Asia Pacific Journal of Management, 21, 5–24, 2004c© 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.

Guest Editors’ Introduction to Special Issue.Turnaround in Asia: Laying the Foundationfor Understanding this Unique Domain

DAVID AHLSTROM Ahlstrom@cuhk.edu.hkDepartment of Management, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong,852-2609-7748

GARRY D. BRUTON g.bruton@tcu.eduDepartment of Management, Neeley School of Business, Texas Christian University, Fort Worth,TX 76129, 817-257-7421

Abstract. Turnaround is a subject that is receiving increasing attention from researchers, managers and con-sultants. However, the subject has received minimal examination in Asia, with studies usually focusing more onthe external environment or macroeconomic issues and less on the management of Asian firms themselves. Thislack of examination has persisted despite the Asian economic crisis of the late 1990s, which pushed many firmsinto significant decline. Thus, this special issue will provide a baseline for examining this topic more closely. Thisintroduction presents ten papers of this special issue of the Asia Pacific Journal of Management on firm turnaroundin Asia. This paper also suggests key research questions for future examinations of the topic of firm turnaround inand around Asia.

Keywords: turnaround, strategy, institutional theory

Introduction

Researchers, consultants and managers today are paying substantial attention to the is-sue of organizational decline and turnaround (e.g., Bruton, Ahlstrom and Wan, 2001;Chanda, 2002; Collins, 2001; Gerstner, 2003; Harvard Business School, 1999–2001; Mone,McKinley and Barker, 1998). In part, this attention is because of the greater incidence offirm decline arising from increased competitiveness, and openness of the global economy(Cameron, Sutton and Whetten, 1988a; Kotter, 1995; Witteloostuijn, 1998). However, moststudies on firm turnaround have been conducted on firms domiciled in more developedeconomies, particularly in North America and Europe (Bruton, Ahlstrom and Wan, 2003).These studies typically make the assumption that firm management has a great deal of au-tonomy to pare assets, lay off workers, hire new managers, change the CEO, raise money,and reorient firm strategy—assumptions that may not hold in developing economies whereadditional stakeholders and differing institutional environments may impact turnaroundefforts (Bruton, Ahlstrom and Wan, 2001, 2003; Serapio and Shenkar, 1999).

There is some indication that firm turnaround in developing economies does not functionthe way it is thought to in the more developed economies of the West because of constraintson managerial action and stakeholders priorities that can aid or impede firm turnaround

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(Ahlstrom and Bruton, 2001; Bruton, Ahlstrom and Wan, 2001, 2003; Chanda, 2002; Frank,2001). But fundamental knowledge on turnaround in developing economies is limited,precluding reliable conclusions on how processes and outcomes differ from those in moredeveloped economies. This special issue on firm turnaround in Asia is motivated by theneed to examine these issues to understand how firm turnaround works in Asia.

Review of turnaround literature

Successful turnaround is defined as the reversal of a firm’s pattern of performance decline(Schendel, Patton and Riggs, 1976). A sizeable body of research on turnaround has de-veloped since the initial work of Schendel and colleagues (Schendel, Patton and Riggs,1976; Schendel and Patton, 1976). This work is based on evidence primarily from theUnited States (U.S.) and the United Kingdom (U.K.) (Barker and Duhaime, 1997; Barkerand Patterson, 1996; Collins, 2001; Davis, 1993; Slatter, 1984), while turnaround researchoriginating outside the U.S. and the U.K. is still scarce (Bruton, Ahlstrom and Wan, 2001).Only a few studies have examined turnaround outside of Anglo-American settings (e.g.,Bruton, Ahlstrom and Wan, 2001, 2003; Bruton and Rubanik, 1997; Ruiz-Navarro, 1998)and these investigations, with one exception, were case-based, sometimes focusing on firmsthat were owned or associated with a government body. The paucity of investigation in Asiais surprising given the region’s rapid growth as a business center (Rohwer, 2001) and poten-tial impact on issues of concern to turnaround research (Bruton, Ahlstrom and Wan, 2001;Haley and Richter, 2002; Singh, 2004).

The prior research on turnaround commonly drew from a rich variety of academic dis-ciplines. The principal questions asked in this research included: Why do firms fall intodecline? (e.g. Argenti, 1976; Hambrick and D’Aveni, 1988; Hannan and Freeman, 1977;Khandwalla, 1992; Singh, 1986; Witteloostuijn, 1998; Zammuto and Cameron, 1985); Whatare the consequences of firm decline? (Harris and Sutton, 1986; Khandwalla, 1992; Suttonand Callahan, 1987); and, What are the performance outcomes of firms’ responses todecline, such as retrenchment and other strategic actions? (Barker and Duhaime, 1997;Bruton, Ahlstrom and Wan, 2001, 2003; Collins, 2001; D’Aveni, 1989; Ford and Baucus,1987; Khandwalla, 1992; Hambrick and Schecter, 1983; Navarro, 1998; Witteloostuijn,1998). More recent research has also looked into the political antecedents and consequencesof firm decline (Huang and Snell, 2003; Liew, 1999; Steinfeld, 1998) as well as examiningthe role of institutions and various stakeholders that may be relevant in firm turnaround indeveloping economies (Ahlstrom and Bruton, 2001; Bruton, Ahlstrom and Wan, 2001). Itis from this perspective that the initial research on turnaround in non Anglo-American set-tings, both empirical (Bruton, Ahlstrom and Wan, 2003) and case-based (Bruton, Ahlstromand Wan, 2001; Haley and Richter, 2002) have developed.

