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Critical Care for Companies® Turnaround Step 7: Diagnosing Your Business Problems Why you should read this section
“Things which matter most must never be at the mercy of things that
matter least.” Pareto's Principle What did Vilfredo Pareto discover that could save your business? Vilfredo Pareto was an Italian economist who, in 1897, discovered something fascinating about wealth distribution. He found there was a consistent mathematical relationship between the proportion of people and the amount of income or wealth that this group enjoyed. Basically, he found that roughly 20% of the population held 80% of the wealth. Pareto further discovered that he could reliably predict that 10% would have perhaps 65% of the wealth and 5% would have 50%. The key point is not the percentages, but the fact that the distribution of wealth across the population was predictably unbalanced. By the way, Richard Koch has written an excellent book on this topic called the "80/20 Principle-The Secret To Success By Achieving More With Less". So Pareto's Law came to be known as the 80/20 Principle. This principle asserts that a minority of causes or inputs usually lead to a majority of the results or outputs. Why the 80/20 Principle can save your business The power of this law or principle lies in its simplicity and reliability in predicting where success and failure can be found. For example, what if you knew (based on this principle) that only 20% of your products accounted for 80% of your sales or profit to your business? And conversely, that 80% of your products only accounted for 20%. If your business needed turning around, then this would be one place to start that process. You would begin to pare down the number of products that you offered and reorganize the organizational chart and overhead to match this smaller offering. In using Pareto's Law to diagnose business problems remember this. Usually the percentages are not exactly equal to 80/20. That is not the point. What is important is to locate the disproportionate relationship between different variables. Examples of Pareto's Law in a business:
The point of all this is to quickly allow you to narrow your analysis scope and focus on the most significant problems and opportunities. Most turnarounds need to downsize In most turnaround situations, you will need to scale back and downsize your business. One way to do this is by focusing on the 20% of the products or services that account for the majority of the sales & profit. What if you eliminated all or some of the products not included in the top 20%? Alternatively, what if you started raising prices on those products rather then eliminating them? Very quickly, you could have a major positive impact on your business. We will get into employee lay-offs in another section of this website, but for now remember that this principle applies to staffing as well. You will most likely find that only about 20% of your employees account for 80% of the productivity or work. Most businesses have picked up a lot of "dead wood" employees and of course this is a major expense area. Strategic Core Competencies The next diagnostic tools we will explore is the concept of Strategic Core Competencies. What you must locate in your business are the few products, profit centers, or business units, which will support a profitable and reorganized business. These areas will most likely contain your organization's Strategic Core Competencies. Robert Bradford & J. Peter Duncan have done some great work on the subject of Strategic Core Competencies. I recommend their book "Simplified Strategic Planning-A No Nonsense Guide For Business People Who Want Results Fast". Strategic Core Competencies (SCC) Imagine that you are holding a box that contains something of great value to your customers and no one else has it or can even copy it without great difficulty. Do you think you could make any money with it? Of course you could! That's the "holy grail" in business- to have something that is both valuable and unique, something that customers really want and that makes you different from other competitors. Such things are called Strategic Core Competencies and you should find yours. However, SCCs are not like many other things in business. You cannot go anywhere and buy a SCC, the way you can purchase a machine, acquire a patent, or even hire an employee. That is because true SCCs are different. They are intellectual assets, not physical assets, and they are the hidden drivers behind most successful modern companies. SCC Mix is important and is usually a combination of 3 things:
Significant value to customers & unique to competitors What makes it a strategic competency is that the particular combination is also of significant value to your customers and rather unique among competing companies. A SCC becomes a weapon that companies can use to win the battle for competitive advantage. It can be used over a long period of time. In addition, it's usually knowledge- based. SCC must pass 4 specific tests
Deep diagnostic dive Finally, if you are still at a loss in locating the big problem areas or the key areas to rebuild your business around, then you will need to move into a more detailed analysis. By going into a more extensive diagnostic assessment, you will be looking for answers to the following questions:
In order to answer those questions, you may need to find answers to the following "audit" type questions, which go into a much finer level of detailed analysis. Arnold S. Goldstein in "Solving Business Problems" has an excellent set of questions if you need this more detailed analysis. He calls it "Cat-Scanning your business". Survey your financials-start with 3 years of profit & loss statements ü What is your break-even point? ü How far below or above break-even point are you operating? ü What can your break-even point be reduced to? How quickly? ü What are your overall sales trends? By product? Line? Division? ü What are your margin trends? Expense trends? ü What factors caused your losses? ü What profits come from each product? Line? Division? ü Who are your biggest customers?
