Description
However, in the rat race to succeed, most organisations are unable to generate revenues for sustainable operations.
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
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Successful Turnarounds:
The Role of Appropriate Entrepreneurial Strategies
Sunita Panicker
Assistant Professor
Christ University
Hosur Road, Bangalore – 56 0029
Tel: 91-(0)80-4012 9414 E-mail: [email protected]
Mathew J Manimala
Professor
Indian Institute of Management Bangalore
Bannerghatta Road, Bangalore – 56 0076
Tel: 91-(0)-2699 3107 E-mail: [email protected]
Objectives: All organisations are set up with an objective to create value to the society. This
necessitates organisations to generate revenues to support all its stakeholders. However, in the
rat race to succeed, most organisations are unable to generate revenues for sustainable
operations. It is obvious that organisations cannot survive without profits/surpluses and the
inability to generate surpluses would lead to industrial sickness. Bringing such organisations
back to health requires entrepreneurial strategies at two levels, namely, from the negative to the
breakeven and from breakeven to the positive. Hence, the turnaround management is a doubly
entrepreneurial act. The objective of this paper is to understand the strategies used in
successful turnarounds and compare them with those of the failed ones and thereby help
turnaround managers to increase their success rate so as to enhance the value of these
organisations to society.
Prior Practices: We hypothesised that the stage theory of successful turnaround proposed by
Manimala (1991) - which identified four stages in the process, namely, arresting sickness,
focusing on core business, expansion and growth, and institutionalization through culture
building – is applicable for bringing about successful turnarounds. In other words, the
turnaround managers will have to adopt a stage wise procedure for implementing their
strategies.
Approach/Methods: Content analysis of 102 published case-studies, of which 68 are
successful ones and 34 are unsuccessful, with a view to identifying the unique strategies of
each group.
Results/Insights: The study has found that successful turnarounds were accomplished through
progressive building up of organisational competencies, as suggested by the stage theory
(through strategies such as employee engagement, cost rationalization, lean management,
image building, and focusing on core business) before taking up aggressive growth and
expansion strategies. The unsuccessful turnarounds, on the other hand, went on for aggressive
product, pricing and promotional strategies without building up the basic competencies of the
organisation.
Implications to Community/Industry: The strategic differences observed, between successful
and unsuccessful turnarounds can be used by turnaround managers in achieving greater
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success in their turnaround efforts. Obviously, this will lead to the turnaround of larger numbers
of sick units and thereby, enhance value creation for the industry and the society at large.
Value to the Theme: The study demonstrates how entrepreneurship in established
organisations can create greater value for the organisation as well as the society.
Keywords: Entrepreneurship, Strategic Management, Turnaround Strategies, Value Creation
Introduction
Industries are an integral part of a nation's economy. With growing industrialization, the
incidence of industrial sickness has also been on the rise and a huge amount of scarce
resources of banks and financial institutions remain locked up in sick units (Singh 2007).
Industrial turbulence or sickness is so widespread that it is found in all types of organizations.
Since sickness in industries affects the entire organization and the country as a whole, there is
a need for organizations to take measures to restore their health. In a dynamic set-up, industrial
units that are non-competitive, uneconomical and inefficient become sick and die out when new
and more efficient units come up to take their place. This process of bringing an organization
from sickness to health is known as turnaround.
A turnaround situation is one where a company suffers declining economic performance for an
extended period of time, such that the performance level is so low that the survival of the
company is threatened unless serious efforts are made to improve its performance. Achieving
turnaround calls for a totally different set of skills to probe into the causes of decline and to
formulate appropriate strategies to transform the company for a fresh lease of life (Prasad
2006). Different organizations adopt different strategies for bringing about turnarounds. There is
enough evidence in the literature to show that there are differences in the strategies used by the
successful and unsuccessful turnarounds.
Successful Turnarounds: A Theoretical Model
Organizational sickness has been defined as a gradual or sudden ‘existence-threatening
decline’ in performance (Pandit 2000), and can be precipitated by internal actions or inactions or
by external circumstances and environmental factors. It is obvious that the definition of
organizational sickness is more like a term describing the symptoms of sickness rather than a
term proposing diagnosis and rectification. In other words, it describes only a situation facing an
organization but does not specify how that situation came about or was caused; nor does it
suggest the remedial actions or strategies that could bring about a turnaround (Walshe 2004).
Corporate sickness is one of the major socio-economic problems of developing as well as
developed nations.An industrial unit may become sick on account of a variety of factors causing
sickness. For this reason it is often difficult to give an exhaustive list of such causes of sickness.
However, attempts have been made by scholars and researchers to develop a list of these
factors (Barker 2005). In the following section we give a brief outline of the internal and external
causes of industrial sickness as identified by prior research.
Internal Causes
The internal causes of sickness arise from mismanagement in several functional areas of the
organisation. As the principal functions of any organisation are human resource management,
finance, marketing, production/operations and corporate planning strategies, the internal causes
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would also relate to mismanagement in these functional areas. Since, these causes occur due
to poor performance of one or the other internal functional parts of the unit, they are usually
controllable in nature, if they are detected in time and corrective actions are taken promptly
(Schendel, Patton and Riggs 1976, Hofer 1980, Hoffman 1989, Manimala 1991, Barker and
Mone 1994, Singh 2007).
Some of the symptoms of industrial sickness or causes of failure observed by researchers are:
poor leadership (Balgobin and Pandit 2001, Walshe 2004); operational inefficiency, past
managerial mistakes, inertia leading to poor adaptability, erosion of competitiveness, non-
availability of resources (Barker and Duhaime 1997, Bibeault 1982, Pearce and Robbins 1993);
product failure, poor diversification, poor control systems, cost slippage (Panchali 2005). It is
ironic that, even though management has direct control over all these functions, more than 80
percent of business failures arise due to management’s inefficiency to control the internal
functions of business (Scherrer 2003).
External Causes
While the internal inefficiencies are in themselves debilitating for the organisation, their
tendency to cause sickness will depend largely on the emerging external environment. If an
organisation is weak in its functional areas, there is a greater chance of it getting adversely
affected by the constraining external environmental factors. These factors may relate to any
aspect of the external environment such as demographic changes, economic conditions, natural
calamities, technological developments, social norms and customs, political systems and
changes and international interactions and exposure of the industrial enterprise (Singh 2007). In
general the external factors can cause sickness to an industrial unit only in so far as it is
internally weak.
The developments in the external environment identified by researchers as causing industrial
sickness are: adverse governmental or controlling authority behaviours, unfavourable market
conditions, industrial unrest, insufficient or excessively costly inputs, fluctuations in commodity
prices, natural calamities (Panchali 2005); changes in international markets, unforeseen
competition, financial market instability and technology changes (Manimala 1991, Khandwalla
1992, Pearce and Robbins 1993, Scherrer 2003); increased domestic and foreign competition,
product or service innovations by competitors, changes in customer expectations (Balgobin and
Pandit 2001, Walshe 2004); innovations in technology, recessionary conditions (Barker 2005),
and so on.
Turnaround Strategies
A corporate turnaround may be defined simply as the recovery of a firm’s economic
performance following an existence-threatening decline (Pandit 2000, Walshe 2004).
Khandwalla (1992) defines a corporate decline as a loss situation, and turnaround as equivalent
to reaching at least a breakeven from a loss situation. Hofer (1980) describes turnaround
strategies in very general terms as management actions employed for saving organisations
from decline. .Turnaround management is more relevant for mature organizations (Miller and
Friesen 1984, Pascale 1999), as they are likely to experience decline more than the younger
ones (as proposed by life cycle theory).
Turnaround researchers have identified a number of turnaround actions and strategies. There
are several ways in which researchers categorise turnaround actions such as strategic and
operational actions (Schendel, Patton and Riggs 1976, Hofer 1980), entrepreneurial and
efficiency actions (Hambrick and Scheter 1983). They could also be understood in terms of the
functional areas being addressed by them and so could be classified into human resources
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strategies, product/market strategies, financial strategies, production, operations and
technology strategies (Manimala 1991, Khandwalla 1992).
As we have noted above, a turnaround is a doubly entrepreneurial act involving ‘negative-to-
breakeven’ and ‘breakeven-to-positive’ phases (Manimala 2005), which also may have several
sub-stages within the two broad phases. Several researchers have proposed stage theories for
understanding the turnaround process. Prominent among them are: (1) Weitzel and Jonsson
(1989) who proposed five stages of decline and corresponding turnaround actions - namely,
blinded stage and good information, inaction stage and prompt action, faulty action stage and
corrective action, crisis stage and effective reorientation, and finally dissolution stage where no
action is possible; (2) Bibeault (1982) who proposed five stages in organisational turnaround,
namely, top management change, evaluation (diagnosis), emergency actions, stabilisation and
re-posturing/return to normal growth; (3) Chowdhury (2002) who identified four stages – decline,
response initiation, transition and outcome, (which are seen in both successful and
unsuccessful turnarounds); (4) Manimala (1991) who empirically found four stages in the post-
decline phase of turnaround, namely, arresting sickness, reorienting, institutionalisation and
growth; (5) Barker and Yasai-Ardekani (1995) who proposed a two stage contingency model
with decline-stemming stage and recovery stage (the former focusing on increasing stakeholder
support, enhancing efficiency and improving internal climate depending on the severity of
decline and availability of slack resources and the latter on enhancing the firm’s competitive
position); (6) Pearce and Robbins (1993) and Chowdhury (2002), who proposed two-stage
contingent process models involving retrenchment and recovery stages (the former focusing on
cost reduction and asset reduction, and the latter on strategies appropriate for the causes -
entrepreneurial strategies to deal with external causes and efficiency strategies to deal with
internal causes).
It was noted above that a commonly understood classification of turnaround strategies is to
base them on functional areas being addressed by them (Manimala 1991, Khandwalla 1992).
This would also make sense, as managers generally operate within their functional areas and
therefore take actions for rectifying the problems experienced in their respective areas. Hence,
classification of turnaround strategies based on the functional areas of management is
convenient both for researchers as well as practioners. Accordingly, we have identified five
categories of functional strategies related to turnaround management, which are: (a) Human
Resource Strategies, (b) Financial Strategies, (c) Marketing Strategies, (d)
Production/Operations Strategies and (e) Corporate Planning Strategies.
