Conceptualization of crisis situation in a company/Imones krizines situacijos konceptualizacija.
Valackiene, Asta ; Virbickaite, Ruta
1. Introduction
Nowadays a modern and successfully going company experiences
continual changes and improvement undergoing rapid political, economic,
social and technical changes or even running ahead of them. Usually
crisis is defined as a negative phenomenon (Rosenblatt, Sheaffer 2002),
however, it is important to notice the close links of crisis and
changes, which reflect positive impulses to overcome crisis in a
successful company development. In this context the problem of
conceptualization and the analysis of the discussed phenomenon still
remain important in social, economic and managerial aspects.
Scientific analysis object is the concept of crisis situation in a
company.
In order to analyze the identified scientific problem, the
following scientific works of different researchers have been taken into
account. They deal with crisis reasons and causes, bankruptcy, crisis
management, company state estimation, bankruptcy prediction and its
methods. Characteristics of crisis situation were analyzed by Augustine
(1995); Ayres (1996); Booth (2000); Burn, Redwood (2003); Demirguc-Kunt,
Detragiache (1998); Hart (1993); Hwang, Lichtenthal (2000); Milburn et
al. (1993); Ravid, Sundgren (1998); Rogov (2006); Jasilioniene,
Tamosiuniene (2009); problems of crisis management were discussed in the
works of Ashcroft (1997); Alas (2008); Boin, Lagadec (2000); Darling et
al. (1996); Darling, Kash (1998); Davidaviciene (2008); Donoho (1994);
Escarraz, Chong (1998); Fink (2002); Kurosheva (KypomeBa 2002); Lalonde
(2004); Maynard (1993); Milesi-Ferritti, Razin (1998); Mitroff (2005);
Murphy (2006); Ponikvar (2009); Paraskev (2006); Parsons (1996);
Pearson, Clair (1998); Ulmer et al. (2007); Valackiene (2009);
Virbickaite (2009); causes of crisis and bankruptcy in a modern company
were dealt with by Argenti (2005); Birch (1994); Grigaravicius (2002);
Kaminsky (1998); Kash, Darling (1998); Martin (1991); Preble (1997); Ren
(2000); Rosenblatt, Sheaffer (2002); Rosenthal, Charles (1998);
Shrivastava et al. (1998); Udo (1993); Ucal et al. (2010).
The paper aims at discussing and presenting critical reviews of
crisis situation interpretations with emphasis on methodological
positions of social phenomenon in different disciplines.
Consequently research goals are to analyze the variety of crisis
concepts and to offer the general definition of crisis in a company as
well as to identify crisis indicators in a company's life cycle.
The formulated goals determined the structure of the paper. In
order to solve the above mentioned problem, the
interpretative--constructive methodological approach was chosen, which
made it possible to reveal the estimation of the subjective phenomena as
well as to develop the researchers' attitude to the analyzed
problems.
2. Genesis of crisis concept
Researchers such as (Webster 2000; Shrivastava 1987; Hauschildt
2000; Fink 2002; Millar, Irvine 1996; Ren 2000; Maksimovic, Phillips
1998; Hauschildt 2000, Kash, Darling 1998, Peters 1995, Pearson 1998,
Coat, Fant 1993) explain that crisis concept coincides with its
manifestation area. We face global, often natural crises, psychological,
national and company-based crises (see Fig. 1). Though the total number
of problems is much bigger, four defined crises areas prove the
complexity of the problem and necessity to focus on its particularities.
Crisis situation in a company has more often been related to macro
environment crisis especially in its primary stage. Growing instability
of the environment increased the consideration of crisis research in a
company. In the classical literature Hermann (1993) pointed out three
crisis indicators: surprise, threat and short reaction time. Generally
crisis in a company is considered as a negative phenomenon. However, we
cannot agree with Ulmer's et al. (2007) opinion that "crisis
is a unique moment in the history of company's performance",
because today crisis situation is a normal state in a developing
company. Therefore a positive crisis aspect has to be considered (see
Table 1). Crisis creates a possibility to learn and improve. In Chinese
the symbol of crisis means "a dangerous possibility". Because
of its nature a crisis is dangerous for organization's life cycle,
but still it gives company a possibility to become stronger (Ulmer et
al. 2007).
[FIGURE 1 OMITTED]
Company is a complex socio-technical system, which performs in the
complicated environment, therefore company crises are closely related to
global and crises in state, for example, economic crises, which often
appear as the cause of crisis in a company, as well as to psychological
crises which can become the consequence or the cause of it.
