Organizational Resilience in Times of Crisis

Does the people centered management philosophy still work during crisis?

© 2005, Coert Visser

Summary - Researchers like Kim Cameron and Wayne Cascio have said for years that a strategy of laying-off people in many cases does not work, and may even backfire, in times of crisis. The situation in the American airline industry after the terrorist attacks of 9/11 was an almost unparalleled crisis. An excellent chance to take the test. Which companies proved to be most resilient and why?

“We are willing to suffer some damage, even to our stock price, to protect the jobs of our people.”

- Jim Parker, CEO of Southwest Airlines”, 8 OCTOBER, 2001

Crisis in the airline industry
Since 9/11 terrorist attacks, the world economy has suffered severely. The airline industry is one of the worst hit sectors. Passenger numbers fell back drastically, companies showed huge losses, and stock prices fell. Large numbers of employees lost their jobs. These traumatic events have confronted the sector with an ultimate test and have provided organizational scientists with a unique natural experiment. What different strategies have companies followed to handle this crisis and which strategies have proven most effective? These are the questions that researchers Jody Hoffer Gittell, Kim Cameron and Sandy Lim (2005) have formulated and answered.

What does research say on the use of downsizing?

For anyone who has followed the management literature of the last 20 years, this is an exciting study. Researchers like Kim Cameron (Cameron & Whetten, 1987; Cameron, 1994, Cameron, 1998) and Wayne Cascio (Cascio, Young & Morris, 1997; Cascio, 2002) have researched the effects of downsizing for many years. The central questions they have addressed were: does laying off personnel lead to a quick and lasting improvement of the financial position of companies? In brief, the conclusion of their research is: companies that use downsizing are not more profitable than companies who don’t downsize and often hurt themselves in the long term. As a result of the negative impact on relationships downsizings usually negatively impact organizational performance. Furthermore, starting a downsizing scenario often leads to repeated downsizings in the future.

But does this also apply in situations of crisis? Can lay-offs be avoided in these circumstances? Is that realistic? A majority of managers tend to see downsizing as a logical, useful and unavoidable tool in times of crisis. However, research by Kim Cameron (1998) shows that most of these companies are confronted with declining profits, product and service quality, and innovation and a deteriorating organization climate. Based on research findings, Cascio (2002) argues that it pays off to use lay-offs only as a last resort, even in a crisis situation. Is this statement confirmed in the airline industry crisis since 9/11?

How did Southwest Airlines stand the test?

One of the companies with an explicit no-lay-offs strategy is Southwest Airlines. This company has been described in many management books as an example of a company which has achieved extremely good financial results while advocating a very people-centered management philosophy which is very consistently implemented. Herbert Kelleher (see picture), the previous CEO of Southwest once made the following comment which summarizes the Southwest philosophy (O'Reilly & Pfeffer, 2000):

"Who comes first, the employee, customers, or shareholders? That’s never been an issue to me. The employees come first. If they’re happy satisfied, dedicated, and energetic, they’ll take real good care of the customers. When the customers are happy, they come back. And that makes the shareholders happy."

It is wonderful to read how Southwest Airlines has flourished in the good times before 9/111. But how did this company perform during the extremely tough times after 9/11? Did it have to own up and start laying off personnel? How did Southwest Airlines do compared to competitors in these challenging times? Below is a summary of the study by Gittell, Cameron, and Lim.

The research by Gittell, Cameron, and Lim

In the three years that followed 9/11, the researchers studied the ten largest U.S. airline companies: Alaska, American, American Trans Air, America West, Continental, Delta, Northwest, Southwest, United and US Airways. The most important variables they looked at were:

1. financial reserve: a) low debt position, b) high cash position
2. percentage lay-offs
3. recovery of stock prize

The researchers were particularly interested in finding out how relational and financial reserves could account for resilience. Based on the above described research by Cameron, Cascio and others the researchers hypothesized that a strategy of commitment to personnel, in which lay-offs would be seen as a last resort, would create relational reserves and would therefore contribute to a quick recovery. Financial reserves were defined as a low debt position and large amounts of cash on hand. The expectation was that strong financial reserves would muffle the blow of a crisis and that strong financial reserves would thus be associated with resilience. In other words, financial reserves would make it easier to realize a strategy of commitment to employees.

