Crisis management

CRISIS MANAGEMENT

INTRODUCTION:-

Companies face problems all the time, and solve them one way or another. Sometimes one of these problems is difficult-at least at the time it occurs-and it becomes public interest with the help of the press. This problem is then known as a Crisis, where the company is faced with legal, political, financial and governmental impact on its business. The most serious property of crises is the element of surprise. The worst part in their handling is being unprepared.

Crisis can come from nowhere at any time; natural disasters, human error, and industrial accidents can all cause crisis. Sometimes the cause of a crisis is management itself; managers may insist that they face no crisis, and they fall into the brink of lying and rejection of its existence. Then, when the time of the deadline comes their answer to why the job is not finished will be: “We faced trouble and stopped the operation.” Some managers fall into the crises fallacies, and they overdo their denial of its existence. With time, the problems accumulate, causing absolute failure.

We can categorize crises according to the cause of their existence, or in another way based on the warning time. Crises, like any business activity, have life cycles. The length of each phase depends on the efficiency of the management in dealing with the crisis.

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It is the management responsibility to try to solve the crisis using everything it can, beginning with self confidence, going through using all the skills, and ending by having the ability to absorb the public’s anger or fear without harming the firm’s income or reputation. If a crisis is solved by a manager without the public hearing about it then the manager has proven his brilliant capability.

LIFE CYCLE OF CRISIS :-

There are five stages of a crisis:

1-PRE-CRISIS STAGE:

Here the conditions for a crisis to occur are waiting for a small error, so that the crisis can step in. This seed that starts growing in this stage can be ignorance or neglect from a manager concerning some aspect of the company, such as: risky operations, or lack of crisis planning.

2-WARNING:

This is considered one of the most important stages in a crisis-if not the most important. In it, a problem is first recognized and it can be either solved and ended forever, or it can expand and lead the way to complete destruction. Crisis can occur after this stage easily because of fear of facing the “storm” or the problem by ignoring it. The general response in this stage is either shock, or denial and complacency.

3-ACUTE CRISIS:

Beginning from here the crisis begins to occur, and the press (with the people) starts to know about the problem. Managers may try to avoid or ignore the problem, but the crisis has already reached a stage where it must be dealt with, because actual losses have already started. This is the time where the documents and modules for facing crises are taken out and put in effect, and it is shown whether the crises’ management staff are well prepared or not. If not, then it is too late for the management to hide the problem anymore.

4-CLEAN-UP:

When the problem passes the warning stage without being solved, then it has struck the company and damage has happened. It is then time to recover the losses or at least save what is left of the firm’s stock price, reputation, and production line. In recovering, a company must deal with legal cases, press and people’s pressure, and litigation. From all this a company can see and determine the reasons for such crisis to occur, to make sure that it never happens again.

5-POST-CRISIS:

This is the stage mentioned before which a company should reach when the warning of a crisis occurs. It is where a company finds remedy for the damage caused by the crisis (if not stopped from the beginning). If the company wins back the peoples’ trust, and work is back to normal, then the crisis has officially ended.

TYPES OF CRISIS:-

Crises are divided into nine categories, based on their causes, which are : natural disasters, industrial accidents, product failure, public perception of a crisis situation, industrial relations, business management, management turnover, hostile takeover, and criminal events.

1 NATURAL DISASTER CRISIS

The most relevant type of crises is the one that happens because of a natural disaster. This natural disaster happens in the environment and the human beings have nothing to do with it, such as: earthquakes, volcanoes, floods, and fire.

2 INDUSTRIAL ACCIDENTS CRISIS

The industrial accidents may vary from fires to machine dysfunction to electrical short-circuit. These crises lead to full-scale emergency. Other crises lead to a limited local response. The danger in the industrial accidents is because they are termed as: “Media Magnet.”;because these accidents cause serious casualties.

3 PRODUCT FAILURE CRISIS

This type of crises is a potential crisis for the company, because the product may fail even if appropriate research and development techniques are followed. The magnitude of this crisis depends on the speed of decision making in the company, and their resistance to any kind of escalation for the problem.

