“anatomy of organizational crises.”

8/3/2019 Anatomy of Organizational Crises.

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Anatomy ofOrganizational Crises.

Peter HwangHong Kong University ofScience and Technology

J. David LichtenthalBaruch College

ISBM Report 28-1999

Institute for the Study ofBusiness Markets

The Pennsylvania State University402 Business Administration Building

University Park, PA 16802-3004

(814) 863-2782 or (814) 863-0413 Fax


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U.Ed. BU S 00 - 0 3 7


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ANATOMY OF ORGANIZATIONAL CRISES

Peter HwangDepartment ofManagement ofOrganizations

The Hong Kong University ofScience & Technology

Clear Water Bay

Kowloon, Hong Kong

(852) 2358-7738

Fax: (852) 2335-5325

J. David Lichtenthal

Department ofMarketing

Zicklin School ofBusinessBaruch College

City University ofNew York

17 Lexington Avenue-Box E0821

New York, NY 10010212 802-6516

212 802-6483

Direct all correspondence to: J. David Lichtenthal


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ABSTRACT

As the business environment gets more complex, the crisesfacedby management are morefrequent

andpotentially more devastating. Previous research on crises looks at specific cases, typologiesand definition ofcrises. Thispaperargues thatcrises are betterunderstood through the way they

develop. Basedon the theory ofpunctuatedequilibria in biology, two types ofcrises are proposed:abruptversus cumulative. An organizingframeworkbasedon a punctuatedequilibria viewofcrisis

is presented. In addition, the key concepts and mechanisms of the framework that provide

managementwith a broadenedviewfor coping with the ubiquitous nature ofcrises are discussed.


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Organizational Crises


INTRODUCTION

Organizations face an environment that is increasingly tumultuous. The accelerated pace of

change in the global economy results in a multiplicity ofcrisis-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-orientedperspective (e.g., Starbuck

an d Milliken, 1988). Another common approach is to develop typologies ofcrises by

classifying them into distinct categories based on observations oftheir 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 oforganizational crises in specific ways.

While good case studies provide deeper understanding ofand greater insight into specific

crises, they suffer from the issue ofgeneralizability. 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 ofcrisis research grounded in the theory of


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punctuated equilibria that addresses the dynamics ofthe evolution ofspecies (Gould and

Bldredge, 1977). The theory ofpunctuated equilibria holds that evolutionarychanges 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 ofas 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 ofcrises 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 ofa dynamic view ofcrises suggested by the theory

ofpunctuated equilibria allows us to explore the root causes ofcrises 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 ofcrisis is offered next. This is followed by the discussion ofthe genesis of

organizational crisis and an organizing framework for crisis management.

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LITERATURE REVIEW

Case-Oriented Studies

A survey of114 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 ofcrises 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 oftop management. For

example, case studies ofmore than a dozen multinational corporations reveal that top

executives respond to crises with a relatively universal order ofbehaviour (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 offour 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 ofrelief 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.

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Normative studies offerlessons drawn from experience gained in handling past crises. For

example, the fascinating account ofthe Challenger tragedy suggests that NASAs past

successes lulled managers into neglecting their safety procedures (Starbuckand 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 ofcrises. 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 ofthe frequency ofincidents experienced during a three-year

span. A crisis prevention portfolio was similarly constructed. Since a crisis family consists

ofrelated crises, preparing for one crisis in each family provides some preparation for each of

the others. The concept ofa crisis portfolio can aid managers significantly in planning for

crisis.

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Other classification schemes ofcrises exist. For example, Myers and Holusha (1986)

suggested nine types ofcrises, including sudden market shifts, cash drain, and regulation and

deregulation ofthe industry. Lerbinger (1986) developed four classes ofcrisis: technological

crises, confrontational crises, crises ofmalevolence, and crises ofmanagerial failure.

Definition-BasedStudies

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 high-

threat level and short decision time that surprises the members ofthe decision-making unit.

Proposing a reformulated frameworkfor crisis, Billings et al. (1980) suggested that the extent

ofcrisis depends on perceived value ofpossible loss, perceived probability ofloss, and

perceived time pressure. The role ofa 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 organizationhas a

crisis only if it perceives one. Borrowing from definition-based research, Clark (1988)

attempted to develop a tentative definition for crises. It consists ofthree elements: threat to

goals; reduced ability to control ordirect the environment; and perceived time pressure.

