Description
Moderating Effects Of Government Assistance & Turnaround Strategies A Research On Private Manufacturing Companies
MODERATING EFFECTS OF
GOVERNMENT ASSISTANCE &
TURNAROUND STRATEGIES: A
RESEARCH ON PRIVATE
MANUFACTURING COMPANIES
*Tengku Mohammad Chairal ABDULLAH
**Zolkafli HUSSIN
*University of North Sumatera
**Northern University of Malaysia
ABSTRACT
There were many cases in corporate turnaround that had seen the influence of government
assistance in influencing the process of recuperating ailing firms. However to what extent such
assistance positively influenced the outcome of turnaround result are still lacking in the literature.
The objective of this paper is to investigate the moderating effect of government assistance towards
the improvement of business performance of turnaround companies. Analysis of logistic regression
was used to investigate the effect of retrenchment and product-market refocusing strategy and the
combination effect of government assistance as a moderator towards the improvement of business
performance of turnaround firms. The sample consists of 135 exporter-manufacturing companies
listed in the Exporter Directory of the Province of North Sumatra, Indonesia. The study found partial
support in the moderating effects of government assistance and firm size and their influence in the
relationship between strategy and successful turnaround. The study also found that Product-Market
refocusing is one of the important strategies to be implemented during turnaround.
Keywords: Corporate Turnaround, Turnaround Strategies, Logistic Regression, Moderating Effect,
Government Assistance
INTRODUCTION
The recent economic crisis of 2008, which swept many of major industrial nations, saw one major
shift in government policies towards ailing businesses. The conviction held especially by liberal
economy, which dictates that the government interference should be limited in the business world,
has been changed dramatically by the act of giving financial assistance in the effort to rescue ailing
businesses, especially big companies. Though as literature would later show that government
assistance has been there in rescuing troubled companies, this recent recession is perhaps the only
one after many decades whereby such assistance massively came in hundreds of billion dollars of
rescue package. Before the economic crisis of 2008, government assistance though arguably to be
quite limited, was present in many cases of turnaround companies. There were many cases in the
literature of corporate turnaround that showed the government taking part in the resuscitation of
ailing companies especially if the company was considered to be an important asset to the nation.
However, to what extent such assistance truly helped in revitalizing turnaround companies were
found to be quite scant in terms of statistical reference.
This paper focuses on the effect of government assistance as a confounding factor and its influence
on turnaround strategies towards the improvement of business performance of turnaround
companies. The effect of company size, which also suspected to have certain moderating effect on
strategy and performance, also will be considered in the study as a control variable. This paper
begins with discussions on the theoretical background underlying the selection of turnaround
strategies. Then several turnaround strategies commonly adopted by troubled companies will be
discussed along with cases of corporate turnaround in which government assistance were present.
64| Journal of Global Strategic Management | 07 | 2010, J une
Several hypotheses were developed in regards to the predictor as well as moderating variable in the
study, in which the theoretical framework were based upon. It will then proceed with the section on
research design, in which detail explanation on sampling, data collection and analytical procedure
will be discussed. The research findings, implication and limitation will be presented in the final
section of the paper.
LITERATURE REVIEW
Literature of corporate turnaround have shown that certain strategies such as retrenchment, cost
reduction or downsizing were among popular strategies adopted by these troubled firms. One of the
reasons that these strategies were widely adopted by ailing business was perhaps better explained by
survival-based theory. This theory argued that in order to survive, organization had to deploy
strategies that should be focused on running very efficient operation and can respond rapidly to the
ever-changing environment (see e.g. Lynch, 2003). However, in reality, not all of these troubled
companies which adopted this kind of strategies managed to successfully turnaround. As Slatter
(1984) argued, only one out of four troubled companies managed to successfully turnaround itself.
The lack of explanation provided by survival-based theory, open up possibilities for other theory of
strategic management to lend itself in explaining the behavior of turnaround companies.
Contingency theory as one of the most influential theories applied in strategy and organizational
studies (Hofer, 1975) and one of which is widely adopted in strategic management (Miner, 1984), is
one of the proposed candidate. The suspected moderating effect of some undefined factors which
influence the outcome of turnaround effort is well within the boundary of contingency theory to
explain.
Literature in the field of corporate turnaround in regards to strategy has been quite well developed
for the last three to four decades. Since the earliest publication on the subject by Schendel & Patton
(1976), literature has been well developed to argue that turnaround companies would resort to certain
types of turnaround strategies, namely: debt restructuring, operating-turnaround strategy, strategic-
portfolio restructuring strategy, and product-market refocusing strategy (Hofer, 1980; Tvorik,
Boissoneau & Pearson, 1998; Slatter, 1984; Sudarsanam & Lai, 2001; Chowdury, 2002; Chowdury
& Lang, 1996; Hambrick & Schecter, 1983; O’Neill, 1986; Slatter & Lovett, 1999, and others).
Although different scholar provided different technical term to these strategies, and sometimes found
conflicting results, these terms are basically presents more or less the same meaning.
Aside from strategy, there are other non-strategy factors which influence performance of turnaround
companies, or somewhat influence strategy – performance relationship of turnaround companies.
Different business practices between Western and Asian companies for example, were argued by
Bruton, Ahlstrom & Wan (2003) as giving different effect on the turnaround effort of Asian
companies, which also supported from other fellow researchers (see for e.g. Fisher, Lee & Johns,
2004; Bruton, Ahlstrom & Wan, 2001). Therefore it would be quite interesting to seek out other
differences which exist or being practiced by turnaround companies in other parts of the world,
especially in South East Asia. For the purpose of this study, two strategy-related factors and two non
-strategy related factors, which will be treated as confounding factor, will be examined in the effort
to further explain their influence on the improvement of performance of turnaround companies.
