Description
This presentation explain assessing success of turnaround strategies for distressed companies.
© 2014 Research Academy of Social Sciences
http://www.rassweb.com 657
International Journal of Management Sciences
Vol. 3, No. 9, 2014, 657-662
Assessing Success of Turnaround Strategies for Distressed Companies:
A Case Study of UCHUMI Supermarket Ltd. Kenya
Waita M. Gichaiya
1
, Mwasa D. Ishmail
2
, Chepkorir D. Kirui
3
Abstract
Financial distress is a situation whereby a firm does not meet creditors’ obligations or are met with
difficulties. Financial distress is evident in many companies in Kenya. It is a major concern to various stake
holders who have interests in these companies. Public companies in Kenya face a number of governance
problems and in particular financial problems. This affects the provision and management of their services.
The study used descriptive research which involves examining the major strategies used to overcome
financial distress in Uchumi supermarket. Managerial competence and corporate governance was considered
to highly influence the success or failure of a firm with internal control systems and cost management
following suit. The study also establishes that successful recovery of a company is not a function of a single
strategy but is a combination various degrees four main restructuring activities.
1. Introduction
Financial distress is evident in many organizations. The countries suffering the most pronounced
financial distress are those that borrowed so heavily during the 1970s that they were unable to service their
external debts fully in the early 1980s. These countries’ excessive external borrowing was in part a result of
the unprecedented international shocks of the past decade. However, the fact that there are many countries
that did not become entangled in debt problems shows that, although international circumstances helped to
shape the crisis, it was domestic policy that precipitated financial distress (Manuel, 2005). Financial distress
is a situation whereby a firm does not meet creditors’ obligations or are met with difficulties (Glen, 2005).
Financially distressed firms have problems in meeting and/or paying off their due or overdue financial
obligations to its creditors. Wruck (1990) defines financial distress as a situation where a firm’s operating
cash-flow are not sufficient to satisfy current obligations and the firm is forced to take corrective action.
Hawawini (2007) argues that when a firm increases its borrowing it also increases the probability that it
will experience a state of financial distress and incur (financial distress) costs that will reduce its value. Some
firms may reach a state of financial distress at lower debt ratios than others. Hawawini (2007) established that
the volatility of the firm’s operating profit is a major determinant in whether the firm will encounter financial
distress. A firm that has highly volatile and cyclical operating profits and cash flows faces a higher
probability of financial distress. Firms with high business risk have such a probability.
Hawawini (2007) further added that a firm with few tangible assets is highly susceptible to financial
distress. Therefore, firms with large investment in human capital, research, brands and other intangible assets
face higher probability of financial distress. The type of product or service sold by a firm is also a major
determinant; if it sells a unique product and maintains high debt ratios it is susceptible to financial distress.
The structure of the country’s financial system matters a lot, the risk of a firm experiencing financial distress
is not just related to factors specific to the industry/firm but also the country.
1
Jomo Kenyatta University of Agriculture and Technology- School of Business
2
Jomo Kenyatta University of Agriculture and Technology- School of Business
3
Jomo Kenyatta University of Agriculture and Technology- School of Business
G. M. Gichaiya et al
658
Arnold (2005) states that one of the cheapest ways to finance a company is through debt but firms tend
to run into financial distress, which is induced by the requirement to pay interest regardless of the cash flow
of the business. If the firms hit a rough patch in its business activities it may have trouble paying its bond
holders, bankers and other creditors their entitlement. Pandey (2005) argues that financial distress occurs
when firms with high business risk borrows. Financial distress losses are spread over a range of parties and
are not only felt by the investors in a company but also by employees who tend to lose their jobs, families
lose their livelihood, customers lose prioritized products, suppliers lose business and the entire economy
suffers reduced income as a result.
Outecheva (2007) concluded that resolution from financial distress provides unsatisfying results varying
from 10% to 34%. This shows a low interrelation between financial distress and recovery that needs constant
results. McCarthy (2011) found out that apart from demographic and economic variables leading to financial
difficulties, behavioural factors also matter. Argyrou (2006) argued that financial distress occurs when a
company’s shareholders’ equity falls below 40% of the company’s share capital. Financial distress is caused
by varying systematic or unsystematic situations. Evidently, financial difficulties in companies have been a
chronic problem and appropriate actions should be incorporated. The motivation of this study emanates from
the arguments that there is no conclusive agreement on which ratio(s) and/or indicators that are most
appropriate to assess the likelihood of financial distress and the successful turnaround strategies of distressed
firms. The study aims at assessing the success of strategies adopted by companies in managing financial
distress.
