Dealing with Crises

In the past week, UK retail has seen the collapse, for the second time, of the music retailer HMV and, following a significant corporate fraud, the collapse of the café chain, Patisserie Valerie.

Both of these businesses could be considered as being in crisis for a significant period of time.

In the last blog entry we discussed economists views of risk and the variety of risk attitudes businesses and individuals may have.  Whatever, the risk profile, it is likely that at some time in its lifespan, a business will face a crisis.

Currently the UK is approaching the deadline for Brexit.  If your business is not making contingency plans for the various potential outcomes of the Brexit process, you may be facing a potential crisis.  In fact it is highly likely that the UK will face some form of national crisis, particularly if a withdrawal agreement cannot be reached.  The UK government preparation papers give some idea to the level of crisis the nation may experience.  For example, the Department for the Environment, Food and rural affairs, it is rumoured, is planning a mass slaughter of one-third of the UK’s sheep in the event of a no deal Brexit as a measure to maintain stock prices.

Mintzberg et al. in The Strategy Process: Concepts, Contexts and Cases (Prentice Hall International, 1988) described organisations in crisis as like ‘living in collapsing palaces’.

These palaces are built of tightly interlocking beams and stone blocks.  They are filled with fine and elegant components.  But these palaces are built atop crumbling mountains.

The rigid, cohesive structure of the palaces look completely rational to those existing inside them.  Indeed they look beautiful.  However viewed from the outside, the palace has foundations that are rapidly eroding away.

Such a position is shown by the collapse of HMV.  For decades, HMV was the model of how to sell music.  It easily survived the movement of music sales from vinyl to compact disc.  It easily coped with the shift in physical technology.  It was an elegant palace.  However, it didn’t foresee the arrival of digital downloads and the rise of streaming services.  The movement to digital music files eroded the foundations of HMV’s palace.

The management of HMV continued to shore up their elegant palace despite clear warnings.  it was obvious to those outside that HMV was operating a declining business model.  Some competitors, such as Our Price Music and Tower Records went bankrupt.  HMV’s main competitor, Richard Branson’s Virgin Megastore was sold off as Branson divested much of his music empire shifting his business into areas such as airlines and train services.

Often the more elegant the palace, the less able it is to cope with a crisis.  Its rigid components mesh together so tightly that it cannot react appropriately. The organisation’s perceptions, goals, capabilities and methods of working are beams and blocks tightly aligned and preventing flexibility.  The elegant palace is rigid, solid, stuck and unable to flex.  Such movement is necessary to cope with the shifting foundations.

However in many crisis, despite flexibility, the foundations fail and the organisation begins to crack:

  • Top managers are viewed as making faulty predictions
  • Doubts arise as to the ability of managers to make crisis decisions
  • Managers as a result are seen as incompetent liars
  • Idealism and commitment to goals fade
  • Cynicism and opportunism thrives
  • Cuts and reorganisation lead to power games and empire-building.  Cooperation is undermined
  • The processes of disintegration feedback on themselves and are reinforced.

An organisation’s ability to achieve often depends on the expectations of its stakeholders.  If stakeholders expect failure, failures become more likely and other expectations of failure multiply.  The organisation enters a downward spiral of failed expectations

Achievement often relies on ability and effort.  If people expect failure, they leave, and they take their ability, expertise and effort with them.  As a result the level of ability in the organisation falls.  This is particularly the case if potential candidates outside the organisation see it as failing and therefore do not consider joining it.

As a result, job performance falls as staff take on unfamiliar roles.  Staff begin to receive proportionally less reward for their efforts.  Job satisfaction slides.

Conflicts and power struggles develop between managers and teams. Some in the organisation become cynical opportunists.  They make unreasonable demands which elicit exhortations from senior management.  This may result in these manages, in turn being seen as opportunistic cynics.

Such conflicts could be seen across UK industry in the 1970s as nationalised industries suffered crises and unions made increasingly exaggerated claims for pay rises.  It got to the stage where the most minor of disputes ended with all out strikes which hobbled productivity.

Such power struggles often ended with the centralisation of power and responsibility.  In the nationalised industries this meant the appointment of figurehead senior managers who micro-managed.  Senior managers often grabbed powers even though they had little knowledge of how to use them.

