Toward improved theory and research on business turnaround

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

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Robbins and Pearce (1992) investigated the textile industry during the economic and competitive turmoil of the 1980s. Their study of 32 publicly held textile manufacturing firms provided evidence that retrenchment was a critical first stage for the strategies undertaken by companies that successfully achieved turnaround. Further, Robbins and Pearce found that the severity of the turnaround situation was the best indicator of the type and extent of retrenchment that was needed, although an immediate cost cutting response to financial decline (absolute and relative to the industry) was consistently found to be of value. The researchers also presented a model of turnaround based on evidence that business firm turnaround characteristically involved a multi-stage process in which retrenchment could serve as either a grand or operating strategy.

The question remains however, as to why retrenchment is so frequently an appropriate first step in an overall turnaround process. One possible explanation is that economic decline diminishes the firm's resource slack. Cost retrenchment helps to preserve what remains. Resource flexibility provides additional slack and is achieved through asset redeployment (entrepreneurial reconfiguration). Resource flexibility must be substituted for slack that has been largely depleted, or when the heightened requirements of strategic redirection place additional demands on the firm for resources. These heightened requirements stem from concurrent demands on the firm to overcome the destructive momentum of the established strategy and to cover the high startup costs of implementing the new strategic initiatives. Consequently, retrenchment may be necessary to stabilize the situation by securing or providing slack regardless of the recovery strategy that is chosen.

Implication 4: A theory of business firm turnaround should accommodate the possibility that a turnaround process is multi-staged, involving both retrenchment and recovery activities.

A Model of the Turnaround Process

The implications from prior research have been assimilated and used as the building blocks for a Model of the Turnaround Process. This illustrative model depicts the inter-relationships between causes and severity of the turnaround situation, and between the retrenchment and recovery stages of the turnaround response. Further, it shows three principal ways by which the turnaround situation and turnaround response arc likely to be linked.

Reference is made to "a" model--not "the" model--of turnaround to reflect the fact that differences in turnaround candidates and in their environmental contexts may necessitate different turnaround models. Researchers who choose different types of organizations to study or who place different requirements on their inclusion as turnaround candidates may find that different models of turnaround processes should be investigated. As the understanding of turnaround becomes more complete, theory builders may even find it useful to pair different turnaround models with different turnaround situation causes or severities.