1# terllerice

[url=]Organizational Underperformance[/url]

We focus now on organizational underperformance, its content, process and symptoms.
Presumably, corporate underperformance is an antecedent to corporate decline, downturn, distress, crisis, insolvency, bankruptcy and death.
Hence, we need first to understand corporate underperformance in all its relevant dimensions, situations, antecedents, concomitants, determinants, causes and effects.


We can best situate and examine the question of organizational underperformance against what is more obvious and studied - organizational high performance.
We can derive the definition, process and measures of underperformance from high performance as a contrasting phenomenon.


What is Organizational High Performance?

What is a high-performance company?
Why did Sam Walton’s small chain of dime stores of 1964 become the greatest retailer in the world, Wal-Mart, by 2000 and continues to do so in 2008?
Conversely, why did K-Mart, the greatest discount store in 1992 go bankrupt in 2000?
Why was Thomas J. Watson, Sr. able to take the small Computing Tabulating Recording Company (CTRC) to the giant International Business Machines (IBM) Corporation it became?
How did a band of renegade entrepreneurs in a bombed-out building in Tokyo in 1945 rise to become the Sony Corporation?
These were high achievers marked with organizational super performance

We do not know everything about organizational high performance.
For one thing, we do not have the benefit of an agreed-upon high performance scorecard whereby we can decide who stands tallest among competing businesses (Kirby 2005: 30).
Much would depend upon which benchmark or yardstick we choose to measure high performance.
For the most part, however, there is agreement that success shows up in cash and that cash comes to businesses in various forms (Kirby 2005:36).
Nevertheless, there is disagreement on other criteria of success.
For instance, are the winners with the highest market capitalization the ones with the greatest sales growth, with the highest profits, or with the highest Tobin’s Q?
Are you better if you boomed in bust years or if you really boomed in boom years?
Different authors come up with different high-performance formulae and determinant causes.


For example, the best business practices such as the principles of scientific management, statistical quality control (SQC), total quality management (TQM), six-sigma, management by objectives (MBO), reengineering, retrobranding, decentralization, customer relationship management (CRM), supply chain management (SCM), retail partners relationship management (PRM), employee relationship management (ERM) and strategic planning tend to spread across all major companies.
Yet, why do some companies become truly great and others do not?
In other words, how to identify the principles that separate iconic institutions, those that weave themselves successfully and permanently into the very fabric of our society and change our world, from the mass of mediocre enterprises (Collins and Porras 1994)?
How among companies born in the same era, with the same market opportunities, facing the same demographic and technology shifts and socioeconomic trends, some corporations (e.g., Dell, GE, IBM, Johnson & Johnson, and Microsoft) succeed and rise to phenomenal greatness while others (e.g., corresponding and contemporary competitors such as, Gateway, Westinghouse, Burroughs, Bristol-Myers and Netscape) last but did not become industrial icons?

Apparently, the question did not occur to anybody until then in the history of business (Kirby 2005).
As management consultants strategically positioned at the intersection of academic scholarship and business practice, Peters and Waterman (1982) asked the same question differently: what separates winners from losers?
Their original sample of 62 great companies was drawn from an analysis of McKinsey’s Reports to which they applied six different financial metrics or quantitative criteria and pared it down to forty-three.
The “winners” consistently beat competitors over a 20-year period on six financial yardsticks: compound asset growth, compound equity growth, ratio of market value to book value, return on capital, return on equity (ROE), and return on sales (ROS).


Peters and Waterman (1982) attributed winning performance to the company’s bias for action, staying close to the customer, fostering autonomy and entrepreneurship within the company, gaining productivity through people, hands-on and value-driven management, and lean enterprise management.
At a later stage in the research, Peters and Waterman (1982) added other non-financial criteria such as managerial attitudes, courage, risk-proneness, and ethics, believing there is more to a great company than money.
For instance, GE made the first the list of sixty-two but did not make the cut at forty-three.
The final sample investigated 43 companies such as 3M, Atari, Boeing, Data General, DEC, Delta Airlines, HP, IBM, Lanier, McDonald’s, NCR, United Technologies, and Wang.


Collins and Porras (1994) in their Built to Last looked for companies that had risen to iconic stature and held it for five, ten or fifteen decades.
Accordingly, the companies they selected for their study included
American Express, Boeing, Citicorp, Ford, GE, HP, IBM, Johnson & Johnson, Marriott, Merck, Motorola, Nordstrom, Philip Morris, P&G, Sony, 3M, Wal-Mart, and Walt Disney.
Collins and Porras (1994) challenged managers by claiming that various managerial actions and attitudes account for the difference between winners and losers in business.
For instance, these great corporations became clock builders and not time tellers, they chose ventures A and B, and not A or B, and they preserved the core business and values while stimulating progress and seeking consistent alignment. Great executives of the world aspired to create something bigger and more lasting than what they were.
They found and sustained an ongoing institution rooted in a set of timeless core values.
Their organizations espoused a purpose beyond just growing large and making money.
They stood the test of time by virtue of their ability continually to renew themselves from within (Collins and Porras 1994: xviii).

As a sequel to this study, Jim Collins (2001) wrote Good to Great.
This time, he drew his winner’s circle using a qualifying metric: cumulative investor returns relative to the general stock market.
The fundamental thesis in both books was - great and built to last companies stood by timeless core values and enduring purpose while dramatically adapting to a changing world.
This is the trademark of organizational high performance.