The results fitted the expectations perfectly. Financial reserves coupled with a strong commitment to employees turned out to be strongly associated with organizational resilience. In other words, the higher the financial reserves and the lower the percentage of lay-offs, the quicker the stock price recovered. I made the following table to illustrate the most important results. It ranks the companies on the most important variables (click to enlarge).

Conclusion
It is crystal clear: Southwest Airlines has stood the test brilliantly. Thanks to its excellent performance in the past it has built strong financial reserves. Isn’t it ironic? Analysts had often criticized Southwest for keeping these strong reserves saying they should have been used for acquiring other companies. But this crisis showed that the financial reserves played a crucial helping role. Southwest Airlines did not have to lay off any personnel. Because of this, the company could stick in word and deed to its strong commitment to personnel. Employees understood this message very well. All kinds of negative side–effects of downsizing could be avoided and the Southwest Airlines stock recovered faster than any of the competitors' stocks. Furthermore, Southwest was the only American airline company to make a profit in every single quarter of the period studied, while US Airways, which followed an almost completely opposite strategy (see table) showed a loss in every single quarter.

An airline analyst remarked the following about Southwest: “They are doing what they do best, which is to shine in the hours of trouble.”

1 In 1998 Jeffrey Pfeffer notes: "Southwest Airlines produced a stock market return of over 21,000 percent between 1972 and 1992 and has been profitable in each of the past twenty-four years, a record unmatched by any other airline in the world except Singapore Airlines." Further, he notes that Southwest has the lowest costs and the lowest fares in the American Airline industry. Pfeffer describes the people-centered management practices of Southwest as follows: "Southwest emphasizes training, selective recruiting, profit sharing and stock ownership and has never had a layoff or furlough in its history - all elements of high commitment work systems."

References

1. Cameron, K.S. & D.A. Whetten (1987). Organizational effects of decline and turbilence. Administrative Science Quarterly, 32: 222-240.
2. Cameron, K.S. (1994). Strategies for successful organizational downsizing. Human Resource Management Journal, 33: 189-212.
3. Cameron, K.S. (1998). “Strategic organizational downsizing: An extreme case.” Research in Organizational Behavior, 20: 185-229.
4. Cascio, W.F., Young, C.E. & Morris, J. (1997). financial consequences of employment change decisions in major US corporations. Academy of Management Journal, 40. 1175-1189.
5. Cascio, W.F. (2002). Responsible restructuring: Creative and Profitable Alternatives to Layoffs. Berrett-Koehler Publishers
6. Conlin, M. (2001). Where Layoffs Are a Last Resort. Treating them as unthinkable can have big benefits. BusinessWeek online, October, 2001
7. Gittell, J., Cameron, K. & Lim, S. (2005). Relationships, Layoffs, and organizational Resilience: Airline Industry Responses to September 11th. Berrett-Koehler Publishers.
8. O'Reilly, C. & Peffer, J. (2000). Hidden Value. How great companies achieve ordinary results with ordinary people. Harvard Business School Press
9. Peffer, J. (1998). The Human Equation. Building profits by putting people first. Harvard Business School Press

Five Bad Habits of Managers

© 2004, Coert Visser

It is widely known that the human factor is of crucial importance to organizational success. But this does not make clear just how managers can effectively deal with people issues. Despite all good intentions and efforts many managers often do not succeed in bringing out the best in people. Research by David Maister (2001) shows that many employees think that managers consider money and customers more important than employees.

