The Flywheel

Long Tails & Masters of Youniverse Or, Why small businesses can become endangered species.

Those of you who are into blogs or are regular readers of Wired, do not need a special introduction to the Long Tail effect or to Chris Anderson. Long Tail effect first (as far as I know) burst into public awareness when Chris Andreson wrote an article about it in Wired. In essence what it postulates is that the emergence of blogs, podcasts and vlogs will result in a transfer of economic and social power from masses to niches. Because of new media, it will be far easier to find, target, communicate to and market to small segments making it increasingly irrelvant to adopt least common denominator marketing. To quote Mr. Anderson from his blog,

The Long Tail is the yellow part of the sales chart at left, which shows a standard demand curve that could apply to any industry, from entertainment to services. The vertical axis is sales, the horizontal is products. The red part of the curve is the "hits", which have dominated our commercial decisions to date. The yellow part is the non-hits, or niches, which I argue in the article will prove equally important in the future now that technology has provided efficient ways to give consumers access to them.
The two big points of the Long Tail theory are these: 1) The yellow part potentially extends forever to the right; 2) The area under that line--the market it represents--may become as big as the hits at the left.

While the article was far more articulate and wide-ranging, I first came across this trend through a small(?) newsletter called (appropriately enough) TrendWatching. About 5 months back or so, they were talking about trends with interesting names like Massclusivity, GenerationC, Masters of Youniverse etc.

What does this mean for a small business like mine? I got one word: disaster! The way I see it is like this: the rise of long tail means that markets will get splintered into smaller and smaller segments. When it comes to splintered markets, the only companies who grow are platform owners and platform innovators. The best way to exploit splintering markets is through mass customization of products, brands and marketing systems. What is the one thing common to all these three? Platforms. Mass customization of products will prove to be enormously capital intensive; mass customization of brands and marketing systems on the other will require huge knowledge capital to effectively target and tap into chosen segments. This in turn means that the industrial eco-system will split into 2 or 3 kinds of players: Platform owners who provide the infrastructure; product innovators who license the platforms to come up with cool, new products aimed at niche markets; marketing system owners who are optimized to reach micro niches more effectively than anyone before them. In some cases, we will see a single entity doing both product innovation and marketing system creation; in very few cases we will see a single entity doing all three functions effectively and efficiently. What are the economic engines for these 3 functions? The platform ownership is driven by scale; product innovation is driven by people and knowledge and marketing systems are driven economies of scope. Where will the biggest chunk of profits go? To the marketing system owners of course. I always believed and experienced that the entity closest to the customer will enjoy the most profits and the product innovators will enjoy the most profitability.

Platform owners will be the giants of the landscape; their business is driven by long term trends, R&D, PR and driving platform adoption. Any names? Well, in technology, I think it will be Intel, IBM, Verizon, Microsoft, TSMC, ebay & Google (or some other search company). Google is in an interesting position because they of all the people will benefit the most from splintering of markets. One fall out of splintering is the emergence of search as a critical piece in the jigsaw. Search or ability to find the right customers and partners will be the glue and lubricant that will make the new reality work. In consumer products it will be TetraPak, SealedAir and P&G.

Product innovators will be organic to the extreme. They bubble up, exploit fleeting trends, micro niches and vanish just as quickly. Who are they? The best example is Hollywood! Others could be fabless designers in semiconductor industry, fashions,

Marketing system owners will be of two kinds; a physical store infrastructure backed by internet and a direct sales infrastructure supported by internet. Some names will be quite obvious: Wal-Mart, Walgreens, Metro, Tesco will definitely grow in significance and strength. On the other side,  Avon and Snap-On are two companies that bubble up right away. These two will move from a closed business model to an open business model where they bring to bear their reputation and field sales force for a variety of products developed by product innovators.

In the next post, I will describe why this trend could mean disaster to my company and countless other small firms.

