Editor’s note: This is the final article of a four-part series on finance business partnering in joint ventures. Read the first three articles on setting up a JV, shutting down an unprofitable JV, and strategies for JV negotiations.
It’s a well-known fact that companies in the fast-moving consumer goods (FMCG) sector face intense competition, compressed margins, and consumers’ ever-changing preferences. Whether a local player or a big international brand, they have to differentiate their offerings through strong branding and product innovation. Companies that fail to do so suffer financially. How can a finance business partner in a loss-making company advise the management team?
In this article, I share a business partnering experience turning around an instant noodle manufacturer that was significantly behind its competitors in profitability, market share, and resources. I will talk about how I was involved in strategy formulation, drove the business strategy, and executed the business turnaround.
Scoping the turnaround: Get key internal stakeholders’ perspectives
CIMA training and past experiences as a finance business partner had led to three realisations:
Same issue, different viewpoints. Different business functional heads had their own version of why and how the business came to its loss-making circumstance. They also had different ideas about the turnaround strategy and the plan for its execution.
It is important to ask as many questions as possible and understand the issues from their point of view without jumping to quick conclusions. It’s also useful to look at the feedback of all these key stakeholders as a package to examine which strategic options would be feasible. Here, CIMA’s strategy mapping tool is useful to link the possible strategic options these key stakeholders shared to the execution plans they provided.
For example, many stakeholders suggested cutting the selling price of products to match competitors’ offerings and, at the same time, further reducing manufacturing costs and regaining lost market share. From experiences in closing down unprofitable operations, I knew that, in the short run, lowering the selling price with cost leadership worked.
However, companies in the FMCG industry as a whole cannot continue undercutting one another in the mid-to-long term. Margins would suffer, and the business would lose even more resources in the process. The business would risk having inadequate resources to invest for future success. In general, for the sake of business sustainability, it is not recommended to adopt this strategy in the mid-to-long term.
Explore strategic options under a “no-constraint rule”. Many finance business partners were not able to get the best ideas out of their key internal stakeholders because many gave strategic options vis-à-vis the resources the business had. Suggestions for turning around the operations become constrained by the resources these stakeholders thought they had or could deploy at their disposal.
It’s important to encourage key stakeholders to “free their mind” and consider the turnaround strategy as if there were no resource constraints. This encourages them to think beyond the company’s financial position at that moment.
For example, many stakeholders did consider investing heavily to open up newer and different sales channels and improving incentives schemes for sales staff. However, many were reluctant to share this idea because they thought the business unit head would not agree with that strategy since the company was in a loss-making position.
These strategic options were eventually part of the overall strategy that successfully turned around the business. So, encouraging a no-constraint rule discussion was important to get the best ideas out of each key stakeholder.
Value of informal meetings. Organisational silos and personal agendas within a business would normally prevent many key stakeholders from sharing strategic options openly. But this can be solved by speaking to key stakeholders on an individual basis in an informal setting.
For example, during formal meetings, many key stakeholders were asked to evaluate the strategy of lowering the price of our products to match competitors’ offering. But many did not comment much. So I decided to ask a few of the key stakeholders to informal one-on-one lunch meetings instead. They were arranged from the angle that I was seeking their advice, and I got more feedback from these stakeholders in a one-on-one informal setting compared to the formal meetings. This information helped me plan better on the next steps.
Scoping the turnaround: Understand external forces
External forces analysis is well articulated in many textbooks and business journals and usually includes political backdrop analysis, environmental analysis, situation analysis, technology analysis, and competitors’ key differentiating factors. However, finance business partners should also look at two other key factors when examining external forces.
Understand customers’ problems. In business turnarounds, it is critical to have a deep understanding of the problems customers face and to develop targeted solutions to help ease the problems or pain points.
For instance, our instant noodles’ key value proposition is to provide consumers with a quick and convenient meal anywhere, anytime, and at an affordable price. Some customers would even substitute a proper lunch or dinner with instant noodles for the sake of convenience. If the instant noodles were not available when consumers wanted them, they would more likely switch to another brand.
Understanding this, we worked on positioning ourselves as a reliable brand in the minds of consumers. The goal was to satisfy customers’ need for a quick and convenient meal by ensuring that our distribution channels were adequately stocked with our products. This also builds brand loyalty.
