Operating Like a Turnaround (Before You Have To) — Part 2

[Part Two in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.]

In our last blog, we discussed how and where you are generating your profits and how detailed examination of this can unlock capacity and growth. In this installation, we address growth via both expansion and acquisition. This may seem a departure from the Turnaround theme, but the rigor of critically evaluating opportunities is indeed applicable.

How and Where Do You Want to Expand?

Many companies begin their expansion planning focused on what THEY do well, or where THEY have additional capacity for new products/services that THEY have developed.  This internally focused methodology often leads to a “Ready, Fire, Aim” scenario and disappointing outcomes.  A far more effective approach is to start with a verified knowledge of demand rooted in the perspective of YOUR CUSTOMERS & CLIENTS.

Successful growth planning begins with listening: What are your clients’ problems and pain points? They may not tell you up front, or even have clear ideas on what they are. They may not even be totally aware of them.  Invest in understanding your clients’ needs better than they do.  Invest in this with both internal and external resources.  Then look inward and match customer demand against the specific product/service extensions where your company has a competitive advantage.

When expanding into new customer segments for your existing products/services, examine each opportunity and how they match with your specific competitive advantages.  Keep this examination simple:  if your company has the production capacity, expand where there is a proven demand that fits your strengths.

Once an addressable demand is solidly identified, investigate your company’s ability to address it. Is the solution within your current skill set? If so, it may be as simple as making minor adaptations to existing products/services or Sales & Marketing programs that can be easily implemented. If not, can you develop it internally with existing resources, perhaps supplemented by some key hires, technologies or other assets? If internal development is not realistic, then one must consider an acquisition, joint venture or partnership. This process is more succinctly described as the classic “build vs buy” analysis.

Whether expanding more deeply into current markets or new markets, whether expanding organically or via acquisition/partnership, the key determinant in assessing viability is current or potential customer demand.

Regardless the path, simplicity is critical. It is usually most effective to focus on 1, or perhaps 2 things at a time. Trying to “multi-task” often leads to dabbling and confusion, and when you make the decision to play, don’t play for pennies; allocate the necessary resources and play to win.  Alternatively, if you don’t have a verified market edge or lack the willingness to invest sufficiently to truly win, don’t start.  Don’t dilute your human, financial or operational capital with multiple, complex and/or poorly funded initiatives.

“Operating like a turn-around” means identifying and investing in the specific things needed to succeed. This doesn’t mean under-investing: it means focusing resources on the simplest path to achieving as close to a pristine implementation as possible.

It also entails creating a realistic budget that your company can fund. Establish benchmarks to justify the ongoing investment and the discipline for monthly tactical and quarterly strategic reviews. If the project progresses successfully, please revert to the discipline outlined in Part 1! Then keep at it or double down.  If performance lags the established benchmarks, determine the specific reasons. You may have to change tactics or even recognize that the initiative should be re-thought and/or perhaps curtailed.

Negative Example (“Ready, Fire, Aim”):

A specialty food manufacturer desired expansion into markets tangential to their core customer base. A thesis was developed internally as to the potential accessible market without any research or fact-driven confirmation.  Loathe to spend money on consultants or market experts and relying solely on their own perceptions, the company simply applied the same marketing and advertising approach that had worked in their core business. They then proceeded to commit significant capital and resources to a build out, tripling their production capacity.

Fast forward 18 months, having failed to confirm and identify the accessible market, the increased production capacity remained unused, and the static marketing strategy not only failed to reach a new audience, but even grew stale with their core customers. This in turn resulted in shrinking of revenues and a significant decrease in their optionality for either a desirable liquidity event or attraction of growth capital.

Positive Example (“Ready, Aim, Fire”):

A home goods manufacturer grew exponentially in one specific product category by providing a key client with extraordinary service and consistent quality.  As the client’s demands grew, the company applied financial and human capital in a well-planned strategic initiative.  The result was a nine-fold increase in revenue from that account in eight years, taking total sales into nine figures.  Then, having established mutual trust, the company approached this key customer to manufacture products in a second category requiring a very similar manufacturing expertise.  The client accepted the proposal and participated as partners in a tightly planned product line expansion.  Within three years, this category too generated mid-eight figure revenue for the company.

