Management consultants Gary Goldstick and George Schreiber specialize in rescuing companies on the brink of disaster, and they insist they've seen just about every flasco under the sun. Goldstick and Schnreiber are likely to show up when problems have peaked, with management under seige from creditors, emotional employees, and worried customers. Their job: to spot the fundamental problems and figure out a quick, practical solution.
After years of this kind of corporate troubleshooting, Goldstick and Schreiber have concluded that there are 13 common reasons why companies need to be rescued. Like a recurrent nightmare, the same scenes reappeared wherever they went. And all too often, management ignored the warning signs until it was too late for simple solutions.
In fact, says Goldstick, the vast majority of the problems he and Schreiber have to solve could have been avoided if their clients had done a better job of listening and communicating -- with other managers, with employees, with customers, with investors and bankers. That's why the first task the two partners undertake is to reopen channels of communication across the board. In the process, they say, they often feel "like priests in a confessional."
"When managers start talking about the company's problems," says Goldstick, "everything else seems to tumble out -- personal problems, internal conflicts, expectations that have never been met. When top management gets an opportunity to talk to someone not directly involved in day-to-day operations, they sometimes come up with the answers themselves," he adds.
Good communication, Goldstick and Schreiber insist, is they key to both curing and preventing a crisis. This fact is underscored by their list of ways companies get into trouble.
Of their 13 prime troublemakers, 6 involve external problems, 4 internal, and 3 financial. But in all three categories, the majority of problems could be avoided if senior management listened harder.
"A lot of problems are caused by not being sensitive to the marketplace and taking precautionary measures," says Goldstick. "Better planning is another critical factor. It's the only way to avoid some problems before they crop up." And good planning, of course, must be based on good input, a clear-eyed perception of what's going on where.
Here are the Goldstick-Schreiber terrible 13 -- the recurring reasons companies find themselves in trouble:
1. Changes in the marketplace. If management is out of touch, change can come with breathtaking speed, leaving a company on the defensive and in financial trouble when it's forced to catch up. American automakers learned this principle the hard way when consumers began to switch to smaller, more fuel-efficient foreign cars after the Arab oil embargo.
The solution? Goldstick and Schreiber suggest management planning that consciously looks ahead and is sensitive to the volatility of the marketplace. Don't be afraid to rely on independent advisers who are not directly involved in the day-to-day operations of your company. Says Schreiber: "An outside observer could provide a more detached view that will serve as a safeguard against getting caught in a marketing shift."
2. Changes in technology. Not keeping current with changes in technology, Goldstick and Schreiber point out, can often cause trouble for a company by making its products suddenly obsolete or less competitive. Even if the new technology offers no real advantage, they add, technological changes can be dangerous, because consumers often base their purchase on perceived, not real, value. While your product may stand up to your competition, a new technological twist could persuade buyers that the newer item is better.
Again, better planning and more sensitivity to change is essential. "More important, though, is adequate financing for a research and development effort to explore and develop better technology," says Goldstick.
3. Increased cost of debt. Learning to live with chronic inflation has become a problem for consumers and businesses alike. One of the most difficult aspects of this late-20th-century phenomenon is the erratic, usually accelerating prime lending rate. For small businesses, trouble can come quickly when cost of debt increases are built into their capital structure. For example, today many mortgages involve variable rates tied to the cost of living or the prime, and routine working capital loans, tied to a floating prime rate, can change borrowing costs dramatically from quarter to quarter.
To deal with uncertainties in the cost of debt, Goldstick and Schreiber have several suggestions. "Keep your eye on the money market," says Schreiber. That's important -- and not too difficult since financial news has become frontpage stuff. Seek long-term financing during period of peak interest rates. Plan for equity infusion to replace debt when your company's debt-to-net-worth ratio becomes out of balance. Finally, attempt to remain flexible in your inventory levels and labor structure so you can strategically "shrink" your business if necessary.
4. The Peter Principle syndrome. This famous theory (which says that people are promoted to their level of incompetency), as applied by Goldstick and Schreiber, suggests that businesses also can succeed to a point where they grow beyond the skills or expertise of their management. Recently, for example, the cansultants were called on for help when an air freight company with annual revenues of $40 million began posting a series of losses after several years of rapid growth and high profitability. Goldstick and Schreiber finally reported to the president -- who was also the firm's founder -- that his insistence on being a part of every decision was hurting the company's performance. He had two choices: delegate or reduce company size. "He chose to reduce the size of the firm so be could retain total control. He enjoyed working like that," Schreiber remembers.
Schreiber admits this problem can be "very difficult to deal with in an owner operated, wholly owned business." He advises senior management not to confuse hard work and enthusiasm with managerial skills, however. Understandably, homemade remedies are of little help in such cases, objective outside evaluations are needed. Goldstick recommends bringing in behavioral consultants periodically to audit all company managers, seeing whether their performance keeps pace with expanding job requirements and the desired organizational climate of the firm.
