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Restructuring in Practice: lessons learnt and pointers for future
reference
Master’s thesis
Submitted by: Martin Vereš
Registration number: 0910634834
At Master’s programme
‘Business Consultancy International’,
International Accounting and Finance
Supervisor: Mr. Pádraig Murray, MBA
Wiener Neustadt, Date 05.09.2011
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Declaration of Integrity
I hereby confirm,
1. that I have independently written the Master‟s thesis at hand, that I
have not used any sources or materials other than those stated, nor availed myself of any unauthorized resources
2. that I have not submitted this Master‟s thesis in any form as an
examination paper before, neither in this country, nor abroad
3. that the electronic copy of this Master‟s thesis and the printed
versions are identical
Wiener Neustadt,_______________ __________________________
Date Signature
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Abstract in English:
The purpose of this master‟s thesis is to identify whether there can be one common
guideline for restructuring that can be applied to any restructuring case. For this
reason, the paper is divided into a theoretical review and a practical experience
involving a restructuring process. From the content perspective, the first chapter
explains what corporate restructuring is, what the reasons for restructuring are,
restructuring options, strategies applied and the concept of restructuring and
corporate crisis.
The second chapter analyzes the restructuring framework, processes, restructuring
success factors and hurdles that might arise.
The third chapter is dedicated to a case study, which discusses the real experience of
restructuring a SME and leads the reader through the restructuring process of the
company which is divided into three groups based on the success factors of the
restructuring of the respective areas.
Keywords:
Corporate Restructuring; Restructuring Process; Restructuring Framework; Turnaround
Abstract in German:
Ziel von dieser Magisterarbeit ist es herauszufinden, ob es eine allgemeine in alle
Restrukturierungsfälle anwendbar Richtlinie zu Restrukturierung geben konnte. Aus
diesem Grund ist diese Arbeit aufgeteilt in theoretischen und praktischen Teil, der
Erfahrungen mit Restrukturierung beschreibt. Von Inhalt her, beschreibt das erste
Kapitel korporative Restrukturierungsprozesse, Gründe für Restrukturierungsprozess,
Restrukturierungsmöglichkeiten, anwendbare Strategien und
Restrukturierungskonzepte und korporative Krise. Zweites Kapitel analysiert den
Restrukturierungsaufbau, Prozesse, Restrukturierungserfolgsfaktore und Hürden die
auftauchen konnten. Das letzte Kapitel beschäftigt sich mit realen Fallstudie und
Erfahrung mit Restrukturierung von einem SME, und führt den Leser über
Restrukturierungsprozess eines Unternehmens aufgeteilt in drei Bereiche die auf
Erfolgsfaktoren von Restrukturierung von perspektiven Bereiche beruhen.
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Keywords:
Unternehmensumstrukturierungen, Umstrukturierungsprozess, Umstrukturierung Rahmen, Turnaround
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Table of contents
1. INTRODUCTION 8
2. CORPORATE RESTRUCTURING 9
2.1 UNDERSTANDING CORPORATE RESTRUCTURING 9
2.2 REASONS FOR CORPORATE RESTRUCTURING 10
2.2.1 Changing Market Dynamics 10
2.2.2 Government Intervention 10
2.2.3 Capital Structure 10
2.2.4 Cost Structure 11
2.3 RESTRUCTURING OPTIONS 13
2.3.1 Portfolio & Asset Restructuring 14
2.3.2 Capital Restructuring 14
2.3.3 Organizational Restructuring 15
2.4 RESTRUCTURING STRATEGIES 19
2.4.1 Prosperity Strategy 19
2.4.2 Revitalization Strategy 19
2.4.3 Resuscitation Strategy 20
2.5 RESTRUCTURING AND CORPORATE CRISIS 21
2.5.1 Corporate crisis 21
2.6 MANAGING CORPORATE CRISIS 25
2.6.1 Crisis analysis 26
2.6.1.1 Stages of the analysis 27
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3. RESTRUCTURING – PROCESSES, FRAMEWORKS AND SUCCESS FACTORS
28
3.1 RESTRUCTURING FRAMEWORK 28
3.1.1 Low cost operation 30
3.1.1.1 Operational efficiency 30
3.1.1.2 Inventory efficiency 30
3.1.1.3 Modest overheads 30
3.1.1.4 Low cost through design 31
3.1.2 Product differentiation 31
3.1.2.1 Distinguishing features 31
3.1.2.2 Product Reliability 32
3.1.2.3 Product Quality 32
3.1.2.4 Market Continuity 32
3.1.3 Tactics for leadership 33
3.1.3.1 Focus on Operations 33
3.1.3.2 Managerial Stability 33
3.1.3.3 Experience in the Industry 34
3.1.3.4 Technical Experience 34
3.1.3.5 Knowledge Exploration 34
3.1.3.6 Incremental changes 34
3.1.3.7 Fair play 35
3.2 HIRING EXTERNAL RESTRUCTURING CONSULTANTS 35
3.2.1 Choosing a Restructuring Consultant 36
3.3 RESTRUCTURING TEAM – KEY TO SUCCESS 38
3.3.1 Team members: roles and responsibilities 39
3.3.2 Necessary tools for the team 41
3.4 RESTRUCTURING AND TURNAROUND PROCESS 43
3.4.1 Step One – Learn about the business 43
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3.4.2 Step Two – Meet with partners involved 43
3.4.3 Step Three – Evaluate the problems and issues 44
3.4.4 Step Four – Identify the most pressing problems 44
3.4.5 Step Five – Identify opportunities 45
3.4.6 Step Six – Market analysis 45
3.4.7 Step Seven – Available resources 47
3.4.8 Step Eight – Risk assessment 47
3.4.9 Step Nine – Developing the restructuring plan 47
3.4.10 Step Ten – Acquire and leverage needed resources 48
3.4.11 Step Eleven – Deploy and don’t look back 48
3.4.12 Step Twelve – Obtaining and distributing value 49
3.5 PHASES OF THE RESTRUCTURING PROCESS 51
3.6 HURDLES OF BUSINESS RESTRUCTURING 57
4. CASE STUDY – RESTRUCTURING OF DELIFOODS 59
4.1 COMPANY BACKGROUND 59
4.2 PRE-RESTRUCTURING PHASE 60
4.3 RESTRUCTURING OF DELIFOODS 62
4.3.1 Restructuring strategy applied 63
4.3.2 Restructuring process 64
4.3.2.1 Company analysis 64
4.3.2.2 Restructuring plan 65
4.3.2.3 Restructuring team 65
4.3.2.4 Management establishment 66
4.3.3 Restructured areas 66
4.3.3.1 Financial restructuring 66
4.3.3.2 Operational restructuring 68
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4.3.3.2.1 Logistics restructuring 70
4.3.3.2.2 Bakery restructuring 73
4.3.3.2.3 Sales 76
4.3.4 Status and summary of DeliFoods restructuring 80
5. CONCLUSION 81
LIST OF ABBREVIATIONS 84
LIST OF FIGURES 85
LIST OF TABLES 86
BIBLIOGRAPHY 87
APPENDICES 90
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1. Introduction
By restructuring we understand a process of changes based on the implementation of
restructuring measures aiming to improve the performance of a company as a whole
or improving the performance of an entity‟s business segment or to avoid and
turnaround a negative trend. The process of restructuring is not only about the
shareholders and management of the company, it is related to all of the employees as
they form the company or business segment that is underperforming and is facing a
restructuring. The impact of restructuring goes even beyond the company; the process
might, and often does, affect investors, suppliers, customers, competition and banks
as providers of funds and other business partners.
There is not a single definition of business restructuring. The term can be perceived
and explained in many ways. Currently, corporations, as one of the key attributes of
the market, are in order to adapt and compete in tough market conditions, required to
undertake restructuring or revitalization measures. Corporations that are willing to
embark on such measures can be successful.
In order to achieve the goal of the thesis, it is necessary to:
1. Understand corporate restructuring
2. Identify restructuring processes, frameworks and success factors
3. Present a case study – showing the restructuring process of DeliFoods. The
name of the company has been changed due to sensitive information in this
paper.
The first chapter is dedicated to explain the concept of restructuring. It discusses the
term restructuring, which is often explained in various meanings. Additionally, the
chapter describes what the reasons are to restructure, restructuring options,
strategies and discusses restructuring and corporate crisis.
The second chapter discusses the restructuring framework and process, and explains
what the benefits are of hiring external advisors, what the key factors are when
building a restructuring team and what hurdles can arise during the restructuring
process.
The third chapter is dedicated to a case study, which presents the real experience of a
corporate restructuring explains the pre-restructuring phase of the company, and
leads the reader through the restructuring process of DeliFoods which is divided into
9
three groups based on the success factors of the restructuring of the respective areas
and departments.
The goal of the thesis is to find out whether the theory provides a single unified
restructuring guideline or framework that can be applied to any restructuring case or
whether each restructuring case is unique and requires specific approach.
2. Corporate restructuring
2.1 Understanding corporate restructuring
The literature on corporate restructuring as well as practice offers different definitions
of restructuring.
C. Zilka1 defines restructuring as follows: “The term refers to a turnaround tactic used
by distressed companies in an attempt to correct a declining financial situation or
climb out of bankruptcy.”
J. Veber2 offers an additional explanation: “It is a change of basic structure, in the
case of an organization it is connected to changes in production, sources of
organization, their interconnection and utilization; it can be accompanied by change in
organizational architecture”.
Restructuring is therefore a way how to continue doing business if the current
structure of business is not performing according to the planned and expected
performance. Corporate restructuring should be therefore perceived as a process of
complete changes within the company based on the execution of restructuring
measures that aim to increase the stagnating performance, turnaround or avoid a
negative trend of the business activities of the company.
To summarize, restructuring can be explained as3:
Continuous adaption of a corporation‟s internal structure to a changing external
environment - defensive restructuring
Complex systematic change of a corporation‟s department or business activity -
strategic restructuring
1 Zilka C., Business Restructuring, Jon Wiley& Sons, Inc., 2010, p.1
2 Veber J. a kol., Management – basics, prosperity, globalization, Prague: Management Press, 2005, p. 533
3 Žák, M a kol., Big Encyclopedia of Economics, Linde, 2002, p. 659
10
2.2 Reasons for corporate restructuring
There is rarely a single cause behind restructuring, but rather a series of events that
affect the market opportunities for companies. These include changes in the
competitive environment, government intervention and an incorrect cost of capital
structure. Companies experiencing a major restructuring are generally doing poorer
than expected and want to get back on the growing pace.
2.2.1 Changing Market Dynamics
A rapidly changing environment as a product of business globalization is a challenge
for companies to be able to react promptly and combat these challenges by reducing
costs hand-in-hand with increasing the quality of products and services. Being unable
to adapt is forcing companies to restructure to remain on the right track. Those who
do not react promptly often fail to grasp the opportunity to capture the trends in the
market and be successful.
2.2.2 Government Intervention
Government plays a certain role and created indirect opportunities for restructuring. In
the case of privatizations, restructuring is generally intended to make the businesses
concerned profitable not only in the short run but also in the long run, so as to attract
potential bidders. Companies owned and run by the government are often monopolies
or benefit from some form of barriers-to-entry. When the government opens up a
previously state-owned monopoly market, the company must be able to compete with
future potential entrants and be profitable. Since state-owned companies are often
over-staffed prior to privatization, the latter can lead to significant redundancies4.
2.2.3 Capital Structure
Manipulation with the capital structure during low interest rate periods pushes
companies to leverage their balance sheets due to the fact that the cost of debt is
lower than the cost of equity. Another reason is that holding debt in a company even
though it is not ultimately necessary, is often done to benefit from the tax shield effect
of interest payments. However, in a competitive environment, with declining revenues
4Morley J., Ward T., ERM Case Studies: Good practice in company restructuring, European Foundation for the Improvement of Living and Working Conditions, 2008, p. 3-6
11
and profitability, inappropriate debt on the balance sheet requires rapid action, and if
not successful, an over-leveraged company may have to sell assets, merge with
competitors or even undergo restructuring through a court based procedure.
2.2.4 Cost Structure
Companies that are unable to adapt quickly by e.g. reducing their costs in comparison
with their competitors will lose profitability almost immediately. Therefore maintaining
a flexible cost structure especially in rapidly changing market conditions should be an
important task for companies. There are several ways how to improve the fixed to
variable cost ratio, such as the ability to outsource production and services. Of course,
there are certain limitations to outsourcing, particularly in the main areas of the
company which give it its competitive edge, such as product development.
Being more technically oriented, a Roland Berger5 survey offers the top 5 components
of restructuring of European companies. Reducing overheads was deemed to be the
most important action by European corporations having the highest score followed by
personnel cost reduction and material cost cutting.
Figure 1 Top 5 Components of Restructuring in Europe, 2005
5 Roland Berger, Restructuring in Europe 2005 – Study, 2005, p.17
9087 86
82 80
Reduc. overhead
Reduc. personnel expenses
Cutting material
costs
Boosting sales
Cutting working capital
12
Corporate restructuring is mostly linked to companies in crisis. However, restructuring
processes are exercised also in companies that have no significant operational or
strategic problems, but are constantly trying to increase their ability to be competitive
on the market. Along with the above mentioned, we could state that reasons for
restructuring of a company are6:
Crisis – company is in a crisis which is threatening its very own existence,
profitability or stability and this unappreciated situation needs to be solved;
Problems – company is forced to solve fragmental problematic situations, that
arise from daily operations and in case of ignoring of these problems, they
might lead to the rise of other, much more complex problems – crisis;
Prevention – company is trying to avoid and prevent potential threats in the
future;
Opportunity – company is trying to benefit from chances to gain a competitive
advantage and strengthen its position in the market
Restructuring measures can be applied in every phase of a company‟s lifecycle. It is
conducted in order to secure the future development of the business. Apart from the
traditional perception of restructuring, it does not necessarily have to be connected
only with the crisis of a company. Restructuring processes can be applied to
companies that have no significant problems, but they are only reacting to constant
market changes and try to keep being more competitive. There is no such event or
point in the cycle of the company that would indicate that it is necessary to restructure
the business. Is it when a company‟s turnover continually declines over a certain
period compared to previous periods? Is it when the internal cost structure is getting
out of control? Is it when a company cannot get from red to black numbers? In an
optimal case, restructuring should be done as a preventive measure with which the
company acquires a competitive advantage. However, a survey conducted by Roland
Berger showed that the majority of companies do not react to an upcoming crisis until
there is an earnings or liquidity problem. The graph below indicates how companies
behave and respond to different crises. 29% of companies respond as soon as
strategic problems arise, or when new competitors or substitutes emerge. 71% of
6 DC DWEK CORPORATE FINANCE, Successful Restructuring, Newsletter Q2, 2005, http://www.dcdwek.com/newsletter-q205.htm
13
companies do not respond until the strategic crisis has turned into an earnings or
liquidity crisis.7
Figure 2 Response to crises by cause
I guarantee that there is no CEO of any company that would claim that there is
nothing to improve. Every company, regardless of its scope of business should
regularly look at itself and conduct a self-assessment to analyze which areas are
performing well and which areas within the company should be improved. Such self-
assessment should be conducted very carefully, not only looking at the past
performance, but it should serve as a prerequisite of preparing for the future. When
such internal evaluations are done continuously, they should help companies to spot
any indications of a potential threat or crisis that might occur in the future based on
certain trends within the external or internal environment. The theory provides certain
evaluation guidelines for the management of a company that should help it to
understand the performance of the company. The previous statement might be
perceived as very controversial, because who else if not the management of the
company should know the company best? However, in reality it is always beneficial for
the company to have a rather different angle of perception of the company that often
spots issues that are not visible for those who are so closely involved with the daily
operations. Please see appendices 1 – 4 for illustrations.
2.3 Restructuring options
Management acceptance of the requirement to restructure the business is the first
task in the process. At this stage, the future of the company is in the hands of
7 Roland Berger, Restructuring in Europe 2005 – Study, 2005, p.17
Large
Ur
gency
Time
SC
OP
E F
OR
AC
TIO
N
NE
ED
FO
R A
CT
ION
LargeSmall
Small
STRATEGIC CRISIS
EARNINGS CRISIS
LIQUIDITY CRISIS
29%
54%
17%
Insolvency
Urgent restructuring cases
14
management and their professionalism irrespective of whether they are able to spot
and accept that they need, in most of the cases, external help to turnaround the
company. This process is rather easier in private equity firms, due to their role to
monitor the management from a more or less external environment which gives them
the ability to spot potential threats in the way the company is doing business much
sooner than for example in public companies where the management is probably
under lower stress and the companies are often less performance oriented. In many
cases, it might happen that management must be replaced in order for the company
to try to restructure itself with new people with fresh ideas, with a different perception
of the company, its processes and ways of conducting business. In all cases, there
must be full support and commitment of the management to execute the restructuring
plan with clearly identifiable targets.