Katzenbach (2000) studied 25 enterprises, including Avon Products, BMC Software, Hambrecht and Quist, Hill’s Pet Nutrition, Home Depot, KFC, Marriott International, NASA, Southwest Airlines, and the U.S. Marine Corps.
The author based the choice on proven financial and market superiority over several years, and found that these companies consistently pursued one or more of five distinct paths: mission, values and pride; process and metrics; entrepreneurial spirit; individual achievement, and recognition and celebration.
Foster and Kaplan (2001) investigated Corning, Enron, General Electric, Johnson & Johnson, Kleiner Perkins, Caufield & Byers, Kohlberg Kravis Roberts, and L’Oréal.
These companies did the virtually impossible - sustained market-beating performance for more than 15 years.
These companies radically transformed their operations by creating new businesses, selling or closing slow-growth businesses or divisions, abandoning outdated structures and rules, and adopting new decision-making processes, control systems, and mental models.

Zook and Allen (2001) identified high performance companies such as Anheuser-Busch, Biogen, Coca-Cola, Dell, EMC, Hilti International, Intel, Microsoft, and Nokia, among others, because of their sustained growth in both revenues and profits over extended periods, while generating total shareholder returns in excess of the cost of capital.
The authors argued that these companies built unique strength in a core business and mined that core for its full growth potential by expanding into logical directions.


Recently, Joyce, Nohria and Roberson (2003) studied 160 companies across 40 different industries, including Dollar General, Flowers Industries, Home Depot, Nucor, Schering-Plough, Target, and Wal-Mart.
They based their choice on total shareholder returns over a ten-year period, as this criterion separated the “winners” that outperformed rivals, “losers” that underperformed, “climbers” that improved over time, and “tumblers” that deteriorated over time.
They used a 4+2 formula, involving simultaneous superior performance in four primary areas (strategy, execution, culture, and structure) and in any two of four secondary areas (talent, leadership, innovation, and mergers and partnerships).


Based on these seminal studies of organizational high performance, we may now draw a profile, by contrast, of organizational underperformance.
profiles corporate high performance traits against corresponding underperformance symptoms.


In general, organizational underperformance occurs for the opposite reasons:

§
No clear definition of vision and mission
§
No timeless core values
§
No enduring purpose
§
Compromising standards for the sake of expediency
§
No well-planned long-term strategies
§
Mostly ruled by tactics to make quick money
§
Short-term gains at the expense of long-term losses
§
Expansion into non-core business areas
§
Over-diffusion of expertise and talent
§
No great innovations or market breakthroughs

§
Do not have a strong social mission or identity

These companies do not positively impact the world around them.
According to Collins and Porras (1994), visionary companies do not ask, How should we change? Rather they ask, Who are we? What do we stand for and why do we exist?
Where are we going?
Collins and Porras (1994) offer the answer: “preserve the core but stimulate progress.”
What the organization is and what it stands for are timeless core values and enduring purpose that should never change.
Whereas, operating practices and business strategies should change constantly in response to a fast changing world.

2# terllerice

[url=]Hidden Traps of Decision Making and Underperformance [/url]

Making decisions is the most important job of an executive, but it is also the toughest and the riskiest.
Bad decisions can damage a business and a career, sometimes irreparably.
Bad decisions come from many sources:

[url=]1，
the problem was ill defined[/url],
2，
the controllable and uncontrollable variables were not fully identified,

3，
the relations between uncontrollable and controllable variables not fully specified,
4，
the alternatives to problem-resolutions were not clearly defined, the right information was not collected, or
5，
the costs and benefits of each alternative solution were not accurately weighed.



The fault of bad decisions, however, may not always lie in the decision-making process, but rather in the mind of the decision maker.
This is because we use unconscious routines or heuristics to cope with the complexity inherent in most decisions.
Some of these heuristics are hidden psychological traps that are hardwired into our thinking process.
They can undermine everything from new product development to acquisition and divestiture strategy to succession planning.

According to Hammond, Keeney and Raiffa (2006), underperforming firms find themselves in various hidden traps of decision-making such as:


·
The Anchoring Trap:
When considering a decision, the mind gives disproportionate weight to the first information it receives.
That is, initial impressions, estimates, or data anchor subsequent thoughts and judgments.
Anchors are often guises or stereotypes we draw from a person’s color, looks, accent, nationality, age or even dress.
In business, past sales and forecasts become our anchor when predicting the future.
In negotiations, the initial proposal by one party with all its terms and conditions can anchor counter bargaining and paralyze creative counter-proposals.

