Environmental Change, Human Resources and Organizational Turnaround

Environmental Change, Human Resources andOrganizational Turnaroundjoms_813 835..863

George A. Boyne and Kenneth J. MeierCardiff University; Texas A&M University

abstract Research on turnaround has largely focused on the impact of retrenchment andrepositioning, and has paid less attention to the impact of changes in the task environmentand human resources on recovery from decline. Moreover, all of the empirical research onturnaround has been conducted on private organizations. We develop a new model thatis derived from theories of environmental and human resource effects on organizationalperformance. We apply this model to failing school districts in Texas, and find thatturnaround is influenced by changes in the munificence and complexity of task environments,and the appointment of a new chief executive and front-line staff.

INTRODUCTION

Strategies for organizational turnaround have attracted substantial academic attention inthe last 30 years. Turnaround is conventionally defined as a recovery in performanceafter a period of organizational failure (Pearce and Robbins, 1993). Research on thisissue has included the development of conceptual models (Arogyaswamy et al., 1995;Pearce and Robbins, 1993) and empirical tests of the impact of different strategies forrecovery from decline (recent studies include Bruton et al., 2003; Dawley et al., 2002;Furrer et al., 2007; Morrow et al., 2004). However, studies of turnaround have focusedmostly on the relative merits of strategies of retrenchment and repositioning, and givenless weight to the external circumstances and internal characteristics of failing organi-zations. Conventional perspectives on the sources of recovery from failure have notdrawn sufficiently on wider perspectives on organizational performance that mightprovide a better understanding of turnaround. In particular, the potential effects ofchanges in task environments and human resources, variables which are widely believedto affect performance, have received insufficient attention.

In this paper we develop a new and more comprehensive model of turnaround thatincorporates three main sets of explanatory variables. First, we examine changes in themunificence and complexity of the task environment during a turnaround attempt. Here

Address for reprints: George A. Boyne, Cardiff Business School, Cardiff University, Colum Drive, CardiffCF10 3EU, UK ([email protected]).

© Blackwell Publishing Ltd 2009. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UKand 350 Main Street, Malden, MA 02148, USA.

Journal of Management Studies 46:5 July 2009doi: 10.1111/j.1467-6486.2008.00813.x

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we focus on variations in the task environment across a set of failing organizations, ratherthan assuming, as in many previous turnaround studies, that all firms in an industry facethe same environment. Second, our model includes changes in the human resources oforganizations that are attempting to recover from decline. Although executive successionhas been widely debated in the turnaround literature, and some studies have examinedthe different turnaround strategies followed by insiders and outsiders, to our knowledgeno systematic empirical studies have distinguished between insider/outsider perfor-mance effects across a large sample of organizations. Furthermore, no analysis of thetheoretical or empirical impact of recruiting new front-line staff has been undertaken.Third, we incorporate the traditional concerns of turnaround researchers by includingmeasures of retrenchment and repositioning in our model. This allows the effects of theseturnaround strategies to be tested when environmental and organizational changes aretaken into account.

A final contribution of our study is that we extend turnaround research to publicorganizations, and examine whether recovery strategies that appear to be successful inthe private sector also work in the public sector. Prior research on turnaround in thepublic sector is qualitative and comprises single case studies that do not explicitlyconsider the impact of different organizational strategies (Boyne, 2006). This extension ofturnaround research to a different empirical setting allows us to test whether the conse-quences of retrenchment and repositioning are generic or contingent on organizationalcontext. An understanding of the sources of recovery from decline in the public sectoralso has pressing practical importance because, unlike their private sector counterparts,public organizations that perform poorly are unlikely to be replaced by superior rivals.Instead, such public organizations will persist as ‘permanent failures’ (Meyer and Zucker,1989) unless actions can be taken to improve their performance.

It is important to stress at the outset that a vast range of theoretical perspectives ispotentially relevant to research on organizational turnaround (Ketchen, 1998). Indeed,any perspective that has been applied to organizational performance in general mightalso be applied to the reversal of decline. It is beyond the scope of a single paper to coverall of this terrain, or to develop a complete and integrated model of turnaround.Nevertheless, by expanding turnaround theory beyond its core focus on retrenchmentand repositioning, it is possible to make significant progress towards a better understand-ing of the determinants of recovery from poor performance. We examine whetherorganizational turnaround is influenced not only by these strategies, but also by changesin the external constraints on an organization, and its internal characteristics.

Our model of turnaround is based upon three main literatures on organizationalperformance. First, work on organizational environments in general (Dess and Beard,1984), and task environments in particular (Castrogiovanni, 2002) suggests that failureand turnaround are influenced by external circumstances that are beyond the control ofmanagers. This may be particularly relevant to public organizations because they areusually unable to exit a difficult environment (Andrews et al., 2006). Second, research onorganizational change, and especially arguments and evidence that internal adjustmentsare adaptive rather than disruptive (Zajac and Kraatz, 1993), holds that new seniormanagers and better human resources throughout the organization are likely to besuccessful adaptation mechanisms when performance is unsatisfactory (Wiersma and

G. A. Boyne and K. J. Meier836

© Blackwell Publishing Ltd 2009

Bantel, 1993). This approach to recovery may be especially important for public orga-nizations, many of which are highly professionalized and reliant on the quality of directinteractions between staff and clients. Third, we draw on classical management theory,which suggests that different organizational strategies are associated with differentperformance outcomes (Miles and Snow, 1978). This is the core proposition of priorresearch on turnaround: failing organizations can rescue themselves through strategies ofretrenchment and repositioning. Taken together, these three theoretical perspectivesimply that organizational turnaround is influenced by external circumstances, internalchange, and the recovery strategies that are adopted.

In the first part of this paper, we review the literature on turnaround, and specifyhypotheses on the determinants of recovery from poor performance. In the second partwe outline the context of our empirical analysis of turnaround and summarize our dataand analytical methods. We then present evidence on the impact of the task environ-ment, human resources, retrenchment and repositioning on turnaround in school dis-tricts over seven years, from 1995 to 2002. Finally, we discuss the implications of ourfindings for theories of turnaround and for further research on recovery strategies in bothpublic and private organizations.

LITERATURE REVIEW AND HYPOTHESES

Prior empirical studies of turnaround have investigated the strategies of failing organiza-tions, and sought to evaluate the relative effects of retrenchment and repositioning. In thissection of the paper we build upon this work and develop a more comprehensive modelthat also emphasizes the task environment and internal organizational characteristics.

Environmental Change and Turnaround

A large body of literature suggests that organizational environments have substantialeffects on performance (Hannan and Freeman, 1977; Haveman, 1992; Hawawini et al.,2003). Several issues concerning the environment need to be addressed in research onturnaround. First, at what level should the environment be conceputalized and mea-sured? Castrogiovanni (1991) makes an important distinction between the ‘aggregation’environment that affects all firms in an industry and the ‘task’ environment that is specificto individual firms (see also Beckman et al., 2004). If the aim is to explain differences inturnaround across firms from a variety of industries, then both the aggregation and taskenvironment may need to be taken into account. If the focus is on firms in a singleindustry, then a more detailed examination of differences in task environments is likelyto be appropriate. The difference between the aggregation and task environment may besmall in concentrated industries, but substantial in fragmented industries with manyfirms and segmented markets. The task environment is also likely to be especiallyimportant for organizations that lack the autonomy to quit their external context – forexample business units within large centralized corporations, small firms with activitiesthat are limited to a narrow niche or geographical area, and public agencies that havestatutory obligations to provide specific services to clients in a defined territory.

