Aim of dissertation
This dissertation is an exploratory research on crisis management, whereby the work aims on illustrating the rationale of crisis management and its relevance in modern organizatnios. The study also aims in explicitly defining the term crisis management, while distinguishing it from other related concepts such as risk management. Although crisis management is differs from risk management, the two concepts go hand in hand, as elaborated in the dissertation.
The work starts with a brief background, whereby the main functions of crisis management are explained. The study does not provide a historical background of the discipline, as its origins are not well known. The work however highlights on the benefits of implementing the current crisis management model, especially from a public relations point of view. Benefits from an effective crisis management process will be felt by both an organization and its stakeholders. Concepts explained in the background include the various classifications of crises, and how such crises can be identified.
The crisis management process starts with the identification of crises, which is important for preparing the organization in the event of such a crisis. The crisis management plan has been analyzed, whereby focus lies in the functions of the plan, as well as the plan preparation process. The crisis management plan involves input from various key personnel in an organization (Curtin et al., 2005), although experts may at times be hired by an organization to prepare a plan for them. The main aim of the crisis management plan is to help an organization to best prepare and manage a potential crisis.
The crisis management process starts off with the identification of all crises that are likely to affect an organization. A crisis can be explained as any event that is likely to disrupt operations, or severely harm an organization. For an event to harm an organization, it has to be a scale that would cause the organization to incur significant expenditure, or would cause the organization to lose its reputation. Potential crises are therefore identified and analyzed for their potential occurrence probability, as well as the potential impact that they pose to the organization.
Several strategies for dealing with a potential crisis have been identified. Organizations have several options available for them, which all aim to either prevent against the occurrence of an identified crisis, or mitigate the impact of a crisis once it has already occurred. A contingency plan is drawn to help the organization in dealing with the crisis. The plan assists management in setting up a crisis report center, which is used as the main point of communication with the media. A spokesperson is usually assigned with the duty of handling the media, whereby the spokesperson should be someone who is knowledgeable of both the organization and the media.
Business continuity planning is usually incorporated in the contingency plan, whereby both short term and long term solutions are implemented (Barton, 2007). Short term measures are usually implemented to lessen the undesired effects of a crisis, for example through an efficient public relations campaign, while long term solutions are strategies that aim on preventing against the probability of reoccurrence of a similar crisis. The limitations of crisis management have been put forward, such as assigning probabilities to potential crises. Results from the study focus on a summary of major findings from the literature review process. Various companies have been analyzed for their successful and unsuccessful crisis management strategies.
Crisis management can be defined as a managerial practice that aims to help the company react to an undesirable event. A situation that could warrant the use of crisis management will most likely be of a scale that would cause disruptions in the normal operations a company, harm the company’s stakeholders, or even members of the public. A crisis, from an organizational point of view, is an event that would cause instability within the organization, or bring a negative reaction to the institution. Crisis management should not be confused with risk management as the former is mostly used as a responsive measure to an unwanted event that has already transpired, as opposed to risk management which helps prevent or guard against the happening of certain events.
Crisis management is therefore an exercise that seeks to normalize an organization’s operations after a significant crisis or disruption has occurred. Although crisis management is different from risk management, some aspects of the two disciplines are alike in that crisis management may also seek to identify potential crises before they reach unmanageable levels. Management could effectively diffuse a crisis before the crisis gets the stakeholders’ or public’s attention. Public relations activities are also involved within crisis management as the company tries to maintain its reputation with the public. Public relations activities are also meant to create awareness of the company’s dedication to resolve the crisis, and reassure stakeholders that the company will emerge strong after the crisis is over.
Crisis management was developed so as to aid management in the mitigation of events that threaten the normal operations of organizations. The discipline is a relatively new concept in management, and while its roots are not well known in the modern world, crisis management has developed from a simple risk reduction system to what it is today. In the modern age, crisis management is used to reduce or manage the damage caused by the happening of an undesirable event.
Other than managing potential losses, the current crisis management model will also apply emphasis on public relations. Communication is an important aspect of the crisis management practice as it aims to reassure to all stakeholders and members of the public that the company is on track to manage the harmful event. The purpose of public relations is to rebuild confidence in stakeholders and the public that the organization can effectively recover from the crisis, and continue to deliver on their commitments. The mass media plays the part of the intermediary between the organization and members of the public.
A proactive crisis management process will go a long way in managing the effects of a crisis. Companies can take measures that aim on preventing the occurrence of crises, but should a crisis happen, management could do better by handling it head on. As with most crises, the management is tasked with tackling the crisis and restoring confidence in the company’s stakeholders. Communication could be an important tool that management can use to reassure its stakeholders. In the modern world, negative news travels fast hence it is important for the company to be the first to release the bad news.
