar range
of products as our competitors, at similar prices, but
our products are twice as reliable and less expensive
to maintain.” Unique offerings need not be unique
in functionality. Sometimes lower cost, better service,
or strong distribution channels are enough to be
compelling.
If you can pass this test by answering the important
question with a substantive, you are ready for the other
three questions.
Do you have the right
business model?
Many business models continue fixed in time though the
market realities have changed or turn out to different
than originally expected. Often companies believe that if
they just continue operating, the issues will get resolved
and profitability will eventually come. Much like the
tourist who cannot make himself understood in another
language, rarely does saying the same thing louder and
slower improve the results.
Sometimes the price of addressing customer needs is too
high. Perhaps it requires the help of a distribution
?
system that is too expensive, or high-quality materials
sourcing which puts you at the mercy of one or two
suppliers. Either way, the key issues in the business
model are best understood by a dispassionate analysis
of the reason why your organization is capable of
addressing customer needs better than anyone else:
UNIQUE TECHNOLOGY, PROTECTED BY
INTELLECTUAL PROPERTY
• What is the cost of deploying this technology?
• Are there reliable sources?
• Will it require significant re-training of the
distribution channels?
EXCELLENT EMPLOYEES WITH
OUTSTANDING CUSTOMER SERVICE
• What is the cost of hiring, training and retaining
these employees?
• Are customers willing to pay the price?
• Can your competitors hire them away?
LOWER COST STRUCTURE
• What is the source of this cost advantage?
• Is it older equipment that is overdue for
replacement?
• Temporary price advantages from suppliers that
are about to expire?
• What prevents other companies from enjoying the
same benefits?
These benefits need to successfully translate into a
favorable profitability model. But this requires putting
in place a pricing or revenue structure that reflects
these advantages accurately.
?
In one example, the company was offering a product
that had compelling benefits to its target customers,
but the benefits were not tangible enough or
demonstrable enough to generate sustainable revenue.
The company continued to operate at a loss until it
eventually ran out of cash.
Do you have the right
management team?
Different stages in a company or product require differ-
ent skill sets and attributes. Often the team that
helped conceptualize and grow the company to its
current stage is not the same team that is able to make
the critical and sometimes cold-hearted decision
needed for successful turnarounds.
The best gauge of the team’s readiness is their ability to
objectively answer the first two questions. Are they so
enamored of the current situation that they cannot see
that the emperor has no clothes? Or, perhaps more
likely, does the diagnosis inevitably require additional
resources or time?
Sometimes it is the successful entrepreneur who resists
the hiring of a more seasoned executive to manage the
transition to a growth company, or the chief executive
who was perfect when the key success factor was
developing new accounts, but not when the business
model needs to be adapted to new realities under tight
timelines. In both of these cases, an appropriate and
cohesive management team is even more important to
the turnaround situation than it is to the startup
company.
?
Do you have the financial
support to survive the
turnaround process?
The challenges are slightly different for internal and
external funding sources. Headquarters may no longer
be able to continue funding this market or product,
either because it no longer fits into a larger strategic
whole, or because other sources of cash are drying up
as well. Initial investors may no longer have the
resources or appetite to invest in a turnaround, and
new investment sources may be extracting too high
a price.
An all-too-common technology example was the
company with commitments from the top players in
the industry. Unfortunately, the product did not have
the required functionality, the customers did not want
to wait for the improvements that were needed and
the company was running out of money. Instead of
admitting this, management continued to tweak the
product internally without success.
Often communication with external funding sources is
left behind as a second level priority. Such sources
need to be incorporated into the process early and
clearly asked what elements need to be included in a
restructuring plan. For example, a company had a
viable product, an adjustable business model, had a
turnaround plan including the addition of a new CEO
with the right skill set to lead the turnaround, but the
debt and equity players had lost confidence and were
unwilling to fund the company through the process.
Where the appetite and patience for funding a
turnaround process exists, the most common pitfall is
to underestimate the amount of time and resources
required. Turnaround efforts need to survive panics by
customers and suppliers, intensified scrutiny by
auditors, additional bonuses to key personnel, and the
hidden costs of managing the turnaround process
while running the core business.
?
