Business Horizons (2008) 51, 121–130

Available online at www.sciencedirect.com

www.elsevier.com/locate/bushor

Strategic transformation as the essential last step

in the process of business turnaround
John A. Pearce II a,⁎, D. Keith Robbins b

a
Villanova School of Business, Villanova University, 800 Lancaster Avenue, Villanova, PA 19085, USA
b
College of Business Administration, Winthrop University, Rock Hill, SC 29733, USA

KEYWORDS
Turnaround;
Retrenchment;
Strategic transformation;
Acquisition strategies;
Collaboration strategies
Abstract
Just over a decade ago, the work of strategic management scholars helped to broaden
the perspectives of executives caught in the throes of declining organizational per-
formance. In addition to the traditional turnaround options that stabilized financial
performance, managers were shown approaches that they could deploy to reduce the
chances of a recurrence of the turnaround situation. This article updates the progress
that has since been made in understanding the turnaround process. Further, we look
at an ambitious approach to redirecting the strategies of a reemerging company
toward a more promising competitive position, as the essential last step in the pro-
cess of business turnaround. Called strategic transformation, this approach to refo-
rmulating strategy cultivates company growth in strong or emerging markets.
© 2007 Kelley School of Business, Indiana University. All rights reserved.

1. Precursors of changes in strategy by companies that must engage in turnaround.

While much is written about restructuring and asso-
A change in strategy is a critical last step in a turn-
ciated turnaround efforts, considerably less atten-
around process that is undertaken to correct declining
tion has been directed toward proactive strategic
firm performance. Consequently, the identification
transformation that is undertaken after retrench-
of the fundamental attributes of successful turn-
ment has produced financial stability.
around strategies has become an important stream of
This article recognizes the differences and poten-
research for scholars who attempt to inform execu-
tial of each type of planned action. We begin by
tives who are tasked as turnaround managers.
assessing the research findings of the past decade on
Over the past decade, restructuring has emerged
reactive approaches to retrenchment and turn-
in the business press as the preferred term to
around, much of it based on the study of organiza-
characterize these reactive changes in operations
tional restructuring. We then turn to proactive
approaches to strategic transformation, which offer
⁎ Corresponding author.
options for executives who recognize the value of
E-mail addresses: john.pearce@villanova.edu (J.A. Pearce II), new strategies as the final step in the turnaround
robbinsk@winthrop.edu (D.K. Robbins). process.
0007-6813/$ - see front matter © 2007 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2007.11.003
122
2. Retrenchment and turnaround
Most of the early research related to the need to
change strategies (circa 1976-1995) emerged from
studies of business turnaround, in which researchers
observed business' responses to declining perfor-
mance and their post-turnaround performance
improvement. Subsequently, empirical research
identified a pattern to the turnaround process:
Firms experience declining performance due to a
variety of managerial and environmental causes
including economic recessions, technological obso-
lescence, infrastructure and operational inefficien-
cies, and other deterioration of competitive
advantages. These causal factors lead to perfor-
mance declines that place the firm in a turnaround
situation that warrants a two-tiered strategic
response, labeled the turnaround strategy. Managers
attempt to recover their pre-decline performance
levels with an initial retrenchment phase, followed
by a longer-term recovery phase.
Retrenchment consists of cost cutting and, if es-
sential, asset reductions. The primary objective
of retrenchment is to stabilize the firm's financial
condition, which is fundamental to successful turn-
around (Hambrick & Schecter, 1983; Robbins &
Pearce, 1992). The range of retrenchment responses
includes cost cutting, asset reduction, changes in
management, debt restructuring, reduced product
lines, and the implementation of tight cost controls.
The profile of a typical retrenchment includes em-
ployee layoffs, facilities closings, consolidation of
jobs and departments, decentralization, and much
wider spans of control.
Following retrenchment, the firm's plan for
recovery was conceptualized as falling along a
continuum (Pearce & Robbins, 1994). At one end
of the continuum are recovery responses that
express a near-term commitment to operating in a
reduced size or scope. At the other extreme,
executives undertake an entrepreneurial redesign
of their firm's strategy given its changed resource
profile. Firms that attribute their turnaround situa-
tions to internal causes are likely to choose to
continue in the downscaled mode, while executives
who face external problems are more inclined to
change their strategy.