Before beginning the exploration of Asian turnaround, the dominant body of litera-ture from mature economies in the West will briefly be reviewed. This prior research onturnaround in developing economies has indicated that there are a number of constraintson well-understood turnaround actions such as limits on the ability to replace the CEO,as well as additional avenues to turnaround such as government participation that may bemore available in developing economies (Bruton and Rubanik, 1997; Bruton, Ahlstrom andWan, 2003). We next examine these concerns in the context of Asia.

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Causes of firm decline

The causes of decline have typically been viewed along two dimensions: factors externalto the organization (e.g. Cameron, 1988a; Kelly and Amburgey, 1991; Khandwalla, 1992;Mone, McKinley and Barker, 1998), and those internal to the organization (e.g. Davis, 1993;Hambrick and D’Aveni, 1988). Schendel and colleagues (Schendel, Patton and Riggs, 1976;Schendel and Patton, 1976) initially proposed this dichotomy, arguing that a firm needs tounderstand the principal cause of its decline since its response needs to be geared to thenature of the problem that created that decline initially.

The first of these views holds that decline primarily comes from factors external tothe firm. Thus, there may a changes in the environment that promote new organizationalforms (Hannan and Freeman, 1977), new dominant technologies (Christensen, 1997) ornew business models (Hamel, 2000), leading to decline in firms that are unable to adapt tothe changes. This view is well articulated, albeit from different perspectives by population-ecology research (e.g. Baum and Singh, 1994; Hannan and Freeman, 1977) and work inindustrial organization economics (e.g. Porter, 1980). Population ecology proposes that thesurvival of organizations in decline facing such environments is problematic since firmsare usually unable to align their capabilities with the environmental niche due to limitedcarrying capacity of the environment and difficulty in making major changes. This viewsuggests that turnaround is very difficult and heavily dependent on changes in the industryand environment (McKelvey and Aldrich, 1983). An industrial organization perspectivealso emphasizes the importance of the external environment but would holds that firmshave much more ability to respond to change by making favorable changes or adapting totheir environments (Porter, 1980)

In contrast, the internal cause of firm decline focuses attention on the operating problemsof companies (Davis, 1993; Hofer, 1980; Chanda, 2002). This builds on the a view commonto strategic thinking that firms have internal resources at their disposal and make choicesabout the application of those resources that impact the success of the business (Collis andMontgomery, 1995). In addition, operational problems of firms that can lead to declineinclude excess assets, high costs, ineffective sales and marketing, (Chen and Miller, 1994;Hofer, 1980), or unproductive new product development (Christensen, 1997). This viewassigns a more instrumental stance to management than does the external view by suggestingthat managers have a significant amount of control over the business and can respond moredirectly to environmental (Collins, 2001; Porter, 1980) or technological (Christensen andRaynor, 2003) change.

Consequences of firm decline

The impact of firm decline on different stakeholders prior to and during the turnaroundeffort is also relevant to firm turnaround. Stakeholders include groups such as employeesinside the organization, and customers and suppliers outside of the organization, laborunions, government, investors and other interested parties. Two key frameworks, resource-dependence theory (Pfeffer and Salancik, 1978), and transaction cost theory (Williamson,1985) are often used to analyze the consequences of firm decline and assess firm turnaround.

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Transaction costs for firms in decline are thought to increase, which thus impact firmturnaround efforts (Williamson, 1985). Suppliers, creditors, customers, and other relevantparties try to disengage from the organization or bargain for more favorable exchangerelationships when the decline becomes known (Sutton and Callahan, 1987). A resourcedependence lens similarly leads to the recognition that problems with resource providers canlead to the failure of the organization (Pfeffer and Salancik, 1978). Thus, this view suggeststhat building and maintaining firm legitimacy with key stakeholders may be central tosuccessful turnaround (Ahlstrom and Bruton, 2001; Bruton, Ahlstrom and Wan, 2003).

However, there are also individual behavioral issues at work in a turnaround situation.Adverse reactions negatively affect the career, reputation, and self efficacy of the top man-agement in the declining organization. Therefore, managers often try to avoid or delayemergence of such reactions by increased secrecy, rigidity, centralization, formalization,and conservatism. These may further hasten the organization towards failure (Khandwalla,1992).

Responses to firm decline

The responses to firm decline fall into two principal categories that can be differentiatedby when the response occurs. The first occurs initially as the firm seeks to gain controlof the decline situation. In this stage the initial cash flow of the organization is broughtunder control so that the firm can survive. The next are the more substantial steps that theorganization takes to ensure the long-term success of the turnaround effort. Each of thesewill be examined in turn.

One of the most controversial aspects of turnaround research in the West is the topicof retrenchment (e.g., Hambrick and Schecter, 1983). Retrenchment ‘entails deliberate re-ductions in costs, assets, products, product lines, and overhead’ of the firm as it beginsits turnaround effort (Pearce and Robbins, 1993:614). Managers refer to this as ‘stop-ping the bleeding’ (Bibeault, 1982). However, there remains disagreement as to whetherretrenchment is an important part of the turnaround effort since firms may move imme-diately to more substantive efforts to restructure without immediate attention to cash flowissues. Studies have yielded differing results as to whether firms undertaking a turnaroundshould go through a formal retrenchment (Robbins and Pearce, 1992) or not (Barker andMone, 1994). However, most turnaround practitioners still commonly promote the concept(Bibeault, 1982; Davis, 1993).