(a) Human Resource Strategies
The human resources have to actively partner with the business leadership and develop
strategies to create capabilities within the organization to speed up the execution of corporate
turnaround (Prasad 2006). Literature on human resources strategies has a lot written on
downsizing efforts, especially those adopting a top-down approach, simply focus on reducing
the number of employees (Cameron 1994, Cascio 2003). Firms experiencing negative trends of
performance typically resort to retrenchment as their most prominent turnaround strategy
(O’Neill 1986, Pant 1991, Smith, et.al. 1995). According to Mishra and Mishra (1994), the
downsizing, strategy commonly adopted by troubled organisations in the early 1980s was
mainly an effort to reduce the number of employees in order to stay competitive. That trend
continued into the 1990s with firms attempting to cut costs through staff-reduction to remain
competitive in the global marketplace (Appelbaum et al., 1987a; Cameron et al., 1991).
However, in the context of successful turnarounds, Manimala (1991) observed that the more
effective and long-lasting employee management strategies for troubled organisations were
based on employee engagement and culture building.
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Change in top management is another well identified human resource strategy. Leaders are
often a contributing source of decline (Arogyaswamy et al., 1995). Executives either directly
caused the problems at the heart of crisis or failed to recognize the problems early enough
(Bibeault, 1982). The first step or the first priority in a turnaround situation is the recognition that
new management can make the difference (Barker and Mone 1994, Jacoby 2004, Murphy and
Meyers 2008). Top management change is widely recognised as a precondition for successful
turnarounds (Bibeault 1982, Hofer 1980, Schendel, Patton and Riggs 1976, Slater 1999). The
nature of the top management team in a company is of greater significance for success or
failure than any of the company’s products, skills or physical assets (Murphy 2008). It is the top
management who sets the style and tone of management in the organisation and therefore can
involve and empower their employees. Empowered employees are energetic, passionate and
experience a feeling of ownership over jobs, which will encourage and motivate the employees
to offer their innovative best for the company with a customer service mindset (Prasad 2006).
Under such conditions performance management becomes voluntary and leads to better results
as compared to management-initiated performance appraisal and monitoring.
Hypothesis 1: Employee engagement strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
(b) Financial Strategies
The objective of financial strategy in turnaround management is to develop and use the financial
strength of the business as an asset to enhance the competitiveness of the business (Scherrer
2003). Organisations adopt several such financial strategies as reduction in the par value of
shares, obtaining loans at low rates of interest, postponement of maturity of debts, and
conversion of debt into equity (Kumar 2003). Robbins and Pearce (1992) have also observed
that the choice of turnaround strategies is linked to the company’s financial performance. They
suggested that as severity of decline increased, the financial strategies for turnaround should
use more of asset reduction strategies rather than cost reduction (Howard 2005).
Research on turnaround suggests that the performance outcomes of asset and cost reduction
are contingent on industry dynamics as well (Chowdhury and Lang 1996, Morrow et al., 2004).
Turnarounds cannot be sensibly analysed without taking into account the context of the financial
obligations and related governance arrangements (Igor and Toms 2006, Kumar 2003). Hofer
(1980) and Robbins and Pearce (1992) argue that companies under severe financial distress
need to make aggressive cost and asset reductions in order to survive. Slashing labor costs,
production costs, selling and administrative expenses, R&D expenditure, and financing costs is
a common strategy used in the early stages of corporate turnarounds (Denis and Kruse 2000,
Beixin et al 2008). However, as pointed out by Slater (1999), the aggressive reduction of costs
and assets is no easy task because of the possible organizational resistance to such action.
Asset-reduction strategies have been recommended for failing companies in order to improve
cash inflows (Hofer 1980, Taylor 1982, Hambrick and Schecter 1983, Robbins and Pearce
1992), which would help in meeting the immediate cash obligations as well as for creating more
productive assets.
Further, companies with high fixed costs become more vulnerable to market changes because
of the inflexibilities and inefficiencies associated with it. Several other researchers have also
observed that cost cutting and financial restructuring leading to lean management as critical
strategies for successful turnarounds (Hoffman 1989, Brown et al., 1993, DeAngelo and
DeAngelo, 1990, Franks and Mayer 1994, Igor 2006). This view is supported by (Hambrick and
Schecter 1983), who found that asset-reduction and debt-reduction to be the two pillars of
financial strategies for turnaround.
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Hypothesis 2a: Cost management strategies are likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 2b: Lean management strategy resulting from asset and cost restructuring is likely
to be used more frequently by successful turnarounds than unsuccessful ones.
(c) Marketing Strategies
The importance of innovative marketing strategies in bringing about successful turnarounds has
been highlighted by several researchers (Hofer 1980, Grinyer et.al. 1988, Goldston 1992).
However, corporate turnaround literature has paid little attention to the value of market
intelligence and planning in the company turnaround process (Harker 2001). The marketing
oriented business is customer-focused, and generates and disseminates market intelligence
that is widely used throughout the firm (Jaworski et.al., 1993). Such firms are able to sense and
respond to market forces with greater precision than more inward-looking rivals (Day 1994).
However, there is scant attention in the literature on the role of marketing and sales in the
corporate turnaround process (Goldston 1992)
Sales is a critical function involving four elements that are apparent more in the successful
turnarounds, such as: (1) environmental comprehension, (2) market selection, (3) innovative
market offers, and (4) managed relationships (Bibeault 1982, Finkin 1998, Harker and Harker
1998). Much has been written about marketing orientation in the management and marketing
literature (Jaworski et.al., 1993, Slater 1999). Such importance given to marketing is borne out
in the findings that customer focus is an important feature of successful turnarounds, where
customer focus permeated the whole organisation and was fully supported by the top
management. The turnaround organisation’s customer efforts were characterised by the
appointment of exclusive managers and sales people for key accounts, who worked tirelessly to
build the respect and trust of customers so essential for building up a sound relationship (Swan
et.al., 1988, Harker and Harker 1998).
Along with the enhancing marketing and sales activities, successful companies would also try to
improve their product quality. It is observed that poor quality of products is a major cause of
corporate failure as it is obvious that without a good quality product marketers would toil in vain.
Successful businesses compete on quality rather than on costs, with a view to developing
competitive advantage (Rosairo 2004). Repositioning has also been described as an
‘entrepreneurial’ turnaround strategy. Market penetration and niche positioning also been
identified as valuable strategies for the successful corporate turnarounds (Hofer 1980).
Hypothesis 3: Customer refocusing strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
(d) Production/Operation Strategies
Hofer (1980), in a study of twelve cases of badly performing organizations, found that the
strategies used for turning around organisations should be appropriate for causes of sickness. If
the sickness is caused by operating problems the solution has to be by operating remedies,
while strategic problems should be addressed by strategic remedies. This view was also
supported by the findings of Hambrick and Schecter (1983) who pointed out those organisations
that are failing due to operational causes opt for operational turnaround strategies and those
failing due to strategic causes opt for strategic turnarounds; and rarely were operational failure
addressed with strategic turnaround actions.
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There is often a relationship between cost reduction and efficient management for investments
in technology and improvement of operations (Arogyaswamy and Yasai-Ardekani 1997)
investigated the role of cutbacks and efficiency improvements in supporting investments in
technology. These actions improve profitability in the short run and allow the company to
release resources that may be used for technology improvements leading to enhancement of
operational efficiencies. They can also play an important political role in winning back
stakeholder support and help raise external resources to fund other initiatives (Smith and
Graves 2005). The development and use of innovative technologies would obviously, give a
competitive advantage to organisations and help them to gain market acceptance and share
quickly, while the investments in research and development can be gradually recovered with
new product exclusivity protected by patents (Kow 2004).
Hypothesis 4: Strategies for increasing operational efficiencies are likely to be used more
frequently by successful turnarounds than unsuccessful ones.
(e) Corporate Planning Strategies
Sickness and failure are often attributed to lack of planning or even short-sighted planning.
Planning in organisations may have a short-term focus (for example, annual planning for
implementing the current activities) or a long- term focus (which involves changing the nature
and direction of the organisation through expansion, diversification, exploration of new paths
through R&D, and so on).
The long-term changes in corporate strategies are required when the existing products and
services have limited acceptability in the market. In the context of turnaround management,
strategic re-orientation may follow two different directions – in the case of mature organisations
that have taken up too many activities and dissipated their energies, there is need for re-
focusing on the core activities; on the other hand, when the core is already strong or
strengthened through operational strategies as part of turnaround, organisations may decide to
expand and diversify anticipating the changes in the environment. This view was supported by
the findings of Manimala (1991), where it was observed that the strategic actions like growth,
are followed by operational ones involving arresting sickness, focusing on the core and
supported by institutionalization. Observations by other researchers are also in similar lines
Pearce and Robinson (1992) found that contraction and consolidation are used when an
organisation’s problems are not pervasive. Even though growth strategies may be appropriate
when an organisation is not doing very well, researchers have largely ignored this possibility. In
a study of small manufacturing firms, Chowdhury and Lang (1996) observed that
entrepreneurial moves, which typically involve growth strategies, could be an alternative to
retrenchment. Refocusing on the core business may often involve corporate restructuring, as
the elimination of non-core activities would involve the redefining of roles and positions (Beixin
et al 2008). For large firms, however, almost all strategic actions revolve around expansion and
diversification (Ramanujan and Varadarajan 1989, Rasheed 2005).
Hypothesis 5: Corporate restructuring and image building are likely to be used more frequently
by successful turnarounds than unsuccessful ones.
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Objectives
As mentioned in the introductory section, the major objective of this research is to understand
the differences in the strategies used by successful and unsuccessful cases of turnaround.
Reviewing the literature on the theme, we have identified five hypotheses suggesting the
differential strategies likely to be used by successful turnarounds, which are reproduced below.
Hypothesis 1: Employee engagement strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 2a: Cost management strategies are likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 2b: Lean management strategy resulting from asset and cost restructuring is likely
to be used more frequently by successful turnarounds than unsuccessful ones.
Hypothesis 3: Customer refocusing strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 4: Strategies for increasing operational efficiencies are likely to be used more
frequently by successful turnarounds than unsuccessful ones.
Hypothesis 5: Corporate restructuring and image building are likely to be used more frequently
by successful turnarounds than unsuccessful ones.
Accordingly, the objective of the present investigation is to test the above-mentioned
hypotheses.
