Description
Analysis, Discussion Of In Depth Case Study And Development Of Revised Model Of Successful
DECLARATION
i
DECLARATION
I declare that this work has not previously been accepted i2004n substance for any
degree and is not being concurrently submitted for any other degree. I further
declare that this thesis is the result of my own independent work and investigation,
except where otherwise stated (a list of references is appended).
Finally, I hereby give consent for my thesis, if accepted, to be available for
photocopying and for inter-library loan, and for the title and abstract to be made
available to outside organisations.
Tamer Mohamed Hassan El Sayed (Candidate)
Prof. David Brooksbank (Director of Studies)
Prof. Eleri Jones (Supervisor)
DEDICATION
ii
DEDICATION
To
My honourable parents,
My beloved wife,
My beautiful daughter ‘Mariam’,
My amazing son ‘Youssef’
I could never find enough words to thank and appreciate them all for the
inspiration, help, encouragement and support they have given and are still giving
me throughout my life.
ACKNOWLEDGEMENTS
iii
ACKNOWLEDGEMENTS
Praise is to Allah the most Gracious and most Merciful who has given me the
ability to do this work. This thesis would not have come to light without the
guidance and support of many people, especially my supervisors Professor David
Brooksbank and Professor Eleri Jones for their endless support, encouragement,
understanding and patience. My supervisors have spared no effort in guiding,
advising and on many occasions, teaching me new skills in order to produce a
good piece of work.
I would also like to thank my dear family for playing the most important role in
encouraging, supporting and understanding me during the whole program.
Additionally, special thanks to all the staff at Cardiff School of Management who
work very hard with a high level of professionalism to support students like myself.
Finally, I would like to thank all participants who took part in the study to make the
possibility of my PhD come true.
Cardiff, Wales 2015
Tamer Mohammed Hassan El Sayed
ABSTRACT
iv
ABSTRACT
There is a growing body of research on turnaround management due to adverse
global economic circumstances. Research on turnaround management aims to
reduce/eliminate business decline. Reviewing the turnaround management
literature revealed that it has not yet been able to provide managers and
practitioners with reliable guidance, or a step-by-step guide to assist them through
the turnaround process. This research aims to identify the key stages of the
turnaround process and to select appropriate turnaround strategies in relation to
particular factors, e.g. causes of decline.
A phenomenological perspective was adopted in this study to investigate the key
turnaround management issues in two multiple case studies, followed by a
feedback analysis from interviews with a panel of experts. The first case study
comprised of 14 large and medium sized UK food manufacturing companies and
used secondary sources of evidence. The second in depth case study involved
three companies, using primary evidence through semi-structured interviews.
Interviews with turnaround and insolvency practitioners were conducted, to
investigate the key issues of the revised model of successful turnarounds in the
light of their daily practices and models.
A general model and step-by-step guide on how to manage a successful
turnaround was developed. The model identifies four key stages (i.e. first, decline;
second, analysis of decline; third, formulation, implementation and stabilisation of
the turnaround plan and fourth, recovery and return to growth). Once decline is
recognised, a leadership decision is made to initiate the turnaround process,
identify major obstacles/problems and select the best actions to stop decline and
return to full recovery. The turnaround model can assist turnaround managers in
evaluating the viability of a company. It also helps analyse a company’s
weaknesses and develop strategies: in the short-term to stop decline and stabilise
the situation; in the longer-term, to identify a company’s strengths and enhance its
competitive advantage to achieve recovery and return to growth.
LIST OF TABLES
v
TABLE OF CONTENTS
Declaration i
Dedication ii
Acknowledgement iii
Abstract iv
Table of contents x
List of tables xi
List of figures xii
List of abbreviations xiii
Chapter one: Introduction
1.1 Background
1-2
1.2 The research rationale 1-2
1.3 The research problem 1-4
1.4 The research aims, objectives and questions 1-8
1.5 Overview of the thesis 1-10
Chapter two: Review of literature
2.1 Introduction 2-2
2.2 Overview of strategic management 2-3
2.2.1 Concept of business decline and failure 2-11
2.2.2 Concept of turnaround 2-15
2.2.3 Stages of the turnaround process 2-18
2.3 Decline stage 2-27
2.3.1 Recognition of decline 2-27
LIST OF TABLES
vi
2.3.2 Change of leadership 2-32
2.4 Analysis of the decline situation 2-35
2.4.1 Viability and competitive advantage 2-37
2.4.2 Severity of decline and cash availability 2-38
2.4.3 Causes of business decline 2-42
2.5 Formulation, implementation and stabilisation of the
turnaround plan
2-60
2.5.1 Classifications of turnaround strategies 2-62
2.5.2 Turnaround strategies 2-65
2.5.3 The best strategy 2-80
2.6 Recovery and return to growth 2-82
2.6.1 Concepts of recovery 2-82
2.6.2 Enhancing the competitive advantage 2-83
2.7 Models for achieving successful turnarounds 2-85
2.8 Theoretical framework of successful turnarounds 2-90
2.9 Summary 2-91
Chapter three: Research approach
3.1 Introduction 3-2
3.2 Research approach 3-2
3.2.1 Qualitative or quantitative 3-2
3.2.2 Deductive or inductive 3-5
3.2.3 Theoretical approach 3-6
3.2.3.1 Epistemology 3-8
LIST OF TABLES
vii
3.2.3.2 Theoretical perspective “Interpretivism” 3-10
3.2.4 Practical approach 3-14
3.2.4.1 Research methodology (case study) 3-14
3.2.4.2 Population and sampling 3-18
3.2.4.3 Research Methods 3-26
3.3 Data analysis 3-34
3.4 Triangulation, reliability and validity 3-36
3.5 Ethical considerations 3-40
3.6 Summary 3-40
Chapter four: Managing successful turnarounds - case
study of 14 UK food manufacturing companies
4.1 Introduction 4-2
4.2 ADM Milling Limited (UK) 4-3
4.3 Bowes of Norfolk Limited 4-10
4.4 Chr. Hansen (UK) Limited 4-16
4.5 Hill Biscuits Limited 4-23
4.6 Icelandic Group UK Limited 4-28
4.7 Kitchen Range Foods Limited 4-34
4.8 Lancashire Eccles Cakes Limited 4-39
4.9 Molls Meats (Birmingham) Limited 4-44
4.10 New Ivory Limited 4-50
4.11 Nimbus Foods Limited 4-56
4.12 Organic Farm Foods 4-63
4.13 Pinguin Foods UK Limited 4-70
LIST OF TABLES
viii
4.14 Stateside Foods Limited 4-77
4.15 Uniq Prepared Foods Limited 4-83
4.16 Summary 4-91
Chapter five: Analysis, discussion and development of
initial model of successful turnarounds
5.1 Introduction 5-2
5.2 Decline stage 5-5
5.3 Analysis of situation stage 5-6
5.4 Formulation, implementation and stabilisation stage 5-13
5.5 Recovery and return to growth stage 5-21
5.6 Initial model of successful turnarounds 5-25
5.7 Summary 5-33
Chapter six: Analysis, discussion of in depth case
study- and development of revised model of successful
turnarounds
6.1 Introduction 6-2
6.2 Castle Dairies Ltd 6-3
6.3 Glanbia Cheese Ltd 6-17
6.4 Peter’s Food Services Ltd 6-26
6.5 Cross-case analysis 6-36
6.6 Modified model of successful turnarounds 6-45
6.7 Summary 6-50
Chapter seven: Analysis, discussion and development
of best practise model
LIST OF TABLES
ix
7.1 Introduction 7-2
7.2 Decline stage7 7-5
7.3 Analysis of decline situation stage 7-12
7.4 Formulation, implementation and stabilisation of turnaround 7-18
7.5 Recovery and return to growth stage 7-27
7.6 Best practise model for successful business turnaround 7-28
7.7 Summary 7-33
Chapter eight: Conclusion
8.1 Introduction 8-2
8.2 Review of objectives and major findings 8-2
8.2.1 Objective 1 8-2
8.2.2 Objective 2 8-4
8.2.3 Objective 3 8-11
8.2.4 Objective 4 8-17
8.3 Contributions 8-20
8.3.1 Contributions to theory 8-20
8.3.2 Contributions to practice 8-21
8.4 Limitation of the research
8-22
8.5 Opportunities for further research
8-23
8.6 Personal reflection
8-24
References
LIST OF TABLES
x
LIST OF TABLES
Table 1.1 The three elements of the turnaround process
1-5
Table 3.1 List of cases in the population (sample frame)
3-22
Table 3.2 Six sources of evidence: strengths and weaknesses
3-28
Table 3.3 The two basic approaches for qualitative data analysis
3-34
Table 5.1 Summary of the cross-case analysis (14 UK food
manufacturing companies)
5-4
Table 6.1 Summary of the cross-case analysis (three in depth UK food
manufacturing companies)
6-37
Table 7.1 Turnaround practitioners v Insolvency practitioners 7-3
Table 7.2 Non-consensual financial restructuring techniques 7-26
LIST OF FIGURES
xi
LIST OF FIGURES
Figure 2.1 Stages of the turnaround process 2-25
Figure 2.2 Stages of decline 2-41
Figure 2.3 The three weapons of the turnaround 2-65
Figure 2.4 The four key turnaround strategies 2-67
Figure 2.5 The Ansoff’s matrix of growth strategies 2-74
Figure 2.6 The key to achieve sustainable competitive advantage 2-84
Figure 2.7 Model of western turnaround process 2-87
Figure 2.8 A framework for successful turnaround 2-88
Figure 2.9 Theoretical framework of successful turnarounds 2.90
Figure 3.1 Thesis theoretical and practical approaches 3-7
Figure 3.2 The three stances of epistemology 3-8
Figure 3.3 The two approaches of phenomenology 3-13
Figure 3.4 Types of case study 3-16
Figure 3.5 Criteria of defining a successful turnaround case 3-18
Figure 3.6 Multiple sources of evidences 3-26
Figure 3.7 The steps of constant comparative method approach 3-35
Figure 4.1 Profit and loss account for (ADM) 4-4
Figure 4.2 Profit and loss account for (BOF) 4-11
Figure 4.3 Profit and loss account for (CHR) 4-17
Figure 4.4 Profit and loss account for (HB) 4-23
Figure 4.5 Profit and loss account for (IG) 4-29
Figure 4.6 Profit and loss account for (KRF) 4-35
LIST OF FIGURES
xii
Figure 4.7 Profit and loss account for (LEC) 4-40
Figure 4.8 Profit and loss account for (MMB) 4-45
Figure 4.9 Profit and loss account for (NI) 4-51
Figure 4.10 Profit and loss account for (NF) 4-57
Figure 4.11 Profit and loss account for (OFD) 4-64
Figure 4.12 Profit and loss account for (PF) 4-72
Figure 4.13 Profit and loss account for (SF) 4-78
Figure 4.14 Profit and loss account for (UPF) 4-84
Figure 5.1 Initial model of successful turnarounds 5-4
Figure 6.1 Profit and loss account for (CD) 6-5
Figure 6.2 Profit and loss account for (GC) 6-19
Figure 6.3 Profit and loss account for (PFS) 6-28
Figure 6.4 Revised model for successful turnarounds 6-47
Figure 7.1 The decline curve 7-6
Figure 7.2 Best practice model of successful turnarounds 7-29
LIST OF ABBREVIATIONS
xiii
LIST OF ABBREVIATIONS
CEO Chief Executive Officer
GNE General National Economy
GNP Growth National Product
MD Managing Director
MLC Memory Lane Cakes Ltd
NP New Product
NPD New Product Development
ROA Return On Assets
ROI Return On Investment
SIC Standard Industrial Classification
SWOT Strengths, Weaknesses, Opportunities and Threats
TMT Top Management Team
P&L Profit And Loss Accounts after taxation
CD Castle Dairies Ltd
NGL Nigel Lloyd
GC Glanbia Cheese Limited
PV Paul Vernon
PFS Peter’s Food Service Limited
GCF Green Country Foods Limited
GFS Glanbia Food Service
GW Grim Wood
FD Finance Director
LIST OF ABBREVIATIONS
xiv
ADM ADM Milling Limited (UK)
BOF Bowes Of Norfolk Limited
CHR Chr. Hansen (UK) Limited
HB Hills Biscuits Limited
IG Icelandic Group UK Limited
KRF Kitchen Range Foods Limited
LEC Lancashire Eccles Cakes Limited
MMB Molls Meats (Birmingham) Limited
NI New Ivory Limited
NF Nimbus Foods Limited
OFD Organic Farm Foods
PF Penguin Foods UK Limited
SF Stateside Foods Limited
UPF Uniq Prepared Foods Limited
TP Turnaround Practitioner
CRO Chief Restructuring Officer
IS Insolvency Practitioner
BPG Best Practice Guideline
CVA Company voluntary arrangement
SOA Schemes of arrangement
PP Pre-packs
CHAPTER ONE: INTRODUCTION
1-1
CHAPTER ONE
INTRODUCTION
1.1 Background 1-2
1.2 The research rationale 1-2
1.3 The research problem 1-4
1.4 The research aims, objectives and questions 1-8
1.5 Overview of the thesis 1-10
CHAPTER ONE: INTRODUCTION
1-2
1.1 Background
My name is Tamer El Sayed, a manager who currently owns and manages a small,
fast food business in Cardiff, South Wales (Jalapenos’ Pizza). I have previously
worked as a despatch manager at one of Cardiff’s biggest private employers
(Memory Lane Cakes Ltd (MLC), a subsidiary of Finsbury Food Group Plc). I am
currently conducting a self-funded PhD study in Cardiff School of Management,
Cardiff Metropolitan University. The topic of my study, which was carefully
selected, is related to the field of turnaround management within in the area of
strategic management.
The study seeks to provide a guide that offers help to managers and turnaround
leaders, practitioners and researchers on how to implement successful
turnarounds. This chapter presents my research journey in sections in the
following order: the research rationale, problems, aim, objectives and questions,
plus an overview of the thesis.
1.2 The research rationale
Organisational turnaround management has become one of the most important
topics of strategic management research in the last few decades (Manimala, 1991;
Arogyaswamy, Barker, Yasai-Ardekani, 1995; Maheshwari, 2000 and Bushen et
al., 2003). This may have been due to the increasing decline rate in companies
especially in the last two decades (Maheshwari, 2000 and Bushen et al., 2003).
CHAPTER ONE: INTRODUCTION
1-3
This increase in the decline rate was seen in times of economic recession as well
as the normal years; in both developed and developing countries (Manimala, 1991
and Maheshwari, 2000). Evidence from the UK and the USA showed that in some
developed countries, 20% of large businesses could be considered to be in
decline, of which less than 40% of those businesses had the chance to survive and
turnaround (Manimala, 1991). In addition, more evidence from India showed that
there are more than 100,000 small units and over 1,000 medium and large sized
businesses in economic decline (Gopal, 2007). The decline and failure of these
businesses usually results in major job losses and lay-offs (Harker and Harker,
1998).
From the above statements, it can be seen that the increasing attention given to
research on organisational turnaround management is logical and needed to
minimise or eliminate the increasing number of declining businesses. This
provides me with a very important academic reason to conduct this research. In
addition, there are economic, social and personal reasons behind the choice of this
topic. The economic reason lies in the employees’ loss of income when they lose
their job, as well as the negative effect of failed businesses on the economy as a
whole. The social reason mainly comes from the fact that business failure affects
the lives of all parties who share an interest in the business (e.g. suppliers,
customers, staff, shareholders, banks and the wider community) (Zimmerman,
2002). For example, when staff lose their jobs, they may also lose their
confidence, self-respect and even the unity of their family in some cases (Harker et
CHAPTER ONE: INTRODUCTION
1-4
al, 1998). Business decline cannot be avoided all the time; however, identifying,
understanding and analysing the causes of decline is critically vital in order to
minimise the overall number of failures amongst businesses and thus minimise the
negative effect on those people’s lives (Everett and Watson, 1998 and Dubrovski,
2009).
Additionally, the personal reason is mainly related to my previous job as a manager
in a Welsh food manufacturing company as mentioned earlier. Since I started in
this role, I began to learn about the company’s turnaround experience, which it had
gone through from 1997 to 2003. Since then, I became inspired with the effort that
the leadership had put in to help revive and save the company. This experience
gave me the courage and motivation to investigate how the company’s turnaround
was successfully achieved, what the issues and obstacles were that faced the
management during the whole turnaround process and how they managed to
overcame such obstacles.
1.3 The research problem
Federowski (2007) and Schmitt and Raisch (2013) have asserted that there have
been several studies which investigated corporate turnaround management during
the last few decades. Those studies have evolved around one or more of three
interdependent elements of the turnaround process which are: context, content and
CHAPTER ONE: INTRODUCTION
1-5
process as shown in the table below (Arogyaswamy and Yasai-Ardekani, 1997:
Federowski, 2007).
Context Content Process
Research
aim
Identify the factors
(internal/external) that
influence the success of
the turnaround process.
Identify the actions and
the turnaround options
that can be adapted to
eliminate decline.
Identify the
appropriate workflow
steps and actions that
can be followed to
achieve the
turnaround.
Questions
asked
Why does it work? What should be done? How should it be
done?
Examples Variables can be causes
of decline, severity of
decline, economic and
market development,
size of company and
routines.
Strategic realignment,
repositioning, cost
reduction, product
development,
recapitalisation, process
optimisation, and
organisational change.
Four stage model of
Bibeault, 1982.
Steps of milestone
model (see
Federowski, 2007:29)
Many scholars (e.g. Hegde, 1982; Arogyaswamy et al., 1995; Pandit, 2000 and
Schmitt and Raisch, 2013) asserted that those studies failed to provide a clear
model for managers, leaders and turnaround practitioners, because it offered little
Adapted from: (Arogyaswamy and Yasai-Ardekani, 1997; Federowski, 2007)
TABLE 1.1: THE THREE ELEMENTS OF THE TURNAROUND PROCESS
CHAPTER ONE: INTRODUCTION
1-6
guidance and failed to draw a clear picture of the topic and its issues. Similarly,
various authors (Winn, 1993 and Lohrke and Bedeian, 1998) added that the
literature on turnaround management, offered very little guidance to managers
involved in daily operations during the turnaround process. Nevertheless, this
guidance has been contradictory and inconsistent at times (Lohrke and Bedeian,
1998; Lohrke, Bedeian and Palmer, 2004).
Based on evidence from the turnaround literature, the reasons behind this lack of
clarity and guidance of existing research on turnaround management can be
summarised and concluded by the following reasons:
1. Failure of research designs to connect their findings to current turnaround
theories. Relying on accounting measures (with high possibilities of
manipulation) to define turnaround cases resulted in doubtful samples of
study (Pandit, 2000).
2. Various problems with the research designs such as: poor definition of
turnaround as a phenomenon, asking questions that were previously asked
or not asking the correct questions (Pandit, 2000).
3. There has been extra attention given to research on the content (different
strategies and turnaround options) of turnarounds over the contexts (why
and when a strategy would work) of them; ignoring various factors such as
the severity of decline and the role of stakeholders (Arogyaswamy et al.,
1995 and Pandit, 2000).
CHAPTER ONE: INTRODUCTION
1-7
4. There have been only a limited number of researchers who focused on the
role of the top management team (TMT) in the turnaround process, to
identify market opportunities and restore original performances (Lohrke and
Bedeian, 1998).
5. There have been few empirical studies, which focused on the effectiveness
of some turnaround strategies, instead of investigating how they were
formulated and implemented by management from a process point of view
(Lohrke, Bedeian and Palmer, 2004).
6. The excessive focus on retrenchment as an initial response to decline and
the lack of examination of the interaction between stages of turnaround
(Arogyaswamy and Yasai-Ardekani, 1997). “The literature lacks fully
integrative models that clearly define the stages in the turnaround process
and highlight the critical contingencies that impact each other”
(Arogyaswamy and Yasai-Ardekani, 1997: 496).
Manimala (1991:95) suggested that there should be a link between the causes of
decline and the chosen turnaround strategies. However, he added that there has
been very little attention given to the investigation of this linkage stating that, “In
many case studies very little attention was paid to the identification of causes and
their relation to strategies, which therefore becomes a major task for future
researchers”.
CHAPTER ONE: INTRODUCTION
1-8
Consequently, this study is designed to contribute to a better understanding of the
topic of organisational turnaround management by:
1. Investigating the topic of turnaround management from an overall stage
theory perspective, with emphasis on the three elements of the turnaround
process (i.e. context-content-process).
2. Establishing a linkage between the causes of decline and the appropriate
turnaround strategies.
3. Including other turnaround theories and models in this study in order to link
the findings to other current turnaround theories and contribute to presenting
a clearer picture of the turnaround topic.
1.4 The research aims, objectives and questions
The aim of this study is to develop a good practice model of how to turnaround a
company in decline, so that it recovers and heads toward profit and growth. The
model should represent the three elements of the turnaround process, to guide
company leaders, turnaround managers and practitioners through the turnaround
process stage by stage, until recovery is successfully achieved.
The aim of this study will be achieved through four objectives, which are as follows:
1. Undertake a critical review of literature to develop a theoretical framework
to achieve successful turnarounds. This to investigate the key issues
CHAPTER ONE: INTRODUCTION
1-9
relating to turnaround management as well as management approaches,
to underpin their turnaround strategies.
2. Investigate the key issues of turnaround management by developing
multiple case studies of some companies, to see if the conceptual
framework and its key issues fit those companies’ experiences and to
then modify the conceptual framework upon the findings.
3. Explore the modified conceptual framework and its key issues in depth,
through detailed multiple case studies which faced similar scenarios; this
is to identify the possibility of generalising findings to wider situations.
4. Develop a panel of expert study with practitioners working in the
turnaround industry, upon which the best practice model to achieve
successful turnarounds will be developed. This model will reflect
modifications made after each phase of the study.
These objectives will be achieved by answering the following research principle
question, how do you successfully turnaround a company in decline? This
question will be addressed by answering the following sub questions:
1. How can decline be recognised?
2. What are the appropriate stages of the turnaround process?
3. What are the common causes of decline?
4. What are the appropriate turnaround strategies to include in any
turnaround plan and how and when can each strategy be implemented?
5. How can recovery be maintained and future decline prevented?
CHAPTER ONE: INTRODUCTION
1-10
1.5 Overview of the thesis
The thesis is divided into seven chapters. This first chapter presents the
background of the topic, through the research, rationale, problems, aims,
objectives, questions and finally an overview of the thesis.
In chapter two, the current available turnaround literature is critically reviewed,
investigated and analysed in sections, in order to highlight all the key issues
relating to the topic. The chapter concludes with a theoretical framework that
reflects on how successful turnarounds can be achieved using a stage theory
model and ends with a summary.
Chapter three identifies the research approach adapted in this study. It covers the
theoretical approach (epistemology, theoretical perspective), as well as the
practical approach (methodology, methods). The chapter also provides some
justification for the research methods used to assemble the objectives. It also
explains the data analysis process, in addition to issues related to research validity,
reliability and triangulation. Lastly, the chapter discusses the potential for
generalisation and ends with a summary.
Chapter four investigates the key issues of turnaround management through a
multiple case study, to see if these issues fit the experience of the companies
observed. The chapter considers each company separately, guided by the key
CHAPTER ONE: INTRODUCTION
1-11
stages of the turnaround process (see Section 2.2.3) using secondary data, with a
discussion relating to the company’s history, decline problem, causes of decline,
adapted turnaround strategy and its recovery.
Chapter five presents a cross-case analysis to the cases investigated in Chapter
four. The cross-case analysis aims to identify similarities and differences, between
each company during the same stages of the turnaround process, to create a
pattern for the appropriate turnaround action during each stage and the turnaround
process as a whole. The chapter concludes with the development of the initial
model of successful turnaround and ends again with a summary.
Chapter six aims to explore the key issues of the initial model of successful
turnaround management developed in chapter five in depth, through a multiple
case study, to identify the possibility of generalising data to wider situations. The
exploration process was guided by the stages of the turnaround process (see
Section 2.2.3) for each company separately. A cross-case analysis between the
three companies was conducted, to reveal similarities and differences and to
reflect changes on the modified model of successful turnaround management. The
chapter ends with a summary.
Chapter seven covers the panel of expert study conducted with turnaround
experts, to investigate the modified model of successful turnarounds in depth and
increase validity and reliability of the model. Upon this, a best practice model of
CHAPTER ONE: INTRODUCTION
1-12
successful turnarounds was developed to guide company leaders, turnaround
managers and researchers on how a successful turnaround can be achieved. The
chapter ends with a summary.
Chapter eight represents the conclusion in which reviews of the research
objectives are presented, in addition to an outline of the researchers major
findings. The chapter also emphasises the thesis’ contributions, limitations and
opportunities for future research.
CHAPTER TWO: REVIEW OF LITERATURE
2-1
CHAPTER TWO
REVIEW OF LITERATURE
2.1 Introduction 2-2
2.2 Overview of the strategic management 2-3
2.2.1 Concept of business decline and failure 2-7
2.2.2 Concept of turnaround 2-11
2.2.3 Stages of the turnaround process 2-13
2.3 Decline stage 2-22
2.3.1 Recognition of decline 2-22
2.3.2 Change of leadership 2-26
2.4 Analysis of the decline situation 2-31
2.4.1 Viability of the company to turnaround 2-32
2.4.2 Severity of decline and cash availability 2-33
2.4.3 Causes of business decline 2-38
2.5 Formulation, implementation and stabilisation of the
turnaround plan
2-57
2.5.1 Classifications of turnaround strategies 2-58
2.5.2 Turnaround strategies 2-62
2.5.3 The best strategy 2-77
2.6 Recovery and return to growth 2-80
2.6.1 Concept of recovery 2-80
2.6.2 Enhancing the competitive advantage 2-80
2.7 Models for achieving a successful turnaround 2-83
2.8 Conceptual framework of successful turnarounds 2-87
2.9 Summary
2-90
CHAPTER TWO: REVIEW OF LITERATURE
2-2
2.1 Introduction
This chapter is designed to investigate how companies can successfully be turned
around by reviewing the current related literature on the topic of turnaround
management. Section 2.2 gives an overview of the strategic management
literature and differentiates between the concepts of business decline and business
failure. This is followed by a discussion on the concept of turnaround as a process
and its different stages according to different scholars in turnaround literature.
Conclusions have been drawn from the turnaround literature establishing four key
stages for the turnaround process, upon which the rest of this chapter is presented
in sections, discussing the key issues related to the topic in the light of those
stages and they are as follow: [1] The decline, [2] Analysis of the decline situation,
[3] Formulation, implementation and stabilisation of the turnaround plan, and [4]
Recovery and return to growth.
The chapter extensively discusses the first stage of the turnaround process i.e. the
decline stage. This section aims to investigate all the key issues during this stage
of the process in which the first, initial steps of the turnaround take place. The
chapter further discusses the next stage of the turnaround process i.e. analysis of
the decline situation to highlight a company’s viability to turnaround (source of the
competitive advantage), severity of decline and the common causes of business
CHAPTER TWO: REVIEW OF LITERATURE
2-3
decline. This stage is considered the most important stage in the turnaround
process. This is because all the gathered information about the business during
this stage will be used to draw a clear picture of the company’s current status,
which will be used as a foundation for the turnaround plan. This stage is followed
by formulation, implementation and stabilisation of the turnaround plan, which
focuses on the development of the short-term strategies that mainly aim to stop the
immediate decline of the company, in relation to the original causes of decline.
The chapter lastly covers the return to growth stage, in which the leadership
develops long-term strategies that will maintain improvements and take the
company forward.
The chapter also discusses the current models of successful turnaround
management in order to link findings from this study to other studies and build
upon them. A conclusion for the chapter is then drawn with a developed,
conceptual framework of successful turnaround management. The chapter ends
with a summary.
2.2 Overview of strategic management
The term “strategic management” became popular and widely used in many US
Business Schools in the 1960s, despite the existence of a substantial previous
literature which related in the main to strategies to do with war (Segal-Horn, 2004).
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However, the “strategy” concept in relation to decision making in businesses and
firms was only adopted in the 20
th
Century. A strategy was defined as, “the science
and art of employing business resources to secure objectives, with emphasis on
adjusting to a competitive environment” (Mason, Harris & McLaughlin, 1971:11).
Volberda (2004) emphasised that an organisation strategy definition has always
being associated with concepts such as organisation goals, its allocated resources
and future plans.
Volberda (2004) further asserted that the strategic management literature has not
yet offered managers in their daily operations, with appropriate theories to guide
them through a growing, changing, competitive market, despite the availability of
various recipes for success in the literature. Since the 1960s, an interest and an
argument has grown in the strategic management literature, with regards to how
strategies are formed/formulated. For example, in research by Segal-Horn (2004)
to understand how strategies can be formulated within an organisation, those two
types of strategies were referred to as “top-down planning” and “strategic decision
making or planning”, asserting that strategic management has moved from the
earlier to the latter. Segal-Horn (2004) emphasised that there has been a shift in
the strategy approach over the last forty years as the concept has changed from
one seen as top-down planning and the responsibility of senior management, to
the more modern-day approach where strategic approaches are based on the
need to react to rapid change in the environment and uncertainty.
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Similarly, Waters & Mintzberg (1985:257) compared what they defined as
“deliberate strategies” and “emergent strategies”. They explained that deliberate
strategies are those decisions that were implemented as partly formulated plans by
top management to achieve the organisation’s goals and focused on control and
target achievement from the top. While the emergent strategies were those sets of
unintended organisational behaviours that formed the working patterns which later
became decisions and strategies and usually stimulates organisational learning.
The deliberate strategies concept was mainly the view and beliefs of what was
called the “classical/planning” school of strategy and its sponsors (e.g. Sloan,
1963; Ansoff, 1965) since the early 1960s, with an emphasis that strategy is a set
of formal tools to allocate resources that will create and support long-term
competitive advantage according to existing company strengths and external
opportunities (Ansoff, 1965: Andrews, 1971 and Segal-Horn, 2004). However, as
emphasised by Segal-Horn (2004), these concepts were highly criticised and
considered to have become outdated by the 1980s because of emerging concepts
in “strategic thinking” led by writers such as Michael Porter (1985), who
emphasised the source of competitive advantage, guided by analysing the levels of
an industry structure to determine potential levels of industry profitability and
potential market share.
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By the 1990s Porter’s idea of analysing the external competitive environment was
superseded by a shift towards a new approach centred on the “Resource-Based
View” of the firm (RBV) where the emphasis is on the internal resources of a
company identifying a competitive advantage within the organisation (Prahalad and
Hamel, 1990 and Segal-Horn, 2004). Additionally, the 20
th
Century was
characterised with the emergence of various theories that argued that old,
traditional theories would not help in overcoming problems relating to continuous,
changing markets and industry structures. Instead, such theories encouraged the
idea of the rise of conflicting views and experimentation to enhance organisational
learning (Segal-Horn, 2004).
Segal-Horn (2004) describes further parallel approaches which were developed to
explain strategic management which include:
1. The Classical/Planning approach: driven by the concept of, “deliberate strategies”
as strategies are developed from top to bottom with an emphasis on building
internal capabilities, against external strengths/weaknesses.
2. The Evolutionary approach: driven by the concept of “emergent strategies” as the
planning is seen as irrelevant to business survival. The changing competitive
market is seen as the main variable that drives strategy development.
3. The Processual approach: driven by the concept of, “emergent strategies” as a
strategy was seen as a product of a process of integration of internal variables.
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4. The Systematic approach: considered to be “context specific” as strategies will
reflect a background of social, political and/or religious context that may vary in
different parts of the world, according to their own strategic goals.
In another argument, Volberda (2004:40) stated that “the main concern of the
proponents of integration in strategic management was the lack of accumulation of
knowledge due to the fragmented state of the field”. Volberda (2004) supported
what was called “strategy synthesis” to overcome the differentiation-integration
dilemma in strategic management and lack of knowledge accumulation in the field.
Strategy synthesis prescribes three modes of strategy i.e. Boundary school,
Dynamic school and Configuration school. However, Volberda (2004) reported
that the three modes overlap and allow the emergence of new schools that help in
knowledge accumulation. Volberda (2004) further added that despite the
continuous change in the highly competitive environment, producing new
contradicting theories, it has indeed supplemented, expanded and deepened the
knowledge base of strategic management.
Mason, Harris & McLaughlin (1971) emphasised that an important part of any
strategy formulation process is to locate, realise and fully understand the
company’s solid advantage (e.g. saleable product, proven market, operating assets
or skilled staff), in order to work on enhancing it later on in the process. Hambrick
and Cannella (1989) argued that implementation procedures are critically important
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2-8
during the first steps of the formulation process. They explained that mistakes lay
in the root of many failed businesses, because the formulation and implementation
processes are usually treated as two separate stages. Hambrick and Cannella,
(1989) also explained that this is due to the fact that no leaders can draw a
complete step-by-step strategy first time, but instead they should think about
formulating a strategy that they are able to use to implement and achieve the
desired targets, with the least amount of risk.
Moreover, Scherrer (2003) reported that in this stage, recognising the company’s
finance and accounting system is vital. Scherrer (2003) further explained that the
management should implement the budget that reflects the actual costs, rather
than the estimates. Furthermore, he explained that this would assist them to stay
within their financial boundaries and fixed costs. Additionally, it was reported that
analysing customer’s needs and types (e.g. productive or less productive
customers), is essential to stop the continuous decline, by letting the management
concentrate on the more profitable ones (Scherrer, 2003).
The strategic management literature offered various organisational strategies for
companies desperate to avoid failure and maintain their profit and growth plans,
through gaining higher shares of the market (Dess and Davis, 1984). For example,
Nandakumar, Ghobadian and O’Regan (2011:222) reported that there are three
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different classifications that organisational strategies can be classified under and
they are:
1. Corporate level strategy: this strategy is, “Concerned with domain selection,
that is to say, the vertical, horizontal market scope and linkage and level of
integration amongst different businesses”.
2. Business level strategy: this strategy is interested in highlighting the
methods of competing successfully in the marketplace within the industry
and it attracts the most attention from researchers in strategy research
studies.
3. Functional level strategy: this strategy is interested in maximising
productivity from the existing resources in each task of the company’s
operations.
Moreover, Porter (1980) introduced a paradigm that includes three groups of
strategies, which can be used to strengthen the company’s footing in the
marketplace on the basis of having a competitive advantage to outperform
competitors and they are:
1. Cost leadership: this strategy aims to achieve efficiency through creating
basic products at the lowest cost possible and this requires continuous
research to find ways to minimise overheads. However, carrying out such a
strategy should not neglect the importance of improving the quality of
products and the services provided to customers. There is some argument
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that such a strategy requires a high share in the market or professional
access to cheap raw materials, but Porter disagrees with such arguments,
reporting that some small firms have successfully adapted such strategies,
with no high market share or cheaper access to raw materials.
2. Differentiation: adapting such a strategy requires the company to develop a
unique advantage that is seen exclusively by customers in the market (e.g.
new product or services). However, the use of such a strategy may incur
higher costs; nevertheless, this can be overcome by adopting a premium
pricing scheme alongside this strategy.
3. Segmentation (focus/or market niche leadership): firms would adopt this
strategy to focus on certain customers, markets or products that are more
profitable to the company.
Porters (1980) and Dess and Davi (1984) argued that companies which fail to
adopt any of the strategy groups mentioned above, would suffer lack of profitability
and decreased performance. It was reported that companies differ in their use of
certain strategic choices even within the same industry, due to size, market share
and/or the strategic orientation of the management (Dess and Davis, 1984).
Relatively, it was highlighted in the literature that there are generic strategies such
as niche, differentiation, growth and turnaround each one of which is adapted in
line with the company’s needs and strategic goals (O’Neil and Duker, 1986).
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Beeri (2009:132) asserted that turnaround strategies are different from other
performance improvement strategies because, “They aim to create a radical and
wide change, they are urgent, they are widely inspected, they are executed by
either poor or new management and they are implemented in an unproductive
organisational climate”. Turnaround strategies are designed to help businesses,
which suffer decreased or negative profitability and become vulnerable to failure in
the marketplace (Lorke and Bedeian, 1998). Various authors (e.g. Schendel,
Patton and Riggs, 1976; Sudarsanam and Lai, 2001 and Pretorius, 2009) asserted
that understanding turnaround management comes from understanding decline
and failure, therefore a discussion of the concepts of both phenomena will follow.
2.2.1 Concept of business decline and failure
There is no one common definition for business decline and failure. Several
researchers from the east to the west have differently defined business decline and
failure in relation to their focus, research problems, interpretation criteria and
diversified fields of research, which created a poorly defined concept of business
failure (Pretorius, 2009). It was found that decline and failure were defined in
relation to various criterions such as the amount of cash loss, bankruptcy risk,
profitability, ability for growth and lack of resources.
For example, from the east, Manimala (1991) reported that the Indian government
identified companies in decline according to the cash loss criterion whereby a
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company is thought to be in decline if it reaches 50% erosion of peak net worth.
However, this criterion was criticised by researchers in relation to its effectiveness
according to Manimala (1991). He explained that this is because the definition
delays any possible turnaround efforts to save the company when time is critical at
this stage.
Furthermore, from the west, Lorke and Bedeian (1998) have defined a company in
decline as the company facing trouble and threats to its existence. Similarly,
various scholars (e.g. Schwartz and Menon, 1985; Hambrick and D’Aveni, 1988;
Zacharakis et al., 1999; Sudarsanam and Lai, 2001; Ferrier et al., 2002 and Probst
and Raisch, 2005) defined business decline in relation to the firms potential as a
bankruptcy risk. However, in contrast, Pretorius (2009) disagreed with this
definition arguing that decline and failure should be defined separately from
bankruptcy. This is due to the idea that failure is not associated with deliberate
situations as it sometimes is in bankruptcy. Similarly, Everett and Watson
(1998:373) also disagreed with defining failure in relation to bankruptcy risk, for a
different reason stating that, “It may exclude many businesses that would
commonly be regarded as having failed”.
However, Pretorius (2009:10) introduced a definition for business decline and
failure in a study conducted on defining business decline, failure and turnaround.
He constructed his definition in relation to the business’ lack of resources defining
decline stating that:
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A venture is in decline when its performance worsens (decreasing
lack of resources) over consecutive periods and it experiences
distress in continuing operations. Decline is a natural precursor in
the process of failure.
Furthermore, Pretorius (2009:10) stated that:
A venture fails when it involuntarily becomes unable to attract new
debt or equity funding to reverse decline; consequently, it cannot
continue to operate under the current ownership and management.
Furthermore, other researchers (e.g. Bibeault, 1982; Hoffman, 1989; DeAngelo
and DeAngelo, 1990 and Lasfer and Remer, 2007), defined a business in decline
in relation to its profitability, arguing that profitability is one of the main targets of
any business. However, some of these researchers defined decline in relation to
negative profitability and some defined it in relation to the continued decrease in
profit for a period of time, even if the profitability was positive. For example, Lasfer
and Remer (2007), reported that a financially declined business is a business that
suffers three consecutive years of negative net income, followed by at least one
year of positive net income. Lasfer and Remer (2007:3) added that this definition
allowed them to avoid adapting any outcome based definitions (e.g. bankruptcy),
stating that, “Such outcomes are a consequence or resolution/existing paths
adopted by companies that are financially-distressed”. On the other hand, Bibeault
(1982) and DeAngelo and DeAngelo (1990) have defined business decline stating
that it, “Means several years of deteriorating profits. In four out of five cases,
decline includes one or more years of unprofitable operations, large non-operating
write-offs, or both”. Similarly, in a study conducted on 54 firms up until 1970,
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Schendel, Patton and Riggs (1976) identified firms in decline as firms that suffer at
least four years of consecutive decline in their net income, as normalised by gross
national product (GNP) growth. They explained that a firm, which is not performing
better than the general national economy (GNE) and not exceeding the growth rate
of GNP, is a turnaround case, even if it is making some growth in income. This
view was supported by Khandwalla (1989), who reported that a company is in
decline if it is no longer able to support any growth over the industry average.
Schendel, Patton and Riggs (1976:4) stated that, “The four year time span is used
to ensure that the downturn period was long enough to show that there is indeed
some basic problem with the firm and that it had not simply made a minor mistake
with a short-term impact”.
However, Bibeault (1982) disagreed with this definition reporting that it had ignored
the idea that each industry has its own unique characteristics and strategic goals
and exceeding the GNP may not be one of these goals. For example, businesses
that are owned by states and governments in which the top priority sometimes can
be keeping people in work to minimise unemployment rates, may not have the goal
of exceeding GNP. Additionally, Pandit (2000) criticised the same description
reporting that such definition fails to differentiate between real and temporary
decline cases. For example, if a company performs better than its competitors in a
difficult business environment at a time when the economy is flourishing, it may be
considered in decline even though it is not.
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It can be concluded from the above debate that the concepts of decline and failure
are not quite robust yet, due to the different interpretation offered by different
scholars to such phenomenon. This conclusion is supported by the view of Pandit
(2000) who argued that research on organisational turnaround management is not
fully understood due to such different definitions and interpretations. Therefore, for
the purpose of this study and in line with the views of many authors (e.g. Hoffman,
1989; DeAngelo and DeAngelo, 1990 and Lasfer and Remer, 2007), this study
identifies firms in decline as those firms that suffer at least three consecutive years
of negative net income, following at least one year of positive net income. The
reason behind defining decline in relation to negative profitability in this study, is
that the researcher agrees with the idea that profitability is the main goal for most
businesses and the reason for the three year time span is to make sure that the
company is not in natural temporary decline, which most firms experience during
the normal course of their lifecycle.
2.2.2 Concept of turnaround
Turnaround was described by Zimmerman (2002) as a multifarious process of
organisational learning experiences, which are achieved through learning how to
do things in new and more efficient ways. Zimmerman (2002:30) stated that,
“Turnaround management is a specific science which requires the ability to nurture,
encourage and reinforce what is good as well as root out what is unsatisfactory”.
Additionally, corporate turnarounds were defined as a, “Dynamic process
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comprising an activity sequence that leads firms from a decline situation, to a
period of sustained success or failure” (Schmitt and Raisch, 2013).
Scherrer (2003) added that successful turnaround is a complex procedure that
requires a solid management team and a sound business core. Turnaround is the
process of persistent constructive change in the performance of any business,
which aims to achieve the desired results (Scherrer, 2003). Moreover, the
turnaround process can also be defined as:
That amalgam of managerial skills, systems and procedures used;
the value systems and individual character traits exhibited and the
actions taken during the turnaround event to achieve a recovery.
(Zimmerman, 2002:30)
Various scholars (e.g. Schendel, Patton and Riggs, 1976; Hoffman, 1989; Barker
and Duhaime, 1997 and Pandit, 2000), have defined a turnaround strategy as the
selection of actions and activities that are required to achieve a business’s survival
and recovery from decline. Turnaround is achieved when a company in decline
returns to its previous status before decline and heads towards growth as a result
of some reversing strategies (Schendel, Patton and Riggs, 1976). Similarly,
O’Kane (2006:112) stated that, “Successful turnarounds are most often associated
with the reversal of a survival-threatening decline”. In addition, Pretorius (2009:11)
stated that:
A venture has been turned around when it has recovered from a
decline that threatened its existence, to resume normal operations
and achieve performance acceptable to its stakeholders
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(constituents) through reorientation of positioning, strategy, structure,
control systems and power distribution.
Furthermore, Zimmerman (2002) defined a turnaround case as the company that is
faced with a period of crisis serious enough to make it in need of radical
improvements, to remain a strong participant in its industry. Notably, Chowdhury
(2002) emphasised that these improvements will not happen as a result of a single
event. He explained that a series of multiple consequential events during a
specific period of time is required to achieve improvements in performance. From
this point, Chowdhury (2002) suggested that because turnaround is of a dynamic
nature due to occurring consequential changes within the process, it is logical to
study any turnaround from a stage theory perspective, in which each stage is in
sequence to the other. Additionally, Chowdhury (2002) argued that studying
turnaround from this perspective helps to understand how and why businesses
respond to turnaround actions differently over time, leading to successful or
unsuccessful turnaround.
From the above discussion, it can be concluded that the turnaround process is a
constructive set of consecutive stages of actions that aim to correct original faults,
which led a business into decline in the first place, eliminate weaknesses and plant
new skills and strengths within the company to help achieve recovery and growth.
Any turnaround process should follow certain stages and steps to ensure its
success, as discussed in the next section.
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2.2.3 Stages of the turnaround process
Decline in most companies starts gradually and then accelerates towards failure;
therefore, Zimmerman (2002) suggested that the most appropriate time for a
successful turnaround is during the early stages of decline. This is because there
may be enough time left to formulate and implement a suitable turnaround plan
before the company’s time and resources are depleted.
Several authors (e.g. Zimmerman, 2002; Scherrer, 2003; (Lohrke, Bedeian and
Palmer, 2004; McGovern, 2007) asserted that in order to turnaround any company
in decline, the management is required to identify and analyse the causes of
decline as soon as signals appear. They must then formulate and implement a
plan that reverses the company’s status to where it was before decline and head
towards growth. The reason behind this was made clear by Hegde (1982:302)
that, “Any turnaround strategy tends to build around eliminating the cause of
sickness”. Similarly, various scholars argued that any turnaround process should
be implemented in stages that any management team could follow to ensure its
success. For example, Chowdhury (2002:251) argued that any turnaround
process should be investigated from a stage theory perspective stating that, “Such
an approach can explain how and why a chronology of occurrences play out over
time and ultimately lead to a firm’s survival or failure”. He further explained that the
turnaround process is a set of chronological events that result, in the end, with
improvements in performance. Based upon this and as mentioned before in
CHAPTER TWO: REVIEW OF LITERATURE
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chapter one, this study investigates turnaround from an overall stage theory
perspective that integrates the three elements of research on turnaround, i.e.
context, content and process of turnaround.
In this context, several authors have tried classifying the turnaround process from
that perspective. However, it was found apparent in the literature that scholars
have not agreed on one set of stages. Instead, each one produced his own set, for
example, Bibeault (1982:92) presented a model to incorporate turnaround
management that consisted of five stages, which are as follow:
1. The management change: The TMT decides if a change in management is
needed or not. If yes, a turnaround leader or a new Chief Executive Officer
(CEO) is appointed and given control over the company. Supportively,
Maheshwari (2000) reported that change of leadership is the initial step in
the turnaround process, due to the incompetence of the existing leadership
to carry out any new changes.
2. Evaluation of situation: The new turnaround leader or CEO analyses the
situation and formulates a plan that aims to turn the company around.
3. Emergency stage: The turnaround plan is ready and the company must
react quickly by implementing a plan to stop decline.
CHAPTER TWO: REVIEW OF LITERATURE
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4. Stabilisation stage: Decline should have stopped by now and further plans
are to be developed to maintain improvements. Results should be reviewed
to decide if any further actions are required to recover from decline.
5. The return to normal growth: By this stage, the company should be
achieving some profits and already heading towards growth.
Moreover, in a study conducted in 2002 by Chowdhury, a four stage model was
presented to explain the turnaround process from a stage theory perspective. The
model of Chowdhury (2002:251) consists of four stages, which can be explained as
follows:
1. The decline stage: This is the first stage of the turnaround process and
decline is attributed to the external environment and/or the internal
environment. However, the length and the speed of decline are linked to the
degree of interaction between those two environments. At this stage, a
decision of change in management is usually initiated by the pressure from
one or more of the stakeholders such as board members, banks, creditors,
governments or unions.
2. The response initiation stage: Chowdhury (2002) disagreed with
categorising the turnaround responses as operating responses for internal
causes of decline and strategic responses for external causes of decline.
He argued that this is a misleading concept because the applicability of
CHAPTER TWO: REVIEW OF LITERATURE
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responses depends on the type, the operating and strategic nature of the
company and the stage of decline. He argued that carrying out the
appropriate turnaround response in the correct time span helps revive the
company more quickly, especially in the early stages and this might
eliminate the need for long-term turnaround actions.
3. The transition stage: Chowdhury (2002) argued that this stage is separate
from the previous two stages. He reported that the turnaround literature
indicated that the turnaround response should have an immediate impact on
the company’s performance. However, there are various factors which may
differ from one case to another, that have to be understood and
simultaneously addressed during the implementation process, such as
resource commitments, sub-unit policies, programs, structures and people
to ensure the success of the turnaround actions.
4. The outcome stage: Chowdhury (2002:256) asserted that, “The measures
used to determine outcome – success or failure – are the same as those
used to define decline at the first stage of the turnaround process”. He
added that a comprehensive measure that investigates the company’s
overall performance (e.g. market share, profitability and managerial
resources), is essential to avoid incorrect determination of the company’s
success in the turnaround process.
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In addition, Zimmerman (2002:27), asserted that there are three stages to the
turnaround process in which, “Each stage is identifiable and possesses its own
unique operational characteristics and organisational dynamics”. These stages
are:
1. The pre-turnaround situation: This is the period before the company falls,
or starts slipping, into the decline position in the form of declined profitability,
or concerns arise from investors or other shareholders about the company’s
health. During this period of time, signals of decline may be mistakenly
understood as temporary decline signals due to some external factors such
as recession. At this stage, the mistake is made in that management did not
realise the fact that these signals are the alarm bells that say change is
needed.
2. The period of crisis: This is the period when the company’s leadership
declare that change is needed, profitability is negative or declined and the
market share is falling or small. This is the period of realising that change is
needed quickly before the company reaches failure. However, this does not
guarantee that the company’s management will make themselves
accountable for some of this decline; management tend to blame decline on
other parties.
3. The period of recovery: This is the stage of action which takes place
whether it will work or not. The important part is that attempts are made
CHAPTER TWO: REVIEW OF LITERATURE
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until profitability is improved or made positive and the market position is
restored, alongside the overall financial health of the company. Turnaround
achievements are when improvements are made in the profitable situation
and the market share of the company and this can go on for several years.
Furthermore, in a later study conducted on turnaround management Scherrer
(2003) introduced a model to achieve a successful turnaround that consisted of five
stages. He explained that each one of these stages required some time to
complete and they were:
1. Analysis of the situation: Scherrer (2003) reported that this stage usually
takes up to one month. During this stage, the turnaround management aim
to develop a full understanding of the situation and highlight any
fundamental problems through the use of different financial ratios. Scherrer
(2003) suggests using cash flow analyses and financial projections on a
regular basis in the early stages of the turnaround process, in order to
recognise the accounting system and asses the company’s chances of
survival and recovery. Relatively, paying extra attention to a good
accounting system is recommended to avoid difficulty in surviving from
decline. Furthermore, Yawson (2005) asserted that one of the first steps to
achieve a successful turnaround is to review the financial strategies in the
company, as it can provide an immediate solution to stop any further
deterioration in performance.
CHAPTER TWO: REVIEW OF LITERATURE
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2. Creation of a plan: This stage usually takes up to two months. At this
stage, the management develop a plan that aims to provide a solution for
any problems highlighted during the analysis stage. This plan may include
changes to operations, assets or both (Scherrer, 2003). The plan can also
be used to gain the support of other parties during the turnaround process
such as the TMT or stakeholders (e.g. shareholders, debtors or customers)
(Scherrer, 2003).
3. Implementation of the plan: This stage usually takes six to twelve months
and the plan should be employed carefully, whilst also monitoring the firm’s
status and response to the new changes internally and externally.
4. Stabilisation of the plan: This stage usually takes six to twelve months.
Scherrer (2003) advises the management to use cash flow projection
analysis on a quarterly basis. He reported that this could assist them in
developing an operating plan that reflects the amount of cash available to
achieve recovery.
5. Returning to growth: This stage usually takes one to two years in which
the management are required to keep monitoring both the external and the
internal environments, in order to locate any problems as early as possible
and alter operations quickly to respond to these new changes.
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From the above views and for the purpose of this study, it can be concluded that
there are four stages that should be understood to ensure the implementation of
successful turnarounds and they are:
1. Decline stage.
2. Analysis of the decline situation.
3. Formulation, implementation and stabilisation of the turnaround plan.
4. Recovery and return to growth.
The first stage, as shown in Figure 2.1 above is the decline stage as evolved from
the view of Chowdhury (2002) and Zimmerman (2002). This is the stage when
decline is recognised and it is seen that change is needed.
FIGURE 2.1: STAGES OF THE TURNAROUND PROCESS
Analysis of
the decline
situation
Formulation,
implementation and
stabilisation of the
turnaround plan
Decline
stage
Recovery and
return to
growth
Adapted from: (Bibeault, 1982; Chowdhury, 2002; Zimmerman, 2002 and
Scherrer, 2003)
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The second stage in Figure 2.1 (analysis of the decline situation), represents stage
two in the study of Bibeault (1982), stage one in the study of Chowdhury (2002)
and stage one in the study of Scherrer (2003). The actions taken during this stage
are undertaken by the new CEO or turnaround management.
Stage three, in Figure 2.1, represents stages three and four in the study of Bibeault
(1982), stages two, three and four in the study of Scherrer (2003) and stages two
and three in the study of Chowdhury (2002). The reason behind this integration is
that I believe that the formulation and the implementation process should be
treated as one stage and not two separate ones. This view was supported by
Hambrick and Cannella (1989) who reported that implementation procedures are
critically important during the first steps of the formulation process. They confirm
that mistakes lay in the root of many failed companies, because formulation and
implementation processes are usually treated as two separate stages (Hambrick
and Cannella, 1989).
Finally, stage four, in Figure 2.1, represents the last stage of the three studies
(Bibeault, 1982; Chowdhury, 2002 and Scherrer, 2003). Each one of the stages in
Figure 2.1 is discussed extensively, highlighting the major key issues in turnaround
management in the following sections from 2.3 to 2.6.
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2.3 The decline stage
2.3.1 Recognition of decline
Various scholars (e.g. Schendel, Patton and Riggs, 1976; DeAngelo and
DeAngelo, 1990; Sudarsanam and Lai, 2001; Zimmerman, 2002; Midanek, 2002
and Lasfer and Remer, 2007) have all reported that every company suffers natural
ups and downs in performance from time to time in its history. However, it is
important to understand the difference between short-term natural decline and
long-term damaging decline. A criterion of various conditions was developed from
the turnaround literature and presented in this section to differentiate between
companies in real decline and businesses experiencing natural difficulties.
The following signs are associated with businesses in decline at different stages.
A company is considered to be heading for, or already in decline, if it is suffering
one or more of the following signals:
? Declined profitability (Manimala, 1991; Zimmerman, 2002 and Teng, 2007).
It should be declining as well as being lower than the average for the
previous four years and for at least one year (Zimmerman, 2002 and Teng,
2007).
? Negative profitability (Zimmerman, 2002 and Teng, 2007) or below industry
average; such as instances when other companies make more profit selling
similar products (Zimmerman, 2002).
CHAPTER TWO: REVIEW OF LITERATURE
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? Negative working capital; increase in losses causing capital exhaustion and
lack of employing the existing capacities (Manimala, 1991).
? Declined real revenue after measuring inflation rates; inflation should not be
calculated as revenue progression because inflation rates may indicate an
increase in revenue whilst actual business is declining (Zimmerman, 2002).
? Deteriorating market position; this may occur due to various reasons such
as loss of market share or loss in numbers of distributors (Zimmerman, 2002
and Scherrer, 2003).
? Arising concerns by investors, managers and board members in relation to
company’s conditions (Zimmerman, 2002).
? Incompetent management (Teng, 2007) who cannot react to the changes
occurring in the environment internally and externally.
? Poor internal accounting systems (Scherrer, 2003), high staff turnover
(Manimala, 1991; Scherrer, 2003 and Teng, 2007), low staff morale,
absenteeism, lack of trust and accidents (Manimala, 1991).
? High accounts receivable, poor leverage ratio, poor inventory turnover and
declining sales (Teng, 2007), disputed balances with customers and liquidity
problems such as cash shortages (Zimmerman, 2002).
? Regular interruption in production and sales, cash losses, cutting or
stopping dividends (Manimala 1991) and poor quality of products
(Manimala, 1991 and Zimmerman, 2002).
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? Organisational problems such as dispersed responsibilities and
inappropriate allocation of staff in key positions (Zimmerman, 2002).
? Ethical problems such as excessive TMT compensation, disturbed
relationship between suppliers and purchasers, theft and financial statement
falsification (Zimmerman, 2002).
? Flat or declined sales and high defection rate of staff or customers
(Midanek, 2002).
? Lack of communication can be another sign of decline if the TMT does not
have an open door policy for key managers (Bibeault, 1982). Bibeault
(1982) explained that managers sometimes hesitate to deliver bad news or
ask for help when they need it, instead they try to solve problems
themselves and this is when things start to go wrong for the company.
Scherer (2003:52) argued that, “Business failure is marked by early signals of
decline that often go unobserved or ignored”. When the team of management
does not recognise the decline signals early enough, a rapid decline could be
expected to happen much quicker in the company. In line with this, Bibeault (1982)
reported in one of his studies that his survey results showed that in eight out of ten
cases, the early warning signals were ignored leading the company to decline.
Additionally, it was reported by Onich (2012) that signals of decline can be denied
CHAPTER TWO: REVIEW OF LITERATURE
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by other stakeholders as well as the management, such as the TMT or even
lenders.
Furthermore, Zimmerman (2002) asserted that it is the fault of management when
they mistakenly think that these signals indicate short term decline and not real
decline. However, Bibeault (1982) emphasised that recognising decline signals
early enough is not an easy task to do, as sometimes problems can be obscure
when they are first found.
Signals of decline are usually observed by the Board of Directors, banks, debtors,
creditors, stakeholders and/or shareholders (Zimmerman, 2002). When decline is
located, the TMT’s responsibility is to identify a turnaround leader who has the
capabilities to lead the firm through the difficult period of decline (Scherrer, 2003).
However, it was found apparent in the literature that scholars differed in their views
about whether to change the current leadership/management of the company, or to
keep it in place to turnaround the company.
2.3.2 Change of leadership
O’Kane and Cunningham (2013:52) stated that “The rationale for leadership
changes and their effect on performance and recovery have yet to be conclusively
established”. This has been due to the debate between scholars regarding the
need to change the leadership to begin the turnaround process. For example,
CHAPTER TWO: REVIEW OF LITERATURE
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Whitaker (1990) reported that the change of leadership is unnecessary if the
causes of decline are due to external factors and not due to bad leadership itself.
On the other hand, in contrast, various authors (e.g. O’Neil and Drucker, 1986;
Grinyer et al., 1990; Pearce and Robbins, 1994; Sudarsanam and Lai, 2001 and
O’Kane, 2006) have asserted that the change of leadership is essential to the
success of the turnaround process because leaders are in the main responsible for
sailing the ship.
Additionally, Bruton and Ahlstrom (2001) explained that existing CEO’s cannot
identify problems or generate the solutions for them, mainly because they are at
least partly responsible for their company’s decline. Furthermore, evidence from
the public sector introduced by Pauline and Skelcher (2005), supported this view
stating that, “Change in the top management produces a reassurance to external
stakeholders that the organisation is engaging with the need to undertake the
strategic changes necessary for turnaround”. Supportively, Yawson (2005) in a
study conducted on 269 Australian companies, which suffered performance decline
during 1993-2000, asserted that one of the most important steps of turnaround is
appointing a new CEO who can offer new skills, direction and strategies that could
revive the company and bring it back on track. Evidence from the literature shows
that new CEO’s increase the chances of any company’s recovery by their ability to
implement greater levels of change in respect of company processes, structure,
strategies and internal environment on the whole (Barker and Mone, 1998:
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Yawson, 2005: and O’Kane and Cunningham, 2012). However, for this to ensue,
when the TMT appoint the new CEO, it should observe his/her decisions and
actions cautiously because some of these actions (e.g. asset divesture) can be
detrimental to the company’s recovery (Yawson, 2005). Relatively, Auchterlonie
(2003:53) in a study on how to fix the rotating CEO dilemma stated that, “The
replacement process of CEO’s is initiated when a company’s Board of Directors
and/or managing private equity group begins to get suspicious of
underperformance”.
Furthermore, Stopford and Baden-Fuller (1990) in a study conducted on the role of
CEOs in the turnaround process, emphasised that new CEOs should provide an
extremely vital role in setting off the change process within companies, as well as
being the educator during the whole turnaround process.
Despite this, various authors such as (Zimmerman, 2000) argued that newly
recruited turnaround leaders or CEOs could have a negative effect on many
potentially successful turnarounds, by assuming that everything needs to be
changed in order to bring the firm back to its original status. Similarly, other
authors (Sull, 1999 and O’Kane and Cunningham, 2012) reported that change of
CEO might damage a company’s chance of recovery because it may cause fear
and confusion internally leading to loss of competencies.
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Moreover, Ofek (1993) has reported another problem when recruiting new leaders
internally, in that there are fewer actions usually taken in companies by leaders
who hold high shares. Therefore, he suggested that recruiting leaders from
outside the company is a helpful choice in such cases. Accordingly, Hoffman
(1989) supported this view asserting that successful businesses are more likely to
replace failing leaders with others from outside the company rather than internally.
External leaders tend to highlight the company’s weaknesses and strengths from a
new perspective (Hoffman, 1989).
Additionally, Tourtellot (2004:68) reported that leaders from outside the industry
and not just the company, can prevent decline from worsening if they are able to:
1) Ask questions that lead to new unexpected solutions by the current
management.
2) Update the answers for questions that were asked in the past and the
answer wasn’t suitable at the time.
3) Maintain perspective of having no emotional baggage to carry when
saving the business, especially in family owned businesses.
4) Make people think about new fresh ideas of marketing and improving
efficiency.
Burbank (2005) and Dubrovski (2009) emphasised that companies in distress need
leaders with virtues that are different from the qualities of leaders in stabilised
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companies. Accordingly, Auchterlonie (2003) introduced a middle ground view
regarding whether change of leadership is an important first step or not. He
asserted that it is better to hire an independent, unbiased turnaround firm/manager
to assess the company’s state and causes of decline and work alongside
incumbent management, instead of changing the CEO straightway. Yet again, in
contrast, O’Kane and Cunningham (2012:60) supported by Ballinger and Marcel
(2010) have stated that, “The use of interim CEO succession processes have also
recently been found to be linked to lower levels of performance and greater
disruption during the interim’s tenure”. Despite this, O’Kane and Cunningham
(2012) found from their study on four in depth cases within the Irish context, that
evidence showed that the timing of implementing change in leadership is the
crucial element and it is best to gain control over the company’s major key issues
and become less reliant on incumbent leadership before implementing the change.
Additionally, in a study conducted on three heavy engineering companies, which
have recovered from decline, to explore the way they were managed through the
turnaround process, Harker et al. (2000) asserted that the Board of Directors’ job
doesn’t end by appointing a new CEO. They explained that a successful
turnaround heavily relies on a strong relationship between the newly recruited CEO
and the Board of Directors. The TMT must provide the newly recruited
CEO/turnaround leader with the professional leadership, assistance and
involvement needed to execute the turnaround plan and transform the business.
CHAPTER TWO: REVIEW OF LITERATURE
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Also, the new CEO/turnaround leader must communicate with the TMT to tell them
about what is going to be done in order to make sure they are fully aware and
supportive of the plan (Harker et al., 2000 and Kow, 2007).
From the above debate it can be concluded that most scholars (e.g. O’Neil and
Drucker, 1986; Stopford and Baden-Fuller; Grinyer et al., 1990; Pearce and
Robbins, 1994; Sudarsanam and Lai, 2001; Auchterlonie, 2003; Yawson, 2005 and
O’Kane, 2006) agree that a change in leadership is critically essential during the
first steps of the turnaround process to ensure success. However, other evidence
shows that appointing a temporary turnaround manager/firm to work alongside the
existing/incumbent management during the early stage of the turnaround process
is the most beneficial (Auchterlonie, 2003).
2.4 Analysis of decline situation
This is the second stage of the turnaround process and it is carried out by the
newly appointed CEOs or turnaround leaders, in order to investigate and draw a
whole picture for the company’s financial and operational status. Scherrer (2003)
suggested that there are various tools which can be relied on during the analysis
process, such as the use of financial ratios (return on assets ROA - or return on
investment ROI). Olstein (2007) added that the analysis of the company’s financial
statements, accounting systems, inventories, receivables, liquidity ratios and free
CHAPTER TWO: REVIEW OF LITERATURE
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cash flow statements, can indicate why and how the company fell into decline.
However, the use of financial ratios was highly rejected by some authors. For
example, Beeri (2009) asserted that relying on these measures during the
turnaround process, limits the management’s ability to see and act upon problems.
Alternatively, Appel (2005) in his study of the Kasper ASL firm, found that speaking
to all kinds of employees and managers was critical to the success of the analysis
process not only because they highlighted problems in their working areas, but
they also highlighted additional problems outside their departments. Furthermore,
Appel (2005) asserted that analysing data on the industry and competitors as a
whole, also played a vital role in drawing a clear picture for Kasper’s position and
chances of survival in the marketplace.
Moreover, Scherrer (2003) explained that understanding the severity and the
causes of decline are the primary elements of this stage, because they can impact
the selection of which turnaround strategy to include in the plan. Similarly, Burbank
(2005) explained that knowing how the company fell into decline in the first place is
critical, because searching the history of the company can reveal past challenges
that can be used to build future strategies on.
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2.4.1 Viability and competitive advantage
Finkbiner (2007) asserted that it is important to carry out an assessment of viability
as the first step of the analysis process, in order to ensure that the business can be
saved. Relatively, Auchterlonie (2003:55) argued that there are three objectives
for the analysis process that the turnaround leader should perform and they are:
1) “To verify that the business can be saved.
2) To identify the most appropriate turnaround strategy based on current
operating and strategic health.
3) To develop a preliminary action plan”.
Accordingly, Finkbiner (2007:123) explained that in order to check if the business
can be saved or not, the three important elements for any successful turnaround
that must be available are:
1. Viable product or service that stands as a competitive advantage for the
company in the market with reasonable share and profit margins that are big
enough to support the business.
2. A management that are loyal, able to change and able to implement new
strategies within the organisation.
3. A bridge finance to provide time and cash for the turnaround process, which is
not easy to find for a business that is already in crisis.
CHAPTER TWO: REVIEW OF LITERATURE
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Based on and supported by the above discussion, it can be concluded that the
framework for the analysis stage comprises of three main elements (i.e. viability of
the company, severity of decline and causes of decline), which will help draw a
clear picture of the company’s ability to turnaround or not and they are:
1. Viability of the company - to ensure that the company has the ability to
recover by identifying the source of a competitive advantage, upon which a
long-term plan to enhance this advantage will be developed (Lohrke and
Bedeian, 1998; Finkbiner, 2007).
2. Severity of decline - to identify whether the company has enough/can
provide the time and financial resources (cash) to fund operations during the
turnaround process (Scherrer, 2003 and Finkbiner, 2007).
3. Causes of decline - as it plays an important role in selecting the appropriate
turnaround strategy later in the formulation and implementation stage
(Scherrer, 2003 and Burbank, 2005).
2.4.2 Severity of decline and cash availability
Understanding the degree of decline a company is in is important because it is
associated with the degree of its survival (Pearce and Robin, 1993; Lohrke and
Bedeian, 1998). Scherrer (2003:58) stated that, “The stage of decline a business
is in will determine the type of action that must be taken to accomplish the
CHAPTER TWO: REVIEW OF LITERATURE
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turnaround”. Similarly, Lohrke and Bedeian (1998) asserted that decline severity is
very much connected to the amount of cash available, influencing the choice of
certain turnaround strategies. For example, a company in the early decline stage
(declining sales and margins), with some resources still available, may use certain
strategies such as increasing expenditure in new product development (NPD) and
functional areas to improve sales. Meanwhile, a company in a late decline stage
with not enough cash resources left and under threat of closure, may seek other
strategies such as cost cutting or divestment of unprofitable units of labour (Lohrke
and Bedeian, 1998).
According to Scherrer (2003) there are three basic stages for decline and they are:
early decline, mid-term decline and late decline. Scherrer (2003) further argued
that each one of these stages has its own signals and characteristics, which can be
presented as follows:
? Early decline stage: This stage includes several signals that indicate the
onset of business decline such as cash shortage, liquidity strains, decrease
in working capital, increase in accounts payable (e.g. falling behind on
paying banks and creditors), increase in customer complaints as well as flat
sales (Scherrer, 2003), replacing substance with form (deteriorating quality)
and lack of clear goals (Lorrange and Nelson, 1987). Additionally, declining
margins, declining market share, debt increasing rapidly, management and
staff turnover, low staff morale and declining working capital are more early
signals of decline (Bibeault, 1982).
CHAPTER TWO: REVIEW OF LITERATURE
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? Mid-term decline stage: Scherrer (2003) has indicated that the signals of
the mid-term decrease is an increase in bank advances, the bank
approached to cover payroll and weakening of customer confidence.
? Late decline stage: The signals associated with this stage according to
Scherrer (2003) are decrease in inventory turnover, no liquidity, overdrawn
bank accounts and depleted working capital (Scherrer, 2003).
Relatively, some scholars (e.g. Hofer, 1980; Platt, 1998 and Pandit, 2000) stressed
that the choice of one or more of the turnaround strategies over another at a
specific stage of the company’s performance, is linked to the company’s severity of
decline. Figure 2.2 illustrates the relationship between the stages of decline and
the choice of some turnaround strategies.
According to Figure 2.2, some authors argue that:
1. A company in an early decline stage may require a cost reduction strategy as
the main one to get to the pre-decline stage and make a recovery (Hofer, 1980;
Platt, 1998 and Pandit, 2000).
2. A company in a mid-term decline will require a cash generation strategy in
order to breakeven and boost the cash flow as an addition to cost reduction
(Platt, 1998 and Pandit, 2000).
3. A company in a late decline stage will require an operating assets reduction
strategy as an addition to the other two sub-strategies. This is because the
CHAPTER TWO: REVIEW OF LITERATURE
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company is in its worst condition, as it is hardly covering its fixed costs (Platt,
1998 and Pandit, 2000).
Adapted from: (Hofer, 1980:27; Pandit, 2000:39 and Platt, 1998:9)
Accordingly, it can be concluded that depending on the stage of decline a company
is in, or in other words, the amount of cash/financial resources still remaining in the
company internally/externally, a decision on the company’s viability to turnaround
can be made by the end of the analysis stage.
Late-
decline
Mid-term
decline
Early
decline
Pre-decline or
recovery stage
£
Total revenue
Cost reduction
Revenue generation
Operating
assets
reduction
Total cost
Variable costs
Fixed costs
FIGURE 2.2: Stages of decline
CHAPTER TWO: REVIEW OF LITERATURE
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2.4.3 Causes of business decline
According to Zimmerman (2002) decline in any company’s performance is
attributed to extreme behaviours, such as too little or too much of, “Market,
product/management” control. Several authors (e.g. Everett and Watson, 1998;
Burbank; 2005 and Dubrovski, 2009), have reported that decline is a stage that
most companies go through as part of their business lifecycle before it reaches
failure or turnaround. They added that if the necessary corrective actions were not
taken within the appropriate timescale, the company would lose its employees,
cash, customers and/or assets.
Notably, it was reported that decline could not be avoided all the time (Dubrovski,
2009). Additionally, Onich (2012:33) stated that, “Decline can be inexorable,
unless an aggressive attempt is made to reverse it”. However, identifying,
understanding and analysing the causes of decline are critically vital to minimise
the overall number of failures among businesses (Everett and Watson, 1998 and
Dubrovski, 2009). The importance of understanding the causes of decline was
emphasised by various authors (e.g. Manimala, 1991 and McGovern, 2007) who
asserted that the turnaround option might largely rely on reversing the original
cause of decline. Therefore, studying and understanding the different causes of
decline is of great importance to the success of the turnaround process (Manimala,
1991 and McGovern, 2007).
CHAPTER TWO: REVIEW OF LITERATURE
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Furthermore, research on the causes of decline comes from the view that each
cause of decline is linked to certain turnaround strategies (Manimala, 1991).
Relatively, Dubrovski (2009) added that the process of analysing the causes of
decline has to be carried out by professional individuals (e.g. consultants, owners,
debtors and industrial experts) and not by the current management, since it tends
to blame decline on the external variables rather than directing the blame to the
internal causes, which may reflect its weaknesses.
Sheppard and Shamsud (2005) emphasised that in order to understand business
decline, we need to understand that a company’s declining performance cannot be
attributed solely to the company itself or the external environment. They explained
that business decline could be attributed to the misalignment of the company
internally with the environment externally. A combination of adverse internal and
external causes is required to cause severe decline in any company, according to
some scholars (e.g. Schendel, Patton and Riggs, 1976 and Dubrovski, 2009),
particularly the combination of lack of managerial decisions and unpleasant
changes in the external environment (Schendel, Patton and Riggs, 1976).
In a study conducted to analyse the attribution of service failures on consumer
satisfaction, Iglesias (2009) has classified the causes of business decline into three
groups and they are:
1. Decline caused by employee’s attitudes towards customers or the firm. This is
considered to be an internal cause and it is controllable.
CHAPTER TWO: REVIEW OF LITERATURE
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2. Decline caused by the company itself (e.g. failure in product design or outdated
equipment). This is considered to be an internal cause and it is controllable.
3. Decline caused by external causes that are not related to the firm itself and
they are considered to be uncontrollable.
Relatively, several authors (e.g. Schendel, Patton and Riggs, 1976; Bibeault, 1982;
Zimmerman, 2002; Maheshwari, 2000; Sudarsanam and Lai, 2001; Scherrer,
2003; McGovern, 2007 and Dubrovski, 2009) have classified the causes of
business decline to internal controllable causes and external uncontrollable
causes.
2.4.3.1 Internal causes
Dubrovski (2009:4) argues that internal causes of business decline are the
controllable causes that emerge within the company stating that they are,
“Denominated as subjective and endogenous”. Dubrovski (2009) added that the
literature on causes of business decline showed a debate between scholars about
the management role in the decline of any organisation as an internal cause.
Some scholars (e.g. Smith and Peters, 1997) argued that the management role in
the decline of any organisation should be voided due to the external constraints
such as the economic and market conditions they are under from the external
environment, limiting their strategic choices. However, on the other hand, most
CHAPTER TWO: REVIEW OF LITERATURE
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scholars (e.g. Scherrer, 2003 and Dubrovski, 2009) disagreed with this view
arguing that other managers under the same circumstances of environmental
constraints, do not fail and therefore, management are the major internal cause of
any decline. Similarly, Bibeault (1982) disagreed with Smith and Peters (1997)
arguing that it is the management’s responsibility to protect the company from
these external challenges and any hazards that can negatively affect its
performance. In other words, although the decline of many companies can be
attributed to various external causes, managerial mistakes as the internal cause of
decline, is considered to be the core factor to any business decline according to
various scholars (e.g. Bibeault, 1982; Scherrer, 2003 and Dubrovski, 2009).
Additionally, several authors (e.g. Weitzel and Jonsson, 1989; Everett and Watson,
1998; Platt, 1998; Wruck, 1990; Sudarsanam and Lai, 2001; Bergstrom and
Sundgren, 2002; Zimmerman, 2002 and Dubrovski, 2009) argued that a company’s
declining performance can be attributed to its management because this highlights
severe problems within their capabilities. Moreover, McGovern (2007:887) agreed
with this view stating that:
Managers make strategic choices. Failure is attributed to
management decisions and lack of competency to reverse the
decline caused by external factors. A crisis may stem from
management commitment to existing strategies and routines.
Companies can experience ‘active inertia’, insofar as the strategic
frames of managers become blinkered which prevents realignment
with the new environment. Crisis induced stress inhibits the effective
processing of information and produces a threat-rigidity response
which impairs decision-making.
CHAPTER TWO: REVIEW OF LITERATURE
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In addition, Schendel, Patton and Riggs (1976:7) also agreed with the previous
view adding that management is considered to be a significant decline factor
stating that, “In some sense, any business decline or failure can be attributed to a
failure of management”. Bibeault (1982) additionally supported this view reporting
that eight out of ten failures in his study were caused by bad management. Still,
more authors (e.g. Platt, 1998 and Scherrer, 2003) supported the same view
arguing that any company’s decline is caused by management’s failure to control
the internal elements, hence, they usually blame decline on the external elements.
Based on the above debate, it can be seen that most scholars hold managers
accountable for their companies’ decline. Therefore, for the purpose of this study,
the internal causes of decline can be classified into two types and they are: [1] bad
management which is related directly to the lack of managerial skills and personnel
characteristics, and [2] organisational inefficiencies, which might be related in
some cases to management error with regard to structures, operations, staff and
their products.
Bad management
Various scholars tried to classify management mistakes that contribute to decline,
in order to make it identifiable and easier to recognise as early as possible. For
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example, many scholars (e.g. Bibeault, 1982; Hartley, 2005 and Dubrovski, 2009)
argued that management mistakes could be grouped into two, which are: [1]
commission mistakes and [2] omission mistakes. In addition, Hartley (2005) and
Dubrovski (2009) added immoral behaviours as another group of managerial
mistakes. These groups are explained as follow:
? Commission mistakes: These include taking the wrong or inadequate
decisions or actions due to lack of skills, experience and/or incompetence.
Various authors blamed managerial errors, such as poor strategic decisions
or lack of intensity (Zimmerman, 2002 and Hamilton and Micklethwait,
2006), poor management skills and weak governance (Bergstrom and
Sundgren, 2002 and Olstein, 2007). Furthermore, several scholars (e.g.
Tayeh, 2004; Hamilton and Micklethwait, 2006; McGovern, 2007 and Teng,
2007) have reported that some of these mistakes occur due to dominant
CEOs, arrogance, hubris and a desire for power. Additionally, Onich (2012)
reported that lack of accountability within manufacturing ranks is another
reason for decline.
? Omission mistakes: These reflect not taking any action with respect to
problems occurring within the company (e.g. not investing in improving the
technology or implementing essential changes), due to management
incompetence and/or lack of experience (McGovern, 2007 and Teng, 2007)
and not recognising the early signals of decline, due to their commitment to
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strategic postures that worked in previous ventures (O’Kane and
Cunningham, 2012).
Relatively, Bibeault (1982) divided omission mistakes into two categories,
which are: firstly, the company’s failure to react to external environmental
changes and secondly, being relaxed in developing control information.
Different scholars (e.g. Maheshwari, 2000; Sudarsanam and Lai, 2001 and
Zimmerman, 2002) emphasised the dangers of this type of mistake,
reporting that when decline happens some fast actions are required and
managerial inaction or inappropriate actions can weaken the company’s
performance even more, leading to a possible failure. Notably, some
managers may avoid taking any action that may damage their interests even
if it is for the company’s sake (Sudarsanam and Lai, 2001; McGovern, 2007
and Teng, 2007). Furthermore, Tayeh (2004) reported that some managers
do not seek help early enough when they are faced with problems, because
they do not want to admit the existence of problems. This happens due to
failure to recognise the extent of these problems causing further
deterioration to the company’s performance.
? Immoral behaviours: Such as crimes, accounting scandals, abuse and
deception by some managers. This kind of behaviour can strongly hit any
company at its core if not found and dealt with quickly and appropriately
CHAPTER TWO: REVIEW OF LITERATURE
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(Hartley, 2005: Wallace 2007; Dubrovski, 2009 and O’Kane and
Cunningham, 2012).
Additionally, Hamilton and Micklethwait (2006) reported that a non-participating or
ineffective Board of Directors is one of the TMT errors that can cause decline.
However, in contrast, Bibeault (1982) disagreed with this view arguing that decline
is caused by senior management, because Boards of Directors do not cause
decline. He explained that boards have a role that consists of two tasks: firstly,
select and recruit the CEO or the turnaround leader and his team and secondly,
careful evaluation information in order to recognise any early warning signals.
Organisation inefficiencies
A large number of authors (e.g. Stopford et al., 1990; Rand, 1999; Maheshwari,
2000 and Pauline and Skelcher, 2005) argued that the source of decline could be
the organisation itself. Maheshwari (2000:40) supported this view stating that,
“Organisational inertia, causing slow responsiveness to the changes in the
environment, leads to the decline of businesses”.
Stopford et al. (1990) added that there are some habits and procedures that are
embedded in the structure of many companies, causing deterioration in
performance. For the purpose of this study, organisational inefficiencies can be
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classified in respect of three major factors and they are: structure and operations
related, staff related and product related.
Structure and operations related causes
Stopford et al. (1990) reported that there are several common organisational
mistakes which contribute to the decline of any company such as outdated
systems and faulty structures that are incapable of responding adequately to the
changing environments. Similarly, Scherrer (2003) added that there are common
causes of decline that are related to the company itself such as none use of formal
communication, ageing production techniques, inadequate research and
development, inappropriate channels of distribution, loss of competitive advantage
and misunderstanding of consumer needs.
Additionally, Rand (1999) argued that overlapping departmental responsibilities are
further mistakes, which limit the ability to see and understand what is going on
inside the company. Furthermore, operational weakness is another familiar cause
of decline that is related directly to the company such as bad marketing, poor
logistics (Teng, 2007) and high costs (Schendel, Patton and Riggs, 1976 and
Teng, 2007). High costs can take several forms such as wage increases, raw
material price increases, low production volume and unplanned costs of starting
new facilities (Schendel, Patton and Riggs, 1976).
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Furthermore, Onich (2012) supplemented this reporting that an organisation
structure that allowed a disconnection between financial measurements and key
performance indicators and lacked control over manufacturing and planning, could
lead to decline in performance and possible total failure.
Staff related causes
It was reported in the literature, that staff satisfaction is considered to be an
important element for any growing company because their satisfaction is highly
essential to ensure a good customer service quality (Scherrer, 2003). However,
there are some organisational actions (e.g. low pay, redundancies, pay-cuts and
downsizing) that may contribute to staff dissatisfaction and negatively impact on
their morale and loyalty, thus promoting unpleasant reactions such as strikes
(Davidson et al., 1993). Auchterlonie (2009) argued that there are two main issues
that worsen staff morale and they are: 1) when employees feel ignored, not
listened to and have no say in the decision making process and 2) when
employees feel that the people who have control over the company’s performance
(productivity/profitability) are ignoring the signs of decline.
In this context, various authors (e.g. Schendel, Patton and Riggs, 1976 and
Davidson, Dickson and Trice, 1993) reported that staff could cause decline if they
become dissatisfied. For example, when they go on strike, this increases the
company’s costs and triggers customers to possibly change suppliers, especially if
strikes go on for a long time and cause interruption to service. However, on the
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other hand, Bushen et al. (2003) argued with this view in that staff should not be
perceived as a cause that sets off decline. This is because the financial and
market situations around businesses are the real causes behind the decrease of
staff initiative and innovative behaviours. However, Bushen et al. (2003) reported
that high staff turnover could deplete the company’s experiences and capabilities.
This can negatively impact on the overall performance of the company and its total
service quality from which decline may occur. Therefore, Bushen et al. (2003)
suggested that interaction between staff and management in the workplace is vital
to improve their innovative behaviour.
On the other hand, Auchterlonie (2009) also argued that staff morale deteriorates
more when they feel that they are ignored or punished by management because
they speak out about certain problems in their work areas or the company as a
whole. Furthermore, Tourtellot (2004) explained that untrained staff cannot do
their jobs accordingly, which may cause deficiency in processes. He emphasised
that if staff are kept isolated from regular training, participating in trade associations
and attending seminars, they will be unable to improve the skills, which are needed
to operate under ever changing, new technologies.
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Product related causes
Mason, Harris and McLaughlin (1971) reported that if the current products on offer
were not achieving the financial and strategic targets for the company, a set of new
product ideas and developments should be a top priority on the management
agenda, to replace existing products or as a new addition. It was found apparent
in the literature that scholars have different definitions for a new product (NP). For
example, Fuller (2004) defined a NP as the product that is not manufactured by
any other company, or it is the current product that is introduced to a market for the
first time. On the other hand, several other authors (e.g. Kotler and Armstrong,
1991 and Rudder, Ainsworth and Holgate, 2001) defined a NP as the product that
is modified or improved from an original product, through their own research and
development within the company.
An empirical study conducted on NPD by Calantone, Schmidt, and Song (1996)
has identified four causes that can affect the success of any NP and they are:
1. Market related causes and these are not controllable.
2. Product related causes and these are controllable.
3. NPD process related causes and these are controllable.
4. Organisational causes and these are controllable.
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Calantone et al. (1996) explained that the organisational controllable causes
affecting NPD success consist of two types of activities, which are marketing and
technical activities. The company must possess sufficient resources and skills in
both activities, in order to achieve a successful NPD (Calantone et al., 1996).
Calantone et al. (1996) additionally reported that performance, marketing and
technical activities requires knowledge about customer needs, tastes, prices
sensitivities and purchase behaviours. In addition, knowledge about competitor’s
products and technological advances is highly important. Schendel, Patton and
Riggs (1976) reported that failure in marketing is considered an important cause of
decline that could occur due to lack of promoting a product in the marketplace
against its competitors. Schendel, Patton and Riggs (1976) explained that these
forms of erroneous actions could cause loss of market share and speed up the
wheel of decline in any company.
Similarly, Maheshwari (2000:40) stated that, “Excessive initiatives beyond the
firm’s technological and financial capacity to alter the product-market domain, has
also been the cause of decline for many firms”. Maheshwari (2000) explained that
when a company enters a new market that is beyond its managerial and financial
capabilities, it may end up increasing its borrowing in order to cope with the new
expansion in the business, incurring enlarged interest costs that it may find a
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problem repaying in the future, causing deterioration in performance and
resources.
2.4.3.2 External causes
Bibeault (1982:27) stated that, “A company does not operate in isolation; it acts
upon and reacts to a very complex environment, which is continually changing and
constantly moving”. He added that some of these environmental changes appear
gradually so can be predicted, however, some occur very suddenly, which is
impossible to predict.
Dubrovski (2009) described external causes of decline as those changes occurring
within the outside environment of companies and cannot usually be detected early
enough. Therefore, they are seen as objectives or exogenous factors (Dubrovski,
2009). Moreover, Everett and Watson (1998) in a study of small businesses,
reported that external/exogenous factors were the cause of failure in one third of
their sample. Furthermore, Dubrovski (2009) added that although external causes
contribute to the failure of many companies, it can be eliminated and avoided if the
external changes are aligned with the company’s internal processes, structures,
strategies and marketing mix. Similar to this, Schendel, Patton and Riggs (1976)
and Scherrer (2003) argued that despite the fact that the external environment is
not controllable, the changes in this environment should be predicted, adapted by
management and acted upon.
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Some external causes that may contribute to the decline of companies are
reported by Zimmerman (2002) and Dubrovski (2007) such as the state of the
economy, crime or physical disasters. However, Bibeault (1982) introduced a
more structured classification for external environment causes that consist of five
types as follow:
1. Political or governmental causes.
2. Economical causes.
3. Competition related causes.
4. Social causes.
5. Technological causes.
Political/Governmental causes
Bibeault (1982) emphasised that there is a huge relationship between politicians
and businesses due to regular polices and legislations that are issued relative to
materials, products, market and finance. Additionally, import and export policies,
high duties (Manimala, 1991), taxation, consumer welfare legislation, employees
records, product safety and pollution control are all different forms of government
interference with businesses, that may require companies to seek assistance from
external agencies (e.g. public relation agencies, lawyers, advertising agencies and
consultants) in order to meet these new legislations (Bibeault, 1982).
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It was reported that external agencies put huge financial constraints on companies
and this can lead to cash shortages and thus decline. However, it was reported
that although the government’s interference can be severe at times, it is important
to predict changes in legislation and work around these constraints when they
occur (Bibeault, 1982). Furthermore, Manimala (1991) reported that a company
that is only able to operate with governmental help (e.g. tax exemption, duties
concessions or concessional finance) would not be worth all the turnaround efforts
that it is going to receive.
Economic causes
Economic changes that can cause business decline may take various forms, such
as slow demand, currency devaluation, international financial downturn, recessions
(Schendel, Patton and Riggs, 1976; Bibeault, 1982) and high interest rates
(Schendel, Patton and Riggs, 1976; Bibeault, 1982 and Everett and Watson,
1998). Accordingly, it was reported that during periods of economic downturn and
recessions, customers reduce their spending, bank creditors reduce their lending,
unemployment rises and competitors drive prices down (Pearson and Michael,
2006). Pearson and Michael (2006) in a study of strategies to prevent economic
recessions from causing business failure, explained that 500,000 US businesses
have failed in the last 70 years (i.e. filed for bankruptcy) due to recession. Despite
this, Schendel, Patton and Riggs (1976) noted that businesses could overcome
such problems and improve their positions by identifying the right products and
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market niches as well as having a good management team that is able to control
the company.
Competition related causes
Traditional economic theory indicates an emphasis on the view that free
competition is the source of a healthy economy, because it encourages companies
to be innovative and competitive in their products and prices (Tezuka, 1997).
Similarly, Rudder et al. (2001) emphasised that customers demand and expect
new and improved products, which are usually provided by the regular competition
between suppliers. Schendel, Patton and Riggs (1976) and Watkin (1986)
explained that increased competition is an important factor that can drive
businesses into decline and thus failure, reporting that there are two forms of
competition and they are:
1. Competition pressure from companies producing the same product at lower
cost due to basic technological advantages, or due to geographic
advantages which offers them cheaper labour, transport and/or materials.
2. Competition pressure from companies substituting new technologies or
products for others, such as changing the raw material from plastic to metal
and so on.
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Bibeault (1982) asserted that although competition can cause decline and failure,
this can be avoided if businesses monitor both the marketplace and the changes
occurring within their industry.
Social change related causes
Bibeault (1982) suggested that businesses have to be in touch with society in order
to be able to identify new market trends that are continuously changing, by age or
lifestyle of the consumers. Notably, Calntone et al., (1997) reported that customers
have become less tolerant with poor service as a result of continued social change.
They added that consumers have become more eager to dissolve a relationship
with a supplier and start a new one. This is supported by the statement of Scherrer
(2003:430) that, “The UK public is aware of animal-borne diseases that can affect
humans (Salmonella, Listeria and BSE) and will not take kindly to any
carelessness”.
In addition, these decisions and switching intentions can be aggravated by some of
the firm’s actions, such as quality failure, low commitment, unfair prices or anger
incidents (Calntone et al., (1997). However, despite this, Bibeault (1982) reported
that social change is moving at such a rate that it can easily catch up with most
industries, if the management identify these changes and alter their strategies to all
in line with the every changing society of today.
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Technological causes
Bibeault (1982) reported that new technological changes have provided customers
with a wide variety of choices (e.g. colour, price, material, quality and shape).
Companies have a difficult choice to make either to meet such technological
changes or leave the market empty for competitors to expand their market share.
If companies wish to stay profitable, they must dedicate a lot of investment to new
technologies (e.g. developing new systems and buying new machinery to improve
productivity and efficiency). However, this could put high economic constraints on
their financial resources (Bibeault, 1982).
A conclusion of the above stage brings to a close the turnaround leaders’ main
task when appointed, which is to identify the viability of the company (source of
competitive advantage), severity of decline (cash availability to fund the
turnaround), as well as the causes of decline (internal or external) in order create a
full understanding of the situation, ready for the next stage of formulation,
implementation and stabilisation of the turnaround plan.
2.5 Formulation, implementation and stabilisation of the turnaround plan
Business strategy is defined as, “The science and art of employing business
resources to secure objectives, with an emphasis on adjusting to a competitive
environment” (Mason et al., 1971:11). When the profitability of a company
declines, it is usually left with a limited choice of actions. It either takes no action
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until the situation worsens and the company reaches total failure, or adapts new
strategies and improvement activities in the hope of recovering the company out of
decline (Bibeault, 1982).
Mason et al. (1971) emphasised that an important part of any strategy formulation
process is to locate, realise and fully understand the company’s solid advantage
(e.g. saleable product, proven market, operating assets or skilled staff) in order to
work on enhancing it later on in the process. Hambrick and Cannella (1989)
argued that implementation procedures are critically important during the first steps
of the formulation process. They explained that mistakes lay in the root of many
failed businesses, because the formulation and implementation processes are
usually treated as two separate stages. Hambrick and Cannella (1989) also
explained that this is due to the fact that no leaders can draw a complete step-by-
step strategy the first time, but instead they should think about formulating a
strategy that they are able to implement and achieve the desired targets with the
least amount of risk.
Moreover, Scherrer (2003) reported that at this stage recognising the company’s
finance and accounting system is vital. Scherrer (2003) further explained that the
management should implement the budget that reflects the actual costs rather than
the estimates. Furthermore, he explained that this would assist them to stay within
their financial boundaries and fixed costs. Additionally, it was reported that
analysing customer’s needs (e.g. productive customers or less productive
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customers) is essential to stop the continuous decline, by letting the management
concentrate on the more profitable ones (Scherrer, 2003).
2.5.1 Classifications of turnaround strategies
O’Neil and Ducker (1986) asserted that there are various generic strategies such
as niche, differentiation, growth strategies and turnaround strategies. The
selection of each one of these strategies depends on the specific conditions of the
company. Slatter and Lovett (1999) asserted that the generic turnaround
strategies are various such as stabilisation, leadership, strategic focus,
organisational change, financial restructuring, critical process improvement and
operational restructuring. It was reported that turnaround strategies are developed
to stabilise operations and to return companies in decline to their original
performance levels before decline and assist in profitability and growth (Pearce,
2007).
It was found apparent in the turnaround literature that there are several
classifications for turnaround strategies. For example, Robbins and Pearce (1992)
classified turnaround strategies into two categories as follow:
1. Competition based strategy and it consists mainly of innovation and
marketing activities.
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2. Efficiency based strategy and it concentrates on reduction in costs and
expenses.
Furthermore, Lohrke and Bedeian, (1998) reported that a company’s overall
turnaround strategy could be analysed in respect of its three sub-strategies which
are:
1. Competitive strategy in which the turnaround leaders identify and utilise a
competitive advantage that the company holds and tries to work on to
strengthen its position in the marketplace.
2. Political strategy in which the turnaround leaders try to gain the support of
all shareholders, through presenting a plan that will enhance a competitive
advantage.
3. Investment strategy in which the turnaround leaders create a set of
decisions aiming to improve the functional areas (e.g. marketing,
production). Lohrke and Bedeian (1998) added that investment strategies
are usually implemented in three forms; retrenchment, innovation and
growth.
In addition, Lasfer and Remer (2007) classified turnaround strategies differently
into two types, in respect to the timescale of formulating and implementing the
strategy as follow:
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1. Short-term strategies: they aim to minimise decline as quickly as possible
through various actions, such as cutting costs and generating cash in order
to achieve efficiency (Hoffman, 1989; Arogyaswamy and Yasai-Ardekani,
1997 and Lasfer and Remer, 2007). Lohrke and Bedeian (1998)
emphasised that several researchers (e.g. Bibeault, 1982 and Pearce and
Robbins, 1993) stressed the need for short-term strategies to be
implemented during the first steps of the turnaround process, in order to
ensure efficiency before changing the strategic direction for long-term
growth.
2. Long-term strategies: they aim to gain the support of investors by sending
them signals about the company’s position in the future. The turnaround
team develops a strategic plan that outlines the future strategic goals and
the activities needed to reach these goals.
Lasfer and Remer (2007) argued that there have been various trials that tried to
categorise turnaround strategies into short-term and long-term. However, there
was no success because what was seen in a study as a quick option, was seen in
a different study as a long term option. For example, Lasfer and Remer (2007)
reported that dividend cuts as a financial restructuring sub-strategy were found to
be a long term option in the study of Benartzi et al. (1997), yet it was seen as a
short term option to achieve recovery in the study of Carapeto (2005).
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From the above diverse classifications and as shown in Figure 2.3, it can be
concluded that an overall turnaround plan is a process that combines three
weapons (i.e. competitive, political and investment) throughout the whole process.
And, when it comes to the investment weapon, the timescale should be considered
to allocate the appropriate strategy to each stage.
2.5.2 Turnaround strategies
Turnaround strategies are developed to stabilise operations and return companies
in decline to their original performance status and guide them towards growth
(Pearce, 2007). Sudarsanam and Lai (2001) explained that research on business
turnaround prescribed a large number of restructuring activities with regard to
Adapted from: (Robbins and Pearce, 1992; Lohrke and Bedeian, 1998 and
Lasfer and Remer, 2007)
FIGURE 2.3: THE THREE WEAPONS OF THE TURNAROUND
PLAN
Competitive
weapon
Political
weapon
Investment
weapon
Short-term phase
Long-term phase
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managers, operations, structures and assets. For example, O’Neil (1986)
prescribed four turnaround strategies as follow: 1] managerial, 2] cutback, 3]
growth and 4] restructuring. Furthermore, Hoffman (1989) identified five
turnaround strategies which are managerial restructuring, organisational
restructuring, cost reduction, asset redeployment and repositioning strategies.
The strategic management literature has provided two major categories to
turnaround strategies, they are efficiency/operating turnaround (operational
restructuring) and entrepreneurial/strategic turnaround (asset restructuring)
(Sudarsanam and Lai, 2001 and Ryan et al., 2007). In addition to this, in a more
recent study it was found that those two categories of the turnaround strategies
were identified under two different definitions as retrenchment and recovery
strategies (Schmitt and Raisch, 2013).
Manimala (1991) and McGovern (2007) argued that the choice of any turnaround
strategy, whether it is efficiency/operating/retrenchment or entrepreneurial/strategic
or recovery, it should be connected to the original cause of decline. In addition to
this, Grinyer, Mayes and McKiernan (1988) and Sudarsanam and Lai (2001)
asserted that evidence from the finance based literature revealed that financial
restructuring is another vital ingredient of many successful turnarounds in paradox
to the turnaround literature, which contains evidence that it is not an essential
component of any turnaround.
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Notably, Lasfer and Remer (2007) argued that a company’s recovery from decline
will not occur as a result of using one restructuring strategy solely, but it takes a
decent mixture of various turnaround strategies to formulate the most appropriate
turnaround plan. Consequently, to conclude what was discussed above and for
the purpose of this study, it can be concluded as shown in Figure 2.4, that a decent
turnaround strategy should include one or more of four major turnaround strategies
and they are: [1] managerial restructuring, [2] operational restructuring, [3] asset
restructuring and [4] financial restructuring.
2.5.2.1 Managerial restructuring
Various researchers (e.g. Schendel, Patton and Riggs, 1976; Weitzel and Jonsson,
1989; Wruck, 1990; Everett and Watson, 1998; Sudarsanam and Lai, 2001;
FIGURE 2.4: THE FOUR KEY TURNAROUND STRATEGIES
Managerial
restructuring
strategy
Financial
restructuring
strategy
Operational
restructuring
strategy
Asset
restructuring
strategy
Turnaround strategies
Adapted from: (Hoffman, 1989; Arogyaswamy and Yasai-Ardekani, 1997;
Sudarsanam and Lai, 2001; Lasfer and Remer, 2007; McGovern, 2007 and
Ryan et al., 2007)
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Bergstrom and Sundgren, 2002; Zimmerman, 2002; Dubrovski, 2007 and
Dubrovski, 2009) have attributed decline and failure to several causes, with bad
management at the top of the list. Various authors argued that (e.g. Schendel,
Patton and Riggs, 1976; O’Neil and Drucker, 1986; Grinyer et al., 1990; Pearce
and Robbins, 1994; Sudarsanam and Lai, 2001 and O’Kane, 2006) managerial
restructuring as a turnaround strategy is a vital component of any successful
turnaround plan. Schendel, Patton and Riggs (1976) and Hoffman (1989)
supported this view, reporting that it is highly important to ensure that the
management in control of the business during the turnaround process, is the most
superlative as possible. Relatively, Kow (2004:234) asserted that the chances of
successful turnaround can be diminished if the CEO did not make sure that, “The
right people are in the right jobs”.
Many authors (e.g. Sudarsanam and Lai, 2001 and Dubrovski, 2009) assert that
during periods of decline, it is important not to rely on existing management to
recover the company from decline. They explain that existing management are
used to working in routines and are not familiar in dealing with uncertain situations.
They also added that those managers are not prepared to establish the essential
improvements needed to amend any faults. Additionally, Sudarsanam and Lai
(2001) reported that some managers may try to resist the new strategy if it hurts
their interests, even if it is for the sake of the company’s turnaround plan to
succeed. However, Burbank (2005) asserted that the turnaround leader’s job is
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not to slash jobs across the board, but to strengthen the existing members and
eliminate the ones who obstruct the progress of the turnaround process.
On the other hand, a contrasting point of view was raised by Whitaker (1990) who
argued that it is less likely for a company in decline to achieve any benefit from
restructuring its management, if decline is not caused originally by management.
Conversely, some authors (e.g. Sudarsanam and Lai, 2001 and Yawson, 2005)
disagreed with Whitaker’s view, arguing that even if the company’s decline may not
have been caused by management in the first place, restructuring the management
sends signals to bankers, investors and employees that there is something positive
taking place in relation to the company’s performance.
From this debate, it can be concluded that although managerial restructuring is not
seen as necessary in some cases by certain authors (e.g. Whitaker, 1990), it is
widely seen by the majority of authors as an essential part of any successful
turnaround, mainly in cases where decline is due to management failure or
management who may resist adapting to the changes required for the success of
the turnaround plan.
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2.5.2.2 Operational restructuring
Operational restructuring is usually the first turnaround strategy formulated and
implemented in a company in decline according to many authors (e.g. Sudarsanam
and Lai, 2001 and Lasfer and Remer, 2007). Operational restructuring is mainly
designed to stabilise operations and restore profitability through some activities,
which improves the efficiency and margins of a company after a period of decline
(Hofer, 1980; Platt, 1998 and Sudarsanam and Lai, 2001). Yawson (2005)
reported that this strategy is important during any period of a business lifecycle and
not only in times of decline.
Sudarsanam and Lai (2001) asserted that efficiency measures in this strategy are
directed to minimising the overall inputs and maximising the outputs in order to
improve margins. An operational restructuring strategy includes two sub-strategies
and they are; cost reduction and cash generation (Platt, 1998 and Sudarsanam
and Lai, 2001).
Cost reduction sub-strategy
Zimmerman (2002) and Auchterlonie (2003) reported that cost reduction as a sub-
strategy is a vital component of any successful turnaround strategy. Zimmerman
(2002) supported his view adding that this strategy includes various methods that
evolve around achieving operational efficiency throughout the entire company, by
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bringing expenditure under better control. This takes various forms such as up-to-
date equipment, systematic layout of production areas, well trained employees and
managers as well as minimising any unnecessary outputs in the company such as
personal embellishments and excessive travelling. Furthermore, Zimmerman
(2002) added that product design can be another form of reducing costs. This can
be done by interaction between NPD and production in order to produce and
deliver products at the lowest cost possible, which achieves a competitive position
in the marketplace.
In addition, reducing wages (Finkbiner, 2007), reducing overtime usage and
carrying out some staff redundancies, can also be useful methods of reducing
costs (Sudarsanam and Lai, 2001 and Yawson, 2005). It was emphasised by
Ribbink (2008) that reduction in staff numbers or reducing their pay, can provide
some help to companies in decline as labour costs are usually one of the highest
expenses. Yawson (2005) agreed with Ribbink (2008) on this view asserting that
staff redundancy should improve the company’s performance, as long as it
removes the unproductive workers and increases the productivity of the remaining
ones.
However, on the other hand, some authors (e.g. Davidson et al., 1993 and Ribbink,
2008) warned that such an activity might have a negative impact on customer
service levels, because such an activity may weaken staff morale and drive them
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to take unpleasant actions. Various authors (Davidson et al., 1993 and Ribbink,
2008) argued that staff might respond to such activities by not performing efficiently
or leave their job to look for a more secure job. Consequently, this staff turnover
may cause depletion to the operating capabilities of the company.
Many scholars (e.g. Arogyaswamy and Yasai-Ardekani, 1997; Harker and Harker,
1998 and Lawrence, 2005) argued that although cost cutting and retrenchment
activities are vital to any successful turnaround, it is not solely enough to pull a
company out of decline.
Cash generating sub-strategy
Olstein (2007:132) stated that, “Free cash flow is the lifeblood of a business and
this is especially true in turnarounds. A company’s articulated strategy should
demonstrate the ability to generate or greatly improve free cash flow in two years
or less”. Sudarsanam and Lai (2001) and Ribbink (2008) reported that cash
generating strategies included various activities aiming mainly to increase cash
flow, such as price increases for profitable products and focusing on existing
products to increase sales. Similarly, Zimmerman (2002) supported the view of
generating more cash by limiting the number of products, arguing that it helps to
concentrate on lower levels of existing ones as long as they are attractive, reliable
and high in quality. Manimala (1991) added that building on current strengths
rather than developing new ones is cheaper and time saving.
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In addition, Sudarsanam and Lai (2001) added that price cuts on selected products
and increasing investment in the marketing area, helps to generate cash by
stimulating demand. Conversely, Finkbiner (2007) found in a study that a price
increase for certain products and searching for better deals when buying raw
materials, were vital components of his turnaround plan.
Ansoff (1987) offered four growth strategies that are related directly to products
(new/existing) and markets (new/existing) as follows:
1. Market penetration: This strategy represents the company’s activities when
supplying its current products in an existing market. It relies on the current
products to accomplish the highest market share via competitive pricing and
promotion policies. This strategy puts the least financial pressure on a
company in decline, because it allows management to focus on products,
markets and competitors that they already know, without new research that
may require added investment.
2. Market development: This strategy aims to promote the current products of
the company in a completely new market, which could be in a new country
or region. This strategy was noted to be an ideal one when the cause of
decline is related to recessions in the existing market (Harker et al. (1998).
However, this strategy may require the company to invest in new market
research, incurring extra financial costs.
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3. Product development: This strategy is the ideal one for companies who
wish to launch a completely new product in an existing market. However, it
is costly to adopt because it requires a lot of investment in NPD.
4. Diversification: This strategy is the final growth strategy in Ansoff’s matrix
and it is considered to be the trickiest one. It helps companies to enter new
markets (which they have little knowledge of) with completely new products.
Relatively, various authors (e.g. Rudder et al., 2001; Ribbink, 2008) asserted that
NPD is highly essential to the success of the turnaround process. Ribbink (2008)
explained that it is an important method of generating cash to companies in
decline, as long as there is enough investment in NPD. Moreover, Rudder et al.
(2001) asserted that food manufacturers cannot rely solely on existing products,
Source: Ansoff (1987)
FIGURE 2.5: THE ANSOFF MATRIX OF GROWTH STRATEGIES
Current product New product
Current
market
New market
Product development
Diversification
Market penetration
Market development
CHAPTER TWO: REVIEW OF LITERATURE
2-75
but they must be aware of any available opportunities to improve their profitability
through a proactive NPD.