4 PUBLIC PERCEPTION CRISIS

During a crisis, a company may fall into another crisis because of failure in dealing with the crisis in a public way. This may lead to confusion, along with financial and personal losses due to poor public image. This crisis is a kind of consequence or a satellite crisis for an emergency crisis. Dealing with this crisis reflects the quality of the organization response to a crisis, and the efficiency of their decision making process.

5 Industrial relations Crisis Poor industrial relations between the workers and the administration may lead to a major crisis. This crisis may lead to serious disorder in the operations. Sometimes business is forced to react aggressively. Sometimes the labor force may force the industry to stop. Therefore, the relationship between the labor and the management should never reach the level of animosity.

6 BUSINESS MANAGEMENT CRISIS

The real danger in this crisis is that it is subtle and non-predictable. The real cause is hidden within a plan followed by the organization, that is proved to be erroneous later on. This happens due to a sudden market shift that the management did not plan for. However, management is responsible for this crisis because they did not foresee the potential market threat. There are other causes, such as: the consequences of other crises, failure to adjustment to the market regulations, or international events that have indirect impact on the business.

7 CRIMINAL EVENTS CRISIS

These events are currently becoming more frequent. They consider a major threat for some industries, such as: tourism, banking, and airlines’ industry. Common examples are hostage taking, terrorism, hijacking, and theft. This crisis requires a very precise response because this type of crises is “Media Magnet.”

8 MANAGEMENT TURNOVER CRISIS

Sometimes change in the organization management is considered as a type of crisis. Some companies think about their CEOs as indispensable, or as a figurehead. Thus his leaving is a real crisis. Some companies follow succession plans to ensure that such a crisis will never happen.

9 HOSTILE TAKEOVER CRISIS

This type is becoming more frequent nowadays, because of tough competition between companies. Some companies that monopolize the market may lead other companies into hostile takeover crises, that direct them to losses, and cost the management its name and reputation.

CONCLUSION:

All these causes fall into four general categories:-

1 – Acts of God (storms, earthquakes, volcanic actions, etc).

2 – Mechanical problems (ruptured pipes, metal fatigue, etc).

3 – Human errors (wrong calculations, miscommunication, etc).

4 – Management decisions/indecision.

Most of the crises fall in the last category, and this is a result of management response to crises, and the efficiency of their decision making process. There is another type of classification that classifies crises according to the amount of warning time.

TYPES OF CRISIS ON THE BASIS OF TIME :-

1-SUDDEN CRISIS:

“This is a disruption in the company’s business that occurs without warning and is likely to generate news coverage and may adversely impact: employees, investors, customers, suppliers, and other publics.” (ICM). It will directly harm the company’s reputation, offices, franchises, and revenues.

The sudden crisis may happen because of the following reasons:

1-Natural Disaster, which endangers the employees and puts obstacles in front of operations.

2-Industrial accident, which disrupts normal operations.

3-Industrial relations, which may lead to workplace violence or demonstrations by the workers or any kind of disruption.

4-Management turnover, due to the death of a key executive.

Sudden crises have four levels, upon which dealing with them differs.

Level Description Example

SUDDEN LEVEL 1 A situation that can be handled by the on-duty personnel responsible for manipulating this kind of situation. A machine is out of order in a factory. The machine technician manages to repair it without any help in a short time.

sudden level 2 A situation that can be handled by the assigned personnel, with the support of other employees. Some employees may be called. A machine is out of order in a factory. The machine technician calls the maintenance unit, and they send a crew that can repair the machine.

SUDDEN LEVEL 3 A situation that requires more resources, and people more than the on-duty personnel or the company employees. They may be from other corporate offices or consultants. The machine had a serious malfunction, and there is a need for spare parts. Neither the technician nor the maintenance crew is able to repair it. The company calls in a mechanical consultant.

SUDDEN LEVEL 4 A situation that is out of control, and it will have serious consequences on the whole business. Some duties will be delayed because of that error. The machine motor had a short circuit, and it needs to be replaced. However, the spare parts are not available in the city, and they need to be purchased. Production is behind schedules, and the customers start feeling uneasy towards the situation.

