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IJCOMA
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Organizational crisis: lessons

from Lehman Brothers and
Paulson & Company

286
Received 12 July 2011
Revised 5 August 2011
Accepted 8 August 2011

Steven H. Appelbaum
John Molson School of Business, Concordia University, Montreal, Canada

Seth Keller
Stone Coast Fund Services, Portland, Maine, USA

Harold Alvarez
Baker & Mckenzie, Montreal, Canada, and

Catherine Bedard
Montreal, Canada
Abstract
Purpose The purpose of this paper is to provide a comprehensive review of organizational crisis
and organizational change management and to provide a guide to crisis prevention, management and
recovery by highlighting critical actions to be taken during each stage of an organizational crisis.
A second aim is to compare the crisis management of two financial firms during the 2007 financial
crisis: Lehman Brothers and Paulson & Company.
Design/methodology/approach The methodology involved a review of the literature and a case
analysis related to organizational crisis and organizational change management. The synthesis of
these two approaches is a conceptual paper. Furthermore, the article is supplemented by comparing
the management of the 2007 financial crisis by both Lehman Brothers and Paulson & Company in an
attempt to compare the literature findings to a global organizational crisis.
Findings The literature suggests that organizations with early crisis detection methods and crisis
management plans already in place before the onset of a crisis are significantly better prepared to
manage and survive a crisis event. In addition, these better prepared organizations have the
opportunity to reposition themselves and turn a crisis event into a strategic opportunity. This is
evident in the authors comparisons of both Lehman Brothers and Paulson & Companys different
management of the 2007 financial crisis.
Practical implications The demand for crisis management is on the rise as the 2007 financial crisis
exposed the lack of preparedness among financial institutions, challenged the assumptions crisis
management plans were based on and required a regulatory transformation of financial markets.
Surviving firms are recovering and learning from the crisis as their crisis management proved to be
ineffective.
Originality/value The scope of this paper offers readers a guide to organizational crisis
management, supplemented with examples from a financial crisis that affected almost every
organization in the world and from which many organizations are still recovering. Any organization,
regardless of industry, can benefit from the guide presented in this research. Moreover, the framework
of this paper can enable practitioners to formulate and improve their organizations crisis management
plans and capabilities.
International Journal of Commerce
and Management
Vol. 22 No. 4, 2012
pp. 286-305
q Emerald Group Publishing Limited
1056-9219
DOI 10.1108/10569211211284494

Keywords Financial institutions, Financial markets, Organizational change, Change management,

Corporate governance, Organizational crisis, Crisis management, Global crisis
Paper type Conceptual paper

Introduction
An organizations survival depends on its ability to undergo changes. While some
changes are initiated from within, other changes occur in response to an external
stimulus. Crises are the extreme form of a change and mark a pivotal moment in an
organizations life; successful adaptation or death. Recently, the sub-prime mortgage
crisis shook the entire financial world and by the same token tested several
organizations crisis plans. Most major financial institutions were severely weakened.
Suddenly, US banks needed bailout money and those that were not bailed out or
acquired in time were liquidated. Three years later, entire countries have yet to recover
from the crisis that froze credit accessibility.
Regardless of the origin, it is imperative that management adequately address a crisis
in order to overcome it. For every action there is a reaction. Therefore, an organization
must plan its crisis management as if it were a chess game. A good chess player always
thinks several moves ahead. This is a guide to help organizations prevent, manage and
recover from crises. In order to better compare and contrast this guide, we will
supplement each stage description with examples from two businesses who managed
the 2008 financial crisis in opposite ways: Paulson & Company and Lehman Brothers.
Paulson & Co. came out of anonymity in 2008 when the hedge fund profited from
the sub-prime financial crisis rather than go down with it (Jones, 2010). By betting
against the overheated housing market, some funds achieved gains over 589 percent
(Market Folly, 2009). Paulson & Co. then bet that the economy would recover in 2010,
a bet that also proved successful since the firm earned $1.9 trillion, a yearly record for
the hedge-fund industry. The hedge-fund founder, John Paulson, is now worth
$12 billion (Star-Phoenix, 2011). The firm is now considered to be the third-largest
hedge-fund worldwide ( Jones, 2010).
In comparison, Lehman Brothers was an investment bank founded in 1850 that rose
to be one of Wall Streets investment giants. Lehman Brothers filed for liquidation on
September 14, 2008 after tremendous losses in the sub-prime mortgage market and
plummeting investor confidence prevented it from finding a buyer (The New York
Times, 2010). What originally seemed like a viable investment strategy in the early
2000s resulted in a $613 billion loss when the housing bubble collapsed (Boedihardjo,
2009). The contrasting fates of both Paulson & Co. and Lehman Brothers highlight the
importance of crisis recognition and crisis management. Paulson & Co. was able to
reposition their organization and turn a crisis situation into an extremely positive
outcome while Lehmans inability to predict, recognize and react to the building crisis,
left the company in bankruptcy. The methodology of this article combines a case study
approach supplemented with academic literature in evaluating an organizational crisis.
Methodology
Case studies have longed been criticised in academic literature for their perceived lack
of rigor in data collection, subjectivity and inability to produce results that can be mass
generalized (Hamel, 1993). Despite these criticisms, several authors have argued the
merit of case studies as a form of theory generation.
Patton and Appelbaum (2003) argue that given the variety of data sources, the case
study contributes uniquely to our knowledge of individual, organizational, social, and
political phenomena. Yin (1984) furthers this notion by suggesting that the case study
allows an investigation to retain the holistic and meaningful characteristics of real life

