2 Turnaround Management – State of the Art

2.1 Abstract
Given the increasing cases of corporate distress and bankruptcy, there is a high
need for empirical research efforts with a sound theoretical basis in the context
of turnaround management. While the causes of crises have been investigated to
a certain degree already, there is an enormous lack of empirically tested turn-
around models that could serve as a guide for management in turnaround
situations. Concomitant with this, the factors behind turnaround success have
insufficiently been identified. To encourage such studies, I provide a guide to the
current state of the art concerning the research field of turnaround management.
Based on this review, I identify research gaps and recommendations for further
research. I conclude by categorizing open research questions and issues to be
considered in future research efforts.

2.2 Introduction
In the scholarly literature, there have been few efforts to provide empirically
tested turnaround models that could help rescue distressed companies. According
to Wild (2010), for example, the research community has not made noteworthy
progress in the identification of success factors for turnarounds in recent
decades. This lack of well-founded research is particularly surprising in light of
the increasing number of bankruptcies in western economies such as Germany
and the US. In 2010, bankruptcies have set new records (Creditreform, 2010;
American Bankruptcy Institute, 2010; United States Courts, 2010), and in 2011,
bankruptcy rates have been stagnating (Euler Hermes, 2011).
The latest and most important wave of empirical examinations of turnarounds
took place in the late 1980s and 1990s. This was a reaction to the far-reaching
changes in the US corporate world during the 1980s, which resulted in many
comprehensive strategic, organizational and financial restructurings (Jensen,
1991; Hoskisson & Johnson, 1992; Bethel & Porter Liebeskind, 1993; Hoskis-
son, Johnson & Moesel, 1994; Johnson, 1996). For example, in the summer 1993

P. Faghfouri, The Role of Governance Structure in the Context of Crisis Management,

DOI 10.1007/978-3-658-00596-2_2, © Springer Fachmedien Wiesbaden 2013
10 2 Turnaround Management – State of the Art

special issue of the Strategic Management Journal, Schendel (1993) refers to the
high number and diversity of restructurings in the 1980s and the resulting need
for research. John, Lang and Netter (1992) even describe this restructuring wave
as an unprecedented opportunity for scholars to investigate different aspects of
corporate and managerial behavior. Hence, it is conjecturable that the current,
not yet survived economic crisis will be followed soon by a refocusing of the
research community on topics related to turnarounds.
In practice, turnaround management aims to prevent a company from filing
bankruptcy or, once involved in the bankruptcy reorganization process, prevent-
ing its liquidation. Thus, this study defines turnaround management as a reaction
to a company’s crisis situation, meaning that the focus lies on coping with a
company crisis, not preventing or predicting it (cf. Altman, 1968; Altman, Hal-
deman & Narayanan, 1977; Altman, 1984; Baetge, Dossmann & Kruse, 2000;
Baetge & Jerschensky, 1999).
Given the lack of well-founded theoretical and empirical research on turn-
arounds (Pearce & Robbins, 1993) and the practical relevance, this topic de-
serves more attention – not only in light of the recently abating economic crisis.
Rather, unlike back in the 1980s, turnarounds and restructurings are part of daily
management today even during upturn phases. Hence, this study aims to provide
a systematic and comprehensive literature review and research agenda to en-
courage other scholars to investigate topics related to turnaround management.
This literature review focuses on the most important articles published in scho-
larly journals ranked as A and A+ (based on the German VHB-JOURQUAL
Ranking in 2003, cf. Hennig-Thurau et al., 2003).
This study is organized as follows. In Chapter 2.3, I define the term “crisis”
including its characteristics and causes. Understanding the causes of crisis is cru-
cial, as the specific cause determines the choice of an adequate turnaround
strategy (Schendel, Patton & Riggs, 1976; Schendel & Patton, 1976; Ashta,
Diaz-Bretones & Tolle, 2005). Depending on the specific cause of the crisis, dif-
ferent actions might be needed to achieve the turnaround. In Chapter 2.4, I
present different existing models of turnaround management. Chapter 2.5 derives
success factors based on existing theoretical and empirical research. Drawing
upon the literature analyzed and calls by researchers, I conclude with a set of
future research directions and questions in Chapter 2.6.
2.3 Crisis and its causes 11