Negative phenomenon for company's existence can appear from
any problematical situation which is provoked by the external factors
(macro-economic, social--political, etc.) or the company's internal
factors (work processes, financial state, management, marketing,
resources, etc.). The indications of negative phenomenon are usually the
same: decrease of liquidity and profitability, loss of financial
stability, cost increase, loss of market and competitive ability (Blume
et al. 1998; Cantor, Packer 1994; Dwyer and Stein 2006; Gupton 2005;
Foster et al. 1998). When economic links among the factors are strong,
decrease of one financial rate in a company determines the negative
changes of the other financial rates that influence the loss of
company's position and profit decrease. This sudden loss of
company's competitive ability is called 'the effect of falling
muggings' (Murphy, Winkler 1992). However, such changes are
necessary in a company for its further development.
The changes in a company can become the essential point to seek for
the leader's position in the market because the results are closely
related to the success of changes. Companies are often faced with
radical changes, so it is very important to understand the essence of
them. Management of changes solves the problems of business management
related to falling rates and inefficiency of company performance as well
as it stops the growth of crisis situation and helps avoid the crisis
itself. In order to control the changes, a company should implement the
management of changes before they start, what will help decrease the
problems and possible stress situations in the future, which are not
avoidable even for the market leaders. Therefore, it is very important
to manage the changes in a company and do not cross the crisis bounds
which are difficult to control.
Despite the clear understanding of crisis, it is necessary to
define normal and necessary changes, crisis situation and crisis in a
company.
Situation when company's performance is fractionally reduced
and can be easily liquidated and do not bring much loss for a company
can be defined as normal changes in a company. While crisis situation is
an unstable company state when usual business operations are failing and
the results of company's performance fall down. Any crisis
situation culminates in crisis. Crisis situations differ from each other
in their duration, depth and consequences. Therefore, they require the
implementation of some operations and application of some
instrumentalities to reduce possible loss and renew system functioning
while crisis depth is not deep yet. The importance of crisis diagnosis
is emphasized in order to notice crisis situation as soon as possible
while crisis did not reach the deepest point and did not make big loss
for a company. Consequentially the earliest crisis stage has been
analyzed in the work.
The scientific literature provides a lot of crisis interpretations.
Oxford dictionary (2004) explains crisis (C) as incident or situation
related to threat which is fast growing and creates the critical
diplomatic, economic, political or military conditions and obliges to
use all resources to reach the goal. Crisis concept is often related to
the moment or period of time when company faces difficulties and
situation becomes dangerous for its further performance (Webster 2000;
Shrivastava 1987; Hauschildt 2000). The other scientists relate crisis
to the crucial changes which can be corrected (Fink 2002; Millar, Irvine
1996; Ren 2000; Maksimovic, Phillips 1998). Therefore the problem
appears:
* when usual changes are over and crisis begins. Though the problem
is relevant, however, it is very complex and multistage.
* When is crisis over and the stage of bankruptcy and liquidation
begins? The formal solution of this problem is clear. But informal
solution ways--avoidance of bankruptcy --depends on the solution level
of the first problem.
From practical point of view crisis is the first situation
indicator when increased risk, rating fall, problems in usual business
operations, danger for the public image, performance decline, etc. are
typical (Fink 2002; Kurosheva 2002; Mitroff 2004). Crisis is the event,
consequences of which make the threat for organization's strategic
aims (Beech 2000; Maynard 1993; Hart 1993). Crisis heart is usually
local, however, unnoticed negative indicators can involve the whole
system. According to Hauschildt (2000), Kash, Darling (1998), Peters
(1995), Pearson (1998), Coat, Fant (1993) it can be claimed that crisis
is the accidental critical moment determined by the formed factors which
disturb normal functioning of the system and it cannot develop according
to the planned trajectory.
Having analysed the crisis conceptions of different authors (Fink
2002; Kuroseva 2002; Mitroff 2004; Webster 2000; Shrivastava 1987;
Hauschildt 2000; White 1989) crisis can be defined as the event,
consequences of which cause a big threat to organization's
strategic goals and it cannot develop according to the planned
trajectory.
The crisis definitions of different researchers are shown in Table
2.
It is noticed that the phrase 'it disturbs the normal system
functioning' (Peters 1995; Pearson 1998; Clark 1995) differs crisis
from normal system functioning. Normal functioning is solved by the
standard procedures, it is not a crisis, but it is operative and
strategic operations regulated by the standard procedures. However, the
moment of crisis beginning is still indefinite, though it is clear that
the standard instrumentalities have to be applied and only when they are
inefficient, crisis situation begins.