From the above discussion, it can be concluded that generating cash is an
important part of any turnaround plan. This can be done through limiting the
number of products and proactive NPD. However, this strategy needs a lot of
investment in product and market research.
2.5.2.3 Assets restructuring
Sudarsanam and Lai (2001) reported that the main tasks in asset restructuring
strategies are: [1] to restructure the company’s asset portfolio and products, [2]
divest unprofitable lines or products and [3] acquire businesses that strengthen the
company’s core and achieve long-term profitable growth. Moreover, building
strategic alliances, joining projects and licensing deals are an interest of this sub-
strategy. Sudarsanam and Lai (2001) classified asset restructuring to asset
divestment and asset investment explained as follows:
Asset divestment
Hillier et al. (2005) argued that asset divestment is a sub-strategy that is mainly
adapted by companies in decline, which are experiencing high levels of financial
leverage and low liquidity, in the hope of achieving recovery and a return to
stability. Asset divestment is a process that includes integration of some business
CHAPTER TWO: REVIEW OF LITERATURE
2-76
units and a reduction of short-term inventory or debtors (Sudarsanam and Lai,
2001 and Yawson, 2005), replacing unprofitable products, or selling off unprofitable
business units or subsidiaries on corporate levels, in order to stop the outflow of
cash and generate more for the restructuring process (Sudarsanam and Lai, 2001
and Bushen et al., 2003). However, in contrast, Sudarsanam and Lai (2001) and
Yawson (2005) argued that companies in decline not only divest unprofitable
subsidiaries to eliminate decline, but they may also divest some profitable
subsidiaries in order to generate cash and enable the management to focus on
specific segments of the business that need more attention.
Similarly, Hillier et al. (2005) in a study conducted on 413 UK firms, which adapted
asset sales in the period between 1993 and 2000, concluded that unprofitable
asset sales contributed to overturning the direction of many companies in their
sample from decline to recovery. Similarly, Lohrke and Bedeian (1998) and
Robbins and Pearce (1992) supported the use of retrenchment activities, asserting
that companies in decline must retrench their unprofitable units in an effort to
generate cash. On the other hand, Barker and Mone (1994) disagreed with
associating asset divestment to successful turnaround, reporting that
retrenchments can limit the outcome of the turnaround strategy, because the
company’s resources become weaker after retrenchment. This view was
supported by Lasfer and Remer (2007) who added that asset divestment as a
strategy can sometimes be a radical choice, because the company in decline may
CHAPTER TWO: REVIEW OF LITERATURE
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not receive a satisfying price for its assets. Consequently, Robbins and Pearce
(1994) stressed that what, when and how much to retrench is critically important to
the success of any turnaround process.
Assets investment
According to Sudarsanam and Lai (2001) asset investment as a sub-strategy can
be classified into two types of actions and they are:
1. Internal capital expenditure: This type of action is a critical component of
any turnaround strategy because it helps companies in decline to improve
their competitive position in the marketplace (Sudarsanam and Lai, 2001).
Internal capital expenditure consists of several activities such as building
new plants, buying new equipment (Schendel, Patton and Riggs, 1976 and
Sudarsanam and Lai, 2001), adapting computerised processing to speed up
production, improving productivity and reducing costs (Sudarsanam and Lai,
2001).
2. Acquisition: Is an activity that targets businesses that meet the company’s
long-term goals with profit potential, in the hope it helps it to recover from
decline and boost its growth (Sudarsanam and Lai, 2001). However,
Sudarsanam and Lai (2001) pointed out that this sub-strategy may not be
suitable for companies in a late decline stage due to the shortage of
financial resources and cash.
CHAPTER TWO: REVIEW OF LITERATURE
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Lasfer and Remer (2007) reported that there are other strategies in asset
restructuring such as forming business alliances, joint businesses and reaching
licensing agreements. However, the main difficulty in adapting such strategies lies
in finding the cash and funding.
It can be concluded that there are many sub-strategies which can be used as part
of asset restructuring. Companies can divest the least performing units or
subsidiaries, whilst investing in the remaining ones to improve efficiency and
productivity. In the meantime, acquiring strong businesses that meet the
company’s long-term goals should be thought about if the cash and the financial
resources are available.
2.5.2.4 Financial restructuring
Financial restructuring can be defined as the process in which the management
takes some action, mainly to cut down or eliminate pressure from banks and
creditors, with regard to interest payments and debt repayments (Sudarsanam and
Lai, 2001). In relation to this, Platt (1998) reported that in financial restructuring;
the skills of the company play a significant role in the success of this strategy.
Financial restructuring includes two main activities according to Sudarsanam and
Lai (2001) and they are equity restructuring and debt restructuring.
CHAPTER TWO: REVIEW OF LITERATURE
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Equity restructuring
In equity restructuring, companies usually offer some shares in the business for
cash to raise equity funds (Sudarsanam and Lai, 2001). Equity restructuring
includes two main activities and they are: dividend cuts or omissions and equity
issues (e.g. rights issues or public offers and institutional placing) (Sudarsanam
and Lai, 2001).
? Dividend cuts or omissions as reported by Yawson (2005) helps
companies in decline to maintain their cash flow to run daily operations.
However, Lasfer and Remer (2007) disagreed with this view arguing that,
dividend cuts should be seen as the last choice of activity to save cash in
equity restructuring, explaining that companies which cut dividends usually
suffered a high level of earnings loss in the year of the cut.
? Equity issues aim to generate some cash to fund the ongoing changes in
the company during turnaround by offering stakes of the business for sale or
to debtors (Sudarsanam and Lai, 2001). Lasfer and Remer (2007:8) stated
that, “When private lenders exchange debt for equity, the firm benefits more
through extra added monitoring and lower agency costs”. However, in
contrast, a disadvantage of using equity is that companies in decline
become weaker by issuing out equity for debt to private lenders, as part of
the value is transferred to debt holders (Lasfer and Remer, 2007: 8).
Furthermore, a critical disadvantage for private lenders is stated by Lasfer
and Remer (2007:8) where they state that they, “Can be forced to return any
CHAPTER TWO: REVIEW OF LITERATURE
2-80
consideration received under the restructuring plan as a ‘voidable
preference’ if the company enters into bankruptcy within one year”. Lasfer
and Remer (2007) explained the reason behind this was that private lenders
may be seen as a partner or an insider in the company under the
bankruptcy law.
Debt restructuring
Companies adopt such an activity to either avoid decline or to eliminate an existing
one (Sudarsanam and Lai, 2001 and Lasfer and Remer, 2007). Debt restructuring
is described as a process in which a new debt replaces an old debt, but with more
advantages such as lower interest rates or extended repayment periods. Notably,
Gilson et al. (1990) reported that nearly half of the companies that adopt financial
restructuring prefer to restructure their debts on a private basis.
2.5.3 The best strategy
Several authors (e.g. Stopford and Baden-Fuller, 1990; Sudarsanam and Lai,
2001; and Lasfer and Remer, 2007) argued that successful and unsuccessful
turnarounds often use similar strategies when tackling their economic decline.
However, those strategies differ over time taking companies on separate routes
either to success or to failure in the turnaround process. The failure of companies
in the turnaround process is usually attributed to the inappropriate selection of the
CHAPTER TWO: REVIEW OF LITERATURE
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turnaround strategy (Sudarsanam and Lai, 2001). This brought up the question of
which strategy is best to use in order to eliminate decline.
Several authors (e.g. Hambrick and Schechter, 1983; Zimmerman, 1989; Lasfer
and Remer, 2007 and Ryan et al., 2007) attributed the failure in the turnaround
process to adopting asset restructuring strategies too early (e.g. acquisition)
instead of concentrating on improving the internal environment ‘operations’.
However, conversely, Sudarsanam and Lai (2001) disagreed with this view arguing
that unsuccessful turnarounds usually pay more attention to internal operational
and financial restructuring, ignoring other strategies. Meanwhile, successful
turnarounds select investment and acquisition strategies, as well as making
continuous incremental improvements and focusing on operational issues
(Sudarsanam and Lai, 2001).
Furthermore, various scholars (e.g. Sudarsanam and Lai, 2001; Zimmerman, 2002
and Lasfer and Remer, 2007) reported that unsuccessful turnarounds are
characterised as being slow in implementing the turnaround strategy and when it is
time to restructure operations, they tend to do it aggressively and on a large scale.
On the other hand, several authors (e.g. Hambrick and Schechter, 1983;
Zimmerman, 1989; Lasfer and Remer, 2007 and Ryan et al., 2007) asserted that
successful turnarounds are usually characterised with distinctive qualities such as
being efficient and careful in implementing cost cutting strategies, as well as being
CHAPTER TWO: REVIEW OF LITERATURE
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considerate with their general expenditure. It was reported that successful
turnarounds are more professional in manufacturing and NPD than the
unsuccessful turnarounds, according to Zimmerman (2002). Moreover, Grinyer et
al. (1988) reported that successful turnarounds usually include financial
restructuring as a vital ingredient of their strategy and they also tend to make more
managerial changes in comparison to unsuccessful turnarounds.
From the above diversified views, it was seen that there has been wide
disagreement and contradictory views on the role of each of the operational and
strategic options. Each scholar prescribed the most appropriate turnaround
strategy according to their sample of study, which may differ from one to the other
in nature, size, industry and/or characteristics. However, in a study conducted on
107 central European turnaround firms, it was reported that complementing and
integrating the two options during decline will increase companies’ chances of
survival (Schmitt and Raisch, 2013). Notably, there seems to be an agreement that
operational restructuring is a widely vital strategy as long as it is not adapted
solely. However, this has not eliminated the gap in the turnaround literature of
which additional strategies are required and when and how it can be adapted in
relation to major factors e.g. causes of decline. A successful turnaround strategy is
the strategy that is adapted in relation to the original causes of decline, combining
various activities and actions. It should also be flexible and open to continuous
alterations (Hegde, 1982).
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2.6 Recovery and return to growth
2.6.1 Concept of recovery
Lasfer and Remer (2007) argued that surviving from financial decline is different
from recovering from financial decline. They explained, surviving is when the
company is able to carry on with operations with no profits, after making losses for
at least three consecutive years or more. Meanwhile, recovering means that the
company is above the breakeven point or is operating and able to make profits
again (Lasfer and Remer, 2007).
2.6.2 Enhancing the competitive advantage
Lasfer and Remer (2007) asserted that when cash losses had stopped, the
situation had stabilised and the company had reached a positive profitability, the
long-term strategy to enhance the competitive advantage should be implemented.
Accordingly, Lohrke and Bedeian (1998:19) asserted that it is the turnaround
manager’s job to employ what is called, “The competitive weapon, i.e. cost
leadership v product differentiation” and “The competitive scope, i.e. broad v
narrow” to identify and realise any competitive advantage/s which the company
may still have, in order to build the long-term turnaround strategy. In relation to
this, Porter (1998:1) stated that:
Competition is the core of the success or failure of the firms.
Competition determines the appropriateness of a firm’s activities that
can contribute to its performance, such as innovations, a cohesive
culture, or good implementation.
CHAPTER TWO: REVIEW OF LITERATURE
2-84
A competitive advantage cannot be built by carrying out daily operational tasks of
transforming materials into finished goods or services (Pervaiz and Rafiq, 1992).
They stated that, “Building a competitive advantage requires a selection of specific
options from a number of options and implementing this selection successfully in
all parts of the business”. Porter (1998) explained that the competitive advantage
stems from the value that the company can create for its customers. He
emphasised that the best value is when the company can offer its customers the
same or more benefits for lower prices than competitors.
Porter (1998) reported that there are two main types of competitive advantage and
they are cost leadership and differentiation. Understanding which of the two the
company is mostly related to, is important in order to select the most appropriate
strategy that will help the company to grow. Similarly, as shown in the following
figure, Gopal (2009) reported that the only way to achieve a competitive advantage
is through two elements and they are cost differentials, or value differentials, in
which the earlier is linked mainly to processes, resources and people skills, whilst
the latter is related to product innovation.
Many of the firm’s activities and/or forces can be used to build a competitive
advantage for the company. However, continued research for new ways to
improve this advantage would be required to stay strong in the marketplace
(Pervaiz, and Rafiq, 1992). Pervaiz and Rafiq (1992) also explained that the
CHAPTER TWO: REVIEW OF LITERATURE
2-85
competitive advantage is lost when competitors are able to outperform the
company.
However, there is a gap in the turnaround literature emphasised by the fact that the
literature has not prescribed a mechanism that helps and assist managers in
selecting the most appropriate turnaround strategy, at this long-term phase similar
to the short-term phase. The focus on the content of the turnaround strategies
over the context and the process as a whole, has led to weakened guidance and
fragile turnaround theories. This raises the question of, is there a theory that has
prescribed a model for successful turnarounds that provides a foundation to a
FIGURE 2.6: THE KEY TO ACHIEVE SUSTAINABLE COMPETITIVE
ADVANTAGE
Source: (Gopal, 2009)
Difference in
skills and
resources
Difference in
processes
Difference in
products and
services
Difference in costs
against the competitor
Difference in value as
perceived by the
customer
Causes of advantage
Kind of advantage
Result of advantage
Difference in the
profit and/or market
share
CHAPTER TWO: REVIEW OF LITERATURE
2-86
process, context, content model that can guide managers in the turnaround
industry? The answer to this question is presented in the next section.
2.7 Models for achieving successful turnarounds
In a study conducted on 18 turnaround cases to suggest a model for successful
turnarounds, Hegde (1980) asserted that each cause of decline had some
interlinked, turnaround strategies to it. These turnaround strategies relate to the
internal environment, the external environment or both. According to Hegde (1980)
the internal changes as shown in Figure 2.8 can take three forms and they are:
? Changes in TMT and the executive team in order to set off the turnaround
process.
? Introduction of critical departments in the company and centralising the
decision making.
? Changes with regard to operations to increase efficiency such as cutting
costs, divestiture of unnecessary assets, paying off debts and generating
cash through improved technologies and motivated staff.
Meanwhile, the external changes are emphasised in the efforts of the turnaround
leader to carry out a strengths, weaknesses, opportunities and threats analysis
(SWOT) in order to seize the available opportunities and eliminate any threats that
may influence the success of the turnaround plan. These opportunities can be in
the form of finding new product lines, developing new markets or entering quick
CHAPTER TWO: REVIEW OF LITERATURE
2-87
paying markets. Also, eliminating threats can take different forms such as
negotiating new deals with banks. Although this model tries to prescribe a guide to
the turnaround process, it can be considered incomplete because it does ignore
two important stages in the turnaround process, which are the analysis stage and
the outcome stage. Furthermore, the model failed to identify the linkage between
the causes of decline and the appropriate turnaround strategies.
Source: (Hegde, 1980:301)
FIGURE 2.7: MODEL OF WESTERN TURNAROUND PROCESS
Change agent (dynamic, tough) takes
over. Change at the top
Alters the status quo by initiating and directing certain changes
(i.e., changes within and outside the company
Changes within the company
Changes to increase
efficiency
-Cost control
-Divesture
-Retrenchment
-Trimming the product
line
-Pay off debts
-Generate cash
-Strengthening R&D set
up/NPD
-Product increase
-Incentives
-Automation
-Renovation of plant
Organisational changes
-Changing the executive
team
-Changing the structure of
the company
-Centralised decision-
making to restore control
-Formulation of critical
staff departments
(planning, MIS)
-Establishing responsibility
centers, operating
decentralisation
Grabbing
opportunities
-New product lines
-Aggressive sales
-Develop new
markets
-Enter quick paying
markets
Nullifying threats
-Negotiating on
payment of debts
-Collaboration and
joint ventures
-Dropping the line
where competition
is formidable and
reaching for safe
segments
Changes with respect to
external environment
A SWOT analysis is made by
the change agent
CHAPTER TWO: REVIEW OF LITERATURE
2-88
Alternatively, in a study conducted by Zimmerman (2002) on some American
companies that recovered from decline, a framework for achieving a successful
turnaround is presented as shown in Figure 2.9 below.
Zimmerman (2002) emphasised that the turnaround process is a blend of many
partial successes and failures, while the successful turnarounds achieve more
triumphs than failures according to their experience. A successful turnaround
according to Zimmerman (2002) is a function of three standard factors and they
are:
Source: (Zimmerman, 2002:16)
FIGURE 2.8: A FRAMEWORK FOR SUCCESSFUL TURNAROUND
B
Product
Differentiation
C
Appropriate
Turnaround Company
(leadership)
A
Low cost
Operation
Successful
turnaround
1-Operational efficiency
2-Inventory efficiency
3-Modest overheads
4-Lower costs through design
1-Distinguishing features
2-Reliability & performance
3-Product quality
4-Market continuality
1-Focus on operation
2-Managerial stability
3-Experience in the industry
4-Ethical experiences
5-Knowledge exploration
6-Fair play
CHAPTER TWO: REVIEW OF LITERATURE
2-89
1. A strategy that mainly focuses its company’s effectiveness as a low cost
operator reaching high levels of inventory and manufacturing, as well as
minimising overheads in the meantime.
2. A strategy that focuses on improving design and becoming the supplier of a
distinguished and high quality product on the market to attract new buyers.
However, Zimmerman (2002) advised developing long-term continuity in the
market with these differentiated products to give potential buyers the time to
get to know them.
3. Leaders with high experience in the industry focus on operational issues
such as manufacturing, NPD and sales. Those turnaround leaders must not
be afraid to make any changes in relation to employees, creditors, suppliers
and customers when needed.
In respect of this model, it can be concluded that it focused on the content of the
turnaround options rather than the context of them, ignoring the various stages of
the turnaround process and the factors that interrelate with the success of the
turnaround strategies such as severity of decline.
From the above turnaround models it can be concluded that there has been a lack
of guidance to turnaround leaders and managers in daily operations, as they only
focused on the content of turnaround strategies, rather than the context of them
CHAPTER TWO: REVIEW OF LITERATURE
2-90
and the process as a whole. They also failed to draw any relationship between the
causes of decline and the possible turnaround actions. This is considered to be a
fragile guidance to practitioners and turnaround leaders who may select the wrong
mix of actions, causing further deterioration of their company’s performance.
Therefore, a conceptual framework concluded from the turnaround literature and
these previous models is provided, to better guide turnaround leaders and
practitioners on how to achieve a successful turnaround.
2.8 Theoretical framework of successful turnarounds
Reviewing the related turnaround literature on decline and turnaround
management, it revealed that there is diversity between turnaround cases in
selecting their strategies. This diversity highlighted the need for a contingency
turnaround theory that can give each case a suitable action for each different stage
during the whole process (Manimala, 1991). Similarly, Hegde (1982:292) stated
that, “There may be no one model of effective turnaround. Actions that are
sensible in one culture may be infeasible in another culture”. For example,
carrying out some staff layoffs may not be an easy task in societies where
legislation prohibits or sharply restricts these actions. Similarly, Boyne (2003) in a
study conducted on organisational turnaround management in the non-profit
service sector, argued that there is no one universal criteria for successful
turnaround that can be applicable to all cases. Consequently, as stated by Hegde
(1982:292), “A search for alternative, more specific models of effective turnaround
CHAPTER TWO: REVIEW OF LITERATURE
2-91
is highly desirable”. Therefore, this section provides a theoretical model that aims
to offer large and medium sized companies in the food manufacturing industry, with
a guide on how to achieve a successful turnaround. The conceptual framework
proposes four stages that the turnaround management should follow, to achieve a
successful turnaround and recover from decline. In each one of these stages the
CHAPTER TWO: REVIEW OF LITERATURE
2-1
Decline sage
Recognition of decline
Replace leadership
Appoint a new CEO or
interim turnaround leader/
firm
Communicate the plan
TMT
support
Stakeholder
s support
Formulation, implementation and stabilization of
the turnaround plan
Recovery and return to growth
Enhance the competitive advantage
(Difference in costs –difference in
products/services)
Successful Turnaround
(2 years or more of positive profitability
Positive
profitability
achieved
Mandatory strategy
(Operational restructuring)
Mandatory strategy
Managerial restructuring
Additional strategy
(Asset restructuring)
Additional strategy
(Financial restructuring
Cost cutting Cash generation
Asset divestment Asset investment
Equity restructuring Debit restructuring
NO
Analysis stage
Assess viability
Does the company hold a
competitive advantage?
Exit
Sale of business/ Liquidation
(Liquidation)
Assess severity
and financial
position
Is there enough cash
for the turnaround?
YES
Identify causes of
decline
Internal causes
Organizational
Inefficiencies
Bad management
External causes
Political
Economic
Competition
Technological
Social
YES
NO YES
NO
FIGURE 2.11: THEORETICAL FRAMEWORK OF ACHIEVING SUCCESSFUL TURNAROUNDS
CHAPTER TWO: REVIEW OF LITERATURE
2-1
turnaround leader is the key player and is mainly responsible for ensuring
efficiency in each stage. These stages are:
1) The decline stage: This is the stage when the TMT and/or shareholders
recognise that change is needed. When decline is recognised, a decision to
appoint a new CEO or a temporary turnaround manager to work alongside
management is formulated and implemented by the TMT. This new leader
must have the required qualities and the skills necessary to turn the
company around. This new leader needs to successfully carry out the first
task in the turnaround process, which is analysing the decline situation.
During this stage it is critical that the new leader gains the support of the
TMT and other stakeholders by presenting a credible plan that emphasises
where the company should be in the short-term as well as the long-term.
2) Analysis of the decline situation: This is the first task to identify the
viability of the business by clarifying sources of competitive advantage,
severity of decline (cash flow resources) and causes of decline (whether
they were internal and/or external). By the end of this stage, the turnaround
manager should be able to draw a clear picture of the company’s condition
and identify the chances of survival and the resources available to the
turnaround process. The information obtained during this stage will
influence the choice of turnaround strategy during the next stage.
CHAPTER TWO: REVIEW OF LITERATURE
2-2
3) Formulation, implementation and stabilisation of the turnaround plan:
During this stage, the turnaround leader must quickly develop a short-term
strategy to stop the continuous depletion of cash and breach the breakeven
point as quick as possible (Bruton and Ahlstrom, 2001). Evidence showed
most scholars agreed that managerial and operational restructuring are
primary strategies during the first steps of this stage in a turnaround
process, regardless of the cause of decline or whether it was internal and/or
external. This is because it aims to improve the state of inefficiency and
generate cash (Robbins and Pearce, 1992, and Yawson, 2005).
Additionally, further strategies to operational restructuring will be required in
relation to the causes of decline and amounts of cash available.
4) Recovery and return to growth: When decline is stopped and
improvements are seen, long-term strategies will be required to achieve
some profit and bring the firm back to growth, by enhancing the company’s
competitive advantages highlighted in the analysis stage. The long-term
strategy should be a combination of two or more of the major strategies (i.e.
operational restructuring, managerial, asset or financial restructuring)
depending on the company’s specific conditions and amount of cash
available.
During this stage, a monitoring system is required to observe the company’s
performance and the external environment on a regular basis, to identify any
CHAPTER TWO: REVIEW OF LITERATURE
2-3
signals of decline as soon as they appear and act upon them quickly in
order to ensure full recovery and growth.
2.9 Summary
This chapter critically analysed the related literature on business turnaround
management. It has revealed that a company should follow certain stages during
the turnaround process to ensure a full recovery. The chapter further revealed that
companies which adopt turnaround strategies often use similar policies. However,
some of these companies recover while others do not. The reason behind this is
that successful turnarounds require the appropriate mix of turnaround strategies in
relation to all the factors affecting the companies’ daily operations.
This chapter provided a foundation for developing a theoretical model of achieving
a successful turnaround (see Figure 2.11). This model will be used as a theoretical
framework to explore the turnaround process, its stages and strategies
implemented by management, through a comparative multiple case study
approach. This theoretical model will be investigated and modified throughout the
fieldwork according to the findings acquired from each case study, in an attempt to
develop a good practice model to daily managers/leaders attempting turnaround.
The next chapter will discuss the research approach adapted in this study.
Successful
Turnaround
Review
of
outcome
s
CHAPTER THREE: RESEARCH APPROACH
3-1
CHAPTER THREE
RESEARCH APPROACH
3.1 Introduction
3-2
3.2 Research approach
3-2
3.2.1 Qualitative or quantitative 3-2
3.2.2 Deductive or inductive 3-5
3.2.3 Theoretical approach 3-6
3.2.3.1 Epistemology 3-8
3.2.3.2 Theoretical perspective 3-10
3.2.4 Practical approach 3-14
3.2.4.1 Research methodology (case study) 3-14
3.2.4.2 Population and sampling 3-18
3.2.4.3 Research Methods 3-26
3.3 Data analysis 3-34
3.4
Triangulation, Validity, Reliability and Generalisation 3-36
3.5 Ethical considerations 3-40
3.6 Summary 3-40
CHAPTER THREE: RESEARCH APPROACH
3-2
3.1 Introduction
This chapter outlines the research approach adapted in this study. A convenient
research methodology and some qualitative research methods were selected to
gather all the required data as presented later in chapter four. My understanding of
the views and data obtained from the participants in each case study assisted me
to develop a good practice model on how to manage successful turnarounds for
companies in decline.
This chapter identifies the research approach adapted in this study, which is a
qualitative, inductive approach. It next reveals the epistemology, theoretical
perspective, research methodology and methods used in the study. It also
discusses the qualitative data analysis techniques that were used to scrutinise the
collected data during each phase of the fieldwork. The chapter moves on towards
the end with a discussion of how validity, reliability and triangulation are achieved
in the study, as well as the possibilities of generalising the findings. The chapter
then concludes with a discussion of all the ethical considerations taken during the
study, followed by a summary for the whole chapter.
3.2 Research approach
3.2.1 Qualitative or quantitative
CHAPTER THREE: RESEARCH APPROACH
3-3
There are two major social research approaches that can be adapted in any
research study and they are quantitative and qualitative approaches (Silverman,
2000 and Yin, 2009). Creswell (2003) noted that these two approaches can be
adapted solely or in combination. Additionally, they are flexible and their outcomes
often depend on the researcher’s own interpretation (Baxter and Eyles, 1997 and
Gummesson, 2003). Notably, Denscombe (2003) reported that each one of these
research approaches is usually selected in line with the research problem and the
purpose of each study. Moreover, Mack, et al. (2005) emphasised that both
research approaches diverge in their analytical objectives, types of proposed
questions, methods of collecting data, types of data produced and their flexibility in
designing the study. Therefore, each one of these approaches is investigated
below.
According to various scholars (e.g. Bouma and Atkinson, 1995; Berg, 2001 and
Creswell, 2003) in any quantitative research, data is collected and analysed using
statistical procedures and hypothesis testing in order to measure observations of
individuals or phenomena. Berg (2001) explained that quantitative research refers
to the measure and count of things. Moreover, it has been stated that:
A quantitative approach is one in which the investigator primarily
uses post-positivist claims for developing knowledge (i.e. cause and
effect thinking, reduction of specific variables, hypotheses, and
questions, use of measurement and observation and the testing of
theories.
(Creswell, 2003: 18)
CHAPTER THREE: RESEARCH APPROACH
3-4
In addition to this, Holliday (2002) reported that this approach had some
weaknesses such as its nature of producing unreliable evidence at some times,
due to some hidden important data that researchers may not be able to obtain.
On the other hand, qualitative research seeks to answer an important question,
which is how social meanings are constructed (Denzin and Lincoln, 1998).
Moreover, Berg (2001) added that this approach uses a narrative method to
investigate all the issues related to research problems. He also reported that the
qualitative research approach refers to meanings, concepts, characteristics and
descriptions of phenomena.
Relatively, Strauss and Corbin (1998:11), defined qualitative approach as it is:
Any type of research that produces findings not arrived by statistical
procedures. It can refer to research about people’s lives, lived
experiences, behaviours, emotions and feelings as well as about
organisational functioning, social movements, cultural phenomena
and interactions between nations.
Silverman (1997) asserted that it is important to select the appropriate methods of
collecting data at the same time as trying to identify what type of data is necessary.
Patton (2002) noted that judging qualitative research depends on the purpose and
methods of each study. Notably, Stokes (2000) argued that the research
approach literature had seen a lack of qualitative research in general, due to over
focusing on the quantitative ones and this created a deficiency in decent theoretical
analysis.
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3-5
With regard to this study, a qualitative research approach was adapted as it was
found to be the most helpful and beneficial. According to Gray (2009) the
qualitative research approach seeks to answer the what, how and why questions.
In this study, the answers to these questions represent the required data from
turnaround leaders in relation to their practices during their turnaround experience.
This data has enriched my understanding of the topic of business turnaround.
Also, this study is not based on numbers and statistics therefore, the quantitative
approach did not seem to be the appropriate way forward.
3.2.2 Deductive or inductive
There are two types of research designs that every researcher should have
knowledge of when carrying out a research study, which are deductive and
inductive approaches.
Saunders, et al. (2003) reported that in a deductive or a “theory testing” approach,
the researcher starts with developing a theory that will be tested later in the study.
Miller and Brewer (2003:67) defined deduction as, “The process of reasoning by
which logical conclusions are drawn from a set of general premises”. Some
authors (e.g. Marshall, 1997 and Yin, 2009) asserted that the findings in the
deductive design confirms or falsifies the hypotheses made earlier in the study.
Miller and Brewer (2003) added that the deductive design is used to confirm a
CHAPTER THREE: RESEARCH APPROACH
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basic theory or add to it and this is why this approach is commonly used in natural
science research.
In contrast to this, induction argues “That empirical generalisations and theoretical
statements should be derived from the data” (Miller and Brewer, 2003: 154).
Similarly, Saunders, Lewis, and Thornhill (2003) explains that the inductive
approach or “Building a theory” approach starts with the process of gathering data
to build a theory. This approach is often associated with qualitative research
because researchers try to build a theory through gathering, investigating and
analysing data in the hope of achieving generalisation across other cases (Miller
and Brewer, 2003).
Consequently, the research design adopted in this study is an inductive design,
since it seeks to collect sufficient qualitative data, which is needed to build a theory
of how successful turnarounds can be achieved. Relatively, Gary (2004) asserted
that the qualitative research approach is in some way linked to the inductive
research design. He added that they are related in the way that they set out to
collect data and explore research problems from different perspectives.
3.2.3 Theoretical approach
In this section, an overview of the research approach was presented by Crotty
(1998) in four steps from epistemology through theoretical perspective,
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methodology and methods. Epistemology and theoretical perspective are
considered to be the theoretical approach, meanwhile, methodology and methods
are seen as the practical approach.
Gray (2009) reported that there is an integrated relation between the four steps of
the research approach. The choice of methods is usually influenced by the
research methodology and this research methodology is also influenced by the
theoretical perspective that is originally influenced by the epistemological stance
adopted in the study.
Adapted from: (Crotty, 1998: 4)
FIGURE 3.1: THESIS THEORETICAL AND PRACTICAL APPROACHES
Epistemology
Constructionism
Theoretical
perspective
Interpretivism
Methodology
Case study
Methods
1- Semi-structured
interviews
2- Document analysis
3- Archival records
Theoretical approach
Practical approach
Qualitative
Inductive
The Research approach for
this study
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This relationship between the four steps of the research approach was also
explained by Crotty (1998:2) as the:
Justification of our choice and particular use of methodology and
methods is something that reaches into assumption about reality that
we bring to our work, which means asking about these assumptions,
is asking about the theoretical perspective. It also reaches into the
understanding you and I have of what human knowledge is, what it
entails and what status can be ascribed to it. What kind of knowledge
do we believe will be attained by our research? What characteristics
do we believe that knowledge to have? Here we are touching upon a
pivotal issue.
3.2.3.1 Epistemology
Helinghen et al. (1995) reported that epistemology seeks to explain what
knowledge is sufficient. It also seeks to explain the source of our knowledge as
reported by Crotty (1998). In addition, various scholars (e.g. Crotty, 1998;
Dawson, 2002 and De Rose, 2005) reported that epistemology provides the
philosophical foundation for deciding what kind of knowledge is possible and how
this knowledge can be justified.
Crotty (1998:8) described epistemology as, “The theory of knowledge embedded in
the theoretical perspective and thereby in the methodology”. Relatively,
epistemology was defined as, “Those insights and questions, which help
understand the relationships between knower (the inquirer) and the known (the
knowledge)” (Phillimore and Goodson, 2004:75). Moreover, according to Crotty
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(1998), there are three types of epistemology and they are: 1) objectivism, 2)
subjectivism and 3) constructionism, as shown in Figure 3.2.
Objectivism according to Crotty (1998:8) is the meaning of existing reality, whether
it is noticed by subjects or not. He illustrated his view in an example stating that:
That tree in the forest is a tree, regardless of whether anyone is
aware of its existence or not. As an object of that kind (objectively
therefore), it carries the intrinsic meaning of ‘tree-ness’. When human
beings recognise it as a tree, they are simply discovering a meaning
that has been lying there in wait for them all along.
However, because objectivism is the philosophy of existing reality as an object, it is
widely criticised. For example, May (1997) argued that objectivism ignored the
historical influence, which is no longer there. In addition, Crotty (1998) asserted
that objectivism also ignored various human emotions such as hopes and fears.
Adapted from: (Crotty, 1998)
FIGURE 3.2: THE THREE STANCES OF EPISTEMOLOGY
Constructionism: is the philosophy of interactions between
subjects and objects producing meanings that can differ between
subjects towards the same phenomenon.
Subjectivism: is the
philosophy of applied
meanings on objects by
subjects
Epistemology
Objectivism: is the
philosophy of existing
meanings that are waiting to
be discovered by subjects
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On the other hand, subjectivism is the second epistemological stance in which
meaning is imposed on objects by subjects. According to this stance, there is no
contribution by objects in shaping the meaning (Crotty, 1998).
Various scholars (e.g. Schwandt, 1998; Walsh, 2001; Miller and Brewer, 2003;
Saunders, Lewis, and Thornhill, 2003 and Gray, 2004) asserted that the meaning
of reality in constructionism is a product of interaction between subjects and
objects in this world. There are no meanings waiting to be discovered because
subjects construct their own meanings differently, even when looking at the same
phenomenon. Similarly, Crotty (1998:8) stated that:
There is no objective truth waiting for us to discover it. Truth, or
meaning, comes into existence in and out of our engagement. There
is no meaning without a mind. Meaning is not discovered, but
constructed. In this understanding of knowledge, it is clear that
different people may construct meaning in different ways, even in
relation to the same phenomenon… In this view of things, subject
and object emerge as partners in the generation of meaning.
Constructionism guides researchers to understand and analyse human beliefs in
order to develop meaningful results and common agreements (Guba and Lincoln,
1989). Moreover, Carr and Kemmis (1986) asserted that constructionism leaves
the door open for new meanings and interpretations to come in, as the knowledge
increases by the regular research and efforts of scientists.
The epistemological stance adapted in this study is constructionism. This is
because the goal of this study is to understand and interpret the social construction
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of meanings and knowledge, when conducting this study on how to achieve
successful business turnarounds. My task is to investigate participant’s views and
their ways of constructing those views, to find out how they turned them into
successful turnaround actions. Constructionism gave me the opportunity to take
part, by interacting with the social world of business managers and turnaround
leaders in companies with turnaround experiences and construct meanings about
the subject of turnaround management.
3.2.3.2 Theoretical perspective “Interpretivism”
Theoretical perspective is perceived as the, “Philosophical stance that lies behind
our chosen methodology … [and] provides a context for the process and grounds
of its logic and criteria” (Crotty, 1998:7). Crotty (1998) asserted that the theoretical
perspective is the approach adapted by researchers to analyse, understand the
surrounding environment and construct the foundation of their chosen
methodology.
Literature on the research approach and theoretical methods, offered some
philosophies that researchers can use to outline their methodology. Some of these
philosophies are positivism, post-positivism and interpretivism (Saunders, Lewis,
and Thornhill, 2003). However, Saunders, Lewis, and Thornhill (2003) argued that
this variety of philosophies does not mean that there is one better than another, but
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the choice of one philosophy over the other is made to suit the phenomena of the
study.
A number of authors noted that interpretivism and constructionism have some sort
of linkage (Schwandt, 1994; Miller and Brewer, 2003 and Gray, 2004). Gray
(2009) explained that they are linked in the view that there is no direct relationship
between subjects and objects in constructing the meaning and the mind is the main
interpreter of the phenomenon.
Interpretivism was described by Neuman (2006:71) as the:
Systematic analysis of socially meaningful action through the direct
detailed observation of people in natural settings, in order to arrive at
understandings and interpretations of how people create and
maintain their social world.
Interpretivism flagged the difference between natural reality (the laws of science)
and social reality, in which each one of these realities require a different mixture of
methods (Gray, 2004). Smith (1989:85) reported that social reality could be
viewed as being constructed stating that it is, “Based on a constant process of
interpretation and reinterpretation of the intentional, meaningful behaviour of
people – including researchers”. In relation to this, Crotty (1998:69) stated, “As far
as human affairs are concerned, any understanding of actions comes through an
interpretative understanding of social action and involves an explanation of
relevant antecedent phenomena as meaning–complexes”.
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Moreover, some scholars (e.g. Myers, 1997 and Saunders, Lewis, and Thornhill,
2003) emphasised that the task of the interpretivist is to interpret and explain the
meaning of a phenomena through interacting with the actual people who originally
applied the meaning to the phenomena. Therefore, the theoretical perspective
used in this study is interpretivism. It gave me the opportunity to engage and learn
from individuals who dealt and managed successful turnarounds. My target in this
study was to investigate how leaders interpret and turn their understanding of
companies declining conditions, into successful turnaround actions.
Phenomenology
Phenomenology was defined as, “The study of lived, human phenomena within the
everyday social contexts in which the phenomena occur, from the perspective of
those who experience them” (Titchen and Hobson, 2005:121). Phenomenology
relies on the experiences of those people involved in social realities to understand
and shape the meaning of reality (Patton, 2002; Gray, 2004).
Phenomenology interacts with people’s current meanings, thoughts and
behaviours as well as their emotions and feelings (Denscombe, 2003 and Gray,
2004). Similarly, Gray (2009) stated that a big part of understanding the meaning
of a phenomenon depends on some personal experiences.
Titchen and Hobson (2005) introduced two approaches that can help to better
understand phenomenology as illustrated in Figure 3.3 below.
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Based on this, the subject of achieving successful turnarounds in medium and
large companies, was the phenomenon investigated for this thesis from various
different aspects. This phenomenon was examined using a direct approach as
shown in Figure 3.3 with some qualitative research methods used in the hope of
understanding all the issues related to it. The views of participants are gathered
and interpreted into one view as a conclusion and a good practice model to
contribute to the research on turnaround management.
3.2.4 Practical approach
3.2.4.1 Research methodology (case study)
Research methodology is defined by Crotty (1998:3) as:
The strategy, plan of action, process or design lying behind the
choice and use of particular methods and linking the choice and use
of methods to the desired outcomes.
FIGURE 3.3: THE TWO APPROACHES OF PHENOMENOLOGY
Phenomenology
Direct approach
Interviews with people experiencing the
phenomenon directly are performed in
order to attain all possible data about
their experiences.
Indirect approach
The researchers try to experience the
phenomenon him/herself by taking part
in the social context with other
participants in order to identify
meanings.
Adapted from: (Titchen and Hobson, 2005)
CHAPTER THREE: RESEARCH APPROACH
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Research methodology can be described as the chosen strategy, which assists
researchers to move from their research aims and objectives, to their research
conclusion (Hamza, 2004). According to Gray (2009), the literature on research
methodologies included various procedures that researchers could choose.
However, this selection must be connected to their previously chosen theoretical
perspective, as well as their chosen research design of handling data (whether it is
deductive or inductive). Relatively, Bryman (1988) stated that the question of
which methodology to select, depends on its suitability to answer the research
questions.
In respect of this study, the research chosen methodology is a case study to
achieve objectives three and four, as it is believed to be the most suitable
methodology for reaching the aims and objectives. Case study can be defined as:
An empirical inquiry that investigates a contemporary phenomenon
within its real-life context, especially when boundaries between
phenomenon and context are not clearly evident and in which
multiple sources of evidence are used.
(Yin, 2003: 13)
Moreover, Finn et al. (2000:81) also defined a case study as:
A detailed investigation, often with data collected over time, of one or
more organisations or groups within organisations. The aim is to
provide an analysis of the context and processes of whatever is being
researched.
Case study helps researchers to avoid any possibility of misleading data between
phenomena and their contents according to Yin (2009). Case study as a research
CHAPTER THREE: RESEARCH APPROACH
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methodology assisted me, the researcher, to achieve a high level of understanding
of the context of the topic of turnaround management as a whole (Saunders,
Lewis, and Thornhill, 2003; and Manyara, 2005).
Types of case study
Bryman and Bell (2003) and Yin (2009) emphasised that a case study may consist
of a single case, or multiple cases for the purpose of comparison. As shown in
Figure 3.3, Yin (2009) offered three types of case studies and they were: 1) single
or multiple exploratory case study (it is usually treated as an introduction to social
research), 2) single or multiple descriptive case study (a theory must be developed
before the onset of the study) and 3) single or multiple explanatory case study (it is
used to study general investigations).
FIGURE 3.4: TYPES OF CASE STUDY
Adapted from: (Yin, 2009
Case study
Exploratory
Explanatory
Descriptive
Single Multiple
Exploratory
Explanatory
Descriptive
CHAPTER THREE: RESEARCH APPROACH
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Yin (2009) suggested that there are some basic skills, which the person conducting
a case study should have before the onset of the study. If one or more of these
skills are not available, it can be developed and strengthened as long as the
researcher honestly examines his/her skills and acknowledges any weaknesses.
Yin (2009) explained that the investigator should be:
1. Able to ask good questions and interpret answers correctly.
2. Able to be a good listener and not be influenced by his/her own
ideologies.
3. Able to be adaptive and flexible in dealing with new occurrences.
4. Able to understand all the issues related to the subject of study.
5. Able to avoid been prejudiced either from theories or from his/her
own experiences.
Relatively, I, the researcher, assessed my skills prior to each case study to identify
any weaknesses and develop them before conducting the study. I prepared a list
of questions and made sure it was in line with my research aims and objectives. I
have conducted a pilot study with work colleagues to train and put myself in the
interview mode to gain more confidence while asking certain questions. At the end
of each answer, I repeated it to the interviewees to make sure it was the actual
CHAPTER THREE: RESEARCH APPROACH
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answer they gave. I was also careful during the whole study not to be prejudiced
by any personal experiences or topic related theories. In respect to this study, the
type of case study adapted, is a multiple explanatory case study in both the first
and second phase, since the study aims to investigate the issue of how successful
turnarounds can be managed in companies in decline.
The first phase of study consisted of the analysis of secondary data for 14 cases of
successfully turned around companies such as document analysis (Internet
sources, databases analysis such as Fame and Duedil) and archival records
(company’s Annual Reports). The use of secondary data was due to the lack of
accessibility to leaders in the sample frame. Meanwhile the second phase of the
study consisted of the analysis of primary data for four successfully turned around
companies.
3.2.4.2 Population and sampling
Population
Population was defined by Saunders, Lewis, and Thornhill (2007) as, “The full set
of cases from which a sample is taken”. To be more specific, the population for
this study is the list of food manufacturing companies in the UK, which
implemented a successful turnaround between 2000 and 2012. The criterion
which was used to identify the successful turnaround companies is the same
criterion used by De Angelo and De Angelo (1990) and Lasfer and Remer (2007) in
their studies; i.e. at least three consecutive years of negative profitability, following
CHAPTER THREE: RESEARCH APPROACH
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by at least one year of positive profitability and by at least two years of positive
profitability in the immediate three years after three loses. The reason being this
criterion avoids using any outcome-based definitions such as bankruptcy.
As reported by Lasfer and Remer (2000) having one year of positive income before
decline, allows the researcher to focus on companies where their decline is
apparent from solvent to insolvent. Furthermore, the time span is to make sure
that the decline was not temporary and the turnaround was also real and
sustainable.
The population was generated from a database website i.e. Fame (Forecasting
Analysis Made Easy). FAME is a database for UK and Irish companies containing
(Pre-decline
period) at least one
year of positive
net income
(Decline period)
at least three years of
negative net income
(Turnaround period)
at least 2 years of positive
net income in any of these
3 years
Year
1
Year
2
Year
3
Year
4
Year
5
Year
7
FIGURE 3.5: CRITERIA OF DEFINING A SUCCESSFUL TURNAROUND
CASE
Adapted from: (De Angelo and De Angelo, 1990; Lasfer and Remer, 2007)
Year
6
CHAPTER THREE: RESEARCH APPROACH
3-20
detailed information about nearly 3.1 million companies. The website offers
several search classifications and step-by-step search processes to make it more
easy, focused and accurate (e.g. search by industry or location... etc.) (Fame
website, 2012).
The database website has categorised all the companies into peer groups in which
each peer group was defined using two elements; i.e. industry and size. According
to the website, the segmentation by industry was made using the primary UK
Standard Industrial Classification (SIC) code 2003/2007. It was stated on the
library’s website of the University of Strathclyde, Glasgow that:
The SIC code was the most prevalent scheme used to organise
material on economic activities in the UK. Data on those
organisations, which work with, or produced the same product or
service, is gathered together under the same industry heading. The
scheme works broadly to a level of four digits. The first two digits
identify the major industry groups, the third digit identifies the industry
group and the fourth digit the precise industry e.g. 36: Electronic and
other electrical equipment, 367: Electronic components and
accessories, 3674: semiconductors and related devices.
Concerning the size element, it was stated on the FAME website that:
The segmentation by size within any industry was made using a
combination of three variables: (Turnover) x (median value of total
turnover by employee of the industry) (Total Assets) x (median value
of Total Assets per Employee of the industry) (Number of Employees)
x (median value of Turnover per Employee of the industry). The
companies are ranked by the highest value of any of the three above
variables.
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When each company was ranked by industry, it was then categorised under one of
four classifications according to the size which are, very large (VL), large (LA),
medium (ME) and small (SM).
Regarding this study, the search process followed the following steps:
1. Select the status of companies in which ACTIVE (still trading) was the
selected choice, as the study is only interested in successful companies,
which achieved successful turnarounds.
2. Select the location of companies in which GOVERNMENT REGIONS was
selected, as regions are considered to be the highest tier of sub-national
division used by the UK Central Government in implementing its policies.
Within this selection, I have selected 10 regions, which are, the East
Midlands, East of England, London, North East, North West, South East,
South West, Wales, West Midlands, Yorkshire and the Humber. Some
locations were excluded during the search process due to their distance,
which would have increased the cost and inconvenience of data collection
during this type of research.
3. Select the industry using the UK SIC (2003/2007) classification in the
manufacture of food and beverages (SIC Code 15). Within this selection,
seven sub-selections were chosen out of nine. The reason for this specific
selection of industry was the desire of the researcher to stay within food
CHAPTER THREE: RESEARCH APPROACH
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manufacturing, excluding the beverage and animal food industries due to
their different nature.
4. Select the type of financial data to be included and displayed in the search
list in which the primary data were the profit and loss account (P&L) after
taxation and annual turnover for each company. The reason behind this is
that companies should be able to make profits without any help from
government or any tax reliefs and/or exceptions. Additionally, other data
was selected such as contact details, management changes and other
financial details.
The outcome of this search process has produced a list of 1,814 companies.
Applying the successful turnaround criteria (i.e. at least three consecutive years of
negative profitability following by at least one year of positive profitability and then
at least three years of positive profitability), has narrowed the number down to 22
companies, 5 of which had to be discarded due to insufficient information about the
company’s financial status, which left a final sample frame of 17 companies as
shown in the table that follows:
CHAPTER THREE: RESEARCH APPROACH
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Sampling
Burke and Larry (2005) reported that sampling is widely perceived as a process of
selecting a portion of a specific category of people and not the whole category
No Name of company
1 KITCHEN RANGE FOODS LIMITED
2 NEW IVORY LIMITED
3 MOLLS MEATS (BIRMINGHAM) LTD
4 ADM MILLING LTD
5 CHR HANSEN LTD
6 ORGANIC FARM FOODS
7 HILL BISCUITS LTD
8 LANCASHIRE ECCLES CAKES LIMITED
9 ICELANDIC GROUP UK LTD
10 UNIQ PREPARED FOODS LTD
11 PINGUIN FOODS UK LIMITED
12 NIMBUS FOODS LIMITED
13 BOWES OF NORFOLK
14 STATESIDE FOODS LIMITED
15 PETER'S FOOD SERVICES LTD
16 CASTLE DAIRIES LTD
17 GLANBIA CHEESE
TABLE 3.1: LIST OF CASES IN THE POPULATION (SAMPLE FRAME)
Companies highlighted in blue represent (Phase 1) case study 1, and
companies highlighted in orange represent (Phase 2) case study 2.
CHAPTER THREE: RESEARCH APPROACH
3-24
when investigating a certain phenomenon. Sampling was described as a scientific
approach that individuals could adopt to obtain data from a portion of a whole
population. However, in order to generalise any research findings, the selected
portion must represent the whole population (Burke and Larry, 2005).
The importance of sampling was emphasised by Dereshiwsky (1998) in that it be
effective in cost, time and convenience/accessibility. In addition to this, it was
found in the methodology literature, that sampling consisted of two types; the first
is probability (every one of the population have the chance to be selected). Whilst,
the second is non-probability (not every one of the population have the chance to
be selected). Each one of these types has its own techniques that can be used to
identify the sample of the study. However, the use of certain techniques is usually
influenced by its ability and convenience to serve the aims and objectives of each
study (Denscombe, 1998; Finn et al., 2000; Corbetta, 2003 and Schutt, 2006).
Notably, Denscombe (1998) has reported that although there are differences
between the two approaches, they both agree that the overall structure of sampling
should be complete and accurate.
Objective two (case study 1)
With regard to the type of sampling used in the first phase of this study, a non-
sampling technique was used, meaning the whole population of companies were
selected to study, since the sample was relatively of a moderate size, as well as
the desire of the researcher to achieve the highest reliability and validity of data.
CHAPTER THREE: RESEARCH APPROACH
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This was supported by Yin (2009), reporting that it is suitable for some research
topics to survey the whole population of cases if they are of a manageable size.
However, Yin (2009) has stressed the importance of availability of sufficient time,
resources and practicality when taking such a step. Accordingly, and since access
to the remaining companies in the population was denied, conducting the research
using secondary data for 14 companies (census) is a manageable number and
practical as well as considered to not be costly, but rich in data, pre-organised and
easy to obtain from the Internet or Companies House.
Regarding this study, emails were sent to the whole population of companies
asking them to participate in the study. This was followed by phone calls to each
company requesting to speak to the Managing Directors (MD), Finance Director
(FD), the CEO, and/or specific directors. This email was sent three times, leaving
a two weeks gap in between, giving time to potential participants to come back
from holidays, business trips or any time off work before answering. This process
produced four participants out of 18. This response rate was limited by the
blockage of personal assistants, receptionists and other company members who
continually declined my requests via emails or telephone calls. However,
substitute sources of evidences were selected to overcome such problems and
archival records and document analysis were used to build the study.
CHAPTER THREE: RESEARCH APPROACH
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Objective three (case study 2)
During this phase of study, a probability self-selected sampling technique was
adopted. The self-selected sampling technique according to Saunders, Lewis, and
Thornhill (2007), is used when the researcher publicises his/her need to include a
case in the study via advertising or direct contact with the cases, in order to collect
data vital to the research. Self-selected cases may devote time and take part in
the study if they believe that the listed topics, aims and objectives are interesting
and/or important (Saunders, Lewis, and Thornhill, 2007). In relation to this study,
this was represented by the four companies who agreed to participate. During this
second phase of the study three managing directors/chief executives are
representing three companies, two directors and a chief executive officer
representing the fourth company. All agreed to take parts in face-to-face
interviews. This was the total that accepted to take part in the study and formed
the sample required for an in depth case study analysis in chapter six of the thesis.
Six interviews were conducted during this phase of the study.
Objective four (panel of experts)
During this phase of the study, a set of interviews with a panel of turnaround
experts was conducted. Those experts have participated in at least one successful
turnaround experience. In addition to this, it was concluded in Schmitt and Raisch
(2013) that turnaround experts are capable of providing extensive and reliable
information because they are insightful informants, they gained experience in
CHAPTER THREE: RESEARCH APPROACH
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different companies, industries and even countries and they are less biased
regarding socially desirable elements. The study revealed two main types of
turnaround professionals (turnaround practitioners and insolvency practitioners).
Each type has a different background, approach, legal status and aim (see Table
7.1). The sampling process adapted during this phase is the purposive sampling
technique, as emails were sent to a population of experts. The population of
experts was defined to be the members of the Turnaround Management
Association (TMA). TMA is a global professional organisation focused on
turnaround management, with many divisions in various countries and a large
number of members in the UK, Europe and internationally.
3.2.4.3 Research methods
Research methods can be defined as, “The techniques or procedures used to
gather and analyse data related to some research questions or hypotheses”
(Crotty, 1998:3). Yin (2009) introduced six sources of evidence that researchers
can use to gather data when conducting a case study, emphasising that each one
of them requires special skills and techniques. These sources of evidence are: 1)
focus group, 2) archival records, 3) participant observation, 4) direct observation,
5) documentation and 6) interviews.
CHAPTER THREE: RESEARCH APPROACH
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As shadowed in grey at Figure 3.6, the sources of evidence adopted in this study
are semi-structured interviews (to achieve objective three), documentation (to
achieve objectives two and three) and archival records (to achieve objectives two
and three). Each one of these has its weaknesses and strengths as highlighted in
Table 3.2 below.
A qualitative interview is considered to be an effective method to investigate, feel
and interpret other people’s experiences (Mack et al., 2005). Kvale (1996:14)
stated that:
“The qualitative research interview is a construction site for
knowledge. An interview is literally an interview, an inter-change of
views between two persons conversing about a theme of mutual
interest”.
FIGURE 3.6: MULTIPLE SOURCES OF EVIDENCES
Adapted from: (Yin, 2009)
Archival
records
Documentation
Direct observation
CASE
STUDY
Objective
three
Objective
two
Objective
three
Interviews
Focus group
Participant
observation
Objective
two
Objective
three
CHAPTER THREE: RESEARCH APPROACH
3-29
In addition, Yin (2009:106) asserted that interviews are one of the most vital
sources of evidence stating that:
The interviews will be guided conversations rather than structured
queries. In other words, although you will be pursuing a constant line
of inquiry, your actual stream of questions in a case study interview is
likely to be fluid rather than rigid.
Interviews, as a data collection method, can be divided into three types according
to many scholars (e.g. May, 1997; Dawson, 2002 and Saunders, Lewis, and
Thornhill, 2003) and they are: 1) structured, 2) semi structured and 3) unstructured
interviews.
Source of evidence Strengths Weaknesses
Documentation
? Stable - can be reviewed
repeatedly
? Unobtrusive-not created as a
result of the case study
? Exact-contains exact names,
references and details of an
event
? Broad coverage-long span of
time many events and many
settings
? Retrievability-can be difficult
to find
? Biased selectivity, if
collection is incomplete
? Reporting bias-reflects
(unknown) bias of author
? Access may be deliberately
withheld
Archival records ? Same as above
? Precise and usually quantitative
? Same as above
? Accessibility due to privacy
reasons
TABLE 3.2: SIX SOURCES OF EVIDENCE: STRENGTHS AND
WEAKNESSES
CHAPTER THREE: RESEARCH APPROACH
3-30
Interviews ?Targeted-focus directly on case
study topics
? Insightful- provides perceived
casual inferences and
explanations
? Bias due to poorly
constructed questions
? Inaccurate due to poor recall
?Reflexivity-interviewee gives
what interviewer wants to
hear
Direct observation ? Reality-covers events in real
time.
? Contextual- covers context of
“case”
? Time-consuming
? Selectivity-broad coverage
difficult without a team of
observers
? Reflexivity-events may
proceed differently because it
is being observed
? Cost-hours needed by
human observers
Participant
observation
? Same as for direct observations
? Insightful into interpersonal
behaviour and motives
? Same as for direct
observations
? Bias due to participant
observer’s manipulation of
events
Physical artefacts ? Insightful into cultural features
? Insightful into technical operations
? Selectivity
? Availability
Many researchers such as Dawson (2002) favoured semi-structured interviews
over the rest, reporting that it is the most common type in qualitative research.
Dawson (2002) justified his views reporting that semi-structured interviews create a
set of questions that seek answers for certain issues, as well as sparking new
questions. He added that they are also flexible in adding or removing questions,
depending on the outcomes of each interview.
Furthermore, other scholars favoured semi-structured interviews over the rest due
to the following reasons:
Source: Yin (2009: 102)
CHAPTER THREE: RESEARCH APPROACH
3-31
It is the most appropriate when interviewing someone more than once (Bernard,
2000). It is flexible enough to allow researchers to add or remove questions if
needed in order to clarify certain issues (Gray, 2004). It allows both the researcher
and the interviewee to talk freely about the topic from different perspectives
(Bernard, 2000).
Yin (2009) reported that there is a type of interview called the in depth interview, in
which researchers can work with interviewees in the most effective way.
Researchers can ask interviewees about facts, their own opinion about an event,
or even about their own insight regarding a specific matter (Yin, 2009). However,
in depth interviews may require more than one meeting and the interviewee can
contribute more by suggesting other people to be interviewed and possible further
sources of evidence (Yin, 2009).
Interview as a method of data collection provides researchers with a high number
of benefits. However, some scholars (e.g. Patton, 2002; Yin, 2009) warned that the
quality of the outcome of these interviews could be influenced by various factors.
These factors vary from one interview to another, for example; the level of
awareness of both parties (the interviewer and the interviewee) and the emotional
state of the interviewee (e.g. being anxious or annoyed during the interview will
affect the type of answers provided).
CHAPTER THREE: RESEARCH APPROACH
3-32
Concerning this study, six semi-structured interviews were conducted with two
CEOs of two different companies, an MD of one company and the CEO and two
other directors of the fourth company. Additionally, CEOs (when available) were
purposely selected to be the interviewees because, “A number of authors contend
that the CEO is likely to provide accurate information about organisational
strategies” (e.g. Hambrick, 1981 and Nandakumar et al., 2011:242).
The first interview was conducted with the MD of Castle Dairies at his office and
the interview took about 50 minutes. The second interview was conducted with the
CEO of Glanbia Cheese Ltd at his office and it lasted for about 55 minutes. The
third interview took place with the MD of Peter Foods Ltd also at his office and this
interview lasted for about 40 minutes.
A list of question was established in advance for all interviews regarding the
turnaround process. The list of questions represented the findings from the review
of literature, which was concluded in the conceptual framework. The conceptual
framework combined various stages, which were converted into groups of
questions (See Appendix 1 for list of questions).
The first section of each interview started with the researcher introducing himself,
stating his name and his institution followed by an explanation of the aim of the
study. This was done to brief all interviewees of the research topic. The second
section covered some personal details about the interviewee (name and position in
CHAPTER THREE: RESEARCH APPROACH
3-33
the company). The rest of the sections covered the topic of the study. In the
research, I made sure that all questions, which were produced for the interviews,
were directly linked to the aims and objectives of the study and they covered all
aspects of the topic. Furthermore, during each interview, I took into consideration
all the recommendations highlighted in the research literature when conducting
interviews such as:
? I did not stick to a certain order of questions; instead I let the
conversation bring the questions up as recommended by many
researchers (e.g. Saunders, Lewis, and Thornhill, 2003). This has
helped the interviewees to continue telling their story without any
interruption which could have caused them to forget some important
data.
? I did not to try to influence the interviewees with any information
about the subject. Instead, I tried to give the interviewees the
opportunity to say what they thought, in order to avoid any inaccurate
data (May, 1997 and Yin, 2009).
? I recorded all the answers and allocated enough time for open-ended
questions to be answered (Saunders, Lewis, and Thornhill, 2003). I
understood the importance of recorded interviews in that it ensures
the accuracy of any data and it can be re-accessed at any time if
necessary.
CHAPTER THREE: RESEARCH APPROACH
3-34
Archival records
Yin (2009) reported that archival records, as another data collection method, can
take several formats (e.g. computer files and records). Archival records can also
be in the form of public use files such as the census, company’s service records,
maps and charts of places and survey data that was previously collected by others.
On the other hand, it can be records for the company’s use internally such as
organisational records (e.g. financial, budget and personnel records).
Notably, in respect of archival records, Yin (2009) asserted that every researcher
has to understand that these records were originally prepared to serve certain
purposes or specific groups of people and not for research purposes. Therefore,
researchers must be alert to this when interpreting the usefulness and the
correctness of these records.
In regard to this study, archival records, during both the first and second phases of
study, were considered to be the most important source of evidence, as it was
considered to be rich with valuable qualitative and quantitative information. The
Annual Reports for each company were obtained from Companies House in
Cardiff. The researcher visited the site on two occasions to search their database
and print the required Annual Reports for each company with a small charge for
each report. The reports were taken to my office located in the Cardiff Metropolitan
University building and when it was analysed, it was kept secure with other
CHAPTER THREE: RESEARCH APPROACH
3-35
evidence. This was vital to understand each company’s conditions during the
period of time in which those financial reports were made and were rich in
qualitative and quantitative data (e.g. losses, profits and managerial changes).
Documentation
Yin (2009) asserted that document analysis was another method of collecting data,
which is considered to be a stable source of evidence due to the fact that it can be
reviewed time after time. However, in contrast, Patton (2002) disagreed with this
view, emphasising that it has some limitations in terms of data accuracy and
completeness. Yin (2009) reported that documentary information can relate to
most topics of case studies and it can take various formats such as letters,
memoranda, emails, administrative documents, progress reports, internal records,
personal documents, newspapers, articles and minutes of meetings.
In both phases of this study and in order to achieve objective two, the websites of
the 18 companies were analysed to gain as much information as possible about
the company. Furthermore, the researcher critically analysed some other articles
and information on Internet sites, such as: FAME (https://fame.bvdinfo.com) and
Duedil (https://www.duedil.com). This diversification in the types of documents has
strengthened my confidence about the accuracy of the collected data. In addition, I
compared the data collected from documents and from interviews to ensure its
consistency and reliability. I found this important especially as the study was
CHAPTER THREE: RESEARCH APPROACH
3-36
conducted about an activity that took place in the past and it is possible that the
interviewees may have forgotten some information.
3.3 Data analysis
The literature on research approach has offered two basic attitudes, which can be
used to analyse qualitative data. As illustrated in Table 3.3, those two approaches
were identified by Gray (2009) as the content analysis and the grounded theory. In
content analysis, criteria and classifications have to be developed prior to the onset
of the research, unlike the grounded theory, in which all classifications and themes
emerge during the study.
Type of
approach
Content analysis Grounded theory
Nature This approach requires
identifying specific selection
categories and criteria before
the onset of the analysis
process.
This approach does not require
identifying any criteria in advance as all
the measures and themes appear during
the data collection and analysis process.
Theoretical
approach
relevance
Deductive approach
Inductive approach
TABLE 3.3: THE TWO BASIC APPROACHES FOR QUALITATIVE DATA
ANALYSIS
Adapted from: (Gray, 2009)
CHAPTER THREE: RESEARCH APPROACH
3-37
Additionally, Glaser (1978) reported that there is another approach called the
constant comparative method and it is connected to the grounded theory approach.
He added that this approach is significant in analysing qualitative data through its
structured steps (see Figure 3.7). These steps are: 1) data collection, 2) identify
the main key issues about the subject, 3) writing about these key issues as well as
keeping an eye open for any more issues that may appear and finally 4) using the
collected data to develop a model that links all issues together and presents the
integrated relationship across all.
In this study, a constant comparative method approach was adopted to analyse all
the gathered data. In respect to the data collected from interviews, it was
Data collection
Identification of main
issues of the topic
Writing about the issues
Development of a model
that links all issues together
Adapted from: (Glaser, 1978)
FIGURE 3.7: THE STEPS OF CONSTANT COMPARATIVE METHOD
APPROACH
CHAPTER THREE: RESEARCH APPROACH
3-38
transcribed, coded and categorised into different groups and stages for comparison
purposes. This was done to highlight any agreement or contradiction during each
stage of the turnaround process, from the decline stage up to the recovery stage,
in order to uncover the true meaning of data. Finally, a model concluding the
results was extracted from findings after the first phase of study, which was then
modified after the second phase of study to link all the issues together.
Additionally, the constant comparative approach has required a strong technique of
analysis that categorises findings in a way that it is clear, to draw all the differences
and similarities to a conclusion at the end of the analysis. The selected technique
was the cross-case synthesis.
3.4 Triangulation, Reliability and Validity
Triangulation, reliability and validity are essential to the verification of data in social
research (Gillham, 2005). Bouma and Atkinson (1995) asserted that it is highly
important to ensure the accuracy of the gathered data (e.g. interview conversation,
phrases and meanings of certain words) in order to avoid any possible
misinterpretation.
CHAPTER THREE: RESEARCH APPROACH
3-39
3.4.1 Triangulation
Triangulation was described by Arksey and Knight (1999) as the plan that is
implemented to increase the assurance of the research outcomes. Harker et al.
(1998) stated that, “The term triangulation is a metaphor from navigation and
military strategy that uses multiple reference points to locate an object’s exact
position”. Moreover, a definition for triangulation was presented by May (2002:189)
stating that,
Methods developed within mainstream qualitative, sociological
research for dealing with problems of validity refers to the injunction
to check pieces of information against at least one other independent
source, before regarding them as credible.
Various scholars (e.g. Easterby-Smith et al., 1991; Bouma and Atkinson, 1995;
Denscombe, 1998 and Yin, 2009) asserted that the use of different research
methods is called triangulation, which assists researchers to ensure the reliability
of their collected data. Triangulation is seen as an effective tool for researchers to
overcome the limitation of each method adapted in their study according to Gray
(2009). Additionally, triangulation assists researchers to reduce any personal or
methodological biases, as well as increasing the chances of their study findings
being generalised.
Triangulation was achieved in this study using three different methods of data
collection as mentioned earlier in the chapter (semi-structured interviews,
documentation and archival records), to achieve objective two of the study. The
CHAPTER THREE: RESEARCH APPROACH
3-40
combination between the three methods strengthened my confidence about the
accuracy and correctness of my data. Moreover, two sources of evidence were
used during the second phase of study in order to achieve a triangulation of data
and results.
3.4.2 Reliability
Seale (2000) emphasised that irreconcilable interpretation of data is unacceptable
in social research. Therefore, he suggested that researchers must save no effort
to provide the same interpretation to an object or a phenomenon of study.
However, on the other hand, some authors (e.g. Marshall and Rossman, 1999 and
Gray, 2004) argued that the absolute reconcilable interpretation in qualitative
research is not easy to attain because these interpretations reflected realities at the
time of conducting the study and not at all times. Consequently, Seale (2000)
suggested that to compensate for this difficulty of achieving reliability through
reconcilable interpretation, researchers should show and explain their findings to
the readers, using as much information as possible about how these findings were
reached. This is why an extensive description for the three data collection methods
adopted in this study was provided earlier in this chapter.
Relatively, it was reported that one major concern in any research study is to which
degree respondents will produce the socially desired answers rather than the ones
they really feel (Miller, 2003). Therefore, several authors (e.g. Bouma and
CHAPTER THREE: RESEARCH APPROACH
3-41
Atkinson, 1995; Welch, 2000 and Burns, 2000) asserted that the verification of data
enables researchers to ensure the reliability of the information collected during the
data collection process.
Similarly, Denscombe (1998) reported that verification of interviews with
interviewees signifies the researcher’s efforts to recapitulate over issues that were
highlighted in the discussion to clarify its correctness and avoid any
misunderstanding and misinterpretation. In relation to this, Gray (2004:345) stated
that, “In terms of reliability, it is fairly obvious that taped conversations will tend to
present more reliable evidence than hastily written field notes”. In relation to this
study, all conducted interviews were recorded and a transcription was extracted
from them. The transcription process was carried out straight after each interview
at the library of UWIC to make sure that there was no interruption and to ensure
the highest level of accuracy. The reliability of this study was also increased
through the pilot study conducted at both UWIC and MLC.
3.4.2 Validity
Yin (2009) indicated that triangulation is considered to be a helpful approach to
overcoming the problems that relate to validity of data. He explained that this can
be done through the various sources of evidence adopted to provide accurate data
for the same case study. Ritchie and Lewis (2003) indicated that the validity of
research is conceived as the precision or correctness of the research findings.
CHAPTER THREE: RESEARCH APPROACH
3-42
Moreover, Denscombe (1998) added that the use of multi-methods for examining
one issue corroborates the findings of the research and increases the validity of the
data. Therefore, in this current study, the validity was achieved by undertaking
multiple methods of data collection, to investigate the turnaround of MLC from
different perspectives, in order to strengthen the validity of the findings.
3.5 Ethical considerations
Miller and Brewer (2003) and Blaxter et al. (2006) reported that there are ethical
issues that have to be taken in consideration during any research study and it is
the researcher’s responsibility to prioritise these issues (e.g. consent, potential
harm and risk, privacy, confidentiality and anonymity).
In this research study there was every effort taken to make the interviewees aware
of the aims, objectives and the nature of the study. I also ensured that all the
interviewees participated voluntarily and felt free to terminate the interview at any
time. Additionally, I made sure they signed the consent form to clarify their
approval to join the study.
In addition to this, the interviewees were reassured that data will be used for the
research purposes of this study only. They were also advised that all the data will
be private and will be securely locked in a safe place at UWIC. Furthermore, I
confirmed that their identity will not be disclosed to any persons including my study
CHAPTER THREE: RESEARCH APPROACH
3-43
supervisors. Therefore, prior to the analysis stage, each one of the directors were
given a unique code that consisted of a random letter and a number that was not
connected to their name or position within the company. This was done to make
sure that their identity was kept completely anonymous.
3.6 Summary
This chapter was designed to emphasis the research approach adopted in this
study theoretically i.e. epistemology, theoretical perspective, and practically i.e.
methodology and methods. A qualitative approach was adapted in the study due
to the large amount of qualitative data needed to uncover any issues related to the
phenomenon of successful turnaround management.
The methodology adopted in this study was a multiple case study with a number of
research methods (semi-structured interviews, documentation and archival
records) used to gather the required qualitative data. These chosen
methodologies and methods were found to be the most suitable to achieve the
aims and objectives of my study. The chapter later presented how triangulation,
reliability and validity were achieved as well as the ethical issues that were taken
into consideration when conducting this study.
The next chapter investigates the issues relating to achieving a successful
business turnaround using the case study MLC and three sources of evidence.
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-1
CHAPTER FOUR
MANAGING SUCCESSFUL TURNAROUNDS -
CASE STUDY OF 14 UK FOOD
MANUFACTURING COMPANIES
4.1 Introduction 4-2
4.2 ADM Milling Limited (UK) 4-3
4.3 Bowes Of Norfolk Limited 4-10
4.4 Chr. Hansen (UK) Limited 4-16
4.5 Hills Biscuits Limited 4-22
4.6 Icelandic Group UK Limited 4-28
4.7 Kitchen Range Foods Limited 4-34
4.8 Lancashire Eccles Cakes Limited 4-39
4.9 Molls Meats (Birmingham) Limited 4-44
4.10 New Ivory Limited 4-50
4.11 Nimbus Foods Limited 4-56
4.12 Organic Farm Foods 4-63
4.13 Penguin Foods UK Limited 4-70
4.14 Stateside Foods Limited 4-77
4.15 Uniq Prepared Foods Limited 4-83
4.16 Summary 4-91
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-2
4.1 Introduction
This chapter is designed to achieve objective two of this study i.e. develop a case
study of some companies which have undergone a successful turnaround, to see if
the conceptual framework and its key issues fit those companies’ experiences and
then to modify the conceptual framework upon the findings
The chapter presents the results obtained from a case study of 14 medium and
large food-manufacturing companies across the UK, with a turnaround experience
according to the turnaround criteria (see methodology chapter). The turnaround
criteria has used the profit and loss account (profitability) as the main factor for
defining the turnaround case and the reason for this is that the researcher agrees
with the idea that profitability is the main goal for most businesses and the reason
for the three year time span is to make sure that the company is not in natural
temporary decline, which most firms experience during the normal course of their
lifecycle (Lasfer and Remer, 2007).
The investigation process was guided by the theoretical framework (see Figure
2.9) that was developed in chapter two, to explore and understand the key issues
of turnaround management, which interferes with the success of any turnaround
process. The chapter presents a study of a secondary data analysis of 14 cases
out of 17 companies, which is the total number for the whole population of
successful turned around companies in the study, after eliminating non-qualifying
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-3
companies. Two research methods were used during this phase of the study i.e.
archival records and document analysis. The Annual Reports for each of the 14
companies, covering the whole period of turnaround were analysed as part of
archival record analysis. Additionally, when this was done, an Internet search for
further information about the selected companies was conducted, to gather all
possible data as part of the documentation analysis method and to strengthen the
reliability of the collected data.
The chapter investigates each company individually from a stage theory
perspective, guiding the whole turnaround process through its main stages and
emphasising the key lessons from each company’s own turnaround experience.
4.2 ADM Milling Limited UK (ADM)
ADM (Archer Daniels Midland) Milling Limited, UK is a subsidiary of ADM
International Limited, which is the largest independent flour miller in the UK, with
eight mills spread across the country, operating to full capacity 24 hours a day, 365
days of the year (ADM website, 2012). The company has a range of flour products
such as white, brown, wholemeal and speciality flours available either in bulk or in
small bags. Additionally, the company has a range of bakery mixes, ingredients,
bran, germ and bakers sundries (ADM milling, 2012).
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-4
ADM is a multinational company with one million tons of wheat sourced from
around the world every year. It was stated on the Wikinvest website (a company
data website) that, “ADM is a world leader in agribusiness segmented into four
categories: oilseed processing, corn processing, agricultural services and others.
It also has a corporate segment which accounts for some rather interesting
accounting profits” (Wikinvest, 2012). It was also stated on the ADM website that,
“ADM processes about one million tons of wheat per year, at the largest
processing facility of its kind in the U.K. The plant crushes the seeds and refines
the crude oil – known in North America as canola oil – into about 385,000 tons of
refined oil, used in a variety of food ingredients and in bio fuels throughout Europe.
The meal from these crushing operations is used as feed by livestock producers in
the U.K., France and Ireland” (ADM milling, 2012).
ADM went through a turnaround experience in the early decade of 2000, qualifying
it as a turnaround case for this study. Figure 4.1 below shows the company’s profit
and loss account after taxation (P&L) during the period under study, showing its
transition from one stage to another.
Review
of
outcome
s
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-5
4.2.1 Decline stage:
4.2.1.1 Recognition of decline
Decline was recognised in ADM as a profitability decrease and becoming negative,
as reported in the 2004 Annual Report. The company made losses in 2002, 2003,
2004 and 2005 before the turnaround efforts started in 2006 and the first profit after
the losses was in 2009. Evidence from the Annual Reports, indicated consecutive
negative profitability was the main decline signal that triggered decline, in addition
to other signals such as inefficiency in operations and lack of cash flow (Annual
Reports).
1,577
-4,963
-859
-1,835
-7,495
-3,112
-1,084
1,887
970
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
2002 2003 2004 2005 2006 2007 2008 2009 2010
FIGURE 4.1: P&L OF ADM
PRE-DECLINE
YEARS YEAR
DECLINE YEARS
TURNAROUND
YEARS
M
O
N
E
Y
IN
£000
Adapted from: (ADM Annual Reports 2002-2010)
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-6
It was found apparent from the Annual Reports that various changes took place of
which changes in the leadership of the company was one of them.
4.2.1.2 Change of leadership
Evidence from the Annual Reports indicated that a new Managing Director for the
company (i.e. T. Cook) was appointed as part of the leadership changes to the
Board of Directors. Additionally, a new Finance Director was appointed in 2007 to
take charge of the company’s financial situation. It was stated in the Annual
Report, that some of the changes aimed to improve the leadership team to take the
company to the next stage. These changes indicate that the senior leadership of
the company recognised the need for change within their team, in order to initiate
the turnaround.
4.2.2 Analysis of decline stage
Evidence from the Annual Reports showed the Board of Directors that decline is
not permanent and the company will recover upon the anticipated changes within
the internal and external environment of the company.
4.2.2.1 Competitive advantage
Evidence from the 2007 Annual Report showed that the company operated in a
market with uncertainty in its capacity, facing a tough competition with other
suppliers. However, it was found from the Annual Report that the company has a
strong position in the marketplace, being the largest milling company in Europe
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-7
and being a subsidiary of the largest milling group in the world, with availability of
multiple secured capital sources. This strong position gave the company the
footings and ability to recover from decline and stay competitive in the marketplace
as long as causes of decline were addressed and eliminated.
4.2.2.2 Severity of decline
Evidence from the Annual Report confirms that the company was in a mid-term
decline, due to negative profitability with some resources (Annual Report, 2004). It
was shown in the Annual Reports that the company’s decline was associated with
certain divisions and not the whole company. This stated that the company was
profitable on other sides of the business and had a stable cash flow, secured loans
and other finance sources. The company’s TMT realised the competitive
advantages and that played a significant role in its viability for turnaround.
4.2.2.3 Causes of decline
It was found from the Annual Reports (2002, 2003, 2004, 2005 and 2006) that the
causes of decline in ADM were found to be mixed causes (internal/external)
combined together, which led the company to six consecutive years of negative
profitability.
The causes of decline can be summarised in the following:
? Internal causes: A major cause of decline in the company was the
unsuccessful acquisition of the Tewksbury and Newcastle mills from ABF
(Associated British Foods), as part of a major acquisition that was
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-8
completed in 2003, which involved six mills in total located in Liverpool,
Corby, Tewkesbury, Caseford, Knottingley and Edinburgh (The Grocer
website, 2012). Financial evidences showed that the turnover of ADM has
grown from £59.7M in 2002 to £146.7M in 2003 (£87.4m from acquisitions).
However, this increase in turnover was accompanied by huge overheads
mainly in the Tewkesbury and the Newcastle mills which made the
integration process with existing operations very costly, hard and slow,
impacting the company’s overall profitability negatively in 2003 until 2008 as
shown in figure 4.1 (company’s Annual Reports 2004-2008).
? External causes: Another cause that contributed to the loss was the
continuous increase in interest charges on loans from debtors and an
intercompany loan. In addition, the bad economic conditions in the second
half of 2007 have affected the raw material prices, causing an increased
cost of raw material prices and higher overheads (Company’s Annual
Reports, 2008).
This combination of mixed factors had contributed to the negative profitability of the
company, pushing the need for turnaround action to be taken very quickly. The
analysis stage reveals critical evidence that decline was mainly associated with
certain subsidiaries, badly acquired, in addition to other high costs.
4.2.3 Formulation, implementation and stabilisation of the turnaround
plan
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-9
It was noted in the 2007 Annual Report that the Board of Directors decided to
implement some restructuring activities in response to the decline situation, by
instigating a rationalisation program in 2006. Evidence showed that the program
included short-term strategies to be implemented immediately and long-term
strategies to follow later.
Evidence showing the content of the short-term plan can be summarised as
follows:
? Operational restructuring: It was reported in the 2007 Annual Report that
cost cutting, tight control of overheads, reduction in spending and focusing
on performance and efficiency improvements, were the key actions within
this strategy to improve the company’s overall performance. Moreover,
sales contracts were adjusted post 2007 to generate more cash, by
transferring any increase in commodity prices to customers. This is aimed
at dealing with problems highlighted in the previous stage, regarding
increased cost of materials and high overheads in general.
? Asset restructuring: Another strategy, which was apparent during the
short-term, as reported in the 2007 Annual Report, was the divesting of as
many assets as possible. Additionally, the Newcastle mill was also
mothballed, which was considered a vital step in reducing the unnecessary
opening of another asset, thus reducing costs and improving their financial
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position. This strategy was in response to the initial cause of decline in the
first place i.e. bad acquisition.
4.2.4 Recovery and return to growth stage
Following the implementation of the short-term strategies during the last stage, it
was reported in the 2009 Annual Report that the companies continued to focus on
managing costs and reducing overheads, to ensure that operating profits remained
positive. This evidence indicates the importance of continuing to adapt operational
restructuring strategies in order to maintain efficiency, stable cash flow and keep
costs down.
Accordingly, by the end of the rationalisation program that took some three years,
the company made a profit from 2006 for two consecutive years of £1,887.147 in
2009 and £970,000 in 2010. Consequently, according to the turnaround criteria,
the company had undergone a successful turnaround experience and had
achieved recovery by 2010. The Board of Directors believed that improvement in
performance was the result of combined actions to reduce overheads, keep costs
down and increase service quality to customers (Annual Report 2009).
4.2.5 Summary of turnaround process ADM
It can be said that the turnaround plan of ADM started with the changes in the
leadership team, followed by identifying all the factors that linked the process such
as, the severity and causes of decline and its relationship to turnaround strategies
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shown and the stimulant transition of the company from one stage to another. A
rationalisation program was developed and implemented over two terms (short and
long) to tackle decline. The company returned to profitability in 2009 and
continued to make profits for more than two consecutive years making it a
successful turnaround case.
4.3 Bowes of Norfolk Limited
Bowes of Norfolk Limited (BOF) was founded in 1957 and previously known as
Norfolk Fat & Bone Company Limited, before it changed its name to its current
form in November 1993. The company is one of the biggest UK retail, food service
and wholesale pork meat suppliers (Cranswick plc, 2012). The company supplies
supermarkets and meat manufacturers in the UK as well as exporting to the Far
East, the Russian Federation, South Africa, Japan and European countries. The
company is operating as a subsidiary of Cranswick PLC since its acquisition on
24
th
June 2009.
It was stated on the company’s website that:
Cranswick is a leading UK food supplier providing the consumer with
a range of great tasting food that includes fresh pork, gourmet
sausages, cooked meats, air-dried bacon and sandwiches along with
a variety of non-meat products. Food is supplied under licensed
brands and retailers’ private labels.
(Cranswick Plc, 2012)
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BOF had suffered four years of negative profitability as shown below in Figure 4.2,
from 2002 until 2005, following their profit of £235,000 in 2001. The company
successfully implemented a turnaround program that brought the company to a
profitable position in 2006. This success story is investigated in detail below.
4.3.1 Decline stage
4.3.1.1 Recognition of decline
Many decline signals were reported in the company’s Annual Reports and the TMT
was concerned about the company’s situation showing negative profitability.
Despite the increase in turnover by £4m, decline was recognised by the TMT and it
was reported that they were confident that the company would return to profitability
435
-1,860
-463
-23
-604
871
2,439
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
2001 2002 2003 2004 2005 2006 2007
FIGURE 4.2: P&L OF BOF
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (BOF Annual Reports 2001-2007)
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and growth by taking some corrective actions, such as increasing volumes and
throughputs and focusing on quality and concern for animal welfare (Annual Report
2002).
4.3.1.2 Change of leadership
Evidence from the Annual Reports confirms that major leadership restructuring
took place at the onset of the turnaround process. For example, it was reported in
the 2006 Annual Report that the company Chairman was replaced, as well as four
other directors. It was stated in the Annual Report that they aimed to bring in new
business ideas and regenerate the company’s leadership for the future (Annual
Report, 2006).
4.3.2 Analysis of decline stage
4.3.2.1 Competitive advantage
It was found apparent in the Annual Reports that the company had a strong
position in the market, having good relationships with multiple retailers in the UK
market as well as abroad and also a highly skilled butchery team. Annual Report
2002). This made the existing management team feel confident that the company
would return to profitability in the near future, if certain measures were taken,
making it viable for turnaround (Annual Report 2002).
4.3.2.2 Severity of decline
According to the evidence found in the Annual Report, the company’s decline
stage can be assessed as a mid-term decline due to certain signals such as
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negative profitability and a deteriorating cash flow position. However, due to the
company position and size in the marketplace, it remained capitalised with sources
of finance and cash available to conduct the turnaround.
4.3.2.3 Causes of decline
It was found apparent from the Annual Report that the cause of decline was
allocated and identified by the company’s leadership, which can be summarised in
the following:
? External causes: Evidence from the Annual Report 2003, reported that the
outbreak of swine fever in 2001, followed by another outbreak of foot and
mouth disease, had caused temporary governmental legislation to be
brought in, restricting animal movement and trading for a long period of
time, thus impacting the overall production, supply and export ability for
2002 and 2003. It was reported that this has reduced the total volume of
sales and trading in general, leaving the company to deal daily with its
running costs.
Additionally, intense competition was found to be another cause of decline as it
created a worldwide oversupply of pork products in the market in 2001. This led to
overall reduced prices and profit margins, as well as other internal inefficiencies,
causing a continuous loss for several consecutive years, especially to the
company’s herds that did not recover at a rate that was anticipated (Annual Report,
2003).
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4.3.3 Formulation, implementation and stabilisation of the turnaround plan
The management team of the company realised that they had to act in a speedy
manner by altering investment plans and restructuring in order to stop the cash
drainage and help save the company. It was stated in the 2001 report that, “The
general environment has caused us to defer plans for re-investment in facilities
until the trading situation is more stable” (Annual Report 2001:1).
In 2004, the company conducted a wide range strategic review to assess the
company’s position internally and externally. The review concluded that there was
a list of actions needing to be implemented to respond to the declining situation, in
order to bring the company back to profitability as follows:
? Operational restructuring: The strategic review concluded that operational
restructuring activities (cost cutting and cash generation) were needed with
immediate effect, to improve the internal working environment. Following
the lift of restrictions on UK pig meat exports, the company increased its
sales to boost its market share and generate more cash in 2003 (Annual
Report, 2003). The company also worked towards improved profit margins
and reduced direct costs and overheads. For example, evidence from the
2006 Annual Report showed that the number of staff was reduced in 2006
by more than 100 in comparison to 2005. This was aimed at increasing and
improving the utilisation of staff, reducing costs and reserving cash.
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During this stage and by focusing on the operational efficiencies of the
company, a breakeven point was reached, the cash loss had stopped and it
was time to develop a long-term strategy to maintain such improvement and
head for full recovery.
4.3.4 Recovery and return to growth stage
It was emphasised in the 2006 Annual Report that they would maintain
improvement by continuing to reduce and control costs. Additionally, asset
investment restructuring strategies were implemented as follows:
? Asset restructuring: It was reported that the company’s strategic review,
including a long-term investment strategy to improve its operations, was a
step towards improving relationships with its major customers such as
Tesco. An investment in people and new equipment was allocated to
support the company’s recovery and future growth. For example, in 2006,
BOF invested a sum of £529,000 to improve the working facilities and in
2007, another sum of £841,000 was invested in improving staff training,
skills and manufacturing capabilities.
As a result of the actions and decisions implemented by the company’s leadership
in response to the strategic review in 2004, the company generated profits for two
consecutive years (£871,000 in 2006 and £2,439,000 in 2007) (Annual Reports
2006/2007). It was stated in the 2006 Annual Report that," This profit has been
achieved through the implementation of a detailed plan to improve efficiency levels
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and reduce costs, whilst taking care not to damage the exceptional quality of the
pork" (Annual Report 2006:1).
As stated in the report, the company will continue to work closely with its major
customers, to provide them with the best products as well as securing supply, by
strengthening the relationship with the main suppliers (Annual Report, 2006).
Additionally, a close eye had to be kept on performance to measure it against
profits and cash flow forecast, to ensure positive outcomes.
4.3.5 Summary of turnaround process BOF
BOF has proven to be a success story and many key lessons can be learnt from
the company’s turnaround experience. The focus on identifying the relationship
between the company’s competitive advantage, severity of decline, causes of
decline and the chosen operational and strategic options, played a significant role
in the success of the company’s turnaround.
4.4 Chr. Hansen (UK) Limited
Chr. Hansen (UK) Limited (CHR) is a subsidiary of the Chr. Hansen Holdings and it
specialises in the manufacturing of food and beverages. CHR is divided into five
divisions; they are (cultures and enzymes, colour, health and nutrition, global sales
and finance and global sourcing) (CHR Website, 2012).
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CHR is known for being a strong competitor in the food market based on its
expertise in the bioscience of food, health and animal industries (CHR Website,
2012). It was stated on the website of CHR that, “Their solution in pro-biotic,
enzymes, cultures and natural colours are based on strong research and
development competencies and significant investment in technology, making them
the market leader without dispute” (CHR Website, 2012).
CHR suffered a period of decline between 2005 and 2007 followed by a successful
turnaround as shown in Figure 4.3. That period was characterised by negative
profitability, inefficiency in operation and high overheads. The turnaround
experience of CHR investigated below, from the early stages of decline until
recovery was achieved.
17
-103
-142
-8
332
431
-200
-100
0
100
200
300
400
500
2004 2005 2006 2007 2008 2009
FIGURE 4.3: P&L OF CHR
DECLINE YEARS TURNAROUND YEARS
YEARSyearsEARS
PRE-DECLINE
YEARS
M
O
N
E
Y
IN
£000
Adapted from: (CHR Annual Reports 2004-2009)
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4.4.1 Decline stage
4.4.1.1 Recognition of decline
In 2005, CHR went into a negative profitability position and the leadership of the
company understood that some quick changes to save the company from failure
were required. It was reported in the 2005 Annual Report that various signals
indicated the companies need to reassess its portfolio in the light of current risks.
Signals such as increased material prices, lack of cash flow and negative
profitability were the most serious. However, it was reported in the 2005 Annual
Report that the TMT of the company felt confident that the negative profitability
position was only temporary and performance should be improved with changes
around the company to enhance NPD from the company’s own research efforts
(Annual Report, 2005).
4.4.1.2 Change of leadership
Following the recognition of decline, some new changes in the leadership team
took place; however, these changes did not involve the Managing Director who
managed the company during the decline stage (i.e. M. Hurley). It was noticed
from the Annual Reports 2005 and 2006 that in 2006 the Sales Director and the
Finance Director were replaced. This was seen to help to initiate the turnaround
process within the company, by bringing in new people with fresh ideas and more
skills needed for the turnaround process.
4.4.2 Analysis of decline stage
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4.4.2.1 Competitive advantage
It was reported in the 2004 Annual Report that CHR is a subsidiary of the Chr.
Hansen Holding Company in Denmark, secured by large financial capital and is
strong competitor in the market based on NPD and experience in the bioscience of
food. This had reassured the company’s leadership team of their ability to return to
profitability, making it viable for turnaround if causes of decline were identified and
rectified.
4.4.2.2 Severity of decline
According to the company’s Annual Reports, evidence showed that despite the
negative profitability and lack of cash flow, the company was supported by its
larger mother company and a massive network of suppliers, customers and
lenders. The decline can be considered a mid-term decline, having reviewed the
major signals of failure.
4.4.2.2 Causes of decline
It was found apparent in the Annual Reports of the company that the causes of
decline can be attributed to the following factors:
? Internal causes: Low profit margins that did not reflect the new continuous
rise in raw material costs, was one of the main causes highlighted in the
Annual Report (Annual Reports, 2005). Furthermore, the rise in operational
costs, such as staff costs, by over 14% (£118,000) in 2005, due to some
directors’ retirements and pay-outs, was another participant in the decline of
CHR (Annual Reports, 2005). This explains the leadership changes early
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on in the process, especially the replacement of the Finance Director,
indicating a lack of managerial financial control leading to various problems.
? External causes: The rise in the interest rate payable (especially after
adding the difference in exchange rate), played a significant role in
increasing the burden on the company’s financial situation, affecting its
profitability. For example, the interest charges increased by 28% in 2005,
76% in 2006 and 86% in 2007. Additionally, in 2006 the increased cost of
raw materials and distribution had both affected the operating profit of the
company, despite the increase in turnover (Annual Reports, 2005).
When these factors were identified, the next stage in the process followed to rectify
and implement the most appropriate strategy to turnaround the company.
4.4.3 Formulation, implementation and stabilisation of the turnaround plan
It can be concluded from the Annual Reports for 2005-2009, that the management
response to the negative profitability situation combined two major strategies
during the short-term phase, to stop the continuous cash loss and improve the
financial situation and they were:
? Operational restructuring: It was seen from the Annual Reports that
bringing the costs down were a key step to getting the situation under
control. It was mentioned in the 2007 Annual Report that the management
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focused on the cost base and general spending to minimise overheads, at
the same time as generating cash by focusing on developing profitable
products with high profit margins that appealed to customers. Evidently, it
was noticed in the 2008 Annual Report that the cost of sales and the
administration were reduced accordingly with the declining turnover.
? Financial restructuring: It was seen in 2008 that the continuous increase
in the interest rate had stopped and the annual charge in 2008 was less
than 2007 by nearly 50%. It was reported in the 2008 Annual Report that
the company secured various lending agreements in 2007, in various
currencies, to overcome problems with interest rate risk. It can also be seen
that the new financial restructuring plan gave the company better terms of
borrowing and thus reduced their annual cost. (Annual Report, 2008).
Implementing those mixed strategies in the short-term had brought the company
back to profitability in 2008 and later years.
4.4.4 Recovery and return to growth stage
No evidence was found in the Annual Reports that the management of the
company had implemented any additional strategies in the long-term. However, it
was mentioned in the 2009 Annual Report that the company’s management would
maintain tighter control over costs and work closely with customers to develop the
best products with the highest profit margins.
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It was reported in the 2009 Annual Report that monitoring the cost base, working
closely with customers on consciously developing new products and ensuring high
levels of service quality, had brought the company to a profitable position in 2008
(PAT of £332.000) and in 2009 (PAT of £431,000) (Annual Report 2009).
Additionally, it was stated on the company’s website that one of the major reasons
behind the success of CHR, was the partnership, which was established with their
customers (CHR Website, 2012). It was emphasised that the continuing dialogue
helped to ensure that customers used the best products for their needs in the best
possible way, confirming that customers are the source of inspiration for new
developments (CHR Website, 2012).
4.4.5 Summary of the turnaround process of CHR
The success story of CHR has many key lessons to be learned since its fall into
decline in 2005 and its full recovery in 2009.
4.5 Hill Biscuits Limited (HB)
Hill Biscuits Limited (HB) was established in 1855 as a family business and since
then the company has passed through several owner. The company is today in
private ownership, combining the family’s traditional baking methods with high
volume production capabilities, creating a successful competitor in the marketplace
(HB website, 2012). The company has various products under its brand name Hill
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in different ranges (e.g. 150 grams range, 250-300 grams range and mini packs)
from rich tea biscuits to light snacks and mini packs (HB website, 2012).
The company went through a turnaround experience after suffering three years of
negative profitability starting in 2001 (see Figure 4.4). The story of HB can be
summarised in the following sub-sections as a success story, of which many key
lessons can be learned.
4.5.1 Decline stage
4.5.1.1 Recognition of decline
The decline of the company was characterised by many key signals of decline,
which were found apparent in the Annual Report, such as the growing concern by
512
-106
-147
-43
313
289
-200
-100
0
100
200
300
400
500
600
2001 2002 2003 2004 2005 2006
FIGURE 4.4: P&L of HB
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (HB Annual Reports 2001-2007)
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the management team, negative profitability and loss of market share (Annual
Report, 2002). Those signals of decline were recognised by the management
team and acted upon by formulating and implementing the necessary actions
needed to reverse decline.
4.5.1.2 Change of leadership
There was no evidence found from the Annual Reports that there were any
leadership changes. It was found clear that the same team, which managed the
company through decline, stayed to manage the company during the turnaround
period, which may have been because the company was a family owned and
managed business, with high constraints on the flexibility to replace bad leaders
with staff from outside the family.
4.5.2 Analysis of decline stage
4.5.2.1 Competitive advantage
It was reported in the 2001 Annual Report and on the company’s website that HB
is one of the UKs strongest competitors in the biscuit market, with over 100 years
of experience and many own brand products. The position that the company holds
in the market, has made the company’s owners and leadership team confident that
they are able to return to profitability and growth by identifying and eliminating the
causes, which led the company into decline in the first place.
4.5.2.2 Severity of decline
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According to evidence from the Annual Report, it can be said that the company
suffered a mid-term decline according to decline signals, such as negative
profitability, decreased sales and low profit margin. The company had the core
competitive advantage that it needed as well as enough cash to execute the
turnaround.
4.5.2.3 Causes of decline
Evidence from the 2001 Annual Report asserts that many causes have contributed
to the negative profitability between the years 2001 and 2003 and they are
summarised as follows:
? Internal factors: Evidence showed that the internal causes of decline in
HB took different forms as below:
1. Data from the 2001 Annual Report showed that the company had lost a
major contract with one of its customers, which resulted in a decline in
sales within the company. In response to this, a program was developed
relying heavily on NPD to boost sales. However, launching these
products was badly managed, causing a high level of waste and
eliminating any potential profits (Annual Reports 2002 and 2003).
2. Low profit margin was another cause of decline as customers were not
willing to accept any price increase in the goods despite the company’s
attempts to implement this (Annual Report, 2003).
3. Exceptional costs that were unexpected, such as a bill from the Inland
Revenue in 2002 for a large sum of cash relating to some previous
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years, plus a large sum of money in 2003 which was over-spent on
machinery maintenance and was greater than was forecasted for this
work.
? External factors: Evidence from the Annual Report indicated that
aggressive pressure from competitors in the marketplace had caused loss of
two major sales contracts in 2001; consequently, a third contract was
salvaged due to them dropping to very low margins. This had caused a
major decrease in sales at a staggering rate of 24% less than the year 2000
(Annual Report, 2001).
All these consecutive occurrences, combined with unstable economic conditions,
had led the company into a negative profitability position. Therefore, some new
strategies were required to be developed and implemented in order to bring the
company back to recovery.
4.5.3 Formulation, implementation and stabilisation of the turnaround plan
In response to the declining situation in the company, a short-term strategy was
developed and implemented to tackle decline on the basis of the following strategy:
? Operational restructuring: An operational restructuring strategy was
implemented in the form of two major activities and they were:
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1. Improve waste levels and better utilise labour within the company
as a whole, as well as keeping raw material prices as low as
possible.
2. Generate cash and raise the company’s portfolio through
importing a range of savoury biscuits from Europe and reselling
them in the UK, as well as focusing on developing products with
the highest margins.
Such cash reserving and cash generation strategies helped the company to
recover from its NPD crisis and source some new products from Europe to add to
its product range. This increased the company’s sales and allowed for a profit
margin increase.
4.5.4 Recovery and return to growth
It was reported in the 2005 Annual Report that the company would maintain a
greater control over costs, expand the customer base and continue to review its
product range, replacing old products with new, higher quality ones as part of the
continuation of the operational restructuring process. Evidence shows that HB has
gained success following the implementation of their turnaround plan. It can be
seen that the company returned to profit in 2004 (PAT of £312,815) and 2005 (PAT
of 289,062) emphasising the importance of cutting costs and cash generation
strategies. It was made apparent in the 2005 Annual Report, that the company will
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keep a close eye on their product range, replacing low margin products with higher
margin ones, as well as keeping costs to their lowest possible level.
4.5.5 Summary of the turnaround process of HB
The leadership team of the company analysed and reversed the decline situation,
using the most appropriate strategy in relation to the original cause of decline as
shown in Figure 4.4. It can be seen that the company relied on one major strategy
to turn the company around i.e. operational restructuring.
4.6 Icelandic Group UK limited (IG)
Icelandic Group UK Limited (IG) (previously known as IFP Holdings Limited) is one
of the biggest companies in the world operating in the seafood sector, with an
international network of independent production and marketing companies in many
countries around Europe, North America and Asia (IG website, 2012). The
company is a subsidiary of Icelandic Group Plc offering a wide variety of fresh,
chilled and frozen seafood products and services globally. The company’s main
business core as stated on their website, is focused on value-added processing of
seafood, mainly ready meals for retail and the food service industry (IG website,
2012).
As mentioned on the website of IG, the company is operating under three business
segments and they are:
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1. Primary processing, representing 6% of the total business sales with raw
material production facilities in Iceland, China and Thailand.
2. Value added processing, representing 69% of the business sales with
production facilities in the US and the UK focused on value added products.
3. Sales and marketing, representing 25% of total sales focusing on promoting
Icelandic branded products in all major markets, most importantly the UK,
Spain and Japan.
The company went through a tough period of decline between 2006 and 2008 as
shown in Figure 4.5. However, that decline was eliminated in response to some
corrective actions implemented in late 2008/2009. The experience of the company
is investigated below emphasising the key lessons that can be learned from its
success.
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4.6.1 Decline stage
4.6.1.1 Recognition of decline
The company’s last positive profitability before it went into decline was in 2005
However, profits for this year were 83% less than the previous year (2004). It was
indicated in the 2005 Annual Report that the impact on efficiency was expected
due to the reorganisation process, following the acquisition of two new businesses
(Seachill Limited and Cavaghan and Gray Limited) in 2004. Decreased profitability,
lack of efficiency in operations and decreased cash flow were the major signals of
decline in IC during that stage (Annual Report, 2004).
4.6.1.2 Change of leadership
406
-1,327
-391
-14,796
6,481
4,797
-20000
-15000
-10000
-5000
0
5000
10000
2005 2006 2007 2008 2009 2010
FIGURE 4.5: P&L of IG
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (IG Annual Reports 2005-2010)
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It was apparent from the Annual Report that despite the changes to the Board of
Directors as part of the reorganisation process, involving many changes in
operations as well as senior management restructure in 2005 and 2006, that to
ensure that the company is well positioned for the future, the company’s Managing
Director remained unchanged to manage the company through the turnaround
process. This provides evidence that despite the new structure, changing the
company’s leader was not found necessary during that stage.
4.6.2 Analysis of decline stage
4.6.2.1 Competitive advantage
It was asserted in the 2005 Annual Report that the management of IG believed that
the company would return to profitability in the short-term, due to the position that it
enjoyed in the market, with many competitive advantages such as its strong
business network around the globe and being one of the biggest competitors in the
seafood market worldwide (Annual Report, 2005).
During this stage, many environmental factors that caused concern to the
company’s leadership were mentioned in the 2006 Annual Report, such as raw
material availability, currency exchange rates, new legislations and competition.
However, it was asserted that, “Directors remain confident in the groups’ market
position and the opportunities provided by its strong operational base” (Annual
Report, 2006).
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4.6.2.2 Causes of decline
It was found apparent in the Annual Reports of the company (2005, 2006 and
2007) that negative profitability caused concern to the Board of Directors regarding
the company’s position in the market, profitability and future growth. Situation
analysis was conducted and the negative results for 2006, 2007 and 2008 can be
attributed to the following causes:
? Internal causes consist of two major causes and they were:
1. High cost of expansion and investment in new equipment as part of the
process of integrating the two new sites acquired in 2004, having
caused huge financial pressure on the company’s resources.
2. The Coldwater site (the main raw material processing facility for the
group) had very high operational costs as well as inefficiency
problems. This had a great impact on the company’s cash flow and
profitability (Annual Report, 2006 and 2007).
? External causes consist of two major causes and they were:
1. Continued increase in the annual interest charges (£4,995.000 in 2005,
£5,752.000 in 2006, £7,086.000 in 2007 and £7,547.000 in 2008) have
caused a great burden on the company’s repayment ability due to cash
shortages.
2. Bad market conditions with continued increase in raw material prices
due to bad weather in 2005, 2006 and 2007, which had led to low profit
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margins and the inability to compete in the marketplace which
impacted the operating profits negatively.
4.6.3 Formulation, implementation and stabilisation of the turnaround plan
It was found apparent from the Annual Reports that the leadership of the company
had implemented various strategies as part of its major turnaround plan. During
this phase, the priority was to improve the operation of the company, reduce cash
loss and to pick up the cash flow position via the following short-term strategies:
? Operational restructuring: It was asserted in the Annual Report that
reducing costs, reserving as much cash as possible and switching suppliers
for cheaper raw materials if needed, were key actions taken to improve
efficiency (Annual Report, 2008). In addition, credit control measures with
customers were placed to ensure regular, on time flow of payments (Annual
Report, 2008). Additionally, NPD played a significant role in generating
more sales, especially with the launch of some new products under a new
brand name (Annual Report, 2008).
? Asset restructuring: Evidence from the 2008 Annual Report asserts that
asset investments as well as asset divestment strategies were used during
the short-term phase.
1. The Coldwater Redditch site was divested on June 2008 to reduce
its high running costs and huge overheads, as well as improving the
overall performance of the group.
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2. An investment amounting to some £3.6m was made in new
equipment and reorganisation at the Grimsby site to accommodate
business brought from the Coldwater site post its closure.
? Financial restructuring: The company needed to take action regarding the
increased interest charges on bank loans and the inter-company loan. Two
major strategies were used as follows:
1. A debit restructuring strategy was implemented in 2008, with the
transfer of the loan (£42.4m) to a different bank with better interest
rates, giving the company headroom with cash flow and banking
covenants. In addition, terms of borrowing and lending
agreements were negotiated with other lenders in favour of the
company, with deferred capital repayment till 2009 and reduced
repayment for 2010 and 2011 (Annual Report, 2007).
2. Furthermore, an equity restructuring strategy was implemented
with the intercompany loan, by turning the remaining sum of the
loan amount into equity, removing the burden of interest charges
and any potential capital repayment (Annual Report, 2007).
4.6.4 Recovery and return to growth
Evidence from the 2010 Annual Report indicated that the company continued to
maintain cost control measures, NPD of profitable products and constantly looked
for new opportunities in the marketplace (Annual Report, 2010). Following the
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short-term, financial changes which took place in the company, performance had
improved as well as profitability in 2009 (£6.4m) and 2010 (£4.7m), which can be
attributed to the reduced overall costs, divesture of unprofitable assets, better
utilisation of assets, the new customer base and the launch of a new brand
stimulating more sales.
4.6.5 Summary of the turnaround process of IG
Several key lessons can be learnt from the case of IG. Evidence showed that
three major strategies (i.e. operational restructuring, asset restructuring and
financial restructuring) were used during the short-term in relation to the original
causes of decline and to eliminate the high overheads, increased costs and
interest rates. Additionally, operational restructuring continued to be used and
implemented during the long-term as an essential strategy to maintain
improvement and ensure full recovery.
4.7 Kitchen Range Foods Limited
Kitchen Range Foods Limited (KRF) has being operating for over 30 years in the
UK, producing various sweet and savoury snack products. Being a part of Moy
Park Food Service and the International Marfrig Group, KRF has become a quality
benchmark pioneer, with pride in its core values, innovation in new product
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
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development with high quality specifications meeting the diverse needs of different
consumers (KRF website, 2012).
