What are Turnaround Recovery Strategies?
Turnaround recovery strategies are a range of measures that companies employ to recover from a period of a performance decline. The range of measures is important since they mark an upturn phase of a company after a period of significant negativity.
The concept of turnaround strategies is also applicable in a country or a region’s economy following a period of stagnation or recession. Similarly, the concept can be used to refer to a fundamental adjustment in an individual’s strategy during a financial crisis.
- Turnaround recovery strategies are a set of measures that companies use to address a decline in performance.
- Companies use turnaround recovery strategies to mark an upturn period after a significant period of negativity.
- Some of the common turnaround recovery strategies used by companies include a change of leadership, focus on core business activities, and asset retrenchment.
Understanding Turnaround Recovery Strategies
Companies suffer a decline in their annual reported earnings from time to time. Several factors can cause a downturn in a business, including new competition entering the market, high costs, inadequate financial controls, unforeseen demand shift, poor management, and over-management.
Companies focus on different change processes to bring about an improvement in performance. The presence of warning signs of a financial downturn prompts executives to think of turnaround recovery strategies before the crisis escalates. Managers first adopt low-risk measures, and if the risk worsens, they become progressively more radical.
The period of decline and recovery in performance is called the turnaround and is measured based on net income. In each turnaround phase, companies identify management actions and decisions, as well as other factors that impact profit before devising appropriate actions. Various elements are involved in the strategies.
Types of Turnaround Recovery Strategies
1. Cost efficiency strategies
Most companies implement turnaround recovery strategies in the pursuit of cost efficiencies. Cost efficiencies entail a varied range of actions aimed at producing quick wins for a company. The measures may improve a company’s cash flow or stabilize its finances before coming up with more complex strategies.
Cost efficiency strategies are often implemented first in any recovery strategy. Companies prefer turnaround recovery strategies that achieve cost efficiencies because they are easy to implement, require little capital, and their effects are almost immediate. Cost-oriented turnaround strategies include reducing research and development (R&D), stretching accounts payable, eliminating pay increases, reducing accounts receivable, cutting inventory, investment diversification, and reducing marketing activities.
The measures can be accompanied by reduced pressure from debt repayments through financial restructuring. However, such an action carries some risk. Companies that solely rely on cost-cutting as a turnaround recovery strategy risk face increased staff turnover because of the reduced employee morale. Cost efficiency strategies can also damage the resources necessary to maintain a company’s core focus.
2. Asset retrenchment strategies
Companies that face performance decline usually pursue asset retrenchment actions after a cost-efficiency drive. Under the strategy, companies evaluate underperforming areas to eliminate them or make them more efficient.
The usefulness of retrenching assets as a turnaround recovery strategy depends on a company’s ability to generate cash flow. For example, a company may dispose of its old assets to generate cash or invest in new ones.
3. Focus on a company’s core activities
Companies also resort to focus on their core activities as a turnaround recovery strategy. Under the increased focus, companies identify markets, customers, and products that can potentially generate high profits, and adopt the measures as the main focus of the firm activities.
For example, a company may re-focus on loyal or less price-sensitive customer segments or product lines best known to it. It may develop a clear competitive strategy through focus.
4. Change of leadership
Companies often replace incumbent CEOs as a turnaround recovery strategy. During turnaround situations, most companies appoint new chief executives from outside the company as a way of injecting a new way of thinking into the top management.
It is inspired by the idea that CEOs bear the responsibility for a company’s negative position, and their replacement serves as a signal of change. CEO replacement can always be accompanied by an overhaul of the top management team to avoid repetition. As a result, a new senior management team can enable a company to focus on new strategies to lead the turnaround.
Real-World Examples of Turnaround Recovery Strategies
The declining sales and profits of the iconic motorcycle manufacturer, Harley-Davidson, during the 2008 mortgage crisis were met with turnaround recovery strategies that aimed to attain cost-efficiency.
Harley-Davidson cut its production costs to protect its brand’s image by balancing supply and demand. The subsequent consolidation of production operations led to massive job losses. In the same vein, the motorcycle manufacturer transferred its distribution of parts and accessories to a third-party provider.
Also, the subprime mortgage crisis of 2007/2008 led to the collapse of some of the leading banks in the United States. The federal government later responded with a series of turnaround recovery strategies. It imposed a tightened lending environment for auto sales.
General Motors (GM) declared bankruptcy, leading to the delisting of its stock from the NYSE. However, the bailout and package funds helped the company restore its business activities.
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