Anatomy of Organizational Crises.

Peter Hwang Hong Kong University ofScience and Technology J. David Lichtenthal Baruch College ISBM Report 28-1999

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ANATOMY OF ORGANIZATIONAL CRISES

Peter Hwang Department of Management of Organizations The Hong Kong University of Science & Technology Clear Water Bay Kowloon, Hong Kong (852) 2358-7738 Fax: (852) 2335-5325

J. David Lichtenthal Department of Marketing Zicklin School of Business Baruch College City University of New York 17 Lexington Avenue-Box E0821 New York, NY 10010 212 802-6516 212 802-6483

Direct all correspondence to: J. David Lichtenthal

ANATOMY OF ORGANIZATIONAL CRISES

ABSTRACT

As the business environment gets more complex, the crisesfaced by management are more frequent and potentially more devastating. Previous research on crises looks at specific cases, typologies and definition of crises. This paper argues that crises are better understood through the way they develop. Based on the theory ofpunctuated equilibria in biology, two types ofcrises are proposed: abrupt versus cumulative. An organizingframeworkbased on a punctuated equilibria viewof crisis is presented. In addition, the key concepts and mechanisms of the framework that provide management with a broadened viewfor coping with the ubiquitous nature of crises are discussed.

Organizational Crises

ANATOMY OF ORGANIZATIONAL CRISES

INTRODUCTION

Organizations face an environment that is increasingly tumultuous. The accelerated pace of change in the global economy results in a multiplicity of crisis-producing events. It is fair to expect that as the environment grows more complex, the crises experienced by organizations will become more frequent and cumulative.

Previous research on organizational crisis generally falls into three categories. The first is an ad hoc approach that views crisis from a piecemeal, case-oriented perspective (e.g., Starbuck and Milliken, 1988). Another common approach is to develop typologies of crises by classifying them into distinct categories based on observations of their similarities (e.g., Mitroff, 1988; Shrivastava and Mitroff, 1987). The third examines crisis from the viewpoint ofdefinition, focussing on characteristics that constitute a crisis situation (e.g., Hermann, 1969; Billings, Milburn and Schaalman, 1980). All these approaches contribute to our understanding of organizational crises in specific ways.

While good case studies provide deeper understanding of and greater insight into specific crises, they suffer from the issue of generalizability. Classification studies help establish crisis categories, providing a necessary albeit preliminary step in theory development. While inquiry into what constitutes a crisis situation is important, definition-based research fails to address the reasons and ways crises arise and the resulting implications for management. In this paper, we propose an alternative path of crisis research grounded in the theory of

Organizational Crises punctuated equilibria that addresses the dynamics of the evolution of species (Gould and Bldredge, 1977). The theory of punctuated equilibria holds that evolutionary changes in species typically come about through two distinct courses: 1) external shocks that cause abrupt mutations and 2) slow and evolving changes that accumulate and eventually reach the threshold-limit (Gould and Eldredge, 1977). This theory views crises as states where species are at odds with the ecological environment and changes are needed to restore stability. Analogously, corporate crises can be thought of as situations where the organizations continued existence is threatened due to serious mismatches between operations and the environment and actions are needed to put organizations back on track. The ecological view suggests that organizations are subject to two types of crises examined from a dynamic perspective: abrupt and cumulative. While abrupt crises come with swift forces that suddenly jolt organizations away from equilibria, cumulative crises gather momentum slowly although ultimately breaks out.

We argue in this paper that the adoption of a dynamic view of crises suggested by the theory of punctuated equilibria allows us to explore the root causes of crises with rich managerial implications. In this paper we propose a crisis management framework that highlights key concepts and mechanisms for preparing for and responding to organizational crises. This paper is organized as follows. The first section presents literature review. The punctuated equilibria view of crisis is offered next. This is followed by the discussion of the genesis of organizational crisis and an organizing framework for crisis management.

Organizational Crises LITERATURE REVIEW

Case-Oriented Studies

A survey of 114 Fortune 1,000 companies revealed that large American corporations, on average, face 10 crises a year (Mitroff, Pauchant, and Shrivastava, 1989). Given the number ofpossible strikes, it is not surprising that examining cases of crises is a popular approach to crisis management.

