Six courses of action to survive and thrive in a crisis

de Waal and Esther Mollema Andre

de Waal and Andre Esther Mollema are both based at the Center for Organizational Performance, Hilversum, The Netherlands.

Context, context, context

Organizations generally respond to times of crisis as though they all suffer to the same extent. The woes and worries are supposedly the same for every sector, every size of company and every circumstance. Consequently, most organizations respond to a crisis in the same manner (Banerij et al., 2009). However, why is then that there are always companies that not only survive the crisis but also benet from it (Rigby, 2009)? Next to all the doom and gloom reports in the media on failing companies there are also stories on organizations that appear to be relatively unaffected by the crisis. It turns out that these companies differ from the majority in that they approach the crisis situation from their own context: What are our specic circumstances? What is the nature of our market? What are our threats and opportunities? What are our condition and striking power? These companies have an excellent insight into their situation on which to base their decision for a specic course of action, and this does not always need to be the Pavlov reaction of reducing costs (Faas, 2009; Wileman, 2009). For example, KLM Royal Dutch Airlines is now making anticyclic investments in new aircrafts. Because currently many orders for Boeing and Airbus aircrafts are cancelled the company can negotiate substantial discounts. A companys condition can be determined by reviewing its nancial status and the strength of its internal organization. The companys nancial status determines whether it has the nancial capacity needed to adopt and execute a specic course of action. For example, the investments needed to begin new operations are higher than those involved in the divestment of a non-protable business unit. The nancial status of an organization can be characterized as strong, when the company has sufcient funds to undertake new operations; reasonable, when the company needs to adopt a cautious nancial approach but nevertheless has some scope for new investments; and weak, a situation in which the company has to be nancially extremely cautious. A companys internal strength can be determined by carrying out the so-called HPO diagnosis. Studies of high-performance organizations (HPOs) organizations with better nancial and non-nancial results than their competitors during a period of at least ve to ten years reveal that ve factors determine an organizations ability to achieve sustainable better results based on a superior internal organization. These factors are: a high quality management, a high quality workforce, a long-term orientation, an open and action-oriented culture, and a focus on continuous improvement and renewal (see Box 1) (de Waal, 2008). An insight into the companys HPO status is obtained by distributing HPO questionnaires to the companys management and staff. The individual scores as given by the respondents are totaled and averaged to obtain a score for each of the ve HPO factors, on a scale from 1 (a great deal of improvement is required) to 10 (excellent). These scores can be compared with the average HPO scores in the industry to obtain an insight into the relative performance of the organization being assessed. The results from the HPO diagnosis form the basis for discussions with management on potential improvements within the company. An

The authors would like to thank the management of the aforementioned companies for their cooperation in the preparation of this article, Kasper Klaarenbeek (Talenten en Teams) and Jan Roording (GTI) for their provision of examples, and the participants in the HPO Leaders Network for their comments on the matrix. A previous version of this article was published in the Dutch journal Holland Management Review (2009, No. 125).

DOI 10.1108/17515631011080740

VOL. 11 NO. 5 2010, pp. 333-339, Q Emerald Group Publishing Limited, ISSN 1751-5637

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Box 1. The high performance organization study

A ve-year research study, based on an extensive study of 290 literature sources and a world-wide survey among more than 1,400 organizations, reveals that there are ve factors that ensure that an organization becomes and stays a HPO. These ve factors have a direct, positive correlation with competitive results. The higher the organization scores on the HPO factors, the better it performs competitively; the lower the scores for the HPO factors, the worse the organization performs relative to its competitors in the industry. The rst and most important HPO factor is the quality of the management. The managers of an excellent organization are characterized by integrity, decisiveness, action-orientation, performance-orientation, effectiveness, self-assuredness and a strong leadership style. They are what is referred to as high performance individuals (HPIs): they are guided by customer-orientation, quality-focus and continual improvement principles in all their actions and their work, as a result of which they inspire others to work together in achieving excellent results. The second HPO factor is the presence of an open and action-oriented organizational culture. An excellent organization promotes interactive internal communications (an open dialogue) between members of the organization to ensure that open and continual exchanges of information take place, both vertically and horizontally throughout the organization. The third factor is the organizations long-term orientation. HPOs always assign a higher priority to long-term continuity than to short-term gains. The excellent organization will do it utmost best to serve all stakeholders of the company as best as possible, as long as possible. In this way the organization deserves it place in society. The fourth HPO factor is continual improvement and renewal. Excellent organizations have a strategy that clearly distinguishes them from the competition. In addition, the organization is continuously improving its processes, products and services and strengthening its core competencies, to be able to fulll its unique strategy. The fth and last HPO factor is the quality of the staff. Staff of an excellent organization want to be held responsible for their results and at the same time want to be inspired to achieve exceptional results. At the same time, staff is resilient and exible, always focusing on achieving better performance.