In the modern crisis concept a crisis has to be defined as the
specific state of a company as well as the causes that influence the
crisis appearance. The necessity of its overcoming has been pointed out
involving the whole staff in a company.
Having generalized crisis conceptions in the scientific literature,
crisis can be defined as a situation characterized by significant
negative changes in a company, which stimulate company staff to apply
crisis communication process and instrumentalities as well as to form
new operations in order to renew and guarantee the success of the
further performance.
Interpreting the complemented crisis concept it is emphasized that
when crisis situation appears, company's strategy becomes
meaningless and it is necessary to update operations and create a new
strategy.
If a company cannot or does not want to notice crisis situation in
time and to foresee and realize its liquidation reasons, then the
juridical instrumentalities have to be applied: restructuring and
bankruptcy processes. Restructuring (R) is the act of reorganizing
operations of the company which has temporal financial difficulties in
order to avoid bankruptcy. Restructuring is often the only way to avoid
bankruptcy and to keep developed business. It is noticed that
company's situation in this stage is very bad, however, company
owners and direction still foresee here a possibility to change the
far-gone company's state by applying all afforded privileges.
Bankruptcy (B) in many countries, including Lithuania (Lithuanian
Republic Bankruptcy Law No IX-216, 20 March 2001, Restructuring Law
2008), describes the last moment of crisis situation and is related to
company insolvency, when company debts make more than a half of its
capital. In the USA bankruptcy is a legally declared inability or
impairment of ability of an individual or organization to pay its
creditors (The United State Bankruptcy Code 2008). Bankruptcy in England
and Wales is governed by Part IX of the Insolvency Act 1986 and by the
Insolvency Rules 1986. The term bankruptcy applies only to individuals,
not to companies or other legal entities. Therefore the boundary of
bankruptcy is clear. It is the juridical far-gone crisis level which
requires the intervention from outside.
Though the rehabilitation mechanism is defined in the bankruptcy
law, still the practice shows (Miskinis, Kvainauskas 2009) that better
results in the bankruptcy stage are gained when company is sold
out--liquidated.
3. Crisis indicators in company life cycle
The boundaries of crisis situation, crisis and bankruptcy can be
defined analyzing company life cycle, which is made of changing phases
of growth and fall. When fall is being changed by growth, a company
grows up improving its performance and financial state. But when growth
is being changed by fall a company faces some difficulties and comes
into crisis situation which requires taking some actions.
In Fig. 2 the detailed company life cycle, the deepest crisis
points and crisis situations are defined. When company profitability is
high, bankruptcy probability is low, but when company profitability
falls down to 0, bankruptcy probability goes up and becomes very high.
Therefore crises become very dangerous when their depth goes up to 1 in
the bankruptcy probability scale.
Having analyzed the company development in its life cycle and the
possible crises there, it can be claimed that there are two main points
emphasized there:
* if a company does not face any changes, even a successful one
falls into desuetude and fails in the changing environment;
* crisis is a feature of the company desuetude as well as a feature
of its development through some stage fall.
[FIGURE 2 OMITTED]
The second reason determined the development of many crisis cause
theories and models development. The classification of crises is step
one for their identification, their causes definition and control.
In a quickly changing situation the proportion of evolutional and
revolutionary development is changing, too,--the period of stable
development shortens, and a company more often is faced with crisis,
overcoming of which requires revolutionary reformations.
The factor of company growth is very important for company
development. The importance of this factor has been explained by the
Greiner conception (Laumenskaite, Vasiliauskas 2006) (see Fig. 3).
In the Greiner's model it is claimed that a developing company
passes through five evolutional stages, which match with the particular
management stages where typical crisis situations can be formed out.
In the creativity stage a company development and growth depends on
the creativity of the company establishers in business. When a company
is growing a company manager falls behind solving all the problems. Then
leadership crisis is formed out. The Greiner's conception offers to
change the manager's attitude or to change the manager, and to form
the managerial system with exchanged work scope (Laumenskaite,
Vasiliauskas 2006).
In the direction stage when a company solves leadership crisis,
autonomy crisis is formed out. Hard functional management structure
begins to limit the initiative, responsibility and motivation of the
employees. The increase of the delegation level is recommended for this
crisis situation solution releasing the decision right and increasing
the privates and responsibilities of the lower level employers. The
establishment of accountability centres is possible in the different
activity areas.
In the delegation stage further company development is reached when
implementing decentralized organizational structure, however, while a
company is growing its executives feel that they are losing the control
of decentralized company. The executives of autonomous departments often
contrast their own interests with the interests of the whole
organization.
