Business lives getting shorter

In an article in the Sunday Times, Luke Johnson, chairman of Risk Capital Partners, says turnarounds need exceptional managers or ‘company doctors’ and a radical agenda – and not many are equipped for the job

First, why do many businesses fail in the short term, and virtually all in the longer term?

In 1950 the average life of a company in the S&P index was 47 years – according to McKinsey consultants, by 2020 it will fall to just 10 years

Reasons for this include:

  • Market share lost to new competitors or changing tastes
  • New technology making theirs outdated e.g. Kodak film versus digital cameras
  • Cash generation drying up
  • Diversification reducing focus on winning products
  • Fire, flood, fraud or customer bankruptcy hitting them
  • Lacking good controls
  • Building a grand office before a good business

Good managers must avoid such problems becoming serious

Some, no matter how good they are, will fail at some stage down the line – the information they act on is rarely perfect so there’s always risks involved with any decision they take – one day, they inevitably get things wrong so down they go – it’s the same with democratic governments trying to get things right when protecting their citizens every day against terrorism – the governments have to get it right every day if they are to ‘win’, the terrorist only once

And most managers are not so good, so the odds are much more against them winning in the long term – some bury their heads in the sand, some even deny there’s a problem when it’s staring them in the face – hence, they’re unwilling and/ or unable to do what’s needed – such managers should ‘almost always be replaced’

So what do good relacement managers or company doctors do when brought in?

  1. Analyse the problems
  2. Produce a plan
  3. Take action, with vigour

The action could include:

  • Cutting loss-making products/ areas of the business
  • Cutting costs big-time
  • Eliminating unnecessary overheads
  • Reducing stock, especially slow-moving or overvalued
  • Raising cash for working capital
  • Renegotiating agreements with lenders and suppliers
  • Collecting debtors more vigorously
  • Increasing prices where feasible
  • Offloading and replacing ‘chaff’ management
  • Educating and energising remaining ‘wheat’ management

Note such actions are all within management’s control

However, there are others outside their control which could prevent any rescue efforts succeeding – new competition, technology or legislation for example

Overall, turnarounds are high-risk ventures – even the best company doctors fail at times

Better, therefore, for existing managers to know how to avoid their company becoming yet another sunken ship

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