After retrenchment, firms typically undertake specific turnaround action (Chanda, 2002;Khandwalla, 1992; Slatter, 1984). This stream of research also takes a proactive view ofmanagement and is concerned about the actual measures firms take to execute a turnaround(Ruiz-Navarro, 1998; Khandwalla, 1992; Robbins and Pearce, 1992; Pearce and Robbins,1993). Most studies have employed a rational model of organizations that presume strategicchoice and degrees of freedom to take the necessary action to turnaround the firm.1

Schendel and colleagues argued that the response to decline should be appropriate tothe cause, whether the cause of the decline is external or internal. This view holds that theexternal causes of decline can be dealt with through strategic actions of the firm. Thesestrategic actions include reconfiguring the assets of the firm in a manner to compete better,

INTRODUCTION—TURNAROUND IN ASIA 9

or repositioning the firm in a manner consistent with the existing competitive configuration(Goldston, 1992; Slatter, 1984; Chen and Miller, 1994). In turn, operating solutions areneeded for operating problems. These solutions include aggressive cost cutting, increasingthe emphasis on sales and marketing at the expense of other functions, or increasing salesby cutting prices without undertaking a major repositioning of the product line (Chen andMiller, 1994; Hofer, 1980). There has been support for the utilization of both strategic(Baker and Duhaime, 1997) and operating solutions (Arogyaswamy, 1992).

One particular type of turnaround action merits special attention as it can prove prob-lematic for firms in Asia—the removal of the CEO (Bruton, Ahlstrom and Wan, 2001).Researchers employing upper-echelon theory argue that CEOs can significantly impactstrategic choices and the performance of firms (Finkelstein and Hambrick, 1990; Starbuck,Greve and Hedberg, 1978). Consistent with this theory, O’Neill (1986) maintained thatchanging firm leadership could help chart a new course, though interestingly he found thatsuccessful turnarounds often did not involve a change of CEO. Mueller and Barker (1997)found, however, that frequently there were significant changes in top management teamswhen firms undertook a successful turnaround. This perspective suggests that actions lead-ing the firm into decline were shaped by the policies of the firm’s leadership (Brenneman,1998). Such policies are not changed easily by those who presided over them; thus tak-ing the firm in new directions may call for new leadership with a different plan (Collins,2001; Starbuck, Greve and Hedberg, 1978). Recently, this dimension of turnaround hasreceived additional empirical support (Barker and Patterson, 1996). However, some re-searchers have found little support for the replacement of the CEO leading to a turnaround(Daily and Dalton, 1995; Kesner and Sebora, 1994). Instead, they argue that it is an illusionof change to change the CEO. The entrenched lower level managers would not be changedin this situation, and thus restrict change.

Firm turnaround in Asia

An a priori case can be made for significant differences in turnaround in Asia, due in partto the different environment, political and institutional settings in which these firms operate(Bruton, Ahlstrom and Wan, 2001; Peng, 2003). Confucian philosophy has widespreadinfluence in Asia and impacts business practice around in the region (Chen, 2001; Haley,Tan and Haley, 1998). Hofstede and Bond (1988) discussed these cultural differences in Asiawhich they referred to as “Confucian Dynamism”. They argued that this cultural dimensionwas unique to Asia and not replicated in the West.

The impact of Confucianism is seen in a wide range of business and economies in Asia.For example, Confucian philosophy is thought to encourage a rather negative view of failure(Chen, 2001). The result is that Chinese entrepreneurs may be less willing to take risks thanentrepreneurs in more mature markets, while investors are less forgiving (Ahlstrom et al.,2004; Bruton, Ahlstrom and Wan, 2001; Tan, 2001). Tan, Luo and Zhang (1998) extendedthis view by arguing that entrepreneurial strategies in China reflect lower risk taking due tothis fear of failure.

To illustrate further, consider aspects that directly impact turnaround efforts. In the West,small businesses typically are the principal family held businesses in the economy; as firms

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grow larger they commonly raise money in the public equity markets and professionalizetheir management (Chandler, 1990). Even if the family remains a principal shareholder, thefinancial markets require that the firm be managed in a manner consistent with other publicfirms. Thus, in the West the role of the family commonly diminishes as the firm grows(Sharma, Chrisman and Chua, 1996). Yet in Asia, the professionalization of managementand the ceding of control by a paternalistic owner-manager may not be the norm (Ahlstromet al., 2004; Liu, Ahlstrom and Yeh, 2004). One of the defining characteristics for manyAsian firms outside of Japan is that they function essentially as family businesses whetherthey are publicly traded or not (Chen, 2001; Perkins, 2000; Weidenbaum and Hughes,1996). This creates a number of tensions for Asian firms steeped in traditional practices(often Confucian) that are simultaneously trying follow the prescriptions of firm turnaroundestablished in the West. Examples are when these firms find it difficult to replace the CEOor sell off major lines of business (Bruton, Ahlstrom and Wan, 2001, 2003).

