About Face

When they're in the throes of a corporate bottoming-out, most executives aren't looking to produce a banner year; they'll settle for stabilizing the company's performance. But some CEOs have figured out how to use the survival instinct to leap directly from "bad" to "great," by reorganizing around their biggest opportunities for market leadership and then capitalizing on them.

Take General Dynamics Corp. The military contractor completed its acquisition Aug. 11 of Veridian Corp., a developer of high-tech defense systems, for $1.5 billion in stock and debt.

That move represents the capstone of the company's nearly complete transformation from a broad-based manufacturer of missiles, aircraft, tanks and submarines to a leading supplier of today's digital military. While peers have mucked through structural decline, General Dynamics has remade itself.

Everyone already understands companies can go from good to great. But the kind of resurrection General Dynamics undertook is more like leaping from bad to great.

We call such moves "full-potential transformations." They occur when a company in trouble determines what its peak performance ought to be along four key dimensions - strategic, operational, organizational and financial - and then systematically sets to work achieving it.

We studied 32 companies that undertook full-potential transformations. On average, they boosted sales by 23%, while growth in earnings before interest and taxes made a U-turn from an average annual decline of 16% preceding their transformations to 20% annual Ebit growth in the subsequent two years. Several were able to leapfrog competitors and claim - or reclaim - leadership positions in their industries.

Despite varying circumstances, transformers followed similar principles: They concentrated on excelling in one or two of their strongest businesses; they quickly cut costs; they transformed capital structures to gain flexibility; and they rejected half-measures.

For many companies, sustained and profitable growth is more likely to result from investing in a fewer core businesses.

Cost reduction may be the single most effective way to start. Tough cost cutting tends to hit the bottom line more quickly.

But revenue enhancements are also key: Thirty-one percent of new profits seen in our study came from activities such as customer segmentation and new products and services.

Preserving cash can be vital when fighting to stabilize operations. But executives looking beyond survival must find opportunities to extend their companies' financial reach - by converting cash flow into capital, for instance, and eventually into shareholder equity.

For all the pain they bring, turnarounds offer an opportunity to break organizational gridlock. Nine out of every 10 full-potential transformers in our study significantly restructured their organizations, aiming to break logjams in three areas: business processes, organizational structure and personnel.

All of these principles of full-potential transformation came to bear at General Dynamics. It was caught in the downdraft of defense spending after the Cold War ended. Instead of waiting for the next military buildup, executives used the crisis to redirect strategy and adopt an entirely new game plan.

The company abandoned its strategy as an integrated defense contractor, choosing to sell six businesses and focus on submarines and tanks, where it created a strategic cost advantage.

It adopted a single-minded focus on cash. A new compensation system geared to return on equity and cash flow reinforced the focus on managing for efficiency. With its increased cash flow, General Dynamics began acquiring "orphaned" defense businesses, underappreciated operations with the potential to be superior performers.

Through 25 acquisitions, General Dynamics has grown from a $3 billion laggard with low growth prospects in 1995 to a top performer in virtually all of its businesses, with projected revenues of $15 billion in 2003. With a return on equity of 20% over the past 12 months, the company continues to outpace the industry, which averages less than 7%.

Full-potential transformation is an aspiration, and difficult to achieve. Yet even partial progress can yield significant improvements in operating results, particularly for companies in turnaround. Once the crisis has passed, managers will find that the principles and strategies that got them out of trouble can boost them to industry leadership.

Indeed, once a company has moved from bad to good, good to great is just a step away.


Vernon Altman, based in Los Angeles and San Francisco, leads Bain & Co.'s full-potential practice. Lisa Walsh is a Bain director in San Francisco and Stan Pace is a director based in Dallas.