Abstract
Orientation: Before a business in distress can be turned around, it requires the accurate identification of the distress causality. Recognition and sensemaking of distress remains a significant factor to inform actions.
Research purpose: This study investigated and explored the application of the critical incident technique (CIT) to inform venture distress causality for sensemaking.
Motivation of the study: Often decision makers are faced with causal ambiguity and rationalism when attributing distress causality. Critical incident technique method has been extensively applied in health sciences as a diagnostic decision-making process to investigate causality. This study applied CIT method as a diagnostic tool to inform causality and origin of business venture distress.
Research design, approach and method: A qualitative study was conducted with a total of 25 participants who included business rescue practitioners (BRPs), creditors and managers. The data were collected through both semi-structured interviews and a card sorting activity. Thematic analysis indicated the core incidents.
Main findings: The application of CIT method in causal attribution revealed a range of causes, distress origin and severity indicators of distressed ventures and the force that impels and propels management to act when faced with distress situations.
Practical/managerial implications: Understanding distress causality and its associated origin is the first step for a successful turnaround. Management always faces challenges, critical incidents and crises that they fail to understand. Critical incident technique method may assist decision making.
Contribution/value-adds: The study introduces CIT method to venture distress context, offering valuable insights into how decision makers can successfully attribute distress causality.
Keywords: distress sense making; business rescue; critical incident technique; causality; insolvency; signalling theory.
Introduction
The famous Swedish author, Ekman (2009:2), wrote in the book, The Dog, ‘an episode never starts, there is always something before’. Venture decline models reveal that venture failure is mostly caused by a destructive chain of unchanged events (Cunningham & Walsh 2016:192). Management studies have witnessed a growing interest in evaluating complex data, shifting from conventional interview approaches to reliance on anecdotal evidence. Several methodologies have emerged for the purpose of anecdotal evidence, with one notable example being the critical incident technique (CIT), wherein participants recollect specific incidents they encountered during a particular event (Ravenscroft & Rogers 2003:184). According to Chell (2004:58), there are currently no general answers to what really happens or happened in organisational drama. Critical incident technique method uses the stories that participants narrate and asks questions of the stories to demystify the underlying problem, which is distress causality in this study.
Causality is the principle that everything has a cause. Causality focusses on the cause, origin, antecedent and provenance. As difficult as it is to classify distress, understanding the causal origin may ease distress sensemaking (Barker III & Barr 2002). Manimala and Panicker (2011) use the term ‘organisational sickness’ to refer to ventures experiencing distress. According to Ifeanyi and Wokeh (2015), a venture is deemed to be in distress when it fails to meet its stakeholders’ financial obligations. This definition concurs with Section 128(1)(f) of the Companies Act, which defines financial distress as when ‘it appears to be reasonably unlikely that the company will be able to pay all its debts as they fall due and payable within the immediately ensuing six months’. This study adopts the Companies Act’s definition of financial distress as its context.
Distress sensemaking is often clouded by causal opacity whereby generic causes of distress are attributed to managerial incompetence’s (Purves, Niblock & Sloan 2016). The lack of stakeholder support and global economic challenges are among the generic causes of venture distress (Chisi 2013).
Sensemaking as a frame of reference is how management researchers address the contextual myopia of venture distress causality and provide greater insight into the process (Cunningham & Walsh 2016:219). The sensemaking process comprises three significant features: scanning, interpretation and learning. Sensemaking holds significance for decision-makers navigating intricate and dynamic environments, where they frequently encounter ambiguous and challenging situations requiring interpretation. Successfully turning around a distressed venture thus requires sensemaking of the distress causality, understanding its severity and forces that either propel or impel management to act.
This study was anchored on signalling theory, which has been used in management studies for improved sensemaking and as a way of reducing information asymmetry. Signalling theory describes how signallers make information known to receivers and in the process reduce information asymmetry, and thus, research on sensemaking shows how these receivers act upon the given information (Plummer, Allison & Connelly 2016:9). If a business can prematurely discern the potential failure through signals, the business may be saved without ending in bankruptcy or legal matters (Lipi & Lipi 2020). Sensemaking, therefore, helps derive meaning from complex and sometimes mystifying data, and thus, signals appear to be at the centre of the sensemaking process (Van Rensburg 2016:64).
Problem statement
While venture decline and turnaround management studies are gaining momentum in the business management field, little is known to understand and explain why companies, find themselves in distress especially as distress mostly is unique or specific (Bodolica & Spraggon 2021; Serra et al. 2017). These concerns raise the question of what the actual causes are that lead ventures to experience distress, considering that unchecked distress leads to the ultimate failure and death of ventures (Rockwell 2016). Identifying and understanding the underlying causes of decline is the first step in restoring distressed ventures (Ghazzawi 2017; Nyagiloh & Kilika 2020). Therefore, the purpose of this study is to investigate the application of CIT method to understand causality and improve distress sensemaking, and proposes that CIT method can be used a diagnostic tool to determine distress causality.
Research questions
This study aimed to answer the following main research question: How is the application of the CIT method relevant to venture distress sensemaking?
The significance of the study is embedded in answering this question. This is to contribute to the field of knowledge by extending the application of CIT method in distressed venture environments; thus, offering valuable insights into how decision makers can understand distress causality.
The supporting research questions that guide this research therefore are: Firstly, what critical incidents inform decision makers of distress origin? Secondly, what critical indicators inform decision makers of the potential severity at a turnaround situation and thirdly, what critical forces impels or propels decision makers to act?