The broad types of restructuring can be classified into 3 main groups:
Portfolio & Asset Restructuring
Capital Restructuring
Organization & Management
These main groups can be further classified into various types or methods of
restructuring depending on the objectives to be achieved.
2.3.1 Portfolio & Asset Restructuring
This type of restructuring affects the asset base or the product and service portfolios
of the company undergoing restructuring. The aim of portfolio & asset restructuring is
to enhance the profitability of the company. A typical case when such restructuring
occurs is in the case of mergers and acquisitions i.e. to choose the best combined
portfolio of both companies. Portfolio & asset restructuring also occurs in the case of
divestments of certain businesses to ensure growth and sustainable development.
2.3.2 Capital Restructuring
The first objective of capital restructuring is to take measures to avert impending
insolvency and to ensure the short-term survival of the business. This is the
prerequisite for a sustainable restructuring process. The medium and long term goal of
capital restructuring is the re-establishment of a healthy and solid capital structure.8
Capital restructuring reallocates capital to improve the availability and therefore
8 Blatz M., Kraus K.-J., Hagani S.; Corporate Restructuring: finance in time of crisis; Springer-Verlag Berlin, 2006; p.7
15
liquidity of assets, often monetary, to generate more assets. The process requires
selling assets to buy different ones with the aim to improve the capital position so that
the asset position can be improved enabling the company to earn more with them.
Capital restructuring is undertaken in order to stabilize the future performance of a
company‟s assets. The motives for capital restructuring are to enhance liquidity, lower
the cost of capital, reduce risk, avoid loss of control and improve shareholder value.
The result of a successful capital restructuring shall be a better financial condition of
the company, access to better technologies and very importantly a focus on core
competencies.
Capital restructuring touches upon the following aspects:
Company leverage – this is executed by debt restructuring, usually in
companies laden with high debt. Debt restructuring is a process used by
companies with cash flow problems and financial distress, to reduce or
renegotiate the company‟s debts in order to improve liquidity so that the
company can continue its operations.
Investment pattern – this relates to the ability of spotting investment
opportunities leading to higher returns. As opportunities spotting is an
important part of restructuring, the necessary capital must be secured in order
to execute the opportunities spotted.
Divestures – this relates to divesting divisions or businesses in order to
improve the financial standing of the organization.
Capital restructuring is almost always occurring during restructuring cases as securing
financing for the operations of a company is an essential task. Without secured
financing, restructuring could not be executed. It is important to realize that even
though restructuring is often explained or perceived as cost cutting, there are
significant upfront costs in order to save e.g. paying severance payments to laid-off
employees; cancelling no longer necessary contracts and lastly paying the consultants
is a financial factor as well.
2.3.3 Organizational Restructuring
Organizational restructuring brings changes to organizational design. It changes the
process of decision making, information flow and management style. Organizational
restructuring is executed in close cooperation with the CEO; nevertheless, it requires
16
the participation of all levels of an organization, especially the employees.
Organizational restructuring makes meaningful changes in the following aspects9:
Centralization or decentralization of the organization – functions or units of the
organization may be centralized or decentralized to create new linkages to
better implement the restructuring measurements. The nature of decision-
making in the organization may be changed due to changes in reporting and
hierarchical levels.
Organizational Culture – the culture of a company is often affected by changes
in the hierarchy brought about by changes caused by restructuring.
Training and redeployment – training the workforce enables the organization to
cope better with the changing environment. At the same time some employees
need to be redeployed. However, training and redeployment may be
inadequate at times and therefore inducting educated and skilled professionals
at different levels becomes necessary.
Changes in HR policies: Current HR policies of a company may need to be
changed in accordance with the changing scenario. The HR department needs
to enable change management, to trigger support activities to employees to be
laid off and be supportive to employees in fear of the changes the restructuring
brings.
Rationalization of Pay Structure: Present pay structures should be modified and
re-evaluated to maintain internal and external equity among employees.
Popular tools and approaches used in organizational restructuring are the application
of Lewin‟s Change Model and Action Research Model.
Firstly, a brief explanation of Lewin‟s Change Model – it is composed of a particular set
of behaviours at any moment which results to two group of forces:
Those striving to maintain the status quo
Those pushing for change
There are three steps in the change process10:
9 What is Business Restructuring, http://www.universalteacherpublications.com/mba/free-
project/p3/page4.htm, p.4
17
1. Unfreezing – reducing forces that maintain the organization‟s behaviour at its
present level. It talks about the way things are right now. In terms of
procedures and instructions, it analyzes what is working well in the
organization.
2. Movement – shifts the behaviour of the organization, department or individual
to a new level. It is the act of cutting or translating the restraining forces
(unfreezing) into driving forces (refreezing). This sets a new behaviour in
restructuring, which means changing the mindsets of the members of the
organization.
3. Refreezing – stabilizes the organization at a new state of equilibrium. It focuses
rather on what is not working well in the organization in terms of procedures
and instructions.
The figure below is the illustration of Lewin‟s Change Model.
Figure 3 Lewin's Change Model
The Action Research Model is aimed at helping an organization to implement
planned change as well as to develop more general knowledge which can be
applied to other settings.
10 Super Business, The Restructuring Process, http://www.super-business.net/Knowledge-Management/892.html
18
There are 8 steps in this model:
1. Problem Identification - key executive senses that there are problems that can
be solved with the help of a responsible person of the restructuring team (in
this paper referred to as “Change Management and Communications Lead”)
2. Consult with Change Management and Communications Lead - the internal HR
head and Change Management and Communications Lead assess the problem
together
3. Gathering the data and initial diagnosis - gathering appropriate information and
analyzing it to determine the underlying causes of the organizational problem
4. Client group feedback - the client‟s HR head and Change Management and
Communications Lead will determine the strengths and weaknesses of the
organization with the data gathered
5. Joint problem diagnosis - the client‟s HR head and Change Management and
Communications Lead discusses the feedback and explore if they want to work
on the problems
6. Joint planning of change actions - client‟s HR head and Change Management
and Communications Lead both agree on further actions to be taken
7. Engagement of change actions - actual change from one organizational state to
another
8. Post action data gathering and evaluation - data should be gathered after the
process to determine the effects to the organization
These are approaches that should be used as any significant changes within the
organization, often associated with layoffs, might lead to loss of morale and
motivation, nervousness and often even fear of employees of the changes arising from
the implementation of organizational measurements arising from the restructuring
plan. Therefore, it is crucial to pay high attention to any changes affecting employees.
Generally, there are two main goals of organizational restructuring which are lower
cost and better formulation and implementation of strategies. In any restructuring,
acceptance of the employees in their new roles is one of the key ingredients to
successful restructuring.
19
2.4 Restructuring strategies
The key to successful restructuring is to determine in what condition the company is at
the time when the restructuring process shall start. After successful restructuring, the
company has been through one of the following strategies11:
Prosperity Strategy – qualitative and quantitative departments of the company
Revitalization Strategy – curing a non-performing corporation
Resuscitation Strategy – “rebirth” of a company
All restructuring strategies are financially intensive and only with the prosperity
strategy, the company is able to utilize its own financial resources.
2.4.1 Prosperity Strategy
A prosperity strategy stands for the most progressive strategy to turnaround the
company and changes the direction of business. It is a restructuring strategy used
when the corporation is in its growth period, before maturity.12 As it is the most
progressive restructuring strategy it requires the most difficult and challenging
decision-making for the management. A corporation, that is considering the prosperity
strategy, is considering to leave its current development of business for a completely
new, risky other business. Only first-class companies, with perfectly prepared business
plans can go for such a risky restructuring.
Each period of a lifecycle is necessary to leave at the right moment, before its
complete maturity, that would lead to a decline period and drag the business in the
wrong direction. The decision is to leave the running business which is close to its
absolute maturity for some other business with a high probability for success. Such a
risky decision can be undertaken only by top quality management that will be
responsible for the complete radical change.
2.4.2 Revitalization Strategy
Revitalization strategy is applied at the time of the biggest need of the corporation to
restructure. The aim of this strategy is to save the company before decline,
bankruptcy and liquidation. Revitalization strategy is applied when the company is in
crisis. Implementation of the strategy allows for radical and complete turnaround of a
11 Kraftova, I., Reserves for restructuring in accounting, Ucetnictvi v praxi, 2002, p. 7
12 Kraftova, I., Reserves for restructuring in accounting, Ucetnictvi v praxi, 2002, p. 8
20
company that has the typical signs of an underperforming company such as declining
turnover, loss-making, worsening liquidity, increasing debt, negative cash-flow, etc.
During the implementation of the strategy it is important to consider the following13:
Management of the company is often completely replaced due to their part
responsibility for the crisis of the company;
Radical and conceptual cost-cutting and cost-management;
Centralization of control and exact leadership;
Fast and smart decisions;
Radical measures targeting an improvement of the financial situation –
receivables management, sale of assets, etc;
Investment activities are put on hold;
Reconsider research & development with the aim to make production and
technological innovations more effective;
Optimization of production and work processes in the company;
High motivation of all employees towards changes
Improvement of customer service, suppliers and public in order to obtain
bigger support
Successfully implemented revitalization strategies are able to secure growth in the
performance of the company, even so in a smaller scale than during the prosperity
strategy.
2.4.3 Resuscitation Strategy
Resuscitation strategy is used during the declining phase, right before a company shut
down connected with the liquidation of the company. This restructuring strategy is
supposed to prevent the company from such an occurrence. It should enable the
company to start a new phase, which is a successor of production, market or
personnel activities of the original company.
The following should be considered during this strategy14:
13 Khouri S., Crisis identification methods, TU Kosice, p.4
14 Khouri S., Crisis identification methods, TU Kosice, p.5
21
Introducing complete new top management to the company;
High-quality business plan that is from the production or technology
perspective a natural continuance of the previously bankrupt entity;
Centralization of control, especially in the restart phase
Smart, quick and understandable decisions
Increase in customer service, suppliers and public to gain trustworthiness and
support of the external environment of the company.
In reality, the resuscitation strategy should secure the stabilization of the company
and is often followed by either the prosperity strategy or revitalization strategy to
boost the whole company significantly.
2.5 Restructuring and corporate crisis
2.5.1 Corporate crisis
Restructuring is not only undertaken by companies in distress as mentioned earlier in
the paper, there are reasons such as mergers & acquisitions where restructuring of
the business is often executed. However, for the purpose of the paper, where the
focus is more on companies in distress and the case study focuses especially on a
distressed company, it is helpful to mention how to combat crisis and how to benefit
out of a crisis in general. The term crisis is mostly explained in a negative way as it is
considered to be a hard and challenging situation for the company. The term,
however, can also be explained with another meaning – it can be the best time for a
company to change, to make radical decisions and to turnaround. Umlauf15 is offering
the following definition of a corporate crisis:
“Corporate crisis is a situation, in which the balance between business characteristics
of a company (mission, philosophy, values, goals) on one side and the business
environment on the other is imbalanced. Therefore the prosperity of the company
requests radical actions in order to reach the balance again.”
A company in crisis can be defined as follows:
unprofitable company facing insolvency
healthy, not necessarily a successful business, that is growing too quickly and
is facing a shortage of capital built on fragile foundations
15 Umlauf,M.; Pfeifer, L., Prevention and Management of Corporate Crisis. Victoria Publishing, 1995, p.13
22
company showing imbalance in the following areas:
o production – decline in volume
o human resources – lack of motivation of employees
o financial conditions – worsening liquidity
The crisis of a company represents such a phase of the lifecycle, which is
characterized by the negative development of the performance potential, a decrease in
profitability, and a worsening capital structure and liquidity. If this status would
preserve, the company‟s pure existence will be challenged16. It is therefore crucial that
the management of a company in crisis reacts promptly to this situation and to
actively challenge the crisis by restructuring the business either with the help of
external professionals or internally, which in successful cases leads not only to turning
around the underperforming company and reaching the pre-crisis performance, but
even increasing the performance beyond the pre-crisis levels. In a corporate crisis,
preventing measures described earlier in this paper such as self-assessment checks
are a much easier solution than the “healing” of the company in crisis. The following
diagram shows the time between recognizing crisis and starting restructuring of
European corporations. The diagram indicates that large companies respond to crisis
only slightly faster than SMEs. Possible explanations of such a result are that SMEs
have a slight disadvantage compared with large companies e.g. limited scope for
action with suppliers and customers, and a lack of diversification options. On the other
hand, SMEs have more flexible structures and shorter decision-making paths17.
16 Daigne, J.F. Restructuring measures in Corporations, HZ, 1996, p.25
17 Roland Berger, Restructuring in Europe 2005 – Study, 2005, p.21
23
Figure 4 Time between recognizing a crisis and starting restructuring based
on company size, 2005
Looking at the crisis response times of different industries, retail has the shortest
reaction period while the energy sector takes nearly three times as long to respond to
crises. Possible explanations of such significant reaction time differences among
industries is in the case of energy sector the high level of regulations that limit
flexibility and the freedom to act. On the other hand, companies in the retail and
consumer goods sectors are often experienced in restructuring and have learned from
the past.18
18 Roland Berger, Restructuring in Europe 2005 – Study, 2005, p.20
11,1>EUR 5,000 m
12,3
12,5
13,5
>EUR 1,000 -5,000 m
>EUR 500 - 1,000 m
<EUR 500 m
24
Figure 5 Time between recognizing a crisis and starting restructuring by
sector, 2005
Common signals of an impending crisis are a lack of raw materials and energy needed
to fulfil orders, diminishing business innovation, increased spoilage, increased
production downtime, decrease in productivity, stagnating or declining sales,
increased customer complaints on services and product quality, forced price
decreases, reduction of customers, worsening business climate, unproductive
cooperation among employees, decrease in employee training, significant employee
fluctuation, costs growth and insolvency issues19. Of course, there are occasions under
which the crisis might evolve not necessarily directly influenced by the bad
management of the company such as accidents in production, environmental
disasters, government interventions etc. Corporate crisis is therefore a significant
violation of the balance between corporate interests and the internal as well external
business environment20. The factors mentioned above should be avoided with all
available efforts. Nevertheless, there is no innovation without a crisis. This being said,
it is absolutely crucial to be well prepared to face a crisis and be able to manage the
crisis effectively.
19 Tetrevova, L., Financial Restructuring of Enterprises, Pardubice: Univerzita Pardubice, 2005, p.21
20 Umlauf,M.; Pfeifer, L., Prevention and Management of Corporate Crisis, Victoria Publishing, 1995, p.14
5,3Retail
Consumer goods
Tourism/Transportation
Plant/Mechanical eng./Steel
Construction
Electronics
Automotive
Media/IT/Internet/Telecom
Pharma/Chemicals/Oil
Energy/Utilities
6,7
8,3
8,8
11,3
12,0
12,8
13,3
14,2
15,1
25
The reasons leading to company crisis and eventually to restructuring are very
different, depending on the concrete company and its actual situation. They have
different phases and diverse speeds and impacts on the company itself. From the
perspective of diverse crises causes, these are as follows:21
Crises arising from management mistakes – crises due to own internal
organization activities
Strategic crises – springing up due to wrong decisions related to running and
managing the company
Crises related to economic results – mostly arising due to low competitiveness
of the company
Liquidity crises – these develop over a period of bad financing and financial
management
Crises arising from accidental external impacts such as natural disasters,
financial crisis, general economic crisis and reasons mentioned earlier such as
natural disasters
2.6 Managing corporate crisis
It is a crucial to predict a crisis and to be prepared for it. The possibility to predict
potential crisis depends on many circumstances, mainly the essence of the crisis, on
the current development of the company and on the impact of external factors.
Further-on the ability to predict the crisis depends on the density and speed of crisis-
symptoms and when the first symptoms are clear and visible. The ability to predict the
crisis is conditioned by the accessibility of necessary information and on the ability of
the management to handle such information accordingly – think towards the future of
the business.22
In many cases, this is where the management of a company fails, falls to deep crisis
and opens the door to restructuring. The first step in predicting a crisis is the ability to
obtain as much quality information as possible, to know what the causes of a crisis
are, to identify such causes and analyze the current situation. The management of the
company, or in a later stage the restructuring team, must put together individual
causalities and prioritize them. It is necessary to look to the future and try to predict
21 Tetrevova, L., Financial Restructuring of Enterprises, Pardubice: Univerzita Pardubice, 2005, p.22
22 Umlaufová, M.; Pfeifer, L. Prevention and Management of Corporate Crisis. Victoria Publishing, 1995, p.
26 - 27.
