STRATEGIC REsPONSE HmRARCIDES AS REACTION

m ENVIRONMENTAL 1'HREAT

Marshall Schminke
Creighton University

Omaha, Nebraska

To perform effectively, an organization must match its capabilities to its constantly
changing environment. However, little research focuses on the dynamic processes by which
organizations make these adaptive decisions. This research develops and tests a hierar-
chical model of organizational response to environmental threat. It suggests that organi-
zations invoke preexisting sets of response programs to deal with familiar threats, and
that these programs emerge in a predictable, hierarchical order.

Response Programs

When an air-raid siren sounds, the members of a military installation initiate a set of
complex activities. The unit members need not discuss and plot a unique set of strate-
gies in each instance, but rather draw on a well-learned set of programs designed to fit
the situation in which they find themselves. In fact, under air raid conditions, the lost
time involved in attempting to plot a unique, optimal reaction could well lead to tragic
results.

In many cases firms respond and react similarly to cues from their environment. Often
these events consist of situations the organization has experienced in the past. The pru-
dent organization develops a repertoire of strategic response programs-prepackaged sets
of actions to be implemented upon detection of particular, recurring, environmental cues-
to deal with such shocks.

These response programs can take on many forms. For example, Staw, Sandelands and
Dutton (1981) model a number of internal organizational responses to threat, one of which
reflects the organization's attempts to increase operating efficiencies. Consistent with other
research (Koberg 1987; Miller and Friesen 1980; Tushman and Romanelli 1985) the
present paper suggests that firms do not execute these reactions randomly but rather in a
predictable, hierarchical fashion. For example, in the case of a manufacturing firm, the
hierarchy of responses to threat might appear as follows:

(1) Do nothing.
(2) Decrease labor costs through short term workforce layoffs.
(3) Increase short term financial liquidity through more aggressive collections.
(4) Decrease inventory levels.
(5) Decrease plant and equipment levels.

A manufacturing firm might cut back on overtime nearly by fiat, more quickly and
easily than it could collect overdue receivables and marginal accounts. In times of de-
cline, especially during severe industry-wide shocks, excess inventory could be very dif-
ficult to dispose of, and the sale of plant and equipment would likely be the most diffi-
cult response of all. The precise ordering of the responses would not be the same in all



20 Journal ofBusiness Strategies Vol. No. 11 No.1

firms or industries, of course (e.g., steel mills and candy manufacturers), but the hierar-
chy reflects a range of relative difficulty and expense involved in each action. Further,
within each category of responses-employment cutbacks vs. fixed asset reduction, for
example-predictable sub-hierarchies also exist. The next section outlines the means by
which these hierarchies may be mapped and tested.

Mapping Response Hierarchies

To determine whether response programs exist and the extent to which firms employ
them, two factors are necessary. The first is an observable set of responses for which a
hierarchical order can be predicted and traced over time. In this study those responses
are changes in employment levels. The second necessary factor is an environmental shock,
familiar to and identifiable by the firms, for which standard response routines could ex-
ist. In this study that shock is recession.

Many organizational responses such as the commission of illegal acts are not readily
observable (Staw and Szwajkowski 1975). However, tracing firms' response hierarchies
requires that we focus on those that are. Firms' adjustment of employment levels pro-
vides one such measure. This study examines the degree to which firms cut back in four
distinct employment categories in response to recession:

(1) Overtime hours of production workers
(2) Average weekly hours of production workers
(3) Total number of production workers
(4) Total number of supervisory workers

A predictable hierarchy of responses exists among these variables; it appears as follows:
(1) Decrease overtime hours of production workers. For a manufacturing organization,

decreasing overtime hours should be the easiest, quickest, and most cost-effective method
of decreasing employment expenses, as the overload of labor hours implemented during
prosperous times is pared back. As long as some workers still earn overtime wages-typi-
cally at least fifty percent higher than base wages-an incentive exits to cut back on these
relatively expensive overtime hours rather than cutting into other workers' regular hours.

