Starbucks, in 2000, was one of the most recognisable brands in the world when Howard Schultz stepped down as CEO. Eight years later, Schultz returned to a company suffering from the GFC and its own poor financial decision-making. Schultz had a significant challenge to turn the company around with large numbers of stores unprofitable, customer decline, employee dissatisfaction and the financial crisis.
Schultz started the turnaround with a few crucial decisions. The first thing was to admit and own the mistakes they had made. Next, to re-establish the values within the company, Schultz took ten thousand employees for a leadership conference and to volunteer in New Orleans after Hurricane Katrina. He stopped the financial bleeding by closing one thousand underperforming stores, revising the business plan and taking many small risks.
In the previous article, we looked at using a phased approach in a crisis and the first two stages: Triage and ICU Plan. The Triage stage is the first step in dealing with an overwhelming crisis, a time to prioritise. The ICU phase is the time to stabilise and plan for the next stage. Let’s look at the next two phases.
Phase 3 – Rehabilitation
The road to recovery can sometimes be slow. Some factors that can impact on the speed of recovery are the customer behaviour, availability of products and how the business was affected by the crisis. Starbucks faced the challenges of customers moving to competitors such as McDonalds and local cafés and the business growing too fast.
Form a Crisis Recovery Team
Set up a team with a diversity of skills, thinking styles and capabilities. Diversity is critical. You don’t want a team of accountants who focus solely on cost-cutting. The businesses that thrive during a crisis take a balanced approach to cost-cutting and growth. If you are a small business without a team, set up an informal team of outside advisers to help you see any potential blind spots.
Build a Strong Balance Sheet
A strong balance sheet will help you survive, be able to react quickly and take opportunities. The first step to building a strong balance sheet is making sure you don’t run out of cash. We prefer to use scenario planning over a cash flow forecast. This allows us to change variables and stress test our cash flow.
The Next Step is to Keep Tight Control Over Debt
Successful businesses during a recession reduce debt during this phase. Know when debt is due or if your bank can call in your loan early. Debt is like a sugar rush. A big boost at first, but it will slow you down later.
Focus on Core Business
A business can be attracted to making sales during this phase. Not all sales are profitable. The strongest companies coming out of recession get out of non-core products and services and focus on their core business, just like focusing the sun’s rays on grass using a magnifying glass to create fire. By being focused, you will make more impact. Samsung used this strategy in 2009 when it focused on the Galaxy smartphone and divested itself of low-performing businesses.
Improve Operational Efficiency
Cutting costs is not the only way to reduce expenses. Rework is one of the silent killers in business. I have rarely seen rework measured in a business. If you have rework, review if you have the right process. If you have the right process, then review how the process is being followed.
Make Small Changes
Customer’s behaviours may be changing. They may change more than once. Don’t risk it all when implementing changes. Take small steps, and if they work, then scale up. Don’t plan on only hitting sixes. Starbucks made many small risks in the first 18 months, which added a billion dollars in extra revenue. Schultz tested ideas such as free Wi-Fi, oatmeal and monitors in a small number of stores before rolling them out across the whole company.
Phase 4 – Growth
The Growth phase is the return to normal stage – if such a thing exists! During this stage, you are seeking opportunities for profitable growth, strengthening your customer relationships and developing your team.
Growth takes cash. The faster you drive a car, the quicker you burn fuel. Business is the same. The faster you grow, the more cash you burn. Ensure your growth is controlled. Uncontrolled growth can lead to running out of money quickly. The company Pie Face is an example of focusing on growth without the necessary cash flow to sustain the growth.
Have a cash flow system. Cash flow is a process like any other process in your business. By having a system, you will build confidence and be prepared for a future crisis. Having a system is simple, following the system is not easy.
Making decisions in a crisis is not easy. We are not going to get everything right. That is ok if we use wisdom and remain strong and flexible. We can do this by taking small risks and scaling up the winners.
Our decisions need to be balanced. We can have too much of a good thing. Cutting costs without a focus on growth will leave us unprepared for future growth. However, focusing purely on growth will see you run out of cash very quickly.
We can feel overwhelmed during a time such as this. Take a deep breath. Focus on the ‘one thing’ you can do today. Ask yourself what is the one thing that I control that I can work on today?
About Scott Richards
Scott Richards has been helping businesses achieve their financial and cultural goals for over 20 years.
He is a partner at Beyond the Numbers, where he assists businesses with budgeting, forecasting and scenario planning including cash flow management.
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