Sample selection and criteria

The research made use of information rich cases. It focused on the transition point of failure-to-success companies in the construction industry. In order to select information rich samples, the thesis looked at recent periods where, more often than not, construction companies would have faced some turbulence and therefore would have attempted a turnaround – hence, the 2008-2009 recession. Although the UK economy is growing gradually and steadily as at 2015, and construction companies are more engaged now with even greater financial lending coming their way, there are some who may argue that the industry is yet to recovered. This thesis wanted to look at that period when the companies would have found it hard to survive. Chapter 1 has already discussed the terrible situation facing small and medium sized construction companies at that time. Survival would require a strong management team, and a company that has not over-exposed itself prior to the recession. Over-exposed companies would have scrambled around to keep their companies

143 afloat. This thesis has to emphasize that though it is trying to identify successful turnaround companies, the overall aim of the research is to identify “successful turnaround strategies” in construction.

Criterion one – ‘Decline’ must be within the last 15 years (2000 – 2014): It is rather impossible to obtain a complete list of all successful and unsuccessful turnarounds amongst construction SMEs even in the said period. Therefore the selection process involved finding a good number of turnaround companies within the last 15 years (2000 – 2014). We chose 15 years because it is closest and probably most relevant in our time. But also because we felt it would give an opportunity to get a comprehensive list of companies that have undergone a turnaround process before or after the recession; and not solely focused on turnaround situations around the time of the recession. As we have established in earlier chapters, that economic downturn, though a player, is not solely the cause of company failure, rather it (economic downturn) exposes company internal flaws; mismanagement or resources, management incompetent, and poor company strategy.

To avoid survivor bias, the first task was to find construction SMEs that have gone out of business within the last 15 years. The research will call these companies “Sample 1”. This

research recognises that some executives would have moved on to other companies. Non- the-less, efforts will be made to find and approach them for their perspectives on the transition period of their former employer. Furthermore, failed companies executives who have moved on to other jobs would also be approached to give information on their failed recovery attempts. The second task is to find construction companies that are trading today but have gone through this transition phase. We will call this group of companies “Sample 2”. This will be achieved by looking at the financial information of small and medium sized

construction companies on the database of Company House. Also, databases such as Nexis: business and news, Duedil, Business Source Premier, and Mintel; proved useful. Most of these websites were used to find any sorts of publications of construction company bankruptcies or rescue articles, newspapers, company reports, online business analysts’ blogs etc.

The selection of these companies was based on two strata; the successful turnaround companies, and the unsuccessful turnaround companies. However, it became quite clear

144 that the unsuccessful turnaround group would have two subgroups – that is, companies that have gone out of business; and those that refused to liquidate despite gross financial and managerial decline – also known as failing companies. This is illustrated in Table 3.2. So this dichotomy within the strata makes it look as though it is three groups but the research classifies the Bankrupt companies and the Non-liquidated companies under “Unsuccessful Turnarounds” (Sample 1); while the Recovered companies are classified under “Successful Turnarounds” (Sample 2).

Table 3.2: Sample Group Classification Sample Group Classification

Unsuccessful Turnarounds (Sample 1) Successful Turnarounds (Sample 2)

Failed (Bankrupt) Companies and Non- liquidated companies.

Recovered Companies

Criterion two – Private companies: Usually, the construction companies that are on the London Stock Exchange (LSE) are publicly held and large. Most small and medium sized construction companies are not on the LSE and therefore will be privately owned – hence, this criterion by default.

Criterion three – Incorporation date must be 10 years and above: This criterion is to

reduce the discrimination against small firms with small amounts of Assets or Retained Earnings accumulation. The Z-score model does exactly this; discriminate against small firms, as it was originally made for medium and large firms. Collins (2001) avoided this problem by only selecting good-to-great companies with twenty-five years and above operation history, prior to the transition point. However, Altman (1993) defends the Z- Score for not making any special considerations for the SME. He states:

“A relatively young firm will probably show a low RE/TA ratio because it has not had time to build up its cumulative profits. Therefore, it may be argued that the young firm is somewhat discriminated against in this analysis, and its chance of being classified as bankrupt is relatively higher than that of another, older firm, ceteris paribus. But, this is precisely the situation in the real world. The incidence of failure is much higher in a firm’s earlier years.”

145 This truth of; firms having greater chance of demise in their earlier years, is supported by many researchers who looked at business failure from the angle of age and size (Evans 1987; Bates and Nucci, 1989; Hall and Young, 1991; Everett and Watson, 1998; Kale and Arditi, 1998; and Perry, 2001;). The argument is based on the premise that new firms have a lot to learn. First with regards their industry business environment and second, firms own management capabilities such as learning and inventing new roles like standardizing processes; developing trust, and cooperation among organisational members. In understanding its industry, securing organisational legitimacy, establishing stable exchange relationship with clients, creditors, suppliers and other organisations and establishing a good company image.

But the research chose 15 years more so because, it was important to have at least 5 to 10 years of company financial records in order to calculate its Z-score profile – the decline and the growth.

Criterion four – Recovered companies must have a decline, transition point, and recovery. To find those companies our only point of call was the companies’ financial

information and performance within the said period – last 15 years. What the research is looking for are companies with a Z-Score financial profile that shows decline, transition point, and recovery.