2. Literature Review
A moral hazard situation in economic theory arises when one party takes a risk knowing that in the
occurrence of that risk, the cost will be met by another party. The concept of moral hazard is rooted in the
agency theory characterized by asymmetric information between the principal-agent relationships. The moral
hazard in this context concerns the adverse enticement on the shareholders of companies as a result of their
managers acting in ways which are contrary to the interest of the stakeholders with maturing financial
obligations. In a nutshell, outsider stakeholders are limited by their inability to adequately monitor the
insiders because of the asymmetric information. This allows the latter to adopt investment strategies that
ultimately lead to higher possibilities of financial distress and consequent failure (Stiglitz and Weiss, 1981).
According to Westkamper (2000), businesses and their products inevitably exhibit a life cycle that
involves the phases of introduction, growth, maturity and decline. This theory holds that business entities
pass through various stages of its life span and each stage has some characteristics. Failure of business re-
engineering during the decline stage ultimately leads to inevitable financial distress, business failure or even
bankruptcy. This theory follows a shortcoming in the fact that financial distress does not only occur in the
decline stage but business failure is known to have a possibility of occurrence at any particular stage of the
life cycle because different organizations have different life cycles altogether.
Management is the active process of making decisions so that use of the available human and material
resources of the organization is planned and controlled to achieve its specific objective(s) most efficiently.
According to Burns and Dewhurst (1996), among those organizations/businesses that failed within their first
year of operation, few actually failed due to bankruptcy yet 75% failed in their first year. Burns and
Dewhurst (1996) further stated that 88% of these businesses/organizations operated without plans and most
managers failed to think strategically. They were just satisfied in staying in what they consider as the
“comfort zone”. They failed to create a framework for the future that includes effective plans. This was
thought to have led to their exit.
Cole (2001), in his descriptive model for business strategy noted that most managers had no developed
plans or strategy design for growth. In addition, he said that managerial skills and teamwork are important in
organization progress. This can decide which direction the organization takes. Problems storming from poor
organization problems have been cited by Foster (1986), as some of the leading issues in financial distress in
International Journal of Management Sciences
659
organizations. He argued that most managers did not have a systematic way of supervising their workforce,
this leading to indiscipline and working problems to most organizations. He concluded that in order for a firm
to perform well a responsible management is a must.
An effective management focuses on results, evaluating the suitability of controls by challenging
underlying rules, procedures and methods. The management exercises power in the stewardship of the
organization’s total portfolio of assets and resources within the objectives of maintaining and increasing
shareholders value and satisfaction of other stakeholders in context to its organization mission. Managers
therefore, must possess the appropriate skills and competence so as to make plans and decisions under an
environment of uncertainty and finally evaluate the strengths, weaknesses, threats and opportunities (SWOT
Analysis)
According to Scherrer (2003), for the turnaround to be successful, business decline must be acted upon
as soon as warning signals are identified and key elements such as competent management, cooperation of
firm stakeholders and sufficient bridge capital to carry out the turnaround plan must be present. A company
that is experiencing financial distress has several turnaround or exit options. Selection is done depending on
the appropriateness of an option or the expected benefits to an organization. The following are the four main
generic strategies that can be adopted by a financially distressed firm for survival as a going concern
According to Ooghe and Prijcker (2008), inappropriate management qualities and skills are a threat to
firm survival and are therefore often linked to failure. Management incompetence is the predominant cause of
the failure in organizations/firms. It is significant that management of many organizations and especially
those in public sector have scarce technical background of managerial financial matters. Strategic awareness
by the managers is a key factor in the successful performance, growth and development of an organization.
According to Pearce and Robbins (1993), the firms that recover respond to the declining sales or
margins in Retrenchment phase by cost reduction and asset reduction. Any business intending to grow
profitably must relentlessly find ways to minimize costs so as to reinvest earnings on the most promising and
profitable growth opportunities. Sudarsanam and Lai (2001) refer to operating asset reduction strategies as
those that involve business unit level sales, closures, integration of surplus fixed assets such as plant,
equipment, offices and reduction in short term assets such as inventory and debtors.
