Company recovery strategies are the strategies undertaken to preserve a company and prevent its shutdown. The key objective of company recovery strategies is to quickly identify and address the sources of its problems that may lead to its collapse.
The main task involved in company recovery strategies is to diagnose the causes of poor operations. Executives should ask themselves questions, such as:
Is the situation the result of an unexpected drop in sales due to a worsening economic situation?
Is there a badly chosen competitive strategy?
Was there poor implementation of a well-designed strategy?
Does the company hold too much debt?
The questions above are necessary to determine whether the business can be saved or if the situation cannot be fixed. By identifying the root cause of the problem, one can implement company recovery strategies that may lead to improvement.
Recovery efforts by a company are high-risk actions that often fail. However, if applied properly, they can lead to company revitalization and operations stability from a crisis.
Many companies wait too long before they start rebuilding. Others lack the funds and entrepreneurial talent needed to compete in slow-growing industries characterized by fierce competition for market share.
The most effective actions to solve problems include a revision of the current business strategy, an increase in revenues, consistent cost reduction, and a sale of assets.
What are the Types of Recovery Strategies?
The two main types of recovery strategies are:
1. Retrenchment Strategies
Retrenchment strategies are mainly cost-oriented. One key retrenchment strategy is to appoint new management that would aim to introduce changes to the business. Another strategy is to reduce assets that require storage space, such as inventory, in order to generate cash. Retrenchment strategies are generally short-term-focused to fix a crisis situation.
2. Turnaround Strategies
Turnaround strategies are more revenue-oriented. These strategies focus on improving the long-term vitality of a company. Some examples include introducing new pricing models or developing new products.
What are the Most Common Causes of Crisis Situations?
There are many factors that can cause a company to fall into a crisis situation. Some of them are as follows:
Too much leverage (debt)
Overestimation of sales growth prospects
Ignoring the negative impact on profits from aggressive attempts to scale the market share through significant price reductions
High levels of fixed costs due to the inability to use production capacities efficiently
Reliance on a technological breakthrough in the long term
What are the Possible Solutions and Company Recovery Strategies?
Both retrenchment and turnaround strategies aim to achieve one of four goals below to solve the problems that are dragging a company down:
1. Asset Sale
Having cash at a company’s disposal can significantly improve its position in the short term, provided it allocates capital efficiently. To generate cash, a company can perform:
Divestiture of an asset
Reduction of activities (decommissioning of a part of the production, sale of old enterprises, reduction in the number of employees, withdrawal from remote markets, reduction in services)
Sometimes companies in a crisis state sell assets not to get rid of a part of operations and to stop cash outflows, but to accumulate funds for preservation and strengthening of its remaining business activities. In such cases, the assets associated with the company’s non-core activities are usually sold to support strategic renewal in key activities.
2. Cost Reductions
Company recovery strategies aimed at reducing costs are most effective in the following situations:
When the company’s value chain is imperfect, and its cost structure is flexible enough to take radical measures to rectify it
When the ineffectiveness of actions can be assessed and corrected
When the company’s costs are inflated and there are many sources of savings
When the company is close to breaking even
Cost reduction also relates to a reduction in administrative costs, the exclusion of non-core and low-margin areas from the company’s value chain, modernization of equipment to increase productivity, restructuring of debts to inprove their repayment terms, and the reduction of interest expenses.
3. Current Business Strategy Revision
Strategy review can be accomplished by:
A shift towards a new competitive approach to restoring the company’s position in the market
Reviewing internal operations and functional strategies to better support the overall business strategy
Merging with another company in the industry and following a revised strategy based on the created synergies
Reducing the number of products and clients to a level ideally suitable to the company’s current capabilities
The most appropriate course of action depends on the industry context, the company’s strengths and weaknesses, its competitive capabilities concerning its rivals, and the severity of the crisis. As a rule, the revision of the strategy should be linked to the strengths of the company and its competitive capabilities, and aimed at strengthening market position.
4. Revenue Increase
Company recovery strategies can be aimed at increasing the income growth of sales volume. There are several strategies to increase revenues, including:
A company must increase revenue and sales volume when cost reductions are not possible. The fastest way to increase short-term income in the case of low price elasticity of demand is to increase prices.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below:
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