3# terllerice Underperformers can fight the anchoring trap by: • Reviewing a problem from different perspectives, alternative starting points and approaches rather than stuck by the first line of thought that occurs to you; • Thinking about the problem on your own before consulting others lest you should be anchored by their biases; and • Being open-minded, transparent, and seeking information and opinions from a variety of people to widen your frame of reference and suggest fresh directions. • The Status Quo Trap: Decision makers display a strong bias toward alternatives that perpetuate the status quo. The source of the status-quo trap lies deep within our psyches, in our unconscious desire to protect our egos from damage. Status quo puts us on less psychological risk. The first automobiles called “horseless carriages” looked very much like the buggies they replaced. The first “electronic newspapers” on the World Wide Web looked very much like their print precursors. People who inherit stocks rarely sell them to make new investments. In general, the more choices you have, the more the influence of the status quo. This is because additional alternatives imply additional processing efforts and risk, and we instinctually tend to the status quo. In organizations where sins of commission get punished more severely than sins of omission, status quo holds much sway. Most mergers flounder because both firms seek individual status quo. Turnaround managers can combat status quo by:  Changing the status quo especially if it fails to achieve your current goals and objectives;  Identifying other alternatives as counterbalances with all their positives and negatives;  Avoid exaggerating the effort or cost of switching from the status quo, and  By daring to rock the boat if need be. • The Sunk Cost Trap: This is another version of the status-quo trap. Sunk costs represent old investments of time and money that are currently irrecoverable. While we rationally believe that sunk costs are irrelevant to the present decision, they, nevertheless, prey on our minds, leading us to make inappropriate decisions. We use the sunk-cost bias to defend our previous decisions even though they currently reveal to be errors or mistakes, and admitting mistakes is painful. Often, we continue to invest into wrong choices hoping to be lucky or recover, but thereby, we throw good money into bad, and drag failing projects endlessly. Underperformers can resolve the sunk-cost bias by:  Seeking out and listening carefully to the views of the people who were uninvolved with the earlier bad decisions;  Examining why admitting past mistakes distresses you and encounter the distress (e.g., sunk-self-esteem, loosing face);  Remembering warren buffet’s advice: “when you find yourself in a hole, the best thing you can do is to stop digging,” and  Reassess past decisions not only by the quality of the outcomes but also by the decision-making process (i.e., taking into account what information and alternatives you had then). • The Confirming-Evidence Trap: This is a more subtle version of the status-quo trap. This bias leads us to seek out information that supports our existing instinct or point of view while avoiding information that contradicts it. This bias affects us not only where and when we go to collect information but also in interpreting the evidence. We automatically accept the supporting information and dismiss the conflicting information. Two fundamental psychological forces entrap us here: a) our tendency to subconsciously decide what we want to do before we figure out why we want to do it; b) we are inclined to be more engaged by things we like than by things we dislike. Underperformers can circumvent the confirming-evidence bias by:  Examining all the evidence with equal vigor, and by avoiding to accept confirming evidence without question;  Building counterarguments yourself or by a devil’s advocate; that is, identify the strongest reasons for doing something else;  Being honest with yourself about your motives; look for smarter choices and stop collecting evidence to perpetuate old choices; and  Do not surround yourself with yes-people as consultants. If there are too many that support your point of view, change your consultants. • The Framing Trap: This is a combination of all the previous traps. The first step in making a decision is to frame your problem or question. However, framing can also be very dangerous: the way you frame a problem can profoundly influence the choices you make. A frame is often closely related to other psychological traps. For instance, your frame can establish a status quo or introduce an anchor; it can highlight sunk costs or lead you toward confirming evidence. Our frames are often affected by possible gains or losses. People are risk-averse when a problem is posed in terms of gains, but are risk-prone when a problem is posed in terms of losses. Losing triggers a conservative response in many people’s minds. Frames are also affected by different reference points: for instance, the same problem impacts you differently whether you have a $2,000 balance in your checking account versus zero. Underperformers can reduce the framing bias by:  Reframing the problem in various ways (i.e., do not automatically accept your initial frame or those of others);  Re-position the problem with different trade-offs of gains and losses or different reference points;  Checking your frame and framing strategy; ask yourself how your thinking might change if the framing changed; and  When others offer solutions, check and challenge their frame. • The Prudence Trap: Some managers are just overcautious or over-prudent in their forecasts, estimates, and budgets. Policy makers often go by “worst case scenario analysis” and get overcautious. When faced with high-stake decisions, managers tend to adjust their estimates and forecasts “just to be on the safer side.” For instance, the Big Three Auto Companies have periodically produced more millions of cars just to be on the safer side, despite less anticipated sales, higher dealer inventories, and more aggressive competitive action. Large accumulated stocks cost billions of dollars to the domestic auto companies. Underperformers can avoid the prudence trap:  Avoid overcautious or overconfident forecasting traps by considering the extremes, the low and the high ends of the possible range of values, and challenge your estimates of the both extremes;  Avoid the prudence trap by honestly stating your estimates to third parties who will be using them unadjusted; and  Examine your assumptions and impressions of the past, and get statistics to back them. Most of these traps work in concert with others, amplifying one another. For instance, a dramatic first impression might anchor our thinking, which in turn might look for confirming evidence to justify our initial bias or status quo. As our sunk costs mount, we become trapped, disabled to find an effective escape. The psychological miscues cascade, making it harder and harder to choose wisely, and we continue to underperform.

