5.7. Crisis Management & Contingency Planning (HL only)

Crisis management and contingency planning

Crisis management

Crisis management refers to actions taken by an organization to maintain its credibility and good reputation after a situation has occurred that may affect it in a negative manner and therefore reduce sales its products or services.

Contingency planning

Contingency planning is an approach seeking to anticipate future events that are not expected to occur, but are possible. Should those future events occur, a plan of action to respond effectively is already in place. The concept of civilian defense is based on contingency planning.

Contingency planning - Crisis management and business continuity planning

Looking to the future can never be accurate. Things may be different to that which is expected. To reduce the risk of encountering a serious shock, firms carry out contingency planning. Contingency planning is a set of procedures applied in handling, containment, and resolution of an emergency in planned and coordinated steps. The organisation questions what might happen, identifies alternatives and examine what effects these may have in resolving the problem or minimising its effects. The purpose of contingency planning is to ensure that an organisation can continue with its activities, which is why contingency planning is often referred to a continuity planning.

Contingency planning prepares for:

● predictable and quantifiable situations

● situations for which there is advanced notice

● unexpected and often unwanted events.

Contingency planning uses simulations and computer models asking 'what happens if' questions. Firms may ask some of the following questions:

What happens if:

● sales are more or less than planned?

● costs are higher or lower than planned?

● salaries and wages are greater or lower than expected?

● our computer or energy system fails?

● there is a flood or a fire?

...and so on, the list may be endless!

The organisation has contingency plans for as many eventualities as it has examined. Surprises will still occur, but the chances of one occurring are reduced.

Firms need to constantly assess and reassess current methods and assumptions. They have to watch closely what is happening within the firm and outside in the market place and general external environment.

Source - http://textbook.stpauls.br/Human_resources_student/page_143.htm

Key Steps in Contingency Planning

1. Identify the potential disasters that could affect the business (some of these will be common to all businesses, others specific to individual firms or industries).

2. Assess the likelihood of these occurring. Some incidents are more likely to occur than others and the degree of impact on business operations varies too. It seems obvious to plan for the most 'common' disasters, but the most unlikely occurrences can have the greatest total risk to a business's future. These issues need to be balanced carefully by managers when choosing which disaster events to prepare for most thoroughly.

3. Minimize the potential impact of crises. Effective planning can sometimes remove a potential risk altogether. When this is not possible the key is to minimise the damage a disaster can do. This does not just mean protecting people and fixed assets, but also the company's reputation and goodwill. This is often done by the publicity department telling the truth and the actions being taken to minimise the impact on the public. Staff training and practice drills with mock incidents are often the most effective ways of preparing to minimise negative impact.

4. Plan for continued operations of the business. Prior planning can help with alternative locations for headquarters, factory premises, supply chains and IT data. The sooner the business can begin trading again, the less the impact is likely to be on customer and supplier relationships.

Advantages of Contingency Planning:

• Careful Planning can help to reduce risks
  • It can reduce the impact of a crisis on the organization. A contingency plan helps you quickly take steps to address a problem that could stop production, shut down your website, cause you to lose work and data or miss credit payments. A simple example of a contingency plan is having a backup generator in the event of a power failure. If you lose a large customer that’s responsible for much of your sales, a contingency plan will help you quickly reduce your workforce, cut your overhead and production spending and seek other sales to replace as much of the loss as possible.
  • It can help to reassure staff
  • Contingency planning necessitates effective communication between management and employees thereby helping to enhance productivity and motivation.
  • Reduces bad PR. Even if you’re a small local business and your operating problems won’t make headlines in your town’s newspapers, competitors might start spreading rumors and customers might start to worry if you run into serious trouble. A contingency plan that helps you address a problem or get back on your feet allows you to communicate your response to a problem to relieve any concerns that problem might create. For example, if a key employee leaves, your contingency plan should include having a successor identified or a qualified substitute ready to fill in, even temporarily. This will allow you to let stakeholders know your employee’s departure will not affect your operations, that you will have a full-time replacement in position within a short time and that you have position covered until that time.
  • Helps keep you operating. There are many factors that can cause you to temporarily stop your operations, including a lack of working capital, machinery breakdown, office shutdown or strike. Contingency plans can help you keep operating through a crisis. A cash reserve or open line of credit can help you weather poor cash flow. The ability to transfer your production to another location or outsource it during a machinery breakdown or weather emergency lets you keep fulfilling orders. Backing up your data offsite each day allows your staff to continue their work without losing important work or access to files.
  • Improves insurance and credit availability. Businesses that create continuity and disaster recovery plans often have an easier time getting insurance and credit than those that don’t. Being able to show your insurers your contingency plans can help you obtain better coverage and reduced premiums, because the less money an insurer has to pay after an accident or emergency, the better risk you are. For example, if you back up all of your data each night, you will have a smaller loss from a fire or robbery than you will if you have to re-create all of your website files, customer databases and other data. In the event you need credit to help you through slow sales because of the loss of a supplier, a lender might be more willing to help you with payroll if you show you have another supplier identified and ready to get you back up and selling.

Disadvantages of contingency planning include:

• Contingency planning uses up valuable management time and resources. Costly and time consuming - not just the planning process but the need to train staff and have practice drills of what to do in the event of fire, IT failure, terrorist attack, accident involving company vehicles and so on.
• Crises may never happen and therefore the time and money invested into contingency planning could have been better used elsewhere. Staff training needs to be increased if labour turnover is high.
• Needs to be constantly updated as the number and range of potential disasters can change overtime. If plans are based on outdated or inaccurate data, then inappropriate action may be taken.
• No amount of planning can prevent the totally unexpected.

Crisis Management

Crisis management is the application of strategies designed to help an organization deal with a sudden and significant negative event.

Crisis management is reactive rather than proactive. Managers respond to events, which threaten the business and could even lead to its closure. The managers can do little but minimize the potential damage to the business and it is likely to result in a rather autocratic approach. Every employee including the managers will have to be flexible and to accept that radical measures may be required.

Counting the cost of the unpredictable

Ryanair has reported a 24% fall in net profits for the first three months of its financial year because of flight disruptions caused by the volcanic ash cloud from Iceland and the carrier is still counting the cost of compensation to passengers. Hundreds of thousands of airline passengers had their travel plans thrown into chaos due to flight disruptions and airport closures caused by the ash cloud.

Its net profit for the period from March to the end of June was €93.7 million, with a cost of €50m for almost 10,000 flights cancelled in April and May.

"Our first-quarter profits were adversely impacted by the unnecessary closure of European airspace," chief executive Michael O'Leary said.

Ryanair angered many passengers in the early stages of the ash cloud disruption by offering refunds of only the ticket price- a blatant refusal to abide by strict EU consumer rules. The company refused to comply with what it called an "unfair" European law requiring airlines to pay the hotel and food costs of people stranded without flights, and was later fined by Brussels. However, it was forced to make full compensation after passengers and consumer groups complained. Ryanair set up dedicated Volcanic Ash Disruption team to handle refunds and claims from passengers.

There are three elements are common to most definitions of crisis:

1. A threat to the organization

2. The element of surprise

3. A short decision time.

Crises such as fire, damage to stock, illness of key staff or IT system failure can make it difficult or even impossible to carry out an organisation's normal day-to-day activities. The crisis may see the organisation losing important customers and at its worst, even forced to cease trading.

A crisis can occur as a result of an unpredictable event or as an unforeseeable consequence of some event that had been considered a potential risk. In either case, crises almost invariably require that decisions be made quickly to limit damage to the organization. For that reason, one of the first actions in crisis management planning is to identify an individual to serve as crisis manager.

Other crisis management best practices include:

• Planning in detail for responses to as many potential crises as possible.
• Establishing monitoring systems and practices to detect early warning signals of any foreseeable crisis.
• Establishing and training a crisis management team or selecting an external crisis management firm with a proven track record in your business area.
• Involving as many stakeholders as possible in all planning and action stages.