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events that could be lost through empirical testing alone. Furthermore, Yin (1984) argues
that the unique strength of a case study is found in its ability to bring together a variety
of evidence; documents, artifacts, interviews and observations and provide a complete
understanding of an event or phenomena. This notion is furthered by Orum et al. (1991)
who argue that a case study rejects the idea of uniformity and simplicity and prefers a
world view of complexity and plurality. Therefore, given the complexity of merging
human agents and organizational structures, it is argued that only after in-depth case
studies come to be viewed as having an independent role of their own in advancing
sociological issues, can major organizational issues be addressed (Sjoberg et al., 1991).
Arguments have also been made as to when a case study is appropriate in research.
Eisenhardt (1989) argues that a case study approach is most appropriate when little is
known about an event or phenomenon or in the early stages of a research topic.
In addition, Eisenhardt (1989) outlines the three main strengths of case studies. First,
by reconciling evidence across cases and from a variety of sources, the likelihood of
generating novel theory is increased. Eisenhardt (1989) furthers this argument by
suggesting that the reconciliation of a variety of evidence in a case analysis unfreezes
thinking and therefore has the potential to generate theory with less researcher
bias than theory built from incremental studies. The second strength supports the
testability of theory generated from case studies. Eisenhardt (1989) suggests that
case theory is likely to be measurable given that the data has already been measured
during the theory building process and therefore, the resultant hypothesis are likely to
be verifiable. The third strength argues that case theory is likely to be empirically valid
because the theory building process is so intimately tied with the evidence, it is likely
the resultant theory will be consistent with empirical observation (Eisenhardt, 1989).
Furthermore, academic researchers have come to the defence of the case study
against those who question its validity as a research tool. In reference to empirical
testing alone, it has been argued that by dealing with only brief survey questions and
disconnected respondents, the reality of everyday life is removed from the research
which diminishes its usefulness (Orum et al., 1991). Furthermore, as noted by Patton
and Appelbaum (2003), quantitative data is also subject to researcher bias through
data manipulation, poorly constructed surveys or dishonest participants.
Finally, Patton and Appelbaum (2003) argue that when comparing natural
sciences and case studies, neither research technique or measurement should be
outright rejected and that the focus and scope of the project and the aim of the researcher
should determine the appropriateness of either approach. Therefore, given the unique
set of circumstances that led to the financial crisis and the reasons outlined in this
section, a case analysis is an appropriate approach towards developing a complete
understanding of the financial crisis for three reasons.
First, the recent financial crisis is arguably the most significant financial crisis the
USA has faced since The Great Depression and therefore; there is a general lack of
available empirical data. Second, given that the understanding of the financial crisis is
still in its relative infancy, a full examination of events must be performed and theories
generated before statistical analysis can be performed. Third, as organizational crisis
are in a constant state of flux, changing and adapting as the crisis progresses,
traditional empirical testing alone will not provide a comprehensive understanding of
the events leading to the crisis. This article presents the theory and application of
prevention, management and recovery of organizational crises.

Define the crisis

Websters Dictionary defines a crisis as:

Organizational
crisis

[. . .] the point of time when it is to be decided whether any affair or course of action must go
on, or be modified or terminate; the decisive moment; the turning point.

In organizational terms, crises are described as disasters precipitated by people,

organizational structures, economics, and/or technology that cause extensive damage
to human life and natural and social environment (Mitroff et al., 1987). Clark
(1995/1996) furthers this definition by adding that crisis are:
[. . .] unplanned events that cause death or significant injuries to employees, customers or the
public; shut down the business; disrupt operations; cause physical or environmental damage;
or threaten the facilitys financial standing or public image.

