Firms in a crisis are struggling for survival and need to implement appropriate turnaround activities for a successful recovery from distress. Potential measures for this could be a managerial restructuring (Sudarsanam and Lai, 2001), an increase in efficiency and productivity (Dawley et al. 2003; Chenchehene and Mensah, 2014), a reduction of costs (Hambrick and Schecter, 1983; Whitaker, 1999) or a restructuring of assets (Sudarsanam and Lai, 2001). However, the contribution of innovation for prevention of corporate crises respectively as a potential factor for turnaround success was not extensively analysed in prior research. Its relevance seems to be a given, because innovation is a necessary characteristic of companies to be healthy and to maintain competitive advantage (Delbecq and Mills, 1985, p. 24). Innovation is the core driver for growth, performance and valuation (Barsh et al., 2008, p. 37). The ability to innovate is of central importance for long-term success of an organization (Metz et al., 2007, p. 19).
Pushed by global competition and short-term performance pressures, particularly in a crisis situation, managers often give in to personnel reductions or relocation to lower-cost regions. In that, they sacrifice true innovation, strong organic growth and clear competitive advantage (Porter and Kramer, 2011, p. 66). On the other hand, managers start to realize that social problems not only constrain their operations, but they also provide rich possibilities for growth or turnaround. When a company’s mission includes the aspect to create shared value for itself and society, it channels resources to the enhancement of innovations that contribute to the solution of social problems (Pfitzer et al., 2013, pp. 101–102). In general, successful companies want to innovate in terms of building a more sustainable business model for the company (Paine, 2014, pp. 92–94). In that, (business model) innovation seems to be an indicator for sustainable company growth and an automatic prevention from drifting into strategic crisis.
Thus, despite the knowledge about the importance of innovation for business success, there is relatively less known about its relevance for corporate turnaround and recovery. Madrid-Guijarro et al. (2011) found that product, process and managerial innovation of financially distressed firms were more strongly pronounced for healthy firms, but this difference was statistically not significant. The same authors published another study in 2013, were they concluded that innovation is positively associated with the performance of the firm. The endeavours for innovation decrease with the increase in distress (Madrid-Guijarro et al., 2013). Ernst (2010) argued that investments in R&D expenses usually are cut in a crisis situation. He showed how the increase in R&D expenses during a crisis situation can help to ensure future growth and long-term success. The negative relation between innovation efforts and degree of corporate health may be attributable to a lack of funds (Murro, 2013).
The link between innovation and the probability of default (PD) was analysed by Pederzoli et al. (2013). They concluded that the PD decreased by the value of a patent portfolio held by a company, but only then, when an appropriate portion of equity is available. Fatazzini and Figini (2009) introduced the variables “industrial rights ratio”, which indicates the degree of innovation in relation to the size of the firm. Its ability for the prediction of credit risk was tested within their study. The variable was a statistically significant predictor, but of lower importance in explanation of credit risk compared to other variables derived from financial statement analysis. It was found that the PD increases if the degree of innovation is increased relative to the size of the firm, which is a similar finding to the result of Schmitt and Raisch (2013, p. 1231). In the study of Murro (2013, p. 320) besides the size, other factors like international presence, the level of efficiency or the level of technology of the industry were named to be drivers for innovation. Innovation in a corporate crisis could be a potential measure for turnaround and recovery, but there are certain pre-conditions which have to be fulfilled for this.
What is also confirmed by the paper of McKinley et al. (2014) is that these short reflections emphasize the lack in research. They conclude that the conditions of innovation and its potential effect on a successful or unsuccessful turnaround are neither described nor understood. The introduction of innovation as a restructuring tool can also be seen as risky under their view, because the final outcome of innovation is sometimes not predictable and it depends on the type of innovation, whether it can contribute positively or negatively to turnaround success. Even if innovation could be seen as a relevant factor to accelerate the turnaround process, the speed is no guarantee for the success of the induced measures (Gupta, 2006, p 58). It will also depend whether innovation is used in context of retrenchment or recovery, when turnaround activities are started. Retrenchment is applied to increase.
Based on the preliminary findings it seems that certain types of innovation are rather helpful for retrenchment, whereas other types of innovation are more closely related to recovery. For example, process innovation is a relevant factor for retrenchment, because activities in this field are supporting the improval of operational efficiency (Robbins and Pearce, 1992). If it is true that a successful turnaround can be associated with effective retrenchment (Lohrke et al. 2012; Pearce and Robbins, 2008), then despite the inherent risk, innovation should be an important driver for this success.
To sum up, looking into the literature about the connection between crisis and innovation, a lot of questions are left open in the guest editors’ point of view. Although intuitively the link seems very logical, the topic is rarely touched so far and particularly empirical research is very scarce. The two research streams go into very different directions, but in fact pursue a common goal: the long-lasting, sustainable, competitive advantage and survival of business organizations. Therefore, it is surprising that until now, we cannot answer how innovation can be used to create successful turnaround situations – in fact, we just do not know how to integrate the topic into turnaround management, what type and level of innovation to work on in such a peculiar situation and how to enhance it in a rather unfavourable setting where sometimes liquidity pressures seem to determine all decisions. Due to the actual lack of knowledge about the contribution of innovation for turnaround success, retrenchment and recovery, the aim of this special issue is to analyse the inherent capabilities of innovation for resolution of corporate crises, to provide a contribution for the existing research gap and to develop practical implications for turnaround managers and how they could apply innovation within a turnaround process. Moreover, this could even open up a new field of specialisation for innovation managers, which might lead into a new discipline of management and education.
Suitable topics include, but are not limited to, the following:
- The contribution of innovation for corporate turnaround success
- The relevance of innovation to prevent corporate crises
- The distinction between types of innovation for short- and long-term success of corporate turnaround
- The relation between innovation and funding sources in financial distress
- The association of different types of innovation to retrenchment and recovery
- The relation between degree of innovation and the probability of firm default
- The search for explanatory variables and factors supporting the positive effects of innovation on turnaround success
- The application of different types of innovation as toolkit for turnaround managers
- The different types and levels of innovation appropriate for different levels of corporate crisis
- The barriers to innovation in turnaround situations
- The aspects of business model innovations as determinant for turnaround success
Paper proposal submission (by email) deadline: 30 September, 2016
Notification of proposal acceptance: 31 December, 2016
Full papers submission (online) deadline: 15 March, 2017
Notification of proposal acceptance: 31 December, 2016
Full papers submission (online) deadline: 15 March, 2017
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