Some Recommendations For Improved Research On Corporate Turnaround

Description
Despite the frequent incidence of corporate turnaround and over two decades of research effort, our understanding of the phenomenon is very incomplete.

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31
Naresh R. Pandit
Despite the frequent incidence of corporate turnaround and over two decades of
research effort, our understanding of the phenomenon is very incomplete. A review of
forty-seven studies of turnaround reveals two main reasons for this state of affairs. First-
ly, problems with research design: the phenomenon has been poorly defined resulting in
unrepresentative cases being selected for analysis; many important research questions
have either been ignored or asked too infrequently resulting in explanations that are sim-
plistic; and, the validity of the findings of qualitative studies is limited due, on the whole,
to poor methodological execution. Secondly, investigations have largely been ad hoc in
that they have either proceeded without a priori theoretical guidance or have failed to
relate findings to extant theory ex post. Recommendations for future research based on
stronger research designs and stronger theory are advanced in the hope that rapid
advancement will ensue.
INTRODUCTION
Writing nearly two decades after the appearance of the first published
journal article on corporate turnaround, Winn (1993, p. 48), emphasis-
ing « inconclusive results », stated:
« while companies facing near-bankruptcy, market losses, or substan-
dard performance are increasing in frequency, strategy researchers
have provided little help for the managers charged with turning around
deteriorating performance. »
Similarly, Arogyaswamy, Barker and Yasai-Ardekani (1995, p. 493)
comment:
« there are many unanswered questions about what characteristics set
turnaround firms apart from firms which continue to decline and even-
tually fail. »
This paper argues that two main reasons account for these inconclu-
sive results. Firstly, most studies suffer from research design
1
prob-
lems which have resulted in weak findings. Secondly, investigations
have largely been ad hoc in that they have either proceeded without a
priori theoretical guidance or have failed to relate findings to extant
theory ex post. Accordingly, the subject has failed to fully benefit from
relevant, potentially productive, extant theory. The argument is struc-
tured as follows. The next section broadly defines the phenomenon
and establishes its importance by reporting estimates of its incidence.
Next, the research designs of existing studies are analysed along three
interdependent dimensions: the various definitions of corporate
Manchester Business School
University of Manchester
eMail: [email protected]
Some Recommendations For Improved
Research on Corporate Turnaround
1. Research design is defined here in the
terms of Easterby-Smith, Thorpe, and
Lowe (1991, p. 21): « the overall configu-
ration of a piece of research: what kind of
evidence is gathered from where, and how
such evidence is interpreted in order to
provide good answers to the basic research
question. »
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turnaround that have been used; basic research questions that have
been posed; and, the various methodologies that have been employed
to provide answers to these questions. Recommendations for future
research are drawn and stated as they arise and pulled together at the
end of the section to specify the types of research design that future
studies could pursue. The penultimate section demonstrates the virtu-
al absence of theory-based studies and proceeds to outline some cur-
rent relevant theoretical ideas on the sources of competitive advantage
and the nature of organisational survival that could usefully inform
future research efforts. A final section concludes.
PROBLEM DEFINITION AND IMPORTANCE
A corporate turnaround may be defined simply as the recovery of a
firm’s economic performance following an existence-threatening
decline. The decline may occur over several years although there are
situations when extraordinary events occurring over a shorter period of
time can place a firm in peril. A successful recovery, in its most sub-
dued form, may involve mere survival with economic performance only
just acceptable to the firm’s various stakeholders. On the other hand,
in its most positive form, the recovery may lead to the firm achieving
sustainable, superior competitive positions in its chosen areas of activ-
ity.
How prevalent is the phenomenon? Five studies have attempted to
answer this question. Schendel, Patton and Riggs (1976) scanned
Standard and Poor’s Compustat database over the period 1952-71
and found that of the 1,800 firms included, 666 (37%) suffered at least
one four-year period of uninterrupted decline in net income normalised
by Gross National Product (GNP) growth (that is, if growth in net
income was less than GNP growth, the firm was defined to be in
decline). Of these, only 68 (10%) recovered according to the authors’
criteria: four years of increase in GNP normalised net income with
allowance for a two year deviation between downturn and upturn phas-
es. In a later study, Bibeault (1982) examined the corporate records of
the 4,090 listed companies (representing 70% of the corporate assets
and 90% of the net profits of US industry) of the New York Stock
Exchange, the American Stock Exchange, and the NASDAQ/Over-
the-Counter exchange over the period 1967-76. He identified 1,094
(approximately 27%) companies which had either suffered sustained
losses in net income or a severe earnings decline (defined as greater
than or equal to 80%). Of these firms, only 369 (approximately 33%)
experienced a turnaround in terms of net earnings during the same
period. In other words, approximately 66 % failed to recover. In the
third study attempting to estimate the incidence of turnaround, Ham-
brick and Schecter (1983) surveyed the Profit Impact of Market Strat-
egy (PIMS) database which contained information on 200 corporations
and 2,000 business units. They focused on mature industrial product
businesses and identified 770. Of these, 260 (33%) were classified as
low performers and of these, only 53 (20%) successfully recovered; in
other words, 80% failed to recover according to their criteria. Slatter’s
(1984) analysis of publicly quoted companies in the UK over the peri-
od 1961-76 revealed that approximately 20% of the 2,100 firms in his
sample were in need of turnaround. What is perhaps more significant
is that, on average, only one in four of the firms that suffered declining
performance for at least three successive years actually managed to
recover. The remaining firms either became insolvent, or more com-
monly, were acquired. Finally, Chowdhury and Lang’s (1996) analysis
of US small firm (less than 500 employees) turnarounds in four 4-digit
SIC industrial classifications over the period 1984-87 revealed that 153
(8%) of the 1,918 publicly traded small firms on the Dialog Information
Services’ Disclosure database were in need of turnaround according
to their criteria (i.e., they were, on average, over a two year period,
earning less than the opportunity cost of capital). Of these, only 27
(17.6%) recovered (i.e., average ROI over the subsequent two year
period equal to or greater than opportunity cost of capital).
On the basis of the studies that have attempted to establish the empir-
ical importance of corporate turnaround, two conclusions may be
drawn: firstly, the incidence of turnaround situations is significant; and
secondly, of those firms suffering significant and/or sustained declining
performance, a greater number proceed to fail rather than recover. It
seems reasonable to assert that a better understanding of turnaround
could lead to a greater number of declining firms successfully recover-
ing and it is on this basis that this paper proceeds.
