Corporate Renewal: Practical Tools for Effective Managers
James B. Shein is Clinical Professor of Management and Strategy at the Kellogg School of Management. He is author of "Reversing the Slide: A Strategic Guide to Turnaround and Corporate Renewal" (Jossey-Bass, 2011).
Mention the term “turnaround strategy” and most managers think in terms of corporate renewal for an entire organization. A great deal of what we apply to helping entire organizations get back on track can be applied just as effectively by managers responsible for smaller units within a large organization. The challenge for managers is to recognize the symptoms of trouble and take aggressive action.
The analogy I like to use is a ski slope. It is easier to stop near the top of the slope than it is if you are careening down the steepest part. The sooner you catch a problem and take action the better. The key here is to wake up the management team before you hit the worst problem of all, a cash crisis.
The Flying J Corporation was an $18 billion privately held company that nobody knew was in trouble until they couldn’t make payroll three days before Christmas. They showed big profits, but no cash, and that is the symptom that shows up when you are at full speed at the end of the ski slope. It’s a bad place to be.
What follows are some of the early signs that renewal is in order. There are more, but these are some I like to talk about when discussing the importance of spotting the early warning signs and taking action sooner not later.
- Pay attention to trend analysis. For example, a typical covenant on a loan might be a current assets to liabilities ratio of no less than 2.0. It is easy to look at the current ratio and as long as it is above the level set in the covenant to think things are fine. But suppose a trend analysis shows that the ratio started at 3.2 then went to 3.1, 3.0, and 2.5 with maybe a little bump to 2.6 then down to 2.2, and 2.1. It’s still above 2.0, but trend analysis tells you something bad is going to happen.
The great quality control expert W. Edwards Deming used trend analysis theory decades ago to help the Japanese transform their manufacturing systems. He said to make a better product, start watching trend lines of gauge measurements. Reset machinery when indicators are heading in the wrong direction. Don’t wait until after they get there. There was much more, of course, but the point is, I don’t see managers doing enough trend analysis.
- Be alert to sudden shifts in your industry’s environment. There wasn’t much advertising on television until TVs went past the 50 percent mark in homes. The shift to advertising on the Internet went even faster. Watch for those sudden shifts, not just in your industry, but in the pipelines serving your industry as well. The newspaper industry, for example, missed the early evidence that the pipelines that carried the news and brought them advertising revenue were shifting to the Internet.
The 50 largest newspapers in the country asked me to speak about turnaround strategy. We asked how many thought that people would go back to reading newspapers when the recession ended and I could not believe the number of hands that went up. So I presented data from prior recessions that showed advertising revenues had been trending down for about 50 years and that during each recession, it simply went down faster.
- Morale is a good early indicator of trouble. Internal people tend to know when performance isn’t good sooner than those at the top. When running a company I used to show up on the graveyard shift and talk with the line employees. I always got an earful. It takes some judgment to separate a problem from a gripe, but the workers are a great source of information about how you are doing.
- Paying attention to quality can pay off, especially if industry standards are shifting and yours are not. Look at what is happening with product returns and scrap rates. Has quality eroded? Has the industry changed its quality standards and you are not meeting them? Either one is a problem.
- Accounts receivable can tell you more than how much money people owe. Are people taking longer to pay? That tends to happen in a recession, but it can also be a sign that customers are unhappy with either quality or with the time it takes for a product to be delivered. Slow payment of accounts receivable can also be a sign that you are losing good customers and picking up new customers who have poor credit and so are slow in paying their bills.
- Benchmarking is a useful tool. Remember, though, to choose your benchmarks carefully and not necessarily against your own industry. Others in a similar business may be in just as good or bad a shape and so while benchmarks are necessary, they may not tell a full story. And be careful to not react too strongly to the information that benchmarking provides. The example I use of going too far is when AT&T fired some of its best salespeople because they couldn’t keep up with some of the reported results of WorldCom. It turned out, of course, that WorldCom was cooking its books so using them as a benchmark turned out to be damaging.
- Concentration of buying power can be a sign of trouble. It used to be that a manufacturer with a great brand name had a lot of power, but with buying power concentrated in a smaller number of big box stores, that has changed. They are willing to drop a big brand name that won’t play their game, no matter how big the brand. I worked with one of the last US-based apparel manufacturers. When they sent a shipment to a big box customer it was not unusual to get a notice back saying they were taking 10 percent off the bill because one hanger was facing the wrong way in the container. That ten percent represented the manufacturer’s margin. Understanding concentration of your customer base is critical. The same goes with your supplier base.
- The most important indicator that you are careening to the bottom of the ski slope is the bleeding of cash, whether at the operating level or requiring dipping into reserves. Cash is the life blood of any organization, anywhere in the world.
If you are a manager and you see some of these (or other) indicators that a renewal strategy is called for, the first step is to figure out how serious the problem is. No one organization is going to have all the indicators at once. So what you do is a function of how far down that ski slope you are.
If problems are spotted early there is room for action. The manager’s responsibility is not simply to say: “We’ve got a problem here.” They should say “We’ve got a challenge, and here is what we are going to do to solve it.” Renewal strategies are available at every point on the ski slope to reverse the slide so these and other warning signs should be prescriptions for action.