A Temporal Approach to Retrenchment and Successful Turnaround in Declining Firms

Abstract

This study extends current understanding of the retrenchment-turnaround relationship in declining firms by introducing a temporal approach and arguing that the effectiveness of retrenchment as a strategy is contingent on its adoption early in turnaround attempts. Drawing from the two-stage turnaround model and insights from the literature on downward spirals in organizations, we develop and test a theoretical model that explains how temporal considerations in retrenchment influence the likelihood of successful turnaround. Using a matched pair sample of 96 US firms, we find that declining firms that implement retrenchment actions early have a higher likelihood of successful turnaround. The findings also indicate that while two specific retrenchment actions, early divestments and early geographic market exits, significantly contribute to the likelihood of successful turnaround, early layoffs do not. Overall, the findings shed some light on the importance of timing strategic actions in organizational turnarounds. Implications for research and practice are discussed.

Founder‐CEOs and corporate turnaround among declining firms

“…Finally, we found the significant negative effect of proportion of outside directors on turnaround success to be interesting, given that the use of more outside board has recently been regarded as a sound governance practice. A possible explanation is that, as Peng (2004) and Luan and Tang (2007) Kanter, 2003;Tangpong et al, 2015). As such, advice and counsel rather than challenge/debate from outside directors may be of greater value in the turnaround context.…”

“…To test the above hypotheses, we used a matched-pair sample design that is common in bankruptcy studies and turnaround literature (e.g. D'Aveni & MacMillan, 1990;De Maere et al, 2014;Mueller & Barker, 1997;Tangpong et al, 2015). We took the following steps in constructing the matched-pair sample for the study.…”

“…prepackaged software, computers, semiconductors) and biotechnology industries (Pollock, Fund, & Baker, 2009;Wasserman, 2012). The result of the first-stage probit analysis was then included in the main logistic regression analysis as inverse Mills ratio (IMR) along with other control variables (Tangpong et al, 2015). Table 1 presents The results of our binary logistic regression analysis are presented in Table 2.…”

The Impact of Labour Force Reduction on the Financial Performance of Manufacturing Companies

“…Vapnek (2017) asserts that laying off employees is a quick way of cutting labour related costs when an entity is failing to be competitive. This notion is supported by organisational turnaround literature such as the work by Brauer and Laamanen (2014); Tangpong et al (2015) who suggest that downsizing exercises such as layoffs can indeed assist an entity to successfully restore its financial performance. Yu et al (2013) stress that timely manpower adjustment strategies such as layoffs are optimal for improving output performance for an organisation facing communication difficulties.…”

“…Abraham et al (2013) noted a negative relationship between labour force reduction and downsizing with organisations that performed poorly having a severe decrease in ROTA while better performing firms experienced minor decreases in ROTA. The timing of labour force reductions influences the possibility of turnaround success while late layoffs are negatively related to increases in ROTA (Tangpong et al, 2015). Chhiner and Currie (2014) established that excuse, justification, denial and apology based labour force reduction had a negative relationship with ROTA.…”