[FIGURE 3 OMITTED]
The presumptions for control crisis have been formed out. It is
mistaken to try to return central management because of the grown
company size. At this point Greiner (Laumenskaite, Vasiliauskas 2006)
offers to increase the coordination of the company activities: to
involve the decentralized departments into the product groups; to
re-establish formal panning procedures; to employ new workers to create,
implement and apply new control programs; to assess and share the
financial resources between all departments; to value every product
group as the investment centre, where the investment change is an
important criterion dividing financial resources; to centralize some
technical functions such as data processing, while daily operational
decision still remains decentralized.
In coordination and monitoring stage company growth is gained
managing the limited company resources. Besides, the company executives
have to assess their own needs as well as the whole company interests.
Therefore, they are forced to act according to the company plans. In
this stage it is very important to overcome formal red-tape system. So
the presumptions for red-tape crisis have been formed out.
In collaboration stage the theories of teamwork and different
personality adaptation to it have been pointed out. Formal management
has been changed into social management and personal discipline:
teamwork has been emphasized.
Greiner in the Growth Phasis Model foresees internal growth crisis
or "psychological tiredness" crisis because of the lack of
collaboration among the employers in a company. This crisis is described
as physical and emotional tiredness of the employers from the intensive
teamwork and too high requirements for employers' innovations.
Greiner offers for solving these problems to create new structures and
programs which will let employers periodically take a rest, relax and
restore power. He also suggests creating the double organizational
structure, which would be made of a usual organizational part to do
daily works as well as of the "mirror" organization, where the
personal and perspective achievements of the employers could be
stimulated. In this double structure an employer can move from the usual
to "mirror" structure and back dependently on the energy, i.e.
if an employer is tired he goes to the 'mirror' structure,
relaxes and returns back to the usual.
Several attempts had been made for evaluating and describing the
research. One of the most comprehensive studies was carried out over the
failed AB "Ekranas". It is an extraordinary case, because AB
"Ekranas" was one of the biggest factories not only in
Lithuania but in Europe, too, where more than 4000 employees worked
there. The year 2000 was the most successful year of its performance,
though in 2006 it went bankrupt. The analysis of its financial rates
applying Altman model showed that bankruptcy probability was high during
all this period from 2001 to 2005. Especially high it was in 2005. The
results of AB "Ekranas" bankruptcy probability applying Altman
model are shown in Fig. 4. Having analyzed the results of the surveyed
company it can be claimed that the first features of crisis situation
could be noticed at the very beginning of 2001.
[FIGURE 4 OMITTED]
[FIGURE 5 OMITTED]
Though the situation was stable, bankruptcy probability still
remained the same and crisis situation turned into deep crisis phase
which determined company bankruptcy.
The other example of a going enterprise UAB "Dainava"
illustrates the research. It is the successful industrial company
producing processed food. It was established in 1995. The purpose of
this company survey was to analyze its situation during the last
five-year period applying Altman model. The analysis of its financial
rates applying Altman model showed that there was not any bankruptcy
probability during all the surveyed period of 2006-2010 (Fig. 5).
Therefore, it can be claimed that it is a successfully growing company
and there are not any crisis situation features in it at the moment.
4. Conclusions
The discussed social phenomenon is significant both theoretically
and practically. The research analysis demonstrates the polarity of the
existing conceptions. The understanding is focused on four main crisis
levels: human, company-based, national and global crisis. They all prove
the complexity of the analyzed problem. Though these crisis levels
appear in different times, still there is a close link among them.
Company crises are closely related to those in state, e.g. economic
crises often cause company crises; psychological crises can become the
cause as well as the consequence of company crises;
* Macroeconomic crises (growing instability) increased the need to
analyze microenvironment crises (company crises). Despite the clear
crisis understanding it is important to define temporary changes, crisis
situation, crisis and bankruptcy. Company crisis is related to the
moment, when a company faces difficulties and the situation becomes
dangerous for further performance or it faces a crucial change, which is
impossible to control;
* It is important to analyze crisis indicators in company life
cycle. Growing company goes through five developmental stages in which
typical crisis situations are formed: leadership, autonomy, control,
red-tape and in-house psychological crises . Having analysed modern
crisis conception, crisis should be defined not only as a special
company state or reasons determining its appearance but also as
involvement of company staff to overcome it. Crisis conception has been
defined as follows: Crisis is a situation characterized by significant
negative changes in a company which stimulate company staff to apply
crisis communication and instrumentalities as well as to form new
operations in order to renew and guarantee the succession of further
performance. The formed crisis concept emphasizes that company strategy
becomes meaningless when crisis situation occurs, in that case it is
necessary to update operations and create a new strategy.
