Description
Turnaround Strategies – Acting Beyond The Generic Strategies
55
Reading 6
Turnaround strategies – acting beyond
the generic strategies
Prof Marius Pretorius
Every company has performance gaps but struggling (declining) companies
have wide performance gaps that can endanger their survival. The situation
analysis is absolutely essential to ascertain the magnitude of the gap and
to determine the availability of speci?c resources to close the gap. If the
gap cannot be closed to achieve at least a break-even return within a
reasonable time, the company is not viable.
– Donald Bibeault
Introduction
Generic strategies as described by Porter’s matrix are the standard from which strategies
originated. Many authors have tried to improve the Porter matrix but have not really
added signi?cantly to the body of knowledge. The generic strategies, however, don’t work
for a turnaround situation. The reason for this is that the situation has changed and the
?rm is in a decline. It now requires a turnaround. Turnaround suggests a reorientation of
positioning, strategy, structure, control systems or power distribution to resume normal
operations. A return to a normal cash ?ow signals that performance has recovered from
the decline that led to the turnaround situation. Alternative strategies (above low cost,
differentiation and focus strategies) must therefore be sought. This reading looks at the
different environments of ?rms in decline (thus facing the turnaround situation) and then
how to take the appropriate strategies to effect change or a turnaround.
The turnaround situation and turnaround
It is very important to understand that turnarounds can be effected in the case of
declining ?rms but not in failed ?rms.
1
The term ‘turnaround situation’ (TAS) refers to
the point at which a ?rm needs to be turned around or face failure. At this point ?rms
mostly consider the appointment of a turnaround manager or alternative leadership.
A turnaround situation is characterised by a combination of unique preconditions or
determinants (internal and external) that threaten ‘normal operations’.
2
Sometimes a
turnaround situation is called a turnaround event.
“
„
1 Pretorius, 2009
2 Pretorius and Holtzhauzen, 2008
56
Part 2 Strategy: Some critical issues
Reading 6 Turnaround strategies – acting beyond the generic strategies
The preconditions or determinants of a
turnaround situation
No single turnaround situation is exactly the same as another. However, the
preconditions for all turnaround situations are driven mainly by two key elements,
namely the cause of the distress and resource muni?cence (scarcity or abundance of
resources). These elements lead to different combinations of environmental factors that
require new and different strategies when pursuing recovery.
The causality of the decline (also failure) of a ?rm is frequently classi?ed as either
strategic or operational in nature. It is easier for a business to respond to operational
problems, such as inef?ciencies, cost relationship pressures, incorrect resource
applications and managerial de?ciencies, as there is room to manoeuvre and the
contributing factors are more visible.
In contrast, strategic causes have to do with weak or wrong positioning in the market,
technological changes that govern demand determinants and loss of competitive
advantage by the ?rm – all highly susceptible to external in?uences that are not clearly
visible to the decision-makers. Strategic factors have a close relationship with the
external environment and the ?rm’s response to changes in that environment. Strategic
causes generally require more speedy action.
3
Resource
abundance
Resource
scarcity
Internal/operational External/strategic
Performing well:
Good sales demand
Market share
Established CA
Invisible rising
Cost/unit
Growth
Strategic Distress:
Dwindling sales
Losing market share
Losing CA
Demand changes
Competitive products
Sudden inventory growth
Expense ratios increase
Underperformance:
Good sales demand
Pressure on contribution margin
Low capacity utilisation
Pressure on CA
Relative productivity low
Cash strapped
Crisis:
Rapidly dwindling sales
Losing market share
Lost CA
Demand changes
Cash strapped
Causality (origin of the distress)
R
e
s
o
u
r
c
e
m
u
n
i
?
c
e
n
c
e
Over-
trading
Figure 1 Turnaround matrix showing unique preconditions that determine
strategy choices
4
3 Pretorius, 2008
4 Adapted from Pretorius, 2008
Part 2 Strategy: Some critical issues 57 Reading 6 Turnaround strategies – acting beyond the generic strategies
Resource muni?cence is the second factor and refers to scarcity or abundance of
critical resources that are needed when operating the ?rm. Firms are mostly forced
to attempt turnarounds at advanced stages of decline, when they typically experience
huge resource scarcity. However, it may also be required while they have resources but
suffer from strategic causality.