26
the potential development of the crisis and be aware of the consequences it might
bring. At this stage, an analysis of the current situation shall be done.
2.6.1 Crisis analysis
It is a crucial duty in order to turnaround such distressed company to pay attention to
the situation‟s analysis23. Top management must react promptly and with or without
the help of external restructuring team implement adequate measures. It all falls on
the people that are managing the company and that are willing to turnaround the
company, often with paying the price of acknowledging self-criticism, analyzing
strengths and weaknesses of the company with the aim to save and turnaround the
negative development, remove and cure the most significant problem areas. Such
analysis is difficult, it is often very difficult to acknowledge bad decisions and have the
willingness and ability to change the attitude towards the problem solving of the
company. This is where independent, third party professionals can be successful as
there are no connections with the past performance and decision-making with the
company facing crisis. The positive contribution of the analysis is that it enables to
analyze the company not only internally, but, in this case even more importantly –
externally. It enables to model future expectations and development and helps to
reinforce the strengths and obviate weaknesses by optimal restructuring/turnaround
measures. One of the goals of the analysis is to enable modelling the potential future
performance by different scenario-modelling with the aim to improve the ability of the
company to react on changes promptly. Based on the findings of the analysis a plan
must be carefully prepared in a way that people are motivated to work, that the
business has a realistic chance to grow and liquidity gets to positive figures.
Such company (status) analysis is an eminent helpful tool for the prevention of a
crisis. It is necessary to work with accounting statements often adjusted to correspond
with reality. The analysis should include certain conditions24:
Be reliable, motivational for the department heads as well as regular
employees and speed up the process of company‟s turnaround
Be fast, as there is no time to waste when the company is in distress. Each day
without turnaround measures is increasing the loss and worsening the liquidity.
The faster the necessary steps being taken begin, the higher the chance that
the restructuring plan will lead to a successful turnaround
23 Daigne, J. F., Restructuring measures in Corporations. Praha: HZ, 1996, p. 45 – 48
24 Daigne, J. F., Restructuring measures in Corporations, Praha: HZ, 1996, p. 49 – 50
27
Go straight to the core of the problem and not waste time and energy on
details;
Share the outcomes of the analysis with all interested parties
Be able to reconsider previously accepted strategic decisions
Take into consideration trends and development of the political, economical,
financial, legal and technological environment with the aim to come up with the
best possible solutions
Do not focus only on the short-term outlook
Find key people that are able to implement the restructuring measures, control
them and guide them either from internal resources or by appointing external
experts
Reveal those people that are an obstacle when it comes to implementation of
the restructuring plan
These are the reasons why a correct analysis must be well prepared and planned. It
must include the current status of the company, evaluate and propose directions and
solutions for the company, specify actions to be taken to cure the company, stipulate
measures and methodology for implementation and particularly create tools for
controlling the results and analyze deviations from the restructuring plan.
2.6.1.1 Stages of the analysis
The following stages should be included within the analysis25:
Stage 1: Basic company information
Stage 2: Economic analysis
Stage 3: Social analysis
Stage 4: Production/Operational analysis
Stage 5: Financial analysis
Stage 6: Findings of the analysis – strengths and weaknesses
In the first stage, basic company data are gathered (e.g. legal establishment, business
model, brand perception, etc.). The second stage provides better understanding of the
economic environment, industry analysis, technology used, customer and supplier
25 Daigne, J. F., Restructuring measures in Corporations, Praha: HZ, 1996, p. 51
28
relationship. Within the third stage, capabilities, expertness, ethical behaviour of the
department heads and their team is explored. This stage helps to spot the right people
which can be relied upon with respect to building the restructuring team with internal
human resources available. Production/operational analysis is focusing on the
production process and operations, it includes the analysis of overheads, analysis of
current and potential investments, stock management and other production-related
issues. Fifth stage is the financial analysis of the company. Development of the
financial statements during several consecutive periods is analyzed as well as working
capital and cash flow statements. The last stage determines the strengths of the
company that the company should build on and weaknesses that the company must
minimize.
3. Restructuring – Processes, Frameworks and
Success Factors
3.1 Restructuring Framework
Zimmerman offers a hypothesis that successful turnaround is a function of three
principal factors26:
1. Low-cost operator – having a strategy that focuses primarily on improving the
firm‟s effectiveness. Low-cost operation implies the design of products for
manufacturability, for attaining high rates of manufacturing and inventory
efficiency, and for keeping overheads costs below industry levels.
2. Product differentiation – a strategy that comes to practice in a later stage of
restructuring and which aims to improve the firm‟s effectiveness as a provider
of increasingly differentiated products. Production of differentiated products
involves products with distinguishing features, high reliability, significant
performance and exceptional product quality.
3. Leadership – working with experts who have significant experience with
restructuring in the industry being served and in some technical function such
as manufacturing or engineering, and have experience with manufacturing,
product development, sales and in all of the areas being restructured. This is a
subject to building a team as Zilka indicates in her practical restructuring
26 Zimmerman F.M., The Turnaround experience: Real World Lessons in Revitalizing Corporations, McGraw-Hill, 2002, p.15-22
29
guideline27. Successful restructuring projects led by professionals should
employ a sense of fair play in dealing with employees, creditors, suppliers,
customers and focus intensely on the operational questions that are important
and relevant to the business the firm is in at the time.
Figure 6 Restructuring Framework
Figure 6 provides a restructuring framework or outline of the turnaround process
incorporating the above mentioned principal factors. These are the areas that are
generally touched and changed, often significantly, during a restructuring process. As
the figure indicates, effectively changing these areas can lead to the successful
turnaround of a company. Zimmerman28 however points out that even the best
executed turnarounds are seldom effective in every respect. Similarly, unsuccessful
27 Zilka C, Business Restructuring, Jon Wiley& Sons, Inc., 2010, p. 29-40
28 Zimmerman, F. M., he Turnaround experience: Real World Lessons in Revitalizing Corporations, McGraw-Hill, 2002, p.17
Focus on Operations
Managerial Stability
Experience in the Industry
Technical Experience
Knowledge Exploration
Incremental Changes
Fair Play
C.
APPROPRIATETURNAROUND
ORGANIZATION (LEADERSHIP)
Distinguishing Features
Reliability & Performance
Product Quality
Market Continuity
B.
PRODUCT DIFFERENTIATION
Operational Efficiency
Inventory Efficiency
Modest Overhead
Lower Cost through Design
A.
LOW COSTOPERATION
SUCCESSFUL
TURNAROUND
30
turnarounds rarely fail in every aspect. Turnarounds are a mixture of hundreds of
partially developed successes and failures with the successful firms being more
thorough and consistent.
3.1.1 Low cost operation
For the sake of better insight into the restructuring processes and areas that are
generally touched throughout the process, it is necessary to understand what needs to
be achieved in each of the principal factors.
3.1.1.1 Operational efficiency
Operational efficiency simply refers to the amount of work that gets done in a work
day. It is necessary to be as efficient as possible not only in production but in all
aspects of the organization. However, production efficiency is one of the key factors
that forms the competitive edge of the firm and it determines the importance of a
well-organized company. Operational efficiency on the other hand implies modern
equipment, systematic layout of production space, well established processes, trained
managers and workers, and any other important factors relating to general efficiency.
3.1.1.2 Inventory efficiency
Inventory efficiency is the skill of a company to manage its inventory in the best, most
effective and efficient way. It is the ability to produce and sell higher amounts of a
product and generate more revenue from lower levels of inventory on stock. It is a
challenging task as it has a major impact on cash flow and overall efficiency. There are
of course sophisticated tools that can be used that take into consideration things such
as production capacity, seasonality and which calculate prognosis taking into
consideration historical sales etc. The task is however still closer to alchemy than to
regular science in order to predict demand and therefore to adjust production and
inventory. Successful restructuring and turnaround should leave the company with a
well-established inventory control system and production efficiency.
3.1.1.3 Modest overheads
Successfully restructured companies should significantly lower non-cost-of-sales
expenses during the pre-restructuring period. Since one of the key aspects of
restructuring is cost-cutting, overhead costs such as expensive travelling, service
contracts and other related items on the expense list should be cut. These items are
called the “low hanging fruits” and can be solved and implemented at the beginning of
the restructuring process. Spending large amounts of money on items that are not
related to current product or product development has to be effectively monitored
31
especially during times of financial distress. There are usually reports available
providing benchmarks on almost any expense items with industry relevance that the
restructuring team along with the management of the company can obtain and work
with. This is one of the methods how to improve earnings through cost-cutting and
more reasonable capital deployment. Using such benchmarks helps to set targets for
the given restructured area.
3.1.1.4 Low cost through design
In order for (any) company to be successful, it has to systematically design products
and services to be produced and delivered at low cost. The restructuring team bringing
necessary expertise in understanding the production processes should insist that
product design and production capability interact with one another to achieve an
enhanced competitive position. Portfolio restructuring, being one of the main
restructuring areas, often focuses on optimizing the production processes based on
the commonality of components to achieve low-cost operation.
3.1.2 Product differentiation
Differentiation represents a range of restructuring measurements in which the product
is perceived to be slightly different by customers from other product offerings in the
market place. Differentiation can be accomplished through brand image, technology
features or through alternative distribution channels.29 Some of the key product
differentiation relevant to this paper is described in sections below.
3.1.2.1 Distinguishing features
In order for customers to be attracted, the product must possess distinguishing
features. It is necessary to be able to gather feedback from customers over time to be
able to meet their needs and grasp the changes in trends on the market. This is
applicable to any industry and any products offered. Depending on the industry,
successful turnaround companies offer innovative well-tested features which are
introduced to the market synchronized with or even ahead of emerging market trends.
This is easier said than done, but it is one of the ways to successful turnaround. There
are several market research companies and it often is worth the money to invest in
such research to find out what are the trends, who are the company‟s customers,
what do they want and how do they react to proposed product or service portfolio
changes. As restructuring is making changes, and often very radical changes, such
29 DePamiphilis, D., Mergers, Acquisitions, and Other Restructuring Activities, Academy Press – Elsevier, 2009, p.146
32
cooperation with market research should give management the confidence to
undertake significant changes to the current portfolio that is not delivering the needed
return anymore.
3.1.2.2 Product Reliability
Some products do not secure repeat business for the company. Nevertheless, securing
repeat business is very crucial for any company and therefore it is absolutely
necessary to offer products if not beyond customer expectations at least at the level of
expectations. As it is a generally known rule that getting a lost customer back is five
times more difficult than obtaining a new one, the restructuring team along with
management must make sure that during the turbulent times of making changes to
products and introducing new ones, the reliability of the products which represents the
reliability of the company towards customers must be not only secured, but boosted
and promoted in order to secure enough business for the future.
3.1.2.3 Product Quality
Many companies fail due to a simple fact that their products are not good enough to
effectively compete in the market. They might be able to sell products during the good
times but they suffer when times are bad. When the restructuring is touching the
products, product quality must be actively managed and constantly improved even if it
is already the best in the industry.
3.1.2.4 Market Continuity
Market continuity can be briefly described as the predisposition of the company to
focus on providing its products to a market that is well known and familiar before
expanding to new markets or introducing new activities. The restructuring changes to
a company‟s strategy should be formed in such a way that what is known about the
current market is utilized to its fullest potential, because this is where the company
has its core competence and it is the place where it is established. Even though the
company is in distress, it still has the most information about the current market and
when it is still able to survive, despite struggling, it means that it is still able to create
and deliver value to its customers. Therefore, the restructuring team along with the
management should build on existing strengths as it is easier to be successful (again)
in an existing environment than to jump from one market to another and neglect the
mainline business.
33
3.1.3 Tactics for leadership
There are many difficult leadership challenges for the restructuring team or a new CEO
who has the ultimate responsibility to successfully achieve a turnaround of a
distressed company. Some of the challenges that the turnaround practitioner will face
are the following30:
“grabbing hold” or taking control of the company so that all stakeholders and
particularly the staff realize that new leadership is in place
Implementing tight management and financial controls
Instilling an immediate sense of urgency and performance orientation into the
distressed company
Prioritizing what needs to be done to fix the business and ensuring that the
necessary actions are implemented
There are several leadership factors that are crucial for successful restructuring and to
properly manage and guide the restructuring process is the most important among
them.
3.1.3.1 Focus on Operations
It is necessary to focus on what is important to save the company from the first day of
work. Solving operational problems such as production cost, product quality, customer
satisfaction and short-term sales are the key areas that require the highest attention.
One of the reasons leading the company to distress is that management strays away
from day-to-day operational issues to other matters that are unrelated to the
company‟s present business.
3.1.3.2 Managerial Stability
Managerial stability is one of the characteristics of successful turnaround cases while
instability, internal fights and high rates of employee fluctuations often characterize
failure. Employing the right people in the right positions is the core essence of
restructuring. The process of employee replacement is rather usual during
restructuring but it has to be done carefully and the replacements must fit the
company, must be aware of the restructuring going on and must show full dedication
and capabilities towards it.
30 Slatter, S., Leading Corporate Turnaround, John Wiley & Sons, 2006,p.6
34
3.1.3.3 Experience in the Industry
It is a fact that those who head successful turnaround efforts have experience in the
industry being served and those who are unsuccessful are lacking the experience.
Industry experience is one of the decisive factors of a successful restructuring due to
the fact that almost any industry has industry-specific processes, competitors,
suppliers and customers. Just an extensive experience with restructuring and
turnaround is often not sufficient whereas detailed industry-specific knowledge is
almost always required.
3.1.3.4 Technical Experience
Pure application of management principles cannot solve all problems. There are almost
always some technical problems. Therefore the technical background of the
restructuring team has to be sufficient enough to be able to react and solve even
technical problems. If not, experts should be called in. Otherwise the lack of technical
knowhow leads to a waste of time, delaying execution of the restructuring plan and
even failure to implement. Depending on the company being restructured, the team
should consist of members with technical experience, not necessarily by education but
also by virtue of many years of experience in manufacturing or engineering positions.
3.1.3.5 Knowledge Exploration
Decision making in unsuccessful restructurings is frequently too intuitive, often lacking
an essential knowledge base and insufficient facts necessary to make a decision. In
order to be successful, key strategic decisions must be based on all information that is
available and studied carefully. It is not only enough to base decisions on information
that is available internally within the company, because it is necessary to keep in mind
that a company is often in distress due to bad decision making based on internally
available information. It is always better to seek information that is exact, truthful and
can serve as a base for decisions. Decision making based on only internally available
information might be wrong and very costly for the whole company and the
restructuring process.
3.1.3.6 Incremental changes
Gradual and consistent incremental improvement is the managerial style of successful
restructurings. Changes and improvements are made carefully by improving one thing
at a time. It is very challenging to properly manage many significant changes at once,
even though the company might need it. It is better to be successful making
incremental changes and implementing restructuring measurements gradually than be
impatient and try to change everything at once – and fail. Therefore gradual and
35
constant incremental improvements along with well planned major improvements
provide the framework for successful companies. Of course, there are periods where
there are more major changes, in another words, periods of relative stabilization and
consolidation follow periods of major changes. This approach is successful due to
general resistance to change and it is easier to gradually change one thing after
another than to try to change everything at one time. As mentioned several times, it
is necessary to have the people on your side, because they are the ones who in the
bottom line must adapt to the new structure, organization of work, values and beliefs
or in this regard drive the successful turnaround.
3.1.3.7 Fair play
Even though it is rather difficult to evaluate, successful restructuring team members
are generally perceived as dealing fairly with employees, creditors, suppliers and
customers. It is about the attitude of the restructuring team towards the partners
helping implementing the plan and since the restructuring process can last for several
years, it is common that team members know employees on a first-name basis and to
have mutually beneficial relationships with them. Restructuring might be and often is a
very tense period for employees as it is often accompanied with lay-offs and therefore
the restructuring team members are not necessarily the most favoured people among
employees. For these understandable reasons, there should be a team member
dedicated to communicate with employees in order to sustain a professional level.
What employees do not often realize is that restructuring might mean laying 20%+ of
their colleagues but it means preserving jobs for the remaining employees. There are
certain ways how management of the company can send a signal to employees that
the situation is tough and that the company is in trouble and that management also
takes compensation reductions. This sends the signal that it is not only employees,
their headcount and often salaries being changed, but that also management is
bearing the burden.
3.2 Hiring external restructuring consultants
Why should a company consider hiring external experts? What are their roles and
what are the benefits of paying external advisors in times when company money is
tight? Is it worth it? Here are several reasons for hiring external advisors31:
31 Costsavings inc., Top Reasons for Hiring a Consultant, http://www.costsavingsinc.com/id5.html
36
1. External consultants bring temporary or ongoing expertise that supplements the
existing staff. This knowledge can be transferred to a company‟s existing staff for their
ongoing benefit.
