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Team Phoenix
Members - Ian Akong, Shad Ali,
Derek Jones, Radha Rampaul,
Karen Lee Lum, Cherese Laptiste,
Ayanna Lloyd & Savitri John
Towards Improved Theory and
Research on Business Turnarounds
Cohort 31/32 Corporate Turnaround Dr. Jules Ferdinand
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BACKGROUND TO ARTICLE
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BACKGROUND TO ARTICLE
Title of Article : Toward Improved Theory andResearch on Business Turnaround © .
Authors: John A. Pearce II, Keith Robbins
George Mason University
Source: Journal of Management,1993,Vol.19,No.3,613-636
Publisher: JAI Press Inc.0149-2063
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ABOUT THE AUTHORS
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JOHN A. PEARCE II
• Professor of Management(Villanova Univ.)
• Chair, Strategic Management &Entrepreneurship
• CIES Fulbright Senior Specialist
Award (2009)
• Expertise - Consulting andExecutive Development
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KEITH ROBBINS
• Chair, Management andMarketing Department(Winthrop University)
• PhD Business Administration,M.Sc Management
• BSc Electrical EngineeringTechnology
• Expertise - StrategicManagement & Teaching
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INTRODUCTION
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INTRODUCTION
• No successful model of business level turnaround duringfinancial decline (Pearce and Robbins,1993)
• Traditional Turnaround efforts result in failure more often thansuccess (Altman, 1983; Nystrom & Starbuck, 1984)
• Despite warning signs, including decline of profits and profitmargins, there is a preoccupation on growth (Heany, 1985)
• This preoccupation is widely reported as primary internal causeof corporate financial decline (Finkin, 1985; Goodman, 1982;Heany, 1985; Slatter, 1984; Sloma, 1985)
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INTRODUCTION
Research is being done to advance theory buildingon management of turnaround in three ways:
Determine & Integrate empirical research
Blend empirical research with practical perspective
Develop a guide to inform a systematic theory
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INTRODUCTION
Methodology (review of existing research)• Single business firms
• Sustained financial or competitive decline
Four Implications inform the Theory Model
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Cause
Severity
Recovery Strategy
Multistage Perspective
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IMPLICATION 1:CAUSE OF THETURNAROUND SITUATION
Schendel and Patton (1976)
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IMPLICATION 1
The cause of the decline is important in order to assess theappropriate recovery response
Authors segmented downturns that resulted from:• Poor Strategy (Inability to adapt to changing environment)
VS• Poor Operations or Poor Implementation of sound strategy
The major findings of the study, showed that:
• Declines caused by operating problems tend to be followed by operating
responses (production bottlenecks, labour strife)
• Declines caused be strategic factors (e.g. obsolete product, pricecompetition etc.) tend to be followed by strategic responses.(e.g. newproducts)
Schendel et al. (1976 and Schendel and Patton (1976)
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PEARLS of Wisdom
IMPLICATION 1Operating responses seldom cure strategicproblems
Important relationship exists between turnaroundresponse and the cause of the decline
Operational and financial restructuring activitiesis the key element of overall restructuringsuccess.
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IMPLICATION 2:SEVERITY OF THETURNAROUND SITUATION
Hofer, (1980)
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IMPLICATION 2 : SEVERITY ANDRETRENCHMENT
• Retrenchment is defined as a set of organizationalactivities undertaken to achieve cost and asset
reductions
• Objective is to stabilize the firm’s financial condition
• Severity of the turnaround situation drives counteractingstrategies
• Hofer (1980) conceptualized a link between severity ofthe downturn and the degree of cost and asset reductionsthat a firm should include in its recovery response.
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IMPLICATION 2:
Less severeturnaround situation
More severeturnaround situation
Operating strategies designedfor cost reductions
Drastic cost reductions
Focused look at product lines Asset reductions
Spending less on marketing Focus on core, kill the non-performing products
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JEWELS of knowledge IMPLICATION 2
• Operating strategies designed for cost reduction arerecommended for firms in less severe turnaroundsituations.
• Drastic cost reductions coupled with asset reductionsare recommended for firms in more severeturnaround situations.
• Basic operating strategies revolve around People,Money, Products and Services.
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IMPLICATION 3: RECOVERY STRATEGIES
Hambrick and Schecter, (1983) O’neill, (1986)
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IMPLICATION 3: RECOVERYSTRATEGIES
Entrepreneurialactions
• Revenuegenerating
• Product/marketrefocusing
Efficiencyactions
• Cost cutting
• Asset reduction
Post-Retrenchment Recovery primarilyinvolves:
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Management
Cutback
Growth
Restructuring
O’NEILL’S FOUR TURNAROUND STRATEGIES
INVOLVENew headNew top managementNew businessMoral building
Cost cutting
Finical &expense controlReplacing losingsubsidiaries
New product promotionmethods
Entering new productareasAcquisitions
Change in organizationalstructureNew manufacturing
methods
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PEARLS of wisdom
IMPLICATION 3• Retrenchment is an isolated phenomenonand is a precursor to recovery activities
• Recovery is said to have been achievedwhen economic measures indicate thatthe firm has regained its pre-downturnlevels of performance.
• The degree and duration of theretrenchment phase should be based onthe firms financial health.
