Navigating the Crossroads: Choosing Between Business Transformation and Turnaround
Poor or dwindling margins, deteriorating market share, or lack of cohesive vision for where the enterprise or BU are headed. A staff in dire need of inspiration, lack of strong leaders to give it to them, and low accountability or the will to do better. These are situations companies find themselves in as the pace of innovation within industries accelerates, unanticipated external forces (e.g., supply chain and energy inflation) rear their ugly head, and maintaining right to play in increasingly competitive markets becomes more and more difficult.
These challenges, which often occur together, create a critical question that senior executives must ask - should we dig our heels in and double-down on our core business while retooling our operating model, or overhaul our strategy to re-orient our business and purposefully build substantially on or away from our core? Phrased differently, is it a turnaround that allows us to get our head above water, or a major leap forward in our identity and footprint requiring us to undergo a strategic transformation? The answer may start with a careful diagnosis of the origin of the problem.
A self-assessment that points to lagging right to play coupled with market trendlines that would likely result in further loss of the firm’s competitive position creates the need for a system(s)-wide transformation focused on capability-building. In contrast, if the self-assessment points to a systemic inability to consistently deliver strong financial performance in fundamentally strong markets, the solution should center on a turnaround focused on identifying and maturing the key existing capabilities that likely suffer from systemic weakness and immaturity. It is worth noting that turnarounds and strategic transformations often go hand-in-hand, with an organization needing to retool its operations and strengthen its core through a turnaround as a precursor and enabler to identifying and making the most of investments targeted at propelling an organization into attractive new space. Let’s take a deeper look at these two levers.
Improvement and survival depend on quick action on the most meaningful opportunities, the wherewithal to avoid becoming distracted by pet projects, and a willingness for turnarounds to bootstrap the plan as a whole.
The decision to execute a turnaround is typically made in response to an existential threat of insolvency if swift action is not taken. In this situation, a company has likely experienced a decline in performance, resulting in dwindling cash flow and profitability. It is clear that something somewhere has gone awry but exactly what went wrong remains obscure. In reality such situations typically aren’t the result of a single or a few poor performing teams. Instead, they typically result from a systematic failure across a large number of commercial and operational functions that perform poorly within their own silos (e.g., an inability to monitor and control costs in the face of steep inflationary pressure) and across silos (e.g., lack of awareness and ability to pass those cost increases on to customers through improved pricing). Retooling immature and weak enterprise functions and their interconnections is never fun. What adds to complexity during a turnaround, however, are the facts that organizations in distress typically aren’t operating with an abundance of resources to fuel the investment needed for holistic change and they do not have the luxury of time. Instead they must to act quickly and with limited access to people and dollars to define the specific fixes required across the people-process-systems-governance continuum and to then laser focus their limited resources on those that are likely to yield the greatest profit and cashflow delivery short-term. That investment focus has to be based on a deep understanding of the firm’s full ecosystem: customer needs, employee capabilities, stakeholder priorities, asset flexibility, competitor strategy, and technological options. Improvement and survival depend on quick action on the most meaningful opportunities, the wherewithal to avoid becoming distracted by pet projects, and a willingness to bootstrap the plan as a whole by investing financial performance gains in not just achieving short-term stability but in maturing the weak capabilities that resulted in the need for a turnaround in the first place.
A strategic transformation, on the other hand, likely encompasses a much wider scope of activities as an all-bets-are-off redefinition of what the organization is and what it does, as current where to play, how to win choices are unlikely to yield continued success or satisfy shareholders’ difficult-to-satiate thirst for growth. Its fundamental objective is to smoothly transition a firm into new space, based on a bolder vision and supported by the operating model adaptation needed to support the same. Rather than operating within, a transformation focuses externally first, rewriting a firm’s established strategic framework with a focus on accessing market space and profit pools previously unavailable to it. Those types of leaps likely mean that a transformation causes functional capabilities to flex and stretch across the company in its entirety, creating the retooling necessary to deliver success in those new segments. For organizations led by strong visionary leaders, a transformation can be pre-emptive in anticipation of an upcoming shift in the business climate and does not necessarily originate with a profitability or cash-flow crisis like a turnaround. In such cases, transformations tend to be well-funded with the time and space needed for senior leadership to assess, test, and deliver growth as they operate from a position of strength. Unfortunately, the landscape is littered with organizations who failed to transform by tricking themselves into believing the status quo (strong position in strong markets) is likely to persist, thereby, finding themselves with too much to do with too little time as rapid innovation and agile, more prescient competitors threaten them with irrelevance. The end result in such situations is irrelevance, as transformations and the capability-building needed to deliver on them do not typically happen at light speed and are exceptionally difficult to pull off once the organization has become distressed. At that stage, it may be too late for even a turnaround to help.
If you are struggling to define whether your organization requires a turnaround or transformation, Tower Strategy possesses the experience and proven track record needed to scope and diagnose the problem at hand, define a roadmap for moving forward, and the expertise to implement the change agenda needed to enable that roadmap.
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