2.3 Crisis and its causes

As the term “crisis” is applied in different contexts, its interpretations vary
strongly (Luneburg, 1970). The literature has been investigating crises at an in-
dividual level, in the context of worldwide (economic) crises, in terms of system
theory or in the sense of a business crisis. This dissertation deals with crises in a
business context and thus from a company’s point of view, while it excludes
other types of crises such as the individual crisis of a person (Fink, 1967; Rüsen,
2007) or the worldwide crisis in the sense of an economic crisis (Narr, 1973;
Hülsmann, 2005).
In business research at the end of the 19th century, crises were most pre-
valently considered in the sense of economic recessions (Bergmann, 1895), and
this understanding continued to dominate until after the first worldwide econo-
mic crisis (Hasenack, 1932). This view did not change until the 1970s, when
scholars started to investigate crises in the sense of a business crisis (Bain, 1968).
Two understandings can be differentiated: a crisis is considered either as a
situation or as a process. According to Hermann (1973), a crisis may be defined
as a situation that surprises the respective owners or managers, threatening both
company goals and personal goals and reducing the available time to react.
These three general attributes of crises, i.e. the surprising effect, the threat and
the time pressure, are established as typical characteristics.
The operationalization of this situative definition of a crisis turns out to be
problematic and unsuitable for application in empirical studies. At this point, it
should be noted that in the Anglo-American literature, the term “turnaround
situation” is used instead of the term “crisis situation,” which is rather common
in the German speaking area. This study uses these two terms synonymously.
Three essential alternatives of the operationalization of the crisis or turn-
around situation were identified in the literature review:
„ Observation of current key performance indicators (KPIs)
„ Comparison of performance ratios with competitors in the same industry
„ Examination of the company’s development based on KPIs

For example, in his empirical investigation, Heany (1985) considers a company

to be in a turnaround situation if its ROI before interest and taxes is regularly
12 2 Turnaround Management – State of the Art

below 10 percent. John, Lang and Netter (1992) classify companies as turn-
around companies if they show negative profits for more than one fiscal year. By
contrast, Goodman (1982) defines a turnaround situation for a company as given
when the observed company repeatedly shows below industry-average profits.
Bibeault (1982) rates companies as turnaround companies if they face perform-
ance decline in three consecutive years without cease, after which the intensity of
the decline might differ. According to one of the most established attempts of
operationalization by Pearce and Robbins (1993), a turnaround situation means
that a company has faced several consecutive years of performance decline,
preceded by a period of success (cf. also Bibeault, 1982; Hambrick & Schecter,
1983; Schendel, Patton & Riggs, 1976; Zammuto & Cameron, 1985).
While there is disagreement in the research community about when a turn-
around situation is prevalent, similarly there is disagreement when it comes to
the definition of the requirements of classifying a turnaround as successful.
According to Schendel and Patton (1976), a turnaround situation is prevalent
when a company’s operating growth rate is below the GDP growth rate for a
minimum of four consecutive years. Turnaround success, by contrast, is achieved
when the operating growth rate is above the GDP growth rate for a minimum of
four consecutive years. Hambrick and Schecter (1983) define a company as
being in need of a turnaround if the ROI is below 10 percent (two-year average
before taxes), while requiring a ROI above 20 percent (two-year average before
taxes) for a turnaround success.
Lohrke, Bedeian and Palmer (2004) suggest solutions for the problems of
defining a turnaround situation and turnaround success for future research in
their literature review. First, they point out problems that might occur when ob-
serving a company’s development (e.g. modifying the beginning of the turn-
around situation by “creative accounting”). As a solution, they mention com-
paring profitability with objective benchmarks such as risk-free interest rate. In
addition, they point out the importance of adding qualitative information by
asking relevant external stakeholders such as consultants their opinions on the
financial performance and overall situation of the company. As a third point,
they mention the extension of the stakeholders asked in order to gain qualitative
information. According to the authors, when it comes to collecting information,
researchers should focus on more than only shareholder-oriented KPIs. For
example, relationships to other stakeholders such as banks, suppliers and co-
2.3 Crisis and its causes 13

operation partners should be examined. Mutual trust with stakeholders might

serve as an important indicator of the stability of a company.
However, it remains questionable to what extent future researchers will be
able to obtain such sensible information and to what extent such information – if
even available – is free from biases, socially desired responses or withholdings.
Therefore, focusing on objectively comparable KPIs is crucial. Using professsio-
nal providers of market studies, the KPIs of a company can be compared with its
competitors or the industry average. Applying this method should show if the
company investigated is in need of turnaround in an objective way.
Considering crisis as a process, the problem of operationalization might be
less complicated, as the process-oriented view of crisis allows distinguishing bet-
ween different severities. According to a current agreed definition, crises are un-
expected, unintentional processes of limited duration and influenceability, while
the outcomes might differ (cf. e.g. Cezanne, 1999). This definition includes all
early and late phases of the crisis process, not only the late phase threatening the
company’s survival (compare with Hess & Fechner, 1991). Differentiating bet-
ween the phases of a crisis is important because of their different characteristics.
Depending on the phase and severity of the situation, the company faces differ-
ent degrees of time pressure and room for maneuver when it comes to turnaround
actions. At the same time, the impact horizon of the respective actions or coun-
termeasures decreases with increasing severity.
Based on these phases of crises, Müller (1986) summarizes the characteristics
of the phases and points out the need to design turnaround actions based on the
specific phase and severity the company is facing (see Figure 1).
It remains to be clarified which events, circumstances and causes take a com-
pany into a turnaround situation. In the 1930s, the first efforts to provide a res-
ponse to this question began in Germany. Fleege-Althoff (1930) and Findeisen
(1932) conducted the first analyses of “diseased” companies in the words of
medical research methods. This approach led to the fact that initially only bank-
rupt companies were considered in the context of identifying the causes of crisis.
It took several decades until Anglo-American researchers started taking into con-
sideration companies that had survived a crisis successfully (cf. e.g. Cameron,
Sutton & Whetten, 1988).
14 2 Turnaround Management – State of the Art