Avoiding Smart Mistakes and Organizational Underperformance

According to [url=]Schoemaker and Gunther [/url][t1] (2006), even avoiding deliberate mistakes can lead to organizational under-performance.
Several great companies have arisen from what perceptive people once considered as bad mistakes.
Examples include:

1.
The [url=]FedEx distribution system[/url][t2] - the bankers rejected the idea as impractical and risky.
2.
The Enterprise- the experts considered it foolish to offer rental cars off airports and city centers.
3.
Giving credit cards to college students (without using adult co-signers) was a radical idea proposed by Citibank in the 1980s but violently opposed by the then financial experts.
4.
At Procter & Gamble, which operates in a market where very few product introductions succeed, their operating philosophy was based on the assumption that all innovations should come from inside the company.
P&G changed it and turned to outside partners (customers, suppliers, distributors, retailers) for new product ideas, even though these sources could be highly risky.
Their rapid learning slogan was – “Fail often, fast, and cheap” - it requires deliberate mistakes.
5.
Whole Foods Market had little experience in organic foods and yet ventured its first small store in Austin, TX, in 1980.
Today, it has more than 180 stores in North America and the UK, with
$4.7 billion in fiscal 2000 sales, and most traditional supermarkets are now expanding their organic food sections.
6.
U. S. Congress mandated Pentagon’s DARPA (Defense Advanced Research Project Agency) to target one-third of the U. S. Military ground vehicles to be autonomous (i.e., unmanned and
remote controlled) by 2015.
Faced with this deadline, DARPA did not seek experienced people and companies in the world to contract for this job, but deliberately chose in 2004 college students from premier U. S. Universities to design, run and test an un-manned vehicle race across the 132-mile California-Nevada desert.
The project was successful in the second year, with a Volkswagen Touareg modified by a team from Stanford University (the team was rewarded $2 million).
DARPA had set the stage for rapid success by deliberately encouraging a high failure rate.
7.
When the advertising pioneer David Ogilvy tested his ideas, he deliberately included ads that he thought would not work in order to test and improve his decision rules for evaluating advertising; (most of these ads were dismal failures, but those that worked pointed to innovative approaches in the fickle world of advertising).
[url=]8.
Google’s[/url] recent IPO prospectus states: “We would fund projects that have a 10% chance of earning a billion dollars,” thereby, alerting investors to expect company actions that may look like mistakes.
[t3]

Executives perceive that flawless execution is what makes them valuable to the organization, and in the process, carefully and deliberately avoid mistakes.
Resistance to making mistakes runs deep in organizations, as most companies are designed for optimum performance rather than learning, and mistakes are seen as defects that need to be minimized.
After all, top executives are rewarded for their successes and not for their depth of learning from failures.
Organizations, however, need to make mistakes in order to improve, contend Schoemaker and Gunther (2006).
They cite four reasons why humans avoid mistakes:


a)
We are overconfident:
we are often blind to the limits of our expertise or specialization.
Inexperienced managers make many mistakes but learn fast from them.
b)
We are risk-averse: our professional and personal pride is reinforced in being right.
We are very reluctant to submit our fragile egos to tests that might show we have been wrong all along. Employees are rewarded for good decisions and penalized for failures, so they spend enormous time and energy trying to avoid mistakes.
c)
We seek confirming evidence: we tend to favor and look for data that support our beliefs and assumptions, and hence refuse to look at other alternatives. [See previous section for decision traps].
d)
We assume feedback is reliable: we listen to feedback that confirms our beliefs.


But in general, experimentation, venturing and risk-taking, navigating unchartered seas, exploring “blue oceans” (Kim and Mauborgne 2005) where no competitor has entered, even though all these alternatives may be fraught with risks, errors and mistakes, can be high roads to organizational performance.
This is especially true, if our fundamental assumptions whereby we avoid mistakes are wrong.
If a mistake does succeed, then it has undermined at least one current assumption, and this is what creates opportunities for profitable learning.
Philosophers of science have long advocated falsification (i.e., disproving a hypothesis and testing new ones) as a legitimate search and fastest way for truth. That is, making mistakes can be the quickest way to discover solutions to a problem.
“Sometimes, committing error is not the just the fastest way to the correct answer, it’s the only way” (Schoemaker and Gunther 2006: 113).

Companies need carefully to analyze the trade-off between the costs (e.g., expenses incurred) of a mistake and potential benefits of learning from that mistake.
Schoemaker and Gunther (2006) encourage executives to make potential “smart” mistakes when the following conditions are prevalent:

a)
The potential gain from learning greatly outweighs the cost of the mistake.
b)
Decisions are made repeatedly (e.g., routine decisions of hiring, running ads, assessing credit risks).
The idea is that the benefits will be multiplied over a large number of future decisions.
c)
The environment has dramatically changed and cannot justify the prevailing assumptions.
The environment can change the problem, the context, the assumptions, and the presuppositions.
d)
The problem is complex and solutions are numerous.
The more complex the problem and the environment, the more difficult it is to define, formulate and specify the relations between the controllable and controllable variables of the problem, and hence, possibly, seek more alternative solutions.
e)
Your organization’s experience with the problem is limited. Your unfamiliarity (e.g., because of technological obsolescence, new products, new markets, new regulations, new competition) with the problem should make you open-minded about it.
Making deliberate mistakes at the outset can expedite learning.

From their vast consulting experience, Schoemaker and Gunther (2006) list ten deeply held (faulty) assumptions that executives make in best running a business and avoiding mistakes:

1.
Cold calling Fortune 100 prospects does not work.
2.
Our clients are primarily based on trust and reputation, with limited price sensitivity.
3.
Young MBAs do not work well for us; we need experienced consultants on the team.
4.
Bundled pricing is better than separate pricing for each of a project’s components.
5.
Senior partners must get more pay from their billing bonuses than from their base salaries.
6.
Formal interviews with clients must always be done by two consultants, with one taking notes.
7.
The firm can be successfully run by a president who is not a senior consultant with significant billings.
8.
Executive education and consulting are natural cross-selling activities.
9.
Books and articles are vital to the firm’s image as cutting-edge and rigorous.
10.
Responding to proposals is not worthwhile, because organizations that send them out are usually price shopping or just going through the motions to justify a choice already made.