Organizational Turnaround 837


A second issue concerns the dimensions of the environment that may impinge onturnaround. Dess and Beard (1984) distinguish between the munificence and complexityof environmental conditions (see also Castrogiovanni, 2002; Harris, 2004). Previous workon organizational performance suggests that organizations are more likely to be success-ful if munificence is high (e.g. abundant financial resources) and complexity is low (e.g.few market domains to be served) (Baum and Oliver, 1991; Gruca and Nath, 1994).These arguments also seem valid for organizations that are attempting to recover fromdecline. For any group of failing organizations, turnaround is likely to be easier if the taskenvironment provides abundant resources and is not complex.

Prior research also suggests that the extent of environmental change is negatively relatedto performance (Anderson and Tushman, 2001; Sheppard, 1995). However, this argu-ment does not apply directly to organizational turnaround, because it is important totake account of the direction of change in munificence and complexity. A failing organi-zation is more likely to improve if munificence and complexity move in favourabledirections during a turnaround attempt. Lower complexity makes it easier for managersto devise and implement turnaround strategies (Lindsley et al., 1995), and higher munifi-cence means that such strategies are more likely to be rewarded with extra revenue(Sheppard, 1995). A deterioration in the environment during a turnaround attempt willplace extra pressures on managers and propel an organization further towards failure.For example, external stakeholders may view environmental constraints as overwhelm-ing, and withdraw cooperation and support for recovery strategies (Arogyaswamy et al.,1995; Pajunen, 2006; Sutton and Callahan, 1987); similarly, it may be very difficult toretain or replace talented personnel if the environment is perceived as more and moreintractable (D’Avenni, 1990). A better task environment is, of course, no guarantee ofrecovery from decline. Some organizations fail even in munificent environments, andextra resources may be squandered on inappropriate strategies (Moulton et al., 1996).

These arguments on task environments imply that it is crucial to measure the directionand size of changes in munificence and complexity in turnaround research, especially forfirms in fragmented industries that find it difficult to escape their existing environment.Static measures (taken, for example, at the lowest point of decline) are unlikely to explainvariations in the subsequent extent of performance improvement. Indeed, the impact ofthe pre-existing environment is likely to be reflected in the performance baseline ratherthan the extent of recovery. The need for dynamic measures also reinforces the impor-tance of studying the task environment in research on organizational turnaround.Changes in the aggregation environment are likely to have uniform effects on theperformance of firms in an industrial sector or sub-sector. By contrast, variations in theextent of turnaround across organizations may be strongly linked to movements in theirindividual task environments.

Few empirical studies of organizational turnaround have paid attention to the impactof constraints imposed by task environments. The general characteristics and the treat-ment of the environment in the 18 turnaround studies that have been published inacademic journals are summarized in Table I. These studies were obtained from a priorsystematic review of the turnaround literature (Boyne, 2006). Five of the studies effec-tively assume that environmental effects are absent. Although their samples are drawnfrom different industries, they include neither industry effects nor task-environment



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effects. In a second set of three studies, the analysis of turnaround is restricted to a singleindustry which effectively sets aside aspects of the aggregation environment that influ-ence all failing firms. The impact of variations in the task environment on the relativeturnaround success of different firms within the industry is, however, ignored. Twostudies use a ‘matched pair’ technique to attempt to control for environmental effects.This involves a sample drawn from multiple industries, and the selection of one successfuland one unsuccessful turnaround attempt from each industry. Again, however, differ-ences in the task environment between each matched pair are missing from the analysis.Another method of controlling for the aggregation environment is to include industrydummies in multivariate models. This approach, which has been used in four studies, hasthe same deficiencies as the use of matched pairs. None of the 18 studies of turnaroundexamines environmental complexity, but four use a measure of industry munificence(usually the size of the market), and generally find that this is positively related toturnaround (Dawley et al., 2002; Hambrick and Schecter, 1983; Pant, 1991). However,measures of task environment munificence, and changes in this variable over time, areomitted from these studies. This omission may not have greatly affected the results ofstudies at the corporate level (e.g. Barker and Mone, 1994; Bruton et al., 2003; Dawleyet al., 2002; Mueller and Barker, 1997) because the effectiveness of turnaround strategiesmay not hinge on constraints imposed by the existing environment. By contrast, theabsence of changes in the task environment is more likely to have affected the results ofstudies of business units (Castrogiovanni and Bruton, 2000; Hambrick and Schecter,1983; Morrow et al., 2004; Thietart, 1988) and small businesses (Chowdhury and Lang,1994, 1996; Evans and Green, 2000; Pearce and Robbins, 1994b).

In sum, prior studies of turnaround have provided limited assessments of the impactof changes in the munificence and complexity of the task environment on organizationalturnaround. Empirical models, are, therefore, not fully specified because they omitimportant theoretical effects of external constraints on recovery from decline. In order toremedy this deficiency we test the following hypotheses on a sample of organizationsdrawn from a single industry:

Hypothesis 1: Increases in the munificence of the task environment are positivelyassociated with organizational turnaround.

Hypothesis 2: Increases in the complexity of the task environment are negativelyassociated with organizational turnaround.

Human Resources and Turnaround

In recent years much emphasis has been placed on the role of human resources inachieving better organizational results (Gimeno et al., 1997; Kor and Leblebici, 2005).Little of this research, however, has penetrated research on organizational turnaround.Many studies have examined the causes and consequences of downsizing (Cameron,1994; Freeman and Cameron, 1993), but rarely in the specific context of organizationalrecovery from decline. Some turnaround studies have examined the effects of downsizingas a retrenchment strategy (Barker et al., 1998), but not the effects of altering the balance



between different types of employee, or seeking to improve the quality of the labourforce. We therefore seek to extend prior work by incorporating these aspects of humanresources in our study of recovery from decline.

The principal human resource issue that has been examined is the replacement of thechief executive or the senior management team (Arogyaswamy et al., 1995; Barker et al.,2001; Hoffman, 1989; Lohrke et al., 2004). Two main arguments for a positive effect ofexecutive succession on organizational recovery have been proposed. First, long-servingsenior managers identify too strongly with the existing strategies that have led to declineand are reluctant to accept that change is necessary (Barker and Patterson, 1996; Miller,1991). This argument is supported by evidence that strategic change is more likely whena new chief executive is appointed as part of the turnaround process (Barker andDuhaime, 1997). Attachment to the existing strategic posture may be reinforced bythreat-rigidity effects when a performance crisis emerges (Barker and Mone, 1998; Stawet al., 1981). A second argument on executive succession refers to the symbolism of theappointment of a new leader rather than the incompetence of existing leaders (Castro-giovanni et al., 1992; Salancik and Meindl, 1984). The replacement of senior managerscan convey the message that an organization is ‘serious about recovery’. This, in turn,may motivate staff and encourage external stakeholders to provide the resources andtime required for performance improvement (Castrogiovanni et al., 1992).