2.1. The emergence of restructuring
Since the mid-1990s, the term corporate (or
business) restructuring has gained popularity in
the management literature as a less pejorative
label than turnaround to describe reactive changes
in strategy precipitated by poor company perfor-
mance. Restructuring has become a euphemism
for a turnaround strategy. A popular topic in the
J.A. Pearce II, D.K. Robbins
business press is the “restructuring de jour”: A
prominent company beset by losses announcing its
newest plans for returning to its halcyon days. The
company lays off thousands of employees, closes
plants, fires its CEO, files for Chapter 11 bankruptcy
protection, divests or spins off businesses to create
cash, changes the constitution of its board, or
retreats geographically — almost always under the
generic “restructuring” banner (Kotter, 2007).
Although they are not acknowledged by the firms
as prompted by competitive decline, restructuring
announcements are usually a strong signal that
there are significant troubles within the company
that jeopardize its financial future.
2.2. Organizational restructuring: A synonym
for retrenchment
When companies announce their restructuring, they
signal shareholders and analysts that even though
the company is experiencing problems, executives
have plans to turn the company around, perhaps by
becoming more competitive (‘leaner and meaner’),
returning to core values, and becoming more
customer-focused. The most likely response in the
financial markets is a falling share price that reflects
skepticism about the espoused restorative effects of
the restructuring. In other words, for firms that
attempt to recover from declining performance,
there is substantial doubt as to whether an
announced restructuring will actually lead to a
performance turnaround (Byerly, Lamont, & Keasler,
2003; Walshe, Harvey, Hyde, & Pandit, 2004).
There are three primary forms of corporate
restructuring: portfolio, financial, and organizational
(Bowman & Singh, 1993). Portfolio restructuring
involves a radical change in the mix of businesses
controlled by a corporation, or in the mix of products
and services controlled by a strategic business unit. A
portfolio is altered through divestitures and liquida-
tions, spin-offs, and the replacement or addition of
operations, products, and services.
Financial restructuring involves changes in the
firm's capital, ownership, or governance. These
moves include employee/management led buyouts,
leveraged recapitalizations, being acquired, mer-
ging, or making major changes in the board of
directors. Organizational restructuring includes the
retrenchment activities of downsizing and plant
closings, delayering, outsourcing, and departmental
and divisional reconfiguration.
2.3. Updated perspectives on reactive
approaches
Bolstered by supportive empirical research findings
in the turnaround literature (Barker & Duhaime,
Strategic transformation as the essential last step in the process of business turnaround
1997; Pearce & Robbins, 1993; Robbins & Pearce,
1992) and in the restructuring literature (Zajac &
Kraatz, 1993), organizational restructuring has
become an integral component of firms' responses
to turnaround situations. Recent research has
provided several useful findings that can benefit
turnaround managers. Next, we examine some of
these.
2.3.1. Retrenchment must be aggressive and
broadly scoped
Piecemeal, incremental, cost-only retrenchment is
seldom sufficient to achieve the financial stability
necessary for turnaround (Poon, Newbould, &
Durtschi, 2001). Major restructuring is generally
more performance enhancing than is a conservative
effort which refocuses on traditional product-
market segments (Byerly et al., 2003). Asset
retrenchment is generally more effective than
cost retrenchment (Morrow, Sirmon, Hitt, & Hol-
comb, 2007).
Although successful restructurings have included
the enhancement of the planning system, increased
decentralization, and more inclusive styles of human
resource management, the element of reorganiza-
tion that is most often associated with successful
turnaround is replacement of the chief executive or
members of the senior management team (Boyne,
2004). This finding has persisted since the inception
of turnaround research. It is now explained by the
fact that the appointment of new managers com-
municates the seriousness of the situation to
investors and company analysts, and encourages
them to have confidence in the strength of the
company's commitment to successful new strategy.
2.3.2. Retrenchment may be the turnaround
strategy
For a declining firm, stabilizing its operations and
restoring profitability usually entails strict cost
reduction followed by a shrinking back to those
segments of the business that have the best prospects
of attractive profit margins (Byerly et al., 2003). For
diversified corporations, retrenchment may be
enough to achieve stability in a single SBU, which
may satisfy the expectation of executives for its
revival if the unit is not required to be independently
profitable (Morrow et al., 2007).