By being the first to release the bad news to the public, the company is seen as honest and an organization that has nothing to hide. Releasing bad news also displays that the company is confident that it will succeed in solving the crisis. Crisis prevention avoids the damages that would have otherwise been experienced if the company had undergone the actual crisis (Roberts and Yeager, 2009). Damage could be both financial and reputational financial damages could arise from repairs and lawsuits while a reputational damage is whereby stakeholder’s faith in the company drops.
Types of crisis
Crises could be categorized in various ways, depending on the organization in question. Governments for example face macro economic and political crises, whereby an economic crisis could avail itself in form of a recession or a depression while a political crisis could result from a political unrest. Corporations face different crises depending in their situations. Manufacturing, construction and mining companies face different forms of risks than service institutions such as banks and telecommunication companies (Johnston and Zawawi, 2009).
Crisis situations, such as natural disasters, are experienced by all by all organizations affected. In such an event, preparedness plays an important part on how such organizations will recover. Other events, such as the 9/11 twin tower bombings are rarely expected; hence most organizations barely make contingency plans for such situations. Other crises have estimated probabilities of happening, hence management can decide to be proactive and draw up a crisis management plan in advance.
Operational crises are those that affect the day to day running o the company, and may affect one or more departments within the organization. With effective management, these crises are avoidable especially if systems are put in place to detect them in their early stages. Management can also resolve these crises without causing alarm within the organization.
One could also differentiate crises into two broader categories, that is sudden and smoldering crises. A sudden crisis is an incident that occurs without warning such as a earthquakes and floods, therefore the management of a company will be forced to react to such events if they can not avoid or minimize the adverse consequences of such events. Smoldering crises are those situations that gradually build up over a period of time, or as a result of a chain of events. Most accidents are avoidable; some happen due to negligence, and their occurrence could have been avoided if management had detected early signs of such crises in advance.
Smoldering, or potential crises, have a strong likelihood of growing and becoming more complicated over time if they are not effectively dealt with on a timely manner. Such crises have early warning sign, such as decreasing sales and stock prices; hence management is tasked with the responsibility of finding out the root causes of the warning signals. These problems negatively affect the future of the organization, making it difficult to attain the company’s objectives. Top management should quickly react to them through effective strategies and risk management programs, so as to owners and creditors of the company that the organization is still competitive.
Another class of crises that most corporate organizations are exposed to involves liquidity, solvency and future profitability crises. The liquidity crisis exists where a company lacks adequate funds to take care of current liabilities. If the value of the company’s assets exceeds the amount of liabilities, then a company may avert this crisis by borrowing funds from financial institutions on a short term basis. A solvency crisis is a more serious condition, which is mostly brought about by a company’s inability to generate sufficient profits to meet short term obligations and repay debts. Such a crisis cannot be tackled by borrowing more funds as this will only serve to increase the debt burden and add on to interest payments.
Both liquidity and solvency crises affect a company’s operations as the business will have to cut back on necessary spending in order to meet its obligations. A solvency crisis will affect the company’s credit rating, and the firm may have to pay higher interest rates in order to gain access to funds. A capital restructuring program may also ensue, whereby the debt may be converted into equity capital, which will have the effect of diluting the firm’s shares. Diluted shares mean that there is lesser income attributable to each share, and voting powers of current shareholders lessen on the introduction of new shareholders.
Lastly, the future profitability crisis is situation where a company faces a high probability of future losses, or insufficient profits. In such a situation, shareholders face the possibility of losing their investments in the settlement of the company’s debts and expenses. A change in technology, regulations, social trends or diminishing resources may be the causes of the drop in revenues. In such a situation, there is little that management can do to reassure investors that the company is still a going concern; hence the company may be liquidated before the company becomes insolvent.
Crisis management plan
A crisis management plan is a detailed documentation of how the company intends to deal with a crisis. The plan helps the crisis management team in handling the crisis and retaining order within the organization. The preparation of the crisis management plan includes input from top management, who are also responsible for selecting members of the crisis management team. The details of the plan depend on type of crisis that the organization is getting prepared for, though the plan is also broad to serve a wider variety of crises that the company is exposed to. In this case, the crisis management plan includes a list of possible actions to be taken in reaction to various crisis situations.
The viability of the crisis management plan relies on input and support of top management and the crisis management team, who will ultimately be responsible for following the guidelines provided in the plan (Curtin et al., 2005). Input in development of the plan from both parties will create binding obligations on both parties. The plan specifies the people who will handle various tasks in case of a crisis, or teams that will tackle various roles. The crisis management plan is therefore a form of proactive crisis management, which yields better results when the crisis management team is well prepared for a crisis.
Communication channels fro the various audiences are also specified in the crisis management plan. The plan could recommend that timely press media briefings and press conferences could be used to communicate to members of the media and the public. Top managers and board members of the company require more sensitive information, so the plan could include details of personnel who should have privileged access to sensitive information. External public relations consultants could be hired if there are weaknesses in the crisis management team. The public relations experts will advice the company on management of the media and provide various strategies for the same.