801 Brickell Avenue, Ninth Floor, Miami, FL 33131
PHONE 305-665-5212 ? TOLL FREE 866-initium
FAX 305-675-3156
www.initium-llc.com
The answers to these questions can be difficult to
articulate, but well worth the effort. At worst, an
expensive and frustrating turnaround effort can be
avoided, as well as the accompanying loss of credibility
with customers and investors. The management team
may emerge bruised, but with its credibility intact to
fight another day.
On the other hand, if the answers are positive, the
process can prove invaluable in focusing the team on
the key variables to manage during the process. If the
unique offering is based on customer service, offered
by experienced employees and a well-trained distribu-
tion channel, key metrics can be put in place to
monitor results, investors can be kept informed on
progress along these measures, and costs can be
reduced in areas that are not critical to this offering.
Michelle M. Miller
Jonathan Sanchez-Jaimes
Ms. Miller & Mr. Sanchez-Jaimes are
Managing Partners at Initium LLC.
doc_730531209.pdf
During this such a detailed paper about to fish or cut bait deciding when to turnaround.
To Fish or Cut Bait:
Deciding When to Turnaround
OPEN FOR DI SCUSSI ON
One of the most critical decisions you will face
regardless of the size or lifecycle stage of your company
is whether to continue to invest in a product line or
geographic market, or whether to sell the company itself
or wind down operations. Turnarounds are challenging
under the best of circumstances, but investing in a
turnaround that is doomed for failure only compounds
an already difficult situation.
There are four key questions that need to be answered
before beginning the turnaround process:
?
Does the product or service uniquely address a
customer need so that it gives the company a
sustainable advantage in that market?
?
Is the business model through which you are
offering the product or service viable, or at least
adjustable?
?
Does the management team exist or can it be
adapted to lead the organization through the turn
around effort?
?
Is there financial support for a turnaround process,
in either internal or external capital markets?
?
Are you uniquely addressing
customer needs?
Of these questions, perhaps the most obvious and yet
the most important question is the first. Unless you can
honestly and objectively answer Yes to this question, the
answers to the other three are irrelevant. And yet, we
have seen many turnaround situations that are stillbirths
because no one in the organization could give a simple
and compelling answer to this question at the outset.
In one example, the company was offering a “me-too”
product with no unique benefits or features to its target
customers. In this situation, there should at least be a
cost advantage but actually the company’s product was
more expensive. Management was ready to ask the
board for a significant investment of time and financial
resources to improve the product, but could not describe
the compelling benefit or feature they would achieve
even after the investment.
In another example, common to technology companies,
the company was offering a truly remarkable and state-
of-the-art technology. Unfortunately, it was difficult and
expensive to implement, involved significant operational
risk, and was not going to provide its customers with a
payback for at least five years.
In one last example, another company continued to
invest to grow revenues in emerging markets whose
potential size was huge. The daunting challenge was
that the cost-benefit analysis for the service offering did
not work in markets with low labor costs. As unappeal-
ing as it might seem, in these markets the slower, less
efficient staffing solution was actually the more cost-
effective answer.
?
THE SIXTY-SECOND TEST
It can be extremely difficult for management or even
investors to be brutally honest about the product or
service offering. We sometimes naïvely ask senior
executives “How are you uniquely addressing customer
needs?” only to hear total silence. An excellent
challenge for the management team or the board is to
articulate a brief but compelling answer.
For example, “We offer customers a similar range
of products as our competitors, at similar prices, but
our products are twice as reliable and less expensive
to maintain.” Unique offerings need not be unique
in functionality. Sometimes lower cost, better service,
or strong distribution channels are enough to be
compelling.
If you can pass this test by answering the important
question with a substantive, you are ready for the other
three questions.
Do you have the right
business model?
Many business models continue fixed in time though the
market realities have changed or turn out to different
than originally expected. Often companies believe that if
they just continue operating, the issues will get resolved
and profitability will eventually come. Much like the
tourist who cannot make himself understood in another
language, rarely does saying the same thing louder and
slower improve the results.
Sometimes the price of addressing customer needs is too
high. Perhaps it requires the help of a distribution
?
system that is too expensive, or high-quality materials
sourcing which puts you at the mercy of one or two
suppliers. Either way, the key issues in the business
model are best understood by a dispassionate analysis
of the reason why your organization is capable of
addressing customer needs better than anyone else:
UNIQUE TECHNOLOGY, PROTECTED BY
INTELLECTUAL PROPERTY
• What is the cost of deploying this technology?
