Riding The Wrong Wave Organizational Failure As A Failed Turnaround

Description
This article proposes that a failing organization goes through a sequence of four stages before finally landing in the morass of death.

Riding the Wrong Wave:
Organizational Failure as a
Failed Turnaround
Jerry Paul Sheppard and Shamsud D. Chowdhury
This article proposes that a failing organization goes through a sequence of four stages
before finally landing in the morass of death. A four-stage model is proposed to describe
this journey, which can lead to failure or to turnaround. By categorizing the elements of
failure or turnaround, the model explains how the elements germane to each stage, when
combined, facilitate the progression of an organization from crippling deterioration in
performance to eventual death or to re-stabilizing survival. To support our contention, we
focus on the Canadian retail industry, and specifically on the story of the once very
successful but now extinct merchandising icon T. Eaton Co. Ltd., contrasting its fortunes
with those of fellow Canadian retail survivors Hudson’s Bay Company and Canadian Tire.
Ó 2005 Elsevier Ltd. All rights reserved
The current rage for courses of study in North American universities is crime scene
investigation. Based on the popular U.S. TV show CSI (Crime Scene Investigation), students
are applying in vast numbers to study forensics, and a number of schools that do not offer this
course of study are working on developing it.
1
It seems that people are far more willing to study
the rather squeamish matter of vicious crime and even murder than to look at the somewhat
cleaner, but more far reaching business of organizational death. It is not a topic most
researchers will stick with for long before moving on to something else.
2
Yet some professions
take a keen interest in the study of failure as a way to prevent its future occurrence. For
example, engineers often study why various structures fail as a way to prevent future problems.
Strategy guru Michael Porter notes that ‘The reason why firms succeed or fail is perhaps the
central question in strategy.’
3
Clearly, closer understanding of organizational failure has as much
to contribute to the understanding of strategy as the continued study of success.
Long Range Planning 38 (2005) 239e260 www.lrpjournal.com
0024-6301/$ - see front matter Ó 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.lrp.2005.03.009
There are four essential points one needs to know in order to understand organizational
failure:
1. failure is not typically the fault of either the environment or the organization, but rather it must
be attributed to both of these forces, or to be more exact, failure is the misalignment of the
organization to the environment’s realities;
2. because failure involves the alignment e or misalignment e of the organization and its
environment, it is, by de?nition, about strategy;
4
3. because failure deals with strategy, we can make choices to accelerate it or avoid falling into its
clutches;
4. because organizational failure can be avoided even after a decline e rapid or prolonged e the
ultimate failure of the organization really stems from a failure to successfully execute
a turnaround.
.a firm’s management, its environment, and the way they interact
each pay a role in its ultimate fate
Thus it is critical to our understanding of organizational survival and failure that
we recognize that three intertwined factors e a firm’s management, its environment, and
the way the firm interacts with its environment e all pay a role in determining its ultimate
fate.
The degree to which managers actually have the ability to turn a company around is a matter
of some debate. The management literature has a long history of crediting e or, to be more
exact, blaming e an organization’s decline and its eventual death on the misalignment of the
organization to the environment. This history is rooted in the application of biological
analogies by some researchers to the explanation of certain organizational phenomena. For
example, the population-ecology perspective focuses on the dynamics of survival and demise of
populations of organizations in a way similar to biologists’ focus on the survival and extinction
of species of living organisms
5
. This perspective stipulates that the characteristics of the species
of living organisms and the degree of their adaptability determine survival or extinction.
Applied to organizations, the population-ecology perspective implies that, ‘organizational
forms that have the appropriate fit with the environment are selected over those that do not fit
or fit less appropriately.’
6
The population ecology perspective is not, however, concerned with single organizational
units, but with forms or populations of organizations. Accordingly, as dramatic changes occur,
the growth patterns of certain existing industries shift and other industries appear and prosper.
As a result, the declining population of firms shift focus in terms of product/market offering,
or change through merger or through acquisition, or fail.
7
This comparison of organizations
with biological organisms is somewhat simplistic, in that while organizations can change
forms in many different ways, biological organisms cannot. Unlike living organisms, some
organizations have been able to stave off decline and failure and managed to survive for years,
even centuries.
The strategic choice perspective stands in contrast to the population ecology perspective.
Works like Levitt’s classic 1960 article, ‘Marketing Myopia’, place blame for organizational
decline clearly on managers’ failure to properly define and ascertain the conditions of their
environment. He argued that increasing population and affluence will not drive demand to
240 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
grow indefinitely. It is an understanding of the underlying customer needs that allow
organizations to remain healthy.
8
Levitt notes that when the U.S. railroads defined themselves as being in the railroad business
and not in the transportation industry they missed the opportunity to move into trucking and
were economically decimated by those that did so. Movie executives who defined themselves as
being in the movie industry rather than the entertainment industry perceived television as
a threat rather than an opportunity to produce entertainment for a new medium. The failure of
executives to align themselves with the changes in customer needs set in motion the decline of
once great organizations that existed in these two and in other industries.
9
As Mellahi & Wilkinson have noted, the population ecology and strategic choice perspectives
are not incompatible.
10
While the environment niche occupied by railroads and movies did
decline, firm failure in those industries involved defining the environment and selecting
segments in which to compete. Had railroads become transportation companies, more of them
would have survived. Had movie producers become entertainment makers more of them
would have survived and prospered. As noted earlier, because organizational failure involves
management e or more precisely, mismanagement e of aligning the organization with its
environment, it is, thus, about strategy. While a firm may require nourishment for its survival
from the external environment (a population-ecology perspective), the fundamentals for
effective survival are crafted, guided, and executed by forces within the firm. This is consistent
with the strategic choice perspective, where ‘purposeful enactment’ involves the conscious
processes, practices, and actions of key players that combine to form a strategy.
11
Thus, if
strategy, as one author defined it, ‘.helps to marshal and allocate an organization’s resources.
based on. anticipated changes in the environment.’,
12
failing to evaluate the environment
properly represents the most fundamental failure managers can make.
Our stars or ourselves: the oscillation between the organization
and its environment
What degree of freedom managers may have to save their organizations is, as we have seen, a matter
of some debate. Researchers have taken one of two extreme positions regarding the degree to which
fate or free will play in shaping organizational destinies, i.e. population ecology versus strategic
choice. Where strategic choice views managers as having the ability to execute strategy, modify ?rm
structure, and impact elements of the environment to their organization’s advantage, population
ecology assumes that organizational conduct is so constrained by past institutional arrangements
that ?rms are unlikely to change even in the face of a strong need to do so.
13
While the academic
debate surrounding whether organizational failure is the fault of management or forces in the
environment,
14
such debate is a chicken and egg problem: we do not know where the cycle starts
but simply that it exists. The occurrence of an environmental event will result in a change in the
organization’s condition. The combination of such an event with a lack of preparedness on the part
of the organization can initiate a decline in its fortunes.
Because organizational failure is the end result of a decline e rapid or prolonged e the
organization adapts and learns to address environmental events.
15
If the organization fails to adapt
and is weakened as a result, it is more susceptible to future problems. For failing organizations this
cycle has been labelled variously as a ‘downward spiral’ to an ‘amplitude.’
16
While experiencing
a downward spiral, failing organizations are continually involved in recurring sets of poor decisions
that lead them into inferior circumstances. At some point the downward spiral is halted by either
a failure or a turnaround. Unless the failure of the organization is the result of some sudden,
unexpected and extreme external shock, such as to preclude adaptation, it could have been avoided.
And if it could have been avoided, the ultimate end of the organization can be blamed on the failure
to execute successfully a turnaround in the declining ?nancial situation.
