Teng “Patient Model” (Teng, 2002) is completely different from the Scanlon Plan. The use of the phased process is now common among turnaround management as remarked by Bartlett (Ghoshal & Bartlett, 1996, 23).
When compared to The Scanlon Plan however, it can be seen that more planning and preparation has occurred, rather than a crisis approach. To be fair to Scanlon, modern practitioners were not in the middle of a great depression at the time, and had the benefit of previous research.
As such, Teng’s approach is a phased turnaround methodology that treats the firm like a sick patient and proposes three different phases to his corporate renewal model:
1. Surgery
2. Resuscitation
3. Nursing
The Surgery Phase
In phase one of Teng’s model, the central aim (like most turnaround management processes) is to restructure the troubled company, improve cash flow and remove the denial by explaining the harsh reality of its present predicament. This approach similar to Nueno (Pedro Nueno, 1992, 7-182), Hays (Hays III, 2003, 1-3) and Bibeault’s (Bibeault, 1998) methodologies.
Teng breaks down the surgical phase in to four separate but simultaneous processes. They are:
· Communication
· Concentration
· Cost Control
· Cash Flow
The Communications Process
In the communications process, the turnaround manager first forms a turnaround management team to project manage the firm’s rehabilitation. Normally during this time some or all-senior managers may get replaced. A “standard” turnaround management stance similar to that by Bibeault (Bibeault, 1998), Colino (Colino, 1986, 52) and the ACTP methodology.
This is done to ensure objectivity, honesty and clarity for the future turnaround. As Teng observes
“It is simply too much to ask or expect incumbent management to be objective in evaluating its past performance when they are the same people who by mismanagement, allowed the firm’s financial health to deteriorate in the first place”.
The communications process has a “no nonsense” management style, which needs to be autocratic (Khandwalla, 1983, 5). Teng observes that the role of a benevolent dictator is the most appropriate. The turnaround manager must be “hard on performance, and soft on people”. The building of credibility is vital and Teng states that cutting all perks at the corporate level first, must be one of the first priorities, in order to show employees that the new management is walking its talk. He comments:
“…You will lose credibility if you continue to fly business class when you have decided that the managers must downgrade to economy class or continue to wine and dine in top class restaurants when your people are fired to save costs. Once you do not practice what you preach, people can see you are inconsistent. The loss of your personal credibility is detrimental to all your subsequent turnaround endeavours”.
The Concentration Process
The second part of the four-part process is Concentration. The focus in this process is on developing core competencies, eliminating marginally profitable projects, challenging past business assumptions and adopting zero-based budgeting approaches.
In the core competence area, Teng advises to divest unprofitable or non-related businesses. Teng intentionally highlights elimination of marginally unprofitable business and projects as separate parts. These businesses / projects are normally “difficult to spot or hard to drop” because they reside just between, either zero profit or marginally successful, and show promise.
In some cases, Teng recommends raising the price of the product or service as this can sometimes have either, no impact on sales volume or reduce sales volume but increase profitability by an equal economic amount.
Teng also illustrates that budget constraints are considerably worse in turnarounds and so budgeting in his model is done differently.
Using zero-based budgeting, each section or manager must justify their proposed activities as if they were in start up mode. This allows all costs (especially hidden ones) to be identified. The zero-budget does not include what is in existence now, and its central aim is to identify how much money the particular business unit, section or department is spending.
Sutton extends this argument by recommending turnaround managers sign a few checks in the finance department each day
“Since every signature shortens your companies life, you’ll discover some pretty silly things that never show up on the income statement. You’ll find yourself acting on them” (Sutton, 2002).
The Cost Control Process
Teng indicates that the CEO must lead from the front on cost control, querying any spending that does not add value. Sometimes this has to be done ruthlessly, in order to guarantee the companies survival. For the most part, it comes in three separate areas:
· Cutting the operating budget
· Downsizing the workforce and finally
· Reducing fixed and variable overheads.
Once the new operating budget is in place, the turnaround manager can have significant problems getting staff to adhere to it. This may be due to a lack of transparency, a lack of commitment or the possibility that the new budget is perhaps unrealistic.
In any case, Teng recommends getting firm commitment from the managers to their sales and profitability numbers in the budget, telling them that once they do commit, they are staking their career’s and credibility on the line.
It could be interpreted that this akin, to the Screening Committee in the Scanlon Plan. As both involve oversight and demand transparency and accountability in order to ensure not only proper budgetary planning, but also the survival of the business itself. In cases of public companies and government enterprises, which have increased pressure on corporate governance transparency and accountability, this is especially important.
The second part of cost cutting is downsizing the workforce. Here Teng advocates first motivating the workforce similar to the Scanlon Plan, rather than beginning with layoffs, as low morale and productivity result in a more difficult recovery. Further he argues that if not handled correctly, it will result in good calibre staff leaving first. This is especially prominent in city-states and smaller countries like Singapore and New Zealand, where
“News of the impending R word – whether rumour or reality, spreads like wildfire and the companies good calibre staff (those that the CEO wishes to retain during the retrenchment exercise) will probably be the first to leave the company. …The problem is further compounded by the troubled company’s inability to attract good calibre staff to replace those who left, since its reputation in the market has been tarnished”.
