Risk and Uncertainty

Abstract

Volatile business conditions have led to drastic corporate downsizing, meaning organizations are expected to do more with less. Managers must be more knowledgeable and possess a more eclectic myriad of business skills, many of which have not even been seen until recently. Many internal and external changes have occurred to organizations that have dictated the need to do business differently. Changes such as technological advances; globalization; catastrophic business crises; a more frantic competitive climate; and more demanding, sophisticated customers are examples of some of the shifts in the external business environment. Internal changes to organizations have been in the form of reengineering, accompanied by structural realignments and downsizing; greater emphasis on quality levels in product and service output; faster communication channels; and a more educated, skilled employee base with higher expectations from management.

KEYWORDS:

• management
• crisis
• risk
• organization
• uncertainty
• effectiveness

MANAGEMENT'S ROLE

Years of relentless downsizing, “right-sizing,” and re-engineering in corporate America are all aimed in part at shredding excess bureaucracy. It is certainly true that tens of thousands of middle managers have lost their jobs in recent years, and many face long, painful struggles in trying to replace them. It also is true that even for many managers who stay employed, the flattening of hierarchies cuts promotion opportunities.

Yet other economic forces are offsetting these losses and creating management work where it did not exist before. The “de-layering” seen in the great reengineering of corporate hierarchies spreads out management work and endows some rank-and-file employees with managerial responsibilities. Technologies that supplant workers require managers to oversee them, as does outsourcing. The growing complexity of white-collar work increases the need for management in some cases. A shift in management duties toward external dealings with customers, rather than just supervision of employees, blurs the distinction between managers and marketers.

TABLE 1 Significant Issues for Risk and Uncertainty

Core competencies

Identifying lucrative markets

Competitive advantage

Necessary expenses

Anticipating changes in future markets

Effective time management

Employee empowerment

Understanding how customers define value

Establishing critical processes

Developing relevant processes for setting profit growth targets

Customers

EFFICIENT PERFORMANCE

In the business world, fat is out and flat is in. The reason is that hierarchy breeds bureaucracy and removing it allows people to make their own decisions. This type of empowerment, in turn, improves efficiency. Many employees are becoming disillusioned by the disappearance of prospects for promotion and other traditional goals in their de-layered workplace. Flatter structures destroy any illusions about career prospects that many employees are able to maintain in a more hierarchical structure.

Recently, 406,000 people worked for IBM, which made profits of $6.6 billion. One-third of the people, and all of the profits, are now gone. Automaker Volkswagen says it needs just two-thirds of its present workforce. Procter & Gamble, with sales rising, is dismissing 12 percent of its employees. Manufacturing is not alone in downsizing: Cigna Reinsurance, an arm of the Philadelphia giant, has trimmed its workforce 25 percent over the past two years. Global competition has accelerated sharply in just the past few years. The market value of US direct investment abroad rose 35 percent to $776 billion last year, while the value of foreign direct investment in the United States more than doubled to $692 billion. The revolution in information technology is creating tools that permit such agility. The next trend is companies that empower their customers (Carter & Ejara, 2008, 58).

As the usefulness of information, information technology, and information work grows, businesses find more ways to substitute them for expensive investments in physical assets, such as factories, warehouses, and inventories. Buildings and stockpiles (physical assets) have been replaced by networks and databases (intellectual assets).

The era of revolutionary corporate change promises enormous economic improvements at an exceptionally high cost in human pain. Companies must transform themselves radically to survive and become more competitive. One result is structural change in the labor market, with downsizing continuing even in a period of economic recovery.

STRATEGIC AND SOCIETAL CONSEQUENCES

Companies can cause stress to workers who merely fear losing their jobs or who cannot navigate new organization structures or handle their new responsibilities. The only way to deal with twenty direct reports, for example, is to delegate more, but many veteran managers seem unable to let go. Job-related suicides are up, along with employee violence, ranging from sabotage of computer systems to bloody rampages with assault weapons.

How will society handle such dilemmas, as competition forces businesses into radical change? This workplace revolution may be remembered as a historic event. But, as corporations abandon the unwritten contract of lifetime employment in return for hard work and loyalty, the social fabric of the United States seems weaker than at any point in the postwar years. Is America up to the challenges that it must face?

Once the organization is flattened, and workers are empowered, shared values provide the only practical way to ensure that everyone is aimed in the same direction. Corporate values such as candor, integrity, facing reality, taking responsibility, being accountable, investing in education, and respecting diversity sound good, but are they really being applied and practiced in a way that makes the organization more effective?

The turmoil in the workplace results in part from management ineffectiveness that made these organizations less competitive. Workers who gave loyalty under the old system have suffered under the new. It is no surprise that employee cynicism has grown.

