Description
Turnarounds are corporate changes which take place when a firm undergoes a survival-threatening performance decline, whereas restructurings can take place also if a firm is not facing a deep crisis, but a slight decline or is simply looking for new business opportunities.
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Gatti Corrado, Leadership and Cultural Renewal in Corporate Turnarounds, Symphonya. Emerging
Issues in Management (www.unimib.it/symphonya), n. 2, 2002, pp. 85-96http://dx.doi.org/10.4468/2002.2.09gatti
85
Leadership and Cultural Renewal
in Corporate Turnarounds
Corrado Gatti
?
Abstract
Turnarounds are corporate changes which take place when a firm undergoes a
survival-threatening performance decline, whereas restructurings can take place
also if a firm is not facing a deep crisis, but a slight decline or is simply looking for
new business opportunities.
A turnaround is successful when the firm is able to reverse the performance
crisis, end the threat to its survival and achieve sustained profitability.
Successful corporate turnarounds depend upon the replacement of the current
top management and actions to be taken simultaneously at three different levels,
strategic, financial and organizational.
Successful turnarounds seem to imply a renewal of the organization’s shared
basic assumptions, i.e. the firm’s culture. Cultural renewal appears to be crucial,
as well as complex and uncertain.
Keywords: Turnaround; Leadership; Cultural Renewal; Management; Global
Competition
1. Introduction
After a decade of expansion and dramatic productivity increases, economic
growth in western countries has recently slowed down. Key indicators of economic
development (e.g. corporate growth and profitability, and consumer confidence)
have declined. Stock markets have reacted negatively, reducing the valuation of
many listed manufacturing and service companies, in some cases by up to 90%
during a one-year period (Roland Berger, 2001). In this context, corporate crises,
and consequently corporate restructurings, seem to be back in fashion. These
phenomena appear to be relevant and generalized, since they regard a large number
of companies, with no sectoral, dimensional or geographical distinguishing marks.
Thus, corporate crisis and restructuring seem to have now gathered greater
attention among both practitioners and academics.
This paper will focus on a particular kind of corporate restructurings, i.e.
turnarounds. These are corporate changes which take place when a firm undergoes
a survival-threatening performance decline, whereas restructurings can take place
?
Assistant Professor in Management, University of Rome-Tor Vergata ([email protected])
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also if a firm is not facing a deep crisis, but a slight decline or is simply looking for
new business opportunities (Guatri, 1995; Barker III and Duhaime, 1997; Rispoli,
1998). Therefore, a turnaround is successful when the firm is able to reverse the
performance crisis, end the threat to its survival and achieve sustained profitability.
More in particular, it will be argued that successful turnarounds depend upon three
main issues. The first concerns the fact that a new top management is required to
perform the actions which are necessary to get the company back on track. The
second relates to the fact that actions to be taken should regard simultaneously
strategic, financial and organizational aspects. Thus, creating a balanced
turnaround mix of actions which is able to ensure the firm’s survival. The third
regards the fact that corporate turnarounds should be founded on a process of
cultural renewal.
2. The Establishment of a New Leadership
When a survival-threatening situation comes to evidence, and in order to
overcome it, a new leadership should be established.
? At this regard, Brenneman, the former chief executive officer at
Continental Airlines, has recently stated, ‘I have never seen the team
that managed a company into a crisis get it back on track. Oh, I’m sure
it has happened some time in the history of business, but I can’t believe
it has happened very often. Instead, managers who have gotten a
company into a mess are usually mired in a puddle of overbrained
solutions. They can’t see any way out either. In fact, they have many
ways of saying: If the solutions were simple, we would have already
thought of it’ (Brenneman, 1998).
There are several reasons why in distressed firms the establishment of a new
leadership represents a fundamental issue in order to perform the turnaround. First,
the existing top management usually fails in accepting responsibility for and
reversing the poor decisions it has made in the past. ‘It’s an ego thing’, as
Brenneman states (Brenneman, 1998). Second, the replacement of the top
management enables a strong and immediate break up with the past and consents to
communicate to stakeholders, both external (e.g. banks and partners) and internal
(e.g. middle management and lower levels), the intention of a radical reorientation.
Finally, it should be underlined that the employees generally do not trust the
existing top management anymore.
The systemic approach to the study of the firm also underlines the importance of
new leaders in particular moments of the system’s development path (Golinelli,
2000a; Golinelli, 2000b; Sterman, 2000). If the structure which originates the
system needs major changes and the system has to be guided along a radically
different path, as when it has to overcome a crisis, then its governing body has to
be substituted first. Furthermore, the Resource Based View (RBV) implicitly
assumes that radical change in a firm needs leadership to be changed (Prahalad and
Hamel, 1990). If the resources or competencies on which the firm is based do not
support its competitiveness, a necessary step is to replace the actors that manage
the resources or competencies at the top level. In other words, if the firm has to
search for new foundations, the founding competence represented by the top
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management has to be different. Nevertheless, as the distinguished Professor
Donaldson points out, in some cases the radical changes implied by a turnaround
have been effectively managed by the existing management (Donaldson, 1994).
For example, this is what has happened with General Mills, Burlington Northern
and CPC International. However, these seem to be extremely rare cases (Hofer,
1991).
Establishing a new leadership generally implies that the chairman and/or the
chief executive officer (CEO) and/or the chief operating officer (COO) has to be
replaced. It should be noticed that the decisions concerning the replacement of the
top management (e.g. when and who should be the new leaders) are taken by
different actors depending upon the firm’s property structure. In large public
companies, choosing the new leaders is a responsibility of the board of directors.
This choice, however, is generally the outcome of a mixture of pressures by the
directors, the banks and the institutional shareholders. In owner-managed firms, of
course, the decision lies within the responsibility of the owner. However, banks
may insist to introduce a turnaround manager to work alongside the owner (Slatter
and Lovett, 1999).
The establishment of a new leadership often involves substitution of employees
at a middle management level. In these cases, the new top management, once it has
settled, decides to perform its task bringing in the company new actors in key
positions. This is what has happened in many distressed companies in the U.S.A.
