Growth transformation: back to long-term thinking – short-term problems must not overshadow long-term trends

by Dr. Stefan Gros and Matthias Müller, September 2021

A comprehensive consulting approach incl.
systematic checklist tool for the sustainability, robustness and future viability of your company in the context of growth transformation

Introduction
The prospect of an end to the pandemic cannot alleviate the recent sharp rise in uncertainty in the face of ever-increasing volatility and short-termism on the markets.
Even though SMEs, and in particular the many family businesses, have demonstrated a high degree of flexibility thanks to their adaptability and personal proximity to customers/suppliers, the equity and liquidity reserves of most companies have been significantly strained in some cases, although there are some companies that have emerged stronger from the crisis.
Nevertheless, the increasing uncertainty about the influence of exogenous factors provides the main argument for the behavior of many top managers: “We’re playing it safe!”.
Given the current situation, this is initially the most logical reaction.
However, management should always be aware of where it is steering the company and which different actions are also options in the long term in order to achieve the goal.
Despite the current economic situation, simply “driving by sight” is not enough and can quickly lead to a lack of direction, fear of the unknown, a lack of vision and falling behind the competition.

In our day-to-day work, we are increasingly faced with the challenge of volatile framework conditions, both in the short and long term.
The trick is to align the transformation of the company with long-term trends and not to ignore them, despite the usually urgent short-term solutions to problems.
Working with companies from a wide range of sectors helps us to anticipate developments across all industries and to align the measures to be taken in the short term as flexibly and with as much future potential as possible within the scope of the company’s capabilities.

Short-term distortions are currently being caused by fluctuating commodity prices and imbalances in international supply chains, among other things.
Long-term distortions can be seen in the shift of general market trends such as sustainability and digitalization into the future.
Companies that are barely able to service their liabilities from their own resources due to short-term problems, or can only do so with liquidity assistance (bridging aid, KFW, etc.), are inhibited in their ability to invest in the future.
Nevertheless, transforming the company and looking to the future is essential in order to survive not only in the short term, but also in the long term.
Clearly defined strategic directions and priorities ensure the targeted and effective use of limited human and financial resources.

The target picture: short and long-term alignment of strategy, operations and financing

A key success factor for a successful future is the short and long-term alignment of strategy, operations and financing, which also has a significant impact on the trust of employees, creditors and shareholders.
This is ultimately achieved through a scenario-based, objectified and consensual strategy that takes into account the iterative triad of market, value creation and financing perspectives.
A special focus should be placed on the targeted use of resources: they ensure innovation and growth and thus ultimately sustainability.

On this basis, possible courses of action, scenarios for the future and financial framework conditions can be derived, which serve as guidelines for all those involved.
Above all, the creation of different scenarios can form a target corridor in which the company is aware of the negative fluctuations of the various scenarios and has already thought through potential countermeasures.
This makes it possible to act at an early stage and not just have to react at short notice.
This makes it possible to take over market competitors or, for example, to proactively address imminent financing or a change in the business model without time pressure.

1) Checklist tool: The concrete procedure (Business Re-view)

The following section outlines potential steps of a business review that a new CFO plus (possibly as an interim manager) can carry out with the help of suitable advisory teams.
The experienced CFO plus is called upon in many different areas and is more of a transformation officer than a sparring partner for the CEO and a business partner for the operations.

a. Step 1: Potential analysis from three perspectives:
A viable starting point in terms of value creation and market as well as transparency of figures with regard to potential and risks

Detailed analyses of the past do not make it clear what a picture of the future might look like and how the company’s capabilities can best meet the requirements of the market and customers.
The authors therefore pursue a forward-looking approach in which the following key questions are answered with regard to sources of income, value creation and growth:

  • What can the factory do (technology, batch sizes, processes)?
  • What do the market and customers want (in the future)?
  • What do data structures and processes look like (end-to-end, unique)?
  • What actually earns money – and which processes “eat up” too many resources?

The following tools are used to answer the above questions:

  • Market and competition analysis including cross-industry experience, SWOT analyses
  • Recording the process and data landscape as well as process mining in the commercial and operational areas with the involvement of IT and operations specialists
  • Profit and loss source analysis (product income statement) with the aim of clearly focusing on the economically successful core business of the respective company and differentiating between good and bad sales (from a profit perspective) as well as the cost flexibility of the respective product/product group
  • Integrated corporate planning incl.
    Scenario calculation to derive financial requirements and estimate profitability and competitiveness
  • Short and long-term rolling liquidity planning in order to be able to react proactively and meet the new requirements of the StaRUG

Transformation is seen here in the sense of taking stock using the aforementioned analysis methods post covid and subsequently developing a CEO/CFO agenda.

b. Step 2: Future concept:
Create a sustainable, robust and realistic target image

In most cases, it is less about “eliminating errors” and more about redimensioning, the best possible scaling level as the basis for competitive advantages, short lead times, high responsiveness, the cash conversion cycle and a clear segmentation of business according to business models and their specific financing requirements.