2-SMOLDERING CRISIS:

“This is any serious business problem which is not generally known within or without the company, which may generate negative news coverage if or when it goes “Public” and could result in more than a predetermined amount in fines, penalties, legal damage, unbudgeted expenses and other costs.” (ICM)

The smoldering crisis may happen because of one of the following causes:

1-Internal problems within the organization that were not previously discovered.

2-Investigati

g crisis falls into four levels, depending on the severity of the problem. The classification recommends a way to treat these problems to minimize the danger of the disclosure the crisis into public.

Level Description Example

SMOLDERING LEVEL 1

An internal business problem, which can be dealt with and resolved by the management assigned to respond for such a situation The employees working within a certain unit feel that they are not equally treated like other units. They talk with their boss to find a solution for this problem.

SMOLDERING LEVEL 2

An internal business problem, which can be resolved by the management assigned, with the help of other management that may act as mediators. The employees decided to boycott their work temporarily until their problem is solved. Their boss and other higher management discuss the problem with them.

SMOLDERING LEVEL 3

An internal business problem that has the potential of going to the public through media, or any official or judicial authority. The employees decided to stand in demonstration to achieve what they asked for. They decide to send a grievance to their syndicate to find a resolution for their problems.

SMOLDERING LEVEL 4

A very serious situation that is more likely to spread to the public. It will have a direct and strong impact on the business. The employees are resisted and they were not given the chance to demonstrate. They decided however to demonstrate. Hence clashes occur between them and the management, and the media knows the whole story.

MODELS AND THEORIES

CRISIS MANAGEMENT MODEL

Successfully diffusing a crisis requires an understanding of how to handle a crisis – before it occurs. Gonzalez-Herrero and Pratt created a four-phase crisis management model process that includes: issues management, planning-prevention, the crisis, and post-crisis (Gonzalez-Herrero and Pratt, 1995). The art is to define what the crisis specifically is or could be and what has caused it or could cause it.

MANAGEMENT CRISIS PLANNING

No corporation looks forward to facing a situation that causes a significant disruption to their business, especially one that stimulates extensive media coverage. Public scrutiny can result in a negative financial, political, legal and government impact. Crisis management planning deals with providing the best response to a crisis.

CONTINGENCY PLANNING

Preparing contingency plans in advance, as part of a crisis management plan, is the first step to ensuring an organization is appropriately prepared for a crisis. Crisis management teams can rehearse a crisis plan by developing a simulated scenario to use as a drill. The plan should clearly stipulate that the only people to speak publicly about the crisis are the designated persons, such as the company spokesperson or crisis team members. The first hours after a crisis breaks are the most crucial, so working with speed and efficiency is important, and the plan should indicate how quickly each function should be performed. When preparing to offer a statement externally as well as internally, information should be accurate. Providing incorrect or manipulated information has a tendency to backfire and will greatly exacerbate the situation. The contingency plan should contain information and guidance that will help decision makers to consider not only the short-term consequences, but the long-term effects of every decision.

BUSINESS CONTINUITY PLANNING

When a crisis will undoubtedly cause a significant disruption to an organization, a business continuity plan can help minimize the disruption. First, one must identify the critical functions and processes that are necessary to keep the organization running. Then each critical function and or/process must have its own contingency plan in the event that one of the functions/processes ceases or fails. Testing these contingency plans by rehearsing the required actions in a simulation will allow for all involved to become more sensitive and aware of the possibility of a crisis. As a result, in the event of an actual crisis, the team members will act more quickly and effectively.

STRUCTURAL-FUNCTIONAL SYSTEMS THEORY

Providing information to an organization in a time of crisis is critical to effective crisis management. Structural-functional systems theory addresses the intricacies of information networks and levels of command making up organizational communication. The structural-functional theory identifies information flow in organizations as “networks” made up of members and “links”. Information in organizations flow in patterns called networks.