Bibeault (1982)
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IMPLICATION 4:MULTISTAGE PERSPECTIVE
Bibeault, (1982) Grinyer, Mayes and McKiernan, (1988; 1990)
Robbins and Pearce, (1992)
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IMPLICATION 4:A MULTISTAGE PERSPECTIVE
• Bibeault (1982) proposed, that turnaround was typicallyachieved through a two-stage process
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TURNAROUND PROCESS:A MULTI-STAGE PERSPECTIVE• First Stage primarily focused on:
• Survival
• Achievement of positive cash flow
• Classic retrenchment activities:
• Liquidation
• Divestment
• Product elimination
• Labour force Downsizing (Rightsizing)
After the realisation of a crisis, firms focus oncash
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STRATEGIC CHOICES INTURNAROUND
First Stage
1. Stop financial haemorrhaging
2. Stabilizing core operations
Second Stage
Recovery OR Return to GrowthPhase
As the rate of financial decline approaches zero,firms are faced with a decision:
1. Pursue recovery in its retrenchment-reduced form
2. Shift strategy to a return-to-growth stage
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JEWELS of knowledge
TURNAROUND PROCESS:
A MULTI-STAGE PERSPECTIVE
• Bibeault (1982) suggests that the degree and duration ofthe retrenchment phase should be based on the firm’s
financial health
• Cause of decline should factor heavily in formulation ofrecovery response
• Retrenchment as a stabilization measure was consistentlyfound to be valuable, regardless of recovery strategy chosen
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A MODEL OF THETURNAROUND PROCESS
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Internal Factors
External Factors
Turnaround Situation
Cause Severity
low
high
Suggests operations response
Suggests strategic response
Turnaround Response
Retrenchment Phase Recovery Phase
Cost
Reduction
Asset
Reduction
Efficiency
Maintenance
Entrepreneurial
Reconfiguration
StabilityRecovery
(operating)
(strategic)
Firm has‘financial
cushion’
BRINGING IT ALL TOGETHER
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A MODEL OF THE TURNAROUNDPROCESS
Prior research on corporate turnaround providesbuilding blocks for a Model of the TurnaroundProcess.
When a firm encounters multiple years ofdeclining financial performance subsequent to aperiod of prosperity
Turnaround Situation
Cause Severity
Turnaround Response
Retrenchment Phase Recovery Phase
(Bibeault, 1982; Hambrick & Schecter, 1983; Schendel et al., 1976; Aammuto & Cameron 1985)
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A MODEL OF THE TURNAROUNDPROCESS
It is important to correctly gauge your responsedepending on your situation
Don’t bring a knife to a gunfight
high (e.g. Imminentbankruptcy)
Turnaround Situation
Cause Severity
Internal Factors
External Factors
low (e.g. decliningsales/margins)Suggests operations response
Suggests strategic response
Retrenchment
Phase
Cost Reduction
Asset Reduction
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A MODEL OF THE TURNAROUNDPROCESS
When turnaround situation has been properly assessedthe appropriate response can be chosen
Turnaround Response
Retrenchment Phase Recovery Phase
Cost Reduction
Asset Reduction
EfficiencyMaintenance
EntrepreneurialReconfiguration
Stability Recovery
Firms in lessseveresituations canachieveStability via costreductions
Firms in moreseveresituations mustimplement cost& asset
reductions toachieve stability
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PEARLS of wisdom
THE TURNAROUND PROCESS MODEL
• Turnarounds appear to be more successful whenit is preceded by a proactively structuredretrenchment which results in near-term financial
stabilization. Pearce and Robbins(1993)
• Internal Causality may be easier to deal with thanExternal Causality
• ‘A’ model and not ‘The’ model – Every situation isunique
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THE WAY FORWARDSummary, Recommendations and Conclusions
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THE WAY FORWARD
Recommendations for future research
1. Consistency in terminology: Definitional problems and inconsistencieshave slowed empirical progress
2. Improved operationalizations of Turnaround Situation and Success: Some researchers never defined requisite conditions; others have done soonly loosely
3. Test the presumption that “Cause determines appropriate response”: Researchers need to undertake studies of significant sample size to allow
for consideration of the possibilities that retrenchment response is properregardless of the cause
4. Methodologies to test for stages in the turnaround process: e.g.Retrenchment has not been empirically investigated under circumstances
where it precedes implementation of a new strategy
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THE WAY FORWARD
“Some Recommendations for Improved Research onCorporate Turnaround, Pandit (2000)
• Better definitions of Turnaround: Leads to more representative
samples, the analysis of which will lead to better explanations.
• Better research questions: Research questions need to be moreproblem-based if they are to lead to better explanations
• Better methodologies: Better explanations of turnarounddepends on both quantitative and qualitative studies working inconcert
Parallels to Pearce and Robbins
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THE WAY FORWARD
Turnaround Models should include seven essentialingredients:
1. Crisis stabilisation
2. New leadership
3. Stakeholder management
4. Strategic focus
5. Critical process improvements6. Organisational change
7. Financial restructuring(Slatter et al, 2006)
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BIBLIOGRAPHY
• Slatter, S. et.al - Leading Corporate Turnaround: How
Leaders Fix Troubled Companies, John Wiley & Sons Ltd,England, 2006
• Pandit, N. - Some Recommendations For ImprovedResearch on Corporate Turnaround, ManchesterBusiness School, Journal of M@n@gement, Vol. 3, No. 2,2000, 31-56
• Pearce, J. and K. Robbins – Towards Improved Theoryand Research on Business Turnaround, Journal ofManagement, 1993, Vol 19, No. 3, 613-636
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THANK YOU