No Bull

As of this writing, the Dow Jones industrial average is plunging into bear market
territory for the first time in more than a decade. While individual investors rely
on Mr. Greenspan to save them, corporations need to tighten the reigns and sharpen
their focus if they are to avoid the drastic measures taken in recent weeks by the
likes of Daimler Chrysler, Procter & Gamble, Disney and Charles Schwab.

</p><p>Remember Econ 101: Success occurs when the company provides the customer with a
desired product or service at a reasonable price that will return an acceptable
profit. The textbooks tell us that businesses fail when there is no demand for the
product or service. If only it were that simple! As we all know, real life is
more complicated than the classroom.

</p><p>As professionals working exclusively with underperforming or distressed companies,
we see several recurring mistakes made by management teams. Of these errors, two of
the most prevalent include uncontrolled growth and passive management styles. Both of
these mistakes, either independently or in combination, can sound the death knell for
an organization.

</p><h3>Uncontrolled Growth</h3>

<p>Uncontrolled growth, whether by acquisition of other businesses or expansion of
existing businesses, almost always leads to a lack of focus by the management team
on the core business of the company. In this era of failed roll-ups, one might
ask how management teams the world over could have strayed so far from the fundamentals
of their core businesses that were once so profitable.

</p><p>In many of these situations, the company's management and its board of directors
were seeking growth for growth's sake. This has often been done with little thought
given to the underlying business rationale for growth or to the probability of achieving
the desired results. Even when there is a good business case supporting this growth
strategy, we seldom see a well-developed strategic and tactical plan for the
operational and cultural integration of the new business(es) into the existing company.
As a result, expansion often looks a lot better on paper than in practice. This
outcome can be—and often has been—devastating, leaving a company with the worst of all
worlds; namely, too much debt, severe operational problems and very limited
flexibility.

</p><p>If such an expansion strategy is, in fact, going to be profitable, management
must have a step-by-step methodology to deal with the following types of issues:

</p><ul>
<li>distraction of management and disruption to the ongoing business;

</li><li>risks of entering markets or businesses in which management has limited or no
experience;

</li><li>integration of the operations and personnel of the acquired business, including
the differences in corporate culture;

</li><li>management of geographically remote locations or several new locations;

</li><li>incorporation of different technology (including computer) systems;

</li><li>unexpected delays and costs caused by the integration process;

</li><li>unknown liabilities or problems associated with the acquired company or assets;
and

</li><li>potential loss of key employees and/or management personnel.
</li></ul>

<p>This was a problem faced by a large NYSE company that had acquired in excess of
20 small companies in an 18-month period. Management was so intent on an
acquisition strategy that no one was focusing on the integration problems that are
typical of a roll-up. The subsidiary companies were all using different computer
systems that were unable to communicate with each other. As a result, they had
severe data integrity issues. There was no centralized cash-management system, and the
treasurer had absolutely no idea of his cash availability. The company had several
underutilized distribution centers within a two-mile radius of each other.

</p><p>Existing management, many of whom were founders of the businesses that had been
acquired, stayed in place. This only added to the dilemma as turf battles and
fiefdoms developed, with no attempts made by anyone to maximize the companies' joint
operations. To exemplify the extent of the problem, the sales forces all remained
independent and, in many cases, were competing with each other for the same piece
of business.

</p><p>Despite all of these problems, management was able to keep the house of cards
together for several years, a testament to the fundamental strength and profitability
of at least one of the core businesses. The stock was flying high, indicating a
value of over a billion dollars. Unfortunately, sooner or later the cash-positive
business that is supporting all the cash-negative businesses will run out of money.

</p><p>The company eventually defaulted on both its senior and subordinated debt and was
forced into a bankruptcy. A new management team is now in the process of "unrolling"
the roll-up and trying to determine which of the acquired businesses has the right
to ongoing operation.