Long Range Planning, vol 38 2005 241
In a downward spiral, failing organizations [suffer] recurring sets
of poor decisions leading them into inferior circumstances
While a spiral implies a uniform path down a slope, an amplitude can change its oscillation:
speeding up or slowing down, showing greater or lesser variability. Because of its very lack of
uniformity, the notion of amplitude better describes the realities of the failure process, as causes and
effects bouncing back and forth between organizational ?aws and environmental problems in
a non-patterned way to move the organization toward failure (or survival). This view of failure
allows us to look at both sides of ‘our stars versus ourselves’ debate on why organizations fail. The
impact of 9-11 on the airline industry is an example. Despite an event that was disastrous for the
industry as a whole, some ?rms were in command of their own fate and managed to avoid falling
into bankruptcy. For example, short-haul economy carrier Southwest Airlines is still managing
successfully in this industry. Southwest was the prototype for other short-haul carriers worldwide.
Its regional imitators e e.g. Canada’s Westjet and Europe’s Ryanairdalso managed successfully in
a post-9-11 world. Those that were able to go through reorganization and remake their companies
(e.g. Air Canada) survived. Those that could not, did not survive (e.g. Sabena Belgian). Thus, even
in environments where resources are parsimonious, properly positioned companies with the correct
strategies can survive through dif?cult times.
Failure as failed turnaround strategy
The four-stage composite model employed in this paper was presented by the second author in
2002. As he demonstrated empirically, this model is capable of describing the dynamics of
turnaround or failure. Brie?y, by categorizing the elements of turnaround as three critical
requirements (discussed later), the model explains how the elements germane to each stage, when
combined, facilitate the progression of an organization from a decline, through crippling
deterioration in performance to an eventual death or a re-stabilizing survival.
Other researchers have also used stage models for turnaround or failure.
17
There are two
noteworthy problems in the stage models of turnaround that these researchers have presented. First,
because of an absence of the meaning of process in such models, the authors’ references to process
can be subsumed under an individual’s unknown perception of the construct. In other words, one
author’s perception of process may be construed as content by another. Second, researchers do not
justify the number of stages they propose: since the number varies from one to another, such stage
models prove dif?cult for researchers to compare. Thus while other models are insightful in their
own right, four compelling reasons encouraged us to adopt Chowdhury’s four-stage model for the
demonstration of Eaton’s failure.
The ?rst rationale for employing the four-stage model is that the model possesses a theoretical
consistency with process theory. This model elucidates the sequence of events that culminate in
a declining ?rm’s failure (or survival) and thus complement the causes and contexts of the event.
Process here is the sequence of actions, incidents, or stages that describe how things change over
time and why they change in this way. Process can be used in three different ways: (1) as a logic to
explain causal relationships between dependent and independent variables in a variance theory; (2)
as a category of concepts referring to actions of individuals and organizations; and (3) as a sequence
of events describing how things change over time and why they change in this way.
18
Thus, it is
important to specify the exact meaning of process in any study of a particular organizational
phenomenon. Of these three meanings, the one that focuses on the sequence of actions, incidents or
stages over time was employed in the development of this model.
The second rationale for employing the four-stage model is that the model requirements suggest
the hierarchical structure of incident, event, and concept. In each stage, incidents are compressed
242 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
into theoretically meaningful events that are then compressed into a few core concepts whose
sequential linkage aids in explanation of how failure or turnaround occurs. Despite the hierarchical
order, there is a range of types of relationships in the model e e.g., though some incidents are nested
within a particular event on one level in one stage, others may be nested within another event on
a different level in the same stage. As incidents and events may occur concurrently at different levels
of analysis, it is dif?cult to determine their exact relationships across the hierarchy in any given
stage. This may explain why no similar sequencing of events is likely to be observed in all failures
because of the idiosyncrasies of such interactions. Thus, the model provides for a mechanism to
incorporate such idiosyncrasies or contingencies in the explanation of failure or turnaround.
The third rationale for employing the four-stage model is that the model’s concurrent nesting of
incidents and events better depicts links and strategy ?ows at various levels. The application of
a process model exclusively to a single business unit can be a problem due to the latter’s restricted
range of options with respect to certain corporate strategies such as diversi?cation.
19
Strategy
changes at the corporate-level usually bring changes at the business-level. Such strategic coherence
entails multi-level analysis, and so makes it hard to separate strategies related to one level as against
another. Since strategies have ‘?uid’ characters that spread out over time and space, a clear-cut
delineation of strategies or their effects proves dif?cult.
20
The fourth and ?nal rationale for employing the four-stage model is that there is empirical
support for the model. While all other models are theoretical, an analysis of the Chrysler case by
Chowdhury largely supported the model.
21
This empirical support was an important consideration
in our selection of the model.
The model
Turnarounds occur when ?rms persevere through an existence-threatening performance decline
and end the threat with a combination of strategies involving skills, systems and capabilities to
achieve sustainable performance recovery. Note that this meaning of turnaround goes well beyond
stereotyped ?nancial and ef?ciency gains that result from certain strategic moves; rather it
encompasses what Stopford & Baden-Fuller referred to as rejuvenation, a term meaning a sustainable
recovery from simultaneous and comprehensive changes in a ?rm’s structure, strategy, systems,
technology, and individual behaviour.
22
Without rejuvenation, the firm’s journey will progress towards failure
and eventual death
Without such rejuvenation, the ?rm’s journey will progress towards failure and eventual death.
The four-stage model appears to illustrate either path, although clearly an organization may not
pass through all the stages to face dissolution, which could occur in any of the four stages. We wish
to investigate further whether an organization which eventually fails proceeds through the same
four sequential stages as one that survives. What we imply here is that corrective actions are possible
during any stage except the last.
23
The important question we address is: What mistakes does
a dying ?rm make in relation to the incidents and events in each stage of the failure process?
A brief description of the model is in order (see Figure 1). During the ?rst stage, the results of
previous misalignments of organizational strategies and environmental challenges create a decline
that starts from ?rm or industry equilibrium and drops until it reaches a nadir. The nadir prompts
management into corrective actions (in failing companies these actions can occur when resources
are too few to make the needed changes), this constitutes the second stage of the process. The third
stage e the period of transition e is by far the most intricate of the stages. Complex interplay
between strategy, structure, culture, technology, and human variables occurs during this stage. This
interplay needs investment in people and systems to link together all disparate activities of the ?rm.
In failing companies, actions may be insuf?cient to turn the ?rm around. The fourth stage shows
Long Range Planning, vol 38 2005 243
the outcome of the interactions that took place during the third stage and can be evaluated as either
a success or a failure.
The model has three critical requirements: incident, event, and concept. An incident is a recurrent
activity which can be empirically observed in one or more stages of the model.
24
It can be conceived
of using terms such as actions, indicators, occurrences, or raw datum. An event is an abstract
conceptual entity that explains the patterns of critical incidents and their temporal order. It is
a construct that does not lend itself to direct observation: to indicate that an event has taken place,
a number of reliable and valid indicators are needed. We can thus create a construct that can be
deliberately adopted for a special purpose, and de?ned and speci?ed so that it can be observed and
measured. A concept is a variable that epitomizes a phenomenon under consideration by being
sequentially present through all stages of the phenomenon.
25
Concepts must link the stages
and, thus, describe the progression of the entire phenomenon. Chowdhury derived the two
requirements e events and concepts e from the literature on decline and turnaround, placed them
in their respective stages, and, ?nally, amalgamated the stages in a composite model.
A review of the literature on decline and turnaround identi?ed a fairly comprehensive set of
events in each stage. (We will provide explanation and detail in the Eaton’s example to follow.)