2. Consultants bring experience that company employees don't have and deliver
results that a company might otherwise not be able to afford fulltime.
3. They bring in the 'external experts' who can introduce new and specialized skills,
techniques and knowledge from other industries.
4. They provide a fresh and objective viewpoint to a problem or opportunity.
5. It gives a company‟s management access to an individual/team who knows the best
places to look and the right questions to ask.
These are the “management” qualities and benefits provided by the external advisors.
From a technical perspective, one can mention:
6. Accelerated timelines of cost reduction initiatives, thus increasing the 'speed to
savings'.
7. Provision of price 'benchmarking expertise' that would not be available internally.
8. Cost reduction, quality and service improvements can be delivered, which are
usually immediate and transparent.
9. Provision of a high ROI on the cost of using an experienced purchasing consultant.
10. Skills, tools and techniques can be adapted by existing staff for use in future
strategic sourcing and negotiating activities.
3.2.1 Choosing a Restructuring Consultant
Restructuring consultants can serve four basic roles: advisor; problem solver/deal
maker; co-manager and manager proxy.32
32 Aragon group, Restructuring Consultants, 2008, p.1-2,
http://www.aragongroup.com/pdf/Restructuring_Consultants.pdf
37
Advisor – the consultant as advisor is used on an ad hoc basis to advise on
deals, problems, negotiations or organizational change. The restructuring
consultants must not provide lengthy reports, but both procedural and
substantive advice that improves an executive‟s ability to create value, get the
biggest piece of the pie for the organization and minimize damage to any
business relationships. These are typically billed on an hourly basis and the
purpose of this role is to provide management with just-in-time advice to
optimize strategic and tactical moves
Problem Solver/Deal Maker – restructuring consultants are tasked to solve
specific problems. Whether solving problems with production or organization
processes, the goal is to deliver concrete value through the consultants‟ skills.
Typical remuneration is a combination of time and a success fee with success
measured on a task-by-task basis.
Co-Manager – partnering with the management of the company, the
restructuring consultant and his team get involved in a subset of daily activities
for the duration necessary for achieving the positive change. These activities
often include a wide span of areas of the company that are to be changed,
business development, negotiations with business partners, and more or less
all of the management issues that the company is struggling with. Decision
making authority usually stays with the management but can be delegated to
the restructuring consultant if appropriate. The restructuring consultant along
with his team becomes part of the company‟s management. Work is typically
billed on a time and success fee basis.
Manager Proxy – in certain circumstances, the restructuring consultant and his
firm can serve as a surrogate, taking on the roles and responsibilities of the
manager for the purpose of leading a specific business project or business unit.
An example of such cooperation would be the divestment of a certain business
line which is led by a restructuring lead. Fees in these instances are highly
variable.
Regardless of the role of restructuring consultants, making the right choice about
hiring a consultant is crucial because there is always too much at stake. If chosen
well, the advisor can make the difference between a successful turnaround and
38
bankruptcy. Company management before making its decision, should consider the
following factors33:
1. Hire a firm, not an individual – boutique restructuring firms have the ability to
offer a range of skills and greater bandwidth. It is a skill based service, so it
must be ensured that consultants and the team have the right set of skills and
experience.
2. Ensure cultural and personal fit – regardless of the role, a restructuring
consultant will represent the management and often spend significant time with
other partners of the company. If the fit is off, the relationships will fail.
3. Hire success – have the restructuring consultant and his team done this
before? What is their track record? Reference list needs to be checked
carefully.
4. Hire experience – does the restructuring consultant have sufficient industry
knowledge to grasp problems quickly and craft complex solutions? Does he or
she have sophisticated conflict management, change management and
negotiation expertise?
5. Align incentives – does the billing structure of the restructuring consultant‟s
organization align with the interests of the company? In addition to purely
time-based billing, are there success fees that actually incentivise the desired
results?
3.3 Restructuring team – Key to Success
One of the most important attributes of a successful restructuring case, if not the most
important, is the team. Even Henry Ford once said “Coming together is a beginning,
staying together is progress, and working together is success”. This quote is a perfect
example of a restructuring project i.e. in the case of restructuring with the help of
external advisors which involves putting together internal and external people working
together on the same goal – a successful turnaround. Without the key persons and
attitude, a project cannot be successful.
The members of the team must be chosen very carefully as they will be responsible
for driving the company to performance excellence, which will lead to savings and
revenue opportunities that were identified during the assessment and company
33 Aragon group, Restructuring Consultants, 2008, p.2, http://www.aragongroup.com/pdf/Restructuring_Consultants.pdf
39
analysis. Proper governance and execution are critical success factors, so a strong,
cohesive team that understands the importance and direction of the project is vital.
When a project starts, all roles and responsibilities must be clearly defined at the kick-
off meeting of the project. It must be ensured that there are no gaps or overlaps in
the spectrum of activities to be executed. Carla Zilka offers a RASCI model as a useful
tool for managing activities and responsibilities.
The elements of RASCI are34:
R = Responsible. Person who owns the problem project
A = to whom “R” is accountable. He or she must sign or approve the work before it is
okay.
S = can be supportive. He or she can provide resources or can play a supporting role
in implementation.
C = should be consulted. He or she has information and/or the capacity necessary to
complete the work.
I – should be informed. He or she must be notified of results, but need not be
consulted.
3.3.1 Team members: roles and responsibilities
Reviewing the roles and responsibilities of each team member is a necessary
prerequisite to launch the project. To be able to distribute roles and responsibilities to
each team member, it must be clear who is doing what. Zilka offers a clear
explanation of team members„ tasks and responsibilities35 :
Steering Committee is the governing and decision-making body of the whole
restructuring process. Members of this committee provide guidance on the
project and work closely to ensure that it delivers the best possible results for
the company as a whole. They encourage execution by communicating the
project‟s priority to their colleagues as well as by fostering an overall sense of
urgency in the culture. The committee is led by a Restructuring Lead and
should establish a standard operating rhythm whereby it meets at least once
a week. Members of the committee should be usually one or two levels down
the organization, open-minded and knowledgeable in a diverse set of
34 RASCI model, Valuebasedmanagement.net, http://www.valuebasedmanagement.net/methods_raci.html
35 Zilka, C., Business Restructuring, Jon Wiley& Sons, Inc., 2010, p. 29-41
40
disciplines. A good mix typically engages multiple functions: marketing, R&D,
operations, IT, HR, legal and finance. Each member of the committee offers
a different viewpoint to the decisions that need to be made.
Restructuring Lead oversees the project and manages the communication of its
status to the Steering Committee, the CEO and the board of directors. This
person has the most strategic role in the team, acting as the team‟s main
change agent and motivator. Such a person must have good communication
and motivational skills as he or she emphasizes the positive impact this project
will deliver and demonstrates its importance with their sense of urgency
towards solving issues that arise from it. Such a person must be able to lead
the team and drive the company towards the future state.
The Project Management Office (PMO) Leader is in charge of running the
project day-to-day. This person connects with the Restructuring Lead on a daily
basis as well as with other members of the team. According to Zilka, this is
probably the most important role on the team as the PMO Leader ensures that
the project plan and resources function properly. This person must have strong
project management skills, including the ability to lead and govern a large
team. This person is indirectly controlling how much the project costs as he or
she is responsible for the timing of the project.
PMO Operations support the work-streams, PMO Leader and Restructuring Lead
and provide infrastructure that will enable execution of the framework.
Information Technology Leader manages the implementation of technology
changes as a result of work-stream outputs. They are very important from the
start of the project as they have access to data for the initial company
assessment as well as to the data requirements for the work-streams during
the restructuring project. There must be a will to drive changes within the
current systems or even implement new systems based on recommendations
that come out of the work-streams. Ultimately, this person ends up being the
project manager for all the system changes and new installations related to the
restructuring project.
Risk Management Leader is the team member who manages the risks that
arise from the restructuring process and ensures business continuity. This
person is responsible for contingency plans and signs off on staff reductions,
severance packages, and any other procedures that may have a legal impact
on the company and that need to be well prepared for. Often this role is
represented by the internal HR department.
41
The Financial Analysis & Tracking Lead oversees the financial opportunities
identified during the assessment and tracks progress towards goals set by the
Restructuring Lead and Steering Committee. Finance Leads track the savings of
the restructuring achieved so far, spots revenue opportunities, and prepares
cost/benefit analysis.
Data Modelling and Validation position is responsible to ensure that the data
are delivered upon request and that the data is correct and valid. Therefore,
this person is also responsible for auditing and signing off on the data before it
is handed over to the teams that will use the data for their work.
Change Management and Communications Lead is a function that is necessary
in every large project. It is a member of the team that oversees the change
efforts and communicates them to employees. This person must understand
how to communicate to the organization, especially those affected by the
changes arising from restructuring.
Work-stream Leads are the subject matter experts for a given restructured
area. They are responsible for detailed execution of the project plan.
It is clear that building a team needs to be done with the utmost care. Seeing how
many important roles needs to be covered by the team, there is no doubt that the
team is the key to a successful turnaround. An organization with cooperation with
external experts may be big enough and have enough skilled persons so that there
can be one owner for each discipline, or the organization may be smaller and not have
enough people to own one area. If roles need to be combined, this is also an option as
long as the tasks are completed accurately and efficiently.
3.3.2 Necessary tools for the team
Once the team is chosen and roles and responsibilities are allocated, the processes
and tools to run the project must be set up. There are several standard tools as well
as processes that help the whole restructuring keep moving. Examples of the tools
needed are36:
Flexible project plan and tool
Secure data repository and knowledge management database
Data validation process
Metrics dashboard
36 Zilka, C., Business Restructuring, Jon Wiley& Sons, Inc., 2010, p. 42
42
Risk management database
Financial models and tracking system
Software: Visio, MiniTab, Webex
Organizational Efficiency Tool kit
Business Process Improvement Tool kit
Of course, depending on the extent of the restructuring project, different sets of tools
are necessary for restructuring e.g. let‟s say a global manufacturing company with its
divisions across the globe where the restructuring takes place in different places at the
same time will use a very different set of tools to a smaller restructuring case of a
standard SME. Nevertheless, the more tools that are available for the team, the more
beneficial it is for both parties – for the team and in the end for the company.
Regardless of the project size, a project plan and tools are a must that enables the
restructuring team to transform the company. The restructuring plan is complex but it
can be managed quite efficiently using project management software. Another very
important feature that is necessary to have with respect to the whole restructuring
project is to have a secure data site that will enable the respective team members get
information and data they need at all times and creates a place where data can be
uploaded, up-to-date and available – keeping in mind that restructuring projects are
usually run by a combination of internal employees and an external party. In order to
be successful, access to necessary data and information must be secured to all parties
involved. Any restructuring project needs a tool or reporting mechanism that will track
the performance of the restructuring, meaning which indicators need to be followed to
analyze whether the restructuring is in line with the plan, to track the savings or
revenues and other key performance indicators. Big projects use reports to load
metric scorecards and business process management (BPM) dashboards. Smaller
projects might be tracked by looking at the monthly income statement with exact
reports behind each item in the statements which in turn are backed-up by the
restructuring measures implemented.
The most basic but hardest part to execute is the financial tracking and modelling that
is required. Tracking is accomplished using a standard template that includes cost
savings, revenue recognition, capital expenditure, severance payouts, and productivity
gains. This should be updated weekly and reviewed with the Steering Committee,
Restructuring Lead, and PMO Lead to track progress.
43
The theory points out that each project should have software tools that will drive the
project team to greater productivity.37
3.4 Restructuring and Turnaround Process
There is no such thing as a given exact process or guideline to restructuring and
turnaround. This is due to the fact that every restructuring case is different, whether it
is different in the sense of the stage when restructuring starts, different industry,
different business model, company structure and organization. There are however
several steps that are common for each restructuring and turnaround process that
form a general guideline or step–by-step process. Several companies with
restructuring and turnaround being their scope of business such as ABC Business
Consultants38 as well as blogs dedicated to turnaround39 offer a restructuring and
turnaround process with twelve key steps.
3.4.1 Step One – Learn about the business
The first step is all about getting to know the facilities and meeting the people.
Advisors should spend time with the employees explaining them the role of the
restructuring team and encourage them to cooperate and give feedback. It is the
stage to find out about the company‟s history, passions, successes, failures,
competitive advantages, processes, organizational structure, trademarks, patents,
intellectual property and so forth to fully understand the company. Once it is known
what is the company and the people at different positions, the restructuring team
should be assembled and the size and roles should be clearly defined. As explained in
the roles of different team members, the restructuring leads and PMO leads meet in
the first step with the board of directors, executives, founders, owners, department
heads, managers and key people.
3.4.2 Step Two – Meet with partners involved
The advisors, creditors, customers, suppliers and other partners need to have a firm
understanding of the restructuring team‟s goals and objectives. It is necessary to
37 Zilka, C, Business Restructuring, Jon Wiley & Sons, Inc., 2010, p.46
38 The Business Success Guide, Saving a Business in Trouble: Business Turnaround Leadership and
Strategy; 2009, p. 5-9
39 Rembor, E., 12 Steps to take in a turnaround process, http://turnaround-manager.blogspot.com/2011/01/12-steps-to-take-in-turnaround-process.html
44
explain the company‟s situation as it is very likely that certain restructuring measures
to be implemented will have a minor or even major impact on them. It is crucial to
establish credibility and trust among these players as it makes the whole restructuring
much easier when there is the full support of all parties involved.
3.4.3 Step Three – Evaluate the problems and issues
This can only be done effectively if Step One i.e. spending time with the managers and
employees, has been successfully accomplished. The restructuring team along with
management shall determine timing factors from the outset. All of the obstacles and
challenges resulting from the company analysis have to be clearly identified,
quantified and prioritized. At this stage, it should be clear what the market can and
cannot support and the restructuring plan should have a realistic vision to what can be
achieved, how, when and at which cost – the plan should be given a believability
factor.
3.4.4 Step Four – Identify the most pressing problems
Segregate the problems which have the most influence on the turnaround situation
and concentrate on those. Other problems, which are not burning can be overcome in
a later stage when the restructuring is on a positive track. The restructuring team
must make sure to identify problems as seen by owners, executives, managers,
advisors, creditors, customers, suppliers and most importantly, the employees.
Prioritize again the pressing turnaround issues and problems. Concentrate on this list
and the related areas. What is extremely crucial is not to get side tracked. Follow the
plan where the key problems are already identified and overcome those, even though
some other problems might arise along the track. Focus on the ones that are spotted
by all parties involved and do not derail and deviate from the plan outside a generally
accepted standard.
Revenue points and expense ratios for the products and services which are involved in
these key problem areas should be identified by now. This often involves portfolio and
asset restructuring.
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3.4.5 Step Five – Identify opportunities
It is important to realize that a restructuring or turnaround strategy is not all about
problems and issues, and cutting them out of the organization as discussed in this
paper. That will result in a band aid which won‟t be able to hold in the long-term.
Opportunities are what will gain traction with creditors, suppliers, customers and
employees alike to bring about positive actions to put the company on a healthy track
or at least it might give a chance to fight for it.
Opportunities can be hidden but can effectively be flushed out with a good process
and they don‟t have to be time consuming to exploit or have to be too resource
intensive. Because, in the end, restructuring and cost cutting alone will not bring
about lasting success for a turnaround company and its creditors, suppliers &
customers know that. It is obvious that if the company running the business for quite
some time unsuccessfully will not, apart from cost cutting and change in the
processes, focus on exploiting new revenue streams, the (financial) success might not
be reached. And this is exactly what is in the interest of the suppliers, customers,
creditors and other partners. If a credit institution is considering giving a company
which is undergoing restructuring certain allowances, they want to see what the
options are and to see the probability that the company will be able to meet their
obligations in the post-restructuring period. Equally, suppliers want to know whether
they can count with the company in the future just like customers are keen to know
whether they should start looking somewhere else or if they should remain loyal to the
company in distress. Without clear ideas on how to push revenue along with cutting
costs, gaining the support of these parties might be very difficult. It is important to
get a firm understanding of the resulting margins that spotted opportunities could
present and whether existing products or services can be used or need modification.
Restructuring involves more often a product or service modification rather than
introducing a complete new portfolio as it is a fact, that there will be probably no time
and resources to develop new products or services.
3.4.6 Step Six – Market analysis
At this point, conduct market research and customer inquiries must be performed to
determine if the market will support the assumptions made in the opportunities
identification step. Make sure any supported opportunities have a good fit with the
current business‟s structure. Pick out the opportunity or two or three which can be
46
implemented quickly, efficiently and economically. It is important to have in mind that
restructuring is a difficult process which often involves an enormous amount of change
that must be accepted by the whole company – from top management to employees.
