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.