Accordingly, k-extinction, r-extinction, and stimulus in decline; domain de?nition, scope overlap, and
strategic contours in response initiation; elapsed time, resource commitment, policy and programs,
structure, rewards, and people in transition; and success and failure in outcome. Except for k- and r-
extinctions, the terms borrowed from microbiology, the meaning of the remaining events are fairly
standard and consistent with the vocabulary in strategy and organization theory. K-extinction refers
to a decline which occurs because an organization is a part of a macroniche inhabited by
a population of ?rms, or part of an industry, that is shrinking or shifting in size or muni?cence. In
other words, k-extinction occurs because the carrying capacity (or what one can think of as the
‘k’arrying capacity) of the organization’s environmental niche is exhausted. R-extinction, on the
other hand, refers to organizational decline possibly through bad management. It implies reduction
in resources (reduction in resources being the ‘r’ in r-extinction) within an organization
independent of changes in the industry environment.
As core concepts, performance, strategy, and implementation were found to be sequentially present
through the four stages of the process of turnaround. The key events and core concepts are imposed
on the hierarchy of dimensions in Figure 2, which illustrates the three dimensions e incidents, key
events, and core concepts e in their hierarchical dimension so as to demonstrate the ?ow of
sequential stages, an essential requirement of a stage model.
Figure 1. The Failure/Turnaround Process
244 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
The illustrative case: T. Eaton Co. Ltd.
In order to elucidate how the model works empirically, we focus on the canadian retail
merchandising industry, and speci?cally on the case of the iconic retailer T. Eaton Co. Ltd., a once
very successful, but now extinct, merchandiser. Founded in 1869 (only two years after the creation
of the nation) Eaton’s was a Canadian institution, with its stores spread across the country. To shed
further light on the process, we contrast Eaton’s decline with the actions made by its Canadian
competitors and others in the market.
The ?rst of these contracting companies is the Hudson Bay Company (HBC). HBC was established
in 1670 to engage in the lucrative trade in transporting beaver pelts to England for the production of
hats. By the mid-1800s, a combination of new materials, fashion changes and declining the beaver
population spelled doom for the company. However, in the process of collecting furs, HBC had
opened trading posts that became retail outlets. Today, HBC is Canada’s largest department store
retailer, the country’s ?fth largest employer, and no longer involved in the fur-trade.
A second company offering useful contrasts is Canadian Tire (CT). CT was started in a Toronto
garage in 1922 by J.W. and A.J. Billes. Early on, CT fought auto makers angry about the store’s low
parts prices. When oil companies cut off CT’s supplies to its gas bars in the 1950s, the company
bought 60 million gallons from the Soviet Union (at the peak of the Cold War). When Wal-Mart
and Home Depot came to Canada in the mid-1990s though, CT looked doomed. The larger
American chains had more resources, more products, and bigger, brighter and newer stores. Yet,
CT managed to grow and thrive in this situation by drastically revamping their stores.
Although a number of different longitudinal methods can be used to observe the process of
failure, some longitudinal methods (like a real time study of events) would be inappropriate for
studying an ex post facto phenomenon, such as failure. We decided, therefore, to use
a comprehensive case with suf?cient detail that would lend itself to ?t within the structure of
a theoretical model. Although this type of analysis is less rigorous than some others,
26
it holds the
potential to provide some preliminary assistance to our understanding of the process of
organizational failure.
Figure 2. Key Events and Core Concepts in Turnaround/Failure
Long Range Planning, vol 38 2005 245
To reconstruct the sequence of actions (or lack thereof) that led to the failure of T. Eaton Co. Ltd.
within the framework of the above four stage model, we employed a content analysis of historic
sources e books, articles and company issued documents (e.g. annual reports, ?lings and web
pages). Like Mellahi, we employed process data to develop an interpretive case study of critical
incidents to allow for a rich description of the context within which Eaton’s decline occurred and as
a valid way to manage large volumes of qualitative data.
27
There were at least three distinct reasons
for the selection of Eaton’s: (1) Eaton’s and the Eaton family had enjoyed incredible success, fame,
and power; (2) the organization was a well-known, respected and an innovative retail leader and;
(3) Eaton’s demise was fairly recent, surprisingly precipitous and de?nitive.
At one point Eaton’s was the world’s largest privately held retailer, in
business for 130 years. The family were regarded as Canadian royalty.
Eaton’s success and power was far-reaching. Not only was it the largest retailer in Canada at one
point, but it was also the world’s largest privately held retailer. At the time of its initial 1997 failure
e after over 130 years in business e it was still one of the three largest retailers in Canada. The
Eaton family were celebrities in their day in much the way the Kennedy family have been regarded
as a kind of U.S. royalty. In fact the Eaton’s were royalty of a sort e the son of founder Timothy
Eaton was Sir John Craig Eaton, knighted in 1915 for his work in World War I.
28
Eaton’s had so
much clout that when, in the 1950s, a man leaped to his death from the Winnipeg Eaton’s ?fth ?oor
(in full view of a crowd) the papers did not identify the building.
So renowned was Eaton’s that, during its prime, its discreet at-home Shopping Service catered to
likes of Mary Pickford, Joan Crawford, and other famous Hollywood actors. Eaton’s principal
innovations - initiated by company founder, Timothy Eaton - included a policy with three
components: cash-only sales, no price-haggling, and a money-back guarantee. Eaton’s also
introduced Canada’s ?rst retail catalogue and its ?rst Santa Claus parade. Moreover, besides
installing one of Canada’s ?rst elevators in its Toronto store, it was the ?rst Canadian retailer to
illuminate its stores with electric lights. Other major innovations were the installation of customer
service facilities like ‘...full-length mirrors, comfortable changing closets, immaculate ?oor-walkers ...
doormen to assist all women with packages. . [Eaton] even provided rooms where they could relax,
leave their children in the charge of a nurse, write letters or take a bath.’
29
Regarding Eaton’s actual demise, there are a number of elements that make its case an excellent
one for analysis. First, the apparently sudden decline captured the public’s interest. Since the
company was privately held, its initial 1997 move into reorganization was a bit of a public surprise.
Second, being such a well-known company meant that there was suf?cient discussion in the
business press regarding the process of decline to illustrate this model. Third, since Eaton’s stock
became publicly traded in 1998, it was under even more public scrutiny and, as a result, even more
detailed information could be obtained. As such, the data from this period made an excellent
example of a turnaround attempt.
Finally, Eaton’s has not lingered on to the present day in a substantially diminished state, but had
a de?nitive end that made it appropriate for the study of a failure. Sears, who had bought Eaton’s as
part of its second bankruptcy in 1999, ?nally pulled the plug in 2002. This has enabled us to key the
reconstruction of events to the stages discussed earlier, and illustrate how Eaton’s case supports the
model’s stage elements.
Eaton’s decline and failure
In order to clarify the major points in story of Eaton’s decline we have included a timeline of major
events as Figure 3. For Eaton’s, the roots of their failure can be traced back as far as 1952 when U.S.
retailing giant Sears formed a joint venture with Simpson’s, then a major competitor of Eaton’s.
246 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
McQueen noted that Eaton’s ‘.underestimated the power of the new arrival. It was as if everything
was happening too far a ?eld from the downtown merchants who then ran Eaton’s. Simpson’s-Sears
stores were sleek, new and usually located in the suburbs, the growth part of most communities.’ Sears
had a long history of operating suburban stores; they opened their ?rst in 1928 in Aurora, Illinois.