Organizational crisis can be detrimental to corporations given that they are

characterized as low probability/high consequence events that threaten the most
fundamental goals of an organization (Weick, 1998). Therefore, given their low
probability of occurrence, many firms do not give proper emphasis to crisis planning.
These problems are further complicated by Hermanns (1969) characterization of a crisis
as a situation with high-threat level and short decision time that surprises the members
of the decision making unit, suggesting that an organization that has not pre-planned
its crisis responses is put at increased risk in the event of a crisis. This point is best
described by Burnett (1998) who concludes that failure to have an active
crisis-management plan before the onset of a crisis, when timing an initial response
matter as much, this could be fatal for a company. While every crisis is different, in
general, the anatomy of any particular crisis is broken down into various stages.
Anatomy of a crisis
In order to properly plan for and manage a crisis situation, an understanding of the
stages of a crisis is necessary. Mitroff et al. (1987) argue that an organizational crisis
consists of four stages: detection, crisis, repair and assessment while Fink (1986)
classifies the stages as; prodromal, acute, chronic and resolution. Furthermore, Turner
(1976) classifies the events leading to an organizational crisis in six stages: normal
starting point, incubation period, precipitating event, crisis onset, rescue and salvage
and full cultural readjustment.
While the literature separates crises into a variety of stages, it can generally be
agreed that a crisis is comprised of four stages; incubation, detection, crisis and repair
and learning. It is important to note that, not all crises must pass through every crisis
stage in the model. Rather, the extent to which a crisis continues from one stage to the
next is determined by managements identification of and reaction to a building crisis
in each stage. Furthermore, the importance of crisis management can be further
emphasized by Darlings (1994) observation that the public treats an organizational
crisis differently than a public crisis by perceiving them as being either a problem or
opportunity for the organization and is therefore a matter to be handled by internal
management responses. Therefore, crisis situations provide an organizations
stakeholders the opportunity to judge management capabilities.
In the sections that follow, the authors provide an in-depth look at the four stages of
a crisis identified above. In addition, a road map is provided in order to help managers

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prepare for, identify and manage crisis situations accompanied by specific actions
or prescriptions (Rx) to be taken based on a review of the literature.
Rx 1: incubation
While many authors argue that detection is the first stage of a crisis, Turner (1976)
argues that prior to crisis detection are the starting point and the incubation periods.
The normal starting point consists of a corporations initial and accepted beliefs
about the world and its hazards. From this starting point, small and unnoticed sets
of events that differ from these accepted beliefs begin to form (Turner, 1976).
These events are further classified as anomalies; oversights, errors and events related
to the normal evolution of organizations. These anomalies are typically invisible to
the organization as they pose no immediate threat to daily operations (Lalonde and
Roux-Dufort, 2010). As anomalies continue to go unnoticed, they begin to incubate
within an organization (Turner, 1976) and eventually evolve into failures:
an accumulation of uncontrolled and poorly managed anomalies (Lalonde and
Roux-Dufort, 2010). Managers often justify failures by attributing them to external
factors such as human error.
The incubation stage can last two to four years according to Johnson (1997),
depending on industry type and crisis scale. In any given incubation period, a certain
number of anomalies have to be accumulated to eventually be noticed and acted upon.
Furthermore, beyond the quantity of anomalies are the anomaly patterns that will
arise. The recurrence of anomaly types or the sequence of anomalies will help
management direct their efforts in the right direction (Johnson, 1997). Therefore,
organizations must have a crisis plan in order to prevent or be prepared for a crisis
situation.
Crisis preparedness and crisis prevention
The incubation period is the ideal opportunity to implement or review two internal
programs: crisis preparedness and crisis prevention ( Jacques, 2010a). Crisis
preparedness involves three activities that will better prepare an organization to
survive a future crisis:
(1) Planning processes: allow managers to know what their responsibilities are and
how information pathways are mapped.
(2) Systems and manuals: technologies that document and enable information and
decision processes.
(3) Training and simulations: beyond theoretic planning and technology resources,
actual crisis simulations hone effective crisis-management skills.
On the other hand, crisis prevention goes further with proactive measures that thwart
potential threats:
.
Early warning/scanning: having processes that record anomalies and notify
managers of their appearance or recurrence in a user-friendly manner.
.
Issue and risk management: identifying internal and external threats and
determine how they would affect the organization.
.
Emergency response: having the ability to spring into action rapidly and nip an
impending crisis in its infancy (Cohn, 1991).

Five principles should be integrated into the crisis preparedness and crisis prevention
activities according to Cohn (1991):
(1) Corporate responsibility. Management has to infuse corporate responsibility and
accountability into all the layers of the organization and empower management
and staff to take ownership of their actions.
(2) Public support. An organization must build positive relationships with the
community, its customers, elected officials, employees and the media. Positive
relations will lead to a better recovery because people involved or witnessing the
crisis will have a pre-existing positive perception of the organization.
(3) Leadership. The CEO must actively be present in the direction the organization
is taking. Within the company and to outside stakeholders, the CEO must appear
sensitive to the situation and fully committed to the organizations health. Active
participation in a non-crisis period helps employees and stakeholders relate to an
individual in charge rather than a faceless company.
(4) Communication. Information, good and bad, should be communicated internally
and externally to build credibility; a priceless asset if a crisis should ever occur,
because internal and external confidence can help better manage and prevent a
storm.
(5) Employee support. Employees are the ambassadors of an organization vis-a`-vis
their entourage. Harnessing employee support will be easier in an incubation
period and will encourage employee implication towards crisis prevention and
management Cohn (1991).
Cohn further insists that together these five principles form the glue that binds the
basis of successful crisis management. These principles are meaningless, however, if top
management does not endorse them (Cohn, 1991). The importance of top management
support and the effectiveness of these strategies are echoed through the findings of
Jacques (2010a).
Paulson and Lehman Brothers
During the early stages of the housing market bubble, Paulson & Co. analyzed market
trends and attempted to forecast beyond the market optimism, considering several
different probable outcomes. Lehman Brothers on the other hand were ill-prepared to
foresee internal and external threats given the market optimism. For example,
assumptions underlying Lehman Brothers real estate investment plan were only
applicable in a growing housing market (Boedihardjo, 2009). Once the anomalies
have incubated into enough failures, organizations may begin to detect the onset of a
crisis.
Rx 2: detection stage
It is argued that detection must precede prevention because it is difficult to prevent
something that has not yet been detected (Mitroff et al., 1987). Therefore, organizations
adopt various warning systems such as computerized process controls, plant and
equipment monitoring, informational technology monitoring and scanning the
internal and external environment for signals of an impending crisis (Mitroff et al.,
1987). Crisis detection occurs when an organizations scanners identify a mismatch

