Peter Madsen takes the admonition to turn lemons into lemonade quite seriously. In grad school Madsen, now a Marriott School organizational leadership and strategy professor, became fascinated with how organizations learn from catastrophes. “Most of my research focuses on how they deal with and try to prevent rare, bad events,” says Madsen, who earned his PhD at the University of California, Berkeley. “Whether mistakes happen internally or externally, companies can glean information that allows them to reduce their chances of being involved in accidents.”
Madsen’s latest research, published in the Journal of Management, follows his interest in risk and error to the airline industry. His article indicates that the airlines performing closest to their financial goals are the least safe, whereas accident risk decreases among those that are performing further away from their financial goals.
In other words, an unprofitable airline can’t afford to have an accident, and a prospering airline has the resources and ability to make sure its safety precautions are up-to-date. It’s the airlines bobbing around their goals that tend to lose focus.
“When an organization is trying to hit a certain target, its behavior changes depending on how close it is to that target,” he says.
In the study Madsen drew upon theories that are typically used to evaluate investment risks. He found there’s a 7 percent decrease in the likelihood of an accident for every 10 percent deviation in an airline’s performance from its financial goal, whether that deviation is above or below the target.
Madsen says that it is dangerous from a financial standpoint when companies build new plants or make acquisitions, but the risk is in the investment. “They may lose their investments, but if something really big happens then there are possibly large gains,” he says.
Accident risk is different, Madsen explains. “It’s humans at stake, not money. Instead of a potentially very large gain, there’s a potentially very large loss,” he says.
Southwest Airlines executive chair Herb Kelleher echoed this idea not long after the low-fare carrier was hit with a $10.2 million safety violation in 2008. “Being unsafe would be the worst business strategy any airline could have,” he acknowledged at a hearing before the House Committee on Transportation and Infrastructure.
Theory In Flight
Madsen’s research is more than an examination of the airline industry. When you look at the big picture, his research has significant implications for the behavioral theory of the firm.
This organizational theory, introduced by Herbert Simon in the 1950s, is built upon the idea that rather than trying to maximize things, leaders of organizations are trying to decide what’s good enough and reach those goals, Madsen explains.
That’s where targets or aspirations come in, he continues. “Companies will set goals for the next year or quarter. They’re not focused on attaining the maximum possible, but they’re trying to hit their attainable goals,” he says.
Companies don’t aim to do amazingly well, echoes Mike Hendron, a Marriott School assistant professor of organizational leadership and strategy. “They base their targets on the company’s past performance or on the performance of their peers. In a sense, they need to ‘keep up with the Joneses’run a bit faster than the nearest competitor or keep earnings growing at a few percent a year to keep the analysts happy.”
Most organizations’ decision makers tend to stick with their routines, Hendron says.
“Only when a problem appears, such as the possibility of missing a performance goal, are they motivated to do anything new or change,” he says. “Firms performing poorly or below their expectations provide the perfect setting to motivate managers to look for better ways to do things or to pursue new opportunities. Without change their survival might be at risk.”
Vinit Desai, an assistant professor of management at the University of Colorado Denver, says behavioral theory of the firm applies to a variety of organizational settings.
“It’s based on aspects of human behavior and psychology that can also explain how people make decisions in other settings, such as in public agencies, nonprofits, and politics,” he asserts.
Desai, who attended grad school with Madsen, says that recently the theory has been used to explain important types of organizational decisions with fairly good accuracy—decisions such as when companies innovate, acquire other companies, or start new factories and, in the case of Madsen’s paper, how and when companies devote resources and attention to safety.
“We’ve seen an era in which organizations in different industries have experienced massive failures because they were unable to maintain or enhance their operational safety and process reliability,” Desai says.
For example, in 2001, Toyota, the maker of Lexus, received a sharp increase in complaints about acceleration problems. The company downplayed the grievances until a California Highway Patrol officer and three of his family members were killed in a Lexus because the gas pedal stuck. The attention this accident received in the social and traditional media realms convinced the company that the complaints weren’t happenstance. Toyota eventually recalled more than 6 million vehicles and lost about $2 billion in North American sales.
“The crisis could have been avoided or dramatically mitigated if Toyota—a company that seemed to be at the head of the class—had recognized the deviation and correctly acknowledged the thousands of complaints for what they really were: near misses,” Madsen points out.
Examining these close calls and identifying them is one way a firm can apply the behavioral theory.
How companies react to near misses might differ depending on how well they are performing relative to their aspirations, Hendron says.
“Those performing very well may not pay enough attention to close calls and may not learn anything. If they fail to examine the causes, odds are that eventually disaster will strike,” he says.
Desai says the theory highlights two things managers should watch for. “The first is complacency when their organizations are performing successfully,” he explains. “The second is for managers, investors, and other stakeholders to not count out organizations that perform slightly below expectations for short periods of time. These organizations often bounce back and outperform in the future.”
There is another aspect to consider, says Desai, who has studied this theory for ten years. “When performance is so far below the aspiration level that the organization’s survival is threatened,” he says, “survival instincts tend to kick in and the organization becomes more risk-averse and less likely to innovate.”
However, it’s not all doom and gloom if a company dips into negative territory.
“There is a window of performance below expectations where organizations increasingly behave in novel and innovative ways, which is cool because you usually think of that sort of behavior from the most successful firms across the industry,” Desai acknowledges. “This theory says that it makes sense, in some cases, to root for the underdog.”
Even with these tools to analyze airlines’ safety tucked under his hat, Madsen doesn’t really care which logo is on his plane’s rudder.
“I never set out to find which airlines are unsafe,” he says. “Instead I’m focused on developing a generalizable theory of when organizational risk for accidents goes up.”
Airlines have only gotten better during the past decade, Madsen says.
“Even a 7 percent increase in accident risk is still incomprehensibly small,” he says, noting a study from the early 2000s that indicated if someone flew on a U.S. commercial airline every day, statistically, it would take 36,000 years before he’d be killed in a crash.
Madsen doesn’t break a sweat when his flight over the Rockies hits a bit of turbulence. “Your risk of being killed in an auto accident is significantly larger than your risk of being killed in a plane accident,” he points out. “The airline industry is very safe.”
Article written by Emily Smurthwaite Edmonds
Illustrated by Christian Northeast