organization with a score of more than eight for all factors is regarded as having a strong HPO status. A score or ve or less means the organization has a weak HPO status. An organization with a score of between ve and eight has an average HPO status. The combination of the organizations nancial status and HPO status determines the striking power it has for the adoption of a specic course of action (Reingold, 2009; Collins, 2009).

Six courses of action

In general organizations have to always, in both good times and bad times, monitor their costs and protability and manage their cash ow. Therefore excellent organizations watch their nancials since this is basic sound business strategy. Companies that have no cost awareness will lose sight of their costs that inevitably weakens their nancial position. At the same time organizations have to continually monitor their protability to avoid the real threat of non-protable growth. In recent years there have been numerous examples of structurally-healthy companies that grew themselves to death. So the key question is: what courses of actions are there, besides cost control and prot monitoring, for an organization during difcult times? A review of the activities organizations have undertaken during past crises reveals that there are six courses of action that companies can adopt in times of crisis (Charan, 2009; Colvin, 2009a, b; Mainardi et al., 2008; Thornton, 2009). The rst three courses of action are defensive, where the primary objective of the organization is to survive. The other three courses of action are offensive, where the intention of the company is to benet from a crisis by growing protably and becoming market leader. The courses of action are:
B

Focus on cost reduction. When the nancial situation of the organization is in a dire state, reducing the companys complexity, streamlining processes, postponing investments,

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reducing stock levels, cutting back on travel and accommodation expenses and refraining from extensions of temporary employment contracts can achieve a signicant decrease in the costs and increase the nancial capacity of the organization fast.
B

Focus on core operations. By investing solely in the companys core operations whilst at the same time divesting the non-core operations that distract management, the organization can exclusively focus on improving and strengthening these operations, thus increase its capacity to serve specic clients well. Downsize. Divesting the organizations marginally protable and loss-making operations increases nancial capacity and creates more scope for investments in the core operations and more promising ventures. Strengthen the internal organization. Improving the quality of management and staff, improving the primary and supporting processes, and devoting more attention to innovation and renewal enhances the internal organization and improves the organizations ability to deal with changed circumstances and prot from them. Focus on increasing turnover and margin. Streamlining the sales process, paying more attention to pricing, focusing on a smaller and higher-quality product range, and strengthening relations with customers, increases turnover and the margin. Exploit opportunities. The period in which many competitors are occupied with defensive measures offers an ideal opportunity to undertake activities that will enhance the organizations position in the market, such as launching new products and services, taking over companies, entering into partnerships that enhance core operations, and recruiting excellent staff currently employed by the competition.

