Description
In the current climate, more and more companies are faced with multiple failures, which are the basic problem that crisis management must resolve.
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 470
THE MANAGEMENT OF ECONOMIC DECLINE
AND THE DIMENSION OF ORGANIZATIONAL CHANGE
Mihaela Onofrei
1?
and Dan Lupu
2
1) 2)
Alexandru Ioan Cuza University, Iasi, Romania
Abstract
In the current climate, more and more companies are faced with multiple failures, which are
the basic problem that crisis management must resolve. In situations of economic decline,
the need for change at the organizational level is imperative to facilitate the recovery of a
company. This study aims to identify methods of corporate restructuring, which would be
to adopt could be adopted by Romanian companies in a time of crisis, to ensure business
sustainability. The research methodology has a theoretical and an empirical component and
it is based on statistical methods that facilitated a quantitative approach, using a sample of
82 companies listed on Bucharest Stock Exchange, all of them being declared insolvent
between 2000 and 2010. The research results have contributed to the classification of
companies, both by generating causes of insolvency and by restructuring methods.
Keywords: organizational change, restructuring, businesses sustainability, insolvency
JEL classification G33, G34, M10, M14
Introduction
The last decade has witnessed a huge increase in corporate restructuring processes around
the world. The deregulation of the markets, technological shocks and intense competition
for the supply of capital urged the firms to make major changes both in their organizational
structure and their funding strategies in order to ensure business sustainability.
In short, sustainability takes into account the extent to which there is a balance between
needs and resources that is able to support business. On a larger scale, sustainability
requires a holistic approach to business, focussing on three dimensions: economic,
environmental and social. Basically, the company is forced to find a balance between
economic growth and environmental protection, requiring a systemic vision and integrating
it in its own development.
During a financial crisis, business sustainability is facing several threats. First, the funding
resources become more expensive as the creditor risk increases. Second, the excess supply
of goods and services and a reduced demand makes the revival of the company by
?
Corresponding author, Mihaela Onofrei - [email protected]
Sustainability and Organizational Change AE
Vol. XIV • No. 32 • June 2012 471
increasing prices more difficult. On the contrary, for instance on the real estate market,
experience has shown that massive cuts for prices are viable for avoiding bankruptcy, even
if it is rather a survival solution that delivers cash for entrepreneurs with significant debts to
banks. Third, companies must clearly define exit strategies and become aware of the
possibility that after recession, sectors that were profitable could no longer be as such. In
such conditions, firms must change their organizational culture, adapting their business to
new market requirements and implementing the restructuring process.
This study aims to establish the relationship between the current status of the firms and the
generating causes of insolvency, on one hand, and the methods of corporate restructuring
on the other hand. The difficult situation of the firm is usually determined by its failure at
the organizational level. However, recovery of the firm can be achieved if problems are
correctly identified and remedied in time. Among the most important causes of insolvency
analysed, we are mentioning the following: poor management, excessive specialization and
inadequate financial structure.
The research methodology used to achieve the research objectives was based on literature
review, completed with a content analysis of how organizational change takes place inside
the firms affected by economic crisis. At the same time, we have conducted a statistical
analysis of Romanian companies listed on BSE that were affected by crisis and how they
used organizational change in order to improve their financial situation.
The first step of our study was a review of the existent literature, studies and analyses in
order to identify some particular features of organizational change specific to companies in
crisis. The second step was the content analysis of these particular features. The last step
was eminently empirical, presenting the statistical analysis of organizational changes that
took place in the Romanian companies affected by crisis and the solutions used to
contracarate it.
1. Literature review
Managing a situation of economic decline is a moment of truth for an organization. It is a
true test for corporation to understand its business environment and also a reason to resist
on the market. White (1994) highlights this decisive character in overcoming a situation of
decline, his results indicating that only 6% to 12% of the companies which are insolvent
will eventually be able to return to the market. Porter mentions that "the reason why
companies succeed or not, is perhaps the central issue in corporate strategy" (Porter, 1991,
p. 95). Why do some companies successfully respond to threats, problems, challenges of
the market, while others are doomed to failure and fail?
Whetten (1980) draws attention to this question and highlights the importance of studying
the management of the economic decline situation. In particular, Whetten criticized the
general theories focused on organizational management, organizational development
situations, while organizational decline was poorly understood. These criticisms have
motivated a growing number of researchers to study the concepts of corporate decline.
Generally, the corporate restructuring involves any necessary actions at strategic, financial,
and/or operational level to reinverse an anticipated or existing declining situation. These
activities may have short term objectives (increased productivity), or may be of long-term
strategic nature (Lai and Sudarsanam, 1997).
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 472
The corporate restructuring is a complex and planned process of change at strategic and
operational levels to align an organization in terms of efficiency and environmental
effectiveness. In this sense, corporate restructuring activities are implemented within an
organization in difficulty and threatened by the market competitors. The restructuring
processes are the natural reaction response to stop the corporate decline and to ensure
sustainable development (Francis and Pettit, 2004; Harker, 1998, Morrow, 2004;
Sudarsanam and Lai, 2001; BarkerIII and Mone, 1998; Bibeault, 1982, Gilson, 1990, 2007,
Shleifer and Vishny , 2002).
Some specialists (Bibeault, 1982, Jas and Skelcher, 2005, Probst and Raisch, 2005; van
Witteloostuijn, 1998, Whetten, 1980, 1988, Balcaen and Ooghe, 2004, 2009) consider that
the difficulties for companies come generally from failures at the organizational level
which, if correctly identified, can be remedied in time to facilitate recovery. Among the
most important causes, we can mention the following:
? Mismanagement, the result of incompetence and decision errors;
? Excessive specialization (some companies that only focus on one goal or activity
considered critical to success);
? Form of ownership (meaning that the whole or partial strategy of a state firm will be
greater influenced by political factors than by market conditions);
? Inadequate financial structure (which may constrain the firm to seek more expensive
sources of financing by assuming onerous loan conditions, with obvious difficulties for
later reimbursement. However, in the absence of funding sources predictability, the
business becomes unsustainable, facing the risk of insolvency and thus, making bankruptcy
possible).
The restructuring process relies on several methods, among which we could mention the
following (Bibeault, 1982; Balcaen and Ooghe, 2004):
? Focus on core business (refocusing on the most profitable activities and products the
company knows best and have real competitive advantages);
? Increase revenue (assumes increasing sales volume in the context of enterprise
activities and existing products through increasing productivity, full utilization of
production capacity, reducing prices to stimulate sales, advertising and marketing
campaignes);
? Reduce costs (monitoring and reducing administrative costs, research and
development, marketing and personnel, a better management of stocks of raw materials and
end products, improving supply activity, improving the recovery of claims, better cost
control systems);
? Sale of assets (waiving of certain assets and redistribution of resources, which could
prevent the risk of maintaining obsolete products or activities that are too traditional);
? Mixed (a combination of the above methods).
Beyond the above causes, restructuring requires the activation of change mechanisms that
are in fact a combination of elements that determine change and also that hinder it. The first
category includes changing technology, product obsolescence, improved working
Sustainability and Organizational Change AE
Vol. XIV • No. 32 • June 2012 473
conditions, changing the structure of the workforce. These elements exert pressure for
change. In turn, the elements that hinder change and strengthen the organization's resistance
to change are: outdated attitudes, fear of new, fear of failure, low level of professionalism
and mental blockages.