Before the end of the 1970s the Simpson’s-Sears combination equalled Eaton’s $1.6-billion sales
level. Eaton’s sales froze at that level while Sears continued to grow. By the time Eaton’s later arrived
in bankruptcy court, Sears’ sales had tripled from mid-1970s levels. About $1-billion of this came
from Sears’ catalogue sales e a market Eaton’s had abandoned in 1976 (the Sears catalogue phone
number is the most frequently called toll free number in Canada). Pessimistically, one could say
that the organization was declining relative to the growth of Sears, but even disregarding the
comparison, for Eaton’s this period e the late 1970s to the early 1980s - could, at a minimum, be
called a period of stagnation.
Some claim that one of Eaton’s biggest mistakes lay in its inconsistent marketing of the Eaton’s
brand. In the 1970s, it moved from being a traditional style department store to becoming
a modern retailer. The company began to sell the whole idea of ‘the store and the customer’s
relationship with the store.’
30
The years between 1970 and 1980 marked the period of Eaton’s
greatest marketing strength. They were media savvy and had incredible resources. But, by the end of
the 1980s, in the view of some experts, Eaton’s had begun to lose sight of the importance of keeping
its brand exciting e including withdrawing its support for the Santa Claus parade in 1982. When
the recession hit in the early 1990s, they redirected their marketing toward a more price-orientated
approach. Eaton’s brie?y tried to rebuild its brand in the mid-1990s by hiring Darcia Joseph (later
president of Young and Rubicam), but the effort did not last long and Eaton’s ?led for
reorganization under Canadian bankruptcy laws in February, 1997.
31
In 1998, Eaton’s hired
a Toronto agency known for its brand-building advertising. Eaton’s new advertising succeeded in
gaining them the attention of the young demographic target. Unfortunately, this strategy amounted
to abandoning Eaton’s traditional customers.
At this point Eaton’s cut product lines and moved into up-scale clothing with its Diversity in-
store boutiques. This move not only ultimately alienated older loyal customers, but also failed to
attract the younger customers they sought. Part of the failure to attract new customers stemmed
from the premature advertising of store changes before they had begun to implement them.
Potential new customers curious enough to look at the new Eaton’s, found the same old store e
a store whose selection of products was not suf?ciently fashionable. As well, competitors e both
specialty retailers and other department stores e already occupied the niche Eaton’s sought. Others
were selling the same clothing lines in stores with a de´cor and ambiance that Eaton’s attempted to
achieve, so there was little incentive for customers to switch. At one end of the spectrum,
department stores like Sears or the Bay (HBC’s major retailing arm) tried to avoid the extremes in
fashion to cater to a wide range of consumers, while specialty shops captured those seeking unique
selections. Eaton’s was perceived as both too staid and trying too hard to be trendy and in the end
alienated both its traditional and prospective customers.
32
In the 1990s, Eaton’s traditional core customers were older than the average Canadian. These
customers were also growing more price-sensitive due to a recession at the beginning of the 1990s.
Customers were able to exercise their price sensitive impulses when Wal-Mart arrived in Canada in
1995. Wal-Mart bought out the remnants of Woolworth’s 122-store Woolco chain and quickly
turned around and expanded its operations. From 1994 to 1998, Eaton’s share of the Canadian
1952 1976 1982 1995 1997 1998 1999 2000 2002
Sears enters
Canadian market
Eaton’s quits
catalogue
business
Eaton’s ends
Santa Claus
parade support
Wal-Mart enters
Canadian
market
Eaton’s files
for bankruptcy
protection to
reorganize
Eaton’s goes
public, cuts 21
stores &
remodels
Eaton’s files
for second
bankruptcy
Sears
re-launches 7
Eaton’s stores
Last 7 Eaton’s
stores converted
to Sears outlets
Figure 3. Timeline of Major Events in the Decline and Failure of Eaton’s
Long Range Planning, vol 38 2005 247
department store market fell from 14.3% to 7.2%e on average, a reduction of $400 to $500 million
in sales every year for three to four years!
33
Finally, Eaton’s was seen to make two serious ?nancial missteps as part of its initial
reorganization. One was that while they closed only 21 of their 85 stores, when critics at the time
argued that they should have closed 25 more under-performing sites. Breaking a lease is a costless
move for companies under bankruptcy protection and Eaton’s failed to take advantage of this. The
remaining 39 stores would have been the best performing locations in the chain. Instead, the 25
poor stores that were retained were so grossly under-performing that they dragged down the entire
company. Secondly, Eaton’s raised hundreds of millions by selling off half the company to the
public. Again, critics noted that twice the amount of funds was really needed to turn the company
around. We now turn to a demonstration of how the Eaton’s story ?ts the model.
Stage 1: Decline:
The process of decline at Eaton’s exhibits elements of both k- and r extinction. K extinction
occurred because the carrying capacity for the higher-end department store niche was exhausted.
Holt-Refrew had occupied the high-end market in most major Canadian cities for some time, and
there had been little evidence of successful entrants into the segment, with the exception of
Montreal’s four store chain, ‘Les Ailes de la Mode’ (The Wings of Fashion).
34
When the well-known
western Canadian department store chain Woodward’s attempted to convert its 26 stores into
higher-end outlets in the early 1990s, it went out of business by 1993. In addition, external moves
by competitor Simpson’s-Sears created a more intense inter-?rm rivalry. Prior to 1950, the industry
consisted of three major players - HBC, Simpon’s, and Eaton’s e with the latter having 60 percent
of the market. When Simpson’s teamed with Sears to open suburban stores, cracks began to appear
in the tripartite arrangement. The Simpson’s Sears deal added a strong competitor that altered the
balance of the arrangement that the big three stores had previously maintained.
the recession of the early 1990s meant a move towards low-price
retailers [but] regular department stores were effectively shut out
from this market by Wal-Mart’s entry
In a further environmental development, the recession of the early 1990s meant that the general
population was moving towards low-price retailers. This meant that the carrying capacity of the
regular department store market was diminished and k-extinction was more likely to occur.
Coupled with the public’s move toward low price retailers was the fact that regular department
stores were effectively shut out from entering the low price market by Wal-Mart’s entry as major
new low price competitor. This is not to say that the low-end of the market did not exist prior to
Wal-Mart’s entry, as U.S. retailer K-Mart was already in the market. Wal-Mart simply made it
extremely dif?cult for anyone to become a low-end competitor at a time when the market segment
was becoming prominent.
The department store market in its entirety was somewhat more stable than the low-end retailers.
This should have given Eaton’s a bit of an edge in surviving the change in the market and entry of
Wal-Mart. However there were incidents indicative of r-extinction that made Eaton’s susceptible to
the vagaries of the market: there was a failure on the part of Eaton’s to respond appropriately to
Simpsons-Sears in the 1950s and Eaton’s failure to maintain marketing support for their brand in
the 1970s and 1980s. These poor internal decisions (r-extinction) left the organization more
susceptible to downturns in the market (k-extinction) and contributed toward the ?nal stimulus to
push Eaton’s past the nadir into its initial 1997 reorganization.
What about other Canadian Retailers? How did HBC and CT fair against this onslaught from the
large American retailers? The threat Wal-Mart and others created may have been greater to the two
248 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
other large contrasting Canadian-based retailers than it was to Eaton’s. HBC’s Zeller’s chain was
essentially the Canadian version of Wal-Mart. Through Zeller’s, HBC sold similar products in the
same price category as Wal-Mart.
HBC as a whole had record earnings in 1993 (C$151 million), but in 1994, earnings declined to
C$34 million as Wal-Mart was entering the market. In spite of an increase in earnings to C$72
million in 1995, HBC pro?ts fell to C$51 million in 1996 and to C$41 million in 1997.
