MBA

Cover Sheet and Own Work Declaration

This sheet must be submitted to show that all conditions below have been met. It must be
signed with your ID number(s), and attached to each copy of assignments/projects.
Candidate Number(s): 10559
Title of Course: Corporate Turnaround
Submission Date: 8th June 2011
Title of Work: In a turnaround or transformation situation, making adjustments to the
business model is more important than managing the people issues
Word count: 1818
Note: Omission of the word count (where one is required) will lead to loss of marks.
I confirm that all this work is my own except where indicated, and that I have:
Clearly referenced/listed all sources as appropriate
Referenced and put in inverted commas all quoted text (from books, web, etc)
Given the sources of all pictures, data etc that are not my/our own
Not made any use of the essay(s) of any other student(s) either past or present
Not made use of any work which I have already submitted (partially or in full) to fulfill
the requirements of another degree course or examination
Not sought or used the help of any external professional agencies for the work
Acknowledged in appropriate places any help that I have received from others
(eg fellow students, statisticians, external sources)
Complied with any other plagiarism criteria specified in the course handbook
For group work, we certify that all members of the group have made a significant contribution.
I understand that any false claim for this work will be reported to the Proctors and will be
penalised in accordance with the University regulations.

SIGNED 10559
Do not sign your name
Please note: If you need further guidance on plagiarism or collusion, you can
1. Consult the Examinations section of your course handbook
2. Speak to your course organiser or supervisor
3. Consult the Essential Information for Students booklet

In a turnaround or transformation situation, making

adjustments to the business model is more important than
managing the people issues
8th June 2011
Two trends have been the recurrent paradigms in the subject of the optimal approach to a
transformation/turnaround situation: making hard adjustments (business model) or soft adjustments (people issues). Based on the evidence from two companies (Nokia1 , Chorlton Tripio Ltd2 )
and Hambricks3 and Weitzels4 work, this paper will argue that, although a company cannot
take a radical dichotomic position and it should adapt its transformation/turnaround strategy to
its particular situation and context, generally speaking, strategies based on soft adjustments
are more suitable for transformation situations, whereas those based on hard adjustments
provide better results in turnaround conditions.

Background

1.1

Transformation and turnaround situations: concept

Turnaround situations are usually associated in the business literature with situations of creating or discovering new realities [...], insight, and the emergence of a new direction quantitatively
and qualitatively different from the old one.5 . In such catastrophic stage, companies require
major reorganizations and dramatic changes in structure, strategy, personnel and ideology are
necessary4 .
However, most companies have opportunities to detect and even react to these situations. And
some of them do react before dramatic changes are needed: they have reached a transformation
situation. Thus, for the purpose of this paper, a company needs a transformation when it failed
to detect, understand or react to a long-term survival threat, even when it is only reflected by a
qualitative change in financial measures or in the more difficult to control, and culture specific,
human and organizational measures.
1 Corporate

Turnaround. Week 4, class material

Turnaround. Week 1, class material
3 Donald C. Hambrick, Richard A. DAveni. Large Corporate Failures as Downward Spirals. Administrative
Science Quarterly, Vol. 33, No. 1. (1988), pp. 1-23
4 Weitzel, W., Jonsson, E. (1989). Decline in Organizations: A Literature Integration and Extension. Administrative Science Quarterly, 34(1), 91-109.
5 Levy, A.. Second-order planned change: Definition and conceptualization, Organizational Dynamics, Volume
15, Issue 1, Summer 1986, Pages 5-17, ISSN 0090-2616
2 Corporate

1.2

Hard adjustments

In the context, a hard adjustment is identified with substantive, disruptive changes in the
basics of the organization. These changes require substantive goals and a radical breakage with
the past and include abrupt replacement of top/senior management team, changes in the business
model and the basic strategy, shifts in target markets or re-creation of the whole organizational
structure.

1.3

Soft adjustments

Soft adjustments gravitate around the idea of managing the people issues and, in their mildest
form, involve incremental changes in order to look for new efficiencies or to mitigate the abovementioned qualitative changes. Organizations try to improve communication and decisionmaking efficiency, increase employee commitment and motivation, foster constructive debate
with digressing opinions, and promote heterogeneity in the decision making process. Moreover,
senior team usually tries to establish a sense of urgency6 and to clarify and correct the differences between the actual and the expected performance4 in other to keep the metrics on
track.

