Turnarounds and sustainable competitive advantage: An integration and study of decline and recovery

David Allan Krueger, Purdue University

Abstract

This research combines the turnaround, industrial organization economics, and resource based theory, and decline literatures to create a framework for investigating the relationship between external and internal changes that cause declines in business organizations. The relationship between the actions that generate recovery and the cause of decline is investigated. The executive succession literature is used to investigate CEO change in turnaround situations. Twelve propositions are proposed and investigated. The results suggest that most declines experienced by large companies are caused by unsuccessful diversification efforts and environmental changes for which firms are not prepared. These environmental changes, in most cases, reduce the value of the resources controlled by a firm. While decline stemming actions are found in most turnarounds, strategic changes are required to generate recovery, even when the cause was not the result of strategic changes. Firms alter their strategies to find new resource combinations to create a sustainable competitive advantage that is related to, but changed from, the competitive advantage that generated the firm's previous success. The results also suggest that there are distinct differences in the actions taken based on the severity of the decline that is experienced before the firm recovers. Firms do not make significant changes to their strategies unless the decline is sufficiently severe to generate a consensus that such actions are necessary. Firms often do not recognize the true nature of a decline when it first begins. They often take actions that do not result in a turnaround. These findings suggest that a contingency theory approach to turnaround research based on small samples may enable us to increase our understanding of how firms recover. While there may be a higher incidence of CEO change during the turnaround cycle, the prescription offered by many turnaround researchers that there must be a CEO change for a firm to recover appears questionable. Many CEO changes in turnaround situations are normal retirements and unrelated to the performance problems of the firm.

Degree

Ph.D.

Advisors

Schendel, Purdue University.

Subject Area

Management|Business costs

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