DIFFUSION OF INNOVATION THEORY

Another theory that can be applied to the sharing of information is Diffusion of Innovation Theory. Developed by Everet Rogers he theory describes how innovation is disseminated and communicated through certain channels over a period of time. Diffusion of innovation in communication occurs when an individual communicates a new idea to one or several others. At its most elementary form, the process involves: (1) an innovation, (2) an individual or other unit of adoption that has knowledge of or experience with using the innovation, (3) another individual or other unit that does not yet have knowledge of the innovation, and (4) a communication channel connecting the two units. A communication channel is the means by which messages get from one individual to another.

ROLE OF APOLOGIES IN CRISIS MANAGEMENT

There has been debate about the role of apologies in crisis management, and some argue that apology opens an organization up for possible legal consequences. “However some evidence indicates that compensation and sympathy, two less expensive strategies, are as effective as an apology in shaping people’s perceptions of the organization taking responsibility for the crisis because these strategies focus on the victims’ needs. The sympathy response expresses concern for victims while compensation offers victims something to offset the suffering.”

PUBLIC SECTOR CRISIS MANAGEMENT

Corporate America is not the only community that is vulnerable to the perils of a crisis. Whether a school shooting, a public health crisis or a terrorist attack that leaves the public seeking comfort in the calm, steady leadership of an elected official, no sector of society is immune to crisis. In response to that reality, crisis management policies, strategies and practices have been developed and adapted across multiple disciplines.

SCHOOLS AND CRISIS MANAGEMENT

In the wake of the Columbine high school Massacre the September 11,2001cattacks and shootings on college campuses including the Virginia tech massacre, educational institutions at all levels are now focused on crisis management.

A national study conducted by the University of Arkansas for Medical Sciences (UAMS) and Arkansas Children’s Hospital Research Institute (ACHRI) has shown that many public school districts have important deficiencies in their emergency and disaster plans (The School Violence Resource Center, 2003). In response the Resource Center has organized a comprehensive set of resources to aid schools is the development of crisis management plans.

Crisis management plans cover a wide variety of incidents including bomb threats, child abuse, natural disasters, suicide, drug abuse and gang activities – just to list a few. In a similar fashion the plans aim to address all audiences in need of information including parents, the media and law enforcement officials.

GOVERNMENT AND CRISIS MANAGEMENT

Historically, government at all levels – local, state, and national – has played a large role in crisis management. Indeed, many political philosophers have considered this to be one of the primary roles of government. Emergency services such as fire and police departments at the local level, and the United State Nation Guard at the federal level, often play integral roles in crisis situations.

To help coordinate communication during the response phase of a crisis, the U.S. Federal Emergency Management Agency (FEMA) within the Department of Homeland Security administers the National Response Plan (NRP). This plan is intended to integrate public and private response by providing a common language and outlining a chain-of-command when multiple parties are mobilized. It is based on the premise that incidences should be handled at the lowest organizational level possible. The NRP recognizes the private sector as a key partner in domestic incident management, particularly in the area of critical infrastructure protection and restoration.

The NRP is a companion to the National Incidence Management System that acts as a more general template for incident management regardless of cause, size, or complexity.

FEMA offers free web-based training on the National Response Plan through the Emergency Management Institute.

Common Alerting Protocol (CAP) is a relatively recent mechanism that facilitates crisis communication across different mediums and systems. CAP helps create a consistent emergency alert format to reach geographically and linguistically diverse audiences through both audio and visual mediums.

ELECTED OFFICIALS AND CRISIS MANAGEMENT

Historically, politics and crisis go hand-in-hand. In describing crisis, President Abraham Lincoln said, “We live in the midst of alarms, anxiety beclouds the future; we expect some new disaster with each newspaper we read.

Crisis management has become a defining feature of contemporary governance. In times of crisis, communities and members of organizations expect their public leaders to minimize the impact of the crisis at hand, while critics and bureaucratic competitors try to seize the moment to blame incumbent rulers and their policies. In this extreme environment, policy makers must somehow establish a sense of normality, and foster collective learning from the crisis experience.

In the face of crisis, leaders must deal with the strategic challenges they face, the political risks and opportunities they encounter, the errors they make, the pitfalls they need to avoid, and the paths away from crisis they may pursue. The necessity for management is even more significant with the advent of a24-hour news cycle and an increasingly internet -saavy audience with ever-changing technology at its fingertips.