In sum, while good case studies provide deeper understanding ofand 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

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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 oftwo or more

categories (Clark, 1988). Although definition-based studies extract commonalities from all

crisis situations, the question ofwhy and how crises come into existence is left unaddressed.

In the following section we discuss the alternative view oforganizational crisis from an

organizational change point ofview.

AN ECOLOGICAL VIEW OF ORGANIZATIONAL CRISIS

The theory ofpunctuated equilibria in biology holds that species go through extended periods

ofstability interrupted by short, discrete periods ofchange (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 ofold

pools by establishing their own tendencies toward a newequilibrium. The discontinuous

fossil records, showing evidence oflong periods oflittle change followed by the sudden

appearance ofmajor variations, lends strong support to the theory. The fundamental tenet of

this theory is that punctuated changes dominating the evolution oflife typically come about

through shocks that are spontaneous or that occur at the threshold-limit ofslowly evolving

changes.

Specifically, the breakdown ofequilibrium has two sources: catastrophic events that appear

suddenly, and breaks with the past that result from the steady accumulation ofstressors.

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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 ofanalysis in organizational theory, such as groups (Gersick, 1988, 1989) and

organizations (Miller and Friesen, 1980, 1984; Tushman and Romanelli, 1985). In the

literature oforganizational 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 offundamental transformation (Romanelli and

Tushman, 1994).

Crises thatjolt organizations away from equilibriaoperate much like the natural phenomena

provoking the evolution ofspecies. Consistent with the view ofcrises as states where species

are at odds with the environment and changes are needed to restore stability, a corporate crisis

for the purposes ofthis paper is a mismatch between an organizations operations and its

environment that critically threatens the organizations continued existence. Grounded in the

theory ofpunctuated equilibria, two sources ofcorporate 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

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ofJohnson & Johnsons Tylenol). Alternatively, a crisis may be the consequence ofslow

changes with little orno 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 ofan

accident occurring the next day is independent ofthe safe driving record in the past. When an

organization is exposed to abrupt crises, the probability ofoccurrence is also independent of

the amount oftime 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 ofthe strike

from cumulative crises in an organization is an increasing function oftime. The importance

ofthe role that time plays will become self-evident in the next section where the behaviourof

crises is modelled.

MODELLING ABRUPT VERSUS CUMULATIVE CRISES

The conceptual distinctiveness ofthese two types ofcrises can be formally modelled through

survival analysis frequently employed in engineering to study the fracture probability of

materials orcomponents (e.g., Pfeiffer, 1990). The failure ofan organization is much like the

failure ofmaterials orcomponents that either are worn out gradually or broken abruptly. We

first represent the operating lifetime ofan organization as a function ofa random variable X.

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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) = 0

for t~0 since X is nonnegative. We further define the survival function R by R (t) = P (X>

t) = 1 - F(t) and the hazard rate function by h(t) = f(t) /R(t), given f(t) as the probability

density function ofX (Ross, 1989; Pfeiffer, 1990). Our conceptualization suggests that

abrupt crises follow a constant hazard rate (CHR); the probability offailure ofthe 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 oftime.

We employ exponential distribution to model the behaviourofabrupt crises since it is

uniquely characterized by a lackofmemory, 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 ofthe 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

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function h(t) ofthe Weibull distribution are expressed below.

fit) = aXt CIle )\t (1)

F(t) = (2)

R(t) e~ta (3

h(t) = (4)

As an example, the graphic presentations off(t), F(t), R(t), and h(t) with a =1

andA =1

for

abrupt crises and a = 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 ofthe crisis over time with a = I and A = I for abrupt crises and a = 3

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

opposite ofF(t); it is the cumulative probability ofsurvival over time for the given value ofc ~

and A for abrupt and cumulative crises. Note that the hazard rate ofan abrupt crisis in

Appendix D is proportional to the value ofA , which represents the degree ofrisk exposure

faced by organizations.