2.3.3. Executives must take ownership of the
turnaround process
Companies whose managers persist in the belief that
the financial decline results from bad circumstances,
rather than from internal mistakes and management
shortcomings, are far less likely to aggressively
retrench and restructure; consequently, they are
less likely to achieve turnaround (Lohrke, Bedeian, &
123
Palmer, 2004). Turnaround managers that attribute
decline to controllable internal factors are more
likely to initiate strategic change. Successful turn-
around managers take ownership and responsibility
for the situation even when it cannot be traced to
controllable or predictable factors, and they act with
speed to implement an improved strategic plan
(Longenecker, Mitchell, & Fink, 2007).
3. Strategic transformation
Although achieving financial stabilization is an
essential first objective of the turnaround process,
stability signals only that the company's decline in
performance has abated, not that a foundation for
profitability exists. Planners need to decide if the
company's long-term prospects are best served by
continuing to implement its existent strategy with
its reduced resources, or if the reactive changes
made during the decline signal the need for a
dramatic change in direction. To develop a basis for
strong future performance, executives face the
choice of three broad strategic alternatives. The
first alternative is perhaps the most dangerous:
rebuild the company on its prior strategic footprint.
This option looks comfortable and familiar, but it
has rare viability because of two inescapable truths:
(1) The company's competitive landscape has
been irrevocably altered, and its old strategy,
if useful before, is unlikely to be as well suited
now.
(2) The old strategy made the company vulner-
able to the downturn and, unless changed,
will leave the company exposed to similar
assaults going forward.
The second broad strategic alternative is for the
company to accept its new reduced form, to
redefine its product/market segments, and attempt
to compete in a more restricted scope than before
its fall. The logic here is that the company was
forcibly reduced to its strengths, which it can use to
provide adequate defense if attacked again in a
fashion similar to that which it has just survived. This
alternative is known as efficiency maintenance.
Franchised companies that close underperforming
units, manufacturers that consolidate warehousing,
and marketing organizations that close branch
offices are good examples of companies that have
narrowed their scope in the attempt to strengthen
their consolidated performance.
Either of these alternatives can be the intended
long-term strategy for the firm. They can also be
the intended starting point for a multiphase strat-
egy that will progress as the company succeeds in
124
strengthening its market and financial base. Organ-
ic growth, emphasizing market development and
product development are the main second stage
options.
A dramatically different third alternative is
strategic transformation, sometimes referred to as
entrepreneurial reconfiguration. Entering the
recovery phase that hopefully follows the trough
of the decline, executives may conclude that their
firm cannot compete effectively or achieve the
objectives of its stakeholders with its current
strategy. They determine that they need to find
creative ways to attract new assets to the company,
and reconfigure them in ways that present major
new challenges to their competition and attractive
new options to customers.
The strategic repositioning that helped fine tune
product and service positioning, and business
practices during the decline, takes a backseat to a
consideration of strategic transformation. By con-
sidering the company's future prospects – shaped by
environmental forces and competitive dynamics as
much as by its own resources and capabilities –
managers must judge where the greatest opportu-
nities lie for their company.
A strategic transformation is required when
managers' predictions and expectations about
future markets, products/services, and technolo-
gies differ from the status quo so significantly that a
radical re-scoping of the firm's strategy and cap-
abilities is required (Blumenthal & Haspeslagh,
1994; Nutt & Backoff, 1997; Pauchant & Mitroff,
1992). The turbulent environment that prompted or
contributed to the company's decline may have
created a host of new strategic mandates. These
contextual changes may have altered the usefulness
of partnerships, innovation, management capabil-
ities, and market expansion (Morrow et al., 2007).
Customer preferences for quality and convenience
may be complemented by new attributes, like
technological compatibility and ecological safety.
A useful way to think about strategic transformation
is in terms of the two broad options that make it
possible to achieve a competitive repositioning of the
firm: company growth through acquisition, and collab-
orative growth through alliances or joint ventures.