? In the case of the turnaround of Intergroup of Arizona Inc., for
example, a new CEO replaced the chief financial officer, the vice
president of sales and marketing, the vice president of operations and
the director of individual products (Gonzales, 2000).
If the outlined process of middle management substitution is extensive, then it
can be said that the company faces a management reengineering.
Once the new leadership has been established, it has to integrate effectively with
the firm’s structure, i.e. people working within the firm at every level. The reason
for this is that everyone in the structure has to be involved and committed, in order
to support the change with enthusiasm. It is generally claimed that, in order to
recover, old habits and procedures should be abandoned and a unity of intents built.
At this regard, classical and enlightening examples come from Alfred Sloan’s
approach at General Motors and Lee Iacocca’s at Chrysler (Sloan, 1963; Iacocca,
1983).
The Human Resource (HR) department generally plays an important role in
rendering the changes shared by the company at all levels, especially when external
consultants are involved in or even guide the turnaround process.
? As Milite, a HR management expert, points out, ‘Top management
can bring in turnaround professionals, and top management can let the
rest of the company know it backs the turnaround process. But that may
not be enough to calm the fears of employees … That’s where HR
comes in. Because of their unique place in the company, HR people can
help or hinder turnaround efforts considerably … The HR department
can set the tone for the turnaround acceptance … Communication and
cooperation are the most important elements of a successful turnaround
effort. The HR department is the most qualified to serve as a bridge
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between turnaround professionals and the rest of the company’ (Milite,
1999).
It should be noticed that in Anglo-Saxon countries, where the managerial labour
market is highly dynamic, distressed firms frequently turn to professionals named
turnaround specialists (Mackay, 1999; Editorial, 2000; Maurer, 2000). These are
managers which have considerable leadership skills, flexibility (the ability to listen
and modify views), the ability and courage to make rapid decisions based on a
minimum of data and analysis, and a relevant experience at driving through change
in difficult times. The turnaround specialist is usually appointed as CEO, but may
not start out in this position. In fact, turnaround specialists sometimes work as
consultants while assessing the firm’s crisis situation and then join the board.
Moreover, the turnaround specialist generally brings in the company a team of
professionals whom he trusts.
3. Turnaround Actions and the Firm’s Equilibria
Once the new top management has entered the company, it has to assess the
causes of the crisis and then take action in order to turnaround the firm’s
performance. Consequently, a plan of action is needed (Weston, Siu and Brian,
2001). This should carefully evaluate the firm’s strengths and weaknesses, as well
as environmental opportunities and threats, thus representing a useful guide for
developing decisions and policies. Once the plan has been set, the firm should stick
with it and continually monitor its performance against it. However, plans are
subject to revision, both in anticipation and reaction to internal and environmental
change. The product mix, for example, is continuously reviewed and modified on
the basis of external changes and new knowledge and understanding.
In a turnaround situation the top management should plan major changes of three
different kinds, strategic, financial and organizational. The first concern the scope
of the firm’s activities, i.e. the firm’s business areas and the way in which it
operates in them. Actions to be taken at this level may include, for example, sell-
offs or divestitures and acquisitions. The second refer to the firm’s financial
structure and policies. Changes at this level may include, for example,
recapitalizations and exchange offers. The third concern the reengineering of the
firm’s organizational structure in a broad sense. This includes, for example, the
adoption of a functional structure in lieu of the multi-divisional one and
downsizing.
The importance of taking action simultaneously at a strategic, financial and
organizational level may be connected to the circumstance that firms which face
deep crisis need radical change, which in turn requires the firm to change as a
whole. In other words, radical change may not be effectively implemented if it fails
to take into account all of the three faces of a business dynamics, which are the
strategic, the financial and the organizational one. Furthermore, it should be
underlined that a firm’s survival and possible competitive advantage is based on
the simultaneous and continuous achievement of three types of equilibria,
economic, financial and organizational (Cafferata, 1995a). Firms which are facing
a crisis generally need to restore all of the three equilibria and consequently to
pursue strategic, financial and organizational change.
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It has been claimed that turnaround situations differ from normal conditions in
that the former require radical change, whereas the latter do not. In normal
situations, in fact, firms should be characterized by dynamic stability
(Abrahamson, 2000). At its essence, this is a process of continual but relatively
small change efforts that involve the reconfiguration of existing practices and
business models rather than the creation of new ones. Firms, like individuals,
should continuously engage in sequential learning and in small adjustments and
improvements, which should be implemented at the right intervals.
In order to perform a successful turnaround the top management should build a
cautiously balanced turnaround mix of actions of the three kinds. In building the
aforementioned mix, it should take into account the interactions existing among the
three kinds of actions. Furthermore, it should be pointed out that the mix is to be
built both ex ante and ex post. Ex ante, to meet the need of planning, with
consciousness and rationality, the actions which seem to be able to grant the firm’s
survival. Ex post, to assess the degree of success of the different actions which
have been implemented.
After the turnaround mix has been planned, it has to be implemented. It has been
claimed that effective implementation depends not only upon the new top
management’s capabilities, but also upon the efficiency with which the actions are
carried out. More in particular, it has been argued that effective implementation of
radical change, such as a turnaround, is influenced by the quality of the firm’s
resources, processes and values (Christensen and Overdorf, 2000). Resources relate
to the tangible and intangible endowment which characterizes the firm. Processes
represent the patterns of interaction, coordination, communication, and decision
making employees use to transform resources into products and services of greater
worth. Finally values, which sometimes carry an ethical connotation, are the
standards by which employees set priorities that enable them to judge whether an
order is attractive or unattractive, whether a customer is more important or less
important, whether an idea for a new product is attractive or marginal, and so on.