As the model shows, the management ofrisk exposure is at the heart ofan 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 ofA , how it

changes with time is a function ofa. Conceptually, A represents the initial size ofmisfit and

a represents the deterioration ofthat misfit over time. Management must not only be aware

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ofthe initial size ofthe misfit (A ) but also pay special attention to the deterioration factor (a)

because it pushes the situation progressively out ofalignment with the environment.

THE GENESIS OF CRISIS

Abrupt Crisis

Abrupt crises are prompted by the sudden impact ofinternal orexternal perturbations that

create a point ofconflict between an organization and one ofits 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 drunkdriver

exposed to the danger oftraffic accidents. Accidents can happen in any day but the

probability ofan accident occurring the next day is independent ofthe probability in the

previous day. Thus, the probability ofthe occurrence ofabrupt crises is time-independent.

The degree ofthe likelihood ofbeing struck by an abrupt crisis is directly related to the

degree ofriskto 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 ofrisk.

Depending on the product-market served and the technology adopted, every organizationhas

its own weak spots regarding potential abrupt crises. As a consequence, unhedged risks

inescapably expose the organization to shocks from the environment. A variety ofsharp,

focussed events such as sudden market shifts, significant and sudden currency depreciation,

product failures, and labour strikes, can trigger abrupt crises.

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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 orcost ofmonitoring and

enforcing appropriate behaviour due to information asymmetry. Major wrong-doings ofkey

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 ofBarings PLC fall into

this category. In sum, abrupt crises are prompted by the sudden impact ofinternal 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 ofthe

system, defy conventions, and challenge viable niches, resulting in multiple points ofconflict

with the environment. Cumulative crises behave like the proverbial straw that breaks the

camels back; the backbreaks suddenly but everyone can see it coming. Thus, the probability

ofthe occurrence ofa cumulative crisis is time-increasing. A potential source ofcumulative

crisis comes from organizational stagnation/mental rigidity (Bonoma, 1981). Several

arguments have been put forwardconcerning sources oforganizational stagnation/mental

rigidity. Crisis denial theory contends that firms may either overemphasize the strength of

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their strategy or dismiss the seriousness ofchanges in the marketplace due to earlier success

(Argenti, 1976; Holsti, 1968). As well, perfect adaptation to the environment and successful

deployment ofresources 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 ofa 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 ofincongruence with the environment is reached (Miller and Friesen,

1984; Ginsberg, 1988). Structural rather than componential changes are witnessed because

an organizations configurations are composed ofmutually supportive elements, piecemeal

changes may cause costly disharmonies. Therefore, management may rationally delay

adaptations and maintain internal configuration as long as costs ofthe former outweigh the

financial consequences ofthe latter. Unlike abrupt crises generally provoked by sharp and

focussed events, cumulative crises are harder to trace to specific events. They manifest the

consequences ofthe gradual fit deterioration between an organization and its environment.

The geneses oforganizational 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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A FRAMEWORK FOR CRISIS MANAGEMENT

Our discussions on the geneses and characteristics oforganizational 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 offalling offa 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 ofabrupt 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 ofthe

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

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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 ofcrises 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 ofincentives encourages

individuals to assume risk with a personal upside but a corporate downside (Pauly, 1968;

Ross, 1973). The major misdeeds ofkey 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 ofBarings 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 thanjust an arsenal ofrisk-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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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 shockand exchange rate risks,

respectively, illustrate the importance ofsound riskmanagement 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 ofearly 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 arejust as important (Kiesler and Sproull,

1982). In a study oforganizations during demand-decline crises, it was found that those

organizations that ultimately failed were frequently the ones unable to uncover the true locus

ofcrisis (DAveni and MacMillan, 1990).


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Another mechanism is to put in place the degeneration safeguards that keep an organization

alert and capable ofrapidly realign itselfwith 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 ofimpending crises. In a study oforganizational

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 ofslack resources add valuable degrees offlexibility 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 ofseveral

directions as events unfold and increase managerial discretion to adapt to change (Allaire and

Firsirotu, 1985).

