Recognizing Decline: The Role of Triggers

C. Gopinath, Suffolk University

AbstractExisting models of decline and turnaround assume an

automatic initiation of a turnaround strategy when declineoccurs. However, extended decline over time suggests thatthe turnaround strategy did not match the causality andseverity of the situation. Borrowing from the crisis manage-ment literature, this paper argues that a triggering event orevents needs to shock incumbent management into realizingthat different action is called for. Such triggering events,or triggers, also play a role in the turnaround process byinfluencing strategies and inducing management changes.Incorporating the need for, and role of, triggers in under-standing the decline/ turnaround sequence helps explain theiterative and non-sequential nature of this process.

IntroductionIt is axiomatic that an organization in decline should at-

tempt a turnaround. Normal organizational processes shouldensure that action is initiated when decline is perceived.However, several factors work to negate the success of theresponse such that the decline continues, leading to a wors-ening of the situation. Early researchers note that turnaroundis not simply a matter of finding the strategy that works, butrequires a recognition of crisis (Schendel and Patton 1976),Gary Hoover, an entrepreneur and practitioner points out,•[One] of the most common causes of [business] failure isthe inability of leadership to see the most important underly-ing trends' (p. 87. 2001), Although several studies examinethe nature and pattems of extended decline {for e.g.. Ham-brick and D'Aveni 1988; Weitzel and Jonsson 1989), theneed for early identification of decline has been relativelyignored.

In the early stages of decline, a combination of processescan work towards concealing the potential nature of theproblem. Even when decline becomes apparent, the interac-tion of economic, psychological and social processes canblind management into inappropriate or delayed actions,thus worsening the situation. Recognition is more than sim-ply being alerted to the problem. It also involves awarenessof the kind of corrective action that is needed.

Recognition is more than simply being alertedto the problem. It also involves awareness ofthe kind of corrective action that is needed.

This paper focuses on why the recognition of declineis delayed in organizations and how it is brought about. Ifirst review existing models that describe stages of declineand turnaround, and find that they have not dealt with theimportant issue of recognition. Drawing from the crisismanagement and resource dependence literature, 1 discusshow recognition is triggered, the role of external agents, andthe consequent implications for the organization. I arguethat incorporating the recognition issue fills the gaps in theexplanation of the decline/turnaround sequence offered byexisting models.

Decline is defined in various ways by researchers(Pandit 2000). I follow the definition of Cameron, Kim andWhetten that organizational decline is 'a condition in whicha substantial absolute decrease in an organization's resourcebase occurs over a specified period of time'(1987, p. 224).Within this meaning, 1 differentiate between different levelsin the severity of decline, where a greater severity wouldindicate that the performance and resource availability ofthe firm has reached a level where it begins to threaten thefirm's survival, often referred to as business failure.

The Decline ProcessSeveral models delineate stages in the turnaround

sequence (for example, Arogyaswamy, Barker and Yasai-Ardekani 1995; Pearce and Robbins 1993; Slatter 1984;Stopford and Baden-Fuller 1990; Weitzel and Jonsson1989). These models focus on causes and symptoms com-monly revealed by failing firms, the turnaround trajectoriesthey follow, and the relationship of the turnaround strategyto the causes. I choose three models for closer examinationthat are comprehensive and representative of the literature inhow they deal with the decline and turnaround phases, I willfocus on the interstices between decline and turnaround andtheir consideration of early recognition.

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Weitzel and Jonsson (1989) provide a comprehensivemodel of the stages of decline that spell out the character-istics of the decline continuum. They identify five stagesranging from the early phases of decline to when the organi-zation is seriously impaired. Initially, organizations are un-able to recognize the internal or external changes that maythreaten their long-term survival ('blinded stage'). Evenas the failure becomes noticeable, the organization fails totake corrective action (inaction'). In the third stage, called'faulty action,' either the decisions or their implementationsare faulty. Then comes the 'crisis' stage, which is the lastchance for revival after which the organization is headed for'dissolution.'

An understanding of the role of triggerswill help management take appropriatelystrong corrective action in time to avoida crisis.