REVIEW OF RESEARCH DESIGNS
THE EXTANT LITERATURE
The first task was to identify the literature on corporate turnaround that
would be included in the review. In order to restrict the sample to the
most developed pieces, two criteria for inclusion were employed: (a)
the study should be empirically-based (i.e., based on collected data or
personal experience); and, (b) the study’s findings should have been
published in book-form or as an article in an academic or practitioner-
oriented journal.
The scanning of the bibliographic database ABI/Inform(which contains
abstracts and indexes from 900 business journals and dates back to
1971) using the key words “turnaround,” “turnaround management,”
“recovery,” “crisis,” “organisational decline” and “declining perfor-
mance” yielded a number of publications that met the two criteria for
inclusion. A study of the references contained within these works yield-
ed further relevant publications. A total of forty-seven studies were
identified (see Appendix 1). The first appeared in 1976 and the most
recent (at time of sampling) in 1996. The research designs of each of
these studies were decomposed into three dimensions: definitions of
corporate turnaround; basic research questions; and, methodology.
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DEFINITIONS OF CORPORATE TURNAROUND
Logically, any definition of turnaround should address two issues: the
definition and measurement of performance; and, the definition of a
turnaround cycle, that is, a period of poor performance (the decline
phase) followed by a recovery in performance (the recovery phase).
Many studies define performance in terms of profitability alone. Seven
(Schendel and Patton, 1976; Schendel et al., 1976; Hamermesh,
1977; Bibeault, 1982; Slatter, 1984; O’Neill, 1986b; and Thain and
Goldthorpe, 1989a, 1989b) use nominal pre-tax profit (of these, only
Slatter converts nominal pre-tax profit into real pre-tax profit) and five
(Graham and Richards, 1979; Hambrick and Schecter, 1983; Pant,
1991; Chakraborty and Dixit, 1992; and Chowdhury and Lang, 1996)
use profitability indicating accounting ratios (either return on total
assets [ROA] or return on investment [ROI]).
However, defining turnarounds on the basis of profitability alone is
problematic. Baden-Fuller and Stopford (1992) demonstrate that a
gradual loss of competitiveness is often not reflected as a gradual
deterioration in profitability. Rather, profitability may decline very slow-
ly at first and then suddenly plummet (see Figure 1). Similarly, there
may be a time lag between improvements in competitiveness and sub-
sequent profit improvement. Baden-Fuller and Stopford explain the
decline lag as the result of top management’s small-scale and partial
response to the initial, admittedly weak, signs of impending failure. For
researchers, the problem is exacerbated by the tendency of manage-
rial manipulation of accounting-based measures of profitability (“win-
dow dressing”) in declining performance contexts (Griffiths, 1992).
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High profits
Strong competitiveness
Losses
Poor competitiveness
Time
Competitiveness
Profits
Figure 1. Behaviour of Profits with Falling Competitiveness
(Baden-Fuller and Stopford, 1992, p. 124)
A further related point on time lags can be made with respect to the
firm that is successful in that its market capitalisation is rising rapidly
but, at the same time, it is making losses. This situation can arise when
investors believe the company to be viable and expect profits in the
longer term
2
. Clearly, in such cases, assessment of turnaround per-
formance based on current profitability alone would be misguided.
Just as the management of firms in decline need to pick up signals of
decline from many sources, turnaround researchers need to use mea-
sures for sample selection based on a variety of indicators.
Going part of the way to address this problem, a number of studies use
multiple accounting-based indicators of performance. Thiétart (1988)
uses ROI and market share; and Barker and Mone (1994) and Rob-
bins and Pearce (1992) use ROI and return on sales (ROS). Grinyer,
Mayes and McKiernan (1990) take the most comprehensive stance by
employing multiple criteria which relate to key stakeholders in the firm.
However, with these studies, the problems of performance/indicator
lags and accounting manipulation referred to remain. Ideally, a trian-
gulated approach that uses non-accounting based indicators to cor-
roborate accounting based indicators is desirable.
Two studies use human judgement to supplement accounting-based
definitions of bad or good performance. Zimmerman (1989) requires a
consensus among stakeholders (investors, board members and man-
agers) and Robbins and Pearce (1992) require agreement from one of
the firm’s executives that a turnaround had occurred. This approach
does have the advantage of capturing the ability of expert witnesses to
take contextual variation into account and this could be considered
particularly valuable given the heterogeneity of turnaround cases
(Schendel et al., 1976). Of course, a weakness of using judgement
alone is that it has the potential to be highly subjective.
Moving on to the second definitional issue, turnaround cycles, Schen-
del et al. (1976) distinguish between temporary declines in perfor-
mance, which are considered to be normal, and more permanent and
damaging declines. The latter type is benchmarked against time and
GNP growth. Specifically, a downturn phase is defined as four years of
uninterrupted decline in net income as normalised by GNP growth.
That is, if growth in net income is less than growth in GNP for four con-
secutive years, the firm is in need of a turnaround. Recovery or suc-
cessful turnaround is defined as four years of increase in GNP nor-
malised net income with allowance for a two year deviation between
the downturn and upturn phase. Schendel and Patton (1976) employ
a similar definition except that they fit a regression line to the downturn
and upturn performance data to allow for slight deviations from the
trend.
The main problem with this approach is that it fails to discriminate
between genuine and contrived turnaround cases. Firstly, the bench-
mark is flawed. Consider, for example, a firm that is performing better
than its competitors but is also operating in a difficult business envi-
ronment at a time when the general economy is booming. In this case,
the firm, although an above average performer amongst its peers, may
be earning returns below GNP growth and so, according to Schendel
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2. Which can be very long in new and/or
high technology areas, where considerable
time and resources are required to build
the business. A celebrated example is the
Internet bookseller Amazon.com which,
despite heavy losses, has enjoyed a trend
of rising market capitalisation.
et al. (1976) and Schendel and Patton’s (1976) criteria, would be
defined as poor performer in need of turnaround. Equally, the opposite
case would hold with relatively poor performing firms earning returns
greater than GNP growth not being selected as turnaround candidates.
Secondly, performance relative to the benchmark is not specified fine-
ly enough. Firms with performance slightly below or above GNP
growth would be included together with firms with performance that is
significantly below and above GNP growth.