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between the current corporate strategy and the emergence of a new environmental
trend (Hermann, 1969). Fink (1986) classifies the detection stage as being the prodromal
crisis stage, suggesting that organizations have constant warnings signaling
potential dangerous changes in the environment. For example, prior to the financial
crisis, many of the third tier sub-prime mortgages had begun to stop making payments
on their mortgage back securities. It was Lehman Brothers failure to recognize and act
upon these warning signals that ultimately led them to be unprepared to respond to the
coming crisis.
Effective scanning methods are only useful if taken seriously. Jacques (2010a) states
that the link between information and action lies at the heart of effective signal
detection. Organizations may have a sophisticated network of early warnings.
However, if warnings are ignored by individuals in the information chain, crises will
not be averted. Crisis expert Ian Mitroff claims that throughout every crisis some
individuals within or close to an organization picked up early warning signs of a
looming crisis and attempted to warn their superiors. Unfortunately, these signals were
ignored or blocked from getting to the top (Mitroff, 2002). Stocker (1997) paints a picture
of this phenomenon:
Top management, is the least informed group in the company when it comes to bad news.
Nothing moves more slowly than bad news running up a hill, a very steep hill.

In order to detect an impending crisis, information must first be collected and analyzed.
Information collection and analysis
When anomaly signals are detected, organizations must analyze them by properly
identifying, categorizing and prioritizing issues (Dyer, 1996; Lauzen, 1995). Although
analysis procedures differ between organizations, three elements will promote a
successful detection phase:
(1) Objectivity. Information collected should be analyzed according to facts from
reputable sources. Jacques (2010b) recommends using a failure benchmarking
system that allows an organization to compare detected failures with occurrences
in peer organizations and peer industries.
(2) Independence. Individuals analyzing information should not be direct
stakeholders in regards to the nature of the information collected. For
example, the individual collecting or analyzing the information should not stand
to lose their employment based on their responsibility to report red flags.
(3) Link to action. Analyzed information, once rendered, must easily be translated
into meaningful action. Mechanisms should be devised during the incubation
stage and promote information reaching the top with efficient, open channels.
The detection phase is the pivotal moment when risk and change can be turned into
opportunities (Cross, 2009); Jacques (2010b) insists that disasters can be averted if an
organization integrates issue and crisis management into its strategic planning
processes. This includes ensuring a no-fault environment to encourage the reporting of
near misses as well as willingly accepting bad news or conflicting opinions; Brown
(2002) further burdens senior management by stating that their full commitment and
support is necessary to promote a successful detection phase. In his opinion, an
organizations systemic challenge is a result of:

.
.
.

lacking imagination;
failing to see the bigger picture; and
failing to link information to action.

Furthermore, Mano (2010), calculated that the organizational structure can also affect
crisis preparedness and crisis prevention. In this study, the number of managers had a
negative effect on managing and preventing a crisis. Therefore, more flexible
organizations better promote information transfers. In addition, managerial
professionalism was shown to have a positive effect on crisis prevention and crisis
control.
Paulson and Lehman Brothers
Paulson & Co. analyzed what if scenarios and found that an external threat was
looming: the housing market bubble was likely to burst. Once the threat was detected,
Paulson & Co. turned this risk into an opportunity. At a time of great economic
confidence, the hedge-fund manager went against the trend and bet that the market
would sink: a highly profitable bet for Paulson & Co. Although the housing bubble was
a hurricane created by cyclical industry-wide short-sighted practices, Lehman Brothers
could have limited its damages if it had detection phase supported by early warning
systems as well as effective communication channels. As major player in the sub-prime
market and the smallest of the major Wall Street firms, it faced a greater risk that large
losses could be fatal (The New York Times, 2010). Lehman Brothers inability to assess
its own vulnerability prevented it from reducing its portion of sub-prime mortgages.
When crises are detected, the organization enters into the acute crisis stage (Fink,
1986). The acute phase is the peak of an accumulation or organizational dysfunctions
that have existed for a long time but have been overlooked (Shemetov, 2010).
Rx 3: crisis stage
Following the acute crisis stage is the chronic crisis stage in which symptoms from the
buildup of failures present themselves. The breakdown occurs as failures have reached
a saturation point beyond which the organization no longer has control (McEntire,
2005), resulting in the ultimate triggering event (Lalonde and Roux-Dufort, 2010;
Milenkovic, 2001). The crisis is now noticeable given the result of some action event;
train crash, building fire or a falling share price (Turner, 1976). This stage is either the
beginning of recovery for some organizations or the death of others (Fink, 1986).
When the crisis presents itself, the organizations internal vulnerabilities are made
clear to all stakeholders as managers realize they cannot control their organizations
as they use to. By ignoring anomalies and failures, managers are no longer faced with a
single issue but rather a complete destabilization of their environment and their
organization (Lalonde and Roux-Dufort, 2010). Major stakeholders may begin to
withdraw their support and managers are forced into action in order to show their
commitment to resolving the crisis. These pressures may cause unprepared managers
to attempt strategies that are not relevant to the situation (Lalonde and Roux-Dufort,
2010). At this point management attempts to design and implement a recovery
program in order to get the crisis under control at a minimal loss.
In the chronic crisis stage, the organization finds itself in the midst of rapid and
potentially dangerous change events. It is suggested that organizational crisis that

