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Turnaround Strategy

Updated on June 28, 2024
Article byPrakhar Gajendrakar
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Turnaround Strategy?

Turnaround Strategy refers to retrenchment when a company realizes that they have made a severe mistake. The strategy is called turnaround because it suggests one has come in the wrong direction, and it is time to make a U-turn, undoing the mistake and minimizing the impact and losses.

Turnaround Strategy

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Generally, company management adopts this strategy to give a strong nudge and rescue failing businesses. This reverses them to a restructuring and transformation process from loss to profitability. If a company is implying a turnaround strategy, it simply means that either they have realized their mistake and are making an early withdrawal or are already on the verge of shutting down.

Key Takeaways

  • Turnaround strategy is the concept of companies realizing the mistake and making amends to going back and withdrawing in time to survive and restore profitability.
  • The main types of turnaround strategies are leadership change, cost reduction, asset redeployment, and refocusing on core business operations.
  • There are five stages in a turnaround process: change in management, evaluation, emergency, stabilization, and recovery.
  • Without turnaround, a company will have less and even no options to make a comeback. They may even have to face severe management challenges and financial losses without it.

Turnaround Strategy Explained

Turnaround strategy is the practice of immediate corporate retracting when a mistake leading to a huge financial loss and market share is either predicted or detected. Simply, it refers to returning to a safe place when a company realizes that they have made a managerial or corporate mishap that is costing them monetary and reputational loss.

Turnaround strategy in strategic management is seen as a technique companies adopt to survive, bounce back, and recover from their declining position. It is generally practiced when companies are going through a tough phase. This could mean low sales figures, minimal or no profit, and revenue generation. The strategy involves looking for alternatives and making amends to pull things back on track.

Although it is a corporate term it can be applied by anyone from an individual, company, economy, any organization or entity. Not all turnaround strategies need to become successful. Sometimes, due to a lack of resources, and funds, loss of faith, and complexity, companies fail to make a comeback and dissolve eventually. The success of the strategy resides in the vision, action, and dedication of the top management.

The general turnaround strategy process involves defining the problem, strategizing, creating an action plan, executing, and lastly, monitoring and reviewing the performance. The general causes of turnaround are a fall in sales, changes in customer choices, extreme market competition, unplanned and abrupt changes in the market dynamics, and natural market conditions.

Stages

The stages of a business turnaround strategy are:

  • Change in management – Once a problem and its consequences are identified, the stakeholders take charge of the company and hold the top management accountable for the poor performance and losses. The most general practice is the removal of the top management.
  • Evaluation – In this stage, some of the key questions are answered to understand and develop a strategy; some of the crucial queries can be what is the true problem or foreseeable risk coming, the amount of time the business has before it becomes insolvent, is the market section that can provide immediate profits, what customer needs are to be met, do all the stakeholders agree to support and fund the turnaround.
  • Emergency – The emergency stage is where quick decisions are made to stop immediate losses and negative cash flow. Without capital and funds, no business can survive; therefore, any form of monetary loss is identified and tends to effectively stop the business from losing more money.
  • Stabilization – As the name suggests, in this stage, the company has made a turnaround and is in the revival process of getting back to improving its profitability. The major activities that occur in this process are low-risk diversification, withdrawal from unprofitable, divesting from underperforming areas, and segments and operational improvements.
  • Recovery – This is the last stage of turnaround; the company has successfully made a comeback, survived the critical phase, and is now looking to achieve new growth. The company has mended its mistake and is now focusing on its core business activities, products, and services. It may look forward to new products and even acquisitions.