A number of studies provide more satisfactory benchmarks and spec-
ifications. O’Neill (1986b) opts for industry average net income as a
benchmark and defines turnaround as a situation in which three years
decline in net income relative to industry average is followed by at least
two out of the following three years when net income is greater than
the industry average. Similarly, for Pant (1991), if a firm’s ROA is in the
bottom 25% of its primary industry for two consecutive years (t = 1 and
t = 2) it is defined as a poor performer. Following a four year interval
period (t = 3-6) if the firm’s ROA is in the top 25% of the industry for
two consecutive years (t = 7 and t = 8) then it is defined as a successful
turnaround case. If, however, it remains in the bottom 25% for t = 7 and
t = 8, then it is defined as an unsuccessful turnaround case.
However, even these approaches are problematic as the use of indus-
try average performance as a benchmark is highly controversial. The
implicit assumption is that firm performance is largely a function of
industry characteristics rather than industry performance being largely
a function of the abilities of the firms that constitute it. Accordingly, a
firm earning low returns in an industry composed of low performing
firms may not be considered a turnaround candidate whilst a firm earn-
ing the same returns in an industry composed of high performing firms
may be. This “industry matters most” school of thought has its roots in
the work of Bain (1951) who observed that some industries were more
profitable than others and proceeded to argue that it was the charac-
teristics of the industry that caused the profitability of incumbent firms.
More recently arguments along these lines have been put by Porter
(1980) and Scherer and Ross (1990). However, a growing body of evi-
dence suggests that the importance of industry membership has been
overstated. Schmalensee’s (1985) cross-sectional study of the perfor-
mance of firms in a wide range of US industries concludes that indus-
try membership accounts for only 14% of the profit variance across
firms. Rumelt (1991), combining cross-sectional and time-series meth-
ods, goes further to demonstrate that industry effects account for only
8.3% of profit variance across business units. Conversely, firm specif-
ic effects (business unit and corporate effects combined) account for
47.2 % of profit variance. Accordingly, industry membership has, at
best, a small causal effect on firm profitability. If the average profitabil-
ity of an industry is high or low, this is largely due to the characteristics
of incumbent firms and not the characteristics of the industry to which
they belong.
The implication is that defining declining performance and turnaround
success relative to average industry performance is unsatisfactory.
Poor or good performance is largely a function of what goes on inside
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firms and so should be gauged relative to benchmarks of poor or good
performance generally. Hambrick and Schecter (1983) adopt just such
an approach by using the opportunity cost of capital as a benchmark.
They define a downturn phase as pre-tax ROI less than 10% for two
successive years. This equates with an after tax ROI of approximately
5% which is less than the cost of capital during the period of the study.
As for recovery:
« ‘success’ was defined as a business that achieved an average end-
ing ROI (years three and four) of at least 20 per cent… An unsuc-
cessful turnaround was a business whose ending ROI was still less
than 10 per cent. » (Hambrick and Schecter, 1983, p. 238.)
Similarly, Chowdhury and Lang (1996) define a downturn phase as
average pre-tax ROI less than 10% for two successive years (there-
fore, after tax ROI equals 5% which is less than the cost of capital dur-
ing the period of the study) the upturn phase as average pre-tax ROI
greater than or equal to 10% over a two year period (accordingly, post-
tax ROI is at least 5%).
RECOMMENDATIONS
It seems that much research has proceeded on the basis of research
samples consisting of many unrepresentative cases. It is no wonder
then that progress has been slow. A recommendation for the future is
that samples should consist of cases that fit a generally agreed con-
ceptualisation of what a turnaround is. The suggestion here is that
turnaround candidates are firms who’s very existence is threatened
unless radical action is taken and successful recovery cases demon-
strate improved and sustainable environmental adaptation.
Time lags between competitiveness and profitability mean that identi-
fying cases of turnaround on the basis of profitability alone is unac-
ceptable. Even the use of multiple accounting measures, although a
step in the right direction, is flawed due to the possibility of accounting
manipulation in declining performance contexts. A triangulated
approach that looks for consensus among accounting-based indica-
tors and expert opinion seems to be the best way forward. In addition,
measures of decline and recovery need to be gauged relative to appro-
priate benchmarks. Ties with the performance of the economy as a
whole (GNP) or with industry average performance are flawed.
Rather, generally accepted benchmarks are the best way forward and
a good example is the use of the opportunity cost of capital.
BASIC RESEARCH QUESTIONS
Given the time-based nature of the phenomenon it seems natural to
categorise and analyse basic research questions using a time-based
analytical framework such as the content, context, and process frame-
work proposed by Pettigrew (Pettigrew, 1987, 1990, 1992):
« broadly speaking, the ‘what’ of change is encapsulated under the
label content, much of the ‘why’ of change is derived from an analysis
of inner and outer context, and the ‘how’ of change can be understood
from an analysis of process. » (Pettigrew, 1987, p. 5.)
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He continues:
« Unstated but central to the mode of analysis implied […] is the need
to explore content, context and process linkages through time. » (Pet-
tigrew, 1987, p. 6. Emphasis added.)
Pettigrew (1990) maintains that much research on organisational
change has concentrated on content/outer context issues whilst
research examining inner context and process issues has been rare.
Research addressing all three categories of analysis simultaneously
has been even rarer. A similar situation holds for research on
turnaround. Fourteen (30%) of the forty-seven studies (Schendel et al.,
1976; Hofer, 1980; Bibeault, 1982; Taylor, 1982/3; Hambrick and
Schecter, 1983; Slatter, 1984; Melin, 1985; O’Neill, 1986b; Thiétart,
1988; Thain and Goldthorpe, 1989b; Ketelhohn, Jarillo, and Kubes,
1991; Brege and Brandes, 1993; Chowdhury and Lang, 1996; and
Martin and Riddell, 1996) question the content of turnaround strate-
gies. A typical example is:
« In general, which strategic moves are associated with turnaround
success? […] Are there any combinations of strategic moves, that is,
strategies, that are especially common routes back to profitability? »
(Hambrick and Schecter, 1983, p. 231.)
Of questions relating to turnaround context, ten (21%) studies (Schen-
del et al., 1976; Bibeault, 1982; Slatter, 1984; Thain and Goldthorpe,
1989a; Grinyer et al., 1990; Gopal, 1991; Chakraborty and Dixit, 1992;
Robbins and Pearce, 1992; Brege and Brandes, 1993; and Martin and
Riddell, 1996) focus on the causes of declining performance. Typical
statements are:
« Before we can start to talk sensibly about turnaround strategies, we
need to have a good understanding of just how and why firms find
themselves in a crisis situation. » (Slatter, 1984, p. 24.)