Five bad management habits

Below I describe five had habits of managers that stand in the way of success:

1. Imitation neurosis

Many managers are inclined to follow management trends. New management concepts, often called ‘hypes’ seem to spread like contagious viruses. Recently I listed some hypes: empowerment, core competencies, the learning organization, self managing teams, business process reengineering, total quality management, competency management, enterprise resource planning, investors in people, coaching. One of the HR-manager in the audience said, smiling: “Bingo, we’ve got them all!” Dutch professor of change management Willem Mastenbroek (1997) put it like this: “approximately 75% of the initiatives turns out to be a fiasco. But never mind, the next paradigm jump is already presenting itself.” In short: waste of energy, confusion and cynicism.

2. Defect fixation

When confronted with problems many managers have a strong tendency to look for mistakes, deficiencies, and guilty people. Research of Gallup (Buckingham. &. Clifton, 2001). has illustrated how negatively focused most managers are. Some examples: personnel selection is being executed as a process of risk detection (what risk to we take if we hire this applicant?), in appraisal conversations managers focus mainly on what’s wrong with the person and the performance, and in change management negative goals are formulated (how can we lose this problem?) and a defect based approach is followed (how can we eliminate problem causes?). Fixation on defects often has the following disadvantages: 1) while searching for problem causes it seems more and more causes are found, 2) resistance increases, and 3) problems grow in an unsuspected manner.

3. Supervision addiction

Many managers tend to supervise and check employees too much. Many employees have been told that they are getting more autonomy and decision freedom but feel disappointed when their manager in fact keeps on controlling and overruling them. That managers have a hard time letting go is demonstrated in research by Cialdini et al (1997). They explain this with the so-called faith in supervision effect. In short, this means that both managers and employees have an unjustified strong faith in the value of supervision. This tendency of managers to not let go usually leads to cynicism about the beautiful rhetoric of empowerment and delegation. A separate issue is that the quality of the work and the commitment to work and organization are negatively affected by the experienced lack of autonomy.

4. Individual obsession

Many managers see the organization more or less as a collection of individuals instead of as a complex system. This tendency to overestimate the importance of personal attributes and to underestimate situational factors is so famous among social scientist that they have named it the fundamental attribution error. This habit works through in things like a strictly individual-focused selection process, individual target setting, individual performance appraisal and rewards, personal development programs, and a headcount approach to personnel. This individual obsession leads to unproductive competition between colleagues and to a too small investment in cooperative relationships and in the work system.

5. Elite glorification

Many managers invest one-sidedly and excessively in ‘top potentials’. Elite glorification is associated with the above mentioned fundamental attribution error. Examples of what this can lead to: excessive pay for top managers, unbalanced high-potential policies (indulging them and promoting them too fast). The excessive attention to the superstars of the organization in fact degrades the majority of the employees and allows for grabbling and self-promoting CEO’s). It is ironic that research shows that the best top managers really are tenacious, modest and relatively unknown (Collins, 2001).

What is good about the five habits?

Would it be better if managers would eliminate these habits altogether? But what would they have to do instead then? There would be the danger of throwing away too much. Because al these habits have their good sides too. The good thing about the imitation neurosis is that managers are open for external knowledge and innovation. It implies a willingness to learn form the outside world. Without this organizations would become too rigid and self-satisfied. The good thing about defect fixation is that the manager acknowledges what is not right. The manager is aware of risks and threats. Without this the organization would slip into a state of unfounded positivism. The good side of supervision addiction is that it implies a willingness to lead and take responsibility, which provides clarity and direction. Without direction, correction, and restrictions and organization could develop into anarchy or even disintegrate. The good thing about individual obsession is that the importance of the human factor is recognized and that individual needs and contributions are valued. Without this there would be a dictatorship of the collective. The good thing about elite glorification is that differences in individual performance and talents are acknowledged. Without this a dictatorship of mediocrity could reign.

Which complementary habits are required?

The five bad habits are not only bad but they have their good sides too. Thus they don’t have to be abolished completely. However, they are being handled to one-sidedly and have to be supplemented by other habits.