</p><p>Just as often, the lack of focus on core operations comes from internal expansion
into new businesses or product lines that are unknown areas for the company's
management. This was a major issue for an international sports licensor and
manufacturer of apparel and footwear. Through a series of marketing and merchandising
missteps, the brand name had begun to erode domestically; however, the name maintained
strong international brand equity. Management had also purchased a footwear manufacturing
company and was struggling with a domestic textile manufacturing business. Both ventures
were draining energy and cash from the core business. The company was facing a severe
liquidity crisis, was under tremendous pressure from its lenders and was out of
options.

</p><p>The answer for this company was to identify the core business, shed non-essential
operations and bring the cost infrastructure back into line. A short-term cash plan
was immediately developed, and a waiver was negotiated with the lenders. With these
steps, the company bought itself enough time to allow management room to maneuver and
develop a new strategy.

</p><p>Management quickly liquidated ancillary or underperforming assets and focused on the
core businesses that were profitable—specifically, the company's European operations,
which were cash-positive and included an important, extensive licensee network. The
company also had very lucrative international endorsement contracts that allowed it to
expand its licensing operation into Asia and the Middle East. These assets became
the center of a new business plan. Once this plan was developed, the manufacturing
plants were closed and sold, the debt was reduced and restructured, and the company
was successfully transitioned from an old-line manufacturer to a profitable marketer
and licensor. In this case, as in many, the company discovered that it was
actually more profitable to shrink than to grow!

</p><blockquote><blockquote>
<hr>
<big><i><center>

When an industry is undergoing a great deal of
change, taking a "wait-and-see" strategy is
not effective.
</center></i></big>
<hr>
</blockquote></blockquote>

<h3>The Complacent Management Team</h3>

<p>Another problem that we regularly encounter is a complacent management team. This
is a team that works very hard and has been successful in the past, but that is
so resistant to change that they are unable or unwilling to adjust to the necessary
market or technological forces that affect their operations. The environment shifts
around them, and they respond by working harder and harder at the same thing. They
don't realize that they need to do things differently to be successful.

</p><p>Such was one of the many problems faced by an old-line manufacturer of footwear.
Although this company was facing the classic symptoms of a distressed company,
including cash constraints and a lack of focus, the main problem was that management
had come to rely too heavily on a single product, a product that had been on the
market for close to 100 years.

</p><p>Once a dominant name in footwear, this company lost its market position to
powerhouses Nike and Reebok. In 1997, it was the fifth largest athletic shoemaker
in the United States; by 1998, that position had dropped to a distant seventh.
As other firms were producing more technologically advanced shoes demanded by the
marketplace, this company did not stay competitive. The management team had not
adjusted to—in fact, had ignored—the desires and demands of their customers in
technology and/or fashion.

</p><p>When they finally produced some credible new product offerings, it was too little,
too late. Retailers gave the products a lukewarm reception, indicating their continued
lack of confidence in the brand.

</p><p>Eventually, the company ran out of time with its lenders. It filed for
bankruptcy protection and will likely be sold.

</p><p>When an industry is undergoing a great deal of change, taking a "wait-and-see"
strategy is not effective. Management must be alert and take the initiative in order
to keep up with, not to mention ahead of, the competition.

</p><h3>Conclusion</h3>

<p>Our work with literally hundreds of struggling or failing companies has shown us that
success demands an avoidance of these common pitfalls. Virtually all companies are
vulnerable to a crisis; it is only a matter of time. How well the company survives
depends on how quickly and effectively the management team and board of directors are
able to react. A focus on the basics—<i>i.e.,</i> the factors responsible for an
organization's existing success—with a willingness to methodically expand based on market
trends may not make the company a market leader, but it will keep it firmly in the
black.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Bettina M. Whyte and Lisa J. Donahue are principals with Jay Alix &amp; Associates Inc., a leading turnaround and crisis
management firm, dedicated to improving the outcome for troubled or underperforming companies. <a href="#1a">Return to article</a>