Definition
Turnaround refers to the financial recovery of a company that has experienced poor performance for an extended period. It’s a positive change in the company’s business strategy, financial health, and operational efficiency, reversing an unfavorable trend. This could occur due to several factors including restructuring efforts, product innovation, or changes in management.
Phonetic
The phonetics of the word “Turnaround” is: /ˈtɝːnəˌraʊnd/
Key Takeaways
Turnaround, often referred to in a business context, is a strategy that strives to convert an underperforming or distressed company into a profitable one. Here are the three main takeaways:
- Identifying Issues: The first and foremost step in any turnaround strategy is to identify the underlying issues contributing to the company’s poor performance. This can include ineffective management, inadequate resources, market changes, financial crises, or any combination of these and more.
- Planning and Implementing Strategies: Once the issues have been identified, the next step is to plan and implement strategies aimed at resolving these issues. This should ideally be done by a dedicated turnaround team consisting of experts in relevant fields. These strategies could involve a variety of activities such as financial restructuring, layoffs, changes to the business model, or overhauling management structures.
- Restoring Profitability and Growth: The ultimate goal of any turnaround strategy is to restore profitability and stimulate growth. Evaluating the success of the turnaround strategy over time and modifying it as necessary is key to steering the company back to profitability and putting it on a path towards sustained growth and success in the long term. Not all turnaround strategies are successful, but businesses that approach these challenges with creativity, perseverance, and a disciplined approach can often pull themselves back from the brink.
Importance
Turnaround, in the context of business and finance, is important because it represents the financial recovery of a company that has been performing poorly for an extended period. It outlines the positive changes in strategies, operations, control, or management of the firm to overcome losses and deliver profits. Rapid and effective turnaround is crucial for a company in distress as it not only revitalizes its financial health but also re-instills confidence among investors, employees, and other stakeholders. Hence, understanding and effectively applying the concept of a turnaround is an essential part of business survival and growth.
Explanation
In the business or finance industry, the term ‘turnover’ is a sacred word that refers to crucial transformation phases a company might undergo to revive from a state of consistent loss to a prospering entity. The essential purpose of a turnaround strategy is to rectify problems within a company that have caused a downfall or hindered its growth, and then reorient the parts of the organization that need modification. This typically involves making comprehensive changes in several key areas such as management, strategy, operations, structure, finance, etc. The ultimate goal is to restore the company to profitability and positive cash flow.Turnarounds are used when a company is facing significant operational and financial pressures and needs a way to restore its health, which might include reducing operational costs, increasing revenues, or both. It’s an intricate process that requires a deep understanding of the company’s problems and how to address them effectively. Companies may also use a turnaround strategy to evolve and adapt to changes in the market, to overcome technological obsolescence, or to outperform their competitors. Through this process, companies can identify and eliminate inefficiencies, improve customer satisfaction, increase market share and create a platform for sustainable growth.
Examples
1. Chrysler Corporation: One of the most famous examples of a company turnaround is the U.S. auto manufacturer Chrysler. In the late 1970s, Chrysler was on the verge of bankruptcy following a decade of poor sales, high fuel prices, and strong competition from foreign auto manufacturers. In 1979, the company hired Lee Iacocca as CEO, who cut costs, introduced new models, and obtained a loan guarantee from the U.S. government. Within a few years, Chrysler was profitable again and repaid its government loan several years early.2. Starbucks: Starbucks is another notable example. The coffee giant was experiencing significant decline in the period of 2007-2008, facing dire financial straits due to over-expansion and the economic recession. But when founder Howard Schultz returned as CEO and implemented strategic changes like closing underperforming stores, adding new menu items, and improving employee morale, the company made a dramatic comeback.3. Apple: Apple Inc. was struggling in the late 1990s, reporting a $1 billion loss in 1997. The company was on the brink of bankruptcy when co-founder Steve Jobs returned as CEO. Under his leadership, Apple launched revolutionary products like the iPod, iPhone, and iPad, which triggered one of the biggest turnaround stories in corporate history. Now, Apple is one of the most valuable companies in the world.
Frequently Asked Questions(FAQ)
What is a turnaround in terms of finance and business?
A turnaround refers to the financial recovery of a company that has been performing poorly for an extended time. It involves improved financial performance, often through restructuring, optimization of resources, and implementing a new business strategy.
What factors lead to a turnaround situation?
A variety of factors can lead to a turnaround situation, including market downturns, changes in industry trends, poor management, financial missteps, or intense competition.
Who is usually responsible for executing a turnaround strategy?
Typically, the company management and board of directors are responsible for developing and executing a turnaround strategy. In some cases, an outside consultant or turnaround specialist may be hired.
What are some signs that a company may need a turnaround strategy?
These could include consistent overall financial losses, decreasing market share, poor cash flow, high levels of debt, or lack of new product introductions.
What strategies might be involved in a turnaround?
Some common turnaround strategies include cost reduction, asset reduction, business restructure, product or service reengineering, and change in corporate strategy.
How long does a turnaround usually take?
The length of a turnaround can vastly differ depending on the size and condition of the business, the industry, and the strategy implemented. It could range from a few months to several years.
How can success in a turnaround be measured?
Success in a turnaround can be measured through improved financial performance, growth in market shares, better cash flow, reduction in debt, or increased profitability.
What are some risks involved in a turnaround strategy?
Some potential risks include employee resistance to change, potential job cuts, drops in staff morale, and unfavourable market conditions which could hamper progress. Additionally, no all turnaround strategies are successful, and the company may continue to decline despite the efforts.
Can a business in any sector go through a turnaround?
Yes, businesses from every sector could potentially undergo a successful turnaround, provided they employ effective strategies and respond effectively to evolving market conditions.
Related Finance Terms
- Restructuring
- Insolvency
- Liquidation
- Cost-Cutting
- Debt Refinancing
Sources for More Information