Combining causality and resource muni?cence in a matrix such as the one in Figure 1
assists us in determining the strategies and strategic practices that can be applied in the
turnaround situation. Figure 1 explains the typical preconditions that are found within
each of the quadrants. It also shows the names of each combination.
In Figure 1 it is shown that Porter’s strategies are working well in the ?rst quadrant
where there are abundant resources and operational causality. However, ?rms can
also experience decline despite being in this quadrant. Mostly, if a ?rm is in one of the
other quadrants, alternative strategies must be found and a turnaround effected. Each
turnaround situation is shortly described.
5
? When a ?rm is performing well: In Figure 1 it is shown that Porter’s strategies
can work fairly well in the performing well quadrant where there are abundant
resources and operational causality.
Firms in this quadrant are generally not experiencing a need for a turnaround
unless they fall in the overtrading trap (complex unique TAS are not explored in
this reading). The ?rm generally has abundant resources and minimum causes
of distress, and can operate normally, barring potential invisible inef?ciencies.
Typically, it experiences good sales demand, growing market share and established
competitive advantage (CA) so there is no need to look at ?rms in this quadrant
any further in this reading.
? When a ?rm underperforms: The underperformance quadrant’s preconditions are
characterised by scarce resources (limited slack) and problems caused by weak
internal operations. Despite good demand for its products, the contribution margin
is under pressure, capacity utilisation is low, the competitive advantage comes
under pressure due to the ?rm’s inability to respond to demand, productivity is low
and the ?rm is cash-strapped. Operations are weak and contain several types of
inef?ciencies such as rising inventory, low capacity utilisation and increasing debtor
days. Increases in both demand and inventory are contradictory but point directly
towards the very inef?ciencies that create the underperformance.
? When a ?rm is in strategic distress: This quadrant’s preconditions are characterised
by abundant resources but declining sales demand due to the loss of competitive
advantage. Market share is under pressure, probably due to growing demand
for competitive or substitute products. Underlying a rise in inventory is the
loss in demand for its own products. Because the ?rm has abundant resources,
leadership is unenthusiastic about ?nding the real cause of the problem, namely
loss in competitive advantage, and tends to blame it on temporary misfortune.
5 Pretorius, 2008
58
Part 2 Strategy: Some critical issues
Reading 6 Turnaround strategies – acting beyond the generic strategies
Management typically responds with increases in sales incentives, marketing and
advertising budgets to overcome the problem, which they perceive as short-lived.
? When a ?rm is in crisis: If nothing is done when in a strategic distress situation or
the wrong strategies (those that drain resources or do not address the problem)
are pursued, distress quickly turns into a crisis. This quadrant’s preconditions
are characterised by scarce resources and the pressure on cash becoming more
pronounced due to the reduced sales. The ?rm is in the intensive care unit and
needs rescue. To increase sales, more credit is granted, which depletes cash
levels even more. Reduced advertising in an attempt to reduce cost weakens the
competitive advantage further. Basically the ?rm direction is south.
Each of these turnaround situations is determined by its own con?guration of
preconditions, and many additional lesser variables may play a role or act as triggers.
Each quadrant in the matrix would then need to employ some support practices to
solve the unique set of problems associated with the turnaround situation.
Strategies and practices for turnaround situations
Figure 2 suggests the strategies suggested for each quadrant in the matrix.
Resource
abundance
Resource
scarcity
Internal/operational External/strategic
Sustainability
strategy
(Needs renewal)
Forced
repositioning
strategy
(Needs turnaround)
Ef?ciency
strategy
(Needs turnaround)
Last resort
strategy
(Needs rescue)
Causality (origin of the distress)
R
e
s
o
u
r
c
e
o
f
m
u
n
i
?
c
e
n
c
e
Combination
strategy
Figure 2 Strategies to respond to the turnaround situations
6
Pretorius
7
suggests that strategic practices are the action plans that management
undertakes to achieve its chosen strategy. Such practices, taken individually or in
6 Adapted from Pretorius, 2008
7 Pretorius, 2008
Part 2 Strategy: Some critical issues 59 Reading 6 Turnaround strategies – acting beyond the generic strategies
combination, should bring about the desired outcome of the strategy. Each turnaround
situation demands a different strategy supported by speci?c practices. These practices
are chosen based on their applicability to the speci?c market (environmental)
conditions. The table below shows some of the key practices supporting each strategy
that are associated with recovery from that speci?c set of preconditions in the matrix.