(2) Decrease average regular weekly hours of production workers. However, as the
recession develops, merely cutting back overtime hours may not provide sufficient sav-
ings. Suppose a firm determines that an additional forty hours per week of labor cut-
backs are required. It may respond by laying off one worker entirely or by cutting back
each of forty workers to thirty-nine hours per week. The latter is a common practice, at
least in the early stages of cutbacks. The company may achieve similar results by invok-
ing mandatory vacation periods, leaves, and so on. Either approach avoids actual layoffs,
which may be costly in terms of unemployment benefits and union grievances. Even more
significant may be the demonstrated effects of layoffs on the survivors of those layoff~
those who retain their jobs. Research shows that commitment, morale and productivity
of the surviving workers may decline after layoffs (Brockner 1992; Brockner, et al. 1987)
generating an additional cluster of indirect expenses related to the layoffs. Other dysfunc-
tional effects of declining organizational size-as indicated by employment levels (Free-



Spring 1994 Schminke: Strategic Response Hierarchies 21

man and Hannan 1975)-include increased conflict, reduced flexibility, increased
scapegoating, loss of leader credibility, as well as declining innovativeness, participation,
and long-term planning (Cameron, Whetten and Kim 1987; Cameron, Kim and Whetten
1987). The astute firm will consider the entire package of costs-direct and indireet-of a
particular employment policy. The net effect is that decreasing the average weekly hours
across employees is likely to be a less costly way to reduce labor expense than complete
worker layoffs.

(3) Decrease total number of production workers. As the recession develops more fully,
and extra shifts or entire plants are idled, full layoffs must be invoked and the total number
of production workers on the payroll will decrease. This is a difficult and costly process
for the organization, especially in situations where labor unions are strong and job secu-
rity has been a major concern in contract negotiations. Further, the dysfunctional effects
of decline cited above have been shown to be strongest under conditions of large layoffs
(Cameron, Whetten and Kim 1987). Facing this, firms will resort to wholesale layoffs
only after other reasonable alternatives have been exhausted.

(4) Decrease total number of supervisory workers. Supervisory workers represent the
final fatalities of the firm's search for increased labor efficiencies in response to the re-
cession. Research demonstrates that administrators added during times of prosperity are
among the final victims of layoffs in times of decline (Freeman and Hannan 1975; Miller
and Friesen 1980).

The shock to which ftrrnS are responding in this study is recession, a shock that is
both familiar and identifiable. From 1945 to 1980, the U.S. economy suffered six sepa-
rate recessions, the first five of which were of similar duration, lasting from eight to twelve
months. These five provided firms with repeated opportunities to develop sets of employ-
ment programs to deal effectively with cyclical, short-term, recessionary decline.

The sixth recession (1973-1974) was far more intense than the previous five, lasting
eighteen months, and is the focus of this study. It has been described as a "prolonged
agony" (Egan and Weiner 1990) as contrasted with the earlier "three quarter blips" (Egan
and Weiner 1990) like the recession of 1970. (Of the two more recent recessions-1980-
1982 and 1990-1991-neither provides a clean contrast between a string of similar shocks
followed by an aberrant, severe shock.)

Upon detecting the threat of decline, firms should employ the response programs de-
veloped in the five previous recessions, since at its outset they have no reason to believe
this threat will differ significantly from earlier threats. However, these established pro-
grams would be inadequate to cope with the severity and duration of the harsh 1973-
1974 recession. As a result, we expect that the initial responses will eventually be aban-
doned and a new set enacted. Each of these responses and changes in responses should
occur in a predictable fashion.

This sixth recession provides a view of whether (1) response programs developed dur-
ing the fIrst fIve recessions were implemented, (2) whether they were enacted in the
predicted order, and (3) whether firms came to recognize the recession as atypical and
as a result, implemented a new, more severe, set of response strategies. In most cases,
this updated response will reflect many of the characteristics of the first as firms facing



22 Journal ofBusiness Strategies Vol. No. 11 No.1

novel problems engage in what Cyert and March (1963) referred to as a problemistic
search.

Under these conditions, most firms demonstrate tendencies to search in the neighbor-
hood of current problems for potential solutions to new problems. That is, before engag-
ing in zero-based solution generation-a costly and time consuming process--organizations
explore their surroundings and histories for clues about prior problems whose successful
solutions might provide for the basis of new solutions. In this case, reactions that worked
well in typical recessions might be expected to work well in severe recession, if ratcheted
up in intensity to match the intensity of the environmental shock.

The following hypotheses formalize these assertions:
Hypothesis 1: In response to the threat of recession, firms will implement strategic

response programs to decrease labor costs.
Hypothesis 2: These response programs will be implemented in the following hier-

archical order: Decrease overtime hours, decrease average weekly hours, decrease pro-
duction workers, decrease supervisory workers.

Hypothesis 3: At a point at which the organizational decline is recognized as atypi-
cally severe, initial original response programs will be abandoned in favor of new, more
extreme, measures.

Hypothesis 4: This second set of response programs will follow the same hierarchi-
cal order as the first: Decrease overtime hours, decrease average weekly hours, decrease
production workers, decrease supervisory workers.

