Financial Data
Updated 01 Oct 2020

Righting a sinking ship

How to create a turnaround strategy.

Think Apple, Starbucks, Ford. If businesses were movies they’d be box office smash hits. But things haven’t always been so rosy for these admired companies. In the lifecycle of a business, a downturn is almost inevitable and these companies faced serious ones.

What sets these apart from other businesses is that by undergoing a turnaround, they benefitted significantly in the process.

Small businesses are not exempt. The shift from running at a loss to re-establishing profitability requires management to reverse the trend and return the business to profitability as quickly as possible to ensure that the company’s long-term position does not suffer irreparable damage

This six step guide will provide you with a methodical approach to turning around an ailing business and setting it back on track to success.

Step 1

Analyse the business

The first priority in turning around a business is to figure out where the prospects and problems lie.

Prospects are the positive elements that exist even when other things are not looking good. Almost any ailing business will have some competencies, assets or markets where they are strong.

Problems are the areas of concern in a business – the domains and activities where the business is failing or under-delivering. Examine your financial reports to determine why the company is not performing to plan. There are two main reasons why companies underperform:

  • Reduction in revenue: analyse your pricing compared to your competition and the performance of your sales staff.
  • Expenses are too high: examine staffing, technology and processes to identify the problem areas.

Being open and honest about what’s not working is essential to launching a business turnaround. Systematically uncovering the prospects and problems can be a challenging task. It’s easy to fall into a trap of just focusing on one aspect of the business or of getting totally wrapped up in the problems and ignoring the prospects.

Step 2

Dissect the problems and prospects

The diagnosis phase provides an overview of the problems (weaknesses and threats) and prospects (strengths and opportunities) in each major element of a business. Next, try to ascertain the root cause of the problems and then explore ways to leverage the prospects. This is the phase in which you go deeper into the ailments and opportunities of a business.

The most useful way of dissecting the problems and prospects in a business is a 5-Ws analysis. As an extension of the 5-Whys analysis, this method was developed in Toyota manufacturing plants to move past symptoms and understand the true root cause of a problem.

When Toyota employees confront a problem on the factory floor, they’re required to ask “Why?” five times, successively, so as to delve into a problem deeply enough to understand the ultimate root cause. This method has been highly effective for Toyota and has been adopted in many other settings from computer programming and teaching to general management.

For each problem, ask “Why?” the problem exists. Then with respect to the answer that you provide, ask “Why?” again. Repeat the process five times to delve into the root cause of the identified problem. For example, if one identifies that a key weakness is employee motivation then the 5-Whys analysis might proceed as follows:

  • Employees appear unmotivated. Why? Because they are bored?
  • Why are they bored? They don’t have enough work to fill their day.
  • Why don’t they have enough work? They have very narrow job descriptions that are relevant when the business is at full capacity.
  • Why do they have very narrow job descriptions? We have never reviewed role descriptions and expectations.
  • Why have we never reviewed role descriptions and expectations of employees? Because we don’t have an HR manager so no one has focused on employee roles.

This analysis highlights the root cause for low employee motivation. That provides something that managers can work with, instead of just saying, “Let’s take the employees bungee jumping to improve morale.”

The flipside of the 5-Whys analysis is the 5-Whats analysis. To explore the breadth and depth of options for making the most of the prospects in the business (opportunities and strengths), ask “What?” five times with respect to each positive aspect of the business. For example, if the business is still strong in Cape Town, seek answers to the following five questions:

  • What could we do to make more of our position of strength in Cape Town?
  • What is it that customers in Cape Town like about our product?
  • What other markets are similar to Cape Town?
  • What can we learn from the people managing the business in Cape Town?
  • What’s the key difference between Cape Town and Johannesburg?

These questions will enable you to explore how to enhance positions of strength and recognise core competencies and opportunities for growth and competitiveness.

Step 3

Develop a Strategic Direction

The direction phase is focused on using that information to decide where the business needs to go. What’s the grand plan? Much has been written about the power of a vision or a mission statement within business.

Articulating a clear picture of where a business will go and what it will do to get there is still one of the most important things that any business leader can do. In ailing companies the vision and mission of the venture have often been lost, confused or watered down. People in the business don’t have a clear idea of what they are working towards.

An essential part of any turnaround is to re-establish the vision for the business. Decide on a direction that will make the most of the prospects, overcome the problems and move the business toward something that is compelling and inspiring for everyone involved.

In setting direction for the business, use a five-year time frame. Articulate, as clearly and compellingly as possible, where you want the business to be in five years time, focusing on the two fundamental questions of strategy:

  • Where do you play?
  • How do you win?

The clarity with which you articulate a response to these two questions will be directly related to the likelihood that you will be successful in the turnaround of the business.

Step 4

Drive the process

The next step of the turnaround process focuses on implementation. This is about putting structures and processes in place that enable and encourage others to do the things that are going to push the business in the chosen direction. There are four items to consider:

  • Goals

These are specific outcomes that a business strives to achieve. They should move an enterprise toward the mission or vision. In establishing goals for a business in turnaround, it’s useful to set 90-day, one-year, three-year and five-year goals. This creates a good balance of short and a long-term perspective so that you get immediate action but not at the expense of big picture thinking.

  • Tasks

These are the actions that need to be taken to achieve goals. They are more focused than goals and they can be assigned to specific people who are then accountable for carrying out the tasks within a predetermined timeframe.

  • Measures

These are an extension of goals and tasks. They are things that help you assess if the business is moving closer to completing a task or achieving a goal. For each goal and task, it’s useful to clarify how you can measure whether or not you’re moving closer to achieving it.

  • Incentives

These are the rewards that are promised to people if the goals of the company are achieved. People respond to incentives. It’s important to establish positive consequences for the achievement of the key turnaround goals and ensure that all involved are aware of, and enthused by, the incentives you put in place.

Step 5

Monitor progress

One of the biggest mistakes that many people at the helm of a turnaround make is that they fail to follow through properly. Some leaders think all the hard work is done when the restructuring plan is implemented. It’s critical that you continually monitor the progress of the turnaround.

The practical implementation of this step should focus on the creation and utilisation of a dashboard – a snapshot of the most critical measures. Take the important measures identified in Step 4 and create a system to extract information on those measures regularly (at least once a week).

Collect those measures on a single screen or spreadsheet so that they can be compared to the same measures from previous weeks. If a problem is identified you can immediately find out why and take action to rectify the situation.

Step 6

Communicate with staff

It’s absolutely essential to make employees aware of the profitability issues and your turnaround plan. Disseminate the plan to everyone and explain how it will impact them. Your goal is for everyone to understand how they can help improve the company's financial stability.

Be sure to deliver the plan in an optimistic, confident manner. This shows employees that the issues have been identified and the course of action is clear.