Description
Developing Dynamic Capabilities For Bank Turnaround
World Review of Business Research
Vol. 5. No. 3. September 2015 Issue. Pp. 197 – 212
Developing Dynamic Capabilities for Bank Turnaround
William W. Lawrence
1
This article explores the evolution of dynamic capabilities over
the bank turnaround cycle from perspective of the resource-
based view of the firm. A longitudinal case study uncovered how
National Commercial Bank Jamaica sensed threats, mobilized
resources to seize opportunity, and transformed for corporate
turnaround. The period of study was 1985 to 2011 using data
from secondary sources and interviews of company personnel.
Managerial cognition created biased perception of reality to
delay strategic intervention. New leadership strengthened the
bank’s business model by building intangible assets and
leveraging external relationships. Employee training and
incentives facilitated deployment of new knowledge and
motivated organizational learning and innovation for corporate
renewal.
JEL Codes: D21, G21 and M10
1. Introduction
Some of the world?s largest banks reported substantial losses during the global financial crisis
of 2007-2008 (Crotty 2009; The Economist 2009). In the aftermath, banks face tighter
regulation, intensifying competition, rapid changes in technology and volatile consumer
preferences. These conditions escalate the likelihood of more losses and make profit recovery
quite challenging. History suggests that managers require more guidance on how to rescue
failing banks.
Strategy literature contains a sbstantial body of knowledge, on corporate turnaround
management, developed over the past four decades. The most popular school of thought
posits that viable firms can recover from organizational decline by resolving financial distress,
changing strategy and increasing efficiency (Schoenberg et al 2013; Arogyaswamy et al 1995).
Only a few studies focus on banks and these suggest that turnaround arises from cost control
and revenue enhancement (Clausen 1990; O?Neill 1986). However, there is need for granular
understanding of the process (Panditt 2000; Pearce and Robbins 1993).
Schoenberg, et al. (2013: p.253) commented: “The resource-based view and dynamic
capability perspectives could also provide insightful lenses to explore turnaround.” Teece et al
(1997) posited that increases in business profitability arise from dynamic capabilities defined
as the firm?s capacity to create, extend or modify its resources base. Ordinary capabilities are
high-level routines for deploying resources to produce and sell goods and services. These
capabilities become dynamic if the firm can purposefully reconfigure and redeploy resources to
cope with environmental changes. However, this concept has escaped the attention of
1
Dr. William W. Lawrence, Mona School of Business and Management, The University of the West Indies, Mona,
Jamaica. E-mail: [email protected]
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turnaround scholars despite evidence of radical environmental changes that made existing
tangible and intangible assets uncompetitive and eroded business profitability in the
marketplace. Easterby-Smith et al (2008) noted that dynamic capabilities remain hidden until
exercised and are associated with tacit organizational elements and intangibles such as
processes, managerial cognition and knowledge.
Research in this area can help to resolve the debate about how to manage resources in
turnaround situations particularly in respect of deriving value from strategic assets (Morrow et
al 2007). The concept of dynamic capabilities is of particular relevance for banks because
they need to reconfigure the way they create and deliver value for survival and prosperity in
highly volatile environments (Sun & Chan 2011). Therefore, the purpose of this study was to
identify the key activities pertaining to dynamic capabilities in the bank turnaround process.
Specifically, the study explored answers to two research questions in the strategy literature
based on the resource based view:
RQ1: What are the dynamic capabilities for bank recovery from profit decline?
RQ2: How do managers develop and leverage dynamic capabilities for bank
turnaround?
Teece (2007) proposed that dynamic capabilities become particularly critical in developing
environments open to international commerce. So, this article reports findings from a study of
corporate transformation and turnaround of a bank located in Jamaica, a small developing
island economy that is open to international trade and highly exposed to natural disasters and
economic shocks (International Monetary Fund, 2013). This is the first study of the corporate
turnaround process to explore the role of dynamic capabilities. Important concepts and themes
were derived, from integration of literature on corporate turnaround and dynamic capabilities,
to conduct historical analysis and longitudinal case study of the turnaround experience of
National Commercial Bank Jamaica Limited (NCB). Findings revealed that bank recovery from
decline involved careful orchestration of the interplay between managerial cognitions and
resource management at each stage of the corporate turnaround cycle.
The next section of this article presents a review of literature to evolve concepts and themes
for the NCB case study. Section 3 reports the methodology used for the study including
research design and procedures for data collection and analysis. Section 4 reports
observations made, during the case study, and important findings. Section 5 is the conclusion
and discusses how the study contributes to theory development, limitations of the study,
suggestion for future research and implication for managerial practice.
2. Literature Review
Corporate turnaround refers to decline and subsequent recovery in firm performance (Schmitt
& Raisch 2013; Schendel et al 1976). Organizational decline is progressive resource
deficiency from subtle erosion to depletion (Heine & Rindfleisch 2013; Weitzel & Jonsson
1989). The firm achieves recovery when it returns to sustainable profitability. Turnaround is
only worthwhile attempting if the firm can regenerate its resources for good financial health
(Schoenberg, et al 2013; Hofer 1980). Yeh and Fang (2011) observed that business
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turnaround involves shedding or adding resources as necessary to arrest the problem and take
corrective action. However, there is need for clarity about how to orchestrate resources for
corporate turnaround. Furthermore, Panditt (2000) noted that scholars have paid scant
attention to the mindsets of managers attempting turnaround. These limitations constrain the
building of turnaround theory.
The resource-based view theorizes that firms achieve competitive advantage and profitable
growth by combining tangible and intangible assets in ways superior to rivals in the
marketplace (Penrose 1959; Wernerfelt 1984). Competitive advantage can be sustained if
these assets are valuable, rare, inimitable and non-substitutable (Barney 1991). These are
VRIN resources. Grant (1991) argued that distinctive resources and capabilities enable the
firm to establish its identity and purpose, craft effective strategy and earn corporate profits in
excess of the cost of capital. Peteraf (1993) proposed that firms should adopt strategies that
match their resources and capabilities. The finance literature suggests that risk-taking and
increases in market share can improve bank profitability (Belkhaoui et al 2014). However, for
corporate turnaround, distressed financial institutions must reduce the riskiness of their asset
portfolios (DeGenarro & Lang 1993).
When faced with radical environmental change, the firm should reconfigure and redeploy its
resources to create new competitive advantage and value (Teece 2007). Firms in turnaround
situations need to build VRIN resources and find new ways of leveraging these tangible and
intangible assets for recovery from decline (Morrow, et al 2007). The capacity to make these
adjustments depends on the firm?s dynamic capabilities which reside largely in the domain of
top management and impacted by organizational systems and structures (Easterby-Smith et al
2008). Importantly, dynamic capabilities do not lead automatically to superior firm
performance and must be well-targeted and deployed for best results. Although the notion of
developing dynamic capabilities is not explicit in extant turnaround literature, Teece (2007)
argued that three sets of activities are involved: sensing threats and opportunities, seizing
opportunities and transforming capabilities and resources to fit new environmental conditions.
2.1 Capability to Sense Threat of Decline
Managers should search proactively for signs of organizational decline through market
probing, listening to customers and scanning elements of the business ecosystem (Weitzel &
Jonsson 1989). This is a process of knowledge discovery during which individuals use
cognitive capabilities to accumulate, filter and interpret information and signals in whatever
form they appear (Rodenbach & Brettel 2012). Cognition refers to mental processes of
perception, memory, judgment and reasoning (Nadkarni and Barr 2008). Managers might not
admit that firm performance is declining because of self-deception, a rigid organizational
culture or excessive company politics, consensus and compromise (Lorange & Nelson 1987).
Decline causes managers to dislike and blame each other, hide information, protect turf and
deny responsibility (Kanter 2003). These conditions cause delayed response or even inaction
(Heine & Rendfleisch 2013).