For effective change to occur, even in large organizations, which depend on thousands of employees understanding the company, strategies must be translated into appropriate actions and leaders must win over their followers one by one. The problem for most executives is that managing change is unlike any other managerial task they have ever confronted. An organization may simultaneously be working on total quality management (TQM), process reengineering, employee empowerment, and several other programs designed to improve performance. In managing change, the key goal is understanding how pieces balance off one another, how changing one element changes the rest, how sequencing and pace affect the whole structure.

One tool that companies can use to provide that critical balance is the Change Management Team (CMT), a group of company leaders, reporting to the CEO, who commit all their time and energy to managing the changing process. When that process has stabilized, the CMT disbands and then oversees the corporate change effort. Managing change means improving the communication between the people leading the change effort and those who are expected to implement the new strategies, managing the organizational context in which change can occur.

When managers or CMT members put off communicating with the rest of the organization, they prevent people from understanding the design principles that guided them and the lessons they learned from previous experience. They unwittingly prevent the people who are expected to implement the change from participating or buying in. As a consequence, no matter how good the new design turns out to be, it does not produce the expected results.

Everything managers say and how they act, or listen, sends a message. Many managers assume that communication is a staff function, a job for human resources or public relations. In fact, communication during the reengineering process must be a priority for every manager at every level of the company. People in the organization may need to hear the message over and over before they believe that, this time, the call for change is not just this year's “hula hoop” or whim. It takes time for people to hear, understand, and believe the message.

The old management paradigm said that at work, people are only permitted to feel emotions that are easily controllable, emotions that can be categorized as positive. The new management paradigm says that managing people is managing feelings. The CEO's job is to be a visible champion for the transformation, articulating the context and rationale for the new corporate direction. This means having a clear understanding of the long-term vision of the company. People who are organizationally co-dependent have enabled the system to control their sense of worth and self-esteem, while investing tremendous energy attempting to control the system. Honest companies will avoid encouraging such co-dependency.

Dynamic Growth

Traditionally, in business, managers added production capacity, allowed overhead to swell, and stockpiled inventories in anticipation of rising demand during expansions. When the economy declined, they shut factories, laid off workers, cancelled new product development, and purged excess inventories at distress prices. The result was that profits vanished as high fixed costs had to be spread over a smaller sales base.

The best strategy to avoid this cycle and to succeed in a downturn is to beat the competitors to the market through dynamic growth. Black & Decker has speeded up the development process by organizing teams of design engineers, production managers, and marketers to work on an entire family of new products from its inception. The team, using an approach called concurrent engineering, looks for ways to standardize components across several new products to make them easier and less costly to assemble.

Achieving profitable growth is harder than cutting costs. Unlike raising profits by shrinking expenses, increasing revenue through product innovation or geographical expansion requires managers to have a vision about where technology is going, how markets can be developed, what consumers will want, where their industry is moving, and how they can move with it—or ahead of it. Cutting and reengineering are only part of the mission, because restructuring has to have a commitment to growth.

In China, reengineering is the reverse of what is seen in the United States. There, it is not characterized by downsizing, but by dynamic growth, since China is experiencing almost unpredictable growth and business organizations have to change rapidly to adjust to market challenges.

Growth managers need to reconceive their business entirely, not just improve it incrementally at the edges. They need the ability to break the rules, to be able to think outside the box and go beyond the established parameters of how things in the organization have been done. It is important for managers and employees to develop a mentality that identifies real problems in their business dealings and to find new, creative solutions. The people who go through restructuring and downsizing without a plan of growth are like the people who consume assets rather than invest in them.

Risk and Uncertainty's Consequences

Facing complex and often intractable problems, companies choose time and again to reorganize, each time hoping that they will finally get it right. The data are clear and suggest that these re-engineering efforts do not always work. The implications of the findings are twofold: one should think long and hard before reorganizing to make sure that the cure matches the disease. Many executives reach for the re-engineering option first because it is something within their control.

CEOs should keep in mind that all re-engineering, whether launched for the right or wrong reasons, can put a company into shock. Re-engineering can also tend to bring out people's ambition and competitiveness, which can amplify already existing interpersonal tensions. The decision to reorganize, the research suggests, is one that managers need to approach with great trepidation.

Today's managers are faced with more pressure than their predecessors because of how much is expected of them, such as slashed budgets, downsized workforces, mergers, and acquisitions. With downsizing and cost cutting in recent years, people feel more stress because they do not view their jobs as stable.