The relative importance of each kind of action varies depending upon the
concrete case, so it can cannot be argued that actions of one kind are always more
or less important in comparison with actions of another kind (Bowman, Singh,
Useem and Bhadury, 1999). Regarding this issue, early corporate turnaround
theorists claimed that strategic reorientations are central to the recovery process at
many declining firms. However, subsequent empirical research has reported that
successful turnarounds are primarily connected to cutback actions that increase
efficiency, i.e. mostly financial and organizational actions. It seems that the gap
between theory and empirical evidence has been recently closed by Barker III and
Duhaime, who discuss a model proposing that the extent of strategic change
initiated in a successful turnaround, and therefore its contribution to the success of
the process, varies systematically with a declining firm’s need and capability to
reorient its strategy (Barker III and Duhaime, 1997).
Turnaround processes generally take place over a long period of time
(Grudzinski, 2000).
? Consider, for example, Finmeccanica, the biggest Italian company
operating in the defence and space industries. It took the firm more
than three years (1997-2000) to reverse its poor performance and
achieve sustained profitability (Gatti, 2002). During the same period
(late 1990s), many other Italian state-owned firms have gone through
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similar rejuvenating processes, in order to create the conditions for
privatisation (Cafferata, 1995b).
Nevertheless, in some cases successful turnaround processes seem to conclude
very quickly (Nelms, 2000). This is what has happened, for example, to Qatar
Airways, which recovered in a few months. Turnaround processes, no matter if
they take a long or a short time, are always very complicated and uncertain, and
should gain momentum at all times (Brenneman, 1998).
4. From a New Ideology to a New Culture: Governing Corporate Fragility
The final aspect on which we would like to draw our attention is represented by
the fact that successful turnarounds seem to imply a renewal of the firm’s culture.
In fact, the effectiveness of the new leadership, effective implementation of
turnaround actions (strategic, financial and organizational), commitment,
enthusiasm and unity of intents of human resources all seem to imply a renewal of
what Schein calls the ‘organization’s shared basic assumptions’, i.e. organizational
culture (Schein, 1992). These assumptions pertain to the solutions experimented by
the firm over time for adaptation to the environment and internal integration.
This aspect should be looked at more closely. In particular, our aim is to discuss
the link between the establishment of a new leadership and the creation of a new
culture, as well as to shed light on the essence of the process of cultural renewal.
Our interpretation is represented in the following figure (Figure 1).
Figure 1: Cultural Renewal in Corporate Turnaround Processes
Although the importance of establishing a new leadership in order to perform the
turnaround process has been previously discussed, it has to be pointed out that this
key issue does not lead directly and immediately to a new culture within the firm.
The establishment a new leadership can be expected, instead, to imply the
introduction of a new ideology, i.e. a mixture of wishful thinking and declarations
New
leadership
New
ideology
New
culture
Process of cultural renewal:
- it takes a long time;
- it is a dialectical process;
- it implies shifting from a
coercive to an enabling type of
culture;
- it implies progressive fragility
reduction.
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of intents relating to the future of the firm. As such, the introduction of a new
ideology typically regards the short term.
Cultural renewal can only be expected to start from the new ideology, as it is not
an event, a discrete choice of the new leader that takes place at a single point in
time. On the contrary, it is a complex process, which takes a long time to generate
a new culture. Furthermore, the contents of a new ideology stem from external
sources (Weick, 1995), whereas the ones of a new culture consist in new collective
and successful experiences and arrangements which originate within the firm.
The process of cultural renewal takes place by means of numerous and very
different actions, such as training, implementation of new managerial approaches
and operating systems, etc. It goes far beyond the scope of our work to deepen the
different actions, their connections and impacts. To this regard it is our intention to
point out four general aspects.
The first relates to the fact that the process of cultural renewal takes place over a
long period of time. Creation and absorption of new shared basic assumptions
represent a slow process, one that unfolds over years. Keeping the firm’s people
involved throughout the process is a crucial factor for the establishment of a new
culture and it’s a job that lies at the heart of leadership.
The second aspect to be considered is that cultural renewal should be intended as
a dialectical process (Benson, 1977). As such, its development is guided by the
application of four principles:
- social construction/production: cultural renewal can be seen as a result of
continued social interactions both within the firm and between the firm and
its environment. Through these interactions old social arrangements are
gradually modified or replaced. The production of new social patterns is
itself guided and constrained by the new leadership and the external context;
- totality: the process has to be guided relationally, that is with attention to the
multiple inteconnections existing among each part and participant in the firm
and between the firm and its environment;
- contradiction: every social order, and thus every organization, contains
contradictions, ruptures, inconsistencies, and incompatibilities. On one hand,
these contradictions are to be used as levers for radical breaks with the old
shared assumptions. On the other, they should be controlled in order not to
exacerbate conflicts among human resources or in ways which contain it;
- praxis: cultural renewal should contribute to the construction of new shared
assumptions on the basis of reasoned analyses on both the limits and the
potential of the old social forms.
The third aspect to be considered is that the process of cultural renewal,
considered as a whole, should consist in shifting from a coercive type of culture to
an enabling one. Borrowing concepts from prior research on bureaucracy (Alder
and Borys, 1996), the aforementioned distinction can be traced as follows. A
coercive culture stifles creativity, fosters dissatisfaction and demotivates
employees, whereas an enabling culture provides needed guidance and clarifies
responsibilities, easing role stress and helping individuals at every level to be and
feel more effective. Thus, an enabling culture represents a complement to, rather
than a substitute for commitment. Among other things, an enabling culture depends
on the characteristics – not the different degrees – of the core features of the
bureaucratic form, i.e. workflow formalization, specialization and hierarchy.
Consider, for example, formalization, i.e. written rules, procedures and
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instructions. An enabling logic is founded on the attributes of the type of
formalization which is adopted, not its different degrees. In an enabling logic,
formalization designs procedures that facilitate responses to real work
contingencies. Procedures are not designed to highlight to superiors whether
subordinates’ actions are in compliance and deviation from standard procedures is
not seen as suspect. Thus, formalization helps to signal to the organization
emerging problems and becomes an opportunity for learning and improvement.
Furthermore, enabling formalization provides human resources with visibility into
their work. It isn’t formulated as a list of flat assertions of duties. Moreover, the
enabling approach to formalization provides human resources with a wide range of
contextual information, designed to help them interact creatively within the
organization and with its environment.
