A Study in corporate sickness and turnaround management: managerial and policy implication

Abstract

Research in performance declines Corporate performance is one of the central dimensions in strategy research. One specific area that has attracted considerable attention of scholars across the globe is continuous performance declines (sickness) of organizations, their turnaround and revitalization. The question is whether the phenomenon of organizational decline is chaotic or do some pat-terns exist which have explanatory and/or predictor value(s)? Business Policy researchers have used deductive as well as inductive approaches for understanding strategy-structure environment-performance linkages. Despite obvious importance at managerial and policy levels, no large sample case-studies research on identifying causes of organizational performance, interlink ages among them, and turnaround management has been done in relation to Indian experience. This study bridges the gap and covers the entire gamut of operations including di-agnostics, prognosis, and strategy formulation and implementation for turnaround management. Praxis orientation Organizational performance can be explained from multiple perspectives. The field stands enriched especially by the following: industrial economics (IE), contingency view, population ecology, transaction cost economics, resources-based view, and strategic commitment. How-ever, the very presence of several explanatory theories point to the fact that no single perspective can wholly explain organizational performance especially in the context of strategy environment linkages. Our research architecture was therefore designed by going back to the basics of input- output systems through the chain of causality and decomposing performance determinants into discrete cost and value-addition activities and performance drivers. These included organizational assets, technology, local environment including economic and regulatory, and economic value-addition linkages. The sample consisted of 170 sick Indian companies in the private, non-SSI sector (of which 168 were firms registered with the BIFR). A cross-sectional content analysis was carried out. This was further analyzed through statistical tabulations, associations and contingency tests. A longitudinal study of one large sick corporation was also undertaken for processual understanding and to augment our arguments on turnaround actions and causal linkages. Research questions Specifically, the following issues / questions were set in this research project: a) The primary performance inhibitors in Indian industry b) The patterns of association of various performance inhibitors across industries. If possible, to look at whether industry competition structure (as represented by main bargaining forces) is a determinant of organizational performance; c) Develop the important concept of pattern of causal linkages with the severity of decline of firms. d) Develop the important concept of vicious cycles and identification of triggers for turnaround for breaking the vicious cycles and instead starting virtuous cycles. These have implications for early and effective turnarounds, and also for theory development. e) The nature of interventions by state agencies for nursing back the sick units to health. Based on this conceptualization, what have been the performance outcomes? f) What can be recommended once the answers are found? Key Findings a.(i) Statistically significant different patterns in main sickness causes exist across industries. The finding reinforces the Business Policy perspective that industry structure, as represented by the five competitive forces in the immediate environment, is a determinant of organizational performance. At the managerial and policy levels, the finding suggests that any turnaround strategy must seriously evaluate the industry structure. a(ii) Simultaneously, enough evidence exists which substantiates other theoretical perspectives. The resources-based view, contingency theory, population ecology, strategic commitments, organizational learning, and transaction cost economics could partially explain the phenomenon of organizational performance declines thereby validating themselves. At the same time, no theoretical perspective could wholly explain the decline. The need for a unified theory therefore becomes imperative, which could explain superior or inferior organizational performances. The chain of causality (as oper-ationalized in our research through the FMEA approach) comes close to that. Here we treat cost and value activities as discrete yet mutually interdependent drivers. b(i) There is strong evidence that differential patterns in sickness causes exist between low-severity (LLl) and high-severity (HLI) sick organizations taken as distinct clusters. The finding has implications on preciseness control, as well as formulating viable rehabilitation packages. The findings in the HLI cluster strongly suggest that change of existing management and improvement in management employee relations are a prerequisite to any successful turnaround. In the LL! group, project management appeared as the most important dimension for controlling sickness. b.(ii) A cross-analysis within the two Loss Index categories for the industry classification show no statistically significant departures. This suggests that the causal syndromes identified within a loss index category are universal irrespective of the sick firm's industry affiliation. In another respect, causal syndromes based on industry classification are weaker in strength compared to the syndromes within a loss index. c) A few causes having large-ripple trigger effects have been isolated. These triggers can act as control points for commencing various cycles for successful turnarounds. d) The turnaround strategies formulated across industries under the aegis of BIFR found to comprise are largely a standard package. Such strategies are clearly inappropriate in the light of our findings on the causal patters. e.(i) The financial projections in several rehabilitation packages were bewildering. Often projections of sales growth by more than 300 percent were supporting fickle profits which barely enough fulfilled the compulsory Debt Service Coverage Ratio (DSCR) requirements. The total financial leverages of about 50 in a few cases meant that a 2 percent shortfall in sales targets would result in decrease of profits by 100 percent. e.(ii) In the light of our analysis of the process of formulation of rehabilitation packages, number of agencies involved, and the nature of financial projections made, we had made the proposition that financial performances of the rehabilitated firms would be poor. The proposition stood strongly supported from the initial results of 61 firms. Of these, as many as 51 firms had failed, 2 were partially successful, and only 8 could be deemed successful. Several crores of rupees had been pumped as additional funding in these units. The results indicate that the rehabilitation packages need to be reoriented towards achieving better organizational performance. f) Clinical research provides evidence that the 'softer' dimensions of strategy remain largely neglected while implementing the 'harder' aspects of turnaround strategy. The 'rational actor' model has limited value in circumstances where stakes are high. The 'political process' model needs to supplement the rational actor model (Allison, 1981) to improve the chances of success of rehabilitation packages. Simultaneously, the organizational processes have to be activated, so that the unlearning of old values and norms and learning of new cultures could become possible. g) Overall, the attempt of turnaround through state intervention mechanisms is feeble and lie within the existing frames pattern. Literature suggests that for deep sickness situations, large-scale strategic changes are needed which could be deemed as breaking away from the past strategy patterns. It is therefore suggested that techno-structural turnaround strategy (as focused in the Bl- FR-sponsored rehabilitation packages) must be accompanied by individual and organizational change strategies. For facilitating this transformation, a 3 - phase change programme is recommended which prepares the organizational members to change and reduce resistance, trains them to new learning’s and values, and finally institutionalizes the new learning’s.