Failure and Turnaround Process: of Debenhams Retail - Case Study Example

Introduction

Debenhams Retail (Ireland) also known as DRIL is a limited company based in Dublin, Ireland that was started in 1995 and deals in accessories, children’s and women’s wear, men’s wear, lingerie and other home wears. It is a subsidiary of Debenhams PLC with a separate entity (Carolan & Brennan 2016, Par. 1-6). This paper will discuss why this company is going through a process of failure pointing out possible causes of failure through multi-level root cause analysis and develop a turnaround or exit strategy.

Many companies go through failures in different forms and times. Failing company, according to Andersen and Fagerhaug (2006, p.8-13), is that whose initiative for value creation has come to a close because the value it creates do not meet its goals and objectives. Many firms have large knowledge gaps and may operate in an unknown business environment in a trial and error method. It is important that every firm gathers necessary information that will enable it to overcome knowledge deficiencies.

Debenhams Retail (Ireland) (DRIL) can be said to be in the process of failing according to Muller and Shepherd definition because it has continued with string of losses amounting to 6.7 Euros in the financial year ended August 2015 and this has limited its ability to achieve its goals DRIL employs about 1415 people directly with additional 850 people indirectly. It runs about 11 chain stores in different locations across Ireland. The string of losses started during the recession in 2007 and had been hitting the company harder especially after the UK mother company’s withdrawal (Carolan & Brennan 2016, Par. 4). These losses made the company seek to be placed under examinership and upon application, High Court-appointed interim examiner to the company.

Prior to the recession, DRIL realized sustained growth which was evident through the opening of chain stores in different locations like Galway, Waterford, and Tralee just to mention but a few. After the recession, the company could hardly cope as sales dropped by 22% in 2015 compared to the sales prior to 2007. Analysis of it financial report shows that its current liability went up by 11.23% totaling to 59.8 Million Euros, long-term liabilities also went up by 28.01% settling at 617,000 Euros. Even though current assets went up by 4.92% to hit 28.3 million Euros, fixed assets were down to 27.1 million which represented a down of 6.46 %. This was majorly affected by high operating cost for instance in high rents and other overheads (Carolan & Brennan 2016, Par. 5)

Root Cause Analysis

Root cause analysis (RCA) is a continuous process of in-depth investigation of causes of an already identified problem such as reducing sales, creditors complaints with the aim of coming up with the best corrective measures (Robitaille 2004, p. 2). In the case study, RCA can also be applied to determine non-conformance to the company’s goals which institute failure. For instance, it will be difficult to rule out if the reduction in sales is as a result of external market factor or employees bad performance. Therefore in using RCA tools, there is need to employ these tools in more than one level so as correctly to identify the cause of that failure Multiple causes can combine at different levels and the effects can be visible as in the case of DRIL Company, in which symptoms can be seen in terms of sustained losses, shooting liabilities as well as unsustainable operating costs.

These symptoms reveal the existence of actual problems rather than pointing to a definite cause. There are simple causes known as first level causes which are easy to identify while multiple first level causes may generate to multi-level causes It is, therefore, important to study diverse data of the company to ascertain the nature of the data which will give criteria for defining the failing process since the recession. Failure is usually associated with financial reasons in many companies and this can be in the form of bankruptcy or insolvency (Robitaille 2004, p. 2).

Traditionally, RCA has been used over the years as a management tool used to address various problems that exist in given enterprises and affect the prospects of that enterprise. For instance, it was an important tool in addressing customer complaints so as to correct what caused their complaints; when an audit that was not favorable was done RCA was used to guide action plans so as to eliminate the cause of inefficiency of the future action plans. Multi-level RCA therefore takes into account all possible root causes of the failing process with the view of correcting the cause so that it does not occur again or eliminating the cause to give the company a turnaround to normalcy without the chance of that specific failure recurring In applying multi-level analysis, care should be taken to ensure that other measures are open to trial because the risk associated with this management tool is that without precise identification of the problem, one will be treating a wrong cause (Andersen & Fagerhaug 2006, p. 8-13).