TABLE 2 Aftermath of Risk and Uncertainty

3.4 million jobs cut by Fortune 500 Firms (20 percent middle management)

Consolidated job and management duties

Talent pool of top executives is shallow

Performance results scrutinized more harshly

Firms unwilling to fill positions based on potential

Flat career growth patterns

Need for personal job restructuring

With available positions, higher salaries and bonuses

More time devoted to find top talent

Law of diminishing returns/what's the payoff?

Morale issues for survivors

The Human Side of Risk and Uncertainty

The American Institute of Stress reports that 78 percent of Americans describe their jobs as stressful, with more than two-thirds stating that the situation has become worse in the last five years.

The condition of burnout occurs after prolonged periods of unrelenting stress on the job. The inability to gain control causes employees to feel unable to cope with the high demands of their job. Job burnout is characterized by feelings of hopelessness and thoughts of leaving or withdrawing from work. Burned-out workers feel demoralized, and their job loses meaning for them.

In job burnout, workers lack energy and motivation. Their productivity plummets, and they often suffer from insomnia, headaches, backaches, and other ailments. They work longer and harder but never seem to catch up. They can turn to alcohol, drugs, or other addictive behavior. In today's world of layoffs, reengineered organizations, two-income families, and fierce global competition, a veritable epidemic of job stress has continued, even after the recession of the early 1990s ended.

Research has shown that stress is clearly linked to burnout. A survey last year of 1,300 workers by the ReliaStar Insurance Company of Minneapolis found that employees who felt their jobs were highly stressful were twice as likely to experience burnout than those who did not find their work stressful. At highest risk were low-income workers, especially those with college degrees, and single mothers.

A survey of 28,000 workers by St. Paul Fire & Marine, for instance, found four major problems that led to job burnout: (1) poor supervision, including a supervisor who is critical, expects too much, is not open to discussing problems, organizes departmental work poorly, and does not recognize employees for a job well done; (2) lack of teamwork, including tension and bad feelings within a work group and a failure to pitch in when needed; (3) unreasonable workload, including employees who feel overworked, can't meet deadlines, and can't keep up with changes; (4) unfair company practices, including promotions that are perceived as unjust or to discriminate on the basis of race, sex, or age.

According to data by the American Management Association (AMA), every year since 2005, at least one-third—and sometimes more than one-half—of large and midsize US companies have downsized their workforces. Once content to trim most hourly workers, employers are now targeting managers and professionals in unprecedented numbers. But just where is all this cutting leading? Only 34 percent of these companies reported any increases in productivity to the AMA. A distressing 80 percent of downsizers admit that the morale of their remaining employees has been lowered (American Management Association, 2008). Unfortunately, these demoralized employees are supposed to revitalize the organization and delight customers.

In an era beset by unending reengineering, bosses do whatever works without looking at the consequences of their behavior on other people. Such bosses do whatever works without looking at the consequences of their behavior on other people. The abusive boss is constantly angry with himself or herself for falling short of his or her ideal. Personal problems such as alcoholism and depression are common among the newly unemployed, and marriages are often strained. Much stress must be dealt with, including family stress.

For many, the years ahead are shaping up as the Age of Job Stress. To white-collar workers who have lost their jobs and are struggling to find a new foothold, it is a bitter irony: the survivors of mergers, downsizing, leveraged buyouts (LBOs), and recession-induced cost cutting may hope for more balance in their lives, but they are too worried about holding on to their place in the company to do anything about their dreams.

Increased Workload

Anecdotal evidence and survey data strongly suggest that many white-collar Americans are approaching the Japanese tradition of twelve-hour days and work-filled evenings. Priority Management, a Seattle consulting firm, recently polled 1,344 middle managers on a variety of topics and reported that the number of hours people said they are working was the study's “single most startling finding.” Although about one-third work forty to forty-five hours weekly, 57 percent are routinely at their desks from six to twenty hours more than that, and 6 percent say they work upward of sixty hours.

Putting in longer hours does not necessarily ensure that the job gets done. A separate study by the American Management Association showed that 41 percent of middle managers say they have more work than time to do it. This helps explain why the Priority Management survey found that 85 percent of managers worry about how to lead a more balanced life, with time for family, hobbies, and volunteer work. Only one in fifty claims success at juggling everything.

A survey of white-collar workers in 1,005 companies found that 86 percent of their employers have done a major restructuring, or more than one, in the preceding five years. About 66 percent of the people surveyed believe that their new, heavier workload is reasonable. The definition of reasonable is shifting, and managers are accepting tougher demands as a way of life.

The American Management Association (2008) study reported on how pressed for time everyone feels these days. Nearly half the managers who responded said they sometimes, or often, work harder and longer to escape pressures in other areas of their lives-trouble at home, for instance.