« Just as a competent medical practitioner needs to understand the
causes of disease, a competent turnaround manager must understand
the causes of decline. » (Thain and Goldthorpe, 1989a, p. 59.)
Only seven (15%) studies (Bibeault, 1982; Slatter, 1984; Stopford and
Baden-Fuller, 1990; Chakraborty and Dixit, 1992; Brege and Brandes,
1993; Armenakis and Fredenberger, 1995; and Martin and Riddell,
1996) tackle questions relating to the process of turnaround in depth.
Most attention has been directed towards the identification of the char-
acteristics of successful turnaround managers, although three studies
(Bibeault, 1982; Slatter, 1984; and Stopford and Baden-Fuller, 1990)
go further to detail common paths or stages toward successful recov-
ery, and two studies (Slatter, 1984; and Stopford and Baden-Fuller,
1990) examine senior management mindsets that lead to and prolong
crisis situations.
RECOMMENDATIONS
In general, it is clear that many important questions have either been
ignored completely or asked too infrequently. It seems that simple
questions focusing on easily available and measurable data have been
asked most often whilst more complex questions requiring difficult to
obtain and messy data have been avoided. Thus, questions relating to
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the content of turnaround strategies are reasonably frequent, whilst
those relating to the context and process of turnaround are rare.
With respect to context, the causes of decline as a factor shaping
appropriate recovery actions has been explored reasonably thorough-
ly and, in general, recovery actions that tackle the cause(s) of decline
have been found to be more successful than those that do not. Other
contextual variables have been relatively neglected by the field as a
whole although certain studies point to their potential significance.
Hofer (1980) focuses on the severity of the crisis, as a contextual fac-
tor determining the appropriateness of certain recovery actions. He
finds that in situations where the crisis facing the firm is not severe,
small changes such as cost pruning can effect recovery. However,
when the crisis facing the firm is more severe, more dramatic changes
such as asset reduction or market reorientation are required. He eluci-
dates his findings by means of a break-even diagram which is depict-
ed in adapted form in Figure 2.
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£
Fixed
costs
Total
Revenues
D C B A Output
Total
Costs
Capacity
Break-even
point
+ Asset
Reduction
Activities
+ Revenue Increasing
Activities
Cost Reduction Activities
Figure 2. The Relationship Between the Severity
of the Crisis and Appropriate Recovery Actions
(adapted from Hofer, 1980, p. 27)
If the firm is operating in any of the corridors A, B or C it is in need of
a recovery strategy in order to get to corridor D where returns at least
cover the opportunity cost of capital
3
. Cost reduction activities are
appropriate if the firm is operating in corridors A, B or C. If the firm is
operating in corridors A or B then revenue increasing activities are
required in addition to cost reduction activities. Finally, if the firm is
operating in corridor A, asset reduction activities are required in addi-
tion to revenue increasing and cost reduction activities.
A third contextual factor, the attitude of stakeholders, is addressed by
Slatter (1984). He argues that stakeholders can influence recovery
strategies in two ways: firstly they can stipulate which actions can be
3. Costs are accounting and not economic
costs and therefore do not include opportu-
nity cost.
pursued and in what priority; and, secondly, they can rule out certain
actions and modes of implementation. In most recovery cases, the
firm’s banks are important stakeholders that influence recovery
actions. Other stakeholders of importance include trade unions (which
could oppose recovery actions such as reducing costs through redun-
dancies) and government.
Unlike research on organisational change in general, research on
turnaround has neglected the firm’s outer context. Earlier, the findings
of Schmalensee (1985) and Rumelt (1991) were reported to support
the argument that industry effects account for only a small proportion
of profit variation among firms in general. However, although the
effects are smaller than first thought, they are still significant (between
8.3 and 14%) and so it is surprising that only a few studies have sys-
tematically researched the relationships between industry characteris-
tics and appropriate recovery actions. Of these studies, Pant (1991) is
the most comprehensive and rigorous. Slatter (1984) examines differ-
ent recovery actions according to industry stage finding, for example,
that successful recovery actions in mature environments are different
from those in fast growth environments.
Extending the firm’s outer context, the impact of the macroeconomic
environment on recovery content and process has also been neglect-
ed with only two studies addressing the issue. Changes in the macroe-
conomic environment, over which the firm has no direct control, con-
tribute to recovery in 16% of the successful recoveries in Bibeault's
(1982) sample and about one-third of successful recoveries in Slatter's
(1984) sample. In particular, cyclical upswings, improved commodity
prices, and favourable exchange rate movements are cited.
Finally, Slatter (1984) is the only study to explicitly identify the firm’s
historical strategy as a contextual factor. Actions taken in the past are
found to constrain or facilitate certain recovery actions and so consti-
tute important contextual elements shaping the content and process of
appropriate recovery strategies.
In summary, in addition to the causes of decline, four categories of
potentially influential contextual factors have been identified: the
severity of the crisis; the attitude of the stakeholders; the firm’s outer
context (industry characteristics and the macroeconomic environ-
ment); and, the firm’s historical strategy. Many, if not all, of these con-
textual factors could play an important role in any explanation of the
turnaround phenomenon and so should be addressed in future
research.
With respect to process, the characteristics of successful turnaround
managers has been explored most. Other process questions have
been neglected by the field as a whole although, as with the discus-
sion of context above, certain studies point to their potential signifi-
cance.
The characteristics or mindsets of senior management that lead to or
prolong crisis situations is an issue that has received scant attention.
This is unfortunate as senior management are not only the change-
facilitators that, when successful, transform the organisation (Guth and
Ginsberg, 1990) but are also the change-inhibitors that lead the organ-
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40
isation into crisis (Grinyer and Spender, 1979a, 1979b) in the first
place. Slatter (1984, p. 61) states:
« The forces causing decline are present, to some degree, in all firms.
Why is it, therefore, that some firms are able to cope successfully with
the problems they face while others end up in a turnaround situation? »
He proceeds to outline a four stage model of crisis development: crisis
denial, when senior management overlook the signals of failure; hid-
den crisis, when the crisis is explained away in the belief that it will dis-
appear and so no action is taken in response; organisational disinte-
gration, when some action is taken but the need for radical change is
underestimated; and organisational collapse, characterised by the
inability to take action. This final stage is followed either by failure or
successful recovery usually lead by a new management team. On the
basis that prevention is better than cure, further research effort into this
important area is recommended.
