In general, strategic management and the strategic planning process tend to be used when a firm is operating normally, or is experiencing some minor issues. However, in times of significant corporate distress, managers have to take special steps to ensure that the firm survives. These situations generally involve a company being near bankruptcy, and possibly already in administration or bankruptcy itself. As a part of the turnaround management process, special turnaround consultants can be brought in to help the company develop a plan to get out of its current troubles, and develop new competitive advantage.
As part of the turnaround management process, the new management team needs to identify the root cause of the crisis. In generally, most crises are caused by falling revenues due to a shrinking market or weak economy or excessive costs caused by over optimistic sales projections or the wrong strategic choices. However, companies can also find themselves in trouble if they lose control of key resources; suffer significant research and development failures; their market is taken over by a highly successful competitor; or they have inadequate financial and governance controls. It is important to realise that more than one of these causes may be to blame in some cases.
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Whilst each individual case will be unique, the generic turnaround process tends to involve five stages:
1. The top management team is replaced, possibly by a team of specifically skilled consultants.
2. The new management team conducts a situation analysis, evaluating the prospects of the company and its viability in the current environment. This is similar to a SWOT analysis, however it focuses on that ability of the business to survive, not to exploit new opportunities.
3. An emergency action plan is drawn up to achieve a positive cash flow and ensure positive net assets. This avoids the business entering cash flow insolvency or balance sheet insolvency.
4. Once the immediate threat of insolvency has passed, the business is restructured to improve ongoing operations, which can involve adjustments to the product and marketing mix as well as disposing of unprofitable lines.
5. Once the company returns to steady profitability and any changes have been internalised the transition team can be replaced with a new senior management team, or the transition team may remain in place. At this point, the focus switches to growing the restructured business and maintaining the positive cash flow and positive net assets.
However, it is possible that in the second stage the transition team will judge that the firm’s situation is too weak for it to continue at all. As such, an exit strategy will need to be developed. Such a strategy can involve immediately liquidating all business assets; selling the company to another firm; or looking to maximise short term cash flows at the expense of the ultimate value of the firm and its assets.