However, reasons related to business strategy require the reduction or even cessation of
individual operations in a particular location and their relocation to another geographical
perimeter. Thus, there is a real problem of internal corporate legitimacy because the
restructuring decisions are criticized by politicians and lose the support of employees,
especially if unpopular measures are taken such as layoffs, in an effort to reduce production
costs. To the extent that the analysis and calculations underlying the rationale of
restructuring decisions will break away from the local branch profitability standards, this
will result in undermining the legitimacy of performance-based principles. The relocation
of jobs makes decisions no longer the exclusive attribute of managers but a prerogative of
different groups existing inside the corporation. Thus, a deficit of legitimacy for managers
is created when replacing centralized decision-making process with a negotiation one. But
such an approach does not undermine the authority of managers, instead it makes them
more responsible in taking the most appropriate measures to ensure recovery and avoid
bankruptcy.
2. Research methodology and assumptions
The study aims to establish the relationships between the situation of the firms and the
causes of insolvency, on one hand, and the methods of restructuring the company to ensure
business sustainability, on the other hand. We have based our study on a sample of 82
companies listed on Bucharest Stock Exchange, which went into insolvency between 2000
and 2010. The data on these companies were collected primarily from Bucharest Stock
Exchange, Ministry of Finance and National Trade Register Office websites.
Our research methodology was focused on the development and testing two working
hypotheses:
? a statistical link exists between a company's insolvency situation and its determining
causes;
? a statistical link exists between a company's insolvency situation and the corporate
restructuring methods used.
For each of the 82 insolvent companies, presented in Table no. 1, the following elements
were analyzed: the company’s situation, the generating causes of insolvency and the
restructuring methods. Each of these elements was divided in several situations, scored
from 1-5, as follows:
? company’s status: 1 dissolution, 2 still in insolvency; 3 viable;
? insolvency causes: 1 concentration niche, 2 high costs, 3 deficient management, 4
property, 5 inadequate financial structure;
? restructuring methods: 1 focus on core business, 2 revenue growth, 3 cost reduction,
4 assets sale, 5 mixed.
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 474
Table no. 1: Companies listed on BSE, which became insolvent between 2000-2010
Year Company Year Company Year Company Year Company
2000 0 2006 RGNA 2009 EDIL 2010 AIUR
2001 0 2006 TRAX 2009 FAZA 2010 ASCB
2002 COSP 2006 TRXW 2009 FEPA 2010 AVIM
2002 VISE 2006 UNPR 2009 INVF 2010 AZRT
2003 AGAG 2007 ALUT 2009 ISTR 2010 BACO
2003 AGMR 2007 HATH 2009 MEMI 2010 BEGA
2003 AGNL 2007 MEMA 2009 METU 2010 BLAN
2003 AGRZ 2007 MTSX 2009 ALF 2010 CRMC
2003 AOEN 2007 SCPT 2009 MANA 2010 CEIB
2003 AONT 2007 VIUX 2009 NEGY 2010 CEBI
2003 COMM 2008 LIBB 2009 PTDB 2010 COMU
2003 FABR 2008 MRPL 2009 PEJI 2010 COGL
2003 MAID 2008 NUCA 2009 STR 2010 COAR
2003 SELU 2009 AGNU 2009 TMDF 2010 COEX
2003 SEVD 2009 ARDZ 2009 TRBZ 2010 EEOB
2003 RAF 2009 ARIY 2009 VCDE 2010 FELA
2004 SIBN 2009 PAND 2009 VINI 2010 FLA
2005 ALIS 2009 CMMR 2010 NUDA 2010 FRUC
2005 FRUD 2009 CONY 2010 NUIA 2010 GETR
2005 SCTM 2009 DACC 2010 ADCA 2010 HIRY
2006 FRAR 2009 DOFA 2010 PERI 2010 IASO
Source: Bucharest Stock Exchange, 2012; Ministry of Public Finances, 2012; The National
Trade Register Office, 2010
The research method we have used was Correspondences of Factorial Analysis (CFA).
CFA is a multidimensional statistical analysis method that aims to describe the links
(associations) between two nonnumeric (categorial) variables. Working with a large data
table, CFA shows a factorial axes system that summarizes the initial information in a
graphical form that could easily be interpreted. The factorial axes are "classified'' in
descending order, according to their importance in explaining the total variance of the cloud
of points.
Applying the CFA method, the initial information contained in a contingency table or a
disjonctif one is summarized in a factorial axes system. Points of the recorded variables for
different categories are projected on these axes. The factor analysis aims to find
correspondences between them uncorrelated orthogonal axes on which to design the point-
line cloud. For this, we calculate the proper values of inertia matrix and the coordinates
associated with each value (?k).
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Vol. XIV • No. 32 • June 2012 475
Eigenvalues sum called total inertia is equal to:
?
?
?
K
k
n
k
1
2
?
? (1)
The calculation of the coordinates of points on the axes line is done using factorial
coordinates of eigenvectors associated with eigenvalues of the matrix of inertia. To assess
the distance between two points, distance ? is used.
Table of line profiles (Table no.. 2) has relative frequencies, due in part to fj/i calculated as
the ratio of partial absolute frequencies (nij) and the marginal absolute frequency (ni.) for
each value of the variable X: fj/i = n ij / ni.
Table no. 2 Table of line profiles
Variable Y Variable
X
Y2 … Yj … Yp
X1 n11/n1. n12/n1. … nij/n1. … n1p/n1.
X2 n21/n2. n22/n2. … n2j/n2. … n2p/n2.
… … … … … … …
Xi ni1/ni. ni2/ni. … nij/ni. … nip/ni.
… … … … … … …
Xm nm1/nm. nm2/nm. … nmj/nm. … nmp/nm.
A profile-line shows, for each value Xi, the percentage of statistical values yi of the variable Y.
Testing the hypothesis of independence between variables formulation involves the
following assumptions:
? null hypothesis, H0, which admits that there is independence between the variables
considered (no links between the variables);
? alternative hypothesis, H1, which admits that the variables are dependent (there are
links between them).
To test these hypotheses, statistical calculation
2
? is used, according to the equation:
??
?
?
i j
ij
ij ij
n
n n
'
2 '
2
) (
? (2)
where: nij are observed effectives; n'ij are theoretical effectives.
A calculated value of statistics
2
? larger than a read critical value in the table
2
? for risk
taking and v=(m-1)(p-1) degrees of freedom, leads to rejection of the hypothesis H0. We
can consider, in this case that the variables X and Y are linked (associated). The description
of these links is done by interpreting the results of CFA.
Cloud line profiles. Each profile-line consists of a series of values fj/i,
f1/i„f2/i„ ...,fp/i),
where fj/i = nij/ni. are relative frequencies of variable Y, conditional on the X = Xi. A
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 476
profile-line can be represented as a point, xij, in the space of variable Y values. The values
xij have a ,,mass’’ equal to the marginal rate fi. that shows the proportion of statistical units
that record the value xi of the variable X.
The point lines, Xij, form a cloud of m points located in a sub-space (p-1) dimensions, as
?
?
p
j
j f
1
. = 1.
The assessment of association between two-line profiles is obtained by calculating the
distance between the points represented by them. To calculate the distance between two
points, xij and x
i 'j,
turns the CFA, the coordinates of points xij by the relation:
j f
f
x
i j
ij
.
/
'
? (3)
Considering the transformation of coordinates, the distance
2
? becomes Euclidean
distance in Rp and it is calculated as follows:
?