The Factor of Operational-Efficiency Strategies
Early scholars in the field referred to this strategy as retrenchment strategy, which arguably is among
the first sets of strategies to be implemented by troubled firms (Robbins & Pearce, 1992; Hofer,
1980). Literature on the field of corporate turnaround has found considerable support in the role of
operational-efficiency strategy in revitalizing ailing companies (Robbins & Pearce II, 1992;
Chowdury & Lang, 1996; Bruton & Rubanik, 1997; Tvorik, Boissoneau & Pearson, 1998). However
there were several other researchers who found conflicting results in this particular role of
operational-efficiency strategy (Barker III & Mone, 1994; Castrogiovanni & Bruton, 2000;
Arogyaswamy & Yasai-Ardekani, 1997). This strategy which is usually implemented to address
operational (inefficiency) problems of troubled companies was usually aimed to improve short-term
performance focusing on operational measures in the effort to gain efficiency and improving margin
Journal of Global Strategic Management | 07 | 2010, J une| 65
by reducing direct cost and slimming overheads in line with volume (Tvorik, Boissoneau & Pearson,
1998; Hofer, 1980; Slatter, 1984; Chowdury, 2002). This strategy usually involves taking actions to
improve operational cash flow and restore profitability by pursuing strict cost and operating-asset
reduction (Sudarsanam & Lai, 2001).
Turnaround Company usually pursues cost reduction through retrenchment of workers, pay cuts,
reducing cost of materials and also overheads, though the first two are the most commonly
mentioned. Scholars found conflicting evidence in the role of cost reduction to improve business
performance. Many scholars found significant role of cost reduction in turning around ailing
companies (Robbins & Pearce II, 1992; Chowdury & Lang, 1996; Bruton & Rubanik, 1997; Tvorik,
Boissoneau & Pearson, 1998), though some others found the role was a bit vague (Barker III &
Mone, 1994; Castrogiovanni & Bruton, 2000; Fisher, Lee & J ohns, 2004). Arogyaswamy & Yasai-
Ardekani (1997) found that retrenchment of workforce and pay cuts were both done by successfully
and non-successfully turnaround firms, whereby some firms even successfully turnaround without
retrenching their workers. Bruton, Ahlstrom & Wan (2001) also argued that the ability to retrench is
somewhat limited in East Asia, although in their subsequent research in 2003 (Bruton, Ahlstrom &
Wan, 2003), they argued that in the case that retrenchment occurred, it did improved performance. In
practice, the role of cost reduction in improving business performance is widely accepted by
turnaround firms, such as the turnaround of IBM (Slatter & Lovett, 1999).
Operating-asset reduction was also deemed to be one of the measures taken during turnaround
(Slatter, 1984; Ganto & Sulaiman, 2005). This action usually involves selling-off less than full
capacity of operating units such as plant or machinery, selling-off idle assets such as warehouses,
office building, vehicles, and even short-term assets such as inventory and receivables (Sudarsanam
& Lai, 2001; Barker III & Mone, 1994; Chowdury & Lang, 1996; Castrogiovanni & Bruton, 2000;
Bruton, Ahlstrom & Wan, 2003; Fisher, Lee & J ohns, 2004).This action were usually adopted to
provide fast cash in a badly-needed cash-flow situation experienced by many turnaround companies,
while at the same time getting rid of unused surplus of assets, enhancing efficiency at the operational
level and improving asset utilization. Based on these arguments, operational-efficiency strategy
which aimed to improve short-term performance by gaining efficiency was argued to have a direct
influence on performance of company seeking turnaround, which leads us to the first hypothesis.
H1: There is a positive relationship between operational-efficiency strategies and successful
turnaround companies
The Factor of Product-Market Refocusing
The strategy of product-market refocusing, was categorized by early scholars of corporate
turnaround as part of recovery strategies (Schendel et al., 1976), growth strategy (O’Neill, 1986),
revenue-generating strategy (Slatter, 1984), or as part of entrepreneurial turnaround strategy
(Hambrick & Schecter, 1983). However, it was Slatter (1984) who first surfaced this strategy as one
among its generic turnaround strategies and differentiated it with other recovery strategies, which
include strategy of improved marketing, product-market changes and growth through acquisition. In
his later writings with Lovett (Slatter & Lovett, 1999), they combined these strategies under product-
market refocusing, which include addition/ deletion of product lines, addition/ deletion of customers,
changes in sales mix, complete withdrawal from a market segment, and entering into a new product-
market segment. Product-market refocusing strategies were widely supported as the instrument of
growth in the literature of corporate turnaround (Kow, 2004), especially as the decline deepens
(Chowdury, 2002). Product-market refocusing strategy were also found to be quite a popular strategy
being adopted by many troubled firms in Malaysia (Siti Maimon, 1999) and Indonesia (Ganto &
Sulaiman, 2005) especially after the financial crisis of 1998.