Impact horizon of countermeasures

Long-term Mid-term Short-term

+ Bankruptcy –

Room for maneuver

Time pressure

Strategy Profit Liquidity

crisis crisis crisis

– +
Low Medium High
Severity

Figure 1: Phases of a crisis according to Müller (1986)

The causes of crisis can be divided into external and internal causes. Although
managers often claim that their company faces crises mainly owing to market
changes, competitive pressure or other external factors, many research studies
suggest that the causes of crises are often internal (of course, this finding is not
necessarily true during extraordinary economic conditions such as during the
worldwide economic crisis in 2009). The most frequently found internal cause of
crisis is management mistakes. Altman and Hotchkiss (2006) confirm this in
their investigation of US companies. Management mistakes may result from the
incompetence or failure of management when it comes to perceiving and inter-
preting early warning signals. Even if the final cause of bankruptcy is a shortage
of liquidity, the initial cause of the problem is management mistakes. For
example, Lovallo and Kahneman (2003) state that excessive optimism and the
overestimation of own talents, skills and control over certain procedures and
events are the typical characteristics of managers that lead to management
mistakes (and finally to a crisis in the worst case). Furthermore, a too strong em-
phasis on growth might foster crisis proneness (Finkin, 1985; Goodman, 1982;
Slatter, 1984; Sloma, 1985), as a strong growth orientation might lead to blind-
2.3 Crisis and its causes 15

ness with regards to warning signals such as profit or performance decline

(Heany, 1985). Based on 82 voluntarily initiated bankruptcy reorganizations,
John, Lang and Netter (1992) demonstrate that managers rarely mention their
own decisions or behavior mistakes as the causes of crisis. In fact, they rather
name external factors such as economic conditions (recessions or tough market
circumstances) and competitive pressure (especially coming from foreign com-
petitors) as the most important causes of crisis. Finally, the literature review by
Pandit (2000) might serve as an orientation for future research on this topic, as it
examines the causes of crisis among other topics. The author provides a literature
review, criticizes existing research efforts including their research designs and
concludes with recommendations for further research. With regards to the inves-
tigation of the causes of crisis, for example, Pandit (2000) states that the severity
of the crisis, the attitudes of stakeholders, the firm’s outer context and firm’s
historical strategy should all be taken into account in future studies.
In contrast to many researchers who report internal factors as the main causes
of crisis, Pearce and Robbins (1993) understand the causes of crisis to be a com-
bination of internal and external causes (see Finkin, 1985; Heany, 1985; Schen-
del, Patton & Riggs, 1976). According to these authors, crises develop because
of several years of slight performance decline or several months of intense per-
formance decline. They call on future researchers to consider external and
internal causes when investigating performance declines, helping ensure that the
link to the turnaround actions implemented later is established (meaning that the
choice of turnaround actions may differ depending on the specific causes).
Besides the internal causes of crisis, Altman and Hotchkiss (2006) identify
further external circumstances and causes that led to a lack of liquidity in US
companies: chronically sick industries, the deregulation of key industries, high
real interest rates in certain periods, international competition, overcapacity
within an industry, the increased leveraging of corporate America and relatively
high new business formation rates in certain periods.
In a comprehensive investigation of different empirical studies, Johnson
(1996) presents antecedents of restructuring, which might be interpreted as the
causes of crisis. He mentions environmental changes, inadequate governance
structures, poor strategy formulation or implementation and poor performance
(indeed, the latter might lead to misunderstandings as it is a variable for measur-
ing the severity of a crisis at the same time; however, the author describes this as
16 2 Turnaround Management – State of the Art