35
HBC
responded by closing some low performing stores, refurbishing some others, stressing in-store
brands, and improving their distribution system. The changes have been slow, and while HBC has
carefully avoided turning away its traditional customers, ?nancial results have been less than
spectacular. It may be that HBC’s performance has never declined to the point where the company’s
management felt the critical need for a speedy and sweeping change.
The other large Canadian retailer that would have been the most threatened by Wal-Mart and the
competitive environment of the early to mid 1990s was franchiser Canadian Tire (CT). With about
the same number of stores as HBC, CT’s 1994 sales were C$3.6 billion (up from C$3.0 billion in
1989). CT had seen a fairly steady decline in its pro?t from C$149.6 million in 1989 to C$5.5
million in 1994 (in only one of those years did earnings improve over the previous year). This
decline likely forced CT to its nadir and caused the company to re-focus on its three traditional
product lines: automotive, sports and leisure, and home products. If CT’s pro?t picture did not
force the change, the competition would. CT’s product lines brought it into direct competition with
two large U.S. big box retailers. CT would need to ?ght Wal-Mart for market share in automotive
and sports and leisure and ?ght Home Depot for market share in home products.
There was some evidence from the U.S. of what had worked e and what had failed to work e as
a response to the entry of a big-box retailer into a market
36
and Canadian Tire used this learning to
institute change. CT responded by undertaking a billion-dollar expansion program that revamped
and expanded store locations e the typical CT store today is twice the size it was in 1994. The
brighter and bigger stores allowed CT to give its product lines greater depth to a degree that CT’s
selection of auto-parts is unmatched by any of its competitors.
Finally, ownership structure may have something to do with the differences in responses at the
three companies. Eaton’s, though a closely held family ?rm, had disinterested ownership, and thus
the company was allowed to fall farther than if it had been under more intense scrutiny. On the
other hand, HBC e a widely held company e has gone through several leadership changes in an
effort to keep the company pro?table. Though its changes have been slow it has maintained
pro?tability. Canadian Tire is publicly traded, but ownership is closely controlled by Martha Billes
(daughter of founder A. J. Billes). Yet because the company’s operations have been run by non-
family professional top management for the last 38 years, and more importantly because CT’s
franchisee dealers - logically - take an intense interest in the fortunes of the company, the need,
desire and competence to drive a quick turnaround for the company were certainly present.
Stage 2: Response Initiation:
Early on in its battle with Simson’s-Sears, Eaton’s failed to recognize that the actions of its suburban
competitors were important. That is, it de?ned its domain as that of a downtown retailer instead of
looking at where the population was moving and then moving along with it. Later, in Eaton’s initial
1997 bankruptcy reorganization it rede?ned its domain again e both in terms of geographic areas
covered (via the number of markets in which it kept stores open) and by the product lines carried
(Eaton’s refocused on higher-end apparel and removed electronics, furniture and appliances). Being
a single-business company, Eaton’s choice was somewhat restricted with respect to cures such as
diversi?cation and vertical integration, yet product/market refocusing appeared to be a viable
response. However, Eaton’s remained committed to an effort that was less likely to be successful at
this stage because the company had failed to close enough stores or to introduce its refocused
strategy successfully.
HBC has been somewhat clearer about the domains of its various retail divisions. By emulating
the U.S. retailer Target, HBC’s lower-end Zeller’s chain has positioned itself as a bit more upscale
Long Range Planning, vol 38 2005 249
retailer than rival Wal-Mart. Whether exclusive brands such as Mossimo, Cherokee and Delta
Burke will produce the perception of suf?cient differentiation among consumers is still unclear. As
for HBC’s traditional department stores, critics note that HBC’s Bay chain is ‘not precisely
positioned’ and is trying to be all things to all people. ‘The Bay has designer shops at the same time
they have Scratch & Save sales, giving different messages e and the customer is rightly confused.’
37
In
addition, HBC’s new home de´cor chain, Home Out?tters, has moved the company into a very
competitive area where they have no brand recognition.
Canadian Tire’s re-focus on its three traditional product lines was the most clear-cut move the
company could have made. Anything which did not ?t well into those categories was dropped. As
a result the company’s identity was clearer in the consumer’s eyes.
38
CT management applied this
ability to refocus operations when, in 2001, the company bought Mark’s Work Wearhouse e
a work wear retailer whose stores were recognized for their bright, friendly surroundings. Mark’s
had drifted into the more competitive market of casual wear over the years and CT has refocused
the company back toward its blue-collar roots with some success.
39
Finally, Eaton’s management failed at numerous stages to understand the strategic contours
involved in the terrain of successfully turning around a company in these circumstances and
bringing it back to pro?tability. For example, in the early decline stage in the 1980s, Eaton’s may
have recovered by simply re-concentrating on keeping its brand exciting e e.g. returning its support
of the Santa Clause parade, refocusing back on its ‘store and the customer’s relationship with the
store’ policy and/or restoring its mail order catalogue. Eaton’s management, either through timidity
or stupidity, did not take this route. Later in the 1980s, Eaton’s may have still been able to recover if
it had pursued cost reduction through eliminating under-performing locations. In its initial
reorganization Eaton’s had an opportunity unique to the bankrupt ?rm: shedding leases on less
pro?table store locations at will and with no penalty. However Eaton’s management failed to do
this. At this point it also failed to get suf?cient proceeds from its public stock offering, in spite of
still having the name recognition that would have allowed them to do so. The depth of Eaton’s
failure, translated in terms of the enormity of its debt, required deeper cuts to stores and greater
proceeds from stock sales. Eaton’s management simply did not seem to understand the route that
needed to be taken: raising suf?cient capital, making deep cuts to cull under-performing stores, and
applying its new capital quickly to refurbish the remaining stores, and then the company image.
The route was quite clear, however, to contemporary business commentators.
management simply did not seem to understand the route that had
to be taken: raising sufficient capital, culling under-performing stores,
quickly refurbishing stores and company image. It was quite clear
to contemporary commentators
To some degree HBC understands the strategic contours involved with turning around their
operations. Improvements to their distribution system have been made. However, closing and
refurbishing stores has been slow due to pre-existing arrangements with mall owners. HBC has also
moved into retail areas where it was weak with its Home Out?tters and DealsOutlet.ca e together
these lesser brands have contributed about one percent to HBC’s sales but reduced its earnings by
about 20 percent.
40
In addition, HBC’s stores lag behind the industry in sales per square foot.
HBC’s main chains sell $146 to $155 per square foot. These numbers are closer to the late Eaton’s
?gure of $125 than to rival Sears Canada ($237 per square foot) or Wal-Mart ($381 per square
foot). HBC’s lower ?gures mean that store sales must support more overhead than any of its non-
bankrupted major rivals. In an industry where customers are concerned with price, this extra
overhead burden puts great pressure on HBC’s bottom line. While there is evidence that
250 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
management understands the need to improve these ?gures, their ability and desire to do so seems
somewhat hesitant and uncertain.
Canadian Tire seems to understand the importance of the sales per square foot numbers. Their
traditional stores have averaged close to $500 per square foot in sales in their main product lines
(excluding seasonal lawn and garden numbers). The new format stores have been averaging $420
per square foot. As a result, CT introduced Concept 20/20 e a plan to expand some new-format
stores by 20 percent and generate 20 percent higher sales. CT is using the program to reinvent its
store space. According to the company, ‘Concept 20/20 stores are more welcoming and customer
friendly e with better traf?c ?ow, better lighting and signage, better display, greater accessibility to
customer service, and superior merchandising opportunities.’ The stores’ central area is changed
regularly and ‘provides customers with new experiences each time they visit.’ Concept 20/20
‘encourages more browsing and more opportunity for impulse purchases.’ This leads to larger sales per
customer visit.