3.1. Acquisition growth
In contrast to “growing your own” organic strategies,
the alternative of “buying the other guy's stuff” is
faster, although it is more costly and provides an
acquisition that was not designed expressly for the
acquirer's purposes. Nevertheless, when strategic
transformation is to be done with speed, the stra-
tegies of acquiring or merging with another firm
through horizontal acquisition, vertical integration,
J.A. Pearce II, D.K. Robbins
related diversification, and conglomerate acquisition
are promising options.
Horizontal acquisition is the long-term strategy
designed to achieve growth through the acquisition
of one or more similar firms operating at the same
stage of the production-marketing chain. Such
acquisitions eliminate competitors and provide the
acquiring firm with access to new markets. When it
pursues a strategy of vertical integration, the plan
of the firm is to acquire companies that supply it
with inputs or to be the customer for its outputs.
The principal attractions of a horizontal acquisi-
tion strategy are readily apparent. The acquiring
firm is able to eliminate competition and expand its
operations, thereby achieving greater market share,
improving economies of scale, and increasing its
efficiency of capital. These benefits are achieved
with only moderately increased risk, since the suc-
cess of the expansion is principally dependent on the
proven abilities of the acquiring firm.
The reasons for choosing a vertical integration
strategy are more varied and sometimes less
obvious. The primary motivation behind backward
integration is a desire to better control the raw
materials used as production inputs for the acquiring
firm, by increasing the dependability and quality of
the supply. This reason is particularly compelling
when the number of suppliers is small relative to the
number of competitors. In this situation, the ver-
tically integrated firm can better control its costs
and thereby improve the profit margin of the ex-
panded production-marketing system. Forward inte-
gration is preferred if advantages accrue to stable
production. A firm can increase the predictability of
demand for its output through forward integration;
that is, through ownership of the next stage of its
production-marketing chain.
Some increased risks are associated with both
types of integration. For horizontally integrated
firms, the risks stem from increased commitment to
one type of business. For vertically integrated firms,
the risks result from the firm's expansion into areas
requiring strategic managers to broaden the base of
their competences and to assume additional
responsibilities.
Diversification represents a distinctive departure
from a firm's existing base of operations, typically
through the acquisition or spin-off of a separate
business. Regardless of the approach taken, the
principal motivations of the acquiring firms are
economic, including the desire for increases in the
firm's stock price, price-earnings ratio, growth rate,
stability of earnings and sales, and tax savings
resulting from acquired tax loss carry forwards.
Operational motives of diversification include com-
pleting or diversifying the product line, acquiring a
Strategic transformation as the essential last step in the process of business turnaround
Figure 1 Speed and magnitude of strategic transformation.
needed resource quickly, and broadening the stock-
holders' scope of investments.
The two main types of diversification targets
reflect the extent to which the new investment is
related to the acquiring firm. Related acquisitions
are also known as concentric diversification because
they involve the acquisition of businesses that are
related to the acquiring firm in terms of technology,
markets, or products. These targets possess a high
degree of compatibility with the firm's current
businesses. The ideal related diversification occurs
when the combined company increases its profits
and decreases its exposure to risk. Thus, the
acquiring firm searches for new businesses whose
products, markets, distribution channels, technol-
ogies, and resource requirements are similar to, but
not identical with, its own; whose acquisition
results in synergies, but neither complete inter-
dependence nor duplication.
When a firm targets a business for acquisition
because it represents the most promising invest-
ment opportunity available, this strategy of unre-
lated acquisition is also known as conglomerate
acquisition. The principal, and often sole, concern
of the acquiring firm is the projected profit pattern
of the target. Unlike related diversification, con-
glomerate acquisition gives little concern to creat-
ing product-market synergy with existing
businesses. Conglomerate diversifiers seek financial
performance and, often, financial synergy. For
example, they may seek a balance between current
businesses with cyclical sales and acquired busi-
nesses with non-cyclical or countercyclical sales,
between high-cash/low-opportunity and low-cash/
125
high-opportunity businesses, or between debt-free
and highly leveraged businesses.
The relative impacts of the different strategic
transformation strategies are suggested in Fig. 1.
The purpose of the figure is to display one
interpretation of the relative appeal of each of
the strategies, when the assumed goal of executives
is for optimal impact in the shortest time. The star
on the figure indicates this ideal but elusive option.
