TURNAROUND STRATEGY
TURNAROUND STRATEGY
Turnaround is a strategy
adopted by firms to arrest the decline and revive their growth. A turnaround
situation exists when a firm encounters multiple years of declining Financial
performance subsequent to a period of prosperity (Bibeault, 1982; Hambrick &
Schecter, 1983; Schendel et al., 1976; Zammuto & Cameron, 1985). Turnaround
situations are caused by combinations of external and internal factors (Finkin,
1985; Heany, 1985; Schendel et al., 1976) and may be the result of years of
gradual slowdown or months of precipitous financial decline. The strategic
causes of performance downturns include increased competition, raw material
shortages, and decreased profit margins, while operating problems include
strikes and labour problems, excess plant capacity and depressed price levels. The
immediacy of the resulting threat to company survival posed by the turnaround
situation is known as situation severity (Altman, 1983; Bibeault, 1982; Hofer,
1980). Low levels of severity are indicated by declines in sales or income
margins, while extremely high severity would be signaled by imminent
bankruptcy. The recognition of a relationship between cause and response is
imperative for a turnaround process and hence, the importance of properly
assessing the cause of the turnaround situation so that it could be the focus of
the recovery response is very important.
Turnaround Process
The Turnaround Process
begins with a depiction of external and internal factors as causes of a firm’s
performance downturn. If these factors continue to detrimentally impact the
firm, its financial health is threatened. Unchecked financial decline places the
firm in a turnaround situation. A turnaround situation represents absolute and relative-to-industry
declining performance of a sufficient magnitude to warrant explicit turnaround
actions. A turnaround is typically accomplished through a two stage process. The
initial stage is focused on the primary objectives of survival and achievement
of a positive cash flow. The means to achieve this objective involves an emergency
plan to halt the firm’s financial haemorrhage and a stabilization plan to streamline
and improve core operations. In other words, it involves the classic retrenchment
activities: liquidation, divestment, product elimination, and downsizing the
workforce. Retrenchment strategies are also characterized by the revenue
generating, product/market refocusing or cost cutting and asset reduction
activities. While cost cutting, asset reduction and product/market refocusing
are easy to visualize, the idea of revenue-generating is best captured by a
strategy that is characterized by increased capacity utilization, and increased
employee productivity.