The identification of common triggers that begin the recovery process
is another interesting area that only a few studies have addressed.
Schendel and Patton (1976, p. 237) find that performance deterioration
beyond a certain level is necessary before radical change is triggered:
« During the decline phase the rate of profit margin decline for
turnaround firms is more than twice as great as for stagnating firms.
This large decrease suggests a severe performance failure is first nec-
essary to motivate turnaround action. »
Taylor’s research provides some rationale for this:
« Necessity is the mother of invention. It often requires a crisis to stim-
ulate new initiatives, and to persuade boards of directors to take radi-
cal measures and to accept new approaches which they would not
normally be prepared to consider. To quote Dr Johnson: “When a man
knows he is to be hanged in a fortnight, it concentrates the mind won-
derfully.” » (Taylor, 1982/3, p. 13.)
Grinyer et al. (1990) focus not on the level of performance deteriora-
tion required to trigger change but on the form of the trigger. Table 1
summarises their findings.
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Table 1. Triggers for Change
% of firms citing this factor
Intervention from external bodies
Change of ownership or the threat of such a change
New chief executive
Recognition by management of problems
Perception by management of new opportunities
30
25
55
35
10
adapted from Grinyer, Mayes, and McKiernan (1990, p. 120).
A third interesting process issue that has been generally neglected is
the identification of a general sequence of successful recovery actions.
Bibeault (1982), Slatter (1984) and Stopford and Baden-Fuller (1990)
are exceptions. All three studies find that successful recoveries tend to
follow a path of top management change, simplification through
retrenchment and, growth built on new-built capabilities. This area is
potentially the most fruitful for practising managers faced with turning
around an organisation and deserves more attention in future
research. Table 2 summarises the discussion of basic research
questions thus far.
M@n@gement, Vol. 3, No. 2, 2000, 31-56
42
Table 2. Summary of Basic Research Questions
Frequently addressed Largely ignored
Content
Context
Process
What actions are successful and
unsuccessful turnaround strategies
composed of?
What are the causes of decline?
What are the characteristics of
successful turnaround managers?
—
How are appropriate recovery
actions shaped by the:
— severity of the crisis facing the firm?
— attitude of stakeholders?
— firm’s outer context?
— firm’s historical strategy?
What senior management mind-
sets lead to and prolong crisis situ-
ations?
What are are the triggers that
begin the recovery process?
Is there a general sequence of
successful recovery actions?
In this sub-section, important turnaround context and process lines of
inquiry that have been ignored by the literature as a whole have been
identified by highlighting studies that have exceptionally pursued them.
A central issue that the body of literature as a whole has failed to prop-
erly address is the identification and testing of links between the con-
tent of turnaround strategies, the context in which they occur, and the
process by which they are implemented. Such effort, if well executed,
could lead to richer explanations of the phenomenon. Pettigrew states
(1987, p. 6):
« In my view, theoretically sound and practically useful research on
strategic change should involve the continuous interplay among ideas
about the context, the process and the content of change, together
with skill in regulating the relations among the three. »
RESEARCH METHODOLOGIES
A wide variety of research methodologies have been employed
although only a few studies elucidate in formal terms the key aspects.
Accordingly, much of what is presented in Tables 3, 4 and 5 is
deduced rather than reproduced. Five dimensions are tabulated:
— unit of analysis. E.g., corporation, division, strategic business unit
(SBU), manager, or consultant;
— sample characteristics. E.g., sample size, successful and unsuc-
cessful turnarounds (mixed) or just successful turnarounds (T/A);
— time period of analysis;
— data source(s). E.g., interview, questionnaire, participant observa-
tion, public archives, database, anecdotal.
— methodology. Quantitative, qualitative
4
, combination.
4. The term qualitative methodology
refers here to any kind of research that
produces findings not arrived at by means
of statistical procedures or other means of
quantification (Tesch, 1989). This does not
mean that quantitative data is not used, but
rather that, if it is, the analysis is qualita-
tive. This analysis essentially produces a
story and not a set of statistics.
M@n@gement, Vol. 3, No. 2, 2000, 31-56
43
T
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M@n@gement, Vol. 3, No. 2, 2000, 31-56
44
T
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The forty-seven studies fall into three categories: “anecdotal” studies,
“large sample” studies (sample sizes greater than 30), and “longitudi-
nal case” studies.
Fourteen studies (see Table 3) employ “anecdotal” methodologies.
The unit of analysis is not always apparent and anecdotal data, often
from unspecified sources, is presented and assessed qualitatively.
Usually, the study simply documents the experiences of a particular
chief executive officer. Of the group of twelve “large sample” studies
(Table 4), eight rely on secondary data stored in publicly available
databases: Schendel and Patton (1976), Schendel et al. (1976),
O’Neill (1986b), Pant (1991) and Barker and Mone (1994) use Stan-
dard and Poor’s Compustat computer tape as their primary data
source; Hambrick and Schecter (1983) and Thiétart (1988) use the
PIMS database; and Chowdhury and Lang (1996) use Dialog Informa-
tion Services’ Disclosure database. The remaining four studies
(Bibeault, 1982; Slatter, 1984; Gopal, 1991; and Robbins and Pearce,
1992) rely on a mixture of primary and secondary data. The predomi-
nant approach of the large sample studies is to generate quantitative
results through the comparison of successful and unsuccessful
turnaround firms (T/A’s and non T/A’s) whilst attempting to hold broad
environmental factors constant.
Of the set of twenty-one “longitudinal case” studies (see Table 5),
nine describe the successful turnaround of a single case. Of the
remaining twelve, eleven compare cases of successful turnaround with
similar but failing cases with a view to isolate themes in both scenar-
ios and suggests contingency frameworks for analysis. In general
these studies utilise qualitative methods to analyse multiple primary
and secondary data and five (Graham and Richards, 1979; O’Neill,
1986a; Thain and Goldthorpe, 1989a,b, 1990; Zimmerman, 1989; and
Grinyer et al., 1990) combine their qualitative methods with quantita-
tive methods.
