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The Five Stages of Crisis-Management According to Jack Welch

October 2, 2008

As we all know, our country is experiencing a staggering financial crisis. This crisis has stunned the nation and left many fearful and concerned regarding how to address and solve it.

In September of 2005, Jack Welch, former CEO and Chairman of General Electric, wrote an op-ed piece in The Wall Street Journal. The article was entitled “The Five Stages of Crisis-Management.” The context for the article was the aftermath of Hurricane Katrina and the devastation left behind in New Orleans.

Although we are experiencing a crisis of a different sort, it seems appropriate to revisit and synopsize the lessons that Mr. Welch shared in that article as they are helpful in contextualizing what we are experiencing today.

* * *

Stage 1: Denial

According to Mr. Welch, the first stage of that pattern is denial. This stage usually begins with the belief that the problem isn’t that bad. This is a typical reaction, in part, because people never believe that bad things will happen to them. He goes on to suggest that “one of the marks of good leadership is the ability to dispense with denial quickly and face into hard stuff with eyes open and fists raised.” It becomes the leader’s job to help people confront reality, create a new direction and inspire people to address that reality with positive action.

Stage 2: Containment

The initial symptom at this stage is for people to try to keep the problem quiet. From there, it is not uncommon to find that leaders, even those who are extraordinarily gifted, try to make the problem disappear by giving it to someone else to solve.

Stage 3: Shame-Mongering

Mr. Welch goes on to state that at this stage, “all stakeholders fight to get their side of the story told, with themselves as the heroes at the center.” In the last few days, we have witnessed a demonstration of this phase as we have listened to our present administration, Democratic and Republican leadership tell us who is to blame and who will save the day.

Stage 4: Blood on the Floor

In the fourth stage, as in just about every crisis, there is at least one high profile person who pays with his job. This crisis is no different. Leadership at AIG, Fannie Mae, Freddie Mac and many of the companies that have been swallowed up have paid with their jobs. And unfortunately, again in this case, that leader often brings down many other people with him or her.

Stage 5: The Problem Gets Fixed

In the fifth and final stage, the crisis is resolved and, as Mr. Welch notes, “despite prophesies of permanent doom, life goes on, usually for the better.” The bill that passed the Senate floor tonight added in may new features for taxpayers including increases in the limit on federal bank deposit insurance, tax breaks for production of and investment in industries promoting clean energy such as solar, wind and biodiesel and tax relief for victims of natural disasters in the Midwest, such as flooding, tornadoes and other severe weather events (although there certainly are “sweeteners” that look alot like “pork” such as tax breaks for builders of auto raceways and rum producers in the Virgin Islands and Puerto Rico).

* * *

It seems that we are beginning to enter stage five of the crisis-management process even though it may take us a number of years to fully experience the results. It is also important to remember that crises have a positive element to them as well. They let us know where things are broken and help us identify the solutions so that future similar crises may be avoided.

Mr. Welch’s insights are extremely valuable in one other arena as well.

Knowing that there is a predictable pattern to crisis management is useful as it will help us move on to the recovery stage.

Categories: Crisis Management, Leadership
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The Five Tests of a Sound Strategy

September 24, 2008

Assuming that we know “what we want to be,” that is, we now have a vision in place, we can begin to immerse ourselves in deciding the best path toward reaching our destination.

Yes, we are finally ready to formalize our business strategy.

Strategy is defined based upon (1) the industry and your position within the industry as well as (2) your position relative to your competitors’ position.

Most people think of strategy as optimizing what they already do and being the best at it, leading them to conclude that there is one, best way to compete. Strategy is really about choosing to differentiate one’s product / services from one’s competitors.

Failing to differentiate one’s products / services from those of one’s competitors – meaning the consumer can’t decide which product is better — creates destructive competition in which the only distinction is price. Price competition is never sustainable and is unwinnable.

Competing effectively means that a company is

  • Exceeding the Industry Average Return
  • Creating a return greater than those of most or all of your competitors

To win, you either have to have a higher price (justified by a differentiation of product / service) or a lower cost (justified by a more efficient value chain). You need to operate from the industry cost vs. your cost and the industry price vs. your price. Regardless, you have to be profitable. After all, you can’t have an army without feeding it…and you can’t have a business without being able to sustain it.