It was stated on the company’s website that, “The company has two production
sites in the UK, Kitchen Range Foods supplies frozen food to all major multiples in
retail, many big brand name food outlets and most national and regional
foodservice wholesalers” (KRF website, 2012). The company has a history of
profitable performance. However, it found it challenging to maintain profitability in
2004, 2005 and 2006 as shown in Figure 4.6 below. The turnaround process of
KRF is investigated in the following sections.
56
-282
-276
-129
1,210
851
-400
-200
0
200
400
600
800
1000
1200
1400
2003 2004 2005 2006 2007 2008
FIGURE 4.6: P&L of KRF
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
Adapted from: (KRF Annual Reports 2003-2008)
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4.7.1 Decline stage
4.7.1.1 Recognition of decline
Evidence was found from the Annual Reports of the company that many warning
signs of decline appeared in 2003, such as decreased sales and revenue (Annual
Report, 2006). It was noted in the report that this decline in profits was expected
due to the changing economic conditions and decrease in demand.
4.7.1.2 Change of leadership
Following the recognition of the decline situation and in an effort to save the
company, various changes in the company’s leadership took place. For example,
the Managing Director of the company and two other directors were replaced in
2006, to start off the turnaround process. Following the change in the leadership of
the company, various operational and strategic changes took place after a full
understanding of the situation was reached.
4.7.2 Analysis of decline stage
4.7.2.1 Competitive advantages
It was found apparent from the Annual Report that KRF was viable for turnaround
due to various competitive advantages that could support its recovery and return to
growth, such as being part of two major business groups with various sources of
funding and being well positioned in the market on the basis of strong NPD
programs and a huge range of products.
4.7.2.2 Severity of decline
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Evidence from the Annual Reports indicated that the company suffered a mid-term
decline due to signals such as negative profitability and inefficiency in operations.
Despite this, it was evident that KRF was well capitalised being financially backed
up by two large groups allowing the necessary cash for the turnaround process.
4.7.2.3 Causes of decline
Based on the evidence from the Annual Reports it can be said that the causes of
decline can be attributed to the following:
? External economic factors: It was noted in the 2006 Annual Report that
the changing economic condition had influenced a global lack of demand,
reduced sales and cash flow. This had increased the burden on businesses
to meet liabilities and breakeven. There was no other evidence found from
the Annual Report that any other factors had participated in the decline of
KRF.
4.7.3 Formulation, implementation and stabilisation of the turnaround plan
Following the change in leadership, various short-term strategies were formulated
and implemented in order to rectify the decline situation mainly focusing on
operational restructuring.
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? Operational restructuring: Evidence were found in the 2007 Annual
Report that different techniques were formulated and implemented as
follows:
1. Costs were put under greater control due to its importance at that
stage (Annual Report, 2007).
2. Cash was generated to fund operations and improve the overall
situation of the company. For example, the company increased its
sales by stimulating demand and benefiting from the improved
market conditions in 2008 (Annual Report, 2008).
4.7.4 Recovery and return to growth stage
Following the short-term changes, further strategies were needed during the long-
term to maintain improvements and achieve full recovery as follows:
? Operational restructuring: It was asserted in the 2008 Annual Report that
the company would maintain improvements by continuing to watch costs
and over-spending.
? Financial restructuring: Evidence from the Annual Reports revealed that a
large sum of shares was offered for sale to the Marfrig-Frigorificos Group in
2008, generating a sum of over £10m (Annual Report, 2008). This capital
was greatly needed during this stage of the turnaround process.
The company achieved positive profitability in 2007 (PAT of £1,210,000) and 2008
(£850,000) as a result for the turnaround effort implemented in both the short and
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longer terms. In 2007, KRF had a profitable year because of the new turnaround
strategy, which mainly evolved around better utilisation of assets, greater control
over spending and the boosting of sales. Two consecutive years of profitability
made KRF a successful turnaround case, with many lessons to be learned.
4.7.5 Summary of the turnaround process of KRF
From the turnaround experience of the company, Figure 4.6 was developed to
emphasis the turnaround experience of KRF. It can be said that operational
restructuring, including some cost cutting and cash generation activities, was
enough to rectify the problem in the short-term. However, in the longer term, the
use of financial equity restructuring strategies, helped in maintaining improvements
and achieving full recovery. The company learned to keep costs down and
continuously improve levels of sales to stay profitable and continue to grow.
4.8 Lancashire Eccles Cakes Limited (LEC)
Lancashire Eccles Cakes Limited (LEC) is a family owned business that has
specialised in the manufacture of handmade, high quality Eccles cakes since the
1930s (LEC website, 2012). The current company was set up in 1979, producing
the leading brand of handmade, Eccles cakes i.e. Real Lancashire Eccles Cakes.
The company has combined the life-long experience and the special traditional
recipe, with the mass manufacturing facilities to produce Eccles cakes for leading
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UK supermarkets, local stores and even for export to Europe and America (LEC
website, 2012).
The company has strongly operated and competed in the market for many years.
However, changing economic and business conditions has caused some
interruption to the company’s profitable performance (as show in Figure 4.7),
leading the company to a decline situation between 2003 and 2005, with negative
profitability for three consecutive years.
4.8.1 Decline stage
99
-255
-93
-128
291
314
-300
-200
-100
0
100
200
300
400
2002 2003 2004 2005 2006 2007
FIGURE 4.7: P&L of LEC
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (LEC Annual Reports 2002-2007)
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4.8.1.1 Recognition of decline
It was found apparent in the company’s Annual Report, that decline in performance
and sales was expected by the TMT due to changing weather conditions affecting
crops in Europe (Annual Report, 2003). In line with this, evidence showed that
various decline signals were found in the company such as declined profitability,
lack of cash flow and deterioration in performance.
4.8.1.2 Change of leadership
It was visibly clear from the Annual Reports that there were no leadership changes
during the turnaround, especially during this stage, to trigger the turnaround
process (LEC website, 2012). This may have been because the company is a
family owned business, with difficulty in conducting any leadership changes, similar
to the case of HB.
4.8.2 Analysis of decline stage
4.8.2.1 Competitive advantage
It was noticeable from the Annual Report that the leadership of LEC was confident
about the position of the company in the marketplace and its viability to stay
competitive in the long run, based on being in the business for many decades with
extensive experience, good reputation and good relationships with its customers
(Annual Report, 2003).
4.8.2.2 Severity of decline
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According to evidence found in the Annual Report, it can be said that the company
was in a mid-term decline, characterised by low volume of sales, declining
profitability and the concerns of the management. However, despite this, the TMT
were confident that the company had the competitive advantage and the required
capital to achieve a turnaround and return the company to full recovery (Annual
Report (2004).
4.8.2.3 Causes of decline
It was highlighted in the company’s Annual Report that various external factors had
played a significant role in the decline of the company and the negative profitability
between 2003 and 2005 and they were:
? Increased cost of raw materials (mainly dried fruits) can be considered the
main cause of decline during the whole three years (i.e. 2003, 2004 and
2005). As a result of bad weather conditions in Greece affecting crops, this
caused a shortage of supply and accordingly increased prices. The high
costs affected the company further in 2004 and 2005, despite the slight
increase in the total turnover.
? Increased costs have played a significant role in the declined profitability of
LEC, for example, pension costs had increased from £215,194 in 2002 to
£315,880 in 2003, £317,428 in 2004 and £573,855 in 2005, due to changes
in legislations. This increase in pension payments had caused another
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
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burden especially during the inflationary economic conditions (Annual
Reports, 2003, 2004, 2005 and 2006).
The increased cost of raw material prices and pension contributions combined
together, were enough to push the company into decline and there was a need for
some essential changes.
4.8.3 Formulation, implementation and stabilisation of the turnaround plan
It can be concluded from the Annual Reports of the company that the company
relied on one strategy during both the short and the long-term, to control the
deteriorating situation and reverse decline as follows:
? Operational restructuring: Evidence from the Annual Reports was found
that the management had focused on reducing all costs in major parts of the
company. For example, the continuous rise in pension costs and staff
wages had been stopped and instead the total cost of staff dropped from
£2,258,496 in 2005 to £1,888,498 in 2006, by reducing the workforce
(Annual Report, 2006). Other costs were put under greater control to
ensure better utilisation of cash.
4.8.4 Recovery and return to growth
In addition to the activities which were implemented during the previous stage,
further cuts to the number of staff were made in 2007 by another four people in the
production area, resulting in a £200,000 decrease in staffing costs when compared
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to 2006. This was done to improve efficiency throughout the manufacturing
facilities and minimise overheads (Annual Report, 2007).
From what was seen in the Annual Reports, it can be said that the company had
operated in a very tough environment, with increasing raw material prices as well
as other costs, such as increased pension costs, affecting its profitability and ability
to grow. LEC represents another successful turnaround story of managing the
business through tough conditions until profitability and recovery were restored.
Profitability was achieved in 2006 (PAT of £261,218) and 2007 (PAT of £284,161)
after dividends (£30k each year) (Annual Report, 2007). It was stated in the 2007
Annual Report that the company will continue to keep a close eye on it overheads,
in order to stay profitable and competitive in the marketplace.
4.8.5 Summary of the turnaround process of LEC
As emphasised in Figure 4.7, the company’s turnaround experience was a good
example of the idea that eliminating the cause of decline is the key to a successful
turnaround. The company had overcome increased costs of raw materials and
pension contributions, by tighter control over all spending and cost cutting activities
(Annual Reports, 2003, 2004, 2005, 2006 and 2007).
4.9 Molls Meats (Birmingham) Limited (MMB)
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Molls Meats (Birmingham) Limited (MMB) also known as Molls Bacon, was
founded by Margaret Oswell, and Roy Oswell in 1970, as a traditional catering
butcher and it was registered as a limited company on 26 February 1982, with its
registered office in Birmingham (Duedil, 2012). In 1984, the transition into bacon
slicing was made and since then the company has seen significant growth. The
private company prides itself on customer service, believing that it is the key to its
success with a wide customer base serving public houses and wholesalers in the
catering trade, as well as the food service sector (MMB, Website, 2012).
The company went through a turnaround experience after a period of three
consecutive years of negative profitability as shown in the figure below. The
reasons behind this negative profitability and the set of strategies used to bring the
company back to profitability, are discussed in the following four sections.
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4.9.1 Decline stage
4.9.1.1 Recognition of decline
It was stated in the Annual Report of 2005 by the Managing Director of the
company, that decline was expected and recognised due to various external
factors that were difficult to control. However, he was confident that decline was
temporary and the company would return to profitability (Annual Report, 2005).
4.9.1.2 Change of leadership
There was no evidence found from the Annual Reports that there were any
leadership changes in response to the decline situation. The private company was
run by the same Managing Director through the decline and the turnaround period
10
-58
-205
-161
38
133
-250
-200
-150
-100
-50
0
50
100
150
2005 2006 2007 2008 2009 2010
FIGURE 4.8: P&L MMB
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
Adapted from: (MMB Annual Reports 2005-2010)
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(Annual Reports, 2005-2010). Similar to previous cases in the study, this may
have been due to the type of ownership as a private business managed by the
owners.
4.9.2 Analysis of decline stage
4.9.2.1 Competitive advantage
The company has been operating in the business for over 28 years with long
experience and good relationships with its customers. This had reassured the
leadership team that the company could stay competitive in the market and was
viable for recovery and turnaround (Annual Report, 2005).
4.9.2.2 Severity of decline
Evidence from the company’s Annual Report indicates that the company had
suffered a mid-term decline stage, when the company showed various signals such
as lack of cash flow, negative profitability and increasing concerns by its
leadership. However, despite this, it was found from the Annual Report that the
company had enough cash in reserve to fund and sustain the business during the
turnaround process.
4.9.2.3 Causes of decline
Identifying the causes of decline was one of the most important steps in this
turnaround case. It was found apparent from the Annual Reports 2005-2007 that
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causes of decline were mainly due to external factors that the company’s
leadership believed it had no control over and these factors were:
? High costs and increased charges: Increased cost of energy, fuel and
transport in 2008 and 2009 had impacted on the direct overheads of the
company as well as the cost of packaging, which indirectly amplified the
pressure on MMB’s financial capabilities and profitability.
? Continuous inflation in meat prices (20% increase between 2007 and 2009)
was another cause for decline, as the increase had led to the loss of some
contracts previously drawn on fixed price agreements, which impacted
profitability negatively.
? Exchange rates were another cause due to the Sterling’s weakness against
the Euro, leading to a shortage of supply of all raw materials imported from
countries in the Euro zone.
Identifying, recognising and understanding those causes of decline and its impact
on the company’s performance had triggered the formulation and implementation
of the turnaround strategy to rectify and amend such causes to bring the company
back to profitability.
4.9.3 Formulation, implementation and stabilisation of the turnaround plan
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It was conveyed in the Annual Report that the company was still operating under
the same circumstance of high-energy bills and increase in raw material prices
during this stage. However, various changes to the assets and operations took
place to rectify the decline situation and return the company to stability and growth.
The changes implemented during the short-term stage were mainly operational
restructuring and it can be summarised as follows:
1. A new pricing system was introduced to quote prices more frequently on
a monthly or even weekly basis, in order to be able to transfer any
increase in raw material prices to customers (Annual Report, 2008-
2009). This increase in prices improved the profit margin of the
company and generated more cash.
2. Focusing on NPD to increase sales was another technique to improve
overall performance, which led to new contracts in 2008 and an opening
into the larger retail sector in 2009, boosting the company’s volume of
sales (Annual Report, 2009).
4.9.4 Recovery and return to growth
In addition to the short-term improvement executed during the previous stage, it
was further asserted that the company would continue to focus on cost reduction,
pass the increase in prices to customers and improve customer service levels
through NPD during the longer term (Annual Report, 2010).
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Further strategies were needed to ensure long-term improvement and sustained
profitability. Consequently, an asset restructuring strategy was adopted during this
stage as stated in the 2009 Annual Report as follows:
1. Asset investment strategy: a new technology to speed the production
process, reduce costs, save energy and increase productivity and efficiency
was put into place in 2009 (Annual Report, 2009). It was stated in the 2010
Annual Report by the Board of Directors that, “We continue to be successful
in winning new customers, whilst still maintaining all our major customers”
(Annual Report 2010:2).
Evidence from the 2010 Annual Report shows that by the end of this stage the
company had reached the recovery position, by achieving improvement in
performance and positive profitability in 2009 (PAT of £37,549) and 2010
(£133,011). It was stated by the Managing Director of the company that, “We will
be focusing during the next year ahead, on maintaining our high level of customer
service and bringing in new product lines to offer to our retail and wholesale
customers” (Annual Report, 2010:2).
4.9.5 Summary of the turnaround process of MMB
As was revealed previously, the turnaround experience of MMB shows many key
lessons to be learnt in relation to how to achieve a successful turnaround. The key
success factors of the company can be concluded as being able to identify the
company’s ability to recover, identifying the causes of decline and implementing
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the operational changes required during the short-term as well as investing in new
technologies to put the company in a good position for future growth.
4.10 New Ivory Limited (NI)
New Ivory Limited (NI) was owned and managed by Zubrance Limited (formerly
named Mathew Foods PLC) under the name of New Ivory Sauces until July 2004.
The name was then changed again in 2005 with the transfer of the trade and
assets to Mathew Group Limited its current name.
The company specialises in the production of a wide range of sauces (e.g. gravies,
marinades, dips and dressings, fish and steak sauces, chicken and beef gravies as
well as chocolate and toffee dessert sauces), making it the market leader working
closely with major UK retailers and food manufacturers (Annual Reports, 2005-
2010). The Board of Directors believed that the success of NI in the market is the
outcome of a combination of good staff, best processes and best environments, all
coming together to produce the finest product. However, like many businesses, NI
had a tough decline period between 2006 and 2008, suffering a negative
profitability (as shown in the figure below) and a decline in growth. This tough
period is investigated to identify all the key factors, which led to such a decline
situation and to identify the formula, which was used to turnaround the company.
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4.10.1 Decline stage
4.10.1.1 Recognition of decline
Post the transfer of trade and assets to Mathew Food PLC in 2004 (the ultimate
parent company), the turnover of NI had grown from £7.9m in 2005 to £10.8m in
2006, generating a profit of £113,598 in 2005. However, this was followed by three
annual losses in 2006, 2007 and 2008 (£566k, £237k, £130k accordingly). It was
asserted in the 2006 Annual Report that the Board of Directors recognised the
changes which needed to take place, to tackle the decline situation and bring the
increase of business under greater control.
4.10.1.2 Change of leadership
114
-566
-237
-130
89
759
-800
-600
-400
-200
0
200
400
600
800
1000
2005 2006 2007 2008 2009 2010
FIGURE 4.9: P&L of NI
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
Adapted from: (NI Annual Reports 2005-2010)
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Evidence from the Annual Report shows that change of leadership was one of the
major initial strategies adapted by the company’s TMT, to ensure that NI had the
right leadership structure ready to take it to the next phase of recovery and growth
(Annual Report, 2007). It was shown in the 2006 Annual Report that the Managing
Director was replaced in September 2006 as an initial step in the turnaround
process.
4.10.2 Analysis of decline situation
4.10.2.1 Competitive advantage
The company has been competitive in the marketplace for many years, with a big
market share on the basis of being a subsidiary of the Mathew Group Limited and
enjoying the benefits of robust relationships with the biggest customers and
suppliers in the market. The Board of Directors added that NI holds a strong
position in based on its ability to respond quickly when managing customer’s
demands, its strong relationship with customers and the delivery of value added
products (Annual Report, 2007). This had provided the TMT with confidence in the
company’s ability to recover and return to growth.
4.10.2.2 Severity of decline
According to evidence from the Annual Reports, it can be asserted that the
company suffered a mid-term decline. This is supported by the decline signals
associated with this stage, such as negative profitability and inefficiency in
operations. However, being part of a large food group provided the company with
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the bridge finance required to implement a successful turnaround, as long as the
causes of decline have been identified and corrected.
4.10.2.3 Causes of decline
When the company’s Annual Reports were reviewed, evidence showed that there
had been many causes that could have been attributed to this, which can be
summarised as follows:
? Internal causes: Following the transfer of trade and assets to the Mathew
Group, the size of sales had increased significantly. However, this was
accompanied by a lack of efficiency in operations, high levels of waste and
low profit margins. Additionally, this increase in sales had incurred high
costs such as the cost of production, staff and distribution, which was not
aligned properly with existing profit margins.
? External causes: In addition to the internal causes, it was highlighted in the
company’s Annual Report that there had been an increase in the raw
material prices due to poor summer conditions in 2006, which played a
significant role in the company’s negative profitability in 2007.
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4.10.3 Formulation, implementation and stabilisation of the turnaround
plan
Following the in depth investigation carried out during the analysis stage, many
factors were revealed upon which a turnaround plan was drawn to rectify the
decline situation. It was stated in the 2006 Annual Report that, “Steps were taken
during the latter part of this year (2006) to establish a more robust team, capable of
arresting the decline in profitability and operating efficiently and effectively at this
level. The company will continue to focus on operational costs to increase
efficiency and drive down costs; this will provide stability in the short term and
ensure customer service levels remain high (Annual Report, 2006:1).
In the light of this statement, the short-term strategy executed by the TMT
consisted mainly of operational restructuring which can be summarised in the
following actions:
? Cost reduction against static lines of sale in all parts of the business to
reduce costs and liabilities (Annual Report, 2007). For example, the
company reduced the number of staff from 148 in 2008 to 140 in 2009 and
down again to 139 in 2010, despite this they had an increase in sales by
over 17% in 2010.
? Cash generation via NPD of new products gave better profit margins. It was
further reported that increased efficiency, improved labour utilisation and
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working closely with customers had participated in increasing sales and
cash generation.
4.10.4 Recovery and return to growth
Following the implementation of the short-term strategy, it was asserted in the
Annual Reports that the company would continue keeping its costs down and work
closely with customers to improve its product range, replace unprofitable products
with profitable ones and generate more cash. Evidence shows that the company
had seen major improvements in performance following the implementation of the
turnaround strategy. The company returned to positive profitability in 2009 with
PAT of £89k followed by a PAT of £759k in 2010 (Annual Reports 2009-2010). It
was mentioned in the Annual Report that the company will continue to monitor
costs, changes in raw material prices and maintain improved efficiency. It was also
reported that the company will continue to work closely with its customers to
develop the best products on the market (Annual Report, 2010).
4.10.5 Summary of the turnaround process of NI
The case of NI is an example of a successfully recovered company. The causes of
decline can be summarised as internal inefficiencies combined with external
increase in raw material prices, leading to negative profitability. Accordingly,
tighter control over costs and overheads and NPD of profitable products were the
type of actions that brought the company to recovery, highlighting the importance
of identifying the cause of decline as a primary step in the turnaround process.
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4.11 Nimbus Foods Limited
Nimbus Foods Limited (NF) was established in 1996 and is now part of Glisten
PLC, which is the leading UK supplier and manufacturer of decorations and
toppings for many sectors within the food industry (e.g. bakery, confectionery, dairy
desserts, ice cream, snack and cereals) with many product ranges (e.g. toffee,
caramel and fudge pieces, honeycomb, biscuits, cereals, meringues and chocolate
coated fruits, sugar strands, sugar crunch, non pareils, vermicelli and chocolate
flakes) (NF website, 2012).
It was stated on the company’s website, that NF is proud to be able to produce
products with special requirements and qualities such as nut free, odourless mint,
functionality in extreme temperatures, high moisture barriers, long shelf life and
cost effectiveness. The company believes that its success lies in its sophisticated
development processes and highly experienced development team working to
widen their product ranges (Nimbus website, 2012).
Figure 4.10 demonstrates the company’s profit and loss for the whole period
between 2001 and 2006. This figure also shows that the company went through a
turnaround experience following a period of negative profitability between 2002 and
2005, which impacted its profitability for a period of time. How did the company fall
into negative profitability and how was it managed out of decline? The answers to
these questions are now discussed by investigating the whole turnaround process
of the company.
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4.11.1 Decline stage
4.11.1.1 Recognition of decline
The company had a profitable history, which was interrupted in 2002 with a PAT
loss of over £47,000 followed by two further annual losses. The company had a
good market position and was well known for its quality and reliable products. It
was mentioned in the Annual Report (2003) that the Board of Directors were
confident that the decline was temporary and the company would return to
profitability following some changes internally.
4.11.1.2 Change of leadership
It was reported in the 2003 Annual Report that changes to the senior management
team would reflect positively in the return to profitability and growth of the
146
-477
-198
-312
368
840
-400
-300
-200
-100
0
100
200
300
400
500
2001 2002 2003 2004 2005 2006
FIGURE 4.10: P&L OF NF
PRE DECLINE YEARS DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£00
0
Adapted from: (NF Annual Reports 2001-2006)
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company. Consequently, following the second annual negative loss in 2003, some
leadership changes at senior management level were implemented, such as the
replacement of the Managing Director of the company and five other directors on
22
nd
December 2004 (Annual Report, 2005). This was necessary to improve the
leadership structure of the company, to tackle decline and take the company to the
next stage (Annual Report).
4.11.2 Analysis of decline situation
4.11.2.1 Competitive advantages
The new Managing Director of the company, in co-operation with the Chairman
and the Board of Directors, believed that NF was the market leader on the basis of
its sophisticated product development program, skilled development team and
unique products, making NF competitive in the marketplace and viable for
turnaround, if causes of decline can be successfully eliminated (Annual Report,
2005). Understanding the company’s strengths at this stage laid the foundation for
the next stage and the recovery stage, during which the company’s strengths
would be enhanced and developed over the longer term.
4.11.2.2 Severity of decline
According to the evidence shown in the Annual Reports and the common decline
signals, it can be said that the company suffered a mid-term decline stage. This
stage of decline is associated with signals such as lack of cash flow, negative
profitability and increased inventory (Annual Report, 2002). However, like many
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previous cases, having many competitive advantages and being part of Glisten
PLC (one of the UKs leading manufacturers), secured the declining company with
an available bridge of finance, enabling it to go through the turnaround
successfully.
4.11.2.3 Causes of decline
It was found apparent from the company’s Annual Reports that various internal and
external causes had played a significant role in the decline of NF. Those causes
are identified and explained as follows:
? Internal causes: As was made apparent in the 2002 Annual Report, the
high cost of group management charges in 2002 were the main reason for
the company’s losses during this year, despite the increase in turnover.
Furthermore, the increased operational costs by 200% in 2002, despite the
slight increase in turnover by only 14%, had participated in the negative
results in 2002. This indicated a high level of inefficiency in operations and
increased overheads.
? External factors: In addition to the increased overheads in the company
internally, evidence was found from the 2005 Annual Report that high costs
of raw materials in 2003 and 2004 had negatively impacted the total cost of
sales, profitability and growth for those years. The increase in raw material
prices stands as a non-controllable cause of decline due to bad weather
conditions or other uncontrollable reasons.
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The new leadership and Board of Directors asserted that those factors threatened
the ability of the company to grow in the short-term as well as the long-term and
decided to implement a restructuring program in 2003 (Annual Report, 2005).
4.11.3 Formulation, implementation and stabilisation of the turnaround
plan
In response to the negative profitability, the Board of Directors had implemented a
refocusing and restructuring program that included changes in the senior
management, sales team and other operations around the company (Annual
Report, 2003).
Two short term-strategies were implemented immediately to rectify the situation;
stopping cash loss and generating as much cash as possible for the turnaround,
these strategies were:
? Managerial restructuring: The new leadership of the company decided
to strengthen the sales management team, by bringing in sales members
with higher skills to be able to attract new contracts and customers to
drive sales up and position the company for future growth (Annual
Report, 2003).
? Operational restructuring: Another strategy to improve the declining
situation was to implement a tighter control over costs, reduce operating
expenses in order to stop the drainage of cash and to generate as much
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cash as possible. For example, in 2004 a strategic product development
program was implemented to produce innovative products for current
and new customers/markets, to replace low margin products with
profitable ones (Annual Report, 2003).
By the end of the short-term, the company was able to generate more cash via
increased sales of profitable products and an extended customer base, as well as
reserving any cash via tighter controls over costs and spending, ready for growth in
the next stage.
4.11.4 Recovery and return to growth
The board realised that short-term changes had to take place if the company was
to return to profitability. It was stated in the Annual Report (2003:3) that, “The
Board believes that the combination of the new senior management, the
strengthened sales force and new product innovation, will return the company to
growth in terms of both revenue and profitability”.
In addition to this, and following the strategies implemented earlier during this
short-term stage, further policies were implemented to secure improvements and
take the company to the next level and they are explained as follows:
? Operational restructuring: Continuing with the operational improvement
and cost cutting activities implemented in all parts of the company. It was
found apparent that the cost of distribution was heavily reduced in 2006 in
comparison to 2004 and 2005, despite the continuous increase in turnover.
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Additionally, staffing costs were also reduced by nearly 40% in 2006,
although the number of staff had only dropped by less than 10% from 45 to
41, which represents the tight control taken over other staff expenses such
as overtime (Annual Report, 2006).
? Asset restructuring: Evidence was found from the 2006 Annual Report
that an investment strategy was part of the company’s long-term
turnaround aims. It was stated in the 2006 Annual Report that a large sum
of money was invested in buying new equipment (a boiler and three
production capabilities) to speed up production, increase throughputs and
improve efficiency (Annual Report, 2006).
By 2005, the company has made a PAT of £368,306 for the first time after four
consecutive annual losses. The company continued its long-term efforts to ensure
that they were on the growth route. Some further leadership changes (Chairman
and Managing Director), as well as some operational improvements took place in
2007 to ensure that the leadership and management in place was capable of
maintaining improvements and taking the company to the next stage of growth
(Annual Report, 2007).
In 2007, the company made its second consecutive PAT of £841,000. It was
noticed that the company was operating profitably with 10 less staff in 2008 than
2007 and with only two directors on its board. It was stated in the 2006 Annual
Report that, “The consistent profits and cash generation have been driven by a
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need to restructure the team, remove low margin sales and create new value
added revenues” (Annual Report, 2006:4).
4.11.5 Summary of the turnaround process of NF
Many key lessons can be learnt from the case of NF. The decline here was
attributed to high costs internally, as well as increased raw material prices
externally. Consequently, a turnaround plan was executed in the form of short-
term, managerial/operational/asset restructuring strategies and long-term
operational/asset (investment) restructuring strategies. This had brought the
company to total recovery and growth making a successful turnaround case.
4.12 Organic Farm Foods (OFD)
Organic Farm Foods (OFD) is the largest supplier of organic (only) fresh products
in the UK. The company was founded in 1986 under the previous name Organic
Farm Foods (Wales) Limited, from the idea of a small group of growers in Wales at
a time when an efficient infrastructure for British organic food was highly essential
(OFD website, 2012).
The company produces a wide range of organic fruits and vegetables, with a large
continuous investment in improving the condition of their products before, during
and after growing the fruit and vegetables to ensure maximum quality (OFD, 2012).
The company is not only the pioneer in the organic food industry, but also a
pioneer in developing new technologies that add value to their products, such as
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the special packaging materials developed to transfer fruit and vegetables from the
farm to the factory, which maintain the eating quality as well as extending the life of
the products (OFD, 2012).
The company had a successful history, however, it went into decline in 2003
suffering four consecutive years of negative profitability (as shown in Figure 4.11),
during which time the company faced financial and mainly cash flow problems. The
decline story of OFD is to follow in the next sections and investigates the factors
that led it into decline and how performance was later restored.
4.12.1 Decline stage
4.12.1.1 Recognition of decline
202
-1,070
-2,357
-495
-244
816
75
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
2002 2003 2004 2005 2006 2007 2008
FIGURE 4.11: P&L OF OFD
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (OFD Annual Reports 2002-2008)
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During this stage, the management of the company recognised decline in its early
stages and started taking steps immediately. It was noticed from the 2003 Annual
Report, that a change in all parts of the company was required to ensure survival
and the ability to maintain a strong market position. This was reported in relation to
many decline signals that raised concern with the TMT such as decreased sales,
lack of cash flow and negative profitability.
4.12.1.2 Change of leadership
It was found evident in the 2003 and 2004 Annual Reports that two directors were
appointed to share a joint Managing Director role to manage the company during
its turnaround. Additionally, further evidence showed that four other directors were
replaced in 2004, as a process of setting the foundations ready for the turnaround
process (Annual Reports 2003/2004).
4.12.2 Analysis of decline situation
4.12.2.1 Competitive advantage
It was repeatedly reported in the Annual Report, that management of OFD were
confident that the company held a strong position in the marketplace over its
competitors on the basis of being a pioneer in the industry, having the latest
technologies and the ability to develop new technologies which extended the life of
their products and made it viable for turnaround (OFD website, 2012).
4.12.2.2 Severity of decline
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According to various signals of decline found apparent in the company’s Annual
Reports, it can be said that OFD was in mid-term decline, which was characterised
by high costs of operation, lack of cash flow, loss of sales contracts and negative
profitability.
4.12.2.3 Causes of decline
From the Annual Reports it was found apparent that the causes, which led OFD
into decline, can be summarised in the following:
? Internal causes: From the 2003 Annual Report it can be noticed that
some costs had increased heavily towards the end of the year. For
example, operational costs did not drop accordingly with the reduced level
of sales, causing disappearance of all anticipated profits for that year. Also,
following the decline of sales, the number of staff was reduced by 21
members in 2003 with a pay out of around £235k contributing to the short-
term financial loss.
Moreover, it was reported in the 2004 Annual Report that lack of
management response to the changing trends of customers, had caused
the loss of a major contract with one of their important retailers, leading to
loss of sales and an unsustainable cash flow position in 2004.
Furthermore, it was stated by the Chairman of the company that, “Reduced
sales coupled with under capacity in the packing facilities, resulted in
losses in this financial year of £2,357,000 and an unsustainable cash flow
position” (Annual Report, 2004:3). This had led to further cuts in staff
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numbers and incurred further pay out costs of £4,142,785. Consequent to
the reduced sales, contract losses, massive pay-outs and continuous
increase in costs, the company became inefficient in operations and faced
problems meeting their debts according to the schedule (Annual Report,
2004).
It can be noted that despite the quick reaction of the Board of Directors, the
company still went through a tough period of decline due to the cash instability
position. However, the company was successfully turned around in 2007, as a
result of successful implementation of a turnaround plan as explained below.
4.12.3 Formulation, implementation and stabilisation of the turnaround
plan
It was stated in the 2004 report, that the company was restructured to restore the
confidence of customers and suppliers. The restructuring plan, which was
implemented during the short-term, was a major plan including activities within the
four main turnaround strategies as follows:
? Managerial restructuring: The Board of Directors implemented a
restructuring program, which involved decentralising decisions in the
company by dividing it into three divisions with a Managing Director, a new
Commercial Manager and a separate management team dedicated to
each division (i.e. fruit, vegetables and salad). This was to enable
department managers to focus on each side of the business individually,
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deal with operational problems in a timely manner and focus on customer
service levels and working procedures (Annual Report, 2005).
? Operational restructuring: Cash generation and cost reduction actions
were also implemented at all levels of the business, to bring spending
under greater control (Annual Report, 2005).
? Asset restructuring: The decision to make an investment to introduce an
IT based inventory control system, to help reduce stock losses was taken
and implemented in 2005 (Annual Report, 2005). Additionally, an
investment in staff training and skills building was made to maintain a high
level of staff loyalty (Annual Report, 2006).
Furthermore, an asset divestment strategy was conducted by the closure
of the Lampeter site and improvement of the distribution network of the
business, leading to a reduction in overheads and major operational
savings (Annual Report, 2006). Similarly, the company divested the USA
subsidiary as well as the salad division in 2006. This was to focus on the
core activities, which became the sourcing and supplying of fruit and
vegetables to the ever-growing market (Annual Report, 2007).
? Financial restructuring: A technique, which was used to generate cash,
was the issue of a large number of shares to new investors after a
negotiation process in May 2004, generating a cash sum of nearly £1.5m.
This was done to refinance the company and support it during the
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restructuring process. The sum included a £6m loan from investors as well
as £9m in return for company shares (Annual Report, 2004).
Following the short-term stage, further sets of strategies were implemented over
the longer term to maintain improvements and head for full recovery.
4.12.4 Recovery and return to growth
It was reported in the Chairman’s Statement of the 2006 Annual Report, that the
board was happy with the improvement of the company’s performance and
confident that the company would return to profitability by 2007.
? Operational restructuring: It was found evident that OFD continued to
focus on improving its portfolio by looking for new products and market
niches to generate higher profit margins. The company continued with its
operational restructuring to maintain costs under greater control, reduce
general spending and generate cash through sales (Annual Report, 2007).
? Asset restructuring: An asset divestment strategy was implemented in
2008 by divesting the Organic Vegetable Company. This was done to
focus on the organic fruit sector and maximise profitability.
Following these changes implemented during the two stages, the company truly
returned to profitability in 2007 with a PAT of £815,598 (of which £336,275 was
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generated from the sale of the salad division and £90,000 in the form of a grant to
the company) and £75,107 in 2008 (reduced profits in 2008 attributed to reduction
in business size after the divestment of some businesses in 2006 and 2007).
It was noted in the 2008 report that the company would continue to look for new
opportunities and monitor the marketplace especially in the current economic
conditions.
4.12.5 Summary of the turnaround process of OFD
The turnaround experience of OFD can be considered a rich case with many key
lessons to be learned. The formula which the new management team used to
turnaround the company, included two phases in which each phase combined one
or more strategies. Linking the causes of decline i.e. high costs and lack of
management response, to new customer needs leading to contract losses, to the
turnaround strategy i.e. managerial/operational/asset/financial restructuring,
emphasises the importance of combining various strategies to tackle decline and
reach full recovery.
4.13 Pinguin Foods UK Limited (PF)
Pinguin Foods UK Limited (PF) was formed from the closure of the Fisher Foods
business in 2002, due to the lack of a suitable buyer for the company as a going
concern (Annual Report, 2002). The Pinguin Group (a company registered in
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Belgium), took over the company to break into the UK market and also to increase
the production power in Europe (Annual Report, 2002).
PF specialised in the production of frozen food products (e.g. vegetables, fruits,
organic products, aromatic herbs, potatoes and organic potatoes, French fries,
pies, pasta and rice, cold salads and mashed potatoes) as well as various non-
frozen food products (e.g. soups, sauces, vegetables in mini portions, pre-fried
chilled chips and dehydrated potato flakes) (PF website, 2012).
The company had had a successful start in its first year, generating a PAT of
£197,797 in what was described as, “An extremely challenging period” (Annual
Report, 2002:3). The new leadership had placed some new strategies in order to
position the company in the marketplace for long-term growth. For example, a new
commercial team of management was appointed to secure contracts with growers
and to sustain and support production and sales growth for the following years
(Annual Report, 2002).
PF had benefited from the strength of its well-established group in Belgium as a
back-up with many links and various export opportunities. However, PF had gone
into a decline period for three years between 2003 and 2005, with deteriorated
performance and negative profitability (see the figure below) (Annual Report,
2002).
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The leadership of PF had understood that the business needed further
improvement strategies to strengthen the company’s footing in the marketplace.
However, it realised that the causes of decline must be understood, dealt with and
rectified in order to achieve recovery and growth. This is explained in the following
sections highlighting the whole turnaround experience of the company and how it
was achieved.
4.13.1 Decline stage
Following the profitable year 2002, PF had experienced a negative profitability in
2003, whilst the company was still under a major process of improvement following
the takeover of Fishers Foods, to ensure the business was ready for the future.
198
-367
-5,797
-3,738
440
830
-7000
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
2002 2003 2004 2005 2006 2007
FIGURE 4.12: P&L OF PF
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (PF Annual Reports 2002-2007)
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4.13.1.1 Recognition of decline
It was clear from the Annual Reports 2003 and 2004, that the leadership of PF
recognised the decline situation and adopted the idea that continuous improvement
in all parts of the company is was urgently needed, in order to recover and return to
profitability. A clear vision for 2003 and 2004 was emphasised in the Annual
Reports for those years asserting that, “The strategy for 2004 includes broadening
our retail customer base as well as continuing the development of our export
markets. The operations are also expected to deliver further improvements in yield
and cost efficiency during 2004” (Annual Report, 2004:2).
4.13.1.2 Change of leadership
One of the first steps, which were taken during the early stages, was found to be
the replacement of the Chair of the UK division. A new Chairman was appointed in
July 2005, to ensure that the group’s aims and objectives were achieved in a
sound manner (Annual Report, 2005).
4.13.2 Analysis of decline situation
4.13.2.1 Competitive advantage
It was found apparent in the Annual Report of the company that the Board of
Directors and the Chairman of PF had fully understood the high potential of
success for the company and the benefits that could be made by becoming a
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subsidiary of one of the biggest food groups in Europe, with well-established links
to the markets in Europe and abroad. It was stated that, “The emergence of
Pinguin in the UK was a milestone in the Pinguin Group strategy to become one of
the leading players in Europe” (Annual Report of 2002:2). This emphasised that
negative profitability was seen as a temporary situation and the company would
soon recover.
4.13.2.2 Severity of decline
Various evidence found in the company’s Annual Reports indicated that decline
could be considered as a mid-term decline, characterised by shortage of cash, high
costs and negative profitability. However, and most importantly, the company had
the financial bridge it needed to go through the turnaround being part of one of the
EUs leading frozen food suppliers.
4.13.2.3 Causes of decline
The various causes, which contributed to the decline of PF, were clearly
emphasised in the company’s Annual Reports from 2002-2005. These causes can
be classified as external causes and are explained as follows:
1. Bad weather conditions had caused a weakness in pea processing (which
was their main operation), during the first half of 2002 due to a shortage of
peas, which continued throughout the decline period till 2005 (Annual
Report, 2002). Additionally this had impacted on the raw material prices in
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the marketplace affecting the cost of sales negatively (Annual Report,
2003).
2. Unpredictable high costs of energy supply between 2003 and 2005 were a
cause for concern to the leadership of PF, due to the negative impact it
had on profitability (Annual Report, 2004).
3. Loss of exchange rate on foreign currency in 2003 was incurred on inter-
company repayments of deferred balances for 2002 (Annual Report,
2003).
In addition to the above, it was also found that there were other factors such as
exceptionally high costs from the lay-offs conducted in 2002 costing £2m and in
costing £1.2m in 2006, as part of the restructuring process of the workforce
following the acquisition of the company.
These factors of decline required the leadership of the company to conduct some
changes to the internal and external environment, in order to stop the deterioration
in performance and the cash loss. These changes are investigated below in the
next section.
4.13.3 Formulation, implementation and stabilisation of the turnaround
plan
It was seen from the Annual Reports that the company’s leadership realised
decline in its early stages and responded accordingly. It was found apparent in the
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2005 Annual Report that a set of new strategies was implemented to stop the cash
loss and deterioration of profitability as follows:
? Operational restructuring: During this stage, various operational
restructuring activities were implemented within a program called
“Baseline”, developed by the company to reduce costs in all parts of the
company (including staff costs) and increase efficiency (Annual Report,
2006). Additionally, unprofitable lines were divested and focus was given to
profitable ones in order to generate more cash, increase sales in the UK
and Europe and support future growth (Annual Report, 2005). Furthermore,
the Company took over the inbound and outbound logistics operation to
save the outsourcing costs (Annual Report, 2006).
4.13.4 Recovery and return to growth
In addition to operational measures implemented during the short-term, further
strategic measures were carried out during the longer term to increase and
maintain improvement as follows:
? Assets restructuring: An acquisition of the trades and assets of Salvesen
Logistics Ltd in the second half of 2007, was a step that doubled PFs
volume of sales and production due to links to new customers and
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suppliers, thus creating an economic scale of sales and purchasing
(Annual Report, 2006).
It was asserted in the Annual Report of 2006:2 that, “The changing market
environment, the reduced cost base and the strategic measures to have a more
profit orientated customer approach, clearly will return Pinguin back to normal,
healthy profit levels”.
The above statement showed that the leadership felt confident about the future of
PF. Consequent to the new strategies, a PAT of £440,000 in the period ending
June 2007, £830,000 in period ending December 2007 and £4.8m in the period
ending December 2008 were generated, returning the company to full recovery
(Annual Reports, 200- 2008). It was reported that the apparent success was
attributed to a clear focus on the company’s goals, robust relationship with
suppliers and the wide customer base in the UK and Europe (Annual Report,
2007).
4.13.5 Summary of the turnaround process of PF
The Annual Reports of the company have revealed many key lessons to be
learned about its experience in dealing with financial decline and turnarounds. PF
has proven to be a success story in restoring profitability, original performance and
growth.
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4.14 Stateside Foods UK Limited
Stateside Foods Limited (SF) has been in the food business for the last 20 years
specialising in the manufacture and supply of chilled and frozen pizzas (both
branded and customer own labels) to the leading food retailers and food service
companies in the UK. In 2003, the company became a subsidiary of the Freiberger
Group, one of the leading companies of pizza manufacturing in the world (SF
website, 2012).
The 1990s was a progressive decade for the company from an investment point of
view, during which the company acquired Fiesta Fine Foods (stone baked pizza
manufacturer) in 1995. The Westhoughton factory was extended from 18,000 sq.
ft. to 120,000 sq. ft. in 1997 and a high speed American pizza crust bakery was
acquired from McCain at Skelmersdale in 1999, which was later destroyed by a fire
in 2008. However, the progress that the company had previously made during its
history was interrupted later on by three consecutive years of decline and negative
losses.
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Adapted from: (SF Annual Reports 2004-2009)
4.14.1 Decline stage
4.14.1.1 Recognition of decline
It was noticed that the company’s turnover in 2005 had dropped heavily by 27%
compared to the previous year from £50m to £36m. It was reported in the 2004
Annual Report that this had caused some concern to the leadership of the
company. The management of SF realised that they were faced with a challenge
that required immediate corrective action. Consequently, a restructuring firm was
called in to lead the turnaround process and investigate the factors that had
steered the company into decline and provide the required measures to turn it
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around. These actions are explained in the next section in detail, highlighting the
steps and measures, which were taken to tackle the problem.
4.14.1.2 Change of leadership
The Annual Reports of the company showed that various changes in the
company’s leadership had taken place. For example, a Chairman and a Vice
Chairman were appointed in 2003, to lead the company during this stage.
Additionally, both the Production Director and the Finance Director were replaced
with new directors, in order to ensure the leadership in place was capable of
working with the turnaround firm (Annual Report, 2005).
4.14.2 Analysis of decline situation
4.14.2.1 Competitive advantage
Evidence showed that SF had a strong presence in the market being one of the
largest suppliers of chilled and frozen pizzas in the UK and being a subsidiary of
one of the world largest pizza manufacturing groups (based in Germany) (Annual
Report, 2004). These competitive advantages had made the company’s leadership
confident about its viability to turnaround. Despite this, it was asserted in the
Annual Reports of the company that several factors had to be monitored to ensure
successful recovery, mainly environmental factors.
4.14.2.2 Severity of decline
Evidence from the company’s 2004 Annual Reports indicated that all signals of
decline can be related to a mid-term decline characterised by the concerned TMT,
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decreased sales and negative profitability. Despite this, evidence showed that
finance needed for the daily operations and the turnaround was still available in the
business via its mother company, lifting a huge burden from them and stopping the
closure threat.
4.14.2.3 Causes of decline
Following the changes in leadership and the appointment of a restructuring firm,
the need for a set of corrective actions was stressed. However, an analysis of the
situation was an initial step conducted to identify all causes, which led the company
to negative profitability. A conclusion of the revealed causes of decline can be
explained as follows:
? External causes: Evidence from the 2005 Annual Reports that the
company’s turnover in 2005 had sharply dropped by nearly 27% compared
to the previous year (2004), due to global lack of demand and reduced
volume of sales leading to reduced cash flow and increased inventory.
This had reflected negatively on final profitability, accordingly leaving the
company with £1.06m in losses compared with £1.66m profits in 2004
(Annual Report, 2005).
? Internal causes: In addition to external factors, high cost of operations,
which did not drop accordingly with the lost sales in 2005, had contributed
to the negative profitability. Moreover, other exceptional costs such as the
layoffs in 2005 and the fees of the restructuring company totalling £251k in
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2005 and £114k in 2006, had also added to the overall negative
performance (Annual Report, 2006).
As shown above, the analysis process of the situation revealed many factors that
the new leadership and the restructuring firm needed to deal with and correct
quickly in order to stop loss of cash and further decline.
4.14.3 Formulation, implementation and stabilisation of the turnaround
plan
The review conducted by the restructuring firm concluded and stressed the
importance of the implementation of a set of actions in order to turn the company
around. These actions can be explained as follows over both the short and longer-
term phases.
? Operational restructuring: It can be seen from the Annual Report that the
short-term phase was mainly characterised with operational improvements
to achieve better utilisation of the workforce and the company’s assets and
to reduce costs and improve the cash reserve. For example, the number
of staff dropped from 759 in 2004 to 702 in 2005 (saving £3m) and down
again to 559 in 2006 (saving £1.4m) (Annual Report, 2006). Furthermore,
the help of the restructuring company was terminated in 2007, to reduce
the large restructuring fees (Annual Report, 2006).
4.14.4 Recovery and return to growth
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Following the implementation of operational restructuring activities during the
previous stage, the performance of SF had improved, cash loss had stopped and it
was time to develop long-term strategies to maintain the improvement. The long-
term strategy can be explained as follows:
? Operational restructuring: The leadership of the company believed that
continuing to implement and maintain the measures used during the short-
term phase to manage costs to the best degree, improve growth margins
and expand the customer base, was the key to SFs success and growth in
the long run (Annual Report, 2008). For example, it was found apparent
from the 2008 Annual Report that the operating charges (such as
distribution costs and staff costs) in 2008, had reduced compared to 2007,
despite the massive increase in turnover and sales growth indicating the
high efficiency level and new measure of cost control.
? Asset restructuring: In addition to the operational improvements, an
investment in a new staff training program to improve skills was introduced
in 2007, to help them to do their job more efficiently and in a timely manner
(Annual Report, 2007).
It was found in the Annual Reports 2007 and 2008 that the sales of the company
increased in 2008 by 16% more than in 2007 with a PAT over £1.7m. The
company had maintained improvement through tighter control over costs,
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increased sales and delivery of the best services to its customers in the UK and
abroad (Annual Report, 2008).
4.14.5 Summary of the turnaround process of SF
It can be said from what was revealed above that SF responded to its declining
situation proactively and in a timely manner. The leadership of SF had appointed a
restructuring firm to manage the company through the initial stages of turnaround,
by identifying errors and providing an appropriate set of strategies to save the
company.
4.15 Uniq Prepared Foods Limited (UPF)
Uniq Prepared Foods Limited (UPF) was one of the UKs leading manufacturers of
branded and own label prepared foods (e.g. sauces, poultry products, yogurts and
spreads) with many sites in the country and also one in France. The company was
a subsidiary of Uniq Foods PLC before it was acquired by the Green Core Group in
November 2011.
In 2003, the leadership of UPF had reviewed its portfolio and decided to implement
some organisational changes (such as acquisition, divestment and cost cutting
actions), to focus on core operations. For example, the company’s own brand was
divested (St Ivel), in order to focus on their own label market, which was growing
rapidly in early 2000 (Annual Report, 2003). Additionally, the trade and assets of a
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new business were acquired (i.e. Toft Foods Limited). However, following this, the
company went through a tough period of negative profitability and bad market
position, putting the company under threat (Annual Report, 2003). How did UPF
end up in decline and how was this situation turned around? These are the types
of questions, which the following section will try to investigate.
4.15.1 Decline stage
4.15.1.1 Recognition of decline
It was found apparent from the Annual Reports, that negative profitability was the
outcome of the financial years of 2004 (PAT of -£30m), 2005 (PAT of -£2m), 2006
44,675
-30,120
-2,116
-31,025
11,873
204,404
-50,000
0
50,000
100,000
150,000
200,000
250,000
2003 2004 2005 2006 2007 2008
FIGURE 4.14: P&L FOR UPF
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (UPF Annual Reports 2003-2008)
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(PAT of -£31m), marking a period of decline for the company (Annual Reports,
2004-2006). Evidence from the Annual Reports showed that leadership of UPF
had recognised the decline signals and they were concerned about the company
performance (Annual Report, 2004). This however, was accompanied by the belief
that the company would return to its pre-decline status, if corrective actions were
taken in a timely manner (Annual Report, 2004/2005).
4.15.1.2 Change of leadership
In response to the decline situation, a change in leadership was made as an initial
step to ensure that good guidance was in place to tackle decline. This change was
the replacement of the CEO of the company in September 2003 to take charge of
the company during the critical period (Annual Report, 2005). In addition to this,
further help was needed and a restructuring firm was hired in 2007 to help the new
leadership with the problems and help create the best turnaround plan (Annual
Report, 2007).
4.15.2 Analysis of decline situation
4.15.2.1 Competitive advantage
UPF had a history of ups and down since its foundation in 1963. They had
operated as one of the strongest competitors in the marketplace, with long
experience in the food sector, other diversified sectors and with a huge turnover of
£748m (Annual Report, 2002). This made the leadership of the company confident
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that they would return to profitability if causes of decline were identified and
eliminated.
4.15.2.2 Severity of decline
Various decline signals relating to the mid-term decline stage were found apparent
in the UPF Annual Reports, such as decreased profit margin, loss of sales
contracts, inefficiency in operations and lack of cash flow. These decline signals
were the indicators for the TMT to implement immediately essential changes,
before the existence of the company was put under threat, by identifying the root
causes of decline and executing the most suitable turnaround strategy.
4.15.2.3 Causes of decline
It was highlighted in the Annual Reports of the company that various causes were
behind the decline of UPF, which can be explained and classified as follows:
? Internal causes: There have been some causes relating to the internal
environment in UPF which participated in the company’s decline as follows:
1. Low profit margins had played an important role in the negative
profitability, as it was reported that retailers were not tolerant to any
increase in prices, which prevented any increase in profit margin and led
to added pressure on the company’s ability to improve cash flow,
especially during tough economic conditions and rising raw material
prices (Annual Report, 2004).
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2. Wrong acquisition of the Minsterley site in May 2004, without an in depth
plan led to bad utilisation of the acquired facilities, despite the increase
in the total turnover of the company causing an operating loss in 2005
and 2006 for the division and the group as a whole. It was explained
that the waste level of the site was massive due to the incomplete
integration of the business with the existing business units (Annual
Report, 2006).
? External causes: In addition to the internal causes of decline, it was seen
from the Annual Reports that a mixture of external causes had also played a
significant role in UPF decline which can be classified as follows:
1. The outbreak of the Avian Flu in 2003 caused a major deterioration in
the poultry division of the company, resulting in decreased sales and
loss of some contracts in 2004 (Annual Reports, 2004).
2. Increased prices of raw materials due to bad market conditions
during 2004, 2005 and 2006 had played an important role in the
decreased operating profit and PAT accordingly for those years
(Annual Reports, 2004, 2005 and 2006).
3. The loss of a £6m business contract in the salad and fresh fish
division (i.e. Smedleys) from J. Sainsbury in 2004, caused a
reduction in sales by 14% in the year ending 2005.
4. Increased competition in the cottage cheese market had caused
reduction in sales by £7m worth of market share in favour of a major
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competitor, impacting the company’s market share and overall
profitability (Annual Report, 2007).
A combination of internal and external factors as shown above, played a significant
role in the decline of UPF and by identifying and allocating those factors, a
turnaround plan could be developed to address them and bring the company back
to profitability.
4.15.3 Formulation, implementation and stabilisation of the turnaround
plan
Following the analysis stage and the recommendation of the turnaround firm, a
turnaround strategy was formulated and implemented, combining various actions
to restore a profitable performance. This strategy can be broken down and
explained in respect of the short-term plans implemented during this stage and the
long-term policy implemented during the recover stage. The earlier combined
three main strategies which were as follows:
? Operational restructuring: The leadership of UPF had focused on cost
cutting activities to reduce overheads in all parts of the company, as an
essential component of their short-term turnaround strategy (Annual Report,
2006). Evidently, it was asserted in the 2005 Annual Report that, “Key
initiatives to support a turnaround in the performance, including a reduction
in overhead costs, are in place and will be implemented during the coming
year” (Annual Report, 2005:1).
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Additionally, cash generation was increased via boosting sales, NPD and
new contracts. For example, sales were increased in the fish and sandwich
sector, due to new business contracts secured with customers such as
Iceland and Morrisons (Annual Report, 2006). This had improved margin
levels and sales by bringing in the ‘To The Cook’ range, and an innovation
on the sandwich product market, leading to excellent records on Marks and
Spencer products with a 9.1 % growth rate (Annual Report, 2007).
? Managerial restructuring: The waste level of the Minsterley site was
targeted and addressed to bring waste levels down and reduce running
costs. Certain measures were taken to do this such as replacement of the
Managing Director of that site and reorganisation of the management team.
This change of management aimed to introduce new business performance
indicators, to measure progress against targets and focus on quality and
service levels. It was asserted in the 2006 Annual Report that, “Daily
performance tracking is the key tool that the business is using to drive
improvements. This performance tracking considers all key inputs and
outputs of the business, as well as focusing on a number of initiatives and
business critical aspects, which when completed should significantly
improve the performance of the Minsterley business” (Annual Report,
2006:3).
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? Asset restructuring strategy: This strategy was developed by the
company to eliminate non-core businesses with low profit margins and
acquire businesses, which better contributed to high profitability. For
example, in 2004, two divisions of the company were divested (i.e. the
Devizes fish site and the Newton Abbot poultry site), to reduce liability and
overheads after transferring the fish operations to the Annan site in Scotland
(Annual Report, 2005). Also, other businesses were acquired in May 2004
(i.e. the Minsterley site) to support the company’s growth in their own label,
chilled desserts sector, driving sales up by 29% in 2005 and opening links
with new customers such as Tesco and Morrisons (Annual Report, 2005).
Additionally, further asset divestment of two sites (i.e. St Herbert site and
Mane Frais site) was carried out to focus on the dessert side of the business
in 2007, generating a sum of £208m before taxation.
It was stated in the Annual Report that the company continued to focus on
operational restructuring activities, in order to improve efficiency and achieve better
utilisation of assets. No evidence was found for other major restructuring
strategies that had taken place during this term.
4.15.4 Recovery and return to growth
As was emphasised above, UPF had clearly gone through a tough period, with
many difficult decisions having to be taken, such as the closure of business units
with many employees being made redundant. However, there are undoubtedly
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many key lessons to be learned from this successful turnaround experience. The
company was turned around achieving positive profitability in 2007 (PAT £11.8m)
and 2008 (PAT of £204.4m). It was noted in the 2007 Annual Report, that the
improvement in performance was attributed to the combination of focus on
profitable operations and quickly eliminating non-profitable businesses, growth in
sales, better utilisation of assets and keeping costs down (Annual Report, 2007).
Evidence confirms that operational restructuring activities i.e. cost cutting and cash
generation, followed on during the recovery stage to maintain improvements and
reach full recovery. However, no evidence was found that additional strategies
were needed during this stage.
4.15.5 Summary of the turnaround process of UPF
From the above discussion, it can be reported that the leadership of UPF, with the
help of the restructuring firm, had fully analysed and understood the situation and
drawn a turnaround plan to reverse the decline position. The turnaround plan
responded to the combined internal/external causes of decline with a short-term
combination of managerial/operational/asset restructuring strategies, to ensure
improvement in performance and full recovery and return to growth.
4.16 Summary
This chapter has presented the case study of 14 medium and large food-
manufacturing companies from the UK, which had undergone a turnaround
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between 2000 and 2011. The turnaround criterion was applied to a large number
of companies from the FAME database, to ensure eligibility for the study and the
results were those 14 companies. The chapter was only interested in the analysis
of successfully turned around companies and not the non-recovered companies as
yet, because one of the aims of the chapters was to highlight the relationship
between the causes of decline and the implementation of successful turnaround
strategies, which would have been difficult to find in currently failing companies.
The study relied on the analysis of secondary data i.e. company’s Annual Reports,
covering the whole period of turnaround as part of archival recording methods.
Other data was collected from Internet sources (document analysis) to add to the
validity and the reliability of information attained from the Annual Reports.
The chapter investigated each company individually from a stage theory
perspective, guided by the theoretical framework developed in the literature review
chapter, to investigate the stages that each company went through since the
recognition of failure in the decline stage, until retrieval was achieved in the
recovery and return to growth stage.
The chapter further highlighted the viability of the companies chosen for turnaround
as most of them were either part of big groups, with strong financial and strategic
back up, or were businesses that had been in the industry for many years, with
good experience and/or strong relationships with customers and other
stakeholders in the business.
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The chapter also revealed that the economic external causes of failure played a
very critical role in the decline of all 14 companies under study. High costs were
the second major cause of decline leading 12 out of the 14 companies into a
negative cash flow position.
The chapter then investigated the turnaround options in response to the highlighted
viability of turnaround, severity of decline and causes of decline. Evidence revealed
that one major strategy was dominant as a vital component of all turnaround
strategies used by the companies, i.e. operational restructuring (cost cutting and
cash generation). Other strategies were implemented in relation to certain causes
of decline, availability of cash and/or other factors, as will be highlighted in the next
chapter.
The next chapter will discuss the facts, which were shown in this chapter to
conclude the key lessons that can be learned from the turnaround experiences of
these companies and modify the conceptual framework developed in Chapter two.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-1
CHAPTER FIVE
ANALYSIS, DISCUSSION
AND DEVELOPMENT OF INITIAL MODEL OF
SUCCESSFUL TURNAROUNDS
5.1 Introduction 5-2
5.2 Decline stage 5-5
5.3 Analysis of decline stage 5-6
5.4 Formulation, implementation and stabilisation stage 5-13
5.5 Recovery and return to growth stage 5-21
5.6 Initial model of successful turnaround 5-25
5.7 Summary 5-33
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-2
5.1 Introduction
This chapter is designed to discuss and present a cross-case analysis of the 14
companies investigated in chapter four. The chapter will analyse and discuss the
findings of those companies from a stage theory perspective, guided by the
theoretical framework developed in chapter two.
This chapter will discuss findings and evidences revealed in order to highlight
similarities and differences between all companies, to draw a conclusion of how to
achieve a successful turnaround. A cross-case, synthesis technique is used to
analyse findings from the 14 companies. This technique is best suited for this type
of case study as it aggregates findings across a series of individual cases (Yin,
2009). Each section of the chapter will represent and discuss a stage of the model
in the light of the rich data attained from different sources of information for the 14
companies.
In the first section is a discussion of the recognition of decline and any change in
leadership needed to reveal the common practises by TMT, to set off the
turnaround process. In the following section, another discussion follows to identify
the viability of the company, severity of decline (availability of cash) and causes of
decline. Another discussion evolving around which/how/when the major
turnaround strategies were implemented in the short-term, to stop cash loss and
the following decline. Additionally, the next discussion further highlights the use of
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-3
each turnaround strategy during the longer term, to maintain improvements and
return the company to full recovery and growth.
Finally, an initial turnaround model, followed by a summary is presented in the last
section to conclude the major key issues of turnaround management in the light of
those company’s’ experience.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL MODEL OF SUCCESSFUL TURNAROUNDS
5-4
Company
ADM
BOF
CHR
HB
IG
KRF
LEC
MMB
NI
NF
OFD
PF
SF
UPF
Decline Recognition of decline ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Changes of leadership ? ? ? ?
? ? ? ? ? ?
Analysis of
decline
Is the company viable for turnaround? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
C
a
u
s
e
o
f
d
e
c
l
i
n
e
Internal
Bad management/leadership ? ? ? ? ? ? ? ? ?
Organisational factors ? ? ? ? ? ? ? ?
External
Political factors ? ? ?
Economic factors ? ? ? ? ? ? ? ? ? ? ? ? ?
Competition factors ? ? ?
Social factors
Technological factors
Formulation,
implementation
and stabilisation
of the plan
S
h
o
r
t
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring ? ? ?
Operational
restructuring
Cost cutting ? ? ? ? ? ? ? ? ? ? ? ? ?
Cash generation ? ? ? ? ? ? ? ? ? ? ? ? ?
Asset
restructuring
Asset divestment ? ? ? ?
Asset investment ? ? ?
Financial
restructuring
Debit restructuring ? ?
Equity restructuring ? ?
Recovery and
return to growth
L
o
n
g
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring
Operational
restructuring
Cost cutting ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Cash generation ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Asset restructuring Asset divestment ?
Asset investment ? ? ?
? ?
Financial restructuring Debit restructuring ?
Equity restructuring ?
Table 5.1: summary of cross case analysis (14 companies)
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-5
5.2 Decline stage:
5.2.1 Recognition of decline
From the Annual Reports analysed in the last chapter and according to Table (5.1),
it was emphasised that the leadership of each company responded to their
company’s decline proactively, as soon as signals of decline appeared. This was
evidenced by the reassurance and confidence of the leadership that decline was
temporary and could be reversed.
Various signals of decline were found apparent in the Annual Report of the
companies such as declined or negative profitability, lack of cash flow, reduced
sales, increased costs, low profit margins, loss of market and organisational
inefficiencies. In some cases, decline was expected to happen due to monitoring
of external factors relating to bad weather conditions and the high cost of raw
materials as in the case of LEC and UPF. It was clear from the reports that those
decline signals were recognised and responded to by the leadership in a timely
manner.
5.2.2 Changes of leadership
Various authors (e.g. O’Neil and Drucker, 1986; Grinyer et al., 1990; Pearce and
Robbins, 1994; Sudarsanam and Lai, 2001 and O’Kane, 2006), asserted in the
turnaround literature that changes in leadership were one of the most important
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-6
first steps when tackling decline and setting off the turnaround process, ensuring a
safe journey to success.
Findings from this study support this view, for example, 10 out of the 14 companies
had implemented various leadership changes at the senior level of management
and Board of Directors. Notably, three out of four companies that did not conduct
any form of leadership change (i.e. HB, MMB and LEC), were privately owned and
managed businesses. This explains the view that in family owned businesses, it is
harder to perform any leadership changes. This finding reveals that it is likely that
TMT tend to restructure the leadership at the early stages of the turnaround
process, to ensure that the company has the necessary management in place to
save it from decline. In addition to this, findings revealed that two companies (i.e.
SF and UPF) had hired some restructuring firms to help the company’s new
leadership in their task of identifying problems, drawing up a turnaround plan and
executing the necessary measures to assist them out of the decline.
According to the findings and as shown in Figure 5.1, it can be concluded that
installing a new leadership, which may take many forms; such as a new CEO,
Managing Directors, senior members of the Board of Directors and/or temporary
turnaround managers/firms until recovery is achieved, is an essential component of
a successful turnaround.
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5.3 Analysis of situation stage
5.3.1 Viability and competitive advantage
Findings show, as presented in the last chapter, that all companies have
successfully managed to recognise and identify their weaknesses and strengths
during their tough period of decline. It was clear in the last chapter that each
company recognised their competitive advantages, which made them positive and
confident about their company’s ability to return to recovery and growth.
Findings of this study showed that the presence of one or more of the following
competitive advantages was essential in making the company viable for turnaround
in the long term:
? Being the market leader with, or at least holding, a large market share of
certain segments, such as in the case of ADM in the milling industry, NI in
the sauce industry and OFD in the organic fresh fruit and vegetable
markets.
? Being a subsidiary of a large manufacturing group with large, strong
business alliances and financial back-up, such as in the case of ADM, BOF,
IG, PF and SF.
? Being one of the experts in the field of industry to enable the company to be
a strong competitor in the market, such as CHR in the bioscience of food
and LEC being the leading UK producer of handmade Eccles Cakes.
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? Being a pioneer in developing new reliable products or technologies, such
as KRF, who are known for being established in developing new products
that meet different consumer needs and NF and its unique products such as
odourless mint, functionality in extreme temperatures products and products
with high moisture barriers.
In conclusion, the findings support the views of Gopal (2009) that building or
enhancing a competitive advantage, relies mainly on lower cost operations or
quality differentiated products/services. The study revealed that identifying and
understanding the competitive advantage of the company is critical to the success
of the turnaround plan, as it plays an important role in influencing the long-term
turnaround strategy.
5.3.2 Severity of decline and cash availability
According to findings, it can be said the each company found its own strengths and
despite the stage of decline (early, mid-term or late decline stage) a company was
in, they all remained positive about their ability to turnaround, supported by the
competitive advantage each held. Findings from the previous section revealed that
most of these companies have been in the marketplace for years with extensive
experience in their field, various links to suppliers and customers and different
financial links that supported their turnaround. This asserts that despite the stage
of decline, finance was still available to support the turnaround via the company’s
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own resources, loans from mother companies and/or lending bodies via financial
restructuring activities, early on in the process as discussed in Section 5.4.2.4.
5.3.3 Causes of decline
As shown in Table 5.1, the study revealed that despite the existence of many
causes that can lead any company into decline, all companies in this study (14
cases) have attributed their decline mainly to external, economic reasons invariably
in the form of increased costs (e.g. cost of energy supply and raw materials due to
bad weather conditions). However, and despite this, internal causes of decline
have played a significant role in the decline of some companies as shown below.
This section explains the causes of decline in the light of the results of this study
and according to the theoretical framework developed in chapter two, that divided
the causes of decline into either internal and/or external.
5.3.2.1 Internal causes of decline
Based on the results revealed in this study and according to the theoretical
framework developed in chapter two, internal causes of decline were divided into
two classifications as follows:
1. Managerial factors relating to weakness of management to respond and
adjust the internal environment to suit changes in the external environment
of the company. Findings from this study showed that this cause of failure
had participated in the decline of three out of 14 companies (i.e. IG, OFD,
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and UPF). For example, lack of management control in one of the sites, as
in IG, had caused a high level of waste and inefficiency in operations.
Furthermore, the lack of management response to change in customer
demand in OFD, had caused a loss of some contracts that had led the
company into a negative cash position. Additionally, high waste levels and
bad utilisations of assets were apparent in the case of UPF, which have all
participated in the company’s’ decline.
2. Organisational inefficiencies relating to problems with the company’s
internal elements, such as structure and operations, staff and the product
(see Section 2.4.1.1). However, as argued by many authors (e.g. Bibeault,
1982; Hartley, 2005 and Dubrovski, 2009), the two types of internal causes
are mostly attributed to the management, as they have the responsibility for
amending and controlling these organisational errors with any of the
company’s structure and operations, products or staff. The results of this
study as shown in Table 5.1, showed that eight companies (AMD, CHR, HB,
IG, NI, NF, SF and UPF) attributed their decline to internal organisational
inefficiencies as follows:
? ADM suffered high costs of both the newly acquired Tewksbury and
Newcastle sites. This can be attributed to the blind acquisition of the
sites, which led to cash loss and decline.
? CHR, HB, NI and UPF suffered a low profit margin, cost control
problems and a price increase in raw materials, causing decline due to
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lack of management identifying and dealing with the problems early
enough. Additionally, HB and NI have both suffered uncontrolled high
waste levels
? SF suffered reductions in sales, lost contracts and high costs.
However, lack of management to reflect the reduction in sales on the
cost base, such as size of workforce and other operational expenses,
had caused loss of cash and further decline.
? IG suffered high costs of operations in the Coldwater site affecting the
company performance overall.
5.3.2.2 External causes of decline
In addition to the internal causes of decline, other external causes were found to
have participated in the decline of many cases in this study. The findings show
that those technological and social factors were not responsible for the decline of
any of the companies in this study. On the other hand, economic, political and
competitive causes have played a significant role in the decline of some companies
in the study as follows:
? Economic causes: Economic causes were responsible for the decline of 12
cases in this study mainly in the form of high cost of raw materials due to
bad weather conditions such as in the cases of ADM (2007), CHR (2006),
IG (2005, 2006 and 2007), LEC (2003, 2004 and 2005), MMB (in 2006,
2007 and 2008), NI (2007), NF (2003) and PF (2002, 2003, 2004 and 2005).
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Additionally, the increasing cost of energy was another form such as in the
cases of MMB (in 2006, 2007 and 2008) and PF (in 2003, 2004 and 2005).
Moreover, increased interest rates and bank charges was another cause, as
in the cases of ADM (in 2005 and 2006), CHR (in 2005, 2006 and 2007) and
IG (2005, 2006 and 2007). Furthermore, high exchange rates of the Euro
against the Sterling was another form of an external cause of decline, which
impacted on exports to Europe, leading to reduction in sales, such as in the
case of MMB post 2006. In addition to this, reduction in sales due to lack of
customer demand, was found to be a cause of decline in KRF affecting its
sales and profitability in 2006.
? Political causes: Findings show that this type of cause has participated in
the decline of one company (i.e. LEC). The new legislation set by the UK
Government in 2001 in relation to company’s contributions to pension
schemes, caused an increase in costs of pension payments payable by LEC
for four consecutive years (2002, 2003, 2004 and 2005), impacting its
profitability negatively for those years. Furthermore, evidence was found in
this study that government legislations and policies regarding the movement
of products during the outbreak of animal diseases can be causes of
decline. For example, the outbreak of swine flu and the foot and mouth
disease in 2001 led to government restrictions on animal movement and
processing and led to a major loss of sales for BOF. Similarly, the outbreak
of the Avian Flu in 2003 had negatively impacted the level of sales and
profitability for UPF in 2003 and 2004 and had led to its decline
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? Competitive causes: Evidence from the study revealed that competitive
causes had participated in the decline of three cases i.e. BOF, HB and UPF.
For example, the worldwide over supply of pork meat in 2001, had pushed
prices down, negatively affecting the profit of BOF. Additionally, tough
competition in the market led to the loss of two major contracts in 2001 in
the case of HB (it left the company with 24% less sales than 2000).
Furthermore, in the case of UPF, the JS contract in 2004 (worth £6m from
the salad division) and another £7m worth of sales were lost to another
competitor in the cottage cheese market.
5.4 Formulation, implementation and stabilisation stage
This section investigates and discusses the turnaround strategies that were
selected by leaders in response to the decline situation. The theoretical model
developed in chapter two and findings from this phase, guides this discussion. It
investigates a turnaround process in respect of four main restructuring strategies
i.e. managerial, operational, asset and financial over two phases, the short-term
and the long-term.
As reported by many scholars (e.g. Hoffman, 1989; Arogyaswamy and Yasai-
Ardekani, 1997 and Lasfer and Remer, 2007), companies in decline implement
short-term strategies aiming mainly to quickly stop the continuous loss of cash and
the worsening performance, to bring the business to a breakeven point and a more
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stabilised situation. Short-term strategies were identified in this study as those
implemented before the year of breakeven point or positive profitability in each
company. This is to identify the strategies, which were implemented during the
early steps of turnaround and differentiate between them and others implemented
at a later stage.
5.4.1.1 Managerial restructuring
Findings from this study revealed that restructuring of middle management was not
a popular option during the early stage of turnaround, as only 3 out of 14 cases
(NF, OFD and UPF) had adapted the strategy during the short-term. However, it is
notable that the three companies that had implemented the strategy had suffered
bad management and organisational inefficiencies as major decline causes.
Additionally, managerial restructuring was implemented in various forms such as;
appointment of a new sales manager/team to attract new contracts or to respond to
decreased or lost sales, such as in the case of NF. Additionally, the appointment
of new managing directors or commercial mangers to certain divisions of the
company as part of decentralisation of decisions plans, such as in the case of
OFD, appointment of a new Managing Director and restructuring the whole
management team to focus on customer service levels such as in the case of UPF.
This findings agreed with the view of Whitaker (1990) that despite the importance
of managerial restructuring in the turnaround literature, it is not an essential
component of every turnaround strategy, if the cause of decline was attributed to
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external factors such as economic. In other words, managerial restructuring can
be considered a vital component of the turnaround strategy, for those companies
who suffer bad management as an internal cause of decline, such as the case of
OFD and UPF.
5.4.1.2 Operational restructuring
As shown from the findings in Table (5.1), operational restructuring was the most
commonly adapted strategy by all 14 cases in response to decline. Findings can
be explained in relation to cost cutting activities and cash generation activities,
aiming to stop cash losses, improve cash flow and efficiency of operations.
Cost cutting
Findings showed that cost cutting activities were implemented in 13 out of 14
cases during the short-term phase. It was not clear from the annual report whether
or not MMB had used any cost-cutting activities during the short-term phase as
part of its turnaround strategy. These activities can be categorised as follows:
? General spending and overheads were reduced and brought under greater
control in 13 cases, such as the number of staff which was reduced in BOF,
NF, OFD and SF to reduce wages and general labour costs and to
overcome problems with increased pension contribution costs in LEC.
Additionally, spending was also reduced in NI to achieve high levels of
efficiency and better utilisation of the workforce.
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? Other operational costs were reduced, such as distribution costs in NF in
2006, the cancellation of outsourced logistics operations in PF, managing it
within the company instead and the cancellation of the restructuring firm
hired in 2006 to reduce fees in SF.
? Waste levels were attacked to minimise losses in HB and UPF. This was
done in response to the high level of waste and inefficiency.
The above findings showed that cost cutting as a strategy was an essential
component of all cases in the study regardless of the cause of decline as it aimed
to reduce spending and waste levels and improve efficiency in operations. This is
in line with the literature as presented in Section 2.5.2.2.
Cash generation
Results from this study revealed that all companies have adapted cash generation
activities during the short-term phase of its turnaround process, in response to
many causes such as declined sales, negative profitability and lack of cash flow. It
can be concluded from findings that cash generation strategies were mainly
implemented in five forms as follows:
? Increasing sales, such as in the case of BOF, KRF, OFD, PF and UPF (fish
and sandwich division).
? Targeting new customers, such as in the case of MMB and UPF.
? Developing a flexible pricing system to reflect any increase in raw material
prices on the final price of the product, to ensure a good profit margin, such
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as in the case of ADM, BOF and MMB. This was done in response to low
profit margin problems and increasing costs.
? Developing new profitable products to replace low profit margin ones, such
as in the case of CHR , IG, MMB, NI, NF and PF. Additionally, HB had
imported a range of new products from Europe to quickly support and boost
its existing range.
? Introducing credit control measures to chase and control credit flow from
customers, such as in the case of IG. This was done to overcome the
problem of cash shortages and delayed accounts receivable.
From what was revealed above, findings support the literature emphasising the
importance of cash generation strategies as a vital component of any successful
turnaround strategy as it aims to generate the cash needed for the turnaround.
5.4.1.3 Asset restructuring
According to Table 5.1, asset restructuring as a strategy was used in four out of 14
cases during the short-term phase (i.e. ADM, IG, OFD and UPF). Asset
restructuring activities were implemented in two forms during the short term as
follows:
Asset Divestment:
In this study, divestment of unprofitable assets was found to be a vital component
of the turnaround strategy for four out of the 14 cases (i.e. ADM, IG, OFD and
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UPF). Notably, the evidence showed that the four companies had all suffered
internal causes of decline related, organisational inefficiencies. For example, the
management of ADM divested the newly acquired Tewksbury mill due to the high
operational costs and massive overheads of the site. Additionally, the
management of OFD divested the US subsidiary as well as the UK Lampeter site
in 2006, to reduce losses to the company. Furthermore, the management of UPF
had exercised the same strategic choice with four of its sites (i.e. Devizes fish and
Newton Abbot poultry sites in 2004 and St Herbert and Mane Frais Sites in 2007)
as part of UPF’s efforts to reduce liability, minimise overheads and turn cash loss
making assets in to a cash sum needed for turnaround.
Based on the evidence above, it can be said that asset divesture is a vital
component of the turnaround strategy of companies, which suffered from internal
causes of decline relating to high costs and overheads of one or more
operations/divisions as part of organisational inefficiencies.
Asset Investment
According to other findings, investment strategy was used in 3 out of 14 companies
in the study. It is important to note that three companies have all suffered decline
due to weak business portfolios, high waste levels and inefficiency in operations,
organisational inefficiencies as well as other external causes. This strategy was
selected to improve the overall internal performance. Namely, investments were
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made in OFD in a new inventory based control system to control and reduce stock
losses in 2005 in addition to a new staff skills and training program to reduce
waste, improve staff skills and maintain their loyalty. Furthermore, the
management of UPF decided that a new business with links to new customers in
the chilled dessert sector was needed, so an investment was made in 2004 to buy
a new company (i.e. the Minsterley site) that supported the company’s vision to
achieve growth in sales by 29% in 2005.
It can be concluded from the above discussion that despite the use of asset
restructuring strategies in some cases, it cannot be considered as an essential
component of every turnaround strategy. Notably, it is highly essential in cases
where decline was caused mainly by internal organisational inefficiencies, as it
aims to eliminate or improve badly distressed processes or assets.
5.4.1.4 Financial restructuring
According to Table 5.1, findings showed that three companies (i.e. CHR, IG and
OFD), which had suffered negative cash flow positions due to high bank charges,
interest rates and/or high exchange rates, adapted financial restructuring during
the short-term phase as follows:
Debit restructuring
Debit restructuring as a type of financial reorganisation was adopted by two
companies (i.e. CHR and IG) during the short-term phase. Both companies did
negotiate interest rates on bank loans with their lenders to reduce their annual
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charges. For instance, CHR secured lending agreements in various currencies to
overcome problems related to high exchange rates, which was one of its decline
causes. Similarly, in 2008 IG managed to get a deferred capital repayment and
discounted repayments for 2009 and 2010, by transferring the whole loan amount
to a different bank. This finding supports the view that debt restructuring helps to
minimise the pressure from loan repayments by negotiating existing/new deals with
existing/new loan providers, in the hope of receiving better terms and conditions
until recovery is achieved (Lasfer and Remer, 2007).
Equity restructuring
Equity restructuring was adapted by IG and OFD during this short-term phase in
order to improve their cash flow position and reduce overheads. For example, IG
turned its intercompany loan into equity to eliminate the annual repayment charges
paid to the company group. As well as this, OFD had generated a large sum of
money to refinance the company during its turnaround, by issuing a large number
of shares to new investors to overcome a problem of continuous increases in
liabilities and interest charges. This finding shows that financial restructuring is
mainly used in cases that suffer decline due to external causes relating to high
interest rates and lack of loan repayment.
These findings disagree with some authors (e.g. Sudarsanam and Lai, 2001) who
argued that the finance-based literature indicated that financial restructuring is a
vital component of any turnaround strategy. The findings show that such a
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strategy is vital only in cases which suffer decline due to high exchange and
interest rate.
As was seen from the results above, various strategies were used to rectify and/or
eliminate causes of decline, preparing the company for further policies to enhance
improvements and return the company to growth.
5.5 Recovery and return to growth stage
Strategies implemented during this phase aim to maintain and enhance
improvements, positive profitability and return the company to growth. Long-term
strategies in this study are identified as those that have been implemented
immediately after the breakeven point or first year of positive profitability. This is
because long-term strategies are not those needed urgently to stop the continuous
decline and cash loss. Long-term strategies are those aimed to enhance the
competitive advantage of the company over the longer term. Findings from this
case study are explained in respect of the four major restructuring strategies
below, according to the theoretical framework developed in chapter two.
5.4.2.1 Managerial restructuring
Evidence revealed that managerial restructuring was not adopted by any of the
companies during the long term. This supports the view that this is only required
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during the short-term phase in order to make sure the appropriate leadership is in
place before implementing any changes.
5.4.2.2 Operational strategies
As was evident from the findings of the results, it can be said that operational
restructuring was the most adaptable strategy during the long-term, as all
companies adopted it. Similar to the short-term phase, this was done to maintain a
greater control over spending and improve cash flow. For example, as shown in
Table 5.1, 13 out of 14 companies (i.e. DM, BOF, CHR, HB, IG, KRF, LEC, NI, NF,
OFD, PF, SF and UPF) which adopted cost cutting activities during the short-term,
continued to control and reduce costs in different forms during the longer-term
such as staff lay-offs and reducing spending in all parts of the company.
Furthermore, it can be seen in Table 5.1 that 12 companies (i.e. ADM, BOF, CHR,
HB, IG, KRF, LEC, NI, NF, OFD, PF and UPF) adopted cash generation strategies
during the short-term and continued to do so during the long-term in different forms
such as NPD, increased prices and targeting new customers. Additionally,
evidence from the two companies which didn’t adopt this type of activity during the
short-term (i.e. SF and LEC), revealed that only SF had adopted cash generation
during the long-term in the form of improving growth margins and expanding
customer bases to help boost sales.
5.4.2.3 Asset restructuring
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Asset divestment
The use of asset restructuring was found apparent in this study during the long-
term. In respect of asset divestment, findings showed that in 1 out of 14
companies (i.e. IG), this sub-strategy had been adopted during the long-term to
maintain improvements, reduce overheads and generate cash. IG had divested
the Coldwater site in 2008 to reduce the continuous cash loss and high overheads
and to generate some much needed cash for the turnaround, after a battle of cost
cutting activities during the short-term. This confirms that asset divestment is not
widely used during the long-term phase.
Asset investments
Referring to Table 6.1, it can be seen that six companies (i.e. BOF, IG, MMB, NF,
PF and SF) adopted this strategy during the long-term. This indicates that asset
investment was the most vital strategy during the long-term, in addition to
maintaining operational improvements. For example, investments were made in
BOF and SF on staff training and skills building in order to improve efficiency and
productivity. Moreover, an investment in new equipment and facilities at the
Grimsby site in IG, was put in place to accommodate business brought from
Coldwater after its divesture. Additionally, BOF, MMB and NF also invested in new
equipment to speed production, reduce costs and increase productivity. Evidence
from PF has shown that the company had invested in acquiring certain trades and
assets of another company to expand sales and growth. It is believed that the
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wide use of investment strategy falls in line with the view of some authors, who
believe that investment strategies are critical in all parts of the company during the
long-term to make the company a strong competitor in the marketplace.
This concludes that asset investment as a strategy was popular during the long-
term, in successfully turned around companies.
5.4.2.4 Financial restructuring
Similar to what was found evident during the short-term, implementation of the
financial restructuring strategy was found apparent in two cases during the long-
term. It was found that IG had re-negotiated its debt and terms of borrowing and
managed to successfully defer capital repayments until 2009 and reduce
repayments for 2010 and 2011. This gave the company headroom with expenses
and helped to save money to fund the turnaround. Additionally, KRF sold a hefty
amount of its shares to a large group, generating a sum of £10m needed to turn it
around and take it to the next level.
Based on the findings shown above, it can be concluded that the long-term phase
includes the use of various turnaround strategies. However, findings show some
agreement and disagreement with the turnaround literature explained as follows:
1. Managerial restructuring was not found to be a vital component of every
turnaround strategy as emphasised in the literature. Findings showed it is
only important in cases that suffered bad management as a cause of
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decline. This finding was supported by the view of Whitaker (1990) who
indicated that change of management is fruitless if decline was not caused
by management. This disagrees with the view of many authors who argue
that managerial restructuring is essential, even if decline was not caused by
management, as it sends good signals to creditors that internal
improvements are taking place.
2. Operational restructuring is found to be a critical component of any
successful turnaround strategy, due to its nature and aim of achieving
greater control over spending and cash flow.
3. Asset restructuring consists of two strategies (i.e. asset divestment, asset
investment). The first was found to be a critical component of the turnaround
strategy in cases which suffered decline, due to internal organisational
inefficiencies such as high operational costs and overheads. However, the
use of such a strategy was found to be less important during the long-term
phase. In paradox, findings showed that the use of asset investment was
associated with the long-term phase due to the improved position of cash
availability.
4. Financial restructuring was found to be more popular during the short-term
mainly in cases that suffered high interest and exchange rates. Findings
showed that such a strategy was only important to the success of one case
during the long-term.
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5.6 Initial model of successful turnarounds
In this section, an initial model for successful business turnarounds was developed
(see Figure 5.1), guided by the theoretical model from literature and facilitated by
the findings from the case study as presented in chapter four and emphasised in
Table 5.1 earlier in this chapter.
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Recovery and return to growth
Successful Turnaround
(2 years or more of positive profitability
Positive
profitability
achieved
Operational restructuring
-Maintain operation
improvements
Asset Investment
- NPD, staff training, new
computer systems, up to
date equipments
Formulation, implementation and stabilization of the
turnaround plan
Mandatory strategy
(Operational restructuring)
Additional strategy
Managerial restructuring
Additional strategy
(Asset restructuring)
Additional strategy
(Financial restructuring
Cost cutting Cash generation
Asset divestment Asset investment
Equity restructuring Debit restructuring
NO
Analysis stage
Identify causes of decline
Internal causes
Organizational
Inefficiencies
Bad management
External causes
Political
Economic
Competition
Assess viability
Does the company hold a
competitive advantage?
Assess severity and
financial position
Is there enough cash
for the turnaround?
YES
YES
NO
NO
Exit
Sale of business/ Liquidation
(Liquidation)
YES
High cost or material
High interest/exchange
rate
Lack of global demand
Decline sage
Recognition of decline
Replace leadership
Appoint a new CEO or interim
turnaround leader/ firm
Communicate the plan
TMT
support
Stakeholders
support
FIGURE 5.1: INITIAL MODEL OF MANAGING SUCCESSFUL TURNAROUNDS
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The model explains the turnaround process from a stage theory perspective,
guided by the four key stages of the turnaround process developed in C10. chapter
two as follow:
1. Decline stage:
This is the stage when decline is first recognised by the TMT through
different decline signals. Findings from 10 out of 14 companies showed that
when decline was recognised, a change in leadership was implemented as
an early step of turnaround, in order to replace incompetent leaders with
competent ones, who are able to manage the company out of decline.
Furthermore, according to the findings, new leadership took various forms
such as new CEO’s, Managing Directors, and or senior members in TMT.
Additionally, findings showed that in some cases a temporary interim
turnaround manager/firm was hired to work in line with the new/existing
leadership until recovery was achieved.
2. Analysis of decline:
The second stage of the model represents the first task for the new/ existing
turnaround management. Decline situation must be analysed in order to
identify three major elements that will impact the decision of the turnaround
process. The first element is the viability check and it must be carried out to
ensure that the company has the short-term financial ability and long-term
value to return to profitability and growth before any further investment can
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be made. Findings show that all case studies held one or more competitive
advantages that had supported it in the market prior to decline, such as
being the market leader or at least having a large market share, being
backed up with finance capital from a large group, being an expert in the
industry and/or being a pioneer in NPD or new technologies. As shown in
the model, there is a link between the identified and the long-term stage of
implementation. Findings show that the long-term strategy revolves around
enhancing this competitive advantage.
The second element is the severity of decline, which identifies the cash flow
and cash availability positions. Findings show that all companies were still
operating under the support of their usual creditors, despite the negative
cash flow position. This indicated that decline was recognised at an early or
mid-term before all resources were depleted. Findings also show that
despite the decline situations, Annual Reports state that TMT’s were
confident that the proposed changes would return companies to a stable
position.
The third element is identifying the cause of decline (internal/external). This
element is critical as it influences the turnaround decision in the short-term
as well as the long-term. As shown in Table 5.1, the findings indicate that
the external causes of decline that played a significant role in certain cases
in the study, was limited to one of three major causes, i.e. economic,
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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5-29
competitive or political. The first mainly came in the form of high costs of
energy, raw materials, increased interest and currency exchange rates
and/or lack of demand. The second was competitive causes relating to the
ability of competitors to attract some contracts from companies in the study,
impacting their sales volume. Political causes related mainly to the UK
governmental legislations on pension schemes. Those external factors
were considered to be uncontrollable. Despite this, internal improvements
that minimised or eliminated the impact of those factors are essential, since
there is nothing to be done externally.
3. Formulation implementation and stabilisation of the turnaround plan:
This is the third stage of the turnaround process during which the
turnaround management develops and implements the initial short-term
turnaround strategy. According to the findings emphasised in chapter four
and presented in an earlier discussion in this chapter, guided by the
theoretical framework and referring to Figure 5.1, the key strategies are
explained as follows:
A. Managerial restructuring
As shown in Figure 5.1, there is a linkage between the original cause of
decline and this strategy as a chosen component in the turnaround.
Findings assert that this strategy was not critical in all cases in this study. In
paradox, findings show that this strategy was only adapted in three cases
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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5-30
(NF, OFD and UPF), which originally suffered internal causes of decline
relating to bad management and organisational inefficiencies. For example,
certain causes such as the lack of management response to changes in
customer trends and lost sales and/or contracts, were responded to by
management restructuring and appointment of a new dedicated Commercial
Manager or team to focus on attracting new sales contracts. This allowed
for new competent management to take their place to ensure the application
of the new changes.
B. Operational restructuring
This strategy is found to be critical to all companies in this study during the
short-term phase, regardless of the cause of decline. Findings showed (as
emphasised in Figure 5.1) that this strategy was adapted in every company
during the short-term and the long-term. Cost cutting and cash generation
sub-strategies are the component of this, due to its importance in
terminating cash loss and improving cash flow and efficiency, regardless of
the cause of decline being either internal or external.
For example, internal causes of decline are associated with various forms of
inefficiencies in operations, high waste levels and high overheads and were
mainly dealt with using various techniques within operational restructuring,
such as greater control over cash, reduction of overtime and introduction of
new discount systems to reduce spending and accelerate cash flow.
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Similarly, many external causes of decline such as increased energy costs,
pension contribution and the global lack in customer demand, were largely
addressed mainly by implementing cost cutting sub-strategies to alter
internal environments, since there is little control over the external ones
(such as layoffs and application of greater control measures over cash
spending). Additionally, cash generation strategies (such as increased
prices, increased sales and NPD) were found to be highly effective,
especially in the presence of major causes such as low profit margins,
reduced sales and lost contracts.
C. Asset restructuring
Figure 5.1 further shows and confirms that asset restructuring is not an
essential component of every turnaround case, it was found essential in
cases where operational restructuring was not enough to eliminate the high
overheads and losses associated with certain operations or divisions (four
cases). This finding established the link between organisational
inefficiencies as a cause of decline and divesture as a turnaround option.
Similar to this, findings show that asset investment was exercised as a
short-term turnaround option in cases where decline was due to lack of
investment in improving the internal operations or the skills of the workforce.
Despite the lack of cash during such a critical period, it was seen as
imperative to invest in up-to-date systems, staff training and NPD to
overcome problems with high waste levels and lack of inventory control.
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D. Financial restructuring
Financial restructuring is another turnaround option that is usually adopted
to ease pressure from creditors. Findings from three cases which suffered
high interest rates on loan repayments or high exchange rates when
working with various currencies, showed that financial restructuring activities
(i.e. securing lending agreements in various currencies, exchange debt for
equity, or transfer of all loans and liabilities to other creditors) is a suitable
turnaround option.
4 Recovery and return to growth
This is the final stage of the model and during this stage, the company
should have reached its breakeven point or positive profitability. When this
is achieved, the company’s turnaround management develops further
strategies in order to maintain improvements, ensure full recovery and future
growth, by enhancing the competitive advantage. Findings showed the
long-term strategy is a mixture of two major policies as follows:
? Operational restructuring: Findings show that continuous review and
implementation of cost control and cash generation activities were
implemented during the long-term (13 out of 14 companies), to ensure
efficiency in operations, positive cash flow and better utilisation of cash
resources.
? Asset restructuring (investment): Findings show that during the long-
term phase, investment strategies aimed to enhance the competitive
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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advantage of those companies by investing in staff training, new
equipment and NPD that will help a company to differentiate in value
and/or cost were necessary.
From the Annual Reports and the analysis above, it can be concluded that
successful companies have maintained their recovery by continually focusing on
operational restructuring strategies as being essential for most causes of decline,
as well as adapting further sets of strategies that target certain causes of decline.
5.7 Summary
This chapter has presented an analysis and a discussion of the results of the case
study of 14 medium and large food-manufacturing companies from the UK, which
underwent a turnaround between 2000 and 2010.
This chapter conducted the analysis process from a stage theory perspective,
guided by the theoretical framework developed in the literature review in chapter
two. Section 5.2 concluded the steps that companies underwent during the decline
stage, since signals of decline appeared, which concluded in two steps; the first
represents the recognition of decline signals and the second takes action with
regard to the company’s leadership.
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Section 5.3 followed prescribing the appropriate steps which must be taken during
the analysis of the decline stage, which starts with identifying the viability of the
company for turnaround, to ensure that the turnaround efforts will be fruitful at the
end. If the company is viable, an analysis of the cash flow position is conducted
along with the original causes of decline.
Section 5.4 covers the third stage of the turnaround process in which all critical
decisions are formulated into turnaround strategies and implemented over two
phases; short-term to stabilise operations, followed by long-term to maintain
improvements and return to growth. During the short-term, there are some
mandatory strategies, which must be implemented regardless of the cause of
decline, as well as some additional strategies, which were selected and
implemented in relation to the presence of certain causes of decline.
Section 5.5 briefly discusses the recovery stage during which two major strategies
continue to be highly important to maintain improvements, enhance the competitive
advantage and return to growth for the turnaround stage in which the company
should have successfully returned to positive profitability and growth.
Section 5.6 represents the initial model of successful turnaround. The section
discusses the development process using the same theoretical framework
developed in chapter two and findings from chapter four and five of the study and
then a summary follows in Section 5.7.
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The next chapter should investigate in depth all the issues highlighted in chapters
two, four and five represented in the initial model, through an in depth case study
of three, large, UK food manufacturing firms.
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CHAPTER SIX
ANALYSIS, DISCUSSION OF IN-DEPTH
CASE STUDY- AND DEVELOPMENT OF
REVISED MODEL OF SUCCESSFUL
TURNAROUNDS
6.1 Introduction 6-2
6.2 Castle Dairies Ltd 6-3
6.3 Glanbia Cheese Ltd 6-17
6.4 Peter’s Food Service Ltd 6-26
6.5 Cross-case analysis 6-36
6.6 Modified model of successful business turnaround 6-45
6.7 Summary 6-50
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6.1 Introduction
This chapter is designed to achieve objective three of the study, i.e. explore the
initial model and its key issues through an in depth case study which faced
similar scenarios.
The chapter presents the results obtained from a case study of three large food
manufacturing companies from the UK (two in Wales and one in England), with
a successful turnaround experience according to the turnaround criteria (see
methodology chapter). The investigation process was guided by the theoretical
framework (see Figure 2.9) and the initial model of successful turnaround (see
Figure 5.1), to explore and understand the key issues of successful turnaround
management.
The chapter presents a case study of primary as well as secondary data
analysis of three companies. Three research methods were used during this
phase of the study, i.e. semi-structured interviews, archival records and
document analysis. Interviews were held with the MD or the CEO of each
company in their own offices. Additionally, the Annual Reports for each
company covering the whole period of turnaround were analysed as part of
archival record analysis. Additionally, when this was done, an Internet search
process for further information about the cases was conducted, to generate as
much data as possible about each case as part of the documentation analysis
method, to increase the reliability of the collected information.
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The chapter investigates the companies from a stage theory perspective
identifying the turnaround process and its key stages for each company
individually, with emphasis on the key lessons, which can be learned from each
case.
6.2 Castle Dairies Ltd (CD)
Castle Dairies Ltd (CD) is one of Wales’s most famous food manufacturing firms
situated in Caerphilly and proud to be an award winner for organic and
conventional butters for the UK wholesale and retail markets (CD website,
2012). It was reported on the company’s website that, “The company is proud
to be Welsh and is owned and run by the Lloyd family since it was established
in 1968” (CD website, 2012). The company is also proud to be the only dairy
producer in Wales that has the capability of both churning and packing butter,
with extra attention given to customers through their, “Rigorous quality
assurance program” as was described on the company’s website (2012).
CD offers various services to their customers such as bulk butter sales (salted
and unsalted), organic butter supply (salted and unsalted), contract processing
and packaging (when the company only transforms customers bulk buy into
small/bigger blocks in different packaging and under customers own brand or
CD’s own brand depending on requirements) (CD website, 2012).
Figure 6.1 shows a period of financial decline that the company went through in
early 2000. That period was characterised with negative profitability, decline in
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-4
performance and cash flow problems. In the same figure, a successful
turnaround can be seen towards the second half of the decade characterised
with a positive profitability. What had led the company to fall into a negative
profitability position early in that decade, were the strategies used to reverse
decline and how the management underpinned their strategies successfully?
These are the types of questions that the following sections will seek to answer
and to identify the key success factors of CD’s turnaround.
The section will investigate the turnaround experience of the company from a
stage theory perspective, identifying the steps that the management followed to
achieve their turnaround successfully. The analysis represents information
obtained from the MD of the company during the semi-structured interview,
information from documents offered on the company’s website and from Annual
Reports obtained from Companies’ House.
Adapted from: (CD Annual Reports, 2001- 2007
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6.2.1 Decline stage
6.2.1.1 Recognition of decline
When the MD, Nigel Lloyd (NGL) was asked how the management recognised
decline, he reported that decline was obvious in many different ways. He
explained that the first one was the monthly financial results, which were
showing losses. NGL added that the management of the company did not
know how to deal with those losses, despite the small size of operations they
had at the time. NGL stated that:
At that stage we were manufacturing cheese, which was our
number one product and most of that cheese was special cheese
that we manufactured for the US, as well as some trading
companies in the UK. We had a very small butter packing
operation for one or two customers. We also had a large what we
call, ‘spray milk drier’ for dried milk powder in the middle of the
factory and that was it as far as the activities went.
(NGL)
NGL added that another sign was the inability to fund operations stating that:
Plant and equipment needed a lot of investment to bring them up
to modern food manufacturing standards and that investment was
not there. Also, the conditions in the factory were sending out
alerts. At that time I wasn’t at senior management level,
nevertheless, I could see there were problems.
(NGL)
6.2.1.2 Change of leadership
When NGL was asked if there was any change in the TMT during the early
stages of turnaround he asserted that a new MD to manage the company out of
decline was appointed in 2003. However, he stated that, “He turned out to be a
complete disaster. He stayed for six months without adding anything to the
business”.
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NGL who was enrolled on an MBA program in the Open University in 2003,
decided to manage the company out of those problems after permission from
his dad to take over the position. When NGL was made the MD and took over,
he conducted his own investigations, as he was aware that some of the issues
in CD were directly related to his family’s involvement in the business.
NGL further explained that a detailed business plan highlighting the current
problems and the proposed solutions to update the bank and other stakeholders
was required immediately, due to the deteriorating cash flow position that might
lead to unpleasant withdraw of stakeholder support.
6.2.2 Analysis of decline situation
When NGL was asked about the analysis process and what tools he used to
gather information, he reported that he looked at the financial ratios they had
and spoke to the management and staff in the facilities as part of his daily
routine. He explained that he wanted to know what was happening and why
things were going wrong and the only way to do this was by listening and
watching. NGL made it clear that certain issues needed thorough investigation,
in order to draw a plan that outlined all the major issues with the company as it
was seen by its employees and management.
6.2.2.1 Viability and Competitive advantage
It was reported in the Annual Reports of the company that CD had a competitive
advantage of been experienced in the dairy product market since 1967, with
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-7
firm links to suppliers and even competitors. Furthermore, skilled staff and
good relationships with customers stood as viable advantages that the company
could build on in its turnaround and recovery.
6.2.2.2 Severity of decline and availability of cash
Findings from the Annual Reports indicated that the company had suffered mid-
term to late-term decline according to various decline signals (as stated in
Section 6.2.1.1). However, the change of leadership had allowed for an in
depth investigation and assessment of the company’s financial position in order
to allocate the cash needed for the turnaround process. Consequently, NGL
has approached the bank with a detailed business plan to obtain funds for the
turnaround process in the form of continuous financial support to pay wages
and other expenses (NGL, 2012). The detailed business plan outlined the
causes of decline and the proposed plan to eliminate such causes and achieve
recovery and growth.
6.2.2.3 Causes of decline
The investigation process revealed various (internal and external) causes,
which contributed to the decline of CD as follow:
Internal causes
NGL explained that there were many internal inefficiencies and high costs in the
company that led it into negative profitability, which can be summarised in the
following:
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? NGL explained that sales had reduced in the last few months of 2002
and they had no control over these sales, because the market was
dominated by two large traders buying from manufacturers such as CD
and selling on to retailers. He added that this is the reason behind his
father’s lack of attention to recruit a sales team and was why they did
not have one, which was, as he described it, “dangerous” because the
whole business was reliant on only two customers.
? Outdated equipment and inefficiency in energy use leading to high costs
of utility bills, was a cause of decline that was mentioned by NGL in the
interview. He explained that the factory needed lots of investment to
replace outdated equipment and systems, which were causing major
high-energy consumption, time losses and high levels of waste and this
investment was not available.
? Low profit margins were another cause that was found apparent in the
Annual Reports 2002, 2003 and 2004. The profit margins did not reflect
the increased cost of raw material and other operational costs such as
distribution.
External causes
NGL further explained that other external causes contributed to the negative
profitability of CD, which can be summarised in the following:
? A fire started in the middle of the production area in 2005 that burnt
down the drying facility and notably, the insurance company rejected a
claim for this (NGL, Annual Report 2005). NGL explained that the fire-
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-9
damaged facilities reduced their production capabilities and added
further pressure on supply and overall sales volume.
? NGL reported that CD used to receive a subsidy (rating of export) from
the European Union for every ton of cheese exported outside the EU
market. However, that subsidy was gradually reduced until it was
completely stopped in 2004. This had led to decreased exports to the
US market in 2003 by over 77% compared to 2002 and had led to £162k
of losses (NGL, Annual Report 2002). It was clarified in the 2005
Annual Report that the cheese operation, which is the main activity of
the business, had become loss making.
? High cost of raw materials was another problem, which was mentioned
earlier. NGL explained that another difficulty they had was that CD
relied on the purchase of surplus milk of desperate sellers at reduced
prices. However, since farmers restructured themselves into stronger
selling groups and they opened a big milk drying factory in Westbury to
save any surplus milk from being sold cheaply on the market, the milk
prices were holding strong through the year so there were less
discounted prices, which again affected their cost base negatively
(NGL). Additionally, other increased costs had contributed to the losses,
for example, the cost of distribution had increased by 49% in 2002
compared to 2001 despite the increase in sales of only 44%.
? Increasing costs of energy and environmental treatments were also
mentioned as causes of decline in the 2005 Annual Report.
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6-10
6.2.3 Formulation, implementation and stabilisation of the turnaround
stage
When NGL was asked, what had he based his turnaround plan on and what
strategies were used to manage the company out of decline, he reported that
he introduced a business plan to his father and the rest of the management
team before he became the MD in 2003. He explained that the plan evolved
around expanding the butter churning operation, but the plan was rejected.
However, when the situation deteriorated six months later and he took the MD
position, he managed to convince his father to take up his plan. A very detailed
business plan was introduced to the bank, which was based on the butter
churning and packing operations as the way out of decline. NGL explained that
the plan had to have a high level of detail, such as the number of employees
needed and the number that would be made redundant, knowing that the bank
would keep a close eye on the company’s PLA against projection, during what
he described as the, “intensive care period”. The short-term turnaround plan,
which was implemented, is explained below:
Managerial restructuring
“The Production Manager we had at the time didn’t think he was the right man
for the job. However, because he worked for my dad for years, we invested in
him to be the Technical Manager and he did a good job on that side and a new
Production Manager was recruited”.
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This statement made by NGL shows that a need to restructure the management
team of the company was essential due to errors made by the previous
management. Interestingly, this finding emphasises that moving management
around the company can be more beneficial to the company than removing
them completely. NGL further added that in 2003 a Sales Manager was
recruited stating that, “Sales are a critical element that my dad didn’t have”.
This was aimed at targeting more customers and trying to promote the new
Welsh butter range to avoid a problem of being limited to an inadequate
numbers of customers (NGL, 2012).
Operational restructuring
? Cost cutting strategy:
NGL asserted that controlling costs was one the most important key measures
during that period, especially with the deteriorating cash flow situation stating
that, “Cost cutting should be done as quickly as you can in the business to buy
you some time”. Therefore, various measures were taken such as having all
spending requests signed by NGL himself, this was to bring all spending under
his direct control. In addition to this, NGL stated, “We looked through our
monthly accounts expenditure, eliminating some unnecessary spending and
because I did it in detail, it was easier to monitor”. Additionally, NGL asserted
that he focused on all the costs line by line and tried cutting them one by one
until he got it streamlined.
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NGL further explained that the cheese operation was reliant on staff overtime
costing the company a massive sum. Therefore, overtime usage was reduced
to a minimum to reserve as much cash as possible and eventually the cheese
operations were replaced with butter operations, eliminating all the costs that
were associated with it.
? Cash generation strategy:
NGL reported that cash flow was an issue that needed to be sorted out to speed
the process of receiving money from customers to boost cash flow. Various
actions were taken to generate cash, which are listed as follows:
? A new invoice discount system was introduced to customers (meaning
that as soon as products left the factory, an invoice was issued to the
customer for payment of 60% of the invoice immediately) to help
improve cash flow.