The model admits the need for recognition and consid-ers intemal mechanisms such as problem recognition skills,employee surveys, and comparisons with industry standardsby which the organization can be warned into taking timelyaction. But the authors concede that in the first stage, theorganization is unable to recognize intemal or extemalchanges that may threaten long-term survival. In the secondstage, organizations may not take appropriate correctiveaction due to a belief that the causes are extemal to theorganization, or due to a misperception of the problems. Themodel thus does not provide for any altemative mechanismsthat could signal problems.

The Pearce/Robbins (1993) model pays equal attentionto decline and turnaround. It identifies critical variablesrather than delineating stages with a focus on the process inboth decline and tumaround phases. In the decline phase,causality and severity are two critical dimensions. Causalitydeals with identification of the causes for the decline, andseverity deals with the immediacy of the threat to the com-pany posed by the situation. A successful tumaround needsto deal with both the causality and the severity dimensions.

Arogyaswamy et al. (1995) extend these argumentsfurther and propose a contingency model focused ontumaround strategies. They consider two different kinds oftumaround measures, namely stemming decline and recov-ery, and tie them to firm-based versus industry-based causesof decline. Their model suggests that altemative tumaroundstrategies may occur simultaneously rather than sequentiallyas most previous scholars have argued.

These models help delineate stages, identify criticaldimensions and describe both the nature and timing oftumaround strategies. However, they all view decline andtumaround as sequential in nature; i.e., tumaround follows

the decline phase, without explaining what initiates theturnaround process since they agree that recognition ofdecline is frequently delayed. Moreover, the models do notexplain how to prevent the organization from moving inexo-rably towards failure and dissolution when the tumaroundactions do not address the causes of decline. I view theprocess as non-sequential and iterative, atid focus on howrecognition can take place. This requires a closer examina-tion of the arguments suggesting the existence of delayedrecognition.

Delayed RecognitionThe arguments that an incumbent management has dif-

ficulty in identifying the causality and severity of the declinehas been analyzed by different scholars from psychological,economic, and organizational perspectives. These theoreticalperspectives are based on different assumptions, but takentogether, they present a holistic view of the phenomenon.

At the individual level, the literature on managerialcognition examines the problem recognition process ofnoticing, interpreting and incorporating stimuli (Kieslerand Sprouil 1982). Cowan (1986) draws on the informationprocessing literature to suggest that individuals move amongthree stages: gestation, categorization and diagnosis. If suit-able action is not taken, the problem develops into a crisis.Managers typically reject surprising or threatening informa-tion as being too abstract, or irrelevant, leading to inaction(Lorange and Nelson 1987). Once committed to a course ofaction, information that the action is failing is ignored andmanagers resort to standard operating procedures, relying onwell rehearsed rather than less familiar responses (Staw etai, 1981).

Economic conditions can also help delay reeognition. Forinstance, slack (i.e., surplus resources) in the organizationgives room for complacency and prevents the firm from fail-ing and slipping into crisis (Hambrick and D'Aveni 1988).Organizational reasons for delays in action can come from aprocess of groupthink that operates among top management,i.e., a distorted style of thinking that makes group membersincapable of arriving at a rational decision (Janis i 982), ormanagers may misinterpret the signals (Lampel and Shapira2001). When there is a combination of intemal and extemalreasons for decline, attribution theory suggests that manag-ers often blame the extemal and ignore the intemal althoughthis may be tempered by relevant mental models that are inuse (Ban-, Stimpert and Huff 1992; Scherrer 2003). Whileorganizational processes such as strategic planning andcontinuous improvement are designed to help managers an-ticipate and deal with problems, it seems tbe problems needto worsen before managers consider a revised 'recipe' andcorrective action is taken (Grinyer and Spender 1979).

Under severe adversity, tbe need for drastic action isclear to all (Cameron et al, 1987) by which time it may betoo late. The recent case of FAO Schwartz, the toy store, isan example (Bannon and Kim 2003). Traditionally suc-

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cessful as an upscale and nicbe retailer, the company overexpanded in the 1990s bringing it into competition with themass merchandizing stores. Although ownership changed in2002, the store was by then selling items that could be hadelsewhere for less, and had lost its cachet. However, it wastoo late to retum to its earlier successful model and the firmfiled bankmptcy in 2003.