The last aspect relates to the fact that the process of cultural renewal should be
intended as a mechanism for governing the firm’s fragility, both internal and
external. The former concerns its internal functioning, whereas the latter its
relationship with the environment. The aforesaid fragility derives from the fact that
the firm is undergoing a deep crisis. In particular, the distressed firm faces a
situation characterized by the fact that the systemic conditions which enable its
survival and competitiveness are seriously damaged. Stemming from mainstream
theories of organization, these conditions may be said to include differentiation,
structuring, integration, goal seeking and equilibrium (Cafferata, 2003). The new
leaders should then govern the process in order to restore the firm’s systemic
conditions, thus progressively reducing its fragility. The process of cultural
renewal then consists in a process for governing the firm’s fragility, it aims at
reducing such fragility by building a new, enabling culture which consents the
systemic conditions to be restored. Thus, the new, enabling culture represents a
fundamental organizational technology, and in turn a powerful weapon for the firm
in competition.
Intending the process of cultural renewal as a means for governing corporate
fragility appears to be central, as it may provide two major benefits. A first benefit
may come to the new leaders, offering them powerful motives for initiating and
pursuing thoroughly cultural renewal in the turnaround process. Which in turn may
strengthen the rational basis for the investment of financial resources in the process
of cultural renewal. In fact, in order for the new ideology to turn into a new culture,
it has to be confirmed by successful strategic and operating choices which require
investments for their implementation. A second benefit may come to those
responsible for selecting and developing actions for cultural renewal, in that it may
clarify the connections between certain actions and the firm’s systemic conditions,
thus underlining the progressive fragility reduction.
? As an example of cultural renewal in a turnaround process consider
the case of Pirelli, an Italian company engaged in the manufacturing of
tyres, energy cables and systems, and telecom cables and systems. In
the early 1990s, the CEO, Marco Tronchetti Provera, has based the
cultural change on value-based management and on thoroughly
different communication patterns within the firm. Moreover, the
commitment of each top manager to the firm’s turnaround plan has
been managed as a personal contract: Pirelli managers had their
personal assignments, their budgets and had to keep their word by
following through on their promises (Sicca and Izzo, 1995).
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One last point appears to be important to underline. It is difficult to judge the
progress of cultural renewal. This circumstance leads us to reflect on a further
aspect, which is represented by the difficulty of judging the possibility of its
continuation if the leader that started it changes. In other words, the process of
cultural renewal is delicate, and may be interrupted, for example if the leader who
launched it is substituted during the turnaround process.
? Evidence of the aforementioned problem comes from the case of
Poste Italiane, the Italian state-owned company which offers postal and
financial services. In March 1998, a new CEO, Corrado Passera, was
called to guide a turnaround process. The organization’s situation at
the time was critical, given its inefficiency, relevant losses and
transition from a public body to a state-owned company. By giving
concreteness to managerial autonomy, which is indeed difficult in
public corporations (Cafferata, 1995b), Passera designed a plan of
action to turnaround the company. In extreme synthesis, Passera’s
intent was to focus not only on cost reduction, but also and even more
on revenue growth. In order to pursue this intent, two key issues
emerged from Passera’s plan. First, the strategic idea of exploiting
Poste’s main strength, its widespread network, to offer financial
services in competition with banks. This idea generated immediate and
strong opposition by financial institutions (e.g. Vergnano, 1999a;
Vergnano, 1999b). Second, the need for cultural renewal, which has
been pursued by investing heavily in building a new image and in
training hundred of thousands of employees to customer care and pride
to be a member of Poste. In this context, an important role was played
by the cooperation with trade unions. The new strategy couldn’t be
fruitful without a cultural renewal.
The progress of the turnaround process is evidently reflected in
Poste’s financial statements and the cultural renewal is clear to all
Italian citizens. In May 2002, though, Passera moved to lead a primary
Italian bank and a new CEO is now guiding Poste Italiane. It is hard to
judge the impact of this event on the ongoing process of cultural
renewal at Poste. Will it continue? Will it stop? Will it regress?
The case of Poste Italiane rises a general question: which is the impact of CEO
succession on an ongoing process of cultural renewal? Our argument then seems to
represent a direction for future research in the fields of corporate culture and CEO
succession.
5. Conclusions
This paper has argued that successful corporate turnarounds depend upon the
replacement of the current top management and actions to be taken simultaneously
at three different levels, strategic, financial and organizational. If the company fails
to establish a new leadership, it is likely that this fact will have a major effect on
the outcome of the turnaround process. It seems important to note, however, that
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the choice of the right leaders represents a very difficult issue. The new top
management settlement is often followed by the replacement of employees at the
middle management level. The new actors should effectively integrate with the
existing structure, so that the whole firm will support the process of change.
Actions concerning strategic, financial and organizational issues should then be
planned, and effectively implemented. In fact, radical change of distressed firms
seems to require the firm to change as a whole. In other words, it seems to require
the firm to change in a systemic way. What appears to be an important issue to
analyse is if systemic change could be implemented before the company’s crisis in
order to prevent it and avoid the need for turnaround actions.
Finally, it has been pointed out that successful turnarounds seem to imply a
renewal of the organization’s shared basic assumptions, i.e. the firm’s culture. To
this regard we argued that firm’s ideological change can be expected to result
directly and immediately from the establishment of a new leadership, whereas
cultural renewal cannot. The latter process is a dialectical process which takes
place over a long period of time and is aimed at generating an enabling culture.
Furthermore, this process of cultural renewal should be viewed as a mechanism for
governing the firm’s fragility. Thus, the most difficult task that the new leaders
face is not to initiate the turnaround process, but to actually perform it guiding a
process of cultural renewal which progressively reduces the firm’s fragility. At its
essence then, a successful process of corporate turnaround can be seen as a process
of cultural renewal which consists in governing effectively the firm’s fragility, i.e.
in progressively reducing it. It appears to be crucial that the new leaders don’t
ignore this process at first, that they don’t neglect to guide it and finally that they
don’t fail it. Cultural renewal appears to be crucial, as well as complex and
uncertain. That’s why it makes the difference.
