Description
Turnaround Strategy Evidence from Indonesian Manufacturing Firms during Asian Financial Crisis in 1997-1998. Jullimursyida Ganto, Ph.D.
Turnaround Strategy: Evidence from Indonesian Manufacturing Firms during
Asian Financial Crisis in 1997-1998.
Jullimursyida Ganto, Ph.D*
Faculty of Economic, University of Malikussaleh, Indonesia
E-mail: [email protected]
Prof. Mohamed Sulaiman
Department of Business Administration, International Islamic University Malaysia
E-mail: [email protected]
Faisal Matriadi, SE, M.Si
Faculty of Economic, University of Malikussaleh, Indonesia
E-mail: [email protected]
1
Turnaround Strategy: Evidence from Indonesian Manufacturing Firms during Asian
Financial Crisis in 1997-1998
ABSTRACT
In the aftermath of the Asian fianancial crisis of 1997-1998, many companies in
Indonesia got into trouble and had to be turned around or face liquidation. This study
attempts to determine what strategies were used to turn around Indonesian firms and
how effective their strategies had been. From a survey of 101 firms, it was found that
the most used strategies were restructuring strategies, cutback strategies and
management strategies. But in terms of effectiveness only cutback and restructuring
strategies were positively related to firm performance.
Keyword: turnaround strategies; firm performance; asian crisis; organizational decline,
manufacturing firms
INTRODCUTION
The study of organizational decline and turnaround has gained importance with the recent
increase of business failures. Many companies in Asia faced trouble in many sectors during last
economic recession of 1997/1998. Indonesia is one of the countries that was hit by this economic
downturn. Many companies failed and went bankrupt, but some of them still survived after the crisis.
The dramatic depreciation of the exchange rate and the collapse of confidence in the financial and
banking sector triggered capital flight in late 1997 and early 1998. The financial crisis quickly spilled
over to the real sector. Domestic prices of tradable goods adjusted upwards toward higher world prices
(in Rupiah terms), as a result of the dramatic depreciation of the exchange rate. High interest rates
coupled with difficulties in the banking system led to a reduction in private sector borrowing during
this period. Real wages fell in 1998 and investment slowed to a trickle. Construction, manufacturing,
and banking and finance sectors were hardest hit in terms of the fall in real value added. Within the
manufacturing sector, construction materials, steel production, transportation, and wood products
recorded the greatest decline in real value added; between minus 23 and minus 55 percent. Indicative
of the sharp decline in aggregate demand, imports had fallen by 36 % in the 10 months to October
1998 compared to the same period in 1997. Total US$ value of Indonesian exports showed a drastic
decline in the 8 months to August 1998 (Widianto, 1999).
2
This study is meant to examine what strategies were used to turnaround the firms and
determine whether these strategies have been effective.
LITERATURE REVIEW
Turnaround Strategies
Turnaround strategy which is designed to reverse a negative trend and to get the organization
back on the track to profitability. Turnaround strategy usually tries to reduce operating costs, either by
cutting “excess fat” and operating more efficiently or by reducing the size of operations. Slatter (1984)
identified ten major generic strategies for turnaround which UK firms commonly applied as; change of
management, strong central financial control, organizational change and decentralization, product
market reorientation, improved marketing, growth via acquisitions, assets reduction, cost reduction,
investment, debt restructuring and other financial strategies. Hofer (1980) introduced the severity of
the turnaround situation into the heuristic for selecting appropriate turnaround strategies. He
encouraged researches to specify the magnitudes, time frames, and patterns and severities of
performance inadequacies and declines. Hofer also conceptualized a link between severity of the
downturn and the degree of cost and asset reductions that a firm should include in its recovery
response. He referred to cost and asset reduction activities as operating turnaround strategies, adapting
the term from Schendel & Patton (1976). Operating strategies designed for cost reduction were
recommended for firms in less severe turnaround situations. Drastic cost reduction coupled with asset
reductions were recommended for firms in more severe turnaround situations. Although he never used
the term retrenchment strategy, Hofer (1980) successfully identified its major elements.