The impact of this ownership structure is compounded by the generally low levels ofmonitoring and regulation from equity markets in Asia (Brancato, 1999; Phan, 2000; Younget al., 2001). Top managements in Asia firms generally govern with fewer external con-straints (Claessens, Djankov and Lang, 2000; Low, 2002; Young et al., 2002).2 The resultis that the owner of the firm is often also the manager, and is allowed much more discretionin making decisions. The primacy of the family in Asian firms, even publicly traded ones,is further ensured by the strong family control over key aspects of the firm and its sub-sidiaries, associated organizations and allied banks (Backman, 1999; Perkins, 2000; Younget al., 2001; Claessens, Djankov and Lang, 2000).

In summary, there is support for the belief that business in Asia can differ significantlyfrom in the West, particularly in how strategies such as turnaround are undertaken (Ahlstromet al., 2004; Bruton, Ahlstrom and Wan, 2001, 2003; Haley, Tan and Haley, 2002; Pye, 2000).This in turn supports the view that theories of organization developed largely in the Westwill not automatically be applicable to Asia, and that their applicability must be evaluated(Boyacigiller and Adler, 1991; Orru, Biggart and Hamilton, 1997; Singh, 2004; Tsui andLau, 2002). This appears especially true in the case of firm turnaround; it is well acceptedthat firms in the U.S. will be able to act with boldness in reducing receivables and payrolls,selling assets, and emphasizing sales, while making major strategic and top managementteam changes. However, firms in Asia operate in conditions that make these actions moredifficult to employ. Thus, the applicability of the Western model cannot be automaticallyassumed and must be adjusted to account for differences in culture (Hickson and Pugh,1995), institutional environment (Bruton, Ahlstrom and Wan, 2001; Bruton and Ahlstrom,2003; Hitt et al., 2004; Singh, 2004), and implementation (Lau et al., 2000).

Firm turnaround and the Asian economic crisis

The Asian Economic Crisis that started in 1997 pushed the issue of firm turnaround tothe forefront of business research and provided an opportunity to examine theory andimplementation of firm turnaround in Asia. Although the crisis started in 1997, its aftereffects are still felt today as Asian economies and firms undergo reform. The Asian economiccrisis started with the devaluation of the Thai Baht in July of 1997, and spread quickly

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around Asia. Even resilient economies such as those of Singapore, Taiwan, and Hong Kongwere affected as currencies declined precipitously around Asia. The prices of equities andproperty also declined drastically, unemployment rose, currency reserves fell, and manyregional currencies came under speculative attacks. The economies of East and South EastAsia, accustomed to high single or double-digit growth rates, shifted to slow or negativegrowth as countries suffered near breakdown in financial systems.

This seemingly sudden decline was in stark contrast to what had been expected of Asianeconomies in the 1980s and 1990s when the talk of the Asian Century (e.g. Rohwer, 1995)and the coming world dominance of Asian management and political systems and val-ues was in vogue (Fallows, 1994; Johnson, 1983; Vogel, 1979). Based on the rapid andwidespread economic growth for more than two decades prior to 1997, many believed thatthere was a unique human resource and cultural dimension to the region that ensured itsuccess. The Asian Crisis challenged many of these beliefs. But even prior to 1997 someeconomics research argued that Asian economies boomed not because of increased manage-rial capabilities or human resource capability, but because of massive capital investments(Young, 1994; Krugman, 1994). The decline made clear that there were both macroeco-nomic mismanagement and significant shortcomings in firm level strategic and managerialmismanagement (Ang et al., 2000). These factors made it more difficult for firms to re-spond effectively to the downturn, and then execute turnarounds (Bruton, Ahlstrom andWan, 2001).

The Asian economic crisis is such a watershed event that a study of turnaround begsexamination in this context. Three different perspectives have been widely employed toexamine the causes of the Asian crisis. These include market failure; institutional failure,and strategic failure. Each will be reviewed briefly in turn and placed in the context of firmturnaround.

Some researchers identify financial related failure as the principal cause of the crisis,particularly attributing it to financial-sector weakness and market failure. Specifically, weakmarkets for corporate control in Asia allowed firms in the region to continue losing moneyand have declining stock prices, with no prospects of being taken over or for money losingdivisions to be sold off (Bruton, Ahlstrom and Wan, 2001; Peng, Luo and Sun, 1999). Thesituation was compounded in some countries by the government’s close association withsome firms. This shielded the firms from external environment pressures, and enabled themto lose money for decades without change being enforced on management.3

Second, institutional-based explanations contend that the causes of the Asian crisis extendmuch deeper than financial sector weaknesses and market failure, but extend to weakness ina broad range of institutions, which facilitated corruption and other opportunistic behavior(Duggan and Levitt, 2002; Low, 2002; Boisot and Child, 1988, 1996). Scott (1995) presentedrelevant institutional forces under the regulatory, normative, and cognitive pillars. Researchin Asia has not emphasized regulatory institutions, which involve the setting of rules andtheir enforcement (Scott, 2002). Instead, researchers have typically focused on normativeand cognitive institutions. Normative institutions represent the commercial conventionsand rules of behavior in different professions, while cognitive institutions are the broadersocietal rules of behavior as reflected in individuals’ mental maps. These institutions aremore resilient and less likely to change (Scott, 1995) since they are socially constructed over

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time by the culture of the region (Jepperson, 1991). Normative and cognitive institutions canconstrain actors by schema, frames, and scripts, often without their conscious knowledge(Scott, 1995). In Asia, those who believe these institutions may have helped to create thedecline have focused on the role of crony capitalism, and corruption in the public and privatesectors (Bruton, Ahlstrom and Wan, 2001).