Nevertheless the popularity of downsizing is still the dominant method for cost cutting for the primary reasons that it:
· Cuts short-term costs immediately,
· Is a more predictable way to achieve cost efficiencies and
· The costs of downsizing can be covered under restructuring charges.
If cutbacks are necessary, Teng recommends removing unproductive senior executives, middle managers, dysfunctional staff and head office staff first; And lower paid workers and unions last, citing that the last groups have a greater interest in the company succeeding than management does. It could be argued at this point, the Scanlon’s work itself reinforces this argument.
Teng warns that downsizing has other dangers too. It can cripple product development, marketing and customer services, as evidenced in the restructuring of Kodak. As Floyd (Floyd & Wooldridge, 1997, 465) explains:
“Rather than achieving performance improvements, innovation and creativity declined and the company fell behind in the crucial race for new products.”
Finally, Teng observes there has been a strong growth in both workplace violence and hostility, as workers become more educated and aware of management’s intransigence to solve business problems that they perceive are putting their jobs at risk. This combined with record pay packages and golden handshakes to “retired” manager’s and directors (who are likely to have caused the problems in the first place), can now result in unprecedented levels of distrust, cynicism and disrespect that are likely to cause permanent cultural damage to the companies involved. Like other turnaround managers, there is a consistent focus on the type of cuts, rather than the size. A fundamental tenet of the Scanlon plan.
The Cash Flow Process
Like most turnaround processes Teng takes the view of “Cash is King”. To enable the firm to increase it’s cash flow he recommends selling off unrelated and non-core assets, controlling inventory levels, reducing purchases and perks, and reviewing and renegotiating terms with existing suppliers, customers and unions. As Platt (Platt, 1998) explains, the primary aim of any cash flow (and credit re-negotiation) process is to seek more favourable terms and economic conditions thereby boosting cash flow and jumpstarting the companies operations.
The Resuscitation Phase
Phase two of Teng’s model, moves the turnaround management process on to growing the company. As Teng indicates cost cutting has its limits, and will not successfully restore the business if the market does not desire it’s products, or the market itself is diminishing. Eight parts are needed to resuscitate a business. They are:
· Ascertain corporate objectives
· Staying on the ground / using consultants (if necessary)
· Focussing on the customers and competitors
· Developing the right product and price
· Implementing an aggressive marketing strategy
· Differentiating using service quality
· Strengthening the brand name
· Investing in future expansions
The first part of the resuscitation phase is to refocus the company, so that all staff are moving in the same direction. Teng recommends turnaround goals that focus on profitability when it comes to defining corporate objectives. E.g. Number one in profitability, rather than number ones in sales. He cites Jack Welsh former CEO of General Electric Corporation.
“You can’t grow long term, if you can’t eat short term. Anybody can manage short. Anybody can manage long. Balancing these two things is what management is.”
Staying on the ground for Teng meant “walking the floor” (Sutton, 2002) and staying in constant touch with workers, customers and unions. Likewise he recommends the occasional use of consultants (after reference checks) in order to provide a third opinion.
The follow on from this is developing the right product(s) at the right price(s). Like Harker (Harker & Harker, 1998, 55) Teng warns against the temptation to become too product focused during a turnaround, without focussing also on cost. This is view is reinforced by Sutton (Sutton, 2002), in that a cost focus can lead to standardisation which in turn can lead to better quality control. Eventually (as in the Scanlon Plan) other competitors will provide similar features, hence price will be the determining factor.
Differentiating using service quality, can be particularly successful for turnarounds especially when competing against products with similar feature sets.
However, only a certain amount of cost cutting can be done on any product before the firm has to differentiate through service. As he observes:
“How the company handles the customers is often of more importance than the product per se (Teng, 2002).”
How the service is differentiated is an important factor, but with turnarounds Teng observes that companies can wow their customers even better as a new “customer service culture”, can encourage staff to voice customer service ideas that till recently were kept quiet for fear of challenging the status quo.
In order to help restore the business Teng next recommends strengthening the firm’s brand name. This insures that as the firm goes through its recovery, brand equity is built up also. Sutton (Sutton, 2002) goes further, and give the examples of applying the brand to anything and everything that goes out of the firm.
”Use the phrase in speeches, advertising and letterheads and on the front door, shipping labels and brochures”.
The final part of the Resuscitation phase is investing in future operations. In this area a number of pitfalls can occur. First Teng remarks that many foreign expansions are done without adequate market research using “china statistics” [1] rather than doing legitimate market research. The second pitfall is rapid expansion, a common condition that can end up with the company back in trouble, especially if, thirdly the expansion occurs at the wrong time.
