The Interrelations between Retrenchment and Recovery

The Interrelations between Retrenchment and Recovery

While prior turnaround research has developed multiple stage models (e.g. Chowdhury, 2002; Lohrke et al., 2012; Robbins and Pearce, 1992), we provide a more integrative conceptualization of corporate turnarounds. Previous stage models suggest that firms address retrenchment in the initial turnaround stage, while shifting their full attention to recovery in the advanced turnaround stage (Filatotchev and Toms, 2006). Conversely, we provide theoretical arguments and empirical evidence that retrenchment and recov- ery are positively associated with turnaround performance during both turnaround stages. Retrenchment acts as a resource provider in the initial turnaround stage (Pearce and Robbins, 2008), but it is also essential to regain stability in the face of strategic change in the advanced turnaround stage. While recovery drives strategic change in the advanced turnaround stage (Barker and Mone, 1994), it is also an important means to direct retrenchment in the initial turnaround stage. Our results thus suggest that retrenchment and recovery play a far more complex and dynamic role in corporate turnarounds than previously assumed. Rather than simply stating the simultaneous need for retrenchment and recovery, we further reveal the two turnaround activities’ complementarities.

An important question for future research concerns the optimum level of interaction between retrenchment and recovery. Previous research has stressed the tensions between retrenchment and recovery and the costs of their integration (Pearce and Robbins, 2008; Sheppard and Chowdhury, 2005). While our results show an overall positive association of the retrenchment–recovery interaction with turnaround performance, the negative squared effect of each turnaround strategy’s individual impact on performance indicates

a curvilinear relationship. This indicates a certain threshold above which the perform- ance will not be further improved. Given that integrating contradictory tensions requires constant managerial attention and their acceptance that the tensions may never be fully resolved (Smith and Lewis, 2011), future studies may explore the optimum balance between retrenchment and recovery. For instance, future research could explore how turnaround firms assess, maintain, and shift their levels of integration between retrench- ment and recovery and how these activities relate to turnaround performance. In particular, it may be interesting to explore how turnaround managers combine integra- tive solutions (to benefit retrenchment and recovery’s mutually enabling qualities) with temporal separation (to avoid some of the two activities’ inherent tensions).

Moreover, researchers have started to explore the ‘how’ of turnaround firms’ retrenchment and recovery activities (e.g. Arogyaswamy et al., 1995; Barker and Duhaime, 1997). In particular, scholars argue that there is not only one kind of retrench- ment and that the different types’ usefulness may vary with organizational and environ- mental conditions (Ndofor et al., 2013; Pearce and Robbins, 1993). For example,

Morrow et al. (2004) show that asset retrenchment and cost retrenchment are either more or less beneficial for turnaround firms depending on their industry context. While our analyses indicate that our findings hold for both types of retrenchment, future research should explore the conditions under which different types of retrenchment activities are either more or less suitable for integration with recovery activities. Further, researchers could draw on insights from related, theoretically more advanced, literature debates. For example, DeWitt (1998) provides empirical evidence that different down- sizing approaches are a function of specific firm, industry, and strategy determinants. Moreover, Bergh et al. (2008) emphasize that different corporate restructuring activities’ influence on firm performance depends partly on how they are implemented. Lim et al. (2013) provide objective measures for asset and cost retrenchment and show that each type’s performance effects are contingent on a firm’s rent creation mechanism. We believe that expanding the turnaround literature’s theoretical bases to insights from these related literatures could further enrich the discussion and refine the current approaches’ perspectives.