The totality of these arguments may be summed upas "too little, too late." Historically, the odds are againstmanagement taking stringent corrective action soon enoughwhen a firm enters into decline. An understanding of the roleof triggers will help management take appropriately strongcorrective action in time to avoid a crisis.

The Recognition IssueThe earlier discussion can now help focus the problem

that is frequently referred to as a lack of, or delayed, recog-nition. To review the argument: In the very early stages ofdecline when the problems are not yet evident, managementis slow to perceive the decline. When the problems becomeapparent and are reflected in the commonly used indices tomeasure performance, 'normal' management response be-gins, Tumaround occurs if the actions were able to addressthe causality correctly and were appropriate given the sever-ity. To the extent that the actions were appropriate and takenearly, tumaround was achieved through normal managementprocess. When problems persist, leading to a worsening ofthe situation,, one can conclude that the normal actions havenot dealt with issues of causality and severity. Thus, I definerecognition as having three components:

a. Awareness of a crisis arising from the decline.

b. Realization that the crisis will not be resolved bycontinuing the present course of action (strategy).

c. Matching corrective action to the true (real) causes ofthe crisis.

These stress that the actions be both appropriate andtimely. Stating the problem as one of recognition in themanner above (and not just delayed action) allows for thefact that some action is always taken though it may notproduce the desired results. Highlighting the need for man-agement to be made aware stresses that early recognitionis desirable and one needs to understand altemate ways oftriggering this recognition.

Crisis ModelsThe crisis management literature provides insights on

how recognition can be triggered. Although scholars fre-quently use the word 'crisis' while referring to the criticalityof events during a decline (Starbuck et al, 1978; Weitzeland Jonsson 1989), there has been little attempt to use themodels of crisis management to analyze the decline phase.Crisis carries a specific meaning and orientation in the crisismanagement literature, and the literature often does not

view performance failure as a typical organization crisis(Pearson and Clair 1998). Preble(1997) recommends thatincorporating the crisis management perspective into thestrategic management field can be valuable,

Hermann (1963, p. 13) provided a widely used definitionof crisis "as a situation that threatens the high-priority goalsof the organization, restricts the amount of time available forresponse and surprises decision makers by its occurrence,thereby engendering high levels of stress." Crisis-inducedstress results in a reduction in management's span of atten-tion, an increase in managerial inflexibility and a reductionin time perspective (Holsti 1978). Industrial crises such asthe Bhopal gas leak disaster (1984) or the Chemobyl nuclearmeltdown (1986) clearly reveal the elements of surprise,high threat, and short decision time. These crises are outsidethe purview of this paper. However, the conditions sur-rounding a business decline as it proceeds toward greaterseverity also exhibit characteristics that parallel those of acrisis and remain the subject of this paper.

Most often there is an identifiable event either withinor outside the system precipitating the crisis and identifyingthe triggering event is an important first step in perceivingthe situation. Otherwise,, complexity of the information andrigidities in perception and belief cause the indicators to bedisregarded or misinterpreted. Crisis recognition is a per-ceptual event, since a set of variables as perceived bythe decision-maker defines the crisis. Thus, in a crisisother than a sudden disaster, an identifiable event helps toserve as a trigger to alter the perceptions of the decisionmakers and establish the situation as a crisis (Billings et al.1980).

The crisis management literature helps to understand therecognition issue in a decline sequence. First, the distinctionin the severity of the situation as being a 'problem' or a 'cri-sis' parallels the low and high severity situation in decline.The distinction between levels of severity can have differentimplications for responses to the situation. Second, the im-portance of recognition of the problem or the crisis suggeststhat the 'problem' may develop into a 'crisis* if there is norecognition. That is, the decline (problem) could rapidlyworsen to a failure (crisis) due to inappropriate action.Third, there is a need for triggers to bring about recogni-tion, and these could be the very events that cause the crisis.Thus, if triggers are incorporated into our decline models,they would help explain the process of how managementcan be made to realize the mismatch between actions takenand the causality/severity of the situation.

Recognition can take place intemally or extemally. Whenit takes place intemally, (i.e., management's perception ofthe causes and its actions are matched and timely action istaken), then normal management processes have been ef-fective. When the recognition does not take place intemally,then an extemal trigger is needed to make managementaware that the present action is inappropriate and help man-agement break out of its response routines. Incorporating thecrisis management perspective into the decline/tumaround

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sequence provides the justification for the role of extemaltriggers in the decline/turnaround sequence.

