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 / Second Quarter 2002 / Issue 27(originally published by Booz & Company)


Yellow-Light Leadership: How the World’s Best Companies Manage Uncertainty

Examine Strategic Alternatives
Leaders have the toughest time making the right calls when a company is headed into crisis. During the September terrorist attacks, business leaders who acted appropriately — those who visibly took charge and gave people hope — were praised widely, whereas those who responded slowly or without reassuring vigor compromised their authority and may have even jeopardized the long-term viability of their organizations. When Continental Airlines Inc.’s Gordon Bethune went from a yellow-light posture into crisis mode in the days following the terrorist attacks, he recorded a daily voice-mail message to keep all his employees fully informed about the fast-changing situation in their industry: “I needed to give them reassurance that things were not coming to an end,” he told the New York Times. “I told them who I had talked to and the progress we had made so that all of us are aware of what we’re trying to do…. Adversity makes trust more important.”

Conversely, when leaders jump into a crisis mode prematurely, or when it is uncalled for, they lose the trust of employees. For example, in 1999, when PeopleSoft abruptly went from being a high-growth company to one that was fast losing market share and profitability, the formerly humanistic CEO, Dave Duffield, slammed on the organizational brakes without ever slowing down. He laid off thousands of workers who had been led to believe they had job security and, in the process, caused a culture precariously based on trust to be ejected through the company’s front window.

Being able to tell what time it is (that is, knowing the difference between merely difficult times and true times of crisis) is one of the most important analytical skills a leader can have, especially with respect to formulating or reassessing strategy.

When the yellow light is flashing, analytical leaders carefully examine all their strategic alternatives, subjecting each to a rigorous benefit/risk assessment. In a formal and disciplined process, they ask if they should:

• Ride out the recession? This seems to work best in strong companies and in short-cycle industries (such as computer chips and entertainment). The risks in this strategy are that the cycle may turn out to be longer than anticipated, and that a company may not be as strong financially as assumed.

• Invest aggressively? In the past, companies like Wal-Mart Stores Inc. grabbed market share and grew during recessions, while their weaker competitors contracted. This usually works only for the largest company in a given industry.

• Cut and run? Almost all companies try to cut costs and inventories during adverse times, but some (like Toys “R” Us Inc. in the current recession) radically downsize, trim product lines, reduce capacity, and exit entire businesses. The risk of this scenario is in going too far — as such companies as Arco and the Polaroid Corporation discovered in the 1990s. Once a company starts a downward spiral, it is hard to pull out, and it creates the difficult challenge of devising a radically new strategy to restart growth.

• Reframe? This entails tweaking or redirecting the existing strategy (as at IBM under Mr. Gerstner in the 1990s) and rethinking and redefining core business practices (as at Ford Motor Company under Donald Peterson and Harold “Red” Poling in the 1980s and early 1990s) — but it seldom if ever means coming up with a totally new strategy (as when Corning Inc. exited homewares in the 1990s). Such rare, complete breaks with the past typically work best when times are good.

Reframing is what Lou Gerstner did at IBM. He stressed four themes, notably the shift from a technology to a services company, and introduced changes gradually over eight years by way of countless decisions — from buying Lotus and walking away from Prodigy, to shrinking investment in PCs and mainframes and shifting 25 percent of R&D to developing Internet applications.

When done successfully during adverse times, reframing can move a company back in the direction of good times (avoiding the crisis mode altogether). Indeed, the greatest benefit of hard times is the opportunity to ask basic reframing questions:

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  1. Bruce A. Pasternack, “Leadership: Dreamers with Deadlines,” s+b, Fourth Quarter 2001 Click here.
  2. Gary Hamel, “What CEOs Can Learn from America,” Fortune, November 12, 2001 Click here.
  3. Jerry Useem, “What It Takes,” Fortune, November 12, 2001 Click here.
  4. James O’Toole, Leadership A to Z: A Guide for the Appropriately Ambitious (Jossey-Bass Inc., 1999)
  5. Alec Levenson, Leveraging Adversity for Strategic Advantage, Working Paper, March 2002, Center for Effective Organizations, Marshall School of Business, University of Southern California
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