41
Stage 3: Transition:
The transition from decline to recovery is not immediate. In fact, turnaround may take many
years.
42
In Eaton’s case, until this stage, there were numerous opportunities to turn the company
around. Yet, Eaton’s delayed response to problems was typical. Decades earlier, Eaton’s and Sears
(neither of them discount chains) instituted an ‘Every Day Low Price’ policy. Both Sears and
Eaton’s realized the poor ?t of the policy with their products and customers. Sears abandoned the
strategy in a month, but it took Eaton’s two-years to learn from their failure and to do away with
the policy.
43
Delays of this type meant that any moves the company made extended the elapsed time
to recovery to an extent that that would have been intolerable for creditors. In the end, trying to
preserve too much of the chain meant that the company was still too large and cumbersome an
institution to make decisions quickly e a factor that also extended the organization’s elapsed time
to recovery. This occurred at the same time creditors were clamoring for a quick recovery. In
addition, managers had not given themselves suf?cient slack to allow for the increased elapsed
time; i.e. they failed to gather suf?cient resources in their stock offering to cover the out?ows
that occurred during the company’s recovery attempt. Eaton’s was simply not able to act quickly
or decisively enough e from the perspective of debt and equity providers e to change their
situation.
Both HBC and Canadian Tire present interesting contrasts to Eaton’s. HBC’s go slow approach
has also placed it in a position where its elapsed time to recovery has been lingering. If turnaround
is when, as Chowdhury notes, ‘a ?rm perseveres through an existence threatening performance
decline’, HBC is still in the process of its turnaround. Though HBC has not had negative earnings, it
has also never regained the level of pro?tability it had prior to Wal-Mart’s arrival (the closest being
2000 when HBC made C$125 million). CT’s efforts, on the other hand, were drastic and fairly
immediate. It is hard to compare a CT store from the mid-1990s to the one of today. The
traditional stores scarcely exist, and were, by and large, replaced by the new larger format stores by
the year 2000.
potential new and old customers were driven away by the lengthy
construction period and their inability to identify what the Eaton’s
brand was all about
The substantive levers available to Eaton’s to create a successful turnaround were also scarce. For
starters, there was a lack of resources and resource commitment that caused Eaton’s problems in
this stage. The lack of resources also contributed to insuf?cient elapsed time due to a hurried
attempt at turnaround: e.g., one where advertised operational claims of a ‘new Eaton’s’ could not be
Long Range Planning, vol 38 2005 251
delivered on because renovations were still in progress. Eaton’s faced a resource scarcity on two
fronts. First, it did not acquire suf?cient resources to make the needed changes. Second, it was left
with extra demands on resources from under-performing store locations that were not only losing
money but required a program of speedy renovation that was unlikely to turn them around. The
lack of resources also made it harder to coordinate the introduction of a new marketing scheme
with the newly renovated decor and new products. Both potential new customers and old
customers were driven away by the lengthy construction period and by their inability to identify what
the Eaton’s brand was all about. The levers of subunit policies and organizational structure did not
allow for speedy actions needed to turn the organization around quickly enough. A ?nal lever e the
organization’s people ealso failed. The people at the top of the Eaton’s organization were part of the
problem. Not only had the Eaton family members neglected the proper management of the company
for years, even the executive hired to turn the company around quit in the middle of the effort.
Certainly those employees who were not ?red in the ?rst bankruptcy were no longer as enthusiastic
about their role in a company that was on shaky ground. All of this had a negative impact on Eaton’s
post-reorganization programs and made its continued existence more perilous.
HBC has substantive levers to create change. While over time HBC’s huge real-estate holdings
have declined, it still has history and reputation. HBC is over 300 years old, its agents mapped
a huge swath of North America and the company provided rugged products to western and artic
explorers. Yet HBC has never used this fact to build any kind of Hudson’s Bay Company product
line that would lean on this history. HBC could also use its size in the Canadian market to acquire
funding to more quickly tackle making-over and maintaining the appearance of its stores. The
company has, however, been slow to do these things.
Canadian Tire has used a number of substantive levers to stay competitive. Being a chain of
franchises, both the company and its franchisees have used their equity and available credit to move
the stores forward into their new larger formats. The fact that the stores are technically locally owned
has over the years garnered the chain some degree of customer loyalty. CT has not taken this customer
loyalty for granted. To keep its customers, the company has maintained its complete geographic
coverage e 85 percent of Canadians live within a 15-minute drive of their local CT store. To keep
customers coming back CT maintained its use of ‘Canadian Tire ‘‘Money’’’ (cash bonuses that can
only be used at CT). The tactics seem to be working e CT management claims that nine out of ten
adult Canadians shop at CT at least twice a year, and 40 percent of Canadians shop at CT every week.
Stage 4: Outcome:
The outcome for Eaton’s was not a pleasant one. After failing to keep its traditional customers,
failing to acquire new customers and having saddled itself with too many poorly performing stores
and too little cash from stock sales proceeds e Eaton’s ended up in receivership again in 1999.
Bought out by Sears, there was some hope for rehabilitation of the Eaton name. However, what
panache Eaton’s had not stripped away through successive bankruptcies was certainly not aided by
its possession in the hands of a company that was not a high-end retailer. In ?ve short years, during
which the chain was reduced from more than seventy to just seven stores, the Eaton’s name went
from retailing icon to a name synonymous with failure. Even Sears, with all its resources, could not
save the name and by 2003 the last of the Eaton’s stores were converted to Sears’ outlets.
Because of HBC’s slow going on closing and changing stores and adapting systems and
marketing, the company has maintained a slow rate of sales growth (less than two percent
compound sales growth since 1994 e the year Wal-Mart arrived in Canada). HBC’s lower sales per
square foot translate into higher overhead and, given the price sensitivity of consumers, it also
means that HBC has suffered with frequently lower pro?ts. This has occurred at a time when press
reports indicate that Sears’ and Wal-Mart’s Canadian growth rates are quite healthy.
The changes at Canadian Tire have propelled the company to a net income of C$350 million on
sales of C$6.1 billion in 2003 (four times HBC’s 1994-2003 sales growth rate).
44
CT has been more
pro?table than HBC since the mid 1990s and, at current rates, will overtake it in sales size within
the next two to three years.
252 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
Conclusions and implications: Snatching defeat from the jaws of victory
Eaton’s started out small and rose to the top of the Canadian market, and to being the largest
privately held department store chain in the world. It took the company over 50 years to crash.
Such a long time span supports the academic insight and conventional wisdom that symptoms of
decline, and eventual failure, start appearing many years before the failing ?rm’s ultimate death.
In this paper, we proposed to illustrate the failure of Canadian retail icon, T. Eaton Co. Ltd.,
through a stage model of turnaround developed earlier. Given that failure is an ex post facto
phenomenon, analyzing a comprehensive case of failure along the tenets of a theoretical model is
likely to enhance our understanding of failure. The widely-publicized failure of T. Eaton Co. Ltd.
provided us with this opportunity. The presence of two other indigenous major competitors facing
similar market pressures also provided a way to look at the possibilities for success in such a market.
These comparisons are highlighted in Table 1 below.
As mentioned earlier, an analysis of the turnaround of Chrysler Corporation provided initial
support for the model in earlier research. It can be concluded from the foregoing analysis and its
synthesis in Table 1 that, with a few exceptions, the model also accorded tentative support to the
Eaton’s case. Brie?y, although there were three requirements of the model (incident, event, and
concept), we were mainly able to see the relationships between two of them: core concepts and key
events. We narrated the story of Eaton’s failure in terms of three core concepts e performance,
strategy, implementation, and performance (again) e each representing a stage. These concepts
served to link the four stages of the process of Eaton’s failure and were sequentially present through
these stages. The case also demonstrated how a combination of the listed elements in every stage
contributed to each concept, enriching the story of Eaton’s failure.