This creates enormous pressure to be able to manage changes in the processes of
work, often layoffs and exploiting new opportunities. The whole process requires the
full dedication of all employees and top management skills to be able to manage the
whole process successfully.
Going through this step, the team must still follow the plan and overcome the
problems by executing strategies that will cut expenses, restructure and bring the
company back in balance. The identified key opportunities must be therefore analyzed
with regards to the other restructuring measurements in order to make sure that they
can be simultaneously implemented. It is very important that the whole restructuring
team communicates and therefore the role of the restructuring lead is very important
– this person is the one with the most information and he or she, along with the
steering committee and other leaders must be fully aware of the stages the project is
in and whether the opportunities are in line with the restructuring process. It is crucial
to have full control and to be fully aware of the whole process of measurements
implemented due to the fact that in case there is lack of information, focusing on
execution of identified opportunities might lead to being counterproductive.
Therefore, issues and problems must be clearly identified and linked. The issues and
problems to be addressed first are the ones that are clear from the outset and cause
major damage to the company. Others can be put on hold until and unless necessary.
Exponential results of linking problems with opportunities will be far more effective
than divergent opportunity and problem strategies. It is again necessary to point out
that restructuring and turnaround is not explicitly about cost cutting. Restructuring is
a success only if it has long lasting positive effects and not only short-term reaction to
a crisis of a distressed company. Being active in opportunities seeking and successful
in its implementation will ensure that the company has a future. Identifying and fixing
problems go hand-in-hand with identifying opportunities and the successful
exploitation of these can bring lasting change. The change may or may not be
completely successful but at least it gives the company and the employees a fighting
chance.
47
3.4.7 Step Seven – Available resources
In this step, it is important to analyze whether the right mix of skills, experience,
management and people to suit the restructuring and turnaround strategy are
available. If the resources are not fully available internally, it is important to find and
estimate the cost of external resources. When it comes to the financial audit, the most
important issue is to have the financing for the restructuring secured, to know the
available funds if additional finance is necessary and whether the financing is available
and on time. Due to the fact that restructuring is usually a project for a longer period,
it is very difficult to estimate the restructuring costs exactly. It is therefore advisable
to develop contingency resources.
3.4.8 Step Eight – Risk assessment
Are the risks involved in the restructuring manageable? It is very critical to be able to
realistically analyze whether the restructuring plan is manageable and to be aware of
all the risks involved. The judgment of such risks is initially in the hands of the top
management executives and the restructuring lead which should after the initial
analysis have more-or-less a picture of the company‟s condition and more importantly
whether there is a potential for change. Does the company have the right people
ready to fight for survival? Does the company have a product or service with which
there is a chance to be successful? Is there a market potential? Are there enough
resources for the restructuring process? Are the costs of restructuring evaluated and
calculated correctly? These are the questions that will trigger the restructuring process
if the answers to them are positive. And this is for the top management, shareholders
and restructuring leads to decide. Critical milestones which will minimize the plan‟s
overall risk must be carefully identified and tracked. The tracking of such milestones
and being aware of other risks related to restructuring once the restructuring is
initiated should be attributed to a risk manager as described in the chapter about the
restructuring team structure.
3.4.9 Step Nine – Developing the restructuring plan
The restructuring team puts together the final plan, which provides step-by-step
solutions to the company‟s problems and to exploit new opportunities. The resulting
plan clearly shows how expenses can be minimized and certain profit areas can be
maximized.
48
A business strategy is developed which lays out important schedules, milestones and
resource deployment to successfully implement the restructuring plan. This strategic
plan clearly shows to customers, employees, creditors and suppliers how these
changes will directly and positively affect their cooperation with the troubled
company. The plan is backed by an experienced restructuring team, solid analysis and
excellent forward-looking market analysis and planning. The plan shall show how the
company will re-establish its competitive edge in the market place. The plan must be
realistically constructed and built on a solid base, so that it is trustworthy.
3.4.10 Step Ten – Acquire and leverage needed resources
Control systems and mechanisms must be established. This is usually done by
a dedicated team member and involves tools given to the team as discussed in
previous chapters. Clearly understand the motivations of resource providers. Financial
resources are mostly a question of structure, as good structure can minimize resulting
costs and be strategically leveraged. This step is not only about financial resources but
also human resources. Human resource needs should be filled by as many capable
internal employees as possible before looking for people from the outside. Too many
outsiders can breed distrust and de-motivate current employees. What is also advised
is to build incentive systems and profit sharing to cut human resource salary and
benefit costs.
3.4.11 Step Eleven – Deploy and don’t look back
Confidence, leadership and direction are key at this point. The restructuring team
along with the key executives must show full dedication to the restructuring in order
to motivate all parties involved. There is a restructuring plan to which the employees
are dedicated and it must be fully implemented. Along the path, the restructuring
strategy and plan might be re-worked and adjusted in order to implement more
effective strategies. The restructuring team should meet on a regular basis and ensure
that the restructuring plan is implemented as agreed and that schedules are
kept. The team keeps close communications with employees, customers, suppliers and
creditors, updating them on progress and changes. Management is fully dedicated and
trusted to implement the plan.
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3.4.12 Step Twelve – Obtaining and distributing value
Along the way, when plan milestones and successes are met, harvesting options
should be considered and deployed to meet company obligations. There should be a
clear understanding and agreement among all involved parties of the factors that
trigger or prevent a harvest, and how any harvest is to occur and how value is
distributed.
This is the stage to remember who got the company to this point:
1. Employees
2. Managers
3. Resource providers
4. Cooperation of customers, suppliers and creditors
Such a guideline should lead to a successful turnaround if nothing remains
underestimated. The guideline is however a very general guideline. Other factors
which should be taken into consideration will be later explored along with what other
essential ingredients there are in a restructuring. Not even a perfect plan and
execution, which is the most important ingredient, always leads to success.
Sometimes it is too little too late and bankruptcy or liquidation become the end game.
This is rather harsh and is often a disincentive especially for the restructuring team
and key executives and persons working on the restructuring. Even if a good plan was
structured and execution went according to plan but due to unforeseen circumstances
the company could not be successfully turned around, employees, customers,
suppliers and other partners will understand it. At least they should.
50
Figure 7 Restructuring and turnaround process
There is never a 100% guarantee that a company will be saved. Frank Goley of ABC
Business Consulting gives 3 additional advices for a successful turnaround strategy
and plan40:
Importance of business consultants - an experienced business consultant
should head up and coordinate the numerous roles, duties and responsibilities
of the Turnaround Team, and not the business owner, CEO, lead investor,
turnaround specialist, interim CEO, Board of Directors or key advisors. It is the
experience, objectivity and expertise which a good business consultant can
employ to effectively manage a diverse team of turnaround experts and
players. The business consultant, or restructuring lead as I refer to this position
in this paper, should be given the authority and negotiating room to achieve
this and ensure that the entire team is on board with this structure. The
40 Goley, Frank, A tried and tested business turnaround Process and Strategy http://www.strategologybyquattro.com/management/a-tried-and-tested-business-turnaround-process-and-strategy/
1. Learn About the Business
2. Meet with
Advisors, Creditors, Customers
and Suppliers
3. Evaluate the Problems and
Issues
4. Identify the Most Pressing and
Significant Problems
5. Identify Opportunities 6. Market
Analysis7. Resource Audit
8. Risk Assessment
9. Develop the
Turnaround Solutions and the Resulting
Business Strategy
10. Acquire and Leverage Needed Resources
11. Deploy and Don’t Look Back
12. Obtaining and
Distributing Value
Restructuring and
Turnaround Process
51
restructuring lead is the one player who can be objectively accepted by all
parties involved in the restructuring plan.
It is the team‟s role, responsibility and authority to ensure that the plan is well
implemented, re-worked when necessary and that performance controls are in
place along the way. However, remember that team accountability to the
employees, owners, investors, suppliers, customers and creditors is
paramount. Clear lines of authority and responsibility are critically important
for the Turnaround Plan‟s success but the team must delegate and trust
management with the day-to-day implementation and management of the
plan.
Gut instincts are very important in a turnaround situation. Process works and is
fine but turnaround talent also depends on excellent business instincts. This is
where experience plays a major role. Recruiting experience upfront into the
Turnaround Team will increase the “gut” factor and be the most successful
element of a turnaround process, strategy and plan.
3.5 Phases of the restructuring process
The theory offers several other approaches which, in fact, are similar but offer
different methodologies for the initiation of restructuring. This methodology of
enterprise restructuring is based on a strategic planning process which consists of
three phases with an applicable estimated time period41:
1. Diagnostic phase: diagnosis of the company through “strategic appraisal” (±
four months)
2. Planning phase: preparation of the “strategic improvement plan” (business
plan, ± two months)
3. Implementation phase: restructuring, including monitoring of progress and
revisions of previous phases (± eighteen months)
The first phase i.e. the diagnostic phase analyses the internal and external
environment of the company, its position on the market and its position relative to the
competition. In this phase, in-depth studies are conducted into the operations of the
company, in particular its marketing, production, organization and finance functions
and into problems encountered and identified, their causes and possible solutions to
form the basis for a restructuring plan. Current and potential markets, whether local
41 Van Manen, Bert; Methodology for Enterprise Restructuring, 2003; www.vanmanen.biz/1.htm
52
or export are extensively investigated, as is the competition. Based on this
information, business frameworks such as the SWOT analysis are completed i.e. the
relative internal strengths & weaknesses and the opportunities & threats in the exter-
nal environment are identified. Through this analysis, the company‟s competitive
advantages on the market can be determined. Based on the outcomes, the identified
competitive advantages are incorporated into the restructuring plan and will be
focused on in the execution phase.
Thorough and detailed diagnosis is the key prerequisite to the proper development of
a restructuring plan. Based on the SWOT, corporate objectives and mission statement,
corporate and business unit strategies are developed – this is where this restructuring
method derives from strategic planning. Restructuring is about strategy i.e. the
strategy of implementing measurements step–by-step in order to be able to manage
daily operations and adapt to changes; changing the overall strategy of the company;
figuring out the strategy in which direction the business shall move etc. Having
completed this important step, the corresponding objectives and actions at the
functional levels (marketing, production, organization and finance) logically follow.
Accordingly, financial projections and scenarios are developed, as is an action plan
that clearly outlines what is to be done to implement the restructuring plan, when and
by whom.
The company diagnostic consists of five consecutive steps that lead to a diagnostic
report. Apart from technical studies, the diagnostic phase includes a number of
participatory planning sessions with middle and higher management staff, which aim
to uncover strategic bottlenecks for the company‟s development, to assess the
options, and to define new strategic directions to be implemented by the restructuring
and implementation of the necessary steps.
53
Figure 8 Diagnostic Phase
The first step is the identification of stakeholders in the company i.e. those who will be
affected. These are the management, shareholders, workers (some of whom may be
shareholders as well), clients, suppliers, distributors, creditors, banks, government
and others. In this step, it is important to explore whether they are willing to
collaborate in the restructuring exercise and whether there are any conflicting
interests among the stakeholders. Generally, a well prepared restructuring plan should
be presented with clear steps that will save the company. In any restructuring
approach or guideline, this step is the same. As mentioned earlier in the paper, all of
the parties affected by the restructuring should be well inform and significant efforts
must be made on obtaining their support.
The second step is the pre-assessment of the current situation. The importance of the
self-assessment was discussed earlier in the paper. Here, it is about the present
product/market combinations, how the company performed in recent years, what
would be the outcome of continuing with the current strategy and whether the
company would be able to secure its continuity without restructuring. There are
several tools for self-assessment…see Appendices 1, 2, 3 and 4 for a better
understanding of how companies can assess themselves rather easily and effectively.
The third step is an internal analysis that aims to identify the strengths and
weaknesses in the company‟s structure, culture and resources. The internal analysis
includes a review of sales, costs, profits, organizational structure, management style,
Diagnostic Phase
Pre-assessment of the Situation
Internal Analysis
External Analysis
SWOT
Identification of
Stakeholders 1
2
3
5 4
54
technology, financial results and other factors. For the main functional areas of
marketing, production, organization and finance different diagnostic tables are made,
which demonstrate the problems found, their consequences and possible solutions.
The diagnostic table should be a summary of the findings…see Appendix 5 for a simple
example. The internal analysis also identifies Strategic Business Units (SBUs) that
could be operated independently from the rest of the enterprise. Core businesses and
core competencies are identified i.e. SBUs that are considered crucial to the
company‟s existence and survival. It is necessary to determine the competitive
strengths and weaknesses of the Strategic Business Units (SBU), starting with the
core businesses.
The fourth step in the process is an external analysis of the economic environment,
markets and competition. This includes a detailed critical analysis of all relevant
developments outside the company that are relevant to the performance of the
company but which cannot in general be directly influenced by the company. This
includes an assessment of macroeconomic, legal and political developments in the
country and an analysis of the market, customers, competitors, distribution channels,
logistics and environment.
The fifth step is conducting a SWOT-analysis at the strategic level i.e. identifying
relative strengths & weaknesses and opportunities & threats. This helps the enterprise
identify its competitive advantages on the market. Competitive advantages may be
found at the level of manufacturing (enabling a company to produce a product
cheaper), product design and quality (enabling a company to reach higher levels of
customer satisfaction), marketing (enabling the company to exploit market oppor-
tunities), distribution (aiming to better reach the client) and many others.
The SWOT summarizes the findings from the diagnostic and places this information in
a strategic framework for company improvement. Through the SWOT, strengths with
opportunities are matched while weaknesses are transformed into strengths and the
avoidance of threats is determined by specific actions. Thus, the SWOT helps deter-
mine what the company is doing well, how it can use its skills to grab opportunities,
and where it needs to make improvements to combat threats and overcome
weaknesses. The SWOT, which is the outcome of the diagnostic study, is an extremely
important step in establishing the priorities for the restructuring plan.
Zimmerman also promotes strategic planning as one of the ways on how to lead
a restructuring process and points out that the focus here is on operational issues
such as improving the product, reducing production cost and improving product
55
quality and customer service42. The strategic planning process consists of another four
steps, during which concrete restructuring actions are formulated.
Figure 9 Strategic Planning
In strategic planning, global objectives are defined. Based on the SWOT analyses, the
company‟s objectives, its strategic vision and business philosophy are formulated. This
means that plans such as what is planned to achieve in terms of profit, market
penetration, client satisfaction and other objectives are defined along with the
strategic analysis of the business in terms of which business is the company in, or
which business it should be in and which business it will no longer operate in. Possibly
a new mission statement can be defined in case of significant strategic decisions,
showing what the (new) company is, what it stands for and what it does for others.
Strategic planning aims to lay down the strategic directions that the company will
follow in the medium and long term. This is not very detailed. Strategic planning deals
with trends rather than details.
Corporate planning, representing the second step of the planning phase incorporates
making the strategic choices (long-term) and affirming the commitment to undertake
corporate restructuring. It includes a decision as to which of the current SBUs to drop
(divest), which ones to develop further and which new ones to start. These decisions
are obviously based on the internal strengths, external opportunities and corporate
42 Zimmerman, F. M., The Turnaround Experience – Real-world Lessons in Revitalizing Corporations; McGraw-Hill, 2002, p.217
Planning Phase
Corporate Planning
Tactical Planning
Financial Implications
Strategic Planning
1
2
3
4
56
objectives identified before. In order to be successful, a detailed assessment of the
attractiveness of the market should be included on the one hand and the ability of the
company to compete successfully on that market on the other hand. As discussed
earlier in Restructuring Framework chapter, it is necessary that all of the significant
changes and decisions must be prepared very carefully and analyzed precisely i.e. to
ensure financial and operational feasibility. Major decisions with a significant impact on
the company as a whole might have a disastrous impact on the entire restructuring if
not done with the utmost care and analysis.
Tactical planning (medium term) discusses the strategy for each of the selected SBUs.
Whether to produce sausages or bread is a strategic decision based on the SWOT and
conclusions of the diagnostics. How to market these strategic decisions is subject to
tactical decisions. This includes a proper marketing strategy showing how the strategic
objectives related to the successful commercialization of the company‟s products will
be reached. This plan indicates specific actions to be undertaken. Likewise, production,
organization and financial management plans are developed.
The fourth step of the planning phase is discussing the financial implications during
which revenue projections and cash flow planning, projected profit & loss statements
and projected balance sheets of the restructuring plan are prepared. Usually, several
scenarios may be developed reflecting variations in uncertain and difficult to predict
factors. In order to realise the restructuring process, an action plan is developed which
indicates who will be responsible for the respective actions to be undertaken in the
implementation of the plan, and when these actions will be undertaken. This is
discussed in more detail in the section about the restructuring team, where the
concrete roles and responsibilities are explained.