There are both positive and normative studies on disaster containment strategies. Positive studies describe the crisis situations and the typical responses of top management. For example, case studies of more than a dozen multinational corporations reveal that top executives respond to crises with a relatively universal order of behaviour (Lukaszewski, 1987). Managers were found to pass through four distinct phases as they dealt with disaster situations: crisis recognition, crisis definition, planning, and reaction. Shrivastava and Siomkos (1989) found that corporations might take one of four positions as crises occur. Managers may attempt to contain damages aggressively by taking actions such as immediate product recall, technical damage control, and the offer of relief to victims. Or they may initiate actions only to meet regulatory requirements for emergency management, hazard mitigation, and public safety. Alternatively, they may make minimum efforts to redress damages, when forced to do so by regulators and the public. Lastly, some corporations may even deny and abdicate responsibility for a crisis.

Organizational Crises Normative studies offerlessons drawn from experience gained in handling past crises. For example, the fascinating account of the Challenger tragedy suggests that NASAs past successes lulled managers into neglecting their safety procedures (Starbuck and Milliken, 1988). Lessons learned from normative case studies are generally framed in the form of how-to checklists. Steps such as preparing a crisis handling unit, establishing spokesperson(s), setting a news center for the media, and getting quick feedback from the public usually top the list (e.g., Shrivastava and Siomkos, 1989; Katz, 1987).

Tv~olo~v-Based Studies

Typological studies seek to explore the underlying similarity of crises. Based on the premise that each crisis results from organization-environment interactions involving social and technical factors, Shrivastava and Mitroff (1987) classified crises along internal-external and technical-social axes. Since all corporations are not equally susceptible to all these types of crises, evaluative criteria for measuring crisis potential were offered. These criteria are intended to help firms understand their propensity to encounter crises. Mitroff (1988) grouped crises into four families depending upon their technical-social and severe-normal nature according to statistical analyses of the frequency of incidents experienced during a three-year span. A crisis prevention portfolio was similarly constructed. Since a crisis family consists of related crises, preparing for one crisis in each family provides some preparation for each of the others. The concept of a crisis portfolio can aid managers significantly in planning for crisis.

Organizational Crises Other classification schemes of crises exist. For example, Myers and Holusha (1986) suggested nine types of crises, including sudden market shifts, cash drain, and regulation and deregulation of the industry. Lerbinger (1986) developed four classes of crisis: technological crises, confrontational crises, crises of malevolence, and crises of managerial failure.

Definition-Based Studies

This literature portrays crisis definition as a fundamental issue in dealing with the crisis concept. In his pioneering work, Hermann (1969) defined a crisis as a situation with highthreat level and short decision time that surprises the members of the decision-making unit. Proposing a reformulated framework for crisis, Billings et al. (1980) suggested that the extent ofcrisis depends on perceived value of possible loss, perceived probability of loss, and perceived time pressure. The role of a triggering event is also included in this model. Billings et al. made an important contribution to Hermanns definition by explicitly recognizing the critical role that perception plays in handling a crisis.

Building on this work, Milburn et al. (1983) reinforced the idea that the organization has a crisis only if it perceives one. Borrowing from definition-based research, Clark (1988) attempted to develop a tentative definition for crises. It consists of three elements: threat to goals; reduced ability to control or direct the environment; and perceived time pressure. In sum, while good case studies provide deeper understanding of and greater insight into specific crises, they are limited in the extent to which knowledge gained from them cannot generally be widely applied. Typological studies could potentially result in numerous 7

Organizational Crises classification schemes, and additions to the list are not hard to find. Moreover, it is conceptually difficult to address real- world crises that result from interactions of two or more categories (Clark, 1988). Although definition-based studies extract commonalities from all crisis situations, the question of why and how crises come into existence is left unaddressed. In the following section we discuss the alternative view of organizational crisis from an organizational change point of view.