Practices associated with each turnaround situation and strategy
Turnaround situations Turnaround strategy Strategic practices
Growth Sustainability strategy Pursue sales (penetrate and new markets)
Maximise market share
Entrench CA
Sustainable growth
Optimise capacity
Organic and inorganic
Protect against overtrading
Underperformance Ef?ciency strategy Protect/strengthen competitive advantage (CA)
Cost cutting
Capacity improvement
Generate cash
Outsource non-essentials
Productivity
Asset reduction
Strategic distress Forced repositioning
strategy
Strategy revision
Alternative revenue streams
Find new products
Alternative markets
Forced to innovate, diversify
Differentiate, acquire
Crisis Last resort strategy Defensive merger
Divestiture
Liquidation
Ask for debt forgiveness
Given the preconditions associated with performing well, the ?rm is free to focus all its
attention on a growth strategy. Growth can be achieved through organic and inorganic
practices such as market development, pursuing new markets and acquisitions. These
?rms focus on strengthening their competitive advantages and build market share
because they have abundant resources and are well positioned in the market.
Given the preconditions associated with underperformance, the ?rm must pursue
an ef?ciency strategy to turn around successfully and move towards the ‘performing
well’ quadrant. It must pursue ef?ciency through such practices as improving capacity
utilisation, lowering inventory levels, improving collection processes, restructuring
?nancing, better use of volume discount, improving supply chain activities and more.
60
Part 2 Strategy: Some critical issues
Reading 6 Turnaround strategies – acting beyond the generic strategies
The focus is mainly on internal operations and doing the business right and better.
These ?rms are well positioned but experience cash-?ow problems due to their
inef?ciencies. Cost to income ratios typically deteriorate.
Given the preconditions associated with distress, the ?rm has little choice but to pursue
a forced repositioning strategy. Because the repositioning is forced, the ?rm is under
pressure to change direction quickly (?nding an alternative value proposition), which
means less time for extensive research about new products and services and market
testing and therefore more chance of pursuing non-starters. The ?rm is on the back
foot and focuses on ‘stop the bleeding’ actions. Even worse than misjudging the right
alternative products is if the leadership is blinded by the apparent resource abundance
and tries to solve the problem by throwing resources into marketing and advertising
efforts, which have little or no effect. The bottom line is that competitive advantage is
dwindling, and so are cash reserves if ‘good money is thrown after bad opportunity’.
Lower-level management and sales staff have realised the problem and start to leave for
more prosperous careers with competitors, aggravating the distress by depleting human
capital. However, refocused positioning, differentiation to new products and services
or diversi?cation to alternative businesses or industries can be pursued, as there are
still resources available.
Repositioning fundamentally asks for a new choice of Porter’s generic strategic options
as a focal point. In the worst-case scenario it requires the start-up of new ?rms, which
involves determining the new positioning where competitive advantage will be sought.
So with abundant resources, Porter’s matrix is still core, but when there is scarcity of
resources, the focus moves towards ?nding ef?ciency ?rst.
Lastly, given the preconditions associated with a crisis, the ?rm now has no choice but
to pursue a last resort strategy. Cash is under severe strain and reduced advertising
weakens the effectiveness of competitive advantage even further, while unfocused cost-
cutting is the order of the day. There is little time for proper analysis and investigation
because of resource scarcity, and poor decisions and poor acquisitions are made. This
quadrant’s preconditions are characterised by scarce resources, and the pressure on
cash becomes more pronounced due to the tumbling sales. To achieve more sales,
credit is often granted, which further depletes cash. Firms are sometimes forced to ask
for debt forgiveness from creditors to stay in operation.
Sometimes it is possible (or necessary) to combine practices from different quadrants
to ?nd an optimal generic strategy. There is a place for combination strategy. The
combined strategy is mostly applied to support the forced reposition strategy or the
last resort strategy. Successful ef?ciency strategies free up cash and drive down costs,
which makes them easier to apply.