• Are there reliable sources?
• Will it require significant re-training of the
distribution channels?
EXCELLENT EMPLOYEES WITH
OUTSTANDING CUSTOMER SERVICE
• What is the cost of hiring, training and retaining
these employees?
• Are customers willing to pay the price?
• Can your competitors hire them away?
LOWER COST STRUCTURE
• What is the source of this cost advantage?
• Is it older equipment that is overdue for
replacement?
• Temporary price advantages from suppliers that
are about to expire?
• What prevents other companies from enjoying the
same benefits?
These benefits need to successfully translate into a
favorable profitability model. But this requires putting
in place a pricing or revenue structure that reflects
these advantages accurately.
?
In one example, the company was offering a product
that had compelling benefits to its target customers,
but the benefits were not tangible enough or
demonstrable enough to generate sustainable revenue.
The company continued to operate at a loss until it
eventually ran out of cash.
Do you have the right
management team?
Different stages in a company or product require differ-
ent skill sets and attributes. Often the team that
helped conceptualize and grow the company to its
current stage is not the same team that is able to make
the critical and sometimes cold-hearted decision
needed for successful turnarounds.
The best gauge of the team’s readiness is their ability to
objectively answer the first two questions. Are they so
enamored of the current situation that they cannot see
that the emperor has no clothes? Or, perhaps more
likely, does the diagnosis inevitably require additional
resources or time?
Sometimes it is the successful entrepreneur who resists
the hiring of a more seasoned executive to manage the
transition to a growth company, or the chief executive
who was perfect when the key success factor was
developing new accounts, but not when the business
model needs to be adapted to new realities under tight
timelines. In both of these cases, an appropriate and
cohesive management team is even more important to
the turnaround situation than it is to the startup
company.
?
Do you have the financial
support to survive the
turnaround process?
The challenges are slightly different for internal and
external funding sources. Headquarters may no longer
be able to continue funding this market or product,
either because it no longer fits into a larger strategic
whole, or because other sources of cash are drying up
as well. Initial investors may no longer have the
resources or appetite to invest in a turnaround, and
new investment sources may be extracting too high
a price.
An all-too-common technology example was the
company with commitments from the top players in
the industry. Unfortunately, the product did not have
the required functionality, the customers did not want
to wait for the improvements that were needed and
the company was running out of money. Instead of
admitting this, management continued to tweak the
product internally without success.
Often communication with external funding sources is
left behind as a second level priority. Such sources
need to be incorporated into the process early and
clearly asked what elements need to be included in a
restructuring plan. For example, a company had a
viable product, an adjustable business model, had a
turnaround plan including the addition of a new CEO
with the right skill set to lead the turnaround, but the
debt and equity players had lost confidence and were
unwilling to fund the company through the process.
Where the appetite and patience for funding a
turnaround process exists, the most common pitfall is
to underestimate the amount of time and resources
required. Turnaround efforts need to survive panics by
customers and suppliers, intensified scrutiny by
auditors, additional bonuses to key personnel, and the
hidden costs of managing the turnaround process
while running the core business.
?
801 Brickell Avenue, Ninth Floor, Miami, FL 33131
PHONE 305-665-5212 ? TOLL FREE 866-initium
FAX 305-675-3156
www.initium-llc.com
The answers to these questions can be difficult to
articulate, but well worth the effort. At worst, an
expensive and frustrating turnaround effort can be
avoided, as well as the accompanying loss of credibility
with customers and investors. The management team
may emerge bruised, but with its credibility intact to
fight another day.
On the other hand, if the answers are positive, the
process can prove invaluable in focusing the team on
the key variables to manage during the process. If the
unique offering is based on customer service, offered
by experienced employees and a well-trained distribu-
tion channel, key metrics can be put in place to
monitor results, investors can be kept informed on
progress along these measures, and costs can be
reduced in areas that are not critical to this offering.
Michelle M. Miller
Jonathan Sanchez-Jaimes
Ms. Miller & Mr. Sanchez-Jaimes are
Managing Partners at Initium LLC.
doc_730531209.pdf