In praise of the boring (in) businesses

Way back, when I still smelled of baby powder, an ad for a clothing company used to be aired quite regularly on Indian TV. It was about this young man who discusses his career options and his contempt for dad’s business. His point is that his dad wants him to join the family ball bearing business, which he finds oh so old fashioned. “Me? Selling ball bearings?” is his refrain. He wants to get into fashion designing! Isn't that cool? What comes through is not that he loves fashion, but that ball bearings are passe. I cannot imagine a more stupid attitude. What is this hunt for the cool, in business. Not cool, as in, "wow, my products really solve customers' problems!" but "wow! I want me and my company to be featured on Page 3!"

Now, 10 years later and 6000 kms away, I see that nothing has changed. Recently, we were looking for some really aggressive, intense sales leaders for our company. In all the interviews we do, majority of the people want warm, cushy jobs that require them to be in office and leave at 4 PM sharp. For the others, health products are not “cool enough”. The refrain goes: "Health products? No way! Gimme IT and I will try! Working in the field? Getouttahere!" Why is it that as long as an industry, company or job looks glamorous, fun and crazy, people are queuing up to get a piece of the action? Is it because they think cool, glamorous and visible equals attractive? Is searching for a partner and searching for a job fundamentally different? Do they really look deep into what makes a business tick? What separates successful businesses from failures?

What is the ultimate goal of a business? To create profits? To create a fun workplace? To create customers? If your answer is something like the above, you are probably right. But what if you dig deeper? Just what exactly is a business? I am sure all of us have our pet definitions about what exactly we mean by a business. Some look at it from anthropologic perspective and say that it is a collective of people trying to achieve some common goal; some look at it from economic perspective and say that a business is a deployment of resources in the most efficient manner. My favorite is a physical science perspective; a business is a violation of 3rd law of thermodynamics. You know the 3rd law: the law that says all systems in the universe move from ordered to chaotic state. That entropy always increases. Machines break down; people die; energy dissipates; all because of entropy. In a deeper sense, all human endeavors are a struggle against entropy. That is why, businesses like P&G, GE strike a deep chord within us. They have defied entropy far longer than a majority of human institutions. We might revile them; we might mock them as "old economy"; but the fact is deep down we hold them in awe because they managed the entropy creep successfully for so long. How did they do that? By imposing an order on the chaos of marketplace. By making the art of making money a science or at the very least, a boring, routine craft.

Do we want the process of delivery schedules to be exciting? exciting as in uncertain? or do we want them to be boringly predictable? Do we want the companies where we hold the shares to be predictable in their earnings? or do we want to hold our collective breath every time the earnings season draws near? Do we want our products to work with predictable efficiency? Or do we want to wake up every day and wonder if our car will start this morning?

I had enough of this celebration of glamor and fun and excitement. I want to stand up and celebrate the boring. I want to make my company the most boring company when it comes to its ability to deliver results, deliver products. I want my company results to become a cure for insomnia among my shareholders.

Now, that is an exciting challenge!

LCD Theory of Performance

Reams of paper and billions of bytes have been spent on the need to hire only top grade people. For those of us who are "cursed" to work with the average joe in the workplace, this means that our businesses and goals are doomed to the dustbin. Not so. My premise is that extraordinary organizations are built by tapping into the energies and will of the average joe in the workplace. Call it the Least Common Denominator theory of performance. If your organization has to grow it will have to figure out how to deploy average employees productively. Yes, if you are in a start-up mode, you need top grade people. But keep in mind that star performers are already gainfully employed elsewhere. As a business with meager resources and no track record, you cannot bring in a star performer at the same level because no star performer will sign-up to do a similar job with higher risk. Secondly, even if someone does come on board, since this is a new job in a new company, there is no guarantee he or she will deliver as per your expectations. It appears that you are caught in a rock and hard place isn't it? It seems that in order for you to succeed, you need a fair amount of luck so you will find the right star performer at the right time or that the industry you are in will take off and you can hang on for the ride with your team of average employees.
I struggled a lot with this dilemma for the past 1 year. I kept moaning about the quality of the people I was given to make the turnaround happen. But the truth has a way of sneaking from behind and biting you in the butt. As the year drew to a close, I realized that at the end of day, as the leader, I am responsible to make the company work. Now I can leave this critical element of the success formula to luck or I can do something about this. That something is what I call the LCD theory of Performance.