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doc_695153573.pdf
Turnarounds are corporate changes which take place when a firm undergoes a survival-threatening performance decline, whereas restructurings can take place also if a firm is not facing a deep crisis, but a slight decline or is simply looking for new business opportunities.
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Gatti Corrado, Leadership and Cultural Renewal in Corporate Turnarounds, Symphonya. Emerging
Issues in Management (www.unimib.it/symphonya), n. 2, 2002, pp. 85-96http://dx.doi.org/10.4468/2002.2.09gatti
85
Leadership and Cultural Renewal
in Corporate Turnarounds
Corrado Gatti
?
Abstract
Turnarounds are corporate changes which take place when a firm undergoes a
survival-threatening performance decline, whereas restructurings can take place
also if a firm is not facing a deep crisis, but a slight decline or is simply looking for
new business opportunities.
A turnaround is successful when the firm is able to reverse the performance
crisis, end the threat to its survival and achieve sustained profitability.
Successful corporate turnarounds depend upon the replacement of the current
top management and actions to be taken simultaneously at three different levels,
strategic, financial and organizational.
Successful turnarounds seem to imply a renewal of the organization’s shared
basic assumptions, i.e. the firm’s culture. Cultural renewal appears to be crucial,
as well as complex and uncertain.
Keywords: Turnaround; Leadership; Cultural Renewal; Management; Global
Competition
1. Introduction
After a decade of expansion and dramatic productivity increases, economic
growth in western countries has recently slowed down. Key indicators of economic
development (e.g. corporate growth and profitability, and consumer confidence)
have declined. Stock markets have reacted negatively, reducing the valuation of
many listed manufacturing and service companies, in some cases by up to 90%
during a one-year period (Roland Berger, 2001). In this context, corporate crises,
and consequently corporate restructurings, seem to be back in fashion. These
phenomena appear to be relevant and generalized, since they regard a large number
of companies, with no sectoral, dimensional or geographical distinguishing marks.
Thus, corporate crisis and restructuring seem to have now gathered greater
attention among both practitioners and academics.
This paper will focus on a particular kind of corporate restructurings, i.e.
turnarounds. These are corporate changes which take place when a firm undergoes
a survival-threatening performance decline, whereas restructurings can take place
?
Assistant Professor in Management, University of Rome-Tor Vergata ([email protected])
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also if a firm is not facing a deep crisis, but a slight decline or is simply looking for
new business opportunities (Guatri, 1995; Barker III and Duhaime, 1997; Rispoli,
1998). Therefore, a turnaround is successful when the firm is able to reverse the
performance crisis, end the threat to its survival and achieve sustained profitability.
More in particular, it will be argued that successful turnarounds depend upon three
main issues. The first concerns the fact that a new top management is required to
perform the actions which are necessary to get the company back on track. The
second relates to the fact that actions to be taken should regard simultaneously
strategic, financial and organizational aspects. Thus, creating a balanced
turnaround mix of actions which is able to ensure the firm’s survival. The third
regards the fact that corporate turnarounds should be founded on a process of
cultural renewal.
2. The Establishment of a New Leadership
When a survival-threatening situation comes to evidence, and in order to
overcome it, a new leadership should be established.
? At this regard, Brenneman, the former chief executive officer at
Continental Airlines, has recently stated, ‘I have never seen the team
that managed a company into a crisis get it back on track. Oh, I’m sure
it has happened some time in the history of business, but I can’t believe
it has happened very often. Instead, managers who have gotten a
company into a mess are usually mired in a puddle of overbrained
solutions. They can’t see any way out either. In fact, they have many
ways of saying: If the solutions were simple, we would have already
thought of it’ (Brenneman, 1998).
There are several reasons why in distressed firms the establishment of a new
leadership represents a fundamental issue in order to perform the turnaround. First,
the existing top management usually fails in accepting responsibility for and
reversing the poor decisions it has made in the past. ‘It’s an ego thing’, as
Brenneman states (Brenneman, 1998). Second, the replacement of the top
management enables a strong and immediate break up with the past and consents to
communicate to stakeholders, both external (e.g. banks and partners) and internal
(e.g. middle management and lower levels), the intention of a radical reorientation.
Finally, it should be underlined that the employees generally do not trust the
existing top management anymore.
The systemic approach to the study of the firm also underlines the importance of
new leaders in particular moments of the system’s development path (Golinelli,
2000a; Golinelli, 2000b; Sterman, 2000). If the structure which originates the
system needs major changes and the system has to be guided along a radically
different path, as when it has to overcome a crisis, then its governing body has to
be substituted first. Furthermore, the Resource Based View (RBV) implicitly
assumes that radical change in a firm needs leadership to be changed (Prahalad and
Hamel, 1990). If the resources or competencies on which the firm is based do not
support its competitiveness, a necessary step is to replace the actors that manage
the resources or competencies at the top level. In other words, if the firm has to
search for new foundations, the founding competence represented by the top
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management has to be different. Nevertheless, as the distinguished Professor
Donaldson points out, in some cases the radical changes implied by a turnaround
have been effectively managed by the existing management (Donaldson, 1994).
For example, this is what has happened with General Mills, Burlington Northern
and CPC International. However, these seem to be extremely rare cases (Hofer,
1991).
Establishing a new leadership generally implies that the chairman and/or the
chief executive officer (CEO) and/or the chief operating officer (COO) has to be
replaced. It should be noticed that the decisions concerning the replacement of the
top management (e.g. when and who should be the new leaders) are taken by
different actors depending upon the firm’s property structure. In large public
companies, choosing the new leaders is a responsibility of the board of directors.
This choice, however, is generally the outcome of a mixture of pressures by the
directors, the banks and the institutional shareholders. In owner-managed firms, of
course, the decision lies within the responsibility of the owner. However, banks
may insist to introduce a turnaround manager to work alongside the owner (Slatter
and Lovett, 1999).
The establishment of a new leadership often involves substitution of employees
at a middle management level. In these cases, the new top management, once it has
settled, decides to perform its task bringing in the company new actors in key
positions. This is what has happened in many distressed companies in the U.S.A.
