Entrepreneurial retrenchment among small manufacturing firms

Abstract

Strategic management researchers have traditionally focused on growth-oriented strategies for small firms. Yet studies of small businesses have consistently cited overzealous pursuit of growth as the number one contributor to financial decline and failure. Record numbers of small firms are finding themselves confronted with declines of sufficient magnitude to require the implementation of turnaround strategies. Much has been written about turnaround strategies for large corporations—the problem is that the commonly recommended turnaround strategies are not often feasible for small firms. Unfortunately, there are no investigations reported in the literature that approach the subject of turnaround from the perspective of the small-market-share businesses. The purpose of this research was to explore turnaround from the small firm perspective. The study focused on the turnaround strategy most often referred to as entrepreneurial retrenchment, i.e., the aggressive pursuit of cost and asset reduction. The results showed that firms that pursued entrepreneurial retrenchment were more successful than firms that continued to pursue growth with the preexisting configuration of assets, even after a period of extensive cost cutting. The findings suggest strongly that managers of successful small-market-share firms must be able to quickly recognize and ameliorate underper forming assets when they encounter turnaround situations. The findings were a result of empirical analyses of 33 small-market-share firms that had encountered turnaround situations. Turnaround situations were initially identified by the incidence of at least two successive years of declining profitability that exceeded any industry-wide decline that may have occurred over the same time period. The firms were subsequently contacted to verify that they considered the timeframe to indeed coincide with a period during which their managerial actions were targeted to achieve a performance turnaround. Each of the firms was then classified according to the direction of their cost and asset changes over the turnaround period. Nonretrenchers were those firms that did not achieve net reductions in costs or assets for any years after the decline. Cost retrenchers were those firms that achieved net costs reductions but not asset reductions for a minimum of one year succeeding the decline. Finally, entrepreneurial retrenchers were those firms that sustained a minimum of one year of asset reductions in addition to cost reductions in the years immediately after the decline. Although entrepreneurship research has traditionally focused on developing and investing in new businesses, little has been done on the issue of asset restructuring that precedes entrepreneurial endeavors in established companies (Robinson and Pearce 1988). For single businesses the essence of entrepreneurship is the ability to quickly respond to marketplace opportunities. The underside of this pursuit is the ability to quickly reposition assets to accompany ensuing moves for competitive viability. For single business firms, an inability to respond quickly to financial downturns creates turnaround situations. Therefore, an examination was prepared to determine the value of retrenchment as a means to achieve turnaround and financial stability. The results were produced through an analysis of longitudinally collected financial data that was used to profile each firm's turnaround situation severity, their classification of retrenchment, and the degree to which they were able to successfully achieve a return to predownturn financial performance.