5. Development of a location disadvantage. Sometimes, says Goldstick, as a result of changes in a local economy, an element of the production cost (raw materials, transportation, or labor) suddenly becomes more critical and, consequently, creates an economic disadvantage for a compan.
A good example, says Goldstrick, was the rising cost of unionized labor in the northern states, which forced companies either to absorb these costs to remain competitive, or else relocate to the South where labor costs are lower.
Schreiber offers this advice: "Diversify, plan ahead to finance plant locations, and don't be afraid to shut down one operation to concentrate investment in another more cost-effective location."
6. Management short of guts. When management sees but is unwilling or unable to effect the streamlining that has become necessary for the survival of the company, there can be a slow, ongoing decline just from carrying too much weight. Example: Certain expenses become what Schreiber terms "institutionalized," and certain employees become sacred cows -- to the detriment of the company.
Schreiber recommends a periodic review of all personnel and expenses, using the techniques of zero-base budgeting. This means going back to square one and fully justifying every dollar spent, every staff position on the payroll. He believes this is another case where an audit by independent consultants can be particularly effective. Among other things, "it will put everyone on notice that you mean business."
7. Company becomes hostage to others. Goldstick says he has seen a surprising number of companies lose control of their own affairs and become "hostage to groups or individuals who place presure on the business, both legal and illegal, in order to pursue their own selfish ends." A typical example, he says, is the banker who puts payment of his loans shead of the purchase of goods or services the firm needs to survive.
Safeguards? Be continuously aware of how anyone with whom you are dealing could adversely affect your business. If, for business reasons, you have to tolerate this kind of risky relationship, be sure you prepare alternative plans for action if what Goldstick calls "negative leverage" is applied.
8. Limited financial resources for the market. For various reasons, companies don't always have the ready cash to remain competitive. As a result, they get in trouble because their competitors do have the resources to invest in engineering, manufacturing, tooling, and marketing.
Schreiber's recommendation: "Be realistic. If you can't afford to market the product, consider selling it or the entire company and use the added cash to exploit another product line or service."
9. Precipitous changes in distribution system. Trouble may arise from rapid changes in the economic demands, market prices, or legal constraints that affect a product, the consultants say. For example, arbitrary increases in world oil prices have dramatically increase the cost to produce such oil hyproducts as plastics and fertilizers. Goldstick says: "Diversification of product lines and markets is the best protection against such changes."
10. Internal conflicts. Bad blood among board members or senior managers can threaten a firm's stability if allowed to go unchecked. A typical example, reports Goldstick, is the chief executive who pursues a conservative growth program to conserve assets and develop a strong balance sheet. But then some board members become unhappy over the poor performance of their stock. They challenge him as well as his supportive board members over this policy, demanding a whole new direction for the company. Regardless of who is right or wrong, the conflict dissipates company vigor. What is needed, says Goldstick, is preventive communication at an early stage. The chief executive must be his firm's primary salesman, not only before the outside world but also to those he asks to accept his leadership. And this selling job never ends; the "buyer" can never be taken for granted. If matters reach an impasse, he's bound to lose control. Says Schreiber: "At the risk of sounding like I believe consultants are the cure for every ill, this case is a classic example of when it's best to call in an independent third party. He can audit, review, and recommend objective decisions."
11. Business grows beyond sources of working capital. Since it involves success, this may sound like a dream problem, but it can be devastating, says Schreiber, and it happens all too often. When a thinly capitalized company over-markets a high-demand product and can't borrow or attract investment capital sufficient to manufacture and deliver on schedule, goodwill evaportates and the entire organization is put in jeopardy.
"Planned growth is absolutely essential for any business," states Schreiber. If it's too late and management already finds itself in such a predicament, he would recommend they consider raising prices strategically to curtail demand. The resulting drop in unit volume will be balanced by the fact that sales will be at a higher profit margin.
12. Inadequate control systems. There are several ways this kind of problem can occur. A company, for example, plans and designs a product, organizes a manufacturing facility, staffs it with competent personnel, but doesn't install adequate quality control procedures.
The result? Poor quality merchandise -- and financial trouble for the company. Likewise, failure to modernize on a timely basis can result in control problems.
Schreiber recommends: "In a small business, the proprietor must protect himself by controlling invoice numbers, check numbers, receiving documents, et cetera."
The same holds true for the larger company, only it will involve more people. Accounting and other control personnel should be dedicated and assigned to separate functions to produce a coordinated control system.
13. Depending on a single customer. Many companies start out this way, but they'd better not remain so indefinitely. It's an example of putting all your eggs in one basket, and it's most risky. If a major buyer who represents 40% or 50% of your business suddenly goes elsewhere or changes into a competitor, your company can be destroyed, warns Schreiber.
"Expanding into new product lines or developing a range of customers," he says, "is the only real protection against such a problem."