This whole model of hire great people reminds me of the Nature vs. Nurture debate. Just as Nature proponents argue that our genetic makeup defines us to a great extent, the Great People theory argues that the company is defined by the quality of its hires. I do not agree with such a stark and strong assertion. Yes, the quality of hires is important, but it is not the only determinant of company success. I believe that all of us hold an acorn of greatness within us. Some of us who are able to grow this acorn without any support from outside are called stars. The others, who are waiting for the right gardener to come along and nurture this seed are called average. How valid is this? If every seed needs to be self-starter, then there will never be a forest to shelter us or to delight us. A leader’s primary job is to provide that nurturing environment and support conditions that will enable the weaker acorns to flower and grow into mighty oaks. In one of my earlier posts, I held that good performance, like good taste is more acquired than innate. In order to instill this habit of good performance, we average folks need a role model, we need a roadmap. A good leader knows what kind of road map each of require and provides us exactly that. In order to figure this out, a good leader needs to go back to the basics. In other words, the leader needs to have a leadership and success model that does not require heroes or supermen to work. He needs a model that assumes majority of us are quite average. A model that can deliver extraordinary results with ordinary people. A model that is based on the Least Common Denominator of Performance: Intensity.

LCD theory of performance starts with the assumption that leaders do not leave finding the right people to chance. If you do not have the right team and you cannot afford to hire the star performers, you have to create the right environment and support systems that even an average joe can plug-in and feel engaged very quickly. I believe that as a leader, one of your primary responsibilities is to build a road as your company crosses the jungle. You should not just finesse your way through and leave no trial for your team to follow. You have to build a company which has systems that can show the teams what it takes to succeed. A company that equips the employees with the necessary tools to succeed. A company that can build a replicable and teachable system for success. A company that taps into the hidden wells of intensity and passion that is present in us all. A company that identifies, nurtures and grows those little acorns of excellence hiding in us all. A system based on least common denominator theory of performance. LCD theory of performance is that if your company cannot build a success model that can tap into the intensity and passion of the average joe out there, you do not have a prayer. Sure, you might fly high for sometime with star performers, but sooner than later, along will come some dude who will have you for breakfast. Why so? Because the majority of the people out there are average people with their little dreams and little lives. Any model of work, performance or success that excludes them is bound to fail in the medium to long term. Being average does not mean being mediocre. Yes, you still have to let go people for non performance. Where the system should come is in identifying and releasing people whose intensity and passion does not align with your industry or function. The job of the leader to create such a system not to moan about how difficult it is to find great people.

Fast Company on Unbundling - Is it valid?

Fast Company says that unbundled of products and services is on the rise. FC in the essay argues that this is a trend that is on the rise as technology makes comparison shopping easier. Maybe so, but I am not yet ready to unbundle construction of my house.
My opinion is that as customers, our primary goals are twofold: convenience and peace of mind. Convenience has to do with the fact that most of us hate the info search part of shopping. We are like bees flitting from shop to shop and tasting samples and make decisions on the go. We love it if someone can come along and give us a complete package and take this hassle out of shopping. We love to shop; not to search. 

On the other end of spectrum lies peace of mind. This has to do with our self image and social image. All of us love to think of ourselves as savvy, pragmatic and hard nosed customers. We hate it if we get the feeling that we are not in control. The bigger the purchase decision, the more we hate it if we do not know what exactly we get for spending so much money. Think cars, think houses, think spouses. We will never, never buy package deals on these categories. We will always want to break it down (do I have to take the in-laws with the spouse?), itemize it, guesstimate the value of each item and then collapse them back into the package. In such cases, if someone comes along who offers to take the hassle out of this analysis, puts together great credentials to build trust into the process and creates enough safety net, we will be more than happy to buy bundles. Consider the case of multi-specialty hospitals in India. They are growing by leaps and bounds because you go to one place and get every kind of care possible. You are maximized on the convenience dimension. What about peace of mind? All these hospitals have swanky facilities, advertise a lot, hold many conferences and do some good PR so that an average person on the street thinks that he will not be ripped off and given a raw deal if he uses these corporate hospitals.