During the early stages of organizational decline, management has a period of warning and
time to act because of significant increases in debt to equity ratio, an indicator of financial
resource erosion (Hambrick & D?Aveni 1988). Decline becomes more severe and noticeable
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over time and can ultimately trigger intervention by external agents (Gopinath 2005). Grinyer &
McKiernan (1990) posited that intervention occurs when influential stakeholders become
sufficiently dissatisfied with firm performance. Failure to find solutions using existing
cognitions often result in resource cutbacks as a knee-jerk reaction to stem asset erosion.
Managers will then try to change strategy within existing objectives, beliefs and rules. Radical
transformation is a last resort. Moreover, Barker and Duhaime (1997) observed that the extent
of strategic change is associated with the magnitude of organizational decline and the firm?s
capacity to make the necessary adjustments.
2.2 Capability to Seize Opportunity for Recovery
Schoenberg et al (2013: p.252) argued that turnaround is driven by a “committed leadership
team whose mental models are appropriate to the environment the firm finds itself in.” These
ingrained assumptions and views of the world are motivated by past experience, organizational
routines and behavior, data patterns, or expectations from plausible scenarios of the future.
While turnaround leaders need to make correct strategic decisions, they must also restore the
self-confidence of employees and garner support from all key stakeholders (Kanter 2003).
However, conventional organizational practices and rules impede change to the extent that
there is resistance to proposals for new action. Managerial cognition filters information such
that those domains deemed to be most relevant get priority attention and others are ignored
selectively. A change of leadership is often required, even at several organizational levels, to
stem decline and seize turnaround opportunity through improved credibility of management
and general acceptance of new strategic initiatives without the stigma of past mistakes (Harker
& Sharma 2000).
After stemming asset erosion, the firm needs to rebuild resources for fueling organizational
change and withstanding further environmental jolts. This requires financial restructuring,
through private workouts or court proceedings, to reduce debt burden (Lawrence & Jones
2001; Hofer 1980). Resources are configured in an architecture or business model that
articulates the customer value proposition taking into account the firm?s risk appetite and how
to profitably satisfy anticipated demand (Teece 2007). Tikkanen et al (2005) posited that every
business model has two dimensions: (1) material elements, such as business networks and
resources, and (2) cognitive capabilities for understanding the choices available, assembling
evidence to validate opinions, setting organization boundaries, procuring appropriate
technologies and having good appreciation of the value chain and ecosystem. The functioning
of a business model is visible in the form of strategic decisions and actions (Tikkanen et al
2005). However, there is need for clarity on the process through which mental models
generate capacity to rebuild company assets and profitability.
2.3 Capability to Transform for Sustained Turnaround
Firms achieve turnaround by recombining existing resources or acquiring new resources that
meet the VRIN criteria (Morrow et al 2007). Managers must redeploy tangible and intangible
assets to renew and transform the organization for improved strategic fit with its ecosystem
(Teece 2007). Proper execution of a new business model requires collective learning, self-
renewal and transformation to institutionalize change in organizational culture by engaging all
employees (Blumenthal & Haspeslagh 1994). Wishnevsky (2004) reported empirical evidence
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to show that transformation enhances the chances of bank survival. Aspara et al (2011: 622)
stated that “the difference between success and failure of transformative activities boils down
to the firm?s ability to change its business model effectively and in rhythm with the dynamics of
the external environment.” The change must also be routinized or embedded within the
organizational culture through training, effective communication, incentives, leadership by
example and generating excitement about the transformation effort.
Renewal is a prerequisite for corporate transformation and arises from organizational learning
defined as the capability to improve by anticipating and coping with change (Blumenthal &
Haspeslagh, 1994). Organizational learning can create new value through cospecialization
wherein the benefit from an asset comes from its use in combination with others to differentiate
products or reduce costs (Teece 2007). Intangible assets are most important but has to be
bundled with complementary physical assets to create competitive advantage. Managers must
cope with anxieties and uncertainties among stakeholders while building a learning
organization. However, there is need for research on the process through which
organizational learning informs the decisions and actions for asset redeployment.
2.4 Conceptual Themes
Sensing, seizing and transforming are the three capabilities necessary to develop and
leverage business models for profitability (Teece 2007). A business model is comprised of two
elements: managerial cognition and material aspects including resources (Tikkanen et al.
2005). During business model transformation, there is interplay and balance between
managerial cognitions and the material aspects (Aspara et al 2011). In turnaround situations,
managerial cognitions sense warning signs of decline and trigger action to stem asset erosion.
Then mental models generate capacity to rebuild tangible and intangible assets. Finally,
organizational learning occurs to redeploy assets for profit recovery propelled by appropriate
employee incentives and strong relationships within the business ecosystem. Teece (2007:
p.1324) stated that development of dynamic capabilities “can also be facilitated if the
enterprise and/or the entrepreneur explicitly or implicitly employ some kind of analytical
framework, as this can highlight what is important.”
Table 1 shows the major themes, from the literature review, in a framework for case study of
turnaround processes. For banks, sensing threat of decline is important to sustain confidence
and avert anxious customer moves to quickly safeguard funds. Seizing opportunity to rebuild
assets, through appropriate mental models, puts the bank in a position to meet or exceed
capital adequacy and other regulatory requirements as well as provide resources for
technological change and competitive actions. Organizational learning facilitates
transformation of VRIN resources for profit recovery by recombining or acquiring assets to
build competitive advantage and cope with volatile consumer preferences. There needs to be a
change of leadership if top management demonstrates weak sensing, seizing and transforming
capabilities (Teece 2007).
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Table 1: Themes for developing dynamic capabilities in turnaround situations
Dynamic
Capabilities
Managerial
Cognition
Resource
Management
Attributes
Sensing threat
Detect signs of
decline
Stem
asset erosion
Decrease in profit level
Declaration of decline
Seizing opportunity
Develop
mental models
Rebuild assets Change of leadership
Increase in Equity ratio
Transforming for
renewal
Organizational
learning for
recovery
Redeploy
assets
Strategic and operational
changes
Increase in profit level
Past studies of corporate turnaround paid scant attention to tacit organizational elements and
intangibles during the process of profit recovery from decline. This research gap in the
literature constrains understanding of turnaround decision-making and, by extension,
development of turnaround theory. The aim of this study is to contribute towards closing this
gap by exploring the interplay between managerial cognitions and resource management
during the turnaround cycle, from the perspective of the three clusters of activities that make
up dynamic capabilities. Table 1 provides a useful framework for analysis of firm turnaround
with sufficient flexibility and parsimony to suit any context.
3. Methodology
3.1 Research Design
Similar to prior studies investigating the turnaround process of service organizations, the
research design is a longitudinal, historical case study with in-depth exploration of concepts
and themes over the entire turnaround cycle (Lawton et al 2011; Aspara et al 2011). This
qualitative study of a single setting provides description of managerial cognitions in the
turnaround decision-making process and how to create, deploy and modify resources during
interaction between the firm and its environment (Easterby-Smith, et al 2008). Longitudinal
case studies reveal important information about the way content, process and context might
relate to each other over time (Panditt 2000). While the case method is susceptible to
researcher bias and the findings cannot be generalized to the population of interest, this
approach is particularly useful for understanding details of a process and the way decision-
making unfolds (Eisenhardt 1989).
3.2 Subject of Study and Research Setting
NCB, one of Jamaica?s largest financial institutions, began operations in 1837 as a Jamaican
branch of the Colonial Bank of London. By 1925, the bank had eleven branches across the
island and Barclays Bank of London acquired Colonial bank. In 1977, the Government of
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Jamaica acquired Barclays Bank of Jamaica and changed its name to National Commercial
Bank. In 1981, NCB launched Jamaica?s first credit card and the institution became listed on
the Jamaica Stock Exchange in 1986. NCB merged with Mutual Security Bank Jamaica in
1996. In the late 1990s, NCB incurred severe losses, was rescued by the Government of
Jamaica and sold afterwards to AIC Canada. NCB provided a range of financial services
through its network of branches and automated transaction machines island-wide. These
services included chequing and savings accounts, credit card facilities, personal and
commercial loans, insurance, and wealth management; supported by Internet banking, along
with telephone banking and a toll-free 24/7 Customer Care Centre.