Arising out of self-interest, when astakeholder perceives its stake isunder threat due to the failure of thebusiness unit, it intervenes to protectthose interests.

Extemal intervention takes place not out of altruisticconcems ('to aid recognition') but out of the self-interest ofthe trigger source. The dependence of an organization on ex-change partners (i,e,, partners in the environment with whomthey have an exchange relationship) and the control thisaffords the latter is an established perspective in organizationtheory (Jacobs 1974). Resource dependence theory sug-gests that organizations depend on each other for the manyresources they require while operating in an environment ofscarce resources. The exchange relationship leads to depen-dency; when the dependence is asymmetric, some poweraccrues to the less dependent organization. The influence isseen as an inducement for contributing critical resources, andresponses are dictated by economic self-interest.

The argument for inter-organizational dependence setsthe stage for intervention. Arising out of self-interest, whena stakeholder perceives its stake is under threat due to thefailure of the business unit, it intervenes to protect thoseinterests. The lender would intervene to protect its funds atrisk; important suppliers may intervene to safeguard accountreceivables; customers may intervene to ensure continuity ofsupplies; and so on.

The bank-client relationship (Mintz and Schwartz 1985;Slatter 1984) is an example of such inter-organizationaldependence. The bank is a particularly powerful exchangepartner due to its control over funds and the firm, as a clientfor funds, is in a dependent relationship with the bank. Theloan is govemed under conditions stipulated in the agree-ment between lender and borrower, or the loan covenant.This gives banks the ability to monitor firms closely (Jensenand Meckling 1976), and the motivation for close monitoringis derived from the bank's interest in protecting its funds atrisk. The act of intervention could serve as the trigger when,say, the bank refuses to extend overdraft facilities plungingthe organization into a liquidity crisis. This is especially ap-plicable in the case of small firms. We have strong empiri-cal evidence of bank intervention in failing firms to suggestthat banks do serve as triggers for recognition (Gopinatb1995; Mintz and Schwartz 1985; Slatter 1984), Grinyer et al.(1990) found extemal intervention triggering change in 30percent of the firms studied with sharp improvement in per-formance. Balgobin and Pandit (2001) have shown how theparent company was a strong trigger for initiating turnaroundin the case of IBM UK.

The Revised SequenceThe decline/tumaround sequence is shown in Figure 1 and

illustrates the role of triggers and recognition. Decline is usu-ally not a sudden event but occurs over a period. Quite often,the seeds of decline take root even earlier when productdevelopment or innovation slows down and the organiza-tion may not even be capturing that information. When thedecline reveals itself in performance measures, it becomesobvious. When problem identification skills are high and in-temal recognition takes place, normal management responseinitiates successful corrective action. The decline is stemmedand the firm proceeds on its tumaround path. If not, firmscould continue their decline until liquidation is inevitable.

Figure 1Decline/Turnaround Sequence

Liquidation

Continuing decline signals to stakeholders that manage-ment's actions are not working, the causality may not havebeeti correctly diagnosed, the actions may not be addressingthe causes, and as time passes, the situation could worsen.

Self-interest would motivate the stakeholder to triggera crisis, which drives extemal intervention. For example,banks concerned about their loan funds demand additionalcollateral; investor groups concemed about their capitalpressure directors; vendors concemed about payments duewithhold supplies or demand advances; labor unions con-cemed about employment security initiate strike actions; andcustomers concemed about future supplies demand assur-ances. Statutory agents such as auditors may also serve asa trigger when they issue a 'going-concem' qualification intbeir audit report.

The stakeholder triggers recognition by trying to bringabout a match between the corrective action and the cause/severity combination until the tumaround takes place. Oncethe triggering event (or crisis) has taken place, stakeholdersmay continue to remain engaged with management (repre-sented by tbe second arrow connecting stakeholders directlyto management action without the triggering effect). How-ever, it is possible that these interventions are not success-ful resulting in the same or a different set of stakeholders

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creating further crisis in the organization leading to differ-ent management actions. This is why some organizationsundergo repeated changes in their tumaround strategy andimplementation until performance improvements occur (cre-ating a loop in the figure), making it an iterative process.

