November, 2003 Newsletter

 
 

Our November, 2003 newsletter is entitled "Dealing With Crisis." Our newsletters feature articles on various aspects of preparing a business plan and over time should lead you through the entire business planning process.  

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Dealing With Crisis
Courtesy of Ralph Brown, Sequus Inc.

What is Crisis Management About?
If you are in business long enough, one day you may have a real crisis or unforeseen disaster. Good managers are able to reduce the number of occurrences simply because they anticipate the potential problems and try to prevent them. Crisis management, therefore, is really about these two things; preventing a crisis before it occurs or behaving appropriately when a serious problem does occur.

Whatever the situation, remember that managers must manage. All crises are shocking and upsetting. Whatever caused the problem, you may suddenly be facing monetary loss, the loss of a business or career, angry customers and employees, or perhaps, journalists or reporters who are questioning your competence. There is a great deal of stress and all eyes have now turned to you.

Crisis Definition
ICM, a crisis management firm, defines a crisis as: "a significant business disruption which stimulates extensive news media coverage. The resulting public scrutiny will affect the organization's normal operations and also could have a political, legal, financial and governmental impact on its business."

We would include any problem occurring unexpectedly which requires the management of a business to respond appropriately or else be threatened with extreme consequences which are financial, legal, governmental, or customer, employee, or supplier-related.

Crisis Fallacies
The stereotype of the business crisis is the industrial accident, oil spill or bizarre crime such as a terrorist bombing or the "Tylenol" type incident. ICM's analysis of business crises since 1989 indicates that "no-warning" crises are actually the minority. The majority are actually the "smoldering crises", in other words, the potential problem areas that management already knows about. The other fallacy, ICM claims, is that most crises are caused by employee errors or criminal actions. The reality is that most problems resulting in a crisis are the results of poor management decisions.

Given that crises are so much in the management domain, we must look look at crisis management first from the prevention point of view, and then how to manage them when they occur whether preventable or not.

Preventing the Crisis in the First Place
Let's look at prevention at three important intervals:

  • When the business is started,
  • When major projects or initiatives are undertaken, and
  • On an ongoing system basis

When the Business is Started
To prevent a crisis in your business begin with a well-conceived business plan. Aside from the fact that a business plan is needed to satisfy the requirements of financial institutions and venture partners, it is the process of preparing the plan itself that is invaluable. The very process requires you to think through the issues confronting the industry you want to enter, who the customers are, who the competitors are and what competitive advantages you have to compete with them successfully, what all the important details of operating the business are and what marketing strategy is required to generate sufficient sales, cash flow and profits. Translating the above into a financial forecast forces you to look at each area with precision and specificity.

It is the risk inherent in the venture and the assumptions you make that really matter and they should be clear in your business plan. While the design of business plans vary, a good one should have a section on Critical Risks and Assumptions. It will identify the risks that could seriously hurt the business and any critical assumptions which, if proven invalid, could jeopardize the business. Critical risks might include such things as economic recession, excessive reliance on the ability of one key employee, the possibility of price wars with stronger competitors, dependence on one or a few customers, and the reliance on very few suppliers for critical parts or components.

List each critical risk and assumption along with the probability of a problem occurring. Finally, show ways of dealing with the problem are available should it occur, or that steps have been taken to prevent the problem from occurring at all. If there is no way of preventing or dealing with a problem, identify this fact. The key is to be aware of threats to the business.

When Major Projects or Initiatives are Undertaken
The successful and growing company is the most prone to a crisis because it is innovative and constantly looking for new products and services to satisfy needs in the marketplace or initiatives to solve problems within the organization itself.

An initiative or project is usually a response to some problem. Check this against the following problem classifier:


 
  Problem Classifier
SOLUTION
DIMENSION
Known

Simple Problem

1

Hidden Problem

2

Hidden Solution

3

Messy Problem

4
Unknown
Hard
Soft
PROBLEM DIMENSION

where Hard means data-oriented and Soft means opinions, beliefs, values, etc.