All these efforts lead to forming a restructuring plan which is later on approved and
adopted by the board of directors and shareholders, and serves as a guideline in the
implementation phase. The restructuring plan is then presented to related parties such
as creditors in order to explain the situation of the company and to present steps that
will help the company to get back on track. The restructuring plan should be written in
a logical and easily accessible manner. Appendix 6 provides an example of the table
of contents of a sample restructuring plan. Appendix 7 is a model to summarize the
restructuring plan in a clear and concise structure, which is understandable and easy
to follow for the related parties.
The phases of the restructuring process reveals the fact that despite the fact that the
theory offers a general step-by-step guideline, there are many strategic decisions to
be taken and that forming the final restructuring plan must take into consideration the
57
whole direction of an enterprise i.e. where does it stand at the moment and where will
it go from now on?
3.6 Hurdles of Business Restructuring
Obviously, restructuring a company regardless of its size, range, length and difficult is
accompanied by challenges, obstacles and hurdles in all restructuring segments i.e.
asset, capital and organizational restructuring. As the case study covered later in this
thesis will discuss, some of the hurdles that arose during the restructuring, it is
necessary to mention what are the generally known hurdles that may arise during the
path and that cause major or minor problems. There are numerous hurdles and some
of them are discussed below:
Inadequate focus and commitment of top management towards the
restructuring – even the best restructuring plan can be successful only if it gets
adequate support and the commitment of top management. If top
management themselves are not focused on or committed to the restructuring,
it will failure without a doubt. It is top management that has to show full
support to the restructuring in order to motivate and pull employees along the
restructuring path.
Resistance to change – any restructuring activity involves change. Whether
these are changes in the process of work or changes in the organization,
management as well as employees must align themselves to the new structure.
If they are not willing to change their mindset, the restructuring will not be
successful.
Lack of involvement of employees – restructuring requires many changes e.g.
change in the mindset, change in work practises, change in reporting, change
in the structure etc. Since employees are often used to their daily routines and
since in general people tend to resist change, the best way to incorporate any
change is to involve people in the formation of this change from the start.
Therefore, communication is crucial and the role of internal or external HR is
therefore so important in the restructuring process. Failure to do so would
invite resistance from employees, which in turn may negatively affect a
successful restructuring.
Poor planning – as proclaimed several times in the paper, planning that starts
with the assessment of the company in distress and an exact understanding of
the problems with clearly defined steps on how to get rid of them, is the key to
58
a successful turnaround. Therefore, if the planning stage itself is faulty, the
whole activity would be affected.
Resource Availability – availability of necessary resources is another potential
constraint. Lack of availability of adequate resources could affect the working of
the business and affect the restructuring activity as a whole. It is necessary to
estimate the running costs and costs for the restructuring for the whole period
as precisely as possible. This is especially the case in restructuring cases where
the company is in serious financial distress and additional capital needs to be
secured, often from the shareholders‟ pockets.
Cost and time – the cost and time involved for the first set of implemented
measurements into the organization may at times make the firm retreat from
the process of restructuring.
Poor communication – the need and benefits of a restructuring activity have
not been clearly communicated to the lower levels of the organization. This in
turn would affect the effective working of employees and their performance.
Unstructured communication flows, unclear reporting structures etc after a
restructuring activity, could also affect the efficient working of the organization.
This is why the role of the Change Management & Communications Lead within
the restructuring team is very important.
Culture – company culture is an important intermediary which determines
whether the strategy will or will not be successfully implemented. Culture
either helps or hinders an organization as it seeks to achieve competitive
advantage. The right culture for an organization is the one that best supports
its strategic objectives. The challenge for an organization is therefore to assess
the fit between the current culture and the culture required to successfully
implement the chosen strategy arising from the restructuring plan and to take
steps to change the organization's culture to better align it with what is
required.
The hurdles arise from changes that the restructuring brings along with the process.
Some of these may need to require major changes. It is important to realize that
understanding the necessity to change is one thing and getting things to actually
change is another. Tichy43 describes three sets of dynamic forces that influence the
43 Tichy, Noel M., Managing Strategic Change: Technical, Political and Cultural Dynamics, John Wiley & Sons, 1983
59
ease with which changes arising from restructuring can be introduced. These forces
are:
1. Technical resistant forces – resistance due to habit; resistance due to fear of
the unknown; resistance due to the absence of skills; resistance due to
organizational predictability and resistance due to sunk costs
2. Political resistant forces – resistance due to the need of power; resistance due
to over-dependence on others; resistance due to threats to powerful coalitions;
resistance due to resource limitations
3. Cultural resistant forces – resistance due to selective perception; resistance
due to values and beliefs; resistance due to security by regression to the past;
resistance due to conformity by norms; resistance due to climate for change
The execution of change is one of the most challenging tasks for the restructuring
team and the problems named above create the biggest hurdles in the whole
implementation process. Methods to achieve objectives must be carefully prepared
and underlined with technical and managerial credibility in order to reduce resistance
to minimum. Being able to convince management as well as employees that changes
are necessary and need to be done is one of the key tasks for the team. These
problems or hurdles are not ranked according to their importance i.e. they are given
an importance or significance factor in the case study part of the thesis.
4. Case study – restructuring of DeliFoods
4.1 Company background
DeliFoods is a medium-sized company with three lines of business i.e. production of
baguettes & sandwiches, a bakery and a meat production unit. The company was
founded in 1997 as a family-owned baguette & sandwich producer and soon became
the leader in the Slovak market. High annual growth of the company led to a decision
to move from unsatisfactory production facilities to the construction of a new modern
factory and expanding the business by adding two more production lines – bakery and
meat production. The new factory was finished in 2007 and the company transferred
its operation to a small village in central Slovakia. DeliFoods grew from being a family-
owned business led by the founder who was everything from CEO to CFO to product
manager. Since the introduction of new production lines required increasing staff, with
the new factory grand opening, there were 250 employees and the company had high
expectations given the previous rapid growth and introduction of new production lines.
60
4.2 Pre-restructuring phase
The transfer from a modest facility to a modern EUR 14 million factory with over
10.000m2 was a challenge that management did not overcome. With all of its efforts
dedicated to finishing the financially very intensive factory, the company started to
lose its position on the market. This had several reasons:
Overestimation of management skills
Entrance of new players in the market
All efforts focused on finishing the factory and forgetting about customer needs
and product quality
Overestimation of the market potential and market segment for the new
production lines
Insufficient preparation of the business plan – overestimated revenues &
underestimated costs
The continued loss in turnover combined with exhausted resources necessary to run
the business and to finish the factory led to the entrance of a new investor in 2008.
The new investor provided the funds necessary to finish the factory and to operate the
business in exchange for a minority share. Despite this financial injection, the
company was struggling with its core business due to increased competition and could
not establish itself properly with the new production lines. Being close to bankruptcy in
late 2009, the investor provided additional capital under the condition that new
management be installed in order to save and develop the company. The new
management presented a vision of success that convinced the investor to continue
providing needed liquidity on a monthly basis. Figure 8 below provides the planned
revenues for 2010 compared to reality. Please see Appendices 8, 9, 10 for planned
revenues versus reality for the respective production lines.
61
Figure 10 DeliFoods revenues: Plan vs. Reality
It is clear that the company was in a huge crisis and was unable to get out of it. It was
having all of the factors that the definition of corporate crisis offers – from unprofitable
company facing insolvency to company showing imbalance in production, human
resources and financial conditions. The crisis arose from management mistakes and its
own internal organizational activities. Strategic crisis occurred due to wrong decisions
related to adding two more production lines that were not the core business of the
company and their launch was poorly prepared and later on weakly promoted; crisis
related to economic results sprung up from not being able to compete with new
players on the market and the liquidity crisis is a result of the combination of the two
above – costs related to opening a new factory expensively equipped for two new
production lines along with a loss of market share that brought the liquidity problems.
The company itself was not able to combat the crisis properly and in most cases did
the opposite to what the theory says about combating crisis. Instead of trying to
systematically solve the crisis internally with a proper approach as mentioned in the
“crisis analysis” part of the thesis, the company continued to stick to their wrong
management decisions, replaced key people in key positions almost on a monthly
basis and had a very chaotic organizational structure without a proper leader that
would be able to lead the turnaround internally and motivate employees to work
together on a proper solution. Due to this poor and unacceptable performance of the
company, management was fired and the minority shareholder stepped in, providing
62
additional capital and in fact became the only shareholder of DeliFoods. For some
months, he tried to lead the company on his own as an unofficial CEO along with
naming the financial director to be deputy-CEO. However, he came to the conclusion
that the food industry is extremely competitive and without proper experience and
management skills, it is extremely difficult, if not impossible, to turnaround a company
in such condition. After several months being in the shoes of CEO and dealing with
daily operations, the shareholder decided to call in a turnaround company in order to
analyze the company, to prepare a restructuring plan and to implement it. This case
only shows how important it is to have proper management and it is a lesson learnt
for the shareholder of the company, as DeliFoods was a candidate for restructuring
with the help of external professionals much sooner than it actually happened.
4.3 Restructuring of DeliFoods
The assignment was to turnaround a heavy loss-making DeliFoods i.e. nearly EUR 4
million in losses on EUR 5 million in turnover to a company in black numbers within
12-months. This should have been achieved with the combination of heavy cost-
cutting, business development in the current market and entering new markets in
Central Europe. The company‟s turnover potential with respect to the production
capacities of the three business lines was estimated to be somewhere around EUR 20-
25 million. With the current EUR 5 million it seemed that with the combination of
cutting costs, intensively developing sales is challenging, but with a little bit of luck,
possible. However, in order to be successful in a relatively short time, all of the
prepared restructuring measurements had to be fully implemented. The illustration
below shows the overall aim i.e. increase turnover by at least 20% and decrease the
cost structure by 42%, which would lead to a positive company value and either “hold
and build” or “exit” strategy for the shareholder.
63
Figure 11 Overall goal of restructuring
After a theoretical review of how to approach restructuring, the aim of the following
sections is to guide the reader through the restructuring process of the whole
company i.e. to compare what was generally applied, what was successfully
implemented, what the hurdles during the process of restructuring were and what the
company‟s current status is.
4.3.1 Restructuring strategy applied
The theory provides three basic restructuring strategies. Since the company was close
to bankruptcy, the conditions of the company were fitting to a revitalization strategy,
which is applicable to companies with the highest need to restructure i.e. try to save
the company before complete decline, bankruptcy and liquidation. Implementation of
this strategy allowed for a radical turnaround of DeliFoods, which was, in the period
when the restructuring team stepped-in, heavily loss-making and cash-burning, with
declining turnover on a yearly comparison with disastrous liquidity, increasing debt
and negative cash flow. The projected economic performance of DeliFoods for 2010 at
the time of the restructuring initiation was as follows:
5m
0
Revenues
5m
Variable costs
4.1m
Fixed costs
2.6m
Depreciation
1.5m
Interests
0.7m
+20%
-42%
64
Revenues, net EUR 4.800.000
Variable Costs EUR 4.300.000
Fixed Costs EUR 2.600.000
EBIT EUR -3.500.000
Figure 12 Projected economic performance of DeliFoods 2010
It is necessary to point out the seasonality of the business and that summer 2010
when the restructuring team stepped-in, was the peak of the season. This simple
preview of the financial figures underlines how difficult the task was to turn DeliFoods
back on track.
4.3.2 Restructuring process
The first step in the restructuring process was preparing an analysis of the company,
making assessment tests, getting to know about the company, its employees, product
portfolio, production processes, how the different departments worked and most
importantly to find solutions on how to improve the situation. And how to do it fast.
4.3.2.1 Company analysis
The pre-restructuring phase was two full weeks of performing a company analysis. As
discussed earlier in the paper, there are 6 stages in the pre-restructuring analysis of a
company in crisis. These stages can be referred to as areas covered by the analysis,
as all of the stages are performed at once. Furthermore, what is not mentioned in the
theory is dividing the analysis into two parts – analysis performed at the company
premises and analysis performed outside of the company premises. The analysis was
launched by gathering all the quantitative data from the company in advance – or
stage one and partly stages two and five; basic company information, economic
analysis and financial analysis respectively. This analysis served one of the
prerequisites to preparing the restructuring and as an introduction to DeliFoods and its
(economic) conditions to the restructuring company in order to prepare for the project
i.e. to analyze the scope and extent of the restructuring, to form a restructuring team
and partly to prepare an internal timeframe for the whole project that would be later
finalized after the analysis at the company. The second part of the analysis occurred
at the factory. The remaining stages i.e. social analysis and production/operational
analysis were performed there. Given the time dedicated to analysis preparation (two-
three weeks), most of the time was spent inside the company analyzing, not yet in
detail, the processes in production, headcounts within the respective departments,
65
internal processes, initial interviews with the heads of departments and comparing the
quantitative findings with available benchmarks to see where the reserves compared
to market figures were.
After the analysis was prepared, the restructuring team presented the findings to the
shareholders and the CEO, and further steps were discussed. Based on the analysis,
the restructuring team prepared a restructuring plan which was structured using a
similar framework to Appendix 7.
4.3.2.2 Restructuring plan
The findings of the analysis served as a basis to prepare the restructuring plan. Key
areas were identified where major changes needed to be done in order to stabilize the
financial situation of the company. The restructuring plan consisted of five major
presentation points:
Management Summary – the summary of the status of the company and
findings from the company analysis
Operational Restructuring – including departments of DeliFoods that were to be
restructured. These were production, sales & product portfolio, administration
and logistics
Financial Restructuring – 2 main areas were negotiating with creditors about a
potential haircut and better cash flow management via decreasing the average
collection period, changing service suppliers etc
Impact of measures on the P&L – projected financial impact of implementation
of the restructuring measurements
Next Steps – definition of actions to be taken presented in a timeframe
4.3.2.3 Restructuring team
The theory states how important it is to build a proper team i.e. with experience that
is sufficient, with a clear division of roles and responsibilities, and having the right
skills to be able to manage the whole restructuring process. The team allocated for
project DeliFoods consisted of a senior manager with years of experience in
restructuring of manufacturing companies and who represented the position of
Restructuring Lead, PMO Leader and member of the Steering Committee. There were
two juniors in the role of PMO support and the team was supposed to be fully
supported by two full-time internal employees. The plan seemed to work but certain
obstacles occurred right from the start. It was agreed for example that the project
language was English due to the fact that the restructuring lead was a foreigner. From
66
the beginning the team faced the fact that there were only 3 persons in the whole
company that spoke a foreign language i.e. the shareholder, CEO and head of HR. The
two nominated persons of DeliFoods dedicated to join the restructuring team did not
speak a word in any language other than Slovak. It soon came to be one of the
biggest obstacles in the whole project. Keeping in mind that the company was in
serious trouble and that the implementation led by the senior manager had to run
smoothly, spending time translating reports, meetings and tasks significantly slowed
the whole progress. Another problem related to the decision to dedicate two persons
to work with the restructuring team as their original job positions remained and had to
be performed as before. This became a serious problem when the overstaffed
administration department was reduced to a minimum and the key tasks that
remained were distributed among the available resources including several tasks to
these two persons. Overall, this meant that the original restructuring team planned
with 5 persons shrunk to one senior and two juniors who had to manage all of the
tasks and implementations along with facing a language barrier. This fact should have
been solved differently by appointing one or two more consultants to join the team as
the extent of the restructuring was very broad and consuming.
4.3.2.4 Management establishment
The original set-up was to have a steering committee meeting at the start of every
week in order to summarize the previous week‟s efforts and completed tasks and to
present a plan of the coming week‟s areas to be analyzed and measurements to be
implemented. This is perfectly in line with what the theory states. However, there
were often issues preventing the team having such meetings. It is absolutely crucial to
have such steering committee meetings in order to align activities, to keep track of
progress and to simply know who is doing what and what the priorities are. It was
especially important in the case of DeliFoods where the CEO could not make any
significant decision without the consent of the major shareholder and the major
shareholder was not present that often to keep up with monitoring all the changes
which led to a deceleration of the whole implementation of the restructuring plan.
4.3.3 Restructured areas
As mentioned earlier, DeliFoods was subject to extensive operational restructuring and
a part financial restructuring.
4.3.3.1 Financial restructuring
Due to the fact that the shareholder had to provide cash on a monthly basis in order
to secure the financing of the company and the restructuring was the last effort to
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save the company or otherwise go to bankruptcy, the goal was to present a
restructuring plan to the credit partner, to explain the difficult situation and to mainly
obtain an interest holiday for the restructuring period and finally to negotiate a loan
haircut. The theory says that all major partners should be informed about activities
such as a restructuring. The company‟s main bank was therefore contacted, the
restructuring plan presented and negotiations about the requested support initiated.
