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The dragon lifts in the hard winds.

Organizational Resilience and Health of Business Systems


Rudrajeet Pal (Presenting Author) Hkan Torstensson Heikki Mattila

Context: Economic/Financial crisis in Sweden Boom (before 1989)-bust (1989-93)-recovery (1994-1998) phases in Sweden
Falling asset prices, rising real rate of interest, financial fragility, budget deficits, negative exports, collapse of banking system, increased bankruptcies

Recent financial crisis (Credit Crunch) (end 2007-2009)


TCF: Decrease in Production Index (96.4 in 2007 to 85.9 in 2008), Decrease in exports (by 11.3%), decrease in order volume (by 8.4%), declining asset price, uncertain labour market, contraction in household consumption (-0.2% in 2008, 1.8% in 2009), lower capital utilization

Conceptualizing Organizational/Business Health

Key business system states and transition behaviours (adapted from Sundstrm and Hollnagel, 2006)

Research Questions RQ1: How can we measure organizational health? RQ2: How can Organizational Resilience (ORes) be related to business health?

Conceptualizing Resilience
AS A SUPER MATERIAL
Resilience is to (i) prevent something bad from happening (ii) prevent something bad from becoming worse (iii) recover from something bad once it has happened (Westrum, 2006) Engineering Resilience is the time the system takes to return... ...amount of disturbance that a system can absorb... (Gunderson et al., 2002) Ability to absorb/withstand Capacity of a system to absorb disturbance... (Andersson, 2006) Ability to absorb disturbances... (Resilience Alliance, 2006) Resilience engineering aims to enhance the ability.... absorb disturbance, disruption, and change (Nathanael and Marmaras, 2006) Many faces of resilience (Madni and Jackson, 2009) ...capacity or ability to withstand system discontinuities... (Starr et al., 2003) Ability to recover Ability to sustain a shock... ...and bouncing back from a disruption (Kendra and Wachtendorf, 2003) ...capacity of an organization to recover... (Paries, 2006)

Conceptualizing Resilience
DEVELOPMENTAL PERSPECTIVE: ADAPTABILITY, POSITIVE FUNCTIONING, COMPETENCE
Capacity of a system to... reorganize... to retain essentially the same function, structure, identity, and feedbacks (Andersson, 2006) ... maintenance of positive adjustment under challenging conditions (Sutcliffe & Vogus, 2003) Ability to... re-organise and still have the same identity... (Resilience Alliance, 2006) Resilience engineering aims to enhance the ability... to adapt... (Nathanael and Marmaras, 2006) Adapting and continuing to function despite severe trauma or losses (Zenpundit, 2006) Many faces of resilience (Madni and Jackson, 2009) ...balance between stability and flexibility that allows for adaptations without losing control (Grote, 2006) Ability to... adapt to changing conditions, and to respond appropriately after the fact (Jackson, 2007)

Output State

System State

Management Mode Day-to-day anticipation of potential failure, implementation of preventive actions to manage small daily perturbations Exceptional adaptive management, corrective actions

Faces of Resilience Anticipate and Avoid (short term) or prevent (long term) Adapt to (reconfigure) or withstand (absorb)

Time period

Event and Action

Normal, Perturbed

Reference State, Normal

1, 2

Event follows (lags) action

Perturbed Acceptable degradation of turnaround or quality characteristics Degraded Unacceptable degradation of turnaround or quality characteristics

Perturbed

3, 4

Event and action (same phase) almost together Action follows (lags) event

Failed, Out of Service

Emergency restore the system

Recovery (restoration)

Time periods (Sheard and Mostashari, 2003)

Altmans Z-score1, 2
Z Score Bankruptcy Model: Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 0.999T5 (for public firms) Z = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 (for private manufacturing firms) Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 (for general use)
Discriminant Function Components Working Capital/Total Assets (T1) Retained Earnings/Total Assets (RE/TA) (T2) Earnings Before Interest and Taxes/Total Asset (T3) Shareholders Equity/Total Liabilities (T4) Sales/Total Asset (T5) Description Measure of liquidity (net liquid assets of the firm relative to total capitalization)

Measure of total amount of reinvested earnings (leverage)


Measure of profitability/operating efficiency (productivity of firm's assets) Measure of solvency (measured by shareholders equity plus untaxed reserves and provisions) before the liabilities exceed the assets Measure of sales generating ability of firm's asset (Activity ratio: capital-turnover ratio)

