Column: Business Revival

BUSINESS REVIVAL
The Hot-Seat Aspirant

A competent and effective CEO will not only bring the required focus to spot opportunities, but will also identify and adopt resource-led strategies.

By Pradip Chanda

Pradip Chanda, Turnaround Consultant

The list of problems nagging sick companies is long and spans the entire breadth of operations-interest arrears, shortage of raw materials, lack of spares, poor maintenance, low productivity, over-manning, low employee morale.

The new CEO will have to steer clear of these minefields. The problems will need to be solved, but his first priority is to find ways and means to generate revenue and that requires identification of productive activities. Once the company is on this track, the CEO will then have the time to tackle other problems.

In selecting the CEO, the board has to remember that in stable companies changes are incremental and require a competitive operating style. Sick companies face instability arising from sudden discontinuities and require innovative solutions from time to time. This is because in stable companies the magnitude of change is small, the relevance of traditional capabilities, high, and a CEO's ability to deal with problems is directly related to experience.

In contrast, an under-performing company often has to initiate dramatic changes.

Rarely do CEOs with successful track records in running entrepreneurial organisations agree to switch to a sick company. The board of a sick company should therefore extend their search to heads of strategic business units in well-run companies and lure one with an appropriate level of professional experience to come aboard.

Managers heading venture management groups or business development groups should be given preference, as they would have demonstrated entrepreneurial flair and innovativeness. That apart, they would have lived with budgetary discipline and limited support structures. They are also more likely to possess the kind of experience needed to handle the uncertainties of the marketplace-a necessary quality for every competent turnaround manager.

Such a person at the helm of the company will not only bring the required ability to spot opportunities, but will also be able to identify and adopt resource-led strategies. Experience, however, suggests that capital restructuring efforts are more successful when the company actually produces better operating results. Meanwhile, there is a real danger of cutting costs across the board without evaluating the potential damage to the long-term interest of the company.

A financial services company will be sorely tempted to hire a CEO with a finance background. This is understandable as creative and effective financial management often produces immediate results. An experienced finance pro can certainly make a big contribution-control costs in the short-term and initiate capital and loan covenant restructuring to reduce debt and free non-performing assets for sale to generate cash. Similarly, an 'engineering' company will be strongly inclined to place a manager with engineering or operational skills on the CEO's chair. For OEM suppliers or contract manufactures, this practice would appear appropriate. However, the board must remember that such a practice is not necessarily an established rule to be followed at all times.

As Theodore Levitt said: ''Without customers, no amount of engineering wizardry, clever financing, or operations expertise can keep the company going. To be the low-cost producer of vacuum tubes, to have the best salesmen of what's not wanted or wanted by the few whose ability to pay won't even pay for the overhead-these can't save you from extinction.'' Peter Drucker made the point even more forcefully when he wrote: ''Because, its (the corporation's) purpose is to create a customer, the business enterprise has two, and only two basic functions: marketing and innovation. Effective marketing and innovation produce results: all the rest are costs.''

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