In answering these supporting research questions, this study brings to light the origin of distress, severity at turnaround situation and forces that finally enables management to act. Understanding the origins, level of severity and force of managerial action may offer decision makers optional strategies to implement when faced with a distress situation.
The literature review to follow provides a detailed description of CIT method as a diagnostic tool, how signalling theory can reduce information asymmetry and a deeper analysis of distress causality.
Literature review
The literature review commences with an overview on CIT as diagnostic tool, followed by discussions on the history of CIT and how it evolved from being a positivist approach to leaning towards an interpretivist approach. Causal ambiguity, rationalism and signalling theory are also unpacked.
The critical incident technique as a diagnostic tool
Critical incident technique is an exploratory and investigative method that is practically oriented and aims to facilitate the complexities of an event (Stokke 2017:4). Cope (2003:10) reports critical incidents as eruptions within fundamental episodic transformation. To trigger action, business rescue practitioners (BRPs) need to establish the root causes of business distress to determine whether the venture can be rehabilitated and be sustainable (Holtzhauzen 2011:38). Holtzhauzen (2011) further argues that diagnosing the problem of the business with the support of management and identifying the root causes are key elements in the turnaround process. Critical incident technique is concerned with reflecting on the causes of events and their level of severity; and therefore, a scholarly investigation is recommended because it addresses the needs of practitioners (Lean, Moizer & Newbery 2014; Serenko & Turel 2010:183). It is important for this study to base the application of the CIT to determine venture distress on the principle of retrospective judgement.
Historical evolution of critical incident technique
Through the studies of human differences and inheritances of intelligence, Sir Francis Galton laid a foundation for CIT, which was later formally developed by John C. Flanagan (1954) which defined CIT as:
[A] technique that consists of a set of procedures for collecting direct observations of human behaviours in such a way as to facilitate their potential usefulness in solving practical ‘problems’. (p. 327)
Over time, CIT has evolved to be applicable to intangible phenomena, considering the subjective nature of an incident, the perceived factors surrounding it and the critical events leading up to it. Critical incident technique was further developed by Elizabeth Chell, who argued that the qualitative approach makes it possible to investigate and explore events that are identified by the subject (Gremler 2015:4). The interpretive view of CIT enables researchers to understand the core of an incident and why CIT holds perceived significance. This study adopts Chell and Pittaway’s (1998) approach to CIT that hinges on the subjective inputs.
Role of critical incident technique in distressed venture environments
Critical incident technique method assists decision-makers by informing practical solutions to challenges they may encounter during the decision-making process (FitzGerald et al. 2008:303). Having a better understanding of the challenges that ventures face during their lifetime is important as it helps determine viable strategies (Serra et al. 2017:3). Using CIT can help identify critical events that caused venture distress and put decision-makers in a better place to provide viable solutions. The turnaround industry is facing the challenge of not having broadly accepted tools, systems or processes that can help practitioners better predict a successful turnaround (Pretorius 2018:2). In addition, most ventures are exposed to a variety of challenges, critical incidents and crisis periods that management find difficult to fathom, and thus, it can be appropriate to use CIT method for problem solving (Breunig & Christoffersen 2016:5142). Using CIT method to identify and analyse critical events that transpired in ventures may help participants make retrospective judgements on the patterns and consequences of an incident. Used together with signalling theory, CIT method may reveal alternative dimensions and patterns of venture distress.
Signalling theory
This study is anchored on signalling theory, which was introduced to the field of economics by Michael Spence in 1973 as a way of identifying employment qualities when recruiting candidates for job positions. Signalling theory can play a crucial role in elucidating how primary strategic actors address the complexities linked to informational uncertainties within decision-making economic models (Bergh et al. 2014). Likewise, venture distress is often characterised by information asymmetry as different stakeholders do not have sufficient nor equal knowledge on why companies may find themselves on the brink of collapse.
In this context, signalling theory is concerned with reducing lack of reliable information between ventures and their stakeholders. Signalling theory directs its attention to the problem of identifying the distress causality faced by management and helps reduce information asymmetry using signals. Signals can thus help close the gap between what stakeholders know about the venture and what they want to know (Bergh et al. 2014). During a business rescue operation, BRPs frequently rely on companies’ financial reports, which can often be misleading (Van Rensburg 2016). Therefore, this necessitates BRPs to seek alternative methods (signals) to achieve a more accurate assessment of distress, especially when there is asymmetrical information.
The relevance of signalling theory in turnaround management
The unique aspect of signalling theory is its focus on developing perspectives that elucidate how parties engage in strategic sensemaking (Bergh et al. 2014:2). Bergh et al. (2014:2) further allude that the theory directs attention to the basic difficulties faced by managers who make strategic decisions. Sensemaking becomes increasingly critical for organisations, particularly during an organisational crisis that poses a threat to the fundamental goals of the organisation (Mallender 2016:43). Likewise, when a business is experiencing distress and turnaround strategies must be implemented, practitioners often encounter challenges of data integrity and information asymmetry.
Decision-makers often find themselves analysing situations, thinking across various levels simultaneously, recognising clues, piecing together diverse information and evaluating potential outcomes of different courses of action. Signalling theory proves to be valuable in describing the behaviour of decision-makers as they act as receivers of signals in situations characterised by incomplete and asymmetrical information (Leong 2021:7). Drover, Wood and Corbett (2018:2) argue that signalling theory has proven to be an impactful theoretical lens to understand how organisation outsiders go about assessing the quality of a business. This understanding of signalling theory is imperative as it highlights how the theory may reduce information asymmetry and the bias that may be associated with CIT method.
