Anyone interested in receiving a lesson in how to, or how not to turnaround a struggling business should pay close attention to Richard Goyder (the MD of Wesfarmers) as he embarks upon the turnaround of Coles.
I do not know many people who don't dream of buying a struggling business, turning it around and then selling it for a fortune. Those following the Coles saga will know that this is not a "private equity play", so its not about making a fast fortune. Its about creating value "to keep" long term (or so says Goyder). That is why this is going to be such an instructive case. A private equity buyer may have looked to create wealth through financial engineering. But Wesfarmers seem to want to create value by repairing the business.
Two possible factors lie at the heart of any business distress. Either poor strategy or poor operations (or a combination of both).
If your business strategy is wrong, then no matter how efficiently you execute it through your operations, you are in trouble. Similarly, the right strategy inefficiently executed will be a problem.
By "efficiency" I mean the cost effective use of assets (hard and soft) and the minimisation of unnecessary costs.
By "strategy" I mean the basis upon which the business chooses to compete: which markets it will compete in, what the value proposition (product offering) will be, and how it will deliver the value proposition to the chosen markets.
A business can be made more efficient by either cutting costs, cutting under performing assets, or a combination of both. But more often than not efficiency is not the problem, it is strategy.
If you are a plastic bottle manufacturer competing with Chinese imports, no amount of cost cutting or asset reduction is going to save you. A new strategy might (such as leading product innovation and outsourcing manufacturing). If you are a small printer competing against large printers, efficiency won't be a big help. A strategic niche offering to a targeted segment of the market might be.
And what about Coles? Listening to an interview this morning with Richard Goyder on the ABC (http://www.abc.net.au/rn/breakfast/stories/2007/1968360.htm) it sounds like the solutions Wesfarmers are going to pursue are going to be more about "strategy" and less about "efficiency". Coles operates in several different markets, and how "New Coles" goes about defining what it stands for, and how it will deliver value to its various markets will prove instructive. Small business owners and advisors should observe carefully and learn.
As I said at the top, it will be a live lesson in either how to, or how not to, but either way it will be very interesting to watch.
The Cash Flow Ninjas