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create more harm can create more opportunity for change (Seegar et al., 2005); however,
organizations must ensure that change is managed properly if the organization is to
successfully create a new organizational identity.
Creating a new organizational identity
Kovoor-Misra (2009) suggests that crisis situations have an impact on a companys
perceived organizational identity (POI), and that identity change can move
through two paths depending on whether a crisis situation is perceived as either a
threat or an opportunity for change. When faced with a crisis, organizations are faced
with competing questions as to who we are vs who we want to be. If a crisis is
perceived to be a threat, pressure to act as who we are dominate behavior and the
current organizational identity is defended (Kovoor-Misra, 2009). Dutton et al. (1994),
argues that the greater the consistency between the attributes members use to define
themselves and the attributes used to define an organizational image, the stronger
a members organizational identification. Therefore, during a change situation
perceived to threaten an organizations culture, the organization will be reluctant to
adopt change as employees often associated the loss of a culture with the loss of a loved
one (Sherer, 1994).
If a crisis is perceived as an opportunity for change, thoughts of who we want to be
dominate and the organization becomes open to changing its identity. In this situation
it is advised that management transition the message from who we want to be into
who we could be as the later seems more attainable, and therefore more motivating to
work towards (Kovoor-Misra, 2009). Corley and Gioia (2004) outline the three
dimensions of identity change for organizations experiencing a crisis event into three
stages: triggers to identity change, identity change context and leadership responses.
A change to the organizations current culture can be triggered by three events;
a change in social referents, temporal identity discrepancies and construed external
image discrepancies. Organizations compare themselves with other organizations in
order to define both who we are and who we are not, a crisis change results in a loss
of a referent and can leave the organization asking who are we? Temporal identity
discrepancies refer to the difference between the current organizational identity and
who it would like to be in the future while construed external image discrepancies refer
to the difference between how organizational members perceive their organization and
how they believe outsiders perceive the organization (Corley and Gioia, 2004).
Temporal identity discrepancies are also referred to as the perceived identity gap
between who we are and who we could be and occur after an organization has
decided it is open to changing its identity. Furthermore, at this stage, the organization is
also faced with the perceived identity cost or the cost associated with not changing their
POI (Kovoor-Misra, 2009). Temporal identity discrepancies and perceived identity gaps
can lead to change overload within an organization. Crisis situations often force
organizations to rapidly change both their daily operating procedures in addition to their
culture, resulting in change overload, similar to information overload (Corley and Gioia,
2004). Change overload results in the emergence of identity tensions. Crises can leave an
organization in a sense of cultural ambiguity and competing viewpoints as to who we
could be begin to emerge. These multiple viewpoints begin to compete for dominance
which further increases identity ambiguity (Corley and Gioia, 2004). These
complications of identity change during the crisis stage, if managed improperly,

