Turnaround Management and Bankruptcy Law
Hoorcollege 1
What is (successful) turnaround management?
- Turnaround management may be defined as the process of recovering a firm’s
economic performance following an existence-threatening decline
- The decline may occur over several years although there are situations when
extraordinary events occurring over a shorter period of time can place a firm in peril
- A turnaround may be defined as the recovery of a firm’s economic performance
- A successful recovery, in its most subdued form, may involve mere survival with
economic performance only just acceptable to the firm’s various stakeholders. On the
other hand, in its most positive form, the recovery may lead to the firm achieving
sustainable, superior competitive positions in its chosen areas of activity
Deterministic (external) explanations for business failure
→ Principle idea: when it comes to failure, the industry matters more than the firm.
- Deterministic scholars agree that organizations are embedded in their environments
and, therefore, external factors have more explanatory power than firm level factors.
That is, failure is caused by external factors over which management has little or no
control.
- Also, organizational decision makers are assumed to be rational and committed to
acting in the firm’s best interest and, therefore, failure could not be caused by them
alone.
- The deterministic literature suggests a range of primary causes of organizational failure.
These include:
- Turbulent demand structure due to brand switching by core customers
- Changes in consumer tastes and preferences
- Cyclical decline in demand
- Increased competition due to rivalry among existing competitors and or new
entrants
- Technological uncertainty due to (disruptive) product innovations and or
process innovations
Voluntaristic (internal) explanations for business failure
→ The voluntaristic perspective rejects the assumption that managers are powerless and/or
rational actors. Instead, it is predicated on the assumption that managers are the principal
decision makers of the firm, and their perceptions of the external environment and
individual behavior have a strong effect on how they (mis)manage the firm.
Examples:
- Curse of success: existing success confirms our ideas that we always make the right
decisions
- Groupthink: the human tendency within organizations to conform to the group because
of the desired harmony, as a result of which critical voices about the need for
intervention are insufficiently heard
- Optimism bias: human tendency to think that they are less susceptible to a negative
event than others
- Semmelweis reflex: the human tendency not to want to face uncomfortable truths as it
makes us feel responsible
, - Similarity bias: the preference or tendency to appreciate “people like us”. We all
gravitate toward people like ourselves in terms of appearance, beliefs and background
because they make us feel comfortable and safe
- Overconfidence bias (“better-than-average-driver”): overconfidence bias is a type of
cognitive bias that causes us to think we are better in some areas than we really are (as
compared to others)
- Confirmation bias: the human tendency not to want to face uncomfortable truths and,
above all, to seek confirmation for existing ideas and beliefs
Werkgroep 1
Voorbereiding: Lees:
- Sobel, R.S., Sobel, R.N., Walker, D.M. and Calcagno, P.T. (2019), ‘How effective are
expert tv hosts at saving failing businesses?’ Contemp Econ Policy, 37, p.p. 9-24.
(available via library search)
- The Downfall of a Furniture Retail Family Business. (available on BrightSpace)
1. How effective are expert tv hosts at saving failing businesses?
2. What caused the downfall of the Furniture company (use the conceptual failure model
by Ooghe & De Prijcker)?
Mensen hebben snel de neiging om te gaan wijzen naar bepaalde personen wanneer iets fout
gaat in een bedrijf. Het is moeilijk om daar niet in mee te gaan, maar je moet duidelijk kijken
naar wat er fout is gegaan. Vaak komen alle zaken namelijk samen: je stelt andere, diepgaande
vragen.
Goede consultants weergeven altijd het grote doel.
Vaak gaat er meer een wereld aan vooraf dan alleen hetgeen dat de ramp veroorzaakte.
, Hoorcollege 2
Making a turnaround plan
→ Turnaround paradox: successful and non-successful firms adopt very similar sets of
strategies, and managers of non-successful firms restructure more intensively than successful
firms.
The 10 elements of a sound business turnaround plan
1. Company profile and causes of decline
a. History of the business
b. Description of current products and services
c. Description of past successes
d. Current management structure
e. Strategy that led to the turnaround situation
f. Causes of decline analysis
2. Analysis of the external environment
a. Relevant political, economic, social, technological changes
b. Industry outlook for next 3-5 years
c. Analysis key customers and suppliers
d. Analysis of successful competitors, new entrants and disruptive innovations
e. Summary external opportunities and threats
3. Turnaround Vision
a. Description of the new ambition of the company
b. New vision on services, products and customer relationships
c. Description of unique features of the new company (‘unique selling points’)
d. How customers will perceive the new company
e. Vision on the new company culture
4. Turnaround Strategy
a. Detailed presentation of retrenchment/cost-cutting/downsizing strategies
b. Presentation of recovery/external-market strategies to boost sales growth
c. Description of cultural change strategies
5. Operational analysis
a. Assessment of key problems in each core business process and each major
support function
6. Operational Action Plan
a. Detailed initiatives that address weaknesses and opportunities identified in the
operational analysis
b. Operationalization of turnaround strategy breaking them down in actionable,
measurable and quantifiable steps
7. Financial Projections
a. Description of how turnaround strategy will lead to renewed profitability
(‘EBITDA-bridge’)
b. Presentation of financial model that will be used in the turnaround including 13-
week rolling cash flow forecast
c. Scenario-analysis (base-case, best-case, worst-case)
d. Assessment of current debt structure, contractual agreements, covenants and
relationship with lenders
e. Funding requirements during turnaround in all scenarios
f. Financial stakeholder communication plan
8. Time Scheme
a. Description of the implementation process
Hoorcollege 1
What is (successful) turnaround management?