Multi-level causal analysis of DRIL

The company is facing an incident of being placed under management examiner, and this study will take that incident caused by a string of losses as what DRIL is suffering from. It is the task of this analysis to come up with clear diagnosis of the causal effect. The analysis will be put into three categories which include; macro, meso and micro contributing factors that might have caused the company failure. Because the company is going through a process of failure, it is important to review all possible causes and categorically suggest most likely cause that might have contributed to the failure of company that led it to seek protection of court in form of examinership management (Carolan & Brennan 2016, Par. 2)

Micro factors

These include all factors that originate from management, organizational, team, staff and technological factors. First, the important factor is the management factor. What are the shortfalls of the management? To begin with, DRIL is managed by four directors who are also involved with other companies as a result; it opens up the possibility for leadership deficiencies as well as the lack of clear leadership roles. This is an important factor that can lead to the current incident because without proper leadership and clear roles. The blame game will go on with nobody willing to take personal responsibility and this will only lead to confusion and might be the cause of the incident (Andersen & Fagerhaug 2006, p. 10).

It is the work of leadership to come up with number of good management strategies that will work in any given situation if the company wants to overcome the cause of its failure however, there will be minimum useful intervention by the leadership of the company if they are irresponsible and this effect of not being responsible will trickle down to other staff. Another management factor that comes out in DRIL is the failure of management to control operating cost which can be through huge allowances for managers and other staffs (Andersen & Fagerhaug 2006, p. 9). 

Secondly, team factor can be a contributing factor to the incident were the workers lack team building initiatives as well as teamwork skills that combine manufacturing, sales and marketing in a seamless manner to achieve required sales. In addition, team members should enhance local induction to new team members so as to ensure that no member is left behind. Each staff should also be given definite responsibility and a clear chain of a command communicated to every staff so as whenever a problem arises there is quick identification as well as the solution. A communication system in DRIL should be analyzed to identify any communication breakdown in the company system so as to clarify the paths and patterns present in the company (Andersen & Fagerhaug 2006, p. 10).

Thirdly, as the liabilities of the company keep on rising, the company capital will continue diminishing which is a key characteristic of failure. Current and long-term liabilities have risen sharply over the years and may be the cause of the incident of insolvency brought about by losses. DRIL Company balance sheet posted the company’s inability to pay debts, for instance, it owes the parent company Debenhams U.K money that it has found difficulty in paying back.

Lastly, lack of knowledge can be a contributing factor in the failure of a firm. Operating a firm like DRIL requires a lot of knowledge in business management, strategic planning, and risk management if ever the company wants to survive. Information availability and sharing is also significant in ensuring that the company stays on top of events if it wants to survive (Trahms et al. 2013, p.1278).

Meso Contributing Factors

It will be important to ask whether the incident that is currently experienced is related to anything in the working environment. For instance, how do chain stores operate in terms of working hours and working conditions? If there is no right to the absence of leave, for example, the staff may feel demoralized which may, in turn, affect their productivity causing loss. Again, working environment may include the level of training that the staff attains before employment, store facilities and on the job training. DRIL runs 11 chain stores and other online facilities that even under examiner they have vowed to remain open. Can this possibly mean that the chain stores activities do not contribute to the losses witnessed over the years and therefore ruled out as a causal factor in failure? On the contrary, all factors ought to be analyzed with an open mind if there is a sure way of identifying the cause of the current failing state (Hrebiniak 2005, p. 28).

