Toward improved theory and research on business turnaround

Journal of Management, Fall, 1993 by John A. Pearce, II, Keith Robbins

The identification of appropriate managerial responses to financial decline has become increasingly important. There is mounting evidence that traditional turnaround efforts result in failure far more often than in success (Altman, 1983; Nystrom & Starbuck, 1984).

Consider, for example, that the number of business failures more than quadrupled from 1979 to 1985... the index of net business formation declined 14 percent from 1979 to 1985... American manufacturing has declined rapidly. Over two million manufacturing jobs have been lost since 1980 due to offshore competition... The steel and automobile industries closed so many plants that the industrial Midwest became known as the "rust bowl" (Cameron, Sutton, & Whetton, 1988, p.3).

Although manufacturing industries such as steel, automobiles and textiles were the first to face widespread turnaround situations, the problem is becoming increasingly common in service industries. In the financial services industry, for example, there were over 200 bank failures between 1980 and 1985--a figure that exceeded the total for the previous 40 years (Cameron et al., 1988). Unfortunately, such upheavals may be but a microcosm of the struggles that will ensue in many industrial sectors, both manufacturing and service.

Contributing to the problems encountered in managing during financial adversity is the fact that American executives have historically thought so little about it. Often, they have been seemingly transfixed by the desire for expansion. Theft priority on growth has prevailed despite warning signs including the decline of profits and profit margins (Heany, 1985), such that the preoccupation with growth is widely reported as the number one internal cause of corporate financial decline (Finkin, 1985; Goodman, 1982; Heany, 1985; Slatter, 1984; Sloma, 1985).

Academicians too, seem to have been drawn to think almost exclusively about strategic planning for strong firms--to the detriment of knowledge building on the management of troubled or declining businesses (Bibeault, 1982). The number of studies that investigate mergers, acquisitions, vertical integration, and strategic alliances far outnumber the research efforts that seek a better understanding of the increasingly prevalent cases of business downturn (c.f. Strategic Management Journal editorial review of articles published during its first 10 years of operation, January, 1991). As a consequence, the study of business level turnaround is without a unifying theory to guide its advancement.

However, useful information has resulted from the limited empirical research that has been undertaken. Research results provide evidence of a common strategic action among firms that have successfully confronted decline. This action, referred to as retrenchment, entails deliberate reductions in costs, assets, products, product lines and overhead. In short, research to date suggests that for firms facing declining financial performance, the key to successful turnaround initially rests in the effective and efficient management of the retrenchment activities (Bibeault, 1982; Hall, 1980; Heany, 1985; Moore, 1987).

Yet, little is known about when, how and in what form retrenchment should be employed as a means to halt financial decline. As explained by Behn (1983), retrenchment is a modern problem:

Many organizations have contracted and disappeared over the centuries, but the idea of managing an organization so as to make it smaller but still effective is quite contemporary. In the past, the inevitability of growth--economic, population, and technological growth--made the task of cutback unimportant ... moreover for most organizations, ... growth itself was a primary goal (p.310).

Consequently, research on the role of retrenchment in the turnaround process is also in its formative phase. Similarly, little attention has been paid to a financially troubled business unit's recovery response--the set of reactions designed to profitably reposition the firm, usually after its decline has been blunted by retrenchment. Thus, the purpose of this research is to advance theory building on the management of turnaround in three ways: 1) by determining and integrating the findings from empirical research on financial decline and recovery; 2) by blending the empirical and practitioner perspectives on retrenchment and recovery; and 3) by developing a paradigm to guide future turnaround research based on a highlighting of the strengths and deficiencies of extant empirical findings. These efforts are designed to facilitate a transition from the current stage of tenuous exploratory studies to systematic theory building on turnaround.

By design, the unit of analysis for this discussion will be single business firms or strategic business units, also referred to as firms. Because each of these firms represent an independent company, or a grouping of related subsidiaries within a diversified corporation that share strategic elements, the need to consider a turnaround process is a core issue for the unit. The firms given attention will be those that experience sustained financial or competitive decline over consecutive performance periods. These declines can be either absolute or relative to prior performance levels, but they exclude precipitous drops caused by catastrophe or disaster that require a crisis response.