Implementation of the crisis management plan is influenced by the severity of the crisis. High severity crises have low probabilities of occurrence, but they have a high devastating effect when they occur. The crisis management plan is therefore implemented in full so as to reduce damages emanating from the crisis. Medium rated risks may reach crisis levels if left unattended, hence provisions in the plan stipulate how the team should respond to such situations. Low severity risks with high frequencies of occurrence are unlikely to damage the company’s image or disrupt operations. The plan provides details of broad steps and personnel needed to resolve such situations.
Since the goal of the crisis management plan is to minimize disruptions, it is important to identify critical process and business functions that are both sensitive and vital to the organization. The continuity plan may establish systems of protecting these organizational functions from the adverse effects of the crisis (Barton, 2007). The aim of protecting these organizational functions is to maintain revenues originating from the key functions, reduce the financial damages and operating expenses resulting from disruption of operations. For this reason, a contingency plan inherent in the crisis management plan will provide or strategies to be deployed so as to minimize damages.
Objectives of crisis management
The main objectives of crisis management in an organization are to prevent the occurrence of a potentially and significantly harmful event that would disrupt the operations of the organizations, and manage the damage caused after the happening of such events. It is the role of crisis management, whether internally based within a company, or externally sourced, to ensure a speedy recovery of the organization from the crisis and resume operations.
The crisis management team also has a task of communicating the proceedings of the crisis management process to the company’s stakeholders. Press conferences and briefings are used to relay information to both the media and members of the public. Communication is meant to reassure the public that the company is doing everything it can to restore order. Effective communication is also used as a tool to maintain the company’s brand value and reputation.
Through effective communication, the company could restore calm and orderliness and gain stakeholder confidence. The images of most companies are battered during a crisis period, as was the case with BP (NYSE: BP) in the 2010 Gulf of Mexico oil spill, hence the crisis management team and the public relations staff have the task of retaining the brand value of the company during the crisis.
Crisis management also seeks to protect the company against the adverse effects of a potential crisis. Effective crisis management will establish potential crises and their potential damages and come up with a crisis management plan. Crisis management can therefore lead to the avoidance of certain crises due to early the early detection of signals. The crisis management plan will enable the company deal appropriately with the crisis once it happens, enabling the company to remain calm and collected during the crisis period. Crisis management, other than minimizing damages resulting from the crisis, will also ensure for business continuity by ensuring that key functions and processes continue as the organization deals with the crisis.
It would be difficult to pinpoint the exact origins of crisis management, but scholars argue that it has always been a part of business strategy. Delving (2006) notes that crisis management concept evolved from an accident at Three Mile Island, Pennsylvania, in 1979. The incident became known as the worst commercial nuclear power accident in American history. The American public was outraged on how management of the nuclear power downplayed the event by providing misinformation. Lessons learnt from the incident provide an insight on how a crisis should not be managed.
The concept was later identified as a different element from risk management as the later tried to reduce the possibility of risk, or alternatively reduce the financial burden resulting from the occurrence of risk. Crisis management therefore sought to establish ways of identifying and handling crisis. A crisis could also be differentiated from a risk in that the term risk is a broader term that is used to refer to the possibility of loss culminating from the occurrence, or lack of occurrence, of a given event. A crisis on the other hand is an event that disrupts the normal operations of an organization, or even threatens the continuity and existence of the company or organization. Both risks and crises occurrence possibilities depend on the scales of operations of the organizations.
Some crises are detectable before they actually occur, and it is therefore the responsibility of the crisis management team to identify these crises and manage them before they reach a scale that disrupts the operations of the company. A detect in a product could be detected before the market discovers such information. It will be more difficult for management to deal with a full blown crisis as opposed to an avoidable crisis. For those crises that are difficult, if not impossible, to detect in advance or in their early stages, management may at best establish mechanisms that will protect the organization’s interests should such events happen.
There are various parties involved prior and after a crisis has developed. Before a crisis has began or has been identified, top management of the company and the crisis management team are responsible for drawing up a crisis management plan and implementing systems that will identify crises before they reach alarming levels. Top management is involved in this stage because it has an obligation to the company’s owners to manage and protect their investments. The crisis management team advises top management on effective risk management techniques. It is in this stage that the crisis management plan is developed, specifying actions to be taken in case of specific events and the people responsible for carrying out certain duties contained in the plan.
When a crisis has already happened, top management and members of the crisis management plan continue to be involved in resolving the crisis. Persons and departments mentioned in the crisis management plan are required to follow the steps provided in the plan, while an authority is selected to guide through the crisis, usually the company’s chief executive officer (CEO). The public relations staff advises on how the media and the public will be handled in favor of the company. A spokesperson is selected, with one or two assistants, to relay information and answer any questions from the press. In case of a serious crisis, the company’s CEO will take up the role of the spokesperson, thereby showing dedication and solidarity of the organization in its efforts to tackle the crisis.