Organizations should focus on assumptions that lie at the core of the business in areas such as planning, strategy, organizational creativity, new product development, R&D funding, operations, marketing, finance, legal matters, IT, and human resources.


Is a mistake that is deliberately undertaken an experiment and not a mistake?
A decision or an act can be viewed as a mistake from one viewpoint and as an experiment from another. Daniel Kahneman, the Nobel Laureate in economics, identified two levels of thinking, known as System 1 and System 2, to which Schoemaker and Gunther (2006) add system 3 as follows:

§
System 1:
Instinctive and intuitive: thoughts and actions come to mind spontaneously; these are mostly reflex, internalized or routine actions that we just do (e.g., driving a car, speaking one’s native language, cooking an ethnic meal, running a mom and pop business). This stage could be emotional and loaded with feelings.

§
System 2:
Linear, logical and objective reasoning:
This stage requires conscious effort and attention, analysis and evaluation.
An action might be considered a mistake in System 1 but sensible in System 2, and vice versa.

§
System 3:
Thinking about thinking:
challenging conclusions of Systems 1 and 2.
Systems 1 & 2 do not guarantee right answers or solutions if they are based on erroneous assumptions.
System 3 allows for a deliberate mistake or a unique alternative consideration that may yield better solution to the problem in hand.

When fundamental assumptions are wrong, companies can achieve success more quickly by deliberately making errors than by considering only data that support the assumptions.
That is, research has proved that those who test their assumptions by deliberately making mistakes or undertaking experimentation are faster in finding the better solution to the problem. In bringing Craig Mundie, who had founded a supercomputer company that ultimately failed, to Microsoft, Bill Gates noted that “every company needs people who have made mistakes – and then made most of them” [cited in Schoemaker and Gunther (2006: 115)]



[url=]Indecisions or Overachievement can contribute to Underperformance[/url]

Organizational underperformance is also plagued with a culture of indecision (Charan 2006).
Instances and patterns of indecision abound in underperforming firms.
“The people charged with reaching a decision and acting on it fail to connect and engage with one another.
Intimidated by the group dynamics of hierarchy and constrained by formality and lack of trust, they speak their lines woodenly and without conviction.
Lacking emotional commitment, the people who must carry out the plan don’t act decisively” (Charan 2006:110).


Often enough, top management may create a culture of indecisiveness or break it.
The primary instrument for breaking this culture is dialogue - human interactions through which assumptions are challenged, information shared, disagreements surfaced, and efforts are coordinated.
Dialogue is the basic unit of work in an organization; its quality determines how people gather and process information, make decisions, and how they feel about one another and about the outcomes of these decisions.
Dialogue can lead to new ideas, and speed and sustain competitive advantage.
“It is the single most important factor underlying the productivity and growth of the knowledge worker” (Charan 2006: 110).
According to Spreier, Fontaine and Malloy (2006), even overachieving executives that relentlessly focus on tasks and goals (e.g., revenue or sales targets) can over time damage organizational performance.
This happens, especially, if overachievers:

·
Command and coerce, rather than coach and collaborate, thus, stifling subordinates.
·
They direct rather than influence subordinates.
·
They are arrogant, aloof and demanding, and rarely listening to others.
·
They, accordingly, focus more on numbers and results and not on people.
·
They take frequent shortcuts and forget to communicate crucial information to their key charges.
·
They are oblivious to the concerns of others and roughshod over the rest of the management team.


Under such conditions, team performance begins to suffer, and they risk missing the very goals that triggered the achievement-oriented behavior.
In the process, talented leaders crash and burn as they exert ever more pressure on their employees and themselves to produce.

Lastly, given all these studies and investigations on organizational underperformance, we could use quantitative criteria for benchmarking underperformance within a given industry.
[url=]See [/url]Appendix 1.1 for such a discussion and procedure.

What is an Organizational Decline?

Prolonged organizational underperformance leads to organizational decline. Symptoms of organizational underperformance and decline include protracted erosion of sales, market share, reduced customer base, or substantially depleted product demand, and hence, financial losses.
The short-term consequences of organizational underperformance and decline are negative cash flow and inability to honor payables while the long-term implications are financial adversity, budget cuts, distress, insolvency, bankruptcy and organizational death.

Earlier investigations in the phenomenon of organizational decline focused on the definition of the construct.
Whetten (1980b) defines organizational decline as stagnation or cutback.
Ford (1980a, 1980b) describes it as a decrease in the number of organizational employees.
McKinley (1987) calls it a downturn in organizational size or performance.
Greenhalgh (1988) and Weitzel and Johnson (1989) characterize organizational decline as mal-adaptation to the environment.
Organization decline occurs when an organization becomes less adapted to its environment, and resources are subsequently reduced within the organization (Cameron, Sutton and Whetten 1988).


Cameron, Kim and Whetten (1987) delineate organizational decline as a decrease in the resource base of an organization.
This definition seems to have prevailed in the management literature judged by its consistent use by subsequent researchers.
For instance, Mone, McKinley and Barker (1998) define organizational decline as a decrease in organizational resources.