Methodology
As turnaround management involves heroic actions, they are being written about in business
magazines and publications. Hence, there was no dearth of secondary materials on turnaround
strategies. This is, indeed, a great opportunity for researchers on the subject. The present
researchers therefore decided to scan the published cases on turnaround management, which
turned out to be very productive. We managed to assemble 68 successful cases and 34
unsuccessful cases, which belonged to a twelve-year period between 1998 and 2010. These
were content-analysed to generate quantitative data, which were then statistically processed for
testing the above-mentioned hypotheses. The steps in this process were as follows:
i. Preliminary reading of the cases in order to identify the commonly observed causes of
sickness and strategies of turnaround.
ii. Listing of the major causes and strategies as well as classifying causes into internal and
external, and strategies into the various functional areas of management (namely,
human resources, finance, marketing, production/operations and corporate planning).
Initially, there were 120 variables belonging to these two major categories (41 of them
among causes and 79 among strategies). These variables were judgmentally combined
into 36 causal variables and 30 strategy variables (by combining major functional area
strategies together) , which were then used for ratings and subsequent analysis.
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iii. Generating quantitative data on causes and strategies by using a quasi-interval scale
ranging from 1 to 3 (‘1’ indicating the absence, ‘2’ indicating doubtfulness, and ‘3’
indicating presence of a particular cause/strategy)
iv. Finding the inter-rater agreement on the above rating by soliciting the help of two other
raters (one a PhD in Economics, and the other a PhD in Sociology) for their independent
ratings of the same variables on the same scale. It was found that the inter-rater
agreements (as computed by correlations) were fairly high at 0.904 (between the
researcher and rater-1), and at 0.855 (between the researcher and rater-2). Hence, it
was concluded that the researcher’s ratings were fairly unbiased.
v. Identifying the major dimensions of causes as well as strategies through separate
hierarchical factor analysis, which yielded six causal factors and eight strategy factors.
vi. Testing the reliability of these factors using Cronbach’s Alpha, which were mostly
acceptable for social science research (as reported under the sub-section on ‘Findings’).
As indicated by the size of the Cronbach’s Alpha a few variables from the original list
had to be removed, resulting in the inclusion of 27 out of 36 originally listed causes and -
23 out of 30 of the originally listed strategies in the final factors.
vii. Testing the differences between successful and unsuccessful turnaround cases in terms
of the causes of sickness as well as the strategies with a view to identifying a set of
successful turnaround strategies and thereby ascertaining the support for the
hypothesis.
Data Analysis
The first step in the data analysis was to compute the means and standard deviations of the
primary variables of causes of sickness and turnaround strategies. Table-1 gives the means
and standard deviations of the causal variables and Table-2 those of the strategy variables.
Variables having a mean score higher than 1.5 are highlighted in the tables. These are the
common causes of sickness, and the commonly adopted strategies for turnaround.
Table-1: Means and standard deviation of causes of sickness variables
Causes of sickness variables Mean
Standard
deviation
IC1: Ambitious expansion 1.5686 0.90663
IC2: High cost of debt due to escalation of projects 1.6961 0.95222
IC4: High debt equity ratio 1.4314 0.49992
IC5: Poor marketing strategy 1.5686 0.89564
IC6: Incompetent management 1.5392 0.79193
IC7: Obsolete technology 1.3873 0.60895
IC9: High non-performing assets 1.1961 0.58087
IC10: Poor capital 1.3529 0.62374
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IC11: Operating inefficiency 1.5000 0.37244
IC12: Large investment in new product line 1.1373 0.50814
IC13: Inefficient workers 1.1569 0.34694
IC14: Poor market demand 1.5294 0.63255
IC16: Low capacity utilisation 1.5392 0.86370
IC17: Low sales turnover 1.2647 0.65893
IC18: Drop in exports 1.1275 0.48075
IC20: Delay in projects 1.1471 0.51506
IC21: Heavily overstaffed 1.3039 0.67177
IC22: Huge stock of inventory 1.1569 0.32228
IC25: Lack of liquidity 1.2745 0.54785
IC26: Improper utilisation of funds 1.3529 0.75317
IC27: Lack of market orientation 1.5719 0.59402
EC1: High input cost 1.4216 0.81370
EC4: High interest rate 1.4216 0.52846
EC5: Market recession and lack of demand 1.1373 0.50814
EC6: Government constraints 1.3856 0.44188
EC8: FOREX fluctuations 1.2206 0.45909
EC9: Weakening of rupee 1.0922 0.18810
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Table-2: Means and standard deviations of turnaround strategy variables
Turnaround Strategies Mean
Standard
deviation
MS2: Reassessment of product mix 1.5784 0.80144
MS3: Transition form sellers to buyers market 1.3039 0.35812
MS4: Focus on core business 1.3627 0.62599
MS5:Initiatives to increase revenues 1.5194 0.48650
MS6: Focus on promotional activities 1.5980 0.77408
MS7: Aggressive pricing 1.3333 0.73570
MS8: Entering newer markets 1.3072 0.38591
FS1: Debt restructuring 1.1667 0.40622
FS2: Reduction of assets 1.2770 0.37381
FS3: Efficiency in short term financing 1.1961 0.28668
FS4: Infusion of funds 1.1985 0.26406
FS5: Cost cutting 2.0784 1.00184
FS6: Reduction in cost of funds 1.3170 0.41791
HRS1: Huge retrenchment 1.3562 0.42801
HRS5: Motivating employees 1.3922 0.78547
HRS6: Culture building 1.0588 0.33958
HRS7: Employee involvement 1.5588 0.75221
HRS8: Information dissemination 1.0392 0.27867
POS1: Efficiency measures for operations 1.7614 0.56944
POS2: Investment in R&D 1.4167 0.54990
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POS3: Reduction in raw material costs 1.2255 0.62785
CPS1: Corporate social responsibility 1.0760 0.20145
CP2: Restructure the organisation 1.2333 0.27443
An observation of high-scoring causes show that they may relate to inefficiency in any functional
area, mainly in the management of operations, marketing, finance and corporate planning. This
finding supports our view that the management of the functions is critical to organisational
success. A second observation about high-scoring causes is that all of them arise from internal
mismanagement. An important inference from this is that unanticipated change in the external
environment can adversely affect the organisations only if they are internally weak.
Similarly, the high-scoring strategies also address issues in different functional areas such as
human resources, finance, marketing and production/operations. This supports the view that
turnaround management requires a comprehensive effort and stage-wise implementation of
strategies. This is particularly important against the generally held view that turnaround is only a
matter of cost cutting.
In order to further strengthen these inferences we have performed a two-stage factor analysis
on the variables with a view to identifying the principal dimensions of causes and strategies as
well as their relative importance for the successful and unsuccessful groups. Table-3 and Table-
4 show the causal factors and strategy factors respectively.
Table 3: Principal factors of causal variables
Causal factor no. and name with variable descriptions
Factor
Loadings
Cronbach
Alpha
Factor-1 (C1): Growth unsupported by resources and
demand
0.519
IC4: High debt equity 0.788
IC19: Fall in share Prices 0.722
EC4: High interest Cost 0.689
IC9: High non-performing assets(NPA’s) 0.636
IC1: Ambitious expansion 0.607
IC2: High cost of debt due to escalation of projects 0.522
Factor-2 (C2): Recessionary conditions 0.463
EC5: Market recession and lack of demand 0.790
EC9: Stagnant price of product 0.790
IC12: Large investment in new product line 0.631
Factor-3 (C3): Operational inefficiency 0.400
IC25: Lack of liquidity 0.807
EC6: Government constraints 0.758
IC11: Operating Inefficiency 0.662
Factor-4 (C4): Inadequate utilisation of resources 0.400
IC21: Excess employees 0.768
IC10: Inadequate capital 0.738
IC22: Huge stock of inventory 0.664
IC16: Low capacity utilisation 0.651
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
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IC26: Improper utilisation of funds 0.564
Factor -5 (C5): Low proactiveness vis-à-vis market and
technology
0.505
IC14: Poor market demand 0.804
IC7: Obsolete technology 0.727
IC5: Poor market strategy 0.689
IC17: Low sales turnover 0.593
Factor-6 (C6): Poor adaptability 0.567
EC8: Forex fluctuations and weakening of rupee 0.763
IC16: Drop in exports 0.744
IC6: Incompetent management 0.651
EC1: High input cost 0.618
IC27: Lack of market orientation 0.617
IC13: Inefficient workers 0.556
Table 4: Principal factors of strategy variables
Strategy factor no. and name with variable descriptions Factor
Loading
Cronbach
Alpha
Factor-1 (S1): Employee engagement 0.665
HR4: Incentives to employees 0.735
HR7: Employee involvement 0.672
HR5: Motivating employees 0.659
HR6: Culture building 0.555
Factor-2 (S2): Aggressive promotion of old products in new
markets
0.421
M3: Transition from sellers market to buyers market 0.728
M6: Focus on promotional activities 0.602
Factor-3 (S3): Cost management strategies 0.361
F6: Reduction in cost of funds 0.847
F5: Cost cutting 0.572
P3: Reduction in raw material cost 0.507
Factor-4 (S4): Investments in new markets and R&D 0.360
M8: Entering new markets 0.774
P2: Investment in R&D 0.740
P1: Efficiency measures for operations 0.638
Factor-5 (S5): Focus on core business 0.505
F4: Infusion of funds 0.726
HR1: Huge retrenchment 0.631
M4: Focus on core business 0.516
Factor-6 (S6): Changes in product mix and pricing 0.471
M7: Aggressive pricing 0.791
M2: Reassessment of product mix 0.558
Factor-7 (S7): Lean management 0.571
F2: Reduction in assets 0.788
F9: Enhance shareholders value 0.782
F1: Debt restructuring 0.722
O2: Restructure the organisation 0.769
F3: Efficiency in short term financing 0.599
Factor-8 (S8): Image building
HR8: Information Dissemination 0.793
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There were six factors among the causes for which the Cronbach’s Alpha ranged from 0.400 to
0.570. Though these values are not very high, they are in the acceptable range. The six causal
factors are as follows:
• Factor-1 (C1): Growth unsupported by resources and demand
• Factor-2 (C2): Recessionary conditions
• Factor-3 (C3): Operational inefficiency
• Factor-4 (C4): Inadequate utilisation of resources
• Factor-5 (C5): Low proactiveness vis-à-vis’ market and technology
• Factor-6 (C6): Poor adaptability
The causal factors also have corroborated the inference from high-scoring causal variables.