Although company operating conditions are routinely disclosed in their financial statements, investors, in general, may not be aware of a company’s financial distress until its official financial statement is issued (Jan 2021). Information asymmetry between top managers and shareholders contributes to a moral hazard risk for stakeholders. Unfortunately, even greater information asymmetry exists between managers and outsiders (Leong 2021). As organisational complexities rise, there can be an increase in behavioural opportunism because it becomes easier for management to obscure and distort internal operations, making it challenging for external parties such as BRPs or creditors to accurately make causal attributions (Ndofor, Wesley & Priem 2013).
In this study, signalling theory comprises the signaller (distressed venture), signals (that which is illuminated by the venture to consider it critical), receivers (turnaround professionals, BRPs, creditors) and feedback. Relying on the work of Spence (1973), this study assumes that the venture makes some negative decisions that are revealed through critical incidents, and furthermore, the venture flashes signals as a sign that there is distress forthcoming. Signalling theory therefore reveals that a distressed venture gives signals to the decision-makers that can help them with distress sensemaking. Having a better understanding of causal ascriptions, level of severity, and the use of signals can provide decision-makers with improved judgement in a turnaround situation and lessen causal ambiguity and rationalism.
Causal ambiguity and rationalism
Causal ambiguity, a key problem, is defined as a condition where there is stochastic lack of understanding and knowledge that leads to uncertainty (McIver & Lengnick-Hall 2018:305). Ambiguity becomes visible when there are different interpretations of certain information (Plummer et al. 2016:9). The challenge with causal ambiguity is the potential to give way to high levels of uncertainty that often leads to poor strategy choices that can break a venture (McIver & Lengnick-Hall 2018:309). The ability of management to identify the root causes of venture distress may lead to a successful turnaround. Thus, managerial sensemaking is crucial in organisations to understand and deal with unexpected or confusing events (McDonald 2017:14). The underlying factor of causal ambiguity is the inability to disclose that which is not known (McIver & Lengnick-Hall 2018:307). In venture distress contexts, causal ambiguity is a situation in which it is difficult for management to link distress to its exact causes. McIver and Lengnick-Hall (2018:306) further argue that causal ambiguity is visible when the causes of distress cannot be articulated and specified, which makes it difficult for existing management to understand distress causality.
The inability of management to link distress to its causes is further exacerbated by the fact that when ventures experience distress, the blame cannot be attributed to a single cause, and subsequently, causes of venture distress differ across industries. Venture distress may be a combination of management complacency, global economic challenges, and a lack of urgency dealing with looming signals. Furthermore, failure to recognise and acknowledge even the so-called minor problematic causes can drive a business into distress (Chisi 2013:15). Kanter (2003:5) concurs that venture decline rarely stems from a single cause but rather from an accumulation of wrong decisions and actions that happen over a period that entangles the venture in a confusing web that makes it difficult to reverse. However, there is no universal agreement about the causes of venture distress (Bushe 2019:8). The differing variables of distress causality has a negative influence on decision-makers as they face challenges of causal attribution to implement the correct turnaround strategies (Pretorius & Holtzhauzen 2013:469). Management’s stance on the stability of causes is crucial, necessitating discussions and debates amid ambiguity to formulate improved strategies (Mueller et al. 2001:25).
Research methodology
The section of the article looks at the research design, sampling methods, data collection and analysis, and the use of card sort technique. This study incorporated CIT method that allowed participants to determine the incidents that are crucial to them, thus providing the researchers with a rich source of data.
Research design
Critical incident technique method is inductive in nature, making it useful to this study as venture distress causality is still under-researched (Gremler 2004:66). The researchers followed the steps of the CIT process as recommended by previous researchers (Breunig & Christoffersen 2016; Chell & Pittaway 1998; Gremler 2004; Harrison 2015).
Sampling
This study used purposive sampling, which entails selecting participants based on the researcher’s judgement to select information rich participants who best can answer the research questions (Creswell 2012:206; Moser & Korstjens 2018:10). The research also used snowball sampling, which entails obtaining referrals from the participants who were selected through purposeful sampling (Cooper & Schindler 2014:152). Critical incident technique method focusses on a limited area of interest in which the participants have rich data about the area under study (Bott & Tourish 2016:278). This study sampled on three levels, namely organisations, individuals and critical incidents.
To qualify for the study, licenced BRPs, businesses and banks had to be located in South Africa to ensure the context of the research was South African. According to the Companies Act, BRPs are appointed in their own personal capacity, and thus, they do not represent any organisation. Sampled businesses must have experienced distress at some point, and banks must have provided post-commencement finance to support a business undergoing rescue efforts. This ensured that the research gathered and obtained diverse and rich information of causal attribution from three different spheres of analysis that have considerable experience dealing with venture distress at various levels.
The final sample was 4 ventures, 10 managers, 11 BRPs and 4 creditors. The stopping criterion was determined after Interview 21 because no new themes were created. The stopping criteria were tested on Interviews 18 and 19 to check if data saturation had been reached; however, Interview 19 provided a new code under card sorting activity, and thus, the stopping criteria was extended to Interview 21 instead of Interview 20 (Francis et al. 2010).