Part 2 Strategy: Some critical issues 61 Reading 6 Turnaround strategies – acting beyond the generic strategies
Application in practice
To use the above, it is ?rstly necessary for the turnaround leadership to determine
what turnaround situation the ?rm is in. It is not a clear judgement and requires some
interpretation. Practice suggests that there are often overlaps between the TAS elements
that manifest for each situation. Once the TAS is determined it leads to the selection of
the practices.
Secondly, at heart, all turnarounds require some form of application of the ef?ciency
strategy. It is generally used in combination with any of the other two strategies.
Summary
? Turnaround situations require different practices than would normally be
associated with the prescriptions of Porter for low-cost, differentiation and focus
strategies.
? Turnaround situations are governed mainly by two factors namely causality of the
decline (strategic or operational) and resource muni?cence (abundance or scarcity)
as shown in Figure 1 on page 56.
? Combining causality and resource muni?cence in a four cell matrix suggest four
types of TAS namely: performing well, underperformance, strategic distress and
crisis as shown in Figure 1 on page 56.
? Each cell requires a different strategy (see Figure 2 on page 58) with its associated
strategic practices.
? A practitioner of turnaround must ?rst identify the ?rms speci?c TAS before
selecting the strategic practices to be pursued for the turnaround.
Critical thinking exercise
It is 2008 and the mighty Starbucks is facing its biggest crisis, with its share price
at
1
___
10
th of its peak just after the turn of the century. Understanding their position
on the turnaround matrix helps to do a turnaround – or maybe a rescue. In late
2007, chairman Howard Schultz stated: ‘Over the past ten years, in order to
achieve growth, development and the scale necessary to go from less than 1 000
stores to 13 000 stores and beyond, I have had to make a series of decisions
that, in retrospect, has led to the watering down of the Starbucks experience,
and what some might call the commoditization of our brand’.
8
Diversi?cation to
other products (like music and ice cream) has also played its part. The news that
McDonalds plans to add espresso machines to all their stores and that several
independent stores are rising up means that substitutes are and will be freely
available at a much lower price. So it seems that Starbucks is losing positioning,
continued on following page
8 Economist, 2008
62
Part 2 Strategy: Some critical issues
with competitive products and substitute products their main threats. On top of
this, the looming recession puts pressure on it price range as well.
1 Which TAS is most relevant for Starbucks (based on the above information)?
2 Based on your placement of Starbucks in Figure 2 on page 58, which of the
strategic practices (from the table on page 59) are relevant when pursuing the
turnaround.
Guidelines for the critical thinking exercise
1 Looking at Figure 1, the problem seems fundamentally strategic in nature and
Starbucks can be placed in the strategic distress quadrant of the matrix. At the
same time, they suffer mildly from underperformance issues.
2 Not all the practices are relevant for this turnaround but the main ones include:
– strategy revision is a must,
– pursuing alternative revenue streams like music and other beverages has
contributed to the problem and should be reconsidered,
– new products within their main lines (coffee) should be sought – maybe a
cheaper coffee product as an alternative,
– seeking alternative markets contributed to their current problems and
should be brought under control,
– innovation for new products should be pursued, and
– some ef?ciency strategies will produce cash needed to for the repositioning.
Bibliography
This chapter is a short summary of the following three key publications around the
issue of turnaround.
Pretorius, M. 2008. When Porter’s generic strategies are not enough: Complementary strategies
for turnaround situations. Journal of Business Strategy 29(6): 19–28.
Pretorius, M. and Holtzhauzen, G. 2008. Critical variables of venture turnarounds. South
African Business Review 12(2): 87–107. Accessed via Internethttp://hdl.handle.net/2263/7394. Viewed 29 July 2009.
Pretorius. M. 2009. De?ning business decline, failure and turnaround: A content analysis.
South African Journal of Entrepreneurship and Small Business Management 1(2): 1–16.