To generate a resilient and realistic future concept (CFO/CEO agenda), the analyses and results of the first step help, for example, to eliminate sources of loss.
Sources of loss can be eliminated, the resource requirements of processes optimized and transparency created – end-to-end from the supplier to the customer, regardless of the legal entity structures.
The evaluation of various options and scenarios in an integrated plan forms a sound basis for decision-making for management and all stakeholders.

The target image is usually achieved in two stages – first a clean redimensioning or refinancing and the subsequent transformation: growth and strategic offensives based on a clearly defined business model.

c. Step 3: Implementing/tracking measures
Implementation should be focused on from the outset – not building “castles in the air”, but defining relevant and practicable solutions for the future.
To this end, it is essential to define the measures precisely and, above all, to quantify them.
This makes it possible to set up a suitable PMO and change management to ensure the successful implementation of measures. The precise tracking of the quantified measures creates additional transparency for all stakeholders and makes the effects visible in the company’s figures.

The implementation projects and measures developed as part of the business review are the transmission belt for the successful change and design of a company – whether at a strategic and organizational level or when changing functional tasks and processes at an operational level.
In the authors’ experience, it provides a very good basis for negotiations with new financiers who also want to get a picture on an ongoing basis.

  • The agenda will also include topics that last 2-3 years
  • Priorities are set

2) The recipe for success

The decisive factor in a business review and subsequent successful corporate transformation is that the defined measures are implemented at C-level.
A “wind of change” must blow through the company.
This can be achieved, for example, by a Chief Transformation Officer who supports the management in implementing the measures.
It is important that these issues are not imposed on the existing management “at the top”.
An action office should monitor the impact on the company’s earnings and financial situation.

In our many years of work with C-level responsibility and in the project business, the following combination of consultant and CTO/CFO has proven to be particularly promising:

A concept clearly derived from the analyses in cooperation between the consultant and CFOplus

+

Implementation by an experienced CTO / CFOplus, who is also involved in the conception phase, with the consultants accompanying the PMO.

Involving the CTO as early as the consultant’s conception phase and jointly drafting a realistic target image, as described above, increases the speed of implementation and the success rate of the company transformation enormously.

3) Conclusion

So what characterizes a successful transformation of a company in the field of dismantling and growth?
How is it possible that short-term hardship does not overshadow long-term trends?

In summary, it is important not to look too closely at the past.
A fact-based discussion of the initial situation, without taboos and with the involvement of various levels of the company, forms the basis for a promising and future-oriented analysis using the various tools.
In the next step, it is important to create a resilient and, above all, realistic target image based on the results.
A consistent approach to loss-making segments and inefficient processes creates confidence in the implementation and demonstrates a willingness to change.
This contributes positively to further motivation and willingness to implement among employees, creditors and shareholders.
The precise definition and quantification of measures are essential.
This enables precise tracking and makes the results of implementation visible.
The interaction between the consultant’s design and the implementation by the CTO/CFOplus, who is also involved in the design, proves to be extremely promising.

Even if the short-term problems and the possible lack of liquidity for future investments initially seem to overshadow the long-term trends, the various tools offer the opportunity to prepare properly for the challenges ahead.
The effort made today offers flexibility for action in an uncertain future.

Authors

Dr. Stefan Gros is Chief Financial Officer.
He has particular expertise in the areas of corporate finance, performance and value enhancement concepts, digital transformation and business model adaptation as well as business transformation.
Growth transformation in combination with M&A is another focus.

With more than 25 years of professional and management experience, Dr. Stefan Gros is one of the most experienced executives in Germany for companies with specific challenges.
His clients include successful and well-known companies.
He takes on tasks as an interim executive as well as long-term board and management mandates.

From 2009-2016, Dr. Gros was a member of the Advisory Board of Deutsche Bank AG, Central Region, and since 2010 he has been a lecturer for Business Valuation at the Catholic University of Eichstätt / Ingolstadt and a founding member of the Digital Finance and M&A Working Group of the German Schmalenbach Society for Business Administration.

Contact: sg@stefan-gros.de

Matthias Müller is a member of the management board of a medium-sized management consultancy.
Since studying economics (University of Constance) and finance and information management (Technical University of Munich), he has been involved in reorganization, restructuring, financing and insolvency projects.

His professional focus is on solving complex issues at the legal-business interface on the one hand and on the pragmatic modeling of complex issues on the other.
His industry focus is on trade, the automotive industry and mechanical and plant engineering.

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