The impact of executive succession on turnaround has been examined in four of theempirical studies that are listed in Table I. A positive relationship between leadershipchange and turnaround is found by Mueller and Barker (1997) and Pearce and Robbins(1994b). By contrast, Bruton et al. (2003), and Sudarsanam and Lai (2001), find that thereplacement of top managers makes no difference to the likelihood of recovery. Thepattern of evidence from case studies of succession effects on turnaround is similarlymixed ( Jas and Skelcher, 2005; O’Neill, 1986b; Zimmerman, 1989). The conflictingresults may have arisen because the impact of executive succession is contingent on anumber of variables (Finkelstein and Hambrick, 1996; Mone et al., 1998), and these maydiffer across the samples. In particular, none of these studies of turnaround has examinedwhether the new top manager is an ‘insider’ or ‘outsider’ (Beatty and Zajac, 1987;Reinganum, 1985). Outsiders may be more prepared to consider radical change, but lackthe detailed knowledge of an organization that would be required for quick and effectiveimplementation of a new strategy (Helmich and Brown, 1972; Schwartz and Menon,1985). Such speed of action is widely regarded as crucial in a turnaround situation(Arogyaswamy et al., 1995; Hambrick, 1985). By contrast, an insider may already bedeeply familiar with current performance problems and have assessed thoroughly thetechnical and political feasibility of strategies for change, and therefore be able to makerapid moves towards organizational recovery. On the other hand, insiders may be toolocked into the existing culture to see that change is required or possible. This may be lessof a problem in the public sector because radical strategic change (e.g. quitting a difficultmarket) is usually not feasible.

Zajac (1990) argues that boards face a serious principal–agent problem when hiring anoutsider as chief executive, and are more likely to have accurate information on thecharacteristics of an insider. The empirical evidence from his study of large US corpo-rations supports this view: insider appointments are associated with significantly higher



performance (Zajac, 1990). Established and effective organizational routines may bedisrupted less by insider than outsider succession (Dalton and Kesner, 1985; Zuniga-Vicente and Vicente-Lorente, 2006). Indeed, Carlson’s (1961) study of new schoolsuperintendents shows that outsiders are more likely to add new rules and administrativeoverheads to the organization, which may hinder rather than help turnaround efforts.

Thus our next hypotheses are:

Hypothesis 3: The appointment of a new top manager from inside the organization ispositively associated with turnaround.

Hypothesis 4: Turnaround is associated more positively with insider succession thanoutsider succession.

A further shortcoming of turnaround studies is that the human resources that areconsidered are senior personnel. This takes to extremes the view that an organizationis ‘a reflection of its top managers’ (Hambrick and Mason, 1984). Turnaround studieshave neglected the potentially positive effect of a wider human resource strategy thatemphasizes the recruitment of new staff at lower organizational levels. In particular,organizations may be better placed to achieve turnaround if they recruit more ‘coreemployees’ with higher expertise. Core employees have been defined as ‘the largestgroup of non-supervisory, non-managerial workers involved in making the product orin providing the service’ (Osterman, 1994, p. 175), and as the workers who are ‘speci-fying the core activity in the firm and performing the organization’s base operations’(Lopez-Cabrales et al., 2006). In the service sector, these might be lawyers in a legalpractice, doctors in a hospital, or teachers in a school. Non-core employees in thesecontexts include administrators and manual workers (e.g. janitors in schools). Thetheoretical argument here is simply that failing organizations need to become better attheir principal task, and that the allocation of resources to more and/or better coreemployees will enhance the prospects of turnaround. This view is supported by empiri-cal evidence that the recruitment of employees with expertise that fits the strategicpurposes of an organization is associated with higher performance (Hitt et al., 2001;Skaggs and Youndt, 2004; Wright et al., 1995), and that managers’ perceptions of thevalue of core employees are positively associated with organizational efficiency (Lopez-Cabrales et al., 2006).

Further support for the potential impact of core employees on turnaround is providedby studies that examine ‘administrative intensity’ in declining organizations. Forexample, Freeman and Hannan’s (1975) analysis of changes in personnel categories indeclining school districts in California shows that core employees are shed more quicklythan non-core staff. In other words, administrative overheads grow as the organizationshrinks (see also McKinley (1987) for similar evidence on manufacturing firms). Althoughthe direction of the relationship between decline and administrative intensity is not fullydisentangled in these studies, one interpretation is that organizations are tipped intodecline when they become top-heavy with non-core staff. If an increase in the non-core/core ratio either precipitates or reinforces decline, then it is plausible that reversing thisbalance will facilitate recovery.



These arguments and evidence suggest that recovery from decline may be especiallylikely if non-core workers are replaced with core employees, and if core employees withhigher expertise are recruited. Our fifth and sixth hypotheses are, therefore:

Hypothesis 5: An increase in the ratio of core staff to total employees is positivelyassociated with turnaround.

Hypothesis 6: An increase in the quality of core staff is positively associated withturnaround.

Retrenchment, Repositioning and Turnaround

The core proposition of strategic management theory is that different organizationalstrategies lead to different performance outcomes. Research on turnaround has exploredthe validity of this argument by evaluating the relative effects of two strategies forrecovery from decline: retrenchment and repositioning.

Retrenchment. The principal content of this strategy is a reduction in the size and scope ofa business. This includes quitting difficult markets, deleting unprofitable product lines,selling assets, outsourcing and downsizing. All of these sub-strategies are designed to stemfinancial losses and generate resources that can be deployed towards more productiveactivities. Retrenchment has also been described as an ‘efficiency’ orientation (Ham-brick, 1985) and as ‘refocusing’ on the core business ( Dawley et al., 2002; Johnson,1996). The theoretical and empirical impact of retrenchment on turnaround has beendebated vigorously. For example, Robbins and Pearce (1992) argue that divesting assetsand cutting costs are the foundations of business recovery, and Hoffman (1989, p. 61)concludes that ‘controlling costs appears to be the key to successful turnaround’. Bycontrast, Barker and Mone (1994) and Barker et al. (1998) view retrenchment as a falseeconomy that saps the strength of a company. Nevertheless, the balance of the empiricalevidence suggests that retrenchment works (see Table I).

These arguments and evidence on retrenchment have been developed for privateorganizations. It is, therefore, important to consider whether retrenchment is likely to befeasible and effective in the public sector. One distinction between public and privateorganizations is that the range of strategic options is more limited in the former than thelatter (Ring and Perry, 1985). For example, public organizations cannot simply discon-tinue the provision of poorly-performing services for which they have statutory respon-sibilities. Nevertheless, periodic fiscal crises in the public sector have shown that variousforms of retrenchment can be undertaken, for example shedding staff, replacing directservice provision with contracts for external supply, and seeking efficiency gains (Boyne,2006). As in the private sector, it seems theoretically plausible that failing public orga-nizations can use retrenchment to release resources for more productive uses, andthereby improve their performance. Our seventh hypothesis is, therefore:

Hypothesis 7: Retrenchment is positively associated with organizational turnaround.



