Turnaround Consulting

Thursday, June 23, 2005

GM and Employee Discount Pricing

So General Motors (GM:NYSE) has decided to cut prices dramatically in order to reduce inventories. In my previous article, I advised increasing margins, but unfortunately, their action will reduce gross margins further. Of course, getting rid of excess inventory and turning it into cash is always high on the turnaround specialist's agenda. Reducing gross profit margins is generally negative unless you can increase inventory turns dramatically.

From a marketing perspective, the "employee discount pricing" is a great technique. Employee pricing is considered to be the best pricing available by many, and it is easy to understand. Since they are not publishing the resultant pricing, it is hard to compare it to other promotions, but it has been pretty effective at increasing revenues and reducing inventories thus far.

On the negative side, decreasing prices to increase sales leaves everyone thinking that the cars are pretty much worth the "employee price", and the price they normally have to pay is a premium. Perhaps other promotions could have been tried to decrease inventory without such a high reduction in prices and gross profit margin. A multi-million dollar lottery/sweepstakes comes to mind, as well as other scenarios such as free additional gifts. The advantage of these techniques is that they are seen as additions, and the prices of the cars are maintained in the consumer's mind.

In the mid-term, GM has to increase its gross profit margins unless it finds a way to increase inventory turns dramatically. In order to give a clearer picture of the interaction of these ratios, lets use an ice cream example. Think of gross profit margin as the size of your spoon, a larger gross profit margin equals a larger spoon. Now think of the inventory turns as the number of scoops per hour. The bigger the spoon and the more often you scoop, the more ice cream you scoop into your bowl. The higher your gross profit margin (the larger your spoon), and the more inventory turns (the number of scoops per hour) the more profit that flows down to cover operating expenses, with the surplus being profit. The smaller the spoon, and the less scoops you take per hour, the small amount of ice cream that flows down to cover operating expenses. It is easy to think that you just want to always increase both your gross profit margin and your inventory turns, but some businesses such as grocery chains, and warehouse stores such as COSTCO, work by maintaining a small gross profit margin (small spoon), but a very high inventory turn rate (scoops per hour). Because they turn their inventory very rapidly they yield high gross profit dollars to cover operating costs and produce a profit.

Hopefully this short-term discount sales strategy will work well for GM, but in the mid-term, it will need to focus on higher margins due to more desirable products. I don't believe that lower pricing alone can increase the inventory turns enough to counter act the lower gross profit margin. Obviously, if you reduce the gross profit margin in half, you will need to double your inventory turns in order to maintain the same gross profit dollars. Of course, this type of increased activity generally yields much higher operating expenses which will mean reduced profit or losses.

Tuesday, June 07, 2005

GM - Discounting to Maintain Sales Volume

I'm sorry - but what the hell is going on at General Motors (GM:NYSE)? They are heavily discounting prices to increase sales. When the only thing you can rely on to increase sales is a large reduction of prices, your business is truly in big trouble.

There is no skill in dropping prices to reduce sales. For example, I have no expertise in the large petroleum sales industry. I do not have any contacts, don't know the players or the competition, don't understand the product line, and the truth be told, I am not the greatest salesman in the world either. But, without any talent, I could walk into that industry tomorrow, with a dramatic reduction in prices, and capture a huge portion of the sales. Of course, the company I worked for would probably go broke, but it literally takes no skill to drop prices to increase sales volume.

Based on my previous article, we have already determined that GM has some of the lowest gross profit margins in the industry. Decreasing prices will further reduce those already weak numbers.

GM has also announced a reduction of work force, which is standard, when a company is losing money. Although 20% of their workforce is a huge number, this probably still leaves them with excess capacity. Just decreasing costs will not make a business profitable. Since your profits can never be larger than your sales, just decreasing headcount and other related costs will allow you to go down hill more smoothly, but down you will still go.

GM's bonds are in junk status, it is time to set forth a bold new future, a thousand points of light, don't ask what your company can do for you… etc.. They need to make major announcements and they need to do so soon. They need to raise prices and raise margins. They need to trim weak products and introduce bold new ones. They need to introduce cars that use less fuel, they need to be a leader, not a follower.

Sounds like they need a turnaround artist, and they better hire him soon. They are literally asleep at the wheel and do not realize how quickly they can completely fail. This is the same type of problem that occurs in companies large and small. Management underestimates their problems and reacts too slowly with measures too small to make a large enough course correction. How many failed businesses could have been saved if their owners/executives reacted swiftly and boldly?

Wake up GM, or you may find yourself slumbering forever….

If you or your business find yourself in similar circumstances, make some bold moves and large course corrections while you still have the opportunity. If you find yourself lowering prices in order to maintain sales volume, then your slide down the tubes may be happening faster than you think.