Methods

Sample
A sample of twenty-five industrial manufacturing and retailing groups was randomly

selected from the U.S. Bureau of Labor Statistics' (BLS) monthly publication Employ-
ment and Earnings. Appendix 1 lists the industry groups and their SIC codes. (Note: The
BLS does not release employment data for individual organizations but aggregates data
at the 2-digit or 3-digit SIC code level. However, this creates a level-of-analysis concern
in that our thinking about responses to environmental threat was carried out at the firm
leve~ while the analyses below are executed at the industry level. The reader is cautioned
to keep this in mind during each set of analyses that follows.)

Measures
Environmental Threat. Examining firms' response to environmental threat requires an

indication of the onset, duration, and the intensity of the shock. Of course, different indus-
tries track different indices to determine the short and long term outlook for their markets.
A variety of economic factors like money supply and housing starts as well as industry-
specific measures like inventories and orders might be tracked by firms attempting to catch
a glimpse of the future. However, for this analysis we cannot hope to track all indices
employed by all firms across several industries. What is needed is a single index that cap-
tures a wide range of information about business conditions across a number of industries.



Spring 1994 Schminke: Strategic Response Hierarchies 23

For American corporate organizations whose common stock is publicly traded, such a
measure is the market price of common stock or market indices derived from individual
stock prices.1 These stock indices provide a useful measure of anticipated environmental
shock to a firm. A decline in the price of a firm's stock indicates that analysts and in-
vestors in the financial markets have perceived some actual or potential negative shock
to the com~any such as increased interest rates, international unrest, impending recession,
and so on. The stock market traditionally acts as a leading indicator, providing finns
with advance notice of impending economic decline. Therefore, it provides a better indi-
cator of the point at which firms, analysts, and investors first detect the threat of decline
than do the Gross Domestic Product (GOP) (then, GNP) figures that determine the tech-
nical beginning and end of recessionary periods themselves. In this case, the Standard &
Poor's 500 Index began its grand decline in January 1973, ten months prior to the onset
of the actual recession. likewise, it began to recover in December 1974, months before
the technical end of the recession.3

Organizational Response. Four categories of monthly employment data were gathered
for each of the 25 industry groups from unpublished, seasonally-adjusted U.S. Bureau of
Labor Statistics employment data for the period 1972-1977.4 Both the severity and the
duration of the responses were calculated for each of the following:

(1) Average overtime hours (01) per production worker.
(2) Average weekly hours (AH) (non-overtime) per production worker.
(3) Total production workers (PW) employed.
(4) Total supervisory workers (SW) employed.

A smoothing program was applied to the data to depict better the underlying patterns.5

The smoothed series-the response curves-were plotted and several critical points
(A,B,C,D,R) were identified, as shown in Figure 1. For illustrative purposes, consider the
response curve for average overtime hours in industry X. It shows the pattern of increases
and decreases in OT hours in industry X before, during, and after the recessionary pe-
riod. Point R represents January, 1973, the onset of the detected recession as indicated
by the S&P 500 Index. As would be expected, employment levels were typically rising
during the pre-recession period.

Figure 1: Sample "Response Curve" for Overtime Hours

Employment
Level

A

B
D

c

1972

R
1973 1974 1975



24 Journal ofBusiness Strategies Vol. No. 11 No. I

Overtime hours peaked at Point A, some months after the onset of the shock This
point represents the industris initial reaction to the shock, the point at which OT hours
began to decline. Plotting Point A generates two values: the month at which the response
occurred (MonthA) and the number of OT hours per employee during that month
(ValueA). Point D, the point six months prior to the initial industry reaction, likewise
yields MonthD and ValueD.

Point C indicates the point at which the response curve reached a minimum value. It
denotes the end of the industry cutback responses, as overtime hours again began to rise.
Point C also yields two critical values, MonthC and ValueC.

Point B indicates the onset of the second, more severe, response program. It is the
point at which the smoothed response curve made its most pronounced inflection-with-
out turning upward-between points A and C. In situations where no inflection point was
identifiable, the midpoint between points A and C was selected. Point B also represents
two values, MonthB and ValueR

Once the four key points were identified, the following values were calculated for each
of the four employment variables.

PRESLOPE: The average change per month in the employment variable during the
six months prior to Point A «ValueA - ValueD) / 6).

LAGI: The time (in months) from the onset of the shock to the beginning of the
industry's initial response (MonthA - MonthR).

DURI: The duration of the first response program (MonthB - MonthA).
MAGI: The magnitude of the first response program «ValueB - ValueA) / ValueA).