Type of Problem Crisis Potential
Simple Problem (Hard Problem - Known Solution)
    e.g. construction project to solve physical problem
Low
Hidden Problem (Soft Problem - Known Solution)
    e.g. management training to solve all ailments
Low
Hidden Solution (Hard Problem - unknown Solution)
    e.g. when the consequences of an action are unknown or unpredictable
Low
Messy Problem (Soft Problem - unknown Solution)
    e.g. when solving one problem often causes many more
Low


We are particularly interested in problem types 3 and 4, those with Hidden Solutions and those described as Messy. In both cases the outcomes are uncertain and in some cases unpredictable. In the former case we are looking at initiatives where the problem is well known (e.g. employee absenteeism) but the solution to it is not. In the latter case neither the problem or the solution can be properly defined (e.g. a general unspecified feeling of unease by employees that management doesn't know how to handle). While we may feel we know the solution and the appropriate initiative to take, the reality is that we do not and the actions taken may lead to unexpected and often dire consequences. In other words, a crisis.

Obviously, it is the unintended negative consequences that we are concerned with as it concerns crisis management. If we can identify them, it is then possible to develop contingency plans as a means of responding should they actually result.

When major initiatives are about to be undertaken, it is a good idea to trace the planned and unintended consequence through. This can be done by making a list of the planned activities. Then, for each of these planned activities, make a list of all the possible things that could happen if things don’t work out (i.e. the unintended consequences). This can be done as an individual exercise but it its often more effective when the work group responsible for the initiative undertakes it collectively.

On an Ongoing System Basis
To prevent crises, every dynamic system must be monitored. This is also true of the small business. Preparing monthly statements and comparing actual results against budget is the best way to do this. One step beyond the preparation of financial statements is to subject financial information routinely to an analysis. We refer to this as monitoring Key Performance Indicators or Financial Ratios.

To learn about these ratios refer to our November, 2002 Newsletter, "Understanding Financial Statements."

Prepare these ratios every time you receive financial statements. Watch for the trends in your business. Compare them to other firms in your industry. Keep on top of developing situations. Don't allow a cash flow, productivity or profitability crisis to develop.

Dealing with a Crisis When it Happens
In spite of all the preventative measures undertaken, one day there will be a crisis. It's guaranteed. What do you do?

First of all, what is a serious sudden crisis? The crisis management firm, ICM, defines a sudden crisis as: "A disruption in the company's business which occurs without warning and is likely to generate serious consequences (sic) and may adversely impact employees, investors, customers, suppliers and other publics."

The serious consequences could be a damaging blow:

  • To our offices, franchises or other business assets,
  • To our revenues, net income, stock prices, etc.
  • To our reputation - and ultimately the good will listed as an asset on the balance sheet.

What are some examples? A sudden crisis may be:

  • A business-related accident resulting in significant property damage that will disrupt normal business operations.
  • The death or serious illness or injury of management, employees, contractors, customers, visitors, etc. as the result of a business-related accident.
  • The sudden death or incapacitation of a key executive.
  • The discharge of hazardous chemicals or other materials into the environment.
  • Accidents that cause the disruption of telephone or utility service.
  • Significant reduction in utilities or vital services needed to conduct business.
  • Any natural disaster that disrupts operations and endangers employees.
  • Unexpected job action or labour disruption.
  • Workplace violence involving employees, family members or customers.

While many of these are preventable occurrences, what do you do when they actually happen?

ICM suggests setting up a Crisis Response Team to deal with the most serious crisis situations. They also suggest making a list of realistic examples of crisis that they may have to deal with. Once this list has been developed, contingency plans can be formulated for each crisis. Some of the elements of a contingency plan may be:

  • The members of the Crisis Response Team (membership may be different depending upon the crisis).
  • Add-on members to the Crisis Response Team from outside the organization.
  • A mobilization plan to bring the team together.
  • Agencies and others who should be notified.
  • News media contacts (who on the Crisis Response Team should make the contact and maintain the liaison until the crisis is resolved).
  • Specific guidelines and actions for the Crisis Response Team to consider (without impairing their need to act otherwise, depending on the circumstances).

Remember, the image of the organization in the aftermath of the crisis will depend a great deal on how the company actually handles the situation. This is the positive side of any crisis. It represents an opportunity to demonstrate the competence of tan organization and may eventually have the effect of enhancing its reputation.

Developing a Support Network
Networks also come in very handy when you’re facing a crisis. Networks include family, accountants, lawyers, business associates, outside consultants, and other mentors. With every opportunity to meet a new acquaintance, nurture the contact and turn it into a relationship. Do whatever you can to be helpful. Inevitably, your day will come to ask for help in return.

_________________________________________________________

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