An erosion of organizational resource-base poses as a threat to an organization’s continued viability.
A “decrease in the resource base of an organization” can be mostly considered as the root cause of all other aspects of organizational decline such as stagnation or cutback, employee layoffs, downturn in organizational size, underperformance, and maladaptation to the environment.


A decrease in the resource base, however, reflects company-specific problems, while an organization decline can also result from exogenous contexts of industry contraction, industry stagnancy, tough competition, new government regulation, technological obsolescence, and globalization of resources and opportunities. Thus, while a decrease in the resource base of an organization seems to be unintentional, all other consequences such as organizational restructuring, layoffs, plant closing, downsizing and cutbacks are intentional aspects of an organizational decline.


Organizational decline, thus defined, differs form organizational downsizing: the latter is defined as intended reductions in personnel (e.g., Freeman and Cameron 1993; Mone 1998).
Earlier definitions of organizational decline (e.g., Ford 1980a,1980b; McKinley 1987; Whetten 1980b) relate more to downsizing than to decline. The reductions via downsizing are planned and intended, while those in organizational decline are unintended, but are often determined by market forces.

In general, therefore, scholars studying decline and turnarounds trace organization decline to two sets of causes: a) firm specific problems, and b) industry contraction that reduces demand and increases competition (Arogyaswamy, Barker and Yasai-Ardekani 1995; Cameron, Sutton and Whetten 1988; Whetten 1987).
In either case, declines if not abated, will lead to the dissolution of the firm as stakeholders (e.g., customers, creditors, suppliers, distributors, stockholders, employees) who find no appropriate rewards for their participation will withdraw their support.


A survey of the literature on organizational decline raises some problems regarding its definition (Weitzel and Jonsson 1991):

a)
Decline is frequently defined as a decrease in some measurement such as sales, work force, profits, or profitability ratios (ROS, ROI, ROA, and ROE).
A decrease in one or more of these measurements, however, does not necessarily indicate imminent failure but may reflect other signs such as temporary cutback or a change in direction.

b)
Conversely, increases in such measures do not predict organizational success.

c)
Organizational decline is defined as a downward trend in such measures over a long period of time.

d)
However, are these decreases occurring early or later?
e)
Are these decreases in efficiency or effectiveness?


Some decreases over a given period of time may be symptoms of normal business fluctuations in one industry while signifying serious difficulties in another industry.
[See Turnaround Executive Exercise 1.11].

Causes of Organizational Decline

How does a decrease in the resource base of an organization occur?
Is it an independent or a dependent variable?
Most research has treated organizational decline as an independent variable and has devoted little attention to the causes of organizational decline (Edwards, McKinley and Moon 2002). The few investigations into the causes of organizational decline have dealt primarily with macro-level factors that are external to the organization (Zammuto and Cameron 1985) such as global competition, shrinking customer bases in a product market, deregulation and other environmental phenomena (Cameron, Sutton and Whetten 1988; Harrigan 1980).


Various schools of management offer their own reasons and theories for organizational decline, and accordingly, prescribe corresponding strategies for reversing firm-threatening performance declines.


Strategic Management School: A firm’s decline is a core problem which could be either operational (not efficient) or strategic (weak strategic position relative to competitors).
Ineffective turnaround attempts often occur when managers fail to diagnose successfully causes of their organizational decline and respond inappropriately; e.g., trying to increase efficiency when the firm’s weak strategic position is the cause of the decline (Hofer 1980; Hofer and Schendel 1978; Schendel and Patton 1976; Schendel, Patton and Riggs 1976).
A weak strategic position may be strengthened by tactical changes such as cost-cutting, asset reductions (e.g., selling fixed assets) and sales-pushing campaigns.

Organization Theory School:
Organizational decline is pathology in corporate decision-making and adaptation processes (Hedberg, Nystrom and Starbuck 1976; Starbuck and Hedberg 1977; Starbuck, Greve and Hedberg 1978)).
Firm-threatening performance declines (e.g., organizational crises) are an inevitable consequence of organizational stagnation over time as managers fail to maintain the alignment of the firm’s strategy, structure and ideology with the demands of a changing and evolving environment.
Combating stagnation-caused declines needs organizational metamorphosis that drastically alters the firm’s strategy, structure and ideology to align them totally with the threatening environment.
An organizational metamorphosis and overcoming inertia need drastic strategic reorientation or corporate restructuring. Mere cost-cutting, asset-reducing or sales-pushing tactics will not work under such contingencies.
Instead, one would require radical strategies such as a declaration of financial crisis, hauling top management, or restructuring the organization with Chapter 7 or 11 provisions.


Both schools of thought make two inter-related assumptions: a) a firm’s weak strategic positioning causes organizational decline and deterioration; b) inertial firms suffer from weak strategic positioning; that is, organizational inertia constrains strategic change.
Both schools also agree on two points: a) firms suffering from performance declines need strategic change; b) failure to execute strategic change often explains why some firms fail to turnaround a declining company.