Public leaders have a special responsibility to help safeguard society from the adverse consequences of crisis. Experts in crisis management note that leaders who take this responsibility seriously would have to concern themselves with all crisis phases: the incubation stage, the onset, and the aftermath. Crisis leadership then involves five critical tasks: sense making, decision making, meaning making, terminating, and learning.

A brief description of the five facets of crisis leadership includes:

1. Sense making may be considered as the classical situation assessment step in decision making.

2. Decision making is both the act of coming to a decision as the implementation of that decision.

3. Meaning making refers to crisis management as political communication.

4. Terminating a crisis is only possible if the public leader correctly handles the accountability question.

5. Learning, refers to the actual learning from a crisis is limited. The authors note, a crisis often opens a window of opportunity for reform for better or for worse.

EXAMPLES OF SUCCESSFUL CRISIS MANAGEMENT

TYLENOL (Johnson and Johnson)

In the fall of 1982, a murderer added 65 milligrams of cyanide to some Tylenol capsules on store shelves, killing seven people, including three in one family. Johnson & Johnson recalled and destroyed 31 million capsules at a cost of $100 million. The affable CEO, James Burke, appeared in television ads and at news conferences informing consumers of the company’s actions. Tamper-resistant packaging was rapidly introduced, and Tylenol sales swiftly bounced back to near pre-crisis levels.

Johnson & Johnson was again struck by a similar crisis in 1986 when a New York woman died on Feb. 8 after taking cyanide-laced Tylenol capsules. Johnson & Johnson was ready. Responding swiftly and smoothly to the new crisis, it immediately and indefinitely canceled all television commercials for Tylenol, established a toll-free telephone hot-line to answer consumer questions and offered refunds or exchanges to customers who had purchased Tylenol capsules. At week’s end, when another bottle of tainted Tylenol was discovered in a store, it took only a matter of minutes for the manufacturer to issue a nationwide warning that people should not use the medication in its capsule form.

ODWALA FOOD

When Odwalla’s apple juice was thought to be the cause of an outbreak of E. coli infection, the company lost a third of its market value. In October 1996, an outbreak of E. coli bacteria in Washington state, California, Colorado and British Columbia was traced to unpasteurized apple juice manufactured by natural juice maker Odwalla Inc. Forty-nine cases were reported, including the death of a small child. Within 24 hours, Odwalla conferred with the FDA and Washington state health officials; established a schedule of daily press briefings; sent out press releases which announced the recall; expressed remorse, concern and apology, and took responsibility for anyone harmed by their products; detailed symptoms of E. coli poisoning; and explained what consumers should do with any affected products. Odwalla then developed – through the help of consultants – effective thermal processes that would not harm the products’ flavors when production resumed. All of these steps were communicated through close relations with the media and through full-page newspaper ads.

MATTEL Mattel Inc., the toy maker, has been plagued with more than 28 product recalls and in Summer of 2007, amongst problems with exports from China, faced two product recall in two weeks. The company did everything it could to get its message out, earning high marks from consumers and retailers. Though upset by the situation, they were appreciative of the company’s response. At Mattel, just after the 7 a.m. recall announcement by federal officials, a public relations staff of 16 was set to call reporters at the 40 biggest media outlets. They told each to check their e-mail for a news release outlining the recalls, invited them to a teleconference call with executives and scheduled TV appearances or phone conversations with Mattel’s chief executive. The Mattel CEO Robert Eckert did 14 TV interviews on a Tuesday in August and about 20 calls with individual reporters. By the week’s end, Mattel had responded to more than 300 media inquiries in the U.S. alone.