What does this mean? This means that peace of mind is a hygiene factor in Kano's customer decision model. Unless this is satisficed, convenience cannot play a role. Where this peace of mind is threatened, we want to unbundle everything and dig deep. Once this need is addressed, we hate to unbundle and love to buy in packages.

What's your management style?

Mike Smock has an interesting post on why it is necessary to keep secrets. The post flies in face of currently accepted wisdom about being open and transparent;  however, the  argument is entirely correct and valid.
Taking his argument further, I strongly believe in command and control management. Since past 6 years I have seen too many people to think that being open, transparent and empathic will do wonders for the team. My experience is that a lot of people are only too willing to give up the responsibility of decision making to someone else. They wait for someone to come along and tell them what to do, how to do and check upon them every day if the job is done as per specs. I have seen many people shy away from taking decisions because of fear; fear of facing the consequences. Only people who are grounded in reality can make good decisions. Unfortunately, a lot of people live in a dream world where they hold court. All good things happen because of them and all bad things happen because someone else screwed up. That is, they are too busy playing the victim instead of making things happen. They do not pay attention to the reality of the situation or to the decision context. Psychologists call this FAE (Fundamental Attribution Error). A more elegant perspective is the concept of Shih from Sun Tzu’s Art of War. Shih is the power inherent in a configuration & timing of action. In English, this means that power of shih comes from deep insight into each element of task at hand, how they interact with each other and with the environment and when we need to deploy each of them to gain the maximum result with least effort.

A person who has Shih is always grounded and aware of the context in which he or she is operating. Leadership requires this shih above all else. Consequently, I believe that the fundamental requirement of a leadership role is to define reality for the rest of organization. However, this tendency to avoid reality and not be context sensitive, makes a lot of them unsuitable for leadership roles.

What does this have to do with management style? If a lot of people are unable or not willing to step up and take charge, the only style that can work is command and control. That is why, I micromanage every new member of my team for at least 3 months. During this 3 months, as I gain more insight into the person’s work ethic and intensity level, I introduce the soft elements of leadership in stages tailored to each person’s character and abilities. This is where the core values of a company come into play. I look at the first 3 months of a new person’s job in my company as a time to introduce our core values. As the person internalizes these core values, I can ease back with the knowledge that the person can use the core values as a decision guide in crunch situations.

Bottomline is that I feel leadership comes after management. Not before. Management style, by necessity has to be command and control till the team member is ready to live the values of your company.

Inside a turnaround - Bringing new people on board (1)

I plan to publish a series of notes, emails and meeting notes I made for the past 1 year to give you an inside view of this turnaround I am involved with. I am starting with a mail I sent to leaders who joined 2 months back to build a sales channel for our products. This was my first mail after formally welcoming them aboard.

Gentlemen,
I am attaching the first cut of the Annual Operating Plan for 2005 for the network channel XXX. Here are some points & thoughts from me on this document and our way forward:

1. Plans are useless; planning is priceless. One belief I strongly hold is that no plan survives the first contact with reality. Having said that, the question would be “why plan”? I think that by planning, we will be forced to consider all kinds of scenarios (both optimistic and realistic) and that in turn prepares us to be balanced when we encounter the surprises that real world throws at us. In this context, please note that the value of a plan increases linearly (or even geometrically) based on the quality and intensity of input.
2. The quality of input will depend on our candidness and openness to challenge our assumptions, and our ability to sit down and tear the plan apart so we can arrive at a common vision for XXX. Please do not hesitate to challenge, reject or modify the assumptions I have made in this document. The more we tear down and build up this plan, the more we will be successful once we start implementing it. On a personal note, I was lucky to have bosses and teams where experience, rank or hierarchy or age had no impact on rewards; the only thing that mattered was the value that each person brought to the table and the courage with which he/she held her opinions and beliefs. Once you add passion for the job into this mix, I believe we have a winner in our hands.
3. I saw today morning that there were some questions or doubts in your mind about our ability to go for x00, 000 €. If this is the case, please talk to me and let us explore how we can get there and what we need to do to reach this goal. If at the end of our discussions, all of us agree that x00,000€ is too ambitious but the fundamentals are good, we can still go ahead on a different resource budget. The key is both of you OWN  this goal. From my experience, I learnt that to move from accepting a challenge to owning a challenge is long, difficult and painful. The sooner we start on this road, the more effective we will be when we begin executing. whatever goals we set for ourselves. From my experience, the mindset shift between

I would like to make a few points on the core values that I am trying to build into OurCompany warp & weft.