?
? ?
p
j
j i ij
i fj i fj
j f
x x d
1
2 '
'
' 2
) ' / / (
.
1
) , ( (4)
The center of gravity of the cloud line profiles (Gi), which defines the average profile is
given by:
'
.
ij
i
i
x fi G
?
? (5)
3. The research results
The research results were obtained by testing the two hypotheses set out above, as follows:
The testing of first hypothesis: a statistical link exists between a company's insolvency
situation and its determining causes.
The values from Table no. 3 show the distribution of insolvency causes of the companies
listed on the BSE, firms that became insolvent between 2000 and 2010. Of the total number
of firms that were insolvent and were winding up, 6.8% of them were insolvent because of
their focus on a niche, 17.2% because of high costs, 37.9% because of poor management,
24.1% because of ownership and 13.7% because of financial structure. These values form
the profile of insolvent companies that ultimately have been dissolved (profile-line).
From the total number of insolvent firms that went bankrupt, 19.2% of them became
insolvent because of their focus on a niche, 15.3% because of high costs, 38.4% because of
management, 15.3% because of ownership and 11.5% because of financial structure. The
mentioned values form the profile of insolvent companies that are still involved in judicial
proceedings (profile-line).
Sustainability and Organizational Change AE
Vol. XIV • No. 32 • June 2012 477
From the total number of insolvent firms that managed to overcome bankruptcy and remain
viable, 14.8% of them became insolvent because of their focus on a niche, 22.2% because
of high costs, 14.8% because of management, 11.1% because of ownership and 37.0%
because of financial structure. The values form the profile of insolvent companies that
managed to surpass the legal proceedings and are economically viable (profile-line).
Table no. 3: The distribution of companies that became insolvent based
on determining causes
Cause of insolvency company
Nice
concentration
High costs Management Property Financial
structure
Active
Margin
dissolution 2 0.068 5 0.172 11 0.379 7 0.241 4 0.137 29
bankruptcy 5 0.192 4 0.153 10 0.384 4 0.153 3 0.115 26
viable 4 0.148 6 0.222 4 0.148 3 0.111 10 0.370 27
Active Margin 11 15 25 14 17 82
Source: our own calculations using SPSS 17.0
Testing the hypothesis of independence between variables involves the formulation of the
following assumptions:
? null hypothesis, H0: hypothesis of independence (no statistical links between the
variables);
? alternative hypothesis, H1: dependence hypothesis (statistical links exists between
the variables).
In Table no. 4, the calculated value of test statistic is (
2
? =16.997) > (
2
? 0.05:8 = 8,85) or
(Sig.=0,020) < 0,05, which shows that the hypothesis H0 is rejected. It can be guaranteed
with a 95% probability that there are links between the considered variables. The
description of these links is done by interpreting the results for the AFC-line profiles.
The largest eigenvalue shows the variance of the first factorial axis and the total sum
shows the total inertia of cloud of points. The largest eigenvalue is ?1=0.219. Sum of
eigenvalues is 0.243. The first factorial axis explains 90.4% of the total variance (inertia).
Table no. 4: The calculated value of statistics
2
? and explained inertia on each
factorial axis used to establish the link cause of insolvency – situation of the firm
Summary
Proportion of Inertia
Confidence Singular
Value
Dimension
Singular
Value
Inertia
Chi
Square
Sig.
Accounted
for
Cumulative
Standard
Deviation
Correlation
1 .468 .219 .904 .904 .092 .019
2 .153 .023 .096 1.000 .111
Total .243 16.997 .020
a
1.000 1.000
a. 8 degrees of freedom
Source: our own calculations using SPSS 17.0
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 478
The graphic representation of the profile line and column onto the factorial axes system
shows a synthetic image of the original data table.
The diagram shown in Figure no. 1 summarizes, in a simple graphic, the output values in
Summary. It is noted that the largest distance between the points represented by profiles-
column is recorded between niche concentration (0.875) and financial structure (-0.402)
(Table no. 5). The greatest distance between-line profiles is recorded between viable firms
(-0.975) and dissolved companies (0.655).
The position of points represented by column profiles (cause of insolvency) onto the first
two factorial axes system shows that the largest differences in insolvency causes is
observed between niche focus areas and financial structure: the firms for which a particular
cause of insolvency applies are not affected by the other ones and vice versa.
The position of points represented by line profiles (situation of the firm) onto the first two
factorial axes system shows that the largest differences between the situation of the firms in
terms of capacity to surpass the judicial proceedings shall be recorded between viable firms
(-0.975) and dissolved companies (0.655). These situations are characterized by the
different capacity of the companies to surpass the judicial procedure phase.
Table no. 5: The results on the column points (cause of insolvency)
Overview Column Points
a
Contribution
Score in
Dimension
Of Point to Inertia
of Dimension
Of Dimension
to Inertia of Point
Cause of
insolvency
Mass 1 2 Inertia 1 2 1 2 Total
Niche focus .129 -.561 .875 .034 .086 .643 .557 .443 1.000
High costs .186 .042 -.134 .001 .001 .022 .234 .766 1.000
Management .300 .382 .138 .021 .094 .037 .959 .041 1.000
property .157 1.062 -.235 .084 .378 .057 .984 .016 1.000
Financial
structure
.229 -.951 -.402 .102 .441 .242 .945 .055 1.000
Total Assets 1.000 .243 1.000 1.000
a. Symmetrical normalization
Source: our own calculations using SPSS 17.0
The conclusions can be drawn in accordance with the different hypostases that entreprises,
which facing difficulties are in, as follows:
? for companies that have gone through the court proceedings and became viable after
exit from bankruptcy, insolvency was due to an inadequate financial structure;
? for companies in dissolution, the main cause for insolvency is the form of ownership,
and the second one is the high costs;
? for companies that are still in insolvency proceedings, the cause for insolvency is
poor management.
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Vol. XIV • No. 32 • June 2012 479
Figure no. 1: The representation of categories for statistical variables
onto the first two factorial axes for the link cause of insolvency – situation of the firm
Source: our own calculations using SPSS 17.0
The testing of the second assumption: a statistical link exists between a company's
insolvency situation and the corporate restructuring methods used.
The values in table no. 6 show the distribution by methods of restructuring for companies
that became insolvent between 2000 and 2010 according to the BSE. From the total
number of firms that that were insolvent and were winding up, 3.4% of them were used to
focus on business core, 17.2% on revenue growth, 13.8% on mixed methods, 17.2% on cost
reduction and 48.3% on sale of assets. These values form the profile of the recovery
methods used by companies during the insolvency proceedings; these companies ultimately
being dissolved (profile-line).
From the total number of insolvent firms that went bankrupt, 16% of them used as
restructuring method the focus on business core, 12% the revenue growth, 12% the mixed
methods, 44% the cost reduction and 16% the sale of assets. These values form the profile
of the recovery methods used by insolvent companies that are still involved in judicial
proceedings (profile-line).
From the total number of insolvent firms that managed to overcome bankruptcy and remain
viable, 28.6% of them used as restructuring method the focus on business core, 14.3% the
revenue growth, 28.5% the mixed methods, 17.9% the cost reduction and 10.7% the sale of
assets. These values form the profile of restructuring methods used by insolvent companies
that managed to surpass the legal proceedings phase (profile-line).