AN ECOLOGICAL VIEW OF ORGANIZATIONAL CRISIS

The theory of punctuated equilibria in biology holds that species go through extended periods of stability interrupted by short, discrete periods of change (Gould and Eldredge, 1977). Gould and Eldredge argued that speciation through spatial isolation would produce new gene pools that differ sharply from parental pools. The new pools punctuate the history of old pools by establishing their own tendencies toward a new equilibrium. The discontinuous fossil records, showing evidence of long periods of little change followed by the sudden appearance of major variations, lends strong support to the theory. The fundamental tenet of this theory is that punctuated changes dominating the evolution of life typically come about through shocks that are spontaneous or that occur at the threshold-limit of slowly evolving changes.

Specifically, the breakdown of equilibrium has two sources: catastrophic events that appear suddenly, and breaks with the past that result from the steady accumulation of stressors. 8

Organizational Crises The punctuated equilibrium model has wide implications across disciplines. Gersick (1991) discussed the largely independent emergence ofpunctuated equilibrium models in biology (Gould, 1989), sociology (Kuhn, 1970), and psychology (Levinson, 1986), and at several levels of analysis in organizational theory, such as groups (Gersick, 1988, 1989) and organizations (Miller and Friesen, 1980, 1984; Tushman and Romanelli, 1985). In the literature of organizational transformation, for example, it emerged as a prominent theoretical explanation for characterizing and investigating fundamental organizational change (Gersick, 1991; Miller and Frisen, 1980, 1984; Tushman and Romanelli, 1985, Romanelli and Tushman, 1994). This literature maintains that organizations evolve through convergent periods punctuated by reorientations that demark and set a new direction for the next convergent period. Empirical findings strongly support the notion that revolutionary transformation is the most common mode of fundamental transformation (Romanelli and Tushman, 1994).

Crises that jolt organizations away from equilibria operate much like the natural phenomena provoking the evolution of species. Consistent with the view of crises as states where species are at odds with the environment and changes are needed to restore stability, a corporate crisis for the purposes of this paper is a mismatch between an organizations operations and its environment that critically threatens the organizations continued existence. Grounded in the theory of punctuated equilibria, two sources of corporate crises can be identified: abrupt crises that strike suddenly and catch management off-guard versus cumulative crises that accumulate stressors and eventually erupt. For example, a crisis may result from an abrupt event necessitating a corresponding response from the organization (e.g., the contamination 9

Organizational Crises ofJohnson & Johnsons Tylenol). Alternatively, a crisis may be the consequence of slow changes with little or no response evoked from the organization (e.g., the challenge offoreign competition that has often been overlooked by many American firms in the past).

Abrupt crises in an organization operate analogously to a driver exposed to the danger of traffic accidents by his condition; accidents can happen in any day and the probability of an accident occurring the next day is independent of the safe driving record in the past. When an organization is exposed to abrupt crises, the probability of occurrence is also independent of the amount of time that the organization has operated without them. In contrast, cumulative crises behave like the straw that breaks the camels back in the old fable; the back breaks suddenly but at the same time everyone can see it coming. Thus, the probability of the strike from cumulative crises in an organization is an increasing function of time. The importance of the role that time plays will become self-evident in the next section where the behaviour of crises is modelled.

MODELLING ABRUPT VERSUS CUMULATIVE CRISES

The conceptual distinctiveness of these two types of crises can be formally modelled through survival analysis frequently employed in engineering to study the fracture probability of materials or components (e.g., Pfeiffer, 1990). The failure of an organization is much like the failure of materials or components that either are worn out gradually or broken abruptly. We first represent the operating lifetime of an organization as a function of a random variable X. 10

Organizational Crises We set a reference time t = 0 at the time the organization starts to operate. The event the organization survives at time t is the event {X> t}. We then define F (the cumulative probability distribution function) for X as the failure distribution function. Note that F (t) for t ~0 since X is nonnegative. We further define the survival function R by R (t)
t) =
= =

P (X>

F(t) and the hazard rate function by h(t)

f(t) / R(t), given f(t) as the probability

density function of X (Ross, 1989; Pfeiffer, 1990). Our conceptualization suggests that abrupt crises follow a constant hazard rate (CHR); the probability of failure of the remaining lifetime is independent ofthe length oftime that the object has already survived. On the other hand, cumulative crises follow an increasing hazard rate (IHR); the probability of failure is an increasing function of time.