NCB is appropriate for filling the conceptual categories shown in Table 1 because this bank
went through a dramatic period of profit decline and recovery, from 1994 to 2003, involving
bank transformation in a developing country shocked by liberalization of trade and foreign
exchange controls. NCB?s turnaround was highly publicized in the media and afterwards
during a special inquiry arranged by the Government of Jamaica to review the operations of its
Financial Sector Adjustment Company (FINSAC) established to rehabilitate and divest local
distressed financial institutions including NCB. Table 2 summarizes NCB?s corporate
transformation and turnaround experience.
Table 2: Corporate transformation and turnaround at NCB
Before change Diversified conglomerate
After change Provider of financial services
Change type Radical transformation
Reason Bad debts and losses
Stimulus Government intervention
Duration Ten years (1994-2003)
Change level Corporate, business and functional
Content Retrenchment and Refocusing
Magnitude
Reduced scope of products and
cutback of physical infrastructure
Impact Sustained recovery from decline
3.3 Data Collection
Data collection occurred over four months and spanned the years 1985 to 2011 to cover the
time period before, during and after NCB?s profit decline and recovery. NCB?s turnaround
cycle was captured visually by arranging the data in four time zones: pre-decline when
profitability was increasing (Zone A), decline when profitability decreased resulting in company
losses (Zone B), recovery when profitability was restored to steady state (Zone C) and post-
recovery when profitability remained in steady state or increased for over three years (Zone D).
Data sources included interviews of company personnel, annual reports, releases posted on
the website of the Jamaica Stock Exchange, articles published in local newspapers, trade
journals such as LatinFinance and the Banker, and economic and social data from the
Planning Institute of Jamaica and the Bank of Jamaica. Aspara et al (2011) adopted a similar
approach to triangulate data for increased validity and reliability. Interviews consisted of open-
ended questions to obtain responses pertaining to concepts and themes from review of
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literature (Table 1). Secondary data is typical in longitudinal studies of turnaround to make
comparisons across several years (Lawton et al 2011). Table 3 summarizes the data types,
sources, collection methods and documents used in the study.
3.4 Measures and Data Analysis
Company financial ratios and the information contained in annual reports are useful for
understanding the corporate turnaround process (Pearce 2007). The study disaggregated the
DuPont formula, or strategic profit model, into two measures, return on assets (ROA) and the
equity ratio, for tracking the turnaround cycle pictorially. ROA was the measured as net profit
after taxes divided by total assets to indicate profitability (Schoenberg et al. 2013). The equity
ratio, measured as total shareholders? equity divided by total assets, reflects capital adequacy
which is a significant determinant of a bank?s ability to survive and grow market share (Berger
& Bouwman 2013). The themes shown in Table 1 guided the description of NCB?s turnaround
experience and extraction of information on how key attributes evolved. Similar to Aspara et
al. (2011), managerial cognitions and resource management were noted from interviews and
decisions and actions evident from company reports, stock market releases, articles in
newspapers and published proceedings of the FINSAC inquiry by the Government of Jamaica.
The study compared evidence of managerial cognitions and resource management with
management thought in the strategy literature to identify similarities and contradictions.
Managerial cognitions arose from comments made by NCB Directors or Managers in company
reports, during the interviews and quotations published in newspapers. Insights on resource
management came from decisions and actions declared during the interviews, reported in
company documents, or derived from analysis of financial data. Similarities strengthen internal
validity and contradictions can evolve new frame-breaking management thought to enrich
theory (Eisenhardt 1989). A chain of evidence supported construct validity and multiple
sources of information to detect convergent lines for internal validity. Of note, this is the first
study of corporate turnaround to describe managerial cognitions and resource management
during each zone of the turnaround cycle.
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Table 3: Data sources, collection methods and documents for the NCB study
Data Sources Collection
methods
Documents Data extracted
Company reports Collected from NCB
offices and website
12 Annual
Reports
Bank performance,
resource usage and
managerial decisions and
views
The Gleaner and
Jamaica Observer
newspapers
Collected from
archives
48 Articles Managerial cognitions
from FINSAC Inquiry and
Media reports on NCB
Planning Institute of
Jamaica – Social and
Economic surveys
Collected from
library
15 Reports
from 1974 to
2013
Data on trends in
Jamaica?s Financial
Services Sector
Jamaica Stock
Exchange
Retrieved from
website
14 Public
releases
Management, financial
and stock market data on
NCB
Google Scholar Retrieved from
website
2 research
articles
Jamaican banking
policies and industry
context and evolution
Trade Journals on
ABI/Inform Global
database
Retrieved from
website
6 articles Commentaries on NCB
by LatinFinance and
Banker magazines
NCB Board Director
Face-to-face
interview for 2
hours
One written
transcript
Qualitative data on
managerial cognitions
and decisions
NCB Executives
(One current and two
former)
One telephone
interview for 30
minutes and two
face-to-face
interviews for 90
minutes each.
Three written
transcripts
Qualitative data on
managerial cognitions
and decisions and
resource management
4. Findings
Figure 1 shows NCB?s turnaround cycle, in terms of ROA and equity ratio, for the period 1985-
2011. In Zone A (1985-1994), NCB was on a path of profitable growth despite clear signs of
financial sector decline from 1991 to 1993. During this pre-decline period, NCB pursued a
strategy of corporate growth through merger with Mutual Security Bank, product diversification,
branch network expansion and electronic banking using automated business machines.
Fueled by high interest rates, NCB?s return on equity (ROE) rose from 25% in 1985 to 42% in
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1994. In Zone B (1994-1996), ROE collapsed to negative 43% mostly because of bad debt
provisions. This adversity was widespread across the financial services sector which continued
to contract by way of mergers. Many of NCB?s customers defaulted on loan repayments
because of onerous interest rates. By 1998, NCB?s equity ratio had fallen well below central
bank guidelines to less than 2% despite sale of assets such as the Wyndham Kingston Hotel.
In Zone C (1996-2003), the Government of Jamaica intervened to take control of NCB with
subsequent profit recovery and sale of the institution to AIC Canada. ROE rose to 22% by
2003. This turnaround involved change of leadership, asset and cost retrenchment,
divestment of non-banking business units, and refocusing on core financial services. The
sharp increase in Financial Sector GDP growth occurred because of Government initiatives to
bailout several failing institutions. NCB continued to increase profitability and build its capital
base in the post-recovery period (Zone D), 2003-2011, notwithstanding continued volatility in
growth of the sector.
Figure 1: NCB’s turnaround cycle
Sources: NCB annual reports
Management failed to respond to the early warning signs of decline when there was time to act
before asset erosion became severe. During the period of decline (Zone B), interest rates
charged by the bank on non-performing loans were as high as 90%. The Jamaican economy
slipped into recession with real growth of Gross Domestic Product falling from 1.4% in 1993 to
negative 2.4% in 1997. NCB?s bad debts rose sharply to 21% of total assets forcing
management to seek assistance from the Government. Rather than admit imprudent handling
of company resources, NCB?s leaders blamed the Government?s policy of high interest rates
and lamented that NCB was unable to make workable deals with delinquent customers
because “we were not given the level of cooperation [from the Government] in terms of our
requests” (Foster 2011). Yet, FINSAC did intervene by buying the bad debt portfolio and
injecting capital, using funds from sale of long-term registered stock in the domestic market, in
exchange for 76% ownership of NCB.
