Saving RadioShack

When the business landscape changes, how can you turnaround a failing company?

Turnaround

(Source: Flickr)

RADIOSHACK, an American consumer electronics giant of yesteryear, faced chaotic trading on Wednesday as analysts predicted the company would report it’s 10th straight quarter of losses.

RadioShack has hired a law firm to provide restructuring advice in an attempt to avert bankruptcy. Assuming this leads to successful refinancing, what should the strategy be to turnaround and save this iconic company?

When faced with a broad turnaround question, it is important to ask a variety of questions to determine the source of the problem.

Why is the company failing?

What have been the prevailing trends in the industry?

Are competitors facing the same problems?

Looking at the stock price of RadioShack over the past fifty years, it is apparent that the dotcom boom represented the height of success for the company.

RadioShack had developed a reputation as the ultimate shopping destination for budding innovators and engineers. Unfortunately, the company has struggled to modernize, doing little to transform itself into a destination for mobile buyers.

By comparison, rivals Amazon and Wal-Mart have continuously adapted and maintain a significant competitive advantage in pricing these products due to scale.

In a competitive landscape fraught with declining sales of consumer electronics and falling margins, RadioShack has fallen into a precarious situation.

What strategy can be implemented to save the company?

Marc Consentino in his book Case In Point suggests the following possible actions for a company turnaround.

Possible Actions

I believe the most applicable actions for Radio Shack involve a thorough examination of current product offerings as well as a transition in company culture.

RadioShack will be forced to close a significant proportion of its brick and mortar stores as part of any restructuring plan. This should present the company with the opportunity to reinvent product offerings and create a new culture.

RadioShack needs to return to its roots as a place of innovation by offering specialty and niche products that are unavailable through the company’s major rivals. Shifting the product focus must also be accompanied by a shift in employee training, encouraging hiring practices that target inventive individuals that can appropriately engage with the new desired consumer base.

Rather than attempt to compete with pre-existing rivals, RadioShack needs to carve out a new niche in the consumer electronics market that celebrates the pioneers and the mavericks.

What strategy would you recommend for RadioShack?

Let us know your thoughts in the forum! (The person with the best response in the next 48 hours will win a copy of Marc Consentino’s Case In Point or another book from the Bookshelf.)

Growth Strategies

Growth strategy begins with identifying the source of the problem – you will want to look at customers, products, the company and its competitors

Growth Strategy

(Source: Culturamix)

THE frequently used term business growth simply describes the process of improving some measure of an enterprise’s success, ranging from promotion, product development, new market entry or improving employee productivity.

How can we more closely define the objectives a company desires when it speaks of growth?

Addressing this type of case question is achievable, provided you can identify the root of the problem.

Below we look at a specific case scenario.

Our client is the Museum of Fine Arts in Boston. They want to develop a growth strategy for the next five years. What would you advise them to look at, and what are your recommendations for growth?

Before we can begin discussing growth strategy, the direction of the case must be determined by asking vital questions regarding the current state of the museum.

  1. Competitors: How are other museums across the city performing? How are we growing relative to the industry?
  2. Customers: Who are our patrons? For example, they might be senior citizens and middle aged women. How is the mix changing over time, and what do they say about us?
  3. Product: Does our revenue come primarily from ticket sales or other sources? What distinguishes our offering from our competitors in regards to pricing, marketing, and curatorial development?
  4. Company: What is our cost structure? Do we have the financial backing to support higher growth?

Let’s assume Bostonians have decided to reduce spending on museums in favor of other leisure activities such as baseball games and musical performances. The stagnant growth our client is experiencing is caused by a decline in the industry overall.

My recommendation would be to increase revenue by attracting new audiences to the museum by investing in popular exhibitions supported by a major marketing campaign. Engaging local teenagers and university students through social media promotions would increase awareness of new museum programming. By appealing to a wider and younger audience, our client could attract visitors who previously were uninterested in the museum’s offerings, leading to more sustainable ticket sales over the next five years.

What recommendations would you provide the Museum of Fine Arts? Share your thoughts in the forum. The person who provides the best response in the next 48 hours will win a copy of Marc Consentino’s Case In Point (or another book from the Bookshelf).

The scenario above is adapted from Case In Point, a case interview preparation book written by Marc P. Consentino. Case scenario used in the book looked at the New York City Opera. Many firms use a version of this case.

For a more in-depth look at growth strategy, check out this case study by McKinsey that outlines the Three Horizons of Growth framework to develop a growth strategy for a major retailer.

Mergers & Acquisitions: Valuation

“Price is what you pay. Value is what you get.” ~ Warren Buffett

LAST post, I highlighted the importance of strategy when considering the viability of a potential acquisition; however, before a final decision can be made, a consultant needs to estimate the value of the target company.

