Investors are cashing in on Rolls-Royce’s turnaround story. The British engine makers’ profits more than doubled last year, with Tufan Erginbilgiç taking the helm in January 2023. Dividend payments are set to resume, and its share price is up over 60 per cent this year alone. The former BP executive, who shook up the company’s top teams, reduced duplication and culled middle managers must be pleased with himself. But he also knows how fragile the gains can be. He said Rolls-Royce’s midterm targets are a “milestone, not a destination”.
Restoring the feelgood factor, for managers, staff and shareholders, plays a vital part in the revival of any struggling enterprise. Some of the best known names in business have undergone their own revamps — from Apple to Ford to Xerox. Citigroup under Jane Fraser is another example of a turnaround under way. Purging the leadership, shrinking the headcount or rolling out some new technology alone is not enough to transform a faltering company. So what should a business do?
Having a clear grip of the level of distress is essential if a leader is to understand what type of turnaround their company needs. Is it a rescue, like BP, which was on the brink of collapse after the Deepwater Horizon disaster? Or a strategic shift, as at Netflix, which moved from rental DVDs to streaming? And which underlying strengths can a leader still exploit?
Often fresh blood is required at the top. Whether the chief executive is an insider or outsider, has a genial disposition or a blunter leadership style, they need to have a clear vision of what success looks like, an unyielding resolve to inspire a renewed sense of purpose and a determination to execute their plan. Boards have a critical role in choosing the right person to lead an organisation, but it is the CEO and executive teams that do the heavy lifting.
When a company has lost its way because of poor debt management and bad spending decisions, financial restructuring is likely to be unavoidable. Cutting costs, finding efficiencies and boosting productivity are central to improving operations. But getting control of the balance sheet while not choking off future growth is a challenge. Business strategies may need adjusting, too. As some companies’ actions during the pandemic showed, crises require rapid adaptation and shifts in demand may force businesses to ditch once-core products or services. Delaying necessary change will only haunt the business later.
No turnaround is possible without restoring employee confidence, which is as vital as bringing investors back on side. Every level of an organisation needs to buy into a transformation. Indeed, a cultural turnaround may be just as crucial as fixing the day-to-day machinery of a business. Satya Nadella, for example, revived Microsoft by turning staff into “learn-it-alls” instead of “know-it-alls”, fostering a growth mindset across the business.
This is where a CEO’s interpersonal skills matter. Leaders who are closing divisions, firing staff and diverting resources need to communicate these tough decisions and the reasons behind them clearly and with the utmost care.
Luck plays its part, of course. Rolls-Royce’s turnaround efforts have coincided with the revival of defence sector spending and recruitment. Data shows CEOs that have led successful transformations are not always able to replicate their wins elsewhere. Ultimately, there is no one-size-fits-all model. Erginbilgiç’s tough approach — he called Rolls-Royce a “burning platform” soon after joining to instil urgency in his staff — may be working. But will he have to shift his leadership style for calmer times? A well-executed turnaround does not guarantee success forever. The leaders that triumph are the ones who can adapt.