The Government believed that NCB was too big to fail and FINSAC took control of NCB?s
Board of Directors, strategy and operations in 1996 (Zone C). The bank sold non-core assets
-5.0
0.0
5.0
10.0
15.0
20.0
85 87 89 91 93 95 97 99 01 03 05 07 09 11
%
Year
Equity ratio Return on Assets
ZONES A B C D
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and moved to collect accounts receivable even by way of putting some of its debtors into
receivership. New management organized NCB into five units, to stem the decline, with
progress monitored closely by a new Board of Directors. The pre-workout unit managed the
current portfolio of performing loans to minimize delinquencies. A workout unit was
responsible for recovering non-performing loans including litigation where necessary. The
banking services unit focused on revenue enhancement, increasing savings, and cost
reduction. An operations unit was responsible for reduction in staff costs and containment of
capital expenditures. Treasury focused on increasing yields on NCB?s liquid assets and
surplus funds. Management automated NCB?s operations to improve the accuracy of
transactions processing. Although eventually beneficial, the actions taken to stem
organizational decline were disruptive and created anxieties and uncertainties among
stakeholders. In the 1997 to 1998 period, NCB closed nine bank branches with staff layoffs.
The cost to income ratio decreased from 75% to 45%.
In 1998, NCB hired consultants, McKinsey and Company, to develop a turnaround plan for the
bank. This led to changes in the business model, organizational structure and roles of the
leadership team. In November 2000, under supervision by FINSAC, new interim leadership
and a scheme of arrangement, NCB Group shares were exchanged for shares in the new
entity reorganized as a bank only. The interim Chairman declared that “the intention is,
however, to return the company to full private sector ownership.” FINSAC refocused NCB on
financial services by selling several non-core businesses including the Wyndham Hotel,
Caribbean Home Insurance Company, and Jamaica Orange Company. However, NCB?s profit
recovery was non-monotonic during the process of rebuilding its assets (Figure 1).
In March 2002, AIC Canada acquired FINSAC?s stake in NCB and immediately set about to
modify NCB?s resources and institutionalize the organizational transformation. The entire
branch network received upgraded technology in record time. NCB had a new Board of
Directors and executive management with some members hired from overseas. This
leadership used fast organizational learning to restore public confidence in the institution,
employee morale and competitiveness and the core technology platform. NCB launched
several new products in the local market while developing a performance-based organizational
culture with ongoing human resource training. According to the Board Chairman in NCB?s
2002 annual report, “in order to face the many and changing eventualities in a dynamic
marketplace, our team must be a group of creative, energetic and hands-on people who have
high expectations of themselves.” NCB also introduced an employee incentive scheme
applicable at all levels of the organization. Importantly, all of NCB?s earnings were reinvested
in the bank, over the next five years, for organic growth. The new CEO declared in the NCB
2002 annual report: “We also intend to make NCB the kind of place where excellent people
find it comfortable to work, prosper and remain, and mediocre performers find it most
uncomfortable to stay.”
In the post-recovery period (Zone D), NCB broadened its scope of banking services and
recorded substantial growth of assets and profit outpacing industry average. The Chairman
declared that the bank was successful in boosting employee morale, regaining public
confidence, rebuilding reputation and renovating the operating infrastructure. NCB
strengthened its governance practices and capital base to world-class standards. The bank
continued its growth momentum even through and beyond the global financial crisis of 2007-
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2009 (Figure 2). NCB received the award of 2008 Bank of the Year in Jamaica from the
Banker magazine and the Group Managing Director commented “Our strong financial
performance has been as a result of our strategic focus on innovation, expertise and strength -
three pillars which define our approach to product delivery, customer service, and employee
development and operating efficiency."
Figure 2 shows that NCB?s Return on Equity (ROE) was more sensitive to Treasury bill interest
rates in the pre-decline period relative to the post-recovery period. NCB derived substantial
income from investments in Government of Jamaica securities. However, interest rates were
appreciably lower during the post-recovery period. To survive in a climate of lower interest
rates, NCB became less reliant on interest income from Government of Jamaica Securities
and instead focused on selling bank products to the general public. Figure 3 shows that NCB
recovered from ROE decline and eventually outperformed its main rival Bank of Nova Scotia
Jamaica Limited (Scotia). The international experience and know-how of NCB?s leadership
enabled the institution to survive two radical environmental changes during recovery:
substantial decline in interest rate spreads, from the late 1990s onwards, and outperform
financial sector GDP growth under conditions of tighter regulatory requirements in the
aftermath of the global economic crisis of 2007-2008.
Figure 2: Treasury bill rates (T-Bill) and NCB’s ROE before decline and after recovery
0
0.1
0.2
0.3
0.4
0.5
0 10 20 30
ROE
T-Bill 6-month rate (before decline 1985 - 1992)
0
0.05
0.1
0.15
0.2
0.25
0.3
0 10 20 30
ROE
T-Bill 6-month rate (after recovery 2005 - 2012)
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Figure 3: Scotiabank and NCB ROE relative to Financial Sector GDP Growth
Sources: Company reports and the Planning Institute of Jamaica
NCB purposefully reconfigured and redeployed human and physical resources to stem
organizational decline and achieve profit recovery. This case study differs from prior
turnaround research by describing the interplay, between managerial cognitions and the way
resources are managed, at each stage of the cycle: pre-decline, decline, recovery and post-
recovery. NCB?s dynamic capabilities hinged critically on know-how to orchestrate bank
processes, for competitive advantage, and leveraging relationships with the Government of
Jamaica and AIC Canada, its ultimate parent company.
5. Conclusion
The findings support the resource based view of the firm (Wernerfelt 1984). NCB regained
competitive advantage and profitable growth by leveraging the know-how of new leadership
which was a VRIN intangible asset. As proposed by Grinyer et al (1990), intervention occurred
only after management sensed inevitable crisis from rising bad debts. Managerial cognitions
created biased perceptions of reality and delayed strategic intervention for turnaround. The
Government of Jamaica perceived that NCB was too big to fail and acquired majority
ownership of the institution as part of its overall bailout program for the ailing financial services
sector. NCB changed its business model, to refocus on commercial banking by rebuilding
customer confidence and employee commitment. This change, though beneficial, was
disruptive and caused anxieties and uncertainties among NCB?s internal and external
stakeholders. NCB transformed to a performance-based culture through human resource
training and incentives with appropriate infrastructural support including new technology. NCB
was able to quickly deploy and routinize new knowledge and organizational learning to cope
with environmental dynamics.
The findings fill a gap in turnaround literature pertaining to the role of tacit organizational
elements and intangible assets on the turnaround process (Panditt 2000). NCB had to
cultivate the mindsets needed for recognizing the source of organizational decline, developing
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
85 87 89 91 93 95 97 99 01 03 05 07 09 10 11
%
YEAR
Scotia ROE NCB ROE Financial Sector GDP Growth
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210
a new business model and transforming from a loss-making diversified conglomerate into a
profitable and focused provider of financial services. Managerial cognitions influenced the
management of resources for NCB?s transformation and turnaround (Aspara et al 2011). The
NCB case study revealed that these cognitions can filter away the early warning signs of
decline and cause delayed action or even inaction. Cognitions affected how NCB crafted
strategy and executed strategic initiatives to rebuild and redeploy resources for corporate
transformation and turnaround. Importantly, external cognitions are also important for building
turnaround theory because NCB was unlikely to recover from decline without fresh financial
resources from the Government of Jamaica who perceived that the institution was too big to
fail.
A limitation of the study is that the findings cannot be generalized because of the focus on
single case. However, this was necessary for in-depth understanding of the turnaround
process. Notwithstanding this limitation, the findings lead to the proposition that success or
failure of bank turnaround depends on the extent to which managerial cognitions create and
leverage relevant VRIN resources to transform business models in alignment with
environmental dynamics. Future studies can use this proposition to develop research
questions for large sample statistical tests.
Turnaround managers need contemplate proactively how their cognitions affect the capacity of
the firm to create, extend and modify firm resources for sustainable profit recovery from
organizational decline. These capabilities are developed and leveraged for corporate
turnaround through effective leadership, relationships with stakeholders, and training and
incentives for employees.
