OPERATIONAL TURN-ROUND STRATEGY

Operational Turn-Round Strategy

Operational Turn-Round Strategy

Introduction

Corporate turnaround has received much attention in the strategy literature and, increasingly, in finance. These two streams have, however, differed in their focus, i.e. type of strategies, in their approach, i.e. whether descriptive or prescriptive and in the definition of performance decline. A range of strategies has been prescribed for their potency in corporate recovery. Corporate responses to performance decline cover a wide range of restructuring: managerial, asset or strategic, financial, operational and organisational. This paper discusses operational turn-round strategy in UK firms with the example of International Business Machines (IBM) UK.

Operational Turn-Round Strategy: A Discussion

Corporate downward spiral to failure, after the onset of performance decline, is attributed by past researchers (e.g. Barker and Mone, 1994; Hambrick and Schecter, 1983; Hofer, 1980; Hoffman, 1989; Schendel, Patton and Riggs, 1976; Weitzel and Jonsson, 1989) to managerial inaction, poor timing and lack of intensity and poor implementation of turnaround strategies. This suggests that success of managerial responses to performance decline is conditioned by their timing, intensity and effective implementation. Analysis of these factors requires a multi-period examination of the turnaround process. Again, empirical evidence on these factors contributing to effectiveness of turnaround strategies, based on large-scale analysis, is limited.

We aim to fill the empirical gap by investigating the turnaround strategies of firms that suffer performance decline. The questions we ask are:

* Do firms in UK that recover from financial distress adopt different turnaround strategies from those that continue to decline into severe distress?

* Do these two groups differ in the intensity and timing of the strategies they deploy?

* Which of these strategies contribute to corporate turnaround?

We define financial distress in terms of potential bankruptcy risk using an accounting-based index of such risk. For a sample of 166 UK firms which experience financial distress during the period 1983-93, we test the effectiveness of each restructuring strategy. We also test the overall effectiveness of all the identified corporate restructuring strategies in achieving turnaround with logit and linear regressions of recovery on restructuring intensity. Our results show recovery and non-recovery firms adopt very similar sets of strategies following financial distress but their strategic choices diverge over time, with recovery firms choosing investment and acquisition to lead them out of trouble whereas non-recovery firms are more internally focused on operational and financial restructuring.

Corporate Turnaround Strategies

Fall of a firm from a superior performance position to an extremely poor position on any appropriate performance criterion normally points to fundamental problems with its management and strategies. However, given that the firm is poorly performing, how should management respond? Management at IBM-UK sits tight in hope of an upturn in its fortunes or restructures to recover rapidly from poor performance. However, `masterly' inaction may lead to further deterioration in firm performance (Schendel, Patton and Riggs, 1976; Weitzel and Jonsson, 1989). Managers may also refrain from actions that may contribute to turnaround but hurt their own self-interest.

UK firms which experience financial distress may choose a variety of methods of restructuring themselves back to financial health ...