can have long-term negative effects on the health of an organization. Therefore,

leadership responses are critical to ensure the continued survival of an organization.
Leadership response
Given the importance of leadership in the crisis stage, it is important to distinguish the
difference between management and leadership; Managers are people who do things right,
and leaders are people who do the right things (Keeffefe and Darling, 2008). Keeffefe and
Darling (2008) further distinguish the difference between managers and leaders by arguing
that managers control resources and accomplish goals while leaders communicate
among people in guiding the organizations operations. Therefore, leaders are normally
the individuals responsible for crisis management (Keeffefe and Darling, 2008).
Strategic leadership is further reflected in individuals who are opportunity-oriented,
and who are constantly on the lookout for problems that can be converted into
opportunities for their organizations, thereby providing a means for creative and
meaningful organizational development. These leaders also nurture positive attitudes,
thoughts, feelings, perceptions and associations that help to nurture strong internally
controlled responses to what otherwise might be considered to be negative crisis events
(Hawkins, 1998). Good crisis leadership can make a huge difference in dealing with a
crisis; poor leaders, unfortunately, may misperceive a crisis and put their companies at
greater risk (Chong, 2004). Therefore, proper problem diagnosis is crucial before
implementing a change response.
Responding to change
Being open to change is not enough to actually initiate change within an organization.
Management (leaders) must provide the proper catalyst for change and steer the
company towards its new identity. Therefore, in a crisis, management must be certain
to provide a resonating message that is clear and meaningful to all stakeholders of the
organization to ensure their support. Management must try to reduce the identity gap
between the current and desired culture by offering a clear vision of the firms future
and create a new raison detre during the crisis stage and identify goals that resonate
with employees (Seegar et al., 2005). Furthermore, it is important for management to be
conscious of the changes already taking place and remember that change is an
emotional process and people need to be changed with dignity while acknowledging
their past and justifying why they should move on (Ashkanasy and Kavanagh, 2006).
Being conscious and respectful during change will help the organization secure buy-in
from their employees and facilitate the change process.
Therefore, it is recommended that leaders make a public commitment in times of
crisis and attempt to generate support (Seegar et al., 2005). It is also important to
determine when the CEO should step up and communicate. Lucero et al. (2009)
suggests that during the crisis stage the CEO should not step up if the crisis was
caused by a strike, rumor, product recall, or hostile takeovers. Furthermore, the CEO
should not step up at the height of an industry-wide crisis when there is no clear
accountability for whom or what caused the crisis. CEO action under these criteria can
worsen the situation and may have legal liability consequences in the future, such as
during the 2007-2009 financial crises (Lucero et al., 2009).
The CEO should step up and communicate when the crisis has become unbearable
and the organizations reputation is threatened. In this situation the CEO has no choice

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and must appear publicly regardless of the crisis situation. It is argued that trust
must be maintained if the organization is to implement corrective actions to the crisis
(Lucero et al., 2009).
Once the organizations message and new cultural image have been communicated,
management must ensure they model the new behavior if it is to be adapted within
the organization. Management must continue to refine the desired image, increase its
branding efforts and model the behaviors associated with the desired image (Corley
and Gioia, 2004). Once management has successfully managed the crisis stage, the
organization will then be ready to reflect and learn from the crisis in the recovery and
learning stage.
Rx 4: recovery and learning stage
Once the organization has recovered from the crisis, it is important that management
takes advantage of the learning opportunity provided to them. At this stage the
organization first assesses the damages resulting from the crisis and determines the
organizations current health and position (Chong and Escarraz, 1998). After the health
assessment, the organization must learn from this past crisis and determine how it can
apply this knowledge to the future (Mitroff et al., 1987). Essentially, the organization
must ask itself three distinct questions: what exactly has happened? How did it
happen? Why did it happen? (Chong and Escarraz, 1998). In this stage the organization
also reviews its handling of the crisis in an attempt to improve its functioning in the
future (Hermann, 1969). Finally, the organization reviews their crisis-management plan
and makes improvements or creates a plan if it did not have one before (Chong and
Escarraz, 1998; Mitroff, 1998).
The effectiveness of crisis-management efforts can be determined when operations
are sustained and/or resumed and losses are minimized, and learning occurs so
that lessons are transferred to avoid future incidents of the same kind (Pearson and
Clair, 1998).
All organizations go through changes throughout their life cycle. Past experiences
in the organizational life cycle affect not only present organizational states but also the
development of future events (Connolly, 2006). It is mainly through past experiences
that organizations as well as individuals develop learning processes, which facilitate
better adjustments to threats (Ebrahim, 2005).
The learning process will provide the basis for re-evaluating organizational
concepts through the exploration of the hidden aspects of past crisis experiences
(Thornhill and Amit, 2003), and will provide valuable lessons about how to improve
performance (Ritchie et al., 2007) and on how to avoid future crisis (Ritchie et al., 2007).
According to Garvin (1994), the ability to assess previous successes and failures and
capitalize on the knowledge gained through learning from past experiences enhances
the development of innovative perceptions and increases organizational capability to
adapt to its environment (Garvin, 1994).
What is more, organizational leaders have a responsibility to learn from past crisis
and to plan for future crises (Hargis and Watt, 2010). However, organizations and their
leaders usually deny their vulnerability to potential future crisis. The main reason is
the entrenched mentality that crises only happen to other organizations or that their
organization is too big and powerful to fail (Mitroff and Anagnos, 2001). Such beliefs,
especially in post-crisis situations, can prevent change, or render its implementation

a challenging endeavor (Paton, 2009). Implementing change is never easy. Nonetheless,