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 480
Table no. 6: The distribution of insolvent companies due to restructuring methods
Correspondence Table
Restructuring methods
Company Focus on core
business
Revenue
growth
Mixed Cost reduction Assets sale
Active
Margin
Dissolution 1 0.034 5 0.172 4 0.138 5 0.172 14 0.483 29
Bankruptcy 4 0.16 3 0.12 3 0.12 11 0.44 4 0.16 25
Viable 8 0.286 4 0.143 8 0.285 5 0.179 3 0.107 28
Active Margin 13 12 15 21 21 82
Source: our own calculations using SPSS 17.0
Testing the hypothesis of independence between variables involves the following
assumptions:
? null hypothesis, H0: hypothesis of independence (no links between the statistical
variables);
? alternative hypothesis, H1: dependence hypothesis (links exist between the statistical
variables).
In Tables no. 7 and 8, the calculated value of test statistic is (
2
? =22.997) > (
2
? 0.05:8 =
8,85) or (Sig.=0,004) < 0,05, which shows that the hypothesis H0 is rejected. It can be
guaranteed with a 95% probability that there are links between the considered variables.
The description of these links is done by interpreting the results for the AFC line profiles.
The largest eigenvalue shows the variance of the first factorial axis and the total sum
shows the total inertia of the cloud of points. Also, the largest eigenvalue is ?1=0.287, sum
of eigenvalues is 0.322. The first factorial axis explains 89.1% of the total variance
(inertia).
Table no. 7: The calculated statistics
2
? and explained inertia on each factorial axis
for the link situation of the company - restructuring methods
Summary
Proportion of Inertia
Confidence Singular
Value
Dimension
Singular
Value
Inertia
Chi
Square
Sig.
Accounted
for
Cumulative
Standard
Deviation
Correlation
1 .536 .287 .891 .891 .087 .243
2 .187 .035 .109 1.000 .124
Total .322 22.539 .004
a
1.000 1.000
a. 8 degrees of freedom
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Vol. XIV • No. 32 • June 2012 481
Table no. 8: The results of column points (methods of restructuring)
Overview Column Points
a
Contribution
Score in
Dimension
Of Point to Inertia
of Dimension
Of Dimension to
Inertia of Point
Restructuring
methods
Mass 1 2 Inertia 1 2 1 2 Total
Focus on core
business
.157 -.824 .211 .058 .199 .037 .978 .022 1.000
Revenue growth .143 .433 -.059 .014 .050 .003 .994 .006 1.000
Mixed .129 -1.14 .517 .097 .315 .184 .933 .067 1.000
Cost reduction .271 -.168 -.66 .026 .014 .636 .155 .845 1.000
Assets sale .300 .868 .295 .126 .422 .140 .961 .039 1.000
Active Total 1.000 .322 1.000 1.000
a. Symmetrical normalization
Source: our own calculations using SPSS 17.0
The graphic representation of the profile, line and column, onto factorial axes system shows
a synthetic image of the original data table.
The diagram shown in Figure no. 2 summarizes, in a simple graphic, the output values in
Summary. It is noted that the largest distance exists between the points represented by
column profiles recorded between mixed methods (0.517) and cost reduction (-0.662). The
greatest distance between line profiles is recorded between viable firms (-0.779) and
dissolved companies (0.945). The position of points represented by column profiles (the
restructuring methods) onto the first two factorial axes system shows that the largest
differences in the results of restructuring methods is observed between mixed methods
(0.517) and cost reduction (-0.662). The analysis shows that a particular method appropriate
for a specific company could bring unsatisfactory results for another one.
Figure no. 2: The representation of statistical variables categories onto the first two
factorial axes for the relationship situation of the firm - restructuring methods
Source: our own calculations using SPSS 17.0
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 482
The position of points represented by line profiles (situation of the firms) onto the first two
factorial axes shows that the largest differences between the situation of the firms in terms
of capacity to surpass judicial proceedings, shall be recorded in viable firms (-0.779) and
dissolved companies (0.945). These situations are characterized by the adoption of different
restructuring methods.
Finally, the companies that have gone through judicial procedure phase and they are still
viable, used as restructuring method the focus on business core, respective the mixed
method. In turn, the dissolving companies have used the sale of assets method, while firms
involved in insolvency proceedings have resorted to reducing costs method.
Conclusions
The difficult situation in which an enterprise could find itself constitutes a warning for
managers and it requires the adoption and implementation of firm and effective measures
for a quick revival of business activity.
The experience of the Romanian companies that have managed the transition from crisis
status to performing enterprise shows that all the measures taken have ensured basic
requirements such as ensuring a good competitive position, a good financial balance and
adopting and implementing appropriate strategies to enable the recovery and enhancement
to a higher level of business resources.
Two hypotheses were tested using the method of Correspondence Factorial Analysis on a
sample of 82 firms listed on the Bucharest Stock Exchange, companies that became
insolvent between 2000 and 2010.
The first assumption was that a statistical link exists between the insolvency situation of a
company and its determining causes. In agreement with the hypostases that enterprises
facing difficulties could be in, the following conclusions can be drawn:
? for companies that have gone through judicial procedure phase and they are still
viable, the cause of their insolvency is the inadequate financial structure;
? for companies in dissolution, the main cause for insolvency is the form of ownership,
and the second one is the high cost;
? for companies that are still involved in insolvency proceedings, the cause for
insolvency is poor management.
The second hypothesis formulated was that between the situation of an insolvent company
and the methods of corporate restructuring there is a statistical link. The analysis showed
that there is no general valid method of restructuring. Such a method adapts to the
specificity of the company. The focus on business core has been used by companies that
have gone through the judicial procedure phase; the dissolving firms used the sale of assets
method and firms that are still involved in insolvency proceedings reduced the costs.
The findings of our research allow some recommendations regarding methods of
organizational change that companies in crisis should follow. The transition from a difficult
situation to a viable and desirable performing business requires the development and the
Sustainability and Organizational Change AE
Vol. XIV • No. 32 • June 2012 483
implementation of an appropriate strategy that through its objectives and policies will
enable the change process.
Such a strategy should potentiate the strengths of the enterprise, turning them into
competitive advantages and, at the same time, exploiting the opportunities offered by the
environment to eliminate weaknesses and thus, to avoid their transformation into threats. At
the same time, the revitalization of business activity requires, besides the existence of a
managerial action strategy, an active involvement of employees to boost the process of
organizational change.
References
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Bibeault, D. B., 1982. Corporate turnaround: how managers turn losers into winners. New
York: McGraw-Hill.
Bucharest Stock Exchange, 2012. Bucharest Stock Exchange. [online] Available at:
<http://www.bvb.ro/> [Accessed 4 January 2012].
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Executive, 19(4), pp. 39-50.
Chattopadhyay, P., Glick, W. H. and Huber, G. P., 2001. Organizational Actions in
Response to Threats and Opportunities. Academy of Management Journal, 44(5), pp.
937-955.
Dinu, V., 2010. Commercial activity and the sustainable development. Amfiteatru
Economic, XI(27), pp. 5-7
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Gujarati, D., 2004. Basic Econometrics. New York: Mc Graw Hill.
Lei, D. and Slocum, Jr.J.W., 2005. Strategic and organizational requirements for
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<http://www.mfinante.ro/acasa.html?method=inceput&pagina=acasa> [Accessed 4
January 2012].
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XI(Special No. 3), pp. 751-762.