1. Imitation neurosis: attention to external and internal knowledge. Put the first priorities with learning from own experiences (solutions that have already proven their value in the relevant context). Also, be open for external solutions but evaluate systematically how they are useful or can be made useful in your context.
2. Defect fixation: attention to problems and successes. 1) use problem acknowledgement to gain energy for change, 2) then proceed success-focused by a) describing what success would look like to you, b) analyzing how you have in the past been able to create this kind of success, and, c) extending and recreating this success.
3. Supervision addiction: attention to directing and to providing autonomy. Keep on leading, directing, supervising, checking, and correcting but only on a small set of essential issues. Beware that you don’t fall back into a too controlling mode in difficult situations (count to ten…)
4. Individual obsession: attention to individuals and the organizational system. 1) Keep on acknowledging individual achievements and needs but don’t overdo it, 2) recognize the considerable importance of interaction and cooperation between people (have a network view of the organization) 3) recognize the great importance of the operating system (like organizational structures, planning systems, computer systems, procedures, etc.).
5. Elite glorification: attention to ‘top people’ and to all others. 1) Recognize and utilize differences in talents, 2) develop the talents of all employees, 3) create symbolic egalitarism. Research shows that accentuating differences in status (very prestigious rooms and cars, flying first class, very large pay differences, etc.) can hinder organizational success (Pfeffer, 1996).

A small change will do

The five habits block success but appear to have their good sides too. Managers who have these bad habits don’t have to change radically. They can instead hold on to the good sides of the five habits and supplement these with some complementary habits. A drastic change is not necessary.

References

1. Buckingham, M. & D.O. Clifton (2001). Now, discover your strengths. Free Press
2. Cialdini, Pfeffer, Hanna &Knopoff (1997). Faith in Supervision and the Self-enhancement Bias: Two Psychological Reason Why Managers Don't Empower Workers. Basic and Applied Social Psychology, v. 20(4), pp. 313-321
3. Collins, J. (2001). Good to Great: Why Some Companies Make the Leap... and Others Don't. HarperCollins
4. Maister, D. (2001). Practice What You Preach : What Managers Must Do to Create a High Achievement Culture. Free Press.
   Mastenbroek, W. (1997). Organisatierot, www.managementsite.net
5. Pfeffer, J. (1996). Competitive Advantage Through People: Unleashing the Power of the Work Force. Harvard Business School Press

There is More to Organizational Success than Individual Talent

© 2003, Coert Visser

Isn’t it sometimes puzzling how a sports team of highly talented players can be defeated by a team of players who are considered by everyone as less talented? And don’t you sometimes wonder why a management team consisting of people with the highest qualifications seems to be constantly doing dumb things? This article challenges a wide-spread view on individual talent and its importance for organizational success and proposes an alternative view.


What is individual talent and how important is it?
The word talent is often used in two different ways and the difference is significant. The first way, the categorical way, is used to point out a category of people: ´John is a big talent´, ´ Maria is a high potential´. The second way, the analytical way, is used to point out specific capabilities of people: ´A great talent of Maria is convincing people´, ´John is very talented at speaking in front of an audience´. The categorical use of the word talent implicitly divides the world in talented people and less talented people. But making such a division is probably largely misplaced and harmful for organizations. After all, when can you really speak of potential or individual talent? And how important is it? These might seem to be rather easy-to-answer questions but the following four points demonstrate that it is quite hard to answer these questions unambiguously.

1. The Pygmalion-effect: expectations shape performance

In the nineteen sixties Harvard professor Robert Rosenthal executed several experiments in which teachers were informed that some of their students had an extraordinary talent while other students did not. Based on this information the teachers developed positive expectations of the first group of students and negative expectations of the latter group. What these teachers did not know was that the so-called highly talented students were randomly selected. In reality the two groups of students were equivalent with respect to their talents. Surprisingly however, as the experiments progressed differences in performance between the two groups started to emerge. The so-called high potentials did considerably better that the other students. As time went on these differences grew. These experiments show how large the effect of expectations of other peoples´ performance is on their actual performance and development (for more information, click here).