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doc_440259684.pdf
Developing Dynamic Capabilities For Bank Turnaround
World Review of Business Research
Vol. 5. No. 3. September 2015 Issue. Pp. 197 – 212
Developing Dynamic Capabilities for Bank Turnaround
William W. Lawrence
1
This article explores the evolution of dynamic capabilities over
the bank turnaround cycle from perspective of the resource-
based view of the firm. A longitudinal case study uncovered how
National Commercial Bank Jamaica sensed threats, mobilized
resources to seize opportunity, and transformed for corporate
turnaround. The period of study was 1985 to 2011 using data
from secondary sources and interviews of company personnel.
Managerial cognition created biased perception of reality to
delay strategic intervention. New leadership strengthened the
bank’s business model by building intangible assets and
leveraging external relationships. Employee training and
incentives facilitated deployment of new knowledge and
motivated organizational learning and innovation for corporate
renewal.
JEL Codes: D21, G21 and M10
1. Introduction
Some of the world?s largest banks reported substantial losses during the global financial crisis
of 2007-2008 (Crotty 2009; The Economist 2009). In the aftermath, banks face tighter
regulation, intensifying competition, rapid changes in technology and volatile consumer
preferences. These conditions escalate the likelihood of more losses and make profit recovery
quite challenging. History suggests that managers require more guidance on how to rescue
failing banks.
Strategy literature contains a sbstantial body of knowledge, on corporate turnaround
management, developed over the past four decades. The most popular school of thought
posits that viable firms can recover from organizational decline by resolving financial distress,
changing strategy and increasing efficiency (Schoenberg et al 2013; Arogyaswamy et al 1995).
Only a few studies focus on banks and these suggest that turnaround arises from cost control
and revenue enhancement (Clausen 1990; O?Neill 1986). However, there is need for granular
understanding of the process (Panditt 2000; Pearce and Robbins 1993).
Schoenberg, et al. (2013: p.253) commented: “The resource-based view and dynamic
capability perspectives could also provide insightful lenses to explore turnaround.” Teece et al
(1997) posited that increases in business profitability arise from dynamic capabilities defined
as the firm?s capacity to create, extend or modify its resources base. Ordinary capabilities are
high-level routines for deploying resources to produce and sell goods and services. These
capabilities become dynamic if the firm can purposefully reconfigure and redeploy resources to
cope with environmental changes. However, this concept has escaped the attention of
1
Dr. William W. Lawrence, Mona School of Business and Management, The University of the West Indies, Mona,
Jamaica. E-mail: [email protected]
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turnaround scholars despite evidence of radical environmental changes that made existing
tangible and intangible assets uncompetitive and eroded business profitability in the
marketplace. Easterby-Smith et al (2008) noted that dynamic capabilities remain hidden until
exercised and are associated with tacit organizational elements and intangibles such as
processes, managerial cognition and knowledge.
Research in this area can help to resolve the debate about how to manage resources in
turnaround situations particularly in respect of deriving value from strategic assets (Morrow et
al 2007). The concept of dynamic capabilities is of particular relevance for banks because
they need to reconfigure the way they create and deliver value for survival and prosperity in
highly volatile environments (Sun & Chan 2011). Therefore, the purpose of this study was to
identify the key activities pertaining to dynamic capabilities in the bank turnaround process.
Specifically, the study explored answers to two research questions in the strategy literature
based on the resource based view:
RQ1: What are the dynamic capabilities for bank recovery from profit decline?
RQ2: How do managers develop and leverage dynamic capabilities for bank
turnaround?
Teece (2007) proposed that dynamic capabilities become particularly critical in developing
environments open to international commerce. So, this article reports findings from a study of
corporate transformation and turnaround of a bank located in Jamaica, a small developing
island economy that is open to international trade and highly exposed to natural disasters and
economic shocks (International Monetary Fund, 2013). This is the first study of the corporate
turnaround process to explore the role of dynamic capabilities. Important concepts and themes
were derived, from integration of literature on corporate turnaround and dynamic capabilities,
to conduct historical analysis and longitudinal case study of the turnaround experience of
National Commercial Bank Jamaica Limited (NCB). Findings revealed that bank recovery from
decline involved careful orchestration of the interplay between managerial cognitions and
resource management at each stage of the corporate turnaround cycle.
The next section of this article presents a review of literature to evolve concepts and themes
for the NCB case study. Section 3 reports the methodology used for the study including
research design and procedures for data collection and analysis. Section 4 reports
observations made, during the case study, and important findings. Section 5 is the conclusion
and discusses how the study contributes to theory development, limitations of the study,
suggestion for future research and implication for managerial practice.
2. Literature Review
Corporate turnaround refers to decline and subsequent recovery in firm performance (Schmitt
& Raisch 2013; Schendel et al 1976). Organizational decline is progressive resource
deficiency from subtle erosion to depletion (Heine & Rindfleisch 2013; Weitzel & Jonsson
1989). The firm achieves recovery when it returns to sustainable profitability. Turnaround is
only worthwhile attempting if the firm can regenerate its resources for good financial health
(Schoenberg, et al 2013; Hofer 1980). Yeh and Fang (2011) observed that business
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turnaround involves shedding or adding resources as necessary to arrest the problem and take
corrective action. However, there is need for clarity about how to orchestrate resources for
corporate turnaround. Furthermore, Panditt (2000) noted that scholars have paid scant
attention to the mindsets of managers attempting turnaround. These limitations constrain the
building of turnaround theory.
The resource-based view theorizes that firms achieve competitive advantage and profitable
growth by combining tangible and intangible assets in ways superior to rivals in the
marketplace (Penrose 1959; Wernerfelt 1984). Competitive advantage can be sustained if
these assets are valuable, rare, inimitable and non-substitutable (Barney 1991). These are
VRIN resources. Grant (1991) argued that distinctive resources and capabilities enable the
firm to establish its identity and purpose, craft effective strategy and earn corporate profits in
excess of the cost of capital. Peteraf (1993) proposed that firms should adopt strategies that
match their resources and capabilities. The finance literature suggests that risk-taking and
increases in market share can improve bank profitability (Belkhaoui et al 2014). However, for
corporate turnaround, distressed financial institutions must reduce the riskiness of their asset
portfolios (DeGenarro & Lang 1993).
When faced with radical environmental change, the firm should reconfigure and redeploy its
resources to create new competitive advantage and value (Teece 2007). Firms in turnaround
situations need to build VRIN resources and find new ways of leveraging these tangible and
intangible assets for recovery from decline (Morrow, et al 2007). The capacity to make these
adjustments depends on the firm?s dynamic capabilities which reside largely in the domain of
top management and impacted by organizational systems and structures (Easterby-Smith et al
2008). Importantly, dynamic capabilities do not lead automatically to superior firm
performance and must be well-targeted and deployed for best results. Although the notion of
developing dynamic capabilities is not explicit in extant turnaround literature, Teece (2007)
argued that three sets of activities are involved: sensing threats and opportunities, seizing
opportunities and transforming capabilities and resources to fit new environmental conditions.
2.1 Capability to Sense Threat of Decline
Managers should search proactively for signs of organizational decline through market
probing, listening to customers and scanning elements of the business ecosystem (Weitzel &
Jonsson 1989). This is a process of knowledge discovery during which individuals use
cognitive capabilities to accumulate, filter and interpret information and signals in whatever
form they appear (Rodenbach & Brettel 2012). Cognition refers to mental processes of
perception, memory, judgment and reasoning (Nadkarni and Barr 2008). Managers might not
admit that firm performance is declining because of self-deception, a rigid organizational
culture or excessive company politics, consensus and compromise (Lorange & Nelson 1987).
Decline causes managers to dislike and blame each other, hide information, protect turf and
deny responsibility (Kanter 2003). These conditions cause delayed response or even inaction
(Heine & Rendfleisch 2013).