? Payments to creditors were delayed to give the company some extra
time and the spending needed for daily operations.
Asset restructuring
? Asset divestment
NGL asserted that the decision to leave the cheese market was taken because
by the time he wanted to expand their market share of cheese products, there
was no space for the company because all niches were taken by competitors.
NGL explained that he tried to stay in the market by introducing an NPD
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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program to develop low fat cheese, which was exported to the US market, to a
cheese that could be sold here in the UK, because low fat food at that time was
a growing market. However, this program had failed due to technical issues
with the shelf life. Therefore, an onsite auction was held to sell unnecessary
equipment to create space and generate a sum of cash needed for turnaround
(NGL).
? Asset investment
Findings also revealed that an investment was made in the butter churning and
packing operation to increase sales and market share. The investment money
mainly came from the sale of the cheese making equipment and the use of cash
reserves as mentioned by NGL.
Financial restructuring
When NGL was asked if financial restructuring was an important part of their
turnaround plan, he stated that:
Financial restructuring is definitely an important short-term
strategy because cash is the life blood of any company. I know
there are many companies that have been operating at a loss for
years, but it is only when it hits the cash flow they realise that they
need to turnaround or they will be out of business and the bank is
never going to run after you.
NGL reported that when he met the bank in 2004, he was worried that the
financial help would stop, due to the problems mentioned earlier with
developing the short-life cheese. Consequently, a new plan evolved around the
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butter churning operations was introduced and the bank kept a close eye on
profit accounts against projections and the funding for operations continued.
6.2.4 Recovery and return to growth stage
When NGL was asked if long-term strategies were required to ensure full
recovery and return to profitability, he confirmed that operational restructuring
remained the centre of focus during the long-term. For example, he asserted
that a court case was filed against the insurance company in relation to the
rejected claim after the fire, which was settled with a £350k pay-out to CD in
2007. NGL stated that, “We made a provision every month to build up some
money to fund legal activities. We had a successful claim at the end with the
insurance company and this money sorted out some cash problems”.
Additionally, further strategies were required to maintain improvement and
support the new competitive advantage of the company, mainly in the form of
asset investment and financial restructuring explained as follows:
Asset restructuring
? Asset investment
Following the divestment of the cheese making operations, an investment was
placed in the butter packing and churning operations as stated in the 2006
Annual Report. NGL reported that the Welsh butter brand is famous across the
country and NGL noticed that there were many butter products branded as
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Welsh butter on the shelves of supermarkets despite the fact that CD is the only
company in Wales with butter churning and manufacturing operations.
NGL believed that this was their niche in the market that can generate a lot of
business for the company, so he reported that he contacted the Trading
Standards Authority and discussed the matter and as a consequence of this,
most of those products on customer shelves were replaced with real Welsh
butter made in CD within 18 months after placing an investment in the butter
churning facilities. NGL stated that:
This move generated a lot of sales and profits more than we
expected. We used this money to reinvest back into the business.
This allowed us to hold massive stocks of frozen butter putting us
ahead in the market because there are not many companies out
there that can have 400 tons of butter in stock.
Furthermore, It was found from the Annual Report of 2007 that financial help
was also needed in the long-term as CD had received a grant from the Welsh
Assembly Government to invest in updating the company’s butter churning and
packing operations and replace old equipment with new automation capabilities
to speed production, reduce waste and boost sales. However, there was no
evidence found that equity or debt-restructuring actions were taken during this
time. The role of the bank in this case was limited to the continuation of funding
operations during the turnaround period.
He reported that investment in new up to date facilities was the key factor. He
stated that:
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By 2007/2008, we decided to make an investment in the factory to
replace the previous poor set-up we had. So after we cleared out
the cheese making equipment, we encapsulated state of the art
production units within the factory. We expanded the butter
packing lines by putting in an extra line. We also replaced many of
the manual handling operations with equipment such as pumps
and conveyers. After these investments, we felt happy and so did
our customers.
NGL asserted that cash was the most important element in their turnaround. He
stated that, “I learned that I had to closely watch our overheads and spending at
all times, because money can easily go down the drain and that is what I have
been doing since” (NGL).
6.2.5 Summary of the turnaround of CD.
From what was presented and discussed above, it can be said that the case of
CD was a successful turnaround experience that relied on strong management
skills, a good relationship with the bank, various operational changes,
successful NPD and strong awareness of changes in the external environment.
It can be concluded as shown in Figure 6.2 that the turnaround process started
with the appointment of NGL as the new MD, who investigated the decline
situation and identified the competitive advantage of the company and the
causes of decline that led the company into failure. Then, during the
formulation and implementation stage, a new opportunity was identified and the
turnaround plan evolved around it (i.e. butter churning, production and packing
operations).
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It was found that the company lacked cost control measures, sales strategies,
long-term vision and a stable position in the marketplace. The new turnaround
strategy was based on divesting the loss making cheese facility, reducing costs
and general spending in all parts of the company and diverting all efforts,
resources and focus into butter churning and packing operations, to expand
sales and market share. In the long-term, the company maintained high levels
of cost control and invested in new equipment to improve productivity and sales.
6.3 Glanbia Cheese Limited (GC)
Glanbia Cheese Limited (GC) is the largest mozzarella cheese manufacturer in
the UK and Europe (GC website, 2012). GC is a joint venture between Glanbia
PLC (an international nutritional solution and cheese group based in Ireland, a
world leader in value-added dairy ingredients) and the Leprino Foods Company
(the world’s largest mozzarella producer, based in the US with customers in
over 48 countries with over 50 production patents) (GC website, 2012).
The CEO of the company Paul Vernon (PV) reported that the company had
been in business for more than 21 years, starting off with a small plant in Wales.
The company with its small plant, merged with Express Foods (based in
Northern Ireland) in 1997 and was reformed in 2002 into two companies (i.e.
Glanbia Cheese and Prima Foods) and both companies were leveraged giving
the company a global network (PV). PV stated that:
The company has three sites of which two have manufacturing
facilities (one in North Wales and one in Northern Ireland) and this
site in England, which is the Head Office, where we have the
directors, sales team, technical team and me.
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The company has a history of profitable performance; however, the company
went into a decline period in which it suffered several years of negative
profitability between 2003 and 2007 as shown in Figure 6.3. This was followed
by a turnaround experience in 2008, managing the company safely out of the
negative profitability position. The story behind the company’s decline and
successful turnaround is investigated below.
Adapted from: (GC Annual Reports, 2002-2009)
6.3.1 Decline stage
6.3.1.1 Recognition of decline
It was found apparent in the Annual Reports that the company had a continuous
growth year on year between 2001 and 2006. However, this rise in turnover
was accompanied by the increased cost of operations and other administrative
expenses, which brought the company into a negative profitability position. The
main decline signals as described in the Annual Reports 2003-2005 are
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declining, negative profitability and concerns by the company’s senior
management about cash flow and profitability.
6.3.1.2 Change of leadership
It was found from the Annual Reports (2001-2009) of the company that the CEO
(PV) who joined the company in 1995, had stayed to manage it through the
turnaround process and there was no change in this position. This, as clarified
during the interview, was because decline was attributed to external factors and
not to the company’s leadership team as will be explained later in Section
6.3.2.3.
6.3.2 Analysis of decline situation
6.3.2.1 Viability and competitive advantage
PV asserted that being the biggest in the market, having multiple sites, being
focused solely on one type of product (cheese) and with a multi-customer sector
(e.g. restaurants, retailers and takeaways) had made the leadership team very
confident that this negative result was only temporary and GC would return to
profitability upon some internal changes. He added that the company still held
its strong competitive position in the marketplace despite the deteriorated
profits.
6.3.2.2 Severity of decline and cash availability
Findings from the Annual Reports indicated that the company had suffered mid-
term decline according to various decline signals. However, the situation was
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not in such a position that it was unable to meet its debts. PV reported that GC
continued in operation, whilst being able to analyse causes of the temporary
decline in order to make changes.
6.3.2.3 Causes of decline
When PV was asked about the causes of decline, he asserted that the
management knew what was wrong with the company, but the solution would
take some time due to constraints on sales contracts and other factors. He also
added that the causes of decline were both internal and external, which can be
explained and summarised in the following:
Internal causes:
Lack of asset utilisation was reported as the biggest problem facing the
company at that time. PV explained that the company was only operating for
four days per week. He explained that this had put huge financial constraints
onto the company, due inefficiency in operations, low productivity, high waste
levels and high costs. PV reported that this had to change to maximise asset
utilisation and increase productivity and sales.
Furthermore, the increase in raw material prices, mainly milk prices had caused
a major increase in overheads. PV explained that nothing could be done
because this happened while they had fixed contracts with customers, which
would not allow them to alter prices to reflect increases in raw material costs.
PV stated that, “The relationship between the selling price and the cost price in
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our business is quite critical because we are reliant on milk, which is where the
biggest chunk of our costs go. If you realise that raw material prices are
uncontrollable, you should try to mitigate that and find a different option to
overcome the problem” (PV).
External causes:
PV reported that high exchange rates was another cause of decline to GC, that
affected its sale price negatively and its profitability. PV stated:
We are located in the Sterling zone and about 40% of our sales go
to the Euro zone and our competitors are in the Euro zone. In the
last few years, we have seen the exchange rate go higher so we
get less money. The movement in the prices affects our costs and
obviously the profit.
(PV)
In addition to this, it was reported by PV that other exceptional costs had added
to the negative profitability the company had suffered. An example of this was
the large pension cost of £604k in 2005, which put the company into a negative
profitability position.
The combination of internal lack of asset utilisation, combined with external
changes and increased costs had formed a huge obstacle for the company’s
profitability and immediate action had to be taken and implemented urgently.
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6.3.3 Formulation, implementation and stabilisation of the turnaround
plan
When the CEO was asked about the strategies, which were used to tackle
decline, he asserted that there were various actions taken to rectify the errors,
which were identified within the business. He concluded the overall strategy
stating that, “What we aimed at is selling more, producing more, and using our
assets in a much more productive way”. PV asserted that, “Numerous changes
had to take place to remove all blockages to the new strategy”.
However, PV stated that implementing change in the food industry is a huge
mission because management had to implement change alongside running the
daily operations. He explained:
This is the nature of the food business to run projects alongside
the daily operations, because you can’t take plant out to retool for
example, like car companies, unless you’re able to rebuild a stock
to cover you for the lost time which is not going to be long.
Guided by the theoretical model in chapter two of the study, those short-term
changes will be divided and explained in respect of the four restructuring
strategies in the sections below.
6.3.3.1 Managerial restructuring
When PV was asked if there were any managerial changes in the lower levels
of management, he confirmed that some managers were replaced to remove all
blockages that rejected the new strategy, which aimed to improve the overall
working environment. He stated that, “You need to have the right people to
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implement the strategy. I divided the strategy into tasks and every manager is
to implement their tasks”. In support of this, findings from the 2005 Annual
Reports show the replacement of three company directors on 19
th
July 2005.
6.3.3.2 Operational restructuring
Cost cutting strategy:
When PV was asked about the role of cost cutting in their turnaround strategy,
he asserted that the short-term strategy was based on increasing volume,
reducing overheads and keeping tight control on expenses. He explained that:
“We compared costs to budgets on a monthly basis, especially
energy that we can take actions on unlike raw materials, which we
cannot control. We utilised the equipment by adapting equipment
that is more efficient and uses a moderate amount of energy”.
Cash generating strategy:
PV explained that cash flow was a critical aspect, which must be focused on in
order to improve it. PV reported that this was done when:
We reviewed our portfolio to see who are the customers that we
should keep (who have the capacity to grow?) and which ones we
can get rid of. But this requires us to differentiate ourselves from
other competitors in the market, because what customers try to do
is to commoditise their purchases, so they can buy from every one
because the price is the main thing.
PV asserted that many changes to improve cash flow were implemented and
they can be explained as follow:
? In 2005, long-term contracts (with a fixed sale price) were replaced with
short-term contracts (one/two months long) to reflect any increase in raw
material prices and any other costs in the final sale price of the product.
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PV asserted that this relied heavily on the negotiation skills with
customers and suppliers to highlight the importance of achieving a fair
profit margin for the whole chain (supplier, producer and customer) to
achieve sustainability of supply and stay competitive in the marketplace.
? Strengthening the relationship with customers based on good service
levels and reliability of supply. PV explained that it was difficult to
strengthen the relationships with customers by offering long-term
contracts with fixed prices, due to the volatility of raw material prices.
Instead, PV stated that, “What we tried to sell, as well as the product,
was our contingency of supply (two factories) and ability to grow with our
customers to establish a long-term relationship”.
? Overcome the problem with the foreign currency exchange rate. The
CEO asserted that a close eye was kept on any changes in currency
rates and decisions taken accordingly to reduce any impact on the
company’s profit margin.
6.3.4 Recovery and return to growth stage
It was reported in the 2009 Annual Report that the Board felt happy with the
company’s improved performance and would continue to invest in and improve
its processes to ensure future success. PV reported that the management felt
satisfied in 2010 with the performance of the company after a profit of nearly
£6.8m. PV asserted that improvements would continue focusing on achieving a
minimum of 5% return on sales, to continue growth by focusing on maximising
asset utilisation, cost control and passing any increase in raw material prices to
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customers to ensure profitability. No evidence was found for any other
strategies in addition to operational restructuring during this stage.
6.3.5 Summary of the turnaround of GC
From what was revealed in the interview with PV, the CEO of GC, in addition to
what was found apparent in the Annual Reports of the company and despite the
fact that the company was managed through its turnaround by the same leader
who managed the company during decline, it can be said that the company’s
turnaround experience was a challenge that was managed successfully until
recovery was achieved. The company’s competitive advantage and causes of
decline were successfully identified and then a suitable set of actions were
implemented to each cause of the decline during the short and long term to stop
decline and return the company to profitability and growth.
6.4 Peter’s Food Services Limited (PFS)
Peter’s Food Services Limited (PFS) is the biggest pastry producer in the UK
with over 10 distribution centres around the country, supplying over 13,500
customers per annum with a large range of products that exceeds 900 (e.g. fish
bars, restaurants, cafes, retailers, schools, hospitals and hotels), all of which
are manufactured and packed in South Wales (PFS website, 2012). The
company has been in the business for over 50 years and started as a small pie
manufacturer in Merthyr Tydfil (South Wales) supplying the surrounding valleys
with pies, sausage rolls and pasties (PFS website, 2012).
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In 2000/2001, the company acquired the trade and assets of Green Country
Foods Limited (GCF) (a sandwich manufacturer) to fill a gap that the company
had in its range of chilled products. However, this was found to be
unsuccessful and the trade and assets of GCF were disposed of in 2003,
costing the company a large sum of money.
Additionally, it was stated in the 2002 Annual Report that PFS had acquired
another company called Glanbia Food Service (GFS) to increase the
distribution side of the business and create a supply chain in the modern
Tamworth site, which was part of the acquisition. However, this also proved to
be an unsuccessful strategic move and ended with the disposal of the business
in September 2004.
However, PFS had a profitable history, as can be seen from Figure 6.5 below.
The company experienced a period of negative profitability and decline in
performance between 2002 and 2004, during which time cash flow was a
growing problem that was threatening operations. As can be seen in the figure
below, negative profitability was turned into positive profitability and the
company was turned around by 2006. The next few sections will investigate all
the key issues relating to the turnaround experience of PFS, to identify the key
lessons which can be learnt from this successful experience. The case, similar
to previous cases, will be investigated from a stage theory perspective guided
by the theoretical model developed in chapter two of the study.
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6.4.1 Decline stage
6.4.1.1 Recognition of decline
When the MD of the company Grim Wood (GW) was asked how did the
management recognise decline? He stated that:
The board recognised the decline simply because the profit flow of the
business had turned negative. We basically relied on a financial based
model and the operating profit turned into losses, the reserve started to
decline and the main thing was that the team understood the problem
that the cost of operation was much higher than expected. So it was
straightforward financial modelling.
GW added that negative profitability was a daunting sign of decline that alarmed
him to the worsening situation and stressed the need for quick actions to be
taken to tackle the problem.
2,569
-1,317
-4,965
-6,006
1,477
1,172
-7,000
-6,000
-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
2001 2002 2003 2004 2005 2006
FIGURE 6.3: PROFIT AND LOSS ACCOUNT FOR
PFS
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND
YEARS
Adapted from: (PFS Annual Reports, 2001-2006)
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6.4.1.2 Change of leadership
When GW was asked if any of the leadership of the company had been
replaced as an early step of the turnaround process he stated that, “Some
people have stayed through the turnaround”. GW explained that no changes
took place in relation to any of the ownership, leadership or the Board of
Directors, because the company at the time was privately owned and they
believed that decline was not caused by management error.
6.4.2 Analysis of decline situation
6.4.2.1 Viability and competitive advantage
When GW was asked if a viability check was carried out to see if PFS had a
good chance of recovery after the consecutive years of losses, he answered,
“The company was obviously viable; the problem was in one division which had
recently been acquired”. He also confirmed that PF was strong in all other
operations based on its long experience and being the biggest in the market,
this reassured the company that recovery would be restored.
6.4.2.2 Severity of decline and availability of cash
Findings from the Annual Reports indicated that the company had suffered mid-
term decline, according to various decline signals (as stated in Section 6.4.1.1).
However, it was found that the TMT was confident that the company would
overcome its problem due to a full awareness of the causes of decline.
6.4.2.3 Causes of decline
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Internal causes
It was found apparent from the Annual Reports of the company that various
internal factors had played an important role in the decline of PTS. These
causes are listed in detail as follows:
? An exceptional cost (£1.12m) of goodwill associated with the previous
acquisition of GCF Limited in 2001, was taken off the operating profits
bringing the company under the breakeven point in 2002.
? High cost of closure of GCF had brought the company to a negative
profitability position in 2003. For example, the disposal of GCF had cost
the company over £1.3m in redundancy payments and contract
termination costs, in addition to a £4m depreciation charge on the fixed
assets.
? Inefficiency and high cost of operations in GFS negatively affected the
final profitability.
External causes
There were also some causes that were out of the company’s control, which
can be listed as follows:
? A major long-term contract with one of the wholesale customers was lost
to a competitor in 2001, due to a decision by the customer not to renew
its contract when it came to an end. It was stated in the Annual Report,
“Turnover fell slightly and operating profit before exceptional goodwill
amortisation was reduced” (Annual Report, 2001:1).
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? Low profit margins on the distribution service to one of the company’s
major customers had participated in the fall of the company into a
negative profitability position in 2003 and 2004 (Annual Report, 2004).
When GW was asked about the reason for the bad acquisition, he stated that:
The company had been put in the position by one of its major
customers that it either lose all of its current business or acquire
another business, which at the time was the Glanbia Food
Service. The company decided to acquire this and when they
commenced the new contract, found that it was losing a significant
amount of money week in week out, month in month out.
GW explained in the interview that post the acquisition of GFS, customers were
not tolerant to any increase in the service prices provided to them from GFS.
This statement was supported by the Annual Report 2004, in which it was
stated that, “It proved difficult to reduce the cost base to a level at which
customer expectation on both price and service level could be satisfied” (Annual
Report, 2004:1). GW explained further that the team of management
understood the possible failure of the acquisition when they signed the deal, but
they felt helpless to reject the proposal made by that customer (who was their
biggest customer at the time) because they were worried about losing their
market share to competitors.
GW clarified that the difficult position that the company was put in, had led them
to make difficult decisions, which eventually led the company into decline. GW
reported that one of the main problems associated with the acquisition of GFS
was the huge operational costs; meanwhile the customers were not prepared to
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pay the right price for the service leaving no profits. GW explained the reason
behind that decision was:
That they were in the position of, win this business or lose that
business. Is that the customer’s fault? Well buyers try to buy as
effectively as they can. If all of a sudden they put the business in
the position of lose it or else, then sometimes decisions are made
out of desperation. You could not blame anybody for it. It was a
straightforward commercial advantage caused by the customer
thinking they can get a good deal.
6.4.3 Formulation, implementation and stabilisation of the turnaround
plan
When GW was asked if there were any changes in the company to manage the
company out of decline, he confirmed that one of the important changes which
took place, was that the Financial Department of the company had an increased
influence on operational and strategic decisions than previously. He explained
that:
Since the acquisition was an operational decision, then all of a
sudden the financial voice of the company got larger, so the
Finance Director was able to say no… this does not work. So,
where you would normally have the operational side of the
company winning the day, all of a sudden, because of the financial
under performance of the business, the financial side suddenly
had a much bigger voice on what could and couldn’t be done.
When GW was asked if they were short-term and long-term orientated during
this stage, his answer was:
Yes, we pretty much did, the short-term strategy was all about
stopping the profit bleed and the management implemented that in
the form of cutting as much cost as they could. The medium–term
strategy was trying to get some customers to pay more or get rid
of them and we managed to do both. So they managed to get
customers to pay more and got rid of business that was not
contributing much to the margin. Then the long-term strategy was
the asset divestment of the acquired company.
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The changes, which took place in the company, can be explained in respect of
the four major strategies in the next four sections.
Managerial restructuring
The MD reported that managerial restructuring was implemented in the form of
replacing some of the management in GFS with some management from PFS,
to keep a close eye on operations and any serious problems. For example, he
stated that:
There was a lot of attention put on the Glanbia division, which was
struggling to become more efficient. For example, David Peak the
Finance Director worked in that business for about six months and they
moved other managers to that division to make it as cost effective as it
could possibly be.
GW added that, despite the high cost of operations, if the customer agreed to
pay the right price for the service, the acquisition could have worked
successfully. However, since they did not want to do this, the management felt
helpless to make it work. Therefore, despite the managerial restructuring
activity, it was pointless because the problem was completely due to external
intolerance on the customer’s part to pay the right price for the product.
Operational restructuring
? Cost cutting
GW asserted reducing the cost base during the three-year period of 2002, 2003
and 2004 was critical to their recovery from negative profitability. He reported
that this was seen as the short-term option until further strategies took place in
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order to minimise the losses. It was reported by GW that spending was
restrained to a minimum across the whole business by increasing the pressure
on management.
? Cash generation
GW asserted that the portfolio of the company’s products and customers was
reviewed to eliminate weak ones, who were not contributing to their profit
margin and keep the ones that were profitable. GW reported, “It was very
much… very close focus on P&L (profit and loss account) lines and cost lines
and off course cash flow. Also, the management was very focused on being
efficient and as cost saving as possible”.
GW also added that various trials were made by the management to convince
the customer that a fair increase in the price of the distribution service offered to
them was due, but the customer was intolerant to any price increase for this
service leaving no option for PFS except to divest the GFS business.
Asset restructuring
? Asset divestment
It was found apparent from the Annual Report 2004, that the GFS business was
divested in September 2004 to eliminate the loss making operations,
concentrating on the profitable operations of manufacturing and the van
distribution service and return to profitability as soon as possible. It was
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reported in the 2004 Annual Report that this strategic move had allowed the
company to focus on its profitable operations in the PFS division, leading to a
reduction in the net liabilities by £7m in 2004.
Financial restructuring
The MD asserted that there were no loans borrowed from the bank and financial
liabilities were met from income, reserve and overdraft allowances. However,
he asserted that it was a hard task because the management had to make sure
they had enough money to pay wages and for materials. He asserted that
during that time, the bank had kept a close eye on the company to ensure
improvement in the financial position and provide help if the situation worsened.
Notably, the company’s management did not share problems with suppliers
because it was keen to meet all payments on time.
6.4.4 Recovery and return to growth stage
Further findings from the Annual Report of 2008, showed that the long-term
strategy evolved around continuing to maintain operational improvements and
continuously reviewing the situation, processes and customers to ensure high
levels of efficiency. GW asserted that many changes took place to stop the
company from falling into the same position again stating:
There is one very important lesson, which is that we have a set
percentage of our business for any customer, which is 20% to stop over
concentration on one customer. This was done to stop the problem from
happening again of letting the customer manage our business.
GW
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When the MD was asked, when did he feel the company had recovered? He
reported that they felt that their hard work to divest GFS had paid off when they
signed the sales contract. He added that they felt ready to move on, learn the
lessons and monitor all operations in PFS, to ensure the return of the business
to efficiency and growth.
6.4.5 Summary of the turnaround of PFS
The PFS case was found to be an interesting case study that had unique
circumstances. PFS was proven to be a successful company that has fallen
under the domination of one of its major customers, leading the company to a
negative profitability. However, the turnaround experience had introduced
many key lessons for PFS and highlighted some weaknesses in the
management that had to be altered and changed.
The turnaround of PFS can be concluded by eliminating the cause of the
decline in the first place. As was found apparent, the leadership of the
company (unchanged) had allocated the causes of decline, implemented some
operational restructuring strategies to reduce its overheads, generated some
cash and stabilised operations in response to high operational costs and low
profit margins. Additionally, some managerial restructuring activities took place,
by moving some of the managers around from the PFS site to the GFS site to
improve operations. Furthermore, in 2004 the company divested the GFS site
and eliminated all costs associated with that division as an important step
towards a return to profitability. Following this, the company achieved profits in
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2005 and implemented some longer-term strategies to maintain this
improvement in operations and profits, such as cost control measures,
increased sales and investment in processes and equipment.
6.5 CROSS-CASE ANALYSIS
This section is designed to analyse and discuss findings from this case, which
represents the second phase of the study which combined three large food
manufacturing firms (two based in Wales and one based in England), with
successful turnaround experiences. Following the same theoretical framework
across the whole study, this section will analyse and discuss findings from a
stage theory perspective, covering the whole turnaround experience.
Company
CD
GC
PFS
Decline Recognition of decline ? ? ?
Change of leadership ?
Analysis of
decline
Is the company viable for turnaround? ? ? ?
C
a
u
s
e
o
f
d
e
c
l
i
n
e
Internal
Bad management ?
Organisational factors ? ? ?
External
Political factors ? ?
Economic factors ? ? ?
Competition factors ?
Social factors
Technological factors
Formulation,
implementation
and stabilisation
of the plan
S
h
o
r
t
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring ? ? ?
Operational
restructuring
Cost cutting ? ? ?
Cash generation ? ? ?
Asset
restructuring
Asset divestment ?
?
Asset investment ?
Financial
restructuring
Debit restructuring
Equity restructuring
TABLE 6.1: SUMMARY OF THE CROSS CASE ANALYSIS (3 IN-DEPTH
UK FOOD MANUFACTURING COMPANIES)
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Adapted from: Annual Reports for CD, GC, PFS (2000-2010)
6.5.1 Decline stage
6.5.1.1 Recognition of decline
Findings from the cases in this chapter indicate that decline was recognised by
TMT in its early stages, mainly by looking at the financial ratios. Decline
signals, such as monthly financial losses (as in the case of CD), declined and
negative profitability (as in the case of GC), high cost of operations and
negative profitability (as in the case of PFS), have required the TMT in those
companies to take actions proactively to stop further deterioration and turn their
companies around.
6.5.1.2 Change of leadership
Change of leadership was emphasised in the turnaround literature as one of the
most important steps in company turnarounds. Findings from this second
phase of study showed that despite the importance of change of leadership at
the onset of the turnaround process, it is still not an essential component of
every successful turnaround if the cause of decline was not down to
management/leadership. This finds an echo in the turnaround literature as an
opposite view (e.g. Whitaker, 1990) to the dominant idea of necessity for this
Recovery and
return to growth
L
o
n
g
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring
Operational
restructuring
Cost cutting ? ? ?
Cash generation ? ? ?
Asset
restructuring
Asset divestment ?
Asset investment
Financial
restructuring
Debit restructuring
Equity restructuring
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-38
strategy to take place to initiate the turnaround process. For example, change
of leadership was seen as an essential element of the success of CD in its
turnaround, because it was reported that the cause of decline was related to the
lack of leadership in understanding the business, improving the business
operations in general and their sales strategy in particular. Meanwhile, in the
other cases (i.e. GC and PFS), change of leadership was found to be un-
necessary, because decline was attributed to causes that were not related to
lack of leadership.
6.5.2 Analysis of decline
6.5.2.1 Viability and competitive advantage
A viability check to ensure that the company is able to return to profitability is
essential to the success of the turnaround process as it determines if the
business is still worth the investment and the turnaround (Finkbiner, 2007). The
viability check relies on the allocation and identification of any competitive
advantages the company holds, which can be enhanced during the turnaround
process to help the company to recover. Consequently, and according to the
findings, the common competitive advantages, which companies must have in
order to be able to recover and turnaround, can be concluded in the following:
1. Being a holder of a big share in the market with a large customer base,
such as the case of PF, the biggest pastry producer in the UK with a
huge product list and GC the biggest pizza cheese manufacturer in
Europe.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-39
2. Long experience in the field of industry with (and skilled staff) various
links to customers, suppliers and competitors in the marketplace such as
the case of CD.
6.5.2.2 Severity of decline and cash availability
Findings show that cash availability is a critical element that influences the
decision of the turnaround as it seeks to determine if a company is able to
continue operations, while implementing the necessary changes. Findings
show that the three leaders of the case studies were confident that their
companies were able to turnaround, using their own reserves and usual
overdraft limits.
6.5.2.3 Causes of decline
When a company is identified as viable for turnaround, the next step is to
earmark the original causes of decline. Based on the findings discussed earlier
in the chapter, a conclusion of the common causes of decline can be drawn in
the following:
Internal causes
1. Bad management: Bad management as a cause of decline was found
evident in this case study. For example, lack of management to develop
a sales strategy in the case of CD was a critical cause of decline, leading
to heavy reduction in sales during 2002.
2. Organisational inefficiencies: Findings showed that internal
organisational inefficiencies have played an important role in the decline
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-40
of the three companies. For example, outdated equipment was causing
CD a huge energy consumption as reported by NGL. Furthermore, low
profit margins was another cause that was found in all three cases, which
brought them to negative profitability. In addition to this, lack of asset
utilisation was another cause found in the case of GC, as the company
was only operating four days a week, causing low productivity levels and
high volume waste.
External causes:
1. Economic cause: Findings show that high costs was the most common
cause of decline mainly in the form of raw materials. For example, the
increased cost of milk had caused low profitability in the case of CD and
GC as it was the main raw material used for production. It was explained
that prices could not be altered due to fixed contracts previously drawn
up. Additionally, increased energy prices were another uncontrollable
cause that led to lower profit margins.
2. Competition: Findings show that competition had also been found as a
cause of decline in the case of PFS as it lost one of its major long-term
contracts in 2001. This has led to reduced sales and operating profits.
3. Political causes: Findings show that new legislation relating to company
pension scheme contributions had participated in the decline of GC in
2005 in the form of exceptional costs of £604k.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-41
6.5.3 Formulation, implementation and stabilisation of the
turnaround plan
Findings from this phase of study show that a combination of various activities
and strategies are required to tackle decline and bring the company back to
profitability. The turnaround strategies, which were used during this stage, can
be summarised and explained as follow:
Managerial restructuring
As shown in Table 6.1, findings from this study reveal that managerial
restructuring was an essential component of the turnaround strategy during the
initial steps in all cases in this phase of study. According to the findings,
managerial restructuring was conducted in two forms and they were:
1. Appointment of a new Sales Manager who was able to target new sales
contracts and customers such as in the case of CD.
2. Restructuring the management team in one or more parts of the
company, to remove managers who form resistance to the new
turnaround strategy and put in place new managers who were able to
improve efficiency of operations such as in the case of CD, GC and PFS.
Notably, it was found that such a strategy was implemented in cases where bad
management was a participating cause of decline.
Operational restructuring
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-42
Findings show that operational restructuring (i.e. cost cutting and cash
generation activities) was a very essential component for the success of the
turnaround strategy for all three cases. According to findings, it can be said that
operational restructuring took various forms, which can be concluded in the
following activities:
? Reduce spending and overheads
? Replace unprofitable products with profitable ones
? Replace long-term contracts with short-term ones to reflect any increase
in raw material prices on final products
? Increase sales to growing customers
? Reduce energy consumption
? Improve utilisation of assets and increase capacity
? Introduce a discount system to boost cash flow
Asset restructuring
? Asset divestment
Findings from this case study showed that asset divestment was an essential
component of the turnaround strategy during the short-term phase, in the case
of CD and PFS. Accordingly, findings from the study revealed that the use of
asset divesture in CD was due to the loss made from the cheese making
operations. Therefore, all operations, machinery and equipment were divested
and sold off. Similarly, in the case of PFS, decline was mainly related to the
GFS division, which was a total cash loss with massive overheads from day
one. This finding supports the view that asset restructuring is highly essential in
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-43
cases where it suffers decline due to internal organisational inefficiencies,
characterised with high overheads in one or more processes/divisions.
However, the findings also revealed that this strategy is not essential to all
turnaround cases.
? Asset investment
Findings shown in Table 6.1 emphasise that investment strategy was used in
CD during the short-term to improve the outdated equipment and systems,
which was another major cause of decline for the company. In this context,
findings showed that the use of this strategy during this stage was highly
connected to the outdated equipment and loss making cheese operations with
low profit margins. This asserts that despite the importance of this strategy for
CD, it cannot be said this is required for all turnaround cases during the short-
term stage.
Financial restructuring
According to findings from this case study, it can be said that financial
restructuring activities were not adapted for any of the cases. However, it was
reported by NGL and PV that mentoring the exchange rate and the market
condition is critical to ensure total control of the situation. It was also reported
that the bank kept a close eye on the situation, to ensure that scheduled targets
were met according to the new plans.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-44
6.5.4 Recovery and return to growth
Findings from the study indicated that the most dominant strategy for the long-
term phase was operational restructuring. It was reported by the three
companies that cost cutting and cash generation activities were implemented by
the three companies in the same way during the short-term, to maintain
improvements and stabilise operations. Additionally, in the case of CD, further
investment was needed during the longer term to bring the manufacturing
facility up to date in order to stay competitive in the market and boost growth.
This asserts that long-term strategies stem and follow on from the strategies
which were implemented during the shorter term, if further improvement was
needed.
According to Table 6.1, the three companies have achieved successful
turnaround by having two or more years of profits in the three years following
the last year of decline. This success in turnaround can be attributed to the
achievement in analysing decline and selecting the appropriate turnaround
options, during both the short-term and long-term phases.
6.6 Modified model of successful business turnaround
The revised model of successful turnaround as shown in the following Figure
6.4, is the outcome of the cross-case analysis process. The model represents
the theoretical framework from literature (see Chapter two), the initial model of
successful turnarounds (see Chapter five) and findings from this phase of the
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-45
study (earlier in this chapter, which were obtained via multiple sources of
evidences). The figure represents the turnaround process from a stage theory
perspective emphasising the four key stages for any successful turnaround
process, i.e. decline stage, analysis of decline stage, formulation,
implementation and stabilisation of the turnaround process and recovery and
return to growth stage explained in the following sections.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-46
Recovery and return to growth
Successful Turnaround
(2 years or more of positive profitability
Positive
profitability
achieved
Operational restructuring
Maintain operation improvements
Asset Investment
NPD, staff training, new computer
systems & up to date equipments
Formulation, implementation and stabilization of the
turnaround plan
Mandatory strategy
(Operational restructuring)
Additional strategy
Managerial restructuring
Additional strategy
(Asset restructuring)
Additional strategy
(Financial restructuring
Cost cutting
Review all costs and
eliminate unneeded
Cash generation
Review products/
customers to remove
weak ones
Asset divestment
Divest unprofitable
operations or division
Asset investment
Invest in NPD, and
new equipment
Equity restructuring Debit restructuring
Keep/Appoint
dedicated managers
Remove resisting
managers
NO
Analysis stage
Identify causes of decline
Internal causes
Organizational
Inefficiencies
Bad management
External causes
Political
Economic
HIGH INTEREST RATE
HIGH COST OF
MATERIALS
Competition
Assess viability
Does the company hold a
competitive advantage?
Assess severity and
financial position
Is there enough cash
for the turnaround?
YES
YES
NO
Exit
Sale of business/ Liquidation
(Liquidation)
YES
Decline sage
Recognition of decline
Keep leadership
Communicate the plan
TMT
support
Stakeholders
support
FIGURE 6.4: MODIFIED MODEL OF MANAGING SUCCESSFUL TURNAROUNDS
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-46
6.6.1 Decline stage
As in Figure 6.4, findings show that decline is recognised in this stage and change
of leadership is usually executed as the initial step. However, change of leadership
was not a practise conducted by all cases in this study as only one company (CD)
exercised this strategy. Notably, it was emphasised that decline was very much
associated with the old leadership approach of management in relation to the sales
strategy of the company at the time. On the other hand, findings revealed that
such a strategy was not needed because it was attributed to external causes and it
was unlikely to be fruitful to do so. This goes in line with the view that change of
leadership is fruitless if they were not the original cause of decline (Whitaker,
1990). This finding supports previous case studies, in that despite changes of
leadership, it is imperative in some but it is not an essential first step and existing
management can participate in the turnaround of their companies.
6.6.2 Analysis of decline
This is the next stage following the recognition of decline and as highlighted in
Figure 6.4, it is a critical step in the process as the major key issues are identified,
located and used to support the turnaround options. Findings revealed that
leaders use financial ratios as well as other means of communication to get as
much information as possible about the situation in order to assess the company’s
viability, financial situation and major causes of decline. For example, NGL
reported that one of the things that he had to do was to approach the bank
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-47
immediately to ensure continued support through the turnaround. The other cases
were reassured about their viability on the basis of their strong position in the
market and availability of cash using their own reserves. Major causes of decline
similar to the previous case study, were mainly external in the form of increased
cost of energy, raw material and interest rates. Nevertheless, findings also showed
that other internal causes played a significant role in the decline of the cases. For
example, bad management, lack of sales strategy and unavailability of a dedicated
sales manager/team to target new customers in the case of CD, were all
participating causes of decline. Additionally, lack of profit margins, high inefficiency
levels in one division of PFS and lack of assets utilisation in GC had caused
negative profitability for both companies.
6.6.3 Formulation, implementation and stabilisation of the turnaround plan
As shown in Figure 6.4, the four major strategies adapted by the three cases are
emphasised in the model and were linked to causes of decline and the degree of
cash available as explained below:
6.6.3.1 Managerial restructuring
Referring to Table 6.1 and as shown in Figure 6.4, it can be said that managerial
restructuring was an essential component of those turnarounds. Notably, this start
was implemented in relation to specific causes of decline that were directly linked
to lack of management. For example, in the CD it was highly essential to appoint a
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-48
Sales Manager to target new customers to overcome the problem of relying on a
limited number of customers. Another case at GC was where some managers had
to be removed due to their resistance to the new changes in the company as
reported by PV. The model emphasises the importance of ensuring that the whole
workforce understood the new changes that needed to take place in the company
and be capable of supporting the new plan.
6.6.3.2 Operational restructuring
As shown in Figure 6.4, operation restructuring remains the most common strategy
adopted by companies in decline, due to its aims and objectives of reducing all
spending to reserve cash, while generating as much cash as possible. Findings
showed that cost cutting activities were implemented in the form of overtime
reduction and stoppage of loss making operations, such as in the case of CD and
reducing energy consumption as with GC. Additionally, cash generation activities
(such as new invoice systems in the case of CD, flexible contracts and increased
sales such as in case of GC and quick elimination of weak products and customers
such as in the case of PFS) were found to be critical to the turnaround of all cases.
6.6.3.3 Asset restructuring
Referring to Figure 6.4, it can be said that this strategy was key in the case which
suffered internal organisational inefficiencies and external competitive causes. For
instance, findings from this case study showed that asset divestment was the key
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-49
option to remove the high cost of loss making cheese operations as with CD, by
selling off all equipment, stopping all cheese operations and using the money to
invest in the new butter churning process. Another supportive case was PFS
which fell in decline due to high overheads and inefficiency of GFS. Divesting GFS
in 2004 was the key to PFS recovering and turning around. The model
emphasises the importance of this strategy to companies that struggle to improve
the efficiency of their operations and bring costs under control.
6.6.3.4 Financial restructuring
Figure 6.4 shows another strategy that was found vital in the previous case study.
However, findings indicate that none of the three cases adopted any of the
activities within this strategy, despite the fact that high interest rates were a
participating factor of decline. This was due to the amount of cash made available
during the turnaround using the company’s own reserves to cover daily operational
expenses.
6.6.4 Recovery and return to growth
By the end of the previous stage and before the long-term strategies are
formulated, a company in decline should have reached a breakeven point or
positive profitability. This reduces pressure and allows time for the long-term
strategies that will take the company to the next stage of recovery.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-50
As shown in Figure 6.4, two major strategies were found to be the vital component
of the long-term objective. Operational restructuring remains a critical element to
ensure total control over costs and cash flow position, by increasing efficiency of
operations and continuing the review of products and customers to ensure high
profit margin and increased sales.
Additionally, investment strategies are also critical to the success of any case as it
aims to improve efficiency, profitability, better utilisation of assets and greater
control over inventory by placing investments in NPD, staff training and up to date
equipment.
6.7 Summary
The chapter discussed and analysed the successful turnaround experience of
three large food-manufacturing companies, in order to highlight the key issues
relating to successful turnaround. The chapter covered all the key issues from a
stage theory perspective in line with the theoretical framework developed in
chapter two and the initial model of successful turnaround developed in chapter
five.
This chapter has presented an analysis and discussion of the results of the case
study of three large food-manufacturing companies from the UK, which underwent
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-51
a turnaround between 2000 and 2010. Section 6.2 concluded the turnaround
experience of the first case study i.e. Castle Dairies (CD) by investigating and
analysing the key issues of turnaround management in the light of this company’s
experiences, with emphasis placed on the steps and actions taken during each
stage of the process.
Section 6.2, 6.3 and 6.4 concluded the turnaround experience of the case studies
i.e. Castle Dairies (CD), Glanbia Cheese Limited (GC) and Peter’s Food Services
Limited (PFS) accordingly by investigating and analysing the key issues of
turnaround management in the light of this company’s experiences with the
emphasis on the steps and actions taken during each stage of the process. Section
6.5 presented a cross-case analysis of findings across all three cases. The cross-
case analysis was guided by the four key stages of the turnaround process
concluded from the literature (see Section 2.2.3) and supported by the process of
categorising findings into patterns to identify the key similarities and differences
between all companies to draw a general idea of how successful turnarounds are
executed.
Section 6.6 introduces a revised model of successful turnarounds. The model
presents the key stages a company should follow during the turnaround process.
The model emphasises the three elements of turnaround i.e. the process of moving
from one stage to another to ensure an effective implementation of internal
changes within the company, the content of the turnaround plan by selecting the
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correct set of strategies linked to certain causes of decline and the context of when
and why those strategies are implemented. This section is followed by a summary
of the whole chapter.
The next chapter should investigate in depth all the issues highlighted in the
revised model through conducting interviews with a panel of experts working within
the turnaround industry.
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-1
CHAPTER SEVEN
ANALYSIS, DISCUSSION
AND DEVELOPMENT OF BEST PRACTISE
MODEL
7.1 Introduction 7-2
7.2 Decline stage 7-5
7.3 Analysis of decline 7-12
7.4 Formulation, implementation and stabilisation of the turnaround
plan
7-18
7.5 Recovery and return to growth stage 7-27
7.6 Good practise model of successful turnarounds 7-28
7.7 Summary 7-33
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-2
7.1 Introduction
This chapter is designed to achieve objective four of this study, i.e. develop a good
practise model of successful turnarounds. This model represents and concludes
key issues arising from the review of literature (see chapter two), findings from both
phases one and two of case studies (see chapters four, five and six) and finally
findings from this chapter, using the inputs and feedback from an expert panel.
This chapter presents information attained from eight specialists who work closely
with the turnaround industry. According to document analysis and interviews, it
was found that there are two types of specialist who mainly concentrate on
managing companies in a state of decline/distress. They are turnaround
practitioners (TP) or chief restructuring officers (CRO) and insolvency practitioners
(IN). Each type has a different concept and approach to the turnaround process
according to their experience, nature of the job and their legal status when dealing
with companies in decline. It was noted in the Best Practice Guideline (BPG)
(2011), that those types of managers appeared when some executives with a
specific set of skills to work with on an interim basis, were needed to implement
change (BPG, 2011).
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-3
In order to understand better the difference between the two, the following table
was developed to show the main key differences between the two types of
specialists according to findings:
Role of
specialist
Turnaround
Practitioner (TP)
Insolvency
Practitioner (IS)
Background
Operational/Managerial/Financial Accountancy
Appointed by Shareholder/Bank Government/Creditors
Timeframe Short/long term Short term support
Loyalty To shareholders (unless business
falls insolvent)
To creditors
Legal obligation
and definition
No defined role or responsibility in
UK law (unless took a directory
position in the company)
Role defined in law
Turnaround Aim
and scheme
Consensual restructuring
(Non-formal turnaround
arrangements) i.e. CVA, Scheme of
arrangement, and Pre-packs
Non-formal/formal
arrangements with the
insolvency acts i.e. CVA,
or/and Formal insolvency
filling
As was highlighted in the table above, each type of practitioner aims to turnaround
the company in the best possible way. However, the difference between the two is
that a turnaround practitioners’ top priority is to use any possible technique, apart
from formal insolvency. The reason for this, as is explained by TPAT1 in an
interview, is that formal insolvency may damage the business when creditors,
customers and even staff find out that the company is in trouble.
Table 7.1: Turnaround practitioners vs. insolvency practitioners
Adapted from: BPG (2011)
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-4
Company Voluntary Arrangements (CVA) and Schemes of Arrangements are
techniques that help a company in decline to set up agreement between its
creditors and stakeholders, to freeze and pay debts in full without entering formal
insolvency (BPG, 2011). The difference between the two is the earlier is a formal
insolvency process under the Insolvency Act 1986 while the latter is not.
Additionally, Pre-pack is another technique that companies can use to ensure
continuity of operations by transferring all assets to a new owner (usually one or
more of the Company Directors) with a lower value to avoid creditors liability (BPG,
2011).
Two sources of evidence were used to collect the required data. The first method
was semi-structured interviews, in which four interviews were conducted with
turnaround practitioners and four further interviews with insolvency practitioners,
who participated or managed in at least one successful turnaround. This was to
ensure that the selected individuals had enough experience and knowledge about
the major key issues relating to the turnaround process. The second method was
document analysis, relying mainly on documents provided by those specialists on
the day of interview or sent later via email, containing some case studies and rich
data relating to previous turnarounds or current models used in their daily
operations.
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-5
The investigation process was guided by the revised model of successful
turnaround (see Figure 6.4), with emphasis on the turnaround process stage by
stage, to ensure the flow of rich information and to explore any issues that may
influence the turnaround process. Findings will be discussed and analysed in the
following section accordingly with the stages of the turnaround model developed
earlier in chapter two.
7.2 Decline stage
7.2.1 Recognition of decline
When the practitioners were asked, how do they recognise decline in a company,
they agreed that this is the most important issue as a company’s leadership usually
fail to recognise decline early enough. For example, TPAT1 stated that, “This is
the $64,000 dollar question, in fact one of the biggest issues is actually getting
management to recognise decline and we call it management in denial”.
Relatively, it was reported in the BPG (2011) that the decline of any company has
four stages and they are; underperformance, distress, crisis and failure and the
earlier a company seeks help, the higher the chance for them to turnaround while
the resources are still available.
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-6
Furthermore, TPDB2 explained why most companies leave it too late before asking
for help, those company’s leaders only realised the situation when they had serious
liquidity and cash flow problem. TPDB2 stated:
Normally most of the businesses we deal with have been in decline
for some time, but the real trigger is liquidity, cash flow. Once they
are struggling to meet their liabilities, as they become due, that is the
point which most businesses are forced to start looking for help and
assistance, it would be nice if they asked for it earlier, but they rarely
do.
Relatively, TPDB2 and TPWM4 added that, in many cases the turnaround option is
easy enough to implement, but because of the position the company has gotten
into with the lack of cash, the turnaround option becomes difficult. TPWM4 gave an
example stating that:
Liquidit
y
Time
Zone of insolvency
Underperformance
Distress
Crisis
Failure
Figure 7.1: The Decline Curve
Source: BPG (2011)
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-7
You could look at it and say, actually, we need to make some
redundancies and we have the cash to do it. Whereas if you leave it
late, which they nearly always do, until they are forced into it, it is
human nature, you can’t help it to some extent, but the later they
leave it the more constrained you’re going to be in what you can and
can’t do.
Consequently, it was reported in the BPG (2011) that early recognition of decline
signals increases the chance of a company’s survival and accordingly a successful
turnaround. This concluded that lack of cash flow and liquidity problems are real
decline signals/triggers that alarm the company’s leadership and show that help is
critically needed and that a new CEO/temporary turnaround management may be
needed. However, this remains a real challenge in the field of turnaround, as
turnaround options and possibility of recovering a company is limited by the time
and resources available for the turnaround.
7.2.2 Change of leadership
When the practitioners were asked about the necessity to change the leadership
as an initial step to set off the turnaround process, findings showed that all
interviewees agreed that it is not an essential step at the onset of the turnaround
process. Instead, appointing a professional turnaround leader/team to take charge
of the company temporarily and to work closely with the existing leaders would be
an appropriate decision. It was emphasised in the BPG (2011) that a turnaround
leader brings focus, priorities, experience, energy and creditability to the
turnaround process, enabling him/her to manage key issues with stakeholders,
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while the existing leadership manages the daily operational side of the business
(Bryan et al., 2011).
For example, INTC2 and TPSA3 have both reported that it is important to analyse
the situation and reveal the severity and causes of decline and then draw a
strategy that might include a change in leadership or might not. Similarly, TPAT1
states that in some cases:
We may have to get rid of some managers, we would prefer not to
because it is actually value destructive to get rid of people and it
costs money. We go in with an open mind and we recognise that
very often in the top management; it depends on the size of the
company, we normally find that people are sticking to strategies that
are failing out of egotism or whatever… we can often persuade them
and turn them around and get them going.
Additionally, INTC2 reported that some of the problems are linked to the leadership
and finding out how many problems the company are experiencing are actually
linked to poor leadership. This will make a change of leadership a possible
strategy. On the other hand, TPSA3 reported that change of leadership is not a
priority at the early stage of the turnaround process because:
Hiring a turnaround specialist is like hiring a lawyer, it is a specialist…
management are not ever hired for their ability to turnaround
companies in distress, they’re hired for other management expertise.
Hiring a turnaround manager should not in any way signal failure on
the part of management, in fact failing is not recognising the
problems and they should not feel appalled about appointing a
turnaround specialist.
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INNC1 reported that speaking to all decision makers at the beginning is
fundamental to reveal the key issues and the situation as a whole and identifying
the real problem, because in many cases it is not possible to get rid of a senior
manager. INNC1 gave an example stating that:
I had an example where two brothers were definitely not agreeing
with the strategy. We met with one of them and then met separately
with the other and we got to a point where we said, unless you’re
both in the room and we sort out the problem you have got with each
other, then I’m just not going to go any further with the advice.
INTC2 supported the above statement emphasising that turnaround managers like
to work with the existing company’s leadership team, because they know the
customers, the product and the business, while the turnaround managers are
experienced in how to manage a business in the zone of insolvency and engaging
with stakeholders. However, findings from the BPG (2011) revealed that the
successes of the turnaround strategy, heavily relies on the company’s recognition
of the importance of appointing a turnaround manager as early as possible,
because of the denial of existing leaders to the problems that may lead the
company into a total failure.
It can be concluded from the above findings that change of senior
management/leadership is not the preferred/easy decision by the turnaround
managers at the early stage of the turnaround process and instead the turnaround
management prefer to advise and support existing management. INTC2 reported
that they do not go into a company with a pre-judged idea that some of the senior
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management has to be changed, because it would be destructive. In addition to
the huge cost involved, those managers are usually on large contracts and liquidity
is normally a problem by that stage.
7.2.3 Communicating the turnaround plan with stakeholder
It was emphasised in the BPG (2011) that whatever the strategy is, it should be
communicated internally and externally in order to maximise the possibility of its
success. Internal communication should be made with staff and management to
ensure a clear, positive message about the problem has been identified and the
proposed plan given, which will recover the company. For example, it was stated
that:
Once CRO or a turnaround manager is appointed, employees will be
contacted by customers, suppliers and service providers assessing
their risk and exposure. Ensuring the right message gets back is
important. From the outset, a clear message should be
communicated internally and advice on how to field calls should be
given. The message should be objective and factual.
Furthermore, it was emphasised in the above statement about the importance of
delivering the right message, as it was clarified that inaccurate gossip could
damage the reputation of the business and thus the chance of the company’s
recovery and turnaround, especially in a market with tough competition (BPG,
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2011). Relatively, communication with directors and senior management should
be carried out with professionalism and all decisions should be properly discussed
and recorded for monitoring purposes, to ensure high levels of corporate
governance (BPG, 2011).
Nevertheless, findings from the BPG (2011) shows that communication with the
external environment is as critical as internal communication, especially with major
creditors and suppliers. It was reported that communication should be made
practical and quick. It was also reported that it is critical to identify stakeholders
with vested interests, to include them in the dialogue, stick to promises and keep
up with payments.
Moreover, findings from the BPG (2011) emphasised that customers are one of the
most critical stakeholders in the company during the turnaround. Therefore, early
communication should be made with key customers to draw a clear picture of the
turnaround plan and restore loyalty and confidence. It was also reported that early
communication with customers would help the turnaround leader to identify the
market drivers.
Additionally, other stakeholder such as landlords and pension trustees should be
considered early in the process, especially when their legal rights and obligations
might require certain turnaround options (BPG, 2011). In addition to this, it was
emphasised in the BPG (2011) that HMRC and taxation should be considered
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early in the process when planning the turnaround strategy. For example, tax or
VAT on capital gains of sold assets, may negatively impact the turnaround if not
deferred to a later stage and covered by operational improvements (BPG, 2011).
Based on findings and depending on the information revealed from the analysis
process and the amount of pressure the company is under, available resources,
time, causes of decline and changes in leadership could still remain an option in
some cases, especially when existing management is not willing to work with the
turnaround team. This should be implemented when time and cash allows them to
do so. For example, TPDB2 stated that, “If you are saying short-term is from now
to three months, yeah I wouldn’t look to rock the boat to that extent, unless the guy
is a complete and utter crook”.
7.3 Analysis of situation stage
This stage is one of the most critical stages of the turnaround process, during
which the turnaround manager/team seeks to uncover the various elements that
have led the company to decline, as well as any other factors that may impact the
success of the turnaround process.
When the interviewees were asked about the tools they use in conducting their
analysis of the decline situation, they all reported that mixed methods are used to
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get the information they require about the company. For example, findings from
the BPG (2011) have revealed that when control over cash has been applied, it is
important to maintain an accurate level of financial and non- financial information
flow. This will help turnaround leaders to effectively engage with stakeholders and
negotiate any proposed plans (Bryan et al., 2011).
TPMW4, INTC2, INTS4 and TPSA3 confirmed that that profit and loss accounts
and balance sheets can provide some clear information of the cash flow position.
TPDB1 added that the aim is to identify all issues through a detailed analysis of
cash flow to see how and what caused the decline. He stated:
Is it lack of profitability, have they had working capital issues and not
been controlling them well, have they had external shock, a customer
themselves gone bust or a contract cancelled or something like that,
or a big change in foreign exchange rates, commodity prices, it can
be anything. You’re trying to get to what’s really caused this... you
know.
On the other hand, TPAT1 and TPMW4 reported that the financial accounts are
usually inflated and may not be accurate by that stage and therefore, other
methods should be considered as an addition, such as talking to customers,
managers and many others in the business to get the real picture. Similarly,
TPSA3 reported that, in a situation with variables, the initial approach would be
financial information and discussions with management to get an overview of the
position. He further stated that, “Despite it sometimes not being up to date and of
poor quality, it will at least give us the bones of the financial position”. INNC1
reported that the type of financial information they look for varies from what is in
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the balance sheet, such as value of assets and liabilities, value of secured credits,
fixed cost payment positions and the situation of credit repayments.
TPDB2 and TPMW4 have both asserted that the analysis process has certain
characteristics that should be considered. For example, TPMW4 reported that it
must be high level, quick and searching for immediate threats to the company’s
survival during the first few weeks. Similarly, TPDB2 stated that:
We look for what is going to kill this business in the immediate future.
Where are the problems coming from, are the banks going to pull the
plug and put the company into administration or is HMRC going to
bring in the bailiffs.
7.3.1 Viability and competitive advantage
When TPDB2 was asked about the process of assessing a company’s viability
importance in having a competitive advantage he stated that:
Right up front you’re going to look at this and say is this... as part of
our initial assessment, does this look like a viable business? Is there
a viable business here? It may not be all of it, but is there something
here that can be turned around and can come out the other side as a
viable, successful business.
TPDB2
Similarly, INJS4 reported that flowcharts look at whether the company has a
reason to exist or not, what are the competitive challenges, what is the “unique
proposition” as he described it, in serving the customer or the market. He further
stated that, “A competitive advantage and a reason for being, because it does have
to have a reason for being”. Furthermore, it is the turnaround manager/team’s job
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to go into the company, identify all the facts, draw a clear picture of the current
situation and act quickly with full understanding whether this business has the
ability to recover or not (INJS4, BPG, 2011). INTC2 emphasised the importance of
the competitive advantage stating:
If a company has got a demonstrable competitive advantage, it
should be relatively easy to convince some equity provider to back
the business. It becomes challenging where it doesn’t have an
obvious competitive advantage and then you’ve got to prove that the
changes that you can make, are going to deliver that advantage.
TPMW4 explained that a company doesn’t have to be the market leaders to be
able to survive decline, but it has to at least have something that keeps it in the
market. Consequently, and building on that, TPAT1 and INJS4 reported that one
of the most important strengths a business can have as a competitive advantage,
is a good relationship with its customers. TPAT1 explained:
The first thing we need to know is, is it a viable business, does it have
a product that customers will buy and will they buy at a price where
the company will make money. You call it a competitive advantage; I
have a bit more blunter way of doing it. You can’t run a business
without customers, you go out of business without accountants, but
you can’t run a business without customers. The first thing you’d
have to do is to get in there and look and say as you say does it have
a competitive edge? Does it have a product? Don’t talk competitive
advantage, it’s all economic rubbish... does it have a product and will
that product sell? And will it sell at a profit?
TPAT1
Furthermore, TPAT1 reported that it is important to have the people who can
determine which products give the company a competitive advantage and which
cannot. He further stated that:
Those people must quickly understand and decide what products are
viable and what people in the organisation can actually get that
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message across into the marketplace, to help you determine viability,
a business plan and who’s going to deliver that business plan,
because you know how to maximise your business to its advantage.
TPAT1
This finding supports the view from the literature and results from phase one and
two of the study (see chapters five and six), to confirm that it is essential during the
early steps of the analysis process to ensure that the business has a competitive
advantage that can help the company to recover. Furthermore, findings reveal that
the competitive advantage doesn’t have to be the best product/service in the
market or the biggest company in the industry but the company must have a
product/service that customers want and can sell in the market profitably.
7.3.2 Severity of decline and cash availability
Not all companies in decline can, or should, be saved. Therefore, it is the
turnaround managers’ task to decide whether the company is viable for turnaround
or should it be liquidated (BPG, 2011). TPDB1, TPWM4 and TPSA3 reported that
this decision depends heavily on the severity of decline, cash flow position and the
amount of the investment required for implementing the turnaround strategy.
Additionally, TPDB2 added:
“If you know that you are never going to reach that level of
investment, so you sell it to someone else who is able to place that
investment, it is only a matter of weeks before you have to go to
lenders and creditors and say look here is the plan. Or, on the other
hand, you might conclude that there is nothing that can be saved and
then you have to really file for insolvency.
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When TPMW4, TPDB2 and INTC2 were asked about the initial steps they take
during the early days of this stage, they all reported that a financial position
analysis is critical at this time of the process to ensure that the company has the
resources and capability to recover. For example, INTC2 stated that:
The first thing we would evaluate is looking at the very short-term
cash flow position, probably for the next three months and that would
be weekly for the next three months, to make sure that we can
survive until then. Because if you're going to implement any
turnaround plan, the chances are, it’s going to take you three months
before perhaps some of those changes of strategy begin to have an
effect.
In support of this, TPMW4 asserted that the first step revolves around identifying
what the problem is, severity of the situation and what the available time and
resources are. INTC2 similarly emphasised that they would also focus on
identifying the financial position of the company in terms of assets, liabilities and
value of equity. In addition to this, INJS4 added that identifying the company’s
future marketing and sales plans to fulfil the changing needs of the market is of
interest, because this will determine the amount of cash needed to support their
future strategy.
7.3.3 Causes of decline
When TPAT1, TPMW4 and INTC2 were asked about the common causes that lead
most companies into decline, they stated that there are various causes, which
contribute to the decline of a company. However, TPAT1 clearly stated that, “95%
are due to management. They are due to management not recognising changes in
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business circumstances and not acting quickly enough or in some cases they are
due to management embarking upon over ambitious projects”. In addition to this,
TPSA3 reported that lack of cash flow and increased pressure from creditors are
major causes/signals of decline. TPAT1 stated that:
Unfortunately, too often when companies are on the decline curve
neither they nor shareholders or interested parties... or the people
that can affect change, actually action change and so too often
companies drift into a near insolvency situation when they have to
take action because of creditor pressure and lack of cash flow.
Furthermore, INTC2 reported that liquidity and lack of cash flow are the primary
cause of any company’s failure, as companies don’t fail and become insolvent
when they don’t make profits, they fail when they cannot meet the payroll or
ultimately when the bank forecloses on them.
7.4 Formulation, implementation and stabilisation stage
When the interviewees were asked about the common strategies that are widely
used by turnaround managers in the industry, they all reported that there is no one
strategy that suits every turnaround case. However, TPSA3 reported that a
turnaround strategy depends on the turnaround manager and the vision that has to
be developed for the business. When the vision is clear about where this business
needs to be, the strategy is developed to support that vision and starts to flow from
it. Then the action plans flow from each of those strategies.
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According to literature, the turnaround manager/team’s main task is to help the
company to relieve the pressure from creditors, improve liquidity and generate
cash. This was supported by the statement of TPDB2 that, “At the end of the three
months in my terms, what I would expect is that we stabilise the cash position to
develop a strategy and a business plan for the next 12-18 months, by which time
you would hopefully have become capable of being funded to implement that
strategy. In other words, TPAT1 reported that the main aim to get the situation
under control is to identify the pressure source and engage with major creditors to
relieve that pressure.
7.4.1 Managerial restructuring
When the interviewees were asked about the use of managerial restructuring as a
component of the turnaround strategy during the process, findings showed that this
action is conducted in the hope of getting operations under new management
control. However, and similar to change of leadership (see Section 7.2), it was
reported that such a strategy is not preferred during the short-term phase, due to
many factors that might make it difficult to execute. Instead, the focus should be
on stabilising the situation and delaying any managerial restructuring to the long-
term stage where possible.
Based on the findings revealed above and earlier in the chapter (see Section
7.2.1.2), managerial restructuring is not the favourite option of any turnaround
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leader during the short-term phase. However, it could still remain an option in the
long-term where resistance to change is present. This finding disagrees with many
authors who reported that managerial restructuring is essential during the early
steps of the turnaround strategy, regardless of the cause of decline.
7.4.2 Operational restructuring
When interviewees were asked about the role of operational restructuring
strategies during the turnaround process, findings showed a wide agreement
between all participants that the strategy is highly essential during that whole
turnaround process and not just the short-term. For example, TPAT1 and TPSA3
have confirmed that the objective at that time is all about getting the business fixed
and eliminating all the issues, problems and operational improvement solved. For
example, TPDB2 reported that:
When the business is stabilised, you can then go out and say well
alright what is the right capital structure for that business now going…
it may be a somewhat smaller business, the nature of it may have
changed a little bit, you might say well this is probably the best way to
fund it, or we need more equity, do we need more debt, do we need
changes in most of the things. And you could not do all this until the
business has reached a point where you can say… yes, the business
has improved.
7.4.2.1 Cost cutting
It was stated in the BPG that a turnaround is not solely about cutting costs.
However, it was clearly emphasised that cost cutting is the best practical way to
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improve the bottom line during the short-term. Similarly, TPMW4 reported that
managing costs is highly essential in the short-term phase and managers have to
find ways of dealing with costs quickly. However, he emphasised that it might not
be easy to do so due to some constraints. He gave an example stating:
Say well actually we need to make a whole load of people redundant,
but there’s going to be a cost to that redundancy so you might say
well it will cost us X now and we know we’ll save Y per month, so
within six months it will have paid for itself, but actually have you got
the cash up front to be able to do it. If not, can you get it, where are
you going to get it from? So some of those things are fairly
straightforward in that yes you ought to do that, but not always quite
as easy to achieve once your cash constrained and that is one of the
biggest problems you have with most actions.
Also, TPDB2 and TPAT1 reported that despite the fact that little can be done to
control costs by the time turnaround managers, it is highly important that all cash
activities are brought under the direct power of the turnaround manager/team to
ensure it is controlled in the best manner. Similarly, it was stated in the BPG
(2011:7) that:
It is important that executive control over cash management is
assumed. On large assignments, this may be done by parachuting in
a dedicated cash manager. In other assignments where there is a
capable accounting function, control can be achieved by delegation
and tight daily management.
Bryan et al. (2011)
It was also reported in the BPG (2011) that payable accounts should be prioritised
and paid to creditors, in line with the amount of pressure they apply on the
company. It was emphasised that they need to continue supply while clearing old
balances, all as part of the agreement. This gives the turnaround team the
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opportunity to restore confidence in the management team as a whole and in the
company’s ability to return to profitability, as long as arrangements have not been
interrupted (BPG, 2011).
Moreover, it was stated in the best practice guide that other unnecessary costs
during the short-term can be cut such as marketing, design and travel costs etc.
However, it was noted that the turnaround leader should be careful not to cause
irreparable damage by implementing too much cost cutting (Bryan et al., 2011).
7.4.2.2 Cash generation
TPAT1 reported that all business plans start from a credible sales plan that is
saleable to stakeholders. He emphasised that increasing sales and keeping it
going is ultimately the source of cash for the business during such a critical time.
However, in contrast, INNC1 reported that in his insolvency firm they tend to
generate cash by increasing the profit margin and not increasing the volume of
sales. He explained that:
We‘re just being prudent, it might be a very good reason, it might be
a step, I’m saying we as a firm tend to say, try and find the things that
don’t involve an increased turnover, margins are fine. So in other
words if you kept your turnover flat but you had an increase in the
margin, of course that helps you to move from loss to profit.
INNC1
Furthermore, TPSA3 emphasised the importance of cash generation strategies
stating that, “During the early days and weeks of the process, we try to get a
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handle on managing the cash; we look for what we call, how we can improve
liquidity”. In addition to this, it was reported that various actions can be taken
within this strategy, aiming to generate cash such as chasing overdue debtors,
settling disputes and payment delays, introducing early payment discount systems
and increasing product prices.
Notably, the BPG (2011) provided findings that in many cases, sales teams feel
reluctant to increase product prices due to expected resistance from customers.
However, it was emphasised that the competitive analysis conducted earlier in the
turnaround process, will help the turnaround management to decide which
products can have their prices increased. It was also reported in the BPG (2011)
that as long as the price increase has been introduced in the appropriate way,
customers are likely to tolerate it appreciating the value of the company, as an
essential supplier in the chain.
7.4.3 Asset restructuring
7.4.3.1 Asset divestment
When interviewees were asked about the importance of this strategy during the
turnaround process, findings showed that this strategy had a strong presence in a
lot of the turnaround cases. For example, TPMW4 and TPDB2 have reported that
it is highly important during the short-term in cases where a cash loss unit or
division has been identified. However, he further explained that this is conditional
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on the availability of cash to implement the strategy, which may not be available
during the short-term phase. TPDB2 stated:
You’ve got to ask yourself, is this worth keeping or is it just something
you get rid of, shut it down even, whether you sell it, close it,
whatever, you know there’s ways and means. It certainly will help
you; really what you’re looking at is where you are bleeding cash
from.
Similarly, it was emphasised in the BGP (2011) that disposing of unnecessary or
failing assets, even for below its book value, can generate cash, which could be
used to maintain remaining operations and assets. TPMW4 reported that asset
divestment could also be implemented for businesses that are not loss making. He
explained that if the business is not a core business, then the conclusion might be
that it would be profitable if sold off and the money used for the core businesses
that have better potential. He gave an example stating:
One we did in Spain a few years ago that was sold off very quickly,
normally for next to nothing because it was rubbish, but it was just get
rid of it because it was bleeding cash.
TPMW4
Notably, in contrast, it was reported in the BGP (2011) that in some cases,
disposing of a loss making unit or subsidiary should be avoided in cases where
that unit/subsidiary is critical to the running of the core operations.
7.4.3.2 Asset investment
When the interviewees were asked about the use of this strategy during the
turnaround process, findings showed that it is dependent on the amount of cash
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available and the value that investment is going to generate afterwards. For
example, TPDB2 stated that:
You have to look at what’s viable, what’s going to come out the other
side of it. You may have something that’s a good viable business, but
if it needs a massive amount of investment, you might say well
actually we’re just not ever going to be able to make that level of
investment so we would say let’s sell it, let somebody else take it
further.
Furthermore, TPAT1, INNC1 and INJS4 have reported that a turnaround strategy
is a combination of many strategies that aim to stabilise the business in the short-
term. However, asset investment strategies tend to be long-term due to a better
cash position and creditors and banks lack of trust and willingness to provide
further financial support, until they have seen a creditable plan supported by short-
term improvement.
7.4.4 Financial restructuring
Financial restructuring is a strategy that aims to reduce the pressure applied by
creditors and stabilise the cash position by negotiating existing/new repayment
arrangements for better terms of equity. When the interviewees were asked about
the importance of this strategy during the turnaround process, findings showed that
it played an important role in the success or failure of the turnaround process of
any company. For example, INTC2 believes that there are two main turnaround
strategies, i.e. operational turnaround and financial turnaround. INTC2 also stated
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that, “The two for me go hand in hand, because there is no point doing a rough
financial turnaround that is restructuring the balance sheet, if you are not going to
follow that through with an operational turnaround”. However, in contrast, TPDB2,
TPSA3 and INNM3 have all reported that the use of financial restructuring
activities, i.e. equity and debt restructuring, tends to be a long-term option rather
than short-term, due to the lack of trust in the business to repay its debt. TPDB2
stated that:
If you’ve got something that’s particularly onerous here, perhaps
you’ve inherited or you’ve got a deal that was done years ago at a
huge rate of interest compared to what’s in the market now, then yes,
you might be able to do something about it. But you know it’s still
kind of hard because you’ve still got to go out into the market and
interest rates might be lower but you’ve got to go and try and
convince somebody they should lend to you when you are teetering
on the edge”.
TPDB2
Similarly, TPMW4 reported that it will always be difficult during the early weeks of
distress of any sort; any lender is going to look at the business as a higher risk, so
it is more likely to increase the interest rates rather than reduce them. He stated:
In some ways some of this operational restructuring stuff and maybe
diversity and other bits and pieces, you’ve almost got to be delivering
that before you can go back to the bank and say the business is
improving and it’s pretty much there, it’s becoming profitable, it’s
starting to generate cash and we want to look at the interest rate and
the terms.
In relation to this, findings show that there are two approaches to financial
restructuring and they are, “consensual and non-consensual” as described in the
BPG (2011:17). Consensual restructuring aims to restructure the business and its
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assets financially outside formal insolvency, by restructuring the debt for a new
debt or equity (BPG, 2011). However, in cases where a growing pressure from
creditors is present and creditors are not willing to support the turnaround plan
outside insolvency, a non-consensual approach might be more appropriate.
According to BPG (2011) non-consensual restructuring includes; a company
voluntary arrangement (CVA), schemes of arrangements (SOA) and pre-packs
(PP). According to findings from the BPG (2011) as shown in the table below,
each one of these techniques aims to give the company the space and time it
requires to pay creditors while continuing with the turnaround.
CVA SOA PP
Definition A payment plan
made by the
company to pay off
some of the
creditors over a
period of time while
continuing daily
operations.
Arrangements
proposed by the
company to pay
off creditors over
a period of time
while continuing
daily operations.
Technique that involves
the sale of the business
immediately after the
insolvency appointment
to allow time for due
diligence to be
undertaken in advance
while causing the least
disruption to the business
Binding
law
Insolvency Act 1986 Companies Act
2006
n/a
TABLE 7.2: NON-CONSENSUAL FINANCIAL RESTRUCTURING TECHNIQUES
Adapted from: BPG (2011)
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-28
This concludes that the strategy is critical during the long-term phase of the
turnaround process and it is the task of the turnaround manager/team to use the
most suitable technique, which gives the company the time and ability to recover.
7.5 Recovery and return to growth stage
Findings from BPG (2011) indicated that a long-term strategy is essential to
maintain improvements achieved during the formulation, implementation and
stabilisation stage (short-term strategy). The long-term strategy relies heavily on
presenting a credible business plan to stakeholders and creditors, with an
emphasis on improvements made during the short-term. TPAT1 and TPDB2 have
reported that by the end of their term in a company, whether it is three months or
six, they aim to have brought the company into a stable cash flow position,
removed credit risks, restructured the business vision and developed a 12 to 18
month long-term plan to ensure a full recovery for the business.
Findings from this chapter (see Section 7.2.3.2 and 7.2.4.2), indicates that the
long-term phase includes a set of strategies that can combine one or more of the
four key areas needed to enhance the vision of the company in the long-term.
However, emphasis on operational restructuring as well as asset investment
strategies during the long-term phase, indicates their importance in strengthening a
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-29
company’s competitive advantage in the long run by investing in sales and other
parts of the business.
7.6 Best practise model of successful business turnarounds
Based on the findings revealed above from interviews and document analysis, the
good practice model is developed to highlight the major key issues with successful
turnaround. The best practice model represents the process of a developed model
through four stages of development following each phase of study, i.e.
development of theoretical model through critical review of literature, development
of initial model by testing all key issues on the initial set of multiple case studies,
development of the revised model through testing the key issues in depth through
the second phase of cases studied using multiple sources of evidence and finally
development of the good practice model following feedback from a panel of
experts.
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7-30
FIGURE 7.2: BEST PRACTISE MODEL OF MANAGING SUCCESSFUL TURNAROUNDS
Formulation, implementation and stabilization of the turnaround plan
Successful
Turnaround
(2 years or more of
positive profitability)
Recovery and return to growth
Asset restructuring
Is it a loss
making asset?
Is core to
operations
?
Keep & invest to
improve efficiency
Divest asset
Eliminate of losses and better asset
utilization losses
YES
NO NO
YES
Mandatory strategy
Operational restructuring
Cost cutting
Review all Costs
Non-core costs Core costs
Cut or eliminate Manage and
control
Total cost reduction and control
Cash generation
Review all
products/customers
Low Profit
products/
customers
High Profit
products/
customers
Eliminate and
replace via
NPD, new
customers
Promote and
Increase
margin and
sales
Increased cash flow
Managerial restructuring
Asses
Management
Resisting change
Willing to
changes
Keep and train
to develop
new skills
Replace bad
management
NO
Competent
management in
place
YES
Operational restructuring
NPD, increase sales and margin, keep
costs down
Asset restructuring
(Asset investment)
Invest in new equipments, systems,
staff skills
Financial restructuring
NO YES
Creditors supporting turnaround
Debit- equity
restructuring
Administration-
CVR- SA- PP
Pressure increasing due to late
repayment
Eased pressure and better
lending
Decline sage
Recognition of
decline
Appoint a turnaround firm
Communicate the plan
TMT
support
Stakeholders
support
Asses’ existing
leadership
Resisting
change
Accepting
change
Replace
Keep
Analysis of decline
Assess severity and
financial position
Is there enough cash
for the turnaround?
Identify causes of decline
External causes
Political
Economic
Competition
Assess viability
Does the company hold a
competitive advantage?
YES
NO
NO
Exit
Sale of business/ Liquidation
(Liquidation)
Internal causes
Bad management
Organizational
inefficiencies
YES
YES
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-30
7.6.1 Decline stage
Based on findings from this study, it is concluded that during the first stage (decline
stage), decline is recognised by the TMT or any of the stakeholders and a decision
in relation to the existing leadership is made. Findings show that appointing an
interim management to work alongside the existing team until cash flow is
improved and the situation is stabilised, is the most preferred decision. It was
emphasised that this is due to the damage that could be done following an early
change of leadership. It is important at this stage that the new turnaround
manager/firm is supported by the TMT and all stakeholders in the company. This
support will be gained by introducing a credible plan that will shed light on the
company’s vision and outlines all changes that need to take place to move a
company forward.
7.6.2 Analysis of decline
The second stage (analysis of decline), is the stage where three important
elements are analysed to ensure that the company can be turned around, i.e.
viability (source of competitive advantage), severity of decline (cash availability)
and cause of decline. It was found clear that a company must have an advantage
that supports its existence in the marketplace in the long-term and depending on
the severity of decline (cash availability), a decision is made whether to commence
the turnaround with a viable business or exit to liquidation/sale. If it is decided that
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-31
the business is viable, causes of decline must be identified in order to develop a
plan that works on reversing or eliminating those causes.
7.6.3 Formulation, implementation and stabilisation of the turnaround plan
The third stage is the formulation, implementation and stabilisation of the
turnaround plan, during which a short-term proposal is developed aiming to bring
the business to stability as quick as possible, by stopping the continued loss of
cash. As shown in Figure 7.2, an operational restructuring strategy is required
immediately to reduce cash depletion and boost cash flow. This requires a review
and reduction of all unnecessary non-core costs and expenses, to achieve greater
control over costs. Similar to this, a review of products and customer lists should
be made to identify the low sales/non-profitable ones and replace these with new,
high margin/profitable ones to boost cash flow.
Additionally, managerial restructuring would help the turnaround leader to identify
any resisting managers who resign to outdated strategies and approaches, forming
a resistance to the new changes and replace them with competent managers if
necessary. Findings show that changes in management at the early steps of the
turnaround is not a preferred option, due to associated costs and possible
depletion of expertise.
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7-32
Furthermore, asset restructuring strategies were found to be critical to the
turnaround process, mainly for companies where it suffers high overheads for one
or more operations/divisions. A review for all operations and individual units and
divisions to identify the loss making ones will help the company to eliminate its
losses. However, in cases where certain operations/units or divisions are critical to
other sides of the business, investment based strategy is more suitable depending
on cash availability. This will ensure elimination of losses and better utilisation of
assets.
Moreover, financial restructuring is another strategy that is used in relation to
economic decline caused possibly by high interest rates. When creditors increase
the pressure on the company for lack of repayment, financial restructuring aims to
ease this pressure, by implementing some activities such as equity or debt
restructuring. However, in cases where creditors are not willing to withdraw from
supporting the company and not willing to support the turnaround, other techniques
can be used to give the company more time to implement its operational
turnaround plan.
By the end of the short-term phase, some improvements should be achieved
through reaching the breakeven point or positive profitability.
7.6.4 Recovery and return to growth
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The last stage of the turnaround is the recovery and return to growth stage by
which time loss of cash should have stopped. During this stage a set of long-term
strategies is developed to maintain improvements. Findings assert that two main
strategies are the key to maintaining long-term improvements and they are;
operational restructuring and asset investment strategy. The earlier being the
implementation of control costs, spending and continued NPD to boost sales and
eliminate low profit products/customers, while the latter revolves around enhancing
the company’s competitive advantage and what its customers want by investing in
staff, equipment and new ventures.
7.7 Summary
The chapter discussed and analysed the feedback from a panel of eight experts
working in the turnaround industry. Rich data relating to key issues of turnaround
management was generated through a set of interviews with those experts, in
order to highlight the key issues relating to successful turnaround. The chapter
discussed all the key issues from a stage theory perspective in line with the
theoretical framework developed in chapter two and the initial and revised models
of successful turnaround developed in chapters five and six accordingly.
Section 7.2 focused on the decline stage and its key issues, such as the process of
recognising decline signals and the decision of change of leadership. Section 7.3
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-34
follows on to discuss the next stage, i.e. analysis of decline stage and its key
elements. Section 7.4 discussed the stage of formulation, implementation and
stabilisation of the plan and the process of selecting the most appropriate
turnaround strategy. Section 7.5 followed with a discussion of the long-term
turnaround options that will help a company to maintain improvement and enhance
its competitive advantages.
Section 7.6 presented the good practice model and the process of developing this
model with great emphasis on the major key issues of the turnaround process.
Section 7.7 presented a summary of the chapter.
The next chapter will conclude the whole study with an emphasis on the main
aims, objectives and major contributions to theory and practice.
CHAPTER EIGHT: CONCLUSION
8-1
CHAPTER EIGHT
CONCLUSION
8.1 Introduction 8-2
8.2 Review of objectives and major findings 8-2
8.2.1 Objective 1 8-2
8.2.2 Objective 2 8-4
8.2.3 Objective 3 8-11
8.2.4 Objective 4 8-17
8.3 Contribution 8-20
8.3.1 Contribution to theory 8-20
8.3.2 Contribution to practice 8-21
8.4 Limitation of the research 8-22
8.5 Opportunities for further research 8-23
8.6 Personal reflection 8-24
CHAPTER EIGHT: CONCLUSION
8-2
8.1 Introduction
This chapter concludes this study on how to turnaround a company in decline and
execute a successful business turnaround, in the context of the UK medium and
large food manufacturing sector. The chapter starts with a review of the research
objectives and how each one was achieved. This is followed by the identification
of the major contributions of the study (theory and practice ) and finally the
limitations and opportunities for further research are identified. The chapter
summarises with some final thoughts and reflections on the research process.
8.2 Review of objectives and major findings
8.2.1 Objective 1
Undertake a critical review of literature to develop a theoretical framework on
how to manage successful turnarounds. This is to investigate the key issues
relating to turnaround management as well as management approaches to
underpin their turnaround strategies.
This objective was achieved through undertaking an in depth critical analysis of
relevant literature on business turnaround management. This objective aimed to
provide a better understanding of the topic in general and the problems that face
managers and practitioners during their daily operations, when attempting a
turnaround. Additionally, reviewing the literature on business turnaround has given
CHAPTER EIGHT: CONCLUSION
8-3
enhanced insight into the common causes that have led companies into decline, as
well as the different management approaches in dealing with these situations.
The literature on turnaround has also offered some theoretical models, which are
used in managing turnarounds. However, there was no major framework that
could be used as a general basis for managing turnaround, in that every case is
different and such differences led to a lack of guidance for managers and
practitioners, on how to deal with decline and turnaround situations.
The literature suggested that there are different stages for any turnaround process
to ensure systematic flow of information, decisions and actions from the onset of
the turnaround process, until full recovery is achieved. This study develops a four-
stage model to rationalise the different perspectives offered in the literature and to
provide the basis for the theoretical framework, initially for the rest of the chapter
and ultimately for the study as a whole.
It was clear from the literature, that there are different causes that can lead a
company into decline. However, it was also clear that early recognition of decline
and starting the turnaround process as early as possible, are critical to the success
of the turnaround process, especially when cash is limited. Additionally, there was
great emphasis in the literature about the importance of matching the root cause of
CHAPTER EIGHT: CONCLUSION
8-4
decline with the turnaround strategy. However, such matching had not been
achieved in the literature. Furthermore, evidence from the literature showed a
huge debate between scholars about what are appropriate strategies for tackling
decline, e.g. retrenchment or not. Evidence showed that this debate stemmed
from those scholars and managers different backgrounds, management styles and
past experiences.
The critical review of the issues, concepts and opinions referred to in the literature,
provided the basis for the development of a theoretical model for managing a
successful turnaround.
8.2.2 Objective 2
Develop a multiple case study of some companies, which have successfully
turned around, to see if the conceptual framework and its key issues fit their
experiences, then modify the conceptual framework to reflect the findings.
In order to achieve this objective, a multiple case study was conducted, in which
certain pieces of information and answers to major questions were targeted. Those
pieces of information and answers were categorised according to the four main
stages of the turnaround process (see Objective 1) using Yin’s (2009) advice on
cross-case comparison.
CHAPTER EIGHT: CONCLUSION
8-5
The multiple case studies consisted of 14 medium and large-sized food-
manufacturing companies based in the UK, using secondary data analysis. The
case study aimed to answer a major research question, i.e. how can a successful
turnaround be implemented? Answering this question is linked to reviewing the
key issues to each stage of the turnaround process, to highlight the factors that are
associated with each stage. A summary of the major findings of this objective in
relation to the four key stages is shown in sub-sections below.
Decline stage
The findings revealed that each of the 14 companies studied had managed to
recognise decline early enough, while cash resources were still sufficient to allow
the turnaround to be successful. Evidence from the literature showed that most
authors emphasised that a new leadership during this stage was essential to the
success of the turnaround process. Accordingly, the findings from this study
supported the literature as 10 out of the 14 companies had made some changes to
its senior leadership team at the onset of the turnaround process.
Other scholars argued that successful turnaround could be achieved with existing
leadership in place, if they were not the original cause of decline and had a strong
voice. Supportively, the findings revealed that four companies have managed
successful turnaround without any changes in leadership. Notably, this may have
been due to the fact that three (HB, KRF and MMB) out of four of the companies
CHAPTER EIGHT: CONCLUSION
8-6
were privately owned and where it would be difficult to change the leadership.
Meanwhile, the fourth company’s decline was not attributed to its leadership;
therefore it was not seen as necessary to change its leader.
A conclusion based on the literature and the findings can assert that change of
leadership is highly important to the success of the turnaround process. However,
in cases where such a decision is limited by the type of ownership or other factors,
appointing an interim, parallel turnaround management to lead the turnaround is a
suitable option.
Analysis of decline
Findings revealed that this is one of the most important stages in the turnaround
process, as turnaround managers often have very limited time to analyse the
company’s resources and ability to return to profitability. The literature revealed
that there are three main elements of analysis during this stage; competitive
advantage, severity of decline and causes of decline. The literature revealed that
the analysis of each of these elements could assist the turnaround team in
deciding if the company is viable or not.
Regarding the first element, it was apparent that each one of the 14 companies
had some competitive advantage, which could be categorised under one or more
of the four major advantages, i.e. firstly, it was the market leader (the biggest in the
market), secondly it had long experience in the industry and skilled staff, thirdly it
CHAPTER EIGHT: CONCLUSION
8-7
had strong financial backing from a large group and fourthly, it was a pioneer in
NPD or new technologies. It was asserted in the literature that the company had to
have a source of competitive advantage to make it worth saving.
Furthermore, the severity of decline was another element that had to be analysed,
since the decline, combined with the cash position, determines the viability of a
company and its potential to survive the turnaround process. The findings showed
that severity of decline was low as those companies had a sufficient amount of
cash available to turnaround at an early/mid-term stage, when the position had not
deteriorated too far.
The third element was also found to be critical to the success of the turnaround
process to set the foundation for the turnaround strategy, by formulating and
implementing a strategy that works on addressing the root cause of decline. The
findings showed mixed causes i.e. (internal/external) had been common in leading
companies into decline. However, the findings attributed most of the declined
cases to external economic causes as 12 out of the 14 companies had suffered
economic problems whether it was high costs, lack of sales or increased energy
prices. Other internal causes relating to bad management and organisational
deficiencies had played a role in the decline of some companies.
CHAPTER EIGHT: CONCLUSION
8-8
Formulation, implementation and stabilisation of the plan
Findings showed various numbers of approaches and strategies for each company
during the short-term phase. However, this study revealed many similarities, that
helped in creating a pattern of which strategies are most suitable for the majority of
companies, with consideration given to the three elements identified earlier in the
analysis stage.
Operational restructuring
Furthermore, findings showed that operational restructuring is the most common
strategy during this phase for all companies in decline, in order to reduce
overheads, non-core costs and spending, while working on profit margins and
sales to boost cash generation. This finding stood robust as 13 out of 14
companies adopted cost cutting strategies and 12 out of 14 companies adopted
cash generation strategies during this stage, as being a vital component in their
turnaround plan.
Findings revealed that other strategies were used to tackle decline in addition to
operational restructuring and linking to specific causes of decline.
Managerial restructuring
Evidence showed that despite the wide agreement in literature that management
change is an essential component of any turnaround strategy, findings show that it
is not actually an essential component. Evidence is clear that only three (NF, OFD
CHAPTER EIGHT: CONCLUSION
8-9
and UPF) out of 14 companies carried out such a strategy during this short phase.
It was asserted that management restructuring is not a preferred option as it
involves high costs and has some negative implications on staff morale and
performance. Results state that it is only exercised during this phase in cases
where management has played a role in the decline, such as in the case of OFD
where lack of management’s understanding of customer demand, had led to lost
sales contracts.
Asset restructuring
Findings show that such a strategy was used in only four cases out of 14. It was
found that such a strategy was used in direct relation to certain causes of decline.
For example, in ADM and OFD, asset divesture strategies were used to eliminate
costs associated with the loss making Tewksbury and Lampeter sites accordingly.
It was found that such a strategic option is associated with the profitability of the
unit. On the other hand, findings also showed that asset investment strategy is
associated with companies suffering losses due to internal inefficiencies, such as
in the case of OFD, which suffered lack of control and high waste. Therefore, an
investment was made to improve staff skills and introduce new control systems.
The findings support and emphasise the importance of the use of such strategies,
in relation to the highlighted causes of decline.
Financial restructuring
CHAPTER EIGHT: CONCLUSION
8-10
Findings from this case study provided a clear example why such a strategy would
be used. They showed that three (CHR, IG, OFD) out of 14 companies had
adopted financial restructuring during the short-term as an addition to operational
restructuring. This had a direct relationship to the cause of decline of each
company. For example, in the case of CHR and IG where they suffered high
exchange rates and high repayment charges, a debit restructuring strategy gave
those two companies better lending terms and eased the financial pressure.
Meanwhile in the case of OFD, an equity restructuring strategy was the key to
providing the cash needed to refinance the company.
Recovery and return to growth
Furthermore, findings also revealed that during this long-term phase of the
turnaround process, a further set of strategies had been developed by the
turnaround management, to maintain improvements and take the firm to the next
stage of growth. They showed that operational restructuring remained a vital
component of the strategy during the long-term, with evidence that all 14
companies carried out cost cutting activities, while 13 out of 14 carried out cash
generation activities during the longer term. Findings also showed an increased
number of companies, which had adapted asset divestment during the long-term in
comparison to the short-term.
CHAPTER EIGHT: CONCLUSION
8-11
Findings from this multiple case study provided an insight to the key issues relating
to turnaround management and the organisations approaches to underpin their
strategies to fulfil and reach this objective of the study. It has been emphasised in
the initial model of successful turnaround, to reflect those companies experiences
and approaches on how to turnaround a company in decline from a stage theory
perspective.
8.2.3 Objective 3
Explore the initial model and its key issues thoroughly through an in depth
multiple case study, which faced similar scenarios; this is to develop a
modified model that can be generalised to wider situations.
Similar to the previous objectives and in order to reach this goal, in depth multiple
case studies of three UK food manufacturing companies were conducted to
explore the key issues and findings highlighted in the initial model of successful
turnaround, identified in the review of literature and the first multiple case study
(see Chapter 5).
Three sources of evidence were used to collect information from each case study,
aiming mainly to answer questions that will affect the formulation of the modified
practice model of successful turnaround. The fulfilment of this objective was
CHAPTER EIGHT: CONCLUSION
8-12
achieved in the light of the four key stages of turnaround as presented in the
following sections.
Decline stage
Major findings revealed that all companies under study during this phase, have
recognised decline early and managed to highlight their weaknesses and start the
turnaround while resources were still available. Evidence showed different signals
of decline from negative profitability, high waste levels, poor performance and
decreased sales, were important indicators and warning signs to management that
the company was in a crucial position and immediate actions were required.
Relatively, findings also revealed that one out of three companies had executed a
change of leadership from the onset, to ensure a strong initiation of the turnaround
process. Notably, the evidence showed that decline was initially linked to the old
leadership, who did not believe in the importance of the sales team, the different
approaches to sales or the wider customer base. On the other hand the leadership
of the other two companies remained in place to lead the turnaround and this was
due to the fact that decline was not attributed to leadership.
These findings support the view that change of leadership is critical to the
turnaround process, in cases where decline was attributed partly or fully to lack of
leadership. However, evidence shows that existing leadership can still turn their
companies around.
CHAPTER EIGHT: CONCLUSION
8-13
Analysis of decline
As previously mentioned, the three elements of the analysis process (i.e.
competitive advantage, severity of decline and causes of decline), will be used as
the framework to sort findings out at this stage. Accordingly, results showed that
some of the three companies had long experience in the field of industry, with
various links to suppliers and customers as with CD, or being one of the biggest
competitors in the marketplace such as in the case of PF and GC. This type of
analysis reassured the management about the viability of each company to
turnaround and recover since it has a solid core in the short-term and could
develop and invest in the longer term.
Additionally, findings revealed that the decline of two cases could not be
considered severe decline, because each one of those companies had sufficient
funds to execute a turnaround. However, in the case of CD who were in a late
decline stage of the turnaround process, they required close contact with the bank
after a meeting with the MD. It was mentioned in the interview that NGL, the MD of
CD, was very worried that the bank may reject the request to continue funding the
operation, following the failure of the short-life cheese NPD program.
The third and the most important element of analysis is cause of decline. Findings
showed that mixed internal and external causes of decline attributed to the decline
of each case. Internal causes of decline related to lack of cash flow due to low
profit margins, low productivity, lack of management, high internal costs and
CHAPTER EIGHT: CONCLUSION
8-14
expenditure and inefficiency in operations, coupled with higher energy prices,
increased cost of materials and new legislations, all of which was enough to put
each one of those companies under the threat of total failure.
Formulation, implementation and stabilisation of the plan
Findings showed that each company had its own causes of decline, whether it was
internal, external or a mixture or both. Reflecting on the three elements of
analysis, each company had to select the suitable set of strategies that considers:
Operational restructuring
Findings showed that operational restructuring remains the most commonly used
strategy during the whole process and especially over the short-term. Operational
restructuring was exercised in the form of cost cutting. This required regular
viewing and furcating of the costs, in order to remove the unnecessary ones. For
example, in the case of CD, because the cheese making operation was very
inefficient and included high costs, overtime was reduced and the cost of staff was
controlled. Furthermore, energy usage was moderately reduced to save on energy
bills in the case of GC.
Cash generation was also targeted to eliminate cash flow problems and stimulate
its flow. For example, in the case of CD customers were encouraged to pay 60%
of their invoices earlier and creditor’s payments were delayed. In addition to this,
new sales/customers were targeted.
CHAPTER EIGHT: CONCLUSION
8-15
This supports the findings from the previous case studies that operational
restructuring is highly essential during the turnaround process as a whole and in
the early days specifically and that high costs and lack of cash flow should be
targeted where problems originated.
Managerial restructuring
Findings from this case study showed that management changes were critical
during this case mainly because management had played a role in the decline
such as in the case of OFD, where lack of management understanding of customer
demand, has led to lost sales contracts. Also in the case of CD, sales
management was put in place for the first time, as the previous MD did not believe
that a sales team was required and hence the company was intimidated by a small
number of customers.
Asset restructuring
Findings from this case study showed that asset restructuring was an essential
component of the turnaround strategy during the short-term phase in CD and PFS.
Accordingly, findings from the study revealed that the use of asset divesture in CD
was highly related, because the company suffered negative performance and
profitability from the cheese making operations. Therefore, all operations,
machineries and equipment were divested and sold off. Similarly, in the case of
PFS, decline was mainly related to the GFS division, which was a total cash loss
with massive overheads from day one.
CHAPTER EIGHT: CONCLUSION
8-16
Furthermore, an asset investment strategy was used in CD during the short-term,
to improve the outdated equipment and systems, which was also another major
cause of decline for the company. This supports previous findings that asset
restructuring strategies are essential in cases where unprofitable assets or
business units are responsible for decline.
Financial restructuring
Findings show that there was no need to adapt financial restructuring activities as
part of the turnaround process for any of the cases. However, it was noted that in
the case of CD, due to the stage of the company’s decline, it was important that the
bank supported them, to ensure continuous funding of operations.
Recovery and return to growth
Findings showed that the three companies aimed to maintained improvements
made during the short-term, by carrying out similar strategies to the ones adopted
in the first phase, as well as other further necessary strategies. For example,
results from GC and PF showed no additional strategies were needed during this
phase to achieve successful turnaround. On the other hand, CD had adapted an
investment strategy to take the company to the next level.
CHAPTER EIGHT: CONCLUSION
8-17
8.2.4 Objective 4
The fourth is to develop a best practice model of successful turnarounds and
make recommendations to company leaders and practitioners on how to
implement it successfully.
The fulfilment of this objective was achieved by conducting the third phase of the
study, during which a panel of experts study was made with a panel of eight
professionals, working closely with the turnaround industry (i.e. four turnaround
practitioners and four insolvency practitioners).
This phase of the study aimed to investigate the major issues in turnaround
management in the light of professional experiences in managing or participating in
the turnaround of at least one company. The best practice model represents a
development of the conceptual framework in chapter two, followed by some
modifications after phase one, two and three of the study. The best practice model
concluded the turnaround process in four key stages to reach recovery and return
to growth.
Based on findings from this study, it is concluded that during the first stage (decline
stage), decline is recognised by the TMT or any of the stakeholders and a decision
in relation to the existing leadership is made. Results show that appointing an
interim management to work alongside the existing management until cash flow is
CHAPTER EIGHT: CONCLUSION
8-18
improved and the situation stabilised, is more beneficial to the turnaround process.
It is important at this stage that the new turnaround manager/firm is supported by
TMT and all stakeholders in a company and also important to keep them informed
and updated with the proposed plan or any changes, which will help to form a
robust team ready to initiate the turnaround.
The second stage (analysis of decline), is the stage where a viability check is made
to ensure that the company is capable of surviving and returning to profitability, by
investigating three important elements, i.e. source of competitive advantage,
severity of decline and cause of decline. It was found that a company must have
an advantage that supports its existence in the marketplace in the long-term and
depending on the severity of decline (cash availability), a decision is made whether
to commence the turnaround with a viable business or exit to liquidation/sale. If
the business is thought to be viable, causes of decline must be identified in order to
develop a plan that is based on reversing the root causes of decline.
The third stage, is the formulation, implementation and stabilisation of the
turnaround plan, during which a short-term plan is developed and aimed at bringing
the business to stability as quickly as possible, by stopping the continued loss of
cash. As shown in the model, an operational restructuring strategy is required
immediately to reduce cash depletion and boost cash flow. This requires a review
and reduction of all unnecessary non-core costs and expenses. Similar to this, a
review of products and customer lists should be made to identify the low
CHAPTER EIGHT: CONCLUSION
8-19
sales/profitable ones and replace them with new, through increased NPD, sales
and a bigger customer base.
The last stage of the turnaround is the recovery and return to growth stage by
which time loss of cash has stopped unless a further strategy is required. During
this stage, three additional strategies linked to certain causes of decline, may be
used. Managerial restructuring is a useful strategy in cases where decline was due
to management. However, findings suggest that it should be used in cases where
management is not ready to change or co-operate. Furthermore, asset
restructuring is another strategy that offers two solutions; firstly is asset divesture,
which may be used in cases where decline is attributed to loss making units or
divisions, secondly is asset investment, which might be adapted to invest in
enhancing the competitive advantage of the company. Finally, financial
restructuring is another strategy in cases where high loan repayments or interest
rates were a participating cause of decline. Nevertheless, findings from the study
suggested that there are some techniques within this strategy, which can help the
turnaround leader/team to manage cash and repayments in cases where creditors
are not in support of the turnaround plan. Implementing this turnaround model
should bring the company back into profitability and successful turnaround.
CHAPTER EIGHT: CONCLUSION
8-20
8.3 Contributions
8.3.1 Contribution to theory
The study contributed and enhanced the understanding of issues relating to
business turnaround management in the context of UK food manufacturing
companies and the appropriate stages and strategies when attempting a
turnaround. The study contributed to growing interest in research and literature on
turnaround management within the science of strategic management, by
conducting an extensive research in the field, creation of new ideas and new
interpretation of rich data collected via different sources of evidence. The study
also participated in the understanding of the major obstacles which face managers
and practitioners, when dealing with decline situations.
This study grounded the theoretical base for further research on turnaround
management in the context of large and medium size food manufacturing firms in
the UK. A key contribution of this study was the development of a theoretical
model of successful turnarounds. The model reflected the major key issues found
in the critical review of literature, as well as other turnaround models. It was
guided by a stage theory to ensure a stable flow in the stages and steps of actions
taken, until the last period of recovery. The significance of the contribution is
emphasised in the smooth flow and presentation of the key issues relating to
turnaround management. Another significance of the model is that it has
CHAPTER EIGHT: CONCLUSION
8-21
integrated the process of formulation and implementation into one stage. This
integration overcame the problem of treating them as two separate stages which
they are not in real life; as the implementation procedures of any strategy must be
considered during the formulation process.
8.3.2 Contribution to practice
This study contributed significantly by introducing a good practice model for daily
managers and practitioners working in the turnaround industry, on how to manage
successful turnarounds. The model reflected the results of the investigation in the
light of the four key stages of the turnaround process, i.e. decline stage, analysis of
decline, formulation, implementation and stabilisation stage, recovery and return to
growth stage.
The first stage of the model allows the TMT to recognise decline signals and
identify the company’s position, whether it is in real decline or a temporary
situation. The importance of the early recognition of decline was emphasised in
the model by the decisions regarding change of leadership. During this stage if
decline is identified, the decision to employ a turnaround manager to join the
management team, is found to be the most suitable, as it avoids taking any actions
regarding leadership during the early, sensitive period of the turnaround when all
expertise is most needed.
CHAPTER EIGHT: CONCLUSION
8-22
The analysis stage aims to investigate and identify three major elements (i.e.
viability and competitive advantage, severity and cash availability and the causes
of decline, in order to identify a company’s strengths and weaknesses. The
viability check aims to identify a company’s core advantage that will maintain its
existence in the market in the long-term. Severity and cash availability position is
critical in identifying the company’s ability to maintain operations while it is being
turned around. Identifying the causes of decline is the third critical element as it is
the first step towards selecting the most suitable turnaround strategy that will
eliminate this cause.
The third stage of the model is the short-term stage, during which the operational
restructuring strategy is critical to immediately help to reduce overheads and
generate cash needed for the turnaround. The model also offers a mechanism that
allows the use of certain strategies in connection with the presence of certain
causes of decline and factors, such as being core to the business or not.
The fourth stage of recovery offers a formula to enhance a company’s competitive
advantage in the long-term by investing in all sides of the business, while
maintaining operational control. The model offers and provides a guide on how to
manage successful turnarounds.
CHAPTER EIGHT: CONCLUSION
8-23
8.4 Limitation of the research
Generally, this is a common issue with access to primary sources of data and it
stands as a challenge for researchers to overcome, especially when targeting
senior members of management in large companies with a complex organisational
chart, guarded by cautious management blocking external outflow of information.
However, the use of multiple sources of evidence to increase the reliability and
validity of the available information, does indeed help with the findings of the first
phase of the study. To help validate findings another two phases of study were
used, which have a strong presence in the primary data collection method was the
use of semi-structured interviews, the validity of information achieved will help to
satisfy the outcome of the research.
Nevertheless, the research has its limitations considering it has been driven by a
qualitative approach, which still remains a great debate between scholars when it
comes to generalisation of findings, as it represents subjective opinions, attitudes
and/or feelings of interviewees and not actual reality. However, myself as the
researcher, tried to overcome such problems by using multiple sources of
evidence.
Another limitation was that the study was conducted on medium and large size
businesses in the food manufacturing industry. Therefore, further research has to
CHAPTER EIGHT: CONCLUSION
8-24
be conducted in the context of other industries before any adaptation of the results
can be used in different industries
Another limitation of the study, is that the research was investigated from a TMT
perspective without an in depth investigation of other stakeholders such as
government, customers, suppliers or staff when dealing with management during
the turnaround process and what kind of support could be offered to them during
that time. This could provide an opportunity for further research to be undertaken
to investigate fully the role of other stakeholders during the turnaround process, in
the light of the key issues identified.
8.5 Opportunities for further research
The study may seem complicated due to the large volume of primary and
secondary data representing the major issues in turnaround, which were
interpreted in the good practice model of managing successful turnaround.
However, the researcher believes this creates an opportunity for further research in
some areas. For example, this model could be investigated in the context of other
European countries with different legislative and banking systems. In addition, the
model could be tested on smaller businesses to identify the possibility of
generalisation of the findings.
CHAPTER EIGHT: CONCLUSION
8-25
8.6 Personal reflection
This study was conducted over five years of part-time/full-time study, attempting to
identify the possible way of overcoming business decline and failure, by creating a
plan that recovers a business and brings it back on the right track. My aspirations,
hard work and long, late nights of research reflect on my best practice model,
which I hope is found to be useful to those managers attempting turnarounds, as
well as researchers intending to carry out research in the field of turnaround
management.
I started this study in 2009 when I was a young manager, with great aspirations,
working in a company based in Wales, UK. I had very little practical experience in
running day-to-day operations in a business. As the time progressed and my
experience increased, I was able to start my own business in 2011 in the fast food
industry. In addition to the practical experience, the research on turnaround
management has provided me with the ability and skills that served my business
needs. This study has given me the opportunity to explore an area of research that
many managers would benefit from, when dealing with issues in their daily working
life.
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doc_691994572.pdf
Analysis, Discussion Of In Depth Case Study And Development Of Revised Model Of Successful
DECLARATION
i
DECLARATION
I declare that this work has not previously been accepted i2004n substance for any
degree and is not being concurrently submitted for any other degree. I further
declare that this thesis is the result of my own independent work and investigation,
except where otherwise stated (a list of references is appended).
Finally, I hereby give consent for my thesis, if accepted, to be available for
photocopying and for inter-library loan, and for the title and abstract to be made
available to outside organisations.
Tamer Mohamed Hassan El Sayed (Candidate)
Prof. David Brooksbank (Director of Studies)
Prof. Eleri Jones (Supervisor)
DEDICATION
ii
DEDICATION
To
My honourable parents,
My beloved wife,
My beautiful daughter ‘Mariam’,
My amazing son ‘Youssef’
I could never find enough words to thank and appreciate them all for the
inspiration, help, encouragement and support they have given and are still giving
me throughout my life.
