The Four Stages Of A Crisis Management Essay

There is little doubt that the notion of crisis has become an important factor within management. When looking at the last decade the list of corporate and economical crises is virtually unending. One of the most shocking disasters was General Motors (GM) crisis and the leading corporate failure. Only a few organisations become so successful that they represent the country and GM was one of them. During the post war boom GM did not only characterise the American way of life but it helped to shape it for many years. Some academics even go that far that they claim the story of GM’s rise was the story of America’s ascendency. GM served for decades as a role model for other organisations. But after decades of success GM reached the point of bankruptcy. Behavioral rules and routines that developed throughout the years acted as a source of rigidity within GM. Therefore, the discussion of path dependency can be applied perfectly to GM’s case.

The outline of this essay is as followed. The first part will outline the theory of corporate failure, different phases of a crisis and path dependency. This is followed by a brief discussion how two different set of rules within the automobile industry evolved. It then analyses the case of GM showing how inefficient path dependency lead to a lock-in. Finally, recommendations will be made on how to unlock and avoid path dependency and a conclusion will summarise the main findings.

Main

There is a huge amount of management literature in place that concentrates on success stories of organisations but crises and failures are still many times ignored. Very often the term “corporate failure” is understood as the disappearance of an organisation. However, Kharbanda and Stallworthy (1985) argue that failure can take place in two ways. Firstly, where the organisation cannot operate successfully in its marketplace and secondly when an organisation is liquidated [1] or goes bankrupt [2] . General Motors (GM) failure first started of with not being able to operate successfully and reached the point of bankruptcy (BBC, 2009). As the Swedish industrialist Marcus Wallenburg (1974 in Pratten, 1991:2) suggested “Every company – however secure it may seem at a particular moment – will be confronted sooner or later by life or death problems…”.. The failure of an organisation be it a small or large has not only an affect on its stakeholders [3] but also on the industry and the overall economy of the country the organisation operates.

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But how does an organisation get to the point of a corporate failure and how did GM reach the point of bankruptcy. The starting point is in most cases is a crisis. The business dictionary (2011a) defines a crisis as a “critical event or point of decision which, if not handled in an appropriate and timely manner (or if not handled at all), may turn into a disaster or catastrophe.”. In regards to organisations usually the “disaster or catastrophe” takes place in the form of corporate failure. According to Darling (1994) managers need to be flexible and respond differently to each crisis as every crisis is unique and might no repeat again. Most of the crises do not occur all of a sudden. In most cases there are signals for a crisis that can picked up by management (Kash and Darling, 1998). Darling et al., (1996 in Kash and Darling, 1998) claims that the main challenge is not identifying the crisis but recognizing it in a timely manner.

A crisis compromises of four different stages Figure 1. (Fink, 1986). The prodromal crisis stage is the warning stage where signals are given. According to Kash and Darling (1998) no matter how successful organisations are the “warning lights” are always blinking as it was the case with GM. One night when a GM executive returned home he was shocked to see a strange car parked in his driveway. Soon he found out it was a used Toyota that his son bought at college. A quarter century later when GM was on its way to bankruptcy and the executive recalled the incident and said “Maybe instead of getting mad about the Toyota. I should have asked him what he liked about the car. The answer would have been – fuel economy for starters.” (Ingrasia, 2010:9). Kash and Darling (1998:181) argue that organisations might have difficulties identifying the prodromal stage as it is “oblique and hard to detect.” Nevertheless, the first stage of a crisis is very significant as Kash and Darling (1998) state that at that point managing the crisis is a lot easier.

The second phase of a crisis is the acute stage. The acute stage arises as seen on Figure when the prodromal stage is not recognised or is ignored. Kash and Darling (1998) argue that only organisations who are prepared can overcome the acute crisis and carry on business as usual. Furthermore, at this stage the action that is taken by the management can only control the damage but the organisations has suffered a loss already. The case of the GM’s Corvair demonstrates perfectly a crisis in the acute stage.  According to Schwartz (1990:1) the Corvair was “powered by a rear engine and had an independent, swing-axle suspension system”. GM’s engineering staff knew that any car that was powered in this way would have serious problems in the future. Additionally, Schwartz (1990) argues that long before the Corvair was offered for sale the problems were known and documented by GM. Goffman (1959 in Schwartz, 1990:1) states that Management told dissenters to “stop these objections. Get on the team, or you can find someplace else to work.” After all the signals the Corvair was still launched and by the time GM tried to control the crisis several people lost their lives resulting in millions spent in legal expenses and a bad reputation (Schwartz, 1990).