Lasfer and Remer (2010), states that the most common strategies include covenant modification,
maturity extension, interest rate adjustments, tender offers, and equity/cash for debt swaps. Negotiation
involving exchange of debt for equity increases monitoring and reduces agency costs between shareholders
and creditors. An organization may negotiate with creditors to extend the duration of debt servicing or reduce
the interest rates and/or swap part of the debt it owes with equity shares. A successful negotiation may save a
company from liquidation.
According to Werther and Davis (1993), motivation is the urge in the individual to have a need fulfilled.
The need or urge becomes more powerful when it is not being satisfied. Motivation is an inner force that
moves a person to behave in a certain way. According to Miner (1993), de-motivated staffs have lower
productivity. Effective managers should understand the needs of employees as expressed in their working
environment and work towards the achievement and satisfaction of those needs. Bird (1989) emphasizes that
motivation gives freedom to create goals and exploit the opportunities. Southern and West (2002), argued
that while the idea of motivation is important, there has been a feeling that motivation is not all about money.
3. Methodology
A research design is a plan that shows the manner of collection and analysis of data aiming to combine
relevance to the research purpose with economy in procedure. It is a process of meticulous selection of
methods to be used to answer the research questions and solve the research problem. The research design
employed in this study was descriptive research. This is a formalized study structured with clearly indicated
investigated questions carried out at a targeted population from a representative sample of Uchumi
G. M. Gichaiya et al
660
supermarket limited. A case study is preferred because it allows for one entity to be investigated in depth and
with meticulous attention to detail (Zikmund, 1991).
Stratified random sampling was used in the study where members of staff from various job groups in
Uchumi supermarket limited were selected to be issued with questionnaires. The researcher in addition made
follow up calls and collected the questionnaires.
Data analysis is a process of gathering, modeling and transforming data with the goal of highlighting
useful information, suggesting conclusions and supporting decision making (Ader, 2008). The data was
analyzed using variance analysis so as to compare the years of failure and the current success years. Data is
presented using scale of frequencies and percentages in tables.
4. Results and Discussions
The study reveals that a combination of strategies was put in place and the various respondents
determined the extent of their effectiveness. Table 4.1 clearly shows that 80.4% of the respondents admit that
reduction of capital spending on research and development had a positive effect, while 7.8% of the
respondents say it had no effect and only 11.8% respondents answered the effect was negative. On laying off
staff, 23.5% of the respondents supported it had positive effect, 15.7% argued no effect while great majority
of 60.8% revealed it had a negative effect. 82.4% of the respondents indicated cost cutting measures had a
positive effect and 9.8% claimed no effect while only 7.8% were of the opinion of negative effect. The results
illustrate that under operational restructuring; cost cutting strategies are most effective.Zimmerman (1989)
carried out a study on managing a successful turnaround and found that recovered companies are diligent and
maintain their costs low. In accordance with Zimmerman (1989), the results indicate the cost cutting is a
successful strategy for the supermarket.
On asset restructuring, disposal of real property was considered to have a positive effect with 35.3%
representation, no effect by 45.1% and negative effect by 19.6%. Gilson et al. (1990) argued that although
disposal of real property is common for obtaining cash while in distress, the sales may not be optimal since
financially distressed firms may get a bad price for their assets. This strategy was not effective hence
unsuccessful and can be attributed to the above fact.
The research displays that under financial restructuring, float of new shares to the public for subscription
was the most effective strategy with 72.5% of the respondents supporting it; only 5.9% argued it had no
effect while 21.6% said the effect was negative as shown on table 4.1. Negotiation with creditors on mode of
payment was the second effective strategy with 64.7%, 11.8% and 23.5% for positive effect, no effect and
negative effect respectively. Most of the respondents (56.9%) claimed that omitted/ cut dividend payment had
a negative effect while 27.5% of the respondents stated it had a positive effect and only 15.7% argued there is
no effect. Strategies under financial restructuring entail debt and/or equity restructuring with an objective of
either generating or conserving cash. The results imply that floatation of new shares generated cash for
resolutions and expansion hence a high degree of success. According to Gilson et al. (1990) debt
restructuring is characterized by one or more of the following; interest or principal reduction, debt maturity
extension and/ or debt is swapped for equity. The study conforms to Datta and Iskandar (1995) who found out
that 50% of companies that undertake financial restructuring are successful in renegotiating the terms of their
debt contracts. Dividend omission/ cut can lead to negative signaling and taint the corporate image.
