Relationships to turnaround
Copenhagen Business School
Center for Applied Market Sciences
Birk Centerpark 40
Phone: +45 – 96 29 64 67 – Fax: +45 – 96 29 64 60
Copenhagen Business School
Center for Applied Market Sciences
Birk Centerpark 40
Phone: +45 – 96 29 64 63 – Fax: +45 – 96 29 64 60
Key words: Declining organizations, change, inter- organisational relationships, turnaround
This paper describes the change in activities of 8 companies attempting turnaround. The role of interorganizational relationships is explored as an integral part of the process by which companies attempt to move away from decline. Empirical findings show operational and strategic turnaround activities similar to those described by Hoffman (1989) within the 8 companies. Both new and existing relationships are used to bring about these changes, but there is strong evidence that companies favour the establishment of new relationships during turnaround.
Companies‟ and managers‟ success stories crowd bookshelves of executives, entrepreneurs, teachers and even academics. Somehow those that excel provoke a certain admiration and are placed on a pedestal serving as a role model, a path to follow. On the other hand,, bankruptcy cases tend to be dealt with in closed rooms while mistakes made by managers are swept under carpets. No one is proud of telling those stories, as they are reminders of the frailty of strategic decisions. It has been a task mostly left to academics to research and write about declining and dying organizations, in order to understand the cause and consequences of decline. The ultimate goal of much research has been to supply managers with a lits of dos and don‟ts during organizational decline. However, according to Winn (1993) strategy researchers have provided litlle help for managers attempting turnaround in practice.
The literature on declining organizations and industries has focused on two opposite schools: the deterministic and the voluntaristic, where the cause of decline was placed on the environment or in the organization itself, respectively. This dichotomy of causes disregarded the role of interdependencies between firms. Research dealt either with internal or external factors, yet managers have been dealing with both factors simultaneously most of the time. Additionally, Pandit (2000) suggests that while “questions relating to content of turnaround strategies are reasonably frequent, those relating to the context and process of turnaround are rare” (Ibid: 52). This on-going
study aims to address these issues by looking at interdependencies between firms and how turnaround processes evolve. Specifically, we propose that it is the interplay interplay between established and new relationships that can create opportunities for survival of declining organizations. This study is carried out from the industrial network perspective of the Industrial Marketing and Purchasing Group (IMP).
The structure of the paper is as follows. First, we review the concept of decline and turnaround strategies, and how relationships have been dealt with in the latter. Thereafter, by adopting an industrial network approach to relationships, we present the relevance of inter-organizational interactions for declining organizations. Subsequently, the research method is described followed by the case presentation. In this section, the context in which the 8 case companies are embedded provides the background for the turnaround activities currently adopted, and the respective role of relationships. Finally, we discuss the influence of established and new relationships in their turnaround activities and conclude by providing some managerial implications and issues for further research.
Hoffman (1989) defines turnaround strategies as the key set of activities employed to halt decline and stimulate an upturn cycle. This before and after picture has led many authors (Schendel et al, 1976; Bibeault, 1982; O‟Neill, 1986) to identify different stages of turnaround:. a downturn phase characterized by financial performance under standard for a period of time, followed by an upturn phase, in which the financial performance exceeds the satisfactory standard for a period of time. (Hoffman, ibid). Other authors related the cause of decline with the choice of turnaround strategies (Schendel et al, 1976; Hofer, 1980; Hambrick and Schechter, 1983; Arogyaswamy et al., 1995) where the main discussion rested on the difference between operational and strategic turnaround strategies.
For the purpose of this study, we define turnaround strategies as any attempt, any action an organization carries out with the intention to survive or come out of decline. This is because we focus on the process, where the outcome is still currently unknown. Furthermore, unsuccessful turnaround strategies can also carry learning elements for further attempts and therefore should not be discarded in understanding the turnaround process.
In general the strategic turnaround options refer to repositioning, which means that the organization can move to new markets, develop new products, or change its core activity. The operational turnaround moves refer to retrenchment or reorganization. Retrenchment implies a reduction in size and scope of the company. It has been pointed out by Robbins and Pearce (1992) as one critical and required phase declining organizations go through. Yet Barker and Mone (1994) suggest this may be a dangerous assumption, as retrenchment can impose limits to turnaround strategies as the organization‟s resource base is weakened. Reorganization reflects managerial changes on structures, processes and human resource management. And in most studies (Bibeault, 1982; Hammermesh, 1976; Biteman, 1979; Graham and Richards, 1979; Hofer, 1980; Slatter, 1984; Melin, 1985; Firsirotu, 1985; O‟Neill 1986) management change in the form of board
representation, new leaders or ownership has played a major role in turnaround as they provide a different perspective of the decline situation.