Data collection
This study focussed mainly on the implementation of CIT to inform distress causality, and because of its inductive, qualitative and interpretivist approach, data were collected using semi-structured critical incident interviews followed by a card sorting activity from BRPs, managers and creditors. The interviews were conducted as telephone interviews and via e-platforms such as Zoom, Teams and Skype as the researchers were based in a different continent with the participants.
The research employed closed card sorting activity, where participants, after finishing the interview, were given predefined categories of signals (Fincher & Tenenberg 2005:89;Paea, Havea & Paea 2020:79; Rugg & McGeorge 2005:95). Participants were presented with a nominal scale measurement ranging from 1 to 5 to evaluate the significance of causal attribution signals in assessing distress. The components constituting these categories were typed on virtual cards. During each session, participants were observed and any questions they had were addressed accordingly. In instances where participants wanted to assign a signal card to two categories, they were prompted to identify the category that best suited the signal card, which was then used for analysis. The researchers believe that semi-structured critical incident interviews and card sorting activity were effective exploratory tools to widen the knowledge on distress causality.
Data analysis
Data analysis of critical incidents, such as other approaches, includes interpreting and analysing the meaning of the data (Nassif, Andreassi & Tonelli 2015:216). This study used inductive thematic analysis, which focusses on analysing, classifying and presenting themes (patterns) that relate to collected data (Ibrahim 2012:40).
The researchers used a response rate of each identified code to mark it as a critical incident. In addition, as recommended by Ravenscroft and Rogers (2003:191), establishing a boundary is fundamental to determine the findings of critical incidents. The boundary of critical incidents for this study was set at six responses, and thus, any code that was analysed and generated at least six responses (agreement) from different participants was regarded as a critical incident. A total of 81 incidents were identified across all research questions. These were further grouped according to the frequency in response rate and a final of 31 critical incidents emerged from the study.
According to Spencer (2009:129), a straightforward method for analysing closed card sorting data involves documenting the outcomes in a spreadsheet, with categories listed in the top row and signal cards in the first column. A signal popular card placement matrix of distress assessment was generated illustrating the percentage of participants who sorted each signal card into the respective category (Spencer 2018). This approach provides a clear overview of the frequency and consensus of signal card placements among participants.
Trustworthiness
Trustworthiness is paramount in qualitative research as it is under scrutiny from positivists (Shenton 2004:63). To enhance trustworthiness of this study, the research established four criteria, namely credibility, dependability, confirmability and transferability (Lincoln & Guba 1985). To ensure the study was trustworthy, the researchers included the research design and its implementation by detailing all the plans and the execution strategy, as recommended in Shenton (2004:71). The use of person triangulation enhanced the dependability of the study. The research used various BRPs, managers and creditors who were actively involved in venture distress situations. To ensure that confirmability was observed, the discussion guide used for data collection was open ended to avoid any form of coercion. As a strategy for member checking, the discussion guide was approved by a more experienced researcher before the data collection commenced.
To conform to transferability in this study, the researchers ensured data saturation was observed. A total of 25 interviews were conducted, and, at Interview 21, the researchers noticed that the point of saturation had been reached; Interviews 22–25 did not contribute to any new data. This study includes verbatim quotes from participants. As recommended by Shenton (2004:70), this research provides the number of participating ventures and their geographical location. It further specifies the inclusion criteria used to sample the organisations and individuals for the study.
Ethical considerations
An application for full ethical approval was made to the Research Ethics Committee, Faculty of Economic and Management Sciences, Department Business Management and ethics consent was received on 12 May 2023. The ethics approval number is EMS046/23. To conform to the ethical principles of informed consent, participants were requested to read through and sign the informed consent form prior to commencing the interview. The form explained the purpose of the study, accentuated that participation in the study was voluntary and that participants could withdraw at any time. Assurances of anonymity and confidentiality were provided, this requirement was met through using pseudonyms for the names of the individuals in the final presentation of the data.
Findings and discussion
The study identified four main themes related to the study’s research questions. These themes and their related sub-themes are discussed in this section, accompanied by descriptive quotations from participants and linkages to relevant literature.
Operational critical incidents
Operational critical incidents include events that occur inside the organisation that could be controlled by decision-makers. Three sub-themes were generated under the operational critical incidents theme, namely managerial misconduct, boardroom fights and financial misconduct. The research categorised the generated codes into critical and generic incidents. Using the response rate of six responses for an incident to qualify as critical, a final total of eight critical codes emerged.
Managerial misconduct
Participants commonly reported managerial misconduct as being an important reason ventures end up filing for business rescue. Participants revealed that in most instances, management lacked the relevant skills to conduct market forecasts or interpret financial statements. Other participants attributed distress to a lack of key operational controls, which either left room for theft by staff or led to high wastage. Some participants highlighted the challenge of big egos from management, especially those who hold top executive positions. Managers were blamed for not proactively reacting to periods of crisis because they did not want to be associated with failure, and thus, they pretended like the problem did not exist. This aligns with the argument by Sarang et al. (2024), which highlights how managers often appoint board members who share their views on business practices to protect themselves from performance pressure.