During the early stages of organizational decline, management has a period of warning and
time to act because of significant increases in debt to equity ratio, an indicator of financial
resource erosion (Hambrick & D?Aveni 1988). Decline becomes more severe and noticeable
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over time and can ultimately trigger intervention by external agents (Gopinath 2005). Grinyer &
McKiernan (1990) posited that intervention occurs when influential stakeholders become
sufficiently dissatisfied with firm performance. Failure to find solutions using existing
cognitions often result in resource cutbacks as a knee-jerk reaction to stem asset erosion.
Managers will then try to change strategy within existing objectives, beliefs and rules. Radical
transformation is a last resort. Moreover, Barker and Duhaime (1997) observed that the extent
of strategic change is associated with the magnitude of organizational decline and the firm?s
capacity to make the necessary adjustments.
2.2 Capability to Seize Opportunity for Recovery
Schoenberg et al (2013: p.252) argued that turnaround is driven by a “committed leadership
team whose mental models are appropriate to the environment the firm finds itself in.” These
ingrained assumptions and views of the world are motivated by past experience, organizational
routines and behavior, data patterns, or expectations from plausible scenarios of the future.
While turnaround leaders need to make correct strategic decisions, they must also restore the
self-confidence of employees and garner support from all key stakeholders (Kanter 2003).
However, conventional organizational practices and rules impede change to the extent that
there is resistance to proposals for new action. Managerial cognition filters information such
that those domains deemed to be most relevant get priority attention and others are ignored
selectively. A change of leadership is often required, even at several organizational levels, to
stem decline and seize turnaround opportunity through improved credibility of management
and general acceptance of new strategic initiatives without the stigma of past mistakes (Harker
& Sharma 2000).
After stemming asset erosion, the firm needs to rebuild resources for fueling organizational
change and withstanding further environmental jolts. This requires financial restructuring,
through private workouts or court proceedings, to reduce debt burden (Lawrence & Jones
2001; Hofer 1980). Resources are configured in an architecture or business model that
articulates the customer value proposition taking into account the firm?s risk appetite and how
to profitably satisfy anticipated demand (Teece 2007). Tikkanen et al (2005) posited that every
business model has two dimensions: (1) material elements, such as business networks and
resources, and (2) cognitive capabilities for understanding the choices available, assembling
evidence to validate opinions, setting organization boundaries, procuring appropriate
technologies and having good appreciation of the value chain and ecosystem. The functioning
of a business model is visible in the form of strategic decisions and actions (Tikkanen et al
2005). However, there is need for clarity on the process through which mental models
generate capacity to rebuild company assets and profitability.
2.3 Capability to Transform for Sustained Turnaround
Firms achieve turnaround by recombining existing resources or acquiring new resources that
meet the VRIN criteria (Morrow et al 2007). Managers must redeploy tangible and intangible
assets to renew and transform the organization for improved strategic fit with its ecosystem
(Teece 2007). Proper execution of a new business model requires collective learning, self-
renewal and transformation to institutionalize change in organizational culture by engaging all
employees (Blumenthal & Haspeslagh 1994). Wishnevsky (2004) reported empirical evidence
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to show that transformation enhances the chances of bank survival. Aspara et al (2011: 622)
stated that “the difference between success and failure of transformative activities boils down
to the firm?s ability to change its business model effectively and in rhythm with the dynamics of
the external environment.” The change must also be routinized or embedded within the
organizational culture through training, effective communication, incentives, leadership by
example and generating excitement about the transformation effort.
Renewal is a prerequisite for corporate transformation and arises from organizational learning
defined as the capability to improve by anticipating and coping with change (Blumenthal &
Haspeslagh, 1994). Organizational learning can create new value through cospecialization
wherein the benefit from an asset comes from its use in combination with others to differentiate
products or reduce costs (Teece 2007). Intangible assets are most important but has to be
bundled with complementary physical assets to create competitive advantage. Managers must
cope with anxieties and uncertainties among stakeholders while building a learning
organization. However, there is need for research on the process through which
organizational learning informs the decisions and actions for asset redeployment.
2.4 Conceptual Themes
Sensing, seizing and transforming are the three capabilities necessary to develop and
leverage business models for profitability (Teece 2007). A business model is comprised of two
elements: managerial cognition and material aspects including resources (Tikkanen et al.
2005). During business model transformation, there is interplay and balance between
managerial cognitions and the material aspects (Aspara et al 2011). In turnaround situations,
managerial cognitions sense warning signs of decline and trigger action to stem asset erosion.
Then mental models generate capacity to rebuild tangible and intangible assets. Finally,
organizational learning occurs to redeploy assets for profit recovery propelled by appropriate
employee incentives and strong relationships within the business ecosystem. Teece (2007:
p.1324) stated that development of dynamic capabilities “can also be facilitated if the
enterprise and/or the entrepreneur explicitly or implicitly employ some kind of analytical
framework, as this can highlight what is important.”
Table 1 shows the major themes, from the literature review, in a framework for case study of
turnaround processes. For banks, sensing threat of decline is important to sustain confidence
and avert anxious customer moves to quickly safeguard funds. Seizing opportunity to rebuild
assets, through appropriate mental models, puts the bank in a position to meet or exceed
capital adequacy and other regulatory requirements as well as provide resources for
technological change and competitive actions. Organizational learning facilitates
transformation of VRIN resources for profit recovery by recombining or acquiring assets to
build competitive advantage and cope with volatile consumer preferences. There needs to be a
change of leadership if top management demonstrates weak sensing, seizing and transforming
capabilities (Teece 2007).
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Table 1: Themes for developing dynamic capabilities in turnaround situations
Dynamic
Capabilities
Managerial
Cognition
Resource
Management
Attributes
Sensing threat
Detect signs of
decline
Stem
asset erosion
Decrease in profit level
Declaration of decline
Seizing opportunity
Develop
mental models
Rebuild assets Change of leadership
Increase in Equity ratio
Transforming for
renewal
Organizational
learning for
recovery
Redeploy
assets
Strategic and operational
changes
Increase in profit level
Past studies of corporate turnaround paid scant attention to tacit organizational elements and
intangibles during the process of profit recovery from decline. This research gap in the
literature constrains understanding of turnaround decision-making and, by extension,
development of turnaround theory. The aim of this study is to contribute towards closing this
gap by exploring the interplay between managerial cognitions and resource management
during the turnaround cycle, from the perspective of the three clusters of activities that make
up dynamic capabilities. Table 1 provides a useful framework for analysis of firm turnaround
with sufficient flexibility and parsimony to suit any context.
3. Methodology
3.1 Research Design
Similar to prior studies investigating the turnaround process of service organizations, the
research design is a longitudinal, historical case study with in-depth exploration of concepts
and themes over the entire turnaround cycle (Lawton et al 2011; Aspara et al 2011). This
qualitative study of a single setting provides description of managerial cognitions in the
turnaround decision-making process and how to create, deploy and modify resources during
interaction between the firm and its environment (Easterby-Smith, et al 2008). Longitudinal
case studies reveal important information about the way content, process and context might
relate to each other over time (Panditt 2000). While the case method is susceptible to
researcher bias and the findings cannot be generalized to the population of interest, this
approach is particularly useful for understanding details of a process and the way decision-
making unfolds (Eisenhardt 1989).
3.2 Subject of Study and Research Setting
NCB, one of Jamaica?s largest financial institutions, began operations in 1837 as a Jamaican
branch of the Colonial Bank of London. By 1925, the bank had eleven branches across the
island and Barclays Bank of London acquired Colonial bank. In 1977, the Government of
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Jamaica acquired Barclays Bank of Jamaica and changed its name to National Commercial
Bank. In 1981, NCB launched Jamaica?s first credit card and the institution became listed on
the Jamaica Stock Exchange in 1986. NCB merged with Mutual Security Bank Jamaica in
1996. In the late 1990s, NCB incurred severe losses, was rescued by the Government of
Jamaica and sold afterwards to AIC Canada. NCB provided a range of financial services
through its network of branches and automated transaction machines island-wide. These
services included chequing and savings accounts, credit card facilities, personal and
commercial loans, insurance, and wealth management; supported by Internet banking, along
with telephone banking and a toll-free 24/7 Customer Care Centre.
