Examples of businesses that faced their fair share of trouble are not hard to find. Netflix disrupted Blockbuster, digital photography disrupted Kodak, and the internet disrupted shops that sold CDs, DVDs and LP records. As the classics put it: this is a tale as old as time.
Over the past two years, we have seen how the Covid-19 Pandemic has changed the global business narrative and forced change whereby companies needed to embrace digitalisation. Companies who could not digitalise their businesses faced even greater disruption. But can every single business that enters into business rescue be saved? Michael Dorn explores this topic below.
Why businesses go under
Businesses that go under typically no longer have a viable business model nor the support of their stakeholders, be it its managers, staff, suppliers, financiers, industry, or regulators.
If you reach the point where there no longer is a reason for existence, and you are unable to convince any stakeholders that the business is still relevant, then a company should be liquidated. However, if it becomes evident that a company is starting to lose relevance or stakeholder support in the earlier phases of its growth cycle, it is often still possible to pivot and rescue the business before it is too late.
Companies typically have three phases: growth, stagnation, and decline. If a stagnant business stops investing in new products, adapting to market conditions or maintaining company energy, morale and financial discipline, it will go into decline, which may become irreversible. Business leaders who understand the basic principles of growth, stagnation and decline – depicted in the well-known S Curve of Change can learn to time their growth phases to go from strength to strength.
In essence, businesses go under because of bad management. Sometimes crises are brought on by unexpected external forces, but if sound fundamentals are in place, including solid financial, people and product management, it will almost always be possible to adapt and survive.
Companies weaken when their numbers start dropping and a culture of complacency and negativity sets in. Strong businesses have sound financials, a culture of goal-setting and winning, and leadership that is fact-based, strong, accountable and treats people well.
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Examples of troubled businesses
You can think of the example of the Yellow Pages. In the old days, this is where you found an electrician or plumber in your area, but then the internet came along. The Yellow Pages were founded in 1886 and its last UK print edition came out in 2019. Today it exists only on the internet as a service directory, although it can’t really compete with Google or Google Maps. Unless it carves a very strong niche for itself, that is in line with current and future digital trends, it will most likely not survive.
Another pertinent example of a company in trouble is sugar giant Tongaat Hulett, which was placed in voluntary business rescue by its board a few weeks ago after it could not pay its suppliers. The company sources its sugarcane from 12 000 small-scale growers across KwaZulu-Natal and Zululand and is a key player in the local sugar industry which creates a million local jobs. This means its demise could create catastrophic socio-economic hardship in a province that has already been hit by a succession of crises over the past few years. While some stakeholders might no longer believe in the business, many other stakeholders are supportive of its survival, which means it might still have a chance – especially if the government and lending institutions come to the party.
A current example of a company that nearly went under but may have a shot at survival is South African cinema chain Ster-Kinekor. The company has just come out of business rescue after it was able to clean up its profit and loss statement and balance sheet (e.g. renew its leases in the malls where it operates) – a key condition for support from its financiers. They’ve done the groundwork, and their business rescue practitioner did a great job, but now the real operational restructuring work starts. If they can drive the company to sustainable profitability in the next three to five years, it may have a chance to survive. The company may be out of business rescue but it’s not out of restructuring yet. Its future success all comes down to solid management now.
Companies who face challenges need to focus on creating value for stakeholders as well as their continued reason for being. If your key stakeholders believe your company needs to exist, it will be much easier to fight for its survival.