The following comment was made by participants, supporting this sub-theme:
‘But very often management have no real visibility of their cash flows. They don’t have good operational controls in place. They don’t have a good risk mitigation strategy in place. So, very often companies that we see in distress, there’s clearly an element of management failure.’ (BRP11, male, senior BRP)
Boardroom fights
The second sub-theme generated was boardroom fights. Boardroom fights consisted of critical incidents such as key-staff turnover, internal fights and a lack of trust. A surge in staff turnover was prevailing with participants who noticed senior leadership resigning from their positions once the business was unstable. One manager highlighted that he had to relocate to Australia after he witnessed the Chief Executive Officer (CEO) and some members of the board fighting. Internal fights increase the lack of trust with internal and external key stakeholders, who withdraw their support. The findings confirm the presence of managerial verifier determinants that validates and ensures that the cause exists and secondly that the early warning sign used to identify it is present as observed by Pretorius and Holtzhauzen (2013:478). The following is an example of comments made by the participants:
‘The company was initially affected by COVID, but you know, we are now long past COVID, and people are still using COVID as an excuse, but then you know they sit with infighting between shareholders about the direction the company is going to take. The shareholders have different motives, and then in the meantime, while they are fighting, they are unable to procure enough orders for the company to generate income, and again by the time they realise that we have a problem, it’s after the banks have already started taking steps.’ (CR2, male, senior legal counsel)
Financial misconduct
The third and last sub-theme that was generated and categorised as critical was financial misconduct. Participants highlighted issues of fraud and an expensive lifestyle from directors and/or shareholders of companies as a contributing and detrimental factor in venture distress. Directors’ lifestyles were also raised as a significant signal that help BRPs or creditors determine distress in an organisation. Participants recognised that in some instances, fraudulent activities, mainly from the directors, led some businesses to be distressed and end up filing for business rescue. Unfortunately, these fraudulent activities were sometimes carried out to satisfy the expensive lifestyle of directors. The King III Code of Governance emphasises under Principle 1.1 that the board of directors should act as the focal point for and custodian of corporate governance (Engelbrecht 2009:21). However, this appears not to be the case on the ground. The following comment shows the participants experiences:
‘There’s another agriculture project that we’re busy with where the distress was largely caused by fraud, fraudulent activities on behalf of the shareholders. (BRP11, male, senior BRP)
Strategic critical incidents
Strategic critical incidents refer to events that affect the business and emanate from the external environment. Management or decision-makers have little to no control over these incidents. Five sub-themes were generated under strategic critical incidents theme, namely force majeure, withdrawal of key stakeholder support, economic turmoil, contagion and criminal activities. The research categorised the generated codes into critical and generic incidents. Using the response rate of six responses for an incident to qualify as critical, a final total of 12 critical codes emerged.
Force majeure
Interviewed participants identified incidents that were categorised as force majeure as having a major effect in venture distress. These events included coronavirus disease 2019 (COVID-19) lockdown effects, different regulations from the government or relevant bodies and natural hazards.
Some participants, especially managers, blamed COVID-19 lockdowns that took place in 2020 as a contributing factor to their businesses facing venture distress. Managers reported that harsh lockdowns led to their businesses failing to operate and generate income. One manager from the airline industry blamed the COVID-19 pandemic and how planes were grounded, which costed the company millions of Rands per day. The effects of COVID-19 are consistent with the study performed by Vermooten (2023:9), which suggests the negative impact COVID-19 had on aviation and tourism industries. However, it is interesting that some participating BRPs admitted that the pandemic contributed to the demise of ventures but only as an aggravating event and not the root cause of the business decline. Some interviewed BRPs revealed that the pandemic and lockdown effects cannot be used as a measure of businesses filing for business rescue as it only exposed the ‘rot’ that was already looming in the affected companies. The following comment is an example of the participants’ experiences:
‘Some contracts were put on hold, for example, we had projects with the XXX company [name of company hidden for anonymity]. They said that because of COVID their growth is not going where they saw themselves now. They said that they will only get there 10 years later, so the projects we were doing with them were stopped, so that affected us.’ (MGR1, male, project manager)
Regulations and natural hazards were also identified as critical events that cause businesses to experience distress. These included different laws or regulations passed either by the government or governing bodies. One participant highlighted the removal of a levy by the government in a horse and leisure company that led to its decline. Natural catastrophes such as the flooding that happened in KwaZulu-Natal province in 2022 impacted heavily on agricultural and construction industries, and most companies ended up filing for business rescue. Participants highlighted that these events could not have been controlled by management as they were ‘unfortunate catastrophes’. These findings are consistent with the study performed by Geldenhuys (2017), which focusses on natural hazards that have been prevalent in South Africa because of climate change. These types of events are explained in the following comments:
‘Ok, so if we talk about XXX company [name of company hidden for anonymity], the critical event that led to distress would be the removal of a levy that led to the company filing for business rescue in terms of gambling legislation that happened in April 2019.’ (BRP1, male, senior BRP)
‘So, with the dairy farm, the critical event is based around the fact that they plant their own feeding for the cattle, and unfortunately, they had too much rain. The actual crops that they planted could not be harvested due to these floods.’ (CR2, male, senior legal consent)
Withdrawal of key stakeholder support
