In the mid ‘90’s “Chancy Inc.” was imploding. Almost daily, the charismatic and mercurial founder announced new and bolder plans to dig us out of the multi-million dollar hole we were in. Senior executives were quietly bailing for more stable climes. Investors were asking if the situation could be righted or if the company should be scuttled.
Sloppiness and overconfidence were the root causes of our problems. When things turned sour short-term fixes only made things worse. As an analyst I was asked to review the financial projections for our biggest new product. It took less than a day to tease out the hubris. Making the first year’s revenue projection would require selling to 100% of the target market. It was a mystery who would be left to buy in the second year.(1)
We were in turnaround.
I see lots of conflicting coverage about the Drumpf campaign shake up — he’s stupid, he doesn’t really want to win, its the consultants padding their wallets. But looked at through a business lens the steps he is taking are textbook. He does bring lots of turnaround experience to the table, lord knows hes created enough of them.
He is showing us that the instincts and managerial discipline to fix a failing company are the opposite of what is needed in the political arena. Given that his business “success” is one of his primary calling cards this ought to be alarming.
Read on to learn why the right thing to in business is the wrong thing to do in politics.
I know a thing or two about turnarounds. I studied them at Wharton(2) and have lived through three. I’ve been in the wrong places at the right times often enough to know what to do in a crunch.
I hope this post expands your understanding of what Trump is doing beyond the facile “he’s dumb/evil” mantra. He is executing a business turnaround in a political context. Let me walk you through it.
Two Models for Turnarounds — The Cure and The Leech
First, lets be clear about the endgame. A turnaround should end with the business delivering value to customers, providing decent and stable jobs for employees, and generating enough profit to sustain investments in new products. If all of that happens investors should earn a fair return. In. That. Order.
We’ll call this approach “The Cure” because the patient is healthy when it is done.
Business turnarounds have an ugly reputation because of vultures like Mitt Romney. They swoop into ailing companies, engage in orgies of self-dealing, and leave stripped and over leveraged hulks to bankruptcy. He got rich flipping the formula on its head — investors first and everyone else be damned.
We’ll call this approach “The Leech” because it focuses on inflated Doctor’s fees for questionable treatments that leave the patient weaker or dead.
The political equivalent of the The Cure is winning an election with clear mandate. It isn’t just about winning the seat, you need to do in a way that allows you to govern.
The political equivalent of The Leech is a bunch of campaign consultants paying themselves big fees on the backs of small donors while flogging a dead horse.
The evidence suggests that Trump’s campaign turnaround is The Leech model, in which case we should slow down to see the flaming wreck but keep on driving. But let’s use the tools a business-person like Trump would employ to see if there is any real hope.
Evaluating the Situation
There is a protocol for helping an ailing company. The very first step is determining if it can be saved. There are three prerequisites for a Cure turnaround. Without all three abandon hope before you start.
- A loyal core market
- Access to working capital
- New leadership at the top
On first blush the Trump campaign appears to be on pretty solid ground. They have real strength in 1 and 3 with some wobbly-ness in 2.
There is less there than meets the eye.
1. A Loyal Core Market
Trump — High Risk
The correct approach in a business turnaround is to consolidate around a core market and ditch everything else — literally. You do not have time or resources to build new markets in a turnaround. Put simply you must shrink a business down to the core and rally around that so you can live to fight another day. No core market, no turnaround.
This problem is actually amplified in the political arena. He has to win in 78 days or it is done and over. Time is not on the campaign’s side.
Trump has a loyal core market, he truly could shoot someone and they wouldn’t care. His business instincts are sound, if your core supporters want to wet their beds over creeping Sharia bring on the Breitbart team to amp that fear up.
Politically this is precisely the wrong thing to do. Coalitions win and they should be doing out-reach not in-reach.
Even if Trump wanted to engage in coalition building his dominance of the narrative through the primaries hurts him, by now pretty much everyone has strong opinions about the man. Changing minds is expen$ive, which brings us to the second prerequisite.
2 Access to Working Capital
Trump — High Risk.
Working capital (cash to cover payroll, rent, normal bills) is like oxygen to a business, and to pull off a turnaround you will need more of it than normal while you shrink your customer base. You need outside support to pull this off.
The existing bankers and investors have to stand behind you during the bridge period with loans and fresh investments. You will not get new people to put money in during a turnaround (unless they are leeches — hi Mitt!).
A campaign isn’t any different — changing your image is more expensive than staying the course. Trump needs to raise MORE money than Hillary to compete at this point. He isn’t.
Trump’s fundraising from his core supporters does appear to be ticking up. But he needs over a billion dollars. That kind of scratch is only going to come from the party and the big money donors. Think of the party as the bank and the big donors as investors (they do).
If the party apparatus pulls back to focus on saving congressional seats it will be the the equivalent of a bank calling in a loan on a business. It would be well and truly over. Watch the moves they make in early September.
