Take this real-life example: A company focused on men’s style acquired a shoe manufacturer and aims to produce a Gucci-like loafer for sale to prestigious retailers. It bought a shoe company that made and sold middle-of-the-road men’s dress shoes to mom-and-pop shops, although its biggest seller was an ugly but in-demand men’s dress military shoe sold to the U.S. government.
Long story short, the loafers were cash flow negative, and the company hadn’t realized it. The board of the new parent company wanted to cut deep into expenses to make the loafers work. Upon further analysis during a turnaround, the parent company found that the shoe company’s core customers were mom-and-pop stores, and its core products were mid-tier men’s dress shoes and the military dress shoe, the latter of which had a 50% gross margin.
It was a strategic error to forego the military dress shoe, Simson said. “We didn’t fire anybody. We didn’t cut expenses. We just redeployed the company to say, 'This is what you’re good at,'” he said.
To do: Ask the question, are we serving core products to core customers?
How can poor cost measurement erode profit margins?
The second mistake is a measurement one: You may have a fantastic market, but if you don’t know your costs, you risk eroding your margins.
It’s important to regularly nail down your costs. Without check-ups, some costs like electricity can slowly creep up, and you ultimately sell your product at a smaller margin, if at any margin at all.
This happens a lot in companies that work with many materials, have complex manufacturing processes, operate multiple facilities or use a lot of electricity, Simson said.
To do: Ask yourself when you last reviewed your costs. Is it time to revisit that?
Why do companies need both market insight and operational visibility?
A turnaround requires sound assumptions about strategic and internal information going forward. Think of it as having a good metaphorical telescope and microscope, Simson said.
A good telescope peers into the market and the external factors of your business. It looks at revenue forecasting, your sales and marketing system, your marketing costs, and your segments and customer needs.
Conversely, a good microscope inspects the four walls inside your company. It means reviewing timely, accurate financial statements and examining the processes and procedures that ensure everything runs on time.
In Simson’s experience, two-thirds of the problems are on the microscope side. Companies tend to defer to the telescope to focus on new customers, especially when the microscope is blurry.
“It’s part of our culture to emphasize talk about the future, but how are your current financials?” he said. “Probably 30% to 40% of all turnarounds are about not understanding this very important part of their own operations,” he said.
To do: How clear of an understanding do you have of your company’s financials? How can you better understand them?
How do execution problems hurt a company in distress?
The next piece of the puzzle is solving execution issues. Perhaps someone isn’t doing something well and you know it's a problem, such as customer service or delivering to the wrong address, or a piece of technology isn’t working well, like an optical character reader for checking in and out packages. Whatever it is, it could be costing you 1%, 2% or 3% of your margin every day.
“In a business culture where we’re talking about the great, big thing, sometimes the board or the CEO doesn’t want to look at the optical character reader and say, ‘How’s that doing?’” Simson said. “If that’s the difference between paying your bank loans on time or not, it’s very, very important.”
Remember that turnarounds are not exercises in perfection. When he is turning around a company, Simson looks for errors in strategy, management and execution and calculates the lost profits attributed to each error.
If you find those errors, fix them. That becomes your plan, he said. Fix them as quickly as possible.
“Very, very seldom is an execution error because someone is bad. The process is bad, but the people aren't bad,” he said.
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