EUROPE: TURNAROUND TRICKS ARE A SHORT-TERM SOLUTION FOR FIRMS. - An effective strategy solves the problems of the future as well as the present.

by Robert Heller.
Last Updated: 31 Aug 2010

An effective strategy solves the problems of the future as well as the present.

The turn of the turnaround man has come round again. After every boom, the bust leaves a trail of corporate near-corpses for somebody to revive. This time, however, the tasks are larger and more complex - maybe too big for the good old turnaround trick to work.

That sleight of hand results from simple arithmetic. If profits have collapsed from £100 million to below zero, pushing them back to £50 million will be hailed by shareholders and commentators as near-miraculous. Merely eliminating the worst incompetence of the previous incumbents and cutting out a few thousand workers will achieve a precipitous recovery from the abysmal to the merely inadequate - but that is well short of success.

A spirited discussion took place at a recent seminar over whether David Dworkin, until recently the chief executive of Storehouse, had made a success of the group's major entity, BhS. His recovery programme had become a Harvard Business School case study. However, sharp questions were raised about the depth of his changes, the vitality of the BhS brand, and the extent to which the bottom line, as opposed to the business, had been transformed.

The hard truth is that in 1991 BhS made £21.6 million operating profit on £617.7 million of turnover - or a niggardly 3.4%. That is far better than the projected £12-million loss towards which the stores were heading when Dworkin arrived; but the whole Storehouse collection made over 11% in 1987 - and clearing that number, rather than simply entering the black, was the true target in front of the turnaround man.

From a personal point of view, the treatment worked fine. Dworkin was recruited for a top job in US retailing, and the success (or failure) of his work will fall to his successors. That is often the case with turnaround men: they move on, sought for their demonstrated skills, before their policies have paid off (or not). Lou Gerstner has thus been recruited by IBM from RJR Nabisco to rescue the company after only three years' demonstration of his talents: the results of which, like Dworkin's, are open to debate. True, the easiest part of RJR's turnaround - disposing of costs, jobs, businesses and debts - has been performed with efficiency. But profits have stuck on a plateau (far lower, note, than earlier levels), tobacco market share has fallen significantly, and Gerstner's strategic plan, with much left still to unfold, will have to be realised (if at all) in other hands. Three years sounds like a long time - but it is not long enough to remake a vast corporation.

That is especially true if its troubles have been created over a long period of ill-treatment. The fact that IBM and Volkswagen, both once national heroes, have been reduced to such dire straits reflects just as much on corporate governance as on the competence of previous management. The writing is always on the wall - the collapse of VW's American market share from 10% to 1%, for example, or the equally dramatic plunge in IBM's share of the PC market, or the fact that sales per sq ft at BhS had been stuck for a decade (at half the level of industry leaders). But those in ultimate charge either do not read the writing or choose to ignore it. The result is crisis.

Because the bulk of turnaround programmes do result from crisis, they have a highly unpromising foundation for long-term building: short-term necessity and shaken morale. The emergency certainly lends needed power to the elbow of the turnaround man - nobody will object when chairman Ferdinand Piech slashes 36,000 or so jobs and takes steps to reduce the huge number of man-hours required to build a Volkswagen.

The turnaround team at General Motors has the same untrammelled mandate - and has been using the same man to slaughter purchasing costs, Jose Ignacio Lopez. The latter, expensively poached by Volkswagen, will doubtless do his stuff there, too - but how did the costs and the man-hours spiral in the first place?

A journalist in the Financial Times made the observation that, 'VW is a classic case of a company that has made too extreme a sacrifice in short-term profitability for future growth'. But Volkswagen was not managing properly for short-term profit (just like BhS, GM, IBM et al) - and it was not managing properly for long-term growth, either. In a car industry getting more competitive by the hour, you cannot build either a decent profit or a viable future on the highest manufacturing costs in Europe. Effective strategy delivers both now and in years to come.

In a telling phrase, one analyst noted of Gerstner's departure from RJR Nabisco that 'he was perfect for the past and wrong for the future of this company'. That is a general truth about the turnaround man. He is called in to rectify the failures of the past. But those failures generally result from managers who were wrong, and did wrong, 'for the future of this company'. Look after the future by taking proper care of the present, and you will never need a turnaround man.

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