In today's leaner organizations, managers have the feeling that if they keep meeting their goals, senior-level management will keep setting them higher. Since managers react so differently to stress, it is hard to generalize about what is “overwork.” One person's exhilarating schedule is another's intolerable grind.

To Japanese, whose work ethic US companies seem increasingly eager to emulate, the phenomenon of karoshi is well-known. The word means “death by overwork,” usually from a heart attack, and the key to it is not hours put in, but the attitude of the worker. The health risks of hating one's job have been known to medical researchers in the United States since 2004, when a Massachusetts study showed that the surest predictor of heart disease was not smoking, cholesterol, or lack of exercise, but job dissatisfaction (Pearce & Robinson, 2009).

Expecting managers to meet unrealistically high goals can lead to cheating, as people struggle to make their numbers look good. The greatest cost to corporations of stressing out managers over long periods of time is also the most ineffable. It is impossible to say how much better a company might be doing if its managers were not quite so busy or quite so tired. How many bad decisions might be avoided? How many innovative ideas might have a chance to bloom? Similar to generalized stress, burnout cuts across executive and managerial levels. Although the phenomenon manifests itself in various ways and to different degrees in different people, it appears, nonetheless, to have identifiable characteristics.

People suffering from burnout generally have certain identifiable characteristics, such as (1) chronic fatigue; (2) anger at those making demands; (3) self-criticism for putting up with the demands; (4) cynicism, negativity, and irritability; (5) a sense of being besieged; and (6) hair-trigger display of emotions. Burned-out managers may inappropriately vent anger at subordinates and family or withdraw, even from those whose support they need the most. They may try to escape the source of pressure through illness, absenteeism, or drugs or alcohol or by seeking temporary psychological refuge in meditation, biofeedback, or other forms of self-hypnosis. In addition, they may display increasingly rigid attitudes or appear cold and detached.

It is essential for an organization to have a systematic way of letting people know that their contributions are important. People need information that supports their positive self-image, eases their conscience, and refuels them psychologically. Many compensation and performance appraisal programs actually contribute to people's sense that their efforts will be unrecognized no matter how well they do. Organizational structures and processes that inhibit timely attacks on problems and delay competitive actions can produce much of the stress that people feel at work. If managers fail to see that organizational factors can cause burnout, their lack of understanding may perpetuate the problem.

Managers should provide avenues through which people can express not only their anger but also their disappointment, helplessness, hopelessness, defeat, and depression. Top management needs to retrain, refresh, and reinvigorate these managers as quickly as possible by encouraging them to attend seminars, workshops, and other activities away from the organization. Reengineering, downsizing, and increased competition have multiplied these pressures in the workplace.

Uncertain Futures

A survey of about 1,000 readers by Industry Week magazine reported that 60 percent of middle managers say they are less loyal to their employers than five years ago. Another study, by the management consulting firm Hay Group, says that in 2004 almost three-quarters of middle managers were optimistic about their chances for advancement. By the end of 2007, mainly because of layoffs and restructuring they have seen, only about one-third still thought their futures looked favorable.

NEW RULES IN THE BUSINESS ENVIRONMENT

The Bureau of Labor Statistics forecasts that the economy will add some 1.7 million new jobs each year from now until 2005. Only one-third will come from Fortune 500 companies. To retool for global competition, organizations must reallocate money to capital investment.

TABLE 3 Marketplace/Volatile Business Environment Characteristics

Changes	Change Outcome	Skill Base
Technology		Computer/Internet
Globalization		Global understanding
Quality levels/TQM	Reengineering	Error-free service
Greater customer demands		Customer relationship building
Higher business costs		Quantitative ability
Competitive environment		Core competencies
Demographic realities		Managing a diverse workplace

No wonder the boss looks strangely at employees who have the temerity to ask for a raise. As companies across the country now realize, the new economy is fundamentally changing the rules and rewards of the workplace. Though people may work harder, and smarter, raises will not automatically follow as they once did. The challenge facing bosses is to find new ways to hang on to valued employees.

“For at least 12 to 18 months, management has been trying to deliver the message that we're going again,” says Jerome Colletti, president of Colletti and Diss, a Phoenix, Arizona, consulting firm. Naturally, sales and marketing teams regard themselves as the people who actually make the growth happen. Colletti says, “The salespeople have demonstrated that they are the competitive advantage and they're gonna put the moves on you” in terms of higher pay.

Management Skill Base

The Association of Executive Search Consultants reports that searches for general managers below the division-head level increased 58 percent last year. The skills needed to succeed in those positions have changed considerably. In today's business environment, middle managers who cannot add substantive value to the organization are candidates for extinction. In enlightened organizations, middle-level managers are viewed as valuable commodities, well positioned to serve not only as valuable commodities—well positioned to serve not only as interpreters and conduits—but as shapers and drivers of corporate strategy. At one time, they may have supervised 10 people. Today, they must win the support of employees of different backgrounds, job titles, and cultures. Also, these new managers are expected to be skilled at organizing complex subjects, solving problems, communicating ideas, and making swift decisions.

