Procrastination & Consequences - Part Two

"Owing to past neglect, in the face of the plainest warnings, we have now entered upon a period of danger greater than has befallen Britain since the U-boat campaign was crushed…The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close. In its place we are entering a period of consequences…"
- Winston Churchill, November 1936

Against a backdrop of Germany's reoccupation of the Rhineland, Part One examined warning signals of struggling businesses mired in procrastination. The "plainest warnings" are the numbers themselves - declining gross margins, unprofitable growth, and insufficient asset productivity. Intangible human signs - no accountability, shrinking expectations, denial - are often more telling. Such situations demand timely, decisive action before the accrued consequences of past delay get out of hand. Those who rise to the occasion are usually rewarded.


Part Two presents case studies in which three middle market companies were able to cut short the unfortunate consequences of procrastination before it was too late. There were numerous similarities between the three:
  • Each business was a well-regarded force in its industry.
  • While each had been financially successful, all were suffering from several consecutive years of unsatisfactory performance and strained relationships with lenders, shareholders, and/or directors.
  • Each served markets that were expected to modestly increase over the long term.
  • Yet, each company's market was in the midst of irreversible shifts in customer and/or competitor structure.
  • As a result, employee morale at each company had deteriorated and was getting worse.
Despite these similarities, each crisis was unique. For example, at ARGO Foods, a regional manufacturer of consumer products, financial performance was slipping despite the fact that the Company appeared to have been reasonably effective at executing a defined strategy. It turned out the problem was the strategy itself.

Lynx Laboratories' situation was the reverse. Interfamily fighting among the third generation owners had rendered this regional technical services firm dysfunctional despite what was an otherwise viable strategic plan.

MidSouth Ore was an international industrial products manufacturer on the brink of financial collapse. Lacking any credible strategy for arresting its decline, the organization was demoralized, paralyzed, and lost.


Management at ARGO Foods was at a loss to explain the Company's lackluster financial performance. Sales were growing, the plant was operating at full capacity, and a major competitor's exit from the market had created "once-in-a-lifetime" opportunities to capture market share with the industry's giant chain stores. ARGO's sales force was the best in the business, and its seasoned management team had been together a long time. The "right answer" seemed obvious - accelerate execution of the strategy already in place by doubling capacity to meet the exploding needs of the major strategic customers.

But something wasn't right. Morale was slowly but steadily deteriorating. Employee turnover was increasing. While operations were marginally profitable, the Company had failed to meet its financial targets for three straight years, resulting in no bonuses for anyone. With increasing debt and higher interest costs, ARGO had lost money in its most recent fiscal year and the current ESOP valuation reported a decline in share value.

Despite technical violations of its existing loan covenants, the bank was ready to finance ARGO's expansion. Fortunately, one outspoken outside director insisted upon an independent assessment.

Exhibit 1
Click to enlarge
That assessment produced several revelations:
  • Price erosion on those products with the highest growth rates had been far greater than previously realized. See Exhibit 1.
  • Fully costed, the gross margins on these "high growth" products were either nonexistent or so low as to make acceptable returns on investment impossible.
  • An increasing percentage of capital, labor, and organizational talent was being devoted to manufacturing these low margin products at the expense of higher value-added specialty foods.
  • In the opinion of its leading customers, ARGO's market image had become clouded. In the words of one, "They're in no-man's land - not competitive on volume products and no longer distinctive in the specialty niches."
  • ARGO's procrastination came to an abrupt end with the adoption of a new strategy which:
    • Pursued a strategic alliance with a focused commodity producer that needed ARGO's account relationships and sales force. This alliance permitted ARGO to devote its internal resources to higher value branded products while still satisfying customers' full-line requirements.
    • Strengthened internal capabilities to develop specialty products and targeted two categories where there was opportunity to dominate the market.
    • Recruited additional marketing management talent with a track record in the specialty products.

The results were dramatic. ARGO exceeded its financial forecast the next year, reduced its debt, improved its relationships with its best customers, and rekindled management's unity of purpose. Bonuses were paid, the stock value rose, and smiles quietly returned to employees' faces.