The relationship of contextual factors to the effectiveness of four primary turnaround
strategies; management (new head executive, new definition of business, new top management team,
morale building among employees), cutback (cost cutting, financial and expense controls, replacing
losing subsidiaries), growth (new product promotion methods, entering new product areas, acquisition,
add markets), and restructuring (change in organizational structure, new manufacturing methods), had
been investigated by O’Neill (1986). His model correctly predicted a negative relationship between
growth strategies and turnaround success where there were strong competitive pressures. Where firms
3
were in weak market positions, success was found for cutback and restructuring strategies. The major
contribution from the O’Neill (1986) studies was the validation of the efficiency approach to recovery.
In fact, there was evidence that for firms competing in mature or declining industries, efficiency or
operating recovery strategies offered the best prospects for successful turnaround. This was an
important contribution. For the first time, retrenchment (cost cutting and asset reducing) was found to
be sufficient under certain circumstances to reestablish the long-term viability of the firm.
The successful turnaround strategies of Malaysian firms were found by Sim (1991). He found
the following as most pertinent: change in top management, cost reduction, strengthened financial
control, change of CEO, improved efficiency and capacity utilization, debt restructuring, new product
market focus, organization change, selective product market pruning, reduction of assets, growth via
diversification, divestment & liquidation, R&D improvements, and investment in plant/equipment.
Kamso (1999) found that the most commonly adopted turnaround strategies in Malaysia were debt
restructuring and cost reductions. The other strategies were change of management, centralizing
financial control, decentralization, assets reduction, growth via acquisition, product market
reorientation, improved marketing and more investment.
In East Asian, a research on turnaround had conducted by Bruton, Ahlstrom and Wan (2003).
The samples were from firms in Hong Kong, Singapore and Taiwan. These firms’ ROI had declined
for three consecutive years. The independent variables were: change in fixed assets, change in sales,
changes in accounts receivable/sales and change in chair person, with firms’ size as control variables.
The results showed that decrease in fixed assets (by selling them off), had better financial result,
increase in profitability was associated with decreasing sales, and firm size had a significantly
negative impact on performance. They also found that reduction in accounts receivables during the
potential recovery period was not significant, and change in chairman of the board was also not
significant with the improvement of performance. Francis and Pett (2004) studied about the
retrenchment in declining organizations. He found that the source of decline and the urgency of the
decline situation must be considered when investigating retrenchment actions. The examination of the
seriousness of decline as measured by severity and suddenness is an important factor for firms to
4
pursue retrenchment responses to the decline. These findings also found significant influences
between the urgency of the situation and specific decline characteristics.
The Effects of Turnaround on Firm Performance
It was theorized that the choice of a particular turnaround strategy would be a function of the
business situation. If the turnaround strategy is to have an effect to the firm performance (Hambrick,
1983), the environment has to be considered, and how a business competes directly determines its
resulting performance (Woo, 1983).
For the Businesses in mature industries, there were indicated three primary successful
turnaround gestalts: asset/cost surgery, selective product/market pruning, and piecemeal strategy.
Assets/cost surgery was pursued primarily by businesses with low levels of capacity utilization;
selective product/market pruning was undertaken primarily by businesses with high levels of capacity
utilization; and the piecemeal strategy was followed primarily by businesses with high market share
(Hambrick and Schecter; 1983).
The turnaround success of large and midsize Chinese firms in Hong Kong and Thailand was
studied by Bruton (2001). He found that the turnaround effort needs to be consistent with local setting
to be successful. While he argued that removing the CEO immediately may not be judicious. It is
better to obtain the CEO’s full cooperation to turn the firm around by directing the CEO’s attention
toward the significant changes needed within the firm and with its relationship with other
organizations. Turnaround action has a favorable impact on company performance, irrespective of the
cause of the firm’s problems in decline (Robbins & Pearce, 1992). While top management change is
noted as a precondition for successful turnaround (Bibeault, 1982; Hofer, 1980; Schendel et al., 1976;
Slatter, 1984).
Hypothesis 1: There is a positive relationship between management strategies used and firm
performance.