Wednesday, June 01, 2005

Let's continue to analyze General Motors (GM:NYSE) today. I did some common sized income statements for GM, Ford, Chrysler and Toyota. The first thing I took notice of is the Gross Profit Margin (standard ratio analysis would have given us this number also). For a manufacturing company, Gross Profit is calculated by taking Sales and deducting costs for all those items that produced the product that made up those sales. This includes all materials, direct manufacturing labor, material acquisitions costs, rent for production and raw materials space, all employees who provide direct support to manufacturing, overhead on all the above labor (Social Security matching, retirement and pension funds, worker's compensation insurance), and others as accountants deem appropriate. Gross Profit generally does not include marketing, advertising, general company management, interest expense, etc.. Take this Gross Profit and then divide it by Total Revenues for the period (all items on our Common Sized Income Statements are a ratio to Total Revenues), to arrive at your Gross Profit Margin. So for the last four periods, let's compare our auto companies selected

GM 17.2%
Ford 20.9%
Chrysler 19.4%
Toyota 19.8%

You don't have to be a genius to know that you don't want to be bottom of this pack. We probably need to do some additional analysis to figure out if our manufacturing costs are higher than our competitors, or we have to we done too much price-cutting, rebating and discounting in order to sell our cars. The former is a manufacturing problem, the latter a design and marketing problem.

One of the things turnaround folks do early is make snap decisions and get people working and mobilized. Make a snap decision of one financial number, for a company the size of General Motors, and work towards it? Yes. It couldn't hurt to increase our margins by cutting costs and raising prices. Each 1% increase in Gross Margins equals a massive increase in profitability as long as we did not have to expend too much operating income to get it. Currently our Income From Continuing Operations Ratio (no need to account for discountinued operations) is 1.7%. If we increase our Gross Profit Margin, our Income ratio would be 2.7%, a massive improvement. If our stock price is a ratio to earnings, then increasing our earnings by 50%, could increase our stock price by 50% as well.

A company that is dying a slow death like GM, takes the will of most of its employees with it. I think we need to sound the company alarm and committ to bringing up the average Gross Margin to over 19%. We are able to achive that for a couple of quarters already, but then heavy discounting causes us to drop to the 17.2% we achived during the previous four quarters. This sounding of the alarm should mobilize both our cost-cutting teams, as well as our marketing teams. We need to achieve our increased margins over the next 3 months, and look to sustain them for at least four quarters in a row. Can we achieve these types of goals just by setting them? As a CEO of a large company, that is about all you can do. Set goals, sell your staff on why they are important to achieve, make sure you have buy-in from your key executives, communicate your goals and the benefit of their achievement to all your employees and relevant business partners, set a time frame, and setup a monitoring system that keeps you and all other stakeholders aware of your progress, and continues to sell them on the goal. If done properly, this is enough to get the gears in motion and focus people on solutions, rather than just the problems that face them..

As you can see this turnaround business is a numbers game as well as a game of psychology and leadership. The numbers hint at what might be wrong, or where the opportunities might be. Psychology and leadership get the problems corrected and get the forces mobilized to take advantage of the opportunities presented.

Wednesday, May 25, 2005

Our First Day at General Motors (NYSE:GM)

I normally focus on small company turnarounds. These are companies with sales between $5 million and $50 million. So, I am going to put myself on the line, and comment on one of the biggest public turnarounds in recent history. General Motors (NYSE:GM) is in big trouble. It has had what we in the turnaround business would consider a "trigger event". A trigger event is when something happens and the client finally decides they need a turnaround artist.

In GM's case, this was a downgrading of GM's bonds to "BB" which now makes them "junk bonds". Pretty clear term if you ask me. Of course, GM is a large company with lots of contacts and analysts, so they knew that this "trigger event" was coming. This allowed them to act "somewhat" in advance and hire a new CEO, Rick Wagoner, to turn them around.

Based on the "BB" bond rating, by definition, Standard and Poor's is estimating that in the next four years, GM has about a 10% chance of failing and defaulting on its bonds. They are also saying there is a negative outlook, and that GM bonds may downgraded again in the future. Of course, that is exactly what you would expect of a company that has a 10% chance of default. It will either get better and their rating will be upgraded, or they will get worse and face downgrade after downgrade as they flush themselves down the toilet.

So, let's put ourselves in the shoes of Rick Wagoner and see what we would do first to turnaround this company. We have arrived on our first day, everyone in the financial community and the media is watching us, and our bonds are going to be downgraded very soon.

First thing we need to do is make sure that all financial information is available to us. We will ask our financial team for the following laundry list of statements:

1) Income Statement, Balance Sheet, and Cash Flow Statements for the Last 20 Quarters - pretty obvious why we need to see where we stand, and how we got there.

2) Financial Ratios for the Last 20 Quarters Including Graphs of Trend Lines - Financial ratios are more than just numbers on a page. Their effect on a business is very real. When we analyze them, we are looking for their absolute values as well as their trends. Leverage ratios are great for us when our business is on the rise, but equally disastrous when our business is in decline.