Study competitors’ differentiated strategy. It’s common practice that companies study their competitors’ business models, including the revenue stream, major costs, and key activities that make them successful. These aside, it’s important to study the differentiated strategies that made competitors successful and how your strategy can be different.
Finance business partners should learn the differentiated strategies of competitors and think beyond what competitors are doing. In a business turnaround, a differentiated strategy needs to be designed to capitalise on a company’s own unique competitive strengths and innovative ideas.
Strategies adopted to turn around losses
After identifying the scope of the turnaround, we agreed on the following strategies and key activities:
Adopting a product innovation business model. Previously, the business model adopted a “copycat” strategy that duplicated successful product offerings from competitors and used lower prices to attract customers. Marketing resources were used to promote the brand and attract customers. However, to turn around the business, this had to change.
After analysing all business segments in the FMCG industry in this particular country, and the pain points faced by customers in each segment, I mapped them against our factory’s capabilities. From discussions of the findings, we identified an underserved market segment — the snack food segment for students.
This segment was fragmented and served by many local players with limited resources to promote their brand. In addition, the pricing for these products was comparatively lower due to the students’ lower spending power. So many big players weren’t focusing on this segment.
To adopt this strategy, the business would have to invest in new machinery and open distribution channels that could reach students. The payback period for investing in machinery to produce snack noodles was less than two years, which we considered a favourable internal rate of return. Investment into distribution channels would also be small, as we could tap into our existing sales channels and expand them.
So I recommended that the business unit change its business model to an innovation business model, like how Apple launched the iPod and iPhone amidst a very crowded and fiercely contested market landscape.
Setting up a product development department. This department was set up next to examine how the business unit could manufacture snack products targeted at students and to address these consumers’ pain points. The pain point in this case was the inconvenience of getting snack foods during recess, after lunch, and after school.
The value proposition was to provide students an affordable, convenient, and tasty snack before main meals. The snack product had to be manufactured at a highly cost-competitive price, as students’ ability and willingness to pay were low. Setting up this department helped us focus on producing a product that could meet this market segment’s need.
For example, most snacks in the market had flavouring already incorporated into the snack. We came up with a plain snack and included two to three choices of flavouring in the packaging. This gave customers the option to customise the flavour of their snack. Each packet also came with a character card of the latest action hero popular with teenagers. No competitors were doing that at the time.
Engaging in critical success activities. Snack foods are elastic products that consumers can forgo. That means product branding and accessibility are critical to success. The business unit already had a well-established brand, and it was a matter of extending the brand from instant noodles to snack foods.
As a finance business partner, I participated in strategy formulation and evaluation with the business unit head and other members of senior management. It was crucial to listen to them and influence them towards adopting strategic initiatives that would help the company in its turnaround. Once the value-creation business model was adopted, my key role was in providing value-measurement initiatives and closely monitoring strategy effectiveness and outcomes.
From the strategic objectives, key performance indicators were set up to measure the sales of this new product across different schools. I also suggested a revamp of staff incentives for the marketing and sales team to include sales and margins instead of the previous incentive that was based wholly on revenue.
Value-leakage initiatives were also put in place to ensure prompt collection of our debt from distribution partners, proper approvals before goods were sold, and tight monitoring. If the strategy was not executed according to plan, I highlighted that to management with recommendations.
To sum up, there were two key factors in this successful turnaround:
- Change of business model. The product innovation business model discovered the student snack market. That market segment was less crowded, and with the right product and the right price, we saw the snack food selling fast in the targeted schools. As a result, we saw an increase in market share from less than 1% to almost 20% once we were 18 months into the turnaround. Profit from the snack products also helped make up losses incurred from the instant noodle products. There were also more resources for the business unit to invest further and to punch ahead of competitors.
- Seamless execution of strategic activities. My training with CIMA and past finance business partnering experiences helped me focus on the value-creation process, which led to the adoption of a different business model. The value-measurement process helped me highlight the execution of the business strategy. Lastly, the value-leakage initiatives helped steer the business towards its objectives. Together, they helped turn around the loss-making operation.
— C.F. Wong, ACMA, CGMA, is a member of the North Asia regional advisory board for the Chartered Institute of Management Accountants and head of finance for a company with manufacturing and sales operations in China. He has more than 20 years of experience in finance, including strategic finance business partnering, operational improvement, mergers and acquisitions, automation, and strategic planning and execution. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.