The third explanation maintains that strategic and management issues were problemsfor firms undergoing a turnaround in Asia. Encouraged by booming economies, firms of-ten pursued a policy of often unrelated, debt driven diversification (Haley, 2000), relyingheavily on short-term debt financing to fund their growth (Bruton, Ahlstrom and Wan,2001). The extent of this diversification was sometime quite extreme. For instance, in 1996,the five largest South Korean chaebols (Daewoo, Hyundai, Lucky Goldstar, Samsung andSunkyong) controlled over 250 subsidiaries in over fifty, mostly unrelated lines of business(Serapio and Shenkar, 1999).

Unrelated diversification and extended leveraging led to vicious cycles where firms pur-sued risky ventures to earn larger returns on their investments to service their expensive,short-term debt. When these risky projects failed, they turned to more borrowing to keeptheir operations afloat. These companies were able to maintain this practice for as longas banks were willing and/or able to extend credit. When the crisis hit, banks refused orwere unable to rollover their loans, causing many of these firms to become bankrupt andto sell assets or lines of business to pay off loans—something that family owned Asianfirms typically avoided (Ahlstrom et al., 2004; Bruton, Ahlstrom and Wan, 2001). Otherturnaround measures such as the replacement of the CEO, reforming the board, and par-ing unrelated lines of business proved similarly difficult to implement among Asian firms(Bruton, Ahlstrom and Wan, 2001, 2003; Young et al., 2001; Claessens, Djankov and Lang,2000). Thus, the high levels of unrelated diversification proved difficult to manage duringthe crisis. The papers in this special issue focus primarily on management issues, thoughinstitutional factors and their impact on firm turnaround are also assessed.

Insights from this issue

This special issue of Asia Pacific Journal of Management seeks to provide some insight onhow firm turnaround works in Asia. The backdrop for much of this research is the Asianeconomic crisis although there are also papers set in other settings. The papers approachthe investigation of turnaround from the macro perspective of large business groups, toindividual firms, to the perspective of the individual in the turnaround firm. The countriesexamined include India, Korea, Thailand, Singapore, Australia, and greater China. ThoughJapan is not represented, it is arguable that Japan’s economy is mature and at an advancedstage of development, and as such may have less in common with the economies of Asiaexamined here. The methodologies used vary from in-depth cases to large data-base analysis.The result is that a rich variety of perspectives, issues and contexts are examined to providean overview of turnaround in Asia.

Rather than an exhaustive coverage, the reader will find a selection of key issues, from for-eign investment and management processes, to the turnaround of state-linked firms. Takentogether, these papers constitute an overview of firm response to downturn and turnaround

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and the approaches that appear to work in this environment. By suggesting ways for re-structuring businesses, these papers present important implications for the restructuring ofnational and regional commercial systems as well.

The paper by Kim, Hoskisson, Tihanyi and Hong leads the special issue. Their pa-per examines business groups in South Korea through an evolutionary theoretical lens.Specifically, the authors argue that the value-creation potential of business group diversi-fication depends on the quality of the economic institutions supporting the economy; andthe strategy-structure fit is a key determinant of diversified business groups’ performance.Combining these two premises, they link business group evolution with the institutionalcontext, sources of competitive advantages, diversification strategy, and structure. Theyuse two of the leading firms in the country, LG and Hyundai, and the ways in which theyrestructured in response to the decline represent their empirical findings. Their work alsosuggests the continuing impact of the government on larger business in South Korea, inspite of protestations to the contrary.

The next paper by O’Neil, Rondinelli and Wattanakul, examines the impact of differentownership structures on firm turnaround in Thailand. This paper demonstrates that owner-ship identity, in the form of government or private ownership, impacts firm restructuring.Government linked firms are more likely to face additional constraints that slow restructur-ing and turnaround. The authors also suggest that the movement for greater privatization ofstate owned enterprises can lead to greater restructuring and turnaround of the firms. Thosefirms that remain under government control experience the lowest levels of restructuring andinnovation, constrained by government ownership and the difficulty of managing multiplestakeholders.

Following the focus on state ownership, the paper by Maheshwari and Ahlstrom is an in-depth case study of a predominantly state-owned firm in India. This state firm approximatesthe permanently failing firms highlighted by Meyer and Zucker (1989). This organizationhad decades of financial losses but was able to continue with help from the governmentand other stakeholders. When firm management finally acted to undertake a turnaround, itcreated a broad-based effort, focusing on strategic-oriented changes and legitimacy buildingwith key stakeholders such as labor unions and various levels of government, typically pow-erful players in developing economies (Ahlstrom, Bruton and Lui, 2000; Peng, 2000). Thispaper suggests that firms need an institutional strategy to deal with government and relatedstakeholders to build and maintain legitimacy for their actions (Ahlstrom and Bruton, 2001),for the right to earn a profit and manage the business as an ongoing concern (Peng, 2003),and for the actions to correct declining performance. These actions may also be common tofirms in developing economies that have powerful government and labor stakeholders thatneed to be co-opted (Ahlstrom and Bruton, 2001; Peng, 2003).

