presentation iias conference
TRANSCRIPT
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Organizational Resilience and
Health of Business Systems
Rudrajeet Pal (Presenting Author)
Hkan TorstenssonHeikki Mattila
The dragon lifts in the hard winds.
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Context: Economic/Financial crisis in Sweden
Boom (before 1989)-bust (1989-93)-recovery(1994-1998) phases in SwedenFalling asset prices, rising real rate of interest, financial fragility, budget deficits,
negative exports, collapse of banking system, increased bankruptcies
Recent financial crisis (Credit Crunch) (end
2007-2009)TCF: Decrease in Production Index (96.4 in 2007 to 85.9 in 2008), Decrease inexports (by 11.3%), decrease in order volume (by 8.4%), declining asset price,
uncertain labour market, contraction in household consumption (-0.2% in 2008, -
1.8% in 2009), lower capital utilization
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ConceptualizingOrganizational/Business
Health
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Key business system states and transition behaviours (adapted from Sundstrm and Hollnagel, 2006)
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Research Questions
RQ1: How can we measure organizationalhealth?
RQ2: How can Organizational Resilience
(ORes) be related to business health?
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Conceptualizing Resilience
Many faces of resilience
(Madni and Jackson, 2009)
AS A SUPER MATERIAL
Resilience is to (i) prevent something bad from happening (ii) preventsomething bad from becoming worse (iii) recover from something bad
once it has happened (Westrum, 2006)
Engineering Resilience is the time the system takes to return... ...amount
of disturbance that a system can absorb... (Gunderson et al., 2002)
Ability to absorb/withstand
Capacity of a system to absorb disturbance... (Andersson, 2006)
Ability to absorb disturbances... (Resilience Alliance, 2006)
Resilience engineering aims to enhance the ability.... absorb disturbance,
disruption, and change (Nathanael and Marmaras, 2006)
...capacity or ability to withstand system discontinuities... (Starr et al.,
2003)
Ability to recover
Ability to sustain a shock... ...and bouncing back from a disruption
(Kendra and Wachtendorf, 2003)
...capacity of an organization to recover... (Paries, 2006)
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DEVELOPMENTAL PERSPECTIVE: ADAPTABILITY,
POSITIVE FUNCTIONING, COMPETENCECapacity of a system to... reorganize... to retain essentially the same
function, structure, identity, and feedbacks (Andersson, 2006)
... maintenance of positive adjustment under challenging conditions
(Sutcliffe & Vogus, 2003)
Ability to... re-organise and still have the same identity... (Resilience
Alliance, 2006)
Resilience engineering aims to enhance the ability... to adapt...
(Nathanael and Marmaras, 2006)
Adapting and continuing to function despite severe trauma or losses
(Zenpundit, 2006)
...balance between stability and flexibility that allows for adaptations
without losing control (Grote, 2006)
Ability to... adapt to changing conditions, and to respond appropriately
after the fact (Jackson, 2007)
Many faces of resilience
(Madni and Jackson, 2009)
Conceptualizing Resilience
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Output State System State Management Mode Faces of Resilience Time periodEvent and
Action
Normal, Perturbed
Reference
State,Normal
Day-to-day
anticipation of potential
failure, implementation
of preventive actions to
manage small daily
perturbations
Anticipate and
Avoid (short term)
or prevent (long
term)
1, 2
Event follows
(lags) action
Perturbed
Acceptable degradation of
turnaround or quality
characteristics
Perturbed
Exceptional
adaptive management,
corrective actions
Adapt to
(reconfigure) or
withstand (absorb)
3, 4
Event and action
(same phase)
almost together
Degraded
Unacceptable degradation
of turnaround or quality
characteristics
Failed, Out
of Service
Emergency
restore the system
Recovery
(restoration)5
Action follows
(lags) event
Time periods (Sheard and Mostashari, 2003)
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Altmans Z-score1, 2
Zones of Discrimination:
Z > 2.9 (for private firms)(2.6 - for general use)Safe Zone
1.23 (for private firms) (1.10for general use)< Z < 2.9 (for private firms) (1.10 for general use)Grey Zone
Z < 1.23 (for private firms) (1.10 for general use)Distress Zone
Z Score Bankruptcy Model:
Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 0.999T5 (for public firms)
Z = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 (for private manufacturing firms)Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 (for general use)
Discriminant Function Components Description
Working Capital/Total Assets (T1) Measure of liquidity (net liquid assets of the firm relative to total capitalization)
Retained Earnings/Total Assets (RE/TA)
(T2)
Measure of total amount of reinvested earnings (leverage)
Earnings Before Interest and Taxes/Total
Asset (T3)Measure of profitability/operating efficiency (productivity of firm's assets)
Shareholders Equity/Total Liabilities
(T4)
Measure of solvency (measured by shareholders equity plus untaxed reserves and
provisions) before the liabilities exceed the assets
Sales/Total Asset (T5) Measure of sales generating ability of firm's asset (Activity ratio: capital-turnover ratio)
1. Altman, E. 1968,The Journal of Finance
, Vol. 23, No. 4, pp. 589-609
2. Altman, E. 2000, Predicting financial distress of companies: revisiting the Z-score and Zeta Models, Stern Business School
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Many faces of ORes, Needs
operationalisation
How to differentiate a resilient
phase or firm from a non-resilient
one?