Product refocusing through new product development and deletion of unprofitable product lines
were practiced among troubled companies. There were cases in which careful new product
development managed to bring the company out of the crisis, such as Fiat for example (Edmondson,
et al. 2002). Market refocusing also found considerable support in the literature of corporate
66| Journal of Global Strategic Management | 07 | 2010, J une
turnaround, though Harker (2001) argued it was still quite limited. Some of the scholars even argued
that there were several aspect of marketing which differentiate between failed and successful
turnaround companies (Harker & Harker, 1998), such as careful selection of potential market and
close relationship with customers (Cunnington, 1996). Micron for example, a Russian microchip
manufacturer, were one of many cases in which turnaround companies resorted to this kind of
strategy to pull themselves out of trouble (Bruton & Rubanik, 1997). Based on these discussions, the
second hypothesis is postulated.
H2: There is a positive relationship between product-market refocusing strategy and successful
turnaround companies
The Factor of Government Assistance
There is no doubt that government has major influences on corporate life. They influence corporate
through taxes, regulations and even sometimes in terms of business policy. In the aspect of
turnaround, government was found to be helpful in some cases of government-related turnaround
effort such as in the case of Chrysler Corp (Chowdury, 2002). In the wake of 2008 economic crisis,
cases like this was found to be quite common. Aside from giving help, in certain cases of
turnaround, government was found to be the reason for corporate decline, such as through budget
cuts (Rose, 2003), or through tight monetary policy which shrink the government spending.
The role that government took when they decided to give assistance in the turnaround process was
also found to be quite diverse. Many cases of government assistance came in the form of financial
backup, such as the turnaround of Rover (Whitehead, 1999). Another type of assistance came in
some form of mutual fund, which will be used to facilitate the debt and financial difficulties
experienced by these troubled companies (see for e.g. Wilks, 2002). This is the type of assistance
which are being used by many Southeast Asian countries during the economic recession of 1998,
and also recently being used by industrial nation which were being hit by recent crisis. And
sometimes government also influenced the turnaround process by supervising the process itself, such
as in the case of turnaround at Daewoo (Lee, 1999). Even in some cases, government influenced the
market side of turnaround by giving government contracts, such as in the turnaround of AMS
(Mullich, 1998). These discussions on the government influence, whether direct or indirect, arguably
have some effect on the turnaround process, which lead us to the third hypothesis.
H3: The factor of government assistance shall moderate the relationship between strategy and
successful turnaround companies.
RESEARCH DESIGN
Financially distressed firms are defined as companies who experienced a two-year of simultaneous
decline in net income and Return on Asset (ROA) between the period of 2000 and 2005. These two
measures of performance were previously used by Bruton, Oviatt & White (1994), Castrogiovanni &
Bruton (2000) and Fisher, Lee & J ohns (2004) in their study. Successful Turnaround Company is
defined as companies who experienced a stable increase of profit (net income) and ROA between
2005 and 2007. The sampling frame in this study consists of manufacturing companies listed in the
Exporter Directory of North Sumatera Province. From the total of 281 manufacturing companies
listed in the directory, 179 falls into financially-distressed category, in which only 135 were included
in the study. From the total of 135 companies, 87 companies fall into the category of successful
turnaround, while the other 48 is classified as non-turnaround. Data was collected from February –
August 2009 by personal interview, in which the respondents were asked to fill up the self
administered questionnaire.
Question items which were developed to measure the variables were adapted from the items
developed by Barker III & Barr (2002). This study also develops additional question items to
strengthen the measures of strategies and also to measure government assistance as new variable.
Three managing directors who were involved in a workshop held by local government were invited
to discuss and develop the additional question items. Then another eight managing directors who
Journal of Global Strategic Management | 07 | 2010, J une| 67
attended the same workshop were given the items to check its face validity in accordance to the
technique developed by Zaichkowsky (1985) and Obermiller & Spangenberger (1998). The results
are the final question items which were distributed to the respondents during data collection period.
Since the question item was developed in native language, the validity and reliability of the question
items has to be re-check. Exploratory Factor Analysis which was used to check the convergent
validity of the items produced satisfactory result except for one item from Cost Reduction and
another one from Market Refocusing, which both produced communality below .5. These items were
excluded from further analysis. Reliability test for each variable is also quite satisfying with the
score of Cronbach’s Alpha well above .7 (Hair, et.al., 2005).
Scholars have shown that firm size has been somewhat associated with successful turnaround
(Bruton, Ahlstrom & Wan, 2003; Bruton, Oviatt & White, 1994). Firm size has also been research
quite rigorously in the context of contingency approach (see e.g. Donaldson, 2001). Therefore it was
considered to be quite important to investigate the effect of firm size in the study as control variable.
However since the exact and reliable figure of total asset of companies in the study was difficult to
obtain, the study will use the classification given by the local government as a measure of firm size.
For the purpose of measuring the firm size, the companies in the study were divided into three
categories: (1) Companies with asset less than Rp. 2 billion, (2) Companies with asset between Rp 2
to 10 billion, (3) Companies with asset more than Rp. 10 billion. Dummy coding was used in the
analysis, in which group (1) was considered as the reference group.
RESULTS AND DISCUSSIONS
Test for linearity of the logit as suggested by Tabachnick & Fiddel (2007) showed no serious
violations of the assumptions. Test for multicollinearity among predictors also showed no serious
violation of the assumption of collinearity, with VIF score below 3.6. The analyses of binary logistic
regression were performed in number of steps. First, each bivariate association between Size,
Operational Efficiency Strategy (OEF), Product-Market Refocusing Strategy (PMR) and
Government Assistance (GA) as predictor variables and turnaround success as the DV were
examined in Model 1. Then each moderating variable will be paired up with each predictor variable
to check the improvement of the model. And finally interaction term will be introduced with each
model to check for the significance of the interaction. Mean centering was applied to all predictor
variables prior creating the interaction term.