Management restructuring was successful to reinstate the organization back to its roots with 86.3% of
the respondents claiming the effectiveness of change of management after financial distress and only 13.7%
disputed this. Reorganization of staff members was also considered effective by 72.5% of the respondents
with 9.8% stating there was not effect while 17.6 argued the effect was negative as demonstrated on table 4.1.
Improvement in industry economic condition is a significant determinant of recovery for companies in
economic distress but not for those that were historically poorly managed (Whitaker, 1999). The results imply
that sound
International Journal of Management Sciences
661
Table 4.1: Turnaround Strategies
Positive No effect Negative
Effect (f) (%) (f) (%) effect (f) (%)
Operational Restructuring
a) Reduced capital spending on research and 41 (80.4) 4 (7.8) 6 (11.8)
development
b) Staff lay off 12 (23.5) 8 (15.7) 31 (60.8)
c) Cost cutting (cost reduction and asset reduction) 42 (82.4) 5 (9.8) 4 (7.8)
Asset Restructuring
d) Disposal of real property 18 (35.3) 23 (45.1) 10 (19.6)
e) Merged with another company 0 0 0
Financial Restructuring
f) Negotiation with creditors on payment mode 33 (64.7) 6 (11.8) 12 (23.5)
g) Float of new shares to the public for subscription 37 (72.5) 3 (5.9) 11 (21.6)
h) Omitted or cut dividend payment 14 (27.5) 8 (15.7) 29 (56.9)
Management Restructuring
i) Change of management after financial distress 44 (86.3) 7 (13.7) 0
j) Reorganization of staff members 37 (72.5) 5 (9.8) 9 (17.6)
5. Conclusion
In accordance to the research results, it is well proven that the successful turnaround of a company is not
only dependent on a particular strategy but a combination of various strategies within thefour main
restructuring activities. Supermarkets do play major economic and intermediary role in completion of the
distribution channel. They provide a link to most end consumers by availing various products and services at
affordable prices if well managed. Their operations are therefore vital to many stakeholders ranging from
statutory tax obligations to employment opportunities hence it is important for the management to execute
their responsibilities diligently to curb any loops leading to financial constraints.
References
Ader, H. J. (2008). Advising on Research Methods. Johannes Van Kessel, Netherlands.
Alexander, D. and Britton, A. (1993). International Financial Reporting and Analysis. Prentice Hall
International, London.
Argyrou, A. (2006). Predicting Financial Distress using Neural Networks: Another Episode to the Serial?
Unpublished Masters Thesis. Hanken Swedish School of Economics and Business Administration.
Arnold, G. (2005). Corporate Financial Management. Pearson Education Limited, London.
Bird, B. (1989). Entrepreneurial Behavior. Scott Forman and Company, Illinois.
Burns, P. and Dewhurst, J. (1996), Small Business and Entrepreneurship, 2
nd
Ed., Macmillan Press London.
Cole, G. A. (2001). Management Theory and Practice. Martin Printers ltd, Great Britain.
Datta, S. and Iskandar, D. M. (1995). Reorganisation and Financial Distress: An Empirical Investigation,
Journal of Financial Research, 18 (1): 15-32.
Foster, G. (1986). Financial Statement Analysis. 2
nd
Edition, Prentice Hall inc., London.
Gilbert, L., Menon, K., Schwartz, K. (1990). Predicting Bankruptcy for Firms in Financial Distress. Journal
of Business Finance & Accounting, 17: 161-171.
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Gilson, S., John, K. and Lang, L. (1990). Troubled Debt Restructurings: An Empirical Study of Private
Reorganization of Firms in Default, Journal of Financial Economics, 27: 315-353.
Glen, A. (2005). Corporate Financial Management. Prentice Hall, London.
Hawawini, G. (2007). Finance for Executives. Thomson South-Western, London.
Lasfer, M. and Remer, L. S. (2010). Corporate Financial Distress and Recovery: The UK Evidence. JEL
Classification: G33, K22, G21 working paper series, Cass Business School, City University, London,
UK.
Manuel, E. (2005). Financial Management.Pearson Education Limited, London.
McCarthy, Y. (2011). Behavioural Characteristics and Financial Distress.
http://ssrn.com/abstract_id=1761570. (Accessed on 10
th
January, 2013).
