Mostly we are concerned with relatively low-stress situations where management wishes to drive faster growth, avoid possible constraints, or reverse declining performance. Sometimes, though, organizations find themselves in crisis, with resources and revenues in sharp decline and financial losses that are worsening so fast as to threaten their survival. Drastic action may be unavoidable – but what action?
A case that illustrates these points concerns an investment fund company facing sharply declining profits after the stock market reversal in 2000/1. Similar situations were common in the 2008/09 recession, and some companies get themselves into similar difficulties, even when market conditions are good.
This company gives private investors the opportunity to invest in pools of shares, rather than in individual companies. Investors buy units in one of the company’s funds on the advice of an investment broker, or invest indirectly through pensions and insurances. The funds range from safe, low-return investments, e.g. government bonds or corporate debt, to high-risk but potentially high-return funds investing, e.g. in high-tech sectors or emerging economies.
Emboldened by previously strong stock market conditions, this company like many others, grew substantially, adding more funds, investing in more equities across many industries and geographic regions. It also started marketing its wide variety of funds directly to the public, in the hope of capturing ordinary folk who were becoming investors for the first time through the increasing number of brokers with whom it was dealing. To support this expansion, they had hired many more fund managers—the clever people who choose where to invest the capital in each fund. To help them, the company had taken on many analysts to assess the likely performance of companies in which each fund’s capital was invested.
This expansionist strategy worked well during the years of strong stock market growth, but these conditions disguised a number of problems. Many of the new brokers were small, and the end-customers were investing only small amounts, but still generated a lot of transactions that had to be administered, increasing overhead costs. Many of the new funds were not performing well, so investors saw no increase, or even a decrease, in the value of their investments. The increasing diversity of the funds meant that neither the fund managers nor the analysts who advised them understood enough to make good decisions.
The company thus found itself with a poor “quality curve” for every one of its resources (figure 1); too small investors and brokers, a too-wide range of poor-performing funds, invested in too many stocks, managed by staff that included many underperforming people. These problems surfaced when stock market conditions collapsed following the bursting of the “dot-com” bubble, and led to a reversal of business growth and rapid loss of profitability.
Management reacted with a range of common steps – e.g. cutting its back-office staff (i.e. the people who actually made sure transactions were handled!), deferring IT investments that would reduce costs, cutting staff training, travel budgets, employment benefits, and so on. These did nothing to address the fundamental problem – that the “system” was accelerating its own demise—as every resource fell in quality, it undermined the ability of other parts of the system to perform. For example, the worse the performance of the smaller funds, the more investors deserted the company’s products, and the more brokers ceased recommending its funds to other investors. This self-reinforcing collapse had already been occurring, but had not been visible because it was hidden by the strong performance of the core business.
Figure 1: Some poor resource quality curves for the fund management company.
Fixing this situation went as follows (figure 2):
- The poorly performing funds were identified and closed; that is, the product range was substantially rationalized. This was not entirely straightforward, since investors’ capital had to be switched into alternative funds.
- This much narrower range of products would require fewer professionals, but to protect morale the plan included the transfer of some investment funds along with the associated staff to rival companies who were more successful in certain classes of investment.
- Some remaining low-value clients had to be rationalized, some of whom departed with the cutting of the marginal products. For the rest, efforts were made to make them more worthwhile, for example consolidating several small investments into one, and simplifying service support.
- The company stopped dealing with many smaller brokers who had in any case brought in mostly low-value clients.
- With reduced support and transactional activity in the business, back-office costs could be reduced, but only after the business had been safely simplified.
Figure 2: The recovery path for the troubled fund management firm.
Further important side benefits of this rationalization soon appeared. Simply removing the complexity reduced the pressure on back-office administration, leading to more reliable service. This boosted the firm’s reputation with investors and brokers, and the product rationalization was turned into a further reputation advantage by explaining how closing down under-performing funds was actually in investors’ best interests.
After the crisis was averted, the team was able to use the architecture as a living control panel, on which they could track each month’s progress towards their better future, making adjustments if things worked out better or worse than expected. Like many firms today, they already employed a balanced scorecard system to track many of these factors — data that could be dropped straight onto the architecture.
Until next time…
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Lessons for recovering from difficulties
Many features of this situation are to be found in firms struggling to escape financial troubles, whether caused by outside challenges or internal errors. Difficulties often originate in initiatives undertaken when things were going well. This heritage may offer the chance of strategic recovery, by thinking back to what the business looked like in better times.
First, as firms scramble to win growth opportunities, they rush to capture every possible new customer. In the process, poor-quality business is signed up, which only becomes apparent when market conditions deteriorate. (Customers are not the only resource that may get over-blown – see Starbucks’ over-growth of stores, featured in a recent presentation).
Unfortunately, it’s a tough decision to shut down customers at exactly the time when you seem to need every one you can get, which is why the decision must be linked to a coherent plan for improving other resources in parallel.
Whilst sales are booming, novel products and services can proliferate fast, and no one sees any need to check if the last great idea was successful. This can leave companies with slow-moving products, and rationalizing these provides the second opportunity.
With fewer, better-performing customers and products, less capacity may be needed, so that resource too can be rationalized.
Regrettably, the corollary of bringing business back to a sustainable core is a reduction in the staff needed to run a slimmer business. But by not acting, everyone is put at risk – and a strategically sound rebasing of the business is going to be substantially less troubling than the, unfortunately common, practice of indiscriminate and repetitive cuts that do little to fix the real problem.
This briefing summarises material from chapter 5 of Strategic Management Dynamics, pages 288-294.
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