The Economist. 2008. Coffee wars: Starbucks ousts its boss and brings backs its founder as a
new threat emerges. The Economist, January 12–18: 54–55.
doc_641789803.pdf
Turnaround Strategies – Acting Beyond The Generic Strategies
55
Reading 6
Turnaround strategies – acting beyond
the generic strategies
Prof Marius Pretorius
Every company has performance gaps but struggling (declining) companies
have wide performance gaps that can endanger their survival. The situation
analysis is absolutely essential to ascertain the magnitude of the gap and
to determine the availability of speci?c resources to close the gap. If the
gap cannot be closed to achieve at least a break-even return within a
reasonable time, the company is not viable.
– Donald Bibeault
Introduction
Generic strategies as described by Porter’s matrix are the standard from which strategies
originated. Many authors have tried to improve the Porter matrix but have not really
added signi?cantly to the body of knowledge. The generic strategies, however, don’t work
for a turnaround situation. The reason for this is that the situation has changed and the
?rm is in a decline. It now requires a turnaround. Turnaround suggests a reorientation of
positioning, strategy, structure, control systems or power distribution to resume normal
operations. A return to a normal cash ?ow signals that performance has recovered from
the decline that led to the turnaround situation. Alternative strategies (above low cost,
differentiation and focus strategies) must therefore be sought. This reading looks at the
different environments of ?rms in decline (thus facing the turnaround situation) and then
how to take the appropriate strategies to effect change or a turnaround.
The turnaround situation and turnaround
It is very important to understand that turnarounds can be effected in the case of
declining ?rms but not in failed ?rms.
1
The term ‘turnaround situation’ (TAS) refers to
the point at which a ?rm needs to be turned around or face failure. At this point ?rms
mostly consider the appointment of a turnaround manager or alternative leadership.
A turnaround situation is characterised by a combination of unique preconditions or
determinants (internal and external) that threaten ‘normal operations’.
2
Sometimes a
turnaround situation is called a turnaround event.
“
„
1 Pretorius, 2009
2 Pretorius and Holtzhauzen, 2008
56
Part 2 Strategy: Some critical issues
Reading 6 Turnaround strategies – acting beyond the generic strategies
The preconditions or determinants of a
turnaround situation
No single turnaround situation is exactly the same as another. However, the
preconditions for all turnaround situations are driven mainly by two key elements,
namely the cause of the distress and resource muni?cence (scarcity or abundance of
resources). These elements lead to different combinations of environmental factors that
require new and different strategies when pursuing recovery.
The causality of the decline (also failure) of a ?rm is frequently classi?ed as either
strategic or operational in nature. It is easier for a business to respond to operational
problems, such as inef?ciencies, cost relationship pressures, incorrect resource
applications and managerial de?ciencies, as there is room to manoeuvre and the
contributing factors are more visible.
In contrast, strategic causes have to do with weak or wrong positioning in the market,
technological changes that govern demand determinants and loss of competitive
advantage by the ?rm – all highly susceptible to external in?uences that are not clearly
visible to the decision-makers. Strategic factors have a close relationship with the
external environment and the ?rm’s response to changes in that environment. Strategic
causes generally require more speedy action.
3
Resource
abundance
Resource
scarcity
Internal/operational External/strategic
Performing well:
Good sales demand
Market share
Established CA
Invisible rising
Cost/unit
Growth
Strategic Distress:
Dwindling sales
Losing market share
Losing CA
Demand changes
Competitive products
Sudden inventory growth
Expense ratios increase
Underperformance:
Good sales demand
Pressure on contribution margin
Low capacity utilisation
Pressure on CA
Relative productivity low
Cash strapped
Crisis:
Rapidly dwindling sales
Losing market share
Lost CA
Demand changes
Cash strapped
Causality (origin of the distress)
R
e
s
o
u
r
c
e
m
u
n
i
?
c
e
n
c
e
Over-
trading
Figure 1 Turnaround matrix showing unique preconditions that determine
strategy choices
4
3 Pretorius, 2008
4 Adapted from Pretorius, 2008
Part 2 Strategy: Some critical issues 57 Reading 6 Turnaround strategies – acting beyond the generic strategies
Resource muni?cence is the second factor and refers to scarcity or abundance of
critical resources that are needed when operating the ?rm. Firms are mostly forced
to attempt turnarounds at advanced stages of decline, when they typically experience
huge resource scarcity. However, it may also be required while they have resources but
suffer from strategic causality.