The firms that undergo the turnaround strategy actually will have a better performance than
the firms that do not undertake turnaround strategy. Iacocca who headed Chrysler Corporation, the
third largest automobile producer in the US, was able to turnaround the company. In showed by
5
increasing in operating income during 1981-1983 and support from with and without the company
survived. Between 1977 and 1980, Chrysler was in a very difficult situation. But after their new CEO
took several efforts to save the company, Chrysler was able to repay its government-backed loans far
ahead of schedule, as its revenues and profits rose steadily. Operational strategies that comprise cost
reduction, revenue generation, and operating assets reduction have been empirically associated with
turnaround success (Hambrick & Schecter, 1989; O’Neill, 1986).
Hypothesis 2: There is a positive relationship between cutback strategies used and firm
performance.
The first author to discuss a multi-stage model of turnaround was Bibeault (1982). Based on
his observations, he proposed that turnaround was typically accomplished through a two-stage process.
The first stage involved an emergency plan to halt the firm’s financial hemorrhaging and stabilization
plan to streamline and improve core operations. These plans are combined to produce the firm’s
retrenchment stage. The second phase involved a return to growth or recovery stage. The initial stage
was directed toward the primary objectives of survival and achievement of a positive cash flow. The
means to achieve this objective encompassed the classic retrenchment activities: liquidation,
divestment. Product elimination and head cost cuts. The advanced stage of the turnaround process
shifts toward objectives of growth and development, and growth in market share. The means
employed for achieving these objectives are acquisitions, new products, new markets, and increased
market penetration. Between the two stages, Bibeault (1982) speculated that a decision was needed on
a strategy for the firm. As the rate of financial decline approaches zero, the firm must decide whether
it will pursue recovery in its retrenchment reduced form through a scaled back version of its
preexisting strategy, or whether it will shift to a return to growth stage. It is at this point that the
ultimate direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to
continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a
new recovery strategy that emphasizes growth. Sudarsanam and Lai (2001) who studied corporate
financial distress and turnaround strategies of UK firms found that the strategies that lead the
companies out of financial distress are investment and acquisition.
Hypothesis 3: There is a positive relationship between growth strategies used and firm performance.
6
Numerous strategies have to be tailor made to the different turnaround situations. Slatter
(1984) found ten generic strategies and O’Neill (1986) has categorized four major turnaround
strategies Hambrick and Schecter (1989) found that efficiency improving turnaround firms also
achieved significantly greater sales growth or market share growth than firms that failed to recover.
The successful turnaround companies are the companies that are able to meet the demanding buyers’
criteria (Harker, 2001). The subsequent effect on firm performance of various management actions is
modeled as either change strategy or attempts to increase efficiency. Corporate strategy, market
orientation and organizational learning are three of the most important factors impacting on company
performance (Slater & Narver, 1995). O’Neill (1986) found that firms were in weak market positions,
success was found for cutback and restructuring strategies.
Hypothesis 4: There is a positive relationship between restructuring strategies used and firm
performance.
Many studies agree with Robbins and Pearce (1992) that simultaneous declines of ROI and
ROS over two successive years would amount to a turnaround situation, (Hambrick & Schecter,
1983). Bibeault (1982) and Slatter (1984) suggest three successive years of declining profits.
Turnaround success should be represented by two years of ROI at pre downturn levels (Hambrick &
Schecter, 1983, Robbins & Pearce, 1992). Maimon (1999) found that to succeed in turnaround a
majority of the companies have what it takes to turnaround themselves. They have “promising teams”,
“self help ability” and “have handled strategies successfully”. The last attribute was positively
correlated to all the other five attributes viz., “a promising team”, “a bridging finance available”, “a
committed leader”, “self help ability”, and “having clincher strategies”, which could ensure the
success of their turnarounds.
Unfortunately, there are no studies conducted on turnaround in Indonesia. The turnaround
strategies that were adopted successfully by companies in the West might not be similarly effective in
this region. Bruton (2003) found that the turnaround strategies that succeeded in the West or US
cannot automatically be adopted in the East especially in ethnic Chinese businesses.
From the literature review, the framework is proposed in figure 1.
7
METHODOLOGY
The causes of decline and turnaround strategies were examined by surveying the CEOs of
Indonesian manufacturing firms. The firms chosen were those with more than 250 employees,
categorized as large companies (Urata, 2002). One thousand questionnaires were sent to 1000
companies which were randomly selected from the Bureau of Statistics Indonesia, 2002.