? In the case of the turnaround of Intergroup of Arizona Inc., for
example, a new CEO replaced the chief financial officer, the vice
president of sales and marketing, the vice president of operations and
the director of individual products (Gonzales, 2000).
If the outlined process of middle management substitution is extensive, then it
can be said that the company faces a management reengineering.
Once the new leadership has been established, it has to integrate effectively with
the firm’s structure, i.e. people working within the firm at every level. The reason
for this is that everyone in the structure has to be involved and committed, in order
to support the change with enthusiasm. It is generally claimed that, in order to
recover, old habits and procedures should be abandoned and a unity of intents built.
At this regard, classical and enlightening examples come from Alfred Sloan’s
approach at General Motors and Lee Iacocca’s at Chrysler (Sloan, 1963; Iacocca,
1983).
The Human Resource (HR) department generally plays an important role in
rendering the changes shared by the company at all levels, especially when external
consultants are involved in or even guide the turnaround process.
? As Milite, a HR management expert, points out, ‘Top management
can bring in turnaround professionals, and top management can let the
rest of the company know it backs the turnaround process. But that may
not be enough to calm the fears of employees … That’s where HR
comes in. Because of their unique place in the company, HR people can
help or hinder turnaround efforts considerably … The HR department
can set the tone for the turnaround acceptance … Communication and
cooperation are the most important elements of a successful turnaround
effort. The HR department is the most qualified to serve as a bridge
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between turnaround professionals and the rest of the company’ (Milite,
1999).
It should be noticed that in Anglo-Saxon countries, where the managerial labour
market is highly dynamic, distressed firms frequently turn to professionals named
turnaround specialists (Mackay, 1999; Editorial, 2000; Maurer, 2000). These are
managers which have considerable leadership skills, flexibility (the ability to listen
and modify views), the ability and courage to make rapid decisions based on a
minimum of data and analysis, and a relevant experience at driving through change
in difficult times. The turnaround specialist is usually appointed as CEO, but may
not start out in this position. In fact, turnaround specialists sometimes work as
consultants while assessing the firm’s crisis situation and then join the board.
Moreover, the turnaround specialist generally brings in the company a team of
professionals whom he trusts.
3. Turnaround Actions and the Firm’s Equilibria
Once the new top management has entered the company, it has to assess the
causes of the crisis and then take action in order to turnaround the firm’s
performance. Consequently, a plan of action is needed (Weston, Siu and Brian,
2001). This should carefully evaluate the firm’s strengths and weaknesses, as well
as environmental opportunities and threats, thus representing a useful guide for
developing decisions and policies. Once the plan has been set, the firm should stick
with it and continually monitor its performance against it. However, plans are
subject to revision, both in anticipation and reaction to internal and environmental
change. The product mix, for example, is continuously reviewed and modified on
the basis of external changes and new knowledge and understanding.
In a turnaround situation the top management should plan major changes of three
different kinds, strategic, financial and organizational. The first concern the scope
of the firm’s activities, i.e. the firm’s business areas and the way in which it
operates in them. Actions to be taken at this level may include, for example, sell-
offs or divestitures and acquisitions. The second refer to the firm’s financial
structure and policies. Changes at this level may include, for example,
recapitalizations and exchange offers. The third concern the reengineering of the
firm’s organizational structure in a broad sense. This includes, for example, the
adoption of a functional structure in lieu of the multi-divisional one and
downsizing.
The importance of taking action simultaneously at a strategic, financial and
organizational level may be connected to the circumstance that firms which face
deep crisis need radical change, which in turn requires the firm to change as a
whole. In other words, radical change may not be effectively implemented if it fails
to take into account all of the three faces of a business dynamics, which are the
strategic, the financial and the organizational one. Furthermore, it should be
underlined that a firm’s survival and possible competitive advantage is based on
the simultaneous and continuous achievement of three types of equilibria,
economic, financial and organizational (Cafferata, 1995a). Firms which are facing
a crisis generally need to restore all of the three equilibria and consequently to
pursue strategic, financial and organizational change.
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It has been claimed that turnaround situations differ from normal conditions in
that the former require radical change, whereas the latter do not. In normal
situations, in fact, firms should be characterized by dynamic stability
(Abrahamson, 2000). At its essence, this is a process of continual but relatively
small change efforts that involve the reconfiguration of existing practices and
business models rather than the creation of new ones. Firms, like individuals,
should continuously engage in sequential learning and in small adjustments and
improvements, which should be implemented at the right intervals.
In order to perform a successful turnaround the top management should build a
cautiously balanced turnaround mix of actions of the three kinds. In building the
aforementioned mix, it should take into account the interactions existing among the
three kinds of actions. Furthermore, it should be pointed out that the mix is to be
built both ex ante and ex post. Ex ante, to meet the need of planning, with
consciousness and rationality, the actions which seem to be able to grant the firm’s
survival. Ex post, to assess the degree of success of the different actions which
have been implemented.
After the turnaround mix has been planned, it has to be implemented. It has been
claimed that effective implementation depends not only upon the new top
management’s capabilities, but also upon the efficiency with which the actions are
carried out. More in particular, it has been argued that effective implementation of
radical change, such as a turnaround, is influenced by the quality of the firm’s
resources, processes and values (Christensen and Overdorf, 2000). Resources relate
to the tangible and intangible endowment which characterizes the firm. Processes
represent the patterns of interaction, coordination, communication, and decision
making employees use to transform resources into products and services of greater
worth. Finally values, which sometimes carry an ethical connotation, are the
standards by which employees set priorities that enable them to judge whether an
order is attractive or unattractive, whether a customer is more important or less
important, whether an idea for a new product is attractive or marginal, and so on.