Repositioning. A strategy of repositioning includes moving into new markets, seekingnew sources of revenue, developing new products, and altering the mission andimage of a company. Repositioning has also been described as an ‘entrepreneurial’strategy (Hofer, 1980) – the emphasis is on change and innovation in marketposition and product portfolio. The main rationale for a repositioning strategy in theprivate sector is that it generates revenue from new sources. This may partly beachieved through external networking that enhances organizational reputation, forexample by altering the perceptions of customers, suppliers and lending institutions(Arogyaswamy et al., 1995). Indeed, the realignment of external expectationsmay be a precondition of both retrenchment and repositioning (Filatotchev andToms, 2006). Empirical studies of turnaround broadly support the argument thatrepositioning is likely to boost organizational recovery (see Table I). This evidence isinconsistent with early work in population ecology which assumed that organizationalchange was likely to be disruptive rather than adaptive (Hannan and Freeman, 1977),which suggests that repositioning would lead to further decline rather than recovery.It is again important to consider the feasibility and potential consequences of thisstrategy in the public sector. The external limits on the strategies of public organiza-tions imply that the most radical forms of repositioning (moving into new industriesand geographical markets) are unavailable when performance is poor. For example,a failing school district cannot diversify into the provision of hospitals or seekpupils in a neighbouring state. Nevertheless, various forms of ‘prospector’ strategiescan be pursued, such as providing new services to existing clients and changing thebalance within the portfolio of activities (Boyne and Walker, 2004). It is theoreticallyplausible that these strategic adjustments can result in higher responsiveness to publicneeds and demands, and thereby help a failing public organization to recover. There-fore, although the public sector context provides a ‘tough test’ for the effect of repo-sitioning because of the restricted range of this strategy, we retain the conventionalview that

Hypothesis 8: Repositioning is positively associated with organizational turnaround.

METHODS

Organizational Context of the Empirical Analysis: Texas School Districts

To date, all of the large-sample empirical research on turnaround has been undertakenon private sector organizations. Although work on organizational decline has beenundertaken in the education sector (Cameron et al., 1987), the determinants of turn-around in the public sector have not been theorized or tested formally, which is asurprising and significant gap in the literature (Boyne, 2006). The provision of publiceducation in particular has substantial effects on economic competitiveness ( Jorgensonand Fraumeni, 1993; Mincer, 1984). Thus evidence on the impact of the task environ-ment, human resources, retrenchment and repositioning on public service turnaround ispotentially of great practical as well as academic value. As we have argued above, publicorganizations in turnaround situations have some distinctive characteristics: a lack



freedom to escape their existing environment and constraints on their autonomy to applythe most radical forms of retrenchment and repositioning. Nevertheless, many privateorganizations also share these characteristics to some extent, so the results of our analysisshould be generalizable beyond their immediate empirical context. Moreover, thebalance of the evidence from empirical comparisons of public and private managementstrongly suggests that organizations in the two sectors are more alike than different(Boyne, 2002).

Our units of analysis are 140 Texas school districts that were performing in thelowest quartile on their primary assessment criterion in 1995. We assess the ability ofthese districts to improve performance by 2002. This time period begins with theintroduction of high stakes testing in Texas whereby students had to pass a standard-ized test (the Texas Assessment of Academic Skills (TAAS)) to graduate, and ends witha change in the exam format (a modified test replaced the TAAS after 2002). Texasschool districts are a good place to examine organizational turnaround for severalreasons. First, the organizations are directly comparable. They are from a single indus-try (public education) within a single state, and all operate under the same set of rulesand regulations. Potentially confounding variables that might influence school districtperformance are thus held constant. Second, all the districts operate under a similargovernance structure. School districts in Texas are independent local government unitsthat are governed by a locally elected school board. The school board appoints thechief administrative officer who in turn recruits and hires staff, establishes personnelprocedures, sets overall school policy, and manages the district. School boards haveindependent taxing power and raise, on average, 50 per cent of all funds expended bythe district. Approximately 45 per cent of funds comes from the state of Texas whichalso imposes a variety of regulations including an accountability system (about 5 percent of public monies comes from the federal government). Third, school districts arethe most common public organization in the United States. To the extent that theydiffer from public organizations generally, they are more professionalized and char-acterized by relatively flat organizational hierarchies. Fourth, the school districts in thisstudy come under an accountability system that has imposed a standardized measureof performance (see below). Finally, superintendents and school districts have discre-tion to act in an effort to improve a failing organization. They can retrench in an effortto improve organizational efficiency and then reallocate savings. They can repositionby seeking innovations in curriculum or by interacting with key stakeholders to createa more favourable organizational climate. In the area of human resources, options inTexas are extensive. Texas is an employment-at-will state with weak to non-existentteachers’ unions. These characteristics mean that superintendents can reallocate per-sonnel and can acquire staff with new or better skills. Because school districts arepersonnel intensive (during this time period, personnel costs were 83 per cent of thetotal budget), these human resources powers are especially important. Finally, unlikesamples of failing private firms, our analysis of school districts does not suffer from‘survival bias’. School districts do not go bankrupt but can instead persist as per-manent failures (Meyer and Zucker, 1989). This allows us to continue to track theperformance of all of the organizations that initially fall into the ‘poor performance’category.



Decline and Turnaround in School Districts

All of the studies of turnaround in the private sector that are summarized in Table I usefinancial indicators of decline and improvement, such as two years of a falling rate ofreturn on investment followed by two years of a rising rate of return (Pearce andRobbins, 1993; Winn, 1993). Sometimes these measures are normalized against move-ments in the economy as a whole or against changes in the fortunes of relevant industries(Arogyaswamy et al., 1995).

Two problems are present in this general approach to the measurement of decline andturnaround. First, the application of a single financial criterion to different organizationsin different industries assumes the existence of universal and objective criteria of orga-nizational performance. In practice, definitions of decline and improvement, whether inthe public or the private sector, are subject to interpretation by external stakeholders(Arogyaswamy et al., 1995; Gimeno et al., 1997; Short et al., 1998). Thus measures ofwhether organizations are performing weakly or strongly should be based not on thejudgements of researchers but on the perceptions of key stakeholders in an industry (e.g.suppliers, customers, rivals and regulators). In the public sector, failure and success arejudged not on ‘objective’ financial criteria but according to the preferences of powerfulgroups in the political system. Thus valid measures of decline and turnaround mustreflect the dimensions of performance on which organizations are held accountable bythe state and its agencies ( Jas and Skelcher, 2005).