Table 1 shows the bivariate relationship between each predictor variable and turnaround success.
Product-Market refocusing strategy has the biggest effect in improving the odds of turnaround
success (33 times more likely than non-turnaround), while government assistance also shows
significant influence on the odd ratio of turnaround success. Although Size and OES does not
produce significant results (p >.05), Hosmer & Lemeshow (2000 : 95) argued that any variable with
p value less than .25 still can be considered as a candidate in multivariable model. Therefore Size
and OES will still be considered in further analysis.
Table 1. Results of Logistic Regression Analysis on Model 1.
The result of logistic regression analysis involving higher order interaction term is shown on Table 2
below. The analysis involves comparing higher order interaction with lower order components of the
higher order model to see whether the inclusion of single variable can significantly improve the
model, which is in someway similar to hierarchical regression analysis. Hosmer & Lemeshow (2000)
argued that computation of moderating variable in logistic regression is always in the form of
68 | Journal of Global Strategic Management | 07 | 2010, J une
hierarchical analysis, in which significance of the interaction term should always be checked prior
interpretation of the result.
Test of Hypotheses
Hypothesis 1: There is a positive relationship between operational-efficiency strategies and
successful turnaround companies
Hypothesis 1(a): Firm size moderates the relationship between operational-efficiency strategies and
turnaround success
Hypothesis 1(b): Government Assistance moderates the relationship between operational-efficiency
strategies and turnaround success
A direct bivariate relationship between OES and turnaround success, which is reported at Table 1,
shows that OES does not produce significant influence towards turnaround success (p: .165). The
interaction between firm size and OES shown under Model 2 in Table 2, also shows that the effect
carried by Size is not significant enough to have moderated the relationship between EOS and
turnaround success. In this case, it is fair enough to say that the evidence does not warrant sufficient
justification to reject H1(a). This finding is in agreement with the findings of some scholars in the
literature which found insufficient support of this strategy positively influence turnaround success
(Bruton, Ahlstrom & Wan, 2001; Arogyaswamy & Yasai-Ardekani, 1997). One of the logical
explanation on this fact is perhaps this strategy was pursued by turnaround as well as non-turnaround
companies.
Table 2. Results of Logistic Regression Analysis on Model 2 - Model 5
The moderating effect of Government Assistance (GA) on OES and turnaround success, which is
shown in Model 3 in Table 2, produced quite significant result. In the presence of GA, the influence
of OES toward turnaround success has somewhat improved. The EOS’ odd ratio of .001 is the
conditioned coefficient which reflects the changes of OES when GA equals to zero. While the odd
ratio of product term (16.05), shows the factor multiplier by which the multiplying factor of OES
changes given a unit increase in GA. Therefore, there is enough evidence to argue that Government
assistance did influence the relationship between OES and turnaround success (H1b is accepted).
Hypothesis 2: There is a positive relationship between product-market refocusing strategies and
successful turnaround companies
Hypothesis 2(a): Firm size moderates the relationship between product-market refocusing strategies
and turnaround success
Journal of Global Strategic Management | 07 | 2010, J une| 69
Hypothesis 2(b): Government Assistance moderates the relationship between product-market
refocusing strategies and turnaround success
Result of logistic regression analysis presented in Table 1, shows that PMR is the single most
important predictor in the model. When entered into the equation model, the variable single
handedly improves the prediction of turnaround success to 74.1%. With an odd ratio of 33.76, the
presence of this variable in turnaround improves the probability of achieving turnaround success by
as much as 33 times. Therefore it can be argued that PMR has a direct influence on turnaround
success, which in this case, hypothesis H2 is accepted.
The effect of firm size on the relationship between PMR and turnaround success is reported in
Model 3 at Table2. The statistical result shows that Size somewhat moderate this relationship,
especially in the case of large companies (Size-1). PMR (Size-1) odd ratio of 564, shows by what
“times” the multiplying factor of PMR would have change in the case of one unit change of Size.
This is particularly quite true for large companies, as they have lots of resources and access to many
markets, which they can fully use to their extent in order to revitalize their company. Therefore,
hypothesis H2(a) is accepted, stating that Size do moderate the relationship between PMR and
turnaround success. These finding is also in support with the findings of other scholars in the subject
(Bruton, Ahlstrom & Wan, 2003; Bruton, Oviatt & White, 1994).
The moderating effect of Government Assistance in the relationship between PMR and turnaround
success seems quite weak to be supported. The result on Model 5 in Table 2, shows that the model is
not significantly different from the lower order model, which means that the introduction of the
product term into the model is not significant. This might explain that Government (at least in the
sample of study) does not assist much in the product or marketing section of turnaround companies,
though this argument is still debatable. The statistical finding of data analysis failed to support
sufficient evidence to accept hypothesis 2(b).
Conclusion
This study has attempted to see the moderating effect of Government Assistance in the relationship
between Strategies and Turnaround Success. Firm Size was also considered as control variable in the
analysis. The result shows that PMR has a direct and strong influence on turnaround success. The
moderating variable of size and government assistance in this study was found to be partially
supported. Firm size was found to moderate the relationship between PMR and turnaround success,
while Government assistance moderates the relationship between OES and turnaround success. As
with other study using logistic regression, the application of the study findings outside the sample
should be carefully considered since normality was not universally assumed in logistic regression.
This study is considered to be a mere step in the much-undisclosed world of corporate turnaround,
especially in the aspect of government assistance in revitalizing troubled companies.