Today's managers need a broader knowledge of their industry, as well as every corner of their own organizations. The trait CEOs say they want their managers to possess, above all others—more than any functional skill—is leadership. Leaders have a charisma that challenges their subordinates to achieve their very best. They impart a vision that makes people believe and want to follow them.

The ranks of the discouraged are loaded with older workers, especially those past 55. According to a survey conducted by the Commonwealth Fund, a New York research group, at least 2 million older workers are ready and able to work but cannot find jobs. A recent Conference Board survey of 400 big companies found about 40 percent offering early retirement packages as part of downsizing efforts.

Advocates for older workers say that attitude is not just cruel but also downright stupid. The Conference Board study found that companies continue to lay off and package out senior workers even though they are more reliable than younger employees, have better work attitudes, have better job skills, are absent less often, and are less likely to quit. About 70 percent of the companies surveyed also said older workers were at least as cost-effective as their younger colleagues. In a survey of 376 unemployed executives conducted by the New York City outplacement firm Lee Hecht Harrison, 90 percent said they needed to upgrade their abilities, particularly communication skills, before even entering the interview circuit.

Globalization

More and more, Americans are sharing a global job market with counterparts who work for far less. A fundamental shift is under way in how and where the world's work gets done—with potentially ominous consequences for wealthy, industrialized nations. The key to this change is the emergence of a truly global labor force that is talented and capable of accomplishing just about anything, anywhere. This truly competitive global workforce is vying for industrial nations’ jobs. The rest of the world is catching up.

Just what is driving US companies—and some from Europe and Japan—to locate their new plants in Bangalore, India, or Guadalajara, Mexico? It is not only the search for cheap labor. Corporations also want to establish sophisticated manufacturing and service operations in markets that promise the most growth, often emerging nations. The migration of jobs to new lands is not a straightforward one-for-one proposition either—one job gained there for every one lost to the industrialized country. Profitability, at the expense of downgrading the productivity of all key resources and not innovations, destroys capital. New technology and the continuing drive for higher productivity push companies to build in undeveloped countries plants and offices that require only a fraction of the manpower that used to be needed in factories back home. If companies reduce 1 million jobs at home through reengineering their work, they may add many overseas.

The conditions and factors in society that impact changes for individuals and the organization examined here are as follows:

• Compare and contrast societal theories that impact customer issues by Hammer (1990; 1993), Kahn (1978), and Ferris (2000).

• Integrate these theories into a clear view of societal change on keeping customers.

Robert Kahn on Systems Theory and Gerald Ferris on Socialization Theory

The rationale in examining these theorists is that social change is affecting our lives for better and for worse and the faster change happens with new innovations and opportunities, the harder it is for people to be confident of what they will be doing. This certainly has meaning for providers and customers because while better informed and technologically astute customers can switch alliances quickly, providing themselves with greater value and choice, providers must constantly make improvements, cut costs and add value, and create new services and products in order to keep up with these changes. As a result, people may have more economic and social stratification but diminished time and security; less energy for family, friends, community, and self; and overall live a more frenzied existence. The advent of diminished loyalty to organizations by customers may suggest that the United States seems weaker than at any point in the postwar years. In managing change through reengineering, the key goal is in understanding how pieces balance off one another in a flattened organization and values are shared to ensure that everyone is aimed in the same direction with customers (Hammer, 1990).

Systems Theory has many components that involve

• Systems made up of interrelated and interdependent interacting

• Systems inputs with new energy such as people, materials, and money

• Transforming inputs into outputs

• Maintaining equilibrium in organizations

• Adaptability to avoid entropy (Katz & Kahn, 1978)

Effective socialization theory shapes individuals in organizations and reflects the expectations and environment of the organization and the changes in the external environment. People in organizations work in an ongoing social system that has a unique set of values, ideals, frictions, conflicts, friendships, coalitions, and all the other characteristics of work groups (Ferris, 2000).

Systems theory views the behavior of organizations as a system, in terms of inputs, outputs, and feedback loops both internally and externally (Katz & Kahn, 1978). This will allow a greater level of partnering between providers and customers, which is needed for improved customer retention. Effective socialization allows salespeople to develop social skills that may improve customer relations and result in increased levels of customer retention (Ferris, 2000).