In such positions, for an organisation to move forward, it must allow the disintegration to take place.  Take HMV as an example.  When the firm first collapsed, there was an opportunity for its new owners to change its business model; to move into downloads, internet sales and music streaming.  However, the new owners retained the old business model whilst taking significant levels of cash out of the organisation.

In retaining the old business systems the ‘rescuers’ of HMV failed to learn the lessons of the original administration process and it once again failed.

So how do you avoid crises:

  1.  Avoid excesses:  Excessively sticking to processes and prescriptions for management.  This is the ‘computer says no’ response.  It often leads to contingency plans being ignored and issues being oversimplified.  Crises caused by environmental change can be exacerbated.  Such excesses can result in complacency i.e. plans become annual events not continually evolving processes and documents.  To avoid such excesses, employ critical friends, carry out both marketing and market research, benchmark, allow dissenters to speak out, don’t become an organisation of ‘Yes Men’.  Plan to employ strategic strengths and eliminate strategic weaknesses through developing SWOT strategies. Have a Plan A, and a Plan B, and a Plan C,…….
  2. Consider Replacing Top Managers:  Often this is a move needed to end or avoid a crisis.  However competent the existing top management, they can build up an existing ‘group think’.  replacing them gets rid of personal enmities and old assumptions.
  3. Reject Implicit Assumptions:  which underlie existing managerial perceptions and behaviours.
  4. Experiment with Portfolios:  Invest in new products, enter new markets, develop new technologies, develop new operational models and employ new people.  Look at Ansoff’s methods of business growth, market expansion, new product development, brand extension and diversification.
  5. Managing Ideology:  Top management are often seen as the villains of a crisis.  They can exacerbate a crisis by delaying action.  They can steer their organisations into crises.  See Fred Goodwin at RBS or the board of Carillion.  However, if they successfully drive the organisation through the crisis, they can become the organisation’s heroes, for example, Steve Jobs at Apple.  By managing organisational ideology, managers can define their status. Crisis are times of danger but they are also times of opportunity.  Shaping ideology can nurture enthusiasm amongst stakeholders.  Let the language and actions of senior managers mould the organisational ideology.  Let managers become the heroes of surviving the crisis.


Drivers for Change

Change is inevitable and in marketing it is a constant.  Strategic marketing plans are not static documents, they live and need to be refined and amended constantly.   Too many organisations see business planning as an annual chore, something that takes place at the start of the financial year.  In previous blog posts, I have discussed the fact that many small businesses have no forward plan – and those that do probably only look forward for no longer than twelve months.

For a business to grow and to thrive in the long-term, you need, at least, to have widely defined long-term goals.  A strategic marketing plan should look forward three or five years.  There should be set aims for the end of that period.  Within the plan there should be incremental SMART objectives which must be met.  These are stepping-stones to the achievement of the long-term goals.  Incremental objectives should reflect the speed of the industry or sector within which the business operates.  For many businesses an annual goal will be the norm.  However, consider H & M, the fashion retailer, they have short-term strategic goals counted in weeks.  They can turn around their stock inventory in eight weeks, a fraction of the time of other high street fashion retailers.

Here are some prominent drivers of change:

  1.  Customer Expectations:  Do you find that ‘customers are demanding the impossible with increasing regularity’?  Consumers have become used to their needs and wants being at the forefront of highly competitive markets such as fast-moving consumer goods (FMCGs), groceries and fashion.  Now they expect the same of services and non-commercial organisations e.g. local government.  As consumer expectations intensify, concepts such as brand loyalty and retention may appear less effective.  You have to work harder to hold onto existing consumers as they become less loyal to your brand.  You certainly cannot take their loyalty for granted.  Consumers are facing an explosion of choice.  So if a consumer feels a brand is falling behind its competitors or that they are being taken for granted, they will switch to a competitor.  If you are perceived as not giving them what they want, when they want it, and at what they see as a reasonable price, they will switch.  Consumers no longer have to put up with second choice.  Loyalty has to be earned, it is not a right.  Astute managers will use customer demand for their products to drive through organisational change.   The ability to investigate and understand market changes is crucial to an organisation’s survival into the future.  It isn’t just knowledge of the factors behind change which is required.  You must have the ability to communicate those factors to all the stakeholders of the organisation.
  2. Revenues:  Cash, profits and turnover are the lifeblood of an organisation.  All to often they are the primary focus of senior management and investors.  If there is a recession, cuts will be made.  If there is a bull market, firms will expand and market manoeuvres (playing with the gears).  In downturns cost-cutting takes place (hitting the brakes) and there can be financial manoeuvring.  Such activity can quickly exhaust an organisations financial reserves.  When things start to pick up, and business sees the potential for further income and growth from their target consumers they increase activity (hitting the accelerator).  But again, customer have to be top of the agenda and marketing managers must push that agenda.  Long-term revenues come through product quality and customer retention, not price.  If you don’t build a customer-focused top line, there won’t be a bottom line to count.
  3. Competition:   It isn’t just technology that is driving increased competition and breaking down market barriers.  We discuss technological change next.  Markets are fragmenting.  Competition is increasing in every market.  It is an ever intensifying battle to gain new customers and to retain customers.  There are also an increasing number of new market entrants looking to disrupt market norms.  As consumers have more choice than ever before, it is crucial that a clear and differentiated position is developed.  You must give consumers good, simple and relevant reasons to choose your product over that of your competitors.  Customer value and customer orientation are crucial to surviving white-hot competition.  Increasing competition is a high-profile driver for change.
  4. Innovation:  There is much discussion and promotion of market disruptors; businesses which use new technological solutions to overturn market norms and ways of operation e.g. Uber, AirBnB.  There are also many column inches being devoted to automation; the use of artificial intelligence and new electronic technologies to replace jobs in service industries currently carried out by people.  For example, Associated Press have developed an application that can produce 4000 thousand short news stories per second with little or no input from journalists.  It is estimated that 40% of all jobs in the USA will be replace by artificial intelligence over the next two decades.  Priority areas for automation are the likes of customer services and routine sales.  However, innovation shouldn’t be for innovation’s sake.  Innovation should be targeted at product innovations which provide customer value, increased market share and profitability.  The innovation must produce solutions which were more relevant to consumers.  It must also be remembered that uncontrolled or excessive innovation can be a business risk.
  5. Cheap Imports:  The world is filled with cheap products made in China, India and other developing countries.  These countries often have huge levels of available human and other resources.  Labour is cheap and regulatory enforcement is low.  Does your firm want to fight these countries bargain basement costs?  Surely it is better to develop a customer focused, added value, option?

Change has to be managed but the reasons behind that change must be communicated.  I used to work in local government and can point to several examples where change was initiated terribly.  One example was the merging of two services due to local government reorganisation.  The following factors were in evidence:

  • The management tried to force a new culture onto staff from different organisations.  It must be remembered that culture belongs to all stakeholders within an organisation not to the management of that organisation.  Management controls process not culture.
  • The management initiated change which was a copy of the activities of other organisations.  They did not research whether these changes were a suitable solution for their organisation.  The local authority in question was a large rural council yet the changes to be applied came from small urban councils with staff based in a single office.  In applying the changes, the managers of the authority ignored the environment in which they worked.
  • The management of the council stated that they wanted to consult staff on the changes.  Members of staff, including me, responded to the consultation giving alternative, and in my opinion, better, and cheaper, solutions to the reasons behind the change.  These were ignored.  All management achieved was the complete alienation of the staff tasked with service provision.  they also ignored crucial factors such as economies of scale.
  • The change process became increasingly secretive and when staff questioned management decisions, all communication was shut down.  Rather than a goals down, solutions up process, the organisational change became a wholly top down dictatorial exercise.
  • As management began to realise their plans were increasingly unworkable, they began to lie.  For example, they claimed that they were creating a matrix organisational structure but all organisation charts were traditionally hierarchies.  Some staff pointed out that the new structure meant the authority was in danger of breaching its statutory obligations, in particular the law relating to staff qualifications.  These warnings were dismissed as ‘a little local difficulty’.  No solutions to these intractable issues was ever found.
  • Most importantly, the changes implemented by management were inward-looking. They were all about internal organisation and managerial power games.  The group of stakeholders who were completely ignored were the service users; the council’s customers.  Massive changes were implemented without reference to the needs and wants of the council’s customers.  There was a complete absence of customer-focus.