70 | Journal of Global Strategic Management | 07 | 2010, J une
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doc_344269185.pdf
Moderating Effects Of Government Assistance & Turnaround Strategies A Research On Private Manufacturing Companies
MODERATING EFFECTS OF
GOVERNMENT ASSISTANCE &
TURNAROUND STRATEGIES: A
RESEARCH ON PRIVATE
MANUFACTURING COMPANIES
*Tengku Mohammad Chairal ABDULLAH
**Zolkafli HUSSIN
*University of North Sumatera
**Northern University of Malaysia
ABSTRACT
There were many cases in corporate turnaround that had seen the influence of government
assistance in influencing the process of recuperating ailing firms. However to what extent such
assistance positively influenced the outcome of turnaround result are still lacking in the literature.
The objective of this paper is to investigate the moderating effect of government assistance towards
the improvement of business performance of turnaround companies. Analysis of logistic regression
was used to investigate the effect of retrenchment and product-market refocusing strategy and the
combination effect of government assistance as a moderator towards the improvement of business
performance of turnaround firms. The sample consists of 135 exporter-manufacturing companies
listed in the Exporter Directory of the Province of North Sumatra, Indonesia. The study found partial
support in the moderating effects of government assistance and firm size and their influence in the
relationship between strategy and successful turnaround. The study also found that Product-Market
refocusing is one of the important strategies to be implemented during turnaround.
Keywords: Corporate Turnaround, Turnaround Strategies, Logistic Regression, Moderating Effect,
Government Assistance
INTRODUCTION
The recent economic crisis of 2008, which swept many of major industrial nations, saw one major
shift in government policies towards ailing businesses. The conviction held especially by liberal
economy, which dictates that the government interference should be limited in the business world,
has been changed dramatically by the act of giving financial assistance in the effort to rescue ailing
businesses, especially big companies. Though as literature would later show that government
assistance has been there in rescuing troubled companies, this recent recession is perhaps the only
one after many decades whereby such assistance massively came in hundreds of billion dollars of
rescue package. Before the economic crisis of 2008, government assistance though arguably to be
quite limited, was present in many cases of turnaround companies. There were many cases in the
literature of corporate turnaround that showed the government taking part in the resuscitation of
ailing companies especially if the company was considered to be an important asset to the nation.
However, to what extent such assistance truly helped in revitalizing turnaround companies were
found to be quite scant in terms of statistical reference.
This paper focuses on the effect of government assistance as a confounding factor and its influence
on turnaround strategies towards the improvement of business performance of turnaround
companies. The effect of company size, which also suspected to have certain moderating effect on
strategy and performance, also will be considered in the study as a control variable. This paper
begins with discussions on the theoretical background underlying the selection of turnaround
strategies. Then several turnaround strategies commonly adopted by troubled companies will be
discussed along with cases of corporate turnaround in which government assistance were present.
64| Journal of Global Strategic Management | 07 | 2010, J une
Several hypotheses were developed in regards to the predictor as well as moderating variable in the
study, in which the theoretical framework were based upon. It will then proceed with the section on
research design, in which detail explanation on sampling, data collection and analytical procedure
will be discussed. The research findings, implication and limitation will be presented in the final
section of the paper.
LITERATURE REVIEW
Literature of corporate turnaround have shown that certain strategies such as retrenchment, cost
reduction or downsizing were among popular strategies adopted by these troubled firms. One of the
reasons that these strategies were widely adopted by ailing business was perhaps better explained by
survival-based theory. This theory argued that in order to survive, organization had to deploy
strategies that should be focused on running very efficient operation and can respond rapidly to the
ever-changing environment (see e.g. Lynch, 2003). However, in reality, not all of these troubled
companies which adopted this kind of strategies managed to successfully turnaround. As Slatter
(1984) argued, only one out of four troubled companies managed to successfully turnaround itself.
The lack of explanation provided by survival-based theory, open up possibilities for other theory of
strategic management to lend itself in explaining the behavior of turnaround companies.
Contingency theory as one of the most influential theories applied in strategy and organizational
studies (Hofer, 1975) and one of which is widely adopted in strategic management (Miner, 1984), is
one of the proposed candidate. The suspected moderating effect of some undefined factors which
influence the outcome of turnaround effort is well within the boundary of contingency theory to
explain.
Literature in the field of corporate turnaround in regards to strategy has been quite well developed
for the last three to four decades. Since the earliest publication on the subject by Schendel & Patton
(1976), literature has been well developed to argue that turnaround companies would resort to certain
types of turnaround strategies, namely: debt restructuring, operating-turnaround strategy, strategic-
portfolio restructuring strategy, and product-market refocusing strategy (Hofer, 1980; Tvorik,
Boissoneau & Pearson, 1998; Slatter, 1984; Sudarsanam & Lai, 2001; Chowdury, 2002; Chowdury
& Lang, 1996; Hambrick & Schecter, 1983; O’Neill, 1986; Slatter & Lovett, 1999, and others).
Although different scholar provided different technical term to these strategies, and sometimes found
conflicting results, these terms are basically presents more or less the same meaning.
Aside from strategy, there are other non-strategy factors which influence performance of turnaround
companies, or somewhat influence strategy – performance relationship of turnaround companies.
Different business practices between Western and Asian companies for example, were argued by
Bruton, Ahlstrom & Wan (2003) as giving different effect on the turnaround effort of Asian
companies, which also supported from other fellow researchers (see for e.g. Fisher, Lee & Johns,
2004; Bruton, Ahlstrom & Wan, 2001). Therefore it would be quite interesting to seek out other
differences which exist or being practiced by turnaround companies in other parts of the world,
especially in South East Asia. For the purpose of this study, two strategy-related factors and two non
-strategy related factors, which will be treated as confounding factor, will be examined in the effort
to further explain their influence on the improvement of performance of turnaround companies.