Combining causality and resource muni?cence in a matrix such as the one in Figure 1
assists us in determining the strategies and strategic practices that can be applied in the
turnaround situation. Figure 1 explains the typical preconditions that are found within
each of the quadrants. It also shows the names of each combination.
In Figure 1 it is shown that Porter’s strategies are working well in the ?rst quadrant
where there are abundant resources and operational causality. However, ?rms can
also experience decline despite being in this quadrant. Mostly, if a ?rm is in one of the
other quadrants, alternative strategies must be found and a turnaround effected. Each
turnaround situation is shortly described.
5
? When a ?rm is performing well: In Figure 1 it is shown that Porter’s strategies
can work fairly well in the performing well quadrant where there are abundant
resources and operational causality.
Firms in this quadrant are generally not experiencing a need for a turnaround
unless they fall in the overtrading trap (complex unique TAS are not explored in
this reading). The ?rm generally has abundant resources and minimum causes
of distress, and can operate normally, barring potential invisible inef?ciencies.
Typically, it experiences good sales demand, growing market share and established
competitive advantage (CA) so there is no need to look at ?rms in this quadrant
any further in this reading.
? When a ?rm underperforms: The underperformance quadrant’s preconditions are
characterised by scarce resources (limited slack) and problems caused by weak
internal operations. Despite good demand for its products, the contribution margin
is under pressure, capacity utilisation is low, the competitive advantage comes
under pressure due to the ?rm’s inability to respond to demand, productivity is low
and the ?rm is cash-strapped. Operations are weak and contain several types of
inef?ciencies such as rising inventory, low capacity utilisation and increasing debtor
days. Increases in both demand and inventory are contradictory but point directly
towards the very inef?ciencies that create the underperformance.
? When a ?rm is in strategic distress: This quadrant’s preconditions are characterised
by abundant resources but declining sales demand due to the loss of competitive
advantage. Market share is under pressure, probably due to growing demand
for competitive or substitute products. Underlying a rise in inventory is the
loss in demand for its own products. Because the ?rm has abundant resources,
leadership is unenthusiastic about ?nding the real cause of the problem, namely
loss in competitive advantage, and tends to blame it on temporary misfortune.
5 Pretorius, 2008
58
Part 2 Strategy: Some critical issues
Reading 6 Turnaround strategies – acting beyond the generic strategies
Management typically responds with increases in sales incentives, marketing and
advertising budgets to overcome the problem, which they perceive as short-lived.
? When a ?rm is in crisis: If nothing is done when in a strategic distress situation or
the wrong strategies (those that drain resources or do not address the problem)
are pursued, distress quickly turns into a crisis. This quadrant’s preconditions
are characterised by scarce resources and the pressure on cash becoming more
pronounced due to the reduced sales. The ?rm is in the intensive care unit and
needs rescue. To increase sales, more credit is granted, which depletes cash
levels even more. Reduced advertising in an attempt to reduce cost weakens the
competitive advantage further. Basically the ?rm direction is south.
Each of these turnaround situations is determined by its own con?guration of
preconditions, and many additional lesser variables may play a role or act as triggers.
Each quadrant in the matrix would then need to employ some support practices to
solve the unique set of problems associated with the turnaround situation.
Strategies and practices for turnaround situations
Figure 2 suggests the strategies suggested for each quadrant in the matrix.
Resource
abundance
Resource
scarcity
Internal/operational External/strategic
Sustainability
strategy
(Needs renewal)
Forced
repositioning
strategy
(Needs turnaround)
Ef?ciency
strategy
(Needs turnaround)
Last resort
strategy
(Needs rescue)
Causality (origin of the distress)
R
e
s
o
u
r
c
e
o
f
m
u
n
i
?
c
e
n
c
e
Combination
strategy
Figure 2 Strategies to respond to the turnaround situations
6
Pretorius
7
suggests that strategic practices are the action plans that management
undertakes to achieve its chosen strategy. Such practices, taken individually or in
6 Adapted from Pretorius, 2008
7 Pretorius, 2008
Part 2 Strategy: Some critical issues 59 Reading 6 Turnaround strategies – acting beyond the generic strategies
combination, should bring about the desired outcome of the strategy. Each turnaround
situation demands a different strategy supported by speci?c practices. These practices
are chosen based on their applicability to the speci?c market (environmental)
conditions. The table below shows some of the key practices supporting each strategy
that are associated with recovery from that speci?c set of preconditions in the matrix.