- Turnaround management may be defined as the process of recovering a firm’s
economic performance following an existence-threatening decline
- The decline may occur over several years although there are situations when
extraordinary events occurring over a shorter period of time can place a firm in peril
- A turnaround may be defined as the recovery of a firm’s economic performance
- A successful recovery, in its most subdued form, may involve mere survival with
economic performance only just acceptable to the firm’s various stakeholders. On the
other hand, in its most positive form, the recovery may lead to the firm achieving
sustainable, superior competitive positions in its chosen areas of activity
Deterministic (external) explanations for business failure
→ Principle idea: when it comes to failure, the industry matters more than the firm.
- Deterministic scholars agree that organizations are embedded in their environments
and, therefore, external factors have more explanatory power than firm level factors.
That is, failure is caused by external factors over which management has little or no
control.
- Also, organizational decision makers are assumed to be rational and committed to
acting in the firm’s best interest and, therefore, failure could not be caused by them
alone.
- The deterministic literature suggests a range of primary causes of organizational failure.
These include:
- Turbulent demand structure due to brand switching by core customers
- Changes in consumer tastes and preferences
- Cyclical decline in demand
- Increased competition due to rivalry among existing competitors and or new
entrants
- Technological uncertainty due to (disruptive) product innovations and or
process innovations
Voluntaristic (internal) explanations for business failure
→ The voluntaristic perspective rejects the assumption that managers are powerless and/or
rational actors. Instead, it is predicated on the assumption that managers are the principal
decision makers of the firm, and their perceptions of the external environment and
individual behavior have a strong effect on how they (mis)manage the firm.
Examples:
- Curse of success: existing success confirms our ideas that we always make the right
decisions
- Groupthink: the human tendency within organizations to conform to the group because
of the desired harmony, as a result of which critical voices about the need for
intervention are insufficiently heard
- Optimism bias: human tendency to think that they are less susceptible to a negative
event than others
- Semmelweis reflex: the human tendency not to want to face uncomfortable truths as it
makes us feel responsible
, - Similarity bias: the preference or tendency to appreciate “people like us”. We all
gravitate toward people like ourselves in terms of appearance, beliefs and background
because they make us feel comfortable and safe
- Overconfidence bias (“better-than-average-driver”): overconfidence bias is a type of
cognitive bias that causes us to think we are better in some areas than we really are (as
compared to others)
- Confirmation bias: the human tendency not to want to face uncomfortable truths and,
above all, to seek confirmation for existing ideas and beliefs
Werkgroep 1
Voorbereiding: Lees:
- Sobel, R.S., Sobel, R.N., Walker, D.M. and Calcagno, P.T. (2019), ‘How effective are
expert tv hosts at saving failing businesses?’ Contemp Econ Policy, 37, p.p. 9-24.
(available via library search)
- The Downfall of a Furniture Retail Family Business. (available on BrightSpace)
1. How effective are expert tv hosts at saving failing businesses?
2. What caused the downfall of the Furniture company (use the conceptual failure model
by Ooghe & De Prijcker)?
Mensen hebben snel de neiging om te gaan wijzen naar bepaalde personen wanneer iets fout
gaat in een bedrijf. Het is moeilijk om daar niet in mee te gaan, maar je moet duidelijk kijken
naar wat er fout is gegaan. Vaak komen alle zaken namelijk samen: je stelt andere, diepgaande
vragen.
Goede consultants weergeven altijd het grote doel.
Vaak gaat er meer een wereld aan vooraf dan alleen hetgeen dat de ramp veroorzaakte.
, Hoorcollege 2
Making a turnaround plan
→ Turnaround paradox: successful and non-successful firms adopt very similar sets of
strategies, and managers of non-successful firms restructure more intensively than successful
firms.
The 10 elements of a sound business turnaround plan
1. Company profile and causes of decline
a. History of the business
b. Description of current products and services
c. Description of past successes
d. Current management structure
e. Strategy that led to the turnaround situation
f. Causes of decline analysis
2. Analysis of the external environment
a. Relevant political, economic, social, technological changes
b. Industry outlook for next 3-5 years
c. Analysis key customers and suppliers
d. Analysis of successful competitors, new entrants and disruptive innovations
e. Summary external opportunities and threats
3. Turnaround Vision
a. Description of the new ambition of the company
b. New vision on services, products and customer relationships
c. Description of unique features of the new company (‘unique selling points’)
d. How customers will perceive the new company
e. Vision on the new company culture
4. Turnaround Strategy
a. Detailed presentation of retrenchment/cost-cutting/downsizing strategies
b. Presentation of recovery/external-market strategies to boost sales growth
c. Description of cultural change strategies
5. Operational analysis
a. Assessment of key problems in each core business process and each major
support function
6. Operational Action Plan
a. Detailed initiatives that address weaknesses and opportunities identified in the
operational analysis
b. Operationalization of turnaround strategy breaking them down in actionable,
measurable and quantifiable steps
7. Financial Projections
a. Description of how turnaround strategy will lead to renewed profitability
(‘EBITDA-bridge’)
b. Presentation of financial model that will be used in the turnaround including 13-
week rolling cash flow forecast
c. Scenario-analysis (base-case, best-case, worst-case)
d. Assessment of current debt structure, contractual agreements, covenants and
relationship with lenders
e. Funding requirements during turnaround in all scenarios
f. Financial stakeholder communication plan
8. Time Scheme
a. Description of the implementation process