Crisis management process
The first step in crisis management lies in the recognition of crises. If systems are in place to detect such crises in their early stages, then the CEO or board of directors could identify a potential risk and assess it. The assessment process establishes the nature of the crisis, determines whether the risk could grow into a crisis situation if left unattended. All potential crises are evaluated to determine their potential impact to the company, effect on normal operations, the company’s reputation and bottom line. Results from the analysis help the board, CEO and crisis management team in the preparation of the crisis management plan.
Potential or smoldering crises can be detected by looking out for warning signals, which could present themselves in form of declining profits, market share or a deteriorating reputation of the company. Financial ratios can also be used to weigh up the soundness of the company, and evaluate the exposure of the company to liquidity and solvency crises. The risk could also be assessed on the kind of attention it may bring to the company, from the media or regulative authorities, and how the reputation of the company will be affected. The board could also consider the effectiveness of the company’s CEO, and determine whether he or she is in a position to identify and quickly respond to crises.
The board and the CEO can team up and identify potential problems that the company may face, and develop appropriate plans to deal with the aftermath of the negative events. The company will have to assess its ethical values and code of conduct in certain situations so as to determine whether they threaten the reputation and continuity of operations. Strategies will then be put in place to respond to the crises, including the preparation of the crisis management plan. A leader is subsequently chosen to head the crisis management team, usually the company’s CEO or an experienced and knowledgeable director. Changes in the environment and the broader economy will have to be monitored since they may end up having a diverse effect on the organization.
A sudden crisis requires fast decision making as the situation was not anticipated. The CEO and the board of directors have to gather facts and find out what is happening. Investigations of the root causes of the crises could be conducted under the guidance of the CEO, who will report to the board periodically and inform them on the latest developments. In case investigations are not being carried out do not meet the board’s expectations, they could decide to hire external consultants to investigate and sort out the crisis.
The crisis management team will be set up, whereby the members will be allocated various responsibilities that they will partake during the crisis. The CEO may have to release members of the crisis management team from their other duties so that they can concentrate on the crisis at hand. The crisis management team will meet on a regular basis and discuss their latest findings and strategies to ensure business continuity (Friedman, 2002).
In both crisis situations, the protocol is usually the same. Top management should demonstrate commitment during the crisis. The company should be careful when dealing with the media. Most companies make the mistake of downplaying the crisis, or misinforming the public. Once the correct and appropriate facts have been gathered, the CEO will have to give briefings to the board and come up with a suitable response together. For serious crises, the board will expect the CEO of the company to be the spokesperson. Crisis management experts may coach the CEO on appropriate ways of handling communications with the media and regulative bodies.
The organization will have to remain calm during the crisis period, so as to prevent panic from both within employees at the organization and members of the public. The situation should be constantly assessed and monitored to prevent it from escalating any further. Management will have to let the crisis management team perform its duties without interfering with the proceedings. The nature of the crisis should be established and the severity taken into consideration when making decisions regarding the continuity of operations. Some crises are so severe that the company may have to close for the entirety of the crisis. The decision will also depend on the ability and how well prepared the company is in dealing with the crisis.
The business continuity plan seeks to minimize disruptions emanating from the crisis, while the contingency plan is a plan aimed at preparing the company for any adverse situation. The contingency plan provides ways of protecting the organization from the crisis, and a method of gaining support from stakeholders. Contingency planning is carried out under consultation of the top management and input from important stakeholders to the company (Fink, 2002).
The plan could be subjected to stress tests to determine its effectiveness. Personnel of the company could be trained before the plan can be implemented so that the employees are left aware of the plan, and be alerted on what is expected of them during a crisis. Feedback from staff is important in order to make sure that they understand their roles and duties in case of an emergency.
If the contingency plan should be improved by keeping it up to date, so that the plan is remains relevant in light of changes in the external environment. A member of the crisis management plan could be tasked with the duty of maintaining the plan, communicating to members of the organization of any changes made in the plan. Changes made in the plan should be subjected to tests, as the person responsible for the contingency plan has to ascertain that the plan is still viable. A second plan could be drawn as a back up plan to the first contingency plan, and is to be used if the first plan fails to meet expectations.
Like a crisis management plan, the contingency plan provides an outline of the steps to be followed in case an undesirable event happens (Harvard business school, 2004). The plan is especially beneficial since people are likely to make sudden decisions during a crisis period, which are likely to endanger the company further. Companies faced with liquidity or solvency crises are more likely to take on riskier projects that promise higher returns, ignoring the high probability of loss resulting from the crisis. The crisis management plan and contingency plan thereby keep individuals from making sudden decisions, no matter how good they sound during the crisis period. A comprehensive crisis management plan should include a contingency plan.
