A Turnaround Case Study
This case study shows how a struggling $100 million division of a large tech company saved itself by adding services to its product line.
Complicating factors included a lack of capital, a non-innovative culture, poor management and bankruptcy of the parent company..
In the 1990’s the data storage industry started showing rapid growth as the Internet and other digital factors drove up data storage demands exponentially. This $100 million manufacturer of analog IBM storage products, primarily magnetic tape, was experiencing a significant slowdown in sales growth as newer and better storage products from competitors emerged.
The parent company, Anacomp, was a $460 million California-based document management company that manufactured and sold microfiche, plus related services for the data center. The company had just emerged from bankruptcy and wanted to divest its declining IBM magnetic tape business to raise cash for developing an Internet-based document management solution.
However, with declining products across the board and no cash to invest in the newer storage technologies, the data storage division attracted no buyers and appeared to have little choice but to sunset the division and try to optimize profits as it rode the curve down.
How corporate management created the problem
Although it had nearly $600 million in revenues in 1995, Anacomp was a poorly managed company. Throughout the 80s and early 90s the company’s leaders took it on an acquisition binge that drove the company into bankruptcy in 1994.
Anacomp had existed for decades as a sales-driven microfiche and document management company, starting out in Indianapolis and later moving to San Diego. It emerged from bankruptcy in 1996 having divested itself of a hodgepodge of bad businesses.
The company’s flagship product was computer-output-to-microfiche (COM), itself a declining product. At Anacomp, strategic marketing was considered unimportant and the company had problems innovating new products.
Anacomp had acquired Texas-based Graham Magnetics in 1994. Graham’s brands included Memorex and it was the world’s largest manufacturer of reel-to-reel tape. At the time of its acquisition, it was one of three companies dominating the enterprise magnetic data tape industry.
The other two were 3M and German chemical company BASF, each with far more financial strength than Anacomp. Each competitor managed its magnetic tape business as a cash cow. The Graham acquisition was poorly planned, one made without foresight into the rapid changes under way as data storage switched from analog to digital formats.
Without the capital needed to stay competitive, the Anacomp magnetic tape division was looking at certain rapid decline and eventual closure. However with $100 million in profitable sales, it was hoped the division could attract a buyer.
A new team tackles the problem
The newly appointed Magnetics Division President, an Anacomp sales veteran and ex-IBMer, understood that the division needed strategy and marketing help.
He hired a marketing VP with successful turnaround experience to help create a new business for selling data conversion services to the company’s impressive list of customers.
One of Anacomp’s core strengths was its blue chip client list, primarily companies in banking, finance and credit.
Another core strength was a valuable hidden resource: the employees’ collective knowledge of how data center operations worked.
The new marketing VP assembled a team focused solely on the new data conversion business. The new team included energized marketing and sales people from both inside and outside the company.
The new team was sequestered for two weeks and given the assignment of researching and understanding the industry’s and company’s most profitable opportunities, both existing and new. The team followed this format:
- What are the trends in our industry?
- What is driving those trends?
- How have we been addressing those trends?
- How are our competitors addressing them?
- What should we be doing to increase sales and profits?
A new services business was created that focused on helping the company’s 1,000+ clients, many of them Fortune 500s, convert their data from aging storage media to new and better formats.
What happened next
- The new services line was launched to the company’s existing customers and favorably received.
- Targeted investments were made including advertising, direct marketing, internet marketing, telesales and other activities.
- Sales of the new service zoomed to $5.1 million in the first year, all profitable.
This turnaround took six months to ramp and achieve respectable market penetration. At the end of the first full year of operations, the new services business had added $5.1 million in profitable sales at much higher margins than the declining tape business.
A private equity firm became aware of the reinvigorated division and made a successful offer. The division was sold and relocated to Atlanta.
- Companies have hidden assets that can be turned into profits.
- New product development is the lifeblood of most companies.
- A culture of innovative and strategic marketing must exist to stay competitive.
- Sales dominated companies can quickly find themselves uncompetitive when the market shifts.