This was the percentage change in the level of the employment variable during the first
response program.

SLOPE1: The average change per month in the employment variable during the first
response program «ValueB - ValueA) / OURI).

LAG2: The time from the onset of the recession to the beginning of the second
response program (MonthB - MonthR).

MAG2: The magnitude of the second response «ValueC - ValueB) / ValueB).
SLOPE2: The average change per month in the employment variable during the

second response period «(ValueC - ValueB) / DUR2).

Analysis and Results

Hypothesis 1 states that firms will react to the recession by implementing labor cut-
backs in each of the four employment categories. Table 1 shows means and standard
deviations for PRESLOPE and SLOPEl for each employment variable across the 25 in-
dustries, with results of the pooled t-test comparisons of these means. PRESLOPE de-
notes the trend in employment levels prior to the initial reaction to the recession. SLOPE1
denotes the trend in employment levels after the initial reaction to the recession. This
comparison reveals that the average OT hours during the first response program were
significantly lower than those in the pre-response period. The same is true across the other
three employment variables, indicating that the firms in these industries did react to the



Spring 1994 Schminke: Strategic Response Hierarchies 25

impending decline with responses across all employment categories. These results sup-
port Hypothesis 1.

Table 1: Test of Hypothesis 1

PRESLOPE SLOPE1 T-VALUE (D.F.)

Overtime Hours
Weekly Hours
Prod. Workers
Super. Workers

MEAN (S.D.)

.125 (.127)

.198 (.300)

.819 (.690)
1.04 (1.780)

MEN (S.D.)

-.057 (.072)
-.046 (.067)
-.331 (.586)
-.729 (2.28)

5.46 (48) ****
3.97 (48) ***
6.23 (48) ** **
3.06 (48) **

Note: ** = p<.Ol, *** = p<.OOI, **** = p<.OOOl

Hypothesis 2 states that the response programs will be implemented in a particular hi-
erarchical order; cutbacks should be implemented first in overtime hours (OT), followed
by average weekly hours (WH), total production workers (PW), and finally, total super-
visory workers (SW). This suggests that the time lag from Point R to the onset of the
response program (lAG1) will be shortest for OT, followed by WH, PW, and SW, re-
spectively. Table 2 shows results of a rank ordering of the industries' mean LAG1 for
each of the employment categories.

Table 2: Test of Hypothesis 2

TEST OF LAGl:
MONTHS TO 1st REACTIO

Av. Overtime Hrs. (OT) 6.16
Av. Weekly Hrs. (AlI) 6.76
Tot. Prod. Workers (PW) 12.20
Tot. Super. Workers (SW) 14.72

OT
SW
PW

SIG. OF DIFFERENCES
BEfWEEN MEANS:

AH PW SW

** **
** *
**

Note: * = p<.05, ** = p<.01, - - = not significant

Results in Table 2 support Hypothesis 2. Lag times for each employment variable
emerge in the predicted order. Cuts in overtime hours occurred slightly more than six
months after Point R. Cuts in average weekly hours began after nearly seven months.
Over twelve months passed before total number of production workers began to fall, and
nearly fifteen months before total number of supervisory workers began to decline.

Table 3 also shows results of a simultaneous paired comparison procedure that tests
whether the differences between these mean lag times were significant.6 With the excep-
tion of the OT-AH pairing, each response was instituted at a significantly later time than
its predecessor. These results provide stronger support for Hypothesis 2.



26 Journal ofBusiness Strategies Vol. No. 11 No.1

Hypothesis 3 suggests that upon discovering that the environmental shock is more severe
than the current set of response programs can accommodate, organizations will invoke a
second, more severe set of response programs. To test whether more severe changes were
employed, two sets of comparisons were performed for each employment variable. First,
SLOPEI and SLOPE2 were compared. SLOPEI values show employment trends during
the first response period, and SLOPE2 values show employment trends after implemen-
tation of the second set of response programs. Second, MAGI and MAG2 were com-
pared, assessing the difference in relative magnitude of the cutbacks in each period. Table
3a shows means and standard deviations for SLOPEI, SLOPE2, MAGI, and MAG2
values as well as results of pooled t-tests of differences between the means.

Table 3: Test of Hypothesis 3

Table 3a:

Overtime Hours
Weekly Hours
Prod. Workers
Super. Workers

Overtime Hours
Weekly Hours
Prod. Workers
Super. Workers

SLOPEI

MEAN (S.D.)