A common strategy used during a crisis is the management of the media. Most companies have learnt that it’s important to be the first to release negative news. Negative news usually travels fast, gaining a lot of attention in the process. The company has to be the first to reveal the crisis, providing both accurate and correct information. If the media feels that the company is withholding information from the general public, then they will conduct their own investigations and gain public trust. Subsequently, people will lose confidence in the company and its image and reputation will be more battered as a result. The public will rely on the media, mistrusting the organization even when the company it releases positive news after the crisis.
A speedy response from the company is therefore warranted in case of a crisis in order to contain external pressure and alleviate fear from the public. The company has to be clear and straightforward in its communications thereby making sure that rumors are not the main source of information for both employees and outsiders (Ray, 1999). The chosen spokesperson should be someone who can handle pressure for the media and regulators, and his assistants should be identified in case the chosen spokesperson is unavailable. The spokesperson should be someone knowledgeable of what is going on. He should get all the facts right and avoid being caught off guard by press questions.
A crisis report center, or media center is selected, usually a distance away from the company so as to not interfere with the crisis management program. Interviews by the media should be restricted to the designated spokesperson, his assistants or technical experts from the company. All the key personnel who have been given permission to speak to the media should follow instructions provided by the crisis management team and the public relations consultants, for instance they should avoid speaking with reporters “off the record” (Boin, 2005). Employees of the company should refer all questions from the media to the designated spokesperson.
Business continuity planning should be at the forefront of strategies used in the crisis period (Blyth, 2009). The company has to identify all functions and critical activities that will keep the company afloat in the crisis period. Important relationships with key clients and suppliers should be maintained, where the company will reassure its stakeholders that it will still be healthy after emerging from the crisis. Employees need to be paid their arrears in time as a massive walkout or a high staff attrition rate will be a major setback for the company. Costs should be minimized, whereby the company should check for redundant processes that the company could do without. The company should be careful when cutting costs since they may affect business continuity.
The business continuity program will be affected by the scale of the crisis. It’s important form the company to seek adequate cash flow in order to meet financial obligations in time. The company may have to dispose of certain none strategic assets in order to maintain liquidity for this purpose. The company will have to avoid in engaging in high risk activities that may promise higher yields. Sound decision making in crisis period should follow on provisions set out by the crisis management plan. The company should not exceed spending limits imposed by the budgetary process since the crisis may use up or dedicate sums of money in case of repairs, compensations or paying off lawsuits
Although the company should be cooperative with the public, it should limit some of the information that could be disadvantageous to the company if let out. Specific details about its products development should be left out since they can be used by competitors. Talks about possible takeovers should not be announced prematurely since the company’s shareholders may panic on the onset of such information.
Information on possible job cuts should be released sensitively, where the company’s employees should be the first to access such information. The company should also not be quick to point blame as to the cause of the crisis. Instead, the company should first conclude the investigations and weigh on the impact of the findings. The company may offer sympathies to all those affected, without necessarily having to apologize if the investigation has not been concluded.
The company will have to be focused at the crisis at hand if it is to respond with speed and precision. Here, resources are reallocated following priority needs since the sooner a crisis is over, the better it will be for the company. A long lasting crisis means that the company will continue being on the spotlights for all the wrong reasons. Companies will want to put the crisis in their past and proceed with operations, and satisfy the various stakeholders of the organization. Communication at every level of the crisis will have to be passed on to the stakeholders.
Business continuity and strategies aimed at getting the company out of the crisis are all but short term measures for returning to normality. The company will have to set up long term strategies that prevent against the occurrence of another crisis, or limit the financial impact of inevitable crises. Such strategies will be based on lessons learnt from the present crisis; hence all activities and events will have to be documented in the entirety of the current crisis. The findings of the investigations could reveal why and how things went wrong and how the company responded to the crisis. The CEO of the company could be replaced if his performance in the crisis was not satisfactory.
The last stage, also referred to as the resolution stage, is where the company integrates the lessons learnt from the crisis into their overall strategic plan. The crisis management plan could be revisited to evaluate whether changes are needed for the company to better perform in a future crisis. Crisis management is also integrated into the routine strategic management process, thereby forming an integral part of it. Strategic management is a continuous process so changes in the environment will also affect crisis management strategies established under strategic management.
After the crisis, the company may continue using the public relations consultants for advice on methods they can use to restore stakeholder confidence. The reaction and response of the company during and after the crisis incident is part of their public relations strategy. The spokesperson should remain calm throughout the process and only confirm correct details. A suitable turnaround strategy should quickly be formulated and implemented after the crisis (Smith, 2005). A turnaround strategy is a strategy that aims to restore the company to normality, take advantage of the crisis to develop strategies that will improve on its performance (Regester, 1987).