1. Deliver what we promise. I believe that any company that is serious and hopeful about its future has to internalize this value. The bottom-line is we are people who agree to work with each other based on mutual trust and respect. The only glue that holds these relationships together is the promises we make to each other and our partners and our customers. I am sure that both of you agree that it would be very difficult to trust and work with a person who keeps breaking promises or does not deliver the results that are promised. Without this value, OurCompany cannot hope to be successful and neither can anyone be inside OurCompany.
2. Do more with less. OurCompany is a small company with big ambitions. In order to realize these ambitions, we have to be extremely miserly and particular about where we deploy our meager resources. All our sales, marketing and recruitment efforts until now have been based on leverage and trying to maximize the bang we can get for every buck we spend. If you and the rest of OurCompany cannot internalize this value, we will not have cash or resources to go after valuable opportunities.
3. Embrace reality. As leaders of the network and potential leaders of OurCompany, your biggest job will be to define reality for your team members and teach them not to be afraid of it. In all my work experience, especially in sales, I saw many people who were reluctant to ask tough questions about their leads, their opportunities and their team members because they were afraid of what they will find out. Our inability to confront, embrace and manage reality will ultimately lead us to fail and surprise our teams and ourselves. I think failure is not bad; but failure that nobody saw coming is terrible.
4. Dream with integrity. I love this value. While the above three values impose restrictions and boundaries, this is the value that builds passion and hope into our company and ourselves. We all dream; we all hope for the best results; it is only when we dream with integrity that we can clearly see what is possible and what is good. It means that our dreams are rooted in reality; it means our dreams do not become wild fantasies; it means our dreams do not force us to do something we will not be comfortable with; it means our dreams will become a source of power for us when things are not going as we expect; it means our dreams will enable us to align our personal goals and values with what OurCompany needs and demands.

You might find it odd that I chose a fact-based Operating Plan discussion to push these soft ideological values and thoughts. As I said initially, plans are useless; planning is priceless. But the kind of high quality, high intensity planning process that I am looking forward to will happen only if we are relaxed about our opinions; confident in our abilities and secure in our self-respect. I believe both of you are way ahead of me in terms of experience, ability and insights into the dynamics of this particular channel. My request to you is please reflect on this mail, and appreciate what it means to accept, own and internalize these values and this work ethic. The only critical issues will be the realism of our planning and the intensity with which we execute our plan. I am supremely confident that you are the right leaders and this is the right time and the right opportunity.
-Srini

10 things you can do to kick-start a turnaround

How should one begin the process of turning around a company? Is there a checklist that one can refer to (while keeping in mind that the map is not the territory)? Something like this would have been really helpful when I started out 1 year back. Needless to say, this is a dynamic list.  I tried to put this in order of timing so that you will have a clear starting point. You can use this to begin the journey and change it to fit your needs and your context.