Fig. 1 illustrates that the three acquisition
growth strategies of vertical integration, related
diversification, and conglomerate acquisition are
likely to fit on the right side of the matrix, indi-
cating that they typically provide a high magnitude
of change in the company's strategic direction. One
exception, horizontal acquisition is likely to result
in a less perceived change. However, in general,
acquisitions are useful to executives when they
believe that considerable strategic transformation
is needed in their operations and when they are
willing to see their plans unfold over a multi-year
period. Companies that have sufficient resources
and market strength to defend existing initiatives,
while simultaneously entering new market seg-
ments, often look first at acquisition strategies
when beginning to map their futures.
The option of conglomerate acquisition merits
special consideration. Of the seven strategies
placed in Fig. 1, conglomerate acquisition proffers
the best combination of magnitude of change and
speed in the transformation process. Visually, the
attractiveness of a conglomerate acquisition strat-
egy is apparent, since it is closest to the starred
“ideal” position in the upper right-hand corner of
126
the figure. The implicit suggestion to strategic
planners, therefore, is to consider conglomerate
acquisition as a promising candidate when perfor-
mance pressures demand that they act expedi-
tiously to produce major changes in their corporate
posture. Equity joint ventures and related diversi-
fications are other likely options.
3.1.1. A case for growth through horizontal
acquisition
The attractions of a horizontal acquisition strategy
are many and varied. However, every benefit
provides the parent firm with critical resources that
it needs to improve overall profitability. For example,
the acquiring firm that uses a horizontal acquisition
can quickly expand its operations geographically,
increase its market share, improve its production
capabilities and economies of scale, gain control of
knowledge-based resources, broaden its product
line, and increase its efficient use of capital. An
added attraction of horizontal acquisition is that
these benefits are achieved with only moderately
increased risk, since the success of the expansion is
principally dependent on proven abilities.
A horizontal merger can provide the firm with an
opportunity to offer its customers a broader product
line. This motivation has sparked a series of
acquisitions in the security software industry.
Because Entrust purchased Business Signatures,
the consolidated company is able to offer banks a
full suite of anti-fraud products. Similarly, VeriSign's
acquisitions of m-Qube and Snapcentric enabled
VeriSign to expand its cross-marketing options by
offering password-generating software, transaction
monitoring software, and identity protection. RSA
Security horizontal acquisitions started with the
purchase of PassMark, which reduced competitors in
the authentication software space. RSA Security
then acquired Cyota to provide its customers with
both transaction monitoring and authentication
software. As a final example, Symantec bought
both Veritas Software and WholeSecurity to provide
its customers of storage with additional features,
such as anti-virus software.
The motivation to gain market share has
prompted the financial industry to feature horizon-
tal merger strategies. The acquisition of First
Coastal Bank by Citizens Business Bank provided
new bases of operation in Los Angeles and Manhat-
tan for the latter firm. The merger of Raincross
Credit Union with Visterra Credit Union enabled
these credit unions to achieve the size needed to
justify expansion of services that their customers
were demanding.
Some horizontal mergers are motivated by the
opportunity to combine resources as a means to
J.A. Pearce II, D.K. Robbins
improve operational efficiency. In the energy
industry, for example, there were eight announced
horizontal acquisitions with a combined value of
$64 billion between January 2004 and January 2007.
In each case, increased operational efficiencies re-
sulted from the elimination of duplicated costs. In
2005, Duke Energy acquired Cinergy Corp. for
$14.1 billion. The friendly takeover worked well
because Duke Energy's North America division was a
great match with Cinergy's energy trading opera-
tion, and provided economies of scale and scope.
The combined company lowered costs by an
estimated $400 million per year by using a broad
platform to serve both electricity and natural gas
customers (Terzo, 2006).
A second example of an efficiency-driven merger
is that of Constellation and FPL, which saves
between $1.5 and $2.1 billion by eliminating over-
lapping operations (Fontana, 2006). In addition,
consider the acquisition of Green Mountain Power by
Gaz Metro, a subsidiary of Northern New England
Energy Power, for $187 million. The merger was
prompted by Green Mountain Power's expiring
supplier contracts, which threatened the firm with
high costs of having to rely on suppliers out of its
geographic region – but, within the region of Gaz
Metro. The horizontal acquisition enabled Green
Mountain Power to avail itself of Gaz Metro's
suppliers.