However, most of the research (insert references) point out the need to look at both, strategic and operational, attempts at the same time also because sometimes it is difficult to determine the boundary between these two strategies. Nevertheless, one main observation by Schendel et al.
(1976) is the fact that many declining companies respond to strategic problems with operational remedies.
An alternative perspective in turnaround strategies has looked at the conditions of the environment in order to determine the adequate strategic response out of decline. Harrigan, (1980) proposed four strategies: leadership, harvest, niche and quick divestment. In a similar way, Cameron and Zamutto, (1983) propose four domain strategies in order to match the change in the environment of declining organizations by taking into account the type of change (size or shape) and its continuity: offence, defence or consolidation, creation and substitution. In both cases the strategic choice is bounded to the management‟s perception of the environment and the company, which can be misleading. If decline could not be avoided in time, it points out already a lack of accuracy in management‟s insight. Moreover, it points towards a fit between the organization and the ever changing environment.
In Hoffman‟s, (1989) reviewed research on corporate turnarounds he identified five generic
turnaround strategies: restructure leadership and organization, cost reduction, asset redeployment and repositioning. Those strategies were related to the main types of actions taken by managers and their perceived environment conditions. The applicability of those results are doubtful as retrospective studies favour simplification of a complex matter due to: (a) the difficulties in determining the cause for decline and turnaround, (b) the perceptions of managers in the moment they are facing a crisis is quite distinct when the crisis is overcome, and (c) the fact that the strategies may be taken simultaneously, and the conditions may be among themselves, contradictive. Nevertheless, the strategies pointed out substantiate choice for survival of declining organizations.
Yet, all of the studies mentioned are retrospective and focused on the content of turnaround strategies. In this context, we focus on the way organizations try to move away from this stage by carrying out activities, the same or new ones. As companies are interdependent with other companies (suppliers, customers and third parties), we aim to deepen the understanding of the role of inter-organizational relationships in this process.
Relationships in turnaround strategies
While many authors (Starbuck et al, 1978; Staw et al, 1981; Kelly and Amburgey, 1991; Cameron et al; 1987 (a); 1987 (b)) have studied the intra-organisational relationships in the organization in
the decline process, especially those with a voluntaristic view, the inter-organisational relationships became part of an intrinsic discussion of the environment, by the determinists (Hannan and Freeman, 1984; Mintzberg, 1984). Sutton‟s (1990) work was the first step to study the role of inter-
relationships and an organization‟s image management during decline, while Arogyaswamy et al.
(1995) pointed out the importance of inter- and intra-relationships in their two-contingency model of firm turnaround.
Finally, Uzzi (1997) deepened the discussion and stated that the research in decline had largely disregarded the role of social structures and interdependencies between firms affected by decline. Uzzi identifies three elements – embeddedness, strength and type of ties and resource
dependencies – that determine the environments and a firm‟s behaviour throughout decline.
Unfortunately, no advances in this field are observed after Uzzi‟s work in studying relationships throughout decline.
From a practical side, lies the fact that to understand how a turnaround process unfolds requires a continuous follow-up of a declining organization. According to Whetten (1980), it is a difficult task given the pressure these organizations usually face, on one side, and dependent on academic research funding for this purpose on the other. In the next section, we pick up where Uzzi left off and adopt a distinct perspective on networks and relationships in order to determine the role of relationships throughout decline.
Relationships in industrial networks
One of the main problems pointed out by Håkansson and Snehota (1989) in traditional strategic research is the explicit or implicit assumption that firms operate in faceless and atomistic environment, which is beyond the influence or control of individual organizations. The perspective of the Industrial Marketing and Purchasing (IMP) through their research found out that a great deal of industrial business exchanges are based on long-lasting relationships rather than one time and arm‟s length transactions. In these businesses exchanges, the buyers were as active as the seller
and the customer was not an anonymous or faceless market. The relationships evolved over time through economic and social/personal interaction among organizations. The focus is then shifted from the organizations per se, and directed at how they shape and are shaped by the business relationships they are engaged in (Håkansson 1982). The environment in this sense is not a separate construction outside the organization but a part of it, as it is embedded in a set of relationships through time and space. The configurations of the organizations (nodes) and their relationships (threads) results in a business network (Håkansson and Ford 2002) and therefore the
outcomes of one relationship affect others. The main implications from this perspective are the following:
Relationships act as opportunities and constraints.
Relationships represent the mutual oriented act of influencing and being influenced.
Higher control of relationships may result in reduction of effectiveness in a net.