Determining decline and improvement for Texas school districts is facilitated by a wellestablished accountability system. In 1985 Governor Mark White proposed a series ofeducational reforms based on the widely held perception that Texas schools weredramatically under-performing. Among other things, those reforms required that allstudents take periodic standardized tests and that student performance on these testswould be used to grade and evaluate school districts. During the time period under study,the test was known as the Texas Assessment of Academic Skills (TAAS). The TAAS is acriterion-based standardized test that was given every year to Texas students. The stateof Texas reports the percentage of students who pass all portions (math, reading, writing)of the TAAS. Our specific dependent variable is the percentage change in the TAAS passrates from 1995 to 2002. The TAAS pass rate is a good performance measure for severalreasons. These results are front page news when released; school districts are rated by thestate in terms of the tests, and low performance is grounds for sanctions. In the mostsevere cases, the state can take over the school district. Many superintendents haveincentive clauses in their contracts based on TAAS performance. Thus poor perfor-mance on the TAAS is a threat to the tenure of the superintendent rather than thecontinued existence of the school district. This is a powerful source of pressure onsuperintendents to seek effective strategies for the reversal of decline. While there areother measures of educational performance, the major stakeholders in the process (theschool board, the state agency, political leaders, and parent groups) see TAAS as theprimary criterion of success. The TAAS exam is positively correlated with four otheravailable indicators of student performance. TAAS scores correlate at 0.473 withaverage student attendance, 0.466 with SAT scores (one of two aptitude tests given tocollege bound students in the USA), 0.527 with ACT scores (the second college aptitude



test used in the USA), and 0.468 with the percentage of college bound students from eachdistrict that scores in the top 20 per cent of college bound students in the state (dataobtained from source 2 that is listed in Table I). Because the TAAS scores include allstudents whether or not they desire to go on to higher education, correlations of thismagnitude indicate that TAAS scores have reasonable convergent validity with otheravailable measures of performance (Kerlinger, 1986).

A second measurement problem in previous studies is the assumption that the relevantperiod for measuring turnaround can generally be set at a few years. The ‘periodicity’ ofdecline and recovery is, however, likely to vary across industries. For example, the timetaken to implement a repositioning strategy may be much shorter in confectionery thanin pharmaceuticals (because legislation requires that new drugs are rigorously testedbefore being introduced on the market). In the case of high school education, turnaroundefforts may start with the enrolment of a new cohort of pupils in first grade, and not cometo fruition until the relevant tests are taken several years later. Changes in educationalpractices also take time to implement because new curricula need to be designed, currentlesson plans must be made consistent with the curricula, teachers and staff need to betrained in the new programs, and students must actually be taught differently. We have,therefore, tracked improvements in performance between 1995 (the first year of TAASresults) and 2002 in order to allow for the performance effects of turnaround efforts toemerge. These are also good years for comparison because the same test was used toassess school district performance throughout this time period.

Measures of Independent and Control Variables

The measures in our statistical model are based on the general literature on turnaroundand on prior empirical work. Our data on the task environment, human resources andorganizational strategies are derived partly from secondary sources and partly fromsurveys of school superintendents in Texas (see Table II). Superintendents are the chiefadministrative officers for school districts. Although superintendents in theory share theirpolicymaking role with the school board, the superintendent sets the policy agenda andexercises more influence on the organization and its policies than the board does (Zeigleret al., 1985). While the superintendent delegates the day-to-day operations of the schooldistrict to principals and others, the superintendent plays a key role in setting goals for theline managers and has incentives available to encourage the adoption of these goals.

These structural factors plus the competitive market for school superintendents (seeMeier and O’Toole, 2002) generally mean that superintendents are given wide strategicdiscretion, especially over human resources. A single survey respondent (the superinten-dent) is, therefore, much more likely to represent the actions of the organization than itwill in other public organizations. School superintendents were surveyed once in 2000and a second time in 2002 to assess their management strategies, goals, and activities.The survey was sent by mail with three follow ups. The survey response rate was 55 percent in 2000 and 60 per cent in 2002. The survey produced approximately 600 usableresponses; our analysis of turnaround is restricted to 140 of the districts performing in thelowest quartile in 1995. The characteristics of school districts that responded to thesurvey did not differ significantly from those that did not respond.[1]



Organizational task environments. We measured changes in both the munificence and com-plexity of the task environment. In effect, we are measuring the extent of dynamism inthese variables during the turnaround attempt. Munificence and complexity are the twocrucial external constraints on school district performance: are the funds available risingor falling, and are the educational needs of schoolchildren becoming more uniform ordifferentiated? The munificence of the organizational task environment was operation-alized in two ways. First, we measured the change in financial resources available to theschool district, which is determined by exogenous variables such as state funding formu-lae and the size of the local tax base. Other things being equal, failing districts that havethe good fortune of an expanding budget should find it easier to improve their perfor-mance. Second, we measured the change in the proportion of economically deprivedstudents. Poor household are less able to afford to ‘co-produce’ education, therebyputting more pressure on school district resources. Research on education productionfunctions has shown that high scores on exam results are more difficult to achieve inschool districts with large proportions of minority students, because the characteristics ofpupils are more varied (Hanushek, 1996; Hedges and Greenwald, 1996; Jencks andPhillips, 1998). Correspondingly, lower task complexity for failing organizations can be

Table II. Concepts, measures and data sources

Concept Measure Data

source

Recovery from decline Change in TAAS, 1995–2002 2Environmental munificence Change in financial resources, 1995–2002 2

Change in low income students, 1995–2002 2Environmental complexity Change in Hispanic students, 1995–2002 2

Change in Black students, 1995–2002 2Human resources New superintendent insider 1A

New superintendent outsider 1AChange in % staff allocated to teaching, 1995–2002 2Change in teacher experience (years), 1995–2002 2

Retrenchment % superintendent’s time on internal management 1APriority to TAAS 1APriority to efficiency 1A

Repositioning Extent to which superintendent is seeking change 1BSeeking private funding 1BInitiation of contact and interaction with external stakeholders 1B

Organizational size Number of students, 1995 2Baseline performance TAAS score, 1995 2Leader experience Years as superintendent 1APrior decline Years district in bottom quartile, 1990–94 2

Data sources:

1A: Management Survey 2000. ‘2000 Superintendent Survey’. Project for Equity Representation and Governance,Texas A&M University, College Station, TX.1B: Management Survey 2002. ‘2002 Superintendent Survey’. Project for Equity Representation and Governance, TexasA&M University, College Station, TX.2 = Texas Education Agency, Academic Excellence Indicator System, http://www.tea.state.tx.us/perfreport/aeis/



http://www.tea.state.tx.us/perfreport/aeis

interpreted as a decline in the percentages of black and Hispanic students. We include aseparate measure of the change in each of these munificence and complexity variables inour statistical model of turnaround.

Human resources. This concept was operationalized in three ways. First, superintendentswere asked about length of employment in any role in the current school district, andtheir length of employment as superintendent in the district. This provided informationon whether a change of superintendent occurred between 1995 and 2002, and whetherthe new superintendent was an insider or outsider. A new superintendent was catego-rized as an outsider if they joined the district in this role during this period. Second,archival data were used to measure the percentage of teachers in the school districtworkforce. An increase in this percentage is taken to indicate greater emphasis on ‘corestaff ’. Third, the quality of core staff was measured through archival data on teacherexperience (in years). A large literature on education suggests that this variable is closelyand positively associated with teaching quality (Burtless, 1996; Rockoff, 2004; Wayneand Youngs, 2003).

Retrenchment. The concept of retrenchment was operationalized in three ways. First,school district superintendents were asked to assess the relative priority that they attachedto ‘lowering costs/increasing efficiency’ (compared with other influences on their policiessuch as school board goals, parent groups’ demands, or pedagogical expertise). Thismeasure reflects the central elements of a retrenchment strategy: cost reduction andimprovement of the input/output ratio. Second, superintendents were asked to identifythe importance of student exam results compared with other school district goals. Therating for exam results was taken as a ratio to the average rating for other activities (e.g.vocational education, extracurricular activities) to provide a measure of ‘focus on corebusiness’. Third, superintendents were asked to estimate the percentage of their timespent on internal management. This measure is based on the argument that a retrench-ment strategy involves detailed attention by senior managers to the internal operations ofan organization (Arogyaswamy et al., 1995).