Measures and Procedures
The questionnaire consists of turnaround strategies and firm performance. The survey on
turnaround strategies consists of 14 items. Such as: (1) new head man (from inside the company); (2)
new head man (from outside the company); (3) new top management team; (4) morale building among
employees; (5) financial and expense control; (6) debt restructuring; (7) cost cutting; (8) asset
reduction; (9) growth via acquisition; (10) entering new product. The survey items were selected based
on the previous studies about turnaround strategies by Slatter (1984), O’Neill (1986). Respondents
were asked to rate the turnaround strategies according to 5 Likert scale of: (1) not used at all, (2) used
to a little extent, (3) moderately used, (4) used to a large extent, and (5) used as the central strategy.
For firm performance the data is the subjective view of CEOs for 3 years from 1999 – 2001
(assumed as years after the crisis). The average performance in ROI, ROS and sales growth is asked
for in the questionnaires. From 1000 questionnaires sent, only 171 responded, with 7 refusing to
participate, and 63 were unusable, thus only 101 questionnaires were used for further analysis. The
companies were located mainly in Java, though a few were in Sumatra and the outer islands.
Sample profiles
The profile of respondent presented in table 1. Majorities of the respondents were male (87.1
%), while female only (12.9%). Their ages according to age groups are 20-29 (5%), 30-39 years old
(36.6%), 40-49 (26.7%), and more than 50 years 31.7%. Twenty-nine point seven of respondents have
been working for 6-10 years, 23.8% 11 and above years, and 1-5 years is 22.8%.
Most of the companies have been in operation 26 years above (40.6%), between 5-15 years
(39.6 %), (19.8 %) for between 16-25 years. Thirty five point six (35.61 %) of the companies are in
textile industry, 16.8% are in wood and wood products, 12.9 % in food, beverage and tobacco
8
industry, 7.9% of industries are in metal products, machinery and equipment, and 26.7% of them are
from other sectors. Majority of the firms (37.6 %) had 250 to 490 permanent employees, 24.8%
companies had 500 to 999 employees, 21.8% of them had 1000 to 1499 employees, and 135.8% had
?1500 permanent employees (table 2).
Factor analysis
In order to determine the turnaround strategies the 14 items were put to the factor analysis test.
The result of factor analysis is presented in the table 3. The table shows the factor analysis results of
turnaround strategies with MSA of .73 and the barlett test of spericity is significant. The total variance
explained is 68.14%, it is indicating that all the items are related to these dimensions which is
appropriate for factor analysis. The factor loading is ranging from .63 to .87. All the items fall into
three factors; they are management strategy (factor 1. alpha .85), restructuring strategy (factor 2. alpha
.74), and lastly cutback strategy (factor 3. alpha .64). The results also indicate that growth strategy is
not the strategy chosen for the firms. This is in line with O’Neill (1986), who found where firms were
in weak market positions; success was found for cutback and restructuring strategies. It is also
consistent with Bibeault (1982) observations; the firm must decide whether it will pursue recovery in
its retrenchment reduced form through a scaled back version of its preexisting strategy, or whether it
will shift to a return to growth stage.
Table 4 shows that the MSA is .67 and the barlett test of spericity is significant, and the total
variance explained is 79.10%, it is indicating that all the items related to these dimensions is
appropriate for factor analysis. The factor loading ranging from .80 to .89, (alpha .81). All the items
fall into 1 factor, so named as firms performance.
Restatement of hypothesis
Based on the result of factor analysis, the new framework and hypothesis proposed in figure 2.
And the restatements of hypothesis are:
Hypothesis 1: There is a positive relationship between management strategies used and firm
performance.
9
Hypothesis 2: There is a positive relationship between cutback strategies used and firm
performance.
Hypothesis 3: There is a positive relationship between restructuring strategies used and firm
performance.
Correlation
The results of correlation analysis are provided in table 5. The table shows that management
strategies has positive relationship with firm performance (r = .36 p value < .05), cutback strategies
also has positive relationship with firm performance (r = .60 p value
Turnaround Strategy Evidence from Indonesian Manufacturing Firms during Asian Financial Crisis in 1997-1998. Jullimursyida Ganto, Ph.D.
