My last post was on learning from success and failure, and one of the main themes was that failure leads to deeper thinking and learning. There was also some hint in the studies I discussed by Shmuel Ellis and his colleagues that talking about both success and failure leads to richer learning than talking about just success or just failure.

This research has essential messages for managers: They should do postmortems so that they don't make the same mistakes over and over again (one of those obvious things that few managers and companies actually do). As I thought about success and failure, I realized that there was a related and equally crucial question: What can leaders do while bad things are happening so that learning and desirable change happens in the organization? After all, bad times and crises often arise in organizations, and go on for substantial stretches, placing pressure on leaders to make the best out of a bad situation as it unfolds (not just after it's over).

There has been a substantial amount written about leaders and organizations in crisis over the years, but for me, the most enlightening study is still Alan Meyer’s classic 1982 Administrative Science Quarterly article “Adapting to Environmental Jolts.” Meyer analyzes a crisis in 19 hospitals in the San Francisco area: After a major malpractice insurer abruptly terminated malpractice for 4,000 northern California doctors and told them any new insurance would come with a 400% increase in premiums, anesthesiologists went on a one-month strike in 1975 against doing any elective surgery. This caused an immediate and drastic drop in hospital admissions and cash flow. Meyer uncovered many nuances among these hospitals’ responses, but the one I still find most interesting was that those hospitals that survived the strike best had leaders who consistently interpreted it as an opportunity rather than a threat.

For example, one hospital used the strike as a dramatic opportunity to celebrate and test their “no layoff policy,” which increased staff loyalty during and after the strike. Indeed, physicians subtly supported the hospital by defining a broader set of cases as “emergencies" during the strike, which meant that they did more surgeries and admitted more patients than other hospitals -- and made more money. Another hospital viewed the strike as a completely different kind of opportunity, using it as a chance to do deep layoffs that it had believed were necessary for years, but did not have the political power to implement before the strike. After the strike, administrators believed that taking this opportunity to do layoffs gave them the license to make changes that likely staved off an otherwise inevitable bankruptcy. Still other hospitals viewed the strike as an opportunity to devote resources to attract nonsurgical patients, which not only helped them endure the crisis, but that left them with greater income after the strike was over. Meyer showed that, by contrast, the less successful hospitals framed the strike as a debilitating threat, making no attempts to attract nonsurgical patients, making few (if any) changes in how they marketed their services, refusing to consider proposals that they change organizational strategies, and communicating serious doubts about the ability of their staff members to perform effectively during the crisis.

In the years since Meyer’s research has been published, a great deal of organizational and psychological research has been published on the power of framing, which shows that whether a challenge is framed as an opportunity or a threat has a huge effect on how people respond. Consistent with Meyer’s work, the opportunity frame leads to far more adaptive behavior and learning that the "threat” frame. The most famous work on framing was done by Daniel Kahneman and the late Amos Tversky, which led to a Nobel Prize for Kahneman. Their work on prospect theory showed that whether people frame an event as a gain or a loss (even though it is the same event) has big effects on their behavior. People are especially (and irrationally) averse to losses. All this work is wonderful, but I still love Meyer’s classic because it provides such rich detail about how the same challenge can have such vastly different effects on organizations that all -- at least on the surface -- face the same problem.

When I combine this post and the last, a pair of lessons seems to emerge for leaders and managers:

* If you want to make the best out of a good situation, focus on what is going wrong and can go wrong.

* If you want to make the best out of a bad situation, focus on what is going right and could go right.

Perhaps I am stretching things too far here, but that is what it makes me think! I invite your comments, as always.

HARVARD BUSINESS ONLINE RECOMMENDS:
Harvard Business Review on Crisis Management (Paperback)
SWOT Analysis I: Looking Outside for Threats and Opportunities (HBS Press Chapter)
Risk Intelligence: Learning to Manage What We Don't Know (Hardcover)