organizations with sufficient structural flexibility are in a better position to develop its
capability to manage crisis (Folke et al., 2003).
Furthermore, central to the components of learning from a crisis is the ability of the
organization to channel and transform knowledge and experience into action. Moreover,
learning is useless if it is not timely and properly applied (Mano, 2010). Additionally,
leaders should adopt management styles that encourages learning from crisis facilitate
dealing with future crisis events (Garcia, 2006). Furthermore, previously acquired
knowledge about how to handle a crisis can help revise earlier organizational
assumptions and actions (Argyris and Schon, 1996), while past mistakes can teach
managers to modify how they cope with current situations and evaluate future trends
(Ebrahim, 2005). However, not all organizations manage crisis and change in the same
way, nor are they able to capitalize from the lessons learnt during crisis situations.
Post-crisis responses will determine the success of an organizations recovery.
Post-crisis responses
Researchers have determined that organizational responses post-crisis vary greatly
depending on their ability to learn from crisis (Gunderson et al., 1995; Alesch et al., 2002;
Folke et al., 2003; Paton and Wilson, 2001). Moreover, recent studies have shown
that crisis-preparedness is crucial to avoid organizational failures (Mano, 2010).
Organizations appropriately positioned for tackling turbulent environmental conditions
effectively, both in preparing for crisis and in terms of learning from past failures, will
eventually be better able to actually control and prepare for crisis (Mitroff and Linstone,
1996). The same authors have identified specific post-crisis responses, namely:
.
The non-response: this occurs when bureaucratic inertia conspires to block
change and sows the seeds of future and more complex crises (Gunderson et al.,
1995). A study carried out by Alesch et al. (2002) on small businesses affected by
crisis in the USA concluded that the extent to which the owner recognizes
and adapts to the post-event situation is a significant predictor of survival.
The study concluded that those who continued to do business under the old
paradigm after the crisis were less likely to survive future crisis situations
(Alesch et al., 2002). We are of the opinion that the non-response was the most
common response among the companies that failed during the financial crisis.
Companies such as Lehman Brothers considered themselves too big to fail and
believed that no major changes were needed in their operations. The outcome of
this behavior is well known, companies that were financial behemoths and pillars
of the global economy ceased to exist.
.
The organization responds, but lacks appropriate experience to do so effectively:
this can occur because the organization has failed to learn lessons from the crisis.
The consequent implementation of untried actions, even while recognizing a
need for change, can increase resilience or it can increase vulnerability and
exacerbate the loss of adaptive capacity (Folke et al., 2003). Emerging from a crisis
with only minor consequences, even when acknowledging that this was due to
luck rather than planning, can stimulate overestimation of future response
capability, leaving the company ill-prepared to manage future crisis situation
(Paton et al., 1998). Folke et al. (2003) emphasize the fact that, to increase resilience,
experience of failure, and an ability to learn from it, is required. Failure provides

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valuable insights into areas where development is required. Not only does the
organization need to develop a culture that embraces risks and uncertainty, but
also it must develop strategies to learn from the unexpected disturbances and
failures that arise over time (Paton, 2009).
In addition to the main post-crisis responses, Colvin (2009) and Mainardi et al. (2008)
have pinpointed some of the most common actions that organizations take, namely:
.
Cost reduction. Cost reduction represents the first anti-crisis measure adopted by
managers. Cost reduction policies might determine the increase of the profit and
limit the registered losses during a crisis (Briciu and Sas, 2009).
.
Focus on core operations. By investing solely in the companys core operations
while at the same time divesting the non-core operations that distract
management, the organization can focus on improving and strengthening these
operations, thus increase its capacity to serve specific clients well (De Waal and
Mollema, 2010; Colvin, 2009).
.
Downsize. The systematic reduction of a workforce through an intentionally
instituted set of activities by which organizations aim to improve efficiency and
performance (Appelbaum, 1991; Cameron et al., 1987; Cascio, 1993). As a result, the
firms costs, processes and workforce are affected. It is understood that
downsizing efforts are undertaken for the improvement of the organization
(Appelbaum et al., 1999).
.
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 change and crisis situation
(Faas, 2009; Mainardi et al., 2008).
.
Exploit opportunities. During crisis times when competitors are occupied with
their own survival, well prepared organizations can undertake activities that will
enhance its 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 laid-off by the competition (De Waal and Mollema,
2010; Thornton, 2009).
Many companies introduced at least one or a combination of the abovementioned
recovery actions as a response to the financial crisis. These companies managed to
successfully weather the crisis and some of them ended up in a stronger position
than where they were before the crisis. For example, Paulson & Co. exploited the
opportunities created by financial products such as credit default swaps and ended up
posting incredible profits when the rest of the financial world was struggling to survive.
It is important to note; however, that the above post-crisis strategies will cause
significant change within an organization that, in turn, will need to be continually
managed after the crisis.
Organizational change
Organizational change involves moving from known to unknown (Agboola and
Salawu, 2011). The most accepted view is that change is generally is triggered