Among the six causal factors only one (Factor-2: Recessionary conditions) relates to external
conditions. All others are about mismanagement within the organisation. Hence, our prior
inference that the primary causes for industrial sickness is internal to the organisation is
supported. In other words, external changes can adversely affect only the internally weak
organisations.
There were eight factors among the strategies, for which the Cronbach’s Alpha ranged from
0.360 to 0.670. Though these values are not very high, they are in the acceptable range. The
eight strategy factors are as follows:
• Factor-1 (S1): Employee engagement
• Factor-2 (S2): Aggressive promotion of old products in new markets
• Factor-3 (S3): Cost management strategies
• Factor-4 (S4): Investments in new markets and R&D
• Factor-5 (S5): Focus on core business
• Factor-6 (S6): Changes in product mix and pricing
• Factor-7 (S7): Lean management
• Factor-8 (S8): Image building
The strategies belong to various aspects of management, which is, suggestive of a multi-
pronged approach needed for managing industrial sickness. The names given to these factors
are based on the nature of the variables included under each. While many of these are
apparently positive and functional (eg: employee engagement, focus on core business, lean
management, etc), some of them are suggestive of too aggressive and unrealistic strategies).
In order to test the association of these strategies with success or failure in turnaround, we
computed the group means of causal factors and strategic factors separately for successful and
unsuccessful cases. Table 5 and Table 6 give these comparative details for causes and
strategies respectively.
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Table 5: Mean scores of causal factors –
A comparative perspective of successful and unsuccessful turnaround cases
Causal factors Mean scores
(Successful)
Mean scores
(Unsuccessful)
Factor-1 (C1): Growth unsupported by resources and
demand
1.50 1.34
Factor-2 (C2): Recessionary conditions 1.05 1.33
Factor-3 (C3): Operational inefficiency 1.34 1.51
Factor-4 (C4): Inadequate utilisation of resources 1.29 1.45
Factor-5 (C5): Low proactiveness vis-à-vis’ market and
technology
1.43 1.53
Factor-6 (C6): Poor adaptability 1.29 1.72
Table 6: Mean scores of strategy factors –
A comparative perspective of successful and unsuccessful turnaround cases
Strategy factors
Mean
scores
(Successful)
Mean scores
(Unsuccessfu
l)
Factor-1 (S1): Employee engagement 1.23 1.19
Factor-2 (S2): Aggressive promotion of old products in new
markets
1.44 1.48
Factor-3 (S3): Cost management strategies 1.59 1.43
Factor-4 (S4): Investments in new markets and R&D 1.42 1.64
Factor-5 (S5): Focus on core business
1.35 1.22
Factor-6 (S6): Changes in product mix and pricing 1.54 1.69
Factor-7 (S7): Lean management 1.24 1.08
Factor-8 (S8): Image building 1.06 1
A visual examination of the means of causal factors for the two groups show that the
unsuccessful group is plagued by several causes, whereas the successful ones had only one
factor mean higher than those of the unsuccessful group. This may suggest that if the sickness
is caused by several factors the turnaround is more difficult. As for the strategies, the success is
apparently a function of slowly building up the capabilities of the organisation and then moving
forward with aggressive expansion and growth strategies. This is evident from the fact that the
successful group has higher scores on many strategy factors, especially the ones contributing
to organisation development such as employee engagement, cost management, focus on core
business and lean management. In order to test these inferences further, we conducted
independent sample t-test, whose results are given in Table 7 and Table 8.
Table 7: Causal factors – Test of difference between successful and unsuccessful cases
Causal factors Mean Standard
deviation
t Signi-
ficance
Factor-1 (C1): Growth unsupported by resources and
demand
1.5163
1.2495
.35854
.16385
5.177 .000
Factor-2 (C2): Recessionary conditions
1.0500
1.2625
.15934
.41073
-2.949 .000
Factor-3 (C3): Operational inefficiency 1.3448 .32868 -1.463 013
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
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1.4297 .24976
Factor-4 (C4): Inadequate utilisation of resources
1.2941
1.3864
.27147
.32626
-1.437 .086
Factor-5 (C5): Low proactiveness vis-à-vis’ market
and technology
1.4338
1.4446
.41400
.50838
-.109 .237
Factor-6 (C6): Poor adaptability 1.2945
1.6291
.26566
.39774
-4.488 .001
Table 8: Strategy factors – Test of difference between successful and unsuccessful
cases
Strategy factors Mean Standard
deviation
t Signi-
ficance
Factor-1 (S1): Employee engagement 1.2316
1.1735
0.40745
0.24117
0.902 0.003
Factor-2 (S2): Aggressive promotion of old products
in new markets
1.4375
1.4467
0.39852
0.55989
-0.086 0.004
Factor-3 (S3): Cost management strategies 1.5931
1.4521
0.43379
0.49939
1.403 0.108
Factor-4 (S4): Investments in new markets and R&D 1.4208
1.6268
0.30388
0.34519
-2.954 0.552
Factor-5 (S5): Focus on core business
1.3480
1.2316
0.27771
0.36333
1.643 0.250
Factor-6 (S6): Changes in product mix and pricing 1.5368
1.6628
0.60666
0.54633
-1.058 0.640
Factor-7 (S7): Lean management 1.2418
1.0827
0.22729
0.08317
5.125 0.000
Factor-8 (S8): Image building 1.0588
1.0017
0.34043
0.01009
1.382 0.047
The t-tests also support the inferences made above from the visual examination of the means.
Among the causal factors, all the means were significantly different for the two groups except
for causal factor 5 (low proactiveness vis-à-vis’ market and technology). It is only for the first
factor (growth unsupported by resources and demand) that the t-value is positive, indicating that
this is the major cause for sickness in the successful group.
Hence, the turnaround is easier for them, as it is only a matter of providing sufficient resources
and re-orienting the business for the appropriate market, supported by lean management and
employee engagement. This is exactly what we find in Table 8, where the successful group has
got significantly higher scores on employee engagement, cost management, lean management
and image building. The factor were there are no significant differences are focus on core
business, changes in product mix and pricing, and investments in new markets and R&D, which
implies that these strategies are equally used by both the groups. While these are functional
strategies the problem with the unsuccessful group may be that they failed to build the
organisation through the strategies mentioned above as characteristic of the successful group.
Besides, the unsuccessful group had also tried to aggressively promote old products in new
markets (Factor 2) where they have a significantly higher score.
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Conclusion
As we have mentioned in the discussion of findings above, most of our hypotheses got
supported by the findings of the present study. There were mainly five hypotheses with which
we started. These related to the more frequent uses of the following strategies by the successful
cases: employee engagement, cost management, customer-refocusing, lean management,
operational efficiency, corporate restructuring and image building. Five out of these six
strategies were found to be more frequently used by the successful cases. The only one
strategy which was more or less equally used by both the groups was customer-refocusing,
which was originally stated as ‘refocusing on core business’. However, since ‘core business’ is
only one aspect of customer-refocusing, we are not able to say anything conclusively about this
hypothesis.
While exploring support for our hypotheses through various statistical analyses, some related
results of the analysis brought out a few insights which may be formulated as theoretical
propositions that could support further research in the field. Three of them are briefly explained
below:
• The analysis of causes showed that the unsuccessful group was affected by more
problems than the successful ones. In fact, there was only one cause (growth
unsupported by resources and market demand) that was more frequently mentioned by
the successful group. This finding leads to the rather obvious inference that if the causes
of sickness are fewer, the chances of recovery are greater.
This is perfectly in line with what happens in case of physical illnesses. A person with
many health problems may develop unanticipated negative reactions when treated for a
specific ailment. Hence for such a person it is very difficult to find a treatment that
addresses all ailments. Similar is the case with organisations having problems in several
functional areas, which implies that the turnaround of such organisations are much more
difficult than the ones fewer problems. A practical implication of this is that managers
should detect problems in their early stage, when the malady is affecting only limited
number of functions. In this context, managers have to be sensitive to early warning
signals and take proactive actions immediately.
• Another inference from the analysis of causes was that the high-scoring causes (above
1.5 out of 3) were all internal causes. This somewhat strange because in the original
listing of causes of sickness, 15 out of 41 (about 36%) were external. The mentioning of
a large number of external causes may be symptomatic of another well researched
individual-level psychological construct - Locus of Control, as proposed by Rotter (1966)
– operating at the organisational level. It may be inferred that the Organisational Locus
of Control operates in such a way that many of their failures are attributed to external
causes. Since none of them could get the average score required for treating them as a
commonly observed cause of sickness, it may be legitimately inferred that the primary
reason why organisations becomes sick is the inefficiency in their internal management.
This was also seen in a few earlier studies done by one of the authors where he found
an absence of any relationship between environmental conditions and strategy-making
(Manimala 1992, 2005, and 2010). While the absence of correlations between
environment and strategy is counter-intuitive it probably suggests that the primary
reason why an individual or organisational actor behaves in a particular fashion is the
nature of the entity rather than the environmental influences. One could take a
Darwinian perspective on this, and state that the nature of the acting entity provokes the
actions which if compatible with the emerging environment gets selected, otherwise
rejected. Hence, the role of the environment is selection or rejection rather than
causation.
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• In the analysis of strategies preferred by successful and unsuccessful groups, it was
observed that the former employed many more strategies than the latter. In fact, the only
strategy that was significantly more frequently used by unsuccessful cases (“aggressive
promotion of old products in new markets”) was apparently as dysfunctional one. The
implication here is probably that organisational sicknesses can be cured only by a multi-
pronged remedial action using several functional strategies. It may also be inferred that
when several strategies are adopted they would be done in a sequence beginning with
the basic actions of arresting sickness and building up the core strengths, which may
provide support for the stage-theory of turnaround proposed by (Manimala 1991). It is
specially to be noted that employee engagement emerged as one of the most significant
differentiators between successful and unsuccessful cases, which was described as a
continuous process of institutionalization in Manimala (1991) and was observed as an
essential ingredient for stabilizing the impact of a turnaround success.
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doc_997599100.pdf
However, in the rat race to succeed, most organisations are unable to generate revenues for sustainable operations.