Aligning the course of action to the organizations context

By combining the nancial status with the HPO status of an organization a matrix with eight squares originates. This matrix can be used to plot the six courses of action (Figure 1). The matrix contains eight rather than nine squares because, pursuant to the denition of a HPO, an organization with a strong HPO status and a long-term weak nancial position is not really feasible. An organization with both a strong nancial and HPO status has sufcient nancial scope and internal strength to make maximum use of the chances that arise during a crisis such as a recession. It can therefore exploit opportunities to the fullest by for instance starting new operations that enhance its market position during a period in which the competition is struggling to survive. Witteveen Bos, a Dutch consultancy and engineering company that ranks ninth in terms of turnover but rst in terms of protability, is in a strong nancial position due to its continuous protable growth since 2002. At the same time the company, owned by its 500 staff/shareholders and characterized by a powerful family culture, has a strong internal organization as manifested by a high score in the HPO diagnosis. Witteveen Bos always monitors the cost and protability of its operations, but does not place extra emphasis on these in the current difcult times. Instead, the organization manages its operations primarily on the basis of authenticity and passion: increasing quality, enjoying carrying out high-prole projects, acting as the partner of ambitious clients, and creating scope for the development and entrepreneurship of staff. In the midst of the recession Witteveen Bos started new operations in Belgium by setting up an ofce in Antwerp and entered in a new partnership in the railway consultancy industry with Royal Haskoning, DB International and Verebus. In so doing, Witteveen Bos is considerably enhancing its leading position in the sector (matrix position 1). When an organization has a strong nancial position but an average HPO status it still is able to exploit opportunities, although the scope of the new operations and the pace at which these opportunities can be utilized depends on how much the internal organization can handle. Therefore the company has to devote explicit attention to strengthening the internal organization so it can make effective use of the opportunities. GTI, the Dutch market leader in the provision of technical services, has a strong nancial position. The company balance

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Figure 1 Matrix of courses of action that can be undertaken, based on an organizations striking power

sheet does not show any (bank) debts and, as a subsidiary of the nancially strong GDF SUEZ parent company, GTI is part of a powerful international player in the energy market. GTIs customers require solutions that have a direct relation with sustainability, corporate social responsibility and cost efciency. For this reason the company anticipates on social trends by distinguishing itself with the themes of increased efciency of energy supply, increased comfort in the living and working environment, and lower overall consumption of energy. The current crisis offers GTI the opportunity to fulll its ambition. Several business propositions have been developed at an accelerated pace that will achieve an immediate desired effect: a permanent increase in turnover and margin at the expense of competitors. GTI has improved its services to customers by increased cross-selling of its solutions, and approaches new customers with sophisticated solutions at lower nancial and social costs. At the same time, as GTI has an average HPO status, the company focuses on the enhancement of the internal organization. GTI has always been cost conscious, the company began to focus on its core operations several years ago by divesting unprotable units. A process has been initiated to amalgamate GTIs 40 individual units into one group that will be able the company to operate more powerfully in the market. A great deal of effort is being devoted to the merger, simplication and harmonization of processes, and the implementation of an unied SAP system for the entire company that will make performance information better measurable and more transparent. In addition, GTI is also working on improving the quality of management as in the new constellation new management skills are required. As a result some managers of the formerly independent units who were unable to adapt to the change have left the company, whilst other managers are still receiving coaching (matrix position 2). Until recently a Dutch temporary employment agency had a strong nancial position which was used to initiate a range of new niche-market operations. However, as the agency had an average HPO status the company could not handle this extension and started slipping nancially. Therefore the agency now has to divest many of the recently acquired operations and has to make additional time and resource investments to accelerate an increase of protability in the remaining niche operations. While doing so the organization, in spite of the

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nancial pressures, will need to expressly devote attention to strengthening the internal organization otherwise the risk exist that the company will slip even further (from matrix position 2 to position 5). A Dutch multinational positions itself as an organization with a strong nancial position and an average HPO status. According to the Chief Financial Ofcer, the current crisis is not a normal economic crisis but a credit crisis, not a cost crisis, but rather a liquidity crisis. For this reason he states:
Cash is king. The real problem is the difculty in obtaining credit so there is not enough oil to lubricate the trade. The banks are no longer functioning adequately and it seems that the business sector has to take over their role. However, that is not what companies are for. For example, they cannot extend their credit periods to customers indenitely because they dont have the nancial capacity to do so. Moreover, their suppliers also want to receive their payments. Consequently, at present solvency is much less important than liquidity. A company can have a very high solvency ratio but if it cannot meet its payment obligations it can go bankrupt overnight. Another element characterizing this crisis is the changed nature of renancing, which is no longer an ordinary business process. Companies with a high leverage nd it very difcult to secure renancing, and when they are offered renancing the costs are substantially higher and, consequently, prots are lower. Obviously, at the moment issuing shares is out of the question. This is an additional reason for dealing carefully with liquidity: pay off debts quickly and refrain from unnecessary investments. As such, acquisitions currently do not have priority. A competitor that goes under is one competitor less anyway! Obviously, you mustnt miss a golden opportunity but any takeover will need to generate added value and cash ow straight away.