Zones of Discrimination: Z > 2.9 (for private firms)(2.6 - for general use) Safe Zone 1.23 (for private firms) (1.10 for general use)< Z < 2.9 (for private firms) (1.10 for general use) Grey Zone Z < 1.23 (for private firms) (1.10 for general use) Distress Zone

1. Altman, E. 1968, The Journal of Finance, Vol. 23, No. 4, pp. 589-609 2. Altman, E. 2000, Predicting financial distress of companies: revisiting the Z-score and Zeta Models, Stern Business School

ORGANIZATIONAL RESILIENCE

HEALTH OF BUSINESS SYSTEM

Many faces of operationalisation

ORes,

Needs
Lack of sufficient measure or coding to determine business health

How to differentiate a resilient phase or firm from a non-resilient one?

Need to operationalize organizational goals, hence, success by conceptualizing business health


Lack of a proper framework, set of rules and codification, empirical study and investigation relating business health to ORes to operationalize it

Scoring System
Possible Z-score transitions (over years) ZHZH+ ZHZHZUHZUH or ZUHZC or ZCZUH or ZCZC ZHZUH or ZHZC ZUHZH Where (according to Altmans Z-score) ZH+>ZH>ZH- (healthy zone) ZUH (unhealthy zone) ZC (catastrophic zone)

Scores assigned for each transition Positive transition, in the healthy zone [Score: 1] Negative transition, but in the healthy zone [Score: 0.5] Transition in unhealthy or catastrophic zone [Score: 0] Transition to unhealthy or catastrophic zone [Score: 0] Positive transition into the healthy zone - V-shaped recovery (2 transitions) [Score: 1] - Other type of recoveries (viz. U, J, W, L- shaped): [Score: determined by deconstructing the Z-score transition profile, year by year]

Aggregate score Score is between: 0-20% over the period Not at all resilient 21-40% of transitions over the period Hardly resilient 41-60% of transitions over the period Partly resilient 61-80% of transitions over the period Mostly resilient 81-100% of transitions over the period Completely resilient

ORes and Business Health transition profile

+[+] indicates that the average value of the indicator, say T i, in a certain period for the healthy or unhealthy firms categorized in terms of the Z-score, is higher than the average value of the Ti for all the firms over the period and also higher compared to the overall T i average for all firms from 1989-2009; Data collected from Annual Reports of 20 textile and clothing related companies in Sweden (1989-2009)
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MANAGERIAL IMPLICATIONS

Organizations can focus on both short-term and long-term business goals by studying their Zscores The Z-score essentially helps the organization to apprehend it true business or corporate health amidst emerging conditions The Z-score transition profile can be a helpful tool for companies to judge their business health, analyze the underpinning attributes and benchmark them compared to competitors in terms of economic viabilities

CONCLUSIONS
Achievement of organizational business goals, in terms of multivariate Z-score, contribute to better system health Univariate ratios are deficient in assessing firms true financial health Z-score transition profiles of organizations are effective in studying the relationship between ORes and business health - Needed to devise strategies and nature of response to crisis events, either feed-forward (readiness or responsiveness) or recovery - Essential to understand the companys recovery potential during crisis events and what financial indicators underpin such response - Imperative for companys strategic positioning to optimize its cash flow, assets and liabilities, profit margin, sales etc. - Helps to differentiate companies into resilient or non-resilient, over time and different contexts

LIMITATIONS
Selected firms, for study were mostly SMEs, being mostly textile and clothing manufacturers (Swedish brands and fashion retailers were less represented) Selected firms were only private aktie bolag firms, not listed on share market. The effects of public listing, share market equity or venture capital could possibly yield contrasting ORes results, not covered in the research Choice of Altmans Z-Score to make a timebased longitudinal study of the organizations disruption profile to study ORes can be argued as it directly does not indicate or measure business system health though it is a very influential predictor of corporate bankruptcy and includes the consideration of mostly all financial performance measures Lack of past researches on operationalisation of ORes by devising some coding scheme

Further Research Work


Detailed explorative study of the causes of financial success or failure for the Swedish TCF related organizations between 1989 and 2009 In-depth studies to analyse the factors underpinning ORes in organizations and what incompetences lead to financial distress and failure.

Thank You!

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