1. Freeze all make to stock orders and investment flow until clarity emerges. Focus especially on all fixed discretionary investments.
2. Identify & put together a SWAT team for turnarounds. make sure at least 1 investor or board member is actively involved in the team.
3. Talk to all the critical info nodes in the company to get a feel for the company mindset and culture first hand. Info nodes can usually be identified through a pareto of email senders.
4. Talk to all the senior leaders to get a feel for who can withstand the intensity of coming months. Make sure they are completely in touch with the reality and severity of the situation.
5. Do a Spring Cleaning. Open up all the closets in your firm so you can identify all liabilities, ticking time bombs and hidden treasures very early in the game.
6. List all customers who fired you in the past 6 months and get quality face time with them ASAP.
7. Create a communication strategy that requires you to update the entire team and key partners every week if not directly then through the info nodes.
8. Communicate with all key suppliers and partners to gain support for the transition plan you and your team put together. Be prepared to spend a lot of time explaining why this plan will work and what kind of preliminary results you achieved with the transition plan.
9. Rigorously question and surface all hidden assumptions that make your company tick. For example, the biggest channel in revenues for my company is direct sales of therapy products. These are marketed direct to customer by a team of independent professional sales agents who are paid within 30 days of making a sale. Each agent carries with her 8–10 of our products on a consignment basis and she accounts for them at the end of every week. On average, each agent sells about 3–4 products per week. The customers pay us in 3 ways: through cash, automatic debit and pension linked pay instrument. In late 2003, when the crisis hit us, the sales split was 25% in cash, 60% in automatic debit spread over 12–24 months and balance in pension linked pay instruments. The revenue is shared 55% to my company and 45% to agents. This means that if 100 products are sold in a week, then we get cash for 45 products, which goes to the agents and leaves us to finance all the fixed operating costs, suppliers through other cash. Sounds terrible right? However, when the channel was started, it was primarily a liquidation route for returns and excess stock from our more profitable TV Sales channel. Under the assumption that TV Sales will be healthy and growing, this was a brilliant move since all the stock is paid for, all costs are covered and TV infomercials have assured that the market price for these products is between 5 to 7 times the cost of sourcing. However, the crisis came about because our TV Sales collapsed in late 2003 and without the support from TV, the direct sales became a burden very quickly.
10. Throw away the book on cost accounting. Cost accounting is for tax purposes. For a company in crisis, except for raw material costs, every thing else is fixed in immediate term more so because you do not have the luxury of time or the power to negotiate from a strong position. In such a situation every extra dollar you can make over and above the cost of materials will go a long way in covering your fixed operating costs. So go for every fleeting opportunity that comes your way. However, make sure that you carefully select the products (because you might end up killing these in the process) and only for new customers, negotiating repeat business with tough customers and any opportunity that might give you a fast return.

How to manage a turnaround (part 1 contd)

After finishing the first part of a long post on managing turnarounds, I thought I said everything I had to say on ensuring the survival of the company. But as I read it back and reflect, I realized that I peeled only the first few layers of the onion. I decided to dig deeper and see if we can create a generic approach for managing a turnaround.
How many kinds of turnarounds are there? I can think of two:

1. Crisis due to structural changes. These are crises brought about because the industry structure has changed either due to stronger consumer protection laws,  new and more effective business models or because of migration of profits due to changing demographics. Sometimes the structural changes could be in the enabling conditions that make the industry tick like legal environment, technology eco-systems etc. In other words, the business model is not broken but the enabling conditions be it legal environment or greedy CEOs or technology changes in unrelated industries  have  put the company in a death loop. Examples: DEC, Nokia, IBM, Xerox
2. Crisis due to mismatch between resources & opportunities.  This is where the CEO/Senior Management values and expertise do not align with reality or market expectations. It could also be that the company's expertise and resources are optimized for a specific business opportunity, market that never materializes or scales. Some examples are Iridium, Parmalat,Tyco, Apple during Sculley era (?), Disney

Interestingly, as I was writing this post, I came across this article from WSJ about the troubles at WorldCom. The point of the article is how relationship between the senior leaders of the company deteriorated as growth slowed down. We can easily jump to the conclusion that as the growth slowed down in telecom industry, management at WorldCom was forced to adopt unethical practices and continue presenting a rosy picture. However, the crisis is not caused due to any structural changes in the industry, but because the glory days of WorldCom caused the executives to lose touch with reality. This in turn led them to ignore or disregard all warning signs and continue chasing growth at all costs.

Quite clearly, the nature of the beast will never be clearly visible at first glance. Even after analysis, the situation will be sufficiently muddy for us to reach a definitive conclusion about the nature of turnaround.  Does this mean, that we do not have any rules of thumb to at least get the drift ? From my experience, I can suggest a few; but it is arguable whether they can support the conclusions we can reach:

1. Is the crisis sudden and dramatic? Look for changes in external world that might have caused this.
2. Are the CEO and senior managers enjoying a lavish lifestyle while the rest of team is down in dumps? Look out for resource-opportunity mismatch.
3. Check the status of fixed discretionary costs (FDCs). Are there too many leases, perks and credits? Look out for resource-opportunity mismatch.
4. Check out the competitors. Are you the only one suffering from slow down? or is it part of a general trend?
5. Open and scrutinise all the closets in the company. How many skeletons tumble out? How many of these are neglected customers? How many are contracts not being honored and potential time bombs?
6. Are people inside the company surprised by the crisis? If so, at what level are they? In other words, is the senior management in sync with reality?