For these reasons the multinational attaches great importance to managing its operating capital well so that it can meet its obligations and make use of opportunities. Consequently, the net debt/EBITDA is now the most important ratio, and the organization is implementing measures such as lowering stock levels, reducing assets on the balance sheet, cutting costs, and focusing on the management of cash ow. The board of management has intensive discussions on these topics with managers in all divisions to coach them in executing these processes efciently and awless. The multinational accepts that during the crisis some of its clients will go bankrupt as the organization will not be able to lend a helping hand without placing itself in jeopardy. In the CFOs words: This crisis is not about survival of the ttest but survival of the fattest (matrix position 2). When an organization has a strong nancial position but a weak HPO status it needs to focus on strengthening the internal organization. This is the case for many healthcare organizations that built up a very strong nancial position during the past decades of their monopoly. They however have, as a result of a series of failed mega mergers and due to poor management, a weak internal organization and are increasingly confronted with nancial pressures as the free market enters the sector. The same goes for housing corporations who, because of their unique position as state-funded organizations, did not have any interest in the HPO idea as they could set their own nancial agenda by for instance dictating rents. As this situation is changing quickly because of free marker principles, these organizations need to make use of their strong nancial position to strengthen their internal operations rapidly (matrix position 3). An organization in a reasonable nancial state needs to focus on strengthening its nancial position. When the company has a strong HPO status it has to reduce costs and increase turnover and margin in order to create the nancial striking power to make use of opportunities and ensure that the company is elevated to the top-right eld in the matrix (matrix position 4). An organization with an average HPO status needs to follow the same courses of action, supplemented with strengthening the internal organization so that the company is able to effectively carry out the requisite actions. Bagels & Beans, a franchise company with 38 outlets throughout The Netherlands, has a reasonable nancial position. Franchise organizations grow by attracting new franchisees who invest in the franchise formula by paying a franchise fee, so Bagels & Beans needs to continually monitor organizational costs in order to keep this fee low. Bagels & Beans can increase the chains protability by opening

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new franchise outlets. As the franchise formula and franchise organization is already in place every new franchisee makes an immediate contribution to the prot. Bagels & Beans opened four new outlets in the second half of 2008 when the recession was in full swing and has plans for opening at least a further four outlets this year. Bagels & Beans has an average HPO status. This is due to the nature of a franchise organization which has a diversity of franchisees such that it is difcult to create a uniform culture. Bagels & Beans appreciates this problem, and for this reason during the coming year the company will determine the prole of a successful Bagels & Beans franchisee (including the prole of a successful Bagels & Beans manager) and then design a training program for the franchisees accordingly (matrix position 5). The Dutch subsidiary of Grohe, a global supplier of sanitary ttings, recently carried out a HPO diagnosis which revealed that the company has an average HPO status. In addition, it has a reasonable nancial position. The company has decided to focus primarily on reduction of costs that do not have an immediate bearing on the manufacture, distribution and marketing of products (such as travel and accommodation expenses, ofce supplies, give-aways, and visits to trade fairs), and increase of turnover by placing the emphasis on supplying the more expensive-home segment of the market. The HPO diagnosis also initiated project groups that will work on further strengthening the internal organization (matrix position 5). An organization with a weak HPO status has no other option but to reduce costs, since the company lacks the strength and innovative capacity required to increase turnover and margin. A good means of cutting costs rapidly is to divest all non-core operations and exclusively focus on core operations. Of course companies in this middle-left eld also need to strengthen the internal organization (matrix position 6). In a period of crisis organizations with a weak nancial position have no choice but to opt for one of the survival courses of action. This automatically implies a focus on reduction of costs, since there is little or no nancial scope for initiation of new operations, improvement of turnover and margin, or even strengthening the internal organization. The effects of cost reduction can be enhanced by withdrawing to the core operations, thereby avoiding the spending of funds on operations in areas in which the company lacks the strength to reap the benets (matrix position 7). In addition, when the nancially weak organization also has a weak HPO status, it needs to downsize to rapidly generate nancial resources. After many years of growth an international fashion company entered a difcult phase because it was unable to manage the rapidly increasing scale of operations adequately. Management started to waver in its strategy and quality and performance of the operations began to decline at an alarming pace. Parts of the company had to be sold and ultimately ownership of the entire company passed into other hands. What once was a world-famous, well-oiled and protable company had become a shadow of its former self. The new management is currently endeavoring to break the impasse by drastically reducing the size of the head ofce. All fat in the stafng is being cut out and the processes are being simplied and reduced to the essence. The companys focus is now on back to the core business and therefore it is in the process of divesting all secondary operations. The entire HRM cycle is being redesigned in line with the new focus and the remuneration structure is amended. Pursuant to this operation staff will exchange part of their xed salary for a variable reward system. In addition, management is devoting a great deal of effort to strengthen the internal organization. In the words of a member of the management team: During times in which you have few funds available for investment it is essential to gain everyones support for the investments you do make. We are making every effort to promote open dialogue in which everyone is free to contribute what he or she can. This ensures that good people keep condence in the future of the company and dedicate themselves with heart and soul to its success (matrix position 8).