We employ exponential distribution to model the behaviour of abrupt crises since it is uniquely characterized by a lack of memory, which implies a constant hazard rate (Evans, Hastings, and Peacock, 1993). For cumulative crises that exhibit an increasing hazard rate, the Weibull distribution is used. The Weibull distribution suits our modelling purpose since
it can be used to express both CHR and IHR with different parameter values and exponential

distribution is a special case of the Weibull distribution (Evans, Hastings, and Peacock, 1993; Ross, 1989; Pfeiffer, 1990). Note that when a
=

1, the Weibull distribution is the exponential

distribution with CHR and when a> 1, the curve exhibits LHR, for all t> 0. The probability density function f(t), the failure function F(t), the survival function R(t), and the hazard rate

11

Organizational Crises function h(t) of the Weibull distribution are expressed below.

fit)

aXt CIle )\t

(1)

F(t) R(t) h(t)

(2)
e~ta

(3
(4)

As an example, the graphic presentations of f(t), F(t), R(t), and h(t) with a abrupt crises and a
=

1 andA = 1 for

3 and A = 1 for cumulative crises are reported in Appendices A, B, C,

and D, respectively. Appendix A depicts the probability density function for both types of crises at the given parameter values. The failure function F(t) in Appendix B shows the cumulative probability of the crisis over time with a and A
= =

I and A = I for abrupt crises and a

I for cumulative crises. The survival function R(t) in Appendix C represents the

opposite of F(t); it is the cumulative probability of survival over time for the given value of c~ and A for abrupt and cumulative crises. Note that the hazard rate of an abrupt crisis in Appendix D is proportional to the value of A, which represents the degree of risk exposure faced by organizations.

As the model shows, the management of risk exposure is at the heart of an abrupt crisis. On the other hand, the misfit between an organization and its environment in cumulative crises is influenced by both A and a. While the hazard rate varies directly with the value of A, how it changes with time is a function of a. Conceptually, A represents the initial size of misfit and a represents the deterioration of that misfit over time. Management must not only be aware
1,

Organizational Crises ofthe initial size of the misfit (A) but also pay special attention to the deterioration factor (a) because it pushes the situation progressively out of alignment with the environment.

THE GENESIS OF CRISIS

Abrupt Crisis

Abrupt crises are prompted by the sudden impact of internal or external perturbations that create a point of conflict between an organization and one of its many stakeholders. Hence, organizations are likely to experience a swift and specific force at a particular point in time with a rapid build-up in speed. Metaphorically, abrupt crises operate like a drunk driver exposed to the danger of traffic accidents. Accidents can happen in any day but the probability of an accident occurring the next day is independent of the probability in the previous day. Thus, the probability of the occurrence of abrupt crises is time-independent. The degree of the likelihood of being struck by an abrupt crisis is directly related to the degree of risk to which an organization is exposed. While it is well documented that certain strategic postures are effective in reducing risks (e.g., Kim, Hwang, and Burgers, 1993; Bettis and Mahajan, 1985), every organization inevitably operates with some degree of risk. Depending on the product-market served and the technology adopted, every organization has its own weak spots regarding potential abrupt crises. As a consequence, unhedged risks inescapably expose the organization to shocks from the environment. A variety of sharp, focussed events such as sudden market shifts, significant and sudden currency depreciation, product failures, and labour strikes, can trigger abrupt crises. 13

Organizational Crises In addition to unhedged risks, abrupt crises can be triggered by excessive risk-taking behaviour in organizations as well. The excessive risk-taking in organizations arises from moral hazard: the difficulty ofmonitoring and enforcing appropriate behaviour gives rise to excessive risk-taking due to the agents self-interest (Pauly, 1968; Ross, 1973). Essentially, moral hazard presents an information problem: the difficulty or cost of monitoring and enforcing appropriate behaviour due to information asymmetry. Major wrong-doings of key personnel that caused the savings and loans crisis in the 1980s, the bond scandal that brought Salomon Brothers into severe difficulties, and the recent bankruptcy of Barings PLC fall into this category. In sum, abrupt crises are prompted by the sudden impact of internal or external perturbations that are generally more specific but less predictable than cumulative ones.

