Sharpening the instinct to survive, then thrive

If you place a frog in a pot of boiling water, it will hop out immediately. But place it in a pot of cool water, gradually turn up the heat, and it will stay put, enjoying the warmth. Finally, it will get groggy and, unable to climb out, it boils to death.

What do the following Irish companies have in common with our boiled frog? Powerscreen, GPA, Irish Press Group, Xtra-Vision, PJ Carroll. Answer: They all ignored the subtle signals that they were in mortal danger. Although some, unlike the frog, were resuscitated by being taken over, none survived in their original form.

In fact, these companies and others abroad - such as Rover, Digital, Nixdorf, Laker Airlines and others - demonstrate how difficult it is for successful companies to reverse a downward spiral. The decline itself is often caused by a fixation on a previously winning strategic approach. Success insulates the company from warning signals that all is not well.

A key indicator is the existence of a bureaucracy with institutionalised power structures and practices that have supported the failing strategic approach. It is generally agreed that by the time financial statements reflect the decline, it is too late. The company will have lost its industry positioning. Yet, resurrection, although difficult, is possible. Examples such as Waterford Crystal, Ryanair, Nokia and IBM prove the possibility of a comeback.

What has enabled these and other companies to climb out of the cauldron, even in a debilitated state? The answer is elegantly summarised by Prof Charles Baden-Fuller of City University and Prof John Stopford of the London Business School in their "crescendo model of rejuvenation".

The model entails the orchestration of four stages that merge into each other. The magnitude of change increases over time, building up to a crescendo, so that the organisation is utterly transformed by the end of the process.

The first stage of the model is to galvanise the top team - taken almost literally by Waterford Crystal when it hired Dr Paddy Galvin to lead its turnaround.

Most research on corporate renewal agrees that, in a crisis, it is necessary to hire a new management team, not associated with the old ways that caused the crisis. While most transformations are associated with leadership changes, for example Ryanair and IBM, there are exceptions. John Reed, the incumbent chief executive officer led Citibank's turnaround in the mid-1990s.

In any case, the top team must provide the leadership and energy for the enormous effort that will be required. The team itself will realise that the problems are deep-seated and fundamental and will not go away of their own accord. This demands urgent action that will mean changes across the entire company.

It is important to look behind the financial figures to the market and competitive dynamics to identify the source of the trouble. There is often a tendency to isolate and blame a particular group when things go wrong. In this respect, it is interesting to note that Carly Fiorina, Hewlett Packard's new chief executive, has chosen to blame and punish the field sales force for recent sluggish sales. Industry observers suggest, however, that HP's problem is its product line in comparison to nimbler competitors such as Sun Microsystems. Thus, Ms Fiorina is tackling the symptom, not the fundamental issue, a basic mistake made by many successful companies as they get into trouble.

Stage two of the crescendo model advocates cutting out unnecessary complexity. This means eliminating those activities and expenses that do not contribute to performance. For example, the revitalisation of Rolls Royce is attributed in large part to the disposal of Rolls Royce Motor Cars and its Cosworth auto engine plant, so it can concentrate on higher value added businesses in aircraft engines. Disposal of non essential operations enables the company to apply its scarce resources in a more focused way on value-creating activities. Waterford Crystal had to make 500 workers redundant and invoke 25 per cent pay cuts for its workers in 1992.

Building the business is the third stage, and can overlap to some extent with the simplification stage.

Inherent in the "build" phase is the honing of skills and capabilities. Part of the reason for IBM's comeback in the mid 1990s was the development of skills in software, services and project management. These were a forceful combination alongside IBM's traditional marketing expertise and powerful brand name.

The final phase is "leveraging". This aims to utilise advantages to create yet more payoffs. Waterford Crystal and Rolls Royce started out with valuable brand names as part of their building base. They have developed their marketing skills to use these brand names to give credibility to new businesses.

There are a few caveats to the crescendo model. First, it requires someone to initiate the process while something remains to be salvaged. This may be the hardest part, since it involves a radical reversal by the incumbent leadership or a change of leadership altogether, the latter initiated by someone outside management.

Even if there is something left, it must be the basis upon which a revitalised competitive company can be built. Otherwise, there is a false dawn, as happened with Rover cars. The company had improved its engineering skills and production processes, thanks to its strategic alliance with Honda, but it was not enough to give it a distinctive advantage in today's competitive automobile industry.

Each of the four stages of the crescendo model has many small steps. Patience is required. Even when companies follow the model to the letter, the winning strategy may not be apparent. This is where new value must be created, but it is the most elusive part. How does the company find the distinctive capabilities that can be converted to competitive advantage? Nokia, almost bankrupt in 1991, became the fifth biggest company in the world in 1998. It achieved this by transforming itself into a telecoms firm, assuming leadership in a booming sector. Nokia's path was not obvius - especially given that it began as a woodpulp mill.

The biggest caveat of all is that the crescendo is never ending. British Airways, heralded as an icon of renewal in the early 1990s, is expected to log a loss this year. Motorola has faltered after a rejuvenation in the mid 1990s. Companies may bounce back but complacency is never an option for them. To quote Andres Grove of Intel: "Only the paranoid survive."

Eleanor O'Higgins is a lecturer in management and business ethics at the Graduate School in UCD.