Miner, V. J. (1993). Role of Motivation Theories. Routledge Publishers, London.
Mugenda, O. M. and Mugenda, A. G. (1999). Research Methods. Quantitative and Qualitative Approaches.
ACTS Press, Nairobi.
Ooghe, H. and Prijcker, S. D. (2008). Failure Processes and Causes of Company Bankruptcy: A Typology,
Management Decision. 46(2): 223 – 242.
Outecheva, N. (2007). Corporate Financial Distress: An Empirical Analysis of Distress Risk. Unpublished
Dissertation, University of St.Gallen Graduate School of Business Administration.
Scherrer, P. S. (2003). Directors' Responsibilities and Participation in the Strategic Decision Making Process.
Corporate Governance, 3(1): 86 – 90
Southern, M. and West, C. (2002). Turn Your Good Idea into a Great Business. Bill and Bian publishers,
London.
Stickney, C. (1990). Financial Statement Analysis. CA Harcourt Brace Jovanovich. San Diego.
Stigliz, J. E. and Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. American
Economic Review, 17: 393-410.
Sudarsanam, S. and Lai, J. (2001). Corporate financial distress and turnaround strategies: An Empirical
Analysis, British Journal of Management, 12: 183-199.
Pearce, J. A. and Robbins, K. (1993). Toward improved theory and research on business turnaround. Journal
of Management, 19(3): 613-636.
Werther, W. B. and Davis, K. (1993). Human Resource and Personnel Management. McGraw-Hill Inc.,
London.
Westkamper, E. (2000). Life Cycle Management and Assessment. Approaches and Visions Towards
Sustainable Manufacturing. Annals of the CIRP, 49: 501-522.
Whitaker, R. (1999). The Early Stages of Financial Distress, Journal of Economics and Finance, 23 (2): 123-
133.
Wruck, D. (1990). Financial Management. Pearson Education Limited, London
Zikmund, W. G. (1991). Exploring Marketing Research. 4
th
Edition, Dryden Press.
Zimmerman, F. (1989). Managing a Successful Turnaround. Long Range Planning, 22(3):105-124
doc_130490623.pdf
This presentation explain assessing success of turnaround strategies for distressed companies.
© 2014 Research Academy of Social Sciences
http://www.rassweb.com 657
International Journal of Management Sciences
Vol. 3, No. 9, 2014, 657-662
Assessing Success of Turnaround Strategies for Distressed Companies:
A Case Study of UCHUMI Supermarket Ltd. Kenya
Waita M. Gichaiya
1
, Mwasa D. Ishmail
2
, Chepkorir D. Kirui
3
Abstract
Financial distress is a situation whereby a firm does not meet creditors’ obligations or are met with
difficulties. Financial distress is evident in many companies in Kenya. It is a major concern to various stake
holders who have interests in these companies. Public companies in Kenya face a number of governance
problems and in particular financial problems. This affects the provision and management of their services.
The study used descriptive research which involves examining the major strategies used to overcome
financial distress in Uchumi supermarket. Managerial competence and corporate governance was considered
to highly influence the success or failure of a firm with internal control systems and cost management
following suit. The study also establishes that successful recovery of a company is not a function of a single
strategy but is a combination various degrees four main restructuring activities.
1. Introduction
Financial distress is evident in many organizations. The countries suffering the most pronounced
financial distress are those that borrowed so heavily during the 1970s that they were unable to service their
external debts fully in the early 1980s. These countries’ excessive external borrowing was in part a result of
the unprecedented international shocks of the past decade. However, the fact that there are many countries
that did not become entangled in debt problems shows that, although international circumstances helped to
shape the crisis, it was domestic policy that precipitated financial distress (Manuel, 2005). Financial distress
is a situation whereby a firm does not meet creditors’ obligations or are met with difficulties (Glen, 2005).
Financially distressed firms have problems in meeting and/or paying off their due or overdue financial
obligations to its creditors. Wruck (1990) defines financial distress as a situation where a firm’s operating
cash-flow are not sufficient to satisfy current obligations and the firm is forced to take corrective action.
Hawawini (2007) argues that when a firm increases its borrowing it also increases the probability that it
will experience a state of financial distress and incur (financial distress) costs that will reduce its value. Some
firms may reach a state of financial distress at lower debt ratios than others. Hawawini (2007) established that
the volatility of the firm’s operating profit is a major determinant in whether the firm will encounter financial
distress. A firm that has highly volatile and cyclical operating profits and cash flows faces a higher
probability of financial distress. Firms with high business risk have such a probability.
