In turbulent economic times, the path from industry leader to turnaround candidate can often be much shorter than anticipated. The U.S.-based restaurant chain Applebee’s is a case in point. After having closed down nearly 100 restaurants in 2017, Applebee’s anticipates the shuttering of an additional 60 to 80 restaurants in 2018, despite a substantial surge of net income in the fourth quarter of 2017.
The successful management of turnarounds becomes an essential part of the skill set for top and middle managers in service industries. Turnarounds in restaurant and hotel firms are fraught with added levels of complexity when compared to other industries. Much of this is due to the simultaneous production and consumption that characterizes the service industries. Hotels and restaurants have hardly any buffer between managerial actions in a turnaround situation and their impact on customers. When they cut costs, they often incur almost simultaneous revenue losses due to decreasing levels of service quality.
How will ailing service firms approach this dual challenge of improving their bottom line while keeping customers satisfied? A recent study of 35 successful service turnarounds in Europe offers a couple of insights.
A key factor for the success of turnarounds is human capital. Successful service delivery and service quality rely on the motivation, commitment and professionalism of front-line service employees. This places special emphasis on the need to retain and motivate front-line service employees during service turnaround attempts. The key task for successful turnaround managers in service firms is to protect the service experience while fighting economic decline.
This is easier said than done. The economic hardship of a turnaround situation requires so-called retrenchment strategies to stabilize operations and increase efficiency and profitability. The reduction of costs of goods sold (COGS), and Selling, General & Administrative Expense (SG&A) is frequently achieved via layoffs and reduced services. Plummeting service quality is often the inevitable result.
A factor that is often overlooked in service turnarounds is the need to implement immediate recovery strategies to create value for customers, as only perceived value will lead to much-needed revenue growth. Such decisions are usually not easy for restaurant managers or hotel GMs as they may have difficulties in abandoning service delivery processes that have been historically valuable to the firm. Since “old habits die hard,” they may lack the cognitive mindset or the risk-attitude to invest scarce resources in new or untried products. As a result, firms often reinforce and rigidly rely on old service delivery processes instead of trying new ones.
In a nutshell, retrenchment and recovery put restaurant and hotel turnaround attempts into a dilemma. While both processes should happen simultaneously, the urgency of the turnaround situation often pushes service firms to separate both strategies. The exclusive focus on cutting costs means that repositioning the firm’s service offerings in the market is pushed back to a later stage. We call this the paradox of retrenchment and recovery.
To confirm our intuition about the importance of balancing retrenchment and recovery, we conducted an in-depth study of 35 successful service turnarounds in Austria, Germany and Switzerland. We investigated a range of six different retrenchment strategies, including layoffs, wage cuts, shedding property, plants, and equipment and trimming marketing expenditure. In addition, we looked at a variety of recovery strategies which included the development of new markets, organizational restructuring and the implementation of new service processes.
The study suggests that retrenchment efforts in themselves could be effective in the initial stages of the turnaround, but adding simultaneous recovery efforts magnified the firms’ turnaround performance. In fact, the best outcome occurred when a firm engaged in a high level of recovery activities at the same time when it was retrenching. However, once a firm has passed through the crucible of its worst year, and return on investment begins to recover, the combination of retrenchment and recovery steps is no longer as powerful. The results of our study yield three key recommendations:
Cut costs, but not without protecting your best employees
As a knee-jerk reaction, restaurant and hotels often cut costs by applying “across-the-board cuts.” Instead, given the critical importance of human capital for service quality, protecting critical employees’ skills should be an essential preoccupation. Identify your star performers and make sure they stay on board to safeguard the quality of the service delivery process.
Focus on a strategic recovery plan—Early
In practice, service turnarounds have often focused exclusively on efficiency without embedding these activities within an overall strategic recovery plan. However, such a one-sided approach will aggravate the risk of bankruptcy for service firms. While a focus on efficiency certainly improves costs and cash-flow, it fails to protect the service delivery processes that are required for urgently needed cash-inflows.
Balance out savings and investments, especially in the initial stage
Service firms need to focus on simultaneously preserving and creating investments in the service delivery process. This adds a certain layer of complexity to our traditional perception of corporate turnarounds. From a managerial point of view, it requires balancing conflicting goals under performance pressure from multiple stakeholders. However, achieving a coherent and comprehensive turnaround plan that identifies where to cut and where to invest allows managers to have a clear objective during the implementation of turnarounds.
Communicating this plan of attack to all stakeholders often helps to raise the commitment needed to achieve a successful recovery. This is often easier said than done. Addressing the paradox of retrenchment and recovery calls for complementary leadership skills and tasks. The creation of an experienced change team that on the one hand drives unpopular cost-cutting measures and stimulates on the other hand motivation and commitment lies at the heart of successful turnarounds.
Steffen Raub, PhD, is a Full Professor of Organizational Behavior at Ecole hôtelière de Lausanne, HES-SO // University of Applied Sciences Western Switzerland. His research focuses on proactivity, organizational citizenship behavior, empowerment, as well as other applied HR issues in the hospitality and service industries.
Achim Schmitt, PhD HDR, is an Associate Dean and Professor of Strategic Management at Ecole hôtelière de Lausanne, HES-SO // University of Applied Sciences Western Switzerland. His past and current research focuses on corporate turnarounds, organizational decline, managerial cognition, as well as strategic renewal and innovation.
This article is based on academic research, submitted in partnership with STR’s SHARE Center, which provides support and data resources to professors and students in hotel and hospitality fields of study at colleges and universities worldwide. The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR, and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.