Instructor Dr. Zeenat Ismail Class BBA-I/I Research by Khwaja Hassam Jahanzaib Riaz Jehangir Hansotia Ayaz Ali Brohi Yousaf Khan Afridi
CONTENTS Topic
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1. The Case of DaimlerChrysler
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2. Introduction
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3. What is Crisis?
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4. Explanation of Crisis
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5. Types a. b. c.
of Crisis On the basis of social settings On the basis of frequency and timing Relationship between operational, potential and sudden crisis
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6. Examples of Crisis a. Karachi Oil Spill b. Chernobyl c. Hurricane Katrina d. Tsunami
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7. Crisis Management
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8. What is Crisis Management?
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9. Purpose of Crisis Management a. Survival b. Reduce Personal Liability c. Minimize Negative Reaction d. Safeguard Company Assets e. Minimize Financial Losses
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10. Critical success factors for effective Crisis Management a. Leadership b. Speed of Response c. A Robust Plan d. Adequate Resources e. Funding f. Caring and Compassionate Response g. Excellent Communications
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11. Components of Crisis Management a. Emergency Response b. Business Continuity c. Crisis Communications d. Humanitarian Assistance e. Drills and Exercises
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12. Methods of Crisis Management a. Resource Reallocation b. Prevention c. Contingency Planning i. Recognizing the need to plan ii. Catalogue as many crisis scenarios as possible iii. Search for ways to prevent each crisis iv. Formulate plans for dealing with each crisis v. Stimulate crisis and the operation of each plan
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13. Barriers to Crisis Management a. Psycho-Social Issues b. Cultural and Group Issues c. Environmental Pressure
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14. What to do if crisis could not be prevented?
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15. DaimlerChrysler case revisited
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16. Bibliography
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THE CASE OF DaimlerChrysler The merger between German based Daimler-Benz and the Chrysler Corporation decided to merge into one and on the 7th May 1998. The new company was to be called DaimlerChrysler AG, with Schrempp and Eaton as co-chairmen. The merger announcement was widely disseminated with generally positive commentary and commensurate effects throughout the auto industry and the financial markets. With a $92 billion market value, annual revenues of $130 billion, and 421,000 employees worldwide; this was the largest industrial merger in history at that time. It would create the world’s fifth largest automaker, changing the structure of the automobile industry. Schrempp and Eaton lobbied extensively for the merger to alleviate stakeholder anxiety and provide reassurance that the two automakers were, indeed, equal partners in this historic merger. In light of the very positive predictions presented, shareholders of both companies overwhelmingly approved the merger on 18th September 1998. In its first full year of post-merger operation, revenues grew 12 per cent, operating profits increased 38 per cent, net income grew by 30 per cent, 19,000 new jobs were created, and more than 4.4 million vehicles were sold. This positive immediate post-merger picture belied the evolving discord and crisis at DaimlerChrysler. Just before the merger, and during the year immediately following the merger, several key executives who had been credited with Chrysler’s success in the 1990s either retired or defected to the Ford Motor Company or General Motors Corporation. On September 24, 1999; the President of DaimlerChrysler’s North American operations was fired and shortly thereafter, Eaton announced that he was retiring. This left Schrempp, as Chairman, and in sole control of DaimlerChrysler. By this time, the DaimlerChrysler “merger of equals” had turned into a German acquisition of a U.S. company. One of the key by-products of this acquisition was the major brain drain, with key executives who had led Chrysler to a solid reputation in its domestic and international markets for creativity, efficiency and profitability, no longer part of the new organization. This management brain drain at Chrysler was evolving into a crisis situation for DaimlerChrysler, and Schrempp began moving members of his German management team into key Chrysler positions. In fact, Chrysler was on track to post losses of hundreds of millions of dollars in 2001; and orders from dealers had slowed to such a point that production shutdowns were forecast by the end of 2000. Chrysler had gone from being one of the world’s most profitable automakers to being a strong organizational as well as financial drain on DaimlerChrysler. Skeptical shareholders began leaving, driving DaimlerChrysler’s stock price to less than half of its post-merger high of $101 per share. Organizational restructuring, worker layoffs, production cutbacks and other cost-cutting measures were announced. However, there was little evidence that the DaimlerChrysler management then in place attempted to identify and resolve the root problems that led to failed expectations and unfulfilled synergies. No one seemed to pay much attention to the basic cross-cultural clashes that played a key role in causing DaimlerChrysler to fall from the mountaintop of record profits to the valley of significant losses.
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Thus, the financial operational data of Chrysler disguised that which can be hypothesized to have been the trigger for the major crisis at DaimlerChrysler – that of the cultural collision that occurred in the organizational and operational interrelationships between the Germans and the Americans.
INTRODUCTION In this age; crises are more likely to happen, irrespective of whether they are small scale crises which affect only one household/small business or large scale crises which can have an impact on the social and economical stability of entire countries. More importantly, a crisis may initially start out small and localized/contained, but has the potential to spread and grow at an alarmingly fast rate. One of the most important reasons perhaps as to why this is so could be because the business world now operates in a dynamic environment i.e. it is constantly changing. This is one of the reasons why crisis management has become such an important part of business management as a whole and why a good leader must also be a good crisis handler. Another reason for the increasing frequency of crises is the lack of trust between world powers and the decrease in natural resources. This scarcity issue causes people to play the “blame game”, whereby they see the lack of resources as a result of different social groups vying for control of said limited resources.
WHAT IS CRISIS? Crisis is a very commonly used word and often misused by people. It is often used to state an emergency situation. But more specifically crisis can be defined as • a crucial or decisive point or situation; a turning point • an unstable situation, in political, social, economic or military affairs, especially one involving an impending abrupt change • a traumatic or stressful change in a person's life Crisis has been defined in many different ways. Its other definitions include
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“A spontaneous situation, in which we are unsure how to react, but requires an immediate response.” “Complex event that confound the abilities of those who try to manage it.”
EXPLANATION OF CRISIS A crisis may occur on a personal or societal level. It may be a traumatic or stressful change in a person's life, or an unstable and dangerous social situation in political, social, economic, military affairs, or a large-scale environmental event, especially one involving an impending abrupt change. More loosely, it is a term meaning 