Sample Case Study
This is a true case history and the dialogue is close to verbatim.
As Mentor/Adviser to the MD, what thoughts are in your head at this point and what would you want to do next with the CEO?
Case Study 2
The client is 39 years of age and was appointed MD of a £10m turnover business 16 months ago. When he joined it was losing £500k pa. He was previously Sales and Marketing Director in a competitor and had 10 years in the sector. The sector was in decline because of new alternative products produced completely differently so they cannot compete with them. (For confidentiality reasons the products cannot be mentioned. Here is a parallel. Their product has simply gone out of fashion compared with new alternative options. So whilst many people still use their products, the market will progressively decline. The gulf between their product and manufacturing and competitors is the equivalent of a manufacturer of audio tapes finding sales are dropping because people are getting records via the internet. It is impossible for them to adapt that completely.)
Since the MD has joined the business, he has fought valiantly and stabilised sales at the same level. However, they have had to discount prices dramatically because of competitors doing the same. The result is that a loss has grown from £500k to £1m in the year.
There was an alarming drop in business on 11 September with sales continuing to fall every month to now £8m pa. They have been waiting ever since for it to come back, but it continues to decline. All their competitors were in the same situation as far as he could ascertain (reliable sources). He has spoken to his Australian parent company, who says that he need not worry because they are playing the long game and the market will recover.
He had asked the high level Interim/turnaround executive to help assess the options and then to lead any changes that they agreed. He concluded his initial briefing with the words ‘But I’m inclined not to make any changes right now because HQ will be OK if I play the long game, sit out the present crisis situation and don’t rock the boat with the staff.’
The Interim’s views at the time were that he was likeable and very customer orientated MD. He was well-liked by his team, was intelligent and personable but showed a lot of unease and insecurity. Many of his comments were tentative and unsure.
Here are extracts of an all day conversation that exclude much detail but briefly indicate key areas discussed.
INTERIM “I think you are very tactically aware on what is happening in your marketplace and you have taken a lot of time to analyse areas where you could take action. In your own best interests, I sense you know yourself you must take those steps very rapidly to turn your business into profit”.
You probably know you need to manage a declining business, not a growing one. If annual sales went down to £6m from £10m within six months, what would your overheads have to be to make a profit of say £600k? If you were to set up to achieve that level of overhead now and the decline went to that level, you would be glad you had done so, wouldn’t you? And if on the other hand turnover only went down to £7m, then you would have made a bigger profit, wouldn’t you?
I think that if you went on the job market at the moment, the fact that your sector was in decline would not be taken as an excuse by companies when you had to disclose the loss had doubled in a year. In your own interests, you must stop that immediately and you do not have much time left.
How could you operate the company at a profit of £600k if it was turning over £6m this time next year? “
MD. I think that’s rather too bold for me considering I don’t really have to be too radical and I would be scared to announce to everyone that I was planning to accept a permanent fall in sales to £6m from £10m 18 months ago. I had thought I could maybe look at some of the other areas to make smaller incremental changes if essential’
INTERIM. What are the other alternatives? .
MD “I had thought of cutting the sales force or closing the Spanish sales office and sell from UK. However, the Spanish will not buy unless it is from a Spanish office, so I can’t do that.”
INTERIM. ‘What are the sales figures there and what are the costs?
MD;. “Spanish Sales are around £750k pa with £500k pa costs.”
INTERIM: “Is that direct costs or does it include all other charges.”
MD “It does not include HQ costs and cost of materials.”
INTERIM “So overall what has £750k sales cost you?”
MD: “£850k actually I suppose”
INTERIM: “If you were to close down your Spanish sales office, how much would that cut overheads?
MD About £250k- £300k pa. but the Spanish are very nationalistic and will only deal with Spaniards, so, its all or nothing. If I close it down I will lose £750k pa. Sales which would be dreadful on top of all the other UK losses in sales’
INTERIM “How many UK salesmen have you got and how much do they cost each?”
MD I don’t know precisely .Their basic is £50k pa, and we have 35.“
INTERIM “Who are the best UK salesmen and how do they compare with the worst?”
MD “I don’t have that information. We are getting systems but we don’t have it at the moment.”
INTERIM “What do you sense is the position then? How do they compare with the Spanish team for example?”
MD “Many of them are probably about the same as the Spanish team and perhaps four or five are doing really well.”
INTERIM “How many calls do they make a week”.
MD “I don’t know that because of our system’s weakness.” “They could do more calls if we took them off some of the warehousing jobs they do but they have always done that so they keep in touch with their own orders and service their customers.”
INTERIM. So you say you could lay off some of the sales staff? How many do you need right now?
MD. Well I probably need about 10 but it would destroy the company if I were to lay off 25 sales staff most of whom have been with the company for over decade. It’s a really happy place with everyone so friendly that it would be impossible for me to fire them. I think Id lose all credibility in their eyes if I did that. ‘
INTERIM “At the moment you seem to be saying that you are selling products at a straight loss. They actually cost in manufacturing and delivery more than you are selling them for?”
MD “Yes, I guess that is correct.”
INTERIM “Apart from cutting your costs, what else can you do to stop that situation?”
MD “I could put prices up – but” (hurriedly) “sales would just dive because the competitors would just undercut us, so my hands are tied”
MD We pay £150k pa rent on our UK HQ. I can get better premises for £52k pa. and can get out of the lease. But the Group CEO negotiated the lease on the UK premises and it would make him look a fool if I told the board we are overpaying so much’ So I don’t think I can do anything there.
MD. The Production Director refuses to cut production even though sales are 40% down. So we’ve got a massive inventory which I cant get him to accept needs to be cut. I could move production to the HQ in Europe actually which would save about £350k pa but he wont hear of it and says it would destroy staff morale. Even so he’s very aggressive with the staff and has told them that the product lines are rubbish. He has been with the company for 7 years and earns £75k pa. I could replace him with another director at £50k but I don’t want to appear to be a hirer/firer so soon after I was appointed as MD some months ago and with staff morale so low.’
What are your thoughts right now about this situation? You have no power to make any changes. Take the view for the purpose of the excercise You are merely a personal adviser /mentor to the MD