This does not imply a wholesale applicability of the model. Any number of incidents can be
chosen to represent an event, and that their number and nature vary across situations. In the
Eaton’s case, which was reconstructed from many secondary sources, the systematic and
chronological listing of the incidents making up each event was impossible. An analysis of original
and relevant sources (company documents, published detailed interviews with Eaton family
members and other key stakeholders etc.) for the full time-span of Eaton’s decline, could have
allowed the case to be reconstructed and all incidents recorded. Recurring incidents representing
several related events could then be tied to the core concepts of the model, and tell more completely
how Eaton’s spun from decline to death.
Chowdhury added two caveats to the degree of his model’s wholesale applicability. First, because
different organizations proceed at greatly different rates through a stage of turnaround or
dissolution, variation is likely in the span of a stage and in the elements that make it up. The Eaton’s
case e along with those of the HBC and CT e seem to support this caveat. For example,
a combination of Eaton’s stagnation and decline spanned an unusually long period of time; after
a decade, HBC is still working on a turnaround; while CT seems to have completed its turnaround
in under ?ve years.
Although external forces outside the ?rm can, to some extent, in?uence how the turnaround
outcome e success or failure e eventually unfolds, these forces are mediated by strategic
maneuvering within the ?rm. This manoeuvring can take place during one or more stages of the
process of turnaround. In the case of Eaton’s, unfortunately, this manoeuvring was either absent, or
inappropriate, or late, or a combination of the last two. For HBC, such manoeuvring has been slow
and less effective than the quick and decisive moves CT made to turn its situation around.
external forces are mediated by strategic manoeuvring within the firm.
At Eaton’s this manoeuvring was either absent, or inappropriate, or
late.
Long Range Planning, vol 38 2005 253
Table 1. Stages and Action
Stage Eaton’s Hudson’s Bay Co. Canadian Tire
1: Decline
K- extinction Carrying capacity for the
high-end dept. store niche
in decline and already full.
Carrying capacity for
lower-end expanded
but over-shadowed by
entry of Wal-Mart.
Focus on traditional
lines with new focussed
areas has allowed for success.
R- extinction Failure to support the brand
and reorganize in a way
re?ecting market carrying
capacity and resources
needed to change.
Avoiding fashion
extremes and catering
to a wide range of
consumers, meant an
inability to quickly
change.
Earnings declined from
unsuccessful U.S. market
entry, ownership
succession rumors and
disgruntled franchisees
Stimulus Disinterested owners may have
let decline to go past the point
of recoverability in the face of
new competition.
Publicly traded, the
?rm has gone through
several CEOs to ?nd
solutions in the new
competitive environment.
Professional managers
and interested franchisees
moved ?rm in the right
direction to meet the
competition.
2: Response Initiation
Domain
de?nition
Narrow domain de?nition/
ability to move into new
niches was unsuccessful.
Maintained de?ned
domain/however new
ventures have had little
success.
Focused on traditional
lines/with new focused
areas have allowed for
success.
Scope overlap The search for younger
customers alienated
past ones.
Going slow allowed
targeting of traditional
customers
All ventures allow
synergies in shipping
and marketing.
Strategic
Contours
Failure to understand on
the need to maintain brand
and keep overhead down
Saw need to keep
customer base, renovate
stores, and move to
lower overhead costs.
Saw need to keep
customers, drastically
renovate stores, and
keep overhead costs low.
3: Transition
Elapsed time Delayed and insuf?cient to
achieve a turnaround.
Lengthy and ongoing. Quick and effective
Resource
commitment
Insuf?cient to make the
changes needed.
Ongoing and not yet
suf?cient to make
drastic change.
Extensive and immediate.
Policy/
Programs
Making and marketing of
changes was uncoordinated.
Mixed signals regarding
the store’s target market.
Concept 20/20 to
improve operations and
customer interest
Structure and
rewards
Disinterested family owners
saw little need for change.
Public shareholders driving
the need for some change
Professionals and
pro?t-minded
franchisees drove
change.
People Disinterested family owners
saw little need for change.
Several changes of CEOs
in an effort to improve
performance
Professional managers/
interested franchisees
drove change.
4: Outcome
Success/
Failure
Final failure after two
bankruptcies and attempted
re-launch.
Stagnating sales and pro?ts
relative to others in the
market.
Increasing/record
sales and pro?ts.
254 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
Regardless of its source e k- or r extinction e decline occurs if the organization lacks sensitivity
to its environment and fails to anticipate and respond to unfavourable conditions. In fact, it is the
sensitivity of management that de?nes if and when the nadir is recognised and prompts turnaround
actions. In the case of Eaton’s, the ?rst major environmental jolt took place with the Sears/
Simpson’s arrangement in 1952, but Eaton’s failed to appreciate the full scope of this change in the
competitive environment. More accurately, Eaton’s confused its decline with a brief hiccup, or with
a series of discrete hiccups, which hardly indicated the notion of sustained dif?culties. It failed to
determine when and how its performance reached a nadir and how to defend itself with appropriate
response initiation. This failure may to some extent exist in today’s HBC but is certainly not the
case with CT.
We also found a variation in relation to one of the elements in Stage 1: stimulus. Although a lot
of stimuli seemed obvious in Eaton’s earlier in Stage 1 (e.g., when Simpson’s-Sears ?rst surpassed
Eaton’s sales level), Eaton’s failed to appreciate them. When management belatedly considered the
recession of the 1990s, and Wal-Mart’s entry, as real stimuli for action, those actions, rather limited
in scope, occurred too late to make a difference in Eaton’s eventual fate. This suggests that stimulus
can occur past Stage 1, leaving a narrow gap between action initiation and the ultimate dissolution
of the ?rm. However, HBC’s case shows that the gap may also be quite wide.
The stage of decline at which the turnaround actions are initiated is very important. It is much
easier to reverse decline at its earlier stages through an aggressive pursuit of tactical measures, such
as cost-cutting, enhanced employee productivity, and parsimonious slack resources. True, no
guaranteed panacea to cure an ailing ?rm, these short-term actions provide a temporary breathing
space, and set the basis for the ?rms ultimate survival through long-term strategies, such as
diversi?cation, vertical integration, and product/market initiatives. Therefore, if the short-term
measures occur too late, decline can turn into an ‘ever descending spiral.’ This also happened in the
case of Woodward’s, the now nonexistent leading department store chain in western Canada
mentioned earlier. Dropping less pro?table areas such as restaurants, electronics, furniture, and
appliances that faced savage competition from mass merchandisers and specialty shops,
Woodward’s concentrated on fashion, accessories, and home fashions e areas where it enjoyed
competitive advantage in western Canada. But these product/market initiatives came too late to
save Woodward’s and were a template for Eaton’s failure. In the case of both HBC and CT their
actions have taken place when the companies were still money-makers e as such they have been
more successful. Therefore, an application of the same strategy at different stages has different
rami?cations, as has been supported by recent research by Mellahi.
The model also suggests the presence of contingency factors to explain why two processes have
different tracks. This is clear in the case of Eaton’s. In Stage 2, it is quite likely that some key
stakeholders might have dictated the strategic contours of possible recovery. In other words, Eaton’s
actions might have been different had it been a public company, as stockholders pressure on the
board and management to institute a decisive response to reverse the decline might have led to
a different contour and timing of a turnaround strategy. As Mellahi documents, in his post mortem
analysis of the failure of HIH (Australia’s largest-ever corporate failure), though a small number of
board of directors triggered a ‘rebellion’ against the top management of HIH for its quickly
declining performance, it was not in time to stop the company’s failure. On the other hand, the
more interested shareholders at HBC and franchisees at CT lend support to what key stakeholders
can do.