Practices associated with each turnaround situation and strategy
Turnaround situations Turnaround strategy Strategic practices
Growth Sustainability strategy Pursue sales (penetrate and new markets)
Maximise market share
Entrench CA
Sustainable growth
Optimise capacity
Organic and inorganic
Protect against overtrading
Underperformance Ef?ciency strategy Protect/strengthen competitive advantage (CA)
Cost cutting
Capacity improvement
Generate cash
Outsource non-essentials
Productivity
Asset reduction
Strategic distress Forced repositioning
strategy
Strategy revision
Alternative revenue streams
Find new products
Alternative markets
Forced to innovate, diversify
Differentiate, acquire
Crisis Last resort strategy Defensive merger
Divestiture
Liquidation
Ask for debt forgiveness
Given the preconditions associated with performing well, the ?rm is free to focus all its
attention on a growth strategy. Growth can be achieved through organic and inorganic
practices such as market development, pursuing new markets and acquisitions. These
?rms focus on strengthening their competitive advantages and build market share
because they have abundant resources and are well positioned in the market.
Given the preconditions associated with underperformance, the ?rm must pursue
an ef?ciency strategy to turn around successfully and move towards the ‘performing
well’ quadrant. It must pursue ef?ciency through such practices as improving capacity
utilisation, lowering inventory levels, improving collection processes, restructuring
?nancing, better use of volume discount, improving supply chain activities and more.
60
Part 2 Strategy: Some critical issues
Reading 6 Turnaround strategies – acting beyond the generic strategies
The focus is mainly on internal operations and doing the business right and better.
These ?rms are well positioned but experience cash-?ow problems due to their
inef?ciencies. Cost to income ratios typically deteriorate.
Given the preconditions associated with distress, the ?rm has little choice but to pursue
a forced repositioning strategy. Because the repositioning is forced, the ?rm is under
pressure to change direction quickly (?nding an alternative value proposition), which
means less time for extensive research about new products and services and market
testing and therefore more chance of pursuing non-starters. The ?rm is on the back
foot and focuses on ‘stop the bleeding’ actions. Even worse than misjudging the right
alternative products is if the leadership is blinded by the apparent resource abundance
and tries to solve the problem by throwing resources into marketing and advertising
efforts, which have little or no effect. The bottom line is that competitive advantage is
dwindling, and so are cash reserves if ‘good money is thrown after bad opportunity’.
Lower-level management and sales staff have realised the problem and start to leave for
more prosperous careers with competitors, aggravating the distress by depleting human
capital. However, refocused positioning, differentiation to new products and services
or diversi?cation to alternative businesses or industries can be pursued, as there are
still resources available.
Repositioning fundamentally asks for a new choice of Porter’s generic strategic options
as a focal point. In the worst-case scenario it requires the start-up of new ?rms, which
involves determining the new positioning where competitive advantage will be sought.
So with abundant resources, Porter’s matrix is still core, but when there is scarcity of
resources, the focus moves towards ?nding ef?ciency ?rst.
Lastly, given the preconditions associated with a crisis, the ?rm now has no choice but
to pursue a last resort strategy. Cash is under severe strain and reduced advertising
weakens the effectiveness of competitive advantage even further, while unfocused cost-
cutting is the order of the day. There is little time for proper analysis and investigation
because of resource scarcity, and poor decisions and poor acquisitions are made. This
quadrant’s preconditions are characterised by scarce resources, and the pressure on
cash becomes more pronounced due to the tumbling sales. To achieve more sales,
credit is often granted, which further depletes cash. Firms are sometimes forced to ask
for debt forgiveness from creditors to stay in operation.
Sometimes it is possible (or necessary) to combine practices from different quadrants
to ?nd an optimal generic strategy. There is a place for combination strategy. The
combined strategy is mostly applied to support the forced reposition strategy or the
last resort strategy. Successful ef?ciency strategies free up cash and drive down costs,
which makes them easier to apply.