NCB is appropriate for filling the conceptual categories shown in Table 1 because this bank
went through a dramatic period of profit decline and recovery, from 1994 to 2003, involving
bank transformation in a developing country shocked by liberalization of trade and foreign
exchange controls. NCB?s turnaround was highly publicized in the media and afterwards
during a special inquiry arranged by the Government of Jamaica to review the operations of its
Financial Sector Adjustment Company (FINSAC) established to rehabilitate and divest local
distressed financial institutions including NCB. Table 2 summarizes NCB?s corporate
transformation and turnaround experience.
Table 2: Corporate transformation and turnaround at NCB
Before change Diversified conglomerate
After change Provider of financial services
Change type Radical transformation
Reason Bad debts and losses
Stimulus Government intervention
Duration Ten years (1994-2003)
Change level Corporate, business and functional
Content Retrenchment and Refocusing
Magnitude
Reduced scope of products and
cutback of physical infrastructure
Impact Sustained recovery from decline
3.3 Data Collection
Data collection occurred over four months and spanned the years 1985 to 2011 to cover the
time period before, during and after NCB?s profit decline and recovery. NCB?s turnaround
cycle was captured visually by arranging the data in four time zones: pre-decline when
profitability was increasing (Zone A), decline when profitability decreased resulting in company
losses (Zone B), recovery when profitability was restored to steady state (Zone C) and post-
recovery when profitability remained in steady state or increased for over three years (Zone D).
Data sources included interviews of company personnel, annual reports, releases posted on
the website of the Jamaica Stock Exchange, articles published in local newspapers, trade
journals such as LatinFinance and the Banker, and economic and social data from the
Planning Institute of Jamaica and the Bank of Jamaica. Aspara et al (2011) adopted a similar
approach to triangulate data for increased validity and reliability. Interviews consisted of open-
ended questions to obtain responses pertaining to concepts and themes from review of
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literature (Table 1). Secondary data is typical in longitudinal studies of turnaround to make
comparisons across several years (Lawton et al 2011). Table 3 summarizes the data types,
sources, collection methods and documents used in the study.
3.4 Measures and Data Analysis
Company financial ratios and the information contained in annual reports are useful for
understanding the corporate turnaround process (Pearce 2007). The study disaggregated the
DuPont formula, or strategic profit model, into two measures, return on assets (ROA) and the
equity ratio, for tracking the turnaround cycle pictorially. ROA was the measured as net profit
after taxes divided by total assets to indicate profitability (Schoenberg et al. 2013). The equity
ratio, measured as total shareholders? equity divided by total assets, reflects capital adequacy
which is a significant determinant of a bank?s ability to survive and grow market share (Berger
& Bouwman 2013). The themes shown in Table 1 guided the description of NCB?s turnaround
experience and extraction of information on how key attributes evolved. Similar to Aspara et
al. (2011), managerial cognitions and resource management were noted from interviews and
decisions and actions evident from company reports, stock market releases, articles in
newspapers and published proceedings of the FINSAC inquiry by the Government of Jamaica.
The study compared evidence of managerial cognitions and resource management with
management thought in the strategy literature to identify similarities and contradictions.
Managerial cognitions arose from comments made by NCB Directors or Managers in company
reports, during the interviews and quotations published in newspapers. Insights on resource
management came from decisions and actions declared during the interviews, reported in
company documents, or derived from analysis of financial data. Similarities strengthen internal
validity and contradictions can evolve new frame-breaking management thought to enrich
theory (Eisenhardt 1989). A chain of evidence supported construct validity and multiple
sources of information to detect convergent lines for internal validity. Of note, this is the first
study of corporate turnaround to describe managerial cognitions and resource management
during each zone of the turnaround cycle.
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Table 3: Data sources, collection methods and documents for the NCB study
Data Sources Collection
methods
Documents Data extracted
Company reports Collected from NCB
offices and website
12 Annual
Reports
Bank performance,
resource usage and
managerial decisions and
views
The Gleaner and
Jamaica Observer
newspapers
Collected from
archives
48 Articles Managerial cognitions
from FINSAC Inquiry and
Media reports on NCB
Planning Institute of
Jamaica – Social and
Economic surveys
Collected from
library
15 Reports
from 1974 to
2013
Data on trends in
Jamaica?s Financial
Services Sector
Jamaica Stock
Exchange
Retrieved from
website
14 Public
releases
Management, financial
and stock market data on
NCB
Google Scholar Retrieved from
website
2 research
articles
Jamaican banking
policies and industry
context and evolution
Trade Journals on
ABI/Inform Global
database
Retrieved from
website
6 articles Commentaries on NCB
by LatinFinance and
Banker magazines
NCB Board Director
Face-to-face
interview for 2
hours
One written
transcript
Qualitative data on
managerial cognitions
and decisions
NCB Executives
(One current and two
former)
One telephone
interview for 30
minutes and two
face-to-face
interviews for 90
minutes each.
Three written
transcripts
Qualitative data on
managerial cognitions
and decisions and
resource management
4. Findings
Figure 1 shows NCB?s turnaround cycle, in terms of ROA and equity ratio, for the period 1985-
2011. In Zone A (1985-1994), NCB was on a path of profitable growth despite clear signs of
financial sector decline from 1991 to 1993. During this pre-decline period, NCB pursued a
strategy of corporate growth through merger with Mutual Security Bank, product diversification,
branch network expansion and electronic banking using automated business machines.
Fueled by high interest rates, NCB?s return on equity (ROE) rose from 25% in 1985 to 42% in
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206
1994. In Zone B (1994-1996), ROE collapsed to negative 43% mostly because of bad debt
provisions. This adversity was widespread across the financial services sector which continued
to contract by way of mergers. Many of NCB?s customers defaulted on loan repayments
because of onerous interest rates. By 1998, NCB?s equity ratio had fallen well below central
bank guidelines to less than 2% despite sale of assets such as the Wyndham Kingston Hotel.
In Zone C (1996-2003), the Government of Jamaica intervened to take control of NCB with
subsequent profit recovery and sale of the institution to AIC Canada. ROE rose to 22% by
2003. This turnaround involved change of leadership, asset and cost retrenchment,
divestment of non-banking business units, and refocusing on core financial services. The
sharp increase in Financial Sector GDP growth occurred because of Government initiatives to
bailout several failing institutions. NCB continued to increase profitability and build its capital
base in the post-recovery period (Zone D), 2003-2011, notwithstanding continued volatility in
growth of the sector.
Figure 1: NCB’s turnaround cycle
Sources: NCB annual reports
Management failed to respond to the early warning signs of decline when there was time to act
before asset erosion became severe. During the period of decline (Zone B), interest rates
charged by the bank on non-performing loans were as high as 90%. The Jamaican economy
slipped into recession with real growth of Gross Domestic Product falling from 1.4% in 1993 to
negative 2.4% in 1997. NCB?s bad debts rose sharply to 21% of total assets forcing
management to seek assistance from the Government. Rather than admit imprudent handling
of company resources, NCB?s leaders blamed the Government?s policy of high interest rates
and lamented that NCB was unable to make workable deals with delinquent customers
because “we were not given the level of cooperation [from the Government] in terms of our
requests” (Foster 2011). Yet, FINSAC did intervene by buying the bad debt portfolio and
injecting capital, using funds from sale of long-term registered stock in the domestic market, in
exchange for 76% ownership of NCB.