Moreover, according to Håkansson and Snehota (1995), relationships have two dimensions: substance and function. On the substance side, it brings companies together through the interaction of organizations, their activities and resources. Each relationship can be developed on one or more levels of the substance dimension. In this way, “actors (organizations) carry out activities and activate resources. Activities are resource-consuming and evolve as the capabilities of actors develop. Resources limit the range of activities an actor can pursue” (Ibid: 48). On the
function level it carries the potential to affect the individual organization, a relationship and the whole network through changes in the substance. Changes in how organizations, activities and resources interrelate affect the individual organization‟s structure, collection of resources and the way activities are performed. It also affects the relationship as through relationships organizations can perform activities and utilize resources that none of them could accomplish in isolation.
From this perspective, relationships create change in industrial networks providing opportunities. But due to a lock-in effect, they also present limitations, as they cannot escape the pattern created by their own development (Håkansson and Lundgren 1997). This perspective may explain some contradictive findings on rigidity (Staw et al., 1981; Cameron, 1983; Whetten, 1981; Rubin, 1979; Bozeman & Susher, 1979) or innovativeness (Hofer 1980; Schendel et al, 1976; Bibeault, 1982;, Nystrom & Starbuck, 1984) from organizations facing decline.
Relationships to turnaround
As defined in the turnaround strategies section, for the purpose of this paper, turnaround strategies are any attempt or action an organization carries out with the intention to survive or come out of decline. Those intentions when translated into actions have the potential to provoke changes not only within the organization but also around it in the network. Though, when referring to a literature dealing with industrial network approach we have to bear in mind that networks are not goal-seeking actors as such (Håkansson and Snehota, 1995) even though the individual companies in the network are. This leads to a further notion that networks do not have life-cyclical characteristics
and therefore networks do not decline and are characterized by co-existing stability and change. Håkansson and Snehota (1995: 295) state that “change in business networks is not a change from
one state to another given state but rather a state of dynamic flux – a continuous process. Yet, in
the intention of the actors, every change is an adjustment towards a workable steady state”. There
are identifiable forces that generate change and understanding their processes and mechanisms is more useful for managers than predicting its effects. In this sense, we move away from a prescriptive solution adopted by many turnaround strategies authors, and offer an analytical tool for managers to understand the meaning of change for the organization, its relationships and the network. In our view, relationships are the means for change, and it can occur both exogenously or endogenously. Changes initiated exogenously refer to changes in the general economic, social, technological and cultural conditions. Endogenous factors are changes initiated by an organization in at least some of their relationships. The connections between the substance levels of a relationship, that is organizations, activities and resources follows a rationale. When a pair is connected an effect in the third dimension is bound to occur, but this effect can vary depending how new connections are discovered, interpreted and enacted by the organizations involved. For example, how organizations and activities are connected has implications on the resource interaction as well.
Considering the possibility for expanding a company‟s resource base through relationships, the
main problem for declining organizations becomes the lack of time. Not only to develop relationships is resource and time demanding, but the costs anticipate the returns, which on its turn, is also uncertain (Håkansson and Snehota, 1998). So instead of looking for new and unique
opportunities, managers choose an easier way out and may imitate other‟s strategy, or keep the
same modus operandi (Starbuck et al, 1978), as a result of time pressure.
Thus, considering that an organization defines and it is defined by its relationships, it cannot be denied that current connections have played a role in organization decline. The paradox is that for some companies opportunities may lie within those same relationships while for others a new set of connection may be required. The role of relationships in established and new relationships is discussed next.
Role of relationships in turnaround
While maintaining relationships, change can occur by developing a new activity or deploying resources in a different way with the organization‟s counterparts (suppliers or clients, for example). In the case of building new relationships, it already brings a new contact to the organization and
this implies that for sure, the combination of resources and the performance of activities will be distinct, as no relationship is the same (Dubois and Pedersen 2002). Next, both approaches to change in relationships are presented.
Changes within established relationships
According to Håkansson and Snehota (1995), organizations may change established relationships by developing stronger connections with only some counterparts. When an activity becomes specialized towards a specific group of counterparts, the resource interaction strengthens and becomes more specific. Additionally, resource heterogeneity implies that organizations can interact and create a set of unique resources, which will change the way activities are carried out. Nevertheless, it still reflects the existing network logic and the evolution will uncover the opportunities that laid inert in those relationships. The skills developed by the organizations become subordinate to the logic of a specific activity chain, and it makes more difficult to link to other activity chains. As a consequence, when changes occur within established relationships it may be a result of a new activity with the same counterpart which will impact the resource base of both organizations involved in the process. Alternatively, it may also materialize as a new combination of resources which will impact the activities carried out in the relationship.