1.4

Theoretical framework

This section tries to relate Hambricks3 and Weitzels4 works, and create an association between
their models of stages of decline. In both models, decline is a continuous process and the need
for a transformation shifts towards a need for turnaround as the time goes by:
Phase 1 Negative qualitative changes in performance measures, difficult to be noticed by the
top management team. These changes can be caused by changes in the environment (new
technologies, shifts in consumers preferences, new entries in the market...). Transformation situation.
Phase 2 Failure to decide on corrective action, caused by overconfidence and groupthinking
in the misinterpretation of the available data, misunderstanding of the change/threat or
denial of the significance of the risk.
Phase 3 Despite the efforts to adapt to the changing environment, faulty decisions and faulty
implementations follow one another. Stress induces perceptual and process impairments
and an eagerness for quick victories, without the necessary re-organization in fractionated
structures and unmotivated personnel. Some positive signs could provide false encouragement leading to more faulty actions.
Phase 4 Last chance of reversal, although complexities and previous cutbacks make it very
difficult, with stakeholders limiting their involvement with the company. This situation
leads to even more extreme attempts to turnaround the organization and, eventually, to
failure. Turnaround situation.

Discussion

In order to test the hypothesis of this paper (a company should adapt its transformation/turnaround
strategy to its particular situation), this section will analyze two different companies Nokia1 , a
6 Hamel, G. (2000). Waking up IBM: How a gang of unlikely rebels transformed big blue. Harvard Business
Review, 78/4: 137-146

Figure 1: N770 (May05), N800 (Jan07), iPhone (Jun07) and N810 (Oct07)
large communications corporation, and Chorlton Tripio Ltd 2 , a small spin-out company from
the Department of Tripiotics at the University of Manchester.

2.1

Case example: Nokia

The evolution of Nokia in the market of the smartphones is a textbook example of the decline
theories already explained:
Phase 1 In May 2005, Nokia announced the N770, a small high-end touchscreen tablet which
ignores the growing trend of smartphones (which started in 2000 when the touchscreen
Ericsson R380 Smartphone was released7 ). The smartphone problem is ignored, there
is not sense of urgency.
Phase 2 In an exercise of overconfidence and groupthinking, Nokia ignored the claims from the
market to provide phone features to the tablet, arguing that (a) they market for high-end
devices was too small (as leader in the handset manufacture, they knew better than anyone
else) and (b) if they introduced other high-end device, they would cannibalize their own
tiny market. In brief, the management is unresponsive to changes in market demand.
Phase 3 Accordingly with that line of thought, Nokia announced in January 2007 the N800,
again a tablet device without phone capabilities. Six months later, in June 2007, Apple
released the iPhone, disrupting the market forever after selling of 6.1 million of units
(lowest price, $399)8 . Four months later, in October 2007, Nokia insists in their strategy
and releases the N810, a phone-size tablet without phone capabilities.
Phase 4 Three years later, in July 2010, Nokia announced that their profits had dropped
40%9 : profit, sales, liquidity and dividends are decreasing. In February 2011, an explosive
speech by Stephen Elop, Nokias CEO, is leaked to the press two days before a billionaire
7 Wikipedia,

accessed on 8th June 2011

accessed on 8th June 2011
9 Wikipedia, accessed on 8th June 2011
8 Wikipedia,

new strategic alliance with Microsoft was unveiled. That was the beginning of a continuous
destruction of shareholder value: that day, Nokia shares fell almost 20% and on 31st May
2011, a profit warning by the Finnish mobile phone maker sent its shares plunging to a
13-year low10 .
Arguably, a stronger initial focus on the smartphone segment (hard adjustment) could have
spared Nokia these last years of continuous decline. However, the analysis shows that the underlying reason of the decline of the company (and maybe the reason of that important miss) was
the extreme overconfidence in their opinions derived from their leader position and their past
success, and a possible very marked problem of groupthinking derived from the homogeneity
of the management team. Therefore, a soft adjustment to foster heterogeneity of ideas and to
create a sense of urgency (challenge from the inside), looks more suitable when the decline is
starting.
Conversely, when the company is close to the failure a more extreme approach looks more
appropriate. It is necessary to address major decisions and major re-organizations. Layoff plans,
reduction of expenses, changes in the internal management team, stronger financial controls,
new business models, or selling secondary or unprofitable business (hard adjustments) could be
necessary at this point. This does not mean that soft adjustments are not necessary; openness,
clarity and loyalty are still important, but they are superseded to the hard adjustments.