Cumulative Crisis

Cumulative crises sow their seeds in an organization and become self-enforcing over time until a certain threshold-limit is reached. These crises often change the state variables of the system, defy conventions, and challenge viable niches, resulting in multiple points of conflict with the environment. Cumulative crises behave like the proverbial straw that breaks the camels back; the back breaks suddenly but everyone can see it coming. Thus, the probability of the occurrence of a cumulative crisis is time-increasing. A potential source of cumulative crisis comes from organizational stagnation/mental rigidity (Bonoma, 1981). Several arguments have been put forward concerning sources of organizational stagnation/mental rigidity. Crisis denial theory contends that firms may either overemphasize the strength of 14

Organizational Crises their strategy or dismiss the seriousness of changes in the marketplace due to earlier success (Argenti, 1976; Holsti, 1968). As well, perfect adaptation to the environment and successful deployment of resources in the past breed organizational inertia, and hence needed changes may be perceived as temporal and inconsequential (DAveni and MacMillian, 1990).

Alternatively, a cumulative crisis could originate from alignments of a firms internal structures and external environments (Greiner, 1972). For organizations going through structural changes, it is typical for one organizational structure supersedes another at the point where a critical state of incongruence with the environment is reached (Miller and Friesen, 1984; Ginsberg, 1988). Structural rather than componential changes are witnessed because an organizations configurations are composed of mutually supportive elements, piecemeal changes may cause costly disharmonies. Therefore, management may rationally delay adaptations and maintain internal configuration as long as costs of the former outweigh the financial consequences of the latter. Unlike abrupt crises generally provoked by sharp and focussed events, cumulative crises are harder to trace to specific events. They manifest the consequences of the gradual fit deterioration between an organization and its environment. The geneses of organizational crises are presented in Figure 1. Table 1 compares and contrasts organizational crises along key characteristics.

INSERT FIGURE 1 ABOUT HERE INSERT TABLE I ABOUT HERE

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Organizational Crises A FRAMEWORK FOR CRISIS MANAGEMENT

Our discussions on the geneses and characteristics of organizational crises have significant implications to pre- and post-crisis management.

Pre-crisis stage. Given that exposure to risks precedes abrupt crises, organizations need to shield themselves from undue risks to lessen the chance of falling off a cliff at the pre-crisis stage. Because gradual fit deterioration lies at the root ofcumulative crises, pre- emptive actions preventing organizations from sliding down a slippery slope must be taken.

Post-crisis stage. Due to the highly specific nature of abrupt crises, a focussed response specifically targeted at the problem area(s) would produce effective results. For cumulative crises, a holistic reorientation is normally called for as multiple dimensions of the organization tend to be involved.

In all, the following key concepts for crisis management are suggested: risk control and fit deterioration (pre-crisis); focussed response and holistic reorientation (post-crisis), for abrupt and cumulative crises, respectively. These key concepts, in turn, highlight appropriate mechanisms (to be discussed in the following sections) for managing organizational crises. The crisis management framework is depicted in Table 2.

INSERT TABLE 2 ABOUT HERE

Preparation for Abrupt Crises 16

Organizational Crises One appropriate mechanism to abort potential abrupt crises is to develop audit systems for undue risks. Shrivastava and Mitroff (1987) argued that crisis potential could be reduced by identifying likely sources of crises through periodic, regular audits that are linked to the reward systems in the organization. Nelson and Winter (1982) argued that organizations could invest in developing a repertoire ofroutines that would serve as damage-limiting tactics to monitor the organizational process. Kiesler and Sproull (1982) maintained that organizational decision making will be differentially effective in a crisis, depending on the extent to which decision makers are practised in coping with similar crises. Crisis audits are ofparticular importance to organizations where the misalignment of incentives encourages individuals to assume risk with a personal upside but a corporate downside (Pauly, 1968; Ross, 1973). The major misdeeds of key personnel causing the U.S. savings and loan crisis in the 1980s, the bond scandal that brought Salomon Brothers into a severe crisis, and the recent bankruptcy of Barings PLC all fall into this category.

