In today’s highly disruptive world, there are plenty of companies that have gone from top of the food chain to becoming prey themselves, but not many that have clawed their way back.

Take Sears, for example. Though it was the Amazon of its day, with its popular catalogues and mail-order delivery system, over time it morphed into a big box store company and became overly complacent. Meanwhile, competitors such as Walmart and Amazon embraced the shift online. Like many companies, Sears reacted not by acknowledging the changing landscape, but by doubling down on an existing strategy. Instead of reducing its store count and building out and improving its online offerings, it spent more money on the “store-within-a-store” approach and merging with other broken companies, such as Kmart. It is an important lesson not only for companies in trouble but also for investors. For companies looking to right the ship, the following three steps are key.

The first step is a critical one because it acknowledges there is a serious problem that isn’t being dealt with. This can be a very difficult thing as it means undertaking some honest self-reflection. It also helps to distinguish between root causes and secondary issues, ensuring that improvements won’t just be temporary.

In 2012, Best Buy was struggling to grow both revenue and profits. The problem was that employee morale fell to new lows at the same time that their product and service offerings were unable to compete with lower-cost online competitors.  So the company decided to take radical steps and refocus itself via the rollout of its Renew Blue strategy, a well-defined five-stage plan to stabilize and then increase comparable same-store sales and operating margins. 

This included the introduction of a price-matching strategy; the conversion of stores into both warehouses and pickup locations, which greatly improved delivery times for online shoppers; an expansion of their product offerings within their store locations; and partnerships with electronics providers to exclusively showcase new technologies. Suddenly Best Buy became an innovative and exciting place to work and employee morale quickly recovered — as did its share price.

Capital partners need to be aligned with management and the plan about to be implemented. A restructuring gives the company the opportunity to replace those shareholders who are not willing to support the company’s refocus. In the case of Best Buy, a new CEO was hired along with other senior management changes, stores were shut down, unproductive regions were exited and internal costs were cut.

Putting a plan into action also requires the right people in the right places. Who gets brought in depends on whether the culture of the organization needs to be completely gutted or if a few tweaks will suffice. For example, in a situation of a complete reorganization, it may be better to change out entire teams under divisional leaders, especially if there is complacency and little buy-in with the new corporate direction among existing staff. To help with the process, change is better the sooner it happens and the more transparent it is. For investors, be sure to own those businesses who have their ears to the ground and who are willing to adapt to the new competitive environment.

• Martin Pelletier, CFA is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd

Source: Financial Post