The revised deciine/tumaround sequence explains twoquestions that are not fully answered by existing models.They arc; (a) the pressures exerted on incumbent manage-ment in turnaround strategy formulation, and (b) the ques-tion of management leadership changes.

Influencing turnaround strategyThe traditional perspective in strategic management,

while allowing for outside influences, assumes that theboard/top management of the enterprise is in completecontrol of the strategic decisions of the enterprise. Yet, in atumaround situation, we see the power of outside influencesextending to what amounts to intervention in the decision-making process. For example, the management of East-man Kodak Co., after poor performance of its historicallysuccessful film business for several years, made a belatedmove to digital initiatives including printers, and imagingas part of its tumaround. However, a group of investors,doubting Kodak's ability to compete in the digital market,and wanting to protect the dividend which was being heldback to fund the new initiatives, is pressing the board to rollback plans as well as considering a shake-up of manage-ment (Zuckerman and Bandler 2003). The histories of majorcorporate decline or failure (Carpenter and Feloni 1989;Marsh 1985) detail the role of the external stakeholders inthe strategic decision-making of the company.

The external agents, who have served as triggers, woulduse their role as influential exchange-partners to intervenein the decision making process (PfetTer and Salancik 1978).While the initial motivation is to trigger recognition, beingunsure of how the firm's responses to the crisis would affectits stake into the future, the exchange partner can continueto be 'engaged' in the failing firm. Freeman (1984) built onthis perspective when he allowed that there are times whenstakeholders mu.st participate in the decision making processof the firm. Thus, the role of the exchange partner expandsfrom one of being a trigger, to that of being an extemalinfluence on the turnaround strategy of the firm.

Empirical studies provide evidence of this influence.Lenders appoint directors, and intervene in operational mat-ters through conditions in loan covenants (Bruton, Ahlstromand Wan 2001; Chowdhury and Lang 1996; Gopinath 1995).The US bankruptcy system formalizes the role of creditorswith the requirement that a creditors' committee approve theplan for revival submitted by the bankrupt firm.

The involvement of the stakeholders in the turnaroundstrategy of the fimi may have unintended consequences. Forone, the negotiated strategy pursued by the firm may not bein its best interests but one that serves the needs of the stake-holders, as suggested in the Kodak example. An influentiallender, for example, may want the divestment of a division

to raise resources so overdue funds can be repaid, while tbefirm may wish to retain that division as the foundation of itstumaround strategy. Moreover, in situations where multiplestakeholders intervene, conflicts due to their diverse inter-ests could delay the adoption of a viable tumaround strategy.

Management changeSeveral scholars have argued that a change in top man-

agement is associated with and often is a precondition fortumaround (Hofer 1980; Khandwalla 1983; O'Neill 1986;Schwartz and Menon 1985). The literature, however, tellslittle about how the management change is brought about.Since the top management team is in charge of the organi-zation, how is its removal orchestrated? The evidence onthe role of the govemance structure in bringing about thechange is equivocal. On the one hand, Dunbar and Goldberg(1978) studying twenty randomly selected cases on misman-agement concluded that the boards of directors had failedto perform their role. On the other hand, increased out-sider presence on the board accounted for the managementchanges (Barker etal. 2001), Empirical studies have shownthe occurrence of management changes following extemalstakeholder intervention (Gopinath 1991). By allowing forinten.'entions by an extemal agent, the model would predictthat the external stakeholder, as part of the recognitionprocess, would try to initiate strategy changes within theorganization that could involve management change.

Gerstner (2002) describes the situation in IBM when hejoined as CEO in 1993. The company was in decline withsales revenues and profits falling and analysts were speculat-ing about the survival of the company. At that time. IBM'sboard felt that the company needed major change and beganto look for a candidate with a track record as a change agent,Gerstner was hired for this qualification, even though hewas neither familiar with the computer industry nor was aninsider, two criteria that determined the selection of previ-ous CEOs. This illustrates a situation where the board usedCEO change as an instrument to trigger recognition withinthe company and effect a tumaround.

