Presentation IIAS Conference

7/31/2019 Presentation IIAS Conference

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Organizational Resilience and

Health of Business Systems

Rudrajeet Pal (Presenting Author)

Hkan TorstenssonHeikki Mattila

The dragon lifts in the hard winds.


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Context: Economic/Financial crisis in Sweden

Boom (before 1989)-bust (1989-93)-recovery(1994-1998) phases in SwedenFalling 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 inexports (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


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ConceptualizingOrganizational/Business

Health


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


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Research Questions

RQ1: How can we measure organizationalhealth?

RQ2: How can Organizational Resilience

(ORes) be related to business health?


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Conceptualizing Resilience

Many faces of resilience

(Madni and Jackson, 2009)

AS A SUPER MATERIAL

Resilience is to (i) prevent something bad from happening (ii) preventsomething 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)

...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)


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DEVELOPMENTAL PERSPECTIVE: ADAPTABILITY,

POSITIVE FUNCTIONING, COMPETENCECapacity 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)

...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)

Many faces of resilience

(Madni and Jackson, 2009)

Conceptualizing Resilience


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Output State System State Management Mode Faces of Resilience Time periodEvent and

Action

Normal, Perturbed

Reference

State,Normal

Day-to-day

anticipation of potential

failure, implementation

of preventive actions to

manage small daily

perturbations

Anticipate and

Avoid (short term)

or prevent (long

term)

1, 2

Event follows

(lags) action

Perturbed

Acceptable degradation of

turnaround or quality

characteristics

Perturbed

Exceptional

adaptive management,

corrective actions

Adapt to

(reconfigure) or

withstand (absorb)

3, 4

Event and action

(same phase)

almost together

Degraded

Unacceptable degradation

of turnaround or quality

characteristics

Failed, Out

of Service

Emergency

restore the system

Recovery

(restoration)5

Action follows

(lags) event

Time periods (Sheard and Mostashari, 2003)


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Altmans Z-score1, 2

Zones of Discrimination:

Z > 2.9 (for private firms)(2.6 - for general use)Safe Zone

1.23 (for private firms) (1.10for 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

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 Description

Working Capital/Total Assets (T1) Measure of liquidity (net liquid assets of the firm relative to total capitalization)

Retained Earnings/Total Assets (RE/TA)

(T2)

Measure of total amount of reinvested earnings (leverage)

Earnings Before Interest and Taxes/Total

Asset (T3)Measure of profitability/operating efficiency (productivity of firm's assets)

Shareholders Equity/Total Liabilities

(T4)

Measure of solvency (measured by shareholders equity plus untaxed reserves and

provisions) before the liabilities exceed the assets

Sales/Total Asset (T5) Measure of sales generating ability of firm's asset (Activity ratio: capital-turnover ratio)

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


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Many faces of ORes, Needs

operationalisation

How to differentiate a resilient

phase or firm from a non-resilient

one?

Lack of sufficient measure or coding

to determine business health

Need to operationalize

organizational goals, hence, success

by conceptualizing business health

ORGANIZATIONAL RESILIENCE HEALTH OF BUSINESS SYSTEM

Lack of a proper framework, set of rules and codification, empirical study and

investigation relating business health to ORes to operationalize it


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Scoring System

Scores assigned for each transition

Positive transition, in the healthyzone [Score: 1]

Negative transition, but in the healthyzone [Score: 0.5]

Transition in unhealthyor catastrophic zone [Score: 0]

Transition to unhealthyor catastrophic zone [Score: 0]

Positive transition into the healthyzone

- 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]

Possible Z-score transitions (over years)

ZHZH+ZHZH-ZUHZUH or ZUHZC or ZCZUH or ZCZC

ZHZUH or ZHZC

ZUHZH

Where (according to Altmans Z-score)

ZH+>ZH>ZH- (healthyzone)

ZUH (unhealthyzone)ZC (catastrophic zone)

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


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ORes and Business Health transition profile


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6 +[+] 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 T i for all the

firms over the period and also higher compared to the overall Ti 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 Z-

scores

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


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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 andliabilities, profit margin, sales etc.

- Helps to differentiate companies into resilient or non-resilient, over time and different

contexts


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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 time-

based 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.


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Thank You!

Presentation IIAS Conference

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