Building on information provided in Management Consulting: A Guide to the Profession, I highlight three approaches that a consultant can use when performing a valuation:

  1. Balance sheet valuation;
  2. Market based valuation; and
  3. Valuation of discounted expected future cash flows.

Target Valuation v4

Each valuation method will result in a different estimate, and the method you select will depend on the situation.

If you are working for the target company, then the obvious goal is to choose the method that yields the highest possible valuation for the company.

However, if you are working for the acquiring company, then the valuation method you select depends on the objective for the merger. If the goal is diversification, then calculating the present value of future cash flows would be appropriate (DCF valuation). If on the other hand the company is being acquired for its resources and capabilities, then valuation should be based on either the market value or replacement value of assets. The replacement value is simply an estimate of how much it would cost to build similar resources and capabilities from scratch.

In addition to valuing the target company, you also need to estimate the value of potential synergies.  Revenue synergies and cost synergies are the revenue streams and cost savings that would be available to a combined entity but not to the target or acquiring company acting by itself.

During a case interview, it is important to thoroughly explain your reasons for using a particular valuation method as well as describe the appropriate process for implementation.

Mergers & Acquisitions: Strategy

MERGERS have had a ubiquitous presence in the news recently as leaders in the airline, publishing, and telecommunications industries have taken steps to consolidate. Just this week, two of the largest advertising entities, Omnicom and Publicis, announced a $35.1 billion merger. In recent months, tech giants Google and Yahoo have acquired dozens of companies, most notably Waze and Tumblr respectively.

Despite the frequency of these deals, a large number of market studies have indicated that “50% to 70% of mergers and acquisitions fail to create incremental shareholder value”. As a result, consulting firms have an opportunity to provide valuable expertise at each step in the M&A process with the goal of preventing these failures.

One of the most vital components of a successful acquisition is the financial valuation: determining the value of the target and ensuring that your client avoids paying too much. However, determining whether the acquisition would be a good strategic fit is the first step.

Clarifying why your client wishes to undertake the acquisition is a good place to begin, both in a case interview and in a real-life consulting engagement. Potential rationale’s for pursuing an M&A deal include:

  1. Performance Improvement: restoring performance of the target company through revenue growth and cost cutting,
  2. Growth Potential: picking winning early stage companies and helping them develop,
  3. Market Access: increasing market access for the products of the acquirer or the target,
  4. Market Power: removing excess capacity from the industry,
  5. Capability Acquisition: acquiring new production capabilities, skills or technologies more quickly or at lower cost than would otherwise be possible,
  6. Synergies: achieving revenue synergies or cost synergies not available to the target or acquirer if acting alone,
  7. Business Transformation: using the merger as a catalyst to change the combined entity into an entirely new company, for example, with new strategic focus, organisational structure, key processes, etc. According to McKinsey, transformational mergers are rare “because the circumstances have to be just right, and the management team needs to execute the strategy well.”
  8. Bargain Price: buying the target at a price below the target’s fundamental value. The ‘bargain price’ rationale is also rare since the acquirer typically has to pay target shareholders a takeover premium in addition to the target’s current market price.

Regardless of the reasons concocted by management to justify action, the vast majority of acquisitions should never take place. Due to the high failure rate and inherent problems arising from the attempt to consolidate distinctly different organisational cultures, the most valuable advice a consultant can give might be to persuade senior management not to become seduced by the allure of a potential acquisition. In the long-term, managerial decisions should support the creation of shareholder value.

Next week I will introduce the various methods consultants use when conducting a financial valuation.

Merger and Acquisition Strategies adapted from Management Consulting: A Guide to the Profession, edited by Milan Kubr and published through the International Labour Office.

Competitive Response

CanadaCo, the largest discount retailer in Canada, currently holds the dominant market share in the industry. USCo, the largest discount retailer in the United States, has decided to expand into Canada by purchasing CanadaCo’s competition. How should the CEO of CanadaCo respond?

WHEN considering a case that requires a competitive response, first take a look at the action which forced the company to respond.

In the example above, we should test the hypothesis that USCo has a cost advantage due to economies of scale. This advantage would allow USCo to provide lower prices to Canadian consumers compared with CanadaCo. As a result, USCo’s entry into the Canadian market would probably cause our client to lose market share.

Without a full understanding of the facts, a response could be determined prematurely, neglecting vital characteristics of the case. What other factors would you ask about?

If I were presented with the case above, I would ask questions specifically pertaining to the differences between the Canadian market and the US market in order to determine the magnitude of USCo’s advantage.

Once the situation has been fully fleshed out, the next step would be to recommend a course of action. CandaCo could opt to do nothing, or respond in one or more of the following ways:

  1. Change its pricing strategy,
  2. Hire top executives away from USCo,
  3. Acquire or merge with a competing company,
  4. Rouse customer loyalty through rewards programs and customer service,
  5. Mimic USCo’s new product offering,
  6. Market CanadaCo’s products and build brand awareness.