ACKNOWLEDGEMENTS
iii
ACKNOWLEDGEMENTS
Praise is to Allah the most Gracious and most Merciful who has given me the
ability to do this work. This thesis would not have come to light without the
guidance and support of many people, especially my supervisors Professor David
Brooksbank and Professor Eleri Jones for their endless support, encouragement,
understanding and patience. My supervisors have spared no effort in guiding,
advising and on many occasions, teaching me new skills in order to produce a
good piece of work.
I would also like to thank my dear family for playing the most important role in
encouraging, supporting and understanding me during the whole program.
Additionally, special thanks to all the staff at Cardiff School of Management who
work very hard with a high level of professionalism to support students like myself.
Finally, I would like to thank all participants who took part in the study to make the
possibility of my PhD come true.
Cardiff, Wales 2015
Tamer Mohammed Hassan El Sayed
ABSTRACT
iv
ABSTRACT
There is a growing body of research on turnaround management due to adverse
global economic circumstances. Research on turnaround management aims to
reduce/eliminate business decline. Reviewing the turnaround management
literature revealed that it has not yet been able to provide managers and
practitioners with reliable guidance, or a step-by-step guide to assist them through
the turnaround process. This research aims to identify the key stages of the
turnaround process and to select appropriate turnaround strategies in relation to
particular factors, e.g. causes of decline.
A phenomenological perspective was adopted in this study to investigate the key
turnaround management issues in two multiple case studies, followed by a
feedback analysis from interviews with a panel of experts. The first case study
comprised of 14 large and medium sized UK food manufacturing companies and
used secondary sources of evidence. The second in depth case study involved
three companies, using primary evidence through semi-structured interviews.
Interviews with turnaround and insolvency practitioners were conducted, to
investigate the key issues of the revised model of successful turnarounds in the
light of their daily practices and models.
A general model and step-by-step guide on how to manage a successful
turnaround was developed. The model identifies four key stages (i.e. first, decline;
second, analysis of decline; third, formulation, implementation and stabilisation of
the turnaround plan and fourth, recovery and return to growth). Once decline is
recognised, a leadership decision is made to initiate the turnaround process,
identify major obstacles/problems and select the best actions to stop decline and
return to full recovery. The turnaround model can assist turnaround managers in
evaluating the viability of a company. It also helps analyse a company’s
weaknesses and develop strategies: in the short-term to stop decline and stabilise
the situation; in the longer-term, to identify a company’s strengths and enhance its
competitive advantage to achieve recovery and return to growth.
LIST OF TABLES
v
TABLE OF CONTENTS
Declaration i
Dedication ii
Acknowledgement iii
Abstract iv
Table of contents x
List of tables xi
List of figures xii
List of abbreviations xiii
Chapter one: Introduction
1.1 Background
1-2
1.2 The research rationale 1-2
1.3 The research problem 1-4
1.4 The research aims, objectives and questions 1-8
1.5 Overview of the thesis 1-10
Chapter two: Review of literature
2.1 Introduction 2-2
2.2 Overview of strategic management 2-3
2.2.1 Concept of business decline and failure 2-11
2.2.2 Concept of turnaround 2-15
2.2.3 Stages of the turnaround process 2-18
2.3 Decline stage 2-27
2.3.1 Recognition of decline 2-27
LIST OF TABLES
vi
2.3.2 Change of leadership 2-32
2.4 Analysis of the decline situation 2-35
2.4.1 Viability and competitive advantage 2-37
2.4.2 Severity of decline and cash availability 2-38
2.4.3 Causes of business decline 2-42
2.5 Formulation, implementation and stabilisation of the
turnaround plan
2-60
2.5.1 Classifications of turnaround strategies 2-62
2.5.2 Turnaround strategies 2-65
2.5.3 The best strategy 2-80
2.6 Recovery and return to growth 2-82
2.6.1 Concepts of recovery 2-82
2.6.2 Enhancing the competitive advantage 2-83
2.7 Models for achieving successful turnarounds 2-85
2.8 Theoretical framework of successful turnarounds 2-90
2.9 Summary 2-91
Chapter three: Research approach
3.1 Introduction 3-2
3.2 Research approach 3-2
3.2.1 Qualitative or quantitative 3-2
3.2.2 Deductive or inductive 3-5
3.2.3 Theoretical approach 3-6
3.2.3.1 Epistemology 3-8
LIST OF TABLES
vii
3.2.3.2 Theoretical perspective “Interpretivism” 3-10
3.2.4 Practical approach 3-14
3.2.4.1 Research methodology (case study) 3-14
3.2.4.2 Population and sampling 3-18
3.2.4.3 Research Methods 3-26
3.3 Data analysis 3-34
3.4 Triangulation, reliability and validity 3-36
3.5 Ethical considerations 3-40
3.6 Summary 3-40
Chapter four: Managing successful turnarounds - case
study of 14 UK food manufacturing companies
4.1 Introduction 4-2
4.2 ADM Milling Limited (UK) 4-3
4.3 Bowes of Norfolk Limited 4-10
4.4 Chr. Hansen (UK) Limited 4-16
4.5 Hill Biscuits Limited 4-23
4.6 Icelandic Group UK Limited 4-28
4.7 Kitchen Range Foods Limited 4-34
4.8 Lancashire Eccles Cakes Limited 4-39
4.9 Molls Meats (Birmingham) Limited 4-44
4.10 New Ivory Limited 4-50
4.11 Nimbus Foods Limited 4-56
4.12 Organic Farm Foods 4-63
4.13 Pinguin Foods UK Limited 4-70
LIST OF TABLES
viii
4.14 Stateside Foods Limited 4-77
4.15 Uniq Prepared Foods Limited 4-83
4.16 Summary 4-91
Chapter five: Analysis, discussion and development of
initial model of successful turnarounds
5.1 Introduction 5-2
5.2 Decline stage 5-5
5.3 Analysis of situation stage 5-6
5.4 Formulation, implementation and stabilisation stage 5-13
5.5 Recovery and return to growth stage 5-21
5.6 Initial model of successful turnarounds 5-25
5.7 Summary 5-33
Chapter six: Analysis, discussion of in depth case
study- and development of revised model of successful
turnarounds
6.1 Introduction 6-2
6.2 Castle Dairies Ltd 6-3
6.3 Glanbia Cheese Ltd 6-17
6.4 Peter’s Food Services Ltd 6-26
6.5 Cross-case analysis 6-36
6.6 Modified model of successful turnarounds 6-45
6.7 Summary 6-50
Chapter seven: Analysis, discussion and development
of best practise model
LIST OF TABLES
ix
7.1 Introduction 7-2
7.2 Decline stage7 7-5
7.3 Analysis of decline situation stage 7-12
7.4 Formulation, implementation and stabilisation of turnaround 7-18
7.5 Recovery and return to growth stage 7-27
7.6 Best practise model for successful business turnaround 7-28
7.7 Summary 7-33
Chapter eight: Conclusion
8.1 Introduction 8-2
8.2 Review of objectives and major findings 8-2
8.2.1 Objective 1 8-2
8.2.2 Objective 2 8-4
8.2.3 Objective 3 8-11
8.2.4 Objective 4 8-17
8.3 Contributions 8-20
8.3.1 Contributions to theory 8-20
8.3.2 Contributions to practice 8-21
8.4 Limitation of the research
8-22
8.5 Opportunities for further research
8-23
8.6 Personal reflection
8-24
References
LIST OF TABLES
x
LIST OF TABLES
Table 1.1 The three elements of the turnaround process
1-5
Table 3.1 List of cases in the population (sample frame)
3-22
Table 3.2 Six sources of evidence: strengths and weaknesses
3-28
Table 3.3 The two basic approaches for qualitative data analysis
3-34
Table 5.1 Summary of the cross-case analysis (14 UK food
manufacturing companies)
5-4
Table 6.1 Summary of the cross-case analysis (three in depth UK food
manufacturing companies)
6-37
Table 7.1 Turnaround practitioners v Insolvency practitioners 7-3
Table 7.2 Non-consensual financial restructuring techniques 7-26
LIST OF FIGURES
xi
LIST OF FIGURES
Figure 2.1 Stages of the turnaround process 2-25
Figure 2.2 Stages of decline 2-41
Figure 2.3 The three weapons of the turnaround 2-65
Figure 2.4 The four key turnaround strategies 2-67
Figure 2.5 The Ansoff’s matrix of growth strategies 2-74
Figure 2.6 The key to achieve sustainable competitive advantage 2-84
Figure 2.7 Model of western turnaround process 2-87
Figure 2.8 A framework for successful turnaround 2-88
Figure 2.9 Theoretical framework of successful turnarounds 2.90
Figure 3.1 Thesis theoretical and practical approaches 3-7
Figure 3.2 The three stances of epistemology 3-8
Figure 3.3 The two approaches of phenomenology 3-13
Figure 3.4 Types of case study 3-16
Figure 3.5 Criteria of defining a successful turnaround case 3-18
Figure 3.6 Multiple sources of evidences 3-26
Figure 3.7 The steps of constant comparative method approach 3-35
Figure 4.1 Profit and loss account for (ADM) 4-4
Figure 4.2 Profit and loss account for (BOF) 4-11
Figure 4.3 Profit and loss account for (CHR) 4-17
Figure 4.4 Profit and loss account for (HB) 4-23
Figure 4.5 Profit and loss account for (IG) 4-29
Figure 4.6 Profit and loss account for (KRF) 4-35
LIST OF FIGURES
xii
Figure 4.7 Profit and loss account for (LEC) 4-40
Figure 4.8 Profit and loss account for (MMB) 4-45
Figure 4.9 Profit and loss account for (NI) 4-51
Figure 4.10 Profit and loss account for (NF) 4-57
Figure 4.11 Profit and loss account for (OFD) 4-64
Figure 4.12 Profit and loss account for (PF) 4-72
Figure 4.13 Profit and loss account for (SF) 4-78
Figure 4.14 Profit and loss account for (UPF) 4-84
Figure 5.1 Initial model of successful turnarounds 5-4
Figure 6.1 Profit and loss account for (CD) 6-5
Figure 6.2 Profit and loss account for (GC) 6-19
Figure 6.3 Profit and loss account for (PFS) 6-28
Figure 6.4 Revised model for successful turnarounds 6-47
Figure 7.1 The decline curve 7-6
Figure 7.2 Best practice model of successful turnarounds 7-29
LIST OF ABBREVIATIONS
xiii
LIST OF ABBREVIATIONS
CEO Chief Executive Officer
GNE General National Economy
GNP Growth National Product
MD Managing Director
MLC Memory Lane Cakes Ltd
NP New Product
NPD New Product Development
ROA Return On Assets
ROI Return On Investment
SIC Standard Industrial Classification
SWOT Strengths, Weaknesses, Opportunities and Threats
TMT Top Management Team
P&L Profit And Loss Accounts after taxation
CD Castle Dairies Ltd
NGL Nigel Lloyd
GC Glanbia Cheese Limited
PV Paul Vernon
PFS Peter’s Food Service Limited
GCF Green Country Foods Limited
GFS Glanbia Food Service
GW Grim Wood
FD Finance Director
LIST OF ABBREVIATIONS
xiv
ADM ADM Milling Limited (UK)
BOF Bowes Of Norfolk Limited
CHR Chr. Hansen (UK) Limited
HB Hills Biscuits Limited
IG Icelandic Group UK Limited
KRF Kitchen Range Foods Limited
LEC Lancashire Eccles Cakes Limited
MMB Molls Meats (Birmingham) Limited
NI New Ivory Limited
NF Nimbus Foods Limited
OFD Organic Farm Foods
PF Penguin Foods UK Limited
SF Stateside Foods Limited
UPF Uniq Prepared Foods Limited
TP Turnaround Practitioner
CRO Chief Restructuring Officer
IS Insolvency Practitioner
BPG Best Practice Guideline
CVA Company voluntary arrangement
SOA Schemes of arrangement
PP Pre-packs
CHAPTER ONE: INTRODUCTION
1-1
CHAPTER ONE
INTRODUCTION
1.1 Background 1-2
1.2 The research rationale 1-2
1.3 The research problem 1-4
1.4 The research aims, objectives and questions 1-8
1.5 Overview of the thesis 1-10
CHAPTER ONE: INTRODUCTION
1-2
1.1 Background
My name is Tamer El Sayed, a manager who currently owns and manages a small,
fast food business in Cardiff, South Wales (Jalapenos’ Pizza). I have previously
worked as a despatch manager at one of Cardiff’s biggest private employers
(Memory Lane Cakes Ltd (MLC), a subsidiary of Finsbury Food Group Plc). I am
currently conducting a self-funded PhD study in Cardiff School of Management,
Cardiff Metropolitan University. The topic of my study, which was carefully
selected, is related to the field of turnaround management within in the area of
strategic management.
The study seeks to provide a guide that offers help to managers and turnaround
leaders, practitioners and researchers on how to implement successful
turnarounds. This chapter presents my research journey in sections in the
following order: the research rationale, problems, aim, objectives and questions,
plus an overview of the thesis.
1.2 The research rationale
Organisational turnaround management has become one of the most important
topics of strategic management research in the last few decades (Manimala, 1991;
Arogyaswamy, Barker, Yasai-Ardekani, 1995; Maheshwari, 2000 and Bushen et
al., 2003). This may have been due to the increasing decline rate in companies
especially in the last two decades (Maheshwari, 2000 and Bushen et al., 2003).
CHAPTER ONE: INTRODUCTION
1-3
This increase in the decline rate was seen in times of economic recession as well
as the normal years; in both developed and developing countries (Manimala, 1991
and Maheshwari, 2000). Evidence from the UK and the USA showed that in some
developed countries, 20% of large businesses could be considered to be in
decline, of which less than 40% of those businesses had the chance to survive and
turnaround (Manimala, 1991). In addition, more evidence from India showed that
there are more than 100,000 small units and over 1,000 medium and large sized
businesses in economic decline (Gopal, 2007). The decline and failure of these
businesses usually results in major job losses and lay-offs (Harker and Harker,
1998).
From the above statements, it can be seen that the increasing attention given to
research on organisational turnaround management is logical and needed to
minimise or eliminate the increasing number of declining businesses. This
provides me with a very important academic reason to conduct this research. In
addition, there are economic, social and personal reasons behind the choice of this
topic. The economic reason lies in the employees’ loss of income when they lose
their job, as well as the negative effect of failed businesses on the economy as a
whole. The social reason mainly comes from the fact that business failure affects
the lives of all parties who share an interest in the business (e.g. suppliers,
customers, staff, shareholders, banks and the wider community) (Zimmerman,
2002). For example, when staff lose their jobs, they may also lose their
confidence, self-respect and even the unity of their family in some cases (Harker et
CHAPTER ONE: INTRODUCTION
1-4
al, 1998). Business decline cannot be avoided all the time; however, identifying,
understanding and analysing the causes of decline is critically vital in order to
minimise the overall number of failures amongst businesses and thus minimise the
negative effect on those people’s lives (Everett and Watson, 1998 and Dubrovski,
2009).
Additionally, the personal reason is mainly related to my previous job as a manager
in a Welsh food manufacturing company as mentioned earlier. Since I started in
this role, I began to learn about the company’s turnaround experience, which it had
gone through from 1997 to 2003. Since then, I became inspired with the effort that
the leadership had put in to help revive and save the company. This experience
gave me the courage and motivation to investigate how the company’s turnaround
was successfully achieved, what the issues and obstacles were that faced the
management during the whole turnaround process and how they managed to
overcame such obstacles.
1.3 The research problem
Federowski (2007) and Schmitt and Raisch (2013) have asserted that there have
been several studies which investigated corporate turnaround management during
the last few decades. Those studies have evolved around one or more of three
interdependent elements of the turnaround process which are: context, content and
CHAPTER ONE: INTRODUCTION
1-5
process as shown in the table below (Arogyaswamy and Yasai-Ardekani, 1997:
Federowski, 2007).
Context Content Process
Research
aim
Identify the factors
(internal/external) that
influence the success of
the turnaround process.
Identify the actions and
the turnaround options
that can be adapted to
eliminate decline.
Identify the
appropriate workflow
steps and actions that
can be followed to
achieve the
turnaround.
Questions
asked
Why does it work? What should be done? How should it be
done?
Examples Variables can be causes
of decline, severity of
decline, economic and
market development,
size of company and
routines.
Strategic realignment,
repositioning, cost
reduction, product
development,
recapitalisation, process
optimisation, and
organisational change.
Four stage model of
Bibeault, 1982.
Steps of milestone
model (see
Federowski, 2007:29)
Many scholars (e.g. Hegde, 1982; Arogyaswamy et al., 1995; Pandit, 2000 and
Schmitt and Raisch, 2013) asserted that those studies failed to provide a clear
model for managers, leaders and turnaround practitioners, because it offered little
Adapted from: (Arogyaswamy and Yasai-Ardekani, 1997; Federowski, 2007)
TABLE 1.1: THE THREE ELEMENTS OF THE TURNAROUND PROCESS
CHAPTER ONE: INTRODUCTION
1-6
guidance and failed to draw a clear picture of the topic and its issues. Similarly,
various authors (Winn, 1993 and Lohrke and Bedeian, 1998) added that the
literature on turnaround management, offered very little guidance to managers
involved in daily operations during the turnaround process. Nevertheless, this
guidance has been contradictory and inconsistent at times (Lohrke and Bedeian,
1998; Lohrke, Bedeian and Palmer, 2004).
Based on evidence from the turnaround literature, the reasons behind this lack of
clarity and guidance of existing research on turnaround management can be
summarised and concluded by the following reasons:
1. Failure of research designs to connect their findings to current turnaround
theories. Relying on accounting measures (with high possibilities of
manipulation) to define turnaround cases resulted in doubtful samples of
study (Pandit, 2000).
2. Various problems with the research designs such as: poor definition of
turnaround as a phenomenon, asking questions that were previously asked
or not asking the correct questions (Pandit, 2000).
3. There has been extra attention given to research on the content (different
strategies and turnaround options) of turnarounds over the contexts (why
and when a strategy would work) of them; ignoring various factors such as
the severity of decline and the role of stakeholders (Arogyaswamy et al.,
1995 and Pandit, 2000).
CHAPTER ONE: INTRODUCTION
1-7
4. There have been only a limited number of researchers who focused on the
role of the top management team (TMT) in the turnaround process, to
identify market opportunities and restore original performances (Lohrke and
Bedeian, 1998).
5. There have been few empirical studies, which focused on the effectiveness
of some turnaround strategies, instead of investigating how they were
formulated and implemented by management from a process point of view
(Lohrke, Bedeian and Palmer, 2004).
6. The excessive focus on retrenchment as an initial response to decline and
the lack of examination of the interaction between stages of turnaround
(Arogyaswamy and Yasai-Ardekani, 1997). “The literature lacks fully
integrative models that clearly define the stages in the turnaround process
and highlight the critical contingencies that impact each other”
(Arogyaswamy and Yasai-Ardekani, 1997: 496).
Manimala (1991:95) suggested that there should be a link between the causes of
decline and the chosen turnaround strategies. However, he added that there has
been very little attention given to the investigation of this linkage stating that, “In
many case studies very little attention was paid to the identification of causes and
their relation to strategies, which therefore becomes a major task for future
researchers”.
CHAPTER ONE: INTRODUCTION
1-8
Consequently, this study is designed to contribute to a better understanding of the
topic of organisational turnaround management by:
1. Investigating the topic of turnaround management from an overall stage
theory perspective, with emphasis on the three elements of the turnaround
process (i.e. context-content-process).
2. Establishing a linkage between the causes of decline and the appropriate
turnaround strategies.
3. Including other turnaround theories and models in this study in order to link
the findings to other current turnaround theories and contribute to presenting
a clearer picture of the turnaround topic.
1.4 The research aims, objectives and questions
The aim of this study is to develop a good practice model of how to turnaround a
company in decline, so that it recovers and heads toward profit and growth. The
model should represent the three elements of the turnaround process, to guide
company leaders, turnaround managers and practitioners through the turnaround
process stage by stage, until recovery is successfully achieved.
The aim of this study will be achieved through four objectives, which are as follows:
1. Undertake a critical review of literature to develop a theoretical framework
to achieve successful turnarounds. This to investigate the key issues
CHAPTER ONE: INTRODUCTION
1-9
relating to turnaround management as well as management approaches,
to underpin their turnaround strategies.
2. Investigate the key issues of turnaround management by developing
multiple case studies of some companies, to see if the conceptual
framework and its key issues fit those companies’ experiences and to
then modify the conceptual framework upon the findings.
3. Explore the modified conceptual framework and its key issues in depth,
through detailed multiple case studies which faced similar scenarios; this
is to identify the possibility of generalising findings to wider situations.
4. Develop a panel of expert study with practitioners working in the
turnaround industry, upon which the best practice model to achieve
successful turnarounds will be developed. This model will reflect
modifications made after each phase of the study.
These objectives will be achieved by answering the following research principle
question, how do you successfully turnaround a company in decline? This
question will be addressed by answering the following sub questions:
1. How can decline be recognised?
2. What are the appropriate stages of the turnaround process?
3. What are the common causes of decline?
4. What are the appropriate turnaround strategies to include in any
turnaround plan and how and when can each strategy be implemented?
5. How can recovery be maintained and future decline prevented?
CHAPTER ONE: INTRODUCTION
1-10
1.5 Overview of the thesis
The thesis is divided into seven chapters. This first chapter presents the
background of the topic, through the research, rationale, problems, aims,
objectives, questions and finally an overview of the thesis.
In chapter two, the current available turnaround literature is critically reviewed,
investigated and analysed in sections, in order to highlight all the key issues
relating to the topic. The chapter concludes with a theoretical framework that
reflects on how successful turnarounds can be achieved using a stage theory
model and ends with a summary.
Chapter three identifies the research approach adapted in this study. It covers the
theoretical approach (epistemology, theoretical perspective), as well as the
practical approach (methodology, methods). The chapter also provides some
justification for the research methods used to assemble the objectives. It also
explains the data analysis process, in addition to issues related to research validity,
reliability and triangulation. Lastly, the chapter discusses the potential for
generalisation and ends with a summary.
Chapter four investigates the key issues of turnaround management through a
multiple case study, to see if these issues fit the experience of the companies
observed. The chapter considers each company separately, guided by the key
CHAPTER ONE: INTRODUCTION
1-11
stages of the turnaround process (see Section 2.2.3) using secondary data, with a
discussion relating to the company’s history, decline problem, causes of decline,
adapted turnaround strategy and its recovery.
Chapter five presents a cross-case analysis to the cases investigated in Chapter
four. The cross-case analysis aims to identify similarities and differences, between
each company during the same stages of the turnaround process, to create a
pattern for the appropriate turnaround action during each stage and the turnaround
process as a whole. The chapter concludes with the development of the initial
model of successful turnaround and ends again with a summary.
Chapter six aims to explore the key issues of the initial model of successful
turnaround management developed in chapter five in depth, through a multiple
case study, to identify the possibility of generalising data to wider situations. The
exploration process was guided by the stages of the turnaround process (see
Section 2.2.3) for each company separately. A cross-case analysis between the
three companies was conducted, to reveal similarities and differences and to
reflect changes on the modified model of successful turnaround management. The
chapter ends with a summary.
Chapter seven covers the panel of expert study conducted with turnaround
experts, to investigate the modified model of successful turnarounds in depth and
increase validity and reliability of the model. Upon this, a best practice model of
CHAPTER ONE: INTRODUCTION
1-12
successful turnarounds was developed to guide company leaders, turnaround
managers and researchers on how a successful turnaround can be achieved. The
chapter ends with a summary.
Chapter eight represents the conclusion in which reviews of the research
objectives are presented, in addition to an outline of the researchers major
findings. The chapter also emphasises the thesis’ contributions, limitations and
opportunities for future research.
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2-1
CHAPTER TWO
REVIEW OF LITERATURE
2.1 Introduction 2-2
2.2 Overview of the strategic management 2-3
2.2.1 Concept of business decline and failure 2-7
2.2.2 Concept of turnaround 2-11
2.2.3 Stages of the turnaround process 2-13
2.3 Decline stage 2-22
2.3.1 Recognition of decline 2-22
2.3.2 Change of leadership 2-26
2.4 Analysis of the decline situation 2-31
2.4.1 Viability of the company to turnaround 2-32
2.4.2 Severity of decline and cash availability 2-33
2.4.3 Causes of business decline 2-38
2.5 Formulation, implementation and stabilisation of the
turnaround plan
2-57
2.5.1 Classifications of turnaround strategies 2-58
2.5.2 Turnaround strategies 2-62
2.5.3 The best strategy 2-77
2.6 Recovery and return to growth 2-80
2.6.1 Concept of recovery 2-80
2.6.2 Enhancing the competitive advantage 2-80
2.7 Models for achieving a successful turnaround 2-83
2.8 Conceptual framework of successful turnarounds 2-87
2.9 Summary
2-90
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2-2
2.1 Introduction
This chapter is designed to investigate how companies can successfully be turned
around by reviewing the current related literature on the topic of turnaround
management. Section 2.2 gives an overview of the strategic management
literature and differentiates between the concepts of business decline and business
failure. This is followed by a discussion on the concept of turnaround as a process
and its different stages according to different scholars in turnaround literature.
Conclusions have been drawn from the turnaround literature establishing four key
stages for the turnaround process, upon which the rest of this chapter is presented
in sections, discussing the key issues related to the topic in the light of those
stages and they are as follow: [1] The decline, [2] Analysis of the decline situation,
[3] Formulation, implementation and stabilisation of the turnaround plan, and [4]
Recovery and return to growth.
The chapter extensively discusses the first stage of the turnaround process i.e. the
decline stage. This section aims to investigate all the key issues during this stage
of the process in which the first, initial steps of the turnaround take place. The
chapter further discusses the next stage of the turnaround process i.e. analysis of
the decline situation to highlight a company’s viability to turnaround (source of the
competitive advantage), severity of decline and the common causes of business
CHAPTER TWO: REVIEW OF LITERATURE
2-3
decline. This stage is considered the most important stage in the turnaround
process. This is because all the gathered information about the business during
this stage will be used to draw a clear picture of the company’s current status,
which will be used as a foundation for the turnaround plan. This stage is followed
by formulation, implementation and stabilisation of the turnaround plan, which
focuses on the development of the short-term strategies that mainly aim to stop the
immediate decline of the company, in relation to the original causes of decline.
The chapter lastly covers the return to growth stage, in which the leadership
develops long-term strategies that will maintain improvements and take the
company forward.
The chapter also discusses the current models of successful turnaround
management in order to link findings from this study to other studies and build
upon them. A conclusion for the chapter is then drawn with a developed,
conceptual framework of successful turnaround management. The chapter ends
with a summary.
2.2 Overview of strategic management
The term “strategic management” became popular and widely used in many US
Business Schools in the 1960s, despite the existence of a substantial previous
literature which related in the main to strategies to do with war (Segal-Horn, 2004).
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2-4
However, the “strategy” concept in relation to decision making in businesses and
firms was only adopted in the 20
th
Century. A strategy was defined as, “the science
and art of employing business resources to secure objectives, with emphasis on
adjusting to a competitive environment” (Mason, Harris & McLaughlin, 1971:11).
Volberda (2004) emphasised that an organisation strategy definition has always
being associated with concepts such as organisation goals, its allocated resources
and future plans.
Volberda (2004) further asserted that the strategic management literature has not
yet offered managers in their daily operations, with appropriate theories to guide
them through a growing, changing, competitive market, despite the availability of
various recipes for success in the literature. Since the 1960s, an interest and an
argument has grown in the strategic management literature, with regards to how
strategies are formed/formulated. For example, in research by Segal-Horn (2004)
to understand how strategies can be formulated within an organisation, those two
types of strategies were referred to as “top-down planning” and “strategic decision
making or planning”, asserting that strategic management has moved from the
earlier to the latter. Segal-Horn (2004) emphasised that there has been a shift in
the strategy approach over the last forty years as the concept has changed from
one seen as top-down planning and the responsibility of senior management, to
the more modern-day approach where strategic approaches are based on the
need to react to rapid change in the environment and uncertainty.
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Similarly, Waters & Mintzberg (1985:257) compared what they defined as
“deliberate strategies” and “emergent strategies”. They explained that deliberate
strategies are those decisions that were implemented as partly formulated plans by
top management to achieve the organisation’s goals and focused on control and
target achievement from the top. While the emergent strategies were those sets of
unintended organisational behaviours that formed the working patterns which later
became decisions and strategies and usually stimulates organisational learning.
The deliberate strategies concept was mainly the view and beliefs of what was
called the “classical/planning” school of strategy and its sponsors (e.g. Sloan,
1963; Ansoff, 1965) since the early 1960s, with an emphasis that strategy is a set
of formal tools to allocate resources that will create and support long-term
competitive advantage according to existing company strengths and external
opportunities (Ansoff, 1965: Andrews, 1971 and Segal-Horn, 2004). However, as
emphasised by Segal-Horn (2004), these concepts were highly criticised and
considered to have become outdated by the 1980s because of emerging concepts
in “strategic thinking” led by writers such as Michael Porter (1985), who
emphasised the source of competitive advantage, guided by analysing the levels of
an industry structure to determine potential levels of industry profitability and
potential market share.
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2-6
By the 1990s Porter’s idea of analysing the external competitive environment was
superseded by a shift towards a new approach centred on the “Resource-Based
View” of the firm (RBV) where the emphasis is on the internal resources of a
company identifying a competitive advantage within the organisation (Prahalad and
Hamel, 1990 and Segal-Horn, 2004). Additionally, the 20
th
Century was
characterised with the emergence of various theories that argued that old,
traditional theories would not help in overcoming problems relating to continuous,
changing markets and industry structures. Instead, such theories encouraged the
idea of the rise of conflicting views and experimentation to enhance organisational
learning (Segal-Horn, 2004).
Segal-Horn (2004) describes further parallel approaches which were developed to
explain strategic management which include:
1. The Classical/Planning approach: driven by the concept of, “deliberate strategies”
as strategies are developed from top to bottom with an emphasis on building
internal capabilities, against external strengths/weaknesses.
2. The Evolutionary approach: driven by the concept of “emergent strategies” as the
planning is seen as irrelevant to business survival. The changing competitive
market is seen as the main variable that drives strategy development.
3. The Processual approach: driven by the concept of, “emergent strategies” as a
strategy was seen as a product of a process of integration of internal variables.
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2-7
4. The Systematic approach: considered to be “context specific” as strategies will
reflect a background of social, political and/or religious context that may vary in
different parts of the world, according to their own strategic goals.
In another argument, Volberda (2004:40) stated that “the main concern of the
proponents of integration in strategic management was the lack of accumulation of
knowledge due to the fragmented state of the field”. Volberda (2004) supported
what was called “strategy synthesis” to overcome the differentiation-integration
dilemma in strategic management and lack of knowledge accumulation in the field.
Strategy synthesis prescribes three modes of strategy i.e. Boundary school,
Dynamic school and Configuration school. However, Volberda (2004) reported
that the three modes overlap and allow the emergence of new schools that help in
knowledge accumulation. Volberda (2004) further added that despite the
continuous change in the highly competitive environment, producing new
contradicting theories, it has indeed supplemented, expanded and deepened the
knowledge base of strategic management.
Mason, Harris & McLaughlin (1971) emphasised that an important part of any
strategy formulation process is to locate, realise and fully understand the
company’s solid advantage (e.g. saleable product, proven market, operating assets
or skilled staff), in order to work on enhancing it later on in the process. Hambrick
and Cannella (1989) argued that implementation procedures are critically important
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2-8
during the first steps of the formulation process. They explained that mistakes lay
in the root of many failed businesses, because the formulation and implementation
processes are usually treated as two separate stages. Hambrick and Cannella,
(1989) also explained that this is due to the fact that no leaders can draw a
complete step-by-step strategy first time, but instead they should think about
formulating a strategy that they are able to use to implement and achieve the
desired targets, with the least amount of risk.
Moreover, Scherrer (2003) reported that in this stage, recognising the company’s
finance and accounting system is vital. Scherrer (2003) further explained that the
management should implement the budget that reflects the actual costs, rather
than the estimates. Furthermore, he explained that this would assist them to stay
within their financial boundaries and fixed costs. Additionally, it was reported that
analysing customer’s needs and types (e.g. productive or less productive
customers), is essential to stop the continuous decline, by letting the management
concentrate on the more profitable ones (Scherrer, 2003).
The strategic management literature offered various organisational strategies for
companies desperate to avoid failure and maintain their profit and growth plans,
through gaining higher shares of the market (Dess and Davis, 1984). For example,
Nandakumar, Ghobadian and O’Regan (2011:222) reported that there are three
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2-9
different classifications that organisational strategies can be classified under and
they are:
1. Corporate level strategy: this strategy is, “Concerned with domain selection,
that is to say, the vertical, horizontal market scope and linkage and level of
integration amongst different businesses”.
2. Business level strategy: this strategy is interested in highlighting the
methods of competing successfully in the marketplace within the industry
and it attracts the most attention from researchers in strategy research
studies.
3. Functional level strategy: this strategy is interested in maximising
productivity from the existing resources in each task of the company’s
operations.
Moreover, Porter (1980) introduced a paradigm that includes three groups of
strategies, which can be used to strengthen the company’s footing in the
marketplace on the basis of having a competitive advantage to outperform
competitors and they are:
1. Cost leadership: this strategy aims to achieve efficiency through creating
basic products at the lowest cost possible and this requires continuous
research to find ways to minimise overheads. However, carrying out such a
strategy should not neglect the importance of improving the quality of
products and the services provided to customers. There is some argument
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2-10
that such a strategy requires a high share in the market or professional
access to cheap raw materials, but Porter disagrees with such arguments,
reporting that some small firms have successfully adapted such strategies,
with no high market share or cheaper access to raw materials.
2. Differentiation: adapting such a strategy requires the company to develop a
unique advantage that is seen exclusively by customers in the market (e.g.
new product or services). However, the use of such a strategy may incur
higher costs; nevertheless, this can be overcome by adopting a premium
pricing scheme alongside this strategy.
3. Segmentation (focus/or market niche leadership): firms would adopt this
strategy to focus on certain customers, markets or products that are more
profitable to the company.
Porters (1980) and Dess and Davi (1984) argued that companies which fail to
adopt any of the strategy groups mentioned above, would suffer lack of profitability
and decreased performance. It was reported that companies differ in their use of
certain strategic choices even within the same industry, due to size, market share
and/or the strategic orientation of the management (Dess and Davis, 1984).
Relatively, it was highlighted in the literature that there are generic strategies such
as niche, differentiation, growth and turnaround each one of which is adapted in
line with the company’s needs and strategic goals (O’Neil and Duker, 1986).
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Beeri (2009:132) asserted that turnaround strategies are different from other
performance improvement strategies because, “They aim to create a radical and
wide change, they are urgent, they are widely inspected, they are executed by
either poor or new management and they are implemented in an unproductive
organisational climate”. Turnaround strategies are designed to help businesses,
which suffer decreased or negative profitability and become vulnerable to failure in
the marketplace (Lorke and Bedeian, 1998). Various authors (e.g. Schendel,
Patton and Riggs, 1976; Sudarsanam and Lai, 2001 and Pretorius, 2009) asserted
that understanding turnaround management comes from understanding decline
and failure, therefore a discussion of the concepts of both phenomena will follow.
2.2.1 Concept of business decline and failure
There is no one common definition for business decline and failure. Several
researchers from the east to the west have differently defined business decline and
failure in relation to their focus, research problems, interpretation criteria and
diversified fields of research, which created a poorly defined concept of business
failure (Pretorius, 2009). It was found that decline and failure were defined in
relation to various criterions such as the amount of cash loss, bankruptcy risk,
profitability, ability for growth and lack of resources.
For example, from the east, Manimala (1991) reported that the Indian government
identified companies in decline according to the cash loss criterion whereby a
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2-12
company is thought to be in decline if it reaches 50% erosion of peak net worth.
However, this criterion was criticised by researchers in relation to its effectiveness
according to Manimala (1991). He explained that this is because the definition
delays any possible turnaround efforts to save the company when time is critical at
this stage.
Furthermore, from the west, Lorke and Bedeian (1998) have defined a company in
decline as the company facing trouble and threats to its existence. Similarly,
various scholars (e.g. Schwartz and Menon, 1985; Hambrick and D’Aveni, 1988;
Zacharakis et al., 1999; Sudarsanam and Lai, 2001; Ferrier et al., 2002 and Probst
and Raisch, 2005) defined business decline in relation to the firms potential as a
bankruptcy risk. However, in contrast, Pretorius (2009) disagreed with this
definition arguing that decline and failure should be defined separately from
bankruptcy. This is due to the idea that failure is not associated with deliberate
situations as it sometimes is in bankruptcy. Similarly, Everett and Watson
(1998:373) also disagreed with defining failure in relation to bankruptcy risk, for a
different reason stating that, “It may exclude many businesses that would
commonly be regarded as having failed”.
However, Pretorius (2009:10) introduced a definition for business decline and
failure in a study conducted on defining business decline, failure and turnaround.
He constructed his definition in relation to the business’ lack of resources defining
decline stating that:
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2-13
A venture is in decline when its performance worsens (decreasing
lack of resources) over consecutive periods and it experiences
distress in continuing operations. Decline is a natural precursor in
the process of failure.
Furthermore, Pretorius (2009:10) stated that:
A venture fails when it involuntarily becomes unable to attract new
debt or equity funding to reverse decline; consequently, it cannot
continue to operate under the current ownership and management.
Furthermore, other researchers (e.g. Bibeault, 1982; Hoffman, 1989; DeAngelo
and DeAngelo, 1990 and Lasfer and Remer, 2007), defined a business in decline
in relation to its profitability, arguing that profitability is one of the main targets of
any business. However, some of these researchers defined decline in relation to
negative profitability and some defined it in relation to the continued decrease in
profit for a period of time, even if the profitability was positive. For example, Lasfer
and Remer (2007), reported that a financially declined business is a business that
suffers three consecutive years of negative net income, followed by at least one
year of positive net income. Lasfer and Remer (2007:3) added that this definition
allowed them to avoid adapting any outcome based definitions (e.g. bankruptcy),
stating that, “Such outcomes are a consequence or resolution/existing paths
adopted by companies that are financially-distressed”. On the other hand, Bibeault
(1982) and DeAngelo and DeAngelo (1990) have defined business decline stating
that it, “Means several years of deteriorating profits. In four out of five cases,
decline includes one or more years of unprofitable operations, large non-operating
write-offs, or both”. Similarly, in a study conducted on 54 firms up until 1970,
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2-14
Schendel, Patton and Riggs (1976) identified firms in decline as firms that suffer at
least four years of consecutive decline in their net income, as normalised by gross
national product (GNP) growth. They explained that a firm, which is not performing
better than the general national economy (GNE) and not exceeding the growth rate
of GNP, is a turnaround case, even if it is making some growth in income. This
view was supported by Khandwalla (1989), who reported that a company is in
decline if it is no longer able to support any growth over the industry average.
Schendel, Patton and Riggs (1976:4) stated that, “The four year time span is used
to ensure that the downturn period was long enough to show that there is indeed
some basic problem with the firm and that it had not simply made a minor mistake
with a short-term impact”.
However, Bibeault (1982) disagreed with this definition reporting that it had ignored
the idea that each industry has its own unique characteristics and strategic goals
and exceeding the GNP may not be one of these goals. For example, businesses
that are owned by states and governments in which the top priority sometimes can
be keeping people in work to minimise unemployment rates, may not have the goal
of exceeding GNP. Additionally, Pandit (2000) criticised the same description
reporting that such definition fails to differentiate between real and temporary
decline cases. For example, if a company performs better than its competitors in a
difficult business environment at a time when the economy is flourishing, it may be
considered in decline even though it is not.
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It can be concluded from the above debate that the concepts of decline and failure
are not quite robust yet, due to the different interpretation offered by different
scholars to such phenomenon. This conclusion is supported by the view of Pandit
(2000) who argued that research on organisational turnaround management is not
fully understood due to such different definitions and interpretations. Therefore, for
the purpose of this study and in line with the views of many authors (e.g. Hoffman,
1989; DeAngelo and DeAngelo, 1990 and Lasfer and Remer, 2007), this study
identifies firms in decline as those firms that suffer at least three consecutive years
of negative net income, following at least one year of positive net income. The
reason behind defining decline in relation to negative profitability in this study, is
that the researcher agrees with the idea that profitability is the main goal for most
businesses and the reason for the three year time span is to make sure that the
company is not in natural temporary decline, which most firms experience during
the normal course of their lifecycle.
2.2.2 Concept of turnaround
Turnaround was described by Zimmerman (2002) as a multifarious process of
organisational learning experiences, which are achieved through learning how to
do things in new and more efficient ways. Zimmerman (2002:30) stated that,
“Turnaround management is a specific science which requires the ability to nurture,
encourage and reinforce what is good as well as root out what is unsatisfactory”.
Additionally, corporate turnarounds were defined as a, “Dynamic process
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2-16
comprising an activity sequence that leads firms from a decline situation, to a
period of sustained success or failure” (Schmitt and Raisch, 2013).
Scherrer (2003) added that successful turnaround is a complex procedure that
requires a solid management team and a sound business core. Turnaround is the
process of persistent constructive change in the performance of any business,
which aims to achieve the desired results (Scherrer, 2003). Moreover, the
turnaround process can also be defined as:
That amalgam of managerial skills, systems and procedures used;
the value systems and individual character traits exhibited and the
actions taken during the turnaround event to achieve a recovery.
(Zimmerman, 2002:30)
Various scholars (e.g. Schendel, Patton and Riggs, 1976; Hoffman, 1989; Barker
and Duhaime, 1997 and Pandit, 2000), have defined a turnaround strategy as the
selection of actions and activities that are required to achieve a business’s survival
and recovery from decline. Turnaround is achieved when a company in decline
returns to its previous status before decline and heads towards growth as a result
of some reversing strategies (Schendel, Patton and Riggs, 1976). Similarly,
O’Kane (2006:112) stated that, “Successful turnarounds are most often associated
with the reversal of a survival-threatening decline”. In addition, Pretorius (2009:11)
stated that:
A venture has been turned around when it has recovered from a
decline that threatened its existence, to resume normal operations
and achieve performance acceptable to its stakeholders
CHAPTER TWO: REVIEW OF LITERATURE
2-17
(constituents) through reorientation of positioning, strategy, structure,
control systems and power distribution.
Furthermore, Zimmerman (2002) defined a turnaround case as the company that is
faced with a period of crisis serious enough to make it in need of radical
improvements, to remain a strong participant in its industry. Notably, Chowdhury
(2002) emphasised that these improvements will not happen as a result of a single
event. He explained that a series of multiple consequential events during a
specific period of time is required to achieve improvements in performance. From
this point, Chowdhury (2002) suggested that because turnaround is of a dynamic
nature due to occurring consequential changes within the process, it is logical to
study any turnaround from a stage theory perspective, in which each stage is in
sequence to the other. Additionally, Chowdhury (2002) argued that studying
turnaround from this perspective helps to understand how and why businesses
respond to turnaround actions differently over time, leading to successful or
unsuccessful turnaround.
From the above discussion, it can be concluded that the turnaround process is a
constructive set of consecutive stages of actions that aim to correct original faults,
which led a business into decline in the first place, eliminate weaknesses and plant
new skills and strengths within the company to help achieve recovery and growth.
Any turnaround process should follow certain stages and steps to ensure its
success, as discussed in the next section.
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2.2.3 Stages of the turnaround process
Decline in most companies starts gradually and then accelerates towards failure;
therefore, Zimmerman (2002) suggested that the most appropriate time for a
successful turnaround is during the early stages of decline. This is because there
may be enough time left to formulate and implement a suitable turnaround plan
before the company’s time and resources are depleted.
Several authors (e.g. Zimmerman, 2002; Scherrer, 2003; (Lohrke, Bedeian and
Palmer, 2004; McGovern, 2007) asserted that in order to turnaround any company
in decline, the management is required to identify and analyse the causes of
decline as soon as signals appear. They must then formulate and implement a
plan that reverses the company’s status to where it was before decline and head
towards growth. The reason behind this was made clear by Hegde (1982:302)
that, “Any turnaround strategy tends to build around eliminating the cause of
sickness”. Similarly, various scholars argued that any turnaround process should
be implemented in stages that any management team could follow to ensure its
success. For example, Chowdhury (2002:251) argued that any turnaround
process should be investigated from a stage theory perspective stating that, “Such
an approach can explain how and why a chronology of occurrences play out over
time and ultimately lead to a firm’s survival or failure”. He further explained that the
turnaround process is a set of chronological events that result, in the end, with
improvements in performance. Based upon this and as mentioned before in
CHAPTER TWO: REVIEW OF LITERATURE
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chapter one, this study investigates turnaround from an overall stage theory
perspective that integrates the three elements of research on turnaround, i.e.
context, content and process of turnaround.
In this context, several authors have tried classifying the turnaround process from
that perspective. However, it was found apparent in the literature that scholars
have not agreed on one set of stages. Instead, each one produced his own set, for
example, Bibeault (1982:92) presented a model to incorporate turnaround
management that consisted of five stages, which are as follow:
1. The management change: The TMT decides if a change in management is
needed or not. If yes, a turnaround leader or a new Chief Executive Officer
(CEO) is appointed and given control over the company. Supportively,
Maheshwari (2000) reported that change of leadership is the initial step in
the turnaround process, due to the incompetence of the existing leadership
to carry out any new changes.
2. Evaluation of situation: The new turnaround leader or CEO analyses the
situation and formulates a plan that aims to turn the company around.
3. Emergency stage: The turnaround plan is ready and the company must
react quickly by implementing a plan to stop decline.
CHAPTER TWO: REVIEW OF LITERATURE
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4. Stabilisation stage: Decline should have stopped by now and further plans
are to be developed to maintain improvements. Results should be reviewed
to decide if any further actions are required to recover from decline.
5. The return to normal growth: By this stage, the company should be
achieving some profits and already heading towards growth.
Moreover, in a study conducted in 2002 by Chowdhury, a four stage model was
presented to explain the turnaround process from a stage theory perspective. The
model of Chowdhury (2002:251) consists of four stages, which can be explained as
follows:
1. The decline stage: This is the first stage of the turnaround process and
decline is attributed to the external environment and/or the internal
environment. However, the length and the speed of decline are linked to the
degree of interaction between those two environments. At this stage, a
decision of change in management is usually initiated by the pressure from
one or more of the stakeholders such as board members, banks, creditors,
governments or unions.
2. The response initiation stage: Chowdhury (2002) disagreed with
categorising the turnaround responses as operating responses for internal
causes of decline and strategic responses for external causes of decline.
He argued that this is a misleading concept because the applicability of
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responses depends on the type, the operating and strategic nature of the
company and the stage of decline. He argued that carrying out the
appropriate turnaround response in the correct time span helps revive the
company more quickly, especially in the early stages and this might
eliminate the need for long-term turnaround actions.
3. The transition stage: Chowdhury (2002) argued that this stage is separate
from the previous two stages. He reported that the turnaround literature
indicated that the turnaround response should have an immediate impact on
the company’s performance. However, there are various factors which may
differ from one case to another, that have to be understood and
simultaneously addressed during the implementation process, such as
resource commitments, sub-unit policies, programs, structures and people
to ensure the success of the turnaround actions.
4. The outcome stage: Chowdhury (2002:256) asserted that, “The measures
used to determine outcome – success or failure – are the same as those
used to define decline at the first stage of the turnaround process”. He
added that a comprehensive measure that investigates the company’s
overall performance (e.g. market share, profitability and managerial
resources), is essential to avoid incorrect determination of the company’s
success in the turnaround process.
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In addition, Zimmerman (2002:27), asserted that there are three stages to the
turnaround process in which, “Each stage is identifiable and possesses its own
unique operational characteristics and organisational dynamics”. These stages
are:
1. The pre-turnaround situation: This is the period before the company falls,
or starts slipping, into the decline position in the form of declined profitability,
or concerns arise from investors or other shareholders about the company’s
health. During this period of time, signals of decline may be mistakenly
understood as temporary decline signals due to some external factors such
as recession. At this stage, the mistake is made in that management did not
realise the fact that these signals are the alarm bells that say change is
needed.
2. The period of crisis: This is the period when the company’s leadership
declare that change is needed, profitability is negative or declined and the
market share is falling or small. This is the period of realising that change is
needed quickly before the company reaches failure. However, this does not
guarantee that the company’s management will make themselves
accountable for some of this decline; management tend to blame decline on
other parties.
3. The period of recovery: This is the stage of action which takes place
whether it will work or not. The important part is that attempts are made
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until profitability is improved or made positive and the market position is
restored, alongside the overall financial health of the company. Turnaround
achievements are when improvements are made in the profitable situation
and the market share of the company and this can go on for several years.
Furthermore, in a later study conducted on turnaround management Scherrer
(2003) introduced a model to achieve a successful turnaround that consisted of five
stages. He explained that each one of these stages required some time to
complete and they were:
1. Analysis of the situation: Scherrer (2003) reported that this stage usually
takes up to one month. During this stage, the turnaround management aim
to develop a full understanding of the situation and highlight any
fundamental problems through the use of different financial ratios. Scherrer
(2003) suggests using cash flow analyses and financial projections on a
regular basis in the early stages of the turnaround process, in order to
recognise the accounting system and asses the company’s chances of
survival and recovery. Relatively, paying extra attention to a good
accounting system is recommended to avoid difficulty in surviving from
decline. Furthermore, Yawson (2005) asserted that one of the first steps to
achieve a successful turnaround is to review the financial strategies in the
company, as it can provide an immediate solution to stop any further
deterioration in performance.
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2. Creation of a plan: This stage usually takes up to two months. At this
stage, the management develop a plan that aims to provide a solution for
any problems highlighted during the analysis stage. This plan may include
changes to operations, assets or both (Scherrer, 2003). The plan can also
be used to gain the support of other parties during the turnaround process
such as the TMT or stakeholders (e.g. shareholders, debtors or customers)
(Scherrer, 2003).
3. Implementation of the plan: This stage usually takes six to twelve months
and the plan should be employed carefully, whilst also monitoring the firm’s
status and response to the new changes internally and externally.
4. Stabilisation of the plan: This stage usually takes six to twelve months.
Scherrer (2003) advises the management to use cash flow projection
analysis on a quarterly basis. He reported that this could assist them in
developing an operating plan that reflects the amount of cash available to
achieve recovery.
5. Returning to growth: This stage usually takes one to two years in which
the management are required to keep monitoring both the external and the
internal environments, in order to locate any problems as early as possible
and alter operations quickly to respond to these new changes.
CHAPTER TWO: REVIEW OF LITERATURE
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From the above views and for the purpose of this study, it can be concluded that
there are four stages that should be understood to ensure the implementation of
successful turnarounds and they are:
1. Decline stage.
2. Analysis of the decline situation.
3. Formulation, implementation and stabilisation of the turnaround plan.
4. Recovery and return to growth.
The first stage, as shown in Figure 2.1 above is the decline stage as evolved from
the view of Chowdhury (2002) and Zimmerman (2002). This is the stage when
decline is recognised and it is seen that change is needed.
FIGURE 2.1: STAGES OF THE TURNAROUND PROCESS
Analysis of
the decline
situation
Formulation,
implementation and
stabilisation of the
turnaround plan
Decline
stage
Recovery and
return to
growth
Adapted from: (Bibeault, 1982; Chowdhury, 2002; Zimmerman, 2002 and
Scherrer, 2003)
CHAPTER TWO: REVIEW OF LITERATURE
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The second stage in Figure 2.1 (analysis of the decline situation), represents stage
two in the study of Bibeault (1982), stage one in the study of Chowdhury (2002)
and stage one in the study of Scherrer (2003). The actions taken during this stage
are undertaken by the new CEO or turnaround management.
Stage three, in Figure 2.1, represents stages three and four in the study of Bibeault
(1982), stages two, three and four in the study of Scherrer (2003) and stages two
and three in the study of Chowdhury (2002). The reason behind this integration is
that I believe that the formulation and the implementation process should be
treated as one stage and not two separate ones. This view was supported by
Hambrick and Cannella (1989) who reported that implementation procedures are
critically important during the first steps of the formulation process. They confirm
that mistakes lay in the root of many failed companies, because formulation and
implementation processes are usually treated as two separate stages (Hambrick
and Cannella, 1989).
Finally, stage four, in Figure 2.1, represents the last stage of the three studies
(Bibeault, 1982; Chowdhury, 2002 and Scherrer, 2003). Each one of the stages in
Figure 2.1 is discussed extensively, highlighting the major key issues in turnaround
management in the following sections from 2.3 to 2.6.
CHAPTER TWO: REVIEW OF LITERATURE
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2.3 The decline stage
2.3.1 Recognition of decline
Various scholars (e.g. Schendel, Patton and Riggs, 1976; DeAngelo and
DeAngelo, 1990; Sudarsanam and Lai, 2001; Zimmerman, 2002; Midanek, 2002
and Lasfer and Remer, 2007) have all reported that every company suffers natural
ups and downs in performance from time to time in its history. However, it is
important to understand the difference between short-term natural decline and
long-term damaging decline. A criterion of various conditions was developed from
the turnaround literature and presented in this section to differentiate between
companies in real decline and businesses experiencing natural difficulties.
The following signs are associated with businesses in decline at different stages.
A company is considered to be heading for, or already in decline, if it is suffering
one or more of the following signals:
? Declined profitability (Manimala, 1991; Zimmerman, 2002 and Teng, 2007).
It should be declining as well as being lower than the average for the
previous four years and for at least one year (Zimmerman, 2002 and Teng,
2007).
? Negative profitability (Zimmerman, 2002 and Teng, 2007) or below industry
average; such as instances when other companies make more profit selling
similar products (Zimmerman, 2002).
CHAPTER TWO: REVIEW OF LITERATURE
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? Negative working capital; increase in losses causing capital exhaustion and
lack of employing the existing capacities (Manimala, 1991).
? Declined real revenue after measuring inflation rates; inflation should not be
calculated as revenue progression because inflation rates may indicate an
increase in revenue whilst actual business is declining (Zimmerman, 2002).
? Deteriorating market position; this may occur due to various reasons such
as loss of market share or loss in numbers of distributors (Zimmerman, 2002
and Scherrer, 2003).
? Arising concerns by investors, managers and board members in relation to
company’s conditions (Zimmerman, 2002).
? Incompetent management (Teng, 2007) who cannot react to the changes
occurring in the environment internally and externally.
? Poor internal accounting systems (Scherrer, 2003), high staff turnover
(Manimala, 1991; Scherrer, 2003 and Teng, 2007), low staff morale,
absenteeism, lack of trust and accidents (Manimala, 1991).
? High accounts receivable, poor leverage ratio, poor inventory turnover and
declining sales (Teng, 2007), disputed balances with customers and liquidity
problems such as cash shortages (Zimmerman, 2002).
? Regular interruption in production and sales, cash losses, cutting or
stopping dividends (Manimala 1991) and poor quality of products
(Manimala, 1991 and Zimmerman, 2002).
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? Organisational problems such as dispersed responsibilities and
inappropriate allocation of staff in key positions (Zimmerman, 2002).
? Ethical problems such as excessive TMT compensation, disturbed
relationship between suppliers and purchasers, theft and financial statement
falsification (Zimmerman, 2002).
? Flat or declined sales and high defection rate of staff or customers
(Midanek, 2002).
? Lack of communication can be another sign of decline if the TMT does not
have an open door policy for key managers (Bibeault, 1982). Bibeault
(1982) explained that managers sometimes hesitate to deliver bad news or
ask for help when they need it, instead they try to solve problems
themselves and this is when things start to go wrong for the company.
Scherer (2003:52) argued that, “Business failure is marked by early signals of
decline that often go unobserved or ignored”. When the team of management
does not recognise the decline signals early enough, a rapid decline could be
expected to happen much quicker in the company. In line with this, Bibeault (1982)
reported in one of his studies that his survey results showed that in eight out of ten
cases, the early warning signals were ignored leading the company to decline.
Additionally, it was reported by Onich (2012) that signals of decline can be denied
CHAPTER TWO: REVIEW OF LITERATURE
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by other stakeholders as well as the management, such as the TMT or even
lenders.
Furthermore, Zimmerman (2002) asserted that it is the fault of management when
they mistakenly think that these signals indicate short term decline and not real
decline. However, Bibeault (1982) emphasised that recognising decline signals
early enough is not an easy task to do, as sometimes problems can be obscure
when they are first found.
Signals of decline are usually observed by the Board of Directors, banks, debtors,
creditors, stakeholders and/or shareholders (Zimmerman, 2002). When decline is
located, the TMT’s responsibility is to identify a turnaround leader who has the
capabilities to lead the firm through the difficult period of decline (Scherrer, 2003).
However, it was found apparent in the literature that scholars differed in their views
about whether to change the current leadership/management of the company, or to
keep it in place to turnaround the company.
2.3.2 Change of leadership
O’Kane and Cunningham (2013:52) stated that “The rationale for leadership
changes and their effect on performance and recovery have yet to be conclusively
established”. This has been due to the debate between scholars regarding the
need to change the leadership to begin the turnaround process. For example,
CHAPTER TWO: REVIEW OF LITERATURE
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Whitaker (1990) reported that the change of leadership is unnecessary if the
causes of decline are due to external factors and not due to bad leadership itself.
On the other hand, in contrast, various authors (e.g. O’Neil and Drucker, 1986;
Grinyer et al., 1990; Pearce and Robbins, 1994; Sudarsanam and Lai, 2001 and
O’Kane, 2006) have asserted that the change of leadership is essential to the
success of the turnaround process because leaders are in the main responsible for
sailing the ship.
Additionally, Bruton and Ahlstrom (2001) explained that existing CEO’s cannot
identify problems or generate the solutions for them, mainly because they are at
least partly responsible for their company’s decline. Furthermore, evidence from
the public sector introduced by Pauline and Skelcher (2005), supported this view
stating that, “Change in the top management produces a reassurance to external
stakeholders that the organisation is engaging with the need to undertake the
strategic changes necessary for turnaround”. Supportively, Yawson (2005) in a
study conducted on 269 Australian companies, which suffered performance decline
during 1993-2000, asserted that one of the most important steps of turnaround is
appointing a new CEO who can offer new skills, direction and strategies that could
revive the company and bring it back on track. Evidence from the literature shows
that new CEO’s increase the chances of any company’s recovery by their ability to
implement greater levels of change in respect of company processes, structure,
strategies and internal environment on the whole (Barker and Mone, 1998:
CHAPTER TWO: REVIEW OF LITERATURE
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Yawson, 2005: and O’Kane and Cunningham, 2012). However, for this to ensue,
when the TMT appoint the new CEO, it should observe his/her decisions and
actions cautiously because some of these actions (e.g. asset divesture) can be
detrimental to the company’s recovery (Yawson, 2005). Relatively, Auchterlonie
(2003:53) in a study on how to fix the rotating CEO dilemma stated that, “The
replacement process of CEO’s is initiated when a company’s Board of Directors
and/or managing private equity group begins to get suspicious of
underperformance”.
Furthermore, Stopford and Baden-Fuller (1990) in a study conducted on the role of
CEOs in the turnaround process, emphasised that new CEOs should provide an
extremely vital role in setting off the change process within companies, as well as
being the educator during the whole turnaround process.
Despite this, various authors such as (Zimmerman, 2000) argued that newly
recruited turnaround leaders or CEOs could have a negative effect on many
potentially successful turnarounds, by assuming that everything needs to be
changed in order to bring the firm back to its original status. Similarly, other
authors (Sull, 1999 and O’Kane and Cunningham, 2012) reported that change of
CEO might damage a company’s chance of recovery because it may cause fear
and confusion internally leading to loss of competencies.
CHAPTER TWO: REVIEW OF LITERATURE
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Moreover, Ofek (1993) has reported another problem when recruiting new leaders
internally, in that there are fewer actions usually taken in companies by leaders
who hold high shares. Therefore, he suggested that recruiting leaders from
outside the company is a helpful choice in such cases. Accordingly, Hoffman
(1989) supported this view asserting that successful businesses are more likely to
replace failing leaders with others from outside the company rather than internally.
External leaders tend to highlight the company’s weaknesses and strengths from a
new perspective (Hoffman, 1989).
Additionally, Tourtellot (2004:68) reported that leaders from outside the industry
and not just the company, can prevent decline from worsening if they are able to:
1) Ask questions that lead to new unexpected solutions by the current
management.
2) Update the answers for questions that were asked in the past and the
answer wasn’t suitable at the time.
3) Maintain perspective of having no emotional baggage to carry when
saving the business, especially in family owned businesses.
4) Make people think about new fresh ideas of marketing and improving
efficiency.
Burbank (2005) and Dubrovski (2009) emphasised that companies in distress need
leaders with virtues that are different from the qualities of leaders in stabilised
CHAPTER TWO: REVIEW OF LITERATURE
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companies. Accordingly, Auchterlonie (2003) introduced a middle ground view
regarding whether change of leadership is an important first step or not. He
asserted that it is better to hire an independent, unbiased turnaround firm/manager
to assess the company’s state and causes of decline and work alongside
incumbent management, instead of changing the CEO straightway. Yet again, in
contrast, O’Kane and Cunningham (2012:60) supported by Ballinger and Marcel
(2010) have stated that, “The use of interim CEO succession processes have also
recently been found to be linked to lower levels of performance and greater
disruption during the interim’s tenure”. Despite this, O’Kane and Cunningham
(2012) found from their study on four in depth cases within the Irish context, that
evidence showed that the timing of implementing change in leadership is the
crucial element and it is best to gain control over the company’s major key issues
and become less reliant on incumbent leadership before implementing the change.
Additionally, in a study conducted on three heavy engineering companies, which
have recovered from decline, to explore the way they were managed through the
turnaround process, Harker et al. (2000) asserted that the Board of Directors’ job
doesn’t end by appointing a new CEO. They explained that a successful
turnaround heavily relies on a strong relationship between the newly recruited CEO
and the Board of Directors. The TMT must provide the newly recruited
CEO/turnaround leader with the professional leadership, assistance and
involvement needed to execute the turnaround plan and transform the business.
CHAPTER TWO: REVIEW OF LITERATURE
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Also, the new CEO/turnaround leader must communicate with the TMT to tell them
about what is going to be done in order to make sure they are fully aware and
supportive of the plan (Harker et al., 2000 and Kow, 2007).
From the above debate it can be concluded that most scholars (e.g. O’Neil and
Drucker, 1986; Stopford and Baden-Fuller; Grinyer et al., 1990; Pearce and
Robbins, 1994; Sudarsanam and Lai, 2001; Auchterlonie, 2003; Yawson, 2005 and
O’Kane, 2006) agree that a change in leadership is critically essential during the
first steps of the turnaround process to ensure success. However, other evidence
shows that appointing a temporary turnaround manager/firm to work alongside the
existing/incumbent management during the early stage of the turnaround process
is the most beneficial (Auchterlonie, 2003).
2.4 Analysis of decline situation
This is the second stage of the turnaround process and it is carried out by the
newly appointed CEOs or turnaround leaders, in order to investigate and draw a
whole picture for the company’s financial and operational status. Scherrer (2003)
suggested that there are various tools which can be relied on during the analysis
process, such as the use of financial ratios (return on assets ROA - or return on
investment ROI). Olstein (2007) added that the analysis of the company’s financial
statements, accounting systems, inventories, receivables, liquidity ratios and free
CHAPTER TWO: REVIEW OF LITERATURE
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cash flow statements, can indicate why and how the company fell into decline.
However, the use of financial ratios was highly rejected by some authors. For
example, Beeri (2009) asserted that relying on these measures during the
turnaround process, limits the management’s ability to see and act upon problems.
Alternatively, Appel (2005) in his study of the Kasper ASL firm, found that speaking
to all kinds of employees and managers was critical to the success of the analysis
process not only because they highlighted problems in their working areas, but
they also highlighted additional problems outside their departments. Furthermore,
Appel (2005) asserted that analysing data on the industry and competitors as a
whole, also played a vital role in drawing a clear picture for Kasper’s position and
chances of survival in the marketplace.
Moreover, Scherrer (2003) explained that understanding the severity and the
causes of decline are the primary elements of this stage, because they can impact
the selection of which turnaround strategy to include in the plan. Similarly, Burbank
(2005) explained that knowing how the company fell into decline in the first place is
critical, because searching the history of the company can reveal past challenges
that can be used to build future strategies on.
CHAPTER TWO: REVIEW OF LITERATURE
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2.4.1 Viability and competitive advantage
Finkbiner (2007) asserted that it is important to carry out an assessment of viability
as the first step of the analysis process, in order to ensure that the business can be
saved. Relatively, Auchterlonie (2003:55) argued that there are three objectives
for the analysis process that the turnaround leader should perform and they are:
1) “To verify that the business can be saved.
2) To identify the most appropriate turnaround strategy based on current
operating and strategic health.
3) To develop a preliminary action plan”.
Accordingly, Finkbiner (2007:123) explained that in order to check if the business
can be saved or not, the three important elements for any successful turnaround
that must be available are:
1. Viable product or service that stands as a competitive advantage for the
company in the market with reasonable share and profit margins that are big
enough to support the business.
2. A management that are loyal, able to change and able to implement new
strategies within the organisation.
3. A bridge finance to provide time and cash for the turnaround process, which is
not easy to find for a business that is already in crisis.
CHAPTER TWO: REVIEW OF LITERATURE
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Based on and supported by the above discussion, it can be concluded that the
framework for the analysis stage comprises of three main elements (i.e. viability of
the company, severity of decline and causes of decline), which will help draw a
clear picture of the company’s ability to turnaround or not and they are:
1. Viability of the company - to ensure that the company has the ability to
recover by identifying the source of a competitive advantage, upon which a
long-term plan to enhance this advantage will be developed (Lohrke and
Bedeian, 1998; Finkbiner, 2007).
2. Severity of decline - to identify whether the company has enough/can
provide the time and financial resources (cash) to fund operations during the
turnaround process (Scherrer, 2003 and Finkbiner, 2007).
3. Causes of decline - as it plays an important role in selecting the appropriate
turnaround strategy later in the formulation and implementation stage
(Scherrer, 2003 and Burbank, 2005).
2.4.2 Severity of decline and cash availability
Understanding the degree of decline a company is in is important because it is
associated with the degree of its survival (Pearce and Robin, 1993; Lohrke and
Bedeian, 1998). Scherrer (2003:58) stated that, “The stage of decline a business
is in will determine the type of action that must be taken to accomplish the
CHAPTER TWO: REVIEW OF LITERATURE
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turnaround”. Similarly, Lohrke and Bedeian (1998) asserted that decline severity is
very much connected to the amount of cash available, influencing the choice of
certain turnaround strategies. For example, a company in the early decline stage
(declining sales and margins), with some resources still available, may use certain
strategies such as increasing expenditure in new product development (NPD) and
functional areas to improve sales. Meanwhile, a company in a late decline stage
with not enough cash resources left and under threat of closure, may seek other
strategies such as cost cutting or divestment of unprofitable units of labour (Lohrke
and Bedeian, 1998).
According to Scherrer (2003) there are three basic stages for decline and they are:
early decline, mid-term decline and late decline. Scherrer (2003) further argued
that each one of these stages has its own signals and characteristics, which can be
presented as follows:
? Early decline stage: This stage includes several signals that indicate the
onset of business decline such as cash shortage, liquidity strains, decrease
in working capital, increase in accounts payable (e.g. falling behind on
paying banks and creditors), increase in customer complaints as well as flat
sales (Scherrer, 2003), replacing substance with form (deteriorating quality)
and lack of clear goals (Lorrange and Nelson, 1987). Additionally, declining
margins, declining market share, debt increasing rapidly, management and
staff turnover, low staff morale and declining working capital are more early
signals of decline (Bibeault, 1982).
CHAPTER TWO: REVIEW OF LITERATURE
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? Mid-term decline stage: Scherrer (2003) has indicated that the signals of
the mid-term decrease is an increase in bank advances, the bank
approached to cover payroll and weakening of customer confidence.
? Late decline stage: The signals associated with this stage according to
Scherrer (2003) are decrease in inventory turnover, no liquidity, overdrawn
bank accounts and depleted working capital (Scherrer, 2003).
Relatively, some scholars (e.g. Hofer, 1980; Platt, 1998 and Pandit, 2000) stressed
that the choice of one or more of the turnaround strategies over another at a
specific stage of the company’s performance, is linked to the company’s severity of
decline. Figure 2.2 illustrates the relationship between the stages of decline and
the choice of some turnaround strategies.
According to Figure 2.2, some authors argue that:
1. A company in an early decline stage may require a cost reduction strategy as
the main one to get to the pre-decline stage and make a recovery (Hofer, 1980;
Platt, 1998 and Pandit, 2000).
2. A company in a mid-term decline will require a cash generation strategy in
order to breakeven and boost the cash flow as an addition to cost reduction
(Platt, 1998 and Pandit, 2000).
3. A company in a late decline stage will require an operating assets reduction
strategy as an addition to the other two sub-strategies. This is because the
CHAPTER TWO: REVIEW OF LITERATURE
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company is in its worst condition, as it is hardly covering its fixed costs (Platt,
1998 and Pandit, 2000).
Adapted from: (Hofer, 1980:27; Pandit, 2000:39 and Platt, 1998:9)
Accordingly, it can be concluded that depending on the stage of decline a company
is in, or in other words, the amount of cash/financial resources still remaining in the
company internally/externally, a decision on the company’s viability to turnaround
can be made by the end of the analysis stage.
Late-
decline
Mid-term
decline
Early
decline
Pre-decline or
recovery stage
£
Total revenue
Cost reduction
Revenue generation
Operating
assets
reduction
Total cost
Variable costs
Fixed costs
FIGURE 2.2: Stages of decline
CHAPTER TWO: REVIEW OF LITERATURE
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2.4.3 Causes of business decline
According to Zimmerman (2002) decline in any company’s performance is
attributed to extreme behaviours, such as too little or too much of, “Market,
product/management” control. Several authors (e.g. Everett and Watson, 1998;
Burbank; 2005 and Dubrovski, 2009), have reported that decline is a stage that
most companies go through as part of their business lifecycle before it reaches
failure or turnaround. They added that if the necessary corrective actions were not
taken within the appropriate timescale, the company would lose its employees,
cash, customers and/or assets.
Notably, it was reported that decline could not be avoided all the time (Dubrovski,
2009). Additionally, Onich (2012:33) stated that, “Decline can be inexorable,
unless an aggressive attempt is made to reverse it”. However, identifying,
understanding and analysing the causes of decline are critically vital to minimise
the overall number of failures among businesses (Everett and Watson, 1998 and
Dubrovski, 2009). The importance of understanding the causes of decline was
emphasised by various authors (e.g. Manimala, 1991 and McGovern, 2007) who
asserted that the turnaround option might largely rely on reversing the original
cause of decline. Therefore, studying and understanding the different causes of
decline is of great importance to the success of the turnaround process (Manimala,
1991 and McGovern, 2007).
CHAPTER TWO: REVIEW OF LITERATURE
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Furthermore, research on the causes of decline comes from the view that each
cause of decline is linked to certain turnaround strategies (Manimala, 1991).
Relatively, Dubrovski (2009) added that the process of analysing the causes of
decline has to be carried out by professional individuals (e.g. consultants, owners,
debtors and industrial experts) and not by the current management, since it tends
to blame decline on the external variables rather than directing the blame to the
internal causes, which may reflect its weaknesses.
Sheppard and Shamsud (2005) emphasised that in order to understand business
decline, we need to understand that a company’s declining performance cannot be
attributed solely to the company itself or the external environment. They explained
that business decline could be attributed to the misalignment of the company
internally with the environment externally. A combination of adverse internal and
external causes is required to cause severe decline in any company, according to
some scholars (e.g. Schendel, Patton and Riggs, 1976 and Dubrovski, 2009),
particularly the combination of lack of managerial decisions and unpleasant
changes in the external environment (Schendel, Patton and Riggs, 1976).
In a study conducted to analyse the attribution of service failures on consumer
satisfaction, Iglesias (2009) has classified the causes of business decline into three
groups and they are:
1. Decline caused by employee’s attitudes towards customers or the firm. This is
considered to be an internal cause and it is controllable.
CHAPTER TWO: REVIEW OF LITERATURE
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2. Decline caused by the company itself (e.g. failure in product design or outdated
equipment). This is considered to be an internal cause and it is controllable.
3. Decline caused by external causes that are not related to the firm itself and
they are considered to be uncontrollable.
Relatively, several authors (e.g. Schendel, Patton and Riggs, 1976; Bibeault, 1982;
Zimmerman, 2002; Maheshwari, 2000; Sudarsanam and Lai, 2001; Scherrer,
2003; McGovern, 2007 and Dubrovski, 2009) have classified the causes of
business decline to internal controllable causes and external uncontrollable
causes.
2.4.3.1 Internal causes
Dubrovski (2009:4) argues that internal causes of business decline are the
controllable causes that emerge within the company stating that they are,
“Denominated as subjective and endogenous”. Dubrovski (2009) added that the
literature on causes of business decline showed a debate between scholars about
the management role in the decline of any organisation as an internal cause.
Some scholars (e.g. Smith and Peters, 1997) argued that the management role in
the decline of any organisation should be voided due to the external constraints
such as the economic and market conditions they are under from the external
environment, limiting their strategic choices. However, on the other hand, most
CHAPTER TWO: REVIEW OF LITERATURE
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scholars (e.g. Scherrer, 2003 and Dubrovski, 2009) disagreed with this view
arguing that other managers under the same circumstances of environmental
constraints, do not fail and therefore, management are the major internal cause of
any decline. Similarly, Bibeault (1982) disagreed with Smith and Peters (1997)
arguing that it is the management’s responsibility to protect the company from
these external challenges and any hazards that can negatively affect its
performance. In other words, although the decline of many companies can be
attributed to various external causes, managerial mistakes as the internal cause of
decline, is considered to be the core factor to any business decline according to
various scholars (e.g. Bibeault, 1982; Scherrer, 2003 and Dubrovski, 2009).
Additionally, several authors (e.g. Weitzel and Jonsson, 1989; Everett and Watson,
1998; Platt, 1998; Wruck, 1990; Sudarsanam and Lai, 2001; Bergstrom and
Sundgren, 2002; Zimmerman, 2002 and Dubrovski, 2009) argued that a company’s
declining performance can be attributed to its management because this highlights
severe problems within their capabilities. Moreover, McGovern (2007:887) agreed
with this view stating that:
Managers make strategic choices. Failure is attributed to
management decisions and lack of competency to reverse the
decline caused by external factors. A crisis may stem from
management commitment to existing strategies and routines.
Companies can experience ‘active inertia’, insofar as the strategic
frames of managers become blinkered which prevents realignment
with the new environment. Crisis induced stress inhibits the effective
processing of information and produces a threat-rigidity response
which impairs decision-making.
CHAPTER TWO: REVIEW OF LITERATURE
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In addition, Schendel, Patton and Riggs (1976:7) also agreed with the previous
view adding that management is considered to be a significant decline factor
stating that, “In some sense, any business decline or failure can be attributed to a
failure of management”. Bibeault (1982) additionally supported this view reporting
that eight out of ten failures in his study were caused by bad management. Still,
more authors (e.g. Platt, 1998 and Scherrer, 2003) supported the same view
arguing that any company’s decline is caused by management’s failure to control
the internal elements, hence, they usually blame decline on the external elements.
Based on the above debate, it can be seen that most scholars hold managers
accountable for their companies’ decline. Therefore, for the purpose of this study,
the internal causes of decline can be classified into two types and they are: [1] bad
management which is related directly to the lack of managerial skills and personnel
characteristics, and [2] organisational inefficiencies, which might be related in
some cases to management error with regard to structures, operations, staff and
their products.
Bad management
Various scholars tried to classify management mistakes that contribute to decline,
in order to make it identifiable and easier to recognise as early as possible. For
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example, many scholars (e.g. Bibeault, 1982; Hartley, 2005 and Dubrovski, 2009)
argued that management mistakes could be grouped into two, which are: [1]
commission mistakes and [2] omission mistakes. In addition, Hartley (2005) and
Dubrovski (2009) added immoral behaviours as another group of managerial
mistakes. These groups are explained as follow:
? Commission mistakes: These include taking the wrong or inadequate
decisions or actions due to lack of skills, experience and/or incompetence.
Various authors blamed managerial errors, such as poor strategic decisions
or lack of intensity (Zimmerman, 2002 and Hamilton and Micklethwait,
2006), poor management skills and weak governance (Bergstrom and
Sundgren, 2002 and Olstein, 2007). Furthermore, several scholars (e.g.
Tayeh, 2004; Hamilton and Micklethwait, 2006; McGovern, 2007 and Teng,
2007) have reported that some of these mistakes occur due to dominant
CEOs, arrogance, hubris and a desire for power. Additionally, Onich (2012)
reported that lack of accountability within manufacturing ranks is another
reason for decline.
? Omission mistakes: These reflect not taking any action with respect to
problems occurring within the company (e.g. not investing in improving the
technology or implementing essential changes), due to management
incompetence and/or lack of experience (McGovern, 2007 and Teng, 2007)
and not recognising the early signals of decline, due to their commitment to
CHAPTER TWO: REVIEW OF LITERATURE
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strategic postures that worked in previous ventures (O’Kane and
Cunningham, 2012).
Relatively, Bibeault (1982) divided omission mistakes into two categories,
which are: firstly, the company’s failure to react to external environmental
changes and secondly, being relaxed in developing control information.
Different scholars (e.g. Maheshwari, 2000; Sudarsanam and Lai, 2001 and
Zimmerman, 2002) emphasised the dangers of this type of mistake,
reporting that when decline happens some fast actions are required and
managerial inaction or inappropriate actions can weaken the company’s
performance even more, leading to a possible failure. Notably, some
managers may avoid taking any action that may damage their interests even
if it is for the company’s sake (Sudarsanam and Lai, 2001; McGovern, 2007
and Teng, 2007). Furthermore, Tayeh (2004) reported that some managers
do not seek help early enough when they are faced with problems, because
they do not want to admit the existence of problems. This happens due to
failure to recognise the extent of these problems causing further
deterioration to the company’s performance.
? Immoral behaviours: Such as crimes, accounting scandals, abuse and
deception by some managers. This kind of behaviour can strongly hit any
company at its core if not found and dealt with quickly and appropriately
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(Hartley, 2005: Wallace 2007; Dubrovski, 2009 and O’Kane and
Cunningham, 2012).
Additionally, Hamilton and Micklethwait (2006) reported that a non-participating or
ineffective Board of Directors is one of the TMT errors that can cause decline.
However, in contrast, Bibeault (1982) disagreed with this view arguing that decline
is caused by senior management, because Boards of Directors do not cause
decline. He explained that boards have a role that consists of two tasks: firstly,
select and recruit the CEO or the turnaround leader and his team and secondly,
careful evaluation information in order to recognise any early warning signals.
Organisation inefficiencies
A large number of authors (e.g. Stopford et al., 1990; Rand, 1999; Maheshwari,
2000 and Pauline and Skelcher, 2005) argued that the source of decline could be
the organisation itself. Maheshwari (2000:40) supported this view stating that,
“Organisational inertia, causing slow responsiveness to the changes in the
environment, leads to the decline of businesses”.
Stopford et al. (1990) added that there are some habits and procedures that are
embedded in the structure of many companies, causing deterioration in
performance. For the purpose of this study, organisational inefficiencies can be
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classified in respect of three major factors and they are: structure and operations
related, staff related and product related.
Structure and operations related causes
Stopford et al. (1990) reported that there are several common organisational
mistakes which contribute to the decline of any company such as outdated
systems and faulty structures that are incapable of responding adequately to the
changing environments. Similarly, Scherrer (2003) added that there are common
causes of decline that are related to the company itself such as none use of formal
communication, ageing production techniques, inadequate research and
development, inappropriate channels of distribution, loss of competitive advantage
and misunderstanding of consumer needs.
Additionally, Rand (1999) argued that overlapping departmental responsibilities are
further mistakes, which limit the ability to see and understand what is going on
inside the company. Furthermore, operational weakness is another familiar cause
of decline that is related directly to the company such as bad marketing, poor
logistics (Teng, 2007) and high costs (Schendel, Patton and Riggs, 1976 and
Teng, 2007). High costs can take several forms such as wage increases, raw
material price increases, low production volume and unplanned costs of starting
new facilities (Schendel, Patton and Riggs, 1976).
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Furthermore, Onich (2012) supplemented this reporting that an organisation
structure that allowed a disconnection between financial measurements and key
performance indicators and lacked control over manufacturing and planning, could
lead to decline in performance and possible total failure.
Staff related causes
It was reported in the literature, that staff satisfaction is considered to be an
important element for any growing company because their satisfaction is highly
essential to ensure a good customer service quality (Scherrer, 2003). However,
there are some organisational actions (e.g. low pay, redundancies, pay-cuts and
downsizing) that may contribute to staff dissatisfaction and negatively impact on
their morale and loyalty, thus promoting unpleasant reactions such as strikes
(Davidson et al., 1993). Auchterlonie (2009) argued that there are two main issues
that worsen staff morale and they are: 1) when employees feel ignored, not
listened to and have no say in the decision making process and 2) when
employees feel that the people who have control over the company’s performance
(productivity/profitability) are ignoring the signs of decline.
In this context, various authors (e.g. Schendel, Patton and Riggs, 1976 and
Davidson, Dickson and Trice, 1993) reported that staff could cause decline if they
become dissatisfied. For example, when they go on strike, this increases the
company’s costs and triggers customers to possibly change suppliers, especially if
strikes go on for a long time and cause interruption to service. However, on the
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other hand, Bushen et al. (2003) argued with this view in that staff should not be
perceived as a cause that sets off decline. This is because the financial and
market situations around businesses are the real causes behind the decrease of
staff initiative and innovative behaviours. However, Bushen et al. (2003) reported
that high staff turnover could deplete the company’s experiences and capabilities.
This can negatively impact on the overall performance of the company and its total
service quality from which decline may occur. Therefore, Bushen et al. (2003)
suggested that interaction between staff and management in the workplace is vital
to improve their innovative behaviour.
On the other hand, Auchterlonie (2009) also argued that staff morale deteriorates
more when they feel that they are ignored or punished by management because
they speak out about certain problems in their work areas or the company as a
whole. Furthermore, Tourtellot (2004) explained that untrained staff cannot do
their jobs accordingly, which may cause deficiency in processes. He emphasised
that if staff are kept isolated from regular training, participating in trade associations
and attending seminars, they will be unable to improve the skills, which are needed
to operate under ever changing, new technologies.
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Product related causes
Mason, Harris and McLaughlin (1971) reported that if the current products on offer
were not achieving the financial and strategic targets for the company, a set of new
product ideas and developments should be a top priority on the management
agenda, to replace existing products or as a new addition. It was found apparent
in the literature that scholars have different definitions for a new product (NP). For
example, Fuller (2004) defined a NP as the product that is not manufactured by
any other company, or it is the current product that is introduced to a market for the
first time. On the other hand, several other authors (e.g. Kotler and Armstrong,
1991 and Rudder, Ainsworth and Holgate, 2001) defined a NP as the product that
is modified or improved from an original product, through their own research and
development within the company.
An empirical study conducted on NPD by Calantone, Schmidt, and Song (1996)
has identified four causes that can affect the success of any NP and they are:
1. Market related causes and these are not controllable.
2. Product related causes and these are controllable.
3. NPD process related causes and these are controllable.
4. Organisational causes and these are controllable.
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Calantone et al. (1996) explained that the organisational controllable causes
affecting NPD success consist of two types of activities, which are marketing and
technical activities. The company must possess sufficient resources and skills in
both activities, in order to achieve a successful NPD (Calantone et al., 1996).
Calantone et al. (1996) additionally reported that performance, marketing and
technical activities requires knowledge about customer needs, tastes, prices
sensitivities and purchase behaviours. In addition, knowledge about competitor’s
products and technological advances is highly important. Schendel, Patton and
Riggs (1976) reported that failure in marketing is considered an important cause of
decline that could occur due to lack of promoting a product in the marketplace
against its competitors. Schendel, Patton and Riggs (1976) explained that these
forms of erroneous actions could cause loss of market share and speed up the
wheel of decline in any company.
Similarly, Maheshwari (2000:40) stated that, “Excessive initiatives beyond the
firm’s technological and financial capacity to alter the product-market domain, has
also been the cause of decline for many firms”. Maheshwari (2000) explained that
when a company enters a new market that is beyond its managerial and financial
capabilities, it may end up increasing its borrowing in order to cope with the new
expansion in the business, incurring enlarged interest costs that it may find a
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problem repaying in the future, causing deterioration in performance and
resources.
2.4.3.2 External causes
Bibeault (1982:27) stated that, “A company does not operate in isolation; it acts
upon and reacts to a very complex environment, which is continually changing and
constantly moving”. He added that some of these environmental changes appear
gradually so can be predicted, however, some occur very suddenly, which is
impossible to predict.
Dubrovski (2009) described external causes of decline as those changes occurring
within the outside environment of companies and cannot usually be detected early
enough. Therefore, they are seen as objectives or exogenous factors (Dubrovski,
2009). Moreover, Everett and Watson (1998) in a study of small businesses,
reported that external/exogenous factors were the cause of failure in one third of
their sample. Furthermore, Dubrovski (2009) added that although external causes
contribute to the failure of many companies, it can be eliminated and avoided if the
external changes are aligned with the company’s internal processes, structures,
strategies and marketing mix. Similar to this, Schendel, Patton and Riggs (1976)
and Scherrer (2003) argued that despite the fact that the external environment is
not controllable, the changes in this environment should be predicted, adapted by
management and acted upon.
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Some external causes that may contribute to the decline of companies are
reported by Zimmerman (2002) and Dubrovski (2007) such as the state of the
economy, crime or physical disasters. However, Bibeault (1982) introduced a
more structured classification for external environment causes that consist of five
types as follow:
1. Political or governmental causes.
2. Economical causes.
3. Competition related causes.
4. Social causes.
5. Technological causes.
Political/Governmental causes
Bibeault (1982) emphasised that there is a huge relationship between politicians
and businesses due to regular polices and legislations that are issued relative to
materials, products, market and finance. Additionally, import and export policies,
high duties (Manimala, 1991), taxation, consumer welfare legislation, employees
records, product safety and pollution control are all different forms of government
interference with businesses, that may require companies to seek assistance from
external agencies (e.g. public relation agencies, lawyers, advertising agencies and
consultants) in order to meet these new legislations (Bibeault, 1982).
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It was reported that external agencies put huge financial constraints on companies
and this can lead to cash shortages and thus decline. However, it was reported
that although the government’s interference can be severe at times, it is important
to predict changes in legislation and work around these constraints when they
occur (Bibeault, 1982). Furthermore, Manimala (1991) reported that a company
that is only able to operate with governmental help (e.g. tax exemption, duties
concessions or concessional finance) would not be worth all the turnaround efforts
that it is going to receive.
Economic causes
Economic changes that can cause business decline may take various forms, such
as slow demand, currency devaluation, international financial downturn, recessions
(Schendel, Patton and Riggs, 1976; Bibeault, 1982) and high interest rates
(Schendel, Patton and Riggs, 1976; Bibeault, 1982 and Everett and Watson,
1998). Accordingly, it was reported that during periods of economic downturn and
recessions, customers reduce their spending, bank creditors reduce their lending,
unemployment rises and competitors drive prices down (Pearson and Michael,
2006). Pearson and Michael (2006) in a study of strategies to prevent economic
recessions from causing business failure, explained that 500,000 US businesses
have failed in the last 70 years (i.e. filed for bankruptcy) due to recession. Despite
this, Schendel, Patton and Riggs (1976) noted that businesses could overcome
such problems and improve their positions by identifying the right products and
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market niches as well as having a good management team that is able to control
the company.
Competition related causes
Traditional economic theory indicates an emphasis on the view that free
competition is the source of a healthy economy, because it encourages companies
to be innovative and competitive in their products and prices (Tezuka, 1997).
Similarly, Rudder et al. (2001) emphasised that customers demand and expect
new and improved products, which are usually provided by the regular competition
between suppliers. Schendel, Patton and Riggs (1976) and Watkin (1986)
explained that increased competition is an important factor that can drive
businesses into decline and thus failure, reporting that there are two forms of
competition and they are:
1. Competition pressure from companies producing the same product at lower
cost due to basic technological advantages, or due to geographic
advantages which offers them cheaper labour, transport and/or materials.
2. Competition pressure from companies substituting new technologies or
products for others, such as changing the raw material from plastic to metal
and so on.
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Bibeault (1982) asserted that although competition can cause decline and failure,
this can be avoided if businesses monitor both the marketplace and the changes
occurring within their industry.
Social change related causes
Bibeault (1982) suggested that businesses have to be in touch with society in order
to be able to identify new market trends that are continuously changing, by age or
lifestyle of the consumers. Notably, Calntone et al., (1997) reported that customers
have become less tolerant with poor service as a result of continued social change.
They added that consumers have become more eager to dissolve a relationship
with a supplier and start a new one. This is supported by the statement of Scherrer
(2003:430) that, “The UK public is aware of animal-borne diseases that can affect
humans (Salmonella, Listeria and BSE) and will not take kindly to any
carelessness”.
In addition, these decisions and switching intentions can be aggravated by some of
the firm’s actions, such as quality failure, low commitment, unfair prices or anger
incidents (Calntone et al., (1997). However, despite this, Bibeault (1982) reported
that social change is moving at such a rate that it can easily catch up with most
industries, if the management identify these changes and alter their strategies to all
in line with the every changing society of today.
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Technological causes
Bibeault (1982) reported that new technological changes have provided customers
with a wide variety of choices (e.g. colour, price, material, quality and shape).
Companies have a difficult choice to make either to meet such technological
changes or leave the market empty for competitors to expand their market share.
If companies wish to stay profitable, they must dedicate a lot of investment to new
technologies (e.g. developing new systems and buying new machinery to improve
productivity and efficiency). However, this could put high economic constraints on
their financial resources (Bibeault, 1982).
A conclusion of the above stage brings to a close the turnaround leaders’ main
task when appointed, which is to identify the viability of the company (source of
competitive advantage), severity of decline (cash availability to fund the
turnaround), as well as the causes of decline (internal or external) in order create a
full understanding of the situation, ready for the next stage of formulation,
implementation and stabilisation of the turnaround plan.
2.5 Formulation, implementation and stabilisation of the turnaround plan
Business strategy is defined as, “The science and art of employing business
resources to secure objectives, with an emphasis on adjusting to a competitive
environment” (Mason et al., 1971:11). When the profitability of a company
declines, it is usually left with a limited choice of actions. It either takes no action
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until the situation worsens and the company reaches total failure, or adapts new
strategies and improvement activities in the hope of recovering the company out of
decline (Bibeault, 1982).
Mason et al. (1971) emphasised that an important part of any strategy formulation
process is to locate, realise and fully understand the company’s solid advantage
(e.g. saleable product, proven market, operating assets or skilled staff) in order to
work on enhancing it later on in the process. Hambrick and Cannella (1989)
argued that implementation procedures are critically important during the first steps
of the formulation process. They explained that mistakes lay in the root of many
failed businesses, because the formulation and implementation processes are
usually treated as two separate stages. Hambrick and Cannella (1989) also
explained that this is due to the fact that no leaders can draw a complete step-by-
step strategy the first time, but instead they should think about formulating a
strategy that they are able to implement and achieve the desired targets with the
least amount of risk.
Moreover, Scherrer (2003) reported that at this stage recognising the company’s
finance and accounting system is vital. Scherrer (2003) further explained that the
management should implement the budget that reflects the actual costs rather than
the estimates. Furthermore, he explained that this would assist them to stay within
their financial boundaries and fixed costs. Additionally, it was reported that
analysing customer’s needs (e.g. productive customers or less productive
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customers) is essential to stop the continuous decline, by letting the management
concentrate on the more profitable ones (Scherrer, 2003).
2.5.1 Classifications of turnaround strategies
O’Neil and Ducker (1986) asserted that there are various generic strategies such
as niche, differentiation, growth strategies and turnaround strategies. The
selection of each one of these strategies depends on the specific conditions of the
company. Slatter and Lovett (1999) asserted that the generic turnaround
strategies are various such as stabilisation, leadership, strategic focus,
organisational change, financial restructuring, critical process improvement and
operational restructuring. It was reported that turnaround strategies are developed
to stabilise operations and to return companies in decline to their original
performance levels before decline and assist in profitability and growth (Pearce,
2007).
It was found apparent in the turnaround literature that there are several
classifications for turnaround strategies. For example, Robbins and Pearce (1992)
classified turnaround strategies into two categories as follow:
1. Competition based strategy and it consists mainly of innovation and
marketing activities.
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2. Efficiency based strategy and it concentrates on reduction in costs and
expenses.
Furthermore, Lohrke and Bedeian, (1998) reported that a company’s overall
turnaround strategy could be analysed in respect of its three sub-strategies which
are:
1. Competitive strategy in which the turnaround leaders identify and utilise a
competitive advantage that the company holds and tries to work on to
strengthen its position in the marketplace.
2. Political strategy in which the turnaround leaders try to gain the support of
all shareholders, through presenting a plan that will enhance a competitive
advantage.
3. Investment strategy in which the turnaround leaders create a set of
decisions aiming to improve the functional areas (e.g. marketing,
production). Lohrke and Bedeian (1998) added that investment strategies
are usually implemented in three forms; retrenchment, innovation and
growth.
In addition, Lasfer and Remer (2007) classified turnaround strategies differently
into two types, in respect to the timescale of formulating and implementing the
strategy as follow:
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1. Short-term strategies: they aim to minimise decline as quickly as possible
through various actions, such as cutting costs and generating cash in order
to achieve efficiency (Hoffman, 1989; Arogyaswamy and Yasai-Ardekani,
1997 and Lasfer and Remer, 2007). Lohrke and Bedeian (1998)
emphasised that several researchers (e.g. Bibeault, 1982 and Pearce and
Robbins, 1993) stressed the need for short-term strategies to be
implemented during the first steps of the turnaround process, in order to
ensure efficiency before changing the strategic direction for long-term
growth.
2. Long-term strategies: they aim to gain the support of investors by sending
them signals about the company’s position in the future. The turnaround
team develops a strategic plan that outlines the future strategic goals and
the activities needed to reach these goals.
Lasfer and Remer (2007) argued that there have been various trials that tried to
categorise turnaround strategies into short-term and long-term. However, there
was no success because what was seen in a study as a quick option, was seen in
a different study as a long term option. For example, Lasfer and Remer (2007)
reported that dividend cuts as a financial restructuring sub-strategy were found to
be a long term option in the study of Benartzi et al. (1997), yet it was seen as a
short term option to achieve recovery in the study of Carapeto (2005).
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From the above diverse classifications and as shown in Figure 2.3, it can be
concluded that an overall turnaround plan is a process that combines three
weapons (i.e. competitive, political and investment) throughout the whole process.
And, when it comes to the investment weapon, the timescale should be considered
to allocate the appropriate strategy to each stage.
2.5.2 Turnaround strategies
Turnaround strategies are developed to stabilise operations and return companies
in decline to their original performance status and guide them towards growth
(Pearce, 2007). Sudarsanam and Lai (2001) explained that research on business
turnaround prescribed a large number of restructuring activities with regard to
Adapted from: (Robbins and Pearce, 1992; Lohrke and Bedeian, 1998 and
Lasfer and Remer, 2007)
FIGURE 2.3: THE THREE WEAPONS OF THE TURNAROUND
PLAN
Competitive
weapon
Political
weapon
Investment
weapon
Short-term phase
Long-term phase
CHAPTER TWO: REVIEW OF LITERATURE
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managers, operations, structures and assets. For example, O’Neil (1986)
prescribed four turnaround strategies as follow: 1] managerial, 2] cutback, 3]
growth and 4] restructuring. Furthermore, Hoffman (1989) identified five
turnaround strategies which are managerial restructuring, organisational
restructuring, cost reduction, asset redeployment and repositioning strategies.
The strategic management literature has provided two major categories to
turnaround strategies, they are efficiency/operating turnaround (operational
restructuring) and entrepreneurial/strategic turnaround (asset restructuring)
(Sudarsanam and Lai, 2001 and Ryan et al., 2007). In addition to this, in a more
recent study it was found that those two categories of the turnaround strategies
were identified under two different definitions as retrenchment and recovery
strategies (Schmitt and Raisch, 2013).
Manimala (1991) and McGovern (2007) argued that the choice of any turnaround
strategy, whether it is efficiency/operating/retrenchment or entrepreneurial/strategic
or recovery, it should be connected to the original cause of decline. In addition to
this, Grinyer, Mayes and McKiernan (1988) and Sudarsanam and Lai (2001)
asserted that evidence from the finance based literature revealed that financial
restructuring is another vital ingredient of many successful turnarounds in paradox
to the turnaround literature, which contains evidence that it is not an essential
component of any turnaround.
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Notably, Lasfer and Remer (2007) argued that a company’s recovery from decline
will not occur as a result of using one restructuring strategy solely, but it takes a
decent mixture of various turnaround strategies to formulate the most appropriate
turnaround plan. Consequently, to conclude what was discussed above and for
the purpose of this study, it can be concluded as shown in Figure 2.4, that a decent
turnaround strategy should include one or more of four major turnaround strategies
and they are: [1] managerial restructuring, [2] operational restructuring, [3] asset
restructuring and [4] financial restructuring.
2.5.2.1 Managerial restructuring
Various researchers (e.g. Schendel, Patton and Riggs, 1976; Weitzel and Jonsson,
1989; Wruck, 1990; Everett and Watson, 1998; Sudarsanam and Lai, 2001;
FIGURE 2.4: THE FOUR KEY TURNAROUND STRATEGIES
Managerial
restructuring
strategy
Financial
restructuring
strategy
Operational
restructuring
strategy
Asset
restructuring
strategy
Turnaround strategies
Adapted from: (Hoffman, 1989; Arogyaswamy and Yasai-Ardekani, 1997;
Sudarsanam and Lai, 2001; Lasfer and Remer, 2007; McGovern, 2007 and
Ryan et al., 2007)
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Bergstrom and Sundgren, 2002; Zimmerman, 2002; Dubrovski, 2007 and
Dubrovski, 2009) have attributed decline and failure to several causes, with bad
management at the top of the list. Various authors argued that (e.g. Schendel,
Patton and Riggs, 1976; O’Neil and Drucker, 1986; Grinyer et al., 1990; Pearce
and Robbins, 1994; Sudarsanam and Lai, 2001 and O’Kane, 2006) managerial
restructuring as a turnaround strategy is a vital component of any successful
turnaround plan. Schendel, Patton and Riggs (1976) and Hoffman (1989)
supported this view, reporting that it is highly important to ensure that the
management in control of the business during the turnaround process, is the most
superlative as possible. Relatively, Kow (2004:234) asserted that the chances of
successful turnaround can be diminished if the CEO did not make sure that, “The
right people are in the right jobs”.
Many authors (e.g. Sudarsanam and Lai, 2001 and Dubrovski, 2009) assert that
during periods of decline, it is important not to rely on existing management to
recover the company from decline. They explain that existing management are
used to working in routines and are not familiar in dealing with uncertain situations.
They also added that those managers are not prepared to establish the essential
improvements needed to amend any faults. Additionally, Sudarsanam and Lai
(2001) reported that some managers may try to resist the new strategy if it hurts
their interests, even if it is for the sake of the company’s turnaround plan to
succeed. However, Burbank (2005) asserted that the turnaround leader’s job is
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not to slash jobs across the board, but to strengthen the existing members and
eliminate the ones who obstruct the progress of the turnaround process.
On the other hand, a contrasting point of view was raised by Whitaker (1990) who
argued that it is less likely for a company in decline to achieve any benefit from
restructuring its management, if decline is not caused originally by management.
Conversely, some authors (e.g. Sudarsanam and Lai, 2001 and Yawson, 2005)
disagreed with Whitaker’s view, arguing that even if the company’s decline may not
have been caused by management in the first place, restructuring the management
sends signals to bankers, investors and employees that there is something positive
taking place in relation to the company’s performance.
From this debate, it can be concluded that although managerial restructuring is not
seen as necessary in some cases by certain authors (e.g. Whitaker, 1990), it is
widely seen by the majority of authors as an essential part of any successful
turnaround, mainly in cases where decline is due to management failure or
management who may resist adapting to the changes required for the success of
the turnaround plan.
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2.5.2.2 Operational restructuring
Operational restructuring is usually the first turnaround strategy formulated and
implemented in a company in decline according to many authors (e.g. Sudarsanam
and Lai, 2001 and Lasfer and Remer, 2007). Operational restructuring is mainly
designed to stabilise operations and restore profitability through some activities,
which improves the efficiency and margins of a company after a period of decline
(Hofer, 1980; Platt, 1998 and Sudarsanam and Lai, 2001). Yawson (2005)
reported that this strategy is important during any period of a business lifecycle and
not only in times of decline.
Sudarsanam and Lai (2001) asserted that efficiency measures in this strategy are
directed to minimising the overall inputs and maximising the outputs in order to
improve margins. An operational restructuring strategy includes two sub-strategies
and they are; cost reduction and cash generation (Platt, 1998 and Sudarsanam
and Lai, 2001).
Cost reduction sub-strategy
Zimmerman (2002) and Auchterlonie (2003) reported that cost reduction as a sub-
strategy is a vital component of any successful turnaround strategy. Zimmerman
(2002) supported his view adding that this strategy includes various methods that
evolve around achieving operational efficiency throughout the entire company, by
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bringing expenditure under better control. This takes various forms such as up-to-
date equipment, systematic layout of production areas, well trained employees and
managers as well as minimising any unnecessary outputs in the company such as
personal embellishments and excessive travelling. Furthermore, Zimmerman
(2002) added that product design can be another form of reducing costs. This can
be done by interaction between NPD and production in order to produce and
deliver products at the lowest cost possible, which achieves a competitive position
in the marketplace.
In addition, reducing wages (Finkbiner, 2007), reducing overtime usage and
carrying out some staff redundancies, can also be useful methods of reducing
costs (Sudarsanam and Lai, 2001 and Yawson, 2005). It was emphasised by
Ribbink (2008) that reduction in staff numbers or reducing their pay, can provide
some help to companies in decline as labour costs are usually one of the highest
expenses. Yawson (2005) agreed with Ribbink (2008) on this view asserting that
staff redundancy should improve the company’s performance, as long as it
removes the unproductive workers and increases the productivity of the remaining
ones.
However, on the other hand, some authors (e.g. Davidson et al., 1993 and Ribbink,
2008) warned that such an activity might have a negative impact on customer
service levels, because such an activity may weaken staff morale and drive them
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to take unpleasant actions. Various authors (Davidson et al., 1993 and Ribbink,
2008) argued that staff might respond to such activities by not performing efficiently
or leave their job to look for a more secure job. Consequently, this staff turnover
may cause depletion to the operating capabilities of the company.
Many scholars (e.g. Arogyaswamy and Yasai-Ardekani, 1997; Harker and Harker,
1998 and Lawrence, 2005) argued that although cost cutting and retrenchment
activities are vital to any successful turnaround, it is not solely enough to pull a
company out of decline.
Cash generating sub-strategy
Olstein (2007:132) stated that, “Free cash flow is the lifeblood of a business and
this is especially true in turnarounds. A company’s articulated strategy should
demonstrate the ability to generate or greatly improve free cash flow in two years
or less”. Sudarsanam and Lai (2001) and Ribbink (2008) reported that cash
generating strategies included various activities aiming mainly to increase cash
flow, such as price increases for profitable products and focusing on existing
products to increase sales. Similarly, Zimmerman (2002) supported the view of
generating more cash by limiting the number of products, arguing that it helps to
concentrate on lower levels of existing ones as long as they are attractive, reliable
and high in quality. Manimala (1991) added that building on current strengths
rather than developing new ones is cheaper and time saving.
CHAPTER TWO: REVIEW OF LITERATURE
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In addition, Sudarsanam and Lai (2001) added that price cuts on selected products
and increasing investment in the marketing area, helps to generate cash by
stimulating demand. Conversely, Finkbiner (2007) found in a study that a price
increase for certain products and searching for better deals when buying raw
materials, were vital components of his turnaround plan.
Ansoff (1987) offered four growth strategies that are related directly to products
(new/existing) and markets (new/existing) as follows:
1. Market penetration: This strategy represents the company’s activities when
supplying its current products in an existing market. It relies on the current
products to accomplish the highest market share via competitive pricing and
promotion policies. This strategy puts the least financial pressure on a
company in decline, because it allows management to focus on products,
markets and competitors that they already know, without new research that
may require added investment.
2. Market development: This strategy aims to promote the current products of
the company in a completely new market, which could be in a new country
or region. This strategy was noted to be an ideal one when the cause of
decline is related to recessions in the existing market (Harker et al. (1998).
However, this strategy may require the company to invest in new market
research, incurring extra financial costs.
CHAPTER TWO: REVIEW OF LITERATURE
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3. Product development: This strategy is the ideal one for companies who
wish to launch a completely new product in an existing market. However, it
is costly to adopt because it requires a lot of investment in NPD.
4. Diversification: This strategy is the final growth strategy in Ansoff’s matrix
and it is considered to be the trickiest one. It helps companies to enter new
markets (which they have little knowledge of) with completely new products.
Relatively, various authors (e.g. Rudder et al., 2001; Ribbink, 2008) asserted that
NPD is highly essential to the success of the turnaround process. Ribbink (2008)
explained that it is an important method of generating cash to companies in
decline, as long as there is enough investment in NPD. Moreover, Rudder et al.
(2001) asserted that food manufacturers cannot rely solely on existing products,
Source: Ansoff (1987)
FIGURE 2.5: THE ANSOFF MATRIX OF GROWTH STRATEGIES
Current product New product
Current
market
New market
Product development
Diversification
Market penetration
Market development
CHAPTER TWO: REVIEW OF LITERATURE
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but they must be aware of any available opportunities to improve their profitability
through a proactive NPD.
From the above discussion, it can be concluded that generating cash is an
important part of any turnaround plan. This can be done through limiting the
number of products and proactive NPD. However, this strategy needs a lot of
investment in product and market research.