Empirical School of Research:
Large sample studies of turnaround versus non-declining firms link organizational decline to operational and financial ratios.
Hambrick and Schecter (1983) found that turnaround or performance (ROI) increase of declining strategic business units (SBUs) was highly correlated with reduced: a) R&D expenditures/SBU sales, marketing expenditures/SBU sales, receivables/SBU sales and inventory/SBU sales.
ROI gains, however, were also associated with market share gains and purchasing new plant and equipment.
Conversely, the reversal of these ratios would cause further organizational decline and insolvency.


Ramanujam (1984) studied the financial ratios of turned around undiversified manufacturing firms and found that increased sales, decreased CGS/sales, reduced inventory/sales and receivables/sales were significantly instrumental in turning around these companies.
Conversely, those that did not control the reversal of these ratios failed to turnaround.
Arogyaswamy (1992) studied the financial ratios and financial statement changes of manufacturing firms that were turning around and found decrease in any three of the following ratios improved financial performance: employees/sales, receivables/sales, inventory/sales, CGS/sales, and SGA expenses/sales.
Conversely, reversal of these ratios would exacerbate organizational decline.

These studies, however, do not necessarily militate against the theories of the strategic management and organization theory schools.
The turnaround strategies that the declining firms adopted directly or indirectly relate to strategic (or pathological) manipulation of financial or performance ratios.
These ratios, moreover, do not reveal the qualitative changes or tactics that underlie them: e.g., cutbacks, retrenchment, new product development or switching to new distribution channels (Schendel and Patton 1976), new R&D expenses as further investments in existing strategies, and the like (Hedberg, Nystrom and Starbuck 1976; Starbuck and Hedberg 1977).
Further, changes in financial ratios (especially efficiency ratios) may not reflect managerial actions that the researchers attach to them (Barker and Duhaime 1997).


Most of the large-sample turnaround studies also report that most turnarounds were accompanied by dramatically increased sales that tell us more about the denominators in the financial ratios but nothing about the numerators (e.g., inventory, receivables, and R&D expenses, CGA or SGA).
In general, these studies worked on declining firms without necessarily studying the causes of the decline.

What is an Organizational Downturn?

While organizational decline is a micro firm-specific phenomenon primarily caused by internal problems, organizational downturns are macro industry-nation-global specific events that impact sets of firms in a given industry and are linked to external problems such as national and global stagnation, wage and price inflation, shrinking markets and global recession.
The two events are intimately connected - organizational downturn may precede and cause organizational decline, or vice versa.

A growing body of research on organizational decline (e.g., Cameron, Sutton and Whetten 1988; Whetten 1987) traces the causes of organizational downturn to industry contraction (shrinking and stagnation of the industry such that it can support less and less firms).
As a contrast, firm-specific problems that lead to decline occur when an industry is stable or growing but the declining firm failed to adapt to the changing industry environment (Cameron, Sutton and Whetten 1988).
Moreover, industry contractions could be temporary or of long duration, cyclic or sporadic.
Organizational downturn caused by cyclical recessions may necessitate little change in strategy for a turnaround.
The need for strategic change may be quite low for a declining firm that has relatively a strong strategic position in a declining or contracting industry, especially if the industry contraction is temporary due to an economic cycle (Barker and Duhaime 1997: 18).
On the contrary, in a stable or growing industry, a declining firm that performs considerably below industry average in absolute terms is strategically sick with weak strategies and a turnaround may necessitate major strategic reorientations.

A number of researchers have proposed that the reasons given by top managers for their firms’ downturns and declines will influence the subsequent strategies chosen to reverse the decline (Ford 1985; Ford and Baucus 1987; Lant, Milliken and Batra 1992).

Types of Organizational Downturns

Organizational downturn can be either latent or manifest (Ford and Baucus 1987).
The latter can be absolute or relative.


Manifest absolute organization downturn occurs: a) when absolute downward changes in performance (e.g., sales, profits) or upward changes (e.g., in costs, theft, crime, defects) are noticed, and b) when absolute downward growth rates (e.g., in sales, market share, profits) or upward rates (e.g., in costs, quality defects, crime) are observed over a long period.
Manifest relative organization downturn occurs when there is detrimental change in the inducement-contribution ratio (March and Cyert 1958) as viewed from the corporations’ decision makers.
That is, inducements of price reductions, wage increases, promotions, advertising, R&D, acquisitions and the like do not generate proportionately adequate returns (e.g., increase in demand, sales, market share, profits, brand equity or reputation) to cover the cost of inducements.

Latent or potential organizational downturn exist (Ford and Baucus 1987): a) when decision makers in an organization ascertain or anticipate the corporation’s inabilities to satisfy their inducement aspirations relative to other organizations (e.g., subsidiaries, competition); and b) when the organization’s demographics change, producing potential shifts in demand.
Either case of latent downturn can cause a manifest organizational decline.

Not all manifest organizational downturns result from latent downturns (Zammuto and Cameron 1985).
Some manifest downturns result from revolutionary or discontinuous events that occur suddenly and without warning.
For instance, when someone laced Tylenol capsules with cyanide, killing seven people, the subsequent impact on McNeil’s market share was drastic forcing an instant organizational downturn.
Similarly, the Bhopal (India) toxic gas leak that killed over 4,000 workers and local residents sent shockwaves all through Union Carbide.