-.057 (.072)
-.046 (.067)
-.331 (.586)
-.729 (2.28)

MAGI

-.157 (.149)
-.017 (.022)
-.030 (.064)
-.021 (.057)

SLOPE2

MEAN (S.D.)

-.159 (.105)
-.214 (.151)
-1.52 (1.20)
-1.02 (2.88)

MAG2

-.409 (.171)
-.045 (.029)
-.115 (.085)
-.050 (.071)

T-VALUE (D.P.)

3.49 (48) **
5.07 (48) ****
4.37 (48) ***

N.S.

4.84 (48) ****
3.97 (48) ***
3.92 (48) ***

N.S.

Note: * = p<.05, ** = p<.01, *** = p<.OOI, **** = p<.OOOI, - - = not significant

Table 3b:

TEST OF DURl:
EAN OUR. OF 1st REACTIO

Av. Overtime Hrs. (01) 13.11
Av. Weekly Hrs. (AR) 13.20
Tot. Prod. Workers (PW) 13.00
Tot. Super. Workers (SW)

SIG. OF DIFFERENCES
BETWEEN MEANS:

AR PW
OT
PW

Note: * = p<.05, ** = p<.Ol, *** = p<.OOI, **** = p<.OOOI, - - = not significant



Spring 1994 Schminke: Strategic Response Hierarchies 27

Results in Table 3a indicate a marked change in employment policies between the two
periods, both in trends (slopes) of employment and in the magnitude of change in em-
ployment levels. The decreases in each of the employment categories that began declin-
ing the initial response period continued, but at an accelerated rate, during the second
period. All differences are significant except for the decreases in SW, which had not
stopped declining during this period, but the rate of decrease had not accelerated rapidly
enough to create significant differences. These results support Hypothesis 3. However, since
the results do not demonstrate a clear two-stage response in supervisory personnel the
rest of the analysis will consider it to be a single-stage response.

A further implication of Hypothesis 3 is that if these responses are truly established
programs rather than week-by-week updates reflecting companies' reactions to decline, their
duration should reflect the average length of the event that they were designed to deal
with. In the two-stage response demonstrated here, the duration of the fIrSt stage should
correspond to the duration of the typical postwar recession. The lengths of the 1949, 1953,
1957, 1960, and 1970 recessions were 11, 10, 8, 10, and 11 months, respectively.

Those programs in the initial stage would reflect that time frame and were expected
to run at least that long. However, they were not expected to stay in place much longer,
as they were not developed to deal with severe recessions of over one year. On or about
the twelfth month, firms would recognize that this shock was something out of the ordi-
nary, abandon their initial response programs, and implement the second stage. Results
in Table 3b demonstrate that the average duration of each employment response was
approximately thirteen months. None differed significantly from the others, further sup-
porting Hypothesis 3.

Hypothesis 4 states that the second set of response programs will be implemented in
the same hierarchical order as the first. Testing this hypothesis followed the same format
as testing Hypothesis 2 with one exception. Since a clear second-stage response for SW
did not appear, it was not included in the analysis. Table 4 shows results of the rank-
ordering of IAG2 for each of the other employment variables.

Table 4: Test of Hypothesis 4

TEST OF IAG2:
MEAN MONTHS TO 2nd REACTIO

SIG. OF DIFFERENCES
BETWEEN MEANS:

**

Av. Overtime Hrs. (OT) 19.26
Av. Weekly Hrs. (AH) 19.96
Tot. Prod. Workers (PW) 25.20
Tot. Super. Workers (SW)

AH PW
OT
PW

**

Note: * = p<.05, ** = p<.01, - - = not significant

Results indicated that the mean values for IAG2 occurred in the predicted order.
Slightly more than nineteen months passed from Point R to the beginning of the second,



28 Journal ofBusiness Strategies Vol. No. 11 No.1

more severe, response in OT cutbacks. Nearly twenty months passed before more severe
cutbacks in WH began, and over twenty-five months passed before the second response
in cutting back PW began. Results indicated that with the exception of the pairing be-
tween WH and QT, these differences were significant.

Discussion and Conclusions

This paper examined the processes by which firms deal with environmental threats. It
tested whether firms respond with sets of preprogrammed routines-response programs-
when facing these threats. It investigated whether companies across 25 industries invoked
predictable sets of strategic responses in a particular hierarchical fashion. Further, it tested
whether one set of routines was abandoned in favor of another upon discovery of the
inappropriateness of the original package. All hypotheses were supported.