Five Tests of a Sound Strategy

There are five tests of a sound strategy

1.      A unique value proposition compared to competitors

2.      A different, tailored value chain

3.      Clear tradeoffs, and choosing what NOT to do

4.      Activities that fit together and reinforce each other

5.      Strategic continuity (having the strategy permeate throughout the organization)

Defining the Value Proposition

Defining the value proposition means identifying the end users and the channels used to sell to them; understanding the end user’s needs and which products, features, and services will address them; and creating a profitable price at which they will buy. We have already discussed how we can learn more about what our customers are really buying.

According to UCLA Anderson’s School of Management Professor Richard Rummelt, there are two ways to get to a successful value proposition. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment – in technology, consumer tastes, laws, resource prices, or competitive behavior – and ride that change with quickness and skill. The key is to take a position while there is uncertainty and ambiguity. Clarity occurs only after a company takes a position. However, by choosing to let another take a position, one loses the opportunity to profit from the knowledge.

The second path is how most successful companies develop their plan. Changes do not come along in nice annual packages, so the need for strategy is episodic, not necessarily annual.

Sustaining Competitive Position – The Role of Tradeoffs

  • Choosing a unique position is necessary but not sufficient to create a sustainable advantage because of the threat of imitation
  • Traditional thinking focuses on competitors’ difficulty or ability to imitate
  • Equally, if not more important, is whether competitors want to imitate
  • Tradeoffs are incompatibilities between strategic positions that create the need for choice
  • Strategic tradeoffs lie at the heart of sustainability
  • An essential part of strategy is choosing what not to do

The takeaway is that as business leaders, we want to encourage choice. In fact, we want to our offering to appeal to our target consumers. We want the service / product to contain exactly what they would like and not have more features than are required, even if they are additional to what the consumer wants. Additional and unnecessary features only drive up our costs and reduce profitability.

In the next post, we’ll talk about companies who employed this approach to great success.

Categories: Leadership, Strategic Plans, Strategy
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The Financial Crisis, Early Warning Systems and the Leader’s Role

September 18, 2008

Crises just don’t happen.

As with any difficult time, the challenge is always how to learn from the experience to assure that it doesn’t happen again. Clearly, there will be some very provocative analysis. Some will attribute the root cause to greed. Others will state that the lack of regulatory oversight contributed to this problem. However, I feel that the very root cause may be elsewhere.

Every business leader must install four components by which they can operate their company.

The first is, of course, a strategy and operation plan. Strategy, as we already know, provides the corporate direction and the operational plan provides that tactics that we are to follow that will get is to the strategic destination. Together, they tell our organization what we must do.

If the strategy and operational plan detail the “what,” then it is the management philosophy that details the “how.” Every business begins and ends with people and their behaviors. A company must recognize the mutual opportunities and responsibilities with its customers, employees, stockholders, suppliers, communities and the public.

This recognition leads us to believe that it is desirable to have a common philosophy. The company’s philosophy should be the basis for actions by managers at all levels of the organization.

An effective management philosophy details

  • What the company is and what it will become
  • How the business will be managed
  • The basic responsibility for each employee
  • The human values that we will live by
  • The company image

The third pillar that must be in place is the compensation program. It should motivate people to properly deliver on corporate tactics consistent with the management philosophy. It serves as a means by which employees will wish to stay within the organization.

Finally, a set of steering mechanisms must be in place. Think of it as more than key performance indicators. It is the dashboard that illustrates how the business is “flying” in all areas and allows for early recognition of difficulties so that course corrections may be easily made and made as early as possible.

So , from a management and leadership perspective, what likely went wrong that caused this crisis?

It is likely that the failures that triggered this crisis are a result of deficiencies in all of the above areas.

  • The strategic and tactical plan may have been flawed in that it took on too much inappropriate risk.
  • The management philosophy may have either ignored or encouraged the achievement of short-term profits at the expense of long-term growth and therefore encouraged irresponsible behaviors and actions.
  • The compensation program may have rewarded results that were produced without consideration to proper behaviors.
  • The steering mechanisms may have been ignored at the earliest stages and therefore corrective actions could not be taken soon enough

The management lesson for all of us then is to place and actively reinforce these elements within our business. It is surest way to avoid catastrophe and the friendliest path to growth and success.

Categories: Leadership, Strategy
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Discovering the Benefits that We Provide to Our Customers

September 17, 2008

We believe that as good managers and leaders, you have a good feel for why your customers work with your company. There is a tremendous opportunity when creating a strategic plan to really tighten that perspective.