The Process of Organizational Downturn

Weitzel and Jonsson (2001: 8) argue, “Organizations enter a state of decline when they fail to anticipate, recognize, avoid, neutralize or adapt external or internal pressures that threaten the organization’s long-term survival.”
In this definition, the organization is already in a state of decline if decision makers are unaware of and insensitive to detrimental changes in the environment.
Weitzel and Jonsson (2001: 8-10) identify five stages in an organizational downturn:

1.
The Blinded Stage: decline begins when the organization fails to recognize negative pressures either internal (e.g., underperformance, inertia, entropy) or external (e.g., environmental threats of inflation, competition or stagnation).
Key question at this stage: are there sufficient internal and external scanning systems capable of detecting such conditions?


2.
The Inaction Stage: decline becomes noticeable when the organization may recognize the problem but fail to decide on corrective actions and measures.
The key question at this stage is - does the scanning information system translate into “trigger points” or built-in mechanisms that will precipitate corrective measures at appropriate levels of the organization?

3.
The Faulty Action Stage:
Decline continues as the organization responds ineffectively or inappropriately to internal or external contingencies.
The key question at this stage is - Do the firm’s decision makers use appropriate information to resolve critical problems and set up effective procedures to implement the solutions?


4.
The Crisis Stage: Decline worsens owing to faulty decisions of the previous stage because of which resources are seriously diminished.
This is the last chance for reorganization and reversal.
The key question at this stage is - Does the organization have sufficient resources and effective mechanisms for a major reorganization?

5.
The Dissolution Stage:
Decline precipitates until the organization ceases to exist as a distinct viable entity.
Slow demise sets in if the environment is supportive; rapid demise takes place in an unforgiving environment.
The key question at this stage is - Is the organization’s leadership willing and able to manage an orderly closing or liquidation?

Managers tend to explain organizational decline or downturn as a product of immutable external forces beyond their control, and are generally unaware of the effects of their own predictions and adaptations on organizational decline.
For example, Baan, a Netherlands-based software maker, and other enterprise-integration software makers such as SAP and Peoplesoft, enjoyed increasing demand for their products through most of the 1990s and, accordingly, spent billions of dollars on more sophisticated software for integrating business processes. The market began to slump, however, in 1998, and Baan began incurring quarterly losses.
Many software makers including those of Baan attributed the softening of market demand to client corporations shifting a large portion of their data processing budgets to Y2K fixes, a temporary cause that would normalize itself by the middle of 2000.
Meanwhile, Baan neglected innovation, new product development, and got involved in high-cost production runs and poor customer service.
That is, consistent with this perception and prediction of Y2K problems, Baan responded relatively conservatively to their decline in financial performance, focusing mostly on temporary layoffs and tighter controls on discretionary expenditures.
Baan’s prediction turned out to be wrong and its difficulties went well beyond Y2K problems to high costs, product-line problems and poor customer service.
Baan bled cash heavily through the year 2000; its shares dropped in price from $54 in 1998 to around $1 in mid-2000; it was on the verge of bankruptcy when U.K.-based Invensys acquired it.
Baan’s disastrous mistake was waiting for the so-called temporary causes of decline to correct themselves, meanwhile burning precious time and cash that precipitated corporate decline (Mueller, McKinley, Mone and Barker 2001).

On the contrary, firms that proactively respond to the causes of organizational downturn and perceive that the latter are controllable have a higher sense of self-efficacy and set more challenging goals for themselves.
Consider Kodak in 1996.
Then CEO George Fisher knew that digital photography would eventually invade or even replace Kodak’s core business.
Instead of declaring digital photography as something of an ephemeral fad, Kodak rallied the troops and aggressively invested more than $2 billion in R&D for digital imaging.
They spent too much money, however, before they knew how the market would develop.
They committed to price points and product specifications that later proved difficult to change.
For instance, they hastily installed 10,000 digital kiosks in Kodak’s partner stores.
The business Kodak built failed in the traditional market and failed to find a new market.
On the contrary, industry outsiders like Hewlett-Packard, Canon and Sony reacted differently: they launched complementary products based on home storage and home printing capabilities, and in the process, uncovered new demand for convenience, storage and selectivity, applications that drove the development of digital photography.
Framing new disruptive technology such as digital photography, e-marketing, e-books, and e-auctions as a threat may help one to free up resources for the new technology, but such a threat-perception may also bias the way those resources are managed.

Edwards, McKinley and Moon (2002) analyze organizational downturn as an anticipated, but unintended and unwanted outcome of managerial or industry predictions.
That is, when managers or external constituencies anticipate organizational downturn and try to adjust to it, their actions, pro-actions or reactions can sometimes exacerbate the very conditions of organizational decline they predicted but would rather have avoided.

Following this discussion on the process, types and causes of organizational decline and downturns, Figure 1.2 sketches the causal sequence of an organizational decline and Table 1.4 outlines a typology of organizational downturns.
Corporations will adapt to organizational downturns differently depending upon their identification, anticipation, and shared interpretations of such downturns.[1]
We will follow this discussion in the next chapter.

What is an Organizational Crisis?

An organizational crisis is “a low probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly” (Pearson and Clair 1998:60).[2]
This definition implies that organizational crises: a) are highly ambiguous situations where causes and effects are unknown; b) they have a low probability of occurring but still pose a major threat to the survival of an organization and its stakeholders; c) they offer little time to respond; d) they often surprise organizational members and e) present an organizational dilemma that needs to be resolved.
In general, most organizational crises imply or result in losses of capital, market valuation, human resources, revenues and reputation.