by events in an organizations environment, such as a crisis, shortfall corporate

performance, shifts in technology, change is customer demand, among others
(March and Simon, 1958; Cyert and March, 1963; Hedberg, 1981; Levitt and March, 1988).
More importantly, such unexpected problems reveal weaknesses in established
strategies and processes that require adaptation and change (Levitt and March, 1988).
Any change will result in responses from those that might be affected positively or
negatively. Perceived positive effect of change will promote commitment while negative
perception will generate resistance (Agboola and Salawu, 2011). Moreover, change in
organizations may be continuous and incremental or rapid and discontinuous with
abrupt shifts from the patterns of the past. Change may be planned or it may be
emergent. The scale of change may range from fine-tuning through incremental and or
modular adjustment to wide scale corporate transformation (Smith, 2011). However,
regardless of how small or large the change required is, implementing change is never
easy. Between 50 and 70 percent of all change efforts fail to achieve their objectives
(Balogun and Hailey, 2004).
Stages of change. Scholars like Isabella (1990) proposed a four-stage model
including: anticipation (information about the change is assembled), conformation
(the implications of the change begin to be understood), culmination (pre- and
post-change results are compared and assimilated), and aftermath (consequences of the
change are evaluated). On the other hand, the Jaffe et al. (1994) model suggested four
reactions organizational members experience as they move through the change process:
denial (refusal to believe the change will be implemented), resistance (not participating
or attempting to avoid implementation), exploration (experimentation with new
behaviors) and commitment (accepting or embracing the change) ( Jaffe et al., 1994).
Achieving change. According to Kotter (1996), the best way to achieve change is
through a staged and sequential approach, not to rush and/or to fall victim to the
illusion of speed, and to look out for and correct the pitfalls that accompany each of
these stages of change (Kotter, 1996). According the same author, the best way to go
about change is as follows:
.
establish a sense of urgency for the needed change;
.
form a powerful high-level coalition to guide and lead the changes;
.
create a vision of the organizations future to focus and direct the change;
.
communicate that vision widely, repeatedly and consistently from top level
down;
.
empower people in the organization to act change champions;
.
plan for visible short-term performance improvements;
.
as change takes effect build on extending the reform structures, systems and
processes and encouraging and growing change agents in the organization; and
.
institutionalize the new ways of working, encourage and develop ongoing
leadership of change and anchor the changes into the organizational culture
(Kotter, 1996).
Additionally to the abovementioned steps, Kotter and Rathgeber (2006) further advises
organizations to approach change as a long-term process, not a simple and short-term
event. Furthermore, Kotter explains that change is a process that builds on itself.

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In Kotters (1996) view, skipping stages will not accelerate the process; rather, it will,
slow the process, or even derail it completely.
Admittedly, the above framework does not guarantee a successful outcome;
however it provides a roadmap that organizations can use to improve their chances of
introducing change.

300

And finally . . . Paulson and Lehman

The comparison of Paulson & Co. and Lehman Brothers again shows the difference
between two firms in similar industries who managed the financial crisis in vastly
different ways. As noted throughout this paper, Lehman Brothers inability to detect the
growing anomalies limited its ability to react and mange the crisis once it appeared.
These inabilities to manage the crisis then ultimately lead to the companys liquidation
in 2008. Therefore, it is not possible to determine whether Lehman Brothers was able to
learn from this crisis. Paulson & Co.; however, was able to turn the crisis into an
exploitable opportunity through proper identification and reaction. It is also evident that
Paulson & Co. was able to learn from this crisis as the hedge-fund company has used its
anomaly detecting abilities to launch a new fund in order to capitalize on what it
anticipates will be the new bubble-crisis: gold (Zuckerman, 2011).
Conclusion
An overview was given as to what defines an organizational crisis, the stages of a
crisis and their effects on an organization during all four crisis stages:
(1) incubation;
(2) detection;
(3) crisis; and
(4) learning and recovery.
Furthermore, advice was offered to management as to what actions to take during each
stage of a crisis in order to prevent, manage or learn from the situation. This paper
highlights the importance of proper signaling systems in order to identify a crisis in its
infancy and minimize damage to the organization. Furthermore, it highlights the
importance that large companies must abandon the too big to fail mentality and not
be overconfident in their abilities to escape crisis situations. The article highlights the
importance of the organization learning from its mistakes and continuously updating
their crisis-management plans. In addition, a management guide was provided to
illustrate how to properly implement these changes within the organization.
The review of the literature has revealed that improper pre-crisis planning is the
cause for most negative outcomes for organizations during a crisis event. This is further
evidenced by the 2007-2009 financial crises that saw some of Wall Streets largest
companies collapse at the onset of the crisis. Prior to this crisis, very few firms were able
to identify (or admit to) the building anomalies leading to the crisis. While Paulson & Co.
represents a firm that was able to recognize and capitalize from the building anomalies
Lehman Brothers and the majority of financial institutions were forced into insolvency,
bailed out by the US Government or forced into mergers that wiped out years of
stockholder gains. Furthermore, this article has helped to further the understanding of
the events that transpired to collapse one of Wall Streets most powerful financial firms.

The comparison of the case study to the literature findings forms a foundation for
future researchers to generate hypothesis and test empirically.
Whether organizations have learned a lesson from this past crisis remains to
be seen. As we have discussed throughout this article, the next crisis is just around the
corner for an organization. Without proper learning and planning, organizations are
destined to repeat past mistakes in crisis management.
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Corresponding author
Steven H. Appelbaum can be contacted at: shappel@jmsb.concordia.ca

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