By Ian Edwards
Objectively speaking, a business facing imminent collapse has two options: close shop or invest in a turnaround. How a company comes to insolvency – whether by bad management, overextended debt or changing markets – is less interesting than how it shifts gears and reemerges as a success. Everyone enjoys a good redemption story.
As one way to squeeze the vast, long-horizon idea of sustainability into modern, short-term-focused business language, we might look at our home planet as a candidate for a corporate turnaround.
In a corporate turnaround, ideas that might have seemed radical in normal business are suddenly reasonable. Strategies that reinvent the brand for a new market, speak to a new kind of business offering, or jettison old and debilitating priorities are designed to return a business to fundamentals and relevance. The goal is long-term survival versus the near-term pain suffered by investors, creditors, employees and customers.
Is Lee Iacocca’s late-‘70s rescue of Chrysler the greatest turnaround in U.S. history? Where, by comparison, do we rank IBM’s 1990s reinvention amid the onslaught of tech startups? Does Apple’s journey back from the brink to world domination eclipse them all?
The case for Earth, Inc.’s insolvency is in overshoot. The demand for Earth’s resources is greater than Earth’s ability to provide them over the long term. Put another way, Earth regenerates its reserves of natural capital – cash inflow – slower than humanity draws against it. Our consumption represents Earth, Inc.’s cash outflow. A company with negative cash flow cannot cover its bills indefinitely and will not remain liquid.
“August 19 is Earth Overshoot Day 2014, marking the date when humanity has exhausted nature’s budget for the year,” says the Global Footprint Network, a leading crusader against ecology insolvency, in its announcement last year. “For the rest of the year, we will maintain our ecological deficit by drawing down local resource stocks and accumulating carbon dioxide in the atmosphere. We will be operating in overshoot.”
As the late Stanley Goodman wrote in his 1982 executive handbook "How to Manage a Turnaround," a turnaround produces “a noticeable and durable improvement in performance, to turn around the trend of results from down to up, from not good enough to clearly better, from underachieving to acceptable, from losing to winning."
This might also suit as a definition of modern sustainability. An effective turnaround, in the case of Earth, Inc., might be to achieve a positive cash position with its natural resources replenished at faster rates than humanity can draw against them.
There is no lack of “corporate renewal” advice on the Internet. The Turnaround Management Association, as one source, is a Chicago-based nonprofit organization of more than 9,300 members in 49 chapters around the world. “Weak financial function,” it says, is one of the signs of corporate trouble.
“A company with excessive debt, stringent covenants, and inadequate equity capital is operating with little or no margin for error,” the association says. “Credit is overextended, inventories are accumulating, and fixed assets are underutilized. The introduction of better working capital policies and improved capacity utilization decisions are clearly warranted in such cases. Yet, incumbent management instead often engages in debilitating attempts to grow the company out of its problems.”
If we decide that Earth, Inc. is 1) in corporate distress and 2) beyond the help of small, incremental adjustments, there is a fairly clear turnaround blueprint to follow next.
“[Turnaround] means doing what has to be done – when it has to be done,” he writes on his website. “It also means not playing favorites. It means doing all of the essentials, and letting some other things go. Turnarounds are not big on formality, but big on real business discipline. Furthermore, in turnarounds, time is always of the essence.”
Instead of resource overshoot putting Earth, Inc.’s cash flow in the red, maybe the value-destruction threat comes from process inefficiency – like global warming – leading to breakdowns of critical operations.
To what degree, if at all, is Earth, Inc. in distress in this case? Are the required fixes big enough to warrant an aggressive, maybe radical, turnaround strategy?
“Today, there’s no greater threat to our planet than climate change,” President Barak Obama said in a weekly address released on video for Earth Day 2015. “Climate change can no longer be denied or ignored.”
In a very clear appeal for action, this executive of Earth, Inc. has identified climate change as the greatest threat to ongoing operations. Yet, there is no real call from senior stakeholders demanding radical, immediate turnaround strategies to protect value.
As one indicator, PwC’s annual survey of CEOs, released in January 2015 to coincide with the annual World Economic Forum, didn’t even include climate change among the critical threats to business – for lack of interest in the subject, according to one report. This mismatch of threat and response remains a frustration for Earth, Inc. and a continuing vulnerability that is hard to imagine being tolerated in other business contexts.
One of the Seven Big Ways to Fail is “stubbornly staying the course.”
“Redoubling your investment in your current strategy in response to market signals is a strategy in itself, and it can lead to disaster,” warns the Harvard Business Review article, sharing wisdom back in 2008. “Executives too often kid themselves into thinking that a problem isn’t so severe or delay any reaction until it is too late. Eastman Kodak stuck to its core in the face of a blatant danger: digital photography. “
As we know, Kodak filed for bankruptcy in 2012, emerged from it in 2013 with a narrowed focus on commercial imaging and graphics, and is now a shadow of its former self.
A turnaround requires action and sacrifice. According to one recap of history’s greatest corporate turnarounds, Iacocca made two decisions to save Chrysler:
Value-creating inputs are at risk. The United Nations has predicted a shortfall of 40 percent in drinking water by 2030. What begins to sound more reasonable? Drinking treated sewage water? Relocating populations from water stressed regions? Do we give up almonds, beef and walnuts – the three most water-intensive foods by weight?
Is a turnaround in order?
Image credit: Pixabay