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The art of brinkmanship

Some form of financial turmoil has faced every company at some point in their existence. But when a well respected corporation falls so deep into debt that bankruptcy is imminent, it requires a strong leader with radical strategies to bring it back to its feet

It takes a chief executive with special skills to salvage ailing companies and completely turn around their fortunes. When a corporation is facing imminent death, bankruptciers are often brought in to lead them back from the brink. By applying the right attitude and strategies through goal and action-orientated plans along a realistic timescale, some CEOs have achieved truly remarkable business renovations.

One such CEO is Sergio Marchionne. After leading Fiat from near ruin to riding high in the FTSE MIB, he is now performing a similar turnaround with Chrysler since the American car manufacturer merged with Fiat in 2009. When he first took over Fiat as its fifth CEO in two years in June 2004, Italy’s biggest manufacturer had run up €8bn of losses and was near bankruptcy. Firstly, Marchionne acquired a $2bn payout from General Motors for their share in Fiat, giving Fiat what Marchionne described as “freedom to design our own future.” And their future was bright. After 17 consecutive quarter losses totalling €8bn, Fiat finally started turning a profit in 2005. From that point on, his main focus was rebranding. The Canadian-Italian used Apple as a model; he admired the way Steve Jobs transformed the brand into the epitome of cool technology. Marchionne spearheaded the re-launch of the Fiat 500 in 2007, a modern reincarnation of the iconic Italian car that had been out of production for 32 years. Within three weeks of the 500’s launch, the entire year’s production of 58,000 vehicles had sold out and the model has made steady sales ever since. He calls it Fiat’s iPod.

“It’s been my experience whenever you run businesses that are dysfunctional, that the real problem sits at the top. And so we changed all of the senior leadership of Chrysler within a matter of a couple of days”

He is now giving Chrysler and its subsidiaries: Jeep, Dodge and Ram, a make-over.  The 2011 Grand Cherokee has proved Marchionne’s formula for success once again. It won a total of 30 awards for its off-road capability, luxury, value, and safety making it the most awarded SUV ever. Additionally, the Dodge Ram won Truck of the Year at the Detroit Auto Show in January, no doubt fuelling Chrysler’s three years of consistent sales increases.

It is not just products that Marchionne revamps: another key part of his strategy is a shakeup of the work force. In an interview to National Public Radio in January, Marchionne said: “It’s been my experience whenever you run businesses that are dysfunctional, that the real problem sits at the top. And so we changed all of the senior leadership of Chrysler within a matter of a couple of days.” He added: “If I look back at the last three and a half years the thing that I’m probably most proud of is the quality of the leadership team we’ve got in place here. These are 20 kids that are just of phenomenal calibre.”

In a similar fashion to Marchionne, Mathias Döpfner, CEO of German multimedia company Axel Springer, reinvigorated a brand to lead it to success. As editor-in-chief of national daily newspaper, Die Welt, he refreshed its image by concentrating on the content of newspaper which bolstered Die Welt’s circulation numbers. His endeavours were so successful; he was promoted to chief executive of Axel Springer in 2002. Once appointed, he embraced digital media. The digital advertising that went hand-in-hand with this new platform proved to be very lucrative. Axel Springer then took a strong foothold within several European internet portals, including employment website StepStone, real estate portal Immonet and price-comparison marketplace Idealo.

Prior to Döpfner’s appointment, Axel Springer was facing losses of just under €200m, so he needed to take radical steps to save the company. Consolidation proved to be the saving point for the multimedia company, as Döpfner boldly sold off a number of low profit subsidiaries in order to focus on the company’s core business, leading Axel Springer to remain Germany’s most profitable major publishing house. He also radically restructured the company, and continued doing so right through to 2005. At the 2006 shareholders meeting, Döpfner said: “The truth of the matter is that restructuring is never complete.” He continues to reassess the inner workings of the media conglomerate on a regular basis and in January, the board announced plans to convert Axel Springer into a European Company to facilitate their international market focus.

Consolidation is often a favourable strategy of bankruptciers. Few people realise that Pirelli, who are now synonymous with Formula 1 tyres, previously dabbled in several markets before Marco Tronchetti Provera stepped in as CEO in 1992. The company, which initially specialised in rubber and made scuba diving rebreathers, was heavily burdened with debt until Tronchetti restructured the company’s business model. He focused on telecoms cables and high performance tyres, which offered higher profit margins. In doing so, he narrowed Pirelli’s niche so they did not have to compete with larger tyre companies who could operate at lower costs. By 1996, Pirelli was back in the black.

“We just left the road and needed to be pushed back to be able to run again”

Tronchetti’s bold move shows that switching a corporation’s focus can be a saving grace, whether it be focusing on a niche product or refocusing the market reach. As CEO of HeidelbergCement, Dr Bernd Scheifele faced serious problems in 2009 when Germany’s oldest cement production company staggered under nearly €12bn of debt. Shares plunged from €120 in May 2007 to a mere €20 in early 2009 and by April they were thought to be only a fortnight away from bankruptcy. He switched the company’s focus to Asian markets in order to generate higher revenue. In an interview with Frankfurter Allgemeine earlier this year Scheifele said: “In Asian countries, we generate around 40 percent of our corporate earnings. Indonesia, China and India are especially important to us.”

Scheifele was also ruthless when it came to making cuts. He laid off 15,000 employees, nearly 20 percent of HeidelbergCement’s workforce. “It is unpleasant, but inevitable in times of crisis. Real savings can only be achieved in large industrial enterprises if jobs are lost,” said Scheifele. “As head of a DAX company, you need this callousness, otherwise you cannot succeed.” It was three years ago that HeidelbergCement became the first company in the construction and building materials sector to join the DAX index. But this successful transition was the result of a radical move by Sheifele: issuing 62.5 million shares to increase capital in an attempt to stave off bankruptcy. This turned out to be a wise move as last year HeidelbergCement was one of the few DAX-listed companies to report an increase in dividends. Now that the German company is in control of its debt, Scheifele has said he wants to continue saving to reach reserves of €6.5bn.

Sometimes, the secret to a CEO’s strategy is simply rebuilding faith in their brand. When Patrick Kron was appointed CEO of Alstom in 2003, the French energy company was close to facing liquidation. Kron managed to convince the French government and then-finance minister Nicholas Sarkozy in particular, that Alstom was an important asset to the national economy. The energy company was partly nationalised before releasing common stock shares. €800m of taxpayers’ money was invested in Alstom and just eighteen months later, the French state made a profit of €1.2bn, 150 percent of its investment. “We just left the road and needed to be pushed back to be able to run again,” said Kron of the situation in a 2012 interview. Alstom went on to issue more shares in October 2012, but the transaction was largely oversubscribed, resulting in the operation expanding from €300m to €350m: a clear indication of investors’ confidence in the corporation.

Kron’s impetus to drive Alstom to further success could be seen in 2011 when he implemented a major reorganisation of Alstom’s company structure. The business was split into conventional and renewable power, with a unified sales team allowing for better focus on the specifics of the market. In Kron’s time with Alstom, he has led its employees back from the brink of bankruptcy, seen the company break world rail speed records and embraced revolutionary new technologies. Now, Alstom has an order backlog of orders worth €50bn: an impressive milestone as Kron’s time with Alstom reaches a decade.

The actions of these executives prove there is no single magic formula for salvaging a sinking company, with solutions ranging from rebranding products to restructuring the inner workings of the organisation. One vital element however, is a strong captain at the helm with a strong enough personality to implement drastic changes necessary to perform a turnaround. Without a talented brinks man, some great corporations may not be in existence today.