The turnaround strategy will also try to take the company back into profitability. The company could improve on its operational efficiency, as measured by financial measures such as the gross profit margin. The company could restructure its portfolio and get rid of assets or divisions that are not in line with the company’s strategic objectives. Segments that appear to unattractive in the long term could be disposed off as the company consolidates operations. Loss making divisions in the company that present potential growth and profitability in the company are evaluated in the turnaround strategy. Rather than divesting the loss making divisions, the company could identify problems and subsequently make resolutions that will take the entire company’s divisions back into the black.
Impact of crisis management
Crisis management is mostly significant when it identifies a possible crisis before it occurs. In so doing, the company may deal head on with the crisis so as to reduce the possibilities of any occurrence. Where the crisis is unavoidable, the company could use strategies that will minimize the financial damage resulting from the risk, such as through insurance where it is applicable. Avoiding a crisis will enable the company to progress with its objectives without any disruptions in its operations. The company could also avoid negative publicity that could have otherwise resulted from the occurrence of the crisis.
If effectively used, crisis management will use efficient public relations strategies to reassure stakeholders that recovery activities are underway and the company should return to normality soon (Kwanash-Aidoo, 2005). An effective crisis management procedure and good public relations techniques can save the company money from possible losses, loss of confidence or even save lives where human life is threatened. Crisis management will enable the organization to be better prepared to handle a crisis when it occurs. The company, under the guidance of the crisis management plan, will be able to make forethought decisions during the crisis period as opposed to making sudden risky decisions.
The crisis management plan could be used to weigh up the possibility of various crises and the potential damage that would result from each crisis. Through identifying and evaluating the possibility and eventuality of identified crises, planning and preparation can be carried out in advance and therefore minimize damage or avoid the risk altogether. A good crisis management plan is essential for the company’s ability of handling a crisis and maintaining credibility.
Crisis management is therefore important if the company is to quickly resolve a crisis and handle public pressure resulting from the publicity. Companies that have mishandled a crisis have experienced a loss in market share and stakeholder confidence. CEOs have also lost their positions due to their mishandling of crises; hence effective crisis management will benefit organizational, stakeholder and individual interests.
Limitations of crisis management
Crisis management strategies apply differently to various organizations as different corporations in different industries are exposed to varying types of crises. Since the most effective crisis management deals with when a company identifies potential crisis events before they become reality, then this type of crisis management is subject to the limitations of probability. It’s difficult to correctly predict or ascertain the probability of a given crisis, hence chances are that the crisis management plan may be inadequate or the company may have dedicated too many resources to a crisis with a low probability of occurrence.
The modern world is characterized by an ever changing environment, meaning that developing the crisis management plan and the contingency plan should be carried out on a regular basis. Most small and medium sized enterprises do not have the capacity to have a crisis management program and will rely on external consultants when they are faced with a crisis. The crisis management program becomes more challenging as the company grows since there is more at stake in the eventuality of a crisis. Crisis management requires the use of public relations experts, which may come at a significant cost to the organization if it does not have such a department (Bernays, 2004). Where the CEO is the appointed spokesperson of the company, his time will be used up in briefings to the media and regulators, time which he could have otherwise been used help solve the crisis.
This research study is exploratory, delving into recorded events where crisis management has been utilized. The research is primarily based on secondary research findings. Case studies have been conducted, showcasing various crises in history, how the companies and various stakeholders were affected. The documentation also reviews how these companies handled their various crises, and evaluates the success or failures of their crisis management strategies.
Data collection method
Extensive library and internet research was carried out to build on more knowledge on the latest developments in the crisis management field. Secondary data was obtained through literature review. Newspapers, journals, periodicals and the internet were perused for the latest information regarding the field under study.
Findings were subjected to qualitative analysis, as based on descriptive statistics, using non statistical techniques on subjective statements and explanations. The researcher was both objective and subjective in the interpretation of the findings. Factors determining the success or failure of the crisis management process carried out by the identified companies’ are based on what the aftermath events surrounding the mentioned company after the crisis, as per the observations of the researcher.
Results contained in this section are based on secondary research, where the researcher relied heavily on published data surrounding various crises that have been in recent history. Conclusions and recommendations made are as per the researcher’s observations, based on case studies and available publications under the crisis management subject matter.
Summary of major findings
Successful crisis management events
Johnson & Johnson Co., a global pharmaceutical and consumer goods manufacturer, was faced with a crisis in 1982 when an individual poisoned the company’s Tylenol capsules with cyanide in several stores in Chicago (Regester and Larkin, 2002). As a result, seven people died after purchasing and taking those drugs, prompting the company to act fast in order to restore customer confidence. The company was quick to inform the public not to consume any Tylenol capsules until the matter was resolved. Subsequently, the company withdrew all Tylenol capsules from stores all over the country, which signified to the public that Johnson & Johnson was willing to incur losses for the safety of the public.