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
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Successful Turnarounds:
The Role of Appropriate Entrepreneurial Strategies
Sunita Panicker
Assistant Professor
Christ University
Hosur Road, Bangalore – 56 0029
Tel: 91-(0)80-4012 9414 E-mail: [email protected]
Mathew J Manimala
Professor
Indian Institute of Management Bangalore
Bannerghatta Road, Bangalore – 56 0076
Tel: 91-(0)-2699 3107 E-mail: [email protected]
Objectives: All organisations are set up with an objective to create value to the society. This
necessitates organisations to generate revenues to support all its stakeholders. However, in the
rat race to succeed, most organisations are unable to generate revenues for sustainable
operations. It is obvious that organisations cannot survive without profits/surpluses and the
inability to generate surpluses would lead to industrial sickness. Bringing such organisations
back to health requires entrepreneurial strategies at two levels, namely, from the negative to the
breakeven and from breakeven to the positive. Hence, the turnaround management is a doubly
entrepreneurial act. The objective of this paper is to understand the strategies used in
successful turnarounds and compare them with those of the failed ones and thereby help
turnaround managers to increase their success rate so as to enhance the value of these
organisations to society.
Prior Practices: We hypothesised that the stage theory of successful turnaround proposed by
Manimala (1991) - which identified four stages in the process, namely, arresting sickness,
focusing on core business, expansion and growth, and institutionalization through culture
building – is applicable for bringing about successful turnarounds. In other words, the
turnaround managers will have to adopt a stage wise procedure for implementing their
strategies.
Approach/Methods: Content analysis of 102 published case-studies, of which 68 are
successful ones and 34 are unsuccessful, with a view to identifying the unique strategies of
each group.
Results/Insights: The study has found that successful turnarounds were accomplished through
progressive building up of organisational competencies, as suggested by the stage theory
(through strategies such as employee engagement, cost rationalization, lean management,
image building, and focusing on core business) before taking up aggressive growth and
expansion strategies. The unsuccessful turnarounds, on the other hand, went on for aggressive
product, pricing and promotional strategies without building up the basic competencies of the
organisation.
Implications to Community/Industry: The strategic differences observed, between successful
and unsuccessful turnarounds can be used by turnaround managers in achieving greater
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
Page 2 of 22
success in their turnaround efforts. Obviously, this will lead to the turnaround of larger numbers
of sick units and thereby, enhance value creation for the industry and the society at large.
Value to the Theme: The study demonstrates how entrepreneurship in established
organisations can create greater value for the organisation as well as the society.
Keywords: Entrepreneurship, Strategic Management, Turnaround Strategies, Value Creation
Introduction
Industries are an integral part of a nation's economy. With growing industrialization, the
incidence of industrial sickness has also been on the rise and a huge amount of scarce
resources of banks and financial institutions remain locked up in sick units (Singh 2007).
Industrial turbulence or sickness is so widespread that it is found in all types of organizations.
Since sickness in industries affects the entire organization and the country as a whole, there is
a need for organizations to take measures to restore their health. In a dynamic set-up, industrial
units that are non-competitive, uneconomical and inefficient become sick and die out when new
and more efficient units come up to take their place. This process of bringing an organization
from sickness to health is known as turnaround.
A turnaround situation is one where a company suffers declining economic performance for an
extended period of time, such that the performance level is so low that the survival of the
company is threatened unless serious efforts are made to improve its performance. Achieving
turnaround calls for a totally different set of skills to probe into the causes of decline and to
formulate appropriate strategies to transform the company for a fresh lease of life (Prasad
2006). Different organizations adopt different strategies for bringing about turnarounds. There is
enough evidence in the literature to show that there are differences in the strategies used by the
successful and unsuccessful turnarounds.
Successful Turnarounds: A Theoretical Model
Organizational sickness has been defined as a gradual or sudden ‘existence-threatening
decline’ in performance (Pandit 2000), and can be precipitated by internal actions or inactions or
by external circumstances and environmental factors. It is obvious that the definition of
organizational sickness is more like a term describing the symptoms of sickness rather than a
term proposing diagnosis and rectification. In other words, it describes only a situation facing an
organization but does not specify how that situation came about or was caused; nor does it
suggest the remedial actions or strategies that could bring about a turnaround (Walshe 2004).
Corporate sickness is one of the major socio-economic problems of developing as well as
developed nations.An industrial unit may become sick on account of a variety of factors causing
sickness. For this reason it is often difficult to give an exhaustive list of such causes of sickness.
However, attempts have been made by scholars and researchers to develop a list of these
factors (Barker 2005). In the following section we give a brief outline of the internal and external
causes of industrial sickness as identified by prior research.
Internal Causes
The internal causes of sickness arise from mismanagement in several functional areas of the
organisation. As the principal functions of any organisation are human resource management,
finance, marketing, production/operations and corporate planning strategies, the internal causes
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would also relate to mismanagement in these functional areas. Since, these causes occur due
to poor performance of one or the other internal functional parts of the unit, they are usually
controllable in nature, if they are detected in time and corrective actions are taken promptly
(Schendel, Patton and Riggs 1976, Hofer 1980, Hoffman 1989, Manimala 1991, Barker and
Mone 1994, Singh 2007).
Some of the symptoms of industrial sickness or causes of failure observed by researchers are:
poor leadership (Balgobin and Pandit 2001, Walshe 2004); operational inefficiency, past
managerial mistakes, inertia leading to poor adaptability, erosion of competitiveness, non-
availability of resources (Barker and Duhaime 1997, Bibeault 1982, Pearce and Robbins 1993);
product failure, poor diversification, poor control systems, cost slippage (Panchali 2005). It is
ironic that, even though management has direct control over all these functions, more than 80
percent of business failures arise due to management’s inefficiency to control the internal
functions of business (Scherrer 2003).
External Causes
While the internal inefficiencies are in themselves debilitating for the organisation, their
tendency to cause sickness will depend largely on the emerging external environment. If an
organisation is weak in its functional areas, there is a greater chance of it getting adversely
affected by the constraining external environmental factors. These factors may relate to any
aspect of the external environment such as demographic changes, economic conditions, natural
calamities, technological developments, social norms and customs, political systems and
changes and international interactions and exposure of the industrial enterprise (Singh 2007). In
general the external factors can cause sickness to an industrial unit only in so far as it is
internally weak.
The developments in the external environment identified by researchers as causing industrial
sickness are: adverse governmental or controlling authority behaviours, unfavourable market
conditions, industrial unrest, insufficient or excessively costly inputs, fluctuations in commodity
prices, natural calamities (Panchali 2005); changes in international markets, unforeseen
competition, financial market instability and technology changes (Manimala 1991, Khandwalla
1992, Pearce and Robbins 1993, Scherrer 2003); increased domestic and foreign competition,
product or service innovations by competitors, changes in customer expectations (Balgobin and
Pandit 2001, Walshe 2004); innovations in technology, recessionary conditions (Barker 2005),
and so on.
Turnaround Strategies
A corporate turnaround may be defined simply as the recovery of a firm’s economic
performance following an existence-threatening decline (Pandit 2000, Walshe 2004).
Khandwalla (1992) defines a corporate decline as a loss situation, and turnaround as equivalent
to reaching at least a breakeven from a loss situation. Hofer (1980) describes turnaround
strategies in very general terms as management actions employed for saving organisations
from decline. .Turnaround management is more relevant for mature organizations (Miller and
Friesen 1984, Pascale 1999), as they are likely to experience decline more than the younger
ones (as proposed by life cycle theory).
Turnaround researchers have identified a number of turnaround actions and strategies. There
are several ways in which researchers categorise turnaround actions such as strategic and
operational actions (Schendel, Patton and Riggs 1976, Hofer 1980), entrepreneurial and
efficiency actions (Hambrick and Scheter 1983). They could also be understood in terms of the
functional areas being addressed by them and so could be classified into human resources
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strategies, product/market strategies, financial strategies, production, operations and
technology strategies (Manimala 1991, Khandwalla 1992).
As we have noted above, a turnaround is a doubly entrepreneurial act involving ‘negative-to-
breakeven’ and ‘breakeven-to-positive’ phases (Manimala 2005), which also may have several
sub-stages within the two broad phases. Several researchers have proposed stage theories for
understanding the turnaround process. Prominent among them are: (1) Weitzel and Jonsson
(1989) who proposed five stages of decline and corresponding turnaround actions - namely,
blinded stage and good information, inaction stage and prompt action, faulty action stage and
corrective action, crisis stage and effective reorientation, and finally dissolution stage where no
action is possible; (2) Bibeault (1982) who proposed five stages in organisational turnaround,
namely, top management change, evaluation (diagnosis), emergency actions, stabilisation and
re-posturing/return to normal growth; (3) Chowdhury (2002) who identified four stages – decline,
response initiation, transition and outcome, (which are seen in both successful and
unsuccessful turnarounds); (4) Manimala (1991) who empirically found four stages in the post-
decline phase of turnaround, namely, arresting sickness, reorienting, institutionalisation and
growth; (5) Barker and Yasai-Ardekani (1995) who proposed a two stage contingency model
with decline-stemming stage and recovery stage (the former focusing on increasing stakeholder
support, enhancing efficiency and improving internal climate depending on the severity of
decline and availability of slack resources and the latter on enhancing the firm’s competitive
position); (6) Pearce and Robbins (1993) and Chowdhury (2002), who proposed two-stage
contingent process models involving retrenchment and recovery stages (the former focusing on
cost reduction and asset reduction, and the latter on strategies appropriate for the causes -
entrepreneurial strategies to deal with external causes and efficiency strategies to deal with
internal causes).
It was noted above that a commonly understood classification of turnaround strategies is to
base them on functional areas being addressed by them (Manimala 1991, Khandwalla 1992).
This would also make sense, as managers generally operate within their functional areas and
therefore take actions for rectifying the problems experienced in their respective areas. Hence,
classification of turnaround strategies based on the functional areas of management is
convenient both for researchers as well as practioners. Accordingly, we have identified five
categories of functional strategies related to turnaround management, which are: (a) Human
Resource Strategies, (b) Financial Strategies, (c) Marketing Strategies, (d)
Production/Operations Strategies and (e) Corporate Planning Strategies.