Conclusion
The examples of the courses of action as taken by the organizations described in this article clearly reveal that one size does not t all. Each organization needs to examine its position

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carefully to identify the status of its nancial situation and internal organization. Organizations can then use the matrix of courses of action, to determine the most appropriate course for the coming time. This requires management to be brutally honest when identifying not only the companys strengths and weaknesses but also its own strengths and weaknesses. Improve the world, start with yourself is an approach that is certainly appropriate here. Management needs to take the lead in enhancing the ve HPO factors, including strengthening the quality of management itself, so that the company can not only survive a crisis but even thrive. And the real HPO always keeps the long-term goal in its visor: to become the best in its industry!

References
Banerij, S., McArthur, N., Mainardi, C. and Ammann, C. (2009), Recession response, why companies are making the wrong moves, white paper, Booz & Company, New York, NY. Charan, R. (2009), Leadership in the Era of Economic Uncertainty, McGraw-Hill, New York, NY. Collins, J. (2009), How the Mighty Fall, and Why Some Companies Never Give In, Random House Business Books, London. Colvin, G. (2009a), The Upside of the Downturn, 10 Management Strategies to Prevail in the Recession and Thrive in the Aftermath, Nicholas Brealey Publishing, London. Colvin, G. (2009b), How to manage your business in a recession, Fortune, January 19. de Waal, A.A. (2008), The secret of high performance organisztions, Management Online Review, April, available at: www.morexpertise.com/download.php?id 88 Faas, R. (2009), Navigating the downturn, white paper, Deloitte Consulting, New York, NY. Mainardi, C., Leinwand, P. and Lauster, S. (2008), How to win by changing the game, Strategy Business, Vol. 53, Winter. Reingold, J. (2009), Jim Collins: how great companies turn crisis into opportunity, CNNMoney.com, January 22. Rigby, D. (2009), Winning in turbulence, pull the right levers for your situation, white paper, Bain & Company, Boston, MA. Thornton, E. (2009), The new rules, managing through a crisis, Business Week, January 19. Wileman, A. (2009), The six million dollar cost manager, The Conference Board Review, January/February.

About the authors

de Waal is Associate Professor of Strategic Management at the Maastricht School of Andre Management and Academic Director of the Center for Organizational Performance. His latest book is called Strategic Performance Management: A Managerial And Behavioural de Waal is the corresponding author and can Approach (Palgrave MacMillan, 2007). Andre be contacted at: andredewaal@planet.nl Esther Mollema is Managing Director of the Center for Organizational Performance.

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