Secondly, because DRIL Company deals with human wears, house ware, cosmetics, lingerie and other accessories, it is a very competitive market because of excess entry as a result of open European marketplace which has seen large numbers of competitors aggressively take on DRIL cutting its larger market share thereby reducing sales volume and raising advertisement costs which have huge impact on the revenue of the company (Carolan & Brennan 2016, Par. 3)

Thirdly, technology is another important contributing factor for failure if not embraced effectively. DRIL has participated in online marketing and sales which added value to its products even though it is not clear whether the online approach has anything to do with the failure. The use of technology should be spread in all areas of production, sales, and marketing. If there is no high technology application in the chain stores gift cards issue and other services, then the failure is inevitable due to lack of competitive advantage in a competitive market

Lastly, the business world is dynamic and nature of products also ought to change with changing times. If DRIL does not embrace innovative products, therefore it will automatically be classified as failing through experiencing losses and would try to prevent losses, therefore, losing initiative to create the value of achieving its goals (Byrne & Womack 2013, p. 213). 

Macroeconomic factors

The company began making losses in the year 2007 in which time the Europe was grappling with the recession that has just devastated the whole continent. During this period a lot of companies winded up their businesses due to insolvency and bankruptcy that was brought about by economic recession DRIL may have been adversely affected by this recession because since that period the chain stores has been making losses every year and has not fully recovered from the shocks produced by recession. This recession and consequent losses have seen parent company Debenhams TLC in U.K cuts its support as a result of huge debt of about 46 Million Euros which the parent company terms as ‘unsustainable’ (website). This coupled with high-interest rate has seen GRIL become insolvent over a period which can ultimately lead to bankruptcy a good sign of failure (Carolan & Brennan 2016, Par. 4)

Another external factor that DRIL faces is its inability to manage the employment rate which contributes to high staff costs and also over the loss-making years there has been lagging employment and this is taken to reduce the losses incurred and this identifies with the current status of the DRIL Company placed under interim examiner thus making it unable to meet its goals, therefore, become one of the failing firms (Haentjens & Wessels 2015, p. 256). Again, falling sales of wears and costumes in the last five years has tremendously affected the profit margin of the GRIL Company which saw business partners like U.K‘s Debenhams discontinue supporting it due to losses made and unsustainability of the business thereby listing it to the categories of failing companies by the virtue of discontinuous of ownership even though they insisted that all their operations in the 11 stores will continue despite all these.

Austerity measures by the government to curb effects of recession has hugely impacted on the operations of DRIL Company because there are tough trading measures put in place that is harsh to the economics of the company which in effect cuts deep into the balance sheet of the company therefore driving it to huge losses making it more insolvent a state of a failing company (Carolan & Brennan 2016, Par. 8)

Figure 1 Causal analysis

SWOT analysis

In addition to causal analysis Strength, Weakness, Opportunities and Threat analysis is also crucial in identifying the position of the DRIL Company in terms of weaknesses that might have exposed the company to the failure. Failure is a process. Therefore, any weakness and threat may be taken into consideration to ensure that even those hidden factors are analyzed, and the appropriate cause of this incident is identified (Hrebiniak 2005, p. 26).

Firstly, DRIL has strength in the existence of 11 branched chain stores, qualified personnel, huge market share, suitable assets and good use of sales technologies. However, the company lacks good strategic plan to enable it survives the recession, do not have a workable turnaround as well as exit strategy because they hold on to all eleven stores even after realizing recurrent losses over the years and inability to develop operational plan that will ensure the high costs are kept under management levels weakens the DRIL Company. Even though what threatens the Company includes withdrawal of support by Parent Debenhams U.K Company, which is a huge financial blow to the operations and financial stability, the Company can stabilize its operation under interim examiner while drawing up turn around strategies. Also, debts accumulated and the inability of the Company to service them indicates a wrong turn which can drive the Company to bankruptcy. Continued losses are also a significant threat to the survival of the company. However, there is an opportunity in cutting down operation and other costs which will enable the Company to realize a profit. It should take advantage of the customer base it already has and design a better competitive advantage to claim desired market share (Carolan & Brennan 2016, Par. 5)

Outcome of the RCA

The RCA of DRIL Company through the evidence provided showed that the cause could not be pointed to a singular event but a succession of events including high operating costs, unsustainable rents, and reduction in sales volume. Since 2007 these events kept on recurring translating to huge losses for the Company.