Turnaround Strategy: Evidence from Indonesian Manufacturing Firms during
Asian Financial Crisis in 1997-1998.
Jullimursyida Ganto, Ph.D*
Faculty of Economic, University of Malikussaleh, Indonesia
E-mail: [email protected]
Prof. Mohamed Sulaiman
Department of Business Administration, International Islamic University Malaysia
E-mail: [email protected]
Faisal Matriadi, SE, M.Si
Faculty of Economic, University of Malikussaleh, Indonesia
E-mail: [email protected]
1
Turnaround Strategy: Evidence from Indonesian Manufacturing Firms during Asian
Financial Crisis in 1997-1998
ABSTRACT
In the aftermath of the Asian fianancial crisis of 1997-1998, many companies in
Indonesia got into trouble and had to be turned around or face liquidation. This study
attempts to determine what strategies were used to turn around Indonesian firms and
how effective their strategies had been. From a survey of 101 firms, it was found that
the most used strategies were restructuring strategies, cutback strategies and
management strategies. But in terms of effectiveness only cutback and restructuring
strategies were positively related to firm performance.
Keyword: turnaround strategies; firm performance; asian crisis; organizational decline,
manufacturing firms
INTRODCUTION
The study of organizational decline and turnaround has gained importance with the recent
increase of business failures. Many companies in Asia faced trouble in many sectors during last
economic recession of 1997/1998. Indonesia is one of the countries that was hit by this economic
downturn. Many companies failed and went bankrupt, but some of them still survived after the crisis.
The dramatic depreciation of the exchange rate and the collapse of confidence in the financial and
banking sector triggered capital flight in late 1997 and early 1998. The financial crisis quickly spilled
over to the real sector. Domestic prices of tradable goods adjusted upwards toward higher world prices
(in Rupiah terms), as a result of the dramatic depreciation of the exchange rate. High interest rates
coupled with difficulties in the banking system led to a reduction in private sector borrowing during
this period. Real wages fell in 1998 and investment slowed to a trickle. Construction, manufacturing,
and banking and finance sectors were hardest hit in terms of the fall in real value added. Within the
manufacturing sector, construction materials, steel production, transportation, and wood products
recorded the greatest decline in real value added; between minus 23 and minus 55 percent. Indicative
of the sharp decline in aggregate demand, imports had fallen by 36 % in the 10 months to October
1998 compared to the same period in 1997. Total US$ value of Indonesian exports showed a drastic
decline in the 8 months to August 1998 (Widianto, 1999).
2
This study is meant to examine what strategies were used to turnaround the firms and
determine whether these strategies have been effective.
LITERATURE REVIEW
Turnaround Strategies
Turnaround strategy which is designed to reverse a negative trend and to get the organization
back on the track to profitability. Turnaround strategy usually tries to reduce operating costs, either by
cutting “excess fat” and operating more efficiently or by reducing the size of operations. Slatter (1984)
identified ten major generic strategies for turnaround which UK firms commonly applied as; change of
management, strong central financial control, organizational change and decentralization, product
market reorientation, improved marketing, growth via acquisitions, assets reduction, cost reduction,
investment, debt restructuring and other financial strategies. Hofer (1980) introduced the severity of
the turnaround situation into the heuristic for selecting appropriate turnaround strategies. He
encouraged researches to specify the magnitudes, time frames, and patterns and severities of
performance inadequacies and declines. Hofer also conceptualized a link between severity of the
downturn and the degree of cost and asset reductions that a firm should include in its recovery
response. He referred to cost and asset reduction activities as operating turnaround strategies, adapting
the term from Schendel & Patton (1976). Operating strategies designed for cost reduction were
recommended for firms in less severe turnaround situations. Drastic cost reduction coupled with asset
reductions were recommended for firms in more severe turnaround situations. Although he never used
the term retrenchment strategy, Hofer (1980) successfully identified its major elements.