an antecedent of restructuring). Regarding environmental changes as a cause of

crisis, Donaldson (1994) argues that the wave of restructurings in the US in the
1980s was a reaction to the fundamentally changed business environment and
poor adaptation of strategies to these changes. Concerning inadequate gover-
nance structures, empirical studies have shown that high share dispersion owners
have insufficient incentives to monitor corporate strategy (Johnson, Hoskisson &
Hitt 1993). The findings of Markides (1992a, 1992b, 1995) indicate that too
much diversification might lead to performance decline. Moreover, Hoskisson,
Johnson and Moesel (1994) provide support for the notion that the majority of
companies refocusing on the core business show higher degrees of diversifica-
tion than their industry peers, which suggests that in some cases an inadequately
high degree of diversification might be a cause of crisis.
The German literature provides comprehensive research efforts investigating
the causes of crisis. Most importantly, the efforts of Hauschildt (2000) have been
seminal, clustering the causes of crisis into four essential categories (see Figure
2). The two categories of causes related to the value creation process and finan-
cial issues are external (even though these categories are influenceable by the
company), while the causes related to the personality of the entrepreneur or the
dominant manager and to the institution or governance are internal (even though
these categories are influenced by external factors). According to Hauschildt’s
investigations, all causes leading to crises can be allocated to one of these cate-
gories. He differentiates between latent and manifested crises, each of them pre-
ceding bankruptcy. The former leads to gradually diminishing strategic success
factors, while the crisis is not prevalent for external parties. Even for internal
stakeholders, the crisis is consciously identified only by a few. By contrast, the
latter describes the more advanced phases of a crisis, leading to the restrictive
behavior of suppliers and creditors (e.g. shipments only with advance payments,
cuts in existing credit lines, denial of new credit) because of the threat of
bankruptcy.
In summary, a variety of internal and external triggers lead to crises or in-
crease the severity of an existing crisis. This demonstrates the importance of
identifying and analyzing the specific causes for the derivation of the turnaround
strategy and the respective actions to be implemented. When it comes to turn-
around strategies, there is no “one size fits all” – rather, each cause requires an-
other course of action.
2.4 Models of turnaround management 17

Causes related to
Causes related to
the personality of
the value creation
the entrepreneur or
process
dominant manager

Latent crisis

Manifested crisis

Bankruptcy

Causes related to
Causes related to
the institution or
financial issues
governance

Figure 2: Four categories of the causes of crisis, Hauschildt (2000)

2.4 Models of turnaround management

When it comes to turnaround management, first it is important to note that owing
to the differences in turnaround situations mentioned above (depending on the
causes, phases and severity of crises), there cannot exist a perfect model of
turnaround management. Pandit (2000) points out that the choice of turnaround
strategy and actions is dependent not only on the specific causes of crisis and
their severity but also on the attitudes of different stakeholders, environmental
conditions (e.g. industry characteristics or macroeconomic conditions) and the
pursued corporate strategies to date. According to Pandit (2000), all these aspects
receive insufficient attention in research on turnaround management. For
example, Pearce and Robbins (1993) emphasize that they do not aim to propose
one model for all turnaround situations, but only one possible model. Different
18 2 Turnaround Management – State of the Art

company types and circumstances may require different models. To enhance

theoretical understanding, it could even be helpful to combine different models
in order to depict different causes of crisis and their severities.
Nevertheless, many research studies in recent decades have shown that
turnarounds can be divided into two essential phases: retrenchment and recovery
(cf. Arogyaswamy, Barker & Yasai-Ardekani, 1995). Furthermore, as already
mentioned, the investigation of the causes of crisis and EWSs is of high import-
ance in this research context. Table 1 provides an overview of the most im-
portant studies dealing with turnaround management and related topics and
shows their specific focuses. It should be noted that this table does not present a
chronological order of events before and during the turnaround, but rather a
chronological differentiation of research topics related to turnarounds.
The overview shown in Table 1 classifies a research topic as focused in a
study if it is the main topic investigated. For example, several studies deal mar-
ginally with the causes of crisis – but only to explain the choice of the retrench-
ment and recovery actions conducted during the turnarounds investigated in the
study. According to Table 1, such a study would be categorized as focusing on
the topics retrenchment and recovery and not on the causes of crisis.
The retrenchment phase describes, in medical terms, all the actions imple-
mented in the sense of “emergency surgery” or “life-sustaining measures.” These
are supposed to contribute to the short-term stabilization of the company and its
survival. In other words, retrenchment activities aim to ensure the short-term
existence of the company, while serving as an umbrella term for any efficiency-
enhancing cut-off action. These include the systematic reduction of direct and
overhead costs and the implementation of continuous cost monitoring (Robbins
& Pearce, 1992). In particular, the late phases of crisis, during which companies
face acute danger of bankruptcy, require quick actions to gain new liquidity or to
free up liquidity (e.g. by selling assets) (Robbins & Pearce, 1992) or to initiate
savings on certain products or product lines.
The recovery phase aims to ensure the long-term competitive position of the
company through strategic reorientation. It comprises a sustaining stabilization
of the company by conducting basic changes in different areas of the value
chain, with all actions aiming to ensure the long-term survival of the company.
Schendel and Patton (1976) identify investment and expansion programs as turn-
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