Withdrawal of key stakeholder support emerged as a second critical sub-theme and includes events such as loss of contracts and the lack of funding, which were recorded as critical incidents. Participants highlighted that some companies found themselves in an unfortunate position where a key contract that was supporting the running of the business was withdrawn. At the same time, some participants also blamed poor management for relying on one big contract and getting comfortable until that contract was withdrawn. In addition, failure to secure enough funding from investors also made various businesses experience distress. Failure to have enough funding was attributed to investors losing confidence in the business or because of the challenges that some investors also encountered on account of COVID-19 pandemic and associated lockdown effects. The findings are consistent with the study by Shem and Mupa (2024), which focussed on the importance of stakeholder engagement as a critical component of successful business rescue processes. The following comment inform these factors:
‘Yeah so, I have a client that is operating in the mining space. They are a mining contractor. They lost a contract at the start of this year, in fact, you know the contract was supported and it wasn’t their biggest contract, but it was a very profitable contract, and they were making probably 45% plus margins on this contract where the other contracts were running at like 25%. So, it had the impact of being quite a nice carrier for the less profitable contracts. They lost that contract because of their client primarily just choosing not to renew the contract.’ (CR23, male, banker)
Economic turmoil
The third sub-theme generated was economic turmoil with critical events such as market decline, mass migration from South Africa and inflation. Interviewed participants highlighted the challenges faced by South Africans with regard to inflation, which leads to an overall market decline for certain products and services. The current state of the South African economy makes it difficult for businesses that focus on luxury products to thrive as most households are living from hand to mouth. Some interviewed participants also explained that because of the economic challenges, there is a mass migration of skilled labour from South Africa to developed countries. One of the interviewed participants, although still working for the same company from South Africa, has migrated to Australia because of a better standard of living. These findings are consistent with the study carried out by Chisi (2013), which suggests how Zimbabwean businesses struggled to thrive under harsh economic conditions. The following comment inform these factors:
‘It’s really one of those challenges, and of course we’ve had losses of some of our key members who have moved to greener pastures, particularly to Europe.’ (MGR9, male, business owner)
Contagion
Contagion was the fourth generated sub-theme and consisted of ripple effects and non-payments from debtors’ critical incidents. Participants believed that the distress faced by some companies was because of some of their big suppliers (contractors) being in distress, which affected them. As unfortunate as it is, some companies filed for business rescue or ended in distress because their main supplier or key debtor experienced distress. Reliance on one big contractor confirms financial verifier determinants as identified by Pretorius and Holtzhauzen (2013:478). Another critical incident identified was because of key debtors not fulfilling payments on time. Managers interviewed expressed the challenges they often face with debtors not paying on time, thus prolonging the payment cycle either from a 30-day payment plan to a 120-day payment plan. This prevented the businesses in question to fulfil their own payment obligations to creditors. The following comments inform these factors:
‘ABC [name hidden for anonymity] mine sort of stayed alive. It was subsidised from the LLZ [name hidden for anonymity] mine, and that’s how the group sort of managed to survive. So, when the LLZ mine went down, suddenly the ABC mine was no longer profitable.’ (BRP10, male, experienced BRP)
‘We have had great challenges when it comes to having financial resources in terms of cash in the business. It’s not something that has stopped, and the reason for that is because some of our big clients do not pay on time.’ (MGR5, female, general manager)
Criminal activities
The fifth and last sub-theme generated under the strategic critical incidents theme was criminal activities. The high crime rate in South Africa and the construction mafia were mentioned during the interviews. Some participants attributed venture distress to the prevalent crime situation in South Africa. These range from politically steered crimes to sheer thuggery. One participant narrated that her pharmaceutical shop, located in one of the townships in Gauteng, was looted in 2021 during the politically motivated Zuma riots, resulting in the loss of most of her medical supplies. Some managers from the construction industry and BRPs who handled cases in the construction industry identified the interference of local business forums, popularly known as construction mafia as a huge hinderance for growth in the sector. Participants revealed that when a contract is given to a construction company, the construction mafia, who have little to no knowledge on how to run the contract, often interfere and demand for a monetary share of the contract. This observation is consistent with the literature that focussed on the emergence of the construction mafia, which has culminated in the disruptions and abandonment of construction sites resulting in the loss of jobs for construction workers (Nyangiwe, Amoah & Mukumba 2023). The following comments further inform these factors:
‘So, let me start with this issue of riots that happened in 2021. We had a challenge where one of our branches that we had acquired was brought down, during the riots, and we lost almost all our medical supplies from that shop. Unfortunately, the insurance company could not help us.’ (MGR3, female, head of human capital)
‘Then in the South African context, you’ve got this advent of what we call ‘construction mafia’, where you have these thugs going around and demanding 30% of the contract value for no contribution towards the construction of the building.’ (BRP9, male, senior BRP)
Severity indicators
Severity indicators relate to issues that inform decision-makers of the level of distress severity at a turnaround situation. The three sub-themes generated under severity were unsustainable income streams, failure to meet financial obligations and stakeholder apathy. The research categorised generated codes into critical and generic incidents. Using the response rate of six responses for an incident to qualify as critical, a total of five critical codes emerged.