Trump went out of his way to snub the big money donors in the primaries and most of them are hanging back. Never call your investors stupid, when you need them in your corner they will wave at you from the crowd.
This may explain the odd fixation on Russian interests in the campaign. If, as suspected, Russian oligarchs are the investors behind a lot of Trump’s businesses then he HAS to work with them at this point. He isn’t going to get anyone else to fill this role.
Hiring Manafort was the turnaround equivalent of taking on a CFO selected by your investors. As a condition of ongoing support the investors put their CFO inside to keep and eye on their money in your hands. So that didn’t turn out well…
Big donors will continue to support “the conservative cause” but they need to believe their money will be well spent on this specific campaign. Which brings us to the third prerequisite.
3 New Leadership At the Top
Trump — High Risk
The most common causes of turnarounds are:
- Corruption
- Idiocy
- Good people making bad calls
In the first two cases the need for new leadership is obvious. Boot the crooks and morons before they do any more damage.
But the vast majority of turnarounds are the result of competent people making bets that don’t pay off. Shit happens, a new category killer hits the market, one of your key customers folds, Bush craters the world economy, R&D hits a dead end, etc.
A lot of people in these orange themed parts want to pin Trumps situation on idiocy. But in business terms he is more like someone caught on the wrong side of a rapid market shift. The switch from his winning strategy in the primaries to the different demands of the general has been jarring. And make not mistake about it — it was a wildly successful strategy in the primaries. Trump is a high speed version of Research in Motion — ferociously hanging on to the Blackberry market and refusing to believe that people would give up a physical keyboard.(3) Except in his case it is misogyny, xenophobia, and racism.
Leadership change has to be at the very top of the organization. Politically this isn’t possible. Despite Bannon’s weird title of “Campaign CEO”(4) the candidate is the senior leader in a campaign organization. Doubling down on a failing strategy with fresh lieutenants isn’t a credible response as far as the big money guys are concerned. Watch and see.
There are two reasons why turnaround organizations need a change at the top.
First, while it may seem quaint, when things go wrong someone should be held accountable. It was part of leadership’s job to anticipate bad things happening and they missed the mark. Investors are not going to bet on a losing team with fresh funds.
Second, during a turnaround commitments need to be changed or postponed. Any leader with a grain of integrity shouldn’t be asked to undo commitments they made personally. To survive the organization needs flexibility. What got you here won’t get you there.
Trump as the candidate is the senior leader on the team. He is accountable for the current situation and by now it should be clear that he isn’t going to change. The flogging will continue until morale improves.
Conclusion
“Chancy Inc.” survived. The founder got booted and new leadership (including yours truly) took over. We sold off or closed down everything that didn’t serve our core market. When we were done we were half our former size. Based on those actions our investors put enough working capital in to carry us for 18 months. Three years later we were growing at twice the rate of the market, hiring like crazy, and investing in a major new product that carried the company for the next 10 years. We did The Cure.
Trump is executing the classic playbook of turnarounds. He is focusing on his core market while (creating the illusion) of bringing in new leadership. We know there are frantic meetings to woo the donor class behind closed doors. In business these would all be the right steps.
But it will fail. If I were scoring his campaign as a business I would recommend shutting it down.
Politically it is even worse. Narrowing your base close to the election is doomed. They can’t change the candidate, Trump will be Trump. Donors will see this and starve the campaign of the working capital it needs to pivot. There is no cure, only leeches lining their pockets before the flame out.
Can we get over the fetishization of running the country like a business as a model for political change — please? Trump’s reaction to his campaign crisis should serve as a case study for why business experience isn’t a panacea for political problems.
Notes
1. Basically, it was going to be “HUGE, details to follow...” Sound familiar?
2. I know big words too! Although mostly they are fancy ways of saying buy low, sell high.
Wharton is the business school at the University of Pennsylvania, not an independent entity. Penn is a great school, but the undergrad Wharton degree is really a Penn Econ BA. Winners get the MBA or the PhD. Just saying Donaldo.
3.This post isn’t the place for it, but how companies respond to disruptive innovation is one of the more fascinating parts of life in the business world. This has more relevance for the Republican Party than for Trump.
In the early days of a disruptive innovation the market leader’s revenues are still growing — why would they respond? By the time they finally acknowledge that there is a problem market momentum is moving away from them faster than they can catch up. See RIM, Sears, Kodak, Blockbuster et al.
4. I ran a search and all the references through page 10 to “Campaign CEO” were from the past week. Normally people in that position are Managers or Directors — C-Suite but not the top position. I haven’t seen any commentary on how weird this is. We know he wants to be the Chairman from his Kasich VP offer. Weird.
5. If there is interest we can run this same analysis for the Republican Party (tl;dr they are in better shape, but only because they have more time).