Crisis and Restructuring

Economic crisis situations are a special facet of management. They present managers with very different challenges than “normal” day-to-day business. Some crises arise acutely from changes in the general conditions.

Example: A food supplier to a large discounter is faced with the short-term choice of further reducing its prices, which are already close to the manufacturer’s marginal costs, or being discontinued. The supplier, which used to be in good health, has been built up by the discounter over many years, and the quantities purchased have increased so much that the supplier now uses a large part of its production capacity for the discounter, but in doing so is actually only “exchanging money”. The supplier has placed itself in a threatening, one-sided dependency, while the discounter has alternatives.

In any case, this new situation portends an economic crisis for the supplier. In this case, the discounter’s advance is the final trigger for the crisis, but the dependency had been looming for some time.

Crises that occur acutely are exceptions. The vast majority of corporate crises occur gradually, but only become visible when symptoms become apparent. The actual causes often lie many years in the past, until at some point they are reflected in a liquidity problem.

In the vast majority of cases, the core problem is not the liquidity bottleneck. A liquidity shortage is merely the consequence of other crisis triggers and causes. Many companies that are provided with fresh liquidity face the same problem again after a few months. A liquidity bottleneck is usually preceded by a weakness in earnings, which is already not so easy to eliminate. Therefore, a transfer of money is not enough. Rather, the earnings weakness must be thoroughly analyzed. Is it a one-off drop in earnings or is there a structural problem? To give an analogy: Is there a locally definable problem, such as a broken leg that heals after 6 weeks, or are we dealing with an organic problem that has not yet been clearly defined at all?

This is where the remedial work begins, for which most line managers lack the systematic process models and the appropriate tools. In addition, active line managers are usually biased because they have at least allowed the problem to occur, if not helped cause it, and because they are emotionally biased. For this reason, it is worthwhile appointing an experienced turnaround manager at an early stage if a crisis is suspected, so that he or she can systematically deal with these issues.

Of course, an earnings problem also has its causes, which were obviously not recognized in time and against which no effective measures were taken. Often there is a strategic problem. A misguided strategy has led to the wrong product portfolio with an unsuitable business model or into the wrong markets. Perhaps market trends have not been correctly identified or have been ignored. You think we now have the cause? Well we don’t, because a wrong strategy is also only an effect of underlying problems. We must not stop here, but question why a wrong strategy could have come about. Behind wrong strategic decisions there are in most cases human perceptions and interests that have led to the decisions made. And here we are very often dealing with management that is still active. How do we get management to admit to themselves that they went in a wrong direction? Why did the shareholders support this direction?

Example: An automotive supplier for vehicle electronics in Baden-Württemberg, which operated in the form of a GmbH (limited liability company), was forced into insolvency because they could not meet outstanding payments. The company had successfully developed and built lighting and ventilation electronics at two locations in Germany. Both product groups are increasingly needed because they meet the growing demand for safety and comfort, regardless of the drive concept. In fact, the company should have been in excellent financial shape.

What had gone wrong? For several years, the managing director, who was experienced in the industry, had ignored the fact that the company had both a sales weakness and a sluggish product development department that did not implement projects in a timely manner. He did not react to these obviously existing problems, which he also did not disclose to his shareholders in all clarity. Rather, he “sold” the shareholders the fact that the company needed to grow in order to return to profitability. He demanded money for his growth strategy instead of eliminating the obvious problems, without which the company could not grow either. The CEO had been exposed by the industry for some time: he was referred to as the “Sun King.”

Why didn’t the second-tier executives act? Why didn’t they push for a change of direction? Again, this is nothing out of the ordinary. Executives also had occasional contact with shareholders, but did not advocate a change of course. Despite having a better idea, they lined up behind the communicative CEO, ostensibly to secure their jobs, and ran full speed ahead into disaster – and lost their jobs. The shareholders, who were no longer actively involved in the company in the second generation, had to accept this development with great personal dismay.

The case described in the real example is unfortunately not an isolated incident. In order to avoid such surprises, which are actually a long time coming, a competent advisory board makes sense.

Now not every wrong decision immediately leads to insolvency. That is why we distinguish between requirements for increasing earnings, requirements for comprehensive turnaround management and requirements for eliminating an acute crisis. These are different phases of an economic crisis that must be addressed at different paces and require different priorities. But weak earnings are a strong indication that there is a need for restructuring or turnaround. Unfortunately, in many cases the need for this step is not acknowledged until it is too late. Effective measures are therefore often not taken in time.

In each country, the local regulations should be applied.

Dialogue

What are your challenges?

...
Restart Dialog