The final stage of a crisis is the chronic crisis stage. The signals are very remarkable during this stage. Kash and Darling (1998:182) claim that it is a period of “make or break”. As it is the final stage the organisations may be forced to once and for all do to something. For many organisations it is the last chance to recover and for others it is the death penalty. Unfortunately, it was the latter for GM. When the management shake out occurred at GM they were nearly bankrupt. The CEO Rick Wagoner [4] tried everything but the “company was headed of a cliff” (Jackson, 2010:211). The problem that occurs at this stage for organisations is that the prodromal and acute problems keep the organisation very occupied that no time is left to pay attention to the chronic problems. Finally, many organisations as well as GM try to fix arising problems with a quick ¬x approach. After GM’s market share declined to 24.4 per cent GM reduced its prices for its Sport Utility Vehicles [5] but the quick fix approach was not enough to rescue GM (Jackson, 2010). Kash and Darling (1998) compare the process to a human patient and they argue that organisations may get used to the band aid approach and loose the track to find a long term solution for the problems leading to a short term resolution.

When looked at GM’s crisis stages one can observe that they had enough information to overcome the crises even at the prodromal stage. However, they decided not to take action and ignore the fact that there were problems and that the environment was changing. Change has been on many organisations agenda for decades. According to Sydow et al (2005:3) “the issue of continuously changing organizations has come to the fore, and social systems have been characterized as fluid”. In contrast to permanently changing organisations various studies have been done on structural inertia [6] (Hannan and Freeman, 1984). Therefore, the growing interest in organisational path dependency is getting bigger and bigger.

Heffernan (2003:60) defines path dependency as a “process in which the consequences of small events and change circumstances, once they occur, can determine which particular path is followed”. Behavioural rules and routines that are developed and adopted within an organisation can cause rigidity within the organisation. The origin of path dependency is linked to studies of Paul David (1985) who studied the development of QWERTY keyboard technology. He proves in his study how a disorganised and inefficient technological standard was established and is still maintained nowadays.

Sydow et al (2005) claims that path dependences shows how organisations are left with very little action alternative and therefore end up in a lock-in situation. Path dependency within organisations can occur as a result of technological considerations but also due to a set of rules adopted as it was the case at GM (Heffernan, 2003). Sydow et al (2005) argues that path dependency can be divided into three phases (Figure). In the first phase the range of variety is quite high. Once the organisation has made its first decision, the so called “critical juncture”, the path dependency starts. The second phase indicates that the decider is getting back benefits for having chosen that action in the first phase therefore making it more attractive. At the same time the scope of variety is getting smaller. In other words Sydow et al (2005:9) states that “a path emerges and renders the whole process more and more irreversible”. Finally the result is a lock in situation where the organisation is locked in within a path and cannot adjust to the changing environment.

An empirical look at GM will reveal how path dependency was developed throughout the years . Figure (phases of path dependency) shows GM’s case applied to the three stages. According to Heffernan (2003) in the 1900s the demand for low quality and cheap cars was high in the United States. When Henry Ford came up with the idea of mass production the car industry changed drastically. The biggest change was seen on the type of labour that was required. The highly skilled labour was replaced “by a workforce that had routine, repetitive jobs.” (Heffernan, 2003:50)

With this process a new set of organisational rules came into effect such as a new wage structure and an employee relations department. General Motors adopted Henry Ford’s restructuring and applied it to its production process. Another turning point was the creation of the United Auto Workers Union (UAW) in 1936 which resulted not only in an industry wide union but also all large car manufacturers were sharing the same rules governing their organisations which meant they were all standardized (Heffernan, 2003).

Additionally, a seniority-based system was “the main criterion for determining layoffs and recall in the industry”. (Heffernan, 2003:51). The result of this was that managerial freedom and decision making was significantly restricted but it also meant that “merit and ability became increasingly unimportant in layoff and promotion decisions” (Piore and Sabel, 1984 in Heffernan, 2003:51). General Motors had an increasing list of work rules which contained every individual task stating who was required to do what (Womack et al, 1990). This systems worked really well and was stable until the external environment created pressures for change for GM. These set of rules that were put in place and remained there for over 30 years until it was challenged by a second set of rules coming from the Japanese car manufacturers (Heffernan, 2003).

The Japanese rules differed widely from the US ones (Figure?+?). The reason behind this lied in the fact that the Japanese market was very different to the US one. The Japanese market required cheap cars and product diversity (Cusumano, 1998). Furthermore, the unionisation took place differently in Japan. As mentioned above in the US the unions were organised by industry however in Japan the unions were organised by the organisation itself. Union negotiations created a compensations system called job grade system. This system was put in place to get the workers more in engaged in the production process to increase their problem solving skills and come up with new ideas. It is very clear that the Japanese rules were very different to the US ones. The Japanese ones emphasized more on flexibility to adjust to changes and the workers creativity.

Heffernan (2003) argues that the American car manufacturing industry had the opportunity to adapt these changes into their production process as the Japanese did not make a secret out of it and made their rules widely available to everyone. In fact Dr. W. Edwards Deming [7] shared his thoughts and ideas about the future of the automobile industry and the expected changes first with the American car manufacturing industry but they were not accessible as the Japanese were. In the 1970’s the significance of lean production became more and more apparent as the market was shifting towards Japanese cars (Taylor, 2010). The decline in the US cars triggered very different responses within the industry. For instance, Chrysler received a government bailout whereas Ford reorganised its whole production process resulting in a drastic change in its organisational rules. Nevertheless, GM followed its path and no changes were made to its production process.

