It is not uncommon for businesses to experience a downturn due to lower than anticipated sales, higher than expected expenses or unanticipated complication, especially in today’s highly disruptive market. When this occurs, management needs to reverse the downturn and return the business to profitability. To do this companies need to develop strategies that can effect a successful corporate turnaround. These are corporate actions that are taken (performed) to deal with issues of a loss-making company like increasing losses, lower return on capital employed, and continuous decrease in the value of its shares. Most companies need to transform at least once during any five-year window.
The concept of turnaround strategy covers the following points:
- Turnaround strategy means to convert, change or transform a loss-making company into a profit-making company.
- The main purpose of implementing a turnaround strategy is to turn the company from a negative point to a positive one.
- If a turnaround strategy is not applied to a sick company, it will close down.
- It is a remedy for curing industrial sickness.
- It tries to remove all weaknesses to help a sick company once again become strong, stable and a profit-making institution.
- It tries to reverse the position from loss to profit, from declining sales to increasing sales, from weakness to strength, and from instability to stability.
- It aids to reduce the brought forward losses of the loss-making company.
- It helps the sick company to stand once again in the market.
- It is a complete U-turn of a planned strategic economic transition.
The following are examples of companies that managed to turn their fortunes around by developing turnaround strategies.
The world’s first trillion-dollar business almost collapsed before making a single iPhone or iPad. After an early momentum and the creation of game-changing products, Apple experienced a fall; over the course of 12 years, its innovation and popularity plummeted, following the 1985 departure of Steve Jobs. By the time Jobs was rehired, in 1997, the company was operating at a loss and creeping closer and closer to bankruptcy every year.
But after embarked on a new strategy that involved a rebranding campaign, a new iMac and the steady restructuring of consumer expectations, Apple turned itself around to become one of the biggest, most successful companies in the world.
Contrary to popular belief, Netflix did not emerge overnight. Netflix was founded in 1997 to combat late fees for video rentals. It did not turn a profit until 2003. Netflix saw rapid growth until 2011 when CEO Hastings decided to split user subscriptions into two separate categories at a hiked price: DVD rentals and unlimited streaming services. As a result, the company lost over 800 000 subscribers and its stock value dropped by 77%. Then Netflix made the smart move of introducing Netflix Original movies and TV shows. This spun the company’s fortunes and led to them as of January 2018 having 120 million subscribers worldwide and generating an annual revenue of over $12 billion.
The story of Ford was mostly one of continued successes and growth, but by the 21st Century, the motor industry in America was in free fall and not even Ford escaped unscathed.
Job losses, plant closures and sales of many of the brands it had acquired over the previous decades were required, along with a rescue plan from the Government. However, by changing its strategy it soon got back to growth and recovery, culminating in announcing record profits of over $10 billion in 2015.
With turnaround strategies it is important to correctly identify the problem in order to address it effectively. If the problem lies in poor sales, develop a strategy that corrects the problem. If the issue lies in high expenses, develop a strategy to reduce the number of employees or lower consulting expenses. Success comes out of failure so often, what you have to remember is that once you have hit rock bottom the only way to go is up.
Fadzai Danha is a consultant at Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm.
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