While effective crisis audits protect organizations from undue risks, uncontrollable shocks will inevitably occur even with the best audit programs. Organizations, therefore, need to manage exposed risks through risk management programs aimed at reducing the imbalance of cash flow resulting from abrupt shifts in economic and/or financial variables (Froot, Scharfstein, and Stein, 1994). It is noteworthy that a sound risk management plan consists of more than just an arsenal of risk-management weapons, it needs to be integrated with the overall strategy. This is because any risk management program will necessarily affect cash flow and hence strategic decisions (Froot, Scharfstein, and Stein, 1994). Moreover, organizations not only need to manage contractual exposure that generally can be handled
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Organizational Crises with the traditional financial instruments, they also need to structure a more fundamental structural hedge such as business reconfiguration that influences operating exposure in revenue, cost, and profit (Glaum, 1990; Soenen and Madura, 1991). The crises experienced by Dresser and Caterpillar in the 1980s due to an energy price shock and exchange rate risks, respectively, illustrate the importance of sound risk management programs.

Preparation for Cumulative Crises

One mechanism for preventing a cumulative crisis is to diagnose incipient signals of degeneration and thus provide opportunities for adaptation before the situation becomes serious. Cumulative crises inevitably leave a trail of early warning signals (Pearson and Mitroff, 1993). Organizations are found, however, frequently to ignore signals that proved fatal since organizations are constantly bombarded with information even under the best of circumstances or when the signal-to-noise ratio is high. (Pearson and Mitroff, 1993; Kiesler and Sproull, 1982). The relevant organizational variables that channel available stimuli to managers such as environment-scanning procedures (Lawance and Lorsch, 1969) and structural differentiation (Keegan, 1974) deserve special attention from managers. Additionally, noticing degenerative signals is only preliminary toward problem sensing since interpreting and incorporating stimuli into analyses are just as important (Kiesler and Sproull, 1982). In a study of organizations during demand-decline crises, it was found that those organizations that ultimately failed were frequently the ones unable to uncover the true locus of crisis (DAveni and MacMillan, 1990).

Organizational Crises Another mechanism is to put in place the degeneration safeguards that keep an organization alert and capable of rapidly realign itself with the environment. The corporate strategy literature suggests that organizations tend to be more nimble and able to quickly adjust to fluctuations through building an organic network a long term purposeful arrangement
-

among distinct but related organizations (Jarillo, 1988, Thorelli, 1986). By focussing on essential skills and rationalizing peripheral operations, networks endow organizations with greater flexibility to absorb tremors of impending crises. In a study of organizational responses to discontinuous changes, forexample, Meyer et al. (1990) found that by pooling information and fostering cooperation, local networks were intended by hospitals to mitigate the extreme uncertainties arising from changes in the health care industry. In addition, cushions of slack resources add valuable degrees of flexibility to organizations and hence help organizations to insulate themselves from tremors and to fuel adaptive responses (Meyer, 1982). These firm-specific resources allow organizations move in any of several directions as events unfold and increase managerial discretion to adapt to change (Allaire and Firsirotu, 1985).

ResDonse to AbruDt Crises

Due to the diversity of abrupt crises, only broad experience-based guidelines to deal with them were generated in the past. Although experience-based rules are useful as general guidelines, organizations have much to gain by tackling abrupt crises through a few parsimonious constructs. The concept of ties rooted in social network theory (e.g., Blau, 1964; Chadwick-Jones, 1976) provides such a key construct in managing abrupt crises. Ties 19

Organizational Crises are connections between social nodes to control, expand, and mobilize resources for mutual benefits (e.g., Pfeffer and Salancik, 1978; Granovetter, 1979). Ties, both within and across organizations, are maintained through the content and quantity of contacts (Granovetter, 1979). Since abrupt crises often require new and untested behaviour under time constraints, the ability of organizations to assemble the necessary resources immediately is critical. When the pattern of ties and the need for coordination overlap, greater resources can then be made available (Krackharde and Stern, 1988).