(a) Human Resource Strategies
The human resources have to actively partner with the business leadership and develop
strategies to create capabilities within the organization to speed up the execution of corporate
turnaround (Prasad 2006). Literature on human resources strategies has a lot written on
downsizing efforts, especially those adopting a top-down approach, simply focus on reducing
the number of employees (Cameron 1994, Cascio 2003). Firms experiencing negative trends of
performance typically resort to retrenchment as their most prominent turnaround strategy
(O’Neill 1986, Pant 1991, Smith, et.al. 1995). According to Mishra and Mishra (1994), the
downsizing, strategy commonly adopted by troubled organisations in the early 1980s was
mainly an effort to reduce the number of employees in order to stay competitive. That trend
continued into the 1990s with firms attempting to cut costs through staff-reduction to remain
competitive in the global marketplace (Appelbaum et al., 1987a; Cameron et al., 1991).
However, in the context of successful turnarounds, Manimala (1991) observed that the more
effective and long-lasting employee management strategies for troubled organisations were
based on employee engagement and culture building.
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Change in top management is another well identified human resource strategy. Leaders are
often a contributing source of decline (Arogyaswamy et al., 1995). Executives either directly
caused the problems at the heart of crisis or failed to recognize the problems early enough
(Bibeault, 1982). The first step or the first priority in a turnaround situation is the recognition that
new management can make the difference (Barker and Mone 1994, Jacoby 2004, Murphy and
Meyers 2008). Top management change is widely recognised as a precondition for successful
turnarounds (Bibeault 1982, Hofer 1980, Schendel, Patton and Riggs 1976, Slater 1999). The
nature of the top management team in a company is of greater significance for success or
failure than any of the company’s products, skills or physical assets (Murphy 2008). It is the top
management who sets the style and tone of management in the organisation and therefore can
involve and empower their employees. Empowered employees are energetic, passionate and
experience a feeling of ownership over jobs, which will encourage and motivate the employees
to offer their innovative best for the company with a customer service mindset (Prasad 2006).
Under such conditions performance management becomes voluntary and leads to better results
as compared to management-initiated performance appraisal and monitoring.
Hypothesis 1: Employee engagement strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
(b) Financial Strategies
The objective of financial strategy in turnaround management is to develop and use the financial
strength of the business as an asset to enhance the competitiveness of the business (Scherrer
2003). Organisations adopt several such financial strategies as reduction in the par value of
shares, obtaining loans at low rates of interest, postponement of maturity of debts, and
conversion of debt into equity (Kumar 2003). Robbins and Pearce (1992) have also observed
that the choice of turnaround strategies is linked to the company’s financial performance. They
suggested that as severity of decline increased, the financial strategies for turnaround should
use more of asset reduction strategies rather than cost reduction (Howard 2005).
Research on turnaround suggests that the performance outcomes of asset and cost reduction
are contingent on industry dynamics as well (Chowdhury and Lang 1996, Morrow et al., 2004).
Turnarounds cannot be sensibly analysed without taking into account the context of the financial
obligations and related governance arrangements (Igor and Toms 2006, Kumar 2003). Hofer
(1980) and Robbins and Pearce (1992) argue that companies under severe financial distress
need to make aggressive cost and asset reductions in order to survive. Slashing labor costs,
production costs, selling and administrative expenses, R&D expenditure, and financing costs is
a common strategy used in the early stages of corporate turnarounds (Denis and Kruse 2000,
Beixin et al 2008). However, as pointed out by Slater (1999), the aggressive reduction of costs
and assets is no easy task because of the possible organizational resistance to such action.
Asset-reduction strategies have been recommended for failing companies in order to improve
cash inflows (Hofer 1980, Taylor 1982, Hambrick and Schecter 1983, Robbins and Pearce
1992), which would help in meeting the immediate cash obligations as well as for creating more
productive assets.
Further, companies with high fixed costs become more vulnerable to market changes because
of the inflexibilities and inefficiencies associated with it. Several other researchers have also
observed that cost cutting and financial restructuring leading to lean management as critical
strategies for successful turnarounds (Hoffman 1989, Brown et al., 1993, DeAngelo and
DeAngelo, 1990, Franks and Mayer 1994, Igor 2006). This view is supported by (Hambrick and
Schecter 1983), who found that asset-reduction and debt-reduction to be the two pillars of
financial strategies for turnaround.
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Hypothesis 2a: Cost management strategies are likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 2b: Lean management strategy resulting from asset and cost restructuring is likely
to be used more frequently by successful turnarounds than unsuccessful ones.
(c) Marketing Strategies
The importance of innovative marketing strategies in bringing about successful turnarounds has
been highlighted by several researchers (Hofer 1980, Grinyer et.al. 1988, Goldston 1992).
However, corporate turnaround literature has paid little attention to the value of market
intelligence and planning in the company turnaround process (Harker 2001). The marketing
oriented business is customer-focused, and generates and disseminates market intelligence
that is widely used throughout the firm (Jaworski et.al., 1993). Such firms are able to sense and
respond to market forces with greater precision than more inward-looking rivals (Day 1994).
However, there is scant attention in the literature on the role of marketing and sales in the
corporate turnaround process (Goldston 1992)
Sales is a critical function involving four elements that are apparent more in the successful
turnarounds, such as: (1) environmental comprehension, (2) market selection, (3) innovative
market offers, and (4) managed relationships (Bibeault 1982, Finkin 1998, Harker and Harker
1998). Much has been written about marketing orientation in the management and marketing
literature (Jaworski et.al., 1993, Slater 1999). Such importance given to marketing is borne out
in the findings that customer focus is an important feature of successful turnarounds, where
customer focus permeated the whole organisation and was fully supported by the top
management. The turnaround organisation’s customer efforts were characterised by the
appointment of exclusive managers and sales people for key accounts, who worked tirelessly to
build the respect and trust of customers so essential for building up a sound relationship (Swan
et.al., 1988, Harker and Harker 1998).
Along with the enhancing marketing and sales activities, successful companies would also try to
improve their product quality. It is observed that poor quality of products is a major cause of
corporate failure as it is obvious that without a good quality product marketers would toil in vain.
Successful businesses compete on quality rather than on costs, with a view to developing
competitive advantage (Rosairo 2004). Repositioning has also been described as an
‘entrepreneurial’ turnaround strategy. Market penetration and niche positioning also been
identified as valuable strategies for the successful corporate turnarounds (Hofer 1980).
Hypothesis 3: Customer refocusing strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
(d) Production/Operation Strategies
Hofer (1980), in a study of twelve cases of badly performing organizations, found that the
strategies used for turning around organisations should be appropriate for causes of sickness. If
the sickness is caused by operating problems the solution has to be by operating remedies,
while strategic problems should be addressed by strategic remedies. This view was also
supported by the findings of Hambrick and Schecter (1983) who pointed out those organisations
that are failing due to operational causes opt for operational turnaround strategies and those
failing due to strategic causes opt for strategic turnarounds; and rarely were operational failure
addressed with strategic turnaround actions.
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There is often a relationship between cost reduction and efficient management for investments
in technology and improvement of operations (Arogyaswamy and Yasai-Ardekani 1997)
investigated the role of cutbacks and efficiency improvements in supporting investments in
technology. These actions improve profitability in the short run and allow the company to
release resources that may be used for technology improvements leading to enhancement of
operational efficiencies. They can also play an important political role in winning back
stakeholder support and help raise external resources to fund other initiatives (Smith and
Graves 2005). The development and use of innovative technologies would obviously, give a
competitive advantage to organisations and help them to gain market acceptance and share
quickly, while the investments in research and development can be gradually recovered with
new product exclusivity protected by patents (Kow 2004).
Hypothesis 4: Strategies for increasing operational efficiencies are likely to be used more
frequently by successful turnarounds than unsuccessful ones.
(e) Corporate Planning Strategies
Sickness and failure are often attributed to lack of planning or even short-sighted planning.
Planning in organisations may have a short-term focus (for example, annual planning for
implementing the current activities) or a long- term focus (which involves changing the nature
and direction of the organisation through expansion, diversification, exploration of new paths
through R&D, and so on).
The long-term changes in corporate strategies are required when the existing products and
services have limited acceptability in the market. In the context of turnaround management,
strategic re-orientation may follow two different directions – in the case of mature organisations
that have taken up too many activities and dissipated their energies, there is need for re-
focusing on the core activities; on the other hand, when the core is already strong or
strengthened through operational strategies as part of turnaround, organisations may decide to
expand and diversify anticipating the changes in the environment. This view was supported by
the findings of Manimala (1991), where it was observed that the strategic actions like growth,
are followed by operational ones involving arresting sickness, focusing on the core and
supported by institutionalization. Observations by other researchers are also in similar lines
Pearce and Robinson (1992) found that contraction and consolidation are used when an
organisation’s problems are not pervasive. Even though growth strategies may be appropriate
when an organisation is not doing very well, researchers have largely ignored this possibility. In
a study of small manufacturing firms, Chowdhury and Lang (1996) observed that
entrepreneurial moves, which typically involve growth strategies, could be an alternative to
retrenchment. Refocusing on the core business may often involve corporate restructuring, as
the elimination of non-core activities would involve the redefining of roles and positions (Beixin
et al 2008). For large firms, however, almost all strategic actions revolve around expansion and
diversification (Ramanujan and Varadarajan 1989, Rasheed 2005).
Hypothesis 5: Corporate restructuring and image building are likely to be used more frequently
by successful turnarounds than unsuccessful ones.
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Objectives
As mentioned in the introductory section, the major objective of this research is to understand
the differences in the strategies used by successful and unsuccessful cases of turnaround.
Reviewing the literature on the theme, we have identified five hypotheses suggesting the
differential strategies likely to be used by successful turnarounds, which are reproduced below.
Hypothesis 1: Employee engagement strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 2a: Cost management strategies are likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 2b: Lean management strategy resulting from asset and cost restructuring is likely
to be used more frequently by successful turnarounds than unsuccessful ones.
Hypothesis 3: Customer refocusing strategy is likely to be used more frequently by successful
turnarounds than unsuccessful ones.
Hypothesis 4: Strategies for increasing operational efficiencies are likely to be used more
frequently by successful turnarounds than unsuccessful ones.
Hypothesis 5: Corporate restructuring and image building are likely to be used more frequently
by successful turnarounds than unsuccessful ones.