The relative importance of each kind of action varies depending upon the
concrete case, so it can cannot be argued that actions of one kind are always more
or less important in comparison with actions of another kind (Bowman, Singh,
Useem and Bhadury, 1999). Regarding this issue, early corporate turnaround
theorists claimed that strategic reorientations are central to the recovery process at
many declining firms. However, subsequent empirical research has reported that
successful turnarounds are primarily connected to cutback actions that increase
efficiency, i.e. mostly financial and organizational actions. It seems that the gap
between theory and empirical evidence has been recently closed by Barker III and
Duhaime, who discuss a model proposing that the extent of strategic change
initiated in a successful turnaround, and therefore its contribution to the success of
the process, varies systematically with a declining firm’s need and capability to
reorient its strategy (Barker III and Duhaime, 1997).
Turnaround processes generally take place over a long period of time
(Grudzinski, 2000).
? Consider, for example, Finmeccanica, the biggest Italian company
operating in the defence and space industries. It took the firm more
than three years (1997-2000) to reverse its poor performance and
achieve sustained profitability (Gatti, 2002). During the same period
(late 1990s), many other Italian state-owned firms have gone through
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similar rejuvenating processes, in order to create the conditions for
privatisation (Cafferata, 1995b).
Nevertheless, in some cases successful turnaround processes seem to conclude
very quickly (Nelms, 2000). This is what has happened, for example, to Qatar
Airways, which recovered in a few months. Turnaround processes, no matter if
they take a long or a short time, are always very complicated and uncertain, and
should gain momentum at all times (Brenneman, 1998).
4. From a New Ideology to a New Culture: Governing Corporate Fragility
The final aspect on which we would like to draw our attention is represented by
the fact that successful turnarounds seem to imply a renewal of the firm’s culture.
In fact, the effectiveness of the new leadership, effective implementation of
turnaround actions (strategic, financial and organizational), commitment,
enthusiasm and unity of intents of human resources all seem to imply a renewal of
what Schein calls the ‘organization’s shared basic assumptions’, i.e. organizational
culture (Schein, 1992). These assumptions pertain to the solutions experimented by
the firm over time for adaptation to the environment and internal integration.
This aspect should be looked at more closely. In particular, our aim is to discuss
the link between the establishment of a new leadership and the creation of a new
culture, as well as to shed light on the essence of the process of cultural renewal.
Our interpretation is represented in the following figure (Figure 1).
Figure 1: Cultural Renewal in Corporate Turnaround Processes
Although the importance of establishing a new leadership in order to perform the
turnaround process has been previously discussed, it has to be pointed out that this
key issue does not lead directly and immediately to a new culture within the firm.
The establishment a new leadership can be expected, instead, to imply the
introduction of a new ideology, i.e. a mixture of wishful thinking and declarations
New
leadership
New
ideology
New
culture
Process of cultural renewal:
- it takes a long time;
- it is a dialectical process;
- it implies shifting from a
coercive to an enabling type of
culture;
- it implies progressive fragility
reduction.
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of intents relating to the future of the firm. As such, the introduction of a new
ideology typically regards the short term.
Cultural renewal can only be expected to start from the new ideology, as it is not
an event, a discrete choice of the new leader that takes place at a single point in
time. On the contrary, it is a complex process, which takes a long time to generate
a new culture. Furthermore, the contents of a new ideology stem from external
sources (Weick, 1995), whereas the ones of a new culture consist in new collective
and successful experiences and arrangements which originate within the firm.
The process of cultural renewal takes place by means of numerous and very
different actions, such as training, implementation of new managerial approaches
and operating systems, etc. It goes far beyond the scope of our work to deepen the
different actions, their connections and impacts. To this regard it is our intention to
point out four general aspects.
The first relates to the fact that the process of cultural renewal takes place over a
long period of time. Creation and absorption of new shared basic assumptions
represent a slow process, one that unfolds over years. Keeping the firm’s people
involved throughout the process is a crucial factor for the establishment of a new
culture and it’s a job that lies at the heart of leadership.
The second aspect to be considered is that cultural renewal should be intended as
a dialectical process (Benson, 1977). As such, its development is guided by the
application of four principles:
- social construction/production: cultural renewal can be seen as a result of
continued social interactions both within the firm and between the firm and
its environment. Through these interactions old social arrangements are
gradually modified or replaced. The production of new social patterns is
itself guided and constrained by the new leadership and the external context;
- totality: the process has to be guided relationally, that is with attention to the
multiple inteconnections existing among each part and participant in the firm
and between the firm and its environment;
- contradiction: every social order, and thus every organization, contains
contradictions, ruptures, inconsistencies, and incompatibilities. On one hand,
these contradictions are to be used as levers for radical breaks with the old
shared assumptions. On the other, they should be controlled in order not to
exacerbate conflicts among human resources or in ways which contain it;
- praxis: cultural renewal should contribute to the construction of new shared
assumptions on the basis of reasoned analyses on both the limits and the
potential of the old social forms.
The third aspect to be considered is that the process of cultural renewal,
considered as a whole, should consist in shifting from a coercive type of culture to
an enabling one. Borrowing concepts from prior research on bureaucracy (Alder
and Borys, 1996), the aforementioned distinction can be traced as follows. A
coercive culture stifles creativity, fosters dissatisfaction and demotivates
employees, whereas an enabling culture provides needed guidance and clarifies
responsibilities, easing role stress and helping individuals at every level to be and
feel more effective. Thus, an enabling culture represents a complement to, rather
than a substitute for commitment. Among other things, an enabling culture depends
on the characteristics – not the different degrees – of the core features of the
bureaucratic form, i.e. workflow formalization, specialization and hierarchy.
Consider, for example, formalization, i.e. written rules, procedures and
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instructions. An enabling logic is founded on the attributes of the type of
formalization which is adopted, not its different degrees. In an enabling logic,
formalization designs procedures that facilitate responses to real work
contingencies. Procedures are not designed to highlight to superiors whether
subordinates’ actions are in compliance and deviation from standard procedures is
not seen as suspect. Thus, formalization helps to signal to the organization
emerging problems and becomes an opportunity for learning and improvement.
Furthermore, enabling formalization provides human resources with visibility into
their work. It isn’t formulated as a list of flat assertions of duties. Moreover, the
enabling approach to formalization provides human resources with a wide range of
contextual information, designed to help them interact creatively within the
organization and with its environment.
