Is it possible to achieve a company turnaround from a sustained decline? Yes, of course. Instead of presenting a turnaround model full of management jargon, I address this question from a real-life company turnaround example I handled.
It was an IT services company with a workforce of around 1000 professionals. The company was facing severe cashflow challenges. It was taking on too much debt. Its order book was full of low-margin business. The founder and company leaders had daily meetings and sessions to decide when salaries should be disbursed, vendors paid, and who to fire.
The first step in turning around this company is understanding and analyzing the balance sheet. The analysis gave me an insight into the strengths and weaknesses of the company. It helped me prepare a financial turnaround hypothesis.
Leadership often lies at the core of the decline of a business. Detailed meetings with each leader helped me gain insights into these individuals’ psychology, capabilities, and competence. Probably, this is the most important of the company’s turnaround steps. Deploying the right people at the right place is critical to the success of a company turnaround. People who are not likely to align with the turnaround strategy or try to resist change have to be let go. A new team is often required to assist the company’s turnaround process. A massive re-organization and restructuring of the company are required.
The company’s decline was taking at a rapid pace, cash flows were rapidly deteriorating, and the company was on the brink of bankruptcy. The ongoing saga of Twitter post the company takeover by Elon Musk, his action of firing half the workforce parallels the turnaround case I have described so far. Much of the media and expert commentary criticizing Musk for the drastic organizational changes that he is making does not appear in line with my experience.
Company turnaround is possible when a new company is created, often undertaking major surgery and removing all those elements that drag its growth and require replacement.
For confidentiality reasons, let me list the steps that helped reverse the decline.
- Firing the leadership
- The business strategy was overhauled
- The business model was revised
- The marketing strategy and marketing plan were reworked
- A new monitoring system was developed
- A new team was hired. Each key member was given a clear set of tasks and performance measurement criteria.
- Fresh equity was infused, which helped tide the immediate cash flow challenge.
- A brand new operational plan was developed and implemented.
Let me now cite from the literature a few examples of companies that were able to turn around and recover from challenging times successfully:
- Apple Inc. – In the late 1990s, Apple was in financial trouble, declining sales and lacking direction. However, Steve Jobs returned to the company in 1997 and implemented a new strategy focused on innovation and design. It led to the development of new products like the iMac, iPod, and iPhone, which helped to transform the company into the tech giant it is today.
- Ford Motor Company – In the mid-2000s, Ford struggled with declining sales and increased competition from overseas automakers. The company brought in Alan Mulally as CEO in 2006, who implemented a new business strategy focused on reducing costs, streamlining operations, and developing fuel-efficient vehicles. Under Mulally’s leadership, Ford was able to turn a profit and avoid bankruptcy during the 2008 financial crisis.
- IBM – In the early 1990s, IBM struggled with declining sales and a bloated bureaucracy. The company brought in Lou Gerstner as CEO in 1993, who implemented a new strategy that focused on cutting costs, streamlining operations, and reinvigorating the company’s culture. It led to the development of new products like the ThinkPad laptop and the creation of a more customer-focused business model. As a result, IBM recovered from its financial struggles and became a leader in the tech industry.
- Starbucks – In the mid-2000s, Starbucks was experiencing declining sales and increased competition from other coffee chains. The company brought back its founder, Howard Schultz, as CEO in 2008, who implemented a new strategy focused on improving the customer experience and expanding its product offerings. It included the development of new drink options, such as the Frappuccino, and expanding the company’s food menu. These changes helped to revive Starbucks’ sales and make it one of the most successful coffee chains in the world.
- Lego – In the early 2000s, Lego struggled with declining sales and increased competition from video games and other digital toys. The company implemented a new strategy focused on innovation and creativity, including developing new product lines like Lego Friends and Lego Ninjago. The company also partnered with popular media franchises like Star Wars and Harry Potter to create licensed sets that appealed to a wider audience. These changes helped to turn Lego’s sales around and make it one of the most successful toy companies in the world.
Each of the examples I have mentioned above indicates that turning around a company is case specific. It requires a close re-examination of the business strategy, finances, and operating model. Investors who are in the business of buying sick assets are familiar with these models. Most companies can be successfully turned around.