There was less mystery surrounding the financial deterioration of Lynx Laboratories. Despite an enviable market position, strong customer reputation, and state-of-the-art technical skills, Lynx had barely dodged bankruptcy on more than one occasion. The cousins who had inherited the Company feuded over just about anything two people could feud over.

The stress which had been building for years came to a head over the implementation of Lynx's geographic expansion strategy. While customers were still happy, field technical and management problems had resulted in costly delays, mounting losses, and a series of liquidity crises. Under this pressure, the cousins' relationship finally disintegrated. Each repeatedly and alternatively accused the other of being the cause of the problems and the obstacle to the solutions. Eventually, one cousin began avoiding the crisis altogether by immersing himself in outside interests.

The morale of other key executives of course was horrible. Management was unable to make even simple decisions, as every matter brought before the group degenerated into a stalemate between the two relatives.

This downward spiral of the cousins' interrelationship intersected with Lynx's deteriorating relationship with lenders. Ongoing talks to avoid catastrophe were becoming bitterly confrontational, and the Chief Financial Officer had quit in frustration.

Despite these obstacles, there was a way to not only rejuvenate the business, but also perpetuate family ownership for another generation. A plan to address issues of capitalization, corporate governance, and management structure was developed and implemented.

  • Restructured senior management
One cousin, Harry, became Chairman, withdrew from daily operating management, and fulfilled his lifelong dream to run for public office.
  • Attracted new capital
Harry sold most of his stock to new investors compatible with and acceptable to his cousin. The new group also infused much needed working capital into the business.
  • Added new management depth
A seasoned Chief Financial Officer was added. The remaining cousin restructured her management team, promoted several from within, and clarified roles, objectives and accountability.
  • Created a professional board of directors
A supportive board was activated to oversee and advise management.

Not surprisingly, the fortunes of Lynx Laboratories reversed as the Company regained its momentum. But the real triumph came when the cloud between the cousins and their families lifted during the closing for the new investor capital amidst tearful embraces and spontaneous laughter. It had been a long time.


Exhibit 2
Click to enlarge
MidSouth Ore was a major force in an international industry. Always a cyclical business, the normal ups and downs had been magnified by structural changes occurring among key customer segments. MidSouth had not fared well amidst the strain, as it plummeted to the bottom of the industry in return on investement after several years of losses. See Exhibit 2. Though management insisted that the market would soon return to normal, the Board began questioning whether MidSouth had a strategy at all.

Employees were asking the same thing. As customer needs were radically shifting even the rank and file could see that MidSouth had to redefine itself in order to survive. They were crying out for leadership and direction but none was forthcoming. Frustration degenerated into fear, paralysis - even anger.

The directors were advised in advance not to be surprised if employees greeted their announcement of major organization changes with applause. Nonetheless, they seemed startled when it actually happened. The outburst was cued by a woman who raised her hand simply to say "thank you." Within an instant, everyone joined in.

A talented group of young middle managers rallied quickly to a new direction and leadership style. One year later the whole company received bonuses. It would turn out that the best days of MidSouth Ore were yet to come.


Churchill would later reflect on World War II, "There was never a war in all history easier to prevent by timely action." All too often, the same can be said about business crises that careen out of control before drastic action is no longer an option.

Happily, such was not the case in the three situations recounted here. In each, procrastination gave way to action, which if not altogether timely, was at least in time. Consequences were traded for opportunities - growth, greater competitive success, renewed spirit and sense of mission, and increased value for shareholders.

In such cases, heroes always emerge. Sometimes it is the Chief Executive or a key lieutenant; it also can be a director, an attorney, a banker, or the spouse of a family shareholder. But notwithstanding all of these players, the one place one can always look for heroes and almost never be disappointed is among the employees themselves. Timely action gives them the chance.

The three cases are disguised adaptations of true situations.

Orchids & Steam Shovels Part II

Orchids & Steam Shovels Part I


At the Speed of Light

On Einstein, Newton and Satchel Paige

New Centuries, Mighty Dreams

Exceptions and Expectations

The Morning After

New Paths...
Worn Paths

Old Values in a
New Era

Procrastination and Consequences
Part I

Procrastination and Consequences
Part II

All in the Family
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