The relationship of contextual factors to the effectiveness of four primary turnaround
strategies; management (new head executive, new definition of business, new top management team,
morale building among employees), cutback (cost cutting, financial and expense controls, replacing
losing subsidiaries), growth (new product promotion methods, entering new product areas, acquisition,
add markets), and restructuring (change in organizational structure, new manufacturing methods), had
been investigated by O’Neill (1986). His model correctly predicted a negative relationship between
growth strategies and turnaround success where there were strong competitive pressures. Where firms
3
were in weak market positions, success was found for cutback and restructuring strategies. The major
contribution from the O’Neill (1986) studies was the validation of the efficiency approach to recovery.
In fact, there was evidence that for firms competing in mature or declining industries, efficiency or
operating recovery strategies offered the best prospects for successful turnaround. This was an
important contribution. For the first time, retrenchment (cost cutting and asset reducing) was found to
be sufficient under certain circumstances to reestablish the long-term viability of the firm.
The successful turnaround strategies of Malaysian firms were found by Sim (1991). He found
the following as most pertinent: change in top management, cost reduction, strengthened financial
control, change of CEO, improved efficiency and capacity utilization, debt restructuring, new product
market focus, organization change, selective product market pruning, reduction of assets, growth via
diversification, divestment & liquidation, R&D improvements, and investment in plant/equipment.
Kamso (1999) found that the most commonly adopted turnaround strategies in Malaysia were debt
restructuring and cost reductions. The other strategies were change of management, centralizing
financial control, decentralization, assets reduction, growth via acquisition, product market
reorientation, improved marketing and more investment.
In East Asian, a research on turnaround had conducted by Bruton, Ahlstrom and Wan (2003).
The samples were from firms in Hong Kong, Singapore and Taiwan. These firms’ ROI had declined
for three consecutive years. The independent variables were: change in fixed assets, change in sales,
changes in accounts receivable/sales and change in chair person, with firms’ size as control variables.
The results showed that decrease in fixed assets (by selling them off), had better financial result,
increase in profitability was associated with decreasing sales, and firm size had a significantly
negative impact on performance. They also found that reduction in accounts receivables during the
potential recovery period was not significant, and change in chairman of the board was also not
significant with the improvement of performance. Francis and Pett (2004) studied about the
retrenchment in declining organizations. He found that the source of decline and the urgency of the
decline situation must be considered when investigating retrenchment actions. The examination of the
seriousness of decline as measured by severity and suddenness is an important factor for firms to
4
pursue retrenchment responses to the decline. These findings also found significant influences
between the urgency of the situation and specific decline characteristics.
The Effects of Turnaround on Firm Performance
It was theorized that the choice of a particular turnaround strategy would be a function of the
business situation. If the turnaround strategy is to have an effect to the firm performance (Hambrick,
1983), the environment has to be considered, and how a business competes directly determines its
resulting performance (Woo, 1983).
For the Businesses in mature industries, there were indicated three primary successful
turnaround gestalts: asset/cost surgery, selective product/market pruning, and piecemeal strategy.
Assets/cost surgery was pursued primarily by businesses with low levels of capacity utilization;
selective product/market pruning was undertaken primarily by businesses with high levels of capacity
utilization; and the piecemeal strategy was followed primarily by businesses with high market share
(Hambrick and Schecter; 1983).
The turnaround success of large and midsize Chinese firms in Hong Kong and Thailand was
studied by Bruton (2001). He found that the turnaround effort needs to be consistent with local setting
to be successful. While he argued that removing the CEO immediately may not be judicious. It is
better to obtain the CEO’s full cooperation to turn the firm around by directing the CEO’s attention
toward the significant changes needed within the firm and with its relationship with other
organizations. Turnaround action has a favorable impact on company performance, irrespective of the
cause of the firm’s problems in decline (Robbins & Pearce, 1992). While top management change is
noted as a precondition for successful turnaround (Bibeault, 1982; Hofer, 1980; Schendel et al., 1976;
Slatter, 1984).
Hypothesis 1: There is a positive relationship between management strategies used and firm
performance.