PEPSI The Pepsi Corporation faced a crisis in 1993 which started with claims of syringes being found in cans of diet Pepsi. Pepsi urged stores not to remove the product from shelves while it had the cans and the situation investigated. This led to an arrest, which Pepsi made public and then followed with their first video news release, showing the production process to demonstrate that such tampering was impossible within their factories. A second video news release displayed the man arrested. A third video news release showed surveillance from a convenient store where a woman was caught replicating the tampering incident. The company simultaneously publicly worked with the FDA during the crisis. The Corporation was completely open with the public throughout, and every employee of Pepsi was kept aware of the details. This made public communications effective throughout the crisis. After the crisis ahd been resolved, the corporation ran a series of special campaigns designed to thank the public for standing by the corporation, along with coupons for further compensation. This case served as a design for how to handle other crisis situations

LESSONS LEARNED IN CRISIS MANAGEMENT

IMPACT OF CATASTROPHES ON SHAREHOLDER VALUE

One of the foremost recognized studies conducted on the impact of a catastrophe on the stock value of an organization was completed by Dr Rory Knight and Dr Deborah Pretty (1995, Templeton College, University of Oxford – commissioned by the Sedgewick Group). This study undertook a detailed analysis of the stock price (post impact) of organizations that had experienced catastrophes. The study identified organizations that recovered and even exceeded pre-catastrophe stock price, (Recovers), and those that did not recover on stock price, (Non-recovers). The average cumulative impact on shareholder value for the recoverers was 5% plus on their original stock value. So the net impact on shareholder value by this stage was actually positive. The non-recoverers remained more or less unchanged between days 5 and 50 after the catastrophe, but suffered a net negative cumulative impact of almost 15% on their stock price up to one year afterwards.

One of the key conclusions of this study is that “Effective management of the consequences of catastrophes would appear to be a more significant factor than whether catastrophe insurance hedges the economic impact of the catastrophe”.

While there are technical elements to this report it is highly recommended to those who wish to engage their senior management in the value of crisis management.

BHOPAL

The Bhopal disaster in which poor communication before, during, and after the crisis cost thousands of lives, illustrates the importance of incorporating cross-cultural communication in crisis management plans. According to American University’s Trade Environmental Database Case Studies (1997), local residents were not sure how to react to warnings of potential threats from the Union Carbide plant. Operating manuals printed only in English is an extreme example of mismanagement but indicative of systemic barriers to information diffusion. According to Union Carbide’s own chronology of the incident (2006), a day after the crisis Union Carbide’s upper management arrived in India but was unable to assist in the relief efforts because they were placed under house arrest by the Indian government. Symbolic intervention can be counter productive; a crisis management strategy can help upper management make more calculated decisions in how they should respond to disaster scenarios. The Bhopal incident illustrates the difficulty in consistently applying management standards to multi-national operations and the blame shifting that often results from the lack of a clear management plan.

FORD AND FIRESTONE TIRE AND RUBBER COMPANY

The Ford-Firestone dispute transpired in August 2000. In response to claims that their 15-inch Wilderness AT, radial ATX and ATX II tire treads were separating from the tire core—leading to grisly, spectacular crashes—Bridgestone/Firestone recalled 6.5 million tires. These tires were mostly used on the Ford Explorer, the world’s top-selling sport utility vehicle (SUV).

The two companies’ committed three major blunders early on, say crisis experts. First, they blamed consumers for not inflating their tires properly. Then they blamed each other for faulty tires and faulty vehicle design. Then they said very little about what they were doing to solve a problem that had caused more than 100 deaths—until they got called to Washington to testify before Congress.

EXXON

On March 24, 1989, a tanker belonging to the Exxon Corporation ran aground in the Prince William Sound in Alaska. The Exxon Valdez spilled millions of gallons of crude oil into the waters off Valdez, killing thousands of fish, fowl, and sea otters. Hundreds of miles of coastline were polluted and salmon spawning runs disrupted; numerous fishermen, especially Native Americans, lost their livelihoods. Exxon, by contrast, did not react quickly in terms of dealing with the media and the public; the CEO, Lawrence Rawl, did not become an active part of the public relations effort and actually shunned public involvement; the company had neither a communication plan nor a communication team in place to handle the event—in fact, the company did not appoint a public relations manager to its management team until 1993, 4 years after the incident; Exxon established its media center in Valdez, a location too small and too remote to handle the onslaught of media attention; and the company acted defensively in its response to its publics, even laying blame, at times, on other groups such as the Coast Guard