These are some of the questions you should ask before reaching any conclusions. Once this is done, then the due diligence phase starts. There are 3 phases to the due diligence. Phase 1 is where we get all the leaders of the company into a conference room and let them talk. Without offering any conclusions or judgments, your role would be to observe, note and file all the things that were said, things that were left unsaid and also the relationship dynamics in the room. Phase 2 is a thorough discussion with key members in company who are not in leadership team. You follow basically the same system as for leadership team. Observe, note, file. Phase 3 is “Spring Cleaning”, in other words, we go through every single document inside the company to figure out what are the potential time bombs, hidden treasures and junk.

Now we are ready to reach some preliminary conclusions about the nature of the crisis and viability of the enterprise as a going concern. Clearly, the task difficult will vary with the kind of crisis we are faced with. In the real world, we will never face a crisis that is purely structural or purely internal. However, in every case, we can reach to the core problem by digging deep and keeping an open mind.

Once the core problem is identified in terms of its nature, we move to the next stage of turnaround:

1. Establish the long term viability of enterprise
2. Establish if this long term viability can be achieved profitably in current context.

Establish long term viability of business. This is the toughest part of the entire turnaround. I am not saying that executing the turnaround is any easy; it is just that figuring out the long term competitive solution needs to be done early when passions runs high, confusion reigns and morale is slipping. It will not be easy to figure out a way forward in this fog and at the same time communicate with enough transparency and intensity that teams are committed to do whatever is required. The critical element in this part is the nature of crisis in the company. If the crisis is brought about because of structural changes in the industry, the task becomes doubly difficult due to lack of expertise, uncertainty about new operating environment and uncertainty about time required and resources required. I believe that where the crisis is due to structural changes in the industry, a turnaround expert brought in from outside cannot be effective. What is required is not expertise in turning companies around, rather a person who thrives in uncertainty and confusion. Turning around companies is essentially a simple task; while the uncertainty of success is high, the uncertainty of way forward is quite manageable. That is why, where structural changes are roiling the industry, we need managers adept at steering company through times of great uncertainty.

Establish if the viability can be achieved profitably. This is the fiduciary duty of the turnaround manager. Even if the long range viability is possible, it makes no sense to embark on the journey if the rate of return is less than the cost of fresh capital required. In such a case, it would be much better to liquidate the company rather than throw good money into a bad industry. Forget about people who say that industries are not bad, its only mindsets and managers who are bad. Unless some of the enabling conditions (technology, legal environment, demographics) change, industries can and will go bad. Yes, we can talking about shaping versus adapting in industries; but if you pile on the higher risk of shaping strategy on top of the uncertainty in a turnaround situation, you really need a cast iron stomach to go through your days. If you do it, great! and good luck to you. Otherwise, you have to scale down the ambitions unless the company’s short term survival is assured before executing a shaping strategy. Probably, we can use some real options based decision guides here…I don’t know. I believe that if you plan to adopt a shaping strategy in a turnaround scenario, you will have to necessarily stage your investment flow so you can get out at minimal cost if things turn sour. This in turn will make your cost of fresh capital that much more difficult to figure out.

Finally, if you believe that your company does have a long range competitive solution and that this can be achieved profitably under severe time pressures, then by all means you should seek fresh capital. If you adopt a shaping growth strategy,  you should seek fresh capital in stages linked to specific milestones in turnaround or events in industry. If you adopt an adapting growth strategy, then get in some industry experts, work with them on business projections and go for fresh investments.

When I started this post, I did not intend it to be this long. As it kept growing, I had to leave out a lot of things that I wanted to say. Maybe, I will do that in another post. On the other hand, if you like what you read so far and want to see a pdf download once I am finished , drop me a comment and I will do my best!