White addresses the challenges of restructuring businesses in Asia and the importanceof managing key stakeholders in that process. He focuses his analysis on Thailand and thechanges in corporate governance that occurred in Thailand (and in other Asian countries)following the Asian economic crisis. He argues that stakeholders and certain structuralelements interact to limit such restructuring in Thailand. White bases this on a systematicanalysis of key stakeholders in Thailand, their power and interests, and how they impactcorporate governance and the ability of firms to reform and turnaround their performance.

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In the Thai case, measures taken to reform corporate governance have not as yet made a fun-damental change in any of the elements of this system. White finds that governance reformshave stimulated already powerful stakeholders to expand their power thus minimizing theeffect of the structural changes intended by the governance reforms. The net effect has beena reduced dependence by Thai firms on foreign funds, with an increased requirement formanagers to behave strategically toward key stakeholders such as the government.

Adopting a broader perspective, Van de Ven expands on this theme in dealing withthe challenges of change in institutional regimes in Asia, both in terms of formal andinformal institutions (North, 1990; Peng and Health, 1996). His paper argues that much ofthe knowledge that provides distinctive competence for sustained competitive advantageis culture and context specific. Thus, this knowledge is very difficult to imitate and canbecome the basis for sustained competitive advantage. This also leads to the conclusion thatfirms’ restructuring strategies should be tailored to a firm’s institutional environment (Hittet al., 2004; Peng, 2003). In particular, firms undergoing a turnaround need to find theirown unique solution to the difficulties they face, in the context of their own institutionalenvironment. A logical conclusion is the need to adopt models formulated in developedeconomies to the environments of developing economies.

Fisher, Lee, and Johns examine the role of retrenchment, and the replacement of thechairman or equivalent, and ownership change in the turnaround process. They use as theirsample sixty listed companies in Australia and Singapore. They argue that transparencyof the regulatory environment and other governance issues are a stronger influence onturnaround practices than are cultural issues. This suggests that culture may have relativelylittle impact once key institutions such as rule of law and regulations are taken into account.What may have seemed to be cultural differences may result from institutional differences.This research raises interesting questions on whether the approaches to turnaround foundin less mature Asian economies disappear as those economies converge with the matureeconomies of the West.

Carney also takes up an institutional theme. He focuses on why the expected restructuringof firms in Asia has not occurred at the pace originally expected following the Asian crisis.Carney argues that the new institutions that promote new entrants and provide incentives toincumbents to restructure or exit an industry are needed to encourage firm turnaround andrestructuring. Additionally, he argues that the level of diversification of firms needs to belimited in Asia if such restructuring is to be successful. The effects of performance declineare difficult to determine and actions needed to restructure are much less clear in highlydiversified firms.

Tan and See offer specific insights on how firms adopt particular strategic actions inrestructuring. They examine Singapore manufacturing firms and their adoption of offensiveor defensive strategies following declines in performance. They find that larger businesses,those with greater control over their environment, and those possessing greater slack tendto adopt offensive strategies when restructuring. On the other hand, firms that are smallerand have less slack, and that are faced with larger numbers of uncontrollable factors, tendto adopt defensive strategies.

Gupta and Wang examine the role of leadership in the turnaround effort. Specifically, theylook at the “entrepreneurial leadership” model recently proposed by Gupta, Macmillan and

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Surie (2003) and conduct an in-depth examination of the restructuring effort of a large statefirm in China. This firm is a leading Chinese electronics firm—Huajing. The rapid changein the electronics industry in China and the world helped to bring this restructuring andleadership’s role into a clearer perspective. The firm’s leaders sought to discover differentstrategic flexibility platforms embedded within the organization as part of their restructuring.They then mobilized various aspects of the firm to work towards transforming that potentialinto a reality. These included a clear strategic thrust, quick product designs, close workingrelationships with suppliers and customers, reduced dependency on the central government,altered compensation packages to encourage creativity and risk taking, and encouraging ofsmaller units.

Finally, Meyer examines why change in organizations in emerging markets can be diffi-cult. He employs a game-theoretic concept of a ‘coordination game’ to analyze conditionsthat may inhibit the coordination of stakeholders to shift from an existing corporate strategyto a new one. Prior research in the West has used approaches such as agency theory wherethe coordination of stakeholders may be less critical. A game theoretic analysis movesthe coordination of stakeholders to a central concern. The author argues that this modelis particularly relevant to Asia, because of its different cultural traditions and numerousstakeholders that may be more closely involved in business (Ahlstrom and Bruton, 2001;Ahlstrom, Bruton and Lui, 2000; Fallows, 1994; Peng, 2003).

Discussion

It is clear from the papers that the models of turnaround from the West are not uniformlyapplicable to Asia. Instead, culture and the institutional environment coupled with differentstages of development of Asian economies limit the usefulness of models derived fromstudies of turnaround in more developed economies. In addition, the enablers of changeand restructuring in Asia also differ, making different approaches to turnaround possible.For example, the absence of a well established legal system in many Asian countries maycreate a constraint in some turnaround situations. However, it also creates opportunities inthat creditors and others can work with key opinion leaders who are most concerned aboutmaintaining the business as a going concern. These individuals can serve as key powercenters to ensure restructuring proceeds successfully. Thus, there are both constraints andopportunities in Asia that require different approaches than those prescribed by the dominantmodels of turnaround used in the West.