The Factor of Operational-Efficiency Strategies
Early scholars in the field referred to this strategy as retrenchment strategy, which arguably is among
the first sets of strategies to be implemented by troubled firms (Robbins & Pearce, 1992; Hofer,
1980). Literature on the field of corporate turnaround has found considerable support in the role of
operational-efficiency strategy in revitalizing ailing companies (Robbins & Pearce II, 1992;
Chowdury & Lang, 1996; Bruton & Rubanik, 1997; Tvorik, Boissoneau & Pearson, 1998). However
there were several other researchers who found conflicting results in this particular role of
operational-efficiency strategy (Barker III & Mone, 1994; Castrogiovanni & Bruton, 2000;
Arogyaswamy & Yasai-Ardekani, 1997). This strategy which is usually implemented to address
operational (inefficiency) problems of troubled companies was usually aimed to improve short-term
performance focusing on operational measures in the effort to gain efficiency and improving margin
Journal of Global Strategic Management | 07 | 2010, J une| 65
by reducing direct cost and slimming overheads in line with volume (Tvorik, Boissoneau & Pearson,
1998; Hofer, 1980; Slatter, 1984; Chowdury, 2002). This strategy usually involves taking actions to
improve operational cash flow and restore profitability by pursuing strict cost and operating-asset
reduction (Sudarsanam & Lai, 2001).
Turnaround Company usually pursues cost reduction through retrenchment of workers, pay cuts,
reducing cost of materials and also overheads, though the first two are the most commonly
mentioned. Scholars found conflicting evidence in the role of cost reduction to improve business
performance. Many scholars found significant role of cost reduction in turning around ailing
companies (Robbins & Pearce II, 1992; Chowdury & Lang, 1996; Bruton & Rubanik, 1997; Tvorik,
Boissoneau & Pearson, 1998), though some others found the role was a bit vague (Barker III &
Mone, 1994; Castrogiovanni & Bruton, 2000; Fisher, Lee & J ohns, 2004). Arogyaswamy & Yasai-
Ardekani (1997) found that retrenchment of workforce and pay cuts were both done by successfully
and non-successfully turnaround firms, whereby some firms even successfully turnaround without
retrenching their workers. Bruton, Ahlstrom & Wan (2001) also argued that the ability to retrench is
somewhat limited in East Asia, although in their subsequent research in 2003 (Bruton, Ahlstrom &
Wan, 2003), they argued that in the case that retrenchment occurred, it did improved performance. In
practice, the role of cost reduction in improving business performance is widely accepted by
turnaround firms, such as the turnaround of IBM (Slatter & Lovett, 1999).
Operating-asset reduction was also deemed to be one of the measures taken during turnaround
(Slatter, 1984; Ganto & Sulaiman, 2005). This action usually involves selling-off less than full
capacity of operating units such as plant or machinery, selling-off idle assets such as warehouses,
office building, vehicles, and even short-term assets such as inventory and receivables (Sudarsanam
& Lai, 2001; Barker III & Mone, 1994; Chowdury & Lang, 1996; Castrogiovanni & Bruton, 2000;
Bruton, Ahlstrom & Wan, 2003; Fisher, Lee & J ohns, 2004).This action were usually adopted to
provide fast cash in a badly-needed cash-flow situation experienced by many turnaround companies,
while at the same time getting rid of unused surplus of assets, enhancing efficiency at the operational
level and improving asset utilization. Based on these arguments, operational-efficiency strategy
which aimed to improve short-term performance by gaining efficiency was argued to have a direct
influence on performance of company seeking turnaround, which leads us to the first hypothesis.
H1: There is a positive relationship between operational-efficiency strategies and successful
turnaround companies
The Factor of Product-Market Refocusing
The strategy of product-market refocusing, was categorized by early scholars of corporate
turnaround as part of recovery strategies (Schendel et al., 1976), growth strategy (O’Neill, 1986),
revenue-generating strategy (Slatter, 1984), or as part of entrepreneurial turnaround strategy
(Hambrick & Schecter, 1983). However, it was Slatter (1984) who first surfaced this strategy as one
among its generic turnaround strategies and differentiated it with other recovery strategies, which
include strategy of improved marketing, product-market changes and growth through acquisition. In
his later writings with Lovett (Slatter & Lovett, 1999), they combined these strategies under product-
market refocusing, which include addition/ deletion of product lines, addition/ deletion of customers,
changes in sales mix, complete withdrawal from a market segment, and entering into a new product-
market segment. Product-market refocusing strategies were widely supported as the instrument of
growth in the literature of corporate turnaround (Kow, 2004), especially as the decline deepens
(Chowdury, 2002). Product-market refocusing strategy were also found to be quite a popular strategy
being adopted by many troubled firms in Malaysia (Siti Maimon, 1999) and Indonesia (Ganto &
Sulaiman, 2005) especially after the financial crisis of 1998.
