IB Business and Management

2.8 – Crisis Management and Contingency Planning

What is a Crisis?

Noun:1.A time of intense difficulty, trouble, or danger.2.A time when a difficult or important decision must be made:

cri·sis/ˈkrīsis/

What type of crisis situations could

occur?

What kinds of crises can occur?• A hostile takeover bid• Fire• Environmental disasters• Terrorist Attacks• Power Failure• Pressure group or unwelcome media attention • Faulty or dangerous products• Sudden strikes by the workforce• A major customer withdraws it’s custom or becomes bankrupt• Natural disaster• Machine failure• A competitor launches a new product• Fraud• Health Scares• Severe recession or slump in demand• Change in exchange rate

Crisis

Some real examples…..

1982 – Tylenol cyanide scandal

• 7 people died after taking Tylenol extra strength tablets.• The product’s market share dropped from 37% to 7%• After investigation it was reported that the packages had been

tampered with

1995 – Nick Leeson and Barings Bank

• Barings was the oldest merchant bank in London.• One of it’s Singapore office employees, Nick Leeson lost

$1.3 billion due to speculative investing

2004 – Coca Cola and Dasani

• Public outcry after the press revealed that the Dasani water that Coca Cola was charging 95p a bottle for was sourced from tap water

• It was then discovered that the water contained traces of cancer causing bromates

2010 – Ash Cloud• At Easter 2010, a volcanic ash cloud grounded

planes over Europe and cost European airlines $1.7 billion

2010 – Snow Chaos

• In December 2010, bad snow cost the UK economy up to £1.2 bn per day

2011 – Blackberry Internet failure

• A hardware breakdown caused 2 days of internet failure for users of Blackberry service.

• This was devastating to the company as it has many business customers that rely on their service

2009 – Toyota’s faulty brakes

• Toyota had to re-call 7.5 million cars with faulty brakes, costing the company $54 million per day in lost revenue

How do businesses deal with crises?

• Contingency Planning – Planning for the event of a crisis occurring. This is a pro-active approach.

• Crisis management – The way a business responds once a crisis has occurred. This is a reactive approach

Crisis TimelineContingency Planning

Pre-crisis Prior to the event

Warning Indications that there is or may be or could be an event liable to cause a significant impact on the organisation

Crisis Management

Crisis point When the event begins to cause significant impact on the organisation

Recovery The acute stage of crisis has passed and the organisation is able to focus on a return to normal operations

Post crisis Evaluation of the effectsRepair to the organisation

CONTINGENCY PLANNING

Contingency Planning

Contingency planning involves:• Preparing for predictable and quantifiable crises • Preparing for unexpected and unwelcome events The aim is to:• Reduce the risk of the crisis occuring • minimise the impact of a foreseeable event and

to plan for how the organisation will resume normal operations after the crisis

Steps in drawing up a contingency plan

• Recognise the need for contingency planning • Identify possible contingencies - all the possible

adverse and crisis scenarios • Specify the likely consequences • Assess of the degree of risk to each eventuality • Determine a strategy to prevent each crisis & to

deal with a crisis should one occur • Draft plans and identify responsibilities • Simulate crises and the operate of each plan

Task

• Watch the 2 video clips from Japan.• These show 2 simulations of crisis situations.

• http://www.youtube.com/watch?v=6dDL7suUM_g&feature=player_embedded

• http://www.youtube.com/watch?v=PgHQfxT7ImI&feature=fvwberel

What might be included in the contingency plan for the following

situations

Fire at a factory Strike at an airline

What are the advantages/limitation

s of contingency planning

Contingency Planning

Advantages• Certain crises can be

avoided/risk reduced• Faster reactions in crisis

event minimise the damage• Staff are reasurred

(Maslow’s safety needs)• Planning process improves

communication and encourages forward thinking

Disadvantages• Can be time consuming• Resources can be wasted

planning for events that never happen (opportunity cost)

• Plans may become outdated• Not all crises are

measurable

CRISIS MANAGEMENT

What do businesses need for effective crisis management?

• Speed• Strong Leadership• Finances available• A focus on Public Relations• Honesty• Good communication both internally and

externally• Input from different functional areas

The role of the crisis manager

• Crisis assessment • Event tracking • Managing human considerations • Damage assessment • Assessment or resources and options • Development of contingencies • Managing communications • Co-ordination with external bodies • Controlling information • Controlling expectations • Managing legal requirements

Dealing with the financial aspects of a crisis

• Accelerate accounts receivable (payment by debtor)- by offering a discount if necessary.

• Slow up payment to creditors where possible. • Reduce expenses - especially “non mission

critical” expenses • Outsource non mission critical operations. • Re-schedule loans

Dealing with the “people” aspects of a crisis

• Form a crisis team • Designate one person only to speak about the

crisis to the outside world • Act to prevent or counter the spread of

negative information • Make use of the media to provide a counter

argument • Do not tell untruths - trying to manipulate or

distort the information will backfire

Task

• Look at the video ‘Crisis management in action – The BP coffee spill’

• What point is this video trying to make

• Now watch this video:• http://

www.youtube.com/watch?v=qM7liob6DPs&feature=related

Task

• Look at the video ‘A heartfelt apology’ from the boss

• Look at the other crisis situations….. How could businesses involved deal with these situations

Task

• Read the article ‘Eurostar – Contingency planning failure’

Research Task

• Research and prepare a presentation about a business and a crisis it suffered.

• You should include detail about:• The crisis and what it involved• What contingency planning had taken place (if possible)• How the company dealt with the crisis• What effects the crisis had on the company (financial,

reputation etc)• An evaluation of whether the business handled the crisis well• Suggestions for how the crisis could have been handled better

Suggested Crisis…..

• Gulf of Mexico oil spill• Toyotas faulty breaks• Union Carbide Bhopal tragedy• Huntingdon Life Science• Pepsi syringe scandal

Task - Essay

• With reference to examples, to what extent are crises avoidable with effective contingency planning.