This view that the impact of additional stakeholders and constraints in Asia calls formodifications to the turnaround process and its implementation, is supported by more thanone paper in this special issue. But in embracing this view of turnaround, researchersshould recognize the need to take one additional step. As the countries of Asia differ inmany aspects that affect business, it may not be useful to discuss turnaround at such abroad level. Instead, aspects of turnaround are likely to differ in the various economies andinstitutional environments around Asia. Each of the unique environments in Asia needsto have its own particular issues addressed. Thus, the issues that impact turnaround ofbusinesses in India and China may overlap due to the similar roles of the governments, andbecause these countries are broadly at similar levels of wealth and development. But each

16 AHLSTROM AND BRUTON

will also have other areas of significant differences. For example, China is influenced byConfucian philosophy, as well as the business practices of the Overseas Chinese, who arespearheading development in that country. These factors have much less impact in India,which has its own set of cultural and commercial influences. More broadly, it is obviousthat the countries of Asia, while sharing many similarities, enjoy enough differences torequire the study of phenomena within specific country contexts. Thus, researchers needto be clear on points of similarities and differences around the region; the approach takenby a number of papers in this special issue to focus on firms in one or two particular (andsimilar) countries in the Asia is helpful in controlling for country differences in the studyof turnaround.

One particular institutional force in Asia merits particular attention. The role of govern-ments in most Asian economies has little analogue in the U.S. Governments in Asia remainactive in most aspects of business in contrast to the U.S. government, which passes regu-lations and laws but plays a relatively small role in terms of direct activity. The papers byMaheshwari and Ahlstrom, Carney, and White examine this critical feature of institutionalregimes in Asian countries. It is these differences that lead Meyer to argue that the manage-ment of a turnaround effort in Asia needs to be different, since unlike mature economies inthe West, there will not be as clear a path to turnaround.

The issue of stakeholders and their role in the turnaround in Asia is one that also deservesgreater attention in the future. Clearly, the government is a key stakeholder. In many nationssuch as India and Korea, unions can also be major stakeholders while in other economiessuch as that of China, Hong Kong and Singapore, they play a minimal role. Legitimacyis a critical issue in many aspects of business in Asia (Ahlstrom and Bruton, 2001). Howthese stakeholders and issues of legitimacy are managed deserve greater attention in futurestudies of turnaround.

The papers in this special issue also highlight that there is no one dimension of turnaroundthat is the central concern for a successful turnaround. Issues of leadership (Fisher, Lee andJohns; Gupta and Wang), corporate governance (White; O’Neil, Rondinelli and Wattanakul),and the strategies employed (Tan and See) including diversification (Kim, Hoskisson,Tihanyi and Hong) and the management of stakeholders (Maheshwari and Ahlstrom), areall important to the turnaround effort. These issues also show up in different settings andare sometimes differently implemented. For example, establishing firm legitimacy in Chinawill likely differ from how it is done in India because of differing cultural and institutionaldimensions in the two countries. Future research should explore further how these variousissues balance with each other and their importance in different settings.

These findings lead to several other questions that need further examination. While it isclear that turnaround in Asia differs, there is also substantive interaction with the Westernmodel of turnaround. Future research could also examine how these models interact witheach other. The second is the broader concern of whether this interaction will lead ultimatelyto a convergence between these two models of management. A third question concerns whichview of the causes of the Asian economic crisis (market, institutional, or managerial failure)is most relevant for the examination of firm turnaround. This is likely to inform studies ofturnaround in other crisis situations. Finally, as noted above, it is clear that governmentsin Asia have a significant impact on turnaround in many regions. Regulatory institutions

INTRODUCTION—TURNAROUND IN ASIA 17

are becoming much more stable in the region, and thus warrant further study, for how suchmaturity impacts turnaround. Each of these questions will be examined below.

Interaction between Asian and Western management

In Asia, a turnaround situation typically introduces new, external pressures on firms sincemajor international banks, which may not share the cultural orientation of Asia, are almostalways major creditors to the firms (Bruton, Ahlstrom and Wan, 2001). This financial posi-tion gives these banks and financial institutions the ability to apply considerable pressureson firms for actions such as the removal of a CEO—actions that are been viewed as in-consistent with Asian firms’ cultural orientation (Backman, 1999; Bruton, Ahlstrom andWan, 2001; Frank, 2001). The power of these creditors has further increased in the faceof regional economic downturns and currency upheavals of the late 1990s. A turnaroundsituation thus yields an important opportunity for an examination of the tension betweenbehavior and norms present in much of Asia and actions promoted by Western financialinstitutions and practices.

A turnaround should not be viewed strictly as a “financial” concern. Instead, it is an eventwhose roots extend well beyond financial markets and institutions to reach political, social,institutional and managerial layers. The long-term impact of the crisis extends past monetaryand exchange rate policies, encompassing institutional regimes and firm management andstrategy, helping to highlight challenges firms face in managing the turnaround process inthe distinct institutional environment of Asia.