The results are significant, both theoretically and practically. We know relatively little
about the way organizations manage environmental shocks, and even less about the ways
in which they should. This paper sheds some light on the processes employed, suggest-
ing that under threatening conditions, mangers employ a problemistic search. That is, for
solutions to new problems, managers seek out existing programs that worked in the past
on similar problems. A repertoire of response programs simplifies this search.

We commonly hear about the pitfalls of "managing by putting out fires"; managers
often have all they can handle simply attending to the problem of the minute. Less im-
mediately-pressing issues like strategic planning are pushed to the background as manag-
ers employ a twine-and-bailing-wire approach to holding the firm together. Diligent en-
vironmental scanning, monitoring, assessment, and forecasting fall by the wayside as ready-
made response programs are pulled from the shelf, put in place, and allowed to run (a
fire is doused) until it is clear they are no longer appropriate (a new fire begins). These
results suggest that may be the process firms use to cope with threat. Ironically, the
declining organization may be the least able to absorb the mistakes inherent in a system
devoid of strategic management. Further study is needed to develop programs aimed at
culling out ineffective response programs, retaining the adaptive ones, and developing
systems that would aid managers in determining which are which in a particular situa-
tion.

Knowing more about how firms are likely to respond to various shocks may be useful
for the strategically adept organization. It has been shown that strategic planning can
provide a source of competitive advantage (powell 1992) and a critical goal of planning
is to be able to anticipate competitive responses to various market changes. These results
suggest that under conditions of familiar shock, a firm might be able to predict accu-
rately the likely responses of its competitors, buyers, and suppliers. With that ability will
come first-mover advantages like increased market share (Mascarenhas 1992).

The larger issue of strategic scanning should also be noted. The present results regard-
ing firms' use of response programs relate to a firm's scanning processes in two ways.
First, an important component of the scanning process is for organizational boundary
spanners to have some notion of the events to which they ought to be attending. Recog-



Spring 1994 Schminke: Strategic Response Hierarchies 29

nizing patterns in competitor responses would be key to formulating and executing ap-
propriate responses. If, as these results suggest, firms tend to utilize existing routines of
responses, those should be relatively easily recognized by skilled scanners. Knowing that
response routines are regularly repeated should allow scarce scanning resources to be
concentrated on a set of "most likely" patterns of behavior.

Second, it has been shown that effective environmental scanning and interpretation is
related to better performance ('Thomas, et al. 1993). The other side of this coin is that poorer
scanning leads to poorer performance, which has been linked to even less attention being
paid to strategic planning. Thus, a dangerous cycle has begun. To the extent that a firm is
skillful in its scanning-and thus better able to detect and predict the responses of others-
the risk of further decline and the dysfunctions associated with it is minimized.

However, several caveats remain. Much of the discussion of the issues at the heart of
this research was at the firm level, but analysis proceeded at the industry level. While
industry-level data reflect the aggregation of individual firms' responses, and strong cross-
industry results boost confidence in their generalizability, industry data miss much of the
potential richness of firm-level data. In addition, industry-level data do not allow for the
sort of between-industry analyses that would tell us about the specific differences that
might be expected from one industry to the next. Responses in recession-vulnerable in-
dustries like building materials may be quite different from those that are more reces-
sion-resistant like food products. However, it should be noted that these employment
responses were strong and stable enough across disparate industries to yield significant
results even at this macro-level of analysis. Therefore, it is likely that the more homoge-
neous within-industry responses would be even more pronounced and traceable.

Second, this paper examined only a small subset of possible responses to a single type
of environmental change. It would be interesting and useful to examine additional types
of response hierarchies, to determine the extent of their predictability and stability. In
addition, this paper shed little light on what additional types of responses exist in these
and other organizations and whether the programs are common across alternative forms
of environmental shocks.

A third set of questions concerns the conditions under which these response programs
might differ. For example, the degree to which a firm is buffered from environmental
shock may affect the type, magnitude, and speed of response programs it invokes. Spe-
cifically, those organizations or industries that are relatively well buffered from the envi-
ronment may respond to market-wide shock much more slowly and to a much lesser
degree than organizations or industries whose businesses are more volatile. For example,
well-buffered firms may be able to make more effective use of response programs as
reactions to decline in that implementing the ''wrong'' program would carry less severe
results. Less-buffered firms may need to decrease their dependence on prepackaged pro-
grams, in that they are especially vulnerable to these same potential mistakes.

It may also be the case that new employment alternatives have emerged that would
alter the nature of the particular employment hierarchy tested here. Corporate restructur-
ing has altered the face of many organizations in the past decade, especially in middle
management, as increased outsourcing, subcontracting, and use of temporary workers has



30 Journal ofBusiness Strategies Vol. No. 11 No.1

pushed the risk of carrying employees during economic downturns out to satellite firms.
It is possible that a revised set of programs would include cutbacks in these areas as
well at the traditional employee pools.