Product refocusing through new product development and deletion of unprofitable product lines
were practiced among troubled companies. There were cases in which careful new product
development managed to bring the company out of the crisis, such as Fiat for example (Edmondson,
et al. 2002). Market refocusing also found considerable support in the literature of corporate
66| Journal of Global Strategic Management | 07 | 2010, J une
turnaround, though Harker (2001) argued it was still quite limited. Some of the scholars even argued
that there were several aspect of marketing which differentiate between failed and successful
turnaround companies (Harker & Harker, 1998), such as careful selection of potential market and
close relationship with customers (Cunnington, 1996). Micron for example, a Russian microchip
manufacturer, were one of many cases in which turnaround companies resorted to this kind of
strategy to pull themselves out of trouble (Bruton & Rubanik, 1997). Based on these discussions, the
second hypothesis is postulated.
H2: There is a positive relationship between product-market refocusing strategy and successful
turnaround companies
The Factor of Government Assistance
There is no doubt that government has major influences on corporate life. They influence corporate
through taxes, regulations and even sometimes in terms of business policy. In the aspect of
turnaround, government was found to be helpful in some cases of government-related turnaround
effort such as in the case of Chrysler Corp (Chowdury, 2002). In the wake of 2008 economic crisis,
cases like this was found to be quite common. Aside from giving help, in certain cases of
turnaround, government was found to be the reason for corporate decline, such as through budget
cuts (Rose, 2003), or through tight monetary policy which shrink the government spending.
The role that government took when they decided to give assistance in the turnaround process was
also found to be quite diverse. Many cases of government assistance came in the form of financial
backup, such as the turnaround of Rover (Whitehead, 1999). Another type of assistance came in
some form of mutual fund, which will be used to facilitate the debt and financial difficulties
experienced by these troubled companies (see for e.g. Wilks, 2002). This is the type of assistance
which are being used by many Southeast Asian countries during the economic recession of 1998,
and also recently being used by industrial nation which were being hit by recent crisis. And
sometimes government also influenced the turnaround process by supervising the process itself, such
as in the case of turnaround at Daewoo (Lee, 1999). Even in some cases, government influenced the
market side of turnaround by giving government contracts, such as in the turnaround of AMS
(Mullich, 1998). These discussions on the government influence, whether direct or indirect, arguably
have some effect on the turnaround process, which lead us to the third hypothesis.
H3: The factor of government assistance shall moderate the relationship between strategy and
successful turnaround companies.
RESEARCH DESIGN
Financially distressed firms are defined as companies who experienced a two-year of simultaneous
decline in net income and Return on Asset (ROA) between the period of 2000 and 2005. These two
measures of performance were previously used by Bruton, Oviatt & White (1994), Castrogiovanni &
Bruton (2000) and Fisher, Lee & J ohns (2004) in their study. Successful Turnaround Company is
defined as companies who experienced a stable increase of profit (net income) and ROA between
2005 and 2007. The sampling frame in this study consists of manufacturing companies listed in the
Exporter Directory of North Sumatera Province. From the total of 281 manufacturing companies
listed in the directory, 179 falls into financially-distressed category, in which only 135 were included
in the study. From the total of 135 companies, 87 companies fall into the category of successful
turnaround, while the other 48 is classified as non-turnaround. Data was collected from February –
August 2009 by personal interview, in which the respondents were asked to fill up the self
administered questionnaire.
Question items which were developed to measure the variables were adapted from the items
developed by Barker III & Barr (2002). This study also develops additional question items to
strengthen the measures of strategies and also to measure government assistance as new variable.
Three managing directors who were involved in a workshop held by local government were invited
to discuss and develop the additional question items. Then another eight managing directors who
Journal of Global Strategic Management | 07 | 2010, J une| 67
attended the same workshop were given the items to check its face validity in accordance to the
technique developed by Zaichkowsky (1985) and Obermiller & Spangenberger (1998). The results
are the final question items which were distributed to the respondents during data collection period.
Since the question item was developed in native language, the validity and reliability of the question
items has to be re-check. Exploratory Factor Analysis which was used to check the convergent
validity of the items produced satisfactory result except for one item from Cost Reduction and
another one from Market Refocusing, which both produced communality below .5. These items were
excluded from further analysis. Reliability test for each variable is also quite satisfying with the
score of Cronbach’s Alpha well above .7 (Hair, et.al., 2005).
Scholars have shown that firm size has been somewhat associated with successful turnaround
(Bruton, Ahlstrom & Wan, 2003; Bruton, Oviatt & White, 1994). Firm size has also been research
quite rigorously in the context of contingency approach (see e.g. Donaldson, 2001). Therefore it was
considered to be quite important to investigate the effect of firm size in the study as control variable.
However since the exact and reliable figure of total asset of companies in the study was difficult to
obtain, the study will use the classification given by the local government as a measure of firm size.
For the purpose of measuring the firm size, the companies in the study were divided into three
categories: (1) Companies with asset less than Rp. 2 billion, (2) Companies with asset between Rp 2
to 10 billion, (3) Companies with asset more than Rp. 10 billion. Dummy coding was used in the
analysis, in which group (1) was considered as the reference group.
RESULTS AND DISCUSSIONS
Test for linearity of the logit as suggested by Tabachnick & Fiddel (2007) showed no serious
violations of the assumptions. Test for multicollinearity among predictors also showed no serious
violation of the assumption of collinearity, with VIF score below 3.6. The analyses of binary logistic
regression were performed in number of steps. First, each bivariate association between Size,
Operational Efficiency Strategy (OEF), Product-Market Refocusing Strategy (PMR) and
Government Assistance (GA) as predictor variables and turnaround success as the DV were
examined in Model 1. Then each moderating variable will be paired up with each predictor variable
to check the improvement of the model. And finally interaction term will be introduced with each
model to check for the significance of the interaction. Mean centering was applied to all predictor
variables prior creating the interaction term.