Accordingly, the objective of the present investigation is to test the above-mentioned
hypotheses.
Methodology
As turnaround management involves heroic actions, they are being written about in business
magazines and publications. Hence, there was no dearth of secondary materials on turnaround
strategies. This is, indeed, a great opportunity for researchers on the subject. The present
researchers therefore decided to scan the published cases on turnaround management, which
turned out to be very productive. We managed to assemble 68 successful cases and 34
unsuccessful cases, which belonged to a twelve-year period between 1998 and 2010. These
were content-analysed to generate quantitative data, which were then statistically processed for
testing the above-mentioned hypotheses. The steps in this process were as follows:
i. Preliminary reading of the cases in order to identify the commonly observed causes of
sickness and strategies of turnaround.
ii. Listing of the major causes and strategies as well as classifying causes into internal and
external, and strategies into the various functional areas of management (namely,
human resources, finance, marketing, production/operations and corporate planning).
Initially, there were 120 variables belonging to these two major categories (41 of them
among causes and 79 among strategies). These variables were judgmentally combined
into 36 causal variables and 30 strategy variables (by combining major functional area
strategies together) , which were then used for ratings and subsequent analysis.
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iii. Generating quantitative data on causes and strategies by using a quasi-interval scale
ranging from 1 to 3 (‘1’ indicating the absence, ‘2’ indicating doubtfulness, and ‘3’
indicating presence of a particular cause/strategy)
iv. Finding the inter-rater agreement on the above rating by soliciting the help of two other
raters (one a PhD in Economics, and the other a PhD in Sociology) for their independent
ratings of the same variables on the same scale. It was found that the inter-rater
agreements (as computed by correlations) were fairly high at 0.904 (between the
researcher and rater-1), and at 0.855 (between the researcher and rater-2). Hence, it
was concluded that the researcher’s ratings were fairly unbiased.
v. Identifying the major dimensions of causes as well as strategies through separate
hierarchical factor analysis, which yielded six causal factors and eight strategy factors.
vi. Testing the reliability of these factors using Cronbach’s Alpha, which were mostly
acceptable for social science research (as reported under the sub-section on ‘Findings’).
As indicated by the size of the Cronbach’s Alpha a few variables from the original list
had to be removed, resulting in the inclusion of 27 out of 36 originally listed causes and -
23 out of 30 of the originally listed strategies in the final factors.
vii. Testing the differences between successful and unsuccessful turnaround cases in terms
of the causes of sickness as well as the strategies with a view to identifying a set of
successful turnaround strategies and thereby ascertaining the support for the
hypothesis.
Data Analysis
The first step in the data analysis was to compute the means and standard deviations of the
primary variables of causes of sickness and turnaround strategies. Table-1 gives the means
and standard deviations of the causal variables and Table-2 those of the strategy variables.
Variables having a mean score higher than 1.5 are highlighted in the tables. These are the
common causes of sickness, and the commonly adopted strategies for turnaround.
Table-1: Means and standard deviation of causes of sickness variables
Causes of sickness variables Mean
Standard
deviation
IC1: Ambitious expansion 1.5686 0.90663
IC2: High cost of debt due to escalation of projects 1.6961 0.95222
IC4: High debt equity ratio 1.4314 0.49992
IC5: Poor marketing strategy 1.5686 0.89564
IC6: Incompetent management 1.5392 0.79193
IC7: Obsolete technology 1.3873 0.60895
IC9: High non-performing assets 1.1961 0.58087
IC10: Poor capital 1.3529 0.62374
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IC11: Operating inefficiency 1.5000 0.37244
IC12: Large investment in new product line 1.1373 0.50814
IC13: Inefficient workers 1.1569 0.34694
IC14: Poor market demand 1.5294 0.63255
IC16: Low capacity utilisation 1.5392 0.86370
IC17: Low sales turnover 1.2647 0.65893
IC18: Drop in exports 1.1275 0.48075
IC20: Delay in projects 1.1471 0.51506
IC21: Heavily overstaffed 1.3039 0.67177
IC22: Huge stock of inventory 1.1569 0.32228
IC25: Lack of liquidity 1.2745 0.54785
IC26: Improper utilisation of funds 1.3529 0.75317
IC27: Lack of market orientation 1.5719 0.59402
EC1: High input cost 1.4216 0.81370
EC4: High interest rate 1.4216 0.52846
EC5: Market recession and lack of demand 1.1373 0.50814
EC6: Government constraints 1.3856 0.44188
EC8: FOREX fluctuations 1.2206 0.45909
EC9: Weakening of rupee 1.0922 0.18810
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Table-2: Means and standard deviations of turnaround strategy variables
Turnaround Strategies Mean
Standard
deviation
MS2: Reassessment of product mix 1.5784 0.80144
MS3: Transition form sellers to buyers market 1.3039 0.35812
MS4: Focus on core business 1.3627 0.62599
MS5:Initiatives to increase revenues 1.5194 0.48650
MS6: Focus on promotional activities 1.5980 0.77408
MS7: Aggressive pricing 1.3333 0.73570
MS8: Entering newer markets 1.3072 0.38591
FS1: Debt restructuring 1.1667 0.40622
FS2: Reduction of assets 1.2770 0.37381
FS3: Efficiency in short term financing 1.1961 0.28668
FS4: Infusion of funds 1.1985 0.26406
FS5: Cost cutting 2.0784 1.00184
FS6: Reduction in cost of funds 1.3170 0.41791
HRS1: Huge retrenchment 1.3562 0.42801
HRS5: Motivating employees 1.3922 0.78547
HRS6: Culture building 1.0588 0.33958
HRS7: Employee involvement 1.5588 0.75221
HRS8: Information dissemination 1.0392 0.27867
POS1: Efficiency measures for operations 1.7614 0.56944
POS2: Investment in R&D 1.4167 0.54990
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POS3: Reduction in raw material costs 1.2255 0.62785
CPS1: Corporate social responsibility 1.0760 0.20145
CP2: Restructure the organisation 1.2333 0.27443
An observation of high-scoring causes show that they may relate to inefficiency in any functional
area, mainly in the management of operations, marketing, finance and corporate planning. This
finding supports our view that the management of the functions is critical to organisational
success. A second observation about high-scoring causes is that all of them arise from internal
mismanagement. An important inference from this is that unanticipated change in the external
environment can adversely affect the organisations only if they are internally weak.
Similarly, the high-scoring strategies also address issues in different functional areas such as
human resources, finance, marketing and production/operations. This supports the view that
turnaround management requires a comprehensive effort and stage-wise implementation of
strategies. This is particularly important against the generally held view that turnaround is only a
matter of cost cutting.
In order to further strengthen these inferences we have performed a two-stage factor analysis
on the variables with a view to identifying the principal dimensions of causes and strategies as
well as their relative importance for the successful and unsuccessful groups. Table-3 and Table-
4 show the causal factors and strategy factors respectively.
Table 3: Principal factors of causal variables
Causal factor no. and name with variable descriptions
Factor
Loadings
Cronbach
Alpha
Factor-1 (C1): Growth unsupported by resources and
demand
0.519
IC4: High debt equity 0.788
IC19: Fall in share Prices 0.722
EC4: High interest Cost 0.689
IC9: High non-performing assets(NPA’s) 0.636
IC1: Ambitious expansion 0.607
IC2: High cost of debt due to escalation of projects 0.522
Factor-2 (C2): Recessionary conditions 0.463
EC5: Market recession and lack of demand 0.790
EC9: Stagnant price of product 0.790
IC12: Large investment in new product line 0.631
Factor-3 (C3): Operational inefficiency 0.400
IC25: Lack of liquidity 0.807
EC6: Government constraints 0.758
IC11: Operating Inefficiency 0.662
Factor-4 (C4): Inadequate utilisation of resources 0.400
IC21: Excess employees 0.768
IC10: Inadequate capital 0.738
IC22: Huge stock of inventory 0.664
IC16: Low capacity utilisation 0.651
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IC26: Improper utilisation of funds 0.564
Factor -5 (C5): Low proactiveness vis-à-vis market and
technology
0.505
IC14: Poor market demand 0.804
IC7: Obsolete technology 0.727
IC5: Poor market strategy 0.689
IC17: Low sales turnover 0.593
Factor-6 (C6): Poor adaptability 0.567
EC8: Forex fluctuations and weakening of rupee 0.763
IC16: Drop in exports 0.744
IC6: Incompetent management 0.651
EC1: High input cost 0.618
IC27: Lack of market orientation 0.617
IC13: Inefficient workers 0.556
Table 4: Principal factors of strategy variables
Strategy factor no. and name with variable descriptions Factor
Loading
Cronbach
Alpha
Factor-1 (S1): Employee engagement 0.665
HR4: Incentives to employees 0.735
HR7: Employee involvement 0.672
HR5: Motivating employees 0.659
HR6: Culture building 0.555
Factor-2 (S2): Aggressive promotion of old products in new
markets
0.421
M3: Transition from sellers market to buyers market 0.728
M6: Focus on promotional activities 0.602
Factor-3 (S3): Cost management strategies 0.361
F6: Reduction in cost of funds 0.847
F5: Cost cutting 0.572
P3: Reduction in raw material cost 0.507
Factor-4 (S4): Investments in new markets and R&D 0.360
M8: Entering new markets 0.774
P2: Investment in R&D 0.740
P1: Efficiency measures for operations 0.638
Factor-5 (S5): Focus on core business 0.505
F4: Infusion of funds 0.726
HR1: Huge retrenchment 0.631
M4: Focus on core business 0.516
Factor-6 (S6): Changes in product mix and pricing 0.471
M7: Aggressive pricing 0.791
M2: Reassessment of product mix 0.558
Factor-7 (S7): Lean management 0.571
F2: Reduction in assets 0.788
F9: Enhance shareholders value 0.782
F1: Debt restructuring 0.722
O2: Restructure the organisation 0.769
F3: Efficiency in short term financing 0.599
Factor-8 (S8): Image building
HR8: Information Dissemination 0.793
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There were six factors among the causes for which the Cronbach’s Alpha ranged from 0.400 to
0.570. Though these values are not very high, they are in the acceptable range. The six causal
factors are as follows:
• Factor-1 (C1): Growth unsupported by resources and demand
• Factor-2 (C2): Recessionary conditions
• Factor-3 (C3): Operational inefficiency
• Factor-4 (C4): Inadequate utilisation of resources
• Factor-5 (C5): Low proactiveness vis-à-vis’ market and technology
• Factor-6 (C6): Poor adaptability
The causal factors also have corroborated the inference from high-scoring causal variables.
