Would Bear Stearns have been bailed out without the imminence of a major liquidity crisis? Had Ford and GM fully accepted and internalized the clear pending crisis in their U.S. markets several years ago, would they now be viable companies? Many companies are in a latent or even imminent crisis. They face a serious threat to their fundamental business norms and operating future. Typically the crisis and its ramifications are not widely recognized or acknowledged unless it is both sanctioned and broadly communicated via, for example, a bankruptcy proceeding.
Crisis can be divided into hard and soft turnaround situations. A hard turnaround exists when it’s clear to most directors, owners, executives and employees that the end is in sight. A soft turnaround exists when there is disagreement about whether the end is coming, or when a longer period of time will pass before the cataclysm. In soft turnarounds, individuals who study the situation carefully know major change is required.
In either case, continuing the prior management methods and decision trends will lead to extinction. Often organizations take halfway measures to fix their systemic problems. Without true change, they merely postpone the inevitable.
The Chinese symbol for crisis is made of two parts: one connoting danger, the other opportunity. We typically think of crises as negative—everyone with their hair on fire. However, a start-up with all the founders working 16/7 in a success-oriented frenzy is one type of crisis. Maybe their hair is on fire but it was self-ignited. They have a common goal and a high performance culture. That’s not negative; it’s positive.
When employees circle the wagons to protect their enterprise, their employer, and their work lifestyle to prevent bankruptcy or beyond, we have another type of crisis. Employees rationally fearing for their jobs can either be highly positive or highly negative depending on how they got there, what they think they can do about it, and whether they believe they can return to their former state or create a more efficient and prosperous operation.
Crises are discontinuities with real opportunities for leadership. They typically allow you to implement sweeping reforms that would be exceedingly difficult during normal times. Use them. Make bold decisions and take meaningful actions. The crisis may be a once-in-a-lifetime opportunity to push the company a major step forward.
Your particular ratio of danger to opportunity will determine the need and opportunity to inflict serious change. A company already in bankruptcy or with poor and seriously deteriorating financial performance may have 80% danger to 20% opportunity. In that case, it’s not difficult to create a crisis environment.
A company that is performing reasonably well but needs to shed some lethargy, or one that is about to hit some semi-invisible but real cliffs, may be at 20% danger to 80% opportunity. In this case, making bold decisions and taking meaningful actions are not typically deemed appropriate. I differ on this point. Enlisting the organization in some degree of change is necessary periodically; not doing so will begin a decline.
Most organizations fall between the 80/20 and 20/80 ratios. In all cases, your organization must recognize the crisis, agree that significant change must occur, and its members must “wake up” and participate in the change. To maintain or generate the necessary credibility, consider the mix and what your organization believes is the mix, then customize your approach accordingly.
The same techniques will help a company fully turn the corner in both hard and soft turnarounds. Whether your situation has a seemingly acceptable low-danger ratio or whether you’re trying to avert immanent collapse, remember: You need a crisis to create constructive change!
First of all, thank you, Tom, for the thoughtful blog that you have put together. The structure of the "Categories" and weekly posts is both helpful and enticing.
I'd like to push back on this post a little bit to make sure I understand and hopefully add to the discussion.
I agree with you on the importance of conflict, crisis, radical change etc. My general question is about how an organization must balance being reactive and proactive when confronting crisis. Specifically, if the culture is becoming one of crisis management, how do you share focus between solving the current crises to preventing the next one?
Quite arguably, the Sarbanes-Oxley response to the Enron, et. al. crises, has created a crisis in its own right. Obviously, businesses should not model themselves after government, but I believe it can be typical for poorly-run organizations to "solve crises" by increasing reporting/paper/clutter (much like the engineering cost summaries that plagued Paradyne). Obviously, it is the wise leader who sees that such responses exacerbate the crisis. But when that is the mentality in an organization, how can one executive turnaround a culture of complacency - a culture that inhibits creative problem solving? How does that executive light a fire in his or her managers to ensure that they spot, diagnose and attack the next crisis themselves without waiting for direction from the top?
I'm sure you have examples! :-)
Posted by: Robin Nourmand | March 08, 2007 at 06:23 PM
The information contained in this posting is especially relevant, not merely to professional corporations but to our private life and to society as a whole. Today it seems that in the modern world crises of one form or another surround us almost always. In fact, given the capabilities of modern technology and the news media, crisis situations that exist on the other side of the globe are brought into our very living room, as they unfold.
Modern technology in business has meant, in part, that information of all types is available on a 24/7 basis. One positive aspect of this increased availability is that firms and managers are subject to a much greater level of scrutiny than perhaps ever before in the past. As a result, one potential outcome may be that “crises” of one form or another may become more commonplace. This may be expected in part because the media, along with the investor public, ensures that information that is reported as if it represented an actual crisis will more readily gain widespread public attention. Therefore, there exists an incentive for crises to be “manufactured”. A second reason, perhaps more salient, that crises in modern business may be increasingly commonplace, relative to the past, is that the increasing demand for more and better information subjects managers to increasing scrutiny, making it less likely that managerial misdeeds or blunders will be successfully covered up.
The Enron debacle and the subsequent fall of the global giant, in which nearly $100 billion in equity value was wiped out almost overnight, was in part made possible, or at least facilitated, by this newfound rapid access to information. Near immediate access to firm-specific negative information caused what amounted to a bank run, leading to a loss of trust in Enron’s business model. The firm then rapidly lost customers, and financial revenues fell accordingly.
The Enron crisis underscores the fact that crises in the modern business firm no longer represent exclusively private, individual failures that impact the elite, but are more and more commonly seen as potential sources of social catastrophe, as they destroy jobs, ruin careers, and harm entire industries. Therefore, business concerns are increasingly interpreted as social concerns, which means that political remedies are more commonly applied in solution. Sarbanes Oxley is a very recent and prominent example of this phenomenon, in which the threat of market instability was confronted by legislators, eager to avoid further business crises.
Therefore, it is very difficult for me to envision business problems exclusively at the micro level (e.g. within the individual firm). The increasing reality today is that the once real separation between the “private” and “public” sector, connoting what was once a very real division between government bureaucrats and capitalist tycoons, is increasingly becoming blended such that each now shares an increasingly prominent role in what once previously was exclusively the others domain.
Therefore, crises are very real, both in corporations but increasingly so in society. All of civilized society has a vested interest in ensuring that the important and necessary processes listed in this section are applied in seeking the solutions to those dilemmas. Crises in modern business are not only more common, they are less and less viewed as the exclusive domain of the “private” sector or Adam Smith’s invisible hand. Instead, the social welfare of society as a whole demands that effective solutions be devised which confront the challenges provided by the business sector head on, realistically, and effectively.
The only way this may be accomplished is by attacking each crisis at its sources utilizing the methodology that is laid out clearly in this section. This information is directly useful, realistic, and capable of being applied to nearly every type of crisis- at multiple levels.
Posted by: Nicholas Vakkur | February 11, 2007 at 12:01 AM