Repositioning. As in previous studies of recovery from failure, we measure the extent ofrepositioning during the turnaround attempt, rather than the change in repositioningduring this period. Three measures of repositioning were obtained from the survey ofschool district superintendents. First, a factor score was derived from responses to fourquestions concerning the extent to which superintendents were seeking change (‘a super-intendent should advocate major changes in school policies’; ‘a superintendent shouldassume leadership in shaping school policies’; ‘a superintendent should advocate policiesto which important parts of the community may be hostile’; ‘I see my role as a changeagent’). The factor analysis produced a single significant factor (eigenvalue 1.40) withhigher scores reflecting a more positive attitude towards change. Second, superinten-dents were asked: ‘Do you actively pursue funds for your district from private sources?’.This directly reflects the key repositioning strategy of prospecting for additional revenue.A third measure of repositioning was based on the extent to which superintendents (a)interacted with external stakeholders and (b) initiated such interactions. Superintendents



were asked how frequently they interacted with seven sets of stakeholders (parent groups,teachers associations, local business leaders, state legislators, other superintendents, theTexas Education Agency, and federal education officials). A factor analysis produced asingle significant factor with all items loading positively. A second question was asked todetermine if the superintendent initiated the contact or if the other person did. Thenumber of superintendent initiations was summed and then this measure was multipliedby the ‘frequency of interaction’ factor. High scores indicate superintendents who areboth active in the environment and initiate those actions. The inclusion of both extentand initiation of interaction is crucial to this measure. A high score on this variable isconsistent with a broad and proactive attempt to influence the perceptions and expec-tations of relevant groups. This element of repositioning may be especially important forpublic organizations which are typically embedded in tight resource-dependence rela-tionships (Pfeffer and Salancik, 1978).

Control variables. Five additional explanatory variables are included in our statisticalmodel of turnaround. First, several studies have suggested that recovery from decline ismore difficult and takes longer in bigger organizations (Bruton et al., 2003; Pant, 1991).Problems may arise, for example, in communicating new strategies effectively to a largeand possibly dispersed workforce, and in winning their support for a change of direction.The size of Texas School Districts was measured as the number of pupils enrolled in1995. This is a measure of organizational ‘workload’ and correlates closely with indica-tors of internal aspects of size such as budget and number of staff (the simple correlationwith staff size is 0.9955 and with the size of the operational budget 0.9965).

Second, prior theory and evidence suggest that the relationship between top manage-ment tenure and organizational performance is non-linear: experience is an asset, butafter a threshold is reached it leads to inertia and becomes a liability (Eitzen and Yetman,1972; Hambrick and Fukutomi, 1991). Thus we expect the relationship between schoolsuperintendents’ positional tenure and turnaround to be initially positive but eventuallynegative, and test this through the inclusion of a squared term in the model. Tenure wasmeasured as the number of years spent as a superintendent in the current school district.

Third, Barker and Mone (1994) argue that a measure of the extent of decline shouldbe included in tests of turnaround strategies, because organizations with the worstproblems have more scope for large improvements in performance. This is confirmed bythe results of the few empirical studies of turnaround that have recognized this issue(Bruton and Wan, 1994; Evans and Green, 2000; Sudarsanam and Lai, 2001). Wetherefore include the TAAS score for districts in 1995 as a measure of their relativedecline. Fourth, turnaround may be more difficult to achieve in organizations wherefailure is persistent, because managers and other stakeholders may be stuck in attitudesand behaviour that lead to poor performance. We therefore included a measure of thehistory of prior failure, defined as the number of years from 1990 (the first year that dataare available) to 1994 that a district had been in the bottom quartile.

Finally, we need to consider the temptation for school districts to try to manipulate theTAAS scores. The state of Texas has introduced elaborate procedures to prevent cheat-ing on this test. The exam questions are prepared by a private company and distributedto schools under elaborate security procedures. The tests are graded and scored by the



state not the school district. Statistical routines are used to check for patterns of answerschanged from wrong to right; in addition, large changes in test scores from year to yearare examined for validity. In the relatively few cases of documented cheating (involvingteachers directly providing answers to students), penalties have been high (revocation ofteaching credentials) and administered swiftly (immediate suspension, followed by con-tract termination). Although cases of individual cheating have been found, cheating atthe school or a district level faces substantial collective action problems because itrequires all administrators, teachers, and students to not defect and inform on theconspiracy. The cost of such defection is relatively small since anyone can file ananonymous complaint with either the school district or the Texas Education Agency.Despite these limits on cheating, we did investigate whether or not these districts mightbe trying to influence the results by excluding students from the tests by over-classifyingstudents in exempt categories such as limited English and special education (see Bohteand Meier, 2000). To measure this potential cheating, we predict the total percentage oftest exemptions in a district with the percentage of students in special education, classifiedas limited English speaking, and absent on the day of the test. The residual from thisequation should correspond to efforts to take excessive exemptions from the test; thisvariable, standardized, is our measure of cheating or the effort to manipulate district testscores.

Data and estimation of the model. The means and dispersions of the variables and thecorrelations between them are shown in Table III. The average TAAS score for thefailing school districts improved between 1995 and 2002, but this largely reflects ‘gradeinflation’ across the Texas school system. A solid majority of bottom quartile districts in1995 remained mired in decline seven years later. Nevertheless, 34 moved into the thirdquartile, eight jumped to the second and seven leapt into the first quartile. In short, theextent of recovery from decline varied markedly across the sample of poorly performingdistricts. The data also show substantial variations in environmental change and humanresource strategies. For example, some failing districts received extra resources whileothers suffered budget cuts; some recruited a higher quantity and quality of core staffwhereas others pursued the opposite strategy; and 23 per cent persevered with the samesuperintendent while others recruited a new top manager internally (30 per cent) orexternally (47 per cent).

We are selecting from a set of poor performing districts and assessing improvements,so the data do not meet the standards of Gaussian distributions. Extreme cases in thedata distribution are likely to create situations where a single point or set of points exertsundue influence on the results, thus rendering the regression estimates unstable. Toavoid this problem, the model was estimated with robust regression techniques that relyon an iterative process of downweighting extreme cases but converge to OLS estimateswhen data meet the assumptions of OLS regression (Krasker, 1998; Rubin, 1983;Western, 1995). The specific technique was Andrews’ (1974, p. 523) sine approach whichis ‘resistant to gross deviations of a small number of points and relatively efficient over abroad range of distributions’. We also evaluated the data for other factors that mightgenerate biased or inaccurate results. We examined the relationships to determine if theywere linear, estimated tolerances to check for collinearity (all tolerances were within



Tab

leII

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acceptable bounds), and examined the residuals to detect any aberrant patterns. Becauserobust regression deals with heteroscedasticity as part of its estimation process, we did notapply additional tests for it.