The field of crisis management is generally considered to have originated with Johnson & Johnson's handling of a situation in 1982, when cyanide-laced Tylenol killed seven people in the Chicago area. The company immediately recalled all Tylenol capsules in the country and offered free product in tamper-proof packaging. As a result of the company's swift and effective response, the effect to shareholders was minimized and the brand recovered and flourished.

Crisis management often includes a strong focus on public relations to recover any damage to the organization's public image and to assure stakeholders that recovery is underway. Unplanned events can have a devastating effect on small businesses.

‘Crisis Hits

When an emergency occurs and an organization's crisis management function activates and moves to the forefront of operations, the importance of the contingency plan also flashes into relief. The organization's key members should be able to address the crisis using the protocols and lessons that they picked up through contingency planning. Systems should allow a business to fashion an organized response to a crisis, with members of the team understanding their roles. Successful crisis management involves all members of an organization working to limit an emergency's impact and damage and to restore operations back to normal as soon as possible.

Unexpected Events

A crisis, of course, rarely follows a step-by-step playbook, so contingency planning can only do so much to prepare a team for any particular scenario. The various ways that real-world events diverge from the contingencies that an organization has prepared to face tests the decision-making capabilities of team members and the systems that are in place. The unpredictability of life dictates that contingency planning be not about predicting the shape of an emergency exactly, but instead focus on exploring general scenarios and the systems that are in place to respond to them. Crisis management, therefore, is a combination of planning and thriving under pressure.’

Source: http://smallbusiness.chron.com/contingency-planning-vs-crisis-management-46081.html

Task 1: Samsung Note 7 crisis

Read the following three articles on the Samsung Note 7 crisis. Ascertain how well the organisation navigated through Mitroff's Five Stages of Crisis Management

Communication

Crisis Communication Management

General principles that can positively affect your actions and communication in a crisis situation:

• Bring the situation under control, if possible. Always protect people first and property second. Analyze the situation to judge its newsworthiness. Don't create a crisis by jumping the gun. Many times the situation doesn't warrant media attention.
• Gather the facts - who, what, where, when, why, how, what next.
• If necessary, activate your crisis management team. Act quickly; spare no expense to distribute the information you determine the media and others should have.
• Give the media as much information as possible; they'll get the information (perhaps inaccurately) from other sources.
• Don't speculate. If you don't know the facts say so and promise to get back to the media as soon as possible. Then be sure to do so.
• Protect the integrity and reputation of the organization.
• Report your own bad news. Don't allow another source to inform the media first.
• Perform an act of goodwill during or immediately after a crisis when appropriate and possible.
• Crisis communication planning can help you deal effectively with those unexpected disasters, emergencies or other unusual events that may cause unfavorable publicity for your organization.

Task 2: Watch the two videos below to obtain information as to how an organisation should approach crisis management and how Mitroff's 4P2 for Crisis Management framework can help systematise a strategy

Crisis Management lessons from the United debacle

United Airlines continues to generate bad publicity days after a man was violently dragged off a Chicago, IL to Louisville, KY flight due to the flight being overbooked and room being needed for 4 flight crew. The entire incident was filmed by other passengers with their smartphones. The man was bloodied as he was dragged on the floor from his seat. Compounding the damage was the tone deaf response from the airline, particularly its CEO, Oscar Munoz, to the incident. The entire story provides several lessons that business leaders can learn from and apply during a crisis.

1. The CEO of the company is the public face of the company and his or her words reflect on the entire company. Following the incident and the ensuing media coverage, United CEO Oscar Munoz issued a statement merely apologizing for any inconvenience passengers may have experienced but never addressing the specific incident nor apologizing to the passenger directly. That statement alone was viewed as insensitive but then Munoz added to the media firestorm by sending a letter to United employees praising them for how they handled the situation and labeling the passenger as belligerent despite video contradicting this accusation. Munoz’s statements became the public face of United Airlines and has drawn condemnation and ridicule from the media, the public, and Hollywood. It has angered the Chinese market (the passenger was Chinese) which is United’s key growth market and driven down the airline’s stock by over a billion dollars. Munoz came across as uncaring in his response and as a result all of United is now perceived that way.