The Government believed that NCB was too big to fail and FINSAC took control of NCB?s
Board of Directors, strategy and operations in 1996 (Zone C). The bank sold non-core assets
-5.0
0.0
5.0
10.0
15.0
20.0
85 87 89 91 93 95 97 99 01 03 05 07 09 11
%
Year
Equity ratio Return on Assets
ZONES A B C D
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and moved to collect accounts receivable even by way of putting some of its debtors into
receivership. New management organized NCB into five units, to stem the decline, with
progress monitored closely by a new Board of Directors. The pre-workout unit managed the
current portfolio of performing loans to minimize delinquencies. A workout unit was
responsible for recovering non-performing loans including litigation where necessary. The
banking services unit focused on revenue enhancement, increasing savings, and cost
reduction. An operations unit was responsible for reduction in staff costs and containment of
capital expenditures. Treasury focused on increasing yields on NCB?s liquid assets and
surplus funds. Management automated NCB?s operations to improve the accuracy of
transactions processing. Although eventually beneficial, the actions taken to stem
organizational decline were disruptive and created anxieties and uncertainties among
stakeholders. In the 1997 to 1998 period, NCB closed nine bank branches with staff layoffs.
The cost to income ratio decreased from 75% to 45%.
In 1998, NCB hired consultants, McKinsey and Company, to develop a turnaround plan for the
bank. This led to changes in the business model, organizational structure and roles of the
leadership team. In November 2000, under supervision by FINSAC, new interim leadership
and a scheme of arrangement, NCB Group shares were exchanged for shares in the new
entity reorganized as a bank only. The interim Chairman declared that “the intention is,
however, to return the company to full private sector ownership.” FINSAC refocused NCB on
financial services by selling several non-core businesses including the Wyndham Hotel,
Caribbean Home Insurance Company, and Jamaica Orange Company. However, NCB?s profit
recovery was non-monotonic during the process of rebuilding its assets (Figure 1).
In March 2002, AIC Canada acquired FINSAC?s stake in NCB and immediately set about to
modify NCB?s resources and institutionalize the organizational transformation. The entire
branch network received upgraded technology in record time. NCB had a new Board of
Directors and executive management with some members hired from overseas. This
leadership used fast organizational learning to restore public confidence in the institution,
employee morale and competitiveness and the core technology platform. NCB launched
several new products in the local market while developing a performance-based organizational
culture with ongoing human resource training. According to the Board Chairman in NCB?s
2002 annual report, “in order to face the many and changing eventualities in a dynamic
marketplace, our team must be a group of creative, energetic and hands-on people who have
high expectations of themselves.” NCB also introduced an employee incentive scheme
applicable at all levels of the organization. Importantly, all of NCB?s earnings were reinvested
in the bank, over the next five years, for organic growth. The new CEO declared in the NCB
2002 annual report: “We also intend to make NCB the kind of place where excellent people
find it comfortable to work, prosper and remain, and mediocre performers find it most
uncomfortable to stay.”
In the post-recovery period (Zone D), NCB broadened its scope of banking services and
recorded substantial growth of assets and profit outpacing industry average. The Chairman
declared that the bank was successful in boosting employee morale, regaining public
confidence, rebuilding reputation and renovating the operating infrastructure. NCB
strengthened its governance practices and capital base to world-class standards. The bank
continued its growth momentum even through and beyond the global financial crisis of 2007-
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2009 (Figure 2). NCB received the award of 2008 Bank of the Year in Jamaica from the
Banker magazine and the Group Managing Director commented “Our strong financial
performance has been as a result of our strategic focus on innovation, expertise and strength -
three pillars which define our approach to product delivery, customer service, and employee
development and operating efficiency."
Figure 2 shows that NCB?s Return on Equity (ROE) was more sensitive to Treasury bill interest
rates in the pre-decline period relative to the post-recovery period. NCB derived substantial
income from investments in Government of Jamaica securities. However, interest rates were
appreciably lower during the post-recovery period. To survive in a climate of lower interest
rates, NCB became less reliant on interest income from Government of Jamaica Securities
and instead focused on selling bank products to the general public. Figure 3 shows that NCB
recovered from ROE decline and eventually outperformed its main rival Bank of Nova Scotia
Jamaica Limited (Scotia). The international experience and know-how of NCB?s leadership
enabled the institution to survive two radical environmental changes during recovery:
substantial decline in interest rate spreads, from the late 1990s onwards, and outperform
financial sector GDP growth under conditions of tighter regulatory requirements in the
aftermath of the global economic crisis of 2007-2008.
Figure 2: Treasury bill rates (T-Bill) and NCB’s ROE before decline and after recovery
0
0.1
0.2
0.3
0.4
0.5
0 10 20 30
ROE
T-Bill 6-month rate (before decline 1985 - 1992)
0
0.05
0.1
0.15
0.2
0.25
0.3
0 10 20 30
ROE
T-Bill 6-month rate (after recovery 2005 - 2012)
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Figure 3: Scotiabank and NCB ROE relative to Financial Sector GDP Growth
Sources: Company reports and the Planning Institute of Jamaica
NCB purposefully reconfigured and redeployed human and physical resources to stem
organizational decline and achieve profit recovery. This case study differs from prior
turnaround research by describing the interplay, between managerial cognitions and the way
resources are managed, at each stage of the cycle: pre-decline, decline, recovery and post-
recovery. NCB?s dynamic capabilities hinged critically on know-how to orchestrate bank
processes, for competitive advantage, and leveraging relationships with the Government of
Jamaica and AIC Canada, its ultimate parent company.
5. Conclusion
The findings support the resource based view of the firm (Wernerfelt 1984). NCB regained
competitive advantage and profitable growth by leveraging the know-how of new leadership
which was a VRIN intangible asset. As proposed by Grinyer et al (1990), intervention occurred
only after management sensed inevitable crisis from rising bad debts. Managerial cognitions
created biased perceptions of reality and delayed strategic intervention for turnaround. The
Government of Jamaica perceived that NCB was too big to fail and acquired majority
ownership of the institution as part of its overall bailout program for the ailing financial services
sector. NCB changed its business model, to refocus on commercial banking by rebuilding
customer confidence and employee commitment. This change, though beneficial, was
disruptive and caused anxieties and uncertainties among NCB?s internal and external
stakeholders. NCB transformed to a performance-based culture through human resource
training and incentives with appropriate infrastructural support including new technology. NCB
was able to quickly deploy and routinize new knowledge and organizational learning to cope
with environmental dynamics.
The findings fill a gap in turnaround literature pertaining to the role of tacit organizational
elements and intangible assets on the turnaround process (Panditt 2000). NCB had to
cultivate the mindsets needed for recognizing the source of organizational decline, developing
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
85 87 89 91 93 95 97 99 01 03 05 07 09 10 11
%
YEAR
Scotia ROE NCB ROE Financial Sector GDP Growth
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a new business model and transforming from a loss-making diversified conglomerate into a
profitable and focused provider of financial services. Managerial cognitions influenced the
management of resources for NCB?s transformation and turnaround (Aspara et al 2011). The
NCB case study revealed that these cognitions can filter away the early warning signs of
decline and cause delayed action or even inaction. Cognitions affected how NCB crafted
strategy and executed strategic initiatives to rebuild and redeploy resources for corporate
transformation and turnaround. Importantly, external cognitions are also important for building
turnaround theory because NCB was unlikely to recover from decline without fresh financial
resources from the Government of Jamaica who perceived that the institution was too big to
fail.
A limitation of the study is that the findings cannot be generalized because of the focus on
single case. However, this was necessary for in-depth understanding of the turnaround
process. Notwithstanding this limitation, the findings lead to the proposition that success or
failure of bank turnaround depends on the extent to which managerial cognitions create and
leverage relevant VRIN resources to transform business models in alignment with
environmental dynamics. Future studies can use this proposition to develop research
questions for large sample statistical tests.
Turnaround managers need contemplate proactively how their cognitions affect the capacity of
the firm to create, extend and modify firm resources for sustainable profit recovery from
organizational decline. These capabilities are developed and leveraged for corporate
turnaround through effective leadership, relationships with stakeholders, and training and
incentives for employees.
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