doi: 10.3846/16111699.2011.575192
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Asta Valackiene (1), Ruta Virbickaite (2)
Kaunas University of Technology, Panevzzys Institute, Faculty of
Management and Administration, Nemuno g. 33, LT-37164 Panevzzys,
Lithuania
E-mails: (1) asta.valackiene@ktu.lt (corresponding author); (2)
ruta.virbickaite@ktu.lt
Received 03 August 2010; accepted 11 February 2011
Asta VALACKIENE. Professor, Doctor of Social Sciences (Sociology;
Management and Administration), dean of Faculty of Management and
Administration, Kaunas University of Technology, Panevezys Institute.
Asta Valackiene gives lectures for businessmen and state officials on
crisis management and decision making. The author published 6 articles
in referred Social Sciences Citation Index (Web of Science) and 40
articles in other reviewed scientific journals, and is the author of
some textbooks, course books and methodological books.
Ruta VIRBICKAITE. Lector, Doctor of Social Sciences (Management),
Kaunas University of Technology, Panevezys Institute, Faculty of
Management and Administration. Ruta Virbickaite defended the
dissertation "Diagnosis of Crisis Situation in a Company" in
2009. The author published 3 articles in referred publications from list
of the In statute for Scientific Information (ISI proceedings), and some
others published in reviewed scientific journals from the list of
international databases.
Table 1. Positive and negative aspects of crisis expression (modified
by the authors)
Crisis position Negative aspects Positive aspects
General Trouble and disorder in Necessity of systemic
organizational organization (Denis research, restoration of
crisis 1993; Lagadec 1996; social structure (Meyer
Offer 1996) et al. 1990)
Operation crisis Inertia, paralysis, Necessity to identify
flurry (Denis 1993; new and efficient
Pauchant, Mitroff 1995) operations (Milburn et
al. 1993; Denis 1993)
Relation crisis Conflicts, competition Cooperation, alliance,
of the whole (Rosenblatt et al. 2002) coalition (Rosenthal et
system members al. 1989)
Behavior and Stress, unconsidered Identification of stress
stress crisis behaviour (Lagadec 1996) source, analysis of
decisions (Milburn et
al. 1993)
Value crisis Banality, routine (Toft, Solidarity (Kaniasty,
Reynolds 1994; Pauchant, Norris 1995)
Mitroff 1995; Perrow
2003)
Learning crisis Seeking for quick Experiments (Hedberg
results and standards 1981; Meyer et al. 1990)
(Hedberg 1981; Rosenthal
et al. 1998)
Table 2. Conceptualization of crisis definitions (modified by the
authors)
Crisis definition Interpretation Authors
Crisis is the moment, Only the situation Webster 2000;
when company faces until the threat is Shrivastava 1987;
difficulties and such emphasized in order to Hauschildt 2000
situation becomes define dangerous
dangerous for further activities but further
company development company activities are
not discussed
Crisis is the crucial Changes do not always Fink 2002;
change in a company mean crisis in a Kash, Darling 1998;
which can be corrected company. Only the Ren 2000
changes in a company
are pointed out
Crisis is the first Only one factor of the Donoho 1994;
feature of the risk is assessed not Mitroff 2004;
situation which is considering the Mitroff et al. 2006
defined by the influence of the other
increased risk, rating factors. Crisis
loss, problems in usual situation is described
business operations, but not crisis itself
danger to the public
image, performance
decline
Crisis is the event The threat is Beech 2000;
which consequences make emphasized for the Hills 2000;
the threat for company activities but Hart 1993
organization's the factors which
strategic aims oblige to act are not
considered
Crisis is a condition Narrow crisis MacKen /ze 1994;
which obliges to take assessment, not Paraskev 2006
actions considering the further
company activities
Crisis is the event or The situation and its Dictionary of
situation related to conditions are pointed international
threat which grows very out but the purposes words 2004;
fast and creates a and aims are not Ulmer 2007;
condition of political, discussed Laitinen 1999
diplomatic, economic or
military importance
which oblige to use all
resources to seek the
aim
Crisis is the set of Crisis process is Peters 1995;
accidental or formed assessed very narrowly Pearson 1998;
factors which emphasizing only the Clark 1995
determined the moment case
appearance of the
critical moment in a
company that disturbed
the normal system
functioning
Table 3. Altman model values
Altman model Z values Bankruptcy probability
Z < 2.79 Bankruptcy probability is high
Z = (2.80; 2.99) Bankruptcy is probable
Z > 3.0 Bankruptcy probability is low