Johnson & Johnson incurred high expenses when re-acquiring all Tylenol capsules from the market. The company also destroyed all the Tylenol capsules, while opening up to the media and the public that the company had destroyed the products and introduced tamper proof packaging. The company appeared as a victim to the general public, wining it votes of sympathy. The company’s decision to introduce tamper proof packaging enabled the company to gain customer confidence. While the company was not responsible for the deaths or the tampering of the Tylenol capsules, its fast response and consumer safety priority won over the public and was therefore a successful crisis management strategy.
Pepsi Co. was also faced with a similar situation as that faced by Johnson & Johnson, whereby syringes were reportedly found inside diet Pepsi cans in 1993 (Doeg, 2005). The company reacted fast by illustrating that such an event was impossible in their bottling factories. The company worked with stores selling its products, instructing it not to sell the products until the crisis had been resolved. Consequently, investigations showed that the cans had been tampered with by an individual, who was later arrested by the police.
Pepsi was open to the media throughout the crisis period, and cooperated with regulatory bodies. Advertisements by the company thanked the public fro their support during the crisis. Its defensive strategy portrayed the company as an innocent party that was being targeted by saboteurs. As part of its denial strategy, the company announced that it would take legal action against anybody who made false accusations against the company. Pepsi’s president, Craig Weatherup, appeared on various interviews explaining that the company’s bottling line was tamper proof (Wilcox, 262)
Unsuccessful crisis management attempts
The recent oil spill in the Gulf of Mexico, also known as the BP oil spill, was caused after an explosion at a deepwater horizon drilling rig. The explosion caused 11 platform staff fatalities and spilled millions of barrels worth of oil in a period spanning three months from late April 2010. The oil spill was a major disaster which posed great danger to marine and wild life in the areas impacted by the oil spill. Livelihoods were also affected by the oil spill, especially in the tourism and fishing sectors. The company held accountable was BP, although the company was at first reluctant to admit that it was responsible. The oil company was also slow in acknowledging the crisis, which meant that the company was not in a position to control the information in the media outlets.
Many would argue that how BP handled the Gulf of Mexico oil spill can serve as an example of how to not manage a crisis. When faced with the task of restoring livelihoods and stopping the oil spill, BP also applied effort to protect itself by shifting blame to companies Transocean and Halliburton who were also involved with the rig that exploded. The company’s CEO went on to claim that BP was left out of certain decisions and processes at the oil rig. The CEO was also observed going on a yatch trip with his son during the crisis, a fact that the media translated to lack of prioritization in part of BP (Steffy, 2010). The CEO was also caught on camera saying that he wanted his life back.
Although BP was applying efforts to plug the oil well, its public image was battered following its handling of the crisis. The company failed to recognize that in the aftermath of such a significant crisis, the CEO is often taken as the face of the company hence his actions are meant to represent the company as a whole. BP’s defensive strategy aimed at sharing blame with the other companies involved, while the company later admitted to making some mistakes after concluding its own investigations. The company failed to cooperate fully with the government, the later of which withdrew from holding joint press conferences with BP. As a result, BP did not get the support of the government, which would have been useful for both sides.
Toyota Motor Corp., the world’s leading car maker, was faced with a crisis when reports surfaced that Toyota cars had an accelerator problem. A car crash in California was though to be the start of the crisis. Reports in the media were that some Toyota car owners had experienced problems when trying to decelerate as a result of a sticky gas pedal. Toyota was slow to react to the crisis, implying that the company was unprepared for the crisis (Reuters, 2010).
The company had initially downplayed the complaints from its customers, saying that it would have to investigate the problem before confirming the crisis. Toyota also tried to point out that the accelerator problem was as a result of sticky floor mats, instead of a software problem.
When the problem was identified, the resultants were several giant recalls of various Toyota car models in North America. The company admitted that it had problems with its cars and would solve them. The company also announced that car dealers had been instructed not to sell certain vehicles that the company had identified as being affected, and several manufacturing factories had been temporarily closed down. The company’s reputation had suffered a major setback, as Toyota vehicles were symbolized as reliable vehicles.
Toyota’s president was also not vocal from the start of the crisis, leading to some criticisms. The company later apologized to the public, citing its rapid growth as the cause of its slow response to the crisis. The president of the car company also went to the US and apologized for the slow response from Toyota, promising that the company would change its structure to ensure quality vehicles and speedy response to its customers. Although the damage had already been done, Toyota was able to restore some credibility in public, and marginally restore its reputation for quality vehicles.
Crisis management, where effectively used, could help to the successful handling of a crisis. Crisis management is important since it enables firms to identify potential crises and plan and prepare for them in advance. Companies that use crisis management are able to minimize their losses and save their public images. Crisis management can also take advantage of crisis and build on the company’s reputation. Johnson & Johnson, by placing human health and customer safety above its own costs, was able to communicate to the public that it was a trustworthy company. Pepsi’s take on the crisis, by assuming a defensive strategy and exposing sabotage, was able to reassure to customers that its diet Pepsi cans were tamper proof.