Types

The types of turnaround strategy are –

  1. Cost reduction – Cost cutting is one of the most important turnaround strategies because a business cannot operate without funds if it is bleeding money or has a negative cash flow. It must be stopped right away. This also works positively for the financial stability of the firm.
  2. Asset retrenchment – This is the second most common strategy applied by companies which, in a nutshell, is all about letting go of assets that are not bringing any return demand maintenance instead. A company tracks all the wide varieties of assets they possess or active operations and shuts down the nonperforming assets and areas to make the company efficient.
  3. Focusing on core business operations – When a company is making a turnaround, it simply means they have deviated from their actual path to explore new territories but failed and are losing in the market. Therefore, this strategy is all about coming back to the core business operations, products, and services as soon as possible.
  4. Leadership change – Stakeholders, when experiencing failure and trying to make a turnaround, the very first step they perform is to remove the top management and people holding up the leadership positions because they have lost faith in them and believe a new plan and authority is required. It also includes merging departments and shuffling roles and managerial positions.

Examples

Below are two examples of turnaround strategies:

Example #1

Suppose Michael owns a textile factory and has a well-established business. One day, Michael decides to start his clothing brand and get started with the process. He sets up a store, hires designers and brand marketers, production units, a small office, a marketing and sales department, and everything. Finally, in a month, his brand will be in the market. Michael believes this was the right decision, but unfortunately, the clothing industry already had many big market players, and things didn’t work as Michael had planned.

Michael’s clothing brand failed in the market; there were negligible and no profits. People remained to their original choices and Michael could see a huge financial loss. This is where Michael decides to do a turnaround. He immediately shut down the clothing brand and all the offices and areas and sold off the assets that were not required. Michael also went back to his core business activities of textile and started making extreme cost-cutting to make up for the losses.

Although Michael had to face a lot of challenges and consequences and lost a large part of his market reputation, within 90 days, he was able to pull the business back on track and managed to make the turnaround strategy successful.

Example #2

Intel, which was once an undisputed leader in computer processors, is looking to adopt a turnaround strategy. Intel’s x86 architecture is going through a tough phase as the other competitors are introducing AI and other innovations to their products. Over the last few years, Intel CEO Pat Gelsinger has tried to pivot the company to a better model.

This turnaround strategy led the company to split into two. With a dramatic rebranding and reorganization, there are now Intel Foundry and Intel Product as two separate legal entities that remain part of the overall company but have their own sales forces and back-end systems. Both would work together but through indirect transactions. It could be one of the most interesting turnarounds in the year 2024.

Advantages And Disadvantages

The advantages of a turnaround strategy are –

  • It allows companies to make financial recovery after a long period of poor performance.
  • Turnaround strategies can be a real eye-opener for companies making strong changes in leadership, cost reduction, and management restructuring.
  • When a turnaround strategy is employed successfully, it brings the business back to recovery and profitability.
  • It ascertains long-term sustainability and cash flow improvement.

The disadvantages of the turnaround strategy are –

  • It is very expensive and may take a substantial time to show results.
  • If the company mainly depends on cost reduction, it damages the resources and demands a strong staff turnover.
  • It harms the company’s reputation, brand image, and market goodwill.
  • A company has to face substantial losses in the turnaround period, giving up on important assets.

Frequently Asked Questions (FAQs)

1. How would one ensure that the turnaround strategy is successful?

To ensure that a turnaround strategy becomes successful, stakeholders and company participants should support the idea of a turnaround with the contribution of adequate funds. The resources available must be optimally utilized and concentrated on the core business operations, and most importantly, it requires a strong leadership able to make concrete decisions.

2. What are the challenges of a turnaround strategy?

The challenges of turnaround strategy are –
 
– Cultural beliefs system
– Inability to change
– Lack of leadership in times of crisis
– Lack of funds and resources
– Political interference and corporate roadblocks

3. Why do turnaround strategies fail?

The common reasons for a turnaround strategy failure are –
 
– Inadaptability to change
– Inability to estimate working capital
– No communication between management and shareholders
– No scope or thought process for innovation
– Failing to share bad news and damages.
– Not learning from others.

This article has been a guide to what is Turnaround Strategy. Here, we explain the concept along with its examples, types, advantages, disadvantages, and stages. You may also find some useful articles here –

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