We naturally have a tendency to ascribe our own personal perspectives as to what a customer really values about a product. Put simply, this is the wrong way to evaluate the benefits of what your company provides.

The customer’s viewpoint is truly all that matters. To discover that perspective, you must do two things.  First, you must talk to your customers. Second, you must listen to them and hear what you don’t already know.

Your customers will tell you what works great about your product or service. They will tell you what your product or service does for them, how it works and what they find valuable about it. Listen to the small things that they are saying. Can you find a pattern? Can you group their answers into something important?

Ask approximately a dozen of your core customers and a few organizations that you would like to be customers, in each customer segment, a series of questions. Asking these questions results in finding out with certainty what is meaningful to them.

We recommend that you ask these four questions.

1)      What are your reasons for working with our company (what do you value about us) or what are your reasons for using our service or product? The answers to this question will tell you why the customer uses your product or service today.

2)      Where do you think your industry is heading? The answers to this question will provide you with the context regarding the issues that your customer will need to manage in the near term.

3)      How will you operate given the direction of the industry that you’ve just described? The answers to this question will tell you how your client needs to work in the future. It will begin to give you insight as to what you will need to provide in the future that will allow you to keep earning their business

4)      What will you expect from our company (or our product or service) in the future (what will make us indispensable to you)? The answers to this question will provide you with what your client sees that you will need to do to keep earning their business.

Undertaking this interview will produce substantial and wide-ranging benefits. You will:

  • Learn how to better express your value to the marketplace
  • Discover short-term opportunities to sell additional goods or services.
  • Be able to add and contribute to your clients’ strategies
  • Very naturally deepen your relationship with your customer as every customer wants to feel special and simply showing interest
  • Gain thee necessary business intelligence to accurately plot a future

The bottom line of this exercise is that you will find short-term and long-term opportunities and your clients will make you much smarter about your own business.

Categories: Leadership, Strategy, Visioning
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What are your customers really buying?

September 12, 2008

f you take a closer look at the list of areas for discussion when starting to craft a vision statement, you would notice that our list begins with “customers.”

So what are your customers really buying?

It seems like a simple enough question. Yet it is at the core of designing your marketing and strategy. It requires you to have an in-depth, pinpoint knowledge of what your customers think and feel they are purchasing rather than what you think you are selling. It is from the point-of-view of your customers only that the question is of any value.

Everyone says they have the best, most reliable, highest quality, most complete array of features at the lowest possible prices! No one is out there saying that his product is expensive, narrowly featured, of low quality, and only marginally useful! Since everyone makes the same claims, you can be certain that your customers are not reacting to the claims. Your customers must, in fact, be reacting to something else. Your customers are reacting to something personal.

McDonald’s is not selling hamburgers. Domino’s is not selling pizza. McDonald’s sells speed (fast food) but also fun and nutrition. Domino’s sells time. Your value becomes much clearer – once you’ve looked deeply at what your customers are buying. Yet, making that determination was not as easy as it seems in retrospect, or as you’re about to discover when you participate in this process.

You are about to engage in creating the benefit of your product or service expressed as your Unique Selling Proposition. That proposition should not be trivial. In fact, the more emotionally based or financially based these benefits are, the better. If you can get in both, you’ve hit a home run! Which emotions? Hope, fear, love, happiness, fitness, value. This is where you want to head.

Once you begin to think this way, it will alter how you represent what you do.

I had the privilege of hearing a presentation from two of the foremost business coaches, Jay Abraham and Chet Holmes. Jay and Chet had an interesting way of framing and expressing the work that one does so that its value is both clear and intriguing to the listener.

Imagine that you’re sitting on an airplane and the person next to you asks, “what do you do?” You say, “I do this.” (Sell donuts, clean carpets, etc.) While that is true, it is not what the product is to the buyer. The buyer only buys what the product does for him or her. You want to define what you’re doing in terms of teh best outcome in order to get the response, “Gee, how do you do that?”

You could be cleaning carpets when you sell that vacuum cleaner or perhaps what you really do is this, “I show people how to clean their houses in such a way that they have a perfectly healthy, dust free, microbe free environment.”

“Gee, how do you do that?”

Do you write software or do you “build solutions that change and uncomplicate people’s lives, creates possibilities for them to make them more money than they thought they could make, and allows them to spend more time with friends and family.”