Both inter-organizational and intra-organizational ties have important ramifications for abrupt crises. Khandwalla (1978) discussed the response phase of crisis as one that involves increased collaborative relations and the establishment of integrative mechanisms within organizations. Solutions to major crises described by Starbuck, Greve, and Hedberg (1978) show the need for increased connectedness between units within organizations that previously were unconnected. In an experimental study, Krackhardt and Stem (1988) found strong support for the hypothesis that the relative density of friendship links across units in an organization is the critical determinant of effectiveness in facing a crisis. As well, the longer the chain of connections that an organization can activate, the better the organizations chance to contain a crisis.

The Tylenols case illustrates the effective use of ties within organizations to contain crises. Through concerted efforts across functional activities, Johnson and Johnson was able to successfully reintroduce the brand within two weeks (Ventolo, 1990). That the promotion offered a free bottle via an 800 number, the new package was redesigned, and production 20

Organizational Crises runs were quickly scheduled were all major ingredients in the success. Profound evidence also shows that organizations with more inter-organizational ties are better equipped to exploit a longer chain of resources in times of crisis. During the Three Mile Island nuclear power accident, the local organization first tried to handle the crisis by itself but failed. The crisis was finally contained through quickly invoking ties with the state government and eventually the federal government (Perrow, 1984).

Response to Cumulative Crises

Severe performance problems resulting from cumulative crises are likely to trigger fundamental organizational transformations (Romanelli and Tushman, 1994). Empirical evidence has found support for the proposition that organizational transformations will most frequently occur in short, discontinuous bursts of change involving most or all domains of organizational activities central to an organizations core competencies (Romanelli and Tushman, 1994). Ginsberg (1988) offers a parsimonious, two-dimensional view of strategic change that is at the disposal of top management, viz., change in product/market position and change in organizational perspective. Position change refers to choices of product/market domains through which firms redefine their relationship to the environment such as attaining new technologies, customers, and products (Bourgeois, 1980). Manifestations of position change are generally reflected in organizations moving into or out of major product lines and changes in principal customer targets (Romanelli and Tushman, 1994; Tushman and Romanelli, 1985).

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Organizational Crises Perspective change pertains to reformulating the way that the collective mind shapes and mediates the organizations enduring relationship with its environment. It usually requires the reconfiguration of organizational norms and values that determine how and why firms chooses their business domains, production processes, and administrative systems (Ginsberg, 1988). Studies on organizational evolution postulate that as organizations grow in size and maturity, distinctive phases of organizational development can be identified (Greiner, 1972). Each phase typically comprises a relatively calm period of growth with a dominant management style that ends with a management crisis which must be solved before growth can continue. Perspective changes in organizations frequently are manifested in power distribution changes (e.g., a high turnover ofsenior executives or the shifting in the functional orientation of a firm) and in structural changes (e.g., a functional to a divisional structure, or major changes in centralization or decentralization of management) (Romanelli and Tushman, 1994; Tushman and Romanelli, 1985).

Practically, product/market positioning and organizational factors are often intertwined. Evidence gathered from successful corporate rejuvenations suggests that strategic repositioning in the product/market position combined with a series of holistic changes in the structure, systems, processes need to be undertaken (Stopford and Baden-Fuller, 1990).

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Organizational Crises DISCUSSION AND FUTURE RESEARCH

It is proposed in this paper that organizational crises can be characterized as abrupt vs. cumulative. Broadly, our research falls into the category of typologic studies. Yet, this paper departs from previous studies in a significant way. Rather than examine similarities of crises after their occurrence as in previous studies, this paper seeks to understanding crises through their development pattern over time. In other words, we advocate a dynamic evolutionary approach toward crisis research and managerial preparation/response.

The crisis management framework offered in this paper suggests key concepts and mechanisms in two alternative crisis situations for managers. Armed with these key concepts and mechanisms, managers would be in a better position to prepare for and respond to organizational crises. Our work can be extended for future research in corporate turnaround and change.

