Crisis Management

• Business Management Theory
• Crisis Management

A crisis is defined as a "time of intense difficulty or danger". A major crisis can affect the survival of a firm, a business must protect itself from any crisis which could affect business reputation and sales.

The diagram below outlines the steps involved in managing a crisis

As illustrated in the crisis management diagram above a crisis can come in many forms, we talk through six examples of a crisis which a business may face.

Crisis: Computer System Failure

The majority of businesses rely heavily on computer systems, so if there is a problem with a firm's computer system it will have a detrimental effect. A quick internet search will reveal a large number of companies affected by computer system failures. A computer system failure can include third parties attempting to hack into the firm's computer system to steal data or sabotage the business. A computer system breakdown is likely to:

• result in lost sales as the firm will find it difficult to process transactions during the failure
• affect business reputation
• affect future business if the failure results in the media and consumers questioning the security and reliability of the firm's computer systems.

A computer system failure needs to be resolved very quickly or at the very least, the firm needs to have a contingency plan to minimise losses during the computer system failure.

Crisis: Product or Service fault

If a product is faulty and if this product puts customers at harm, then the firm must take action to deal with the danger. In 2010 Toyota recalled millions of cars worldwide after discovering faulty brakes on a number of their vehicles. Massive recall rates and fixing the problem are now helping the firm with rebuilding their brand.

Crisis: Strikes

Strikes can bring a company to a standstill and have a major impact on profitability. British Airways settled dispute with their cabin union after major strikes over busy periods crippled the airlines capabilities during 2010 and 2011.

Crisis: Natural Disasters

The massive earthquake in Japan in April 2011 resulted in many firm's production capabilities being destroyed. As a result of this, many car manufacturers ran short of supplies or had lengthy waits for new supplies. This can have a serious impact on profitability and business reputation. BP's oil spill in April 2010 in the Gulf of Mexico had a major impact on the image of the firm culminating in the US President, President Obama commenting on BP's handling of the affair. This resulted in people at top level losing their jobs

Crisis: Paretos Law

If 80% of your business comes from 20% of your customers, then what would happen if half of these customers decided to leave? There is a danger that the firm may collapse. It is important for an organisation to move its reliance away from the few customers that contribute to the majority of the firms turnover and increase its customer base.

Crisis: Civil Unrest And War

Any form of civil unrest or war in a country that your firm operates in, will impact on your business. An example is the current crisis in Syria which began in Tunisia and spread to other countries in that region. War and civil unrest affects customers that are based in the region affected, it may impact on your distribution arrangements and could place any of firm's sites that are based in the region in danger. There could also be international sanctions which make trading in a country affected by war difficult. Taking all of these factors into account, firms need to decide when and whether to withdraw trade in a country affected by civil unrest and war. If a firm decides to continue trading in a war region, they should make arrangements to protect company assets which are based or pass through the affected areas.

Crisis: Takeovers And Acquisitions

If a firm is not doing too well and the share price drops dramatically, they may become the subject of a takeover. If the takeover bid is unwanted, the firm will need to act immediately to prevent the takeover. Preventative action will include convincing shareholders not to sell the shares to the company that wants to take them over. For more information, read our article about Takeovers and Acquisitions

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Conclusion

As we can see crisis management incolves planning for a number of different scenarios as any change in circumstances could have a sudden and negative impact on an organisation. Sometimes you can not prevent a crisis (e.g. natural disaster, recession), so it is important to identify a crisis quickly and have a plan ready to deal with it, in order to minimise losses. The first step in crisis management planning is to make a list of crisis scenarios likely to affect your business. Next write a contingency/crisis management plan to deal with each crisis on your list.