Competitive Response

Let’s assume USCo is relatively unknown in Canada and will incur costs resulting from challenges in establishing a Canadian distribution network, but not enough to cause costs to rise to CanadaCo’s level.

The solution I would propose is that CanadaCo should focus on reputation. Unfortunately, attempting a price war with USCo would appear to be futile, and so I believe the best response would be to attempt to retain existing customers by developing CanadaCo’s customer loyalty program and by focusing on customer service.

How would you respond?

Strategy and framework adapted from Case In Point, a case interview preparation book written by Marc P. Cosentino. Case scenario is a derivation from a practice case provided by The Boston Consulting Group.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Entering a New Market

Your client is a low-cost airline headquartered in Philadelphia with frequent service to cities along the East Coast of the United States. The CEO is interested in expanding service into a small town in the Midwest; let’s call it Greenville. What is your recommendation?

THE first step in approaching a question such as this one is simply to summarise the information provided. Considering the brevity of the question above, this process may seem unnecessary; however, by repeating the question in your own words you will be able to differentiate between relevant and irrelevant information. Furthermore, this engages you in a conversation with the interviewer as opposed to enduring an uncomfortable silence.

Once the important information has been identified, it is valuable to verify the client’s objectives. Consultants often begin their working relationship with a client by asking about objectives and determining the feasibility of those goals. In this scenario, it is vital to understand why the client wants to expand service to this area. Is it strictly profit related? Or is there a desire for diversification?

Grasping the objective will enable you to ask the right questions. This part of the interview allows you to understand the case, provide a suitable recommendation, and demonstrate your thought process when dealing with new information. What is the size of the market? What is the current growth rate? Who are the potential customers in Greenville? Who is the competition? This is also a good time to explore details about the product and pricing.

Finally, you determine whether to advise the client to enter the market and, if so, what is the best way to do so?

By organising your thoughts in a simple diagram such as the one below, you can ensure that you are providing a truly comprehensive answer.

Entering a New Market - Diagram 4

Strategy and framework adapted from Case in Point, a case interview preparation book written by Marc P. Cosentino.

Mastering the Case Interview

Demonstrating that you have the business acumen required for the job

AFTER impressing interviewers with tales of leadership ability and applicable work experience, the hard part commences: demonstrating that you have the business acumen required for the job.

Cases allow consulting firms to see how applicants would react in front of a client when faced with difficult situations, as well as provide insight into an individual’s thought process. While certain skills can be taught, an ability to rationalize logically, act objectively, and think creatively can often only come naturally. Consulting firms seek to discover whether you possess those necessary skills.

Over the next few weeks, I will explore the various methods used to approach these interviews as well as introduce cases used by top consulting firms.

I encourage you to collaborate together in the comment section to discover new solutions or present a different angle than the one I have chosen.

To start with, please take a look at the video below which presents an introduction to the case interview from Ernst & Young Advisory.

A Perfect Storm: Growth in Public Sector Consulting

Cash strapped governments seek counsel in these tempestuous times

THE United States government has utilised management consultants for the past fifty years, beginning when McKinsey organised the National Aeronautics and Space Administration (NASA) in 1958. The number of consultants hired for public sector projects has been steadily increasing ever since, spiking to new heights over the past few years in response to the tumultuous state of public sector finances. Top management consulting firms including Bain & Company and Boston Consulting Group have been marketing themselves to state and municipal governments as the solution to stringent austerity requirements. When approaching government clients in the United States, BCG strives to create a “lean” model: strategies focusing on contracting out nonessential government services and curtailing union power to increase flexibility.

The trend towards the prevalence of management consulting in the public sector most recently has been seen in the city of Detroit, Michigan. The emergency financial manager, hired by the state as a final attempt to avoid bankruptcy, has agreed to spend over $14 million this year on a range of financial and legal professional services. A city wrought by a failing auto-industry has been steadily losing its affluent tax base for decades, culminating now in a massive budget deficit and rapidly maturing long-term liabilities. A complete restructuring is needed to remedy the problems resulting from years of corruption and inefficiency. The three-consulting firm team assembled by Kevin Orr, the bankruptcy lawyer appointed as the city’s emergency financial manager, looks set to gain significant business from Detroit’s public sector restructuring.

Management consulting firms have worked successfully with municipal governments across the United States, particularly in the public education sector. BCG collaborated with the city of Philadelphia to completely revitalise their struggling public school system and develop private charter schools. Consultants in Colorado have captured a significant percentage of federal funds flowing into the state for education management, approximately 36% or $10 billion.

The ability of management consulting firms to successfully serve both private and public sector clients has led the industry to continued success, and further growth looks set to occur. Government organisations continue to seek out management consulting firms with the knowledge and skills necessary to work through the bureaucratic complexity of government organisations. At the same time, firms are seizing the opportunity to have a significant positive impact on the lives of millions of fellow citizens.