The occurrence of a crisis and its aftermath can have a devastating effect on a company's sales. A crisis is a major, unpredictable event that has potentially negative results. Crisis management routinely deals with issues affecting the survival of the corporation. Sales managers are those people in charge of the sales effort and the various functional responsibilities of the sales force, such as customer development, planning, controlling, budgeting, and decision making. They are particularly at risk when confronting a crisis, and their inability to effectively handle the crisis can significantly change the ability of the sales force to generate revenue. Accordingly, sales managers should understand the dynamics of how to prepare for and manage “worse case scenarios.” Like it or not, future events will most assuredly cause harm. Traditionally, crisis management has been viewed negatively as “managerial fire fighting” or waiting for things to go wrong and then rushing to limit the damage. So, predicting problems requires a strategy to anticipate crisis situations like consumer protests or negative public relations. Crisis management also requires a plan of action once the crisis has occurred. For every $100 million in revenue, two incidents per year occur that call on a company's emergency response plan. For every $8 billion of revenue, there is one major loss per year, representing about 1 percent of annual sales. One catastrophic loss every 10 years equals 1.5 times annual profit. These catastrophic losses also include one or more serious injuries or deaths to employees. This is even more alarming when it is considered that most companies do not even have a strategic system to anticipate and solve crisis situations.

Last year, 2008, about 50,000 US companies reached the point of ultimate failure, as gauged by Dun & Bradstreet. By 2009 the number of failures had nearly doubled, to 97,000. Each year many thousands more head down the path to failure by losing ground to competitors or by watching a key piece of business disappear. Managers must develop cultures that foster and reward the management of crisis. They must continually update crisis-management policies to ensure that they reflect changing industry dynamics.

Why do corporations fall short of objectives? Why do strategies that seemed eminently sensible turn out to be disasters? Just why do successful organizations, which once could do no wrong, suddenly begin to lose their way? Managers must fully integrate crisis management into business practices so that dealing with the crisis is not an after-the-fact exercise.

THE CONSEQUENCES OF CRISIS

Crisis can be characterized as a major unpredictable event that has potentially negative results. It can also be thought of as a turning point for better or worse. The crisis event and its aftermath may significantly change a sales organization and its salespeople, products, services, financial condition, and reputation. So, the real consequences of crisis events to sales managers can mean the loss of future sales and reputation, the loss of consumer confidence, prolonged negative publicity, exposure to lawsuits, declines in stock values, and increases in operating expenses.

Union Carbide

In the area of crisis management, few firms have experienced more than Union Carbide. Gases released from a pesticide plant of an affiliate—owing to a deliberate act of sabotage—killed about 2,000 people in Bhopal, India, and injured many more. The “Crisis” as such obliged the company and its Indian affiliate to pay $470 million to the Indian government to compensate victims and survivors. The “Crisis” also ultimately depressed the stock price so much that the company was subject to an unfriendly takeover attempt. To fight it off, the company had to sell off significant portions of the company and use the proceeds to pay a special dividend to the stockholders. To forestall another tragedy of such proportions, Union Carbide's management resolved to create the world's best episodic risk-management system (ERMS), one that ensures senior executive review of substantial risks. This incident really illustrates what can be at stake with a crisis.

Union Carbide spent five years building a database of information that catalogs hazardous materials stored on site, size of storage tanks, vulnerability of local people to an explosion, and so on. Arthur D. Little, Inc. of Cambridge, Massachusetts, weighed the variables and ranked every one of the company's 1,400 operations. So, when the company initiated its ERMS program, responsibility was assigned to the senior line managers, not the risk manager. The company spent between $5 million and $10 million to develop its ERMS and spends about $1 million a year to manage it.

Causes of Crisis

One particular cause of crisis is that senior executives too often do not understand the fundamentals of their business. They neglect to ask central questions, such as what precisely is their company's core expertise, what are reasonable long- and short-term goals, and what are the key drivers of profitability in their competitive situation. It is a disturbing fact of corporate life that a lot of senior people at very large companies have no idea what made their organization successful.

Another cause for crisis is corporate leaders who are proponents of streamlining efforts and then who pump up their own bonuses while telling the troops to tighten their belts. It can be fatal to the cohesion, focus, and organization needed to respond to a crisis when cynicism and resentment build up because sales managers preach one doctrine and practice another. This brand of managerial hypocrisy goes well beyond pay and perks. Far too many sales managers ignore the human dimension of day to day operations, taking actions that violate unwritten rules as well as their stated intentions. They preach the importance of teamwork, then reward individuals who work at standing out from the crowd. They announce a preference for workers with broad experience then denounce job jumpers within the organization. They encourage risk taking then punish good-faith failures. Many future failures may take place because of the so called new deal between workers and employers, in which traditional bonds of loyalty loosen or disappear. Companies that offer employees a sense of long-term stability may satisfy customers and prosper at the expense of less effective competitors.