2.5.2.3 Assets restructuring
Sudarsanam and Lai (2001) reported that the main tasks in asset restructuring
strategies are: [1] to restructure the company’s asset portfolio and products, [2]
divest unprofitable lines or products and [3] acquire businesses that strengthen the
company’s core and achieve long-term profitable growth. Moreover, building
strategic alliances, joining projects and licensing deals are an interest of this sub-
strategy. Sudarsanam and Lai (2001) classified asset restructuring to asset
divestment and asset investment explained as follows:
Asset divestment
Hillier et al. (2005) argued that asset divestment is a sub-strategy that is mainly
adapted by companies in decline, which are experiencing high levels of financial
leverage and low liquidity, in the hope of achieving recovery and a return to
stability. Asset divestment is a process that includes integration of some business
CHAPTER TWO: REVIEW OF LITERATURE
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units and a reduction of short-term inventory or debtors (Sudarsanam and Lai,
2001 and Yawson, 2005), replacing unprofitable products, or selling off unprofitable
business units or subsidiaries on corporate levels, in order to stop the outflow of
cash and generate more for the restructuring process (Sudarsanam and Lai, 2001
and Bushen et al., 2003). However, in contrast, Sudarsanam and Lai (2001) and
Yawson (2005) argued that companies in decline not only divest unprofitable
subsidiaries to eliminate decline, but they may also divest some profitable
subsidiaries in order to generate cash and enable the management to focus on
specific segments of the business that need more attention.
Similarly, Hillier et al. (2005) in a study conducted on 413 UK firms, which adapted
asset sales in the period between 1993 and 2000, concluded that unprofitable
asset sales contributed to overturning the direction of many companies in their
sample from decline to recovery. Similarly, Lohrke and Bedeian (1998) and
Robbins and Pearce (1992) supported the use of retrenchment activities, asserting
that companies in decline must retrench their unprofitable units in an effort to
generate cash. On the other hand, Barker and Mone (1994) disagreed with
associating asset divestment to successful turnaround, reporting that
retrenchments can limit the outcome of the turnaround strategy, because the
company’s resources become weaker after retrenchment. This view was
supported by Lasfer and Remer (2007) who added that asset divestment as a
strategy can sometimes be a radical choice, because the company in decline may
CHAPTER TWO: REVIEW OF LITERATURE
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not receive a satisfying price for its assets. Consequently, Robbins and Pearce
(1994) stressed that what, when and how much to retrench is critically important to
the success of any turnaround process.
Assets investment
According to Sudarsanam and Lai (2001) asset investment as a sub-strategy can
be classified into two types of actions and they are:
1. Internal capital expenditure: This type of action is a critical component of
any turnaround strategy because it helps companies in decline to improve
their competitive position in the marketplace (Sudarsanam and Lai, 2001).
Internal capital expenditure consists of several activities such as building
new plants, buying new equipment (Schendel, Patton and Riggs, 1976 and
Sudarsanam and Lai, 2001), adapting computerised processing to speed up
production, improving productivity and reducing costs (Sudarsanam and Lai,
2001).
2. Acquisition: Is an activity that targets businesses that meet the company’s
long-term goals with profit potential, in the hope it helps it to recover from
decline and boost its growth (Sudarsanam and Lai, 2001). However,
Sudarsanam and Lai (2001) pointed out that this sub-strategy may not be
suitable for companies in a late decline stage due to the shortage of
financial resources and cash.
CHAPTER TWO: REVIEW OF LITERATURE
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Lasfer and Remer (2007) reported that there are other strategies in asset
restructuring such as forming business alliances, joint businesses and reaching
licensing agreements. However, the main difficulty in adapting such strategies lies
in finding the cash and funding.
It can be concluded that there are many sub-strategies which can be used as part
of asset restructuring. Companies can divest the least performing units or
subsidiaries, whilst investing in the remaining ones to improve efficiency and
productivity. In the meantime, acquiring strong businesses that meet the
company’s long-term goals should be thought about if the cash and the financial
resources are available.
2.5.2.4 Financial restructuring
Financial restructuring can be defined as the process in which the management
takes some action, mainly to cut down or eliminate pressure from banks and
creditors, with regard to interest payments and debt repayments (Sudarsanam and
Lai, 2001). In relation to this, Platt (1998) reported that in financial restructuring;
the skills of the company play a significant role in the success of this strategy.
Financial restructuring includes two main activities according to Sudarsanam and
Lai (2001) and they are equity restructuring and debt restructuring.
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Equity restructuring
In equity restructuring, companies usually offer some shares in the business for
cash to raise equity funds (Sudarsanam and Lai, 2001). Equity restructuring
includes two main activities and they are: dividend cuts or omissions and equity
issues (e.g. rights issues or public offers and institutional placing) (Sudarsanam
and Lai, 2001).
? Dividend cuts or omissions as reported by Yawson (2005) helps
companies in decline to maintain their cash flow to run daily operations.
However, Lasfer and Remer (2007) disagreed with this view arguing that,
dividend cuts should be seen as the last choice of activity to save cash in
equity restructuring, explaining that companies which cut dividends usually
suffered a high level of earnings loss in the year of the cut.
? Equity issues aim to generate some cash to fund the ongoing changes in
the company during turnaround by offering stakes of the business for sale or
to debtors (Sudarsanam and Lai, 2001). Lasfer and Remer (2007:8) stated
that, “When private lenders exchange debt for equity, the firm benefits more
through extra added monitoring and lower agency costs”. However, in
contrast, a disadvantage of using equity is that companies in decline
become weaker by issuing out equity for debt to private lenders, as part of
the value is transferred to debt holders (Lasfer and Remer, 2007: 8).
Furthermore, a critical disadvantage for private lenders is stated by Lasfer
and Remer (2007:8) where they state that they, “Can be forced to return any
CHAPTER TWO: REVIEW OF LITERATURE
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consideration received under the restructuring plan as a ‘voidable
preference’ if the company enters into bankruptcy within one year”. Lasfer
and Remer (2007) explained the reason behind this was that private lenders
may be seen as a partner or an insider in the company under the
bankruptcy law.
Debt restructuring
Companies adopt such an activity to either avoid decline or to eliminate an existing
one (Sudarsanam and Lai, 2001 and Lasfer and Remer, 2007). Debt restructuring
is described as a process in which a new debt replaces an old debt, but with more
advantages such as lower interest rates or extended repayment periods. Notably,
Gilson et al. (1990) reported that nearly half of the companies that adopt financial
restructuring prefer to restructure their debts on a private basis.
2.5.3 The best strategy
Several authors (e.g. Stopford and Baden-Fuller, 1990; Sudarsanam and Lai,
2001; and Lasfer and Remer, 2007) argued that successful and unsuccessful
turnarounds often use similar strategies when tackling their economic decline.
However, those strategies differ over time taking companies on separate routes
either to success or to failure in the turnaround process. The failure of companies
in the turnaround process is usually attributed to the inappropriate selection of the
CHAPTER TWO: REVIEW OF LITERATURE
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turnaround strategy (Sudarsanam and Lai, 2001). This brought up the question of
which strategy is best to use in order to eliminate decline.
Several authors (e.g. Hambrick and Schechter, 1983; Zimmerman, 1989; Lasfer
and Remer, 2007 and Ryan et al., 2007) attributed the failure in the turnaround
process to adopting asset restructuring strategies too early (e.g. acquisition)
instead of concentrating on improving the internal environment ‘operations’.
However, conversely, Sudarsanam and Lai (2001) disagreed with this view arguing
that unsuccessful turnarounds usually pay more attention to internal operational
and financial restructuring, ignoring other strategies. Meanwhile, successful
turnarounds select investment and acquisition strategies, as well as making
continuous incremental improvements and focusing on operational issues
(Sudarsanam and Lai, 2001).
Furthermore, various scholars (e.g. Sudarsanam and Lai, 2001; Zimmerman, 2002
and Lasfer and Remer, 2007) reported that unsuccessful turnarounds are
characterised as being slow in implementing the turnaround strategy and when it is
time to restructure operations, they tend to do it aggressively and on a large scale.
On the other hand, several authors (e.g. Hambrick and Schechter, 1983;
Zimmerman, 1989; Lasfer and Remer, 2007 and Ryan et al., 2007) asserted that
successful turnarounds are usually characterised with distinctive qualities such as
being efficient and careful in implementing cost cutting strategies, as well as being
CHAPTER TWO: REVIEW OF LITERATURE
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considerate with their general expenditure. It was reported that successful
turnarounds are more professional in manufacturing and NPD than the
unsuccessful turnarounds, according to Zimmerman (2002). Moreover, Grinyer et
al. (1988) reported that successful turnarounds usually include financial
restructuring as a vital ingredient of their strategy and they also tend to make more
managerial changes in comparison to unsuccessful turnarounds.
From the above diversified views, it was seen that there has been wide
disagreement and contradictory views on the role of each of the operational and
strategic options. Each scholar prescribed the most appropriate turnaround
strategy according to their sample of study, which may differ from one to the other
in nature, size, industry and/or characteristics. However, in a study conducted on
107 central European turnaround firms, it was reported that complementing and
integrating the two options during decline will increase companies’ chances of
survival (Schmitt and Raisch, 2013). Notably, there seems to be an agreement that
operational restructuring is a widely vital strategy as long as it is not adapted
solely. However, this has not eliminated the gap in the turnaround literature of
which additional strategies are required and when and how it can be adapted in
relation to major factors e.g. causes of decline. A successful turnaround strategy is
the strategy that is adapted in relation to the original causes of decline, combining
various activities and actions. It should also be flexible and open to continuous
alterations (Hegde, 1982).
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2.6 Recovery and return to growth
2.6.1 Concept of recovery
Lasfer and Remer (2007) argued that surviving from financial decline is different
from recovering from financial decline. They explained, surviving is when the
company is able to carry on with operations with no profits, after making losses for
at least three consecutive years or more. Meanwhile, recovering means that the
company is above the breakeven point or is operating and able to make profits
again (Lasfer and Remer, 2007).
2.6.2 Enhancing the competitive advantage
Lasfer and Remer (2007) asserted that when cash losses had stopped, the
situation had stabilised and the company had reached a positive profitability, the
long-term strategy to enhance the competitive advantage should be implemented.
Accordingly, Lohrke and Bedeian (1998:19) asserted that it is the turnaround
manager’s job to employ what is called, “The competitive weapon, i.e. cost
leadership v product differentiation” and “The competitive scope, i.e. broad v
narrow” to identify and realise any competitive advantage/s which the company
may still have, in order to build the long-term turnaround strategy. In relation to
this, Porter (1998:1) stated that:
Competition is the core of the success or failure of the firms.
Competition determines the appropriateness of a firm’s activities that
can contribute to its performance, such as innovations, a cohesive
culture, or good implementation.
CHAPTER TWO: REVIEW OF LITERATURE
2-84
A competitive advantage cannot be built by carrying out daily operational tasks of
transforming materials into finished goods or services (Pervaiz and Rafiq, 1992).
They stated that, “Building a competitive advantage requires a selection of specific
options from a number of options and implementing this selection successfully in
all parts of the business”. Porter (1998) explained that the competitive advantage
stems from the value that the company can create for its customers. He
emphasised that the best value is when the company can offer its customers the
same or more benefits for lower prices than competitors.
Porter (1998) reported that there are two main types of competitive advantage and
they are cost leadership and differentiation. Understanding which of the two the
company is mostly related to, is important in order to select the most appropriate
strategy that will help the company to grow. Similarly, as shown in the following
figure, Gopal (2009) reported that the only way to achieve a competitive advantage
is through two elements and they are cost differentials, or value differentials, in
which the earlier is linked mainly to processes, resources and people skills, whilst
the latter is related to product innovation.
Many of the firm’s activities and/or forces can be used to build a competitive
advantage for the company. However, continued research for new ways to
improve this advantage would be required to stay strong in the marketplace
(Pervaiz, and Rafiq, 1992). Pervaiz and Rafiq (1992) also explained that the
CHAPTER TWO: REVIEW OF LITERATURE
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competitive advantage is lost when competitors are able to outperform the
company.
However, there is a gap in the turnaround literature emphasised by the fact that the
literature has not prescribed a mechanism that helps and assist managers in
selecting the most appropriate turnaround strategy, at this long-term phase similar
to the short-term phase. The focus on the content of the turnaround strategies
over the context and the process as a whole, has led to weakened guidance and
fragile turnaround theories. This raises the question of, is there a theory that has
prescribed a model for successful turnarounds that provides a foundation to a
FIGURE 2.6: THE KEY TO ACHIEVE SUSTAINABLE COMPETITIVE
ADVANTAGE
Source: (Gopal, 2009)
Difference in
skills and
resources
Difference in
processes
Difference in
products and
services
Difference in costs
against the competitor
Difference in value as
perceived by the
customer
Causes of advantage
Kind of advantage
Result of advantage
Difference in the
profit and/or market
share
CHAPTER TWO: REVIEW OF LITERATURE
2-86
process, context, content model that can guide managers in the turnaround
industry? The answer to this question is presented in the next section.
2.7 Models for achieving successful turnarounds
In a study conducted on 18 turnaround cases to suggest a model for successful
turnarounds, Hegde (1980) asserted that each cause of decline had some
interlinked, turnaround strategies to it. These turnaround strategies relate to the
internal environment, the external environment or both. According to Hegde (1980)
the internal changes as shown in Figure 2.8 can take three forms and they are:
? Changes in TMT and the executive team in order to set off the turnaround
process.
? Introduction of critical departments in the company and centralising the
decision making.
? Changes with regard to operations to increase efficiency such as cutting
costs, divestiture of unnecessary assets, paying off debts and generating
cash through improved technologies and motivated staff.
Meanwhile, the external changes are emphasised in the efforts of the turnaround
leader to carry out a strengths, weaknesses, opportunities and threats analysis
(SWOT) in order to seize the available opportunities and eliminate any threats that
may influence the success of the turnaround plan. These opportunities can be in
the form of finding new product lines, developing new markets or entering quick
CHAPTER TWO: REVIEW OF LITERATURE
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paying markets. Also, eliminating threats can take different forms such as
negotiating new deals with banks. Although this model tries to prescribe a guide to
the turnaround process, it can be considered incomplete because it does ignore
two important stages in the turnaround process, which are the analysis stage and
the outcome stage. Furthermore, the model failed to identify the linkage between
the causes of decline and the appropriate turnaround strategies.
Source: (Hegde, 1980:301)
FIGURE 2.7: MODEL OF WESTERN TURNAROUND PROCESS
Change agent (dynamic, tough) takes
over. Change at the top
Alters the status quo by initiating and directing certain changes
(i.e., changes within and outside the company
Changes within the company
Changes to increase
efficiency
-Cost control
-Divesture
-Retrenchment
-Trimming the product
line
-Pay off debts
-Generate cash
-Strengthening R&D set
up/NPD
-Product increase
-Incentives
-Automation
-Renovation of plant
Organisational changes
-Changing the executive
team
-Changing the structure of
the company
-Centralised decision-
making to restore control
-Formulation of critical
staff departments
(planning, MIS)
-Establishing responsibility
centers, operating
decentralisation
Grabbing
opportunities
-New product lines
-Aggressive sales
-Develop new
markets
-Enter quick paying
markets
Nullifying threats
-Negotiating on
payment of debts
-Collaboration and
joint ventures
-Dropping the line
where competition
is formidable and
reaching for safe
segments
Changes with respect to
external environment
A SWOT analysis is made by
the change agent
CHAPTER TWO: REVIEW OF LITERATURE
2-88
Alternatively, in a study conducted by Zimmerman (2002) on some American
companies that recovered from decline, a framework for achieving a successful
turnaround is presented as shown in Figure 2.9 below.
Zimmerman (2002) emphasised that the turnaround process is a blend of many
partial successes and failures, while the successful turnarounds achieve more
triumphs than failures according to their experience. A successful turnaround
according to Zimmerman (2002) is a function of three standard factors and they
are:
Source: (Zimmerman, 2002:16)
FIGURE 2.8: A FRAMEWORK FOR SUCCESSFUL TURNAROUND
B
Product
Differentiation
C
Appropriate
Turnaround Company
(leadership)
A
Low cost
Operation
Successful
turnaround
1-Operational efficiency
2-Inventory efficiency
3-Modest overheads
4-Lower costs through design
1-Distinguishing features
2-Reliability & performance
3-Product quality
4-Market continuality
1-Focus on operation
2-Managerial stability
3-Experience in the industry
4-Ethical experiences
5-Knowledge exploration
6-Fair play
CHAPTER TWO: REVIEW OF LITERATURE
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1. A strategy that mainly focuses its company’s effectiveness as a low cost
operator reaching high levels of inventory and manufacturing, as well as
minimising overheads in the meantime.
2. A strategy that focuses on improving design and becoming the supplier of a
distinguished and high quality product on the market to attract new buyers.
However, Zimmerman (2002) advised developing long-term continuity in the
market with these differentiated products to give potential buyers the time to
get to know them.
3. Leaders with high experience in the industry focus on operational issues
such as manufacturing, NPD and sales. Those turnaround leaders must not
be afraid to make any changes in relation to employees, creditors, suppliers
and customers when needed.
In respect of this model, it can be concluded that it focused on the content of the
turnaround options rather than the context of them, ignoring the various stages of
the turnaround process and the factors that interrelate with the success of the
turnaround strategies such as severity of decline.
From the above turnaround models it can be concluded that there has been a lack
of guidance to turnaround leaders and managers in daily operations, as they only
focused on the content of turnaround strategies, rather than the context of them
CHAPTER TWO: REVIEW OF LITERATURE
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and the process as a whole. They also failed to draw any relationship between the
causes of decline and the possible turnaround actions. This is considered to be a
fragile guidance to practitioners and turnaround leaders who may select the wrong
mix of actions, causing further deterioration of their company’s performance.
Therefore, a conceptual framework concluded from the turnaround literature and
these previous models is provided, to better guide turnaround leaders and
practitioners on how to achieve a successful turnaround.
2.8 Theoretical framework of successful turnarounds
Reviewing the related turnaround literature on decline and turnaround
management, it revealed that there is diversity between turnaround cases in
selecting their strategies. This diversity highlighted the need for a contingency
turnaround theory that can give each case a suitable action for each different stage
during the whole process (Manimala, 1991). Similarly, Hegde (1982:292) stated
that, “There may be no one model of effective turnaround. Actions that are
sensible in one culture may be infeasible in another culture”. For example,
carrying out some staff layoffs may not be an easy task in societies where
legislation prohibits or sharply restricts these actions. Similarly, Boyne (2003) in a
study conducted on organisational turnaround management in the non-profit
service sector, argued that there is no one universal criteria for successful
turnaround that can be applicable to all cases. Consequently, as stated by Hegde
(1982:292), “A search for alternative, more specific models of effective turnaround
CHAPTER TWO: REVIEW OF LITERATURE
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is highly desirable”. Therefore, this section provides a theoretical model that aims
to offer large and medium sized companies in the food manufacturing industry, with
a guide on how to achieve a successful turnaround. The conceptual framework
proposes four stages that the turnaround management should follow, to achieve a
successful turnaround and recover from decline. In each one of these stages the
CHAPTER TWO: REVIEW OF LITERATURE
2-1
Decline sage
Recognition of decline
Replace leadership
Appoint a new CEO or
interim turnaround leader/
firm
Communicate the plan
TMT
support
Stakeholder
s support
Formulation, implementation and stabilization of
the turnaround plan
Recovery and return to growth
Enhance the competitive advantage
(Difference in costs –difference in
products/services)
Successful Turnaround
(2 years or more of positive profitability
Positive
profitability
achieved
Mandatory strategy
(Operational restructuring)
Mandatory strategy
Managerial restructuring
Additional strategy
(Asset restructuring)
Additional strategy
(Financial restructuring
Cost cutting Cash generation
Asset divestment Asset investment
Equity restructuring Debit restructuring
NO
Analysis stage
Assess viability
Does the company hold a
competitive advantage?
Exit
Sale of business/ Liquidation
(Liquidation)
Assess severity
and financial
position
Is there enough cash
for the turnaround?
YES
Identify causes of
decline
Internal causes
Organizational
Inefficiencies
Bad management
External causes
Political
Economic
Competition
Technological
Social
YES
NO YES
NO
FIGURE 2.11: THEORETICAL FRAMEWORK OF ACHIEVING SUCCESSFUL TURNAROUNDS
CHAPTER TWO: REVIEW OF LITERATURE
2-1
turnaround leader is the key player and is mainly responsible for ensuring
efficiency in each stage. These stages are:
1) The decline stage: This is the stage when the TMT and/or shareholders
recognise that change is needed. When decline is recognised, a decision to
appoint a new CEO or a temporary turnaround manager to work alongside
management is formulated and implemented by the TMT. This new leader
must have the required qualities and the skills necessary to turn the
company around. This new leader needs to successfully carry out the first
task in the turnaround process, which is analysing the decline situation.
During this stage it is critical that the new leader gains the support of the
TMT and other stakeholders by presenting a credible plan that emphasises
where the company should be in the short-term as well as the long-term.
2) Analysis of the decline situation: This is the first task to identify the
viability of the business by clarifying sources of competitive advantage,
severity of decline (cash flow resources) and causes of decline (whether
they were internal and/or external). By the end of this stage, the turnaround
manager should be able to draw a clear picture of the company’s condition
and identify the chances of survival and the resources available to the
turnaround process. The information obtained during this stage will
influence the choice of turnaround strategy during the next stage.
CHAPTER TWO: REVIEW OF LITERATURE
2-2
3) Formulation, implementation and stabilisation of the turnaround plan:
During this stage, the turnaround leader must quickly develop a short-term
strategy to stop the continuous depletion of cash and breach the breakeven
point as quick as possible (Bruton and Ahlstrom, 2001). Evidence showed
most scholars agreed that managerial and operational restructuring are
primary strategies during the first steps of this stage in a turnaround
process, regardless of the cause of decline or whether it was internal and/or
external. This is because it aims to improve the state of inefficiency and
generate cash (Robbins and Pearce, 1992, and Yawson, 2005).
Additionally, further strategies to operational restructuring will be required in
relation to the causes of decline and amounts of cash available.
4) Recovery and return to growth: When decline is stopped and
improvements are seen, long-term strategies will be required to achieve
some profit and bring the firm back to growth, by enhancing the company’s
competitive advantages highlighted in the analysis stage. The long-term
strategy should be a combination of two or more of the major strategies (i.e.
operational restructuring, managerial, asset or financial restructuring)
depending on the company’s specific conditions and amount of cash
available.
During this stage, a monitoring system is required to observe the company’s
performance and the external environment on a regular basis, to identify any
CHAPTER TWO: REVIEW OF LITERATURE
2-3
signals of decline as soon as they appear and act upon them quickly in
order to ensure full recovery and growth.
2.9 Summary
This chapter critically analysed the related literature on business turnaround
management. It has revealed that a company should follow certain stages during
the turnaround process to ensure a full recovery. The chapter further revealed that
companies which adopt turnaround strategies often use similar policies. However,
some of these companies recover while others do not. The reason behind this is
that successful turnarounds require the appropriate mix of turnaround strategies in
relation to all the factors affecting the companies’ daily operations.
This chapter provided a foundation for developing a theoretical model of achieving
a successful turnaround (see Figure 2.11). This model will be used as a theoretical
framework to explore the turnaround process, its stages and strategies
implemented by management, through a comparative multiple case study
approach. This theoretical model will be investigated and modified throughout the
fieldwork according to the findings acquired from each case study, in an attempt to
develop a good practice model to daily managers/leaders attempting turnaround.
The next chapter will discuss the research approach adapted in this study.
Successful
Turnaround
Review
of
outcome
s
CHAPTER THREE: RESEARCH APPROACH
3-1
CHAPTER THREE
RESEARCH APPROACH
3.1 Introduction
3-2
3.2 Research approach
3-2
3.2.1 Qualitative or quantitative 3-2
3.2.2 Deductive or inductive 3-5
3.2.3 Theoretical approach 3-6
3.2.3.1 Epistemology 3-8
3.2.3.2 Theoretical perspective 3-10
3.2.4 Practical approach 3-14
3.2.4.1 Research methodology (case study) 3-14
3.2.4.2 Population and sampling 3-18
3.2.4.3 Research Methods 3-26
3.3 Data analysis 3-34
3.4
Triangulation, Validity, Reliability and Generalisation 3-36
3.5 Ethical considerations 3-40
3.6 Summary 3-40
CHAPTER THREE: RESEARCH APPROACH
3-2
3.1 Introduction
This chapter outlines the research approach adapted in this study. A convenient
research methodology and some qualitative research methods were selected to
gather all the required data as presented later in chapter four. My understanding of
the views and data obtained from the participants in each case study assisted me
to develop a good practice model on how to manage successful turnarounds for
companies in decline.
This chapter identifies the research approach adapted in this study, which is a
qualitative, inductive approach. It next reveals the epistemology, theoretical
perspective, research methodology and methods used in the study. It also
discusses the qualitative data analysis techniques that were used to scrutinise the
collected data during each phase of the fieldwork. The chapter moves on towards
the end with a discussion of how validity, reliability and triangulation are achieved
in the study, as well as the possibilities of generalising the findings. The chapter
then concludes with a discussion of all the ethical considerations taken during the
study, followed by a summary for the whole chapter.
3.2 Research approach
3.2.1 Qualitative or quantitative
CHAPTER THREE: RESEARCH APPROACH
3-3
There are two major social research approaches that can be adapted in any
research study and they are quantitative and qualitative approaches (Silverman,
2000 and Yin, 2009). Creswell (2003) noted that these two approaches can be
adapted solely or in combination. Additionally, they are flexible and their outcomes
often depend on the researcher’s own interpretation (Baxter and Eyles, 1997 and
Gummesson, 2003). Notably, Denscombe (2003) reported that each one of these
research approaches is usually selected in line with the research problem and the
purpose of each study. Moreover, Mack, et al. (2005) emphasised that both
research approaches diverge in their analytical objectives, types of proposed
questions, methods of collecting data, types of data produced and their flexibility in
designing the study. Therefore, each one of these approaches is investigated
below.
According to various scholars (e.g. Bouma and Atkinson, 1995; Berg, 2001 and
Creswell, 2003) in any quantitative research, data is collected and analysed using
statistical procedures and hypothesis testing in order to measure observations of
individuals or phenomena. Berg (2001) explained that quantitative research refers
to the measure and count of things. Moreover, it has been stated that:
A quantitative approach is one in which the investigator primarily
uses post-positivist claims for developing knowledge (i.e. cause and
effect thinking, reduction of specific variables, hypotheses, and
questions, use of measurement and observation and the testing of
theories.
(Creswell, 2003: 18)
CHAPTER THREE: RESEARCH APPROACH
3-4
In addition to this, Holliday (2002) reported that this approach had some
weaknesses such as its nature of producing unreliable evidence at some times,
due to some hidden important data that researchers may not be able to obtain.
On the other hand, qualitative research seeks to answer an important question,
which is how social meanings are constructed (Denzin and Lincoln, 1998).
Moreover, Berg (2001) added that this approach uses a narrative method to
investigate all the issues related to research problems. He also reported that the
qualitative research approach refers to meanings, concepts, characteristics and
descriptions of phenomena.
Relatively, Strauss and Corbin (1998:11), defined qualitative approach as it is:
Any type of research that produces findings not arrived by statistical
procedures. It can refer to research about people’s lives, lived
experiences, behaviours, emotions and feelings as well as about
organisational functioning, social movements, cultural phenomena
and interactions between nations.
Silverman (1997) asserted that it is important to select the appropriate methods of
collecting data at the same time as trying to identify what type of data is necessary.
Patton (2002) noted that judging qualitative research depends on the purpose and
methods of each study. Notably, Stokes (2000) argued that the research
approach literature had seen a lack of qualitative research in general, due to over
focusing on the quantitative ones and this created a deficiency in decent theoretical
analysis.
CHAPTER THREE: RESEARCH APPROACH
3-5
With regard to this study, a qualitative research approach was adapted as it was
found to be the most helpful and beneficial. According to Gray (2009) the
qualitative research approach seeks to answer the what, how and why questions.
In this study, the answers to these questions represent the required data from
turnaround leaders in relation to their practices during their turnaround experience.
This data has enriched my understanding of the topic of business turnaround.
Also, this study is not based on numbers and statistics therefore, the quantitative
approach did not seem to be the appropriate way forward.
3.2.2 Deductive or inductive
There are two types of research designs that every researcher should have
knowledge of when carrying out a research study, which are deductive and
inductive approaches.
Saunders, et al. (2003) reported that in a deductive or a “theory testing” approach,
the researcher starts with developing a theory that will be tested later in the study.
Miller and Brewer (2003:67) defined deduction as, “The process of reasoning by
which logical conclusions are drawn from a set of general premises”. Some
authors (e.g. Marshall, 1997 and Yin, 2009) asserted that the findings in the
deductive design confirms or falsifies the hypotheses made earlier in the study.
Miller and Brewer (2003) added that the deductive design is used to confirm a
CHAPTER THREE: RESEARCH APPROACH
3-6
basic theory or add to it and this is why this approach is commonly used in natural
science research.
In contrast to this, induction argues “That empirical generalisations and theoretical
statements should be derived from the data” (Miller and Brewer, 2003: 154).
Similarly, Saunders, Lewis, and Thornhill (2003) explains that the inductive
approach or “Building a theory” approach starts with the process of gathering data
to build a theory. This approach is often associated with qualitative research
because researchers try to build a theory through gathering, investigating and
analysing data in the hope of achieving generalisation across other cases (Miller
and Brewer, 2003).
Consequently, the research design adopted in this study is an inductive design,
since it seeks to collect sufficient qualitative data, which is needed to build a theory
of how successful turnarounds can be achieved. Relatively, Gary (2004) asserted
that the qualitative research approach is in some way linked to the inductive
research design. He added that they are related in the way that they set out to
collect data and explore research problems from different perspectives.
3.2.3 Theoretical approach
In this section, an overview of the research approach was presented by Crotty
(1998) in four steps from epistemology through theoretical perspective,
CHAPTER THREE: RESEARCH APPROACH
3-7
methodology and methods. Epistemology and theoretical perspective are
considered to be the theoretical approach, meanwhile, methodology and methods
are seen as the practical approach.
Gray (2009) reported that there is an integrated relation between the four steps of
the research approach. The choice of methods is usually influenced by the
research methodology and this research methodology is also influenced by the
theoretical perspective that is originally influenced by the epistemological stance
adopted in the study.
Adapted from: (Crotty, 1998: 4)
FIGURE 3.1: THESIS THEORETICAL AND PRACTICAL APPROACHES
Epistemology
Constructionism
Theoretical
perspective
Interpretivism
Methodology
Case study
Methods
1- Semi-structured
interviews
2- Document analysis
3- Archival records
Theoretical approach
Practical approach
Qualitative
Inductive
The Research approach for
this study
CHAPTER THREE: RESEARCH APPROACH
3-8
This relationship between the four steps of the research approach was also
explained by Crotty (1998:2) as the:
Justification of our choice and particular use of methodology and
methods is something that reaches into assumption about reality that
we bring to our work, which means asking about these assumptions,
is asking about the theoretical perspective. It also reaches into the
understanding you and I have of what human knowledge is, what it
entails and what status can be ascribed to it. What kind of knowledge
do we believe will be attained by our research? What characteristics
do we believe that knowledge to have? Here we are touching upon a
pivotal issue.
3.2.3.1 Epistemology
Helinghen et al. (1995) reported that epistemology seeks to explain what
knowledge is sufficient. It also seeks to explain the source of our knowledge as
reported by Crotty (1998). In addition, various scholars (e.g. Crotty, 1998;
Dawson, 2002 and De Rose, 2005) reported that epistemology provides the
philosophical foundation for deciding what kind of knowledge is possible and how
this knowledge can be justified.
Crotty (1998:8) described epistemology as, “The theory of knowledge embedded in
the theoretical perspective and thereby in the methodology”. Relatively,
epistemology was defined as, “Those insights and questions, which help
understand the relationships between knower (the inquirer) and the known (the
knowledge)” (Phillimore and Goodson, 2004:75). Moreover, according to Crotty
CHAPTER THREE: RESEARCH APPROACH
3-9
(1998), there are three types of epistemology and they are: 1) objectivism, 2)
subjectivism and 3) constructionism, as shown in Figure 3.2.
Objectivism according to Crotty (1998:8) is the meaning of existing reality, whether
it is noticed by subjects or not. He illustrated his view in an example stating that:
That tree in the forest is a tree, regardless of whether anyone is
aware of its existence or not. As an object of that kind (objectively
therefore), it carries the intrinsic meaning of ‘tree-ness’. When human
beings recognise it as a tree, they are simply discovering a meaning
that has been lying there in wait for them all along.
However, because objectivism is the philosophy of existing reality as an object, it is
widely criticised. For example, May (1997) argued that objectivism ignored the
historical influence, which is no longer there. In addition, Crotty (1998) asserted
that objectivism also ignored various human emotions such as hopes and fears.
Adapted from: (Crotty, 1998)
FIGURE 3.2: THE THREE STANCES OF EPISTEMOLOGY
Constructionism: is the philosophy of interactions between
subjects and objects producing meanings that can differ between
subjects towards the same phenomenon.
Subjectivism: is the
philosophy of applied
meanings on objects by
subjects
Epistemology
Objectivism: is the
philosophy of existing
meanings that are waiting to
be discovered by subjects
CHAPTER THREE: RESEARCH APPROACH
3-10
On the other hand, subjectivism is the second epistemological stance in which
meaning is imposed on objects by subjects. According to this stance, there is no
contribution by objects in shaping the meaning (Crotty, 1998).
Various scholars (e.g. Schwandt, 1998; Walsh, 2001; Miller and Brewer, 2003;
Saunders, Lewis, and Thornhill, 2003 and Gray, 2004) asserted that the meaning
of reality in constructionism is a product of interaction between subjects and
objects in this world. There are no meanings waiting to be discovered because
subjects construct their own meanings differently, even when looking at the same
phenomenon. Similarly, Crotty (1998:8) stated that:
There is no objective truth waiting for us to discover it. Truth, or
meaning, comes into existence in and out of our engagement. There
is no meaning without a mind. Meaning is not discovered, but
constructed. In this understanding of knowledge, it is clear that
different people may construct meaning in different ways, even in
relation to the same phenomenon… In this view of things, subject
and object emerge as partners in the generation of meaning.
Constructionism guides researchers to understand and analyse human beliefs in
order to develop meaningful results and common agreements (Guba and Lincoln,
1989). Moreover, Carr and Kemmis (1986) asserted that constructionism leaves
the door open for new meanings and interpretations to come in, as the knowledge
increases by the regular research and efforts of scientists.
The epistemological stance adapted in this study is constructionism. This is
because the goal of this study is to understand and interpret the social construction
CHAPTER THREE: RESEARCH APPROACH
3-11
of meanings and knowledge, when conducting this study on how to achieve
successful business turnarounds. My task is to investigate participant’s views and
their ways of constructing those views, to find out how they turned them into
successful turnaround actions. Constructionism gave me the opportunity to take
part, by interacting with the social world of business managers and turnaround
leaders in companies with turnaround experiences and construct meanings about
the subject of turnaround management.
3.2.3.2 Theoretical perspective “Interpretivism”
Theoretical perspective is perceived as the, “Philosophical stance that lies behind
our chosen methodology … [and] provides a context for the process and grounds
of its logic and criteria” (Crotty, 1998:7). Crotty (1998) asserted that the theoretical
perspective is the approach adapted by researchers to analyse, understand the
surrounding environment and construct the foundation of their chosen
methodology.
Literature on the research approach and theoretical methods, offered some
philosophies that researchers can use to outline their methodology. Some of these
philosophies are positivism, post-positivism and interpretivism (Saunders, Lewis,
and Thornhill, 2003). However, Saunders, Lewis, and Thornhill (2003) argued that
this variety of philosophies does not mean that there is one better than another, but
CHAPTER THREE: RESEARCH APPROACH
3-12
the choice of one philosophy over the other is made to suit the phenomena of the
study.
A number of authors noted that interpretivism and constructionism have some sort
of linkage (Schwandt, 1994; Miller and Brewer, 2003 and Gray, 2004). Gray
(2009) explained that they are linked in the view that there is no direct relationship
between subjects and objects in constructing the meaning and the mind is the main
interpreter of the phenomenon.
Interpretivism was described by Neuman (2006:71) as the:
Systematic analysis of socially meaningful action through the direct
detailed observation of people in natural settings, in order to arrive at
understandings and interpretations of how people create and
maintain their social world.
Interpretivism flagged the difference between natural reality (the laws of science)
and social reality, in which each one of these realities require a different mixture of
methods (Gray, 2004). Smith (1989:85) reported that social reality could be
viewed as being constructed stating that it is, “Based on a constant process of
interpretation and reinterpretation of the intentional, meaningful behaviour of
people – including researchers”. In relation to this, Crotty (1998:69) stated, “As far
as human affairs are concerned, any understanding of actions comes through an
interpretative understanding of social action and involves an explanation of
relevant antecedent phenomena as meaning–complexes”.
CHAPTER THREE: RESEARCH APPROACH
3-13
Moreover, some scholars (e.g. Myers, 1997 and Saunders, Lewis, and Thornhill,
2003) emphasised that the task of the interpretivist is to interpret and explain the
meaning of a phenomena through interacting with the actual people who originally
applied the meaning to the phenomena. Therefore, the theoretical perspective
used in this study is interpretivism. It gave me the opportunity to engage and learn
from individuals who dealt and managed successful turnarounds. My target in this
study was to investigate how leaders interpret and turn their understanding of
companies declining conditions, into successful turnaround actions.
Phenomenology
Phenomenology was defined as, “The study of lived, human phenomena within the
everyday social contexts in which the phenomena occur, from the perspective of
those who experience them” (Titchen and Hobson, 2005:121). Phenomenology
relies on the experiences of those people involved in social realities to understand
and shape the meaning of reality (Patton, 2002; Gray, 2004).
Phenomenology interacts with people’s current meanings, thoughts and
behaviours as well as their emotions and feelings (Denscombe, 2003 and Gray,
2004). Similarly, Gray (2009) stated that a big part of understanding the meaning
of a phenomenon depends on some personal experiences.
Titchen and Hobson (2005) introduced two approaches that can help to better
understand phenomenology as illustrated in Figure 3.3 below.
CHAPTER THREE: RESEARCH APPROACH
3-14
Based on this, the subject of achieving successful turnarounds in medium and
large companies, was the phenomenon investigated for this thesis from various
different aspects. This phenomenon was examined using a direct approach as
shown in Figure 3.3 with some qualitative research methods used in the hope of
understanding all the issues related to it. The views of participants are gathered
and interpreted into one view as a conclusion and a good practice model to
contribute to the research on turnaround management.
3.2.4 Practical approach
3.2.4.1 Research methodology (case study)
Research methodology is defined by Crotty (1998:3) as:
The strategy, plan of action, process or design lying behind the
choice and use of particular methods and linking the choice and use
of methods to the desired outcomes.
FIGURE 3.3: THE TWO APPROACHES OF PHENOMENOLOGY
Phenomenology
Direct approach
Interviews with people experiencing the
phenomenon directly are performed in
order to attain all possible data about
their experiences.
Indirect approach
The researchers try to experience the
phenomenon him/herself by taking part
in the social context with other
participants in order to identify
meanings.
Adapted from: (Titchen and Hobson, 2005)
CHAPTER THREE: RESEARCH APPROACH
3-15
Research methodology can be described as the chosen strategy, which assists
researchers to move from their research aims and objectives, to their research
conclusion (Hamza, 2004). According to Gray (2009), the literature on research
methodologies included various procedures that researchers could choose.
However, this selection must be connected to their previously chosen theoretical
perspective, as well as their chosen research design of handling data (whether it is
deductive or inductive). Relatively, Bryman (1988) stated that the question of
which methodology to select, depends on its suitability to answer the research
questions.
In respect of this study, the research chosen methodology is a case study to
achieve objectives three and four, as it is believed to be the most suitable
methodology for reaching the aims and objectives. Case study can be defined as:
An empirical inquiry that investigates a contemporary phenomenon
within its real-life context, especially when boundaries between
phenomenon and context are not clearly evident and in which
multiple sources of evidence are used.
(Yin, 2003: 13)
Moreover, Finn et al. (2000:81) also defined a case study as:
A detailed investigation, often with data collected over time, of one or
more organisations or groups within organisations. The aim is to
provide an analysis of the context and processes of whatever is being
researched.
Case study helps researchers to avoid any possibility of misleading data between
phenomena and their contents according to Yin (2009). Case study as a research
CHAPTER THREE: RESEARCH APPROACH
3-16
methodology assisted me, the researcher, to achieve a high level of understanding
of the context of the topic of turnaround management as a whole (Saunders,
Lewis, and Thornhill, 2003; and Manyara, 2005).
Types of case study
Bryman and Bell (2003) and Yin (2009) emphasised that a case study may consist
of a single case, or multiple cases for the purpose of comparison. As shown in
Figure 3.3, Yin (2009) offered three types of case studies and they were: 1) single
or multiple exploratory case study (it is usually treated as an introduction to social
research), 2) single or multiple descriptive case study (a theory must be developed
before the onset of the study) and 3) single or multiple explanatory case study (it is
used to study general investigations).
FIGURE 3.4: TYPES OF CASE STUDY
Adapted from: (Yin, 2009
Case study
Exploratory
Explanatory
Descriptive
Single Multiple
Exploratory
Explanatory
Descriptive
CHAPTER THREE: RESEARCH APPROACH
3-17
Yin (2009) suggested that there are some basic skills, which the person conducting
a case study should have before the onset of the study. If one or more of these
skills are not available, it can be developed and strengthened as long as the
researcher honestly examines his/her skills and acknowledges any weaknesses.
Yin (2009) explained that the investigator should be:
1. Able to ask good questions and interpret answers correctly.
2. Able to be a good listener and not be influenced by his/her own
ideologies.
3. Able to be adaptive and flexible in dealing with new occurrences.
4. Able to understand all the issues related to the subject of study.
5. Able to avoid been prejudiced either from theories or from his/her
own experiences.
Relatively, I, the researcher, assessed my skills prior to each case study to identify
any weaknesses and develop them before conducting the study. I prepared a list
of questions and made sure it was in line with my research aims and objectives. I
have conducted a pilot study with work colleagues to train and put myself in the
interview mode to gain more confidence while asking certain questions. At the end
of each answer, I repeated it to the interviewees to make sure it was the actual
CHAPTER THREE: RESEARCH APPROACH
3-18
answer they gave. I was also careful during the whole study not to be prejudiced
by any personal experiences or topic related theories. In respect to this study, the
type of case study adapted, is a multiple explanatory case study in both the first
and second phase, since the study aims to investigate the issue of how successful
turnarounds can be managed in companies in decline.
The first phase of study consisted of the analysis of secondary data for 14 cases of
successfully turned around companies such as document analysis (Internet
sources, databases analysis such as Fame and Duedil) and archival records
(company’s Annual Reports). The use of secondary data was due to the lack of
accessibility to leaders in the sample frame. Meanwhile the second phase of the
study consisted of the analysis of primary data for four successfully turned around
companies.
3.2.4.2 Population and sampling
Population
Population was defined by Saunders, Lewis, and Thornhill (2007) as, “The full set
of cases from which a sample is taken”. To be more specific, the population for
this study is the list of food manufacturing companies in the UK, which
implemented a successful turnaround between 2000 and 2012. The criterion
which was used to identify the successful turnaround companies is the same
criterion used by De Angelo and De Angelo (1990) and Lasfer and Remer (2007) in
their studies; i.e. at least three consecutive years of negative profitability, following
CHAPTER THREE: RESEARCH APPROACH
3-19
by at least one year of positive profitability and by at least two years of positive
profitability in the immediate three years after three loses. The reason being this
criterion avoids using any outcome-based definitions such as bankruptcy.
As reported by Lasfer and Remer (2000) having one year of positive income before
decline, allows the researcher to focus on companies where their decline is
apparent from solvent to insolvent. Furthermore, the time span is to make sure
that the decline was not temporary and the turnaround was also real and
sustainable.
The population was generated from a database website i.e. Fame (Forecasting
Analysis Made Easy). FAME is a database for UK and Irish companies containing
(Pre-decline
period) at least one
year of positive
net income
(Decline period)
at least three years of
negative net income
(Turnaround period)
at least 2 years of positive
net income in any of these
3 years
Year
1
Year
2
Year
3
Year
4
Year
5
Year
7
FIGURE 3.5: CRITERIA OF DEFINING A SUCCESSFUL TURNAROUND
CASE
Adapted from: (De Angelo and De Angelo, 1990; Lasfer and Remer, 2007)
Year
6
CHAPTER THREE: RESEARCH APPROACH
3-20
detailed information about nearly 3.1 million companies. The website offers
several search classifications and step-by-step search processes to make it more
easy, focused and accurate (e.g. search by industry or location... etc.) (Fame
website, 2012).
The database website has categorised all the companies into peer groups in which
each peer group was defined using two elements; i.e. industry and size. According
to the website, the segmentation by industry was made using the primary UK
Standard Industrial Classification (SIC) code 2003/2007. It was stated on the
library’s website of the University of Strathclyde, Glasgow that:
The SIC code was the most prevalent scheme used to organise
material on economic activities in the UK. Data on those
organisations, which work with, or produced the same product or
service, is gathered together under the same industry heading. The
scheme works broadly to a level of four digits. The first two digits
identify the major industry groups, the third digit identifies the industry
group and the fourth digit the precise industry e.g. 36: Electronic and
other electrical equipment, 367: Electronic components and
accessories, 3674: semiconductors and related devices.
Concerning the size element, it was stated on the FAME website that:
The segmentation by size within any industry was made using a
combination of three variables: (Turnover) x (median value of total
turnover by employee of the industry) (Total Assets) x (median value
of Total Assets per Employee of the industry) (Number of Employees)
x (median value of Turnover per Employee of the industry). The
companies are ranked by the highest value of any of the three above
variables.
CHAPTER THREE: RESEARCH APPROACH
3-21
When each company was ranked by industry, it was then categorised under one of
four classifications according to the size which are, very large (VL), large (LA),
medium (ME) and small (SM).
Regarding this study, the search process followed the following steps:
1. Select the status of companies in which ACTIVE (still trading) was the
selected choice, as the study is only interested in successful companies,
which achieved successful turnarounds.
2. Select the location of companies in which GOVERNMENT REGIONS was
selected, as regions are considered to be the highest tier of sub-national
division used by the UK Central Government in implementing its policies.
Within this selection, I have selected 10 regions, which are, the East
Midlands, East of England, London, North East, North West, South East,
South West, Wales, West Midlands, Yorkshire and the Humber. Some
locations were excluded during the search process due to their distance,
which would have increased the cost and inconvenience of data collection
during this type of research.
3. Select the industry using the UK SIC (2003/2007) classification in the
manufacture of food and beverages (SIC Code 15). Within this selection,
seven sub-selections were chosen out of nine. The reason for this specific
selection of industry was the desire of the researcher to stay within food
CHAPTER THREE: RESEARCH APPROACH
3-22
manufacturing, excluding the beverage and animal food industries due to
their different nature.
4. Select the type of financial data to be included and displayed in the search
list in which the primary data were the profit and loss account (P&L) after
taxation and annual turnover for each company. The reason behind this is
that companies should be able to make profits without any help from
government or any tax reliefs and/or exceptions. Additionally, other data
was selected such as contact details, management changes and other
financial details.
The outcome of this search process has produced a list of 1,814 companies.
Applying the successful turnaround criteria (i.e. at least three consecutive years of
negative profitability following by at least one year of positive profitability and then
at least three years of positive profitability), has narrowed the number down to 22
companies, 5 of which had to be discarded due to insufficient information about the
company’s financial status, which left a final sample frame of 17 companies as
shown in the table that follows:
CHAPTER THREE: RESEARCH APPROACH
3-23
Sampling
Burke and Larry (2005) reported that sampling is widely perceived as a process of
selecting a portion of a specific category of people and not the whole category
No Name of company
1 KITCHEN RANGE FOODS LIMITED
2 NEW IVORY LIMITED
3 MOLLS MEATS (BIRMINGHAM) LTD
4 ADM MILLING LTD
5 CHR HANSEN LTD
6 ORGANIC FARM FOODS
7 HILL BISCUITS LTD
8 LANCASHIRE ECCLES CAKES LIMITED
9 ICELANDIC GROUP UK LTD
10 UNIQ PREPARED FOODS LTD
11 PINGUIN FOODS UK LIMITED
12 NIMBUS FOODS LIMITED
13 BOWES OF NORFOLK
14 STATESIDE FOODS LIMITED
15 PETER'S FOOD SERVICES LTD
16 CASTLE DAIRIES LTD
17 GLANBIA CHEESE
TABLE 3.1: LIST OF CASES IN THE POPULATION (SAMPLE FRAME)
Companies highlighted in blue represent (Phase 1) case study 1, and
companies highlighted in orange represent (Phase 2) case study 2.
CHAPTER THREE: RESEARCH APPROACH
3-24
when investigating a certain phenomenon. Sampling was described as a scientific
approach that individuals could adopt to obtain data from a portion of a whole
population. However, in order to generalise any research findings, the selected
portion must represent the whole population (Burke and Larry, 2005).
The importance of sampling was emphasised by Dereshiwsky (1998) in that it be
effective in cost, time and convenience/accessibility. In addition to this, it was
found in the methodology literature, that sampling consisted of two types; the first
is probability (every one of the population have the chance to be selected). Whilst,
the second is non-probability (not every one of the population have the chance to
be selected). Each one of these types has its own techniques that can be used to
identify the sample of the study. However, the use of certain techniques is usually
influenced by its ability and convenience to serve the aims and objectives of each
study (Denscombe, 1998; Finn et al., 2000; Corbetta, 2003 and Schutt, 2006).
Notably, Denscombe (1998) has reported that although there are differences
between the two approaches, they both agree that the overall structure of sampling
should be complete and accurate.
Objective two (case study 1)
With regard to the type of sampling used in the first phase of this study, a non-
sampling technique was used, meaning the whole population of companies were
selected to study, since the sample was relatively of a moderate size, as well as
the desire of the researcher to achieve the highest reliability and validity of data.
CHAPTER THREE: RESEARCH APPROACH
3-25
This was supported by Yin (2009), reporting that it is suitable for some research
topics to survey the whole population of cases if they are of a manageable size.
However, Yin (2009) has stressed the importance of availability of sufficient time,
resources and practicality when taking such a step. Accordingly, and since access
to the remaining companies in the population was denied, conducting the research
using secondary data for 14 companies (census) is a manageable number and
practical as well as considered to not be costly, but rich in data, pre-organised and
easy to obtain from the Internet or Companies House.
Regarding this study, emails were sent to the whole population of companies
asking them to participate in the study. This was followed by phone calls to each
company requesting to speak to the Managing Directors (MD), Finance Director
(FD), the CEO, and/or specific directors. This email was sent three times, leaving
a two weeks gap in between, giving time to potential participants to come back
from holidays, business trips or any time off work before answering. This process
produced four participants out of 18. This response rate was limited by the
blockage of personal assistants, receptionists and other company members who
continually declined my requests via emails or telephone calls. However,
substitute sources of evidences were selected to overcome such problems and
archival records and document analysis were used to build the study.
CHAPTER THREE: RESEARCH APPROACH
3-26
Objective three (case study 2)
During this phase of study, a probability self-selected sampling technique was
adopted. The self-selected sampling technique according to Saunders, Lewis, and
Thornhill (2007), is used when the researcher publicises his/her need to include a
case in the study via advertising or direct contact with the cases, in order to collect
data vital to the research. Self-selected cases may devote time and take part in
the study if they believe that the listed topics, aims and objectives are interesting
and/or important (Saunders, Lewis, and Thornhill, 2007). In relation to this study,
this was represented by the four companies who agreed to participate. During this
second phase of the study three managing directors/chief executives are
representing three companies, two directors and a chief executive officer
representing the fourth company. All agreed to take parts in face-to-face
interviews. This was the total that accepted to take part in the study and formed
the sample required for an in depth case study analysis in chapter six of the thesis.
Six interviews were conducted during this phase of the study.
Objective four (panel of experts)
During this phase of the study, a set of interviews with a panel of turnaround
experts was conducted. Those experts have participated in at least one successful
turnaround experience. In addition to this, it was concluded in Schmitt and Raisch
(2013) that turnaround experts are capable of providing extensive and reliable
information because they are insightful informants, they gained experience in
CHAPTER THREE: RESEARCH APPROACH
3-27
different companies, industries and even countries and they are less biased
regarding socially desirable elements. The study revealed two main types of
turnaround professionals (turnaround practitioners and insolvency practitioners).
Each type has a different background, approach, legal status and aim (see Table
7.1). The sampling process adapted during this phase is the purposive sampling
technique, as emails were sent to a population of experts. The population of
experts was defined to be the members of the Turnaround Management
Association (TMA). TMA is a global professional organisation focused on
turnaround management, with many divisions in various countries and a large
number of members in the UK, Europe and internationally.
3.2.4.3 Research methods
Research methods can be defined as, “The techniques or procedures used to
gather and analyse data related to some research questions or hypotheses”
(Crotty, 1998:3). Yin (2009) introduced six sources of evidence that researchers
can use to gather data when conducting a case study, emphasising that each one
of them requires special skills and techniques. These sources of evidence are: 1)
focus group, 2) archival records, 3) participant observation, 4) direct observation,
5) documentation and 6) interviews.
CHAPTER THREE: RESEARCH APPROACH
3-28
As shadowed in grey at Figure 3.6, the sources of evidence adopted in this study
are semi-structured interviews (to achieve objective three), documentation (to
achieve objectives two and three) and archival records (to achieve objectives two
and three). Each one of these has its weaknesses and strengths as highlighted in
Table 3.2 below.
A qualitative interview is considered to be an effective method to investigate, feel
and interpret other people’s experiences (Mack et al., 2005). Kvale (1996:14)
stated that:
“The qualitative research interview is a construction site for
knowledge. An interview is literally an interview, an inter-change of
views between two persons conversing about a theme of mutual
interest”.
FIGURE 3.6: MULTIPLE SOURCES OF EVIDENCES
Adapted from: (Yin, 2009)
Archival
records
Documentation
Direct observation
CASE
STUDY
Objective
three
Objective
two
Objective
three
Interviews
Focus group
Participant
observation
Objective
two
Objective
three
CHAPTER THREE: RESEARCH APPROACH
3-29
In addition, Yin (2009:106) asserted that interviews are one of the most vital
sources of evidence stating that:
The interviews will be guided conversations rather than structured
queries. In other words, although you will be pursuing a constant line
of inquiry, your actual stream of questions in a case study interview is
likely to be fluid rather than rigid.
Interviews, as a data collection method, can be divided into three types according
to many scholars (e.g. May, 1997; Dawson, 2002 and Saunders, Lewis, and
Thornhill, 2003) and they are: 1) structured, 2) semi structured and 3) unstructured
interviews.
Source of evidence Strengths Weaknesses
Documentation
? Stable - can be reviewed
repeatedly
? Unobtrusive-not created as a
result of the case study
? Exact-contains exact names,
references and details of an
event
? Broad coverage-long span of
time many events and many
settings
? Retrievability-can be difficult
to find
? Biased selectivity, if
collection is incomplete
? Reporting bias-reflects
(unknown) bias of author
? Access may be deliberately
withheld
Archival records ? Same as above
? Precise and usually quantitative
? Same as above
? Accessibility due to privacy
reasons
TABLE 3.2: SIX SOURCES OF EVIDENCE: STRENGTHS AND
WEAKNESSES
CHAPTER THREE: RESEARCH APPROACH
3-30
Interviews ?Targeted-focus directly on case
study topics
? Insightful- provides perceived
casual inferences and
explanations
? Bias due to poorly
constructed questions
? Inaccurate due to poor recall
?Reflexivity-interviewee gives
what interviewer wants to
hear
Direct observation ? Reality-covers events in real
time.
? Contextual- covers context of
“case”
? Time-consuming
? Selectivity-broad coverage
difficult without a team of
observers
? Reflexivity-events may
proceed differently because it
is being observed
? Cost-hours needed by
human observers
Participant
observation
? Same as for direct observations
? Insightful into interpersonal
behaviour and motives
? Same as for direct
observations
? Bias due to participant
observer’s manipulation of
events
Physical artefacts ? Insightful into cultural features
? Insightful into technical operations
? Selectivity
? Availability
Many researchers such as Dawson (2002) favoured semi-structured interviews
over the rest, reporting that it is the most common type in qualitative research.
Dawson (2002) justified his views reporting that semi-structured interviews create a
set of questions that seek answers for certain issues, as well as sparking new
questions. He added that they are also flexible in adding or removing questions,
depending on the outcomes of each interview.
Furthermore, other scholars favoured semi-structured interviews over the rest due
to the following reasons:
Source: Yin (2009: 102)
CHAPTER THREE: RESEARCH APPROACH
3-31
It is the most appropriate when interviewing someone more than once (Bernard,
2000). It is flexible enough to allow researchers to add or remove questions if
needed in order to clarify certain issues (Gray, 2004). It allows both the researcher
and the interviewee to talk freely about the topic from different perspectives
(Bernard, 2000).
Yin (2009) reported that there is a type of interview called the in depth interview, in
which researchers can work with interviewees in the most effective way.
Researchers can ask interviewees about facts, their own opinion about an event,
or even about their own insight regarding a specific matter (Yin, 2009). However,
in depth interviews may require more than one meeting and the interviewee can
contribute more by suggesting other people to be interviewed and possible further
sources of evidence (Yin, 2009).
Interview as a method of data collection provides researchers with a high number
of benefits. However, some scholars (e.g. Patton, 2002; Yin, 2009) warned that the
quality of the outcome of these interviews could be influenced by various factors.
These factors vary from one interview to another, for example; the level of
awareness of both parties (the interviewer and the interviewee) and the emotional
state of the interviewee (e.g. being anxious or annoyed during the interview will
affect the type of answers provided).
CHAPTER THREE: RESEARCH APPROACH
3-32
Concerning this study, six semi-structured interviews were conducted with two
CEOs of two different companies, an MD of one company and the CEO and two
other directors of the fourth company. Additionally, CEOs (when available) were
purposely selected to be the interviewees because, “A number of authors contend
that the CEO is likely to provide accurate information about organisational
strategies” (e.g. Hambrick, 1981 and Nandakumar et al., 2011:242).
The first interview was conducted with the MD of Castle Dairies at his office and
the interview took about 50 minutes. The second interview was conducted with the
CEO of Glanbia Cheese Ltd at his office and it lasted for about 55 minutes. The
third interview took place with the MD of Peter Foods Ltd also at his office and this
interview lasted for about 40 minutes.
A list of question was established in advance for all interviews regarding the
turnaround process. The list of questions represented the findings from the review
of literature, which was concluded in the conceptual framework. The conceptual
framework combined various stages, which were converted into groups of
questions (See Appendix 1 for list of questions).
The first section of each interview started with the researcher introducing himself,
stating his name and his institution followed by an explanation of the aim of the
study. This was done to brief all interviewees of the research topic. The second
section covered some personal details about the interviewee (name and position in
CHAPTER THREE: RESEARCH APPROACH
3-33
the company). The rest of the sections covered the topic of the study. In the
research, I made sure that all questions, which were produced for the interviews,
were directly linked to the aims and objectives of the study and they covered all
aspects of the topic. Furthermore, during each interview, I took into consideration
all the recommendations highlighted in the research literature when conducting
interviews such as:
? I did not stick to a certain order of questions; instead I let the
conversation bring the questions up as recommended by many
researchers (e.g. Saunders, Lewis, and Thornhill, 2003). This has
helped the interviewees to continue telling their story without any
interruption which could have caused them to forget some important
data.
? I did not to try to influence the interviewees with any information
about the subject. Instead, I tried to give the interviewees the
opportunity to say what they thought, in order to avoid any inaccurate
data (May, 1997 and Yin, 2009).
? I recorded all the answers and allocated enough time for open-ended
questions to be answered (Saunders, Lewis, and Thornhill, 2003). I
understood the importance of recorded interviews in that it ensures
the accuracy of any data and it can be re-accessed at any time if
necessary.
CHAPTER THREE: RESEARCH APPROACH
3-34
Archival records
Yin (2009) reported that archival records, as another data collection method, can
take several formats (e.g. computer files and records). Archival records can also
be in the form of public use files such as the census, company’s service records,
maps and charts of places and survey data that was previously collected by others.
On the other hand, it can be records for the company’s use internally such as
organisational records (e.g. financial, budget and personnel records).
Notably, in respect of archival records, Yin (2009) asserted that every researcher
has to understand that these records were originally prepared to serve certain
purposes or specific groups of people and not for research purposes. Therefore,
researchers must be alert to this when interpreting the usefulness and the
correctness of these records.
In regard to this study, archival records, during both the first and second phases of
study, were considered to be the most important source of evidence, as it was
considered to be rich with valuable qualitative and quantitative information. The
Annual Reports for each company were obtained from Companies House in
Cardiff. The researcher visited the site on two occasions to search their database
and print the required Annual Reports for each company with a small charge for
each report. The reports were taken to my office located in the Cardiff Metropolitan
University building and when it was analysed, it was kept secure with other
CHAPTER THREE: RESEARCH APPROACH
3-35
evidence. This was vital to understand each company’s conditions during the
period of time in which those financial reports were made and were rich in
qualitative and quantitative data (e.g. losses, profits and managerial changes).
Documentation
Yin (2009) asserted that document analysis was another method of collecting data,
which is considered to be a stable source of evidence due to the fact that it can be
reviewed time after time. However, in contrast, Patton (2002) disagreed with this
view, emphasising that it has some limitations in terms of data accuracy and
completeness. Yin (2009) reported that documentary information can relate to
most topics of case studies and it can take various formats such as letters,
memoranda, emails, administrative documents, progress reports, internal records,
personal documents, newspapers, articles and minutes of meetings.
In both phases of this study and in order to achieve objective two, the websites of
the 18 companies were analysed to gain as much information as possible about
the company. Furthermore, the researcher critically analysed some other articles
and information on Internet sites, such as: FAME (https://fame.bvdinfo.com) and
Duedil (https://www.duedil.com). This diversification in the types of documents has
strengthened my confidence about the accuracy of the collected data. In addition, I
compared the data collected from documents and from interviews to ensure its
consistency and reliability. I found this important especially as the study was
CHAPTER THREE: RESEARCH APPROACH
3-36
conducted about an activity that took place in the past and it is possible that the
interviewees may have forgotten some information.
3.3 Data analysis
The literature on research approach has offered two basic attitudes, which can be
used to analyse qualitative data. As illustrated in Table 3.3, those two approaches
were identified by Gray (2009) as the content analysis and the grounded theory. In
content analysis, criteria and classifications have to be developed prior to the onset
of the research, unlike the grounded theory, in which all classifications and themes
emerge during the study.
Type of
approach
Content analysis Grounded theory
Nature This approach requires
identifying specific selection
categories and criteria before
the onset of the analysis
process.
This approach does not require
identifying any criteria in advance as all
the measures and themes appear during
the data collection and analysis process.
Theoretical
approach
relevance
Deductive approach
Inductive approach
TABLE 3.3: THE TWO BASIC APPROACHES FOR QUALITATIVE DATA
ANALYSIS
Adapted from: (Gray, 2009)
CHAPTER THREE: RESEARCH APPROACH
3-37
Additionally, Glaser (1978) reported that there is another approach called the
constant comparative method and it is connected to the grounded theory approach.
He added that this approach is significant in analysing qualitative data through its
structured steps (see Figure 3.7). These steps are: 1) data collection, 2) identify
the main key issues about the subject, 3) writing about these key issues as well as
keeping an eye open for any more issues that may appear and finally 4) using the
collected data to develop a model that links all issues together and presents the
integrated relationship across all.
In this study, a constant comparative method approach was adopted to analyse all
the gathered data. In respect to the data collected from interviews, it was
Data collection
Identification of main
issues of the topic
Writing about the issues
Development of a model
that links all issues together
Adapted from: (Glaser, 1978)
FIGURE 3.7: THE STEPS OF CONSTANT COMPARATIVE METHOD
APPROACH
CHAPTER THREE: RESEARCH APPROACH
3-38
transcribed, coded and categorised into different groups and stages for comparison
purposes. This was done to highlight any agreement or contradiction during each
stage of the turnaround process, from the decline stage up to the recovery stage,
in order to uncover the true meaning of data. Finally, a model concluding the
results was extracted from findings after the first phase of study, which was then
modified after the second phase of study to link all the issues together.
Additionally, the constant comparative approach has required a strong technique of
analysis that categorises findings in a way that it is clear, to draw all the differences
and similarities to a conclusion at the end of the analysis. The selected technique
was the cross-case synthesis.
3.4 Triangulation, Reliability and Validity
Triangulation, reliability and validity are essential to the verification of data in social
research (Gillham, 2005). Bouma and Atkinson (1995) asserted that it is highly
important to ensure the accuracy of the gathered data (e.g. interview conversation,
phrases and meanings of certain words) in order to avoid any possible
misinterpretation.
CHAPTER THREE: RESEARCH APPROACH
3-39
3.4.1 Triangulation
Triangulation was described by Arksey and Knight (1999) as the plan that is
implemented to increase the assurance of the research outcomes. Harker et al.
(1998) stated that, “The term triangulation is a metaphor from navigation and
military strategy that uses multiple reference points to locate an object’s exact
position”. Moreover, a definition for triangulation was presented by May (2002:189)
stating that,
Methods developed within mainstream qualitative, sociological
research for dealing with problems of validity refers to the injunction
to check pieces of information against at least one other independent
source, before regarding them as credible.
Various scholars (e.g. Easterby-Smith et al., 1991; Bouma and Atkinson, 1995;
Denscombe, 1998 and Yin, 2009) asserted that the use of different research
methods is called triangulation, which assists researchers to ensure the reliability
of their collected data. Triangulation is seen as an effective tool for researchers to
overcome the limitation of each method adapted in their study according to Gray
(2009). Additionally, triangulation assists researchers to reduce any personal or
methodological biases, as well as increasing the chances of their study findings
being generalised.
Triangulation was achieved in this study using three different methods of data
collection as mentioned earlier in the chapter (semi-structured interviews,
documentation and archival records), to achieve objective two of the study. The
CHAPTER THREE: RESEARCH APPROACH
3-40
combination between the three methods strengthened my confidence about the
accuracy and correctness of my data. Moreover, two sources of evidence were
used during the second phase of study in order to achieve a triangulation of data
and results.
3.4.2 Reliability
Seale (2000) emphasised that irreconcilable interpretation of data is unacceptable
in social research. Therefore, he suggested that researchers must save no effort
to provide the same interpretation to an object or a phenomenon of study.
However, on the other hand, some authors (e.g. Marshall and Rossman, 1999 and
Gray, 2004) argued that the absolute reconcilable interpretation in qualitative
research is not easy to attain because these interpretations reflected realities at the
time of conducting the study and not at all times. Consequently, Seale (2000)
suggested that to compensate for this difficulty of achieving reliability through
reconcilable interpretation, researchers should show and explain their findings to
the readers, using as much information as possible about how these findings were
reached. This is why an extensive description for the three data collection methods
adopted in this study was provided earlier in this chapter.
Relatively, it was reported that one major concern in any research study is to which
degree respondents will produce the socially desired answers rather than the ones
they really feel (Miller, 2003). Therefore, several authors (e.g. Bouma and
CHAPTER THREE: RESEARCH APPROACH
3-41
Atkinson, 1995; Welch, 2000 and Burns, 2000) asserted that the verification of data
enables researchers to ensure the reliability of the information collected during the
data collection process.
Similarly, Denscombe (1998) reported that verification of interviews with
interviewees signifies the researcher’s efforts to recapitulate over issues that were
highlighted in the discussion to clarify its correctness and avoid any
misunderstanding and misinterpretation. In relation to this, Gray (2004:345) stated
that, “In terms of reliability, it is fairly obvious that taped conversations will tend to
present more reliable evidence than hastily written field notes”. In relation to this
study, all conducted interviews were recorded and a transcription was extracted
from them. The transcription process was carried out straight after each interview
at the library of UWIC to make sure that there was no interruption and to ensure
the highest level of accuracy. The reliability of this study was also increased
through the pilot study conducted at both UWIC and MLC.
3.4.2 Validity
Yin (2009) indicated that triangulation is considered to be a helpful approach to
overcoming the problems that relate to validity of data. He explained that this can
be done through the various sources of evidence adopted to provide accurate data
for the same case study. Ritchie and Lewis (2003) indicated that the validity of
research is conceived as the precision or correctness of the research findings.
CHAPTER THREE: RESEARCH APPROACH
3-42
Moreover, Denscombe (1998) added that the use of multi-methods for examining
one issue corroborates the findings of the research and increases the validity of the
data. Therefore, in this current study, the validity was achieved by undertaking
multiple methods of data collection, to investigate the turnaround of MLC from
different perspectives, in order to strengthen the validity of the findings.
3.5 Ethical considerations
Miller and Brewer (2003) and Blaxter et al. (2006) reported that there are ethical
issues that have to be taken in consideration during any research study and it is
the researcher’s responsibility to prioritise these issues (e.g. consent, potential
harm and risk, privacy, confidentiality and anonymity).
In this research study there was every effort taken to make the interviewees aware
of the aims, objectives and the nature of the study. I also ensured that all the
interviewees participated voluntarily and felt free to terminate the interview at any
time. Additionally, I made sure they signed the consent form to clarify their
approval to join the study.
In addition to this, the interviewees were reassured that data will be used for the
research purposes of this study only. They were also advised that all the data will
be private and will be securely locked in a safe place at UWIC. Furthermore, I
confirmed that their identity will not be disclosed to any persons including my study
CHAPTER THREE: RESEARCH APPROACH
3-43
supervisors. Therefore, prior to the analysis stage, each one of the directors were
given a unique code that consisted of a random letter and a number that was not
connected to their name or position within the company. This was done to make
sure that their identity was kept completely anonymous.
3.6 Summary
This chapter was designed to emphasis the research approach adopted in this
study theoretically i.e. epistemology, theoretical perspective, and practically i.e.
methodology and methods. A qualitative approach was adapted in the study due
to the large amount of qualitative data needed to uncover any issues related to the
phenomenon of successful turnaround management.
The methodology adopted in this study was a multiple case study with a number of
research methods (semi-structured interviews, documentation and archival
records) used to gather the required qualitative data. These chosen
methodologies and methods were found to be the most suitable to achieve the
aims and objectives of my study. The chapter later presented how triangulation,
reliability and validity were achieved as well as the ethical issues that were taken
into consideration when conducting this study.
The next chapter investigates the issues relating to achieving a successful
business turnaround using the case study MLC and three sources of evidence.
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-1
CHAPTER FOUR
MANAGING SUCCESSFUL TURNAROUNDS -
CASE STUDY OF 14 UK FOOD
MANUFACTURING COMPANIES
4.1 Introduction 4-2
4.2 ADM Milling Limited (UK) 4-3
4.3 Bowes Of Norfolk Limited 4-10
4.4 Chr. Hansen (UK) Limited 4-16
4.5 Hills Biscuits Limited 4-22
4.6 Icelandic Group UK Limited 4-28
4.7 Kitchen Range Foods Limited 4-34
4.8 Lancashire Eccles Cakes Limited 4-39
4.9 Molls Meats (Birmingham) Limited 4-44
4.10 New Ivory Limited 4-50
4.11 Nimbus Foods Limited 4-56
4.12 Organic Farm Foods 4-63
4.13 Penguin Foods UK Limited 4-70
4.14 Stateside Foods Limited 4-77
4.15 Uniq Prepared Foods Limited 4-83
4.16 Summary 4-91
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-2
4.1 Introduction
This chapter is designed to achieve objective two of this study i.e. develop a case
study of some companies which have undergone a successful turnaround, to see if
the conceptual framework and its key issues fit those companies’ experiences and
then to modify the conceptual framework upon the findings
The chapter presents the results obtained from a case study of 14 medium and
large food-manufacturing companies across the UK, with a turnaround experience
according to the turnaround criteria (see methodology chapter). The turnaround
criteria has used the profit and loss account (profitability) as the main factor for
defining the turnaround case and the reason for this is that the researcher agrees
with the idea that profitability is the main goal for most businesses and the reason
for the three year time span is to make sure that the company is not in natural
temporary decline, which most firms experience during the normal course of their
lifecycle (Lasfer and Remer, 2007).
The investigation process was guided by the theoretical framework (see Figure
2.9) that was developed in chapter two, to explore and understand the key issues
of turnaround management, which interferes with the success of any turnaround
process. The chapter presents a study of a secondary data analysis of 14 cases
out of 17 companies, which is the total number for the whole population of
successful turned around companies in the study, after eliminating non-qualifying
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-3
companies. Two research methods were used during this phase of the study i.e.
archival records and document analysis. The Annual Reports for each of the 14
companies, covering the whole period of turnaround were analysed as part of
archival record analysis. Additionally, when this was done, an Internet search for
further information about the selected companies was conducted, to gather all
possible data as part of the documentation analysis method and to strengthen the
reliability of the collected data.
The chapter investigates each company individually from a stage theory
perspective, guiding the whole turnaround process through its main stages and
emphasising the key lessons from each company’s own turnaround experience.
4.2 ADM Milling Limited UK (ADM)
ADM (Archer Daniels Midland) Milling Limited, UK is a subsidiary of ADM
International Limited, which is the largest independent flour miller in the UK, with
eight mills spread across the country, operating to full capacity 24 hours a day, 365
days of the year (ADM website, 2012). The company has a range of flour products
such as white, brown, wholemeal and speciality flours available either in bulk or in
small bags. Additionally, the company has a range of bakery mixes, ingredients,
bran, germ and bakers sundries (ADM milling, 2012).
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-4
ADM is a multinational company with one million tons of wheat sourced from
around the world every year. It was stated on the Wikinvest website (a company
data website) that, “ADM is a world leader in agribusiness segmented into four
categories: oilseed processing, corn processing, agricultural services and others.
It also has a corporate segment which accounts for some rather interesting
accounting profits” (Wikinvest, 2012). It was also stated on the ADM website that,
“ADM processes about one million tons of wheat per year, at the largest
processing facility of its kind in the U.K. The plant crushes the seeds and refines
the crude oil – known in North America as canola oil – into about 385,000 tons of
refined oil, used in a variety of food ingredients and in bio fuels throughout Europe.
The meal from these crushing operations is used as feed by livestock producers in
the U.K., France and Ireland” (ADM milling, 2012).
ADM went through a turnaround experience in the early decade of 2000, qualifying
it as a turnaround case for this study. Figure 4.1 below shows the company’s profit
and loss account after taxation (P&L) during the period under study, showing its
transition from one stage to another.
Review
of
outcome
s
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-5
4.2.1 Decline stage:
4.2.1.1 Recognition of decline
Decline was recognised in ADM as a profitability decrease and becoming negative,
as reported in the 2004 Annual Report. The company made losses in 2002, 2003,
2004 and 2005 before the turnaround efforts started in 2006 and the first profit after
the losses was in 2009. Evidence from the Annual Reports, indicated consecutive
negative profitability was the main decline signal that triggered decline, in addition
to other signals such as inefficiency in operations and lack of cash flow (Annual
Reports).
1,577
-4,963
-859
-1,835
-7,495
-3,112
-1,084
1,887
970
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
2002 2003 2004 2005 2006 2007 2008 2009 2010
FIGURE 4.1: P&L OF ADM
PRE-DECLINE
YEARS YEAR
DECLINE YEARS
TURNAROUND
YEARS
M
O
N
E
Y
IN
£000
Adapted from: (ADM Annual Reports 2002-2010)
CHAPTER FOUR: MANAGING SUCCESSFUL TURNAROUNDS – CASE
STUDY OF 14 UK FOOD MANUFACTURING COMPANIES
4-6
It was found apparent from the Annual Reports that various changes took place of
which changes in the leadership of the company was one of them.
4.2.1.2 Change of leadership
Evidence from the Annual Reports indicated that a new Managing Director for the
company (i.e. T. Cook) was appointed as part of the leadership changes to the
Board of Directors. Additionally, a new Finance Director was appointed in 2007 to
take charge of the company’s financial situation. It was stated in the Annual
Report, that some of the changes aimed to improve the leadership team to take the
company to the next stage. These changes indicate that the senior leadership of
the company recognised the need for change within their team, in order to initiate
the turnaround.
4.2.2 Analysis of decline stage
Evidence from the Annual Reports showed the Board of Directors that decline is
not permanent and the company will recover upon the anticipated changes within
the internal and external environment of the company.
4.2.2.1 Competitive advantage
Evidence from the 2007 Annual Report showed that the company operated in a
market with uncertainty in its capacity, facing a tough competition with other
suppliers. However, it was found from the Annual Report that the company has a
strong position in the marketplace, being the largest milling company in Europe
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and being a subsidiary of the largest milling group in the world, with availability of
multiple secured capital sources. This strong position gave the company the
footings and ability to recover from decline and stay competitive in the marketplace
as long as causes of decline were addressed and eliminated.
4.2.2.2 Severity of decline
Evidence from the Annual Report confirms that the company was in a mid-term
decline, due to negative profitability with some resources (Annual Report, 2004). It
was shown in the Annual Reports that the company’s decline was associated with
certain divisions and not the whole company. This stated that the company was
profitable on other sides of the business and had a stable cash flow, secured loans
and other finance sources. The company’s TMT realised the competitive
advantages and that played a significant role in its viability for turnaround.
4.2.2.3 Causes of decline
It was found from the Annual Reports (2002, 2003, 2004, 2005 and 2006) that the
causes of decline in ADM were found to be mixed causes (internal/external)
combined together, which led the company to six consecutive years of negative
profitability.
The causes of decline can be summarised in the following:
? Internal causes: A major cause of decline in the company was the
unsuccessful acquisition of the Tewksbury and Newcastle mills from ABF
(Associated British Foods), as part of a major acquisition that was
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completed in 2003, which involved six mills in total located in Liverpool,
Corby, Tewkesbury, Caseford, Knottingley and Edinburgh (The Grocer
website, 2012). Financial evidences showed that the turnover of ADM has
grown from £59.7M in 2002 to £146.7M in 2003 (£87.4m from acquisitions).
However, this increase in turnover was accompanied by huge overheads
mainly in the Tewkesbury and the Newcastle mills which made the
integration process with existing operations very costly, hard and slow,
impacting the company’s overall profitability negatively in 2003 until 2008 as
shown in figure 4.1 (company’s Annual Reports 2004-2008).
? External causes: Another cause that contributed to the loss was the
continuous increase in interest charges on loans from debtors and an
intercompany loan. In addition, the bad economic conditions in the second
half of 2007 have affected the raw material prices, causing an increased
cost of raw material prices and higher overheads (Company’s Annual
Reports, 2008).
This combination of mixed factors had contributed to the negative profitability of the
company, pushing the need for turnaround action to be taken very quickly. The
analysis stage reveals critical evidence that decline was mainly associated with
certain subsidiaries, badly acquired, in addition to other high costs.
4.2.3 Formulation, implementation and stabilisation of the turnaround
plan
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It was noted in the 2007 Annual Report that the Board of Directors decided to
implement some restructuring activities in response to the decline situation, by
instigating a rationalisation program in 2006. Evidence showed that the program
included short-term strategies to be implemented immediately and long-term
strategies to follow later.
Evidence showing the content of the short-term plan can be summarised as
follows:
? Operational restructuring: It was reported in the 2007 Annual Report that
cost cutting, tight control of overheads, reduction in spending and focusing
on performance and efficiency improvements, were the key actions within
this strategy to improve the company’s overall performance. Moreover,
sales contracts were adjusted post 2007 to generate more cash, by
transferring any increase in commodity prices to customers. This is aimed
at dealing with problems highlighted in the previous stage, regarding
increased cost of materials and high overheads in general.
? Asset restructuring: Another strategy, which was apparent during the
short-term, as reported in the 2007 Annual Report, was the divesting of as
many assets as possible. Additionally, the Newcastle mill was also
mothballed, which was considered a vital step in reducing the unnecessary
opening of another asset, thus reducing costs and improving their financial
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position. This strategy was in response to the initial cause of decline in the
first place i.e. bad acquisition.
4.2.4 Recovery and return to growth stage
Following the implementation of the short-term strategies during the last stage, it
was reported in the 2009 Annual Report that the companies continued to focus on
managing costs and reducing overheads, to ensure that operating profits remained
positive. This evidence indicates the importance of continuing to adapt operational
restructuring strategies in order to maintain efficiency, stable cash flow and keep
costs down.
Accordingly, by the end of the rationalisation program that took some three years,
the company made a profit from 2006 for two consecutive years of £1,887.147 in
2009 and £970,000 in 2010. Consequently, according to the turnaround criteria,
the company had undergone a successful turnaround experience and had
achieved recovery by 2010. The Board of Directors believed that improvement in
performance was the result of combined actions to reduce overheads, keep costs
down and increase service quality to customers (Annual Report 2009).
4.2.5 Summary of turnaround process ADM
It can be said that the turnaround plan of ADM started with the changes in the
leadership team, followed by identifying all the factors that linked the process such
as, the severity and causes of decline and its relationship to turnaround strategies
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shown and the stimulant transition of the company from one stage to another. A
rationalisation program was developed and implemented over two terms (short and
long) to tackle decline. The company returned to profitability in 2009 and
continued to make profits for more than two consecutive years making it a
successful turnaround case.
4.3 Bowes of Norfolk Limited
Bowes of Norfolk Limited (BOF) was founded in 1957 and previously known as
Norfolk Fat & Bone Company Limited, before it changed its name to its current
form in November 1993. The company is one of the biggest UK retail, food service
and wholesale pork meat suppliers (Cranswick plc, 2012). The company supplies
supermarkets and meat manufacturers in the UK as well as exporting to the Far
East, the Russian Federation, South Africa, Japan and European countries. The
company is operating as a subsidiary of Cranswick PLC since its acquisition on
24
th
June 2009.
It was stated on the company’s website that:
Cranswick is a leading UK food supplier providing the consumer with
a range of great tasting food that includes fresh pork, gourmet
sausages, cooked meats, air-dried bacon and sandwiches along with
a variety of non-meat products. Food is supplied under licensed
brands and retailers’ private labels.
(Cranswick Plc, 2012)
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BOF had suffered four years of negative profitability as shown below in Figure 4.2,
from 2002 until 2005, following their profit of £235,000 in 2001. The company
successfully implemented a turnaround program that brought the company to a
profitable position in 2006. This success story is investigated in detail below.
4.3.1 Decline stage
4.3.1.1 Recognition of decline
Many decline signals were reported in the company’s Annual Reports and the TMT
was concerned about the company’s situation showing negative profitability.
Despite the increase in turnover by £4m, decline was recognised by the TMT and it
was reported that they were confident that the company would return to profitability
435
-1,860
-463
-23
-604
871
2,439
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
2001 2002 2003 2004 2005 2006 2007
FIGURE 4.2: P&L OF BOF
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (BOF Annual Reports 2001-2007)
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and growth by taking some corrective actions, such as increasing volumes and
throughputs and focusing on quality and concern for animal welfare (Annual Report
2002).
4.3.1.2 Change of leadership
Evidence from the Annual Reports confirms that major leadership restructuring
took place at the onset of the turnaround process. For example, it was reported in
the 2006 Annual Report that the company Chairman was replaced, as well as four
other directors. It was stated in the Annual Report that they aimed to bring in new
business ideas and regenerate the company’s leadership for the future (Annual
Report, 2006).
4.3.2 Analysis of decline stage
4.3.2.1 Competitive advantage
It was found apparent in the Annual Reports that the company had a strong
position in the market, having good relationships with multiple retailers in the UK
market as well as abroad and also a highly skilled butchery team. Annual Report
2002). This made the existing management team feel confident that the company
would return to profitability in the near future, if certain measures were taken,
making it viable for turnaround (Annual Report 2002).
4.3.2.2 Severity of decline
According to the evidence found in the Annual Report, the company’s decline
stage can be assessed as a mid-term decline due to certain signals such as
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negative profitability and a deteriorating cash flow position. However, due to the
company position and size in the marketplace, it remained capitalised with sources
of finance and cash available to conduct the turnaround.
4.3.2.3 Causes of decline
It was found apparent from the Annual Report that the cause of decline was
allocated and identified by the company’s leadership, which can be summarised in
the following:
? External causes: Evidence from the Annual Report 2003, reported that the
outbreak of swine fever in 2001, followed by another outbreak of foot and
mouth disease, had caused temporary governmental legislation to be
brought in, restricting animal movement and trading for a long period of
time, thus impacting the overall production, supply and export ability for
2002 and 2003. It was reported that this has reduced the total volume of
sales and trading in general, leaving the company to deal daily with its
running costs.
Additionally, intense competition was found to be another cause of decline as it
created a worldwide oversupply of pork products in the market in 2001. This led to
overall reduced prices and profit margins, as well as other internal inefficiencies,
causing a continuous loss for several consecutive years, especially to the
company’s herds that did not recover at a rate that was anticipated (Annual Report,
2003).
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4.3.3 Formulation, implementation and stabilisation of the turnaround plan
The management team of the company realised that they had to act in a speedy
manner by altering investment plans and restructuring in order to stop the cash
drainage and help save the company. It was stated in the 2001 report that, “The
general environment has caused us to defer plans for re-investment in facilities
until the trading situation is more stable” (Annual Report 2001:1).
In 2004, the company conducted a wide range strategic review to assess the
company’s position internally and externally. The review concluded that there was
a list of actions needing to be implemented to respond to the declining situation, in
order to bring the company back to profitability as follows:
? Operational restructuring: The strategic review concluded that operational
restructuring activities (cost cutting and cash generation) were needed with
immediate effect, to improve the internal working environment. Following
the lift of restrictions on UK pig meat exports, the company increased its
sales to boost its market share and generate more cash in 2003 (Annual
Report, 2003). The company also worked towards improved profit margins
and reduced direct costs and overheads. For example, evidence from the
2006 Annual Report showed that the number of staff was reduced in 2006
by more than 100 in comparison to 2005. This was aimed at increasing and
improving the utilisation of staff, reducing costs and reserving cash.
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During this stage and by focusing on the operational efficiencies of the
company, a breakeven point was reached, the cash loss had stopped and it
was time to develop a long-term strategy to maintain such improvement and
head for full recovery.
4.3.4 Recovery and return to growth stage
It was emphasised in the 2006 Annual Report that they would maintain
improvement by continuing to reduce and control costs. Additionally, asset
investment restructuring strategies were implemented as follows:
? Asset restructuring: It was reported that the company’s strategic review,
including a long-term investment strategy to improve its operations, was a
step towards improving relationships with its major customers such as
Tesco. An investment in people and new equipment was allocated to
support the company’s recovery and future growth. For example, in 2006,
BOF invested a sum of £529,000 to improve the working facilities and in
2007, another sum of £841,000 was invested in improving staff training,
skills and manufacturing capabilities.
As a result of the actions and decisions implemented by the company’s leadership
in response to the strategic review in 2004, the company generated profits for two
consecutive years (£871,000 in 2006 and £2,439,000 in 2007) (Annual Reports
2006/2007). It was stated in the 2006 Annual Report that," This profit has been
achieved through the implementation of a detailed plan to improve efficiency levels
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and reduce costs, whilst taking care not to damage the exceptional quality of the
pork" (Annual Report 2006:1).
As stated in the report, the company will continue to work closely with its major
customers, to provide them with the best products as well as securing supply, by
strengthening the relationship with the main suppliers (Annual Report, 2006).
Additionally, a close eye had to be kept on performance to measure it against
profits and cash flow forecast, to ensure positive outcomes.
4.3.5 Summary of turnaround process BOF
BOF has proven to be a success story and many key lessons can be learnt from
the company’s turnaround experience. The focus on identifying the relationship
between the company’s competitive advantage, severity of decline, causes of
decline and the chosen operational and strategic options, played a significant role
in the success of the company’s turnaround.
4.4 Chr. Hansen (UK) Limited
Chr. Hansen (UK) Limited (CHR) is a subsidiary of the Chr. Hansen Holdings and it
specialises in the manufacturing of food and beverages. CHR is divided into five
divisions; they are (cultures and enzymes, colour, health and nutrition, global sales
and finance and global sourcing) (CHR Website, 2012).
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CHR is known for being a strong competitor in the food market based on its
expertise in the bioscience of food, health and animal industries (CHR Website,
2012). It was stated on the website of CHR that, “Their solution in pro-biotic,
enzymes, cultures and natural colours are based on strong research and
development competencies and significant investment in technology, making them
the market leader without dispute” (CHR Website, 2012).
CHR suffered a period of decline between 2005 and 2007 followed by a successful
turnaround as shown in Figure 4.3. That period was characterised by negative
profitability, inefficiency in operation and high overheads. The turnaround
experience of CHR investigated below, from the early stages of decline until
recovery was achieved.
17
-103
-142
-8
332
431
-200
-100
0
100
200
300
400
500
2004 2005 2006 2007 2008 2009
FIGURE 4.3: P&L OF CHR
DECLINE YEARS TURNAROUND YEARS
YEARSyearsEARS
PRE-DECLINE
YEARS
M
O
N
E
Y
IN
£000
Adapted from: (CHR Annual Reports 2004-2009)
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4.4.1 Decline stage
4.4.1.1 Recognition of decline
In 2005, CHR went into a negative profitability position and the leadership of the
company understood that some quick changes to save the company from failure
were required. It was reported in the 2005 Annual Report that various signals
indicated the companies need to reassess its portfolio in the light of current risks.
Signals such as increased material prices, lack of cash flow and negative
profitability were the most serious. However, it was reported in the 2005 Annual
Report that the TMT of the company felt confident that the negative profitability
position was only temporary and performance should be improved with changes
around the company to enhance NPD from the company’s own research efforts
(Annual Report, 2005).
4.4.1.2 Change of leadership
Following the recognition of decline, some new changes in the leadership team
took place; however, these changes did not involve the Managing Director who
managed the company during the decline stage (i.e. M. Hurley). It was noticed
from the Annual Reports 2005 and 2006 that in 2006 the Sales Director and the
Finance Director were replaced. This was seen to help to initiate the turnaround
process within the company, by bringing in new people with fresh ideas and more
skills needed for the turnaround process.
4.4.2 Analysis of decline stage
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4.4.2.1 Competitive advantage
It was reported in the 2004 Annual Report that CHR is a subsidiary of the Chr.
Hansen Holding Company in Denmark, secured by large financial capital and is
strong competitor in the market based on NPD and experience in the bioscience of
food. This had reassured the company’s leadership team of their ability to return to
profitability, making it viable for turnaround if causes of decline were identified and
rectified.
4.4.2.2 Severity of decline
According to the company’s Annual Reports, evidence showed that despite the
negative profitability and lack of cash flow, the company was supported by its
larger mother company and a massive network of suppliers, customers and
lenders. The decline can be considered a mid-term decline, having reviewed the
major signals of failure.
4.4.2.2 Causes of decline
It was found apparent in the Annual Reports of the company that the causes of
decline can be attributed to the following factors:
? Internal causes: Low profit margins that did not reflect the new continuous
rise in raw material costs, was one of the main causes highlighted in the
Annual Report (Annual Reports, 2005). Furthermore, the rise in operational
costs, such as staff costs, by over 14% (£118,000) in 2005, due to some
directors’ retirements and pay-outs, was another participant in the decline of
CHR (Annual Reports, 2005). This explains the leadership changes early
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on in the process, especially the replacement of the Finance Director,
indicating a lack of managerial financial control leading to various problems.
? External causes: The rise in the interest rate payable (especially after
adding the difference in exchange rate), played a significant role in
increasing the burden on the company’s financial situation, affecting its
profitability. For example, the interest charges increased by 28% in 2005,
76% in 2006 and 86% in 2007. Additionally, in 2006 the increased cost of
raw materials and distribution had both affected the operating profit of the
company, despite the increase in turnover (Annual Reports, 2005).
When these factors were identified, the next stage in the process followed to rectify
and implement the most appropriate strategy to turnaround the company.
4.4.3 Formulation, implementation and stabilisation of the turnaround plan
It can be concluded from the Annual Reports for 2005-2009, that the management
response to the negative profitability situation combined two major strategies
during the short-term phase, to stop the continuous cash loss and improve the
financial situation and they were:
? Operational restructuring: It was seen from the Annual Reports that
bringing the costs down were a key step to getting the situation under
control. It was mentioned in the 2007 Annual Report that the management
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focused on the cost base and general spending to minimise overheads, at
the same time as generating cash by focusing on developing profitable
products with high profit margins that appealed to customers. Evidently, it
was noticed in the 2008 Annual Report that the cost of sales and the
administration were reduced accordingly with the declining turnover.
? Financial restructuring: It was seen in 2008 that the continuous increase
in the interest rate had stopped and the annual charge in 2008 was less
than 2007 by nearly 50%. It was reported in the 2008 Annual Report that
the company secured various lending agreements in 2007, in various
currencies, to overcome problems with interest rate risk. It can also be seen
that the new financial restructuring plan gave the company better terms of
borrowing and thus reduced their annual cost. (Annual Report, 2008).
Implementing those mixed strategies in the short-term had brought the company
back to profitability in 2008 and later years.
4.4.4 Recovery and return to growth stage
No evidence was found in the Annual Reports that the management of the
company had implemented any additional strategies in the long-term. However, it
was mentioned in the 2009 Annual Report that the company’s management would
maintain tighter control over costs and work closely with customers to develop the
best products with the highest profit margins.
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It was reported in the 2009 Annual Report that monitoring the cost base, working
closely with customers on consciously developing new products and ensuring high
levels of service quality, had brought the company to a profitable position in 2008
(PAT of £332.000) and in 2009 (PAT of £431,000) (Annual Report 2009).
Additionally, it was stated on the company’s website that one of the major reasons
behind the success of CHR, was the partnership, which was established with their
customers (CHR Website, 2012). It was emphasised that the continuing dialogue
helped to ensure that customers used the best products for their needs in the best
possible way, confirming that customers are the source of inspiration for new
developments (CHR Website, 2012).
4.4.5 Summary of the turnaround process of CHR
The success story of CHR has many key lessons to be learned since its fall into
decline in 2005 and its full recovery in 2009.
4.5 Hill Biscuits Limited (HB)
Hill Biscuits Limited (HB) was established in 1855 as a family business and since
then the company has passed through several owner. The company is today in
private ownership, combining the family’s traditional baking methods with high
volume production capabilities, creating a successful competitor in the marketplace
(HB website, 2012). The company has various products under its brand name Hill
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in different ranges (e.g. 150 grams range, 250-300 grams range and mini packs)
from rich tea biscuits to light snacks and mini packs (HB website, 2012).
The company went through a turnaround experience after suffering three years of
negative profitability starting in 2001 (see Figure 4.4). The story of HB can be
summarised in the following sub-sections as a success story, of which many key
lessons can be learned.
4.5.1 Decline stage
4.5.1.1 Recognition of decline
The decline of the company was characterised by many key signals of decline,
which were found apparent in the Annual Report, such as the growing concern by
512
-106
-147
-43
313
289
-200
-100
0
100
200
300
400
500
600
2001 2002 2003 2004 2005 2006
FIGURE 4.4: P&L of HB
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (HB Annual Reports 2001-2007)
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the management team, negative profitability and loss of market share (Annual
Report, 2002). Those signals of decline were recognised by the management
team and acted upon by formulating and implementing the necessary actions
needed to reverse decline.
4.5.1.2 Change of leadership
There was no evidence found from the Annual Reports that there were any
leadership changes. It was found clear that the same team, which managed the
company through decline, stayed to manage the company during the turnaround
period, which may have been because the company was a family owned and
managed business, with high constraints on the flexibility to replace bad leaders
with staff from outside the family.
4.5.2 Analysis of decline stage
4.5.2.1 Competitive advantage
It was reported in the 2001 Annual Report and on the company’s website that HB
is one of the UKs strongest competitors in the biscuit market, with over 100 years
of experience and many own brand products. The position that the company holds
in the market, has made the company’s owners and leadership team confident that
they are able to return to profitability and growth by identifying and eliminating the
causes, which led the company into decline in the first place.
4.5.2.2 Severity of decline
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According to evidence from the Annual Report, it can be said that the company
suffered a mid-term decline according to decline signals, such as negative
profitability, decreased sales and low profit margin. The company had the core
competitive advantage that it needed as well as enough cash to execute the
turnaround.
4.5.2.3 Causes of decline
Evidence from the 2001 Annual Report asserts that many causes have contributed
to the negative profitability between the years 2001 and 2003 and they are
summarised as follows:
? Internal factors: Evidence showed that the internal causes of decline in
HB took different forms as below:
1. Data from the 2001 Annual Report showed that the company had lost a
major contract with one of its customers, which resulted in a decline in
sales within the company. In response to this, a program was developed
relying heavily on NPD to boost sales. However, launching these
products was badly managed, causing a high level of waste and
eliminating any potential profits (Annual Reports 2002 and 2003).
2. Low profit margin was another cause of decline as customers were not
willing to accept any price increase in the goods despite the company’s
attempts to implement this (Annual Report, 2003).
3. Exceptional costs that were unexpected, such as a bill from the Inland
Revenue in 2002 for a large sum of cash relating to some previous
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years, plus a large sum of money in 2003 which was over-spent on
machinery maintenance and was greater than was forecasted for this
work.
? External factors: Evidence from the Annual Report indicated that
aggressive pressure from competitors in the marketplace had caused loss of
two major sales contracts in 2001; consequently, a third contract was
salvaged due to them dropping to very low margins. This had caused a
major decrease in sales at a staggering rate of 24% less than the year 2000
(Annual Report, 2001).
All these consecutive occurrences, combined with unstable economic conditions,
had led the company into a negative profitability position. Therefore, some new
strategies were required to be developed and implemented in order to bring the
company back to recovery.
4.5.3 Formulation, implementation and stabilisation of the turnaround plan
In response to the declining situation in the company, a short-term strategy was
developed and implemented to tackle decline on the basis of the following strategy:
? Operational restructuring: An operational restructuring strategy was
implemented in the form of two major activities and they were:
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1. Improve waste levels and better utilise labour within the company
as a whole, as well as keeping raw material prices as low as
possible.
2. Generate cash and raise the company’s portfolio through
importing a range of savoury biscuits from Europe and reselling
them in the UK, as well as focusing on developing products with
the highest margins.
Such cash reserving and cash generation strategies helped the company to
recover from its NPD crisis and source some new products from Europe to add to
its product range. This increased the company’s sales and allowed for a profit
margin increase.
4.5.4 Recovery and return to growth
It was reported in the 2005 Annual Report that the company would maintain a
greater control over costs, expand the customer base and continue to review its
product range, replacing old products with new, higher quality ones as part of the
continuation of the operational restructuring process. Evidence shows that HB has
gained success following the implementation of their turnaround plan. It can be
seen that the company returned to profit in 2004 (PAT of £312,815) and 2005 (PAT
of 289,062) emphasising the importance of cutting costs and cash generation
strategies. It was made apparent in the 2005 Annual Report, that the company will
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keep a close eye on their product range, replacing low margin products with higher
margin ones, as well as keeping costs to their lowest possible level.
4.5.5 Summary of the turnaround process of HB
The leadership team of the company analysed and reversed the decline situation,
using the most appropriate strategy in relation to the original cause of decline as
shown in Figure 4.4. It can be seen that the company relied on one major strategy
to turn the company around i.e. operational restructuring.
4.6 Icelandic Group UK limited (IG)
Icelandic Group UK Limited (IG) (previously known as IFP Holdings Limited) is one
of the biggest companies in the world operating in the seafood sector, with an
international network of independent production and marketing companies in many
countries around Europe, North America and Asia (IG website, 2012). The
company is a subsidiary of Icelandic Group Plc offering a wide variety of fresh,
chilled and frozen seafood products and services globally. The company’s main
business core as stated on their website, is focused on value-added processing of
seafood, mainly ready meals for retail and the food service industry (IG website,
2012).
As mentioned on the website of IG, the company is operating under three business
segments and they are:
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1. Primary processing, representing 6% of the total business sales with raw
material production facilities in Iceland, China and Thailand.
2. Value added processing, representing 69% of the business sales with
production facilities in the US and the UK focused on value added products.
3. Sales and marketing, representing 25% of total sales focusing on promoting
Icelandic branded products in all major markets, most importantly the UK,
Spain and Japan.
The company went through a tough period of decline between 2006 and 2008 as
shown in Figure 4.5. However, that decline was eliminated in response to some
corrective actions implemented in late 2008/2009. The experience of the company
is investigated below emphasising the key lessons that can be learned from its
success.
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4.6.1 Decline stage
4.6.1.1 Recognition of decline
The company’s last positive profitability before it went into decline was in 2005
However, profits for this year were 83% less than the previous year (2004). It was
indicated in the 2005 Annual Report that the impact on efficiency was expected
due to the reorganisation process, following the acquisition of two new businesses
(Seachill Limited and Cavaghan and Gray Limited) in 2004. Decreased profitability,
lack of efficiency in operations and decreased cash flow were the major signals of
decline in IC during that stage (Annual Report, 2004).
4.6.1.2 Change of leadership
406
-1,327
-391
-14,796
6,481
4,797
-20000
-15000
-10000
-5000
0
5000
10000
2005 2006 2007 2008 2009 2010
FIGURE 4.5: P&L of IG
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (IG Annual Reports 2005-2010)
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It was apparent from the Annual Report that despite the changes to the Board of
Directors as part of the reorganisation process, involving many changes in
operations as well as senior management restructure in 2005 and 2006, that to
ensure that the company is well positioned for the future, the company’s Managing
Director remained unchanged to manage the company through the turnaround
process. This provides evidence that despite the new structure, changing the
company’s leader was not found necessary during that stage.
4.6.2 Analysis of decline stage
4.6.2.1 Competitive advantage
It was asserted in the 2005 Annual Report that the management of IG believed that
the company would return to profitability in the short-term, due to the position that it
enjoyed in the market, with many competitive advantages such as its strong
business network around the globe and being one of the biggest competitors in the
seafood market worldwide (Annual Report, 2005).
During this stage, many environmental factors that caused concern to the
company’s leadership were mentioned in the 2006 Annual Report, such as raw
material availability, currency exchange rates, new legislations and competition.
However, it was asserted that, “Directors remain confident in the groups’ market
position and the opportunities provided by its strong operational base” (Annual
Report, 2006).
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4.6.2.2 Causes of decline
It was found apparent in the Annual Reports of the company (2005, 2006 and
2007) that negative profitability caused concern to the Board of Directors regarding
the company’s position in the market, profitability and future growth. Situation
analysis was conducted and the negative results for 2006, 2007 and 2008 can be
attributed to the following causes:
? Internal causes consist of two major causes and they were:
1. High cost of expansion and investment in new equipment as part of the
process of integrating the two new sites acquired in 2004, having
caused huge financial pressure on the company’s resources.
2. The Coldwater site (the main raw material processing facility for the
group) had very high operational costs as well as inefficiency
problems. This had a great impact on the company’s cash flow and
profitability (Annual Report, 2006 and 2007).
? External causes consist of two major causes and they were:
1. Continued increase in the annual interest charges (£4,995.000 in 2005,
£5,752.000 in 2006, £7,086.000 in 2007 and £7,547.000 in 2008) have
caused a great burden on the company’s repayment ability due to cash
shortages.
2. Bad market conditions with continued increase in raw material prices
due to bad weather in 2005, 2006 and 2007, which had led to low profit
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margins and the inability to compete in the marketplace which
impacted the operating profits negatively.
4.6.3 Formulation, implementation and stabilisation of the turnaround plan
It was found apparent from the Annual Reports that the leadership of the company
had implemented various strategies as part of its major turnaround plan. During
this phase, the priority was to improve the operation of the company, reduce cash
loss and to pick up the cash flow position via the following short-term strategies:
? Operational restructuring: It was asserted in the Annual Report that
reducing costs, reserving as much cash as possible and switching suppliers
for cheaper raw materials if needed, were key actions taken to improve
efficiency (Annual Report, 2008). In addition, credit control measures with
customers were placed to ensure regular, on time flow of payments (Annual
Report, 2008). Additionally, NPD played a significant role in generating
more sales, especially with the launch of some new products under a new
brand name (Annual Report, 2008).
? Asset restructuring: Evidence from the 2008 Annual Report asserts that
asset investments as well as asset divestment strategies were used during
the short-term phase.
1. The Coldwater Redditch site was divested on June 2008 to reduce
its high running costs and huge overheads, as well as improving the
overall performance of the group.
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2. An investment amounting to some £3.6m was made in new
equipment and reorganisation at the Grimsby site to accommodate
business brought from the Coldwater site post its closure.
? Financial restructuring: The company needed to take action regarding the
increased interest charges on bank loans and the inter-company loan. Two
major strategies were used as follows:
1. A debit restructuring strategy was implemented in 2008, with the
transfer of the loan (£42.4m) to a different bank with better interest
rates, giving the company headroom with cash flow and banking
covenants. In addition, terms of borrowing and lending
agreements were negotiated with other lenders in favour of the
company, with deferred capital repayment till 2009 and reduced
repayment for 2010 and 2011 (Annual Report, 2007).
2. Furthermore, an equity restructuring strategy was implemented
with the intercompany loan, by turning the remaining sum of the
loan amount into equity, removing the burden of interest charges
and any potential capital repayment (Annual Report, 2007).
4.6.4 Recovery and return to growth
Evidence from the 2010 Annual Report indicated that the company continued to
maintain cost control measures, NPD of profitable products and constantly looked
for new opportunities in the marketplace (Annual Report, 2010). Following the
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short-term, financial changes which took place in the company, performance had
improved as well as profitability in 2009 (£6.4m) and 2010 (£4.7m), which can be
attributed to the reduced overall costs, divesture of unprofitable assets, better
utilisation of assets, the new customer base and the launch of a new brand
stimulating more sales.
4.6.5 Summary of the turnaround process of IG
Several key lessons can be learnt from the case of IG. Evidence showed that
three major strategies (i.e. operational restructuring, asset restructuring and
financial restructuring) were used during the short-term in relation to the original
causes of decline and to eliminate the high overheads, increased costs and
interest rates. Additionally, operational restructuring continued to be used and
implemented during the long-term as an essential strategy to maintain
improvement and ensure full recovery.
4.7 Kitchen Range Foods Limited
Kitchen Range Foods Limited (KRF) has being operating for over 30 years in the
UK, producing various sweet and savoury snack products. Being a part of Moy
Park Food Service and the International Marfrig Group, KRF has become a quality
benchmark pioneer, with pride in its core values, innovation in new product
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development with high quality specifications meeting the diverse needs of different
consumers (KRF website, 2012).