3.2. Collaborative growth
Various forms of strategic partnering enable a firm
to leverage its resources with those of its partners,
for the benefit of all. Called collaborative growth
strategies, they differ from each other on many
dimensions: legal form and protection, duration,
risk and liability, cost, management control, visibi-
lity, geographic scope, size, complexity, and profit
potential, among others. However, the two notable
options are joint ventures and strategic alliances.
3.2.1. Joint ventures
Occasionally, a capable firm lacks a necessary
component for success in a particular competitive
environment. By undertaking a joint venture (JV),
such a firm can become contractual partners with
another business or businesses to provide the
missing capability and resources. This particular
form of JV is joint ownership. It is characterized by
an equity investment by the parties, after which the
partners share in the revenues, expenses, and
control of the enterprise. In recent years, it has
become increasingly appealing for domestic firms to
join foreign firms through JVs.
Joint ventures are particularly useful in enabling
foreign companies to gain access to restricted
Strategic transformation as the essential last step in the process of business turnaround
industries. Foreign partners in equity JVs benefit
from speed of entry into the market, the motiva-
tional and competitive advantages of a mutual long-
term commitment, and access to all of the valuable
resources of its partner. Alternatively, the foreign
company can set up an asset joint venture with a
host firm. In such a JV, which is more aptly termed a
strategic alliance because the partnership is for a
contractually fixed period, the two partners share
the assets and the financial results of a particular
project but do not assume liability for one another's
preexisting debts or obligations. Additionally, the
foreign company in an asset joint venture is not
required to sacrifice managerial control, as is often
the case in equity joint ventures.
Strategic managers are understandably wary of
joint ventures. Although joint ventures present new
opportunities with risks that can be shared, they
often limit the discretion, control, and profit
potential of partners, while demanding managerial
attention and other resources that might be
directed toward the firm's mainstream activities.
3.2.2. Strategic alliances
Strategic alliances differ from joint ventures in that
the companies involved do not take an equity
position in the venture. In many instances, strategic
alliances are partnerships that exist for a defined
period, during which the partners contribute their
resources to a cooperative project while maintain-
ing their independence. Such alliances are fre-
quently undertaken because the partners want to
learn from one another, with the intention of being
able to develop in-house capabilities to supplant the
partner when the contractual arrangement between
them reaches its termination date. These relation-
ships are tricky since, essentially, the partners may
attempt to “steal” each other's expertise. Despite
the contract, the relationship is based on trust and
rife with potential for a partner to exercise
opportunism at the expense of its ally.
In other instances, the term strategic alliance is
used euphemistically in referring to licensing agree-
ments. Licensing involves the transfer of some indus-
trial property right from the US licensor to a
motivated licensee in a foreign country. Most agree-
ments involve patents, trademarks, or technical
expertise that is granted to the licensee for a
specified time in return for a royalty and for avoiding
tariffs or import quotas.
Another licensing strategy open to US firms is to
contract-out the manufacturing of its product line
to a foreign company, to exploit local comparative
advantages in technology, materials, or labor.
Service and franchise-based firms have long
engaged in licensing arrangements with foreign
127
distributors as a way to enter new markets with
standardized products that can benefit from mar-
keting economies.
Outsourcing can operate as a type of strategic
alliance that enables a firm to gain a competitive
advantage by having a collaborator agree to perform
a specific business activity, because the partner can
produce a particularly high value added on the
activity – perhaps because they can do the work
more proficiently or cheaply. The critical idea in the
relationship is that of “partner,” since a distinguish-
ing characteristic of a strategic alliance is that the
welfare of both parties is dependent on the success
of the shared endeavor.
3.2.3. Innovation
In many industries, it has become increasingly risky
not to innovate. Both consumer and industrial mar-
kets have come to expect more than incremental
changes and improvements in the products offered;
they expect revolutionary new products. As a
result, some firms find it profitable to make
innovation their grand strategy. They seek to reap
the initially high profits associated with customer
acceptance of a new or greatly improved product on
a repeated, if not predictable, basis. Then, rather
than face stiffening competition when the basis of
profitability shifts from innovation to production or
marketing competence, they search for other
original or novel ideas. The underlying rationale
for the grand strategy of innovation is to create a
new product life cycle and thereby make similar
existing products obsolete.