RECOMMENDATIONS
Whilst anecdotal studies are rich in terms of issues addressed, their
general lack of established methodological protocol means that their
results and conclusions are of limited validity. Even so, they can serve
as good starting points for more orthodox research such as the group
of twelve “large sample” studies (Table 4) which are more systemat-
ic and rigorous. These studies have usefully identified relevant con-
cepts and categories and suggested basic relationships between
these, and further studies along these lines are encouraged, particu-
larly ones which quantitatively analyse data on the context and pro-
cess issues that have been largely ignored to date. As stated earlier
however, great care needs to be taken with respect to sample compo-
sition and so to steer away from simple case selection techniques
based on accounting data alone.
However, a problem with large sample studies is that their analysis
tends to be partial. Research resource scarcity means that increasing
the number of cases carries an opportunity cost, usually in the form of
less analytical depth and breadth per case (Easterby-Smith, Thorpe,
M@n@gement, Vol. 3, No. 2, 2000, 31-56
46
and Lowe, 1991). This is true of existing studies of turnaround which
have concentrated on the content of recovery strategies with only
occasional, always limited, attention paid to context and process issues.
Of course, this important limitation can be tackled by small-sample lon-
gitudinal case studies which can produce more holistic accounts and
supporting rationale for the empirical regularities uncovered by large
sample quantitative studies.
Longitudinal case studies are potentially able to generate more holis-
tic explanations both within and between cases. Explanation that are
able to reveal the interaction between content, context, and process
over time. However, given this potential, the vast majority of
turnaround studies using this research style are disappointing since
they fail to use recognised qualitative methodologies. In this sense, the
more general concerns of Schendel are echoed (1992, p. 3):
« Too much strategy research proceeds in an ad hoc fashion without
clear protocols that can be replicated and authenticated. »
Indeed, of the twenty-one studies only one (Hardy, 1990) follows a rig-
orous, systematic, internally consistent and established qualitative
research protocol —the case study method advocated by Yin (1984)
amongst others. Accordingly, the study addresses the recognised and
established qualitative research quality criteria of construct validity,
internal validity, external validity and reliability and goes beyond the
analysis of a single case by employing a comparative design focusing
on the identification of patterns, structures and underlying logics
across several cases. The clear recommendation here is for future
research to employ recognised methodologies such as Yin’s.
Overall then, the call is not for a particular methodology to dominate,
but rather for methodological pluralism, with different approaches
working in concert. With this in mind, and by pulling together the main
recommendations stated earlier, the question that requires an explicit
answer is: “How exactly should future research on corporate
turnaround be designed?”
BETTER DEFINITIONS
The logic is simple: better definitions of turnaround will lead to more
representative samples, the analysis of which will lead to better expla-
nations. This holds for both quantitative and qualitative approaches. A
turnaround should involve an existence-threatening decline in perfor-
mance followed by a recovery that ensures at least survival but prefer-
ably achieves sustainable competitive advantage. Definitions of an
“existence-threatening decline in performance” and “recovery” should
be based on a combination of corroborating accounting-based and
expert witness-based indicators. Thus, an existence-threatening
decline in performance may be characterised by returns well below the
opportunity cost of capital and a consensus amongst different expert
witnesses (drawn, for example, from the firm’s stakeholders) that the
firm could not survive under the prevailing conditions. Similarly, a
recovery may be characterised as returns at least equal to the oppor-
tunity cost of capital and a consensus amongst different expert wit-
nesses that the firm had a viable future.
M@n@gement, Vol. 3, No. 2, 2000, 31-56
47
BETTER RESEARCH QUESTIONS
Research questions need to be more problem-based if they are to lead
to better explanations. The problem of corporate turnaround is a com-
plex one involving interactions between the content of recovery strate-
gies, the context in which they occur, and the process by which they
are implemented. Research questions need to reflect this. Reporting
the content of successful turnaround strategies, although useful, does
not take us very far. What we need a better understanding of is how
appropriate content varies according to different contexts and how the
delivery of appropriate content varies over time.
BETTER METHODOLOGIES
Because of the observed trade-off between large sample quantitative
studies (less breadth and depth, more empirical generalisability) and
small sample qualitative case studies (more breadth and depth, less
empirical generalisability) better explanations of turnaround depend on
both approaches working in concert. The problem with the studies to
date is that whilst all of the “large sample” studies employ recognised
quantitative methodological protocols, only one of the “longitudinal
case” studies employs a recognised qualitative method. This is not to
say that the findings of the remaining “longitudinal case” studies are
not useful, but rather that the validity of their findings is suspect. There
are many qualitative protocols that explicitly aim to improve the validi-
ty of case study research and it is not the goal here to identify all of
these and suggest a preferred approach. Suffice it to say that, in
future, case study researchers should employ a recognised qualitative
research protocol. Good starting points are the classic works by Miles
and Huberman (1994), Ragin (1987) and Yin (1984).
A THEORETICAL BASIS FOR
THE STUDY OF CORPORATE TURNAROUND
In addition to weaknesses with respect to research design, studies of
corporate turnaround have been, on the whole, guilty of theoretical
neglect. Of the forty-seven under review here only three relate their
investigations to relevant existing theory. Ramakrishnan and Shah
(1989) apply the systems approach to the problem of turnaround while
Stopford and Baden-Fuller (1990) discuss the utility of the rational
school of thought. Pant (1991) questions the extent to which the struc-
ture-conduct-performance framework of industrial economics is useful
in the analysis of the attributes of turnaround firms:
« Do turnaround firms differ in their structural characteristics from non-
turnaround firms? And, can these structural characteristics be used in
a model that distinguishes turnaround firms from non-turnaround
firms? » (p. 624.)
Of course, it is not a necessary condition that good research must be
guided by theory; at least one generally accepted methodology (Glaser
and Strauss, 1967) advocates a style of research that purposefully
avoids a priori theoretical guidance. Rather, the suggestion here is that
M@n@gement, Vol. 3, No. 2, 2000, 31-56
48
M@n@gement, Vol. 3, No. 2, 2000, 31-56
49
research efforts should be related to extant theory in some way. That
is, if the research is not guided by theory a priori, then the results of
the research should be compared to the predictions of extant theory ex
post (Eisenhardt, 1989). Both ways, a study’s findings would then be
able to make a theoretical contribution either by confirming the predic-
tions of existing theory or by providing evidence that calls for theory
modification.
What relevant extant theory might future research be related to?