RESULTS

The results for our model of turnaround are presented in Table IV which shows the fullmodel and four sub-models. The full model explains 78 per cent of the variation in theextent of turnaround across school districts between 1995 and 2002. Four of the controlvariables are significant with the anticipated signs: performance improvement was great-est in districts with the worst baseline performance, the impact of superintendent expe-rience is non-linear, and large school districts were less likely to achieve better results.The number of years that the district had been in the lowest quartile before 1995 wasstrongly related to a lower recovery percentage. The fifth control variable, for cheatingor excessive test exemptions, was not statistically significant.

The statistical evidence provides some support for our argument that turnaround isassociated with favourable changes in the task environment. Two of the four coefficientsfor the measures of external constraints are statistically significant. Less environmentalcomplexity, as reflected in the percentage of students who are black, and more munifi-cence, as measured by a smaller percentage from low-income households, are likely tolead to better results. It should be noted that these variables tap the underlying constructsof complexity and munificence, so no direct practical implications can be derived fromtheir coefficients. Changes in human resources also have a significant positive effect onperformance improvement. The coefficients for the insider and outsider successionvariables provide clear support for Hypotheses 3 and 4. School districts that replace theirsuperintendent with an insider are more likely to achieve turnaround, but the appoint-ment of an outsider is insignificantly different from persevering with the superintendentwho led the district to decline. Hypotheses 5 and 6 are strongly supported by thestatistical results. Districts that raise the proportion of their staff who are teachers, andrecruit more experienced teachers, have significantly better prospects of recovering fromdecline. Thus the results are consistent with the proposition that turnaround is associatednot only with top management change but also with a human resource strategy that paysparticular attention to core staff.

The extent of turnaround is also influenced to some extent by retrenchment andrepositioning, but not always in the direction predicted by prior theory and empiricalresearch. Two of the three retrenchment variables, focus on core business and time spenton internal management, have no significant effect on performance change. The coef-ficient for the third measure of retrenchment – emphasis on lowering costs and increas-ing efficiency – directly contradicts Hypothesis 7: school districts that adopt this strategyare substantially less likely to produce better results. In contrast to the evidence on privateorganizations, this form of retrenchment appears to be a route to further decline ratherthan rapid recovery. The results for a strategy of repositioning are broadly consistentwith Hypothesis 8. Two of the three repositioning variables are positively related to theextent of turnaround: superintendents who seek change, and who initiate interactions



Tab

leIV

.E

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with a wide range of stakeholders, are more likely to lead their districts towards perfor-mance improvement.

Further corroboration of the influence of task environments and human resourceson turnaround can be obtained by examining the extra explanatory power providedby adding other explanatory variables to a base model that contains only the controlvariables (see Table IV). The base model on its own explains 60 per cent of the variationin the change in TAAS scores from 1995 to 2002. This rises as follows when each of theblocks of other variables is added separately: to 64 per cent for retrenchment andrepositioning, 64 per cent for changes in the task environment, and 71 per cent forchanges in human resources. Thus, using the criterion of marginal addition to statisticalexplanation, human resource effects outweigh retrenchment and repositioning.

Examination of the 15 districts that moved to either the first or second quartile showsthat there are different paths to turning around a deficient school district. For example,Cuero County (a district that improved its TAAS score by 55.5 percentage points) hadbudget growth of 45 per cent (compared to the average 40 per cent for these districts) anda drop in its black, Hispanic and low income students by 4, 2, and 7.1 percentage pointsrespectively. In contrast, New Caney, another recovering district (from 55.1 to 88.1 onthe TAAS), saw its percentage of black (+1), Hispanic (+11) and low income students(+3.1) all increase. The variance in strategic actions among these 15 success storiessuggests that there are also different managerial paths to turnaround. Cuero Countyreplaced their superintendent in 1997 with an outsider. The superintendent pursued achange strategy (score +4.1), raised private funds, and stressed the TAAS as the primarygoal of the district. New Caney replaced their superintendent with an insider in 1999;that superintendent was not a prospector (score -0.4), placed a high priority on examresults, and increased the proportion of class room teachers by 2 percentage points.

It is possible that these different routes to performance improvement reflect interac-tions between the environment and turnaround strategies. Prior work on turnaround hassuggested that the impact of managerial strategies may be contingent on the extent ofenvironmental munificence. Retrenchment is necessary in an environment of lowmunificence, whereas a strategy of repositioning is more feasible when munificence ishigh (Dawley et al., 2002; Thietart, 1988). We tested the validity of these argumentsthrough interaction terms that captured the combined effects of managerial strategiesand environmental munificence. Specifically, we interacted the growth in resources withthe measures of retrenchment and repositioning; a joint f-test indicated that this set ofcoefficients was statistically insignificant. The evidence implies that turnaround strategieswork equally well (or, in the case of retrenchment, badly) regardless of changes inmunificence during the attempt to recover from decline.

Discussion

In this paper we have contributed to turnaround research in three main ways. We have(a) added changes in the task environment to the conventional models of organizationalrecovery from decline, (b) developed hypotheses on human resources that distinguishbetween insider and outsider executive succession and focus not only on top



management but also changes in core service production staff, and (c) provided the firstempirical test of turnaround in the public sector. We now consider the theoreticalimplications and empirical limitations of our findings.

Environmental change. Our evidence suggests that shifts in environmental constraints playa significant role in organizational turnaround. Although this result has been obtainedfor a specific set of public agencies, it seems likely to apply in other settings. In particular,any organization that cannot easily escape its task environment will find that recoveryfrom decline is influenced by changes in munificence and complexity. Indeed, perma-nent failure, which has previously been attributed to the political problems of introducingstrategic change (Meyer and Zucker, 1989), may also be the outcome of consistentlyunfavourable changes in external constraints.

The impact of environmental change on organizational turnaround may vary bothacross and within the public and private sectors. Constraints imposed by task environ-ments are likely to be stronger in turnaround situations facing public organizations,because managers usually have lower discretion to shift to new markets. Within thepublic sector, organizations that have legal limits on their service and territorial man-dates are especially likely to be prisoners of changes in their task environments whenattempting to recover from poor performance. Many private organizations are, at leastin the short term, also shackled to a specific market niche and a narrow set of strategicoptions. This description applies to firms in regulated industries, to business units withinlarge companies and to small firms that may supply only one product in a particulargeographical market. We expect that the munificence and complexity of the task envi-ronment will play an important role in turnaround for all such organizations in theprivate sector. In either sector, the greater the difficulty of escaping from the existing taskenvironment, the greater the impact of changes in munificence and complexity onorganizational turnaround.

Human resources. Our results for a change of superintendent support the argument thatturnaround is more likely to be achieved by insiders than outsiders. Studies of non-failingprivate organizations have found that external succession is more likely to lead to radicalstrategic change (Helmich and Brown, 1972; Westphal and Frederickson, 2001;Wiersma, 1992). As noted above, however, the most radical forms of retrenchment andrepositioning are not available to new leaders in the public sector. An insider’s knowledgeof the existing organization may be more valuable than an outsider’s appetite for a largestrategic reorientation. In this case, the lower the scope for a radical turnaround strategy(again in small firms, business units and regulated industries), the more likely that insidersuccession is the better form of leadership change for failing organizations.