Criterion five – Upward trend after recovery: At the time of selection, the company would have had a minimum of about 2 to 3 years of upward growth in Z-score after the decline year. 2 – 3 years is enough to certify that the plans and actions taken during the turnaround were effective and sustainable (Kotter, 1996).

Criterion six – The recovery period: whatever the year of recovery (turnaround), the company would have to be, at the time of this research, still trading as a standalone company, with a Z-score equal to or above the 1.10 mark (Altman’s defined threshold for a failing company). In section 2.33, Model 3 of Altman’s Z-Score shows the classification of healthy and failing companies. Any score below 1.1 mark is a failing company (or a company in distress), and any score above 2.6 mark is a healthy company (Altman, 1993).

146

3.17

Constructing the Sampling Frame for the study

The population of the study is the total number of small and medium sized construction companies with experience in turnaround especially those with first hand knowledge also known as information rich cases for the purpose of this research. These are the companies the research aimed to find. However, since it is impossible to speak to all of them, a total of 12 unsuccessful turnarounds, and 9 Successful turnarounds could be reached, and a total of 27 interviews were conducted with these companies. After all, as Bailey (1978) and Emmel (2013) have demonstrated, it is a carefully selected sample and not the number of sample units that is responsible for accurate representation. Therefore, using the purposeful sampling strategy, the research identified some information rich cases that can answer the research question.

Unsuccessful Turnaround (Sample 1)

 Failed companies: it was easy to generate the list of companies that have gone out of business in the last 15 years. These are companies that went bankrupt, or are in administration, receivership or being liquidated or dissolved. Using purposeful sampling technique, this list was generated from the following websites, which allow the input search criteria: CompanyHouse.com, Duedil.com, CompanyCheck.com, and Nexis.com. It is impossible for all the companies to make it into the study. With the hope that these companies can fulfil the research objectives, the researcher reached out to 40 and stopped after saturation was achieved. Out of this 40 only 9 could be reached for interview but were sufficient because saturation was achieved. Three non-liquidated companies were also reached, which takes the total number of Sample 1 to 12 companies. In the next section, the research will explain how the non-liquidated companies were identified.

 Non-liquidated companies: By implication, those companies that are presently still in decline but refused to fold even when their financial health is consistently poor. They are also known as “businesses in distress” – businesses that are at pre-insolvency stage, near-bankruptcy, having substantial market losses, or substandard performance (Balgobin and Pandit, 2001). That is, businesses that are barely breaking even,

147 providing neither a reasonable income for the owner nor a fair return to the investor (Land, 1975; Everett and Watson, 1998). They are also known as “failing businesses” (Altman, 1993). These are companies who experienced distress about the same time as others, but did not make the transition from failure-to-recovery. It is assumed that these companies would have attempted a turnaround in one form or another. The non- liquidated companies form part of Sample 1 (unsuccessful turnarounds). A total of 22

non-liquidated companies were identified. However, only 3 could be reached for interviews.

Successful Turnaround (Sample 2)

The selection process here, involved a sifting technique.

 Recovered companies: In order to get these companies with the right profile (Sample 2), another list was generated using the same websites mentioned earlier.

A total of 83 companies were purposefully selected and a financial analysis of company financial books was done using Alman’s Z-score model. The aim was to identify companies that have shown a pattern; a Z’ < 1.10; indicating distress and a Z’ > 1.10 and above, preferably above Z’ > 2.60; within the last 15 years. Alman’s Z-Score model was used on all 83 companies - the whole bunch of; privately owned, longer than 10 years incorporation date SMEs; initially selected. The research defines “distress” as any Z-score below 1.10 mark (Altman’s Threshold). However, if a company shows tremendous recovery in the healthy zone from a very low Z-score close to the 1.10 mark and classified under the grey area, the research will classify this company under successful turnaround. This is to account for the 3-6 percent error in classification that is responsible for the “Grey area”. On the other hand, the research defines “recovery”, as any period (2 years and above) that shows a change in Z-score from the failing zone into the healthy zone. That is, Z-scores from below the 1.10 mark to any Z-score greater than or equal to 2.60 (Healthy Zone). Also included in the recovered firms are companies that have shown significant increase in Z-score above 1.10 mark for which the company must have recovered from a significantly low (negative) Z-score. A total of 24 companies showed the required pattern and therefore formed the stratum for recovered firms. However, only 9 of the 24 could be reached for interviews.

148 The question that the research will keep asking at this stage is, “what was different between the strategies adopted by the two – the successful and the unsuccessful turnaround groups?” Could it be the difference in decision-making, or in the type of leadership, or

even in the company atmosphere? In order to achieve this, first, the researcher resolves to be value-free and put aside all bias and to have an open mind to finding new trends within each group. Second, a comparison of the pattern and trends will be done. The comparison will help the research to contrast and illuminate on actions or sets of actions: why they were taken, how they were implemented, and with what result (Schramm, 1971; cited in Yin, 2003). This will lead to the identification of those critical turnaround strategies as well as recovery-impeding factors that will help shape the formulation of the framework envisioned.

Table 3.3: Total number of Unsuccessful Turnaround and Successful Turnaround companies

Companies Description Total number

Unsuccessful Turnaround (Sample 1)

Failed (Bankrupt) Companies and Non-liquidated companies.

9+3 = 12

Successful Turnaround (Sample 2)

Recovered Companies 9

Table 3.3 shows the total number of Unsuccessful Turnaround and Successful Turnaround companies - the latter is 12 and the former is 9.