Makridakis asserts that few businesses manage to survive for long periods and that only a small
percentage of them maintain above-average performance for considerable spans of time. The truth
of this assertion depends on how a long period is de?ned. Some ?rms have survived for centuries.
Having changed from a fur-trading company to a retail merchandiser, HBC has a 335 year history.
Sustained success is by no means unheard of: the 1892 merger of two large rival electrical
companies produced General Electric (GE), one of the most successful, highly diversi?ed
companies in the world, still ranked by Stern Stewart in the ?rst two for market value from 1993 to
2000.
Long Range Planning, vol 38 2005 255
Fundamentally, it appears that the problem-sensing ability
of management was missing at the troubled Eaton’s
In this paper, our purpose was not to debate various theories of decline. What seemed important
is that the perpetuation of decline and the subsequent death of an organization can largely be
contributed to the ‘complacency’ of those in the highest positions of organizational power. This was
certainly the case with the Eaton’s and has been supported by other more empirical investigations.
For example, case-based empirical enquiry has demonstrated that the dynamics of complacency
play a strong role in the decline of small ?rms.
45
An investigation of 18 large North American and
European corporations found that the erosion of pro?ts under complacent management is due to
a lack of strategic planning and neglect of critical areas,
46
such as attending to an increase in
competition and an increase in the rate of technological changes.
47
The failure of Eaton’s attests to
the insidious effects of strategic complacency in large ?rms. The late Eaton’s and the surviving HBC
and CT showed signi?cant differences, not only in the elements of the four stage model presented
here but along numerous dimensions of practical basic strategy with which managers ought to be
familiar e as summarized in Table 2.
Table 2. Strategic Advice for Managers
Element What to do:
1. Poor current performance Do not confuse a sustained decline with a brief hiccup or a series of hiccups.
This delineation is critical: if confusion leads to oversight or inaction on your
part, it may lead to your ?rm’s eventual death. Recognise a decline early and
that there are elements of the ?rm’s strategy that must be changed.
2. Taking action Be serious and judicious in understanding the decline situation you are up
against and prioritise and execute your strategies accordingly.
3. Mission Know what your ?rm is all about: what basic customer needs your ?rm can
serve well; the products you sell; the customers and market segments you serve.
Develop a clear identity that sends a clear signal to customers.
4. Addressing key stakeholders Listen carefully to key stakeholders. Ask for their input and all-out support and
mobilize them to rally around your ?rm’s chosen course of action.
5. Industry dynamics Be careful about ambiguous and incomplete environmental data, as they might
lead to incorrect interpretation of the industry dynamics. Because of constantly
evolving industry dynamics, an incorrect reading doesn’t let you manoeuvre the
external forces well; rather it serves as a booby trap.
6. Resources Be steadfast and decisive in the acquisition and use of funds needed to make the
correct change in a timely fashion. The same change might need far more
resources later, or the opportunity to change might have been lost for good.
7. Capabilities Have marketing to connect with what customers want and the ?nancial acumen
to fund needed changes.
8. Core competences Make a dedicated effort to exploit where the ?rm can add value with rare, hard
to imitate activities.
9. Domain selection Be familiar with your industry’s domain without de?ning it too narrowly or too
broadly. Be ready to quickly adjust your domain along with changes in
customer needs. Do not stick to domains that have recently seen limited
success.
10. Implementing changes Coordinate implementation of strategy elements to work together in an
effective, decisive, and timely way.
256 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
Fundamentally, it appears that the problem-sensing ability of management was missing at the
troubled Eaton’s.
48
When a problem has been brewing over a long period, its economic and social
consequences may not appear immediate to managers: on many occasions, problems within Eaton’s
or in its environment seemed to have been set aside as random events. Eaton’s top managers
frequently ‘deluded themselves into believing that a problem does not exist or that it is not serious’
49
when it often was critical. In fact, the problem sensing ability of Eaton’s management seemed to
diminish as the company moved through the phases leading to its ultimate disappearance. Even
when the company had decided on a reasonable course of action, its responses proved insuf?cient,
ineffective and poorly timed. The result was the calamitous decline and failure of a once-proud
Canadian retail name.
Acknowledgements
Our special thanks to Marnie Young for her research assistance with this article. We are grateful to
the LRP editor-in-chief, two guest editors of this special issue, and two anonymous reviewers for
their constructive comments and kind assistance at various stages of this article.
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258 Riding the Wrong Wave: Organizational Failure as Failed Turnaround
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room for nursing mothers, and, on occasion, complimentary coffee and dessert. If Les Alies does not have
an item in stock, employees will get it for the customer, even if they have to go to a competitor to buy it.
(See S. Silcoff, Move over, Timothy Eaton: Quebec retailer Paul Roberge is reinventing how Canadian
department stores do business, Canadian Business 58(June 26/July10), 64, (1998) .). Yet even with all this
going for it, Les Ailes has trouble maintaining pro?tability.
35. These ?gures are net earnings after interest and taxes, and re?ect HBC’s earnings for the ?scal year ending
Jan 31 of the following year. Thus 1994 earnings ?gure re?ects earnings for ?scal year ending 31 Jan 1995,
the 1995 ?gure re?ects ?scal year ending 31 Jan 1996, etc..
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lingering under-performance of HBC indicates that long turnarounds may still be possible.
43. Thus any learning that could occur from the failure simply never occurred. To see how organization’s can
better learn from failure see M. D. Cannon, & A. C. Edmondson, Failing to learn and learning to fail
(intelligently): How great organizations put failure to work to improve and innovate, Long Range
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44. CT ?gures are net of Mark’s Work Wearhouse acquired in 2002. Mark’s earnings were C$25 million on
sales of C$458 million in 2003. Sales averaged a respectable $250 per square foot in the Mark’s Work
Wearhouse stores.
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47. Though we have not discussed technical change, there has been an impact. We found many references to
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of its strategic advantages, CT has wisely made major investments to bring technology to bear as a method
for improving its own distribution system.
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from social cognition, Administrative Science Quarterly 27, 548e570 (1982).
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Long Range Planning, vol 38 2005 259
Biographies
Jerry Paul Sheppard is an associate professor of Strategic Management at Simon Fraser University, Canada. His
PhD dissertation from the University of Washington e in the areas of strategic management and business,
government and society e won Strategic Management Society Best Dissertation Award. He has written numerous
journal articles on organizational survival and failure, as well as law and the environment and ethics. His current
publications include Strategic Management: Competitiveness & Globalization, Canadian Editions, with Hitt, Ireland,
Hoskisson, and Rowe. Faculty of Business Administration, Simon Fraser University, Burnaby, British Columbia, V5A
1S6 CANADA Phone: (604) 291-4918, Fax: (604) 291-4920, e-mail: [email protected]
Shamsud D. Chowdhury earned his PhD degree in strategic management at the University of Kentucky. He is
currently an associate professor of strategy and competitiveness at the School of Business Administration at
Dalhousie University in Halifax, Canada. His research interests include corporate governance, comparative analysis
of ownership structures, and organizational decline and turnaround. He sits on the editorial review board of the
Canadian Journal of Administrative Sciences, Journal of Business Research, and Metamorphosis. School of Business
Administration, Dalhousie University, Halifax, Nova Scotia, B3H 3J5 CANADA Phone: (902) 494-1795, Fax: (902)
494-1107, e-mail: [email protected]
260 Riding the Wrong Wave: Organizational Failure as Failed Turnaround

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