Hawawini (2007) further added that a firm with few tangible assets is highly susceptible to financial
distress. Therefore, firms with large investment in human capital, research, brands and other intangible assets
face higher probability of financial distress. The type of product or service sold by a firm is also a major
determinant; if it sells a unique product and maintains high debt ratios it is susceptible to financial distress.
The structure of the country’s financial system matters a lot, the risk of a firm experiencing financial distress
is not just related to factors specific to the industry/firm but also the country.
1
Jomo Kenyatta University of Agriculture and Technology- School of Business
2
Jomo Kenyatta University of Agriculture and Technology- School of Business
3
Jomo Kenyatta University of Agriculture and Technology- School of Business
G. M. Gichaiya et al
658
Arnold (2005) states that one of the cheapest ways to finance a company is through debt but firms tend
to run into financial distress, which is induced by the requirement to pay interest regardless of the cash flow
of the business. If the firms hit a rough patch in its business activities it may have trouble paying its bond
holders, bankers and other creditors their entitlement. Pandey (2005) argues that financial distress occurs
when firms with high business risk borrows. Financial distress losses are spread over a range of parties and
are not only felt by the investors in a company but also by employees who tend to lose their jobs, families
lose their livelihood, customers lose prioritized products, suppliers lose business and the entire economy
suffers reduced income as a result.
Outecheva (2007) concluded that resolution from financial distress provides unsatisfying results varying
from 10% to 34%. This shows a low interrelation between financial distress and recovery that needs constant
results. McCarthy (2011) found out that apart from demographic and economic variables leading to financial
difficulties, behavioural factors also matter. Argyrou (2006) argued that financial distress occurs when a
company’s shareholders’ equity falls below 40% of the company’s share capital. Financial distress is caused
by varying systematic or unsystematic situations. Evidently, financial difficulties in companies have been a
chronic problem and appropriate actions should be incorporated. The motivation of this study emanates from
the arguments that there is no conclusive agreement on which ratio(s) and/or indicators that are most
appropriate to assess the likelihood of financial distress and the successful turnaround strategies of distressed
firms. The study aims at assessing the success of strategies adopted by companies in managing financial
distress.
2. Literature Review
A moral hazard situation in economic theory arises when one party takes a risk knowing that in the
occurrence of that risk, the cost will be met by another party. The concept of moral hazard is rooted in the
agency theory characterized by asymmetric information between the principal-agent relationships. The moral
hazard in this context concerns the adverse enticement on the shareholders of companies as a result of their
managers acting in ways which are contrary to the interest of the stakeholders with maturing financial
obligations. In a nutshell, outsider stakeholders are limited by their inability to adequately monitor the
insiders because of the asymmetric information. This allows the latter to adopt investment strategies that
ultimately lead to higher possibilities of financial distress and consequent failure (Stiglitz and Weiss, 1981).
According to Westkamper (2000), businesses and their products inevitably exhibit a life cycle that
involves the phases of introduction, growth, maturity and decline. This theory holds that business entities
pass through various stages of its life span and each stage has some characteristics. Failure of business re-
engineering during the decline stage ultimately leads to inevitable financial distress, business failure or even
bankruptcy. This theory follows a shortcoming in the fact that financial distress does not only occur in the
decline stage but business failure is known to have a possibility of occurrence at any particular stage of the
life cycle because different organizations have different life cycles altogether.
Management is the active process of making decisions so that use of the available human and material
resources of the organization is planned and controlled to achieve its specific objective(s) most efficiently.
According to Burns and Dewhurst (1996), among those organizations/businesses that failed within their first
year of operation, few actually failed due to bankruptcy yet 75% failed in their first year. Burns and
Dewhurst (1996) further stated that 88% of these businesses/organizations operated without plans and most
managers failed to think strategically. They were just satisfied in staying in what they consider as the
“comfort zone”. They failed to create a framework for the future that includes effective plans. This was
thought to have led to their exit.