The firms that undergo the turnaround strategy actually will have a better performance than
the firms that do not undertake turnaround strategy. Iacocca who headed Chrysler Corporation, the
third largest automobile producer in the US, was able to turnaround the company. In showed by
5
increasing in operating income during 1981-1983 and support from with and without the company
survived. Between 1977 and 1980, Chrysler was in a very difficult situation. But after their new CEO
took several efforts to save the company, Chrysler was able to repay its government-backed loans far
ahead of schedule, as its revenues and profits rose steadily. Operational strategies that comprise cost
reduction, revenue generation, and operating assets reduction have been empirically associated with
turnaround success (Hambrick & Schecter, 1989; O’Neill, 1986).
Hypothesis 2: There is a positive relationship between cutback strategies used and firm
performance.
The first author to discuss a multi-stage model of turnaround was Bibeault (1982). Based on
his observations, he proposed that turnaround was typically accomplished through a two-stage process.
The first stage involved an emergency plan to halt the firm’s financial hemorrhaging and stabilization
plan to streamline and improve core operations. These plans are combined to produce the firm’s
retrenchment stage. The second phase involved a return to growth or recovery stage. The initial stage
was directed toward the primary objectives of survival and achievement of a positive cash flow. The
means to achieve this objective encompassed the classic retrenchment activities: liquidation,
divestment. Product elimination and head cost cuts. The advanced stage of the turnaround process
shifts toward objectives of growth and development, and growth in market share. The means
employed for achieving these objectives are acquisitions, new products, new markets, and increased
market penetration. Between the two stages, Bibeault (1982) speculated that a decision was needed on
a strategy for the firm. As the rate of financial decline approaches zero, the firm must decide whether
it will pursue recovery in its retrenchment reduced form through a scaled back version of its
preexisting strategy, or whether it will shift to a return to growth stage. It is at this point that the
ultimate direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to
continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a
new recovery strategy that emphasizes growth. Sudarsanam and Lai (2001) who studied corporate
financial distress and turnaround strategies of UK firms found that the strategies that lead the
companies out of financial distress are investment and acquisition.
Hypothesis 3: There is a positive relationship between growth strategies used and firm performance.
6
Numerous strategies have to be tailor made to the different turnaround situations. Slatter
(1984) found ten generic strategies and O’Neill (1986) has categorized four major turnaround
strategies Hambrick and Schecter (1989) found that efficiency improving turnaround firms also
achieved significantly greater sales growth or market share growth than firms that failed to recover.
The successful turnaround companies are the companies that are able to meet the demanding buyers’
criteria (Harker, 2001). The subsequent effect on firm performance of various management actions is
modeled as either change strategy or attempts to increase efficiency. Corporate strategy, market
orientation and organizational learning are three of the most important factors impacting on company
performance (Slater & Narver, 1995). O’Neill (1986) found that firms were in weak market positions,
success was found for cutback and restructuring strategies.
Hypothesis 4: There is a positive relationship between restructuring strategies used and firm
performance.
Many studies agree with Robbins and Pearce (1992) that simultaneous declines of ROI and
ROS over two successive years would amount to a turnaround situation, (Hambrick & Schecter,
1983). Bibeault (1982) and Slatter (1984) suggest three successive years of declining profits.
Turnaround success should be represented by two years of ROI at pre downturn levels (Hambrick &
Schecter, 1983, Robbins & Pearce, 1992). Maimon (1999) found that to succeed in turnaround a
majority of the companies have what it takes to turnaround themselves. They have “promising teams”,
“self help ability” and “have handled strategies successfully”. The last attribute was positively
correlated to all the other five attributes viz., “a promising team”, “a bridging finance available”, “a
committed leader”, “self help ability”, and “having clincher strategies”, which could ensure the
success of their turnarounds.
Unfortunately, there are no studies conducted on turnaround in Indonesia. The turnaround
strategies that were adopted successfully by companies in the West might not be similarly effective in
this region. Bruton (2003) found that the turnaround strategies that succeeded in the West or US
cannot automatically be adopted in the East especially in ethnic Chinese businesses.
From the literature review, the framework is proposed in figure 1.
7
METHODOLOGY
The causes of decline and turnaround strategies were examined by surveying the CEOs of
Indonesian manufacturing firms. The firms chosen were those with more than 250 employees,
categorized as large companies (Urata, 2002). One thousand questionnaires were sent to 1000
companies which were randomly selected from the Bureau of Statistics Indonesia, 2002.