Since corporate turnaround is clearly about the loosing of competitive
advantage, the threat of extinction, and the subsequent regaining of
competitive advantage, it seems appropriate to begin by focusing on
current theoretical ideas on the sources of competitive advantage and
the nature of organisational survival. A perspective on the nature of
firm-level competitive advantage that has gained currency recently
explains performance variation with reference to unique resources
contained within the firm. This resource-based theory of the firm
defines resources as tangible and intangible assets that affect the
firm’s ability to implement strategies to improve its efficiency and effec-
tiveness (Penrose, 1959; Barney, 1991). Tangible assets are property-
based and include plant and equipment, geographic location, physical
technology and access to raw materials. Intangible assets are knowl-
edge-based and include organisational routines and the abilities of
individual employees (Miller and Shamsie, 1996). Key resources are
rare, difficult to imitate and valuable. According to this view, the firm
achieves competitive advantage by exploiting its resources to create
competencies which are valued in the market place (Prahalad and
Hamel, 1990). However, over time, as the firm’s environment changes,
these competencies may erode in value and so may require replacing.
As such, the central problem facing the firm is the need to balance the
exploitation of existing competencies with the exploration of new com-
petencies in order to ensure long-run survival:
« The basic problem confronting an organization is to engage in suffi-
cient exploitation to ensure its current viability and, at the same time,
to devote enough energy to exploration to ensure its future viability.
Survival requires a balance, and the precise mix of exploitation and
exploration that is optimal is hard to specify. » (Levinthal and March,
1993, p. 105.)
Achieving balance between the activities of exploitation and explo-
ration is problematic in that there is a tendency for firms to over-exploit
and under-explore because of the activities’ differing distributions of
costs and benefits over time and space and because they compete for
scarce resources within the organisation (pursuing one entails less
capacity to pursue the other). Adaptive processes characteristically
improve the exploitation of existing competencies as this is more
immediate, less remote from the centre of the firm, and so less risky.
These advantages for exploitation cumulate in a path-dependent pro-
cess characterised by positive feedback (Arthur, 1989; David, 1985):
exploiting a competence leads to increased productivity allowing fur-
ther refinement of the competence which leads to further increases in
productivity and so on. What the firm already does well is enhanced at
the expense of the enhanced flexibility and innovative capacity that
would come about via exploration. However, since long-run survival
« depends on sustaining a reasonable level of exploration, these ten-
dencies to increase exploitation and reduce exploration make adaptive
processes potentially self-destructive. » (March, 1991, p. 73, emphasis
added)
5
.
Two conceptual questions arise in this context: (a) “What mechanisms
enable organisations to achieve balance between exploitation and
exploration?;” and (b) “Which of these mechanisms may corporate
turnaround be a manifestation of?” Volberda and Baden-Fuller’s
(1996) work is particularly instructive here. They identify four generic
mechanisms that, employed individually or in conjunction, solve the
problem of achieving balance. They label these mechanisms “selec-
tion,” “network,” “hierarchy,” and “time.”
Briefly, with selection it is the market that solves the problem as if by
an “invisible hand.” Resource scarcity and competition compel the firm
to “unconsciously” select a bundle of ventures that lead to competen-
cies that co-evolve with the environmental sources of competitive
advantage and so ensure long-run balance and survival (Williamson,
1975; Hannan and Freeman, 1984). The network mechanism also
solves the problem externally. Here, the firm operating in a network or
cluster, co-evolves to achieve balance by adapting to the evolving
demands made on it by its network partners (Miles and Snow, 1986,
1994). In contrast, with the hierarchy mechanism, exploitation and
exploration are tackled separately by different sub-units within the firm
(Chandler, 1962; Galunic and Eisenhardt, 1996). Sub-units maybe
separated by level (front-line, middle-line, corporate) or spatially (oper-
ating core vs. new venture). Accordingly, maintaining balance is pri-
marily an administrative process initiated by the firm’s management.
As with the hierarchy mechanism, it is forces within the firm that are
central to the time mechanism. The main difference is that the problem
of achieving balance between exploitation and exploration is resolved
not contemporaneously but temporally in a process of punctuated
equilibrium (Tushman and Romanelli, 1985; Baden-Fuller and Stop-
ford, 1992): a period dominated by exploitation (stability) is followed by
a period dominated by exploration (radical renewal).
Volberda and Baden-Fuller (1996) argue that different types of firms
adopt different mechanisms to resolve the problem of maintaining bal-
ance between exploitation and exploration. For example, acquisitive
conglomerates such as Hanson and BTR are good examples of the
selection mechanism at work while the network mechanism tends to
prevail among high technology small firms, and oil companies have
successfully employed the hierarchy mechanism. Companies that
have successfully turned-around (Pandit, 1998) seem to be good
examples of the time mechanism in action.
An alternative to the “outside the firm”/“inside the firm” categorisation
of the four mechanisms, that underlines the distinctiveness of the time
mechanism and therefore the possible distinctiveness of the
turnaround phenomenon, is a dichotomy based on the scale of the
organisational adaptation to environmental change (Pandit, 1997). The
M@n@gement, Vol. 3, No. 2, 2000, 31-56
50
5. For completeness, it is worth mention-
ing that it is possible for firms to self-
destruct due to cumulative over-explo-
ration. Consider a group of firms engaged
in exploration through intensive research
activity. An incumbent of the group bene-
fits from the rich pool of external knowl-
edge within the group and is more likely to
engage in research activity itself. This
leads to a richer pool of knowledge within
the group which encourages incumbents to
further invest in research and so on (Cohen
and Levinthal, 1989, 1990; Levinthal and
March, 1993). This focus on exploration at
the expense of exploitation can lead to
cash flow problems that cause the firm to
fail. However, this scenario is rare and
firms engaged in research activities usually
suffer the costs of experimentation without
reaping many of its benefits (hence the
need for devices such as patents to enable
firms to better reap the rewards of success-
ful exploration).
first three mechanisms, selection, network, and hierarchy, may be
viewed as incremental in that the process of balance and adaptation is
an ongoing process of relatively small adjustments that ensure contin-
ued survival. In contrast, time is a radical mechanism involving periods
of stability and slow decline followed by crisis and large scale change
followed by a further period of stability:
« There are cases where the crisis is one which confronts the entire
organisation, and it requires a comprehensive response, not a partial
one. Sometimes a dramatic corporate-wide transformation may be
necessary to temporarily explore new capabilities and skills. » (Volber-
da and Baden-Fuller, 1996, p. 12, emphasis added).