Among the six causal factors only one (Factor-2: Recessionary conditions) relates to external
conditions. All others are about mismanagement within the organisation. Hence, our prior
inference that the primary causes for industrial sickness is internal to the organisation is
supported. In other words, external changes can adversely affect only the internally weak
organisations.
There were eight factors among the strategies, for which the Cronbach’s Alpha ranged from
0.360 to 0.670. Though these values are not very high, they are in the acceptable range. The
eight strategy factors are as follows:
• Factor-1 (S1): Employee engagement
• Factor-2 (S2): Aggressive promotion of old products in new markets
• Factor-3 (S3): Cost management strategies
• Factor-4 (S4): Investments in new markets and R&D
• Factor-5 (S5): Focus on core business
• Factor-6 (S6): Changes in product mix and pricing
• Factor-7 (S7): Lean management
• Factor-8 (S8): Image building
The strategies belong to various aspects of management, which is, suggestive of a multi-
pronged approach needed for managing industrial sickness. The names given to these factors
are based on the nature of the variables included under each. While many of these are
apparently positive and functional (eg: employee engagement, focus on core business, lean
management, etc), some of them are suggestive of too aggressive and unrealistic strategies).
In order to test the association of these strategies with success or failure in turnaround, we
computed the group means of causal factors and strategic factors separately for successful and
unsuccessful cases. Table 5 and Table 6 give these comparative details for causes and
strategies respectively.
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Table 5: Mean scores of causal factors –
A comparative perspective of successful and unsuccessful turnaround cases
Causal factors Mean scores
(Successful)
Mean scores
(Unsuccessful)
Factor-1 (C1): Growth unsupported by resources and
demand
1.50 1.34
Factor-2 (C2): Recessionary conditions 1.05 1.33
Factor-3 (C3): Operational inefficiency 1.34 1.51
Factor-4 (C4): Inadequate utilisation of resources 1.29 1.45
Factor-5 (C5): Low proactiveness vis-à-vis’ market and
technology
1.43 1.53
Factor-6 (C6): Poor adaptability 1.29 1.72
Table 6: Mean scores of strategy factors –
A comparative perspective of successful and unsuccessful turnaround cases
Strategy factors
Mean
scores
(Successful)
Mean scores
(Unsuccessfu
l)
Factor-1 (S1): Employee engagement 1.23 1.19
Factor-2 (S2): Aggressive promotion of old products in new
markets
1.44 1.48
Factor-3 (S3): Cost management strategies 1.59 1.43
Factor-4 (S4): Investments in new markets and R&D 1.42 1.64
Factor-5 (S5): Focus on core business
1.35 1.22
Factor-6 (S6): Changes in product mix and pricing 1.54 1.69
Factor-7 (S7): Lean management 1.24 1.08
Factor-8 (S8): Image building 1.06 1
A visual examination of the means of causal factors for the two groups show that the
unsuccessful group is plagued by several causes, whereas the successful ones had only one
factor mean higher than those of the unsuccessful group. This may suggest that if the sickness
is caused by several factors the turnaround is more difficult. As for the strategies, the success is
apparently a function of slowly building up the capabilities of the organisation and then moving
forward with aggressive expansion and growth strategies. This is evident from the fact that the
successful group has higher scores on many strategy factors, especially the ones contributing
to organisation development such as employee engagement, cost management, focus on core
business and lean management. In order to test these inferences further, we conducted
independent sample t-test, whose results are given in Table 7 and Table 8.
Table 7: Causal factors – Test of difference between successful and unsuccessful cases
Causal factors Mean Standard
deviation
t Signi-
ficance
Factor-1 (C1): Growth unsupported by resources and
demand
1.5163
1.2495
.35854
.16385
5.177 .000
Factor-2 (C2): Recessionary conditions
1.0500
1.2625
.15934
.41073
-2.949 .000
Factor-3 (C3): Operational inefficiency 1.3448 .32868 -1.463 013
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
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1.4297 .24976
Factor-4 (C4): Inadequate utilisation of resources
1.2941
1.3864
.27147
.32626
-1.437 .086
Factor-5 (C5): Low proactiveness vis-à-vis’ market
and technology
1.4338
1.4446
.41400
.50838
-.109 .237
Factor-6 (C6): Poor adaptability 1.2945
1.6291
.26566
.39774
-4.488 .001
Table 8: Strategy factors – Test of difference between successful and unsuccessful
cases
Strategy factors Mean Standard
deviation
t Signi-
ficance
Factor-1 (S1): Employee engagement 1.2316
1.1735
0.40745
0.24117
0.902 0.003
Factor-2 (S2): Aggressive promotion of old products
in new markets
1.4375
1.4467
0.39852
0.55989
-0.086 0.004
Factor-3 (S3): Cost management strategies 1.5931
1.4521
0.43379
0.49939
1.403 0.108
Factor-4 (S4): Investments in new markets and R&D 1.4208
1.6268
0.30388
0.34519
-2.954 0.552
Factor-5 (S5): Focus on core business
1.3480
1.2316
0.27771
0.36333
1.643 0.250
Factor-6 (S6): Changes in product mix and pricing 1.5368
1.6628
0.60666
0.54633
-1.058 0.640
Factor-7 (S7): Lean management 1.2418
1.0827
0.22729
0.08317
5.125 0.000
Factor-8 (S8): Image building 1.0588
1.0017
0.34043
0.01009
1.382 0.047
The t-tests also support the inferences made above from the visual examination of the means.
Among the causal factors, all the means were significantly different for the two groups except
for causal factor 5 (low proactiveness vis-à-vis’ market and technology). It is only for the first
factor (growth unsupported by resources and demand) that the t-value is positive, indicating that
this is the major cause for sickness in the successful group.
Hence, the turnaround is easier for them, as it is only a matter of providing sufficient resources
and re-orienting the business for the appropriate market, supported by lean management and
employee engagement. This is exactly what we find in Table 8, where the successful group has
got significantly higher scores on employee engagement, cost management, lean management
and image building. The factor were there are no significant differences are focus on core
business, changes in product mix and pricing, and investments in new markets and R&D, which
implies that these strategies are equally used by both the groups. While these are functional
strategies the problem with the unsuccessful group may be that they failed to build the
organisation through the strategies mentioned above as characteristic of the successful group.
Besides, the unsuccessful group had also tried to aggressively promote old products in new
markets (Factor 2) where they have a significantly higher score.
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Conclusion
As we have mentioned in the discussion of findings above, most of our hypotheses got
supported by the findings of the present study. There were mainly five hypotheses with which
we started. These related to the more frequent uses of the following strategies by the successful
cases: employee engagement, cost management, customer-refocusing, lean management,
operational efficiency, corporate restructuring and image building. Five out of these six
strategies were found to be more frequently used by the successful cases. The only one
strategy which was more or less equally used by both the groups was customer-refocusing,
which was originally stated as ‘refocusing on core business’. However, since ‘core business’ is
only one aspect of customer-refocusing, we are not able to say anything conclusively about this
hypothesis.
While exploring support for our hypotheses through various statistical analyses, some related
results of the analysis brought out a few insights which may be formulated as theoretical
propositions that could support further research in the field. Three of them are briefly explained
below:
• The analysis of causes showed that the unsuccessful group was affected by more
problems than the successful ones. In fact, there was only one cause (growth
unsupported by resources and market demand) that was more frequently mentioned by
the successful group. This finding leads to the rather obvious inference that if the causes
of sickness are fewer, the chances of recovery are greater.
This is perfectly in line with what happens in case of physical illnesses. A person with
many health problems may develop unanticipated negative reactions when treated for a
specific ailment. Hence for such a person it is very difficult to find a treatment that
addresses all ailments. Similar is the case with organisations having problems in several
functional areas, which implies that the turnaround of such organisations are much more
difficult than the ones fewer problems. A practical implication of this is that managers
should detect problems in their early stage, when the malady is affecting only limited
number of functions. In this context, managers have to be sensitive to early warning
signals and take proactive actions immediately.
• Another inference from the analysis of causes was that the high-scoring causes (above
1.5 out of 3) were all internal causes. This somewhat strange because in the original
listing of causes of sickness, 15 out of 41 (about 36%) were external. The mentioning of
a large number of external causes may be symptomatic of another well researched
individual-level psychological construct - Locus of Control, as proposed by Rotter (1966)
– operating at the organisational level. It may be inferred that the Organisational Locus
of Control operates in such a way that many of their failures are attributed to external
causes. Since none of them could get the average score required for treating them as a
commonly observed cause of sickness, it may be legitimately inferred that the primary
reason why organisations becomes sick is the inefficiency in their internal management.
This was also seen in a few earlier studies done by one of the authors where he found
an absence of any relationship between environmental conditions and strategy-making
(Manimala 1992, 2005, and 2010). While the absence of correlations between
environment and strategy is counter-intuitive it probably suggests that the primary
reason why an individual or organisational actor behaves in a particular fashion is the
nature of the entity rather than the environmental influences. One could take a
Darwinian perspective on this, and state that the nature of the acting entity provokes the
actions which if compatible with the emerging environment gets selected, otherwise
rejected. Hence, the role of the environment is selection or rejection rather than
causation.
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• In the analysis of strategies preferred by successful and unsuccessful groups, it was
observed that the former employed many more strategies than the latter. In fact, the only
strategy that was significantly more frequently used by unsuccessful cases (“aggressive
promotion of old products in new markets”) was apparently as dysfunctional one. The
implication here is probably that organisational sicknesses can be cured only by a multi-
pronged remedial action using several functional strategies. It may also be inferred that
when several strategies are adopted they would be done in a sequence beginning with
the basic actions of arresting sickness and building up the core strengths, which may
provide support for the stage-theory of turnaround proposed by (Manimala 1991). It is
specially to be noted that employee engagement emerged as one of the most significant
differentiators between successful and unsuccessful cases, which was described as a
continuous process of institutionalization in Manimala (1991) and was observed as an
essential ingredient for stabilizing the impact of a turnaround success.
10th International Entrepreneurship Forum, Tamkeen, Bahrain, 9-11 January 2011
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