It was stated on the company’s website that, “The company has two production
sites in the UK, Kitchen Range Foods supplies frozen food to all major multiples in
retail, many big brand name food outlets and most national and regional
foodservice wholesalers” (KRF website, 2012). The company has a history of
profitable performance. However, it found it challenging to maintain profitability in
2004, 2005 and 2006 as shown in Figure 4.6 below. The turnaround process of
KRF is investigated in the following sections.
56
-282
-276
-129
1,210
851
-400
-200
0
200
400
600
800
1000
1200
1400
2003 2004 2005 2006 2007 2008
FIGURE 4.6: P&L of KRF
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
Adapted from: (KRF Annual Reports 2003-2008)
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4.7.1 Decline stage
4.7.1.1 Recognition of decline
Evidence was found from the Annual Reports of the company that many warning
signs of decline appeared in 2003, such as decreased sales and revenue (Annual
Report, 2006). It was noted in the report that this decline in profits was expected
due to the changing economic conditions and decrease in demand.
4.7.1.2 Change of leadership
Following the recognition of the decline situation and in an effort to save the
company, various changes in the company’s leadership took place. For example,
the Managing Director of the company and two other directors were replaced in
2006, to start off the turnaround process. Following the change in the leadership of
the company, various operational and strategic changes took place after a full
understanding of the situation was reached.
4.7.2 Analysis of decline stage
4.7.2.1 Competitive advantages
It was found apparent from the Annual Report that KRF was viable for turnaround
due to various competitive advantages that could support its recovery and return to
growth, such as being part of two major business groups with various sources of
funding and being well positioned in the market on the basis of strong NPD
programs and a huge range of products.
4.7.2.2 Severity of decline
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Evidence from the Annual Reports indicated that the company suffered a mid-term
decline due to signals such as negative profitability and inefficiency in operations.
Despite this, it was evident that KRF was well capitalised being financially backed
up by two large groups allowing the necessary cash for the turnaround process.
4.7.2.3 Causes of decline
Based on the evidence from the Annual Reports it can be said that the causes of
decline can be attributed to the following:
? External economic factors: It was noted in the 2006 Annual Report that
the changing economic condition had influenced a global lack of demand,
reduced sales and cash flow. This had increased the burden on businesses
to meet liabilities and breakeven. There was no other evidence found from
the Annual Report that any other factors had participated in the decline of
KRF.
4.7.3 Formulation, implementation and stabilisation of the turnaround plan
Following the change in leadership, various short-term strategies were formulated
and implemented in order to rectify the decline situation mainly focusing on
operational restructuring.
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? Operational restructuring: Evidence were found in the 2007 Annual
Report that different techniques were formulated and implemented as
follows:
1. Costs were put under greater control due to its importance at that
stage (Annual Report, 2007).
2. Cash was generated to fund operations and improve the overall
situation of the company. For example, the company increased its
sales by stimulating demand and benefiting from the improved
market conditions in 2008 (Annual Report, 2008).
4.7.4 Recovery and return to growth stage
Following the short-term changes, further strategies were needed during the long-
term to maintain improvements and achieve full recovery as follows:
? Operational restructuring: It was asserted in the 2008 Annual Report that
the company would maintain improvements by continuing to watch costs
and over-spending.
? Financial restructuring: Evidence from the Annual Reports revealed that a
large sum of shares was offered for sale to the Marfrig-Frigorificos Group in
2008, generating a sum of over £10m (Annual Report, 2008). This capital
was greatly needed during this stage of the turnaround process.
The company achieved positive profitability in 2007 (PAT of £1,210,000) and 2008
(£850,000) as a result for the turnaround effort implemented in both the short and
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longer terms. In 2007, KRF had a profitable year because of the new turnaround
strategy, which mainly evolved around better utilisation of assets, greater control
over spending and the boosting of sales. Two consecutive years of profitability
made KRF a successful turnaround case, with many lessons to be learned.
4.7.5 Summary of the turnaround process of KRF
From the turnaround experience of the company, Figure 4.6 was developed to
emphasis the turnaround experience of KRF. It can be said that operational
restructuring, including some cost cutting and cash generation activities, was
enough to rectify the problem in the short-term. However, in the longer term, the
use of financial equity restructuring strategies, helped in maintaining improvements
and achieving full recovery. The company learned to keep costs down and
continuously improve levels of sales to stay profitable and continue to grow.
4.8 Lancashire Eccles Cakes Limited (LEC)
Lancashire Eccles Cakes Limited (LEC) is a family owned business that has
specialised in the manufacture of handmade, high quality Eccles cakes since the
1930s (LEC website, 2012). The current company was set up in 1979, producing
the leading brand of handmade, Eccles cakes i.e. Real Lancashire Eccles Cakes.
The company has combined the life-long experience and the special traditional
recipe, with the mass manufacturing facilities to produce Eccles cakes for leading
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UK supermarkets, local stores and even for export to Europe and America (LEC
website, 2012).
The company has strongly operated and competed in the market for many years.
However, changing economic and business conditions has caused some
interruption to the company’s profitable performance (as show in Figure 4.7),
leading the company to a decline situation between 2003 and 2005, with negative
profitability for three consecutive years.
4.8.1 Decline stage
99
-255
-93
-128
291
314
-300
-200
-100
0
100
200
300
400
2002 2003 2004 2005 2006 2007
FIGURE 4.7: P&L of LEC
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (LEC Annual Reports 2002-2007)
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4.8.1.1 Recognition of decline
It was found apparent in the company’s Annual Report, that decline in performance
and sales was expected by the TMT due to changing weather conditions affecting
crops in Europe (Annual Report, 2003). In line with this, evidence showed that
various decline signals were found in the company such as declined profitability,
lack of cash flow and deterioration in performance.
4.8.1.2 Change of leadership
It was visibly clear from the Annual Reports that there were no leadership changes
during the turnaround, especially during this stage, to trigger the turnaround
process (LEC website, 2012). This may have been because the company is a
family owned business, with difficulty in conducting any leadership changes, similar
to the case of HB.
4.8.2 Analysis of decline stage
4.8.2.1 Competitive advantage
It was noticeable from the Annual Report that the leadership of LEC was confident
about the position of the company in the marketplace and its viability to stay
competitive in the long run, based on being in the business for many decades with
extensive experience, good reputation and good relationships with its customers
(Annual Report, 2003).
4.8.2.2 Severity of decline
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According to evidence found in the Annual Report, it can be said that the company
was in a mid-term decline, characterised by low volume of sales, declining
profitability and the concerns of the management. However, despite this, the TMT
were confident that the company had the competitive advantage and the required
capital to achieve a turnaround and return the company to full recovery (Annual
Report (2004).
4.8.2.3 Causes of decline
It was highlighted in the company’s Annual Report that various external factors had
played a significant role in the decline of the company and the negative profitability
between 2003 and 2005 and they were:
? Increased cost of raw materials (mainly dried fruits) can be considered the
main cause of decline during the whole three years (i.e. 2003, 2004 and
2005). As a result of bad weather conditions in Greece affecting crops, this
caused a shortage of supply and accordingly increased prices. The high
costs affected the company further in 2004 and 2005, despite the slight
increase in the total turnover.
? Increased costs have played a significant role in the declined profitability of
LEC, for example, pension costs had increased from £215,194 in 2002 to
£315,880 in 2003, £317,428 in 2004 and £573,855 in 2005, due to changes
in legislations. This increase in pension payments had caused another
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burden especially during the inflationary economic conditions (Annual
Reports, 2003, 2004, 2005 and 2006).
The increased cost of raw material prices and pension contributions combined
together, were enough to push the company into decline and there was a need for
some essential changes.
4.8.3 Formulation, implementation and stabilisation of the turnaround plan
It can be concluded from the Annual Reports of the company that the company
relied on one strategy during both the short and the long-term, to control the
deteriorating situation and reverse decline as follows:
? Operational restructuring: Evidence from the Annual Reports was found
that the management had focused on reducing all costs in major parts of the
company. For example, the continuous rise in pension costs and staff
wages had been stopped and instead the total cost of staff dropped from
£2,258,496 in 2005 to £1,888,498 in 2006, by reducing the workforce
(Annual Report, 2006). Other costs were put under greater control to
ensure better utilisation of cash.
4.8.4 Recovery and return to growth
In addition to the activities which were implemented during the previous stage,
further cuts to the number of staff were made in 2007 by another four people in the
production area, resulting in a £200,000 decrease in staffing costs when compared
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to 2006. This was done to improve efficiency throughout the manufacturing
facilities and minimise overheads (Annual Report, 2007).
From what was seen in the Annual Reports, it can be said that the company had
operated in a very tough environment, with increasing raw material prices as well
as other costs, such as increased pension costs, affecting its profitability and ability
to grow. LEC represents another successful turnaround story of managing the
business through tough conditions until profitability and recovery were restored.
Profitability was achieved in 2006 (PAT of £261,218) and 2007 (PAT of £284,161)
after dividends (£30k each year) (Annual Report, 2007). It was stated in the 2007
Annual Report that the company will continue to keep a close eye on it overheads,
in order to stay profitable and competitive in the marketplace.
4.8.5 Summary of the turnaround process of LEC
As emphasised in Figure 4.7, the company’s turnaround experience was a good
example of the idea that eliminating the cause of decline is the key to a successful
turnaround. The company had overcome increased costs of raw materials and
pension contributions, by tighter control over all spending and cost cutting activities
(Annual Reports, 2003, 2004, 2005, 2006 and 2007).
4.9 Molls Meats (Birmingham) Limited (MMB)
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Molls Meats (Birmingham) Limited (MMB) also known as Molls Bacon, was
founded by Margaret Oswell, and Roy Oswell in 1970, as a traditional catering
butcher and it was registered as a limited company on 26 February 1982, with its
registered office in Birmingham (Duedil, 2012). In 1984, the transition into bacon
slicing was made and since then the company has seen significant growth. The
private company prides itself on customer service, believing that it is the key to its
success with a wide customer base serving public houses and wholesalers in the
catering trade, as well as the food service sector (MMB, Website, 2012).
The company went through a turnaround experience after a period of three
consecutive years of negative profitability as shown in the figure below. The
reasons behind this negative profitability and the set of strategies used to bring the
company back to profitability, are discussed in the following four sections.
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4.9.1 Decline stage
4.9.1.1 Recognition of decline
It was stated in the Annual Report of 2005 by the Managing Director of the
company, that decline was expected and recognised due to various external
factors that were difficult to control. However, he was confident that decline was
temporary and the company would return to profitability (Annual Report, 2005).
4.9.1.2 Change of leadership
There was no evidence found from the Annual Reports that there were any
leadership changes in response to the decline situation. The private company was
run by the same Managing Director through the decline and the turnaround period
10
-58
-205
-161
38
133
-250
-200
-150
-100
-50
0
50
100
150
2005 2006 2007 2008 2009 2010
FIGURE 4.8: P&L MMB
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
Adapted from: (MMB Annual Reports 2005-2010)
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(Annual Reports, 2005-2010). Similar to previous cases in the study, this may
have been due to the type of ownership as a private business managed by the
owners.
4.9.2 Analysis of decline stage
4.9.2.1 Competitive advantage
The company has been operating in the business for over 28 years with long
experience and good relationships with its customers. This had reassured the
leadership team that the company could stay competitive in the market and was
viable for recovery and turnaround (Annual Report, 2005).
4.9.2.2 Severity of decline
Evidence from the company’s Annual Report indicates that the company had
suffered a mid-term decline stage, when the company showed various signals such
as lack of cash flow, negative profitability and increasing concerns by its
leadership. However, despite this, it was found from the Annual Report that the
company had enough cash in reserve to fund and sustain the business during the
turnaround process.
4.9.2.3 Causes of decline
Identifying the causes of decline was one of the most important steps in this
turnaround case. It was found apparent from the Annual Reports 2005-2007 that
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causes of decline were mainly due to external factors that the company’s
leadership believed it had no control over and these factors were:
? High costs and increased charges: Increased cost of energy, fuel and
transport in 2008 and 2009 had impacted on the direct overheads of the
company as well as the cost of packaging, which indirectly amplified the
pressure on MMB’s financial capabilities and profitability.
? Continuous inflation in meat prices (20% increase between 2007 and 2009)
was another cause for decline, as the increase had led to the loss of some
contracts previously drawn on fixed price agreements, which impacted
profitability negatively.
? Exchange rates were another cause due to the Sterling’s weakness against
the Euro, leading to a shortage of supply of all raw materials imported from
countries in the Euro zone.
Identifying, recognising and understanding those causes of decline and its impact
on the company’s performance had triggered the formulation and implementation
of the turnaround strategy to rectify and amend such causes to bring the company
back to profitability.
4.9.3 Formulation, implementation and stabilisation of the turnaround plan
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It was conveyed in the Annual Report that the company was still operating under
the same circumstance of high-energy bills and increase in raw material prices
during this stage. However, various changes to the assets and operations took
place to rectify the decline situation and return the company to stability and growth.
The changes implemented during the short-term stage were mainly operational
restructuring and it can be summarised as follows:
1. A new pricing system was introduced to quote prices more frequently on
a monthly or even weekly basis, in order to be able to transfer any
increase in raw material prices to customers (Annual Report, 2008-
2009). This increase in prices improved the profit margin of the
company and generated more cash.
2. Focusing on NPD to increase sales was another technique to improve
overall performance, which led to new contracts in 2008 and an opening
into the larger retail sector in 2009, boosting the company’s volume of
sales (Annual Report, 2009).
4.9.4 Recovery and return to growth
In addition to the short-term improvement executed during the previous stage, it
was further asserted that the company would continue to focus on cost reduction,
pass the increase in prices to customers and improve customer service levels
through NPD during the longer term (Annual Report, 2010).
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Further strategies were needed to ensure long-term improvement and sustained
profitability. Consequently, an asset restructuring strategy was adopted during this
stage as stated in the 2009 Annual Report as follows:
1. Asset investment strategy: a new technology to speed the production
process, reduce costs, save energy and increase productivity and efficiency
was put into place in 2009 (Annual Report, 2009). It was stated in the 2010
Annual Report by the Board of Directors that, “We continue to be successful
in winning new customers, whilst still maintaining all our major customers”
(Annual Report 2010:2).
Evidence from the 2010 Annual Report shows that by the end of this stage the
company had reached the recovery position, by achieving improvement in
performance and positive profitability in 2009 (PAT of £37,549) and 2010
(£133,011). It was stated by the Managing Director of the company that, “We will
be focusing during the next year ahead, on maintaining our high level of customer
service and bringing in new product lines to offer to our retail and wholesale
customers” (Annual Report, 2010:2).
4.9.5 Summary of the turnaround process of MMB
As was revealed previously, the turnaround experience of MMB shows many key
lessons to be learnt in relation to how to achieve a successful turnaround. The key
success factors of the company can be concluded as being able to identify the
company’s ability to recover, identifying the causes of decline and implementing
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the operational changes required during the short-term as well as investing in new
technologies to put the company in a good position for future growth.
4.10 New Ivory Limited (NI)
New Ivory Limited (NI) was owned and managed by Zubrance Limited (formerly
named Mathew Foods PLC) under the name of New Ivory Sauces until July 2004.
The name was then changed again in 2005 with the transfer of the trade and
assets to Mathew Group Limited its current name.
The company specialises in the production of a wide range of sauces (e.g. gravies,
marinades, dips and dressings, fish and steak sauces, chicken and beef gravies as
well as chocolate and toffee dessert sauces), making it the market leader working
closely with major UK retailers and food manufacturers (Annual Reports, 2005-
2010). The Board of Directors believed that the success of NI in the market is the
outcome of a combination of good staff, best processes and best environments, all
coming together to produce the finest product. However, like many businesses, NI
had a tough decline period between 2006 and 2008, suffering a negative
profitability (as shown in the figure below) and a decline in growth. This tough
period is investigated to identify all the key factors, which led to such a decline
situation and to identify the formula, which was used to turnaround the company.
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4.10.1 Decline stage
4.10.1.1 Recognition of decline
Post the transfer of trade and assets to Mathew Food PLC in 2004 (the ultimate
parent company), the turnover of NI had grown from £7.9m in 2005 to £10.8m in
2006, generating a profit of £113,598 in 2005. However, this was followed by three
annual losses in 2006, 2007 and 2008 (£566k, £237k, £130k accordingly). It was
asserted in the 2006 Annual Report that the Board of Directors recognised the
changes which needed to take place, to tackle the decline situation and bring the
increase of business under greater control.
4.10.1.2 Change of leadership
114
-566
-237
-130
89
759
-800
-600
-400
-200
0
200
400
600
800
1000
2005 2006 2007 2008 2009 2010
FIGURE 4.9: P&L of NI
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEAR
DECLINE YEARS TURNAROUND YEARS
Adapted from: (NI Annual Reports 2005-2010)
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Evidence from the Annual Report shows that change of leadership was one of the
major initial strategies adapted by the company’s TMT, to ensure that NI had the
right leadership structure ready to take it to the next phase of recovery and growth
(Annual Report, 2007). It was shown in the 2006 Annual Report that the Managing
Director was replaced in September 2006 as an initial step in the turnaround
process.
4.10.2 Analysis of decline situation
4.10.2.1 Competitive advantage
The company has been competitive in the marketplace for many years, with a big
market share on the basis of being a subsidiary of the Mathew Group Limited and
enjoying the benefits of robust relationships with the biggest customers and
suppliers in the market. The Board of Directors added that NI holds a strong
position in based on its ability to respond quickly when managing customer’s
demands, its strong relationship with customers and the delivery of value added
products (Annual Report, 2007). This had provided the TMT with confidence in the
company’s ability to recover and return to growth.
4.10.2.2 Severity of decline
According to evidence from the Annual Reports, it can be asserted that the
company suffered a mid-term decline. This is supported by the decline signals
associated with this stage, such as negative profitability and inefficiency in
operations. However, being part of a large food group provided the company with
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the bridge finance required to implement a successful turnaround, as long as the
causes of decline have been identified and corrected.
4.10.2.3 Causes of decline
When the company’s Annual Reports were reviewed, evidence showed that there
had been many causes that could have been attributed to this, which can be
summarised as follows:
? Internal causes: Following the transfer of trade and assets to the Mathew
Group, the size of sales had increased significantly. However, this was
accompanied by a lack of efficiency in operations, high levels of waste and
low profit margins. Additionally, this increase in sales had incurred high
costs such as the cost of production, staff and distribution, which was not
aligned properly with existing profit margins.
? External causes: In addition to the internal causes, it was highlighted in the
company’s Annual Report that there had been an increase in the raw
material prices due to poor summer conditions in 2006, which played a
significant role in the company’s negative profitability in 2007.
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4.10.3 Formulation, implementation and stabilisation of the turnaround
plan
Following the in depth investigation carried out during the analysis stage, many
factors were revealed upon which a turnaround plan was drawn to rectify the
decline situation. It was stated in the 2006 Annual Report that, “Steps were taken
during the latter part of this year (2006) to establish a more robust team, capable of
arresting the decline in profitability and operating efficiently and effectively at this
level. The company will continue to focus on operational costs to increase
efficiency and drive down costs; this will provide stability in the short term and
ensure customer service levels remain high (Annual Report, 2006:1).
In the light of this statement, the short-term strategy executed by the TMT
consisted mainly of operational restructuring which can be summarised in the
following actions:
? Cost reduction against static lines of sale in all parts of the business to
reduce costs and liabilities (Annual Report, 2007). For example, the
company reduced the number of staff from 148 in 2008 to 140 in 2009 and
down again to 139 in 2010, despite this they had an increase in sales by
over 17% in 2010.
? Cash generation via NPD of new products gave better profit margins. It was
further reported that increased efficiency, improved labour utilisation and
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working closely with customers had participated in increasing sales and
cash generation.
4.10.4 Recovery and return to growth
Following the implementation of the short-term strategy, it was asserted in the
Annual Reports that the company would continue keeping its costs down and work
closely with customers to improve its product range, replace unprofitable products
with profitable ones and generate more cash. Evidence shows that the company
had seen major improvements in performance following the implementation of the
turnaround strategy. The company returned to positive profitability in 2009 with
PAT of £89k followed by a PAT of £759k in 2010 (Annual Reports 2009-2010). It
was mentioned in the Annual Report that the company will continue to monitor
costs, changes in raw material prices and maintain improved efficiency. It was also
reported that the company will continue to work closely with its customers to
develop the best products on the market (Annual Report, 2010).
4.10.5 Summary of the turnaround process of NI
The case of NI is an example of a successfully recovered company. The causes of
decline can be summarised as internal inefficiencies combined with external
increase in raw material prices, leading to negative profitability. Accordingly,
tighter control over costs and overheads and NPD of profitable products were the
type of actions that brought the company to recovery, highlighting the importance
of identifying the cause of decline as a primary step in the turnaround process.
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4.11 Nimbus Foods Limited
Nimbus Foods Limited (NF) was established in 1996 and is now part of Glisten
PLC, which is the leading UK supplier and manufacturer of decorations and
toppings for many sectors within the food industry (e.g. bakery, confectionery, dairy
desserts, ice cream, snack and cereals) with many product ranges (e.g. toffee,
caramel and fudge pieces, honeycomb, biscuits, cereals, meringues and chocolate
coated fruits, sugar strands, sugar crunch, non pareils, vermicelli and chocolate
flakes) (NF website, 2012).
It was stated on the company’s website, that NF is proud to be able to produce
products with special requirements and qualities such as nut free, odourless mint,
functionality in extreme temperatures, high moisture barriers, long shelf life and
cost effectiveness. The company believes that its success lies in its sophisticated
development processes and highly experienced development team working to
widen their product ranges (Nimbus website, 2012).
Figure 4.10 demonstrates the company’s profit and loss for the whole period
between 2001 and 2006. This figure also shows that the company went through a
turnaround experience following a period of negative profitability between 2002 and
2005, which impacted its profitability for a period of time. How did the company fall
into negative profitability and how was it managed out of decline? The answers to
these questions are now discussed by investigating the whole turnaround process
of the company.
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4.11.1 Decline stage
4.11.1.1 Recognition of decline
The company had a profitable history, which was interrupted in 2002 with a PAT
loss of over £47,000 followed by two further annual losses. The company had a
good market position and was well known for its quality and reliable products. It
was mentioned in the Annual Report (2003) that the Board of Directors were
confident that the decline was temporary and the company would return to
profitability following some changes internally.
4.11.1.2 Change of leadership
It was reported in the 2003 Annual Report that changes to the senior management
team would reflect positively in the return to profitability and growth of the
146
-477
-198
-312
368
840
-400
-300
-200
-100
0
100
200
300
400
500
2001 2002 2003 2004 2005 2006
FIGURE 4.10: P&L OF NF
PRE DECLINE YEARS DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£00
0
Adapted from: (NF Annual Reports 2001-2006)
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company. Consequently, following the second annual negative loss in 2003, some
leadership changes at senior management level were implemented, such as the
replacement of the Managing Director of the company and five other directors on
22
nd
December 2004 (Annual Report, 2005). This was necessary to improve the
leadership structure of the company, to tackle decline and take the company to the
next stage (Annual Report).
4.11.2 Analysis of decline situation
4.11.2.1 Competitive advantages
The new Managing Director of the company, in co-operation with the Chairman
and the Board of Directors, believed that NF was the market leader on the basis of
its sophisticated product development program, skilled development team and
unique products, making NF competitive in the marketplace and viable for
turnaround, if causes of decline can be successfully eliminated (Annual Report,
2005). Understanding the company’s strengths at this stage laid the foundation for
the next stage and the recovery stage, during which the company’s strengths
would be enhanced and developed over the longer term.
4.11.2.2 Severity of decline
According to the evidence shown in the Annual Reports and the common decline
signals, it can be said that the company suffered a mid-term decline stage. This
stage of decline is associated with signals such as lack of cash flow, negative
profitability and increased inventory (Annual Report, 2002). However, like many
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previous cases, having many competitive advantages and being part of Glisten
PLC (one of the UKs leading manufacturers), secured the declining company with
an available bridge of finance, enabling it to go through the turnaround
successfully.
4.11.2.3 Causes of decline
It was found apparent from the company’s Annual Reports that various internal and
external causes had played a significant role in the decline of NF. Those causes
are identified and explained as follows:
? Internal causes: As was made apparent in the 2002 Annual Report, the
high cost of group management charges in 2002 were the main reason for
the company’s losses during this year, despite the increase in turnover.
Furthermore, the increased operational costs by 200% in 2002, despite the
slight increase in turnover by only 14%, had participated in the negative
results in 2002. This indicated a high level of inefficiency in operations and
increased overheads.
? External factors: In addition to the increased overheads in the company
internally, evidence was found from the 2005 Annual Report that high costs
of raw materials in 2003 and 2004 had negatively impacted the total cost of
sales, profitability and growth for those years. The increase in raw material
prices stands as a non-controllable cause of decline due to bad weather
conditions or other uncontrollable reasons.
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The new leadership and Board of Directors asserted that those factors threatened
the ability of the company to grow in the short-term as well as the long-term and
decided to implement a restructuring program in 2003 (Annual Report, 2005).
4.11.3 Formulation, implementation and stabilisation of the turnaround
plan
In response to the negative profitability, the Board of Directors had implemented a
refocusing and restructuring program that included changes in the senior
management, sales team and other operations around the company (Annual
Report, 2003).
Two short term-strategies were implemented immediately to rectify the situation;
stopping cash loss and generating as much cash as possible for the turnaround,
these strategies were:
? Managerial restructuring: The new leadership of the company decided
to strengthen the sales management team, by bringing in sales members
with higher skills to be able to attract new contracts and customers to
drive sales up and position the company for future growth (Annual
Report, 2003).
? Operational restructuring: Another strategy to improve the declining
situation was to implement a tighter control over costs, reduce operating
expenses in order to stop the drainage of cash and to generate as much
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cash as possible. For example, in 2004 a strategic product development
program was implemented to produce innovative products for current
and new customers/markets, to replace low margin products with
profitable ones (Annual Report, 2003).
By the end of the short-term, the company was able to generate more cash via
increased sales of profitable products and an extended customer base, as well as
reserving any cash via tighter controls over costs and spending, ready for growth in
the next stage.
4.11.4 Recovery and return to growth
The board realised that short-term changes had to take place if the company was
to return to profitability. It was stated in the Annual Report (2003:3) that, “The
Board believes that the combination of the new senior management, the
strengthened sales force and new product innovation, will return the company to
growth in terms of both revenue and profitability”.
In addition to this, and following the strategies implemented earlier during this
short-term stage, further policies were implemented to secure improvements and
take the company to the next level and they are explained as follows:
? Operational restructuring: Continuing with the operational improvement
and cost cutting activities implemented in all parts of the company. It was
found apparent that the cost of distribution was heavily reduced in 2006 in
comparison to 2004 and 2005, despite the continuous increase in turnover.
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Additionally, staffing costs were also reduced by nearly 40% in 2006,
although the number of staff had only dropped by less than 10% from 45 to
41, which represents the tight control taken over other staff expenses such
as overtime (Annual Report, 2006).
? Asset restructuring: Evidence was found from the 2006 Annual Report
that an investment strategy was part of the company’s long-term
turnaround aims. It was stated in the 2006 Annual Report that a large sum
of money was invested in buying new equipment (a boiler and three
production capabilities) to speed up production, increase throughputs and
improve efficiency (Annual Report, 2006).
By 2005, the company has made a PAT of £368,306 for the first time after four
consecutive annual losses. The company continued its long-term efforts to ensure
that they were on the growth route. Some further leadership changes (Chairman
and Managing Director), as well as some operational improvements took place in
2007 to ensure that the leadership and management in place was capable of
maintaining improvements and taking the company to the next stage of growth
(Annual Report, 2007).
In 2007, the company made its second consecutive PAT of £841,000. It was
noticed that the company was operating profitably with 10 less staff in 2008 than
2007 and with only two directors on its board. It was stated in the 2006 Annual
Report that, “The consistent profits and cash generation have been driven by a
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need to restructure the team, remove low margin sales and create new value
added revenues” (Annual Report, 2006:4).
4.11.5 Summary of the turnaround process of NF
Many key lessons can be learnt from the case of NF. The decline here was
attributed to high costs internally, as well as increased raw material prices
externally. Consequently, a turnaround plan was executed in the form of short-
term, managerial/operational/asset restructuring strategies and long-term
operational/asset (investment) restructuring strategies. This had brought the
company to total recovery and growth making a successful turnaround case.
4.12 Organic Farm Foods (OFD)
Organic Farm Foods (OFD) is the largest supplier of organic (only) fresh products
in the UK. The company was founded in 1986 under the previous name Organic
Farm Foods (Wales) Limited, from the idea of a small group of growers in Wales at
a time when an efficient infrastructure for British organic food was highly essential
(OFD website, 2012).
The company produces a wide range of organic fruits and vegetables, with a large
continuous investment in improving the condition of their products before, during
and after growing the fruit and vegetables to ensure maximum quality (OFD, 2012).
The company is not only the pioneer in the organic food industry, but also a
pioneer in developing new technologies that add value to their products, such as
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the special packaging materials developed to transfer fruit and vegetables from the
farm to the factory, which maintain the eating quality as well as extending the life of
the products (OFD, 2012).
The company had a successful history, however, it went into decline in 2003
suffering four consecutive years of negative profitability (as shown in Figure 4.11),
during which time the company faced financial and mainly cash flow problems. The
decline story of OFD is to follow in the next sections and investigates the factors
that led it into decline and how performance was later restored.
4.12.1 Decline stage
4.12.1.1 Recognition of decline
202
-1,070
-2,357
-495
-244
816
75
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
2002 2003 2004 2005 2006 2007 2008
FIGURE 4.11: P&L OF OFD
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (OFD Annual Reports 2002-2008)
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During this stage, the management of the company recognised decline in its early
stages and started taking steps immediately. It was noticed from the 2003 Annual
Report, that a change in all parts of the company was required to ensure survival
and the ability to maintain a strong market position. This was reported in relation to
many decline signals that raised concern with the TMT such as decreased sales,
lack of cash flow and negative profitability.
4.12.1.2 Change of leadership
It was found evident in the 2003 and 2004 Annual Reports that two directors were
appointed to share a joint Managing Director role to manage the company during
its turnaround. Additionally, further evidence showed that four other directors were
replaced in 2004, as a process of setting the foundations ready for the turnaround
process (Annual Reports 2003/2004).
4.12.2 Analysis of decline situation
4.12.2.1 Competitive advantage
It was repeatedly reported in the Annual Report, that management of OFD were
confident that the company held a strong position in the marketplace over its
competitors on the basis of being a pioneer in the industry, having the latest
technologies and the ability to develop new technologies which extended the life of
their products and made it viable for turnaround (OFD website, 2012).
4.12.2.2 Severity of decline
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According to various signals of decline found apparent in the company’s Annual
Reports, it can be said that OFD was in mid-term decline, which was characterised
by high costs of operation, lack of cash flow, loss of sales contracts and negative
profitability.
4.12.2.3 Causes of decline
From the Annual Reports it was found apparent that the causes, which led OFD
into decline, can be summarised in the following:
? Internal causes: From the 2003 Annual Report it can be noticed that
some costs had increased heavily towards the end of the year. For
example, operational costs did not drop accordingly with the reduced level
of sales, causing disappearance of all anticipated profits for that year. Also,
following the decline of sales, the number of staff was reduced by 21
members in 2003 with a pay out of around £235k contributing to the short-
term financial loss.
Moreover, it was reported in the 2004 Annual Report that lack of
management response to the changing trends of customers, had caused
the loss of a major contract with one of their important retailers, leading to
loss of sales and an unsustainable cash flow position in 2004.
Furthermore, it was stated by the Chairman of the company that, “Reduced
sales coupled with under capacity in the packing facilities, resulted in
losses in this financial year of £2,357,000 and an unsustainable cash flow
position” (Annual Report, 2004:3). This had led to further cuts in staff
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numbers and incurred further pay out costs of £4,142,785. Consequent to
the reduced sales, contract losses, massive pay-outs and continuous
increase in costs, the company became inefficient in operations and faced
problems meeting their debts according to the schedule (Annual Report,
2004).
It can be noted that despite the quick reaction of the Board of Directors, the
company still went through a tough period of decline due to the cash instability
position. However, the company was successfully turned around in 2007, as a
result of successful implementation of a turnaround plan as explained below.
4.12.3 Formulation, implementation and stabilisation of the turnaround
plan
It was stated in the 2004 report, that the company was restructured to restore the
confidence of customers and suppliers. The restructuring plan, which was
implemented during the short-term, was a major plan including activities within the
four main turnaround strategies as follows:
? Managerial restructuring: The Board of Directors implemented a
restructuring program, which involved decentralising decisions in the
company by dividing it into three divisions with a Managing Director, a new
Commercial Manager and a separate management team dedicated to
each division (i.e. fruit, vegetables and salad). This was to enable
department managers to focus on each side of the business individually,
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deal with operational problems in a timely manner and focus on customer
service levels and working procedures (Annual Report, 2005).
? Operational restructuring: Cash generation and cost reduction actions
were also implemented at all levels of the business, to bring spending
under greater control (Annual Report, 2005).
? Asset restructuring: The decision to make an investment to introduce an
IT based inventory control system, to help reduce stock losses was taken
and implemented in 2005 (Annual Report, 2005). Additionally, an
investment in staff training and skills building was made to maintain a high
level of staff loyalty (Annual Report, 2006).
Furthermore, an asset divestment strategy was conducted by the closure
of the Lampeter site and improvement of the distribution network of the
business, leading to a reduction in overheads and major operational
savings (Annual Report, 2006). Similarly, the company divested the USA
subsidiary as well as the salad division in 2006. This was to focus on the
core activities, which became the sourcing and supplying of fruit and
vegetables to the ever-growing market (Annual Report, 2007).
? Financial restructuring: A technique, which was used to generate cash,
was the issue of a large number of shares to new investors after a
negotiation process in May 2004, generating a cash sum of nearly £1.5m.
This was done to refinance the company and support it during the
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restructuring process. The sum included a £6m loan from investors as well
as £9m in return for company shares (Annual Report, 2004).
Following the short-term stage, further sets of strategies were implemented over
the longer term to maintain improvements and head for full recovery.
4.12.4 Recovery and return to growth
It was reported in the Chairman’s Statement of the 2006 Annual Report, that the
board was happy with the improvement of the company’s performance and
confident that the company would return to profitability by 2007.
? Operational restructuring: It was found evident that OFD continued to
focus on improving its portfolio by looking for new products and market
niches to generate higher profit margins. The company continued with its
operational restructuring to maintain costs under greater control, reduce
general spending and generate cash through sales (Annual Report, 2007).
? Asset restructuring: An asset divestment strategy was implemented in
2008 by divesting the Organic Vegetable Company. This was done to
focus on the organic fruit sector and maximise profitability.
Following these changes implemented during the two stages, the company truly
returned to profitability in 2007 with a PAT of £815,598 (of which £336,275 was
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generated from the sale of the salad division and £90,000 in the form of a grant to
the company) and £75,107 in 2008 (reduced profits in 2008 attributed to reduction
in business size after the divestment of some businesses in 2006 and 2007).
It was noted in the 2008 report that the company would continue to look for new
opportunities and monitor the marketplace especially in the current economic
conditions.
4.12.5 Summary of the turnaround process of OFD
The turnaround experience of OFD can be considered a rich case with many key
lessons to be learned. The formula which the new management team used to
turnaround the company, included two phases in which each phase combined one
or more strategies. Linking the causes of decline i.e. high costs and lack of
management response, to new customer needs leading to contract losses, to the
turnaround strategy i.e. managerial/operational/asset/financial restructuring,
emphasises the importance of combining various strategies to tackle decline and
reach full recovery.
4.13 Pinguin Foods UK Limited (PF)
Pinguin Foods UK Limited (PF) was formed from the closure of the Fisher Foods
business in 2002, due to the lack of a suitable buyer for the company as a going
concern (Annual Report, 2002). The Pinguin Group (a company registered in
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Belgium), took over the company to break into the UK market and also to increase
the production power in Europe (Annual Report, 2002).
PF specialised in the production of frozen food products (e.g. vegetables, fruits,
organic products, aromatic herbs, potatoes and organic potatoes, French fries,
pies, pasta and rice, cold salads and mashed potatoes) as well as various non-
frozen food products (e.g. soups, sauces, vegetables in mini portions, pre-fried
chilled chips and dehydrated potato flakes) (PF website, 2012).
The company had had a successful start in its first year, generating a PAT of
£197,797 in what was described as, “An extremely challenging period” (Annual
Report, 2002:3). The new leadership had placed some new strategies in order to
position the company in the marketplace for long-term growth. For example, a new
commercial team of management was appointed to secure contracts with growers
and to sustain and support production and sales growth for the following years
(Annual Report, 2002).
PF had benefited from the strength of its well-established group in Belgium as a
back-up with many links and various export opportunities. However, PF had gone
into a decline period for three years between 2003 and 2005, with deteriorated
performance and negative profitability (see the figure below) (Annual Report,
2002).
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The leadership of PF had understood that the business needed further
improvement strategies to strengthen the company’s footing in the marketplace.
However, it realised that the causes of decline must be understood, dealt with and
rectified in order to achieve recovery and growth. This is explained in the following
sections highlighting the whole turnaround experience of the company and how it
was achieved.
4.13.1 Decline stage
Following the profitable year 2002, PF had experienced a negative profitability in
2003, whilst the company was still under a major process of improvement following
the takeover of Fishers Foods, to ensure the business was ready for the future.
198
-367
-5,797
-3,738
440
830
-7000
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
2002 2003 2004 2005 2006 2007
FIGURE 4.12: P&L OF PF
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (PF Annual Reports 2002-2007)
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4.13.1.1 Recognition of decline
It was clear from the Annual Reports 2003 and 2004, that the leadership of PF
recognised the decline situation and adopted the idea that continuous improvement
in all parts of the company is was urgently needed, in order to recover and return to
profitability. A clear vision for 2003 and 2004 was emphasised in the Annual
Reports for those years asserting that, “The strategy for 2004 includes broadening
our retail customer base as well as continuing the development of our export
markets. The operations are also expected to deliver further improvements in yield
and cost efficiency during 2004” (Annual Report, 2004:2).
4.13.1.2 Change of leadership
One of the first steps, which were taken during the early stages, was found to be
the replacement of the Chair of the UK division. A new Chairman was appointed in
July 2005, to ensure that the group’s aims and objectives were achieved in a
sound manner (Annual Report, 2005).
4.13.2 Analysis of decline situation
4.13.2.1 Competitive advantage
It was found apparent in the Annual Report of the company that the Board of
Directors and the Chairman of PF had fully understood the high potential of
success for the company and the benefits that could be made by becoming a
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subsidiary of one of the biggest food groups in Europe, with well-established links
to the markets in Europe and abroad. It was stated that, “The emergence of
Pinguin in the UK was a milestone in the Pinguin Group strategy to become one of
the leading players in Europe” (Annual Report of 2002:2). This emphasised that
negative profitability was seen as a temporary situation and the company would
soon recover.
4.13.2.2 Severity of decline
Various evidence found in the company’s Annual Reports indicated that decline
could be considered as a mid-term decline, characterised by shortage of cash, high
costs and negative profitability. However, and most importantly, the company had
the financial bridge it needed to go through the turnaround being part of one of the
EUs leading frozen food suppliers.
4.13.2.3 Causes of decline
The various causes, which contributed to the decline of PF, were clearly
emphasised in the company’s Annual Reports from 2002-2005. These causes can
be classified as external causes and are explained as follows:
1. Bad weather conditions had caused a weakness in pea processing (which
was their main operation), during the first half of 2002 due to a shortage of
peas, which continued throughout the decline period till 2005 (Annual
Report, 2002). Additionally this had impacted on the raw material prices in
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the marketplace affecting the cost of sales negatively (Annual Report,
2003).
2. Unpredictable high costs of energy supply between 2003 and 2005 were a
cause for concern to the leadership of PF, due to the negative impact it
had on profitability (Annual Report, 2004).
3. Loss of exchange rate on foreign currency in 2003 was incurred on inter-
company repayments of deferred balances for 2002 (Annual Report,
2003).
In addition to the above, it was also found that there were other factors such as
exceptionally high costs from the lay-offs conducted in 2002 costing £2m and in
costing £1.2m in 2006, as part of the restructuring process of the workforce
following the acquisition of the company.
These factors of decline required the leadership of the company to conduct some
changes to the internal and external environment, in order to stop the deterioration
in performance and the cash loss. These changes are investigated below in the
next section.
4.13.3 Formulation, implementation and stabilisation of the turnaround
plan
It was seen from the Annual Reports that the company’s leadership realised
decline in its early stages and responded accordingly. It was found apparent in the
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2005 Annual Report that a set of new strategies was implemented to stop the cash
loss and deterioration of profitability as follows:
? Operational restructuring: During this stage, various operational
restructuring activities were implemented within a program called
“Baseline”, developed by the company to reduce costs in all parts of the
company (including staff costs) and increase efficiency (Annual Report,
2006). Additionally, unprofitable lines were divested and focus was given to
profitable ones in order to generate more cash, increase sales in the UK
and Europe and support future growth (Annual Report, 2005). Furthermore,
the Company took over the inbound and outbound logistics operation to
save the outsourcing costs (Annual Report, 2006).
4.13.4 Recovery and return to growth
In addition to operational measures implemented during the short-term, further
strategic measures were carried out during the longer term to increase and
maintain improvement as follows:
? Assets restructuring: An acquisition of the trades and assets of Salvesen
Logistics Ltd in the second half of 2007, was a step that doubled PFs
volume of sales and production due to links to new customers and
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suppliers, thus creating an economic scale of sales and purchasing
(Annual Report, 2006).
It was asserted in the Annual Report of 2006:2 that, “The changing market
environment, the reduced cost base and the strategic measures to have a more
profit orientated customer approach, clearly will return Pinguin back to normal,
healthy profit levels”.
The above statement showed that the leadership felt confident about the future of
PF. Consequent to the new strategies, a PAT of £440,000 in the period ending
June 2007, £830,000 in period ending December 2007 and £4.8m in the period
ending December 2008 were generated, returning the company to full recovery
(Annual Reports, 200- 2008). It was reported that the apparent success was
attributed to a clear focus on the company’s goals, robust relationship with
suppliers and the wide customer base in the UK and Europe (Annual Report,
2007).
4.13.5 Summary of the turnaround process of PF
The Annual Reports of the company have revealed many key lessons to be
learned about its experience in dealing with financial decline and turnarounds. PF
has proven to be a success story in restoring profitability, original performance and
growth.
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4.14 Stateside Foods UK Limited
Stateside Foods Limited (SF) has been in the food business for the last 20 years
specialising in the manufacture and supply of chilled and frozen pizzas (both
branded and customer own labels) to the leading food retailers and food service
companies in the UK. In 2003, the company became a subsidiary of the Freiberger
Group, one of the leading companies of pizza manufacturing in the world (SF
website, 2012).
The 1990s was a progressive decade for the company from an investment point of
view, during which the company acquired Fiesta Fine Foods (stone baked pizza
manufacturer) in 1995. The Westhoughton factory was extended from 18,000 sq.
ft. to 120,000 sq. ft. in 1997 and a high speed American pizza crust bakery was
acquired from McCain at Skelmersdale in 1999, which was later destroyed by a fire
in 2008. However, the progress that the company had previously made during its
history was interrupted later on by three consecutive years of decline and negative
losses.
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Adapted from: (SF Annual Reports 2004-2009)
4.14.1 Decline stage
4.14.1.1 Recognition of decline
It was noticed that the company’s turnover in 2005 had dropped heavily by 27%
compared to the previous year from £50m to £36m. It was reported in the 2004
Annual Report that this had caused some concern to the leadership of the
company. The management of SF realised that they were faced with a challenge
that required immediate corrective action. Consequently, a restructuring firm was
called in to lead the turnaround process and investigate the factors that had
steered the company into decline and provide the required measures to turn it
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around. These actions are explained in the next section in detail, highlighting the
steps and measures, which were taken to tackle the problem.
4.14.1.2 Change of leadership
The Annual Reports of the company showed that various changes in the
company’s leadership had taken place. For example, a Chairman and a Vice
Chairman were appointed in 2003, to lead the company during this stage.
Additionally, both the Production Director and the Finance Director were replaced
with new directors, in order to ensure the leadership in place was capable of
working with the turnaround firm (Annual Report, 2005).
4.14.2 Analysis of decline situation
4.14.2.1 Competitive advantage
Evidence showed that SF had a strong presence in the market being one of the
largest suppliers of chilled and frozen pizzas in the UK and being a subsidiary of
one of the world largest pizza manufacturing groups (based in Germany) (Annual
Report, 2004). These competitive advantages had made the company’s leadership
confident about its viability to turnaround. Despite this, it was asserted in the
Annual Reports of the company that several factors had to be monitored to ensure
successful recovery, mainly environmental factors.
4.14.2.2 Severity of decline
Evidence from the company’s 2004 Annual Reports indicated that all signals of
decline can be related to a mid-term decline characterised by the concerned TMT,
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decreased sales and negative profitability. Despite this, evidence showed that
finance needed for the daily operations and the turnaround was still available in the
business via its mother company, lifting a huge burden from them and stopping the
closure threat.
4.14.2.3 Causes of decline
Following the changes in leadership and the appointment of a restructuring firm,
the need for a set of corrective actions was stressed. However, an analysis of the
situation was an initial step conducted to identify all causes, which led the company
to negative profitability. A conclusion of the revealed causes of decline can be
explained as follows:
? External causes: Evidence from the 2005 Annual Reports that the
company’s turnover in 2005 had sharply dropped by nearly 27% compared
to the previous year (2004), due to global lack of demand and reduced
volume of sales leading to reduced cash flow and increased inventory.
This had reflected negatively on final profitability, accordingly leaving the
company with £1.06m in losses compared with £1.66m profits in 2004
(Annual Report, 2005).
? Internal causes: In addition to external factors, high cost of operations,
which did not drop accordingly with the lost sales in 2005, had contributed
to the negative profitability. Moreover, other exceptional costs such as the
layoffs in 2005 and the fees of the restructuring company totalling £251k in
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2005 and £114k in 2006, had also added to the overall negative
performance (Annual Report, 2006).
As shown above, the analysis process of the situation revealed many factors that
the new leadership and the restructuring firm needed to deal with and correct
quickly in order to stop loss of cash and further decline.
4.14.3 Formulation, implementation and stabilisation of the turnaround
plan
The review conducted by the restructuring firm concluded and stressed the
importance of the implementation of a set of actions in order to turn the company
around. These actions can be explained as follows over both the short and longer-
term phases.
? Operational restructuring: It can be seen from the Annual Report that the
short-term phase was mainly characterised with operational improvements
to achieve better utilisation of the workforce and the company’s assets and
to reduce costs and improve the cash reserve. For example, the number
of staff dropped from 759 in 2004 to 702 in 2005 (saving £3m) and down
again to 559 in 2006 (saving £1.4m) (Annual Report, 2006). Furthermore,
the help of the restructuring company was terminated in 2007, to reduce
the large restructuring fees (Annual Report, 2006).
4.14.4 Recovery and return to growth
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Following the implementation of operational restructuring activities during the
previous stage, the performance of SF had improved, cash loss had stopped and it
was time to develop long-term strategies to maintain the improvement. The long-
term strategy can be explained as follows:
? Operational restructuring: The leadership of the company believed that
continuing to implement and maintain the measures used during the short-
term phase to manage costs to the best degree, improve growth margins
and expand the customer base, was the key to SFs success and growth in
the long run (Annual Report, 2008). For example, it was found apparent
from the 2008 Annual Report that the operating charges (such as
distribution costs and staff costs) in 2008, had reduced compared to 2007,
despite the massive increase in turnover and sales growth indicating the
high efficiency level and new measure of cost control.
? Asset restructuring: In addition to the operational improvements, an
investment in a new staff training program to improve skills was introduced
in 2007, to help them to do their job more efficiently and in a timely manner
(Annual Report, 2007).
It was found in the Annual Reports 2007 and 2008 that the sales of the company
increased in 2008 by 16% more than in 2007 with a PAT over £1.7m. The
company had maintained improvement through tighter control over costs,
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increased sales and delivery of the best services to its customers in the UK and
abroad (Annual Report, 2008).
4.14.5 Summary of the turnaround process of SF
It can be said from what was revealed above that SF responded to its declining
situation proactively and in a timely manner. The leadership of SF had appointed a
restructuring firm to manage the company through the initial stages of turnaround,
by identifying errors and providing an appropriate set of strategies to save the
company.
4.15 Uniq Prepared Foods Limited (UPF)
Uniq Prepared Foods Limited (UPF) was one of the UKs leading manufacturers of
branded and own label prepared foods (e.g. sauces, poultry products, yogurts and
spreads) with many sites in the country and also one in France. The company was
a subsidiary of Uniq Foods PLC before it was acquired by the Green Core Group in
November 2011.
In 2003, the leadership of UPF had reviewed its portfolio and decided to implement
some organisational changes (such as acquisition, divestment and cost cutting
actions), to focus on core operations. For example, the company’s own brand was
divested (St Ivel), in order to focus on their own label market, which was growing
rapidly in early 2000 (Annual Report, 2003). Additionally, the trade and assets of a
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new business were acquired (i.e. Toft Foods Limited). However, following this, the
company went through a tough period of negative profitability and bad market
position, putting the company under threat (Annual Report, 2003). How did UPF
end up in decline and how was this situation turned around? These are the types
of questions, which the following section will try to investigate.
4.15.1 Decline stage
4.15.1.1 Recognition of decline
It was found apparent from the Annual Reports, that negative profitability was the
outcome of the financial years of 2004 (PAT of -£30m), 2005 (PAT of -£2m), 2006
44,675
-30,120
-2,116
-31,025
11,873
204,404
-50,000
0
50,000
100,000
150,000
200,000
250,000
2003 2004 2005 2006 2007 2008
FIGURE 4.14: P&L FOR UPF
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND YEARS
M
O
N
E
Y
IN
£000
Adapted from: (UPF Annual Reports 2003-2008)
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(PAT of -£31m), marking a period of decline for the company (Annual Reports,
2004-2006). Evidence from the Annual Reports showed that leadership of UPF
had recognised the decline signals and they were concerned about the company
performance (Annual Report, 2004). This however, was accompanied by the belief
that the company would return to its pre-decline status, if corrective actions were
taken in a timely manner (Annual Report, 2004/2005).
4.15.1.2 Change of leadership
In response to the decline situation, a change in leadership was made as an initial
step to ensure that good guidance was in place to tackle decline. This change was
the replacement of the CEO of the company in September 2003 to take charge of
the company during the critical period (Annual Report, 2005). In addition to this,
further help was needed and a restructuring firm was hired in 2007 to help the new
leadership with the problems and help create the best turnaround plan (Annual
Report, 2007).
4.15.2 Analysis of decline situation
4.15.2.1 Competitive advantage
UPF had a history of ups and down since its foundation in 1963. They had
operated as one of the strongest competitors in the marketplace, with long
experience in the food sector, other diversified sectors and with a huge turnover of
£748m (Annual Report, 2002). This made the leadership of the company confident
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that they would return to profitability if causes of decline were identified and
eliminated.
4.15.2.2 Severity of decline
Various decline signals relating to the mid-term decline stage were found apparent
in the UPF Annual Reports, such as decreased profit margin, loss of sales
contracts, inefficiency in operations and lack of cash flow. These decline signals
were the indicators for the TMT to implement immediately essential changes,
before the existence of the company was put under threat, by identifying the root
causes of decline and executing the most suitable turnaround strategy.
4.15.2.3 Causes of decline
It was highlighted in the Annual Reports of the company that various causes were
behind the decline of UPF, which can be explained and classified as follows:
? Internal causes: There have been some causes relating to the internal
environment in UPF which participated in the company’s decline as follows:
1. Low profit margins had played an important role in the negative
profitability, as it was reported that retailers were not tolerant to any
increase in prices, which prevented any increase in profit margin and led
to added pressure on the company’s ability to improve cash flow,
especially during tough economic conditions and rising raw material
prices (Annual Report, 2004).
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2. Wrong acquisition of the Minsterley site in May 2004, without an in depth
plan led to bad utilisation of the acquired facilities, despite the increase
in the total turnover of the company causing an operating loss in 2005
and 2006 for the division and the group as a whole. It was explained
that the waste level of the site was massive due to the incomplete
integration of the business with the existing business units (Annual
Report, 2006).
? External causes: In addition to the internal causes of decline, it was seen
from the Annual Reports that a mixture of external causes had also played a
significant role in UPF decline which can be classified as follows:
1. The outbreak of the Avian Flu in 2003 caused a major deterioration in
the poultry division of the company, resulting in decreased sales and
loss of some contracts in 2004 (Annual Reports, 2004).
2. Increased prices of raw materials due to bad market conditions
during 2004, 2005 and 2006 had played an important role in the
decreased operating profit and PAT accordingly for those years
(Annual Reports, 2004, 2005 and 2006).
3. The loss of a £6m business contract in the salad and fresh fish
division (i.e. Smedleys) from J. Sainsbury in 2004, caused a
reduction in sales by 14% in the year ending 2005.
4. Increased competition in the cottage cheese market had caused
reduction in sales by £7m worth of market share in favour of a major
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competitor, impacting the company’s market share and overall
profitability (Annual Report, 2007).
A combination of internal and external factors as shown above, played a significant
role in the decline of UPF and by identifying and allocating those factors, a
turnaround plan could be developed to address them and bring the company back
to profitability.
4.15.3 Formulation, implementation and stabilisation of the turnaround
plan
Following the analysis stage and the recommendation of the turnaround firm, a
turnaround strategy was formulated and implemented, combining various actions
to restore a profitable performance. This strategy can be broken down and
explained in respect of the short-term plans implemented during this stage and the
long-term policy implemented during the recover stage. The earlier combined
three main strategies which were as follows:
? Operational restructuring: The leadership of UPF had focused on cost
cutting activities to reduce overheads in all parts of the company, as an
essential component of their short-term turnaround strategy (Annual Report,
2006). Evidently, it was asserted in the 2005 Annual Report that, “Key
initiatives to support a turnaround in the performance, including a reduction
in overhead costs, are in place and will be implemented during the coming
year” (Annual Report, 2005:1).
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Additionally, cash generation was increased via boosting sales, NPD and
new contracts. For example, sales were increased in the fish and sandwich
sector, due to new business contracts secured with customers such as
Iceland and Morrisons (Annual Report, 2006). This had improved margin
levels and sales by bringing in the ‘To The Cook’ range, and an innovation
on the sandwich product market, leading to excellent records on Marks and
Spencer products with a 9.1 % growth rate (Annual Report, 2007).
? Managerial restructuring: The waste level of the Minsterley site was
targeted and addressed to bring waste levels down and reduce running
costs. Certain measures were taken to do this such as replacement of the
Managing Director of that site and reorganisation of the management team.
This change of management aimed to introduce new business performance
indicators, to measure progress against targets and focus on quality and
service levels. It was asserted in the 2006 Annual Report that, “Daily
performance tracking is the key tool that the business is using to drive
improvements. This performance tracking considers all key inputs and
outputs of the business, as well as focusing on a number of initiatives and
business critical aspects, which when completed should significantly
improve the performance of the Minsterley business” (Annual Report,
2006:3).
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? Asset restructuring strategy: This strategy was developed by the
company to eliminate non-core businesses with low profit margins and
acquire businesses, which better contributed to high profitability. For
example, in 2004, two divisions of the company were divested (i.e. the
Devizes fish site and the Newton Abbot poultry site), to reduce liability and
overheads after transferring the fish operations to the Annan site in Scotland
(Annual Report, 2005). Also, other businesses were acquired in May 2004
(i.e. the Minsterley site) to support the company’s growth in their own label,
chilled desserts sector, driving sales up by 29% in 2005 and opening links
with new customers such as Tesco and Morrisons (Annual Report, 2005).
Additionally, further asset divestment of two sites (i.e. St Herbert site and
Mane Frais site) was carried out to focus on the dessert side of the business
in 2007, generating a sum of £208m before taxation.
It was stated in the Annual Report that the company continued to focus on
operational restructuring activities, in order to improve efficiency and achieve better
utilisation of assets. No evidence was found for other major restructuring
strategies that had taken place during this term.
4.15.4 Recovery and return to growth
As was emphasised above, UPF had clearly gone through a tough period, with
many difficult decisions having to be taken, such as the closure of business units
with many employees being made redundant. However, there are undoubtedly
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many key lessons to be learned from this successful turnaround experience. The
company was turned around achieving positive profitability in 2007 (PAT £11.8m)
and 2008 (PAT of £204.4m). It was noted in the 2007 Annual Report, that the
improvement in performance was attributed to the combination of focus on
profitable operations and quickly eliminating non-profitable businesses, growth in
sales, better utilisation of assets and keeping costs down (Annual Report, 2007).
Evidence confirms that operational restructuring activities i.e. cost cutting and cash
generation, followed on during the recovery stage to maintain improvements and
reach full recovery. However, no evidence was found that additional strategies
were needed during this stage.
4.15.5 Summary of the turnaround process of UPF
From the above discussion, it can be reported that the leadership of UPF, with the
help of the restructuring firm, had fully analysed and understood the situation and
drawn a turnaround plan to reverse the decline position. The turnaround plan
responded to the combined internal/external causes of decline with a short-term
combination of managerial/operational/asset restructuring strategies, to ensure
improvement in performance and full recovery and return to growth.
4.16 Summary
This chapter has presented the case study of 14 medium and large food-
manufacturing companies from the UK, which had undergone a turnaround
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between 2000 and 2011. The turnaround criterion was applied to a large number
of companies from the FAME database, to ensure eligibility for the study and the
results were those 14 companies. The chapter was only interested in the analysis
of successfully turned around companies and not the non-recovered companies as
yet, because one of the aims of the chapters was to highlight the relationship
between the causes of decline and the implementation of successful turnaround
strategies, which would have been difficult to find in currently failing companies.
The study relied on the analysis of secondary data i.e. company’s Annual Reports,
covering the whole period of turnaround as part of archival recording methods.
Other data was collected from Internet sources (document analysis) to add to the
validity and the reliability of information attained from the Annual Reports.
The chapter investigated each company individually from a stage theory
perspective, guided by the theoretical framework developed in the literature review
chapter, to investigate the stages that each company went through since the
recognition of failure in the decline stage, until retrieval was achieved in the
recovery and return to growth stage.
The chapter further highlighted the viability of the companies chosen for turnaround
as most of them were either part of big groups, with strong financial and strategic
back up, or were businesses that had been in the industry for many years, with
good experience and/or strong relationships with customers and other
stakeholders in the business.
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The chapter also revealed that the economic external causes of failure played a
very critical role in the decline of all 14 companies under study. High costs were
the second major cause of decline leading 12 out of the 14 companies into a
negative cash flow position.
The chapter then investigated the turnaround options in response to the highlighted
viability of turnaround, severity of decline and causes of decline. Evidence revealed
that one major strategy was dominant as a vital component of all turnaround
strategies used by the companies, i.e. operational restructuring (cost cutting and
cash generation). Other strategies were implemented in relation to certain causes
of decline, availability of cash and/or other factors, as will be highlighted in the next
chapter.
The next chapter will discuss the facts, which were shown in this chapter to
conclude the key lessons that can be learned from the turnaround experiences of
these companies and modify the conceptual framework developed in Chapter two.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-1
CHAPTER FIVE
ANALYSIS, DISCUSSION
AND DEVELOPMENT OF INITIAL MODEL OF
SUCCESSFUL TURNAROUNDS
5.1 Introduction 5-2
5.2 Decline stage 5-5
5.3 Analysis of decline stage 5-6
5.4 Formulation, implementation and stabilisation stage 5-13
5.5 Recovery and return to growth stage 5-21
5.6 Initial model of successful turnaround 5-25
5.7 Summary 5-33
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-2
5.1 Introduction
This chapter is designed to discuss and present a cross-case analysis of the 14
companies investigated in chapter four. The chapter will analyse and discuss the
findings of those companies from a stage theory perspective, guided by the
theoretical framework developed in chapter two.
This chapter will discuss findings and evidences revealed in order to highlight
similarities and differences between all companies, to draw a conclusion of how to
achieve a successful turnaround. A cross-case, synthesis technique is used to
analyse findings from the 14 companies. This technique is best suited for this type
of case study as it aggregates findings across a series of individual cases (Yin,
2009). Each section of the chapter will represent and discuss a stage of the model
in the light of the rich data attained from different sources of information for the 14
companies.
In the first section is a discussion of the recognition of decline and any change in
leadership needed to reveal the common practises by TMT, to set off the
turnaround process. In the following section, another discussion follows to identify
the viability of the company, severity of decline (availability of cash) and causes of
decline. Another discussion evolving around which/how/when the major
turnaround strategies were implemented in the short-term, to stop cash loss and
the following decline. Additionally, the next discussion further highlights the use of
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-3
each turnaround strategy during the longer term, to maintain improvements and
return the company to full recovery and growth.
Finally, an initial turnaround model, followed by a summary is presented in the last
section to conclude the major key issues of turnaround management in the light of
those company’s’ experience.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL MODEL OF SUCCESSFUL TURNAROUNDS
5-4
Company
ADM
BOF
CHR
HB
IG
KRF
LEC
MMB
NI
NF
OFD
PF
SF
UPF
Decline Recognition of decline ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Changes of leadership ? ? ? ?
? ? ? ? ? ?
Analysis of
decline
Is the company viable for turnaround? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
C
a
u
s
e
o
f
d
e
c
l
i
n
e
Internal
Bad management/leadership ? ? ? ? ? ? ? ? ?
Organisational factors ? ? ? ? ? ? ? ?
External
Political factors ? ? ?
Economic factors ? ? ? ? ? ? ? ? ? ? ? ? ?
Competition factors ? ? ?
Social factors
Technological factors
Formulation,
implementation
and stabilisation
of the plan
S
h
o
r
t
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring ? ? ?
Operational
restructuring
Cost cutting ? ? ? ? ? ? ? ? ? ? ? ? ?
Cash generation ? ? ? ? ? ? ? ? ? ? ? ? ?
Asset
restructuring
Asset divestment ? ? ? ?
Asset investment ? ? ?
Financial
restructuring
Debit restructuring ? ?
Equity restructuring ? ?
Recovery and
return to growth
L
o
n
g
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring
Operational
restructuring
Cost cutting ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Cash generation ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Asset restructuring Asset divestment ?
Asset investment ? ? ?
? ?
Financial restructuring Debit restructuring ?
Equity restructuring ?
Table 5.1: summary of cross case analysis (14 companies)
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5.2 Decline stage:
5.2.1 Recognition of decline
From the Annual Reports analysed in the last chapter and according to Table (5.1),
it was emphasised that the leadership of each company responded to their
company’s decline proactively, as soon as signals of decline appeared. This was
evidenced by the reassurance and confidence of the leadership that decline was
temporary and could be reversed.
Various signals of decline were found apparent in the Annual Report of the
companies such as declined or negative profitability, lack of cash flow, reduced
sales, increased costs, low profit margins, loss of market and organisational
inefficiencies. In some cases, decline was expected to happen due to monitoring
of external factors relating to bad weather conditions and the high cost of raw
materials as in the case of LEC and UPF. It was clear from the reports that those
decline signals were recognised and responded to by the leadership in a timely
manner.
5.2.2 Changes of leadership
Various authors (e.g. O’Neil and Drucker, 1986; Grinyer et al., 1990; Pearce and
Robbins, 1994; Sudarsanam and Lai, 2001 and O’Kane, 2006), asserted in the
turnaround literature that changes in leadership were one of the most important
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first steps when tackling decline and setting off the turnaround process, ensuring a
safe journey to success.
Findings from this study support this view, for example, 10 out of the 14 companies
had implemented various leadership changes at the senior level of management
and Board of Directors. Notably, three out of four companies that did not conduct
any form of leadership change (i.e. HB, MMB and LEC), were privately owned and
managed businesses. This explains the view that in family owned businesses, it is
harder to perform any leadership changes. This finding reveals that it is likely that
TMT tend to restructure the leadership at the early stages of the turnaround
process, to ensure that the company has the necessary management in place to
save it from decline. In addition to this, findings revealed that two companies (i.e.
SF and UPF) had hired some restructuring firms to help the company’s new
leadership in their task of identifying problems, drawing up a turnaround plan and
executing the necessary measures to assist them out of the decline.
According to the findings and as shown in Figure 5.1, it can be concluded that
installing a new leadership, which may take many forms; such as a new CEO,
Managing Directors, senior members of the Board of Directors and/or temporary
turnaround managers/firms until recovery is achieved, is an essential component of
a successful turnaround.
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5.3 Analysis of situation stage
5.3.1 Viability and competitive advantage
Findings show, as presented in the last chapter, that all companies have
successfully managed to recognise and identify their weaknesses and strengths
during their tough period of decline. It was clear in the last chapter that each
company recognised their competitive advantages, which made them positive and
confident about their company’s ability to return to recovery and growth.
Findings of this study showed that the presence of one or more of the following
competitive advantages was essential in making the company viable for turnaround
in the long term:
? Being the market leader with, or at least holding, a large market share of
certain segments, such as in the case of ADM in the milling industry, NI in
the sauce industry and OFD in the organic fresh fruit and vegetable
markets.
? Being a subsidiary of a large manufacturing group with large, strong
business alliances and financial back-up, such as in the case of ADM, BOF,
IG, PF and SF.
? Being one of the experts in the field of industry to enable the company to be
a strong competitor in the market, such as CHR in the bioscience of food
and LEC being the leading UK producer of handmade Eccles Cakes.
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? Being a pioneer in developing new reliable products or technologies, such
as KRF, who are known for being established in developing new products
that meet different consumer needs and NF and its unique products such as
odourless mint, functionality in extreme temperatures products and products
with high moisture barriers.
In conclusion, the findings support the views of Gopal (2009) that building or
enhancing a competitive advantage, relies mainly on lower cost operations or
quality differentiated products/services. The study revealed that identifying and
understanding the competitive advantage of the company is critical to the success
of the turnaround plan, as it plays an important role in influencing the long-term
turnaround strategy.
5.3.2 Severity of decline and cash availability
According to findings, it can be said the each company found its own strengths and
despite the stage of decline (early, mid-term or late decline stage) a company was
in, they all remained positive about their ability to turnaround, supported by the
competitive advantage each held. Findings from the previous section revealed that
most of these companies have been in the marketplace for years with extensive
experience in their field, various links to suppliers and customers and different
financial links that supported their turnaround. This asserts that despite the stage
of decline, finance was still available to support the turnaround via the company’s
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own resources, loans from mother companies and/or lending bodies via financial
restructuring activities, early on in the process as discussed in Section 5.4.2.4.
5.3.3 Causes of decline
As shown in Table 5.1, the study revealed that despite the existence of many
causes that can lead any company into decline, all companies in this study (14
cases) have attributed their decline mainly to external, economic reasons invariably
in the form of increased costs (e.g. cost of energy supply and raw materials due to
bad weather conditions). However, and despite this, internal causes of decline
have played a significant role in the decline of some companies as shown below.
This section explains the causes of decline in the light of the results of this study
and according to the theoretical framework developed in chapter two, that divided
the causes of decline into either internal and/or external.
5.3.2.1 Internal causes of decline
Based on the results revealed in this study and according to the theoretical
framework developed in chapter two, internal causes of decline were divided into
two classifications as follows:
1. Managerial factors relating to weakness of management to respond and
adjust the internal environment to suit changes in the external environment
of the company. Findings from this study showed that this cause of failure
had participated in the decline of three out of 14 companies (i.e. IG, OFD,
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and UPF). For example, lack of management control in one of the sites, as
in IG, had caused a high level of waste and inefficiency in operations.
Furthermore, the lack of management response to change in customer
demand in OFD, had caused a loss of some contracts that had led the
company into a negative cash position. Additionally, high waste levels and
bad utilisations of assets were apparent in the case of UPF, which have all
participated in the company’s’ decline.
2. Organisational inefficiencies relating to problems with the company’s
internal elements, such as structure and operations, staff and the product
(see Section 2.4.1.1). However, as argued by many authors (e.g. Bibeault,
1982; Hartley, 2005 and Dubrovski, 2009), the two types of internal causes
are mostly attributed to the management, as they have the responsibility for
amending and controlling these organisational errors with any of the
company’s structure and operations, products or staff. The results of this
study as shown in Table 5.1, showed that eight companies (AMD, CHR, HB,
IG, NI, NF, SF and UPF) attributed their decline to internal organisational
inefficiencies as follows:
? ADM suffered high costs of both the newly acquired Tewksbury and
Newcastle sites. This can be attributed to the blind acquisition of the
sites, which led to cash loss and decline.
? CHR, HB, NI and UPF suffered a low profit margin, cost control
problems and a price increase in raw materials, causing decline due to
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lack of management identifying and dealing with the problems early
enough. Additionally, HB and NI have both suffered uncontrolled high
waste levels
? SF suffered reductions in sales, lost contracts and high costs.
However, lack of management to reflect the reduction in sales on the
cost base, such as size of workforce and other operational expenses,
had caused loss of cash and further decline.
? IG suffered high costs of operations in the Coldwater site affecting the
company performance overall.
5.3.2.2 External causes of decline
In addition to the internal causes of decline, other external causes were found to
have participated in the decline of many cases in this study. The findings show
that those technological and social factors were not responsible for the decline of
any of the companies in this study. On the other hand, economic, political and
competitive causes have played a significant role in the decline of some companies
in the study as follows:
? Economic causes: Economic causes were responsible for the decline of 12
cases in this study mainly in the form of high cost of raw materials due to
bad weather conditions such as in the cases of ADM (2007), CHR (2006),
IG (2005, 2006 and 2007), LEC (2003, 2004 and 2005), MMB (in 2006,
2007 and 2008), NI (2007), NF (2003) and PF (2002, 2003, 2004 and 2005).
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Additionally, the increasing cost of energy was another form such as in the
cases of MMB (in 2006, 2007 and 2008) and PF (in 2003, 2004 and 2005).
Moreover, increased interest rates and bank charges was another cause, as
in the cases of ADM (in 2005 and 2006), CHR (in 2005, 2006 and 2007) and
IG (2005, 2006 and 2007). Furthermore, high exchange rates of the Euro
against the Sterling was another form of an external cause of decline, which
impacted on exports to Europe, leading to reduction in sales, such as in the
case of MMB post 2006. In addition to this, reduction in sales due to lack of
customer demand, was found to be a cause of decline in KRF affecting its
sales and profitability in 2006.
? Political causes: Findings show that this type of cause has participated in
the decline of one company (i.e. LEC). The new legislation set by the UK
Government in 2001 in relation to company’s contributions to pension
schemes, caused an increase in costs of pension payments payable by LEC
for four consecutive years (2002, 2003, 2004 and 2005), impacting its
profitability negatively for those years. Furthermore, evidence was found in
this study that government legislations and policies regarding the movement
of products during the outbreak of animal diseases can be causes of
decline. For example, the outbreak of swine flu and the foot and mouth
disease in 2001 led to government restrictions on animal movement and
processing and led to a major loss of sales for BOF. Similarly, the outbreak
of the Avian Flu in 2003 had negatively impacted the level of sales and
profitability for UPF in 2003 and 2004 and had led to its decline
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? Competitive causes: Evidence from the study revealed that competitive
causes had participated in the decline of three cases i.e. BOF, HB and UPF.
For example, the worldwide over supply of pork meat in 2001, had pushed
prices down, negatively affecting the profit of BOF. Additionally, tough
competition in the market led to the loss of two major contracts in 2001 in
the case of HB (it left the company with 24% less sales than 2000).
Furthermore, in the case of UPF, the JS contract in 2004 (worth £6m from
the salad division) and another £7m worth of sales were lost to another
competitor in the cottage cheese market.
5.4 Formulation, implementation and stabilisation stage
This section investigates and discusses the turnaround strategies that were
selected by leaders in response to the decline situation. The theoretical model
developed in chapter two and findings from this phase, guides this discussion. It
investigates a turnaround process in respect of four main restructuring strategies
i.e. managerial, operational, asset and financial over two phases, the short-term
and the long-term.
As reported by many scholars (e.g. Hoffman, 1989; Arogyaswamy and Yasai-
Ardekani, 1997 and Lasfer and Remer, 2007), companies in decline implement
short-term strategies aiming mainly to quickly stop the continuous loss of cash and
the worsening performance, to bring the business to a breakeven point and a more
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stabilised situation. Short-term strategies were identified in this study as those
implemented before the year of breakeven point or positive profitability in each
company. This is to identify the strategies, which were implemented during the
early steps of turnaround and differentiate between them and others implemented
at a later stage.
5.4.1.1 Managerial restructuring
Findings from this study revealed that restructuring of middle management was not
a popular option during the early stage of turnaround, as only 3 out of 14 cases
(NF, OFD and UPF) had adapted the strategy during the short-term. However, it is
notable that the three companies that had implemented the strategy had suffered
bad management and organisational inefficiencies as major decline causes.
Additionally, managerial restructuring was implemented in various forms such as;
appointment of a new sales manager/team to attract new contracts or to respond to
decreased or lost sales, such as in the case of NF. Additionally, the appointment
of new managing directors or commercial mangers to certain divisions of the
company as part of decentralisation of decisions plans, such as in the case of
OFD, appointment of a new Managing Director and restructuring the whole
management team to focus on customer service levels such as in the case of UPF.
This findings agreed with the view of Whitaker (1990) that despite the importance
of managerial restructuring in the turnaround literature, it is not an essential
component of every turnaround strategy, if the cause of decline was attributed to
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external factors such as economic. In other words, managerial restructuring can
be considered a vital component of the turnaround strategy, for those companies
who suffer bad management as an internal cause of decline, such as the case of
OFD and UPF.
5.4.1.2 Operational restructuring
As shown from the findings in Table (5.1), operational restructuring was the most
commonly adapted strategy by all 14 cases in response to decline. Findings can
be explained in relation to cost cutting activities and cash generation activities,
aiming to stop cash losses, improve cash flow and efficiency of operations.
Cost cutting
Findings showed that cost cutting activities were implemented in 13 out of 14
cases during the short-term phase. It was not clear from the annual report whether
or not MMB had used any cost-cutting activities during the short-term phase as
part of its turnaround strategy. These activities can be categorised as follows:
? General spending and overheads were reduced and brought under greater
control in 13 cases, such as the number of staff which was reduced in BOF,
NF, OFD and SF to reduce wages and general labour costs and to
overcome problems with increased pension contribution costs in LEC.
Additionally, spending was also reduced in NI to achieve high levels of
efficiency and better utilisation of the workforce.
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? Other operational costs were reduced, such as distribution costs in NF in
2006, the cancellation of outsourced logistics operations in PF, managing it
within the company instead and the cancellation of the restructuring firm
hired in 2006 to reduce fees in SF.
? Waste levels were attacked to minimise losses in HB and UPF. This was
done in response to the high level of waste and inefficiency.
The above findings showed that cost cutting as a strategy was an essential
component of all cases in the study regardless of the cause of decline as it aimed
to reduce spending and waste levels and improve efficiency in operations. This is
in line with the literature as presented in Section 2.5.2.2.
Cash generation
Results from this study revealed that all companies have adapted cash generation
activities during the short-term phase of its turnaround process, in response to
many causes such as declined sales, negative profitability and lack of cash flow. It
can be concluded from findings that cash generation strategies were mainly
implemented in five forms as follows:
? Increasing sales, such as in the case of BOF, KRF, OFD, PF and UPF (fish
and sandwich division).
? Targeting new customers, such as in the case of MMB and UPF.
? Developing a flexible pricing system to reflect any increase in raw material
prices on the final price of the product, to ensure a good profit margin, such
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as in the case of ADM, BOF and MMB. This was done in response to low
profit margin problems and increasing costs.
? Developing new profitable products to replace low profit margin ones, such
as in the case of CHR , IG, MMB, NI, NF and PF. Additionally, HB had
imported a range of new products from Europe to quickly support and boost
its existing range.
? Introducing credit control measures to chase and control credit flow from
customers, such as in the case of IG. This was done to overcome the
problem of cash shortages and delayed accounts receivable.
From what was revealed above, findings support the literature emphasising the
importance of cash generation strategies as a vital component of any successful
turnaround strategy as it aims to generate the cash needed for the turnaround.
5.4.1.3 Asset restructuring
According to Table 5.1, asset restructuring as a strategy was used in four out of 14
cases during the short-term phase (i.e. ADM, IG, OFD and UPF). Asset
restructuring activities were implemented in two forms during the short term as
follows:
Asset Divestment:
In this study, divestment of unprofitable assets was found to be a vital component
of the turnaround strategy for four out of the 14 cases (i.e. ADM, IG, OFD and
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UPF). Notably, the evidence showed that the four companies had all suffered
internal causes of decline related, organisational inefficiencies. For example, the
management of ADM divested the newly acquired Tewksbury mill due to the high
operational costs and massive overheads of the site. Additionally, the
management of OFD divested the US subsidiary as well as the UK Lampeter site
in 2006, to reduce losses to the company. Furthermore, the management of UPF
had exercised the same strategic choice with four of its sites (i.e. Devizes fish and
Newton Abbot poultry sites in 2004 and St Herbert and Mane Frais Sites in 2007)
as part of UPF’s efforts to reduce liability, minimise overheads and turn cash loss
making assets in to a cash sum needed for turnaround.
Based on the evidence above, it can be said that asset divesture is a vital
component of the turnaround strategy of companies, which suffered from internal
causes of decline relating to high costs and overheads of one or more
operations/divisions as part of organisational inefficiencies.
Asset Investment
According to other findings, investment strategy was used in 3 out of 14 companies
in the study. It is important to note that three companies have all suffered decline
due to weak business portfolios, high waste levels and inefficiency in operations,
organisational inefficiencies as well as other external causes. This strategy was
selected to improve the overall internal performance. Namely, investments were
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made in OFD in a new inventory based control system to control and reduce stock
losses in 2005 in addition to a new staff skills and training program to reduce
waste, improve staff skills and maintain their loyalty. Furthermore, the
management of UPF decided that a new business with links to new customers in
the chilled dessert sector was needed, so an investment was made in 2004 to buy
a new company (i.e. the Minsterley site) that supported the company’s vision to
achieve growth in sales by 29% in 2005.
It can be concluded from the above discussion that despite the use of asset
restructuring strategies in some cases, it cannot be considered as an essential
component of every turnaround strategy. Notably, it is highly essential in cases
where decline was caused mainly by internal organisational inefficiencies, as it
aims to eliminate or improve badly distressed processes or assets.
5.4.1.4 Financial restructuring
According to Table 5.1, findings showed that three companies (i.e. CHR, IG and
OFD), which had suffered negative cash flow positions due to high bank charges,
interest rates and/or high exchange rates, adapted financial restructuring during
the short-term phase as follows:
Debit restructuring
Debit restructuring as a type of financial reorganisation was adopted by two
companies (i.e. CHR and IG) during the short-term phase. Both companies did
negotiate interest rates on bank loans with their lenders to reduce their annual
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charges. For instance, CHR secured lending agreements in various currencies to
overcome problems related to high exchange rates, which was one of its decline
causes. Similarly, in 2008 IG managed to get a deferred capital repayment and
discounted repayments for 2009 and 2010, by transferring the whole loan amount
to a different bank. This finding supports the view that debt restructuring helps to
minimise the pressure from loan repayments by negotiating existing/new deals with
existing/new loan providers, in the hope of receiving better terms and conditions
until recovery is achieved (Lasfer and Remer, 2007).
Equity restructuring
Equity restructuring was adapted by IG and OFD during this short-term phase in
order to improve their cash flow position and reduce overheads. For example, IG
turned its intercompany loan into equity to eliminate the annual repayment charges
paid to the company group. As well as this, OFD had generated a large sum of
money to refinance the company during its turnaround, by issuing a large number
of shares to new investors to overcome a problem of continuous increases in
liabilities and interest charges. This finding shows that financial restructuring is
mainly used in cases that suffer decline due to external causes relating to high
interest rates and lack of loan repayment.
These findings disagree with some authors (e.g. Sudarsanam and Lai, 2001) who
argued that the finance-based literature indicated that financial restructuring is a
vital component of any turnaround strategy. The findings show that such a
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strategy is vital only in cases which suffer decline due to high exchange and
interest rate.
As was seen from the results above, various strategies were used to rectify and/or
eliminate causes of decline, preparing the company for further policies to enhance
improvements and return the company to growth.
5.5 Recovery and return to growth stage
Strategies implemented during this phase aim to maintain and enhance
improvements, positive profitability and return the company to growth. Long-term
strategies in this study are identified as those that have been implemented
immediately after the breakeven point or first year of positive profitability. This is
because long-term strategies are not those needed urgently to stop the continuous
decline and cash loss. Long-term strategies are those aimed to enhance the
competitive advantage of the company over the longer term. Findings from this
case study are explained in respect of the four major restructuring strategies
below, according to the theoretical framework developed in chapter two.
5.4.2.1 Managerial restructuring
Evidence revealed that managerial restructuring was not adopted by any of the
companies during the long term. This supports the view that this is only required
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during the short-term phase in order to make sure the appropriate leadership is in
place before implementing any changes.
5.4.2.2 Operational strategies
As was evident from the findings of the results, it can be said that operational
restructuring was the most adaptable strategy during the long-term, as all
companies adopted it. Similar to the short-term phase, this was done to maintain a
greater control over spending and improve cash flow. For example, as shown in
Table 5.1, 13 out of 14 companies (i.e. DM, BOF, CHR, HB, IG, KRF, LEC, NI, NF,
OFD, PF, SF and UPF) which adopted cost cutting activities during the short-term,
continued to control and reduce costs in different forms during the longer-term
such as staff lay-offs and reducing spending in all parts of the company.
Furthermore, it can be seen in Table 5.1 that 12 companies (i.e. ADM, BOF, CHR,
HB, IG, KRF, LEC, NI, NF, OFD, PF and UPF) adopted cash generation strategies
during the short-term and continued to do so during the long-term in different forms
such as NPD, increased prices and targeting new customers. Additionally,
evidence from the two companies which didn’t adopt this type of activity during the
short-term (i.e. SF and LEC), revealed that only SF had adopted cash generation
during the long-term in the form of improving growth margins and expanding
customer bases to help boost sales.
5.4.2.3 Asset restructuring
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Asset divestment
The use of asset restructuring was found apparent in this study during the long-
term. In respect of asset divestment, findings showed that in 1 out of 14
companies (i.e. IG), this sub-strategy had been adopted during the long-term to
maintain improvements, reduce overheads and generate cash. IG had divested
the Coldwater site in 2008 to reduce the continuous cash loss and high overheads
and to generate some much needed cash for the turnaround, after a battle of cost
cutting activities during the short-term. This confirms that asset divestment is not
widely used during the long-term phase.
Asset investments
Referring to Table 6.1, it can be seen that six companies (i.e. BOF, IG, MMB, NF,
PF and SF) adopted this strategy during the long-term. This indicates that asset
investment was the most vital strategy during the long-term, in addition to
maintaining operational improvements. For example, investments were made in
BOF and SF on staff training and skills building in order to improve efficiency and
productivity. Moreover, an investment in new equipment and facilities at the
Grimsby site in IG, was put in place to accommodate business brought from
Coldwater after its divesture. Additionally, BOF, MMB and NF also invested in new
equipment to speed production, reduce costs and increase productivity. Evidence
from PF has shown that the company had invested in acquiring certain trades and
assets of another company to expand sales and growth. It is believed that the
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wide use of investment strategy falls in line with the view of some authors, who
believe that investment strategies are critical in all parts of the company during the
long-term to make the company a strong competitor in the marketplace.
This concludes that asset investment as a strategy was popular during the long-
term, in successfully turned around companies.
5.4.2.4 Financial restructuring
Similar to what was found evident during the short-term, implementation of the
financial restructuring strategy was found apparent in two cases during the long-
term. It was found that IG had re-negotiated its debt and terms of borrowing and
managed to successfully defer capital repayments until 2009 and reduce
repayments for 2010 and 2011. This gave the company headroom with expenses
and helped to save money to fund the turnaround. Additionally, KRF sold a hefty
amount of its shares to a large group, generating a sum of £10m needed to turn it
around and take it to the next level.
Based on the findings shown above, it can be concluded that the long-term phase
includes the use of various turnaround strategies. However, findings show some
agreement and disagreement with the turnaround literature explained as follows:
1. Managerial restructuring was not found to be a vital component of every
turnaround strategy as emphasised in the literature. Findings showed it is
only important in cases that suffered bad management as a cause of
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decline. This finding was supported by the view of Whitaker (1990) who
indicated that change of management is fruitless if decline was not caused
by management. This disagrees with the view of many authors who argue
that managerial restructuring is essential, even if decline was not caused by
management, as it sends good signals to creditors that internal
improvements are taking place.
2. Operational restructuring is found to be a critical component of any
successful turnaround strategy, due to its nature and aim of achieving
greater control over spending and cash flow.
3. Asset restructuring consists of two strategies (i.e. asset divestment, asset
investment). The first was found to be a critical component of the turnaround
strategy in cases which suffered decline, due to internal organisational
inefficiencies such as high operational costs and overheads. However, the
use of such a strategy was found to be less important during the long-term
phase. In paradox, findings showed that the use of asset investment was
associated with the long-term phase due to the improved position of cash
availability.
4. Financial restructuring was found to be more popular during the short-term
mainly in cases that suffered high interest and exchange rates. Findings
showed that such a strategy was only important to the success of one case
during the long-term.
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5-26
5.6 Initial model of successful turnarounds
In this section, an initial model for successful business turnarounds was developed
(see Figure 5.1), guided by the theoretical model from literature and facilitated by
the findings from the case study as presented in chapter four and emphasised in
Table 5.1 earlier in this chapter.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL MODEL OF SUCCESSFUL TURNAROUNDS
5-27
Recovery and return to growth
Successful Turnaround
(2 years or more of positive profitability
Positive
profitability
achieved
Operational restructuring
-Maintain operation
improvements
Asset Investment
- NPD, staff training, new
computer systems, up to
date equipments
Formulation, implementation and stabilization of the
turnaround plan
Mandatory strategy
(Operational restructuring)
Additional strategy
Managerial restructuring
Additional strategy
(Asset restructuring)
Additional strategy
(Financial restructuring
Cost cutting Cash generation
Asset divestment Asset investment
Equity restructuring Debit restructuring
NO
Analysis stage
Identify causes of decline
Internal causes
Organizational
Inefficiencies
Bad management
External causes
Political
Economic
Competition
Assess viability
Does the company hold a
competitive advantage?
Assess severity and
financial position
Is there enough cash
for the turnaround?
YES
YES
NO
NO
Exit
Sale of business/ Liquidation
(Liquidation)
YES
High cost or material
High interest/exchange
rate
Lack of global demand
Decline sage
Recognition of decline
Replace leadership
Appoint a new CEO or interim
turnaround leader/ firm
Communicate the plan
TMT
support
Stakeholders
support
FIGURE 5.1: INITIAL MODEL OF MANAGING SUCCESSFUL TURNAROUNDS
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-27
The model explains the turnaround process from a stage theory perspective,
guided by the four key stages of the turnaround process developed in C10. chapter
two as follow:
1. Decline stage:
This is the stage when decline is first recognised by the TMT through
different decline signals. Findings from 10 out of 14 companies showed that
when decline was recognised, a change in leadership was implemented as
an early step of turnaround, in order to replace incompetent leaders with
competent ones, who are able to manage the company out of decline.
Furthermore, according to the findings, new leadership took various forms
such as new CEO’s, Managing Directors, and or senior members in TMT.
Additionally, findings showed that in some cases a temporary interim
turnaround manager/firm was hired to work in line with the new/existing
leadership until recovery was achieved.
2. Analysis of decline:
The second stage of the model represents the first task for the new/ existing
turnaround management. Decline situation must be analysed in order to
identify three major elements that will impact the decision of the turnaround
process. The first element is the viability check and it must be carried out to
ensure that the company has the short-term financial ability and long-term
value to return to profitability and growth before any further investment can
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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5-28
be made. Findings show that all case studies held one or more competitive
advantages that had supported it in the market prior to decline, such as
being the market leader or at least having a large market share, being
backed up with finance capital from a large group, being an expert in the
industry and/or being a pioneer in NPD or new technologies. As shown in
the model, there is a link between the identified and the long-term stage of
implementation. Findings show that the long-term strategy revolves around
enhancing this competitive advantage.
The second element is the severity of decline, which identifies the cash flow
and cash availability positions. Findings show that all companies were still
operating under the support of their usual creditors, despite the negative
cash flow position. This indicated that decline was recognised at an early or
mid-term before all resources were depleted. Findings also show that
despite the decline situations, Annual Reports state that TMT’s were
confident that the proposed changes would return companies to a stable
position.
The third element is identifying the cause of decline (internal/external). This
element is critical as it influences the turnaround decision in the short-term
as well as the long-term. As shown in Table 5.1, the findings indicate that
the external causes of decline that played a significant role in certain cases
in the study, was limited to one of three major causes, i.e. economic,
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-29
competitive or political. The first mainly came in the form of high costs of
energy, raw materials, increased interest and currency exchange rates
and/or lack of demand. The second was competitive causes relating to the
ability of competitors to attract some contracts from companies in the study,
impacting their sales volume. Political causes related mainly to the UK
governmental legislations on pension schemes. Those external factors
were considered to be uncontrollable. Despite this, internal improvements
that minimised or eliminated the impact of those factors are essential, since
there is nothing to be done externally.
3. Formulation implementation and stabilisation of the turnaround plan:
This is the third stage of the turnaround process during which the
turnaround management develops and implements the initial short-term
turnaround strategy. According to the findings emphasised in chapter four
and presented in an earlier discussion in this chapter, guided by the
theoretical framework and referring to Figure 5.1, the key strategies are
explained as follows:
A. Managerial restructuring
As shown in Figure 5.1, there is a linkage between the original cause of
decline and this strategy as a chosen component in the turnaround.
Findings assert that this strategy was not critical in all cases in this study. In
paradox, findings show that this strategy was only adapted in three cases
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-30
(NF, OFD and UPF), which originally suffered internal causes of decline
relating to bad management and organisational inefficiencies. For example,
certain causes such as the lack of management response to changes in
customer trends and lost sales and/or contracts, were responded to by
management restructuring and appointment of a new dedicated Commercial
Manager or team to focus on attracting new sales contracts. This allowed
for new competent management to take their place to ensure the application
of the new changes.
B. Operational restructuring
This strategy is found to be critical to all companies in this study during the
short-term phase, regardless of the cause of decline. Findings showed (as
emphasised in Figure 5.1) that this strategy was adapted in every company
during the short-term and the long-term. Cost cutting and cash generation
sub-strategies are the component of this, due to its importance in
terminating cash loss and improving cash flow and efficiency, regardless of
the cause of decline being either internal or external.
For example, internal causes of decline are associated with various forms of
inefficiencies in operations, high waste levels and high overheads and were
mainly dealt with using various techniques within operational restructuring,
such as greater control over cash, reduction of overtime and introduction of
new discount systems to reduce spending and accelerate cash flow.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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Similarly, many external causes of decline such as increased energy costs,
pension contribution and the global lack in customer demand, were largely
addressed mainly by implementing cost cutting sub-strategies to alter
internal environments, since there is little control over the external ones
(such as layoffs and application of greater control measures over cash
spending). Additionally, cash generation strategies (such as increased
prices, increased sales and NPD) were found to be highly effective,
especially in the presence of major causes such as low profit margins,
reduced sales and lost contracts.
C. Asset restructuring
Figure 5.1 further shows and confirms that asset restructuring is not an
essential component of every turnaround case, it was found essential in
cases where operational restructuring was not enough to eliminate the high
overheads and losses associated with certain operations or divisions (four
cases). This finding established the link between organisational
inefficiencies as a cause of decline and divesture as a turnaround option.
Similar to this, findings show that asset investment was exercised as a
short-term turnaround option in cases where decline was due to lack of
investment in improving the internal operations or the skills of the workforce.
Despite the lack of cash during such a critical period, it was seen as
imperative to invest in up-to-date systems, staff training and NPD to
overcome problems with high waste levels and lack of inventory control.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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5-32
D. Financial restructuring
Financial restructuring is another turnaround option that is usually adopted
to ease pressure from creditors. Findings from three cases which suffered
high interest rates on loan repayments or high exchange rates when
working with various currencies, showed that financial restructuring activities
(i.e. securing lending agreements in various currencies, exchange debt for
equity, or transfer of all loans and liabilities to other creditors) is a suitable
turnaround option.
4 Recovery and return to growth
This is the final stage of the model and during this stage, the company
should have reached its breakeven point or positive profitability. When this
is achieved, the company’s turnaround management develops further
strategies in order to maintain improvements, ensure full recovery and future
growth, by enhancing the competitive advantage. Findings showed the
long-term strategy is a mixture of two major policies as follows:
? Operational restructuring: Findings show that continuous review and
implementation of cost control and cash generation activities were
implemented during the long-term (13 out of 14 companies), to ensure
efficiency in operations, positive cash flow and better utilisation of cash
resources.
? Asset restructuring (investment): Findings show that during the long-
term phase, investment strategies aimed to enhance the competitive
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
MODEL OF SUCCESSFUL TURNAROUNDS
5-33
advantage of those companies by investing in staff training, new
equipment and NPD that will help a company to differentiate in value
and/or cost were necessary.
From the Annual Reports and the analysis above, it can be concluded that
successful companies have maintained their recovery by continually focusing on
operational restructuring strategies as being essential for most causes of decline,
as well as adapting further sets of strategies that target certain causes of decline.
5.7 Summary
This chapter has presented an analysis and a discussion of the results of the case
study of 14 medium and large food-manufacturing companies from the UK, which
underwent a turnaround between 2000 and 2010.
This chapter conducted the analysis process from a stage theory perspective,
guided by the theoretical framework developed in the literature review in chapter
two. Section 5.2 concluded the steps that companies underwent during the decline
stage, since signals of decline appeared, which concluded in two steps; the first
represents the recognition of decline signals and the second takes action with
regard to the company’s leadership.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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5-34
Section 5.3 followed prescribing the appropriate steps which must be taken during
the analysis of the decline stage, which starts with identifying the viability of the
company for turnaround, to ensure that the turnaround efforts will be fruitful at the
end. If the company is viable, an analysis of the cash flow position is conducted
along with the original causes of decline.
Section 5.4 covers the third stage of the turnaround process in which all critical
decisions are formulated into turnaround strategies and implemented over two
phases; short-term to stabilise operations, followed by long-term to maintain
improvements and return to growth. During the short-term, there are some
mandatory strategies, which must be implemented regardless of the cause of
decline, as well as some additional strategies, which were selected and
implemented in relation to the presence of certain causes of decline.
Section 5.5 briefly discusses the recovery stage during which two major strategies
continue to be highly important to maintain improvements, enhance the competitive
advantage and return to growth for the turnaround stage in which the company
should have successfully returned to positive profitability and growth.
Section 5.6 represents the initial model of successful turnaround. The section
discusses the development process using the same theoretical framework
developed in chapter two and findings from chapter four and five of the study and
then a summary follows in Section 5.7.
CHAPTER FIVE: ANALYSIS, DISCUSSION AND DEVELOPMENT OF INITIAL
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5-35
The next chapter should investigate in depth all the issues highlighted in chapters
two, four and five represented in the initial model, through an in depth case study
of three, large, UK food manufacturing firms.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-1
CHAPTER SIX
ANALYSIS, DISCUSSION OF IN-DEPTH
CASE STUDY- AND DEVELOPMENT OF
REVISED MODEL OF SUCCESSFUL
TURNAROUNDS
6.1 Introduction 6-2
6.2 Castle Dairies Ltd 6-3
6.3 Glanbia Cheese Ltd 6-17
6.4 Peter’s Food Service Ltd 6-26
6.5 Cross-case analysis 6-36
6.6 Modified model of successful business turnaround 6-45
6.7 Summary 6-50
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-2
6.1 Introduction
This chapter is designed to achieve objective three of the study, i.e. explore the
initial model and its key issues through an in depth case study which faced
similar scenarios.
The chapter presents the results obtained from a case study of three large food
manufacturing companies from the UK (two in Wales and one in England), with
a successful turnaround experience according to the turnaround criteria (see
methodology chapter). The investigation process was guided by the theoretical
framework (see Figure 2.9) and the initial model of successful turnaround (see
Figure 5.1), to explore and understand the key issues of successful turnaround
management.
The chapter presents a case study of primary as well as secondary data
analysis of three companies. Three research methods were used during this
phase of the study, i.e. semi-structured interviews, archival records and
document analysis. Interviews were held with the MD or the CEO of each
company in their own offices. Additionally, the Annual Reports for each
company covering the whole period of turnaround were analysed as part of
archival record analysis. Additionally, when this was done, an Internet search
process for further information about the cases was conducted, to generate as
much data as possible about each case as part of the documentation analysis
method, to increase the reliability of the collected information.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-3
The chapter investigates the companies from a stage theory perspective
identifying the turnaround process and its key stages for each company
individually, with emphasis on the key lessons, which can be learned from each
case.
6.2 Castle Dairies Ltd (CD)
Castle Dairies Ltd (CD) is one of Wales’s most famous food manufacturing firms
situated in Caerphilly and proud to be an award winner for organic and
conventional butters for the UK wholesale and retail markets (CD website,
2012). It was reported on the company’s website that, “The company is proud
to be Welsh and is owned and run by the Lloyd family since it was established
in 1968” (CD website, 2012). The company is also proud to be the only dairy
producer in Wales that has the capability of both churning and packing butter,
with extra attention given to customers through their, “Rigorous quality
assurance program” as was described on the company’s website (2012).
CD offers various services to their customers such as bulk butter sales (salted
and unsalted), organic butter supply (salted and unsalted), contract processing
and packaging (when the company only transforms customers bulk buy into
small/bigger blocks in different packaging and under customers own brand or
CD’s own brand depending on requirements) (CD website, 2012).
Figure 6.1 shows a period of financial decline that the company went through in
early 2000. That period was characterised with negative profitability, decline in
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-4
performance and cash flow problems. In the same figure, a successful
turnaround can be seen towards the second half of the decade characterised
with a positive profitability. What had led the company to fall into a negative
profitability position early in that decade, were the strategies used to reverse
decline and how the management underpinned their strategies successfully?
These are the types of questions that the following sections will seek to answer
and to identify the key success factors of CD’s turnaround.
The section will investigate the turnaround experience of the company from a
stage theory perspective, identifying the steps that the management followed to
achieve their turnaround successfully. The analysis represents information
obtained from the MD of the company during the semi-structured interview,
information from documents offered on the company’s website and from Annual
Reports obtained from Companies’ House.
Adapted from: (CD Annual Reports, 2001- 2007
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-5
6.2.1 Decline stage
6.2.1.1 Recognition of decline
When the MD, Nigel Lloyd (NGL) was asked how the management recognised
decline, he reported that decline was obvious in many different ways. He
explained that the first one was the monthly financial results, which were
showing losses. NGL added that the management of the company did not
know how to deal with those losses, despite the small size of operations they
had at the time. NGL stated that:
At that stage we were manufacturing cheese, which was our
number one product and most of that cheese was special cheese
that we manufactured for the US, as well as some trading
companies in the UK. We had a very small butter packing
operation for one or two customers. We also had a large what we
call, ‘spray milk drier’ for dried milk powder in the middle of the
factory and that was it as far as the activities went.
(NGL)
NGL added that another sign was the inability to fund operations stating that:
Plant and equipment needed a lot of investment to bring them up
to modern food manufacturing standards and that investment was
not there. Also, the conditions in the factory were sending out
alerts. At that time I wasn’t at senior management level,
nevertheless, I could see there were problems.
(NGL)
6.2.1.2 Change of leadership
When NGL was asked if there was any change in the TMT during the early
stages of turnaround he asserted that a new MD to manage the company out of
decline was appointed in 2003. However, he stated that, “He turned out to be a
complete disaster. He stayed for six months without adding anything to the
business”.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-6
NGL who was enrolled on an MBA program in the Open University in 2003,
decided to manage the company out of those problems after permission from
his dad to take over the position. When NGL was made the MD and took over,
he conducted his own investigations, as he was aware that some of the issues
in CD were directly related to his family’s involvement in the business.
NGL further explained that a detailed business plan highlighting the current
problems and the proposed solutions to update the bank and other stakeholders
was required immediately, due to the deteriorating cash flow position that might
lead to unpleasant withdraw of stakeholder support.
6.2.2 Analysis of decline situation
When NGL was asked about the analysis process and what tools he used to
gather information, he reported that he looked at the financial ratios they had
and spoke to the management and staff in the facilities as part of his daily
routine. He explained that he wanted to know what was happening and why
things were going wrong and the only way to do this was by listening and
watching. NGL made it clear that certain issues needed thorough investigation,
in order to draw a plan that outlined all the major issues with the company as it
was seen by its employees and management.
6.2.2.1 Viability and Competitive advantage
It was reported in the Annual Reports of the company that CD had a competitive
advantage of been experienced in the dairy product market since 1967, with
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-7
firm links to suppliers and even competitors. Furthermore, skilled staff and
good relationships with customers stood as viable advantages that the company
could build on in its turnaround and recovery.
6.2.2.2 Severity of decline and availability of cash
Findings from the Annual Reports indicated that the company had suffered mid-
term to late-term decline according to various decline signals (as stated in
Section 6.2.1.1). However, the change of leadership had allowed for an in
depth investigation and assessment of the company’s financial position in order
to allocate the cash needed for the turnaround process. Consequently, NGL
has approached the bank with a detailed business plan to obtain funds for the
turnaround process in the form of continuous financial support to pay wages
and other expenses (NGL, 2012). The detailed business plan outlined the
causes of decline and the proposed plan to eliminate such causes and achieve
recovery and growth.
6.2.2.3 Causes of decline
The investigation process revealed various (internal and external) causes,
which contributed to the decline of CD as follow:
Internal causes
NGL explained that there were many internal inefficiencies and high costs in the
company that led it into negative profitability, which can be summarised in the
following:
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? NGL explained that sales had reduced in the last few months of 2002
and they had no control over these sales, because the market was
dominated by two large traders buying from manufacturers such as CD
and selling on to retailers. He added that this is the reason behind his
father’s lack of attention to recruit a sales team and was why they did
not have one, which was, as he described it, “dangerous” because the
whole business was reliant on only two customers.
? Outdated equipment and inefficiency in energy use leading to high costs
of utility bills, was a cause of decline that was mentioned by NGL in the
interview. He explained that the factory needed lots of investment to
replace outdated equipment and systems, which were causing major
high-energy consumption, time losses and high levels of waste and this
investment was not available.
? Low profit margins were another cause that was found apparent in the
Annual Reports 2002, 2003 and 2004. The profit margins did not reflect
the increased cost of raw material and other operational costs such as
distribution.
External causes
NGL further explained that other external causes contributed to the negative
profitability of CD, which can be summarised in the following:
? A fire started in the middle of the production area in 2005 that burnt
down the drying facility and notably, the insurance company rejected a
claim for this (NGL, Annual Report 2005). NGL explained that the fire-
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-9
damaged facilities reduced their production capabilities and added
further pressure on supply and overall sales volume.
? NGL reported that CD used to receive a subsidy (rating of export) from
the European Union for every ton of cheese exported outside the EU
market. However, that subsidy was gradually reduced until it was
completely stopped in 2004. This had led to decreased exports to the
US market in 2003 by over 77% compared to 2002 and had led to £162k
of losses (NGL, Annual Report 2002). It was clarified in the 2005
Annual Report that the cheese operation, which is the main activity of
the business, had become loss making.
? High cost of raw materials was another problem, which was mentioned
earlier. NGL explained that another difficulty they had was that CD
relied on the purchase of surplus milk of desperate sellers at reduced
prices. However, since farmers restructured themselves into stronger
selling groups and they opened a big milk drying factory in Westbury to
save any surplus milk from being sold cheaply on the market, the milk
prices were holding strong through the year so there were less
discounted prices, which again affected their cost base negatively
(NGL). Additionally, other increased costs had contributed to the losses,
for example, the cost of distribution had increased by 49% in 2002
compared to 2001 despite the increase in sales of only 44%.
? Increasing costs of energy and environmental treatments were also
mentioned as causes of decline in the 2005 Annual Report.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-10
6.2.3 Formulation, implementation and stabilisation of the turnaround
stage
When NGL was asked, what had he based his turnaround plan on and what
strategies were used to manage the company out of decline, he reported that
he introduced a business plan to his father and the rest of the management
team before he became the MD in 2003. He explained that the plan evolved
around expanding the butter churning operation, but the plan was rejected.
However, when the situation deteriorated six months later and he took the MD
position, he managed to convince his father to take up his plan. A very detailed
business plan was introduced to the bank, which was based on the butter
churning and packing operations as the way out of decline. NGL explained that
the plan had to have a high level of detail, such as the number of employees
needed and the number that would be made redundant, knowing that the bank
would keep a close eye on the company’s PLA against projection, during what
he described as the, “intensive care period”. The short-term turnaround plan,
which was implemented, is explained below:
Managerial restructuring
“The Production Manager we had at the time didn’t think he was the right man
for the job. However, because he worked for my dad for years, we invested in
him to be the Technical Manager and he did a good job on that side and a new
Production Manager was recruited”.
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6-11
This statement made by NGL shows that a need to restructure the management
team of the company was essential due to errors made by the previous
management. Interestingly, this finding emphasises that moving management
around the company can be more beneficial to the company than removing
them completely. NGL further added that in 2003 a Sales Manager was
recruited stating that, “Sales are a critical element that my dad didn’t have”.
This was aimed at targeting more customers and trying to promote the new
Welsh butter range to avoid a problem of being limited to an inadequate
numbers of customers (NGL, 2012).
Operational restructuring
? Cost cutting strategy:
NGL asserted that controlling costs was one the most important key measures
during that period, especially with the deteriorating cash flow situation stating
that, “Cost cutting should be done as quickly as you can in the business to buy
you some time”. Therefore, various measures were taken such as having all
spending requests signed by NGL himself, this was to bring all spending under
his direct control. In addition to this, NGL stated, “We looked through our
monthly accounts expenditure, eliminating some unnecessary spending and
because I did it in detail, it was easier to monitor”. Additionally, NGL asserted
that he focused on all the costs line by line and tried cutting them one by one
until he got it streamlined.