Table 1 shows the bivariate relationship between each predictor variable and turnaround success.
Product-Market refocusing strategy has the biggest effect in improving the odds of turnaround
success (33 times more likely than non-turnaround), while government assistance also shows
significant influence on the odd ratio of turnaround success. Although Size and OES does not
produce significant results (p >.05), Hosmer & Lemeshow (2000 : 95) argued that any variable with
p value less than .25 still can be considered as a candidate in multivariable model. Therefore Size
and OES will still be considered in further analysis.
Table 1. Results of Logistic Regression Analysis on Model 1.
The result of logistic regression analysis involving higher order interaction term is shown on Table 2
below. The analysis involves comparing higher order interaction with lower order components of the
higher order model to see whether the inclusion of single variable can significantly improve the
model, which is in someway similar to hierarchical regression analysis. Hosmer & Lemeshow (2000)
argued that computation of moderating variable in logistic regression is always in the form of
68 | Journal of Global Strategic Management | 07 | 2010, J une
hierarchical analysis, in which significance of the interaction term should always be checked prior
interpretation of the result.
Test of Hypotheses
Hypothesis 1: There is a positive relationship between operational-efficiency strategies and
successful turnaround companies
Hypothesis 1(a): Firm size moderates the relationship between operational-efficiency strategies and
turnaround success
Hypothesis 1(b): Government Assistance moderates the relationship between operational-efficiency
strategies and turnaround success
A direct bivariate relationship between OES and turnaround success, which is reported at Table 1,
shows that OES does not produce significant influence towards turnaround success (p: .165). The
interaction between firm size and OES shown under Model 2 in Table 2, also shows that the effect
carried by Size is not significant enough to have moderated the relationship between EOS and
turnaround success. In this case, it is fair enough to say that the evidence does not warrant sufficient
justification to reject H1(a). This finding is in agreement with the findings of some scholars in the
literature which found insufficient support of this strategy positively influence turnaround success
(Bruton, Ahlstrom & Wan, 2001; Arogyaswamy & Yasai-Ardekani, 1997). One of the logical
explanation on this fact is perhaps this strategy was pursued by turnaround as well as non-turnaround
companies.
Table 2. Results of Logistic Regression Analysis on Model 2 - Model 5
The moderating effect of Government Assistance (GA) on OES and turnaround success, which is
shown in Model 3 in Table 2, produced quite significant result. In the presence of GA, the influence
of OES toward turnaround success has somewhat improved. The EOS’ odd ratio of .001 is the
conditioned coefficient which reflects the changes of OES when GA equals to zero. While the odd
ratio of product term (16.05), shows the factor multiplier by which the multiplying factor of OES
changes given a unit increase in GA. Therefore, there is enough evidence to argue that Government
assistance did influence the relationship between OES and turnaround success (H1b is accepted).
Hypothesis 2: There is a positive relationship between product-market refocusing strategies and
successful turnaround companies
Hypothesis 2(a): Firm size moderates the relationship between product-market refocusing strategies
and turnaround success
Journal of Global Strategic Management | 07 | 2010, J une| 69
Hypothesis 2(b): Government Assistance moderates the relationship between product-market
refocusing strategies and turnaround success
Result of logistic regression analysis presented in Table 1, shows that PMR is the single most
important predictor in the model. When entered into the equation model, the variable single
handedly improves the prediction of turnaround success to 74.1%. With an odd ratio of 33.76, the
presence of this variable in turnaround improves the probability of achieving turnaround success by
as much as 33 times. Therefore it can be argued that PMR has a direct influence on turnaround
success, which in this case, hypothesis H2 is accepted.
The effect of firm size on the relationship between PMR and turnaround success is reported in
Model 3 at Table2. The statistical result shows that Size somewhat moderate this relationship,
especially in the case of large companies (Size-1). PMR (Size-1) odd ratio of 564, shows by what
“times” the multiplying factor of PMR would have change in the case of one unit change of Size.
This is particularly quite true for large companies, as they have lots of resources and access to many
markets, which they can fully use to their extent in order to revitalize their company. Therefore,
hypothesis H2(a) is accepted, stating that Size do moderate the relationship between PMR and
turnaround success. These finding is also in support with the findings of other scholars in the subject
(Bruton, Ahlstrom & Wan, 2003; Bruton, Oviatt & White, 1994).
The moderating effect of Government Assistance in the relationship between PMR and turnaround
success seems quite weak to be supported. The result on Model 5 in Table 2, shows that the model is
not significantly different from the lower order model, which means that the introduction of the
product term into the model is not significant. This might explain that Government (at least in the
sample of study) does not assist much in the product or marketing section of turnaround companies,
though this argument is still debatable. The statistical finding of data analysis failed to support
sufficient evidence to accept hypothesis 2(b).
Conclusion
This study has attempted to see the moderating effect of Government Assistance in the relationship
between Strategies and Turnaround Success. Firm Size was also considered as control variable in the
analysis. The result shows that PMR has a direct and strong influence on turnaround success. The
moderating variable of size and government assistance in this study was found to be partially
supported. Firm size was found to moderate the relationship between PMR and turnaround success,
while Government assistance moderates the relationship between OES and turnaround success. As
with other study using logistic regression, the application of the study findings outside the sample
should be carefully considered since normality was not universally assumed in logistic regression.
This study is considered to be a mere step in the much-undisclosed world of corporate turnaround,
especially in the aspect of government assistance in revitalizing troubled companies.
70 | Journal of Global Strategic Management | 07 | 2010, J une
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