Part 2 Strategy: Some critical issues 61 Reading 6 Turnaround strategies – acting beyond the generic strategies
Application in practice
To use the above, it is ?rstly necessary for the turnaround leadership to determine
what turnaround situation the ?rm is in. It is not a clear judgement and requires some
interpretation. Practice suggests that there are often overlaps between the TAS elements
that manifest for each situation. Once the TAS is determined it leads to the selection of
the practices.
Secondly, at heart, all turnarounds require some form of application of the ef?ciency
strategy. It is generally used in combination with any of the other two strategies.
Summary
? Turnaround situations require different practices than would normally be
associated with the prescriptions of Porter for low-cost, differentiation and focus
strategies.
? Turnaround situations are governed mainly by two factors namely causality of the
decline (strategic or operational) and resource muni?cence (abundance or scarcity)
as shown in Figure 1 on page 56.
? Combining causality and resource muni?cence in a four cell matrix suggest four
types of TAS namely: performing well, underperformance, strategic distress and
crisis as shown in Figure 1 on page 56.
? Each cell requires a different strategy (see Figure 2 on page 58) with its associated
strategic practices.
? A practitioner of turnaround must ?rst identify the ?rms speci?c TAS before
selecting the strategic practices to be pursued for the turnaround.
Critical thinking exercise
It is 2008 and the mighty Starbucks is facing its biggest crisis, with its share price
at
1
___
10
th of its peak just after the turn of the century. Understanding their position
on the turnaround matrix helps to do a turnaround – or maybe a rescue. In late
2007, chairman Howard Schultz stated: ‘Over the past ten years, in order to
achieve growth, development and the scale necessary to go from less than 1 000
stores to 13 000 stores and beyond, I have had to make a series of decisions
that, in retrospect, has led to the watering down of the Starbucks experience,
and what some might call the commoditization of our brand’.
8
Diversi?cation to
other products (like music and ice cream) has also played its part. The news that
McDonalds plans to add espresso machines to all their stores and that several
independent stores are rising up means that substitutes are and will be freely
available at a much lower price. So it seems that Starbucks is losing positioning,
continued on following page
8 Economist, 2008
62
Part 2 Strategy: Some critical issues
with competitive products and substitute products their main threats. On top of
this, the looming recession puts pressure on it price range as well.
1 Which TAS is most relevant for Starbucks (based on the above information)?
2 Based on your placement of Starbucks in Figure 2 on page 58, which of the
strategic practices (from the table on page 59) are relevant when pursuing the
turnaround.
Guidelines for the critical thinking exercise
1 Looking at Figure 1, the problem seems fundamentally strategic in nature and
Starbucks can be placed in the strategic distress quadrant of the matrix. At the
same time, they suffer mildly from underperformance issues.
2 Not all the practices are relevant for this turnaround but the main ones include:
– strategy revision is a must,
– pursuing alternative revenue streams like music and other beverages has
contributed to the problem and should be reconsidered,
– new products within their main lines (coffee) should be sought – maybe a
cheaper coffee product as an alternative,
– seeking alternative markets contributed to their current problems and
should be brought under control,
– innovation for new products should be pursued, and
– some ef?ciency strategies will produce cash needed to for the repositioning.
Bibliography
This chapter is a short summary of the following three key publications around the
issue of turnaround.
Pretorius, M. 2008. When Porter’s generic strategies are not enough: Complementary strategies
for turnaround situations. Journal of Business Strategy 29(6): 19–28.
Pretorius, M. and Holtzhauzen, G. 2008. Critical variables of venture turnarounds. South
African Business Review 12(2): 87–107. Accessed via Internethttp://hdl.handle.net/2263/7394. Viewed 29 July 2009.
Pretorius. M. 2009. De?ning business decline, failure and turnaround: A content analysis.
South African Journal of Entrepreneurship and Small Business Management 1(2): 1–16.
The Economist. 2008. Coffee wars: Starbucks ousts its boss and brings backs its founder as a
new threat emerges. The Economist, January 12–18: 54–55.
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