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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 first stage involved an emergency plan to halt the firm's financial hemorrhaging and a stabilization plan to streamline and improve core operations. These plans combined to produce the firm's retrenchment stage. Bibeault's second phase involved a return-to-growth or recovery stage. While there was some support within the practitioner literature for a multi-stage approach (Bibeault, 1982; Goodman, 1982; Slatter, 1984), the idea has received scant empirical testing (Grinyer, Mayes, & McKiernan, 1988; 1990).

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In Bibeault's (1982) view, turnaround involved a two-stage process for a firm. The initial stage was directed toward the primary objectives of survival and achievement of a positive cash flow. The means to achieve these objectives encompassed the classic retrenchment activities: liquidation, divestment, product elimination, and head count cuts. The advanced stage of the turnaround process shifts toward objectives of growth and development, and growth in market share. The means employed for achieving these objectives are acquisitions, new products, new markets, and increased market penetration.

Between these two stages, Bibeault speculated that a decision was needed on a strategy for the firm. As the rate of financial decline approaches zero, the firm must decide whether it will pursue recovery in its retrenchment-reduced form through a scaled-back version of its preexisting strategy, or whether it will shift to a return-to-growth stage. It is at this point that the ultimate direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a new recovery strategy that emphasizes growth.

Bibeault's major contribution to the development of the turnaround literature was his separation of retrenchment from the concept of recovery. He argued that it was possible and enlightening to observe retrenchment as an isolated phenomenon and as a precursor to recovery activities.

In discussing the two stages, Bibeault was in agreement with Hofer (1980) that the degree and duration of the retrenchment phase should be based on the firm's financial health. He further posited that the recovery phase should be formulated in response to the cause of the decline. He placed special emphasis on the role of retrenchment in providing a stable base from which to launch a recovery phase of the turnaround process.

Grinyer, Mayes, and McKiernan (1988; 1990) and Grinyer and McKiernan (1990) studied the causes of decline, events triggering change, actions taken, and performance characteristics among 25 companies in the U.K. that achieved a sharply improved level of performance. The study offered empirical support for the notion of stages in turnaround actions though the researchers did not objectively measure turnaround situation severity or retrenchment strategy. Although the researchers considered turnaround (i.e., forced change) to represent a different research stream than unforced change, they acknowledged many conceptual similarities.

Business Services Industry

Toward improved theory and research on business turnaround

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

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