The last aspect relates to the fact that the process of cultural renewal should be
intended as a mechanism for governing the firm’s fragility, both internal and
external. The former concerns its internal functioning, whereas the latter its
relationship with the environment. The aforesaid fragility derives from the fact that
the firm is undergoing a deep crisis. In particular, the distressed firm faces a
situation characterized by the fact that the systemic conditions which enable its
survival and competitiveness are seriously damaged. Stemming from mainstream
theories of organization, these conditions may be said to include differentiation,
structuring, integration, goal seeking and equilibrium (Cafferata, 2003). The new
leaders should then govern the process in order to restore the firm’s systemic
conditions, thus progressively reducing its fragility. The process of cultural
renewal then consists in a process for governing the firm’s fragility, it aims at
reducing such fragility by building a new, enabling culture which consents the
systemic conditions to be restored. Thus, the new, enabling culture represents a
fundamental organizational technology, and in turn a powerful weapon for the firm
in competition.
Intending the process of cultural renewal as a means for governing corporate
fragility appears to be central, as it may provide two major benefits. A first benefit
may come to the new leaders, offering them powerful motives for initiating and
pursuing thoroughly cultural renewal in the turnaround process. Which in turn may
strengthen the rational basis for the investment of financial resources in the process
of cultural renewal. In fact, in order for the new ideology to turn into a new culture,
it has to be confirmed by successful strategic and operating choices which require
investments for their implementation. A second benefit may come to those
responsible for selecting and developing actions for cultural renewal, in that it may
clarify the connections between certain actions and the firm’s systemic conditions,
thus underlining the progressive fragility reduction.
? As an example of cultural renewal in a turnaround process consider
the case of Pirelli, an Italian company engaged in the manufacturing of
tyres, energy cables and systems, and telecom cables and systems. In
the early 1990s, the CEO, Marco Tronchetti Provera, has based the
cultural change on value-based management and on thoroughly
different communication patterns within the firm. Moreover, the
commitment of each top manager to the firm’s turnaround plan has
been managed as a personal contract: Pirelli managers had their
personal assignments, their budgets and had to keep their word by
following through on their promises (Sicca and Izzo, 1995).
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One last point appears to be important to underline. It is difficult to judge the
progress of cultural renewal. This circumstance leads us to reflect on a further
aspect, which is represented by the difficulty of judging the possibility of its
continuation if the leader that started it changes. In other words, the process of
cultural renewal is delicate, and may be interrupted, for example if the leader who
launched it is substituted during the turnaround process.
? Evidence of the aforementioned problem comes from the case of
Poste Italiane, the Italian state-owned company which offers postal and
financial services. In March 1998, a new CEO, Corrado Passera, was
called to guide a turnaround process. The organization’s situation at
the time was critical, given its inefficiency, relevant losses and
transition from a public body to a state-owned company. By giving
concreteness to managerial autonomy, which is indeed difficult in
public corporations (Cafferata, 1995b), Passera designed a plan of
action to turnaround the company. In extreme synthesis, Passera’s
intent was to focus not only on cost reduction, but also and even more
on revenue growth. In order to pursue this intent, two key issues
emerged from Passera’s plan. First, the strategic idea of exploiting
Poste’s main strength, its widespread network, to offer financial
services in competition with banks. This idea generated immediate and
strong opposition by financial institutions (e.g. Vergnano, 1999a;
Vergnano, 1999b). Second, the need for cultural renewal, which has
been pursued by investing heavily in building a new image and in
training hundred of thousands of employees to customer care and pride
to be a member of Poste. In this context, an important role was played
by the cooperation with trade unions. The new strategy couldn’t be
fruitful without a cultural renewal.
The progress of the turnaround process is evidently reflected in
Poste’s financial statements and the cultural renewal is clear to all
Italian citizens. In May 2002, though, Passera moved to lead a primary
Italian bank and a new CEO is now guiding Poste Italiane. It is hard to
judge the impact of this event on the ongoing process of cultural
renewal at Poste. Will it continue? Will it stop? Will it regress?
The case of Poste Italiane rises a general question: which is the impact of CEO
succession on an ongoing process of cultural renewal? Our argument then seems to
represent a direction for future research in the fields of corporate culture and CEO
succession.
5. Conclusions
This paper has argued that successful corporate turnarounds depend upon the
replacement of the current top management and actions to be taken simultaneously
at three different levels, strategic, financial and organizational. If the company fails
to establish a new leadership, it is likely that this fact will have a major effect on
the outcome of the turnaround process. It seems important to note, however, that
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the choice of the right leaders represents a very difficult issue. The new top
management settlement is often followed by the replacement of employees at the
middle management level. The new actors should effectively integrate with the
existing structure, so that the whole firm will support the process of change.
Actions concerning strategic, financial and organizational issues should then be
planned, and effectively implemented. In fact, radical change of distressed firms
seems to require the firm to change as a whole. In other words, it seems to require
the firm to change in a systemic way. What appears to be an important issue to
analyse is if systemic change could be implemented before the company’s crisis in
order to prevent it and avoid the need for turnaround actions.
Finally, it has been pointed out that successful turnarounds seem to imply a
renewal of the organization’s shared basic assumptions, i.e. the firm’s culture. To
this regard we argued that firm’s ideological change can be expected to result
directly and immediately from the establishment of a new leadership, whereas
cultural renewal cannot. The latter process is a dialectical process which takes
place over a long period of time and is aimed at generating an enabling culture.
Furthermore, this process of cultural renewal should be viewed as a mechanism for
governing the firm’s fragility. Thus, the most difficult task that the new leaders
face is not to initiate the turnaround process, but to actually perform it guiding a
process of cultural renewal which progressively reduces the firm’s fragility. At its
essence then, a successful process of corporate turnaround can be seen as a process
of cultural renewal which consists in governing effectively the firm’s fragility, i.e.
in progressively reducing it. It appears to be crucial that the new leaders don’t
ignore this process at first, that they don’t neglect to guide it and finally that they
don’t fail it. Cultural renewal appears to be crucial, as well as complex and
uncertain. That’s why it makes the difference.
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