Industrial Engineering

Correcting for the Future


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A Framework for making decisions can help turn around a faltering business

Liquidity shortfalls in banking systems around the world triggered substantial contractions in credit and international trade. For many companies, this translated to weak product demand and a cash crisis. During 2010, 29 of the 41 firms listed on Jamaica Stock Exchange reported profits declines or losses relative to the prior year.

Combining evidence from Jamaican manufacturing firms that recovered from profit decline helps develop a roadmap to answer two critical questions that arise in every turnaround situation: What are the fundamental areas of decision making for business turnaround? How should managers make the correct decisions to suit particular turnaround situation?

1. The Turnaround Process

Turnaround refers to decline and subsequent recovery in company performance. The business is likely to traverse a V-shaped turnaround cycle when cash is at hand to implement the correct set of decisions. A U- or W-shaped cycle occurs when the firm needs to overcome a cash crisis.

2. Recognizing Decline

Decline is a substantial absolute decrease in the resource base of the business over time. This adversity can lead to business failure and should not be confused with turbulence or stagnation.

3. Financial Restructuring

The business enters a state of financial distress or cash crisis when it cannot meet monetary obligations that are due. In this situation, management must defer or shrink the debt burden as a matter of urgency.

4. Changing Strategy

Turnaround strategy refers to the set of actions used to interact with the environment and deploy resources for profit recovery. When the source of decline is external, the troubled entity needs to change corporate or business strategy to align better with the environment.

5. Forward Thinking

Business turnaround take time and involves a set of fundamental decisions to mitigate the source of decline. Results from the four Jamaican companies help develop a decision pathway.

Management must promote organizational learning and seek to improve organizational culture while improving economic value. Business turnaround is, first and foremost, about people who bring commitment and energy to the effort for planning and executing the correct set of decisions.