Lack of sufficient measure or coding
to determine business health
Need to operationalize
organizational goals, hence, success
by conceptualizing business health
ORGANIZATIONAL RESILIENCE HEALTH OF BUSINESS SYSTEM
Lack of a proper framework, set of rules and codification, empirical study and
investigation relating business health to ORes to operationalize it
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Scoring System
Scores assigned for each transition
Positive transition, in the healthyzone [Score: 1]
Negative transition, but in the healthyzone [Score: 0.5]
Transition in unhealthyor catastrophic zone [Score: 0]
Transition to unhealthyor catastrophic zone [Score: 0]
Positive transition into the healthyzone
- V-shaped recovery (2 transitions) [Score: 1]
- Other type of recoveries (viz. U, J, W, L- shaped):
[Score: determined by deconstructing the Z-score
transition profile, year by year]
Possible Z-score transitions (over years)
ZHZH+ZHZH-ZUHZUH or ZUHZC or ZCZUH or ZCZC
ZHZUH or ZHZC
ZUHZH
Where (according to Altmans Z-score)
ZH+>ZH>ZH- (healthyzone)
ZUH (unhealthyzone)ZC (catastrophic zone)
Aggregate score
Score is between: 0-20% over the period Not at all
resilient
21-40% of transitions over the period Hardly resilient
41-60% of transitions over the period Partly resilient
61-80% of transitions over the period Mostly resilient
81-100% of transitions over the period Completely
resilient
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ORes and Business Health transition profile
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6 +[+] indicates that the average value of the indicator, say T i, in a certain period for the healthy or unhealthy firms categorized in terms of the Z-score, is higher than the average value of the T i for all the
firms over the period and also higher compared to the overall Ti average for all firms from 1989-2009; Data collected from Annual Reports of 20 textile and clothing related companies in Sweden (1989-2009)
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MANAGERIAL IMPLICATIONS
Organizations can focus on both short-term and long-term business goals by studying their Z-
scores
The Z-score essentially helps the organization to apprehend it true business or corporate health
amidst emerging conditions
The Z-score transition profile can be a helpful tool for companies to judge their business health,
analyze the underpinning attributes and benchmark them compared to competitors in terms of
economic viabilities
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CONCLUSIONS
Achievement of organizational business goals, in terms of multivariate Z-score,
contribute to better system health
Univariate ratios are deficient in assessing firms true financial health
Z-score transition profiles of organizations are effective in studying the relationship
between ORes and business health
- Needed to devise strategies and nature of response to crisis events, either feed-forward
(readiness or responsiveness) or recovery
- Essential to understand the companys recovery potential during crisis events and what
financial indicators underpin such response
- Imperative for companys strategic positioning to optimize its cash flow, assets andliabilities, profit margin, sales etc.
- Helps to differentiate companies into resilient or non-resilient, over time and different
contexts
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LIMITATIONS
Selected firms, for study were mostly SMEs,
being mostly textile and clothing
manufacturers (Swedish brands and fashion
retailers were less represented)
Selected firms were only private aktie bolag
firms, not listed on share market. The effects of
public listing, share market equity or venture
capital could possibly yield contrasting ORes
results, not covered in the research
Choice of Altmans Z-Score to make a time-
based longitudinal study of the organizations
disruption profile to study ORes can be argued
as it directly does not indicate or measure
business system health though it is a very
influential predictor of corporate bankruptcy
and includes the consideration of mostly all
financial performance measures
Lack of past researches on operationalisation
of ORes by devising some coding scheme
Further Research Work
Detailed explorative study of the causes of
financial success or failure for the Swedish
TCF related organizations between 1989 and
2009
In-depth studies to analyse the factors
underpinning ORes in organizations and what
incompetences lead to financial distress and
failure.
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Thank You!