How digitalization affects the effectiveness of turnaround actions for firms in decline

Abstract

We investigate how digitalization influences the effectiveness of retrenchment and strategic actions on firms’ turnaround outcomes after a situation of firm decline. To ensure turnaround actions are effective, declining firms must possess relevant knowledge about how to implement such action. We argue that through digitalization, firms can form a close relationship with key stakeholders in their business ecosystem, which can provide important knowledge to guiding their response actions. More specifically, we argue that different types of digitalization linking firms to different groups of stakeholders allows firms to access knowledge about different types of response actions. Based on a sample of publicly listed small and medium-sized enterprises (SMEs) in China from 2012 to 2019, we find that the internal digitalization has a positive moderating effect on the relationship between asset and cost retrenchments and turnaround performance, and that the external digitalization has a positive moderating effect on the relationship between new product introduction and turnaround performance.