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6-12
NGL further explained that the cheese operation was reliant on staff overtime
costing the company a massive sum. Therefore, overtime usage was reduced
to a minimum to reserve as much cash as possible and eventually the cheese
operations were replaced with butter operations, eliminating all the costs that
were associated with it.
? Cash generation strategy:
NGL reported that cash flow was an issue that needed to be sorted out to speed
the process of receiving money from customers to boost cash flow. Various
actions were taken to generate cash, which are listed as follows:
? A new invoice discount system was introduced to customers (meaning
that as soon as products left the factory, an invoice was issued to the
customer for payment of 60% of the invoice immediately) to help
improve cash flow.
? Payments to creditors were delayed to give the company some extra
time and the spending needed for daily operations.
Asset restructuring
? Asset divestment
NGL asserted that the decision to leave the cheese market was taken because
by the time he wanted to expand their market share of cheese products, there
was no space for the company because all niches were taken by competitors.
NGL explained that he tried to stay in the market by introducing an NPD
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-13
program to develop low fat cheese, which was exported to the US market, to a
cheese that could be sold here in the UK, because low fat food at that time was
a growing market. However, this program had failed due to technical issues
with the shelf life. Therefore, an onsite auction was held to sell unnecessary
equipment to create space and generate a sum of cash needed for turnaround
(NGL).
? Asset investment
Findings also revealed that an investment was made in the butter churning and
packing operation to increase sales and market share. The investment money
mainly came from the sale of the cheese making equipment and the use of cash
reserves as mentioned by NGL.
Financial restructuring
When NGL was asked if financial restructuring was an important part of their
turnaround plan, he stated that:
Financial restructuring is definitely an important short-term
strategy because cash is the life blood of any company. I know
there are many companies that have been operating at a loss for
years, but it is only when it hits the cash flow they realise that they
need to turnaround or they will be out of business and the bank is
never going to run after you.
NGL reported that when he met the bank in 2004, he was worried that the
financial help would stop, due to the problems mentioned earlier with
developing the short-life cheese. Consequently, a new plan evolved around the
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-14
butter churning operations was introduced and the bank kept a close eye on
profit accounts against projections and the funding for operations continued.
6.2.4 Recovery and return to growth stage
When NGL was asked if long-term strategies were required to ensure full
recovery and return to profitability, he confirmed that operational restructuring
remained the centre of focus during the long-term. For example, he asserted
that a court case was filed against the insurance company in relation to the
rejected claim after the fire, which was settled with a £350k pay-out to CD in
2007. NGL stated that, “We made a provision every month to build up some
money to fund legal activities. We had a successful claim at the end with the
insurance company and this money sorted out some cash problems”.
Additionally, further strategies were required to maintain improvement and
support the new competitive advantage of the company, mainly in the form of
asset investment and financial restructuring explained as follows:
Asset restructuring
? Asset investment
Following the divestment of the cheese making operations, an investment was
placed in the butter packing and churning operations as stated in the 2006
Annual Report. NGL reported that the Welsh butter brand is famous across the
country and NGL noticed that there were many butter products branded as
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Welsh butter on the shelves of supermarkets despite the fact that CD is the only
company in Wales with butter churning and manufacturing operations.
NGL believed that this was their niche in the market that can generate a lot of
business for the company, so he reported that he contacted the Trading
Standards Authority and discussed the matter and as a consequence of this,
most of those products on customer shelves were replaced with real Welsh
butter made in CD within 18 months after placing an investment in the butter
churning facilities. NGL stated that:
This move generated a lot of sales and profits more than we
expected. We used this money to reinvest back into the business.
This allowed us to hold massive stocks of frozen butter putting us
ahead in the market because there are not many companies out
there that can have 400 tons of butter in stock.
Furthermore, It was found from the Annual Report of 2007 that financial help
was also needed in the long-term as CD had received a grant from the Welsh
Assembly Government to invest in updating the company’s butter churning and
packing operations and replace old equipment with new automation capabilities
to speed production, reduce waste and boost sales. However, there was no
evidence found that equity or debt-restructuring actions were taken during this
time. The role of the bank in this case was limited to the continuation of funding
operations during the turnaround period.
He reported that investment in new up to date facilities was the key factor. He
stated that:
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By 2007/2008, we decided to make an investment in the factory to
replace the previous poor set-up we had. So after we cleared out
the cheese making equipment, we encapsulated state of the art
production units within the factory. We expanded the butter
packing lines by putting in an extra line. We also replaced many of
the manual handling operations with equipment such as pumps
and conveyers. After these investments, we felt happy and so did
our customers.
NGL asserted that cash was the most important element in their turnaround. He
stated that, “I learned that I had to closely watch our overheads and spending at
all times, because money can easily go down the drain and that is what I have
been doing since” (NGL).
6.2.5 Summary of the turnaround of CD.
From what was presented and discussed above, it can be said that the case of
CD was a successful turnaround experience that relied on strong management
skills, a good relationship with the bank, various operational changes,
successful NPD and strong awareness of changes in the external environment.
It can be concluded as shown in Figure 6.2 that the turnaround process started
with the appointment of NGL as the new MD, who investigated the decline
situation and identified the competitive advantage of the company and the
causes of decline that led the company into failure. Then, during the
formulation and implementation stage, a new opportunity was identified and the
turnaround plan evolved around it (i.e. butter churning, production and packing
operations).
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It was found that the company lacked cost control measures, sales strategies,
long-term vision and a stable position in the marketplace. The new turnaround
strategy was based on divesting the loss making cheese facility, reducing costs
and general spending in all parts of the company and diverting all efforts,
resources and focus into butter churning and packing operations, to expand
sales and market share. In the long-term, the company maintained high levels
of cost control and invested in new equipment to improve productivity and sales.
6.3 Glanbia Cheese Limited (GC)
Glanbia Cheese Limited (GC) is the largest mozzarella cheese manufacturer in
the UK and Europe (GC website, 2012). GC is a joint venture between Glanbia
PLC (an international nutritional solution and cheese group based in Ireland, a
world leader in value-added dairy ingredients) and the Leprino Foods Company
(the world’s largest mozzarella producer, based in the US with customers in
over 48 countries with over 50 production patents) (GC website, 2012).
The CEO of the company Paul Vernon (PV) reported that the company had
been in business for more than 21 years, starting off with a small plant in Wales.
The company with its small plant, merged with Express Foods (based in
Northern Ireland) in 1997 and was reformed in 2002 into two companies (i.e.
Glanbia Cheese and Prima Foods) and both companies were leveraged giving
the company a global network (PV). PV stated that:
The company has three sites of which two have manufacturing
facilities (one in North Wales and one in Northern Ireland) and this
site in England, which is the Head Office, where we have the
directors, sales team, technical team and me.
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The company has a history of profitable performance; however, the company
went into a decline period in which it suffered several years of negative
profitability between 2003 and 2007 as shown in Figure 6.3. This was followed
by a turnaround experience in 2008, managing the company safely out of the
negative profitability position. The story behind the company’s decline and
successful turnaround is investigated below.
Adapted from: (GC Annual Reports, 2002-2009)
6.3.1 Decline stage
6.3.1.1 Recognition of decline
It was found apparent in the Annual Reports that the company had a continuous
growth year on year between 2001 and 2006. However, this rise in turnover
was accompanied by the increased cost of operations and other administrative
expenses, which brought the company into a negative profitability position. The
main decline signals as described in the Annual Reports 2003-2005 are
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declining, negative profitability and concerns by the company’s senior
management about cash flow and profitability.
6.3.1.2 Change of leadership
It was found from the Annual Reports (2001-2009) of the company that the CEO
(PV) who joined the company in 1995, had stayed to manage it through the
turnaround process and there was no change in this position. This, as clarified
during the interview, was because decline was attributed to external factors and
not to the company’s leadership team as will be explained later in Section
6.3.2.3.
6.3.2 Analysis of decline situation
6.3.2.1 Viability and competitive advantage
PV asserted that being the biggest in the market, having multiple sites, being
focused solely on one type of product (cheese) and with a multi-customer sector
(e.g. restaurants, retailers and takeaways) had made the leadership team very
confident that this negative result was only temporary and GC would return to
profitability upon some internal changes. He added that the company still held
its strong competitive position in the marketplace despite the deteriorated
profits.
6.3.2.2 Severity of decline and cash availability
Findings from the Annual Reports indicated that the company had suffered mid-
term decline according to various decline signals. However, the situation was
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not in such a position that it was unable to meet its debts. PV reported that GC
continued in operation, whilst being able to analyse causes of the temporary
decline in order to make changes.
6.3.2.3 Causes of decline
When PV was asked about the causes of decline, he asserted that the
management knew what was wrong with the company, but the solution would
take some time due to constraints on sales contracts and other factors. He also
added that the causes of decline were both internal and external, which can be
explained and summarised in the following:
Internal causes:
Lack of asset utilisation was reported as the biggest problem facing the
company at that time. PV explained that the company was only operating for
four days per week. He explained that this had put huge financial constraints
onto the company, due inefficiency in operations, low productivity, high waste
levels and high costs. PV reported that this had to change to maximise asset
utilisation and increase productivity and sales.
Furthermore, the increase in raw material prices, mainly milk prices had caused
a major increase in overheads. PV explained that nothing could be done
because this happened while they had fixed contracts with customers, which
would not allow them to alter prices to reflect increases in raw material costs.
PV stated that, “The relationship between the selling price and the cost price in
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our business is quite critical because we are reliant on milk, which is where the
biggest chunk of our costs go. If you realise that raw material prices are
uncontrollable, you should try to mitigate that and find a different option to
overcome the problem” (PV).
External causes:
PV reported that high exchange rates was another cause of decline to GC, that
affected its sale price negatively and its profitability. PV stated:
We are located in the Sterling zone and about 40% of our sales go
to the Euro zone and our competitors are in the Euro zone. In the
last few years, we have seen the exchange rate go higher so we
get less money. The movement in the prices affects our costs and
obviously the profit.
(PV)
In addition to this, it was reported by PV that other exceptional costs had added
to the negative profitability the company had suffered. An example of this was
the large pension cost of £604k in 2005, which put the company into a negative
profitability position.
The combination of internal lack of asset utilisation, combined with external
changes and increased costs had formed a huge obstacle for the company’s
profitability and immediate action had to be taken and implemented urgently.
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6.3.3 Formulation, implementation and stabilisation of the turnaround
plan
When the CEO was asked about the strategies, which were used to tackle
decline, he asserted that there were various actions taken to rectify the errors,
which were identified within the business. He concluded the overall strategy
stating that, “What we aimed at is selling more, producing more, and using our
assets in a much more productive way”. PV asserted that, “Numerous changes
had to take place to remove all blockages to the new strategy”.
However, PV stated that implementing change in the food industry is a huge
mission because management had to implement change alongside running the
daily operations. He explained:
This is the nature of the food business to run projects alongside
the daily operations, because you can’t take plant out to retool for
example, like car companies, unless you’re able to rebuild a stock
to cover you for the lost time which is not going to be long.
Guided by the theoretical model in chapter two of the study, those short-term
changes will be divided and explained in respect of the four restructuring
strategies in the sections below.
6.3.3.1 Managerial restructuring
When PV was asked if there were any managerial changes in the lower levels
of management, he confirmed that some managers were replaced to remove all
blockages that rejected the new strategy, which aimed to improve the overall
working environment. He stated that, “You need to have the right people to
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implement the strategy. I divided the strategy into tasks and every manager is
to implement their tasks”. In support of this, findings from the 2005 Annual
Reports show the replacement of three company directors on 19
th
July 2005.
6.3.3.2 Operational restructuring
Cost cutting strategy:
When PV was asked about the role of cost cutting in their turnaround strategy,
he asserted that the short-term strategy was based on increasing volume,
reducing overheads and keeping tight control on expenses. He explained that:
“We compared costs to budgets on a monthly basis, especially
energy that we can take actions on unlike raw materials, which we
cannot control. We utilised the equipment by adapting equipment
that is more efficient and uses a moderate amount of energy”.
Cash generating strategy:
PV explained that cash flow was a critical aspect, which must be focused on in
order to improve it. PV reported that this was done when:
We reviewed our portfolio to see who are the customers that we
should keep (who have the capacity to grow?) and which ones we
can get rid of. But this requires us to differentiate ourselves from
other competitors in the market, because what customers try to do
is to commoditise their purchases, so they can buy from every one
because the price is the main thing.
PV asserted that many changes to improve cash flow were implemented and
they can be explained as follow:
? In 2005, long-term contracts (with a fixed sale price) were replaced with
short-term contracts (one/two months long) to reflect any increase in raw
material prices and any other costs in the final sale price of the product.
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PV asserted that this relied heavily on the negotiation skills with
customers and suppliers to highlight the importance of achieving a fair
profit margin for the whole chain (supplier, producer and customer) to
achieve sustainability of supply and stay competitive in the marketplace.
? Strengthening the relationship with customers based on good service
levels and reliability of supply. PV explained that it was difficult to
strengthen the relationships with customers by offering long-term
contracts with fixed prices, due to the volatility of raw material prices.
Instead, PV stated that, “What we tried to sell, as well as the product,
was our contingency of supply (two factories) and ability to grow with our
customers to establish a long-term relationship”.
? Overcome the problem with the foreign currency exchange rate. The
CEO asserted that a close eye was kept on any changes in currency
rates and decisions taken accordingly to reduce any impact on the
company’s profit margin.
6.3.4 Recovery and return to growth stage
It was reported in the 2009 Annual Report that the Board felt happy with the
company’s improved performance and would continue to invest in and improve
its processes to ensure future success. PV reported that the management felt
satisfied in 2010 with the performance of the company after a profit of nearly
£6.8m. PV asserted that improvements would continue focusing on achieving a
minimum of 5% return on sales, to continue growth by focusing on maximising
asset utilisation, cost control and passing any increase in raw material prices to
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customers to ensure profitability. No evidence was found for any other
strategies in addition to operational restructuring during this stage.
6.3.5 Summary of the turnaround of GC
From what was revealed in the interview with PV, the CEO of GC, in addition to
what was found apparent in the Annual Reports of the company and despite the
fact that the company was managed through its turnaround by the same leader
who managed the company during decline, it can be said that the company’s
turnaround experience was a challenge that was managed successfully until
recovery was achieved. The company’s competitive advantage and causes of
decline were successfully identified and then a suitable set of actions were
implemented to each cause of the decline during the short and long term to stop
decline and return the company to profitability and growth.
6.4 Peter’s Food Services Limited (PFS)
Peter’s Food Services Limited (PFS) is the biggest pastry producer in the UK
with over 10 distribution centres around the country, supplying over 13,500
customers per annum with a large range of products that exceeds 900 (e.g. fish
bars, restaurants, cafes, retailers, schools, hospitals and hotels), all of which
are manufactured and packed in South Wales (PFS website, 2012). The
company has been in the business for over 50 years and started as a small pie
manufacturer in Merthyr Tydfil (South Wales) supplying the surrounding valleys
with pies, sausage rolls and pasties (PFS website, 2012).
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In 2000/2001, the company acquired the trade and assets of Green Country
Foods Limited (GCF) (a sandwich manufacturer) to fill a gap that the company
had in its range of chilled products. However, this was found to be
unsuccessful and the trade and assets of GCF were disposed of in 2003,
costing the company a large sum of money.
Additionally, it was stated in the 2002 Annual Report that PFS had acquired
another company called Glanbia Food Service (GFS) to increase the
distribution side of the business and create a supply chain in the modern
Tamworth site, which was part of the acquisition. However, this also proved to
be an unsuccessful strategic move and ended with the disposal of the business
in September 2004.
However, PFS had a profitable history, as can be seen from Figure 6.5 below.
The company experienced a period of negative profitability and decline in
performance between 2002 and 2004, during which time cash flow was a
growing problem that was threatening operations. As can be seen in the figure
below, negative profitability was turned into positive profitability and the
company was turned around by 2006. The next few sections will investigate all
the key issues relating to the turnaround experience of PFS, to identify the key
lessons which can be learnt from this successful experience. The case, similar
to previous cases, will be investigated from a stage theory perspective guided
by the theoretical model developed in chapter two of the study.
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6.4.1 Decline stage
6.4.1.1 Recognition of decline
When the MD of the company Grim Wood (GW) was asked how did the
management recognise decline? He stated that:
The board recognised the decline simply because the profit flow of the
business had turned negative. We basically relied on a financial based
model and the operating profit turned into losses, the reserve started to
decline and the main thing was that the team understood the problem
that the cost of operation was much higher than expected. So it was
straightforward financial modelling.
GW added that negative profitability was a daunting sign of decline that alarmed
him to the worsening situation and stressed the need for quick actions to be
taken to tackle the problem.
2,569
-1,317
-4,965
-6,006
1,477
1,172
-7,000
-6,000
-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
2001 2002 2003 2004 2005 2006
FIGURE 6.3: PROFIT AND LOSS ACCOUNT FOR
PFS
M
O
N
E
Y
IN
£000
PRE-DECLINE
YEARS
DECLINE YEARS TURNAROUND
YEARS
Adapted from: (PFS Annual Reports, 2001-2006)
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6.4.1.2 Change of leadership
When GW was asked if any of the leadership of the company had been
replaced as an early step of the turnaround process he stated that, “Some
people have stayed through the turnaround”. GW explained that no changes
took place in relation to any of the ownership, leadership or the Board of
Directors, because the company at the time was privately owned and they
believed that decline was not caused by management error.
6.4.2 Analysis of decline situation
6.4.2.1 Viability and competitive advantage
When GW was asked if a viability check was carried out to see if PFS had a
good chance of recovery after the consecutive years of losses, he answered,
“The company was obviously viable; the problem was in one division which had
recently been acquired”. He also confirmed that PF was strong in all other
operations based on its long experience and being the biggest in the market,
this reassured the company that recovery would be restored.
6.4.2.2 Severity of decline and availability of cash
Findings from the Annual Reports indicated that the company had suffered mid-
term decline, according to various decline signals (as stated in Section 6.4.1.1).
However, it was found that the TMT was confident that the company would
overcome its problem due to a full awareness of the causes of decline.
6.4.2.3 Causes of decline
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Internal causes
It was found apparent from the Annual Reports of the company that various
internal factors had played an important role in the decline of PTS. These
causes are listed in detail as follows:
? An exceptional cost (£1.12m) of goodwill associated with the previous
acquisition of GCF Limited in 2001, was taken off the operating profits
bringing the company under the breakeven point in 2002.
? High cost of closure of GCF had brought the company to a negative
profitability position in 2003. For example, the disposal of GCF had cost
the company over £1.3m in redundancy payments and contract
termination costs, in addition to a £4m depreciation charge on the fixed
assets.
? Inefficiency and high cost of operations in GFS negatively affected the
final profitability.
External causes
There were also some causes that were out of the company’s control, which
can be listed as follows:
? A major long-term contract with one of the wholesale customers was lost
to a competitor in 2001, due to a decision by the customer not to renew
its contract when it came to an end. It was stated in the Annual Report,
“Turnover fell slightly and operating profit before exceptional goodwill
amortisation was reduced” (Annual Report, 2001:1).
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? Low profit margins on the distribution service to one of the company’s
major customers had participated in the fall of the company into a
negative profitability position in 2003 and 2004 (Annual Report, 2004).
When GW was asked about the reason for the bad acquisition, he stated that:
The company had been put in the position by one of its major
customers that it either lose all of its current business or acquire
another business, which at the time was the Glanbia Food
Service. The company decided to acquire this and when they
commenced the new contract, found that it was losing a significant
amount of money week in week out, month in month out.
GW explained in the interview that post the acquisition of GFS, customers were
not tolerant to any increase in the service prices provided to them from GFS.
This statement was supported by the Annual Report 2004, in which it was
stated that, “It proved difficult to reduce the cost base to a level at which
customer expectation on both price and service level could be satisfied” (Annual
Report, 2004:1). GW explained further that the team of management
understood the possible failure of the acquisition when they signed the deal, but
they felt helpless to reject the proposal made by that customer (who was their
biggest customer at the time) because they were worried about losing their
market share to competitors.
GW clarified that the difficult position that the company was put in, had led them
to make difficult decisions, which eventually led the company into decline. GW
reported that one of the main problems associated with the acquisition of GFS
was the huge operational costs; meanwhile the customers were not prepared to
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pay the right price for the service leaving no profits. GW explained the reason
behind that decision was:
That they were in the position of, win this business or lose that
business. Is that the customer’s fault? Well buyers try to buy as
effectively as they can. If all of a sudden they put the business in
the position of lose it or else, then sometimes decisions are made
out of desperation. You could not blame anybody for it. It was a
straightforward commercial advantage caused by the customer
thinking they can get a good deal.
6.4.3 Formulation, implementation and stabilisation of the turnaround
plan
When GW was asked if there were any changes in the company to manage the
company out of decline, he confirmed that one of the important changes which
took place, was that the Financial Department of the company had an increased
influence on operational and strategic decisions than previously. He explained
that:
Since the acquisition was an operational decision, then all of a
sudden the financial voice of the company got larger, so the
Finance Director was able to say no… this does not work. So,
where you would normally have the operational side of the
company winning the day, all of a sudden, because of the financial
under performance of the business, the financial side suddenly
had a much bigger voice on what could and couldn’t be done.
When GW was asked if they were short-term and long-term orientated during
this stage, his answer was:
Yes, we pretty much did, the short-term strategy was all about
stopping the profit bleed and the management implemented that in
the form of cutting as much cost as they could. The medium–term
strategy was trying to get some customers to pay more or get rid
of them and we managed to do both. So they managed to get
customers to pay more and got rid of business that was not
contributing much to the margin. Then the long-term strategy was
the asset divestment of the acquired company.
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The changes, which took place in the company, can be explained in respect of
the four major strategies in the next four sections.
Managerial restructuring
The MD reported that managerial restructuring was implemented in the form of
replacing some of the management in GFS with some management from PFS,
to keep a close eye on operations and any serious problems. For example, he
stated that:
There was a lot of attention put on the Glanbia division, which was
struggling to become more efficient. For example, David Peak the
Finance Director worked in that business for about six months and they
moved other managers to that division to make it as cost effective as it
could possibly be.
GW added that, despite the high cost of operations, if the customer agreed to
pay the right price for the service, the acquisition could have worked
successfully. However, since they did not want to do this, the management felt
helpless to make it work. Therefore, despite the managerial restructuring
activity, it was pointless because the problem was completely due to external
intolerance on the customer’s part to pay the right price for the product.
Operational restructuring
? Cost cutting
GW asserted reducing the cost base during the three-year period of 2002, 2003
and 2004 was critical to their recovery from negative profitability. He reported
that this was seen as the short-term option until further strategies took place in
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order to minimise the losses. It was reported by GW that spending was
restrained to a minimum across the whole business by increasing the pressure
on management.
? Cash generation
GW asserted that the portfolio of the company’s products and customers was
reviewed to eliminate weak ones, who were not contributing to their profit
margin and keep the ones that were profitable. GW reported, “It was very
much… very close focus on P&L (profit and loss account) lines and cost lines
and off course cash flow. Also, the management was very focused on being
efficient and as cost saving as possible”.
GW also added that various trials were made by the management to convince
the customer that a fair increase in the price of the distribution service offered to
them was due, but the customer was intolerant to any price increase for this
service leaving no option for PFS except to divest the GFS business.
Asset restructuring
? Asset divestment
It was found apparent from the Annual Report 2004, that the GFS business was
divested in September 2004 to eliminate the loss making operations,
concentrating on the profitable operations of manufacturing and the van
distribution service and return to profitability as soon as possible. It was
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reported in the 2004 Annual Report that this strategic move had allowed the
company to focus on its profitable operations in the PFS division, leading to a
reduction in the net liabilities by £7m in 2004.
Financial restructuring
The MD asserted that there were no loans borrowed from the bank and financial
liabilities were met from income, reserve and overdraft allowances. However,
he asserted that it was a hard task because the management had to make sure
they had enough money to pay wages and for materials. He asserted that
during that time, the bank had kept a close eye on the company to ensure
improvement in the financial position and provide help if the situation worsened.
Notably, the company’s management did not share problems with suppliers
because it was keen to meet all payments on time.
6.4.4 Recovery and return to growth stage
Further findings from the Annual Report of 2008, showed that the long-term
strategy evolved around continuing to maintain operational improvements and
continuously reviewing the situation, processes and customers to ensure high
levels of efficiency. GW asserted that many changes took place to stop the
company from falling into the same position again stating:
There is one very important lesson, which is that we have a set
percentage of our business for any customer, which is 20% to stop over
concentration on one customer. This was done to stop the problem from
happening again of letting the customer manage our business.
GW
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When the MD was asked, when did he feel the company had recovered? He
reported that they felt that their hard work to divest GFS had paid off when they
signed the sales contract. He added that they felt ready to move on, learn the
lessons and monitor all operations in PFS, to ensure the return of the business
to efficiency and growth.
6.4.5 Summary of the turnaround of PFS
The PFS case was found to be an interesting case study that had unique
circumstances. PFS was proven to be a successful company that has fallen
under the domination of one of its major customers, leading the company to a
negative profitability. However, the turnaround experience had introduced
many key lessons for PFS and highlighted some weaknesses in the
management that had to be altered and changed.
The turnaround of PFS can be concluded by eliminating the cause of the
decline in the first place. As was found apparent, the leadership of the
company (unchanged) had allocated the causes of decline, implemented some
operational restructuring strategies to reduce its overheads, generated some
cash and stabilised operations in response to high operational costs and low
profit margins. Additionally, some managerial restructuring activities took place,
by moving some of the managers around from the PFS site to the GFS site to
improve operations. Furthermore, in 2004 the company divested the GFS site
and eliminated all costs associated with that division as an important step
towards a return to profitability. Following this, the company achieved profits in
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-36
2005 and implemented some longer-term strategies to maintain this
improvement in operations and profits, such as cost control measures,
increased sales and investment in processes and equipment.
6.5 CROSS-CASE ANALYSIS
This section is designed to analyse and discuss findings from this case, which
represents the second phase of the study which combined three large food
manufacturing firms (two based in Wales and one based in England), with
successful turnaround experiences. Following the same theoretical framework
across the whole study, this section will analyse and discuss findings from a
stage theory perspective, covering the whole turnaround experience.
Company
CD
GC
PFS
Decline Recognition of decline ? ? ?
Change of leadership ?
Analysis of
decline
Is the company viable for turnaround? ? ? ?
C
a
u
s
e
o
f
d
e
c
l
i
n
e
Internal
Bad management ?
Organisational factors ? ? ?
External
Political factors ? ?
Economic factors ? ? ?
Competition factors ?
Social factors
Technological factors
Formulation,
implementation
and stabilisation
of the plan
S
h
o
r
t
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring ? ? ?
Operational
restructuring
Cost cutting ? ? ?
Cash generation ? ? ?
Asset
restructuring
Asset divestment ?
?
Asset investment ?
Financial
restructuring
Debit restructuring
Equity restructuring
TABLE 6.1: SUMMARY OF THE CROSS CASE ANALYSIS (3 IN-DEPTH
UK FOOD MANUFACTURING COMPANIES)
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-37
Adapted from: Annual Reports for CD, GC, PFS (2000-2010)
6.5.1 Decline stage
6.5.1.1 Recognition of decline
Findings from the cases in this chapter indicate that decline was recognised by
TMT in its early stages, mainly by looking at the financial ratios. Decline
signals, such as monthly financial losses (as in the case of CD), declined and
negative profitability (as in the case of GC), high cost of operations and
negative profitability (as in the case of PFS), have required the TMT in those
companies to take actions proactively to stop further deterioration and turn their
companies around.
6.5.1.2 Change of leadership
Change of leadership was emphasised in the turnaround literature as one of the
most important steps in company turnarounds. Findings from this second
phase of study showed that despite the importance of change of leadership at
the onset of the turnaround process, it is still not an essential component of
every successful turnaround if the cause of decline was not down to
management/leadership. This finds an echo in the turnaround literature as an
opposite view (e.g. Whitaker, 1990) to the dominant idea of necessity for this
Recovery and
return to growth
L
o
n
g
-
t
e
r
m
t
u
r
n
a
r
o
u
n
d
s
t
r
a
t
e
g
i
e
s
Managerial restructuring
Operational
restructuring
Cost cutting ? ? ?
Cash generation ? ? ?
Asset
restructuring
Asset divestment ?
Asset investment
Financial
restructuring
Debit restructuring
Equity restructuring
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-38
strategy to take place to initiate the turnaround process. For example, change
of leadership was seen as an essential element of the success of CD in its
turnaround, because it was reported that the cause of decline was related to the
lack of leadership in understanding the business, improving the business
operations in general and their sales strategy in particular. Meanwhile, in the
other cases (i.e. GC and PFS), change of leadership was found to be un-
necessary, because decline was attributed to causes that were not related to
lack of leadership.
6.5.2 Analysis of decline
6.5.2.1 Viability and competitive advantage
A viability check to ensure that the company is able to return to profitability is
essential to the success of the turnaround process as it determines if the
business is still worth the investment and the turnaround (Finkbiner, 2007). The
viability check relies on the allocation and identification of any competitive
advantages the company holds, which can be enhanced during the turnaround
process to help the company to recover. Consequently, and according to the
findings, the common competitive advantages, which companies must have in
order to be able to recover and turnaround, can be concluded in the following:
1. Being a holder of a big share in the market with a large customer base,
such as the case of PF, the biggest pastry producer in the UK with a
huge product list and GC the biggest pizza cheese manufacturer in
Europe.
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6-39
2. Long experience in the field of industry with (and skilled staff) various
links to customers, suppliers and competitors in the marketplace such as
the case of CD.
6.5.2.2 Severity of decline and cash availability
Findings show that cash availability is a critical element that influences the
decision of the turnaround as it seeks to determine if a company is able to
continue operations, while implementing the necessary changes. Findings
show that the three leaders of the case studies were confident that their
companies were able to turnaround, using their own reserves and usual
overdraft limits.
6.5.2.3 Causes of decline
When a company is identified as viable for turnaround, the next step is to
earmark the original causes of decline. Based on the findings discussed earlier
in the chapter, a conclusion of the common causes of decline can be drawn in
the following:
Internal causes
1. Bad management: Bad management as a cause of decline was found
evident in this case study. For example, lack of management to develop
a sales strategy in the case of CD was a critical cause of decline, leading
to heavy reduction in sales during 2002.
2. Organisational inefficiencies: Findings showed that internal
organisational inefficiencies have played an important role in the decline
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-40
of the three companies. For example, outdated equipment was causing
CD a huge energy consumption as reported by NGL. Furthermore, low
profit margins was another cause that was found in all three cases, which
brought them to negative profitability. In addition to this, lack of asset
utilisation was another cause found in the case of GC, as the company
was only operating four days a week, causing low productivity levels and
high volume waste.
External causes:
1. Economic cause: Findings show that high costs was the most common
cause of decline mainly in the form of raw materials. For example, the
increased cost of milk had caused low profitability in the case of CD and
GC as it was the main raw material used for production. It was explained
that prices could not be altered due to fixed contracts previously drawn
up. Additionally, increased energy prices were another uncontrollable
cause that led to lower profit margins.
2. Competition: Findings show that competition had also been found as a
cause of decline in the case of PFS as it lost one of its major long-term
contracts in 2001. This has led to reduced sales and operating profits.
3. Political causes: Findings show that new legislation relating to company
pension scheme contributions had participated in the decline of GC in
2005 in the form of exceptional costs of £604k.
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6-41
6.5.3 Formulation, implementation and stabilisation of the
turnaround plan
Findings from this phase of study show that a combination of various activities
and strategies are required to tackle decline and bring the company back to
profitability. The turnaround strategies, which were used during this stage, can
be summarised and explained as follow:
Managerial restructuring
As shown in Table 6.1, findings from this study reveal that managerial
restructuring was an essential component of the turnaround strategy during the
initial steps in all cases in this phase of study. According to the findings,
managerial restructuring was conducted in two forms and they were:
1. Appointment of a new Sales Manager who was able to target new sales
contracts and customers such as in the case of CD.
2. Restructuring the management team in one or more parts of the
company, to remove managers who form resistance to the new
turnaround strategy and put in place new managers who were able to
improve efficiency of operations such as in the case of CD, GC and PFS.
Notably, it was found that such a strategy was implemented in cases where bad
management was a participating cause of decline.
Operational restructuring
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-42
Findings show that operational restructuring (i.e. cost cutting and cash
generation activities) was a very essential component for the success of the
turnaround strategy for all three cases. According to findings, it can be said that
operational restructuring took various forms, which can be concluded in the
following activities:
? Reduce spending and overheads
? Replace unprofitable products with profitable ones
? Replace long-term contracts with short-term ones to reflect any increase
in raw material prices on final products
? Increase sales to growing customers
? Reduce energy consumption
? Improve utilisation of assets and increase capacity
? Introduce a discount system to boost cash flow
Asset restructuring
? Asset divestment
Findings from this case study showed that asset divestment was an essential
component of the turnaround strategy during the short-term phase, in the case
of CD and PFS. Accordingly, findings from the study revealed that the use of
asset divesture in CD was due to the loss made from the cheese making
operations. Therefore, all operations, machinery and equipment were divested
and sold off. Similarly, in the case of PFS, decline was mainly related to the
GFS division, which was a total cash loss with massive overheads from day
one. This finding supports the view that asset restructuring is highly essential in
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-43
cases where it suffers decline due to internal organisational inefficiencies,
characterised with high overheads in one or more processes/divisions.
However, the findings also revealed that this strategy is not essential to all
turnaround cases.
? Asset investment
Findings shown in Table 6.1 emphasise that investment strategy was used in
CD during the short-term to improve the outdated equipment and systems,
which was another major cause of decline for the company. In this context,
findings showed that the use of this strategy during this stage was highly
connected to the outdated equipment and loss making cheese operations with
low profit margins. This asserts that despite the importance of this strategy for
CD, it cannot be said this is required for all turnaround cases during the short-
term stage.
Financial restructuring
According to findings from this case study, it can be said that financial
restructuring activities were not adapted for any of the cases. However, it was
reported by NGL and PV that mentoring the exchange rate and the market
condition is critical to ensure total control of the situation. It was also reported
that the bank kept a close eye on the situation, to ensure that scheduled targets
were met according to the new plans.
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6-44
6.5.4 Recovery and return to growth
Findings from the study indicated that the most dominant strategy for the long-
term phase was operational restructuring. It was reported by the three
companies that cost cutting and cash generation activities were implemented by
the three companies in the same way during the short-term, to maintain
improvements and stabilise operations. Additionally, in the case of CD, further
investment was needed during the longer term to bring the manufacturing
facility up to date in order to stay competitive in the market and boost growth.
This asserts that long-term strategies stem and follow on from the strategies
which were implemented during the shorter term, if further improvement was
needed.
According to Table 6.1, the three companies have achieved successful
turnaround by having two or more years of profits in the three years following
the last year of decline. This success in turnaround can be attributed to the
achievement in analysing decline and selecting the appropriate turnaround
options, during both the short-term and long-term phases.
6.6 Modified model of successful business turnaround
The revised model of successful turnaround as shown in the following Figure
6.4, is the outcome of the cross-case analysis process. The model represents
the theoretical framework from literature (see Chapter two), the initial model of
successful turnarounds (see Chapter five) and findings from this phase of the
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-45
study (earlier in this chapter, which were obtained via multiple sources of
evidences). The figure represents the turnaround process from a stage theory
perspective emphasising the four key stages for any successful turnaround
process, i.e. decline stage, analysis of decline stage, formulation,
implementation and stabilisation of the turnaround process and recovery and
return to growth stage explained in the following sections.
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-46
Recovery and return to growth
Successful Turnaround
(2 years or more of positive profitability
Positive
profitability
achieved
Operational restructuring
Maintain operation improvements
Asset Investment
NPD, staff training, new computer
systems & up to date equipments
Formulation, implementation and stabilization of the
turnaround plan
Mandatory strategy
(Operational restructuring)
Additional strategy
Managerial restructuring
Additional strategy
(Asset restructuring)
Additional strategy
(Financial restructuring
Cost cutting
Review all costs and
eliminate unneeded
Cash generation
Review products/
customers to remove
weak ones
Asset divestment
Divest unprofitable
operations or division
Asset investment
Invest in NPD, and
new equipment
Equity restructuring Debit restructuring
Keep/Appoint
dedicated managers
Remove resisting
managers
NO
Analysis stage
Identify causes of decline
Internal causes
Organizational
Inefficiencies
Bad management
External causes
Political
Economic
HIGH INTEREST RATE
HIGH COST OF
MATERIALS
Competition
Assess viability
Does the company hold a
competitive advantage?
Assess severity and
financial position
Is there enough cash
for the turnaround?
YES
YES
NO
Exit
Sale of business/ Liquidation
(Liquidation)
YES
Decline sage
Recognition of decline
Keep leadership
Communicate the plan
TMT
support
Stakeholders
support
FIGURE 6.4: MODIFIED MODEL OF MANAGING SUCCESSFUL TURNAROUNDS
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-46
6.6.1 Decline stage
As in Figure 6.4, findings show that decline is recognised in this stage and change
of leadership is usually executed as the initial step. However, change of leadership
was not a practise conducted by all cases in this study as only one company (CD)
exercised this strategy. Notably, it was emphasised that decline was very much
associated with the old leadership approach of management in relation to the sales
strategy of the company at the time. On the other hand, findings revealed that
such a strategy was not needed because it was attributed to external causes and it
was unlikely to be fruitful to do so. This goes in line with the view that change of
leadership is fruitless if they were not the original cause of decline (Whitaker,
1990). This finding supports previous case studies, in that despite changes of
leadership, it is imperative in some but it is not an essential first step and existing
management can participate in the turnaround of their companies.
6.6.2 Analysis of decline
This is the next stage following the recognition of decline and as highlighted in
Figure 6.4, it is a critical step in the process as the major key issues are identified,
located and used to support the turnaround options. Findings revealed that
leaders use financial ratios as well as other means of communication to get as
much information as possible about the situation in order to assess the company’s
viability, financial situation and major causes of decline. For example, NGL
reported that one of the things that he had to do was to approach the bank
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-47
immediately to ensure continued support through the turnaround. The other cases
were reassured about their viability on the basis of their strong position in the
market and availability of cash using their own reserves. Major causes of decline
similar to the previous case study, were mainly external in the form of increased
cost of energy, raw material and interest rates. Nevertheless, findings also showed
that other internal causes played a significant role in the decline of the cases. For
example, bad management, lack of sales strategy and unavailability of a dedicated
sales manager/team to target new customers in the case of CD, were all
participating causes of decline. Additionally, lack of profit margins, high inefficiency
levels in one division of PFS and lack of assets utilisation in GC had caused
negative profitability for both companies.
6.6.3 Formulation, implementation and stabilisation of the turnaround plan
As shown in Figure 6.4, the four major strategies adapted by the three cases are
emphasised in the model and were linked to causes of decline and the degree of
cash available as explained below:
6.6.3.1 Managerial restructuring
Referring to Table 6.1 and as shown in Figure 6.4, it can be said that managerial
restructuring was an essential component of those turnarounds. Notably, this start
was implemented in relation to specific causes of decline that were directly linked
to lack of management. For example, in the CD it was highly essential to appoint a
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
DEVELOPMENT OF REVISED MODEL OF SUCCESSFUL TURNAROUNDS
6-48
Sales Manager to target new customers to overcome the problem of relying on a
limited number of customers. Another case at GC was where some managers had
to be removed due to their resistance to the new changes in the company as
reported by PV. The model emphasises the importance of ensuring that the whole
workforce understood the new changes that needed to take place in the company
and be capable of supporting the new plan.
6.6.3.2 Operational restructuring
As shown in Figure 6.4, operation restructuring remains the most common strategy
adopted by companies in decline, due to its aims and objectives of reducing all
spending to reserve cash, while generating as much cash as possible. Findings
showed that cost cutting activities were implemented in the form of overtime
reduction and stoppage of loss making operations, such as in the case of CD and
reducing energy consumption as with GC. Additionally, cash generation activities
(such as new invoice systems in the case of CD, flexible contracts and increased
sales such as in case of GC and quick elimination of weak products and customers
such as in the case of PFS) were found to be critical to the turnaround of all cases.
6.6.3.3 Asset restructuring
Referring to Figure 6.4, it can be said that this strategy was key in the case which
suffered internal organisational inefficiencies and external competitive causes. For
instance, findings from this case study showed that asset divestment was the key
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-49
option to remove the high cost of loss making cheese operations as with CD, by
selling off all equipment, stopping all cheese operations and using the money to
invest in the new butter churning process. Another supportive case was PFS
which fell in decline due to high overheads and inefficiency of GFS. Divesting GFS
in 2004 was the key to PFS recovering and turning around. The model
emphasises the importance of this strategy to companies that struggle to improve
the efficiency of their operations and bring costs under control.
6.6.3.4 Financial restructuring
Figure 6.4 shows another strategy that was found vital in the previous case study.
However, findings indicate that none of the three cases adopted any of the
activities within this strategy, despite the fact that high interest rates were a
participating factor of decline. This was due to the amount of cash made available
during the turnaround using the company’s own reserves to cover daily operational
expenses.
6.6.4 Recovery and return to growth
By the end of the previous stage and before the long-term strategies are
formulated, a company in decline should have reached a breakeven point or
positive profitability. This reduces pressure and allows time for the long-term
strategies that will take the company to the next stage of recovery.
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6-50
As shown in Figure 6.4, two major strategies were found to be the vital component
of the long-term objective. Operational restructuring remains a critical element to
ensure total control over costs and cash flow position, by increasing efficiency of
operations and continuing the review of products and customers to ensure high
profit margin and increased sales.
Additionally, investment strategies are also critical to the success of any case as it
aims to improve efficiency, profitability, better utilisation of assets and greater
control over inventory by placing investments in NPD, staff training and up to date
equipment.
6.7 Summary
The chapter discussed and analysed the successful turnaround experience of
three large food-manufacturing companies, in order to highlight the key issues
relating to successful turnaround. The chapter covered all the key issues from a
stage theory perspective in line with the theoretical framework developed in
chapter two and the initial model of successful turnaround developed in chapter
five.
This chapter has presented an analysis and discussion of the results of the case
study of three large food-manufacturing companies from the UK, which underwent
CHAPTER SIX: ANALYSIS, DISCUSSION OF IN-DEPTH CASE STUDY- AND
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6-51
a turnaround between 2000 and 2010. Section 6.2 concluded the turnaround
experience of the first case study i.e. Castle Dairies (CD) by investigating and
analysing the key issues of turnaround management in the light of this company’s
experiences, with emphasis placed on the steps and actions taken during each
stage of the process.
Section 6.2, 6.3 and 6.4 concluded the turnaround experience of the case studies
i.e. Castle Dairies (CD), Glanbia Cheese Limited (GC) and Peter’s Food Services
Limited (PFS) accordingly by investigating and analysing the key issues of
turnaround management in the light of this company’s experiences with the
emphasis on the steps and actions taken during each stage of the process. Section
6.5 presented a cross-case analysis of findings across all three cases. The cross-
case analysis was guided by the four key stages of the turnaround process
concluded from the literature (see Section 2.2.3) and supported by the process of
categorising findings into patterns to identify the key similarities and differences
between all companies to draw a general idea of how successful turnarounds are
executed.
Section 6.6 introduces a revised model of successful turnarounds. The model
presents the key stages a company should follow during the turnaround process.
The model emphasises the three elements of turnaround i.e. the process of moving
from one stage to another to ensure an effective implementation of internal
changes within the company, the content of the turnaround plan by selecting the
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correct set of strategies linked to certain causes of decline and the context of when
and why those strategies are implemented. This section is followed by a summary
of the whole chapter.
The next chapter should investigate in depth all the issues highlighted in the
revised model through conducting interviews with a panel of experts working within
the turnaround industry.
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-1
CHAPTER SEVEN
ANALYSIS, DISCUSSION
AND DEVELOPMENT OF BEST PRACTISE
MODEL
7.1 Introduction 7-2
7.2 Decline stage 7-5
7.3 Analysis of decline 7-12
7.4 Formulation, implementation and stabilisation of the turnaround
plan
7-18
7.5 Recovery and return to growth stage 7-27
7.6 Good practise model of successful turnarounds 7-28
7.7 Summary 7-33
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-2
7.1 Introduction
This chapter is designed to achieve objective four of this study, i.e. develop a good
practise model of successful turnarounds. This model represents and concludes
key issues arising from the review of literature (see chapter two), findings from both
phases one and two of case studies (see chapters four, five and six) and finally
findings from this chapter, using the inputs and feedback from an expert panel.
This chapter presents information attained from eight specialists who work closely
with the turnaround industry. According to document analysis and interviews, it
was found that there are two types of specialist who mainly concentrate on
managing companies in a state of decline/distress. They are turnaround
practitioners (TP) or chief restructuring officers (CRO) and insolvency practitioners
(IN). Each type has a different concept and approach to the turnaround process
according to their experience, nature of the job and their legal status when dealing
with companies in decline. It was noted in the Best Practice Guideline (BPG)
(2011), that those types of managers appeared when some executives with a
specific set of skills to work with on an interim basis, were needed to implement
change (BPG, 2011).
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-3
In order to understand better the difference between the two, the following table
was developed to show the main key differences between the two types of
specialists according to findings:
Role of
specialist
Turnaround
Practitioner (TP)
Insolvency
Practitioner (IS)
Background
Operational/Managerial/Financial Accountancy
Appointed by Shareholder/Bank Government/Creditors
Timeframe Short/long term Short term support
Loyalty To shareholders (unless business
falls insolvent)
To creditors
Legal obligation
and definition
No defined role or responsibility in
UK law (unless took a directory
position in the company)
Role defined in law
Turnaround Aim
and scheme
Consensual restructuring
(Non-formal turnaround
arrangements) i.e. CVA, Scheme of
arrangement, and Pre-packs
Non-formal/formal
arrangements with the
insolvency acts i.e. CVA,
or/and Formal insolvency
filling
As was highlighted in the table above, each type of practitioner aims to turnaround
the company in the best possible way. However, the difference between the two is
that a turnaround practitioners’ top priority is to use any possible technique, apart
from formal insolvency. The reason for this, as is explained by TPAT1 in an
interview, is that formal insolvency may damage the business when creditors,
customers and even staff find out that the company is in trouble.
Table 7.1: Turnaround practitioners vs. insolvency practitioners
Adapted from: BPG (2011)
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-4
Company Voluntary Arrangements (CVA) and Schemes of Arrangements are
techniques that help a company in decline to set up agreement between its
creditors and stakeholders, to freeze and pay debts in full without entering formal
insolvency (BPG, 2011). The difference between the two is the earlier is a formal
insolvency process under the Insolvency Act 1986 while the latter is not.
Additionally, Pre-pack is another technique that companies can use to ensure
continuity of operations by transferring all assets to a new owner (usually one or
more of the Company Directors) with a lower value to avoid creditors liability (BPG,
2011).
Two sources of evidence were used to collect the required data. The first method
was semi-structured interviews, in which four interviews were conducted with
turnaround practitioners and four further interviews with insolvency practitioners,
who participated or managed in at least one successful turnaround. This was to
ensure that the selected individuals had enough experience and knowledge about
the major key issues relating to the turnaround process. The second method was
document analysis, relying mainly on documents provided by those specialists on
the day of interview or sent later via email, containing some case studies and rich
data relating to previous turnarounds or current models used in their daily
operations.
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
PRACTICE MODEL
7-5
The investigation process was guided by the revised model of successful
turnaround (see Figure 6.4), with emphasis on the turnaround process stage by
stage, to ensure the flow of rich information and to explore any issues that may
influence the turnaround process. Findings will be discussed and analysed in the
following section accordingly with the stages of the turnaround model developed
earlier in chapter two.
7.2 Decline stage
7.2.1 Recognition of decline
When the practitioners were asked, how do they recognise decline in a company,
they agreed that this is the most important issue as a company’s leadership usually
fail to recognise decline early enough. For example, TPAT1 stated that, “This is
the $64,000 dollar question, in fact one of the biggest issues is actually getting
management to recognise decline and we call it management in denial”.
Relatively, it was reported in the BPG (2011) that the decline of any company has
four stages and they are; underperformance, distress, crisis and failure and the
earlier a company seeks help, the higher the chance for them to turnaround while
the resources are still available.
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Furthermore, TPDB2 explained why most companies leave it too late before asking
for help, those company’s leaders only realised the situation when they had serious
liquidity and cash flow problem. TPDB2 stated:
Normally most of the businesses we deal with have been in decline
for some time, but the real trigger is liquidity, cash flow. Once they
are struggling to meet their liabilities, as they become due, that is the
point which most businesses are forced to start looking for help and
assistance, it would be nice if they asked for it earlier, but they rarely
do.
Relatively, TPDB2 and TPWM4 added that, in many cases the turnaround option is
easy enough to implement, but because of the position the company has gotten
into with the lack of cash, the turnaround option becomes difficult. TPWM4 gave an
example stating that:
Liquidit
y
Time
Zone of insolvency
Underperformance
Distress
Crisis
Failure
Figure 7.1: The Decline Curve
Source: BPG (2011)
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You could look at it and say, actually, we need to make some
redundancies and we have the cash to do it. Whereas if you leave it
late, which they nearly always do, until they are forced into it, it is
human nature, you can’t help it to some extent, but the later they
leave it the more constrained you’re going to be in what you can and
can’t do.
Consequently, it was reported in the BPG (2011) that early recognition of decline
signals increases the chance of a company’s survival and accordingly a successful
turnaround. This concluded that lack of cash flow and liquidity problems are real
decline signals/triggers that alarm the company’s leadership and show that help is
critically needed and that a new CEO/temporary turnaround management may be
needed. However, this remains a real challenge in the field of turnaround, as
turnaround options and possibility of recovering a company is limited by the time
and resources available for the turnaround.
7.2.2 Change of leadership
When the practitioners were asked about the necessity to change the leadership
as an initial step to set off the turnaround process, findings showed that all
interviewees agreed that it is not an essential step at the onset of the turnaround
process. Instead, appointing a professional turnaround leader/team to take charge
of the company temporarily and to work closely with the existing leaders would be
an appropriate decision. It was emphasised in the BPG (2011) that a turnaround
leader brings focus, priorities, experience, energy and creditability to the
turnaround process, enabling him/her to manage key issues with stakeholders,
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while the existing leadership manages the daily operational side of the business
(Bryan et al., 2011).
For example, INTC2 and TPSA3 have both reported that it is important to analyse
the situation and reveal the severity and causes of decline and then draw a
strategy that might include a change in leadership or might not. Similarly, TPAT1
states that in some cases:
We may have to get rid of some managers, we would prefer not to
because it is actually value destructive to get rid of people and it
costs money. We go in with an open mind and we recognise that
very often in the top management; it depends on the size of the
company, we normally find that people are sticking to strategies that
are failing out of egotism or whatever… we can often persuade them
and turn them around and get them going.
Additionally, INTC2 reported that some of the problems are linked to the leadership
and finding out how many problems the company are experiencing are actually
linked to poor leadership. This will make a change of leadership a possible
strategy. On the other hand, TPSA3 reported that change of leadership is not a
priority at the early stage of the turnaround process because:
Hiring a turnaround specialist is like hiring a lawyer, it is a specialist…
management are not ever hired for their ability to turnaround
companies in distress, they’re hired for other management expertise.
Hiring a turnaround manager should not in any way signal failure on
the part of management, in fact failing is not recognising the
problems and they should not feel appalled about appointing a
turnaround specialist.
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INNC1 reported that speaking to all decision makers at the beginning is
fundamental to reveal the key issues and the situation as a whole and identifying
the real problem, because in many cases it is not possible to get rid of a senior
manager. INNC1 gave an example stating that:
I had an example where two brothers were definitely not agreeing
with the strategy. We met with one of them and then met separately
with the other and we got to a point where we said, unless you’re
both in the room and we sort out the problem you have got with each
other, then I’m just not going to go any further with the advice.
INTC2 supported the above statement emphasising that turnaround managers like
to work with the existing company’s leadership team, because they know the
customers, the product and the business, while the turnaround managers are
experienced in how to manage a business in the zone of insolvency and engaging
with stakeholders. However, findings from the BPG (2011) revealed that the
successes of the turnaround strategy, heavily relies on the company’s recognition
of the importance of appointing a turnaround manager as early as possible,
because of the denial of existing leaders to the problems that may lead the
company into a total failure.
It can be concluded from the above findings that change of senior
management/leadership is not the preferred/easy decision by the turnaround
managers at the early stage of the turnaround process and instead the turnaround
management prefer to advise and support existing management. INTC2 reported
that they do not go into a company with a pre-judged idea that some of the senior
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management has to be changed, because it would be destructive. In addition to
the huge cost involved, those managers are usually on large contracts and liquidity
is normally a problem by that stage.
7.2.3 Communicating the turnaround plan with stakeholder
It was emphasised in the BPG (2011) that whatever the strategy is, it should be
communicated internally and externally in order to maximise the possibility of its
success. Internal communication should be made with staff and management to
ensure a clear, positive message about the problem has been identified and the
proposed plan given, which will recover the company. For example, it was stated
that:
Once CRO or a turnaround manager is appointed, employees will be
contacted by customers, suppliers and service providers assessing
their risk and exposure. Ensuring the right message gets back is
important. From the outset, a clear message should be
communicated internally and advice on how to field calls should be
given. The message should be objective and factual.
Furthermore, it was emphasised in the above statement about the importance of
delivering the right message, as it was clarified that inaccurate gossip could
damage the reputation of the business and thus the chance of the company’s
recovery and turnaround, especially in a market with tough competition (BPG,
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2011). Relatively, communication with directors and senior management should
be carried out with professionalism and all decisions should be properly discussed
and recorded for monitoring purposes, to ensure high levels of corporate
governance (BPG, 2011).
Nevertheless, findings from the BPG (2011) shows that communication with the
external environment is as critical as internal communication, especially with major
creditors and suppliers. It was reported that communication should be made
practical and quick. It was also reported that it is critical to identify stakeholders
with vested interests, to include them in the dialogue, stick to promises and keep
up with payments.
Moreover, findings from the BPG (2011) emphasised that customers are one of the
most critical stakeholders in the company during the turnaround. Therefore, early
communication should be made with key customers to draw a clear picture of the
turnaround plan and restore loyalty and confidence. It was also reported that early
communication with customers would help the turnaround leader to identify the
market drivers.
Additionally, other stakeholder such as landlords and pension trustees should be
considered early in the process, especially when their legal rights and obligations
might require certain turnaround options (BPG, 2011). In addition to this, it was
emphasised in the BPG (2011) that HMRC and taxation should be considered
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early in the process when planning the turnaround strategy. For example, tax or
VAT on capital gains of sold assets, may negatively impact the turnaround if not
deferred to a later stage and covered by operational improvements (BPG, 2011).
Based on findings and depending on the information revealed from the analysis
process and the amount of pressure the company is under, available resources,
time, causes of decline and changes in leadership could still remain an option in
some cases, especially when existing management is not willing to work with the
turnaround team. This should be implemented when time and cash allows them to
do so. For example, TPDB2 stated that, “If you are saying short-term is from now
to three months, yeah I wouldn’t look to rock the boat to that extent, unless the guy
is a complete and utter crook”.
7.3 Analysis of situation stage
This stage is one of the most critical stages of the turnaround process, during
which the turnaround manager/team seeks to uncover the various elements that
have led the company to decline, as well as any other factors that may impact the
success of the turnaround process.
When the interviewees were asked about the tools they use in conducting their
analysis of the decline situation, they all reported that mixed methods are used to
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get the information they require about the company. For example, findings from
the BPG (2011) have revealed that when control over cash has been applied, it is
important to maintain an accurate level of financial and non- financial information
flow. This will help turnaround leaders to effectively engage with stakeholders and
negotiate any proposed plans (Bryan et al., 2011).
TPMW4, INTC2, INTS4 and TPSA3 confirmed that that profit and loss accounts
and balance sheets can provide some clear information of the cash flow position.
TPDB1 added that the aim is to identify all issues through a detailed analysis of
cash flow to see how and what caused the decline. He stated:
Is it lack of profitability, have they had working capital issues and not
been controlling them well, have they had external shock, a customer
themselves gone bust or a contract cancelled or something like that,
or a big change in foreign exchange rates, commodity prices, it can
be anything. You’re trying to get to what’s really caused this... you
know.
On the other hand, TPAT1 and TPMW4 reported that the financial accounts are
usually inflated and may not be accurate by that stage and therefore, other
methods should be considered as an addition, such as talking to customers,
managers and many others in the business to get the real picture. Similarly,
TPSA3 reported that, in a situation with variables, the initial approach would be
financial information and discussions with management to get an overview of the
position. He further stated that, “Despite it sometimes not being up to date and of
poor quality, it will at least give us the bones of the financial position”. INNC1
reported that the type of financial information they look for varies from what is in
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the balance sheet, such as value of assets and liabilities, value of secured credits,
fixed cost payment positions and the situation of credit repayments.
TPDB2 and TPMW4 have both asserted that the analysis process has certain
characteristics that should be considered. For example, TPMW4 reported that it
must be high level, quick and searching for immediate threats to the company’s
survival during the first few weeks. Similarly, TPDB2 stated that:
We look for what is going to kill this business in the immediate future.
Where are the problems coming from, are the banks going to pull the
plug and put the company into administration or is HMRC going to
bring in the bailiffs.
7.3.1 Viability and competitive advantage
When TPDB2 was asked about the process of assessing a company’s viability
importance in having a competitive advantage he stated that:
Right up front you’re going to look at this and say is this... as part of
our initial assessment, does this look like a viable business? Is there
a viable business here? It may not be all of it, but is there something
here that can be turned around and can come out the other side as a
viable, successful business.
TPDB2
Similarly, INJS4 reported that flowcharts look at whether the company has a
reason to exist or not, what are the competitive challenges, what is the “unique
proposition” as he described it, in serving the customer or the market. He further
stated that, “A competitive advantage and a reason for being, because it does have
to have a reason for being”. Furthermore, it is the turnaround manager/team’s job
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to go into the company, identify all the facts, draw a clear picture of the current
situation and act quickly with full understanding whether this business has the
ability to recover or not (INJS4, BPG, 2011). INTC2 emphasised the importance of
the competitive advantage stating:
If a company has got a demonstrable competitive advantage, it
should be relatively easy to convince some equity provider to back
the business. It becomes challenging where it doesn’t have an
obvious competitive advantage and then you’ve got to prove that the
changes that you can make, are going to deliver that advantage.
TPMW4 explained that a company doesn’t have to be the market leaders to be
able to survive decline, but it has to at least have something that keeps it in the
market. Consequently, and building on that, TPAT1 and INJS4 reported that one
of the most important strengths a business can have as a competitive advantage,
is a good relationship with its customers. TPAT1 explained:
The first thing we need to know is, is it a viable business, does it have
a product that customers will buy and will they buy at a price where
the company will make money. You call it a competitive advantage; I
have a bit more blunter way of doing it. You can’t run a business
without customers, you go out of business without accountants, but
you can’t run a business without customers. The first thing you’d
have to do is to get in there and look and say as you say does it have
a competitive edge? Does it have a product? Don’t talk competitive
advantage, it’s all economic rubbish... does it have a product and will
that product sell? And will it sell at a profit?
TPAT1
Furthermore, TPAT1 reported that it is important to have the people who can
determine which products give the company a competitive advantage and which
cannot. He further stated that:
Those people must quickly understand and decide what products are
viable and what people in the organisation can actually get that
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message across into the marketplace, to help you determine viability,
a business plan and who’s going to deliver that business plan,
because you know how to maximise your business to its advantage.
TPAT1
This finding supports the view from the literature and results from phase one and
two of the study (see chapters five and six), to confirm that it is essential during the
early steps of the analysis process to ensure that the business has a competitive
advantage that can help the company to recover. Furthermore, findings reveal that
the competitive advantage doesn’t have to be the best product/service in the
market or the biggest company in the industry but the company must have a
product/service that customers want and can sell in the market profitably.
7.3.2 Severity of decline and cash availability
Not all companies in decline can, or should, be saved. Therefore, it is the
turnaround managers’ task to decide whether the company is viable for turnaround
or should it be liquidated (BPG, 2011). TPDB1, TPWM4 and TPSA3 reported that
this decision depends heavily on the severity of decline, cash flow position and the
amount of the investment required for implementing the turnaround strategy.
Additionally, TPDB2 added:
“If you know that you are never going to reach that level of
investment, so you sell it to someone else who is able to place that
investment, it is only a matter of weeks before you have to go to
lenders and creditors and say look here is the plan. Or, on the other
hand, you might conclude that there is nothing that can be saved and
then you have to really file for insolvency.
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When TPMW4, TPDB2 and INTC2 were asked about the initial steps they take
during the early days of this stage, they all reported that a financial position
analysis is critical at this time of the process to ensure that the company has the
resources and capability to recover. For example, INTC2 stated that:
The first thing we would evaluate is looking at the very short-term
cash flow position, probably for the next three months and that would
be weekly for the next three months, to make sure that we can
survive until then. Because if you're going to implement any
turnaround plan, the chances are, it’s going to take you three months
before perhaps some of those changes of strategy begin to have an
effect.
In support of this, TPMW4 asserted that the first step revolves around identifying
what the problem is, severity of the situation and what the available time and
resources are. INTC2 similarly emphasised that they would also focus on
identifying the financial position of the company in terms of assets, liabilities and
value of equity. In addition to this, INJS4 added that identifying the company’s
future marketing and sales plans to fulfil the changing needs of the market is of
interest, because this will determine the amount of cash needed to support their
future strategy.
7.3.3 Causes of decline
When TPAT1, TPMW4 and INTC2 were asked about the common causes that lead
most companies into decline, they stated that there are various causes, which
contribute to the decline of a company. However, TPAT1 clearly stated that, “95%
are due to management. They are due to management not recognising changes in
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business circumstances and not acting quickly enough or in some cases they are
due to management embarking upon over ambitious projects”. In addition to this,
TPSA3 reported that lack of cash flow and increased pressure from creditors are
major causes/signals of decline. TPAT1 stated that:
Unfortunately, too often when companies are on the decline curve
neither they nor shareholders or interested parties... or the people
that can affect change, actually action change and so too often
companies drift into a near insolvency situation when they have to
take action because of creditor pressure and lack of cash flow.
Furthermore, INTC2 reported that liquidity and lack of cash flow are the primary
cause of any company’s failure, as companies don’t fail and become insolvent
when they don’t make profits, they fail when they cannot meet the payroll or
ultimately when the bank forecloses on them.
7.4 Formulation, implementation and stabilisation stage
When the interviewees were asked about the common strategies that are widely
used by turnaround managers in the industry, they all reported that there is no one
strategy that suits every turnaround case. However, TPSA3 reported that a
turnaround strategy depends on the turnaround manager and the vision that has to
be developed for the business. When the vision is clear about where this business
needs to be, the strategy is developed to support that vision and starts to flow from
it. Then the action plans flow from each of those strategies.
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According to literature, the turnaround manager/team’s main task is to help the
company to relieve the pressure from creditors, improve liquidity and generate
cash. This was supported by the statement of TPDB2 that, “At the end of the three
months in my terms, what I would expect is that we stabilise the cash position to
develop a strategy and a business plan for the next 12-18 months, by which time
you would hopefully have become capable of being funded to implement that
strategy. In other words, TPAT1 reported that the main aim to get the situation
under control is to identify the pressure source and engage with major creditors to
relieve that pressure.
7.4.1 Managerial restructuring
When the interviewees were asked about the use of managerial restructuring as a
component of the turnaround strategy during the process, findings showed that this
action is conducted in the hope of getting operations under new management
control. However, and similar to change of leadership (see Section 7.2), it was
reported that such a strategy is not preferred during the short-term phase, due to
many factors that might make it difficult to execute. Instead, the focus should be
on stabilising the situation and delaying any managerial restructuring to the long-
term stage where possible.
Based on the findings revealed above and earlier in the chapter (see Section
7.2.1.2), managerial restructuring is not the favourite option of any turnaround
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leader during the short-term phase. However, it could still remain an option in the
long-term where resistance to change is present. This finding disagrees with many
authors who reported that managerial restructuring is essential during the early
steps of the turnaround strategy, regardless of the cause of decline.
7.4.2 Operational restructuring
When interviewees were asked about the role of operational restructuring
strategies during the turnaround process, findings showed a wide agreement
between all participants that the strategy is highly essential during that whole
turnaround process and not just the short-term. For example, TPAT1 and TPSA3
have confirmed that the objective at that time is all about getting the business fixed
and eliminating all the issues, problems and operational improvement solved. For
example, TPDB2 reported that:
When the business is stabilised, you can then go out and say well
alright what is the right capital structure for that business now going…
it may be a somewhat smaller business, the nature of it may have
changed a little bit, you might say well this is probably the best way to
fund it, or we need more equity, do we need more debt, do we need
changes in most of the things. And you could not do all this until the
business has reached a point where you can say… yes, the business
has improved.
7.4.2.1 Cost cutting
It was stated in the BPG that a turnaround is not solely about cutting costs.
However, it was clearly emphasised that cost cutting is the best practical way to
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improve the bottom line during the short-term. Similarly, TPMW4 reported that
managing costs is highly essential in the short-term phase and managers have to
find ways of dealing with costs quickly. However, he emphasised that it might not
be easy to do so due to some constraints. He gave an example stating:
Say well actually we need to make a whole load of people redundant,
but there’s going to be a cost to that redundancy so you might say
well it will cost us X now and we know we’ll save Y per month, so
within six months it will have paid for itself, but actually have you got
the cash up front to be able to do it. If not, can you get it, where are
you going to get it from? So some of those things are fairly
straightforward in that yes you ought to do that, but not always quite
as easy to achieve once your cash constrained and that is one of the
biggest problems you have with most actions.
Also, TPDB2 and TPAT1 reported that despite the fact that little can be done to
control costs by the time turnaround managers, it is highly important that all cash
activities are brought under the direct power of the turnaround manager/team to
ensure it is controlled in the best manner. Similarly, it was stated in the BPG
(2011:7) that:
It is important that executive control over cash management is
assumed. On large assignments, this may be done by parachuting in
a dedicated cash manager. In other assignments where there is a
capable accounting function, control can be achieved by delegation
and tight daily management.
Bryan et al. (2011)
It was also reported in the BPG (2011) that payable accounts should be prioritised
and paid to creditors, in line with the amount of pressure they apply on the
company. It was emphasised that they need to continue supply while clearing old
balances, all as part of the agreement. This gives the turnaround team the
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opportunity to restore confidence in the management team as a whole and in the
company’s ability to return to profitability, as long as arrangements have not been
interrupted (BPG, 2011).
Moreover, it was stated in the best practice guide that other unnecessary costs
during the short-term can be cut such as marketing, design and travel costs etc.
However, it was noted that the turnaround leader should be careful not to cause
irreparable damage by implementing too much cost cutting (Bryan et al., 2011).
7.4.2.2 Cash generation
TPAT1 reported that all business plans start from a credible sales plan that is
saleable to stakeholders. He emphasised that increasing sales and keeping it
going is ultimately the source of cash for the business during such a critical time.
However, in contrast, INNC1 reported that in his insolvency firm they tend to
generate cash by increasing the profit margin and not increasing the volume of
sales. He explained that:
We‘re just being prudent, it might be a very good reason, it might be
a step, I’m saying we as a firm tend to say, try and find the things that
don’t involve an increased turnover, margins are fine. So in other
words if you kept your turnover flat but you had an increase in the
margin, of course that helps you to move from loss to profit.
INNC1
Furthermore, TPSA3 emphasised the importance of cash generation strategies
stating that, “During the early days and weeks of the process, we try to get a
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handle on managing the cash; we look for what we call, how we can improve
liquidity”. In addition to this, it was reported that various actions can be taken
within this strategy, aiming to generate cash such as chasing overdue debtors,
settling disputes and payment delays, introducing early payment discount systems
and increasing product prices.
Notably, the BPG (2011) provided findings that in many cases, sales teams feel
reluctant to increase product prices due to expected resistance from customers.
However, it was emphasised that the competitive analysis conducted earlier in the
turnaround process, will help the turnaround management to decide which
products can have their prices increased. It was also reported in the BPG (2011)
that as long as the price increase has been introduced in the appropriate way,
customers are likely to tolerate it appreciating the value of the company, as an
essential supplier in the chain.
7.4.3 Asset restructuring
7.4.3.1 Asset divestment
When interviewees were asked about the importance of this strategy during the
turnaround process, findings showed that this strategy had a strong presence in a
lot of the turnaround cases. For example, TPMW4 and TPDB2 have reported that
it is highly important during the short-term in cases where a cash loss unit or
division has been identified. However, he further explained that this is conditional
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on the availability of cash to implement the strategy, which may not be available
during the short-term phase. TPDB2 stated:
You’ve got to ask yourself, is this worth keeping or is it just something
you get rid of, shut it down even, whether you sell it, close it,
whatever, you know there’s ways and means. It certainly will help
you; really what you’re looking at is where you are bleeding cash
from.
Similarly, it was emphasised in the BGP (2011) that disposing of unnecessary or
failing assets, even for below its book value, can generate cash, which could be
used to maintain remaining operations and assets. TPMW4 reported that asset
divestment could also be implemented for businesses that are not loss making. He
explained that if the business is not a core business, then the conclusion might be
that it would be profitable if sold off and the money used for the core businesses
that have better potential. He gave an example stating:
One we did in Spain a few years ago that was sold off very quickly,
normally for next to nothing because it was rubbish, but it was just get
rid of it because it was bleeding cash.
TPMW4
Notably, in contrast, it was reported in the BGP (2011) that in some cases,
disposing of a loss making unit or subsidiary should be avoided in cases where
that unit/subsidiary is critical to the running of the core operations.
7.4.3.2 Asset investment
When the interviewees were asked about the use of this strategy during the
turnaround process, findings showed that it is dependent on the amount of cash
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available and the value that investment is going to generate afterwards. For
example, TPDB2 stated that:
You have to look at what’s viable, what’s going to come out the other
side of it. You may have something that’s a good viable business, but
if it needs a massive amount of investment, you might say well
actually we’re just not ever going to be able to make that level of
investment so we would say let’s sell it, let somebody else take it
further.
Furthermore, TPAT1, INNC1 and INJS4 have reported that a turnaround strategy
is a combination of many strategies that aim to stabilise the business in the short-
term. However, asset investment strategies tend to be long-term due to a better
cash position and creditors and banks lack of trust and willingness to provide
further financial support, until they have seen a creditable plan supported by short-
term improvement.
7.4.4 Financial restructuring
Financial restructuring is a strategy that aims to reduce the pressure applied by
creditors and stabilise the cash position by negotiating existing/new repayment
arrangements for better terms of equity. When the interviewees were asked about
the importance of this strategy during the turnaround process, findings showed that
it played an important role in the success or failure of the turnaround process of
any company. For example, INTC2 believes that there are two main turnaround
strategies, i.e. operational turnaround and financial turnaround. INTC2 also stated
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that, “The two for me go hand in hand, because there is no point doing a rough
financial turnaround that is restructuring the balance sheet, if you are not going to
follow that through with an operational turnaround”. However, in contrast, TPDB2,
TPSA3 and INNM3 have all reported that the use of financial restructuring
activities, i.e. equity and debt restructuring, tends to be a long-term option rather
than short-term, due to the lack of trust in the business to repay its debt. TPDB2
stated that:
If you’ve got something that’s particularly onerous here, perhaps
you’ve inherited or you’ve got a deal that was done years ago at a
huge rate of interest compared to what’s in the market now, then yes,
you might be able to do something about it. But you know it’s still
kind of hard because you’ve still got to go out into the market and
interest rates might be lower but you’ve got to go and try and
convince somebody they should lend to you when you are teetering
on the edge”.
TPDB2
Similarly, TPMW4 reported that it will always be difficult during the early weeks of
distress of any sort; any lender is going to look at the business as a higher risk, so
it is more likely to increase the interest rates rather than reduce them. He stated:
In some ways some of this operational restructuring stuff and maybe
diversity and other bits and pieces, you’ve almost got to be delivering
that before you can go back to the bank and say the business is
improving and it’s pretty much there, it’s becoming profitable, it’s
starting to generate cash and we want to look at the interest rate and
the terms.
In relation to this, findings show that there are two approaches to financial
restructuring and they are, “consensual and non-consensual” as described in the
BPG (2011:17). Consensual restructuring aims to restructure the business and its
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assets financially outside formal insolvency, by restructuring the debt for a new
debt or equity (BPG, 2011). However, in cases where a growing pressure from
creditors is present and creditors are not willing to support the turnaround plan
outside insolvency, a non-consensual approach might be more appropriate.
According to BPG (2011) non-consensual restructuring includes; a company
voluntary arrangement (CVA), schemes of arrangements (SOA) and pre-packs
(PP). According to findings from the BPG (2011) as shown in the table below,
each one of these techniques aims to give the company the space and time it
requires to pay creditors while continuing with the turnaround.
CVA SOA PP
Definition A payment plan
made by the
company to pay off
some of the
creditors over a
period of time while
continuing daily
operations.
Arrangements
proposed by the
company to pay
off creditors over
a period of time
while continuing
daily operations.
Technique that involves
the sale of the business
immediately after the
insolvency appointment
to allow time for due
diligence to be
undertaken in advance
while causing the least
disruption to the business
Binding
law
Insolvency Act 1986 Companies Act
2006
n/a
TABLE 7.2: NON-CONSENSUAL FINANCIAL RESTRUCTURING TECHNIQUES
Adapted from: BPG (2011)
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This concludes that the strategy is critical during the long-term phase of the
turnaround process and it is the task of the turnaround manager/team to use the
most suitable technique, which gives the company the time and ability to recover.
7.5 Recovery and return to growth stage
Findings from BPG (2011) indicated that a long-term strategy is essential to
maintain improvements achieved during the formulation, implementation and
stabilisation stage (short-term strategy). The long-term strategy relies heavily on
presenting a credible business plan to stakeholders and creditors, with an
emphasis on improvements made during the short-term. TPAT1 and TPDB2 have
reported that by the end of their term in a company, whether it is three months or
six, they aim to have brought the company into a stable cash flow position,
removed credit risks, restructured the business vision and developed a 12 to 18
month long-term plan to ensure a full recovery for the business.
Findings from this chapter (see Section 7.2.3.2 and 7.2.4.2), indicates that the
long-term phase includes a set of strategies that can combine one or more of the
four key areas needed to enhance the vision of the company in the long-term.
However, emphasis on operational restructuring as well as asset investment
strategies during the long-term phase, indicates their importance in strengthening a
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company’s competitive advantage in the long run by investing in sales and other
parts of the business.
7.6 Best practise model of successful business turnarounds
Based on the findings revealed above from interviews and document analysis, the
good practice model is developed to highlight the major key issues with successful
turnaround. The best practice model represents the process of a developed model
through four stages of development following each phase of study, i.e.
development of theoretical model through critical review of literature, development
of initial model by testing all key issues on the initial set of multiple case studies,
development of the revised model through testing the key issues in depth through
the second phase of cases studied using multiple sources of evidence and finally
development of the good practice model following feedback from a panel of
experts.
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST PRACTICE MODEL
7-30
FIGURE 7.2: BEST PRACTISE MODEL OF MANAGING SUCCESSFUL TURNAROUNDS
Formulation, implementation and stabilization of the turnaround plan
Successful
Turnaround
(2 years or more of
positive profitability)
Recovery and return to growth
Asset restructuring
Is it a loss
making asset?
Is core to
operations
?
Keep & invest to
improve efficiency
Divest asset
Eliminate of losses and better asset
utilization losses
YES
NO NO
YES
Mandatory strategy
Operational restructuring
Cost cutting
Review all Costs
Non-core costs Core costs
Cut or eliminate Manage and
control
Total cost reduction and control
Cash generation
Review all
products/customers
Low Profit
products/
customers
High Profit
products/
customers
Eliminate and
replace via
NPD, new
customers
Promote and
Increase
margin and
sales
Increased cash flow
Managerial restructuring
Asses
Management
Resisting change
Willing to
changes
Keep and train
to develop
new skills
Replace bad
management
NO
Competent
management in
place
YES
Operational restructuring
NPD, increase sales and margin, keep
costs down
Asset restructuring
(Asset investment)
Invest in new equipments, systems,
staff skills
Financial restructuring
NO YES
Creditors supporting turnaround
Debit- equity
restructuring
Administration-
CVR- SA- PP
Pressure increasing due to late
repayment
Eased pressure and better
lending
Decline sage
Recognition of
decline
Appoint a turnaround firm
Communicate the plan
TMT
support
Stakeholders
support
Asses’ existing
leadership
Resisting
change
Accepting
change
Replace
Keep
Analysis of decline
Assess severity and
financial position
Is there enough cash
for the turnaround?
Identify causes of decline
External causes
Political
Economic
Competition
Assess viability
Does the company hold a
competitive advantage?
YES
NO
NO
Exit
Sale of business/ Liquidation
(Liquidation)
Internal causes
Bad management
Organizational
inefficiencies
YES
YES
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7.6.1 Decline stage
Based on findings from this study, it is concluded that during the first stage (decline
stage), decline is recognised by the TMT or any of the stakeholders and a decision
in relation to the existing leadership is made. Findings show that appointing an
interim management to work alongside the existing team until cash flow is
improved and the situation is stabilised, is the most preferred decision. It was
emphasised that this is due to the damage that could be done following an early
change of leadership. It is important at this stage that the new turnaround
manager/firm is supported by the TMT and all stakeholders in the company. This
support will be gained by introducing a credible plan that will shed light on the
company’s vision and outlines all changes that need to take place to move a
company forward.
7.6.2 Analysis of decline
The second stage (analysis of decline), is the stage where three important
elements are analysed to ensure that the company can be turned around, i.e.
viability (source of competitive advantage), severity of decline (cash availability)
and cause of decline. It was found clear that a company must have an advantage
that supports its existence in the marketplace in the long-term and depending on
the severity of decline (cash availability), a decision is made whether to commence
the turnaround with a viable business or exit to liquidation/sale. If it is decided that
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7-31
the business is viable, causes of decline must be identified in order to develop a
plan that works on reversing or eliminating those causes.
7.6.3 Formulation, implementation and stabilisation of the turnaround plan
The third stage is the formulation, implementation and stabilisation of the
turnaround plan, during which a short-term proposal is developed aiming to bring
the business to stability as quick as possible, by stopping the continued loss of
cash. As shown in Figure 7.2, an operational restructuring strategy is required
immediately to reduce cash depletion and boost cash flow. This requires a review
and reduction of all unnecessary non-core costs and expenses, to achieve greater
control over costs. Similar to this, a review of products and customer lists should
be made to identify the low sales/non-profitable ones and replace these with new,
high margin/profitable ones to boost cash flow.
Additionally, managerial restructuring would help the turnaround leader to identify
any resisting managers who resign to outdated strategies and approaches, forming
a resistance to the new changes and replace them with competent managers if
necessary. Findings show that changes in management at the early steps of the
turnaround is not a preferred option, due to associated costs and possible
depletion of expertise.
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Furthermore, asset restructuring strategies were found to be critical to the
turnaround process, mainly for companies where it suffers high overheads for one
or more operations/divisions. A review for all operations and individual units and
divisions to identify the loss making ones will help the company to eliminate its
losses. However, in cases where certain operations/units or divisions are critical to
other sides of the business, investment based strategy is more suitable depending
on cash availability. This will ensure elimination of losses and better utilisation of
assets.
Moreover, financial restructuring is another strategy that is used in relation to
economic decline caused possibly by high interest rates. When creditors increase
the pressure on the company for lack of repayment, financial restructuring aims to
ease this pressure, by implementing some activities such as equity or debt
restructuring. However, in cases where creditors are not willing to withdraw from
supporting the company and not willing to support the turnaround, other techniques
can be used to give the company more time to implement its operational
turnaround plan.
By the end of the short-term phase, some improvements should be achieved
through reaching the breakeven point or positive profitability.
7.6.4 Recovery and return to growth
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The last stage of the turnaround is the recovery and return to growth stage by
which time loss of cash should have stopped. During this stage a set of long-term
strategies is developed to maintain improvements. Findings assert that two main
strategies are the key to maintaining long-term improvements and they are;
operational restructuring and asset investment strategy. The earlier being the
implementation of control costs, spending and continued NPD to boost sales and
eliminate low profit products/customers, while the latter revolves around enhancing
the company’s competitive advantage and what its customers want by investing in
staff, equipment and new ventures.
7.7 Summary
The chapter discussed and analysed the feedback from a panel of eight experts
working in the turnaround industry. Rich data relating to key issues of turnaround
management was generated through a set of interviews with those experts, in
order to highlight the key issues relating to successful turnaround. The chapter
discussed all the key issues from a stage theory perspective in line with the
theoretical framework developed in chapter two and the initial and revised models
of successful turnaround developed in chapters five and six accordingly.
Section 7.2 focused on the decline stage and its key issues, such as the process of
recognising decline signals and the decision of change of leadership. Section 7.3
CHAPTER SEVEN: ANALYSIS, DISCUSSION AND DEVELOPMENT OF BEST
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7-34
follows on to discuss the next stage, i.e. analysis of decline stage and its key
elements. Section 7.4 discussed the stage of formulation, implementation and
stabilisation of the plan and the process of selecting the most appropriate
turnaround strategy. Section 7.5 followed with a discussion of the long-term
turnaround options that will help a company to maintain improvement and enhance
its competitive advantages.
Section 7.6 presented the good practice model and the process of developing this
model with great emphasis on the major key issues of the turnaround process.
Section 7.7 presented a summary of the chapter.
The next chapter will conclude the whole study with an emphasis on the main
aims, objectives and major contributions to theory and practice.
CHAPTER EIGHT: CONCLUSION
8-1
CHAPTER EIGHT
CONCLUSION
8.1 Introduction 8-2
8.2 Review of objectives and major findings 8-2
8.2.1 Objective 1 8-2
8.2.2 Objective 2 8-4
8.2.3 Objective 3 8-11
8.2.4 Objective 4 8-17
8.3 Contribution 8-20
8.3.1 Contribution to theory 8-20
8.3.2 Contribution to practice 8-21
8.4 Limitation of the research 8-22
8.5 Opportunities for further research 8-23
8.6 Personal reflection 8-24
CHAPTER EIGHT: CONCLUSION
8-2
8.1 Introduction
This chapter concludes this study on how to turnaround a company in decline and
execute a successful business turnaround, in the context of the UK medium and
large food manufacturing sector. The chapter starts with a review of the research
objectives and how each one was achieved. This is followed by the identification
of the major contributions of the study (theory and practice ) and finally the
limitations and opportunities for further research are identified. The chapter
summarises with some final thoughts and reflections on the research process.
8.2 Review of objectives and major findings
8.2.1 Objective 1
Undertake a critical review of literature to develop a theoretical framework on
how to manage successful turnarounds. This is to investigate the key issues
relating to turnaround management as well as management approaches to
underpin their turnaround strategies.
This objective was achieved through undertaking an in depth critical analysis of
relevant literature on business turnaround management. This objective aimed to
provide a better understanding of the topic in general and the problems that face
managers and practitioners during their daily operations, when attempting a
turnaround. Additionally, reviewing the literature on business turnaround has given
CHAPTER EIGHT: CONCLUSION
8-3
enhanced insight into the common causes that have led companies into decline, as
well as the different management approaches in dealing with these situations.
The literature on turnaround has also offered some theoretical models, which are
used in managing turnarounds. However, there was no major framework that
could be used as a general basis for managing turnaround, in that every case is
different and such differences led to a lack of guidance for managers and
practitioners, on how to deal with decline and turnaround situations.
The literature suggested that there are different stages for any turnaround process
to ensure systematic flow of information, decisions and actions from the onset of
the turnaround process, until full recovery is achieved. This study develops a four-
stage model to rationalise the different perspectives offered in the literature and to
provide the basis for the theoretical framework, initially for the rest of the chapter
and ultimately for the study as a whole.
It was clear from the literature, that there are different causes that can lead a
company into decline. However, it was also clear that early recognition of decline
and starting the turnaround process as early as possible, are critical to the success
of the turnaround process, especially when cash is limited. Additionally, there was
great emphasis in the literature about the importance of matching the root cause of
CHAPTER EIGHT: CONCLUSION
8-4
decline with the turnaround strategy. However, such matching had not been
achieved in the literature. Furthermore, evidence from the literature showed a
huge debate between scholars about what are appropriate strategies for tackling
decline, e.g. retrenchment or not. Evidence showed that this debate stemmed
from those scholars and managers different backgrounds, management styles and
past experiences.
The critical review of the issues, concepts and opinions referred to in the literature,
provided the basis for the development of a theoretical model for managing a
successful turnaround.
8.2.2 Objective 2
Develop a multiple case study of some companies, which have successfully
turned around, to see if the conceptual framework and its key issues fit their
experiences, then modify the conceptual framework to reflect the findings.
In order to achieve this objective, a multiple case study was conducted, in which
certain pieces of information and answers to major questions were targeted. Those
pieces of information and answers were categorised according to the four main
stages of the turnaround process (see Objective 1) using Yin’s (2009) advice on
cross-case comparison.
CHAPTER EIGHT: CONCLUSION
8-5
The multiple case studies consisted of 14 medium and large-sized food-
manufacturing companies based in the UK, using secondary data analysis. The
case study aimed to answer a major research question, i.e. how can a successful
turnaround be implemented? Answering this question is linked to reviewing the
key issues to each stage of the turnaround process, to highlight the factors that are
associated with each stage. A summary of the major findings of this objective in
relation to the four key stages is shown in sub-sections below.
Decline stage
The findings revealed that each of the 14 companies studied had managed to
recognise decline early enough, while cash resources were still sufficient to allow
the turnaround to be successful. Evidence from the literature showed that most
authors emphasised that a new leadership during this stage was essential to the
success of the turnaround process. Accordingly, the findings from this study
supported the literature as 10 out of the 14 companies had made some changes to
its senior leadership team at the onset of the turnaround process.
Other scholars argued that successful turnaround could be achieved with existing
leadership in place, if they were not the original cause of decline and had a strong
voice. Supportively, the findings revealed that four companies have managed
successful turnaround without any changes in leadership. Notably, this may have
been due to the fact that three (HB, KRF and MMB) out of four of the companies
CHAPTER EIGHT: CONCLUSION
8-6
were privately owned and where it would be difficult to change the leadership.
Meanwhile, the fourth company’s decline was not attributed to its leadership;
therefore it was not seen as necessary to change its leader.
A conclusion based on the literature and the findings can assert that change of
leadership is highly important to the success of the turnaround process. However,
in cases where such a decision is limited by the type of ownership or other factors,
appointing an interim, parallel turnaround management to lead the turnaround is a
suitable option.
Analysis of decline
Findings revealed that this is one of the most important stages in the turnaround
process, as turnaround managers often have very limited time to analyse the
company’s resources and ability to return to profitability. The literature revealed
that there are three main elements of analysis during this stage; competitive
advantage, severity of decline and causes of decline. The literature revealed that
the analysis of each of these elements could assist the turnaround team in
deciding if the company is viable or not.
Regarding the first element, it was apparent that each one of the 14 companies
had some competitive advantage, which could be categorised under one or more
of the four major advantages, i.e. firstly, it was the market leader (the biggest in the
market), secondly it had long experience in the industry and skilled staff, thirdly it
CHAPTER EIGHT: CONCLUSION
8-7
had strong financial backing from a large group and fourthly, it was a pioneer in
NPD or new technologies. It was asserted in the literature that the company had to
have a source of competitive advantage to make it worth saving.
Furthermore, the severity of decline was another element that had to be analysed,
since the decline, combined with the cash position, determines the viability of a
company and its potential to survive the turnaround process. The findings showed
that severity of decline was low as those companies had a sufficient amount of
cash available to turnaround at an early/mid-term stage, when the position had not
deteriorated too far.
The third element was also found to be critical to the success of the turnaround
process to set the foundation for the turnaround strategy, by formulating and
implementing a strategy that works on addressing the root cause of decline. The
findings showed mixed causes i.e. (internal/external) had been common in leading
companies into decline. However, the findings attributed most of the declined
cases to external economic causes as 12 out of the 14 companies had suffered
economic problems whether it was high costs, lack of sales or increased energy
prices. Other internal causes relating to bad management and organisational
deficiencies had played a role in the decline of some companies.
CHAPTER EIGHT: CONCLUSION
8-8
Formulation, implementation and stabilisation of the plan
Findings showed various numbers of approaches and strategies for each company
during the short-term phase. However, this study revealed many similarities, that
helped in creating a pattern of which strategies are most suitable for the majority of
companies, with consideration given to the three elements identified earlier in the
analysis stage.
Operational restructuring
Furthermore, findings showed that operational restructuring is the most common
strategy during this phase for all companies in decline, in order to reduce
overheads, non-core costs and spending, while working on profit margins and
sales to boost cash generation. This finding stood robust as 13 out of 14
companies adopted cost cutting strategies and 12 out of 14 companies adopted
cash generation strategies during this stage, as being a vital component in their
turnaround plan.
Findings revealed that other strategies were used to tackle decline in addition to
operational restructuring and linking to specific causes of decline.
Managerial restructuring
Evidence showed that despite the wide agreement in literature that management
change is an essential component of any turnaround strategy, findings show that it
is not actually an essential component. Evidence is clear that only three (NF, OFD
CHAPTER EIGHT: CONCLUSION
8-9
and UPF) out of 14 companies carried out such a strategy during this short phase.
It was asserted that management restructuring is not a preferred option as it
involves high costs and has some negative implications on staff morale and
performance. Results state that it is only exercised during this phase in cases
where management has played a role in the decline, such as in the case of OFD
where lack of management’s understanding of customer demand, had led to lost
sales contracts.
Asset restructuring
Findings show that such a strategy was used in only four cases out of 14. It was
found that such a strategy was used in direct relation to certain causes of decline.
For example, in ADM and OFD, asset divesture strategies were used to eliminate
costs associated with the loss making Tewksbury and Lampeter sites accordingly.
It was found that such a strategic option is associated with the profitability of the
unit. On the other hand, findings also showed that asset investment strategy is
associated with companies suffering losses due to internal inefficiencies, such as
in the case of OFD, which suffered lack of control and high waste. Therefore, an
investment was made to improve staff skills and introduce new control systems.
The findings support and emphasise the importance of the use of such strategies,
in relation to the highlighted causes of decline.
Financial restructuring
CHAPTER EIGHT: CONCLUSION
8-10
Findings from this case study provided a clear example why such a strategy would
be used. They showed that three (CHR, IG, OFD) out of 14 companies had
adopted financial restructuring during the short-term as an addition to operational
restructuring. This had a direct relationship to the cause of decline of each
company. For example, in the case of CHR and IG where they suffered high
exchange rates and high repayment charges, a debit restructuring strategy gave
those two companies better lending terms and eased the financial pressure.
Meanwhile in the case of OFD, an equity restructuring strategy was the key to
providing the cash needed to refinance the company.
Recovery and return to growth
Furthermore, findings also revealed that during this long-term phase of the
turnaround process, a further set of strategies had been developed by the
turnaround management, to maintain improvements and take the firm to the next
stage of growth. They showed that operational restructuring remained a vital
component of the strategy during the long-term, with evidence that all 14
companies carried out cost cutting activities, while 13 out of 14 carried out cash
generation activities during the longer term. Findings also showed an increased
number of companies, which had adapted asset divestment during the long-term in
comparison to the short-term.
CHAPTER EIGHT: CONCLUSION
8-11
Findings from this multiple case study provided an insight to the key issues relating
to turnaround management and the organisations approaches to underpin their
strategies to fulfil and reach this objective of the study. It has been emphasised in
the initial model of successful turnaround, to reflect those companies experiences
and approaches on how to turnaround a company in decline from a stage theory
perspective.
8.2.3 Objective 3
Explore the initial model and its key issues thoroughly through an in depth
multiple case study, which faced similar scenarios; this is to develop a
modified model that can be generalised to wider situations.
Similar to the previous objectives and in order to reach this goal, in depth multiple
case studies of three UK food manufacturing companies were conducted to
explore the key issues and findings highlighted in the initial model of successful
turnaround, identified in the review of literature and the first multiple case study
(see Chapter 5).
Three sources of evidence were used to collect information from each case study,
aiming mainly to answer questions that will affect the formulation of the modified
practice model of successful turnaround. The fulfilment of this objective was
CHAPTER EIGHT: CONCLUSION
8-12
achieved in the light of the four key stages of turnaround as presented in the
following sections.
Decline stage
Major findings revealed that all companies under study during this phase, have
recognised decline early and managed to highlight their weaknesses and start the
turnaround while resources were still available. Evidence showed different signals
of decline from negative profitability, high waste levels, poor performance and
decreased sales, were important indicators and warning signs to management that
the company was in a crucial position and immediate actions were required.
Relatively, findings also revealed that one out of three companies had executed a
change of leadership from the onset, to ensure a strong initiation of the turnaround
process. Notably, the evidence showed that decline was initially linked to the old
leadership, who did not believe in the importance of the sales team, the different
approaches to sales or the wider customer base. On the other hand the leadership
of the other two companies remained in place to lead the turnaround and this was
due to the fact that decline was not attributed to leadership.
These findings support the view that change of leadership is critical to the
turnaround process, in cases where decline was attributed partly or fully to lack of
leadership. However, evidence shows that existing leadership can still turn their
companies around.
CHAPTER EIGHT: CONCLUSION
8-13
Analysis of decline
As previously mentioned, the three elements of the analysis process (i.e.
competitive advantage, severity of decline and causes of decline), will be used as
the framework to sort findings out at this stage. Accordingly, results showed that
some of the three companies had long experience in the field of industry, with
various links to suppliers and customers as with CD, or being one of the biggest
competitors in the marketplace such as in the case of PF and GC. This type of
analysis reassured the management about the viability of each company to
turnaround and recover since it has a solid core in the short-term and could
develop and invest in the longer term.
Additionally, findings revealed that the decline of two cases could not be
considered severe decline, because each one of those companies had sufficient
funds to execute a turnaround. However, in the case of CD who were in a late
decline stage of the turnaround process, they required close contact with the bank
after a meeting with the MD. It was mentioned in the interview that NGL, the MD of
CD, was very worried that the bank may reject the request to continue funding the
operation, following the failure of the short-life cheese NPD program.
The third and the most important element of analysis is cause of decline. Findings
showed that mixed internal and external causes of decline attributed to the decline
of each case. Internal causes of decline related to lack of cash flow due to low
profit margins, low productivity, lack of management, high internal costs and
CHAPTER EIGHT: CONCLUSION
8-14
expenditure and inefficiency in operations, coupled with higher energy prices,
increased cost of materials and new legislations, all of which was enough to put
each one of those companies under the threat of total failure.
Formulation, implementation and stabilisation of the plan
Findings showed that each company had its own causes of decline, whether it was
internal, external or a mixture or both. Reflecting on the three elements of
analysis, each company had to select the suitable set of strategies that considers:
Operational restructuring
Findings showed that operational restructuring remains the most commonly used
strategy during the whole process and especially over the short-term. Operational
restructuring was exercised in the form of cost cutting. This required regular
viewing and furcating of the costs, in order to remove the unnecessary ones. For
example, in the case of CD, because the cheese making operation was very
inefficient and included high costs, overtime was reduced and the cost of staff was
controlled. Furthermore, energy usage was moderately reduced to save on energy
bills in the case of GC.
Cash generation was also targeted to eliminate cash flow problems and stimulate
its flow. For example, in the case of CD customers were encouraged to pay 60%
of their invoices earlier and creditor’s payments were delayed. In addition to this,
new sales/customers were targeted.
CHAPTER EIGHT: CONCLUSION
8-15
This supports the findings from the previous case studies that operational
restructuring is highly essential during the turnaround process as a whole and in
the early days specifically and that high costs and lack of cash flow should be
targeted where problems originated.
Managerial restructuring
Findings from this case study showed that management changes were critical
during this case mainly because management had played a role in the decline
such as in the case of OFD, where lack of management understanding of customer
demand, has led to lost sales contracts. Also in the case of CD, sales
management was put in place for the first time, as the previous MD did not believe
that a sales team was required and hence the company was intimidated by a small
number of customers.
Asset restructuring
Findings from this case study showed that asset restructuring was an essential
component of the turnaround strategy during the short-term phase in CD and PFS.
Accordingly, findings from the study revealed that the use of asset divesture in CD
was highly related, because the company suffered negative performance and
profitability from the cheese making operations. Therefore, all operations,
machineries and equipment were divested and sold off. Similarly, in the case of
PFS, decline was mainly related to the GFS division, which was a total cash loss
with massive overheads from day one.
CHAPTER EIGHT: CONCLUSION
8-16
Furthermore, an asset investment strategy was used in CD during the short-term,
to improve the outdated equipment and systems, which was also another major
cause of decline for the company. This supports previous findings that asset
restructuring strategies are essential in cases where unprofitable assets or
business units are responsible for decline.
Financial restructuring
Findings show that there was no need to adapt financial restructuring activities as
part of the turnaround process for any of the cases. However, it was noted that in
the case of CD, due to the stage of the company’s decline, it was important that the
bank supported them, to ensure continuous funding of operations.
Recovery and return to growth
Findings showed that the three companies aimed to maintained improvements
made during the short-term, by carrying out similar strategies to the ones adopted
in the first phase, as well as other further necessary strategies. For example,
results from GC and PF showed no additional strategies were needed during this
phase to achieve successful turnaround. On the other hand, CD had adapted an
investment strategy to take the company to the next level.
CHAPTER EIGHT: CONCLUSION
8-17
8.2.4 Objective 4
The fourth is to develop a best practice model of successful turnarounds and
make recommendations to company leaders and practitioners on how to
implement it successfully.
The fulfilment of this objective was achieved by conducting the third phase of the
study, during which a panel of experts study was made with a panel of eight
professionals, working closely with the turnaround industry (i.e. four turnaround
practitioners and four insolvency practitioners).
This phase of the study aimed to investigate the major issues in turnaround
management in the light of professional experiences in managing or participating in
the turnaround of at least one company. The best practice model represents a
development of the conceptual framework in chapter two, followed by some
modifications after phase one, two and three of the study. The best practice model
concluded the turnaround process in four key stages to reach recovery and return
to growth.
Based on findings from this study, it is concluded that during the first stage (decline
stage), decline is recognised by the TMT or any of the stakeholders and a decision
in relation to the existing leadership is made. Results show that appointing an
interim management to work alongside the existing management until cash flow is
CHAPTER EIGHT: CONCLUSION
8-18
improved and the situation stabilised, is more beneficial to the turnaround process.
It is important at this stage that the new turnaround manager/firm is supported by
TMT and all stakeholders in a company and also important to keep them informed
and updated with the proposed plan or any changes, which will help to form a
robust team ready to initiate the turnaround.
The second stage (analysis of decline), is the stage where a viability check is made
to ensure that the company is capable of surviving and returning to profitability, by
investigating three important elements, i.e. source of competitive advantage,
severity of decline and cause of decline. It was found that a company must have
an advantage that supports its existence in the marketplace in the long-term and
depending on the severity of decline (cash availability), a decision is made whether
to commence the turnaround with a viable business or exit to liquidation/sale. If
the business is thought to be viable, causes of decline must be identified in order to
develop a plan that is based on reversing the root causes of decline.
The third stage, is the formulation, implementation and stabilisation of the
turnaround plan, during which a short-term plan is developed and aimed at bringing
the business to stability as quickly as possible, by stopping the continued loss of
cash. As shown in the model, an operational restructuring strategy is required
immediately to reduce cash depletion and boost cash flow. This requires a review
and reduction of all unnecessary non-core costs and expenses. Similar to this, a
review of products and customer lists should be made to identify the low
CHAPTER EIGHT: CONCLUSION
8-19
sales/profitable ones and replace them with new, through increased NPD, sales
and a bigger customer base.
The last stage of the turnaround is the recovery and return to growth stage by
which time loss of cash has stopped unless a further strategy is required. During
this stage, three additional strategies linked to certain causes of decline, may be
used. Managerial restructuring is a useful strategy in cases where decline was due
to management. However, findings suggest that it should be used in cases where
management is not ready to change or co-operate. Furthermore, asset
restructuring is another strategy that offers two solutions; firstly is asset divesture,
which may be used in cases where decline is attributed to loss making units or
divisions, secondly is asset investment, which might be adapted to invest in
enhancing the competitive advantage of the company. Finally, financial
restructuring is another strategy in cases where high loan repayments or interest
rates were a participating cause of decline. Nevertheless, findings from the study
suggested that there are some techniques within this strategy, which can help the
turnaround leader/team to manage cash and repayments in cases where creditors
are not in support of the turnaround plan. Implementing this turnaround model
should bring the company back into profitability and successful turnaround.
CHAPTER EIGHT: CONCLUSION
8-20
8.3 Contributions
8.3.1 Contribution to theory
The study contributed and enhanced the understanding of issues relating to
business turnaround management in the context of UK food manufacturing
companies and the appropriate stages and strategies when attempting a
turnaround. The study contributed to growing interest in research and literature on
turnaround management within the science of strategic management, by
conducting an extensive research in the field, creation of new ideas and new
interpretation of rich data collected via different sources of evidence. The study
also participated in the understanding of the major obstacles which face managers
and practitioners, when dealing with decline situations.
This study grounded the theoretical base for further research on turnaround
management in the context of large and medium size food manufacturing firms in
the UK. A key contribution of this study was the development of a theoretical
model of successful turnarounds. The model reflected the major key issues found
in the critical review of literature, as well as other turnaround models. It was
guided by a stage theory to ensure a stable flow in the stages and steps of actions
taken, until the last period of recovery. The significance of the contribution is
emphasised in the smooth flow and presentation of the key issues relating to
turnaround management. Another significance of the model is that it has
CHAPTER EIGHT: CONCLUSION
8-21
integrated the process of formulation and implementation into one stage. This
integration overcame the problem of treating them as two separate stages which
they are not in real life; as the implementation procedures of any strategy must be
considered during the formulation process.
8.3.2 Contribution to practice
This study contributed significantly by introducing a good practice model for daily
managers and practitioners working in the turnaround industry, on how to manage
successful turnarounds. The model reflected the results of the investigation in the
light of the four key stages of the turnaround process, i.e. decline stage, analysis of
decline, formulation, implementation and stabilisation stage, recovery and return to
growth stage.
The first stage of the model allows the TMT to recognise decline signals and
identify the company’s position, whether it is in real decline or a temporary
situation. The importance of the early recognition of decline was emphasised in
the model by the decisions regarding change of leadership. During this stage if
decline is identified, the decision to employ a turnaround manager to join the
management team, is found to be the most suitable, as it avoids taking any actions
regarding leadership during the early, sensitive period of the turnaround when all
expertise is most needed.
CHAPTER EIGHT: CONCLUSION
8-22
The analysis stage aims to investigate and identify three major elements (i.e.
viability and competitive advantage, severity and cash availability and the causes
of decline, in order to identify a company’s strengths and weaknesses. The
viability check aims to identify a company’s core advantage that will maintain its
existence in the market in the long-term. Severity and cash availability position is
critical in identifying the company’s ability to maintain operations while it is being
turned around. Identifying the causes of decline is the third critical element as it is
the first step towards selecting the most suitable turnaround strategy that will
eliminate this cause.
The third stage of the model is the short-term stage, during which the operational
restructuring strategy is critical to immediately help to reduce overheads and
generate cash needed for the turnaround. The model also offers a mechanism that
allows the use of certain strategies in connection with the presence of certain
causes of decline and factors, such as being core to the business or not.
The fourth stage of recovery offers a formula to enhance a company’s competitive
advantage in the long-term by investing in all sides of the business, while
maintaining operational control. The model offers and provides a guide on how to
manage successful turnarounds.
CHAPTER EIGHT: CONCLUSION
8-23
8.4 Limitation of the research
Generally, this is a common issue with access to primary sources of data and it
stands as a challenge for researchers to overcome, especially when targeting
senior members of management in large companies with a complex organisational
chart, guarded by cautious management blocking external outflow of information.
However, the use of multiple sources of evidence to increase the reliability and
validity of the available information, does indeed help with the findings of the first
phase of the study. To help validate findings another two phases of study were
used, which have a strong presence in the primary data collection method was the
use of semi-structured interviews, the validity of information achieved will help to
satisfy the outcome of the research.
Nevertheless, the research has its limitations considering it has been driven by a
qualitative approach, which still remains a great debate between scholars when it
comes to generalisation of findings, as it represents subjective opinions, attitudes
and/or feelings of interviewees and not actual reality. However, myself as the
researcher, tried to overcome such problems by using multiple sources of
evidence.
Another limitation was that the study was conducted on medium and large size
businesses in the food manufacturing industry. Therefore, further research has to
CHAPTER EIGHT: CONCLUSION
8-24
be conducted in the context of other industries before any adaptation of the results
can be used in different industries
Another limitation of the study, is that the research was investigated from a TMT
perspective without an in depth investigation of other stakeholders such as
government, customers, suppliers or staff when dealing with management during
the turnaround process and what kind of support could be offered to them during
that time. This could provide an opportunity for further research to be undertaken
to investigate fully the role of other stakeholders during the turnaround process, in
the light of the key issues identified.
8.5 Opportunities for further research
The study may seem complicated due to the large volume of primary and
secondary data representing the major issues in turnaround, which were
interpreted in the good practice model of managing successful turnaround.
However, the researcher believes this creates an opportunity for further research in
some areas. For example, this model could be investigated in the context of other
European countries with different legislative and banking systems. In addition, the
model could be tested on smaller businesses to identify the possibility of
generalisation of the findings.
CHAPTER EIGHT: CONCLUSION
8-25
8.6 Personal reflection
This study was conducted over five years of part-time/full-time study, attempting to
identify the possible way of overcoming business decline and failure, by creating a
plan that recovers a business and brings it back on the right track. My aspirations,
hard work and long, late nights of research reflect on my best practice model,
which I hope is found to be useful to those managers attempting turnarounds, as
well as researchers intending to carry out research in the field of turnaround
management.
I started this study in 2009 when I was a young manager, with great aspirations,
working in a company based in Wales, UK. I had very little practical experience in
running day-to-day operations in a business. As the time progressed and my
experience increased, I was able to start my own business in 2011 in the fast food
industry. In addition to the practical experience, the research on turnaround
management has provided me with the ability and skills that served my business
needs. This study has given me the opportunity to explore an area of research that
many managers would benefit from, when dealing with issues in their daily working
life.
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