Olaru, M., Dinu, V. et al., 2010. Responsible Commercial Activity of SMEs and Specific
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Service Organizations. Amfiteatru Economic, XI(26), pp. 323-329.
Porter, M. E., 1991. Toward a Dynamic Theory of Strategy. Strategic Management
Journal, 12 (Winter Special Issue), pp. 95-117.
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The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 484
Probst, G. and Raisch, S., 2005. Organizational Crisis: The Logic of Failure. Academy of
Management Executive, 19(1), pp. 90-105.
Rasheed, H. S., 2005. Turnaround Strategies for Declining Small Business: The Effects of
Performance and Resources. Journal of Developmental Entrepreneurship, 10(3), pp.
239-252.
Slatter, S. and Lovett, D., 1999. Corporate Turnaround: Managing Companies in Distress.
London: Penguin Books Ltd.
Sudarsanam, S. and Lai, J., 2001. Corporate Financial Distress and Turnaround Strategies:
An Empirical Analysis. British Journal of Management, 12(3), pp. 183-199.
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doc_338479189.pdf
In the current climate, more and more companies are faced with multiple failures, which are the basic problem that crisis management must resolve.
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 470
THE MANAGEMENT OF ECONOMIC DECLINE
AND THE DIMENSION OF ORGANIZATIONAL CHANGE
Mihaela Onofrei
1?
and Dan Lupu
2
1) 2)
Alexandru Ioan Cuza University, Iasi, Romania
Abstract
In the current climate, more and more companies are faced with multiple failures, which are
the basic problem that crisis management must resolve. In situations of economic decline,
the need for change at the organizational level is imperative to facilitate the recovery of a
company. This study aims to identify methods of corporate restructuring, which would be
to adopt could be adopted by Romanian companies in a time of crisis, to ensure business
sustainability. The research methodology has a theoretical and an empirical component and
it is based on statistical methods that facilitated a quantitative approach, using a sample of
82 companies listed on Bucharest Stock Exchange, all of them being declared insolvent
between 2000 and 2010. The research results have contributed to the classification of
companies, both by generating causes of insolvency and by restructuring methods.
Keywords: organizational change, restructuring, businesses sustainability, insolvency
JEL classification G33, G34, M10, M14
Introduction
The last decade has witnessed a huge increase in corporate restructuring processes around
the world. The deregulation of the markets, technological shocks and intense competition
for the supply of capital urged the firms to make major changes both in their organizational
structure and their funding strategies in order to ensure business sustainability.
In short, sustainability takes into account the extent to which there is a balance between
needs and resources that is able to support business. On a larger scale, sustainability
requires a holistic approach to business, focussing on three dimensions: economic,
environmental and social. Basically, the company is forced to find a balance between
economic growth and environmental protection, requiring a systemic vision and integrating
it in its own development.
During a financial crisis, business sustainability is facing several threats. First, the funding
resources become more expensive as the creditor risk increases. Second, the excess supply
of goods and services and a reduced demand makes the revival of the company by
?
Corresponding author, Mihaela Onofrei - [email protected]
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Vol. XIV • No. 32 • June 2012 471
increasing prices more difficult. On the contrary, for instance on the real estate market,
experience has shown that massive cuts for prices are viable for avoiding bankruptcy, even
if it is rather a survival solution that delivers cash for entrepreneurs with significant debts to
banks. Third, companies must clearly define exit strategies and become aware of the
possibility that after recession, sectors that were profitable could no longer be as such. In
such conditions, firms must change their organizational culture, adapting their business to
new market requirements and implementing the restructuring process.
This study aims to establish the relationship between the current status of the firms and the
generating causes of insolvency, on one hand, and the methods of corporate restructuring
on the other hand. The difficult situation of the firm is usually determined by its failure at
the organizational level. However, recovery of the firm can be achieved if problems are
correctly identified and remedied in time. Among the most important causes of insolvency
analysed, we are mentioning the following: poor management, excessive specialization and
inadequate financial structure.
The research methodology used to achieve the research objectives was based on literature
review, completed with a content analysis of how organizational change takes place inside
the firms affected by economic crisis. At the same time, we have conducted a statistical
analysis of Romanian companies listed on BSE that were affected by crisis and how they
used organizational change in order to improve their financial situation.
The first step of our study was a review of the existent literature, studies and analyses in
order to identify some particular features of organizational change specific to companies in
crisis. The second step was the content analysis of these particular features. The last step
was eminently empirical, presenting the statistical analysis of organizational changes that
took place in the Romanian companies affected by crisis and the solutions used to
contracarate it.
1. Literature review
Managing a situation of economic decline is a moment of truth for an organization. It is a
true test for corporation to understand its business environment and also a reason to resist
on the market. White (1994) highlights this decisive character in overcoming a situation of
decline, his results indicating that only 6% to 12% of the companies which are insolvent
will eventually be able to return to the market. Porter mentions that "the reason why
companies succeed or not, is perhaps the central issue in corporate strategy" (Porter, 1991,
p. 95). Why do some companies successfully respond to threats, problems, challenges of
the market, while others are doomed to failure and fail?
Whetten (1980) draws attention to this question and highlights the importance of studying
the management of the economic decline situation. In particular, Whetten criticized the
general theories focused on organizational management, organizational development
situations, while organizational decline was poorly understood. These criticisms have
motivated a growing number of researchers to study the concepts of corporate decline.
Generally, the corporate restructuring involves any necessary actions at strategic, financial,
and/or operational level to reinverse an anticipated or existing declining situation. These
activities may have short term objectives (increased productivity), or may be of long-term
strategic nature (Lai and Sudarsanam, 1997).
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Amfiteatru Economic 472
The corporate restructuring is a complex and planned process of change at strategic and
operational levels to align an organization in terms of efficiency and environmental
effectiveness. In this sense, corporate restructuring activities are implemented within an
organization in difficulty and threatened by the market competitors. The restructuring
processes are the natural reaction response to stop the corporate decline and to ensure
sustainable development (Francis and Pettit, 2004; Harker, 1998, Morrow, 2004;
Sudarsanam and Lai, 2001; BarkerIII and Mone, 1998; Bibeault, 1982, Gilson, 1990, 2007,
Shleifer and Vishny , 2002).
Some specialists (Bibeault, 1982, Jas and Skelcher, 2005, Probst and Raisch, 2005; van
Witteloostuijn, 1998, Whetten, 1980, 1988, Balcaen and Ooghe, 2004, 2009) consider that
the difficulties for companies come generally from failures at the organizational level
which, if correctly identified, can be remedied in time to facilitate recovery. Among the
most important causes, we can mention the following:
? Mismanagement, the result of incompetence and decision errors;
? Excessive specialization (some companies that only focus on one goal or activity
considered critical to success);
? Form of ownership (meaning that the whole or partial strategy of a state firm will be
greater influenced by political factors than by market conditions);
? Inadequate financial structure (which may constrain the firm to seek more expensive
sources of financing by assuming onerous loan conditions, with obvious difficulties for
later reimbursement. However, in the absence of funding sources predictability, the
business becomes unsustainable, facing the risk of insolvency and thus, making bankruptcy
possible).