Poor customer-relations building can also be a cause for crisis. About 91% of unhappy customers will never buy again from a company that did not satisfy them, and they will communicate their displeasure to other people. There can be various reasons that customers become dissatisfied with a company. It can involve product or service quality, price, poor location, lack of attentiveness, complacency, not having a customer complaint system, or a weak public image. In addition, about one third of all dissatisfied customers leaves because the customer was unappreciated. Some of those customers will never complain to the company. So, the failure of sales managers to have a process to monitor and meet customer-satisfaction needs can be devastating to a company.

A Framework for Crisis Solutions for Managers

Managers can help their organizations cope with crisis by knowing what to do before and after the crisis hits. Here are some steps to follow:

Phase One: Fact Gathering

Fact gathering will be an extensive stage in the crisis management process. Certainly this is an important process once a crisis occurs to determine the best course of action. However, fact gathering should take place even before the crisis and actually be an ongoing process. Sales managers should determine the amount that their company spends in the region, their impact on the economy, awards and citations received, charities, internal financial considerations, and the historical overview of the company. Information regarding customer dealings and in particular patterns of complaint by customers or regulators are important to know. All of this information from the fact gathering process not only determines how to respond to a crisis but can have a preemptive impact with regard to those circumstances susceptible to a crisis.

Phase Two: Scenario Development

It is important for managers to develop the ability to anticipate and plan for a crisis. This can be done by forecasting and developing scenarios with the greatest probability of occurring and estimating outcomes for alternative situations. A written crisis plan should be developed that discusses these things and helps respond quickly to crisis. Also, role-playing exercises should be given to the sales force to prepare for those contingencies. These scenarios and role plays need not distract people from other duties and can be done during a meeting once or twice a year. For example, the role play could be:

Simulated Drill

A reporter from The New York Times calls the office claiming that a man contacted him enraged that his daughter went into convulsions soon after drinking one of our soft-drink products. How should this be handled?

The main purpose of the Scenario Development stage of crisis management is to have a process that can identify and address all the relevant elements of crisis readiness.

Phase Three: Communicating Our Message

This stage deals with assigning tasks and accountability and communicating this inside and outside the organization. The formation of a crisis management team is an important tool to help sales managers cope with crisis. A problem with crisis is that 43% of the time managers speak without authorization, 27% present incorrect data, and 22% took action that complicated the crisis. So, the crisis management team is essential to effectively communicate how the crisis is being handled. Sales managers need to either develop or be a member of the crisis management team. The structure of the crisis management team can be as follows:

The crisis management team should determine who is the most appropriate person to speak for the company. It should develop communication plans to inform employees, decide how to keep customers informed of events, and help establish what media will cover the crisis and who will prepare drafts of news releases and press kits. A press kit addresses external communication by dealing with all potential players and the public. The press kit also deals with internal communication by notifying the Crisis Team members and calling a meeting, immediately sending a memo to all employees detailing the policy, having the press monitored, and possibly even setting up an 800 number to provide easy access for questions from the public. With a crisis, the media play an important role, since in many instances they dictate the existence of a crisis and determine if it has taken place.

Effective crisis-management programs establish an independent unit, like the crisis management team, to ensure objectivity and avoid vested-interest specialization. Shared responsibility allows an organization to pursue market opportunities aggressively without suffering from excessive adverse exposure due to a crisis. Companies can also establish a system of checks and balances involving managers, line managers, senior management, and the independent crisis management team.

A MANAGER'S PREVENTIVE FRAMEWORK FOR CRISIS

Problem Solving

This conceptual model characterizes events that are not of crisis proportions, but that occur and have to be resolved. The manager's job is inherently a problem-solving job. This means determining how to improve morale, how to motivate employees, why performance levels are not where they should be, and how to get customers interested in what products or services are being offered. The dilemma that managers can face with problem solving is selecting the first reasonable solution that becomes available. Instead, three things should be determined. First, defining the problem—differentiating facts from opinions and using all individuals as information sources will help with stating the problem explicitly. Next, generate alternate solutions to find a range of options. All individuals involved should propose alternatives, take into account long-term and short-term consequences, and build these alternatives on one another in order to evaluate them in terms of their probable effects. Finally, managers should implement the solutions and have a monitoring and feedback system to assess their effectiveness.

Organizational Communication

Good interpersonal skills are no longer a luxury, but a bona fide qualification for effective performance. Managers spend about 30% to 50% of their time communicating with subordinates. Problems arise when managers believe they communicate more effectively than they do or subordinates believe these managers are more open to communication than they actually are. Distortion, where employees suppress information that may be interpreted to reflect negatively on themselves, can also occur with poor organizational communication.