Previous literature on turnaround and changes agents does not distinguish abrupt and cumulative crises. Smith and Sipika (1993) point to the need for organizational change over contingency planning and suggest a three phase approach to post crises turnaround (i.e. defensive phase; consolidation phase; offensive phase). Whitney (1987) suggests the cause, cure and prevention of turnarounds (crises) are closely related. Management practices that can cure a troubled a company could have kept it well. Yet, turnaround response likely differs for abrupt vs. cumulative crises. More research that systemically link abrupt and cumulative crises to changes in strategy, structure, staffing,.etc. are needed. For example,

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Organizational Crises major strategy overhaul and business design changes may be needed in the face of cumulative crises. Functional strategic adjustments could more likely be the focus for abrupt crises turnaround. As well, top management may need to rethink through business philosophies and core ideologies upon which companies are founded in facing cumulative crises. Top management may want to pay particular attention to certain elements of value systems that cause abrupt crises.

Equally interesting is the implications that managers could manufacture crises purposely to imbue a sense of urgency in organizations. For example, top management could engineer a one-time sizeable accounting loss to alert the organization in a abrupt sense. Knowing full well beforehand and making public the poor result of customer satisfaction survey could alert organization with the danger of organizational deterioration in a chronic sense (Kotter 1995).

Our research may be extended to the literature of organizational ecology. While research on post-entry performance of firms showed that hazard rates tend to increase during the first years and to decrease afterwards (e.g., Wagner, 1994), it would be of interest to know to what extend the failure was due primarily to abrupt or cumulative crises across the time span of the study. Studies on organizational mortality suggest that mortality rates vary across types of organizations. For instance, Carroll (1983) found that capital-intensive manufacturing organizations generally showed lower failure rates than other types of organizations. Do these organizations also differ from others in the way crises strike? In addition, do the types of crises vary across an organizations size and age? Answers to these questions would 24

Organizational Crises require empirical test of the model and could potentially shed more light on the mortality of organizations. Furthermore, can these two types of crises be characterized beyond modelling through survival analysis? Finally, these studies might also seek to uncover the casual forces shaping both abrupt and cumulative crises. Interesting points for theoretical development could be how changes and change agentry differ between abrupt and cumulative crises. Equally, interesting, is conceptualizations on the kinds of learning that takes place when managing the two types of crises as well as how crises managers use crises to bring about changes.

There is a multitude of constituencies an organization must become cognizant of, if not wedded to, in todays complex environment. These relationships cannot always be smooth and without crises. Indeed, organization effectiveness and maturity can never be achieved painlessly and may periodically require revolutionary steps. It might be argued that management may need to permit, facilitate, or perhaps even precipitate crises as a way of bring about positive organizational change. Doing so might induce or even produce crises that might never otherwise have occurred thereby helping to ward off more severe consequences before it is too late.

A crisis is a turning point, for better or for worse, which creates a significant event or radical change that impacts a companys life. In the best of circumstances, a crisis can be converted into opportunity. We hope in this article that we have provided solid ground for further thought, generate, and encouraging a field of research that will contribute to a greater understanding of organizational crises.

25

Organizational Crises REFERENCES

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30

TABLE 1 COMPARISONS OF ABRUPT AND CUMULATiVE CRISIS: KEY CHARACTERISTICS

~Y CHARACTERISTICS OF CRISIS

TYPES OF CRISES ABRUPT CUMUlATIVE

Build-up speed Predictability Specificity Crisis recognition Trigger point Probability of Occurrence Misalignment with environment

Rapid Low Focused Clear Specific events Time-constant

Gradual High Nebulous Fuzzy Threshold-limit Time-increasing

One/few aspects

Many aspects

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APPENDIX

Probability

Density Function of Acute Versus Chronic Crisis

Chronic Crisis

Probability

0.

Acute
0.

Crisis

APPENDIX

Failure Function of Acute Versus Chronic Crisis

Chronic Crisis

Acute

Crisis

Probability
0.

0~

APPENDIX

Survival Function of Acute Versus Chronic Crisis

0..

probability

Chronic Crisis

Acute Crisis

APPENDIX

Hazard Rate Function of Acute Versus Chronic Crisis

Chronic Crisis
1.

Hazard Acute Crisis