The restructuring process relies on several methods, among which we could mention the
following (Bibeault, 1982; Balcaen and Ooghe, 2004):
? Focus on core business (refocusing on the most profitable activities and products the
company knows best and have real competitive advantages);
? Increase revenue (assumes increasing sales volume in the context of enterprise
activities and existing products through increasing productivity, full utilization of
production capacity, reducing prices to stimulate sales, advertising and marketing
campaignes);
? Reduce costs (monitoring and reducing administrative costs, research and
development, marketing and personnel, a better management of stocks of raw materials and
end products, improving supply activity, improving the recovery of claims, better cost
control systems);
? Sale of assets (waiving of certain assets and redistribution of resources, which could
prevent the risk of maintaining obsolete products or activities that are too traditional);
? Mixed (a combination of the above methods).
Beyond the above causes, restructuring requires the activation of change mechanisms that
are in fact a combination of elements that determine change and also that hinder it. The first
category includes changing technology, product obsolescence, improved working
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Vol. XIV • No. 32 • June 2012 473
conditions, changing the structure of the workforce. These elements exert pressure for
change. In turn, the elements that hinder change and strengthen the organization's resistance
to change are: outdated attitudes, fear of new, fear of failure, low level of professionalism
and mental blockages.
However, reasons related to business strategy require the reduction or even cessation of
individual operations in a particular location and their relocation to another geographical
perimeter. Thus, there is a real problem of internal corporate legitimacy because the
restructuring decisions are criticized by politicians and lose the support of employees,
especially if unpopular measures are taken such as layoffs, in an effort to reduce production
costs. To the extent that the analysis and calculations underlying the rationale of
restructuring decisions will break away from the local branch profitability standards, this
will result in undermining the legitimacy of performance-based principles. The relocation
of jobs makes decisions no longer the exclusive attribute of managers but a prerogative of
different groups existing inside the corporation. Thus, a deficit of legitimacy for managers
is created when replacing centralized decision-making process with a negotiation one. But
such an approach does not undermine the authority of managers, instead it makes them
more responsible in taking the most appropriate measures to ensure recovery and avoid
bankruptcy.
2. Research methodology and assumptions
The study aims to establish the relationships between the situation of the firms and the
causes of insolvency, on one hand, and the methods of restructuring the company to ensure
business sustainability, on the other hand. We have based our study on a sample of 82
companies listed on Bucharest Stock Exchange, which went into insolvency between 2000
and 2010. The data on these companies were collected primarily from Bucharest Stock
Exchange, Ministry of Finance and National Trade Register Office websites.
Our research methodology was focused on the development and testing two working
hypotheses:
? a statistical link exists between a company's insolvency situation and its determining
causes;
? a statistical link exists between a company's insolvency situation and the corporate
restructuring methods used.
For each of the 82 insolvent companies, presented in Table no. 1, the following elements
were analyzed: the company’s situation, the generating causes of insolvency and the
restructuring methods. Each of these elements was divided in several situations, scored
from 1-5, as follows:
? company’s status: 1 dissolution, 2 still in insolvency; 3 viable;
? insolvency causes: 1 concentration niche, 2 high costs, 3 deficient management, 4
property, 5 inadequate financial structure;
? restructuring methods: 1 focus on core business, 2 revenue growth, 3 cost reduction,
4 assets sale, 5 mixed.
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Amfiteatru Economic 474
Table no. 1: Companies listed on BSE, which became insolvent between 2000-2010
Year Company Year Company Year Company Year Company
2000 0 2006 RGNA 2009 EDIL 2010 AIUR
2001 0 2006 TRAX 2009 FAZA 2010 ASCB
2002 COSP 2006 TRXW 2009 FEPA 2010 AVIM
2002 VISE 2006 UNPR 2009 INVF 2010 AZRT
2003 AGAG 2007 ALUT 2009 ISTR 2010 BACO
2003 AGMR 2007 HATH 2009 MEMI 2010 BEGA
2003 AGNL 2007 MEMA 2009 METU 2010 BLAN
2003 AGRZ 2007 MTSX 2009 ALF 2010 CRMC
2003 AOEN 2007 SCPT 2009 MANA 2010 CEIB
2003 AONT 2007 VIUX 2009 NEGY 2010 CEBI
2003 COMM 2008 LIBB 2009 PTDB 2010 COMU
2003 FABR 2008 MRPL 2009 PEJI 2010 COGL
2003 MAID 2008 NUCA 2009 STR 2010 COAR
2003 SELU 2009 AGNU 2009 TMDF 2010 COEX
2003 SEVD 2009 ARDZ 2009 TRBZ 2010 EEOB
2003 RAF 2009 ARIY 2009 VCDE 2010 FELA
2004 SIBN 2009 PAND 2009 VINI 2010 FLA
2005 ALIS 2009 CMMR 2010 NUDA 2010 FRUC
2005 FRUD 2009 CONY 2010 NUIA 2010 GETR
2005 SCTM 2009 DACC 2010 ADCA 2010 HIRY
2006 FRAR 2009 DOFA 2010 PERI 2010 IASO
Source: Bucharest Stock Exchange, 2012; Ministry of Public Finances, 2012; The National
Trade Register Office, 2010
The research method we have used was Correspondences of Factorial Analysis (CFA).
CFA is a multidimensional statistical analysis method that aims to describe the links
(associations) between two nonnumeric (categorial) variables. Working with a large data
table, CFA shows a factorial axes system that summarizes the initial information in a
graphical form that could easily be interpreted. The factorial axes are "classified'' in
descending order, according to their importance in explaining the total variance of the cloud
of points.
Applying the CFA method, the initial information contained in a contingency table or a
disjonctif one is summarized in a factorial axes system. Points of the recorded variables for
different categories are projected on these axes. The factor analysis aims to find
correspondences between them uncorrelated orthogonal axes on which to design the point-
line cloud. For this, we calculate the proper values of inertia matrix and the coordinates
associated with each value (?k).
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Vol. XIV • No. 32 • June 2012 475
Eigenvalues sum called total inertia is equal to:
?
?
?
K
k
n
k
1
2
?
? (1)
The calculation of the coordinates of points on the axes line is done using factorial
coordinates of eigenvectors associated with eigenvalues of the matrix of inertia. To assess
the distance between two points, distance ? is used.
Table of line profiles (Table no.. 2) has relative frequencies, due in part to fj/i calculated as
the ratio of partial absolute frequencies (nij) and the marginal absolute frequency (ni.) for
each value of the variable X: fj/i = n ij / ni.
Table no. 2 Table of line profiles
Variable Y Variable
X
Y2 … Yj … Yp
X1 n11/n1. n12/n1. … nij/n1. … n1p/n1.
X2 n21/n2. n22/n2. … n2j/n2. … n2p/n2.
… … … … … … …
Xi ni1/ni. ni2/ni. … nij/ni. … nip/ni.
… … … … … … …
Xm nm1/nm. nm2/nm. … nmj/nm. … nmp/nm.
A profile-line shows, for each value Xi, the percentage of statistical values yi of the variable Y.
Testing the hypothesis of independence between variables formulation involves the
following assumptions:
? null hypothesis, H0, which admits that there is independence between the variables
considered (no links between the variables);
? alternative hypothesis, H1, which admits that the variables are dependent (there are
links between them).
To test these hypotheses, statistical calculation
2
? is used, according to the equation:
??
?
?
i j
ij
ij ij
n
n n
'
2 '
2
) (
? (2)
where: nij are observed effectives; n'ij are theoretical effectives.
A calculated value of statistics
2
? larger than a read critical value in the table
2
? for risk
taking and v=(m-1)(p-1) degrees of freedom, leads to rejection of the hypothesis H0. We
can consider, in this case that the variables X and Y are linked (associated). The description
of these links is done by interpreting the results of CFA.