This section has drawn from current relevant theory to begin to identi-
fy a possible theoretical domain for the study of corporate turnaround.
It is offered as a first step towards the theoretical enrichment of the
subject and, as such, should not be regarded as all-encompassing. It
suggests that the phenomenon may be regarded as a particular type
of episode in organisational evolution: it describes how, over time, suc-
cessful organisations fail to adapt to environmental changes, loose
competitive advantage, and come close to extinction but, at some
point, are able to radically change and recover, and once again
become successful organisations. As such, according to Volberda and
Baden-Fuller’s (1996) scheme of organisational renewal, turnaround
may be thought of as a manifestation of the time mechanism for bal-
ancing exploitation and exploration in order to ensure the long-run sur-
vival of the organisation. This time mechanism seems distinctive from
other mechanisms that have the same objective in that it is not pri-
marily characterised by on-going small scale ecological adjustments.
Rather, it involves an evolutionary process primarily characterised by
punctuated equilibrium: a period of stability is followed by a period of
dramatic upheaval.
Research in the future could usefully test and/or extend this conceptu-
alisation or offer alternative approaches. Either way, a theoretical con-
tribution would be made and one would expect the advancement of our
understanding of the phenomenon to ensue.
CONCLUSION
Despite over two decades of research effort, our understanding of cor-
porate turnaround is very incomplete. This paper has argued that this
is due to weaknesses in the research designs of existing studies and
their collective failure to relate their findings to extant theory.
With respect to research designs, there has been an over-reliance on
simple accounting measures to indicate a turnaround situation and,
often, these indicators have not been suitably benchmarked. As a
result, most samples include dubious cases. Until the phenomenon is
properly sampled progress will be continue to be slow. In addition,
many important questions have either been ignored or asked too infre-
quently. Whilst questions relating to the content of turnaround strate-
M@n@gement, Vol. 3, No. 2, 2000, 31-56
51
gies are reasonably frequent, those relating to the context and process
of turnaround are rare. In particular, contextual factors that have been
relatively neglected include the severity of the crisis, the attitude of
stakeholders, the firm’s outer context and, the firm’s historical strategy.
Many, if not all, of these contextual factors could play an important role
in a robust explanation of corporate turnaround. Process issues that
have been largely ignored, but have the potential to enhance a gener-
al theory of turnaround, include the characteristics or mindsets of
senior management that lead to or prolong crisis situations, the identi-
fication of common triggers that begin the recovery process and, the
identification of a general sequence to successful recovery actions. In
future, the basic research questions of studies investigating
turnarounds should at least aim to unpack the important elements of
content, context and process. Better still, it is hoped that some studies
will go one important step further and systematically investigate rela-
tionships between the three categories. Also, whilst large sample stud-
ies have provided useful findings, there inevitably partial analyses
leave many questions unanswered. Longitudinal case study investiga-
tions, have great potential here but this potential has remained largely
unrealised due to poor execution.
With respect to theory, most research efforts have been ad hoc in that
they have either proceeded without a priori theoretical guidance or
have failed to relate findings to extant theory ex post. Accordingly,
opportunities to make potentially productive theoretical contributions
have been missed.
All of these factors, lack of care with respect to samples, the overlook-
ing of important research questions, poor methodological execution,
and theoretical neglect have colluded to leave the subject area
explanatorily weak. It is hoped that, by outlining the shortcomings of
the extant literature and by providing recommendations for future
research, stronger findings will result leading to significant and rapid
theoretical advancement, thereby providing academics with a better
understanding, and practising managers with better guidance in terms
of what to do in a turnaround situation, how to do it, and why it works.
Endnote: This study was supported by a Tom Lupton Scholarship from the Manchester
Business School, University of Manchester, UK. My thanks to Tony Cockerill, John West-
wood, Bobby Balgobin and Christian De Cock for their helpful comments. The usual dis-
claimer applies.
Naresh R. Pandit is Lecturer in Economics at Manchester Business School, Univer-
sity of Manchester, UK. He teaches Economics and Strategic Management on all of the
School's postgraduate programmes as well as on shorter courses run by the School's
Executive Development Centre. His main research interests are corporate turnaround
among small and large firms and the economics of industrial clustering. He has pub-
lished over a dozen articles in refereed journals and has contributed to research reports
for the Department of Trade and Industry (UK), the European Community, the Econom-
ic and Social Research Council (UK) and Cambridge Econometrics amongst others.
M@n@gement, Vol. 3, No. 2, 2000, 31-56
52
M@n@gement, Vol. 3, No. 2, 2000, 31-56
53
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APPENDIX: THE LITERATURE ON CORPORATE
TURNAROUND ASSESSED IN THIS STUDY
1. Armenakis and Fredenberger (1995)
2. Barker and Mone (1994)
3. Bellisario (1985)
4. Bibeault (1982)
5. Brege and Brandes (1993)
6. Brunetti (1987)
7. Carrington and Aurelio (1976)
8. Chakraborty and Dixit (1992)
9. Chowdhury and Lang (1996)
10. Colino (1986)
11. Di Primio (1988)
12. Gopal (1991)
13. Graham and Richards (1979)
14. Grinyer, Mayes, and McKiernan (1990)
15. Hambrick and Schecter (1983)
16. Hamermesh (1977)
17. Hardy (1990)
18. Hofer (1980)
19. Janzen (1983)
20. Ketelhohn, Jarillo, and Kubes (1991)
21. Marshall (1989)
22. Martin and Riddell (1996)
23. Melin (1985)
24. Miller and Vaghefi (1987)
25. Modiano (1987)
26. Müller (1985)
27. O’Neill (1986a)
28. O’Neill (1986b)
29. Pant (1991)
30. Ramakrishnan and Shah (1989)
31. Reichert (1988)
32. Remick (1980)
33. Robbins and Pearce (1992)
34. Rose (1989)
35. Schendel and Patton (1976)
36. Schendel, Patton and Riggs (1976)
37. Scherer (1989)
38. Seabright (1985)
39. Slatter (1984)
40. Stopford and Baden-Fuller (1990)
41. Taylor (1982/3)
42. Thain and Goldthorpe
(1989a, 1989b, 1990)
43. Thiétart (1988)
44. Whitney (1987)
45. Wyman (1989)
46. Zimmerman (1986)
47. Zimmerman (1989)

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