“Gee, how do you do that?”

“I provide people with extraordinary vacations that they talk about for the rest of their lives.”

“Gee, how do you do that?”

If you just say, “I run a vacation resort,” or “I clean carpets,” or “I write software,” people will probably say, “That’s fine.” But, as Jay and Chet said, they’ll also probably wish they never asked and return to reading the airline magazine.

Categories: Leadership, Strategy, Visioning
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An Appreciation: On the Passing of Dr. Michael Hammer

September 7, 2008

It was with great sadness that I read today of the passing of Dr. Michael Hammer. Dr. Hammer was one of the seminal thinkers and authors in the management consulting industry and influenced me and so many others.

As co-author with James Champy of “Reengineering the Corporation,” he espoused that many of the problems with how companies operate were due to processes that were bloated, inappropriate or simply just ineffectual. As CEO of an IT consulting company, Flash Creative Management, at the time, this resonated deeply with my partner, Yair Alan Griver and me. This led us and our company on a journey that would result in us redefining our business.

Initially, we shifted Flash from being a software development company to one that looked first at the processes that our automation efforts would impact.  Our consulting practice and our team of very talented and committed professionals began to study reengineering in earnest and, needless to say, the impact that we had on our clients grew significantly.

By applying automation and technology after evaluating and redesigning processes, we were able to produce dramatic results. In some cases, this resulted in product design and delivery shrinking from months to weeks and from weeks to days.

Intellectually, Dr. Hammer’s and Mr. Champy’s works prompted us to create and codify best practices for creating visions, redesigning process, implementation planning and improvement strategies, to name but a few. And for me personally, it helped to begin the education process regarding how to develop business strategies as I learned that understanding strategy is the pre-requisite to creating effective processes. As mentioned in an earlier post, the vision of what a company wishes to become is fundamental to all business design.

Over the years, Dr. Hammer needed to respond to criticism that streamlined and automated processes eliminated jobs. He took the position that if a business was not competitive; all jobs within the business were at risk. If you subscribe to the belief that to be successful your business must add a value that your competition does not, it becomes very easy to align with Dr. Hammer’s way of thinking. Efficiency and cost reduction by streamlining processes and aligning actions with strategy are sure ways to make certain that your business is more competitive.

The world has lost one of the most profound thinkers of organizational design. Fortunately, he leaves behind an impressive body of work and many disciples who will build on his teachings.

Categories: Leadership, Strategy, Visioning
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The Four Questions You Must Answer and The Importance of Your Vision

September 4, 2008

It’s time then to get down to the more practical aspects of creating a business strategy.

Fundamentally speaking, every strategic plan must answer these four questions and they must be answered in this very logical progression:

  1. Who are we?
  2. What are we?
  3. What do we want to be?
  4. What can stop us from getting there?

The answer to the first question is articulated in the mission and vision of the company. The mission states what business we are in and what we do and provide for our clients.

However, it is the vision of what the company hopes to become that establishes the strategic direction for the organization. An effective vision lays out a future about what the company hopes to become. It typically is uncomfortable, much like clothing that is too big because it doesn’t fit who we are today. (I still remember that as a child, my Mom would always say “don’t worry, you’ll grow into it.” Visions are just like that.)

The vision states the value that we are ultimately committed to providing to our clients, employees, stockholders and even ourselves. It motivates us to stretch beyond where we are today.

Establishing a vision first is critical because it becomes our corporate compass. It sets a direction and destination for the company. The tactical options that we choose to implement must propel us towards reaching that destination, and so, the vision helps us to make intelligent choices. When opportunities present themselves we are able to evaluate them in a context of whether it moves us forward and whether it moves us forward more effectively than the other options that are available to us.

It is important to recognize that understanding the vision is a requirement for every member of the organization. If you subscribe to the belief, as I do, that every job in a company is meaningful – otherwise why do it or pay someone to do it? – then you must conclude that every employee will be expected to make choices on behalf of the company. The greatest tool that we may provide to our people is the vision as it will provide the context for so many decisions.

A vision is very different from goals and objectives. Goals and objectives are predictions of what we are going to accomplish or do in the next weeks or months or quarter to get to our vision. The vision though must come first as it is the foundation for goal setting that is based in the future and not in the past.

Categories: Leadership, Strategic Plans, Strategy, Visioning
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