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Journal of Management
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The Effects of Cost and Asset Retrenchment on Firm Performance: The Overlooked Role of a Firm’s Competitive Environment

J. L. Morrow, Jr.

Division of Business and Graduate Programs, Birmingham-Southern College, 900 Arkadelphia Road, Box 549052, Birmingham, AL 35254, USAbmorrow{at}bsc.edu

Richard A. Johnson

Price College of Business, University of Oklahoma, Norman, OK 73019-4006, USArajohnson{at}ou.edu

Lowell W. Busenitz

Price College of Business, University of Oklahoma, Norman, OK 73019-4006, USA

When firms face declining financial performance, research suggests that cost and asset retrenchment can lead to improved performance among poorly performing firms. However, previous studies have largely focused on firms operating in mature industries. This research develops and tests arguments that cost and/or asset retrenchment strategies will have different effects on firm performance in competitive environments characterized as growing and declining. In growth industries, asset retrenchment was positively related to performance improvement while cost retrenchment was unrelated. In declining industries, cost retrenchment was positively related to improved performance while asset retrenchment had a negative effect on firm performance. Implications of these findings for turnaround strategies are discussed.

Journal of Management, Vol. 30, No. 2, 189-208 (2004)
DOI: 10.1016/j.jm.2003.01.002
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