3) Financial Ratios for the Last 20 Quarters Including Graphs of Trend Lines for Our Competitors - Who knows what the proper and best value for these ratios to have? Try looking at our profitable and unprofitable competitors for clues. If we see ratios that are working for our competitors, we might be wise to see if we can put ourselves in position to achieve similar ratios. If you are a small business, you might have to research more carefully to find companies that operate similar to yours, but it can be done.

4) Common-Sized Financial Statements - These common sized statements are the regular financial statements viewed as percentages instead of dollar figures. Generally they are either a percentage of sales, or a percentage of assets. I should have a crack financial team here at GM, so I will ask for common sized statements in both formats.

5) Common Sized Financial Statements for Our Competitors - These common sized statements allow for different companies to be compared side to side, which is exactly what we will need to do. If you are a small business, developing common sized statements for your competitors is again difficult, but very worthwhile.

6) 80/20 Analysis of Major Products, Product Lines, and Divisions - This is much harder to generate and takes more time. Many times when businesses are failing, this is the information that they don't have and never thought to look at. Of course we would all expect a large company like GM to have done this analysis over and over, but I for one would not be shocked if they hadn't. We all know the 80/20 rule and it applies in business very well. What are the top 20% of products that make us 80% of the money? Top divisions? Top performing plants? This will be very helpful as we restructure the company.

7) All Internal Reports, Spreadsheets and Analysis - In a company the size of GM, this is probably ridiculous, but lets ask for them anyway. When we look at these statements we ask - Why did someone at our company take the trouble to track and identify these metrics in the first place? Since I have a team beneath me, they will categorize this data into junk and valuable, and then again to the categories of analysis they represent. If we run into a question in our larger analysis, perhaps we can drill down into these statements for more detail.

Friday, May 06, 2005

Customer Disconnects

Customer disconnects are exactly what they sound like. It is your company doing something that gives the opportunity for your customer to disconnect from the buying process. Everytime a customer communicates with your company via any method, or for any reason, they are judging your company and deciding if they should do business with you or disconnect from the process. How much money is your company spending on advertising and marketing, just to have processes and communications that cause your customers to disconnect from the buying process?

I had to update my credit card expiration date on overture.com (now Yahoo) the other day. There was no place to update the expiration date, that I could find, so I tried to enter the new credit card as a new payment source. I received an error message and was told to call a toll-free number. No offers of another online chance, just call this number.

I don't know about you, but when I am working on the internet, I do not want to have to use the telphone to complete the process or vice versa.

What happened when I dialed the toll-free number? I was treated to phone tree. It was up to me to listen to all of the selections then decide how my problem fit into one of those categories and cross my fingers. Eventually, I got a message that asked for me to enter my account number. Not my login, which I know off the top of my head, but my account number, which of course was not showing on the screen I was viewing that told me to call them on the phone. I did not want to hit the "back" button, since I know this posts to the credit card screen, so I had to go offline and look-up the account number and then enter it into the telephone.

Eventually, I am transferred to a human. Guess what their first question is. "What is your account number please?" "Hey, I just entered my account number". "Sorry, I can't see that on my screen, I need it again."

Hey, you want my credit card information that will be good for the next three years. Why make it so difficult? Why give me so many chances to disconnect from the process? Of course I will still continue to do business with them, but I am on my guard since I don't want to have to call that help-desk again. These types of problems tend to add up over time, and since I don't max out the possible search engine dollars, I can always do without either overture.com or google.com (but not both).

MY PRESCRIPTION TO FIX THE PROBLEM :
1) Let me fix my online problems online. I don't like switching mediums.
2) Toll-free numbers are cheap. Do your customers a favor and link specific toll-free numbers to the correct department directly, and don't put me through the phone tree.
3) If you are going to need my account number, then put it on the screen with the phone number you want me to dial so it is handy. There was no security reason not to, since the account number appears on many of the other pages.
4) If you are going to ask me to enter my account number into your phone system, then make sure you deliver it to everyone I talk to. I should NEVER have to enter it again.
5) Figure out how your company looks from the point of view of your customer. a) where have we put them? b) where do they want to go? c) how can we make it easy?

Answer this question. Is there anything more important than collecting money from your customer? There is not one system in your company that should be easier and have less chance of customer disconnects. Customer disconnects can happen in many ways, but make absolutely sure it NEVER happens during the payment process.

Welcome Message

I will be posting articles that are specific to business turnarounds as well as just plain old good advice on business practices. It amazes me how often, businesses drop the ball on the abc's - the basics. Forget about the next great wave of management techniques, if you cannot do simple things like have your employees treat your customers with politeness and respect ; or budget the next 13 weeks of cash flows with reasonable accuracy. Lets work through the basics together, in order to build a business that produces profits and is a joy to manage an run.