Monday, 11 November 2013

HOW NOT TO RESTRUCTURE

HOW NOT TO RESTRUCTURE.

I am in the middle of a struggle between enhancing shareholder value(read cash dividend harvesting) which by the way tends to be short term and firm value creation which is long-term,and is a typical entrepreneur's bug-bear.This tussle is between making money at any cost,not minding the needs of the business for growth and expansion;indeed the model for ploughing back earnings into the business for future consolidation.The literature on small business has often emphasized the mortality rate of start-ups;their survival period not more than 3-5 years into their founding.And it is this period that increased funding for either expansion of diversification is more accute.Our firm was faced with this situation;that of accute shortage of funds for expansion.We relied on internal funds for organic growth,even though slower, our capital objectives were largely met.We had no banks breathing down our necks,neither were the shareholders nervy about what management did with their money,at least not then.Its five years into our strategic plan,goals largely met and insync with our view of the furture of the business.Strategic plans however beautifully crafted are merely statements of intent.They hardly pip into the future hence our emergent determinism for the course of action during this period.

Emergent scenarios tend to change the course of strategic plans;the most critical being the entry of refurbished equipment into the industry,thus altering the preponderant balance of equation in their favour,with the concumitant price drop.Needless to say a fierce price war ensued and every body is a loser in this kind of scenario. Marketing literature argues the need to position your offering on the basis of value derivable from the consumption of a product and not on price as the later is often transient and rightly so.Price wars demean profit,erode value,stymies the opportunity for future industry growth,kills in the very long run.

In scenarios such as this,managerial leaders have very few options than to restructure and this consequentially leads to loss of jobs.Herein lies the tussle earlier stated in this article;the tussle between the short-term view (profit taking) and long-term (value creation).This tussle is exercebated   when shareholders are financially illiterate;who are not able to distinguish betwen having cash(liquidity) and growing the firm's balance sheet to hedge against future shocks and down turns which from experience are bound to come given the cyclicality of economics.What we witness is a clash of culture between the trading mentality and the investing one with a longterm view.It is also the perenial tussle between the owners' view of the business and that of managerial view.The former trumps the later.

In our situation,the tussle between the two management tendencies is further sharpened by the lack of an orderly retreat from some of our business segments with the attendant loss of jobs.Managers as operators of the business have insights that must not be taken for granted during restructuring exercises;a given that most business owners take for granted.Rather in ignoring this,business owners bring in from outside "new brooms" which tend to sweep the clean and not so clean aside.
Change management literature has observed the difficulties involved when companies change the direction of businesses more so the people element which lies at the heart of most restructuring exercises.You can retrench equipment,close down units even whole strategic business units,dealing with the people issues is akin to dealing with a heart by pass surgery. Who do you fire?Who do you retain?In firing,care must be taken to retain those that will help the 'new broom' point the restructuring in the right direction.For instance,firing those presumed not amenable to change might contain employees with institutional memories of the business;leaving with these memories mean the new man will start from scratch.You will also contend with resistance to the new ways of doing things as enunciated by the new dictat.Threats of sack,withholding of salaries and entitlements become the order of the day.Retained employees will react to these threats with absenteeism,sit-ins and our right walk aways from their jobs.Human emotions are elastic,but they must not be stretched too far to the point of snapping.Machines on the other hand are inelastic and therefore can be pushed around for as long as their useful life spans can take punishments.

POST SCRIPT.

It has been one year since the restructuring in our company took place;with the attendant expectation that the business will turn around for the better.It has always been my thesis that  leaders are dispensable;what is indispensable is good leadership that is built on sound business ethics,one that looks to the future of the company's survival and prosperity,not that of its operators.The obverse remains the case as the literature of our company reveals.In times of market down turn,astute managers look for ways to generate value for the company's products in four or more ways. You could (a) sell more to your existing customers (market maximization),b) sell more of current products to new customers (customer development), c) sell new products to current customers ( new product development) and last,(d) sell new products to new customers in existing market or new market (diversification to new geography).In this we see a mix of strategic and tactical approaches to a most difficult situation.But we compound the situation by not selecting a CEO that is abreast such knowledge and is forward thinking.Considerations for profit taking (short term) often trump the long term view of things.This came to the fore when a replacement was appointed.One year down the road,upon review what one finds is a massive erosion of value: equipment bought in the course of the previous management's tenure have been sold,customers that were painstakingly cultivated have moved to competitors,sales are being routinely diverted to selves,sales revenues are being diverted into personal accounts and disbursed arbitrarily without documentation,the system that drove the structure has been up turned and returned to the previous era.Leaders come and go,but companies remain as eternal testimonies of eras that are good or bad.The dispensability of leaders lie in the thesis that man is fallible,can be replaced,can die ,just as companies are fallible,can be replaced,can die because they both are mortal. Social and industrial Darwinism ensure that the firmament will continue to be renewed on the cusp of new ideas and their propagation.Also, what remains eternal are the axioms of good management and leadership.Leaders,good or bad are turned over in organizations;their positions must be filled,guaranteed .But what cannot be guaranteed is what their performance will be given the variability of human behaviour in organizations and the consequence of fluctuating fortunes.
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