Cloud line profiles. Each profile-line consists of a series of values fj/i,
f1/i„f2/i„ ...,fp/i), where fj/i = nij/ni. are relative frequencies of variable Y, conditional on the X = Xi. A
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and the Dimension of Organizational Change
Amfiteatru Economic 476
profile-line can be represented as a point, xij, in the space of variable Y values. The values
xij have a ,,mass’’ equal to the marginal rate fi. that shows the proportion of statistical units
that record the value xi of the variable X.
The point lines, Xij, form a cloud of m points located in a sub-space (p-1) dimensions, as
?
?
p
j
j f
1
. = 1.
The assessment of association between two-line profiles is obtained by calculating the
distance between the points represented by them. To calculate the distance between two
points, xij and x
i 'j,
turns the CFA, the coordinates of points xij by the relation:
j f
f
x
i j
ij
.
/
'
? (3)
Considering the transformation of coordinates, the distance
2
? becomes Euclidean
distance in Rp and it is calculated as follows:
?
?
? ?
p
j
j i ij
i fj i fj
j f
x x d
1
2 '
'
' 2
) ' / / (
.
1
) , ( (4)
The center of gravity of the cloud line profiles (Gi), which defines the average profile is
given by:
'
.
ij
i
i
x fi G
?
? (5)
3. The research results
The research results were obtained by testing the two hypotheses set out above, as follows:
The testing of first hypothesis: a statistical link exists between a company's insolvency
situation and its determining causes.
The values from Table no. 3 show the distribution of insolvency causes of the companies
listed on the BSE, firms that became insolvent between 2000 and 2010. Of the total number
of firms that were insolvent and were winding up, 6.8% of them were insolvent because of
their focus on a niche, 17.2% because of high costs, 37.9% because of poor management,
24.1% because of ownership and 13.7% because of financial structure. These values form
the profile of insolvent companies that ultimately have been dissolved (profile-line).
From the total number of insolvent firms that went bankrupt, 19.2% of them became
insolvent because of their focus on a niche, 15.3% because of high costs, 38.4% because of
management, 15.3% because of ownership and 11.5% because of financial structure. The
mentioned values form the profile of insolvent companies that are still involved in judicial
proceedings (profile-line).
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Vol. XIV • No. 32 • June 2012 477
From the total number of insolvent firms that managed to overcome bankruptcy and remain
viable, 14.8% of them became insolvent because of their focus on a niche, 22.2% because
of high costs, 14.8% because of management, 11.1% because of ownership and 37.0%
because of financial structure. The values form the profile of insolvent companies that
managed to surpass the legal proceedings and are economically viable (profile-line).
Table no. 3: The distribution of companies that became insolvent based
on determining causes
Cause of insolvency company
Nice
concentration
High costs Management Property Financial
structure
Active
Margin
dissolution 2 0.068 5 0.172 11 0.379 7 0.241 4 0.137 29
bankruptcy 5 0.192 4 0.153 10 0.384 4 0.153 3 0.115 26
viable 4 0.148 6 0.222 4 0.148 3 0.111 10 0.370 27
Active Margin 11 15 25 14 17 82
Source: our own calculations using SPSS 17.0
Testing the hypothesis of independence between variables involves the formulation of the
following assumptions:
? null hypothesis, H0: hypothesis of independence (no statistical links between the
variables);
? alternative hypothesis, H1: dependence hypothesis (statistical links exists between
the variables).
In Table no. 4, the calculated value of test statistic is (
2
? =16.997) > (
2
? 0.05:8 = 8,85) or
(Sig.=0,020) < 0,05, which shows that the hypothesis H0 is rejected. It can be guaranteed
with a 95% probability that there are links between the considered variables. The
description of these links is done by interpreting the results for the AFC-line profiles.
The largest eigenvalue shows the variance of the first factorial axis and the total sum
shows the total inertia of cloud of points. The largest eigenvalue is ?1=0.219. Sum of
eigenvalues is 0.243. The first factorial axis explains 90.4% of the total variance (inertia).
Table no. 4: The calculated value of statistics
2
? and explained inertia on each
factorial axis used to establish the link cause of insolvency – situation of the firm
Summary
Proportion of Inertia
Confidence Singular
Value
Dimension
Singular
Value
Inertia
Chi
Square
Sig.
Accounted
for
Cumulative
Standard
Deviation
Correlation
1 .468 .219 .904 .904 .092 .019
2 .153 .023 .096 1.000 .111
Total .243 16.997 .020
a
1.000 1.000
a. 8 degrees of freedom
Source: our own calculations using SPSS 17.0
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The graphic representation of the profile line and column onto the factorial axes system
shows a synthetic image of the original data table.
The diagram shown in Figure no. 1 summarizes, in a simple graphic, the output values in
Summary. It is noted that the largest distance between the points represented by profiles-
column is recorded between niche concentration (0.875) and financial structure (-0.402)
(Table no. 5). The greatest distance between-line profiles is recorded between viable firms
(-0.975) and dissolved companies (0.655).
The position of points represented by column profiles (cause of insolvency) onto the first
two factorial axes system shows that the largest differences in insolvency causes is
observed between niche focus areas and financial structure: the firms for which a particular
cause of insolvency applies are not affected by the other ones and vice versa.
The position of points represented by line profiles (situation of the firm) onto the first two
factorial axes system shows that the largest differences between the situation of the firms in
terms of capacity to surpass the judicial proceedings shall be recorded between viable firms
(-0.975) and dissolved companies (0.655). These situations are characterized by the
different capacity of the companies to surpass the judicial procedure phase.
Table no. 5: The results on the column points (cause of insolvency)
Overview Column Points
a
Contribution
Score in
Dimension
Of Point to Inertia
of Dimension
Of Dimension
to Inertia of Point
Cause of
insolvency
Mass 1 2 Inertia 1 2 1 2 Total
Niche focus .129 -.561 .875 .034 .086 .643 .557 .443 1.000
High costs .186 .042 -.134 .001 .001 .022 .234 .766 1.000
Management .300 .382 .138 .021 .094 .037 .959 .041 1.000
property .157 1.062 -.235 .084 .378 .057 .984 .016 1.000
Financial
structure
.229 -.951 -.402 .102 .441 .242 .945 .055 1.000
Total Assets 1.000 .243 1.000 1.000
a. Symmetrical normalization
Source: our own calculations using SPSS 17.0
The conclusions can be drawn in accordance with the different hypostases that entreprises,
which facing difficulties are in, as follows:
? for companies that have gone through the court proceedings and became viable after
exit from bankruptcy, insolvency was due to an inadequate financial structure;
? for companies in dissolution, the main cause for insolvency is the form of ownership,
and the second one is the high costs;
? for companies that are still in insolvency proceedings, the cause for insolvency is
poor management.
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Vol. XIV • No. 32 • June 2012 479
Figure no. 1: The representation of categories for statistical variables
onto the first two factorial axes for the link cause of insolvency – situation of the firm
Source: our own calculations using SPSS 17.0
The testing of the second assumption: a statistical link exists between a company's
insolvency situation and the corporate restructuring methods used.