Cole (2001), in his descriptive model for business strategy noted that most managers had no developed
plans or strategy design for growth. In addition, he said that managerial skills and teamwork are important in
organization progress. This can decide which direction the organization takes. Problems storming from poor
organization problems have been cited by Foster (1986), as some of the leading issues in financial distress in
International Journal of Management Sciences
659
organizations. He argued that most managers did not have a systematic way of supervising their workforce,
this leading to indiscipline and working problems to most organizations. He concluded that in order for a firm
to perform well a responsible management is a must.
An effective management focuses on results, evaluating the suitability of controls by challenging
underlying rules, procedures and methods. The management exercises power in the stewardship of the
organization’s total portfolio of assets and resources within the objectives of maintaining and increasing
shareholders value and satisfaction of other stakeholders in context to its organization mission. Managers
therefore, must possess the appropriate skills and competence so as to make plans and decisions under an
environment of uncertainty and finally evaluate the strengths, weaknesses, threats and opportunities (SWOT
Analysis)
According to Scherrer (2003), for the turnaround to be successful, business decline must be acted upon
as soon as warning signals are identified and key elements such as competent management, cooperation of
firm stakeholders and sufficient bridge capital to carry out the turnaround plan must be present. A company
that is experiencing financial distress has several turnaround or exit options. Selection is done depending on
the appropriateness of an option or the expected benefits to an organization. The following are the four main
generic strategies that can be adopted by a financially distressed firm for survival as a going concern
According to Ooghe and Prijcker (2008), inappropriate management qualities and skills are a threat to
firm survival and are therefore often linked to failure. Management incompetence is the predominant cause of
the failure in organizations/firms. It is significant that management of many organizations and especially
those in public sector have scarce technical background of managerial financial matters. Strategic awareness
by the managers is a key factor in the successful performance, growth and development of an organization.
According to Pearce and Robbins (1993), the firms that recover respond to the declining sales or
margins in Retrenchment phase by cost reduction and asset reduction. Any business intending to grow
profitably must relentlessly find ways to minimize costs so as to reinvest earnings on the most promising and
profitable growth opportunities. Sudarsanam and Lai (2001) refer to operating asset reduction strategies as
those that involve business unit level sales, closures, integration of surplus fixed assets such as plant,
equipment, offices and reduction in short term assets such as inventory and debtors.
Lasfer and Remer (2010), states that the most common strategies include covenant modification,
maturity extension, interest rate adjustments, tender offers, and equity/cash for debt swaps. Negotiation
involving exchange of debt for equity increases monitoring and reduces agency costs between shareholders
and creditors. An organization may negotiate with creditors to extend the duration of debt servicing or reduce
the interest rates and/or swap part of the debt it owes with equity shares. A successful negotiation may save a
company from liquidation.
According to Werther and Davis (1993), motivation is the urge in the individual to have a need fulfilled.
The need or urge becomes more powerful when it is not being satisfied. Motivation is an inner force that
moves a person to behave in a certain way. According to Miner (1993), de-motivated staffs have lower
productivity. Effective managers should understand the needs of employees as expressed in their working
environment and work towards the achievement and satisfaction of those needs. Bird (1989) emphasizes that
motivation gives freedom to create goals and exploit the opportunities. Southern and West (2002), argued
that while the idea of motivation is important, there has been a feeling that motivation is not all about money.
3. Methodology
A research design is a plan that shows the manner of collection and analysis of data aiming to combine
relevance to the research purpose with economy in procedure. It is a process of meticulous selection of
methods to be used to answer the research questions and solve the research problem. The research design
employed in this study was descriptive research. This is a formalized study structured with clearly indicated
investigated questions carried out at a targeted population from a representative sample of Uchumi
G. M. Gichaiya et al
660
supermarket limited. A case study is preferred because it allows for one entity to be investigated in depth and
with meticulous attention to detail (Zikmund, 1991).
Stratified random sampling was used in the study where members of staff from various job groups in
Uchumi supermarket limited were selected to be issued with questionnaires. The researcher in addition made
follow up calls and collected the questionnaires.
Data analysis is a process of gathering, modeling and transforming data with the goal of highlighting
useful information, suggesting conclusions and supporting decision making (Ader, 2008). The data was
analyzed using variance analysis so as to compare the years of failure and the current success years. Data is
presented using scale of frequencies and percentages in tables.