Unsustainable income streams
Unsustainable income streams generated codes varying from a lack of income stream to failure to supply products. Some participants attributed the level of severity at a turnaround situation to businesses not having a reliable income stream, which further leads to constraints on cashflow. Business rescue practitioners interviewed revealed that in some instances, businesses could not generate income or because the business model was no longer sustainable. Not having a reliable income stream was also used as a test to check whether there was a possibility of saving the business (using the ‘do we have a business’ [DWAB] test). Unsustainable income streams were closely linked to signals of financial distress. These findings are consistent with the study done by Citterio (2024), that emphasised the importance of having strong and reliable financial streams. The following comment shows the participants’ views:
‘Always I like to look at the cash because sometimes the cash is what determines the severity for me. So, it’s the cash in the bank and how they apply the cash. If the cash is applied to pay dividends, then there is probably no distress because the company can pay dividends. If the cash is applied to pay your long-term funders like your banks, but not dividends, then it’s slightly more distressed for me.’ (BRP2, male, senior BRP)
Failure to meet financial obligations
The second sub-theme generated was failure to meet financial obligations, which included codes such as inability of businesses to pay their creditors and the state of historical financial statements. Some participants observed that when a business starts struggling to pay its creditors, the severity of the turnaround situation is higher, making the venture difficult to turn around. Failure to pay creditors included, among others, missing payments, failure to repay loans and failure to meet SARS obligations. This observation highlights the importance of understanding severity indicators in determining distress situations, which is consistent with the study performed by Li et al. (2023), on failure prediction and on how cash flows help investors to assess firms’ going concern status by providing information about their solvency position. There was also general consensus among BRPs that severity at a turnaround situation is linked to the definition of financial distress in Section 128(1)(f)(i) and (ii) of the Companies Act: In addition, failure to meet financial obligations was linked to directors lifestyle, a signal where directors were blamed by participants for an exorbitant expenditure. The ollowing comments typify this sub-theme:
‘Certainly, other reasons can make you change your mind and then convert it into liquidation or whatever. So, it’s an ongoing process, but I think it is prudent or sensible that I personally use an analysis of historical financials to try and determine how long the financial distress and the warning signs have been present and the reasons for it whether it’s financial, operational or whatever.’ (BRP5, male, experienced BRP)
‘You pick up the whisky, the fancy cars everybody drives, you know, the directors or the family members or whatever. The children, everybody has got the best cars, but they are claiming poverty. Nobody can pay anything in terms of the company, but personally they’re all doing quite well.’ (CR2, male, senior legal counsel)
Stakeholder apathy
The third sub-theme generated was stakeholder apathy, which entails the absence of support from different stakeholders. Interviewed participants revealed that in most cases stakeholders withdraw their support because of the lack of confidence in the business, which worsens the distress situation of the business and make it practically impossible to turn the business around. Unavailability to secure investors who may assist with post commencement finance (PCF) also determined the severity at the turnaround situation as PCF is a crucial element in ensuring the potential reversal of the distress. Participants also raised concerns that once the business filed for business rescue, creditors, investors or even customers withdrew their support; and thus, business rescue is still treated with stigma in the South African context. Precise understanding of the severity of the decline is crucial in implementing successful turnaround strategies. The findings are consistent with the study performed by Shem and Mupa (2024), which is focussed on the importance of having stakeholder engagement, if the business is to continue operating successfully. The following comment exemplifies these factors:
‘Lastly, I would say you need to have support from creditors. If no one’s prepared to support this business, customers have run away, suppliers don’t want to supply, whether it’s suppliers of money or goods, then you probably don’t have a business.’ (CR3, male, banker)
Forces of action
Two sub-themes were generated under the forces of action theme, namely creditor protection and directors’ self-interests. The research categorised the generated codes into critical and generic incidents. Using the response rate of six responses for an incident to qualify as critical, a final total of six critical codes emerged.
Creditors’ protection
The dominant sub-theme was creditors protection. Participants revealed that in most cases management only decided to seek help when there are legal demand letters from creditors; and thus, they seek help to avoid liquidation. This is in line with the study by Lokman et al. (2021), which looked at the underlying causes of why businesses opted for winding up instead of pursuing a rescuing process. In addition, after understanding that business rescue can offer a moratorium, some participants revealed that top management then decides to apply for business rescue so they can buy some time from ‘nagging’ creditors. Cash depletion was also raised as one of the reasons why management tend to file for business rescue. However, it is interesting that after waiting so long to look for help, management resorts to business rescue, which is an expensive process that has stigma attached to it. This was reported to be because of the decision-makers’ lack of knowledge of other avenues, such as informal turnaround, which can be explored. The following comment typifies this sub-theme:
‘It’s normally when the banks are threatening them or when creditors are threatening them with liquidation, and the company knows that they won’t be able to make the payments.’ (BRP4, female, senior BRP)
Directors’ self-interests
Another prevailing sub-theme was directors’ self-interests. Some participants argued that filing for business rescue was performed not because the top management or directors had the company’s best interests at heart but to avoid personal liability because they know that if the business folds, they will be held liable. Thus, applying for business rescue was used as a way for directors to save themselves rather than the business. This observation is consistent with earlier research, which highlights how the old Malaysian corporate rescue mechanism was susceptible to abuse by directors (Lokman, Mohamed & Othman 2020). The following comment informs this sub-theme:
‘They do not act with integrity. They try to avoid liability, and they blame everybody else except themselves to such an extent that they end up in a business rescue scenario, and then expect everybody else to compromise except themselves.’ (CR1, female, TA portfolio specialist)
Discussion
This study investigated CIT method to inform venture distress sensemaking. The research aimed to gain a better understanding of causal attribution of venture distress. The study hinged on signalling theory, which helped in lessening hindsight bias that may be present during the use of CIT method.
Summary of findings
The purpose of this study was to use CIT method as a diagnostic tool for venture causal attribution. The study’s findings revealed that venture distress cannot be attributed to a single cause or origin but can be attributed to operational or strategic factors. However, some incidents that cause businesses to experience distress can be more critical than others.