Finally, the role of organizational and managerial learning (Lant and Milliken 1992)
in these response processes needs to be examined. The present research assumes that or-
ganizational response programs grow from previous organizational experience, either that
of the firm or that of the individuals the firm might hire from experienced firms. The
"liability of newness" effect (Bruder! and Schussler 1990) that relatively young firms are
generally more vulnerable-may have to do with their inability to make good decisions
regarding appropriate responses to what they view as novel events. Their more experi-
enced counterparts are able to implement established response programs more quickly,
freeing up scarce resources for other needs and addressing the impending problem in a
more timely fashion.

The process by which well-learned response programs are updated or disposed of should
also be addressed. The severe shock that was the focus of this study followed a series of
mild, relatively similar, recessions that allowed firms to develop programs to deal with a
''typical'' recession. We do not know much about the process by which organizations cope
with a series of atypical shocks or a change in what is believed to be typical. For ex-
ample, since the 1973-1975 recession the U.S. has experienced two longer recessionary
periods than were typical in the post-war era. The effect that the severe 1973-1975 re-
cession and the later double-dip shocks have had on the established response routines
provides an interesting avenue for future research.

Guidelines for Managers

Several important lessons for managers may be drawn from this study. They involve
the strategic benefits of recognizing and utilizing the response patterns of one's own firm
as well as those of one's competitors. First mover advantages go to firms whose responses
are both timely and accurate. This final section outlines the process by which managers
might adopt some of these ideas for their own strategic benefit.

(1) Identify the Critical Success Factors (CSFs) for your industry. Experts in most
industries are able to identify a small set of numbers that conveys an accurate picture of
the health of firms in that industry. Typically, these are underlying operational figures
rather than pure financial (outcome) statistics. For example, every carrier in the airline
industry tracks and attends to passenger load factor, the percentage of available seats that
are actually sold. Keeping planes full (or as nearly so as possible) is key to success in
this industry. Retailers track inventory turnover, restaurants track food cost as a percent-
age of sales, and large brewers track market share. The specific categories differ across
industries, but once identified, five or six CSFs provide a great deal of information about
the firms in that industry. They also provide the basis for tracking the response hierar-
chies in that industry.

(2) Identify threats and shocks common to the industry. This paper examined reces-
sion, and for some industries that constitutes a---<)r even the-major threat. For other busi-



Spring 1994 Schminke: Strategic Response Hierarchies 31

nesses, fuel prices, interest rates, international instability, or even the weather might be
more salient threats. To identify the most pronounced response programs, these threats
should include only recurring events for which firms would have well-developed, pre-
packaged responses.

(3) Gather historical data. Once CSFs and recurring threats have been identified, a
history must be drawn. CSF information for each competitor is gathered over a span of
time in which industry threats emerged and subsided several times. Part of this process
includes identifying points analogous to those in Figure 1: onset of the shock, inflection
points, and so on. As the history is drawn, care should be taken to collect relevant con-
trol factors like firm size, severity of shock, and so on, to be used in the analysis.

(4) Include your firm in this process. Like individuals, many firms may be more aware
of others' habits than their own. Throughout the process, self-analysis and self-evaluation
are vital.

(5) Evaluate the effectiveness of the response programs. Even within a single indus-
try, firms will differ in terms of their responses to threats. Some may implement layoffs
while others cut back on research and development spending. By assembling a lengthy
industry history we may learn not only what competitors did, but what worked. Grossly
inappropriate strategic moves are often self-correcting (firm death) but in most industries
a range of strategic responses might be supported. The point is to determine which are
most effective.

(6) Assess your firm's vulnerability to the shocks. Not all organizations are equally
vulnerable to a given threat. Within-industry differences in strategic posture might soften
or enhance the effect of a particular shock. In addition, something of a compensatory
effect exists between resources devoted to buffering your firm from shock (e.g., outsourcing
components even at slightly higher cost) and those devoted to managing the threat (e.g.,
scanning, analysis, and corrective action expenses). By prioritizing the threats to which a
firm is most vulnerable, managers might make better use of limited resources.