4. Results and Discussions
The study reveals that a combination of strategies was put in place and the various respondents
determined the extent of their effectiveness. Table 4.1 clearly shows that 80.4% of the respondents admit that
reduction of capital spending on research and development had a positive effect, while 7.8% of the
respondents say it had no effect and only 11.8% respondents answered the effect was negative. On laying off
staff, 23.5% of the respondents supported it had positive effect, 15.7% argued no effect while great majority
of 60.8% revealed it had a negative effect. 82.4% of the respondents indicated cost cutting measures had a
positive effect and 9.8% claimed no effect while only 7.8% were of the opinion of negative effect. The results
illustrate that under operational restructuring; cost cutting strategies are most effective.Zimmerman (1989)
carried out a study on managing a successful turnaround and found that recovered companies are diligent and
maintain their costs low. In accordance with Zimmerman (1989), the results indicate the cost cutting is a
successful strategy for the supermarket.
On asset restructuring, disposal of real property was considered to have a positive effect with 35.3%
representation, no effect by 45.1% and negative effect by 19.6%. Gilson et al. (1990) argued that although
disposal of real property is common for obtaining cash while in distress, the sales may not be optimal since
financially distressed firms may get a bad price for their assets. This strategy was not effective hence
unsuccessful and can be attributed to the above fact.
The research displays that under financial restructuring, float of new shares to the public for subscription
was the most effective strategy with 72.5% of the respondents supporting it; only 5.9% argued it had no
effect while 21.6% said the effect was negative as shown on table 4.1. Negotiation with creditors on mode of
payment was the second effective strategy with 64.7%, 11.8% and 23.5% for positive effect, no effect and
negative effect respectively. Most of the respondents (56.9%) claimed that omitted/ cut dividend payment had
a negative effect while 27.5% of the respondents stated it had a positive effect and only 15.7% argued there is
no effect. Strategies under financial restructuring entail debt and/or equity restructuring with an objective of
either generating or conserving cash. The results imply that floatation of new shares generated cash for
resolutions and expansion hence a high degree of success. According to Gilson et al. (1990) debt
restructuring is characterized by one or more of the following; interest or principal reduction, debt maturity
extension and/ or debt is swapped for equity. The study conforms to Datta and Iskandar (1995) who found out
that 50% of companies that undertake financial restructuring are successful in renegotiating the terms of their
debt contracts. Dividend omission/ cut can lead to negative signaling and taint the corporate image.
Management restructuring was successful to reinstate the organization back to its roots with 86.3% of
the respondents claiming the effectiveness of change of management after financial distress and only 13.7%
disputed this. Reorganization of staff members was also considered effective by 72.5% of the respondents
with 9.8% stating there was not effect while 17.6 argued the effect was negative as demonstrated on table 4.1.
Improvement in industry economic condition is a significant determinant of recovery for companies in
economic distress but not for those that were historically poorly managed (Whitaker, 1999). The results imply
that sound
International Journal of Management Sciences
661
Table 4.1: Turnaround Strategies
Positive No effect Negative
Effect (f) (%) (f) (%) effect (f) (%)
Operational Restructuring
a) Reduced capital spending on research and 41 (80.4) 4 (7.8) 6 (11.8)
development
b) Staff lay off 12 (23.5) 8 (15.7) 31 (60.8)
c) Cost cutting (cost reduction and asset reduction) 42 (82.4) 5 (9.8) 4 (7.8)
Asset Restructuring
d) Disposal of real property 18 (35.3) 23 (45.1) 10 (19.6)
e) Merged with another company 0 0 0
Financial Restructuring
f) Negotiation with creditors on payment mode 33 (64.7) 6 (11.8) 12 (23.5)
g) Float of new shares to the public for subscription 37 (72.5) 3 (5.9) 11 (21.6)
h) Omitted or cut dividend payment 14 (27.5) 8 (15.7) 29 (56.9)
Management Restructuring
i) Change of management after financial distress 44 (86.3) 7 (13.7) 0
j) Reorganization of staff members 37 (72.5) 5 (9.8) 9 (17.6)
5. Conclusion
In accordance to the research results, it is well proven that the successful turnaround of a company is not
only dependent on a particular strategy but a combination of various strategies within thefour main
restructuring activities. Supermarkets do play major economic and intermediary role in completion of the
distribution channel. They provide a link to most end consumers by availing various products and services at
affordable prices if well managed. Their operations are therefore vital to many stakeholders ranging from
statutory tax obligations to employment opportunities hence it is important for the management to execute
their responsibilities diligently to curb any loops leading to financial constraints.
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