ConclusionI have defined the recognition issue as the need for man-

agement to be made aware that the actions being taken donot match the severity and causality of decline. The role oftriggers, from the crisis management literature, provides uswith a theoretical basis and fills gaps in our understanding.Resource dependence theory supports the role of extemalintervention to aid recognition and extension of that roleto infiuence the strategy of the firm through managementchange and/or other interventions in the tumaround strategy.

This discussion has important implications for managersfacing decline. These are in the areas of early recognitionintemally and co-opting stakeholders to facilitate the tum-around. Incumbent management should realize that delayedrecognition could have serious consequences for their role

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as incumbents and their effectiveness. Since recognitiondelays invite the need for triggering action involving anextemal agent, that could further lead to lessening of controlover the tumaround process, and possibly management'sreplacement.

It would be preferable for organizations to ensure thatrecognition takes place early and internally. The problemswould be less severe and management would still be in fullcontrol. Organizational culture and systems are two impor-tant areas that could facilitate this recognition.

A culture in which employees feel comfortable talk-ing about areas of weakness and poor performance in theorganization without personal repercussions is ideal andtakes time to build. Organizations are built on objectivesof growth and success., and decline, or failure, are seen asaberrations that reflect on the leadership of the organiza-tion. A successful leadership team needs to send the signalsthat they would prefer to hear the bad news early, withoutallowing this freedom to be used as an excuse for poor per-formance. That is a fine line to walk. This conflict is similarto what research and development managers face when theypush for risk taking and innovation yet seek high successrates for their projects.

Jack Welch, former CEO of GE. paid a lot of attentionto building an appropriate culture supportive of risk takingand high performance, and developed the systems aroundthat culture. Through personnel decisions, rituals and sharedbeliefs that he communicated throughout the company, heinstitutionalized the culture (Slater 1999). For example, herewarded high performers very well, yet fired some highperformers if their values and behavior did not fall in line withthe organization's culture and publicized such information.

It is imperative that an organization design its informa-tion and control systems to also serve the needs of earlywarning of problems and constant monitoring of progresstoward resolution. This would impact both the nature ofdata gathering and reporting formats. Accounting indicesbased on empirical studies of failing firms can serve as anearly warning of failure (sec, for example, Grice and Ingram2001). These could play a useful role as part of the organi-zation's internal control measures and be included in regularreports to top management. Another approach could be theuse of the 'balanced scorecard' (Kaplan and Norton 1996).This system is meant to develop measures of performancethat match the objectives of the organization, and go beyondthe usual accounting and financial measures. Creatively de-veloping measures that would capture the very early signs ofslowdown even before decline becomes apparent in finan-cial measures would be especially valuable. For example,Medtronics follows a policy that 70 percent of revenuesshould come from products launched in the previous twoyears (George 2001). Monitoring this index would serve asan early indicator of product innovation problems.

Indices can be designed to measure the extent to whichdifferent stakeholders" expectations of the organizationare met {for example, the nature and quantum of customer

complaints). While admittedly the self-interests of mul-tiple stakeholders need not necessarily correspond with theinterests of the organization, they create an awareness of themultiple pressures on the organization and how the stake-holder can be expected to respond. These may fljrther serveas valuable sources of early warning. What is even moreimportant is that, in addition to developing such measures,they be a part of the reports that reach top management sothat awareness is created at the highest level.

An important role for the board of directors arising out ofagency theory is supervision of management. To strengthenthis role, companies have begun to reduce the dominance ofinsiders on the board and give representation to stakehold-ers. In addition, some leading boards (for example. GeneralMotors) have adopted board guidelines that call for regularperformance evaluation of the CEO. These efforts contributeto systems of checks and balances such that self-servingexplanations can be questioned and debated and can lead tobetter recognition in a decline situation.

It is critically important for an incumbent management tobe cognizant that decline is as probable as success in the lifeof an organization. Paying attention to early recognition willhelp it stay close to its intended growth path. •

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About the Author

C. Gopinath is Associate Professor of Management at SuffolkUniversity, Boston. MA. His research and consulting interests instrategy and intemational business include tumaround manage-ment and organizational responses to growth and diversification.He is currently studying how management theories interact withindigenous practices as they are adapted for use in developingeountries. He received his Ph.D. from the University of Masachu-setts. Amherst.

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