Balance Sheet trends for the past 3 years show your financial strength & weakness from a different perspective ü Are fixed assets valued accurately? ü Are accounts receivable verified and accurate? ü Do accounts receivable collections depend upon contract completions or continued business operations? ü Is the inventory accurate? ü Are the inventories salable, obsolete, or slow moving? ü Are there valuable patents, trademarks, copyrights or other intangible assets? ü What assets are leased or financed? ü What equipment can be sold? ü What assets are unessential and can be sold? ü What is the amount and aging of each trade obligation? ü Will slow-payment or non-payment of trade obligations affect continued supply? ü How are overdue payables handled? ü What are the past-due tax obligations? ü What tax collections are threatened? ü Are secured debts and leases current or in default? ü Is foreclosure or repossession threatened on any secured or leased equipment? ü What is owed to pension plans? ü How insolvent is the firm? ü How illiquid is the firm? In most cases, you will need to free up cash fast, use these questions and bullet points to investigate this area ü Turn receivables, inventory, and equipment into cash to keep operating. ü Do you have excess plant capacity? ü What is your present and projected utilization of plant and equipment? ü What plant or equipment you can sell without hurting present or future sales or profits? ü What improvements or upgrades can you make that will produce greater efficiency and productivity? ü Do you have sufficient current assets to maintain sales and positive cash flow? Excess debt can always be reduced, but assets cannot always be increased. Focus on one question-how can you transfer your assets and liabilities to stay afloat? Survey your organization ü What is the organization chart? What organizational changes have occurred in the past 3 years? ü What is the detailed job description for each executive? ü What is the composition of the board? How often does it meet? ü How active is it in managing the company? ü What are the staffing levels in each department? ü What are the line and staff relationships within the organization? ü Is management centralized or decentralized? ü What changes in the organization are necessary to carry out the turnaround? Survey your competitiveness ü Do you have a well-defined market niche? ü Do you follow industry trends? ü Can your company easily change and adapt? ü Who are your key customers? ü How profitable is each customer? ü Are relationships good with key accounts? ü Do others within your industry share your problems? ü Why are sales or market share shrinking? ü What products or lines are declining? ü What products sell well? ü Who are your key competitors? What is their advantage? ü What is your marketing strategy? ü Measure your marketing results. How can you improve those results? ü Which products or services produce your largest profits? ü Which products or services have the greatest growth potential? ü Which ones only tie up capital or lose money?
Survey your legal position-most turnarounds create a legal maze that must be untangled early ü Does your business have multiple entities? ü Can you protect the healthy entities from the sick ones? ü What litigation could disrupt your business? Is foreclosure, seizure, or repossession of key assets an immediate threat? ü Is there current or potential litigation from shareholders, franchisees, customers or the government? ü Does the company have major claims against others? Can they be resolved quickly to raise cash to rehabilitate the company? ü What contracts or affiliations limit the workout strategy? ü What regulations or laws limit turnaround options? ü Who are the major and essential suppliers? ü What debts are disputed? ü What debt has the company guaranteed? ü What are the loan renewal or expiration dates? ü What credit is available? ü What loans are in default? ü Can tax arrears be rapidly paid from cash flow? ü Will existing or threatened tax liens impede a reorganization? ü Are there threatened seizures of the business by any tax agencies? ü What is the remaining length of each lease? ü How important is each lease? Which can be terminated? ü Are important leases in default? Can they be cured?
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