Crisis management needs the integration of other factors in order to be successful. A crisis management plan will enable a company to be better prepared in times if crisis, thereby facilitating effective and reasonable decision making. Crisis avoidance is a cheaper approach as the company will not have to deal with the negative media coverage. Crisis management, when incorporated in strategic management will enable management to better plan for a crisis. Crisis management strategies that will be formulated from the strategic process will be more in line with the company’s overall strategies. The crisis management plan will consequently identify the key operations and processes that are essential for business continuity.
The company learns the importance of relating well with stakeholders, and the importance of a successful public relations campaign. BP was not too defensive in its approach, shifting blame in its reluctance to accept responsibility. Through a crisis management plan, a crisis management team can be formed and the responsibilities of all members identified. The CEO of the company may have to be coached on how to manage the media how to answer questions and how to stay calm under public scrutiny.
Essentially, dangers caused by a botched botch crisis management process are huge and on most cases continue to affect the company on a long term basis. Both BP’s and Toyota’s shares prices declined significantly in value after their respective crises. Companies may also lose market share when competitors capitalize on the company’s crisis moment, which may result into lower future profitability. Companies that deploy wrong crisis management may have to change their brand names as a strategy to counter the bad reputation.
Crisis management could be taken as a continual learning lesson. Companies could take advantage of the crisis they endured or crises experienced by a peer company and develop appropriate strategies to deal with similar situations in the future. The company will therefore be in a better position to identify a possible crisis in the future. The company could learn how a crisis that could have been avoided went by unnoticed. This could require paying more attention in the future.
After the crisis, the board of directors and the CEO could meet and review the findings of the crisis, as required by the crisis management plan. The meeting will be successful if it starts by asking the right questions. For example it could reflect on the response of the company to the crisis. The company could have reacted due to pressure form the public or a regulative body. If that was the case, then the company will have to change its response strategy in order to build on its reputation as a reliable company.
The communication of the company will also be scrutinized. If the communication with the public was effective, the company may decide to either improve or maintain the communication policy. Where the company had shortcomings in dealing with the crisis, the board could decide to change the crisis management plan strategically (Goel, 2009). The meeting will have to establish whether the company has enough internal competencies to manage the crisis. If not, then the company may have to hire external help in the form of crisis management professionals or public relations consultants (Henslow, 2003).
Weaknesses in the internal structure may reveal themselves during the crisis. Factors inside the company that had not been tested will most likely succumb to pressure emanating from the crisis. Toyota realized that it did not have adequate structures in place to deal with their crisis as a result of their rapid growth. The company learnt that it will have to improve its systems to keep up with its growing organizational structure, improve on communication within the company and speed up the time it takes to respond to a crisis.
Crisis management provides for turnaround strategies that the company can use to emerge from the crisis (Gottschalk, 2002). After the crisis, the company could evaluate what was lost during the crisis. The crisis management plan could be looked back at to determine what worked and what did not work. The public opinion of the company could be sourced through methods such as surveys and questionnaires, or simply reviewing the type of coverage the company is receiving from the media after the crisis (Reid, 2000). The findings from these could help determine the appropriate turnaround strategy that will be used to improve on the company’s image.
Where the company decides to change a few aspects of its system, it should regard its relationships with the various stakeholders before implementing the changes. Possible consequences may affect employees, suppliers or even owners of the company. Just like the crisis management plan development process, plans of system changes to protect the company from future possible crises should acknowledge the input of the various stakeholders of the company.
When things go wrong, there are various strategies that the company can use to gain sympathy and restore stakeholder confidence. Most consultants recommend that management assume the worst but hope for the best when faced with a crisis. In so doing, the company will be able strategize for the worst possible scenarios before they actually happen. The company’s spokesperson will have to exercise various principles when dealing with the media.
The spokesperson will have to appreciate the role of the media in the crisis period and permit them to do their work lack of cooperation may indicate that the spokesperson is withholding valuable information to the public, or he is interfering with the media’s parallel investigations. The spokesperson will have to be courteous and sensitive especially to matters that concern the public.
Though companies avoid making public apologies following a crisis, an apology may derive better results than applying defensive strategies as evidenced in the Toyota crisis. The company should be quick in responding to a crisis as this saves the company’s earning power; its brand name. Both Johnson and Johnson and Pepsi Co. were able to build on their reputation by acting fast in crises concerning human safety. Public satisfaction may also be derived where the company issues compensations for damages to those affected as a result of the mistakes the company made that led to the crisis. Social networking tools could be used to facilitate communication with the public during and after the crisis period.
The crisis management plan could be developed, following input from various positions in the company. Top management will have to be involved in the development of the plan, and effective communication passed down to employees so that they can know their responsibilities in times of a crisis. Employee training could also be carried out so as to educate them on the company’s overall objectives and what is expected off them (Lewis, 2006). Lastly, the company could hire professionals to advice on oversee the development of the crisis management plan.
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