ResDonse to AbruDt Crises

Due to the diversity ofabrupt 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 ofties rooted in social network theory (e.g., Blau,

1964; Chadwick-Jones, 1976) provides such a key construct in managing abrupt crises. Ties

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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 ofcontacts (Granovetter,

1979). Since abrupt crises often require new and untested behaviour under time constraints,

the ability oforganizations to assemble the necessary resources immediately is critical.

When the pattern ofties 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 ofcrisis as one that involves

increased collaborative relations and the establishment ofintegrative 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 offriendship links across units in an

organization is the critical determinant ofeffectiveness in facing a crisis. As well, the longer

the chain ofconnections that an organization can activate, the better the organizations chance

to contain a crisis.

The Tylenols case illustrates the effective use ofties 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

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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 ofresources in times ofcrisis. 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 ofchange 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 ofstrategic

change that is at the disposal oftop management, viz., change in product/market position and

change in organizational perspective. Position change refers to choices ofproduct/market

domains through which firms redefine their relationship to the environment such as attaining

new technologies, customers, and products (Bourgeois, 1980). Manifestations ofposition

change are generally reflected in organizations moving into or out ofmajor product lines and

changes in principal customer targets (Romanelli and Tushman, 1994; Tushman and

Romanelli, 1985).

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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 oforganizational 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 oforganizational development can be identified (Greiner, 1972).

Each phase typically comprises a relatively calm period ofgrowth 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 ofa firm) and in structural changes (e.g., a functional to a divisional

structure, or major changes in centralization or decentralization ofmanagement) (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 ofholistic changes in the

structure, systems, processes need to be undertaken (Stopford and Baden-Fuller, 1990).

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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 oftypologic studies. Yet, this paper

departs from previous studies in a significant way. Rather than examine similarities ofcrises

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 frameworkoffered 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 ofturnarounds (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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major strategy overhaul and business design changes may be needed in the face ofcumulative

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 ofvalue systems that

cause abrupt crises.

Equally interesting is the implications that managers could manufacture crises purposely to

imbue a sense ofurgency 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 beforehandand making public the poor result ofcustomer satisfaction survey could

alert organization with the danger oforganizational deterioration in a chronic sense (Kotter

1995).

Our research may be extended to the literature oforganizational ecology. While research on

post-entry performance offirms showed that hazard rates tend to increase during the first

years and to decrease afterwards (e.g., Wagner, 1994), it would be ofinterest to know to what

extend the failure was due primarily to abrupt orcumulative crises across the time span ofthe

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 oforganizations. Do

these organizations also differ from others in the way crises strike? In addition, do the types

ofcrises vary across an organizations size and age? Answers to these questions would

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require empirical test ofthe model and could potentially shed more light on the mortality of

organizations. Furthermore, can these two types ofcrises 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 oflearning that takes place

when managing the two types ofcrises as well as how crises managers use crises to bring

about changes.

There is a multitude ofconstituencies 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, orperhaps 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 offmore severe

consequences before it is too late.

A crisis is a turning point, for better orfor worse, which creates a significant event orradical

change that impacts a companys life. In the best ofcircumstances, 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 ofresearch that will contribute to a greater

understanding oforganizational crises.

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TABLE 1

COMPARISONS OF ABRUPT AND CUMULATiVE CRISIS:KEY CHARACTERISTICS

~Y CHARACTERISTICS

OF CRISIS

TYPES OF CRISES

ABRUPT CUMUlATIVE

Build-up speed Rapid Gradual

Predictability Low High

Specificity Focused Nebulous

Crisis recognition Clear Fuzzy

Trigger point Specific events Threshold-limit

Probability of Time-constant Time-increasing

Occurrence

Misalignment with One/few aspects Many aspects

environment


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APPENDIX A

Probability Density Function of Acute Versus Chronic Crisis

Probability

Chronic Crisis

Acute Crisis

0.

0.

t


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BAPPENDIX

Failure Function of Acute Versus Chronic Crisis

Probability

Chronic Crisis

Acute Crisis

0.

0~

t


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APPENDIX C

Survival Function of Acute Versus Chronic Crisis

probability

0..

Chronic Crisis

Acute Crisis

t


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APPENDIX D

Hazard Rate Function of Acute Versus Chronic Crisis

1.

Hazard

Chronic Crisis

Acute Crisis

t

“anatomy of organizational crises.”

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