2.2

Case example: Chorlton Tripio Ltd

Using the frameworks already explained, an analysis of the evolution of the decline of Chorlton
Tripio Ltd can be made in the following way:
Phase 1 The technology was not ready and almost cause a legal dispute among two of the
partners of Chorlton Tripio Ltd (Irwell Farnsworth -30%-, Professor R. Orbison -10%-).
Phase 2 Grant and research contracts were not useful to solve the problems with the technology
and, probably due to overconfidence and groupthinking, no other alternatives were seriously
exploited (the testing business brings in a marginal income stream).
Phase 3 High level of managerial stress and division among the partners (board conflict) are
evident, they cannot work together harmoniously, with different groups in the company
fighting for diminishing resources. Neither current nor prospective customers show any
kind of interest in the technology.
Phase 4 Middle of 2010, the technology is still not working, there are not immediate prospect
of further commissions, and Chorlton Tripio Ltd only has cash for the next six months.
In this company, we dont see the slow decline typical of large companies, but instead, Chorlton Tripio Ltd suffered a flash-transition to the fourth phase. In this case, a hard adjustment in
the early stages is not advisable: all the business problems are related to an under-researched
technology which has to be improved. The technology and the kit to commercialized are their
core business and epitomize their competitive advantage and their expertise. However, soft adjustments would have prevented major (current) problems, reducing the probabilities of having
to deploy a turnaround strategy now. Firstly, the development of a culture of constructive collaboration and cooperation, and enhancements in communication (content and manner) would
have probably improved the debate of new ideas. Secondly, a better relationship with current
and future customers (maybe using more skillful people) would develop a relationship of trust
10 Wikipedia,

accessed on 8th June 2011

among the participants in their economic ecosystem, and make easier the negotiation of future
projects.
However, Chorlton Tripio Ltd is now in a phase four crisis, and therefore, soft adjustments
are not the solution. Chorlton Tripio Ltd needs hard adjustments to turnaround its business.
Solutions such as short-term focus into the testing business or sell the specialized equipment can
be used to generate enough cash to survive, but they will change the physiognomy of the company
as radically as other dramatic hard adjustments, such as changes in the equity structure of the
firm.

Conclusion

Transformation and turnaround processes involve adjustments in the hard and in the soft part
of the company (in the technology and in the people parts) and the importance of any of
them has to be evaluated bearing in mind the stage of decline of the organization. The analysis
made in previous sections shows that early in the decline process, when a transformation process
is needed, soft adjustments look more promising to have a healthier organization and make it
able to explore and exploit again (and avoid the turnaround). However, when the organization is
facing extinction and the management team needs to turnaround the organization, a successful
adjustment in the hard part of the organization will deploy better results.
But the management team also should take into account that each company has a different
history, a different inertia and different people in the management team, with different skills,
backgrounds, traits and bias. Therefore, not only the stage of decline should be considered to
decide the type of adjustment to be done, but also external, industrial and internal factors play a
pivotal role in the decision. External factors11 such as Political, Economic, Social, Technological,
Environmental and Legal factors; industry factors12 such as threat of new entry or substitutes,
bargaining power of suppliers and buyers, and rivalry among existing firms; and internal factors of
the Organizational Culture13 such Stories, Symbols, Routines, Paradigms/Assumptions, Power
structures, Controls and Organization structure.
Thus, in summary, this paper has tried to prove that the statement making adjustments
to the business model is more important than managing the people issues fails to address the
stage of decline and the context (internal, close and external) of the company as main drivers in
the decision making process, and therefore, one should not declared himself strictly in favour or
against the statement.
Word count: 1818

11 Scanning

the business environment. 1967. Francis J. Aguilar.

M. 2008. The five competitive forces that shape strategy, Harvard Business Review, 86(1), 7893.
13 Johnson, G and Scholes, K (1998) Exploring Corporate Strategy. Pearson Education (5th edn).
12 Porter