The values in table no. 6 show the distribution by methods of restructuring for companies
that became insolvent between 2000 and 2010 according to the BSE. From the total
number of firms that that were insolvent and were winding up, 3.4% of them were used to
focus on business core, 17.2% on revenue growth, 13.8% on mixed methods, 17.2% on cost
reduction and 48.3% on sale of assets. These values form the profile of the recovery
methods used by companies during the insolvency proceedings; these companies ultimately
being dissolved (profile-line).
From the total number of insolvent firms that went bankrupt, 16% of them used as
restructuring method the focus on business core, 12% the revenue growth, 12% the mixed
methods, 44% the cost reduction and 16% the sale of assets. These values form the profile
of the recovery methods used by insolvent companies that are still involved in judicial
proceedings (profile-line).
From the total number of insolvent firms that managed to overcome bankruptcy and remain
viable, 28.6% of them used as restructuring method the focus on business core, 14.3% the
revenue growth, 28.5% the mixed methods, 17.9% the cost reduction and 10.7% the sale of
assets. These values form the profile of restructuring methods used by insolvent companies
that managed to surpass the legal proceedings phase (profile-line).
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Table no. 6: The distribution of insolvent companies due to restructuring methods
Correspondence Table
Restructuring methods
Company Focus on core
business
Revenue
growth
Mixed Cost reduction Assets sale
Active
Margin
Dissolution 1 0.034 5 0.172 4 0.138 5 0.172 14 0.483 29
Bankruptcy 4 0.16 3 0.12 3 0.12 11 0.44 4 0.16 25
Viable 8 0.286 4 0.143 8 0.285 5 0.179 3 0.107 28
Active Margin 13 12 15 21 21 82
Source: our own calculations using SPSS 17.0
Testing the hypothesis of independence between variables involves the following
assumptions:
? null hypothesis, H0: hypothesis of independence (no links between the statistical
variables);
? alternative hypothesis, H1: dependence hypothesis (links exist between the statistical
variables).
In Tables no. 7 and 8, the calculated value of test statistic is (
2
? =22.997) > (
2
? 0.05:8 =
8,85) or (Sig.=0,004) < 0,05, which shows that the hypothesis H0 is rejected. It can be
guaranteed with a 95% probability that there are links between the considered variables.
The description of these links is done by interpreting the results for the AFC line profiles.
The largest eigenvalue shows the variance of the first factorial axis and the total sum
shows the total inertia of the cloud of points. Also, the largest eigenvalue is ?1=0.287, sum
of eigenvalues is 0.322. The first factorial axis explains 89.1% of the total variance
(inertia).
Table no. 7: The calculated statistics
2
? and explained inertia on each factorial axis
for the link situation of the company - restructuring methods
Summary
Proportion of Inertia
Confidence Singular
Value
Dimension
Singular
Value
Inertia
Chi
Square
Sig.
Accounted
for
Cumulative
Standard
Deviation
Correlation
1 .536 .287 .891 .891 .087 .243
2 .187 .035 .109 1.000 .124
Total .322 22.539 .004
a
1.000 1.000
a. 8 degrees of freedom
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Vol. XIV • No. 32 • June 2012 481
Table no. 8: The results of column points (methods of restructuring)
Overview Column Points
a
Contribution
Score in
Dimension
Of Point to Inertia
of Dimension
Of Dimension to
Inertia of Point
Restructuring
methods
Mass 1 2 Inertia 1 2 1 2 Total
Focus on core
business
.157 -.824 .211 .058 .199 .037 .978 .022 1.000
Revenue growth .143 .433 -.059 .014 .050 .003 .994 .006 1.000
Mixed .129 -1.14 .517 .097 .315 .184 .933 .067 1.000
Cost reduction .271 -.168 -.66 .026 .014 .636 .155 .845 1.000
Assets sale .300 .868 .295 .126 .422 .140 .961 .039 1.000
Active Total 1.000 .322 1.000 1.000
a. Symmetrical normalization
Source: our own calculations using SPSS 17.0
The graphic representation of the profile, line and column, onto factorial axes system shows
a synthetic image of the original data table.
The diagram shown in Figure no. 2 summarizes, in a simple graphic, the output values in
Summary. It is noted that the largest distance exists between the points represented by
column profiles recorded between mixed methods (0.517) and cost reduction (-0.662). The
greatest distance between line profiles is recorded between viable firms (-0.779) and
dissolved companies (0.945). The position of points represented by column profiles (the
restructuring methods) onto the first two factorial axes system shows that the largest
differences in the results of restructuring methods is observed between mixed methods
(0.517) and cost reduction (-0.662). The analysis shows that a particular method appropriate
for a specific company could bring unsatisfactory results for another one.
Figure no. 2: The representation of statistical variables categories onto the first two
factorial axes for the relationship situation of the firm - restructuring methods
Source: our own calculations using SPSS 17.0
AE
The Management of Economic Decline
and the Dimension of Organizational Change
Amfiteatru Economic 482
The position of points represented by line profiles (situation of the firms) onto the first two
factorial axes shows that the largest differences between the situation of the firms in terms
of capacity to surpass judicial proceedings, shall be recorded in viable firms (-0.779) and
dissolved companies (0.945). These situations are characterized by the adoption of different
restructuring methods.
Finally, the companies that have gone through judicial procedure phase and they are still
viable, used as restructuring method the focus on business core, respective the mixed
method. In turn, the dissolving companies have used the sale of assets method, while firms
involved in insolvency proceedings have resorted to reducing costs method.
Conclusions
The difficult situation in which an enterprise could find itself constitutes a warning for
managers and it requires the adoption and implementation of firm and effective measures
for a quick revival of business activity.
The experience of the Romanian companies that have managed the transition from crisis
status to performing enterprise shows that all the measures taken have ensured basic
requirements such as ensuring a good competitive position, a good financial balance and
adopting and implementing appropriate strategies to enable the recovery and enhancement
to a higher level of business resources.
Two hypotheses were tested using the method of Correspondence Factorial Analysis on a
sample of 82 firms listed on the Bucharest Stock Exchange, companies that became
insolvent between 2000 and 2010.
The first assumption was that a statistical link exists between the insolvency situation of a
company and its determining causes. In agreement with the hypostases that enterprises
facing difficulties could be in, the following conclusions can be drawn:
? for companies that have gone through judicial procedure phase and they are still
viable, the cause of their insolvency is the inadequate financial structure;
? for companies in dissolution, the main cause for insolvency is the form of ownership,
and the second one is the high cost;
? for companies that are still involved in insolvency proceedings, the cause for
insolvency is poor management.
The second hypothesis formulated was that between the situation of an insolvent company
and the methods of corporate restructuring there is a statistical link. The analysis showed
that there is no general valid method of restructuring. Such a method adapts to the
specificity of the company. The focus on business core has been used by companies that
have gone through the judicial procedure phase; the dissolving firms used the sale of assets
method and firms that are still involved in insolvency proceedings reduced the costs.
The findings of our research allow some recommendations regarding methods of
organizational change that companies in crisis should follow. The transition from a difficult
situation to a viable and desirable performing business requires the development and the
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Vol. XIV • No. 32 • June 2012 483
implementation of an appropriate strategy that through its objectives and policies will
enable the change process.
Such a strategy should potentiate the strengths of the enterprise, turning them into
competitive advantages and, at the same time, exploiting the opportunities offered by the
environment to eliminate weaknesses and thus, to avoid their transformation into threats. At
the same time, the revitalization of business activity requires, besides the existence of a
managerial action strategy, an active involvement of employees to boost the process of
organizational change.
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