In declining organizations to change activities and resources is not as simple as it seems. As the organizations involved are already connected through a certain logic of operation, means that any change will need to be recognized as valuable and approved by the counterpart. This process may take time, and it is dependent on the ability of the firm initiating the change to influence its counterparts. The signals the declining organization sends to its main stakeholders become more important in order to avoid a deterioration of its relationship portfolio. In this sense, a strategic action is defined as efforts of a firm to influence its position in its network based on an understanding of its position in terms of its relationships and the resources available in the network, instead of simply looking at a set of products, markets and competitors (Håkansson and Ford 2002). As the perspectives are not the same for the organizations involved, moving away from a self-centred view can benefit the declining organization and open latent opportunities within established relationships.
Changes by establishing new relationships
Alternatively, organizations may try to link their activities with new types of counterparts. In this case the activity becomes generalized to other nets. An organization can therefore change its
position in an activity chain within the same net, or develop the same activity for a different net. A rupture to the existing network logic is to be expected as the connection to other nets brings new elements into the relationship. Thus, an exploitation of skills to an assortment of purposes allows for contacts in different nets, broadening the scope of relationships.
On the other hand, the connection of resources between organizations is a matter of control and availability. An organization can gain control of significant resources through ownership or informal association. Considering products also as a scope of an organization‟s resource base, when a new product is developed targeting a new market, new contacts require a distinct approach. The important part of establishing a new relationship in the case of declining organizations is their attractiveness to the counterpart and vice-versa.
For declining organizations, it may be an advantage to attempt new connections as its reputation regarding its financial situation may not be disclosed in other nets. In this sense, if the organization is able to offer value in a distinct net it will create a new opportunity. Wynstra (1998) affirms that it is more beneficial for an organization to interact with existing counterparts than to choose new ones because it may imply new investments, besides requiring an understanding of new modus operandi. In the case of declining organizations however, the rationale in established relationships have been proven damaging for the company, and although time and resource consuming, new relationships materialize as opportunities. In order to be able to influence counterparts in this case, organizations can resort to third parties, like banks, designers, institutions in order to send a signal that can be read positively by the participants of the net, aligned with Sutton‟s (1990) and Arogyaswamy et al. (1995) findings and proposition. Thus, new relationships can open the mindset of declining organizations, but it requires awareness and risk taking from their part.
To conclude, declining organizations turnaround through their established relationships or building new ones, rather than deciding which path to take as proposed by many turnaround strategists. Understanding the role of relationships in those paths is important, as it requires a self-analysis of the organizations‟ role in the network. Simply deciding what to do is not enough, as declining organizations need to ensure the approval of counterparts for its turnaround strategies.
In the following section the research method is presented.
The opportunity to study turnaround processes was triggered by a group of companies co-financing two research projects as they identified the need for another perspective on their activities. And in this sense, the sample was given. Although case studies seemed the most logic, we will not follow Yin‟s (1994) approach. Our method is more aligned with Dubois and Araujo‟s (2004) view of cases as a convoluted process of systematic iteration and combination of empirical evidence, theoretical frameworks and persistent reframing of what it is the researcher is studying. Instead of moving from theory to practice, we adopt a continuous exchange between those elements in order to better understand the objects of the study.
There are two interesting features in this paper. The first related to the fact that we are looking simultaneously at declining organizations and the potential demise of an industry. In this case, contrary to the usual methodology process (Easton, 1995), the sample was given. The eight companies studied are co-financing the research project, 6 pine furniture producers, one subcontractor and one component supplier. The context of decline became obvious shortly after the project started when one of the companies went bankrupt. Of the remaining companies, five present characteristics of decline. Although there is a lot of disagreement in the literature of when decline can be spotted some common signs on these five companies cannot be ignored and considered as short-lived, as we have observed the following common characteristics: decreasing profits over the last three years, combined with retrenchments in the company sizes and rearrangements in the companies‟ structures and processes (for companies‟ financials see
Appendix 1). Moreover, in 2002 the industry used to be composed by 88 manufacturers and three years later only 10 are left. The companies studied represent then 70% of the industry. Two exceptions, the component supplier and one producer of children‟s furniture, are not part of this
study as their condition has not been identified as critical as the others. Nevertheless, if the early signals are not taken into account they also may join the group at a later time (Weitzel and Johnson, 1989).
The second feature is the study of decline while it is happening. Many academic studies related to firm response to decline have been executed as historical studies and have focused the analysis on quantitative data. In this case, we are following up the processes closely and focusing on qualitative data with different actors in the following way. We visit the companies on a regular basis and until late November 2005 we have conducted all together 115 visits in the 8 sample companies, and we expect to keep the same cadence in the forthcoming months. The interviews are conducted as narrative interviews and conversations, normally lasting from one hour to two, with diverse people in different departments (marketing, purchasing, production and finance) and levels