Measures and Procedures
The questionnaire consists of turnaround strategies and firm performance. The survey on
turnaround strategies consists of 14 items. Such as: (1) new head man (from inside the company); (2)
new head man (from outside the company); (3) new top management team; (4) morale building among
employees; (5) financial and expense control; (6) debt restructuring; (7) cost cutting; (8) asset
reduction; (9) growth via acquisition; (10) entering new product. The survey items were selected based
on the previous studies about turnaround strategies by Slatter (1984), O’Neill (1986). Respondents
were asked to rate the turnaround strategies according to 5 Likert scale of: (1) not used at all, (2) used
to a little extent, (3) moderately used, (4) used to a large extent, and (5) used as the central strategy.
For firm performance the data is the subjective view of CEOs for 3 years from 1999 – 2001
(assumed as years after the crisis). The average performance in ROI, ROS and sales growth is asked
for in the questionnaires. From 1000 questionnaires sent, only 171 responded, with 7 refusing to
participate, and 63 were unusable, thus only 101 questionnaires were used for further analysis. The
companies were located mainly in Java, though a few were in Sumatra and the outer islands.
Sample profiles
The profile of respondent presented in table 1. Majorities of the respondents were male (87.1
%), while female only (12.9%). Their ages according to age groups are 20-29 (5%), 30-39 years old
(36.6%), 40-49 (26.7%), and more than 50 years 31.7%. Twenty-nine point seven of respondents have
been working for 6-10 years, 23.8% 11 and above years, and 1-5 years is 22.8%.
Most of the companies have been in operation 26 years above (40.6%), between 5-15 years
(39.6 %), (19.8 %) for between 16-25 years. Thirty five point six (35.61 %) of the companies are in
textile industry, 16.8% are in wood and wood products, 12.9 % in food, beverage and tobacco
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industry, 7.9% of industries are in metal products, machinery and equipment, and 26.7% of them are
from other sectors. Majority of the firms (37.6 %) had 250 to 490 permanent employees, 24.8%
companies had 500 to 999 employees, 21.8% of them had 1000 to 1499 employees, and 135.8% had
?1500 permanent employees (table 2).
Factor analysis
In order to determine the turnaround strategies the 14 items were put to the factor analysis test.
The result of factor analysis is presented in the table 3. The table shows the factor analysis results of
turnaround strategies with MSA of .73 and the barlett test of spericity is significant. The total variance
explained is 68.14%, it is indicating that all the items are related to these dimensions which is
appropriate for factor analysis. The factor loading is ranging from .63 to .87. All the items fall into
three factors; they are management strategy (factor 1. alpha .85), restructuring strategy (factor 2. alpha
.74), and lastly cutback strategy (factor 3. alpha .64). The results also indicate that growth strategy is
not the strategy chosen for the firms. This is in line with O’Neill (1986), who found where firms were
in weak market positions; success was found for cutback and restructuring strategies. It is also
consistent with Bibeault (1982) observations; the firm must decide whether it will pursue recovery in
its retrenchment reduced form through a scaled back version of its preexisting strategy, or whether it
will shift to a return to growth stage.
Table 4 shows that the MSA is .67 and the barlett test of spericity is significant, and the total
variance explained is 79.10%, it is indicating that all the items related to these dimensions is
appropriate for factor analysis. The factor loading ranging from .80 to .89, (alpha .81). All the items
fall into 1 factor, so named as firms performance.
Restatement of hypothesis
Based on the result of factor analysis, the new framework and hypothesis proposed in figure 2.
And the restatements of hypothesis are:
Hypothesis 1: There is a positive relationship between management strategies used and firm
performance.
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Hypothesis 2: There is a positive relationship between cutback strategies used and firm
performance.
Hypothesis 3: There is a positive relationship between restructuring strategies used and firm
performance.
Correlation
The results of correlation analysis are provided in table 5. The table shows that management
strategies has positive relationship with firm performance (r = .36 p value < .05), cutback strategies
also has positive relationship with firm performance (r = .60 p value