“Operating like a Turnaround” means taking a “Ready, Aim, Fire” approach focused on meeting proven demand in the simplest manner.  This will diminish internal friction while increasing the odds of sustainable top-line growth, stronger bottom-line results and much higher ROI.   That in turn optimizes value, whether for a liquidity event or in seeking further growth and funding capacity.

Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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Operating Like a Turnaround (Before You Have To) — Part 1

[Part One in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.] 

How & Where Are You Generating Profits?

Imagine running your company with a laser focus on where it is generating profit.  Imagine trimming or eliminating unprofitable functions, retaining only those aspects of the business that provide the best returns and opportunities for growth.

This is the discipline that turn-around professionals bring to troubled businesses.  This discipline, when applied to healthy companies, makes them even stronger. It rallies resources around the company’s core mission, manifesting profitable growth and allowing significant, retentive awards for the company’s key assets: its people.

Many companies have a great set of core products/services.  They have developed a competitive advantage in those offerings and understand the specific market subsegments that find value in their purchase.  These core activities create strong, sustainable profits.

But then arise the dual temptations of 1) “mission creep”: the expansion beyond these core offerings, and 2) “avatar creep”: marketing/selling to customers who do not perceive/receive the highest value from these products/services. These diversions start out innocently enough, often as tangential add-ons, but are borne not of true market demand, but from an inwardly focused culture.  These initiatives may appear to address customer/market needs, but often merely distract management from addressing growing internal problems. They add operational complexities, confuse both consumers and employees, and can ultimately lead to cultural friction and diminished financial performance.

A ”mission creep” example: a company offering a nascent, evolving technology finds that their  offering(s) are not performing exactly as anticipated or promised. Customers ask for supplementary or stop-gap services, which customer service staff tries to accommodate. Instead of confronting the core issues around product improvements, a spiral of ad hoc deliverables takes hold. This unsanctioned “sub-division” consumes the attention of your most valuable people, squeezing out bandwidth for critical “must-have” improvements which would more effectively improve customer satisfaction. This bandwidth shortage leads to more hiring, misaligned with the company’s core mission.  Before you know it, payroll has ballooned past the point of profitability without cementing core customer relationships.

An ”avatar creep” example: An industrial services company finds that a particular type of client receives very high value from its services. These clients are large, sophisticated, and their needs align precisely with the company’s services. In an effort to generate growth, the company markets to smaller, less sophisticated customers. While sales to these customers increase revenue, it is at far smaller margins. Customer acquisition and service costs increase, production assets are strained and customer service demands may skyrocket – all contributing to decreased profitability, and if left unchecked, a potential cash crunch.

Examples of how this looks when acted upon: a healthy restaurant group operating in multiple venues undertook a broad analysis of their portfolio. This analysis revealed underperformance in a distinct segment, which led to shuttering numerous locations. While revenue decreased, margins strengthened and bandwidth was unlocked, allowing them to double-down on their profitable core and pursue a new venue type with far stronger growth potential.

A profitable 3PL enterprise performed a granular review of their client base, which revealed that many of their customers were in fact unprofitable. This detailed analysis resulted in culling 60% of their clients, refocusing on their best clients, and increasing EBITDA margins from 5% to 16%. This allowed the company to explore additional services and expansions that will further serve their core customers and at stronger margins, positioning them to attract additional clients of similarly high value.

In short, when companies take a page from turnaround management, doing a deep dive into core competencies that match specific high-value customer demands and shedding margin dilutive activities, friction in product development / distribution is minimized and Sales & Marketing messaging is clarified. Costs are reduced, and while revenue may lag in the short-term, increased margins and customer satisfaction open the door to far greater, more profitable revenues in the future.

This also highlights the rigorous due diligence necessary to undertake expansion. It involves an examination of specific customer demands, how they match with the company’s capabilities and a robust buy/build analysis. Stay tuned for our next blog, which will address this in greater detail.

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Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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