After assessing different signals being flashed by the distressed venture, it takes external consultants, such as BRPs or creditors, to alert management of the looming danger. Interestingly, management is forced to start looking for help only when creditors start putting pressure on the entity through legal routes or when directors want to protect their own self-interests. Unfortunately, at this time it may be too late as the distress ‘hole might be too deep’. Business rescue practitioners and creditors use severity indicators to determine how severe the distress is before attempting to implement any turnaround strategies. Managerial inertia often puts pressure on the turnaround situation as the severity of distress tends to be higher and more difficult to reverse because of delay. Severity indicators, such as unsustainable income, failure to meet financial obligations and the lack of support from stakeholders, inform the consultants on whether the business could be saved or not. If the business can be saved, the severity indicators inform BRPs on the turnaround strategies that can be implemented.
Having the above-stated arguments in mind, Figure 1 is a visual representation of the origin of distress in a venture, the signals flashing alerting decision makers of the looming danger and how through forces of action and severity indicators, causal distress sensemaking may be achieved.
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FIGURE 1: Distress causal attribution framework. |
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Theoretical implications
Organisations are often challenged to identify and resolve problems. Threats of distress continue to be a great concern for stakeholders, coupled with failure to properly identify the root causes of distress in the face of other imminent threats (Ghazzawi 2017:38). To address these challenges, the study contributes by introducing the use of CIT method to identify root causes of venture distress and its associated origins to understand distress situations. The ability of participants to recall the incidents can give insights that may be used to improve sensemaking. In addition, the severity indicators can show practitioners what to look for when assessing distress situations. The study’s findings enrich the understanding that distress origin emanates from both internal and external environments. This knowledge can assist in coming up with probable strategies that may be used when turning around distressed ventures.
Managerial recommendations
The proper identification of root causes is core to a correct diagnosis of the problem. When distress causality, origin and severity are identified, it can help determine the decisions made for proper rehabilitation (Lohrke, Bedeian & Palmer 2004:63). Furthermore, BRPs are continuously judged on their performances, but there appears a lack of clear measurements in practice. Chapter 6 of the Companies Act does not provide practitioners with an evaluation tool, framework or guidelines to follow when faced with distress situations (Butar-Butar, Sadalia & Irawati 2019; Pretorius 2018). By focussing on CIT method and signalling theory, the study provides insights and a framework for practitioners to use to inform distress causality. Causality and its associated origins are key to understanding distress. Furthermore, the findings from the study may help bankers, who are often secured creditors during business rescue events, and business people with insights they can use to reduce future risks.
Limitations and future research
Initially, the research proposed conducting a multiple case study with businesses that filed for business rescue and continued operating after the rescue event was a success. However, seeking a better understanding mainly, reduced the number of interviews and as saturation was achieved, the number was capped.
Fundamentally, the nature of the factors identified to inform that the distress contains vagueness and unclarity is not easy to identify or recognise. This suggests that further research has to be conducted into development of an early distress recognition tool to assist decision makers. Such a tool should consider anticipation techniques and deliberate acts to enhance early recognition.
Applying CIT method contributed to identifying the causes of distress in business rescue environment. However, it did not contribute to the decision makers’ ability to recognise distress in practice. Some interviewed participants had difficulty identifying at least three critical incidents that could have caused venture distress while others ended up providing many causes and identifying all of them as critical. Further research that focusses on assisting decision makers with early anticipation and recognition may be useful.
Conclusion
The study aimed to explore causal attribution by utilising CIT as a diagnostic tool. It highlighted that business distress stems from both operational and strategic critical incidents, with certain causes being more severe than others. Operational critical incidents included managerial misconduct, financial mismanagement and internal conflicts. On the other hand, strategic incidents were linked to external factors such as economic turmoil, force majeure events, withdrawal of stakeholder support, contagion effects and criminal activities.
The findings revealed that key severity indicators such as unsustainable income streams, failure to meet financial obligations and stakeholder apathy are vital for assessing the extent of distress and formulating effective turnaround strategies. In addition, the study identified driving forces such as creditor protection and directors’ self-interests as key motivators for seeking business rescue interventions. It further emphasised the role of signalling theory in mitigating information asymmetry by detecting distress signals, which can facilitate early recognition and informed decision-making.
Overall, the study underscores the significance of understanding the root causes and severity of distress to develop suitable strategies and enhance turnaround success rates. It also provides a practical framework for BRPs and managers to better identify and address venture distress.
Acknowledgements
This article is partially based on M.K.J.’s thesis entitled ‘Investigating the critical incident technique to inform venture distress decision making’ towards the degree of Doctor of Philosophy in Business Management at the University of Pretoria on 04 March 2023, with supervisor Prof. Marius Pretorius.
Competing interests
The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
Authors’ contributions
M.K.J. was the main researcher. M.P. acted as the supervisor and contributed to conceptualization, research instruments used, and development of this article.
Funding information
This research received no specific grant from any funding agency in the public, commercial or not-for-profit sectors.
Data availability
The data that support the findings of this study are openly available in the University of Pretoria Figshare at https://figshare.com/s/1cf96a29ffe59690ceb0 with reference number 10.25403/UPresearchdata.26312197.
Disclaimer
The views and opinions expressed in this article are those of the authors and are the product of professional research. The article does not necessarily reflect the official policy or position of any affiliated institution, funder, agency or that of the publisher. The authors are responsible for this article’s results, findings and content.
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