2. Talent is multidimensional

Often the suggestion is made that talent is a very clear and unambiguous construct. I want to propose however that the use of the word talent without mentioning to which performance domain you are referring is useless. In other words: there is no such thing as general talent. One person can have a strong analytical talent, another person a strong social talent. The next person has a strong creative talent and yet another has the talent excel at certain sports. People with talents in all of these domains are probably as scarce as snow in the summer. But people without any talent most likely are just as scarce. Thus, more useful than the question ´Is he talented?´ is the question 'Where lies his main talent and how can this be used and developed?' (An example of a theory that acknowledges the multidimensionality of talent is that of Howard Gardner).

3. Individual talent is not the only important thing…..

Apart from the question what individual talent is and who really has it and to what extent, there is the question how important individual talent is anyway. The importance of individual talent is most likely overrated in many organizations, nowadays. The fact is, individual performance is not only determined by talent (plus knowledge and skills), but also, and probably to a large degree, by the organizational system in which the individual operates (the processes, procedures, and the interactions between people). The quality of the relationships between people and the question of how individual talents of different people can be matched to each other, deserves at least as much attention as developing individual talent. Building a well-working organizational system is of the highest importance. It pays off to invest in building a work system that enables all people to use and develop their talents.

4. Focusing on ´superstars´ may degrade the majority of the people
It is probably much more fruitful to assume that anyone in the organization is a potential than it is to identify a small elite of superstars. Doing the latter can unintendedly be interpreted as an implicit degradation of the rest of the personnel. Viewing and treating all employees as potentials far more likely will lead to everyone feeling taken seriously and feeling challenged.

How to build a well-working organization system
How to build an effective organizational system that challenges all of its members is described in detail in Hidden Value, a book by Chales O'Reilly & Jeffrey Pfeffer. In this book the authors tell the story of eight extremely successful companies that manage to bring out the best in their people. Examples of these companies are: PSS World Medical, AES, Southwest Airlines, and SAS Institute. The stories are detailed descriptions of the company's backgrounds, strategies, systems and management practices. What these studies show is how these companies have achieved their success by aligning their values, strategies and people. This may be easy to understand but it is hard to do and keep on doing. It requires consistent articulation and implementation of the values and vision and a relentless attention to detail in ensuring that all policies and practices support the company's values. In order to be able to show this kind of consistency a real belief and commitment are needed and a willingness to persevere. High performing companies consciously turn a lot of the conventional management wisdom upside down. What they do is:

1. Focus more on building talents than on hiring them
Contrary to what many people now think, recruiting, selecting and retaining unique talent is NOT the primary source of competitive advantage. Notice how a company with excessive attention to individual talent, Enron, failed miserably. Although talent development is important, the examples of these extraordinary companies in Hidden Value show that it is much more important to build a culture and work system that enables all people to use their talents and develop their talents. A very nice byproduct of this will be that your company will also be better at attracting and retaining people.

2. Put values first instead of strategies
The conventional view puts competitive strategy on top and derives from that strategy what structure is needed, what competencies and behaviors are needed and so on. The companies described here work differently. Although they do have competitive strategies these are secondary to their set of guiding values and to the alignment of these values with their management practices. In other words: they have a values-based view of strategy. This values-first way of working is reflected in the following statement the extremely successful company AES made many years ago: “If the company perceives a conflict between these values and profits, the Company will try to adhere to its values – even though doing so might result in diminished profits or forgone opportunities.”

3. Focus more on trusting people than on controlling them
Many companies monitor, check and try to control employee behavior. The hidden value companies work differently. In the spirit of Douglas McGregor's classic management book The Human Side of Enterprise, they seem to understand that if you begin by designing systems to protect against the small, unmotivated minority, you end up alienating the motivated majority. So they put their people first by treating them respectfully, involving them and trusting them.

Choose your assumptions about people and organizations wisely
Lessons like the ones presented in this book can be found in several other well-researched books by for instance Jeffrey Pfeffer (The Human Equation), David Maister (Practise What You Preach) and Jim Collins (Good to Great). They demonstrate that the human factor is of critical importance to achieving organizational success but show that how this works goes against conventional wisdom.