Turnarounds: A stage theory perspective

Canadian Journal of Administrative Sciences, Sep 2002 by Shamsud D Chowdhurry

Stage 2: Response Initiation

Turnaround responses are typically categorized as strategic and operating (Bibeault, 1982; Chowdhury & Lang, 1996; Hambrick, 1985; Hofer, 1980; Schendel et al., 1976). Strategic turnarounds focus on changing or adjusting the business the firm is currently engaged in, and consist of major, long-term moves such as diversification, vertical integration, new market share initiatives, and divestment. Operating turnarounds focus on the way the firm currently conducts its business and involve short-run tactics geared toward cost cutting, asset reduction, and revenue generation. The general conclusion from this dichotomy is that turnaround actions must match the cause of a firm's decline. In other words, if decline stems from structural shifts in markets, the response should be strategic turnaround. If the underlying cause is internal inefficiency, the firm should engage in operating turnaround (Hofer, 1980; Schendel et al., 1976). This dichotomy is somewhat misleading and cannot be universally applicable. Untangling this questionable dichotomy brings into focus three events, which we refer to as domain definition, scope overlap, and strategic contours.

Domain definition. Many of the strategic cures such as diversification, divestment, and vertical integration have limited applicability at an independent business or at the business unit level of a multibusiness corporation. Similarly, product/market refocusing involving geographic expansion, concentric diversification, and acquisition programs is generally feasible only for firms with a broad range of business portfolios. Although large, single-business firms may consider diversification and vertical integration as ways out of decline in their core businesses, these options may be somewhat restricted for their small counterparts. For example, R. J. Reynolds' acquisition of Nabisco exemplifies a classic diversification strategy to compensate for a declining macroniche. Such a major shift in competitive position would be almost impossible for a small, single-business tobacco firm. Beatrice Foods, CBS, General Electric, and Gulf & Western divested major holdings during the early and mid-1980s. Single-business firms simply cannot participate in a sell-off of this magnitude.

Moreover, turnaround strategies even differ across different types of single-business firms, such as an independent single business and the business unit of a corporate parent (Castrogiovanni & Bruton, 2000). For example, as Castrogiovanni and Bruton illustrate, although capital infusion may indeed be an option for a single business within a corporate portfolio, financially distressed independent single businesses may not have this access to outside capital. So, the type of business and its exact strategic and operational domain can only determine the appropriateness and efficacy of a particular strategy or a set of strategies.

Scope overlap. Even though the business domain is clearly defined, the real difficulty may lie in the isolation of the effects of a chosen turnaround strategy, or a combination of strategies, that may be appropriate for a particular type of business. Paraphrasing Pettigrew's (1992) terminology, because strategies have "fluid" characters that spread out over both space and time, a clear-cut delineation of strategies, or of their effects, proves difficult. Castrogiovanni and Bruton's example may be expanded to reinforce this point. A multibusiness corporation may acquire a distressed business to turn it around and then gain valuable synergies between the acquired business and the existing businesses in its portfolio. In such a case, for strategic coherence, changes in corporate-level strategy bring about corresponding changes in business-level strategies of all affected business units, including the newly acquired unit. This correspondence involves multiple levels of analysis and, as a result, it becomes difficult to separate strategies pertaining to one level from those pertaining to others.