team pheonix towards improved theory final

8/3/2019 Team Pheonix Towards Improved Theory FINAL

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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



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



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


Cause Severity

Turnaround Response


(Bibeault, 1982; Hambrick & Schecter, 1983; Schendel et al., 1976; Aammuto & Cameron 1985)

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It is important to correctly gauge your responsedepending on your situation

Don’t bring a knife to a gunfight

high (e.g. Imminentbankruptcy)


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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When turnaround situation has been properly assessedthe appropriate response can be chosen

Turnaround Response


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

team pheonix towards improved theory final

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