The Nursing Phase
The final phases of Teng’s model take a more eastern and holistic view of the organisation. Like Scanlon, Teng verifies that most company failures normally begin very early with a decline in the cultural, heart and soft issues of the company. Although the previous two phases have returned the company back to profitability, keeping it there and reinforcing good business is still difficult without the third phase. As he explains:
“Cutting back products is relatively easy, and has short-term pay-offs. But they do not help….the generation of business growth in the longer term”.
To address the “soft issues” in this third phase Teng states there are nine processes involved:
· Incorporating a new corporate philosophy
· Strengthening the free flow of internal energy
· Installing a strong and healthy corporate culture
· Engendering action-drive orientation
· Eating a balanced diet: vision, feedback, and action
· Promoting active communication
· Cultivating a positive mental attitude
· Emphasising exercise: Training and development
· People, people, people
The first process of the nursing phase involves addressing the decline in corporate philosophy. The central tenets of the founders normally form the rock of many corporate mission statements or values, but over time become eroded by hypocrisy, people taking the value system for granted, diluting them to justify situations or simply not “walking the talk” (if it is still even talked about).
In strengthening the free flow of energy, Teng likes to equate organisational energy and fervour to the Asian energy of Qi. From western eyes, it is that part of the human condition that constantly seeks self-improvement. Be it enthusiasm, drive, passion, determination and spirit. It is normally witnessed among company founders. As he explains
“You do not create Disneyland or build personal computers or invent the Walkman because the outside environment demands it. These things rose out of the inner urge for progress. The drive to further, to do better, to create new possibilities without any external justification or request.”
This is why installing a strong and healthy corporate culture is important. Teng describes this as similar to building a strong immune system (Birkinshaw & Fry, 1998, 51). However when change to a corporate culture is needed, it must be fast. Like an immunity system, if cultural change is not done quickly, the very system seeking to be changed can turn against the change agents. A similar observation is reported by Birkinshaw in the case of a NCR subsidiary in Dundee, Scotland (Birkinshaw et al., 1998).
Teng also cites the example of Jan Timmer who was given the task of turning around Philips. Timmer remarked that earlier efforts to change the organisation had failed due to significant resistance by senior managers and a piecemeal attempt; while in Birkinshaw’s case study, the corporate immune system attacked new ideas in three ways:
· Ignoring them first (hoping they’ll got away),
· Being sceptical about them second and
· Outright resistance the third.
Hence the turnaround manager must reinforce an action-driven orientation. Billionaire Donald Trump on the television show “The Apprentice”, remarked a similar comparison. When talking to contestants in the first episode he describes management as only two things “monitoring and action…”and you didn’t take action!!””. The turnaround manager must reinforce to staff that allowing resistance or inertia to derail any event should not be tolerated. Scanlon supported this position, by using the team approach to counter any resistance “head on”, so that staff should be more worried about not acting. As Sutton reinforces:
“Don’t expect things to get better. They don’t! (Sutton, 2002)”
Such an action orientation also encourages a fast and flexible approach to solving problems and winning new markets. Teng cites Kotler, who observed that when market and product cycles are shorter, most value must be captured earlier in the growth or introduction phase.
Teng’s next recommendation is to cultivate a positive mental attitude. This can mean being realistic enough for the turnaround manager to know when to leave (Sutton, 2002) and preparing for a successor a head of time. Naturally part of a positive mental attitude, is the ability for an employee to know that they can grow and progress in the company if they work hard.
Unfortunately Teng states that this is not likely when managers intentionally hold good workers back, if their subordinate are better than they are. As such he recommends turnaround managers consider implanting an “apprentice and succession policy”. (Again a similar policy to Joseph Scanlon’s, who remarked that operational efficiencies had occurred because of transparency, and so should succession).
In this case no manager(s) can get promoted if they do not have a capable successor to take over one’s portfolio, and part of the succession planning becomes part of the managers performance measurement.
Teng final part of the nursing process is People, people, and people. As he states, it is not companies that fail, it is people, and finding good people is not easy. Therefore, one must be on the constant lookout for good staff. Sutton (Sutton, 2002) describes this as “Hustle the hustlers” and encourages managers to go further by hunting down staff ahead of time. Locating those studying part-time for their own interest, working at night or demonstrating a willingness to work beyond what is normally expected.
Teng’s Patient Model took a modern-day Asian/Eastern look on the turnaround management process. This is the current trend in academic research on the discipline.
The advantage of Teng’s model is its strong focus on it’s communication processes, and the ability to handle Asian turnarounds more effectively, by coming in with a “white knight”. However, the disadvantage with Teng’s model is the focus is particularly human resource and marketing based. This is probably an outcome of most Asian firms being relatively low cost producers, with the focus being more and strategic realignment. Another disadvantage is the speed it takes to intervene in order for the turnaround to occur. It may be that by the time intervention is allowed, the firm is already in dire-straights. Finally Teng’s model is not as prescriptive at the ACTP model, which allows for the braking down of each phase by objectives and departments.
[1] An incorrect measure based upon the assumption that population size determines potential market size, rather than “who can afford to pay and may possibly buy” determining potential market size.