Two alternative interpretations of our finding that insiders are better than outsidersshould be noted (Lohrke et al., 2004). First, insiders may be more effective in stableindustries, because they already understand the external context of the organization. Bycontrast, when an industry is subject to major change the ‘dominant logic’ of insidersmay be a liability because they fail to adapt to new circumstances. Thus our evidencethat insider succession is superior may reflect the stability of the Texas school system.Yet, during the period covered by our analysis Texas school districts faced high levels of



turbulence caused by immigration and the new accountability requirements associatedwith the TAAS. It seems unlikely, therefore, that our finding on insider succession can beattributed to the stability of the industrial context. A second alternative interpretation isthat it is managers’ mental capacity rather than their insider/outsider status that counts.In other words, the insiders in our sample may simply be superior managers, and wouldhave produced the same performance effects had they moved to a different schooldistrict. We cannot rule out this possibility, but believe that our sample is sufficiently largeto make this unusual distribution of the managerial qualities of insiders and outsidersunlikely.

The statistical evidence on school districts in Texas is inconsistent with previousarguments that all superintendents are essentially the same. March and March (1977, p.405) found that school superintendents in Wisconsin over a period of 30 years were‘nearly indistinguishable in their behaviours, performance, abilities and values. This ispartly a consequence of the filters by which they came to the role.’ Because Texassuperintendents in the 1990s faced a far more challenging task (elaborate accountabilitysystems, mobilized stakeholders, etc) than Wisconsin superintendents did in the 1970s,we would expect the chief executive officer role to become more important and morevaried. March and March (1977) essentially studied a set of well performing schooldistricts in an environment without an elaborate evaluation system. The more challeng-ing 1990s Texas system, in contrast, placed a premium on good management.

A final point on human resources is that turnaround theorists need to recognize thatleaders are not the only people who make a difference to the recovery of failing organi-zations. We found significant positive effects of human resource management strategiesthat involve raising the proportion and quality of core staff. This may be an effectiveturnaround strategy for all organizations that are highly professionalized, whether in thepublic or private sector. In addition to the direct benefits of better ‘front-line’ perfor-mance, redirecting resources in this way may reinforce impact of a retrenchment strategyby cutting administrative overheads. Future turnaround research needs to investigate thecircumstances under which other aspects of the management of human resources arelinked to performance improvement in failing organizations. For example, are particularhuman resource practices associated with turnaround, and is succession amongst middleas well as senior managers linked to recovery from failure?

Retrenchment and repositioning. These two strategies, which have generally been found toassist turnaround in the private sector, had contradictory effects in our sample of publicorganizations. Retrenchment, and in particular an emphasis on cutting costs and raisingefficiency, pushed school districts further towards decline. This need not imply thatretrenchment is always inappropriate in the public sector, or cast doubt on the validityof most previous findings on private organizations. We were unable with this data set toinvestigate the sequencing of turnaround strategies (Arogyaswamy et al., 1995), so it ispossible that some school districts that implemented retrenchment prior to repositioninggained benefits from a focus on cutting costs. Nevertheless, our evidence is consistentwith arguments that different strategies may be required to respond to decline ondifferent dimensions of performance (Arogyaswamy et al., 1995). Organizational declinehas been measured as poor financial results in studies of turnaround in private firms. By



definition, this problem can be tackled in the short term by improving efficiency. In otherwords, retrenchment is likely to be a successful initial route to recovery if an organiza-tion’s performance problems are high costs and low efficiency.

The performance weakness in failing Texas school districts, however, was low effec-

tiveness. We have no evidence that they were also suffering from low efficiency. Thusretrenchment did not fit the nature of their performance problem. By extension, studiesof turnaround in the private sector are likely to find weaker retrenchment effects if theyadopt a wider definition of performance. For example, decline may comprise socialirresponsibility and a disregard for employee welfare, as well as poor financial returns. Itseems unlikely that retrenchment would lead to better results on these dimensions oforganizational performance in either the public or the private sector.

In contrast to the results for retrenchment, our evidence on a strategy of repositioningis consistent with most of the prior research on private firms. Although we have exam-ined only the specific context of turnaround, this finding contradicts claims that privateand public organizations are so dissimilar that generic management theories cannot beapplied successfully to both sectors (Boyne, 2002). It has been argued that highly insti-tutionalized public organizations, such as school districts (which are long-established,heavily regulated and professionalized), will find it difficult to purse effective strategies ofinnovation and repositioning (Mone et al., 1998). However, our evidence suggests thatthe basic logic of a repositioning strategy may be as valid in the public as the privatesector: poor performance calls for a change in the products offered and better relation-ships with other organizations.

CONCLUSION

Turnaround research has mostly ploughed a narrow furrow on the relative merits ofretrenchment and repositioning while neglecting wider elements of the theoreticalterrain of studies of organizational performance. We have shown that the extent ofrecovery from decline is influenced not only by these strategies but also by changes in taskenvironments and human resources. Thus we have built upon rather than rejectedconventional models of turnaround: retrenchment and repositioning make a difference,but are part of a wider picture of environmental and organizational changes thatinfluence recovery from decline. The general validity of these conclusions is, of course,limited by the sectoral and temporal setting of our study. Different institutional contexts,time-periods and measures of the key variables might lead to different findings. Never-theless, we believe that our evidence has implications for generic theories of turnaround,and for practitioners in public and private organizations.

First, the type of turnaround strategy that is effective is likely to be contingent on thedimension of performance that is weak. In the case of Texas school districts, failingorganizations had low effectiveness that was reversed by repositioning but reinforced byretrenchment. By contrast, if their primary performance criterion had been efficiency,then retrenchment might have been a better strategy than repositioning. Second, thesuccess of turnaround strategies can be helped or hindered by benign or hostile changesin the task environment. The lesson for external stakeholders is that judgements on theeffectiveness of turnaround strategies should to some extent be tempered by knowledge



of whether managers are attempting to achieve turnaround in a context that is becomingmore or less favourable. Finally, and perhaps of most direct practical relevance for bothpublic and private organizations, recovery from decline is likely to be assisted by replac-ing non-core with core staff, and by recruiting core staff of higher quality. All of thesedirect effects on turnaround may be part of a more complex picture of moderated effects.Future studies could usefully examine the full range of interactions between the taskenvironment, organizational characteristics and turnaround strategies.

Many issues remain to be investigated in research on turnaround. Our study hasinvestigated the effects of changes in the technical environment of failing organizations.An important extension of this line of work is to include changes in the institutionalenvironment, which are likely to be especially important for organizations that areheavily regulated. An analysis of institutional pressures could include the political rela-tionships between firms in turnaround situations and auditors, professional associationsand government agencies. A more comprehensive examination of whether internalchange is adaptive or disruptive would also be a very useful addition to knowledge onturnaround. This could include not only further studies of human resources, but alsochanges in other organizational characteristics such as structures and processes. Thesepotential developments hold the promise of enriching turnaround research in particular,and dynamic models of organizational performance in general.

NOTE

[1] Some districts changed superintendents during this time period. In 72 per cent of the cases, the samesuperintendent responded to both surveys. An analysis of the survey mortality showed that it wasunrelated to district size or performance of the district.

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Environmental Change, Human Resources and Organizational Turnaround