According to Heffernan (2003:55) GM had the “biggest ¬nancial cushion” and therefore could have easily changed its productions process to adjust to the market. This would have helped GM to overcome the lock-in. What GM did was to rely on its financial cushion instead of going the uncertain path of changing its production process. The result was a drastic loss of market share and the leading negative profits and finally a bankruptcy (Find Table). Finally, when the US government got involved GM was forced to adopt an Epsodic and Radical Change (Figure Book page 37) where change took place quickly and drastically in response to the bankruptcy. Plowman et al (2007 in Senior and Swailes, 2010) argue that in this kind of change the template needs to be altered and GM was forced to give a big stake of its shares to the government therefore enabling the government to get involved in the decision making.

GM’s structure that was copied from Henry Ford remained the same until it reached bankruptcy. GM’s management was very resistance to change. Many years of being the market leader and previously made decisions locked GM in and made path dependent. Even though there were clear indications that GM’s production process was no longer efficient no or only little changes were made. Furthermore, according to Burgelman (2002) if organisation are faced with a highly competitive environment they focus more on more on its product offering to be the best in the market and to beat its competitors. As it was the case with GM. GM was the market leader and focused on its product offering of big cars and trucks. However, GM ignored the ever increasing petrol prices and the changing consumer trends.

Recommendations

Sydow et al (2005:22) argues “that organizational paths result from human activities, where alternative ways of actions were always at hand”. Therefore, there is always a way to unlock from a path dependency. Burgelman and Grove 1996 suggest to use consultants that are external to the company. Someone external to the organisation can not only identify the patterns but it can overcome inertial self-perceptions and show the organisation new future perspectives. Burgelman and Grove (1996: 15) claim that “emotional attachment on the part of the top management to the business” can play a big role to path dependency. Thus, an external consultant will not have that emotional attachement to the organisation meaning the ideas and suggestion will be neutral without any bonds.

Furthermore, Heffernan (2003:58) suggest that “entrepreneurship can provide an impetus for change that prevents long term lock-in from occurring”. This process of internal entrepreneurship is also known as intrapreneurship [8] . Many organisations are following the trend of intrapreneurship as the assumption that senior management knows everything best is no longer valid (Thomas, 1999). Thomas (1999) believes that top level management is too far away from customers resulting less sensitivity to change requirements. Jansen and Wees (1994) recommend that organisations should support people in letting them speak up when things go wrong or just to generate new ideas.

A good example for unlocking path dependency with intrapreneurship is the Ford case. Ford was the only organisation out of the big three [9] that managed to unlock its path dependence successfully. Ford may have responded to the market conditions with a time lag but despite high switching costs and institutional impediments to change Ford created a whole new set of rules which were radical changes but rescued the company. The biggest change that took place at Ford was that it engaged in intrapreneurship. Ideas that were not considered in the past were noticed and were incorporated into the business again (Heffernan, 2003). Employee involvement groups were created so the workers were part of the decision making process. The changes that took place were very similar to the Japanese set of rules but nevertheless they were very unique to Ford’s organisational culture. Nasser and Wetlaufer (1999 in Senior and Swailes, 2010:148) says “the Ford you see today has no resemblance to the Ford of five years ago…our DNA has changed”. In the year 2011 out of the Detroit Three Ford is in the best shape (Schepp, 2011)

Conclusion

The American automobile industry provides a real world example on how ignoring crisis signals and the resistence to change caused inefficient path dependency. This proves how critical crisis recognition for the organisations future is. Various crisis signals took place at GM but it consciously ignored the fact that every organisations needs to change one day to stay competitive in the long term. The world is changing at a rapid pace and there is always a point in the history of any organisation where change is required to get to the next level and if you miss that moment as GM a decline stage starts.

In regards to the essay quote that “Uncertainty has become the norm in modern day organisation’s and Managers are the blind navigators” does not apply to GM. The information and a new set of rules were widely available to GM. Therefore, GM’s management were not blind navigators. Additionally, as GM’s case suggests the postponement of unlocking the path dependency is not always due to high switching costs. In most traditional organisations the forces that are around an organisation encourage chief executives to believe in their own infallibility. Rather than advising to stop and change non-executive directors, auditor and investment analysts support chief executives in their decisions. Therefore, academics as well as the Ford case suggested that intrapreneurship can counterbalance the effects of rigid rule following behaviour. Individual perceptions’ can prevent the lock in of organisations. Finally, as Andy Grove from Intel once said “A corporation is a living organism; it has to continue to shed its skin. Methods have to change. Focus has to change. Values have to change. The sum total of those changes is transformation.”

Sydow et al (2005)