Future research should examine the impact how these different forces from the Westand Asia interact. Issues such as whether there are factors that mitigate the impact of theWestern model or encourage its use are of particular interest. This could include lookingat the ownership structure of the firm, its principal products and whether they are soldinternationally or domestically, the educational background of the executives includingwhether they were educated in the West or not, the role of the culture and whether itencourages stronger relationships within the local business community or with those fromoutside the community, and the role suppliers and buyers in this process.

Convergence of management models?

The paper by Fisher, Lee and Johns indicates that two of the more developed economies inthe region, Singapore and New Zealand, have more developed regulatory institutions thanin the other Asian countries and hence rely less on informal institutions. (Bruton, Ahlstromand Wan, 2003). The interesting question raised is whether economic development andmaturity lead to a convergence on Asian and Western models of management. It is clearthat the influence of U.S. business education, Western banks and workout consultants on theturnaround efforts in Asia have been substantial. But do these lead to fundamental changeswhere the two models merge to become one, or is the impact at best a fleeting change in Asianinstitutions and management systems which return later to their original state? There also arepowerful forces supporting change beyond banks and institutional investors from the West.The influence of institutions such as the World Trade Organization and the International

18 AHLSTROM AND BRUTON

Monetary Fund also lead to greater similarities in many aspects of business. The resultof this influence is that the proponents of convergence believe that there will be greatersimilarity in the models of business. An even more fundamental question is whether thereare in fact Asian or Western models of management at all—it is possible that as economiesdevelop and mature, businesses adopt systems of management that are prevalent amongWestern businesses, but that are not western as much as they are universal. The examinationof turnaround offers the potential to examine the interesting issue of convergence.

Proponents of a theory of divergence also see change, but one that is less predictable andnot path dependent. According to their view, change will have a distinctly Asian essence,with organizations and governments selectively adopting elements from Western systemsand in some cases coming up with new solutions to adapt to the environment (Ahlstrom andBruton, 2001). How firms respond to turnaround pressures in the future is part of the largerquestion of whether convergence or divergence will be the model that will guide change indeveloping market economies.

Views of Asian crisis

As discussed previously there are three views of what led to the Asian Crisis, market,institutional, and managerial failure. To date, each of these rationales has had proponents.But each will lead to substantively different actions that are needed in a turnaround situation.Therefore, determining which may have the greatest relevance and which firm actions lead tothe greatest success is a critical topic for future investigation. As there are signs that crisesare becoming endemic, establishing the links between causes of crises and appropriateturnaround responses will clearly establish the base for improved turnaround responses infuture.

Regulatory institutions

It was noted in the introduction to this paper that research in the West has begun to focusmore closely on the political antecedents and consequences of firm decline as well (Huangand Snell, 2003; Liew, 1999; Steinfeld, 1998). A part of this examination is an effort to betterunderstand the role of legal institutions on the decline and turnaround process. This increasedinterest reflects the reality that laws are not some abstract entity in the environment that allmust be accepted as a constant. Rather they can be initiators or inhibitors of competitiveadvantage for firms.

Thus, there is a need to better understand the role of regulatory institutions on theturnaround process. Several papers suggest important roles by governments. The exam-ination of the impact of specific regulatory institutions is almost void from the researchon turnaround. In part this could be from the belief that regulatory institutions in Asia arenot fully developed and corruption will overrule legal requirements. However, the legalenvironment in many Asian nations is developing towards certain standards achieved bydeveloped countries, while lagging in others. But it is clear that the legal environment affectsthe effort to restructure the firm. Therefore, future research should examine the role of theseregulatory institutional differences and their impact on the turnaround effort. The potential

INTRODUCTION—TURNAROUND IN ASIA 19

insights could be substantive not only for management researchers but also for governmentregulators and consultants working in the field as well as outside firms and investors seekingto participate in turnaround and restructuring through alliances or acquisition.

Conclusion

This special issue lays the groundwork for a sustained and substantive investigation ofturnaround and restructuring in Asia. As the economies of the region mature, the issueof turnaround and restructuring will continue to be important. Additionally, as economiessuch as those of India and China move away from strong governmental ownership, theseconcerns will become more salient for firms and their stakeholders to understand. From aresearch perspective, there is also insufficient knowledge of how firms respond to crises,and how they can manage the constraints that hinder turnaround.

The research reported here fundamentally advances the foundation for understandingthese issues. The papers represent the outcome of over fifty papers initially submitted tothe conference on turnaround sponsored by the Asia Pacific Journal of Management, TheChinese University of Hong Kong, National University of Singapore, and Texas ChristianUniversity. The ten papers that comprise this special issue on firm turnaround in Asia wereselected after extensive processes of peer review. It is expected that these papers and thegroundwork they lay will help to promote an active and substantial stream of research onfirm turnaround and restructuring in Asia.

Notes

1. Studies from other perspectives in particularly in management and sociology are more numerous if the phe-nomenon can be more broadly defined as “organizational change” with additional options other than strictturnaround actions.

2. This is also not uncommon in stakeholder-oriented economies such as Germany and other Germanic countries;this is the reason for example that Jurgen Schrempp is still CEO of Daimler-Chrysler after their unsuccessfulmerger.

3. For a excellent discussion of how government businesses could lose money for years and the resulting turnaroundissues see the article by Maheshwari and Ahlstrom in this issue.

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