Unit 5 7 Crisis Management and Contingency Planning

Unit 5. 7 Crisis Management and Contingency Planning

Crisis is a situation of instability that results in major problems for a business. Crisis are usually unexpected and often unpredictable. In the event of an actual crisis, it is probable that costs to the business will be significant in terms of both time and money. Managers devise plans to minimize the damage that crises can cause to their organization. See page 548 Box 5. 7. a Examples of real crisis

Examples of crisis A lack of working capital to pay workers and suppliers Theft and vandalism Negative and damaging media facility (e. g. food poisoning at a restaurant) Computer hacking or data loss Accidents such as fire damage to stock and property

Examples of crisis Soaring levels of stock turnover Natural disasters such as floods, storms or earthquakes No power due to a blackout or power cut Computer failure Delayed flights due to computer failure at airports Outbreaks of infectious diseases Loss or long-term sickness of key personnel Terrorist attacks

Crisis Management (CM) CM refers to the response of an organization to a crisis situation. It is about being reactive to events that can cause serious harm to a business. CM involves formulating the best response to a crisis. If the business finds itself faced with an emergency, then CM is required to minimize the impact on the business. CM sometimes referred to as disaster recovery.

Contingency Planning (CP) CP is about being proactive to changes in the business environment. It involves developing a plan before an unwanted or unlikely event occurs by using ‘what if? ’ questions to identify all probable threats. CP helps with CM by preparing for the event of a crisis or emergency. Contingency plans help managers to be better prepared if there is a crisis in order to ensure the continuity of the business.

Contingency Planning (CP) The more quantifiable the crisis, the more effective a contingency plan tends to be. Ex. ‘Typhoon signal 10’ warning, businesses and schools are closed as the sever weather conditions threatens people’s safety. Effective contingency plans enable a business to be better prepared to manage a crisis (proactive), rather than being totally unprepared to cope with the crisis when it occurs (reactive or passive). This is far easier to do if all risks and crisis are identified and quantified.

EXAM TIP! Students often confuse crisis management and contingency planning, using the terms interchangeably. Crisis management (or disaster recovery) occurs during and after an event (such as the outbreak of a fire) while contingency planning happens before (planning a fire drill). The latter asks ‘what if? ’ questions, such as what the firm should do if exchange rates or interest rates rise, whereas crisis management asks ‘what now’? questions.

EXAM TIP! See page 551 worked example.

Factors affecting effective crisis management Transparency Ø Acting in a socially irresponsible way is more likely to cause a firm long-term damage than if it had acted responsibly and taken necessary corrective measures from the outset. Communication Ø Effective communication help to reassure employees, customers, suppliers, investors and other stakeholder groups.

Factors affecting effective crisis management Speed Ø The speed of response to the crisis influences the chances of containing or reducing the damages caused. This is far more likely to happen if managers have an effective contingency plan. Control Ø Leaders need to be able to control the crisis situation. This entails many skills, including the ability to work under extreme pressure, to communicate with all key stakeholders and to make quick and effective decisions.

Case Study - Fukushima The Fukushima nuclear power plant disaster in 2011 was caused by the tsunami that followed the Tohoku earthquake. The nuclear disaster caused substantial amounts of radioactive materials to be released. It was the largest nuclear incident since the Chernobyl disaster in 1986. Following a formal investigation into the accident, investigators blamed the catastrophe on a culture of complacency around nuclear safety and poor crisis management.

Contingency Planning Advantages Cost – acting in a socially responsible way can be a source of competitive advantage Time – Planning takes time but can save time in the event of a crisis Risks – CP helps reduce risks or eventualities can be accounted for Safety – immediate actions (i. e. communication) can help to alleviate or minimize the concerns of staff and meet their security needs Disadvantages Cost – crisis may never happen Time – Planning uses up valuable management time and resources Risks – plans that are based on outdated or inaccurate data

CUEGIS page 554

Questions 5. 7. 1 -5. 7. 5

Key Terms

Contingency Planning • Is about being proactive to changes in the business environment. It involves developing a plan before an unwanted or unlikely event occur by using ‘what if? ’ questions to identify all probable threats.

Crisis • Is a situation of instability that results in major problems for a business. These are usually unexpected and often unpredictable, e. g. natural disasters, accidents and computer failure.

Crisis Management • Is about being reactive to events and disasters that can cause serious disruptions and harm to a business, i. e. taking action as and when a crisis happens.

Quantifiable risks (or insurable risks) • Are probable and financially measurable threats to a business, such as fire damage.

Unquantifiable risks (or uninsurable risks) • Are threats to a business that are impossible or prohibitively expensive to examine and measure.