Toward improved theory and research on business turnaround

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

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The need for this work on the turnaround process as a base on which to focus empirical research was succinctly stated by Meyer (1988):

Case description of failing organizations have inspired speculative theories that have informed exploratory empirical work. Not surprisingly, much of the evidence currently available is preliminary, and many of the prescriptions currently offered are contradictory ... During a time period when U.S. businesses were chalking up the highest bankruptcy rates in history, most organizational scholars found themselves a long way up the empirical creek without a theoretical paddle (pp. 411-413).

Turnaround

From the low point of their economic performance, researched companies have experienced one of three primary outcomes in the ensuing years:

1. They were reorganized under Chapter 11 or liquidated (Altman, 1968, 1983; Argenti, 1976). The primary focus of research on these firms has been on the identification of financial indicators of impending bankruptcy that can provide early warning signals (Beaver, 1966; Miller, 1977).

2. They languished or achieved moderate improvement in performance but were never able to regain their pre-downturn level of performance (D'Aveni, 1989). Most of these studies involved businesses in industries that had passed the zenith of their life-cycles (Weitzel & Jonsson, 1989).

3. They recovered to match or even exceed their most prosperous periods of pre-downturn performance and earned the label of turnaround firms.

The underlying premise of this article is that competitive action can reverse the consequences of hostile environments or inefficient management practices. The turnaround literature proffers that patience and perseverance by the firm are rarely sufficient to produce profitable performance for the firm, even if it is attractively positioned on the product-market lifecycle (Harrigan & Porter, 1983; Pearce, 1981; 1982). We believe that a key to the achievement of turnaround is for firms to meet financial or competitive adversity with carefully considered, and thoughtfully measured cost reductions while preparing to undertake appropriate asset reconfigurations.

An important commonality can be extracted from the findings of the various research perspectives on turnaround (Ramanujam & Grant, 1989). There is evidence that a basic set of activities are present among firms that achieve turnaround following an absolute or relative decline in financial performance (Altman, 1983; Ansoff, 1977; D'Aveni, 1989; Goodman, 1982; Hall, 1980; O'Neill, 1986; Slatter, 1984). This set of activities is most frequently referred to as retrenchment. As an aid to reconciling the various terms applied to this general field of study, a brief Glossary of key terms is provided as the Appendix.

Regardless of terminology, many of these researchers agree that for the firm with eroding markets or profitability, the efforts to stabilize operations and restore profitability almost always entail strict cost reductions followed by a shrinking back to those segments of the business that have the best prospects of attractive profit margins. In fact, researchers have described such retrenchment as appropriate as an operational response to financial decline in general and as a specialized turnaround strategy (D'Aveni, 1989; Finkin, 1985; Hambrick & Schecter, 1983; Hofer, 1980; Modiano, 1987; Robbins & Pearce, 1992).