While most growth-oriented firms appreciate the
need to be innovative occasionally, only a few firms
use it as their fundamental way of relating to their
markets because of the great risk and investment
costs involved. The high research, development,
and marketing costs of converting a promising idea
into a profitable product, and the unpredictability
of consumer demand, mean that few innovative
ideas will prove to be successful. Furthermore, be-
cause innovation is a creative process, the timing of
an invention or radical innovation is extremely
difficult to predict, frustrating the strategic plan-
ning process.
In other contexts, innovation strategies can be
classified as organic, as they often are for biophar-
maceutical companies, or as acquisition growth, as
they are for large pharmaceutical firms that find it
less costly and less risky to acquire biopharmaceu-
tical companies that have achieved patent approval
on a new product rather than to originate a
competitive search on their own. However, innova-
tion is classified as a cooperative strategy for our
analysis because the emerging tendency is for
128
companies that specialize as innovators to partner
with, rather than acquire, other innovators that can
supplement their product offerings.
While product development extends the life cycle
of an existing product, successful innovation creates a
new product life cycle. When the new product or
service can cannibalize the market of the old product,
it has exceptional potential for profitability. For
example, in 2002, Forest Labs abandoned its anti-
depressant drug Celexa, even though it had two years
of patent protection remaining. Its 2300 sales repre-
sentatives were retrained to promote Lexapro, which
is nearly identical in chemical composition to Celexa.
In its first six months on the market, Lexapro grabbed
10% of the $8 billion antidepressant market. This
highly successful strategy of Forest Labs was not
intended to extend the life cycle of the base product
Celexa, as might have been done by offering an
injectable or an ointment as a substitute for an original
patented form. Instead, Lexapro was designed to
replace the original product with a “new” drug that
would begin a fresh life cycle of its own (Pearce, 2006).
Fig. 1 shows that the three collaborative growth
options differ greatly on the dimension of speed of
change, with a strategic alliance likely to be
accomplished more quickly than a joint venture,
or an innovation. In fact, innovation can be argued
to have the highest degree of unpredictability as to
timeframe and impact of any of the seven strategic
options. The three collaborative options also differ
in the magnitude of strategic transformation that
they are likely to effect, with a joint venture
providing the most profound level of change.
3.3. A case for collaborative growth through
joint ventures in China
Until very recently, China enthusiastically invited
foreign investment to help in the development of its
economy. In the early 2000s, however, China
increased its regulations on foreign investment to
moderate its economic growth and to ensure that
Chinese businesses would not be at a competitive
disadvantage when competing for domestic markets.
The new restrictions require local companies to
retain control of Chinese trademarks and brands,
prevent foreign investors from buying property that is
not for their own use, limit the size of foreign owned
retail chains, and restrict foreign investment in
selected industries (Kurtenbach, 2006). With these
increasing regulations, investment in China through
joint ventures with Chinese companies has become a
prominent strategy for foreign investors who hope to
circumvent some of the limitations on their strate-
gies, therefore more fully capitalizing on China's
economic growth.
J.A. Pearce II, D.K. Robbins
In China, a host country partner can greatly
facilitate the acceptance of a foreign investor and
help minimize the costs of doing business in an
unknown nation. Typically, the foreign partner
contributes financing and technology, while the
Chinese partner provides the land, physical facil-
ities, workers, local connections, and knowledge of
the country (Qui, 2005). In a wholly owned venture,
the foreign company is forced to acquire the land,
build the workspace, and hire and train the employ-
ees, all of which are especially expensive proposi-
tions in a country in which the foreign company
lacks guanxi (Pearce & Robinson, 2000). Addition-
ally, because China restricts direct foreign invest-
ment in the life insurance, energy, construction of
transportation facilities, higher education, and
healthcare industries, asset or equity joint ventures
are sometimes the only option for foreign firms.
Foreign partners in equity joint ventures benefit
from speed of entry to the Chinese market, tax
incentives, motivational and competitive advan-
tages of a mutual long-term commitment, and
access to the resources of its Chinese partner. In
2006, two large joint ventures in the media industry
were created when Canada's AGA Resources part-
nered with Beijing Tangde International Film and
Culture Co, and when the United States' Sequoia
Capital formed a joint venture with Hunan Great-
dreams Cartoon Media (Bagnell, 2006). Recent joint
ventures in China's asset management industry
include the 2006 partnerships between Italy's
Banca Lombarda, the US's Lord Abbett, and Chinese
companies.