(7) Adjust or create response programs accordingly. Steps one through six are not the
firm's solution. Rather, they put the firm in a position to create solutions. Carefully ex-
ecuted, steps one through six will provide a manager with a clear picture of patterns of
responses to common environmental shocks, by his or her own firm as well as competi-
tors, over time. At this point, a manager should understand the nature of the responses,
as well as their predictability and effectiveness. Once those three pictures emerge, it is
relatively simple to evaluate one's own existing set of programs. It would not be un-
usual to expose over- or under-allocation of resources across these programs. That is, the
80/20 rule (that 80% of the action comes from 20% of the cases) may be in effect here.
If so, it would serve the strategic manager well to know of it and to reallocate adapta-
tion resources accordingly.

(8) Explore related industries. A great deal can be learned from examining one's own
industry, but additional insights may emerge from taking a close look at similar or re-
lated industries. Much as technology transfers between industries or economies, strategies
also find their way to arenas outside those in which they were born. Sometimes those
moves happen accidently; other times they are managed. The prudent strategic manager



32 J oumal ofBusiness Strategies Vol. No. 11 No.1

will look beyond his or her own industry in search of ideas that might lead to competi-
tive advantage.

In The Art of War, Sun Tzu tells us "What enables the wise sovereign and the good
general to strike and conquer, and achieve things beyond the reach of ordinary men, is
foreknowledge" (Sun Tzu 1983). A great deal of knowledge can be gained from study-
ing the history of one's firm, one's industry, and related industries. That study is made
more efficient by knowing what information to gather and what sort of patterns to look
for after gathering it. This approach to environmental scanning, information gathering,
response mapping and strategic sense-making may yield significant strategic benefits.

Endnotes

1. Reasonable theoretical basis exists for using a market index as a leading economic
indicator. The efficient market hypothesis (EMIl) of finance theory suggests that the current
market price of a stock reflects all publicly available and relevant information regarding
the value of the firm {Brigham and Gapenski 1991). This information includes company
earnings records and announcements, economic conditions, world news, and any other
conditions that the buyers and sellers in the stock market feel will affect its present or
future performance. According to the EMH, stock prices reflect new information very
quickly-just how rapidly is a point of some debate-but most evidence suggests these
markets are quite efficient (Arrow 1982).

2. It is not necessary to monitor all environmental events in order to identify impend-
ing environmental shock, since the financial markets perform the task for us. (It is esti-
mated that each major stock is tracked by approximately 1000 industry analysts at banks,
insurance companies, investment firms, and brokerage houses across the country and
around the world {Brigham and Gapenski 1991).) In fact, it is not necessary even to agree
upon or fully understand what the shock is or what caused it; we need only observe the
change in the index to detect negative news. We may measure the intensity of the shock
without fully understanding its cause in much the same way that we may measure tempera-
ture without an understanding of molecular theory. This holds for industry-level and
market-level indices as well as individual stocks. The Standard and Poor's 500 Compos-
ite Index, for example, identifies market-wide shocks to American corporations and in-
dustries it represents.

3. It is not the position of this paper that a single market index like the S&P 500 is
what firms are actually tracking, or that it will do a better job of predicting impending
shocks to a firm or industry than the numerous indices they do follow. However, it does
provide a useful proxy for the many individual indices firms and industries do, in fact,
track.

4. This "unpublished" raw data is available from the BLS, but does not appear in
any periodical HLS publication like Employment and Earnings.

5. This resistant smoothing program replaces each data value with the median of data
values immediately before and after it. Resistant smoothers were built up by successive
applications of simple smoothers (running medians of 4, then 2, then 5, then 3) followed



Spring 1994 Schminke: Strategic Response Hierarchies 33

by a Hanning process (a running average computed as z(t) = .25y(t-1) + .5y(t) +
.25y(t+1». The smoothing program executed this sequence twice. See also Velleman
(1980).

6. Tukey's paired comparison procedure tests for differences between multiple means,
a procedure not possible with simple paired t-tests.

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Spring 1994

SIC Industry

Schminke: Strategic Response Hierarchies

Appendix 1: Inventory of Industrial Groups

35

120 Bituminous coal
130 Oil and gas extraction
150 General building contractors
160 Heavy construction contractors
207 Confectionery and related products
208 Beverages
211 Cigarettes
220 Textile mill products
230 Apparel and other textile products
251 Household furniture
260 Paper and allied products
283 Drugs
301 Tires and inner tubes
331 Blast furnace / basic steel products
352 Farm machinery
353 Construction and related machinery
354 Metalworking machinery
363 Household appliances
367 Electronic components and accessories
372 Aircraft and parts
374 Railroad equipment
394 Toys and sporting goods
530 Retail variety stores
540 Retail food stores


	Strategic Response Hierarchies as Reaction to Environmental Threat