To remain competitive and avoid situations that can grow into a crisis, organizations must have a responsible process for communicating, sharing information, and getting work done. Sales managers, by empowering the employees and being a supportive, an open, and an active listener, can overcome employee distrust. To overcome distortion, managers can use “management by wandering around,” keeping employees informed, and asking them for their input in order to maximize the sharing of information.

A Well-Defined Appetite for Crisis

An organization must clearly define its appetite for crisis in every business area. It also needs a compensation program that rewards appropriate risk taking but discourages managers from taking inappropriate risks. With standards in place, areas can be held accountable for how they manage crises. Making managers responsible for managing crises fosters a culture in which assessing risk potential is an integral part of the decision-making process in product development, in responding to customer requests, and in weighing new opportunities.

The problem is that too many companies are content to prepare their organizations only for the predictable snags. In recent years, one of the most common disasters stemming from management shortsightedness is getting stuck with yesterday's technology. The manufacturer contemplating a new product line should be pondering new materials that his customers will be using 10 years from now. The company that fails to buy new equipment that knocks a few pennies off of per-ton costs will almost surely surrender business to cheaper imports.

Staying close to the customer is the business mantra. Many companies continue to fail precisely because they have lost touch with their most important customers. IBM was still pushing giant mainframes, when the whole world was cutting costs. Companies that turn out products or services with a traditionally short life cycle are particularly vulnerable when they fail to detect and bend with shifting consumer attitudes. Whatever the business, really staying in touch with customers often involves a lot more than merely running market surveys and focus groups. The theory behind such exit polling is that you can learn more from your mistakes than from your successes. GM would have known that it was failing ten years before it did if it had tracked customer defections at the right time.

A crisis can bring out a maverick. No blueprints exist for maverick management and, by its very nature, maverick thinking defies conventional wisdom and cannot be premeditated. The brilliance of a maverick is evident in his or her ability to strike out alone. Maverick managers stand apart by taking notions like flexible workplace and open-book management to unprecedented extremes. What is perhaps a maverick's greatest challenge is winning the support of employees.

Great mavericks do not all think alike and their ideas can be unorthodox, but they do share an ability to stun the competition with their own personal brand of action. Unconventional leaders can be irritating, threatening, and disruptive for employees and competitors alike, but they may be exactly what is called for when a crisis occurs. Mavericks are no longer oddities, and for effective crisis management they are necessities because they will develop creative ways to resolve a crisis.

Customer Advisory Boards

A customer advisory board is a tool that can be used by sales managers to prevent a crisis or minimize damage once it occurs. Customer advisory boards are a cost effective way to find out from the marketplace how to become a firm they would do business with. The advisory board members, who are actual or prospective customers can provide a fresh perspective, not only on how to prevent problems that can lead to a crisis, but on how to approach business opportunities. An important part of an effective board is the participation of managers. Their suggestions will help target desired board members and frame the relevant issues to be discussed when the board meets. In addition, if they have involvement with the board they are also in a position to build relationships with the members.

The customer advisory board can include CEOs and presidents or the functional executives that decide where to direct their business. Members could be selected for their particular expertise. For example, a strategic planner with a good long-range perspective, or a technical expert that understands the features of a product or service might be a good choice. Customers want to believe that a company they do business with cares about them. The formation of a customer advisory board shows this and helps to develop a rapport. This can be essential to helping to identify early any issues that dissatisfy customers and could lead to a crisis.

SYSTEM CHECKLIST

When a company has a comprehensive crisis-management system how can sales managers know it is working? Here are some clear indicators:

• Critical risk areas are identified.

• Reports are clear and concise.

• Crisis is automatically part of daily decision making.

• Crisis terminology is part of the vocabulary.

• Surprises are less frequent.

• Strategic advantages are identified.

Crisis management can touch on both reliability and credibility issues. One key is the disruption of regular service that a crisis can lead to and how its handling can determine in a customers mind if the company is the kind of company he or she wants to deal with. So, the circumstances in today's business world dictate the need for a crisis plan and strategies. Managers have to be the catalyst in their organizations for recognizing the need for developing a crisis plan and implementing it appropriately.

SUMMARY

Above all, crisis management must be viewed as an evolutionary process. In particular, the validity and appropriateness of risk policies need to be reevaluated constantly. In addition, managers must develop, and encourage top management to develop, a crisis-management culture and philosophy that permeates the company. They should use crises to their advantage and reduce the impact of a crisis. So, by being prepared, rehearsing options in advance, developing a crisis plan, and identifying communications channels, managers can deal successfully with crises.