Similar opportunities exist for international joint
ventures in the construction and operation of oil
refineries, in the building of the nation's railroad
transportation system, and in the development of
specific geographic areas. In Special Economic Zones,
foreign firms operate businesses with Chinese joint
venture partners. The foreign companies receive tax
incentives in the form of rates that are lower than the
standard 30% corporate tax rate. For example, in the
Shanghai Pudong New Area, a 15% tax rate applies
(Chopey, 2006).
The number of international joint ventures is
increasing because of China's admission to the
World Trade Organization (WTO). Under the condi-
tions of its membership, China is expanding the list
of industries that permit foreign investment (“Chi-
na's WTO Scorecard,” 2005). As of 2007, for
example, foreign investors that participate with
Chinese partners in joint ventures are permitted to
hold an increased share of JVs in several major
industries: banks (up to 20%), investment funds
(33%), life insurance (50%), and telecommunica-
tions (25%).
Strategic transformation as the essential last step in the process of business turnaround
4. Final thoughts
Managers are motivated to change their organiza-
tion's strategy whenever performance expectations
and actual results differ in important ways for an
extended period. Achieving a profitable match
between a business' resources capabilities and
environmental opportunities requires a continuous
process of change and adjustment.
At times, the immediate stimulus for turnaround is
the recognition that environmental and competitive
pressures have effectively blunted the strategic
initiatives of the firm. At other times, a firm's stra-
tegic resources are so compromised and so depleted
by competition and a hostile remote environment
that the company's strategy must be discarded as
inappropriate because of the firm's diminished state.
In either case, the old strategy is a poor guide to the
intended future of the company – it is irreparable and
indefensible. Management's prepotent goal must be
to retrench until it can stop the decline and achieve
stabilization. Then turnaround, completed by stra-
tegic transformation, is essential for the competitive
repositioning of the firm.
In other cases, the motivations for change in
strategy represent expanded ambition and height-
ened expectations following the euphoria of survi-
val. Incremental increases to old goals seem too
modest to inspire future efforts for many firms, once
it is clear that they have bottomed-out. Inspired by
their own resilience or the successes of their com-
petitors, a company's stakeholders set heightened
growth goals for their executives. In these cases as
well, the old alignment of the company with its
environment is inadequate to deliver satisfaction of
the demands on management. However, in this case,
the formulation of a new strategy is grounded in the
core competencies and competitive advantages
credited for the business' durability. Management
can advance on firm footing, but must find new ways
to transform the business into a bolder force in the
marketplace.
Acquisition growth trades some of the control
retained by internal growth for greater speed in
implementation. Acquiring what others have built can
often be accomplished quickly, but the business that is
acquired rarely matches the exact strategic specifica-
tions of the acquirer's needs. Although acquisition
growth is achieved with speed and provides as much
diversification as the acquirer demands, acquired
firms must be skillfully modified and integrated with
existing operations to provide the strategic partner-
ship that portfolio growth demands.
Collaborative growth strategies have intuitive
appeal. They enable companies to concentrate on
their strengths while their complementary partners
129
assume part of a project's risks and responsibilities.
That said, a collaborative strategy can be the worst,
not the best, of all worlds, given the shared power and
compromises that are usually required. However,
political and economic realities sometimes require
that a company pursue strategic alliances, joint ven-
tures, or innovation partnership. Developing countries
are particularly prone to requiring that foreign
companies must partner with host-country businesses
or individuals to secure legal authorization to operate.
Turnaround situations change the competitive
context. Therefore, if a company can survive the
trough of a decline and steady itself with retrench-
ment, restructuring, and repositioning, it is usually
best served when executives construct a new, more
appropriate strategy that will enable the company
to compete successfully in the changed competitive
environment. The choice of components for this
strategic transformation includes acquisition and
collaborative growth options, but each works
optimally in the rather well-defined circumstances
that we have described. As experience and aca-
demic research have shown, turnaround situations
can be managed to improve the odds of company
survival. In addition, a turnaround can be the basis
of unprecedented future performance when the
process of strategic transformation sets promising
new directions for the company.
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