2. Apologies Matter (and how they are worded even more). What should have been a one-day media story has now been spread across several days and counting, due to Munoz’s lack of apology. If Munoz had offered a strong apology for what happened and condemned the actions, the media would be moving on by now. Rather by failing to issue a strongly worded apology and blaming the passenger, Munoz has kept the story alive in the media causing more days of bad press for United. His response has become a bigger story than the original incident and is overshadowing the original report.

3. Everything can be recorded with a smartphone. Think of any television show (Chicago PD, Law & Order SVU, Chicago Justice, The Catch) where the police make an arrest or rough up a suspect and all of the bystanders are recording it with their phones. This isn’t just the stuff of Hollywood; it happens every day. Part of the reason this story got the amount of play that it has (besides United’s poor crisis management) is that fellow passengers were able to video the entire incident with their smartphones. The video images brought to life the episode in a powerful, emotional, and impactful way and created a readymade story for the media. People often forget anytime an incident happens people begin recording with their smartphones. Every occurrence is now just not reported upon but has video accompanying it due to bystanders recording it.

4. Social media drives narratives. This point cannot be stated enough. Social media is driving this story with the hashtag being #NewUnitedAirlinesMottos (#NeedCrisisManagement should be United’s hashtag in this crisis). The result is the traditional media is reporting on the social media outrage.

United Airlines serves as a lesson on what not to do during a crisis. Hopefully other companies will learn from United’s mistakes.

Source - https://www.linkedin.com/pulse/crisis-management-lessons-from-united-debacle-david-johnson-atl

Task 3: Group work: In your assigned group, complete the template on crisis management in a specific organisation.

Task 4: THE BP GULF OF MEXICO DISASTER

Read the case study and then answer the questions that follow.

On 20 April 2010, the Deepwater Horizon drilling rig exploded in the Gulf of Mexico, killing 11 workers and causing an oil spill that soon became the worst environmental disaster in US history. The rig was drilling in about 1525m of water, pushing the boundaries of deep-water drilling technology. Following the explosion the Deepwater Horizon sank to the bottom of the Gulf after burning for 36 hours.

The US Coast Guard quickly became involved with the incident putting a crisis management plan into place. Environmental experts raised concerns that the Macondo well Deepwater Horizon was drilling could be releasing up to 40000 barrels of oil per day into the sea. A few days after the disaster, oil from the leaking well began washing ashore in Louisiana; fragile coastal wetlands were inundated with thick, brown mud, beaches were covered in black tar and a black shadow appeared over hundreds of square miles of the Gulf of Mexico. The US Administration reacted furiously to the incident accusing BP of ‘criminal negligence’.

BP made a number of vain attempts to cap the leaking well until it finally stopped the leak in July. BP, under considerable political pressure, announced in June that it would place $20 billion in a fund to compensate victims of the oil spill and said it would not pay a shareholder dividend in 2010. By early July BP’s share price had fallen by 50 per cent since the start of the crisis. The BP CEO, Tony Hayward, came under pressure because of his perceived mishandling of the crisis and received a ‘tongue-lashing’ at a hearing in the US Congress because BP seemed to have no contingency plan to deal with the crisis. Tony Hayward was eventually forced to resign.

Questions

1. Define the following terms:

a crisis management

b contingency plan [4]

2 Outline the key steps BP would have gone through to produce a contingency plan for a crisis such as the Deepwater Horizon. [5]

3 Analyse the reasons why the BP share price fell by 50 per cent following the Deepwater Horizon crisis. [7]

4 Discuss the likely benefits and limitations of BP’s contingency planning when preparing for any future disasters like Deepwater Horizon. [9]

Source: Business and Management for the IB Diploma

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