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.
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