Obviously, all of the company‟s assets served as collateral to the loans, so the bank in
the first instance did not want to participate or to make any allowances.
Apart from presenting the dedication of the shareholder to save the company, the
bank was presented with the following facts:
DeliFoods was never late with interest payments even though they went
straight from the pocket of the main shareholder, which shows a serious
partnership intention
The book value of assets serving as collateral were by far over-valued and the
real value was much lower
DeliFoods was considering filing for legal restructuring which under Slovak law
is very favourable towards enterprises and can take-up to two years until
solved, which would mean that the bank would have no access to obtaining
funds from DeliFoods during this period
The bottom line is that DeliFoods benefited out of the cooperation with external
advisors with experience in such negotiations. The result was that the company was
granted a 12-month interest holiday and a haircut of 23% from the original loan or in
terms of money, a haircut of EUR 1.25 million. This was, however, the easy part of the
whole restructuring process. Apart from this achievement, which immediately saved
tens of thousands of Euro that the shareholder had to be provide every month, the
focus was to speed up the receivables collection period. The company had a traditional
system of contacting customers with open invoices and in case of no consent, of
delegating them to lawyers. However one simple factor improved the attitude of
DeliFoods‟ employees towards receivables management i.e. they were granted a
certain percentage of the open invoices when they managed to convince the
customers to pay their debts towards DeliFoods. This brought in €100,000 in the first
month when this motivational tool was introduced. But still, the problem of DeliFoods
lay somewhere else.
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4.3.3.2 Operational restructuring
The biggest task in the reduction of costs was to optimize processes throughout the
whole company i.e. from production through logistics and purchasing to
administration. The goal was to operate more efficiently. The approach in order to
reach this was to divide departments among team members, to analyze the
department processes and to prepare a proposal. The restructuring plan included the
percentage of costs that needed to be reduced with respect to respective departments
or cost items, and these served as a goal for the team. Reaching lower cost operations
started right from the beginning.
In order to get a full a picture about the restructuring of DeliFoods, it is crucial to
present a common simplified step-by-step process of the restructuring approach. As
explained earlier, DeliFoods was a case to complete restructuring of nearly all
departments and processes. The following is a common approach to the restructuring
of the respective departments and this is already after the initial analysis and getting
the first feeling of the company:
Step 1 – Observations: This step included making observations by the team member
of the respective department which was being analyzed at a given time. This would
differ from 1-2 days of observations during the day, to spending night shifts in
production and observing. But what was being observed? Observing activity enabled
the restructuring team to take notes, to observe the activities and processes
predefined prior to observations, to measure the times that employees needed for the
job to be done or in simple words to gather the data necessary to propose a solution
to improve the current status.
Step 2 – Evaluations & proposal preparation: After the observations and data
gathering, the team member would prepare a proposal for improvement either alone
or in cooperation with other restructuring team members or often with the help of the
head of the respective department. After the evaluation was finished and data
analyzed, a proposal was prepared and its benefit quantified in terms of either cost-
cutting or job quality improvement or similar other benefits.
Step 3 – Justification of restructuring measures: once the proposal was finished, the
implementation was discussed at a special meeting that would include the
restructuring team, the CEO, respective department heads and other relevant persons
that needed to be aware of planned changes as change of only one process in a
department often affects others as well. The restructuring team would justify the
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intentions of the measure, explain the benefits (either financial or quality
improvement, or easement of work) and get the support of all related parties.
Step 4 – Implementation: This was the one step that showed if what was written on
paper works in reality. The measures were implemented and granted a test period
particularly if connected to layoffs or were granted a factor of significance.
Implementation often lies on the shoulders of the department head as that is the
position that has to show full support to the restructuring in order to get employees
onside as restructuring measures often mean more work for employees and without
proper motivation and support, it is impossible to be successful.
Step 5 – Post-implementation: This is a very important step where the measures need
to be monitored, their impact tracked and if necessary, the measures might need to
be adapted or changed if something was not working as planned.
In the following sections, a sample of restructured departments will be presented one-
by-one and the process of observation, evaluation, justification, implementation and
post-implementation steps will be discussed in order to highlight how different the
restructuring process is even within one company across different departments.
We can identify three main groups within the DeliFoods restructuring process. It is
essential to mention that the division is based on the easiness of restructuring and
let‟s say not the financial benefit arising out of it. The division considers how much
time and effort were dedicated to the restructuring, what was the cooperation with the
respective department head and how the implemented changes were accepted.
Below is a summary of the restructuring process of the respective departments and
areas restructured divided into 3 groups to provide an overview of how the
restructuring of DeliFoods looked like. Key restructured areas are also discussed in
more detail.
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Table 1 Summary of the restructuring process – success stories
The green colour groups together restructuring areas that went well and where
execution was according to plan. These were the areas where from the point-of-view
of the restructuring process it was rather easy to cooperate and to come to
conclusions. The success of the restructuring is attributed to the people that were part
of it and their knowledge. It is promoted several times in the thesis that building the
right restructuring team from the point of external advisors and choosing the right
external advisor with the right set of experience, can make the difference between
success and bankruptcy of a company. The restructuring of DeliFoods promotes this
statement and the success of restructuring different divisions or departments of the
company relied on the people and their knowledge, experience, motivation, attitude
and professionalism. The 5-step model of approach remains and in several examples
of department restructuring, we will see why the restructuring in this group can be
considered rather easy.
4.3.3.2.1 Logistics restructuring
Logistics was one of the key areas to be restructured and serves as an example of a
successful implementation of measures. From the organizational level, the logistic
department had a department head of logistics, a coordinator of warehouse and
drivers in west Slovakia, technical support and 28 drivers. This was the status at the
commencement of the restructuring. The initial analysis highlighted several defects
Area Target Result Description
Financial Restructuring Obtain loan haircut & interest holiday Haircut of 23%, 12 month interest
holidays achieved
Bank convinced to cooperate on
turnaround
Logistics Reduce logistic cost by 30%,
introduce proper reporting, decrease
low turnover stops, improve own f leet
utilization, reduce maintenance costs
15% reduction without decreasing the
quality of service
30% goal impossible without
decreasing quality, professional
cooperation with the department
head, all possible solutions executed
Purchasing Introducing system in purchasing,
making tenders, increasing number of
suppliers to increase competition,
reporting introduction
Introduced ABC division of suppliers,
proper reporting system
Prior to restructuring, poor reporting,
no real motivation to f ight for the best
prices, weak negotiation skills.
Continual work with the employees
brought desired results, despite the
fact that key raw material prices
escalated
Warehouse Reduce staf f by 40%, improve
processes
Fully accomplished The reduction of employees due to
introduction of new processes,
adjusting working hours to peak
times, new internal controlling system
was introduced
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and several restructuring measures in order to improve the conditions. The biggest
problems identified were:
Trucks driving with low capacity utilization
Many time-consuming low turnover stops
High loss making fresh bakery routes
Too many “dead” kilometres – trucks driving empty
High repair costs
Low utilization of the potential of own fleet compared to external logistic costs
Insufficient reporting, tracking and monitoring
These were the main shortcomings of the logistic department to be solved with the
goal to save 30% of the actual expenses attributed to logistics. This was known after
finalizing step 1 i.e. the observation stage. In the next steps, the shortcomings were
solved one-by-one. This was made easier by the fact that the department head was
dedicated and motivated towards the restructuring and not only aware of the financial
situation and economic performance of DeliFoods, he understood what the
consequences of failing to turnaround were. The first step was to work on the
reporting. The outcome of this measure is in Appendix 11 and shows a detailed
tracking of expenses and evolution of the logistic costs. Good reporting is key to be
able to monitor and evaluate the efforts and in case of positive trends, it is the best
motivational tool for employees because their hard work is visible on a plain white
paper filled with graphs. There were numerous meetings between the restructuring
team and the proactive logistic department, resulting in a complete rerouting of the
respective logistic routes, which meant a reduction of drivers, a reduction of external
logistic costs due to the a greater utilization of the company‟s own fleet, the
introduction of an additional warehouse, numerous attempts to cooperate with other
partners in order to sell free capacity in the trucks and the tendering of service repairs
with proper tracking of maintenance costs to each respective car. During the
restructuring process, it is absolutely crucial to be able to cooperate with employees,
work with employees that are open to different opinions that come outside of the
company, that show dedication to the restructuring process and that to try to
implement all measures that came from mutual discussions even though it is often a
process of trial and error.
The figure below indicates a time-line of the main areas that were covered in the
logistics department.
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Figure 13 Time-line of logistics measurements
The orange group describes the areas or tasks that were accompanied by certain
obstacles arising either from implementation problems or a lack of cooperation with
the internal key employees or similar. In the Table 2 below, both key production
departments are in this group. Unfortunately, these are the areas that should have
been in the green area as they are the key areas in the whole company in terms of
creating value. The fact that there were several problems along the way can be
partially be attributed to the restructuring team, which was not so experienced with
this respect. The only experienced person, the restructuring lead, could not fully
dedicate his time to these areas and the majority of the work was done by the juniors.
This was simply due to the fact that the extent of the DeliFoods restructuring was
enormous and the shareholder wanted to see results in the shortest possible time.
Many activities were therefore being done simultaneously but none of them had the
100% dedication of the restructuring team given that the team was active in the
restructuring of all departments.
Area: LOGISTICSJuly Aug Sept Oct Nov Dec Jan Febr Mar Apr
Problem Action
Stops with low
turnoverReduction of unprofitable customers
Poor capacity
utilization
Combining & merging routes; serving
more customers per route
“Dead” kilometers
Opening warehouse in west and east
Slovakia, delivering fresh goods and collecting returned goods
High maintenance
costs
Detailed per truck reporting; negotiations
with servicing partner
Own fleet utilization Reduction of external logistic partners
WEST EAST
ReportingNew servicing
terms
1st external
cancelled
2nd external
cancelled
last external
cancelled
implementationobservations
justification post-implementationevaluation &
proposal preparation
Explanatory:
73
Table 2 Summary of the restructuring process – challenging areas
4.3.3.2.2 Bakery restructuring
The restructuring of the bakery serves as an example of the area where there were
significant problems and obstructions throughout the process of the DeliFoods
turnaround and where the target set in the restructuring plan was not fully reached.
Figure 14 below shows the organizational structure at the beginning of restructuring.
The bakery operated 24-hours a day, 7-days a week.
Figure 14 Organizational structure of bakery
Area Target Result Description
Bakery Production Reduce staf f by 40%, simplify
processes, develop sales
Reduction of 23% was possible Very dif f icult analysis of the
production processes due to 4
production lines within bakery with
f lexible operating hours,
implementation of measurements
delayed due to refusal of department
head and employees
Baguette production Reduce staf f by 40%, simplify
processes, develop sales
Reduction of 28% was possible Core business of the company, very
challenging to push and test
measurements, poor support of the
department head, fear of
management to make radical
changes
Administration Reducing staf f and overhead costs
by 40%, reorganizing job positions,
cancelling inef fective services
25% of target reached Dif f icult to convince the steering
committee to make radical cost
cutting in terms of human resources
across the departments, several
contracts were almost impossible to
terminate
Technical
head
Head of bakeryOperator
2eHygiene
Shift headShift head Shift head Shift head
10e 10e 10e 10e
AdjusterAdjuster Adjuster Adjuster
51+1 employees
74
The bakery had 52 employees out of which only 40 were fully productive. It was
staffed to have the maximum employees needed at peak time. Focused staffing
according to the demands of a single working day or shift was not done. The
department was therefore in times of automated and running processes overstaffed.
The aim of the bakery restructuring was therefore to:
Define the optimum processes with time durations
Define the number of staff needed according to actual production
Define flexible work not directly connected to production (hygiene, cleaning,
preparation of machines and equipment etc)
Ensure higher machine utilization
Remodel the current shifts
Cooperate in adjustment/change of the product portfolio
The target was to reach savings of more than €200,000 through staff reduction and
other material cost savings. Apart from this, the goal was to develop the business and
to define the purpose of bakery for DeliFoods i.e. whether to close the
underperforming external sales activities and to produce only for own consumption or
to develop the business by further identifying the right products at right prices. The
first step was spending several day and night shifts at the bakery to observe the
production processes, to measure single steps in production, to evaluate the workload,
to compare actual output with maximum output and to gather enough data to be able
to prepare a proposal. Due to the fact that changing processes in production requires
significant expertise in the production processes, an expert joined the restructuring
team for one week to help and to guide the team in this respect. Since the expensive
expert could spend only one week on this project, he set the base and showed the
team how to proceed. It took more than a month to prepare an initial proposal, which
was later on rejected. This is where the first significant problems within the DeliFoods
restructuring occurred. Despite the fact that the department head was fully informed
and consulted about the upcoming changes, she presented a list of potential threats at
the approval presentation (Step 3), which were previously never discussed or
presented to the restructuring team. This action obviously triggered tension between
the department head and the restructuring team. Some of the potential threats
presented by the department head had to be taken for consideration even if the way
of presenting them on the day of the steering committee presentation was
unacceptable. The whole concept was therefore reconstructed but ongoing
restructuring “sabotage” lead by the bakery head continued and led to further delays
75
in implementation. It was very time consuming to get any data and there was no
longer a relationship with the involved person. This escalated to a point where a new
department head had to be found by head hunters and the current one was laid off.
Again, the replacement of such a key person led to further delays and the new shift
model was introduced with a 3-month delay. The new department head was
introduced to the company‟s situation and the restructuring process, and started to
work on product development. The people factor again showed to be key to the whole
restructuring. It is a fact that if the restructuring team was comprised of experts in
bakery, such problems would not have appeared but in reality, how many
restructuring consultants are experts in bakery? In the end, 4-shifts were reduced to
3-shifts, 24-hour production was replaced by flexible production hours and complex
products with low sales were substituted with new products that have more potential.
The cost-cutting mission was therefore accomplished but bakery sales are still not at
satisfactory levels. The figure below illustrates the key areas of the bakery
restructuring projected in a time-line.
Figure 15 Time-line of bakery measures
The red group represents those areas and tasks that were for various reasons not
executed or the execution of those was accompanied by serious problems and
implementation was not successful.
76
Table 3 Summary of the restructuring process - problematic areas
4.3.3.2.3 Sales
The restructuring of sales shows the other and often unknown side of restructuring. As
mentioned earlier, restructuring is generally connected to cost-cutting. However, it is
not true. From the company background, it is clear that DeliFoods was in desperate
need of new sales. In fact, one of the goals of the restructuring plan was to push sales
by 20% in 12-months. This rather ambitious plan had however solid background. Prior
to restructuring, DeliFoods had ongoing negotiations with a foreign meat producer and
the content of the negotiations was the possibility to take over the full capacity of the
meat production area with an estimated net annual income from rent of €500,000.
This itself would mean an increase in overall sales of 10%. The additional increase was
planned to be achieved via the better work of the sales team and by introducing a
sales strategy. The status of the sales team at the beginning of restructuring was as
follows:
Main shareholder acted as Director of Sales
Sales department including drivers had 52 (!) people
No motivational system existed for the sales department (salary incentives)
No systematic reporting, tracking of work, client division etc existed
No real leadership – no “real” sales director
Area Target Result Description
Meat Production Renting the meat production to
bigger player on the market, ongoing
negotiations prior to restructuring
Months of negotiations led to zero
ef fect, DeliFoods is trying to establish
on the market with its own production
Unsuccessful negotiations and test of
production for foreign global player
lasting for over a year did not lead to
any conclusion. Having relatively
small production capacity, DeliFoods
is trying to f ind a niche market with
f rozen ready-made foods with minor
success up to date
Sales Promote sales, target +20% in 12
months, improve the point of sales,
change the sales team, enter foreign
markets
Sales were stagnating due to new
competitor, poor performance of the
sales team
Sales team was managed by the
main shareholder, spread throughout
the whole country, with minor control,
low sales skills and no corporate
identity
Maintenance Decrease maintenance costs by
20%, improve performance of the
team, introduce reporting
Constant delays in implementation of
measurements, poor management
and maintenance team, HR problem
The maintenance was performing
poorly, lack of knowledge of the
machines, no systematic problem
solving, unable to deliver
maintenance plan, of ten changed
head of maintenance
77
In order to push sales in the desired direction, the main areas to be improved were
identified as follows:
Install proper sales director
Reorganize the sales team
Install measurements enabling monitoring of the sales team
Improve point-of-sales
Develop new products and new packaging
Enter new surrounding markets
With respect to hiring a proper sales director, a headhunting company was appointed,
which delivered a candidate that was appointed in October 2010 i.e. 3-months after
the restructuring was initiated. In the meantime, a proposal to reorganize the sales
team was made by the restructuring team. The sales force of DeliFoods counting 52
heads (at €5 million turnover) is illustrated below.