Turnaround Strategy

According to Slatter and Lovett (1999, p. 1), turnaround strategy is a situation in those firms whose financial indicators points to a failure in the foreseeable future unless the short term corrective measure is employed. The GRIL Company needs a turnaround because it is faced with failure in the near future unless right turnaround strategies are put in place to correct the losses it incurs. The life cycle of this company because it is under insolvency, it has passed decline stage and therefore requires urgent measures to initiate turn around (Lenahan & Lenahan 2006, p. 4). 

Content-oriented versus Process oriented strategy

This study identified three turnaround strategies that could be recommended to DRIL Company. The content-oriented strategy is an ideal strategy that will look into various ways of managing costs to achieve cost efficiencies and also asset management through asset retrenchment that will ensure that the root cause which is high operational cost is addressed. Process-oriented strategy in other hand deals with micro factors such as addressing leadership problems that DRIL is facing (Robitaille 2004, p. 24). 

Content Oriented Strategies

• Cost Efficiencies

DRIL has a high operational cost which is the contributing reason for recurrent losses it makes. Firms that make a profit will always thrive in pursuit of cost efficiencies (Haentjens & Wessels 2015, p. 24). Various methods can be used in ensuring that operation and production costs are kept low to enable the firm to stabilize its finances. One advantage of taking cost efficiencies measures is that they are easy and cheaper to implement because no additional resources are required, and also they produce instant results. DRIL is already involved with one cost efficiencies strategy of eliminating pay raises, however, it should engage actively in reducing production cost to a lower scale to that of their competitors, adjusting wages incentives, tightening financial and management controls to ensure that it attains cost efficiencies within the shortest time possible.

The company should also consider investing in new stock to ensure streamlined operations. While cost efficiency is the first important strategy that will ensure that DRIL comes out of its current situation, it has some risks attached to it and the Company should be cautious when carrying out this corrective measure because studies have shown that if it is over pursued and used singularly may result in employees turn over To avert this effect, TDRIL should think of also cutting on research and development costs to complement the cut in operation and production costs (Lenahan & Lenahan 2006, p. 5). 

• Asset retrenchment

Asset retrenchment which follows closely to the cost reduction is a process of appraising non-performing areas of the company with the view of restructuring to combat non-conforming assets to the action plan development to help in turnaround. This is, however, a very tough area that should be tackled after conducting thorough studies whether the asset is redundant or not because it will have a long-term effect on the future strategic planning (Lenahan & Lenahan 2006, p. 9). Lastly, liquidation and product diversification can also be considered as the company is pursuing turnaround strategies.

Process Oriented Strategies

In the case study, we found out from the report that all the four directors of the DRIL Company have some involvement in other peer companies. This strategy suggests various methods that should be considered by the Company shareholders to address the decline and future failure. One of the methods that have worked on wide range of companies pursuing turnaround is replacing the directors and changing top management. This is a sign of change to shareholders who place an enormous amount of responsibility on the leadership and changing them will give the fresh company reorganization that is much required in turnaround process (Spender 2014, p. 23). 

Conclusion

Company failure is a complex process that involves many diverse processes. Many factors come into play in determining a failing company. There is a connection between causes of the failure, and diligence should be practiced in solving the problem that any failing company is facing. It is important also for the organization of the company to realize decline and its attributes as well as what it perceive of the future of the decline. Without employing proper RCA, there can be no turnaround in any organization. Accurate application of RCA will suggest definite turnaround methods that will have short as well as long-term effect whether the company will avert is a failure or exit with honor. It is, therefore, important to conduct continuous assessment and carry out proper monitoring and evaluation to guide any turnaround process.