Figure 16 Organizational structure of sales department
The sale force of DeliFoods was by far overstaffed but even worse, extremely
underperformed. Such a complicated structure without a proper sales director was
causing confusion and misunderstandings i.e. it was not clear who is who‟s boss and
this had to be properly solved. The proposal was therefore to simplify the structure, to
divide the market based on geographical location and to make the organization
structure simple and clear. The idea was to split customers according to their
performance and potential. Therefore the first task for the sales team was to classify
individual customers into three groups based on their turnover and potential. The
biggest class “A” clients would be allocated to area managers along with the
headquarters of the chains “HQ” while the “B“ clients would belong to sales
representatives and “C” clients to drivers. Below is the proposed structure.
Sales Director
Key Account-
Independent MarketKey Account-Chains Area Manager Project Manager Internal Sales Manager
9 Drivers 4 Sales Representatives 6 Sales Representatives 4 Customer Service
23 Drivers
78
Figure 17 Proposed organizational structure of the sales team
It was decided however that the final decision regarding change in the sales team was
to be done by the newly installed sales director. It makes sense that the new
department head should organize his team according to his or her preference but this
turned out to be a problem. The newly installed sales director coming from a big
international meat producer struggled to establish himself, had difficulties to be
accepted by the sales team and did not handle the pressure of restructuring and the
enormous pressure to bring new business to DeliFoods well. The whole sales team
restructuring from the organizational point-of-view was delayed and later on only
minor changes occurred.
Apart from the proposal for organizational change, one of the first measures installed
was aimed to monitor the work performance of the respective sales representatives.
The common measure here is the GPS tracking of company vehicles. This measure is
obviously not appreciated by employees but a secret test of one random sale
representative proved to the management of DeliFoods that it was necessary i.e. after
checking randomly the workday of the sale representative, it was discovered that from
the planned nine customer visits, the car was parked outside a spa resort! It goes
without saying that GPS tracking was installed on all vehicles and the sale
representative was replaced. Additionally, proper reporting and “plan of activities and
visits” was installed in order to monitor which clients were visited, the purpose of the
visit and the outcome. These are however measures that do not directly increase
turnover.
On the other hand, a measure identified as key to a turnover increase without
obtaining new customers, was to improve the point-of-sales (POS). Therefore an
action plan to increase the turnover at each POS was activated in order to increase the
turnover with current customers. There were four main areas to be covered and
improved:
Sales Director
West
Sales
Drivers
East
Sales
Drivers
East
Sales
Drivers
A+HQ
B
C
79
Location of the product in the store – negotiate with store management to
improve the location of the DeliFoods products
Coolers – DeliFoods coolers placed in customer premises were renovated
Incentives – the analysis of “segment behaviour” brought up the fact that store
managers were incentivized by competitors to promote their products. The
sales representatives were therefore given tools how to trigger action with this
respect
Number of visits – the reclassification of customers enabled the sales
representatives to identify key customers with the highest potential for
turnover increase and therefore to adjust their visit periodicity
Another increase of income was planned via negotiating higher prices. The detailed
work with clients and the deep involvement of the main shareholder revealed the fact
that despite the fact that retail prices of the products were very close to competitors,
the margin of the retailer was much higher on the DeliFoods products. This finding and
later on hard negotiations with the respective chains led to an average price increase
of 8%. Even though smart measures were initiated, the entrance of a strong
competitor to the market slowed down the turnover growth as the competitor, being
promoted by a strong established company with a well-known and popular brand in
the region, had opened doors to all of the current DeliFoods customers. This was a
major obstacle on the path to save DeliFoods because cost-cutting in itself could not
bring the company to black numbers. The illustration below shows the main actions
with explanations on a time-line.
Figure 18 Time-line of sales measurements
Area: SALESJuly Aug Sept Oct Nov Dec Jan Febr Mar Apr
Problem Action
No Director of Sales
Convincing shareholder to install a
Director of Sales instead of himself acting as one
No reporting &
monitoring
Proper reporting installed, GPS
monitoring
Sales teamIntroduction of new sales team structure,
price increase
Product portfolioPortfolio reduction, development of new
products, new packaging
Market potentialEntering Austrian market, exporting meat
to foreign markets, price increase
!
Director of
Sales search
implementationobservations
justification post-implementationevaluation &
proposal preparation
Explanatory:
reporting
Client
segmentation &
POS actions
GPS
tracking
Proposal
rejected
Poor performance, no turnover increase,
no will to replace by new person
New products
introduction
New
packaging
Low sellers
cancelled
!Attempt to
enter Austria
failed
!
Meat export
deal failed
!
Price increase
80
4.3.4 Status and summary of DeliFoods restructuring
With the failing negotiations regarding the meat partner, a minor increase of the
bakery‟s turnover, increasing competition in the core business of DeliFoods and
diminishing resources of the shareholder, the restructuring team proposed a different
solution to the shareholder i.e. to find a partner and to sell the company. The
restructuring team through its network contacted several potential buyers and one of
them is in the final round of negotiations about purchasing a major stake in the
company under conditions that are acceptable for the shareholder and which promise
a bright future for the company and its employees. The whole restructuring process
turned out to be very challenging due to hurdles along the way. The hurdles of
restructuring presented in the theory are ranked according to their relevance and
significance for this current project from 1-7 with 1 being most significant:
1. Resistance to change – the DeliFoods restructuring brought many changes from
working habits and increased workload to different ways of thinking. Along the
way, strong resistance from employees and even management caused severe
problems and delays, and resulted in the unsuccessful implementation of
measures
2. Poor communication – the need and benefits of the restructuring had not been
clearly communicated especially to lower levels of the organization. This in
return affected the effective working and performance of the employees that
were not properly informed about the difficulties DeliFoods was facing and
therefore their whole attitude towards the restructuring was rather resistant
3. Lack of involvement of employees – since the restructuring introduced many
changes and since the employees were used to their daily routines and that it
is a fact that people are generally resistant to change, it was a mistake that the
people were not fully involved in the formation of these changes from the start.
It was also a mistake to think that the restructuring team along with the help
of top management knows best. Sometimes the best solutions came from
regular employees that did not have a chance to present this idea before
4. Inadequate focus and commitment of top management towards restructuring –
some of the managers of DeliFoods were not fully cooperative and this is visible
in the results of the restructuring of the respective departments. It is
management that has to show full support for the restructuring in order to
motivate and take employees along the restructuring path
81
5. Resource availability – the company was in a disastrous financial condition and
it could operate only due to the continuous financial liquidity provided by the
shareholder. Therefore any expenses were limited to the minimum required to
run the company and there were no additional funds for marketing, machine
replacement and other expenses that could have helped to improve the
performance of both sales and production
6. Culture – the culture of a company, which is an important intermediary
determining whether the strategy will or will not be successfully implemented,
was not right. There was no feeling coming from management that they were
proud to work for DeliFoods. Poor company culture can be attributed to the
non-stop fluctuation of employees in every position and to the fact that the
originally “family operated” company turned into a regular corporation
7. Poor planning – planning was done properly according to what the restructuring
team anticipated to achieve. What happened however showed that the
assumption regarding the implementation rate planned was wrong
This ranking shows that the most common hurdles of restructuring were
accompanying the DeliFoods project as well. For a different case, the ranking might be
completely different but this specific project‟s success was lying on the shoulders of
the people involved in the process. Not only the restructuring team, but the
shareholder, management and all employees were responsible for making the
turnaround happen.
5. Conclusion
The purpose of the paper was to present what restructuring stands for, what the
reasons for corporations to decide to undertake the challenging process of
restructuring are, what strategies, processes and frameworks the theory offers and
how restructuring is executed in practice. The theory provides certain general
guidelines and frameworks on how to restructure a company but the hypothesis
whether there is one common step-by-step restructuring guideline does not hold. The
structure of a restructuring process in general can be applied to most restructuring
and turnaround cases but the theory provided only very general statements and
recommendations and was far from offering a detailed guideline.
There is a reason why the theory does not offer detailed restructuring guidelines and
the presentation of the case study and detailed explanation of the process of
82
restructuring of DeliFoods proved that even though there are similarities in the
process, each restructuring case is very different and requires an unique approach.
The restructuring of DeliFoods highlighted how important the attitude, dedication and
motivation of the management and employees of the company is in order to
successfully turnaround a company. Therefore, despite the fact that restructuring
seems to be very technical and experience-intensive, it is a people business. It is
about the ability of the restructuring team to justify and sell the improvements to
management and employees because these are the people that are affected by such
measurements. It is about the soft skills of the restructuring professionals, how they
interact and cooperate with the other party that in general is resistant to change. Even
the best prepared restructuring plan will fail if such a skill-set is missing.
Being part of the restructuring team in this project enabled me to evaluate the whole
process of turnaround. Is DeliFoods restructuring a success story? In overall
performance and given the current status of the company – no, the restructuring is
not a success. DeliFoods is still loss-making and the only option now before
bankruptcy, is the sale of the company as mentioned above. However, the
restructuring of DeliFoods can be broken down into two major parts – cost side and
turnover side. The measures such as improving the production processes, reduction of
employees, cheaper purchasing, improved and cheaper logistics, improved supplier
contracts i.e. all focusing on cost reductions implemented during the restructuring
changes, brought significant results on the cost side. But restructuring and turnaround
is not only about the cost side. The turnover side stagnated due to unforeseen
circumstances such as the entrance of new competitors, staff fluctuation, an
untouchable sales team and the overall strategy ownership by the owner of the
company, meant that the +20% turnover set as a goal for the restructuring was not
reached. What could have been done better? Looking at the theoretical restructuring
process and especially on step 7 – available resources, indicates that there could have
been actions taken that might have improved the restructuring results. The major
challenge was to handle the amount of work and the level of difficulty. The team was
understaffed i.e. restructuring such a troubled company and touching nearly all
departments and processes was simply too much to handle and monitor for one
foreign senior consultant and two juniors. The problem of adding more team members
was the cost of such experienced consultants. The company simply could not afford to
hire additional manpower. The question still remains whether adding one or two
experienced team members would make a significant difference. I believe that the
cost reduction potential was reached almost to the maximum possible at the time and
that the project success or failure relied on the turnover factor. This reveals an
83
additional issue that could have been managed differently. The sales team was almost
exclusively managed by the owner of the company and therefore the performance of
sales mostly depended on him and the efforts of the sales team. Unfortunately, there
was no lucky shot in sales despite the fact that although all of the open negotiations
with foreign customers were promising, none of them were actually executed. Even
though the cost side can be deemed as a success, the turnover side sunk all efforts.
And guess who is blamed for the failure?
Overall, the project was too challenging considering the pre-restructuring condition of
the company and maybe the best advice would have been to send DeliFoods to
bankruptcy 12 months ago. However, the project introduced me to the dynamic world
of restructuring where every day is different and which enables you to obtain
knowledge in all areas of a company‟s pure existence and shows you how everything
is or is not working. Restructuring can be perceived as a company‟s rebirth. I hope
that thesis has provided interesting information about restructuring and turnaround
and that the case study has showed how it is done in real life.
84
List of Abbreviations
BPM – Business Process Management
CEO – Chief Executive Officer
HR – Human Resources
PMO – Project Management Office
POS – Point of Sales
SBU – Strategic Business Unit
SME – Small and Medium Sized Company
SWOT – Strength Weaknesses Opportunities Threats
85
List of figures
FIGURE 1 TOP 5 COMPONENTS OF RESTRUCTURING IN EUROPE, 2005 11
FIGURE 2 RESPONSE TO CRISES BY CAUSE 13
FIGURE 3 LEWIN'S CHANGE MODEL 17
FIGURE 4 TIME BETWEEN RECOGNIZING A CRISIS AND STARTING RESTRUCTURING
BASED ON COMPANY SIZE, 2005 23
FIGURE 5 TIME BETWEEN RECOGNIZING A CRISIS AND STARTING RESTRUCTURING BY
SECTOR, 2005 24
FIGURE 7 RESTRUCTURING AND TURNAROUND PROCESS 50
FIGURE 8 DIAGNOSTIC PHASE 53
FIGURE 9 STRATEGIC PLANNING 55
FIGURE 10 DELIFOODS REVENUES: PLAN VS. REALITY 61
FIGURE 11 OVERALL GOAL OF RESTRUCTURING 63
FIGURE 12 PROJECTED ECONOMIC PERFORMANCE OF DELIFOODS 2010 64
FIGURE 13 TIME-LINE OF LOGISTICS MEASUREMENTS 72
FIGURE 14 ORGANIZATIONAL STRUCTURE OF BAKERY 73
FIGURE 15 TIME-LINE OF BAKERY MEASURES 75
FIGURE 16 ORGANIZATIONAL STRUCTURE OF SALES DEPARTMENT 77
FIGURE 17 PROPOSED ORGANIZATIONAL STRUCTURE OF THE SALES TEAM 78
FIGURE 18 TIME-LINE OF SALES MEASUREMENTS 79
86
List of tables
TABLE 1 SUMMARY OF THE RESTRUCTURING PROCESS – SUCCESS STORIES 70
TABLE 2 SUMMARY OF THE RESTRUCTURING PROCESS – CHALLENGING AREAS 73
TABLE 3 SUMMARY OF THE RESTRUCTURING PROCESS - PROBLEMATIC AREAS 76
87
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What is Business Restructuring,
http://www.universalteacherpublications.com/mba/free-project/p3/page4.htm
90
Appendices
91
Appendix 1 Self-Assessment Tool
Appendix 2 Self-Assessment Tool
92
Appendix 3 Self-Assessment Tool
Appendix 4 Self-Assessment Tool
Appendix 5 Diagnostic Table
Problems observed Consequences Solutions
Products
Price
……
93
Appendix 6 Contents of the Restructuring Plan
Appendix 7 Summary of the Restructuring Plan
Mission statement:
Restructuring Goal (medium and long-term):
Corporate Objectives (short and medium term): 1… 2… 3…
Corporate Strategy:
Marketing objectives: 1… 2… 3…
Production objectives: 1… 2… 3…
Organisation / HRM objectives: 1… 2… 3…
Finance objectives: 1… 2… 3…
Marketing strategy: 1.1… 1.2… 1.3… 2.1…
Production strategy: 1.1… 1.2… 1.3… 2.1…
Organisation / HRM strategy: 1.1… 1.2… 1.3…
Finance strategy: 1.1… 1.2… 1.3… 2.1…
Analysis of external, customer, and internal environments
SWOT analysis at the strategic level: analysis of internal
strengths and weaknesses, and external opportunities and
threats
Development of mission statement and corporate
objectives
Formulation of Corporate or Business Unit Strategy
Marketing
Objectives
Strategy
Implementation and
resources needed
Production
Objectives
Strategy
Implementation and
resources needed
Organisation / Human resources
Objectives
Strategy
Implementation and
resources needed
Financial management
Objectives
Strategy
Implementation and
resources needed
Financial Projections
94
2.2… 2.3… 3.1… 3.2…
2.2… 2.3… 3.1… 3.2…
2.1… 2.2… 2.3… 3.1… 3.2…
2.2… 2.3… 3.1… 3.2…
Resources needed: 1… 2… 3…
Resources needed: 1… 2… 3…
Resources needed: 1… 2… 3…
Resources needed: 1… 2… 3…
Appendix 8 Revenues Bakery
95
Appendix 9 Revenues Meat Production
Appendix 10 Revenues Baguettes & Sandwiches
96
Appendix 11 Expense Monitoring of DeliFoods 2010
Month 2010 I II III IV V VI VII VIII IX X Avarage
Ext. Logistics 21197 20057 23706 21550 22775 20209 16452 17621 13302 11898 18877
Gas 18171 15924 19708 19636 20518 21668 21766 21195 19964 18704 19725
Interest 298 482 474 427 5960 3180 2995 2975 2872 2691 2236
Salaries 26681 28970 26681 22870 24941 24821 33151 34020 33873 33100 28911
Maintenance 9865 8409 25360 7661 8277 11746 4404 9727 6320 3221 9499
Insurance + tax 2438 2438 4684 4162 4162 4237 3307 2614 3365 3337 3474
Overheads 3070 2280 6604 5831 2962 3370 1733 2701 2914 944 3241
Depreciation 8661 6457 21572 21570 21569 21242 21240 21240 21239 19660 18445
Fixes Costs 11397 9378 26730 26159 31691 28659 27542 26829 27477 25688 24155
Variable Costs 78984 75641 102060 77548 79474 81813 77506 85263 76373 67867 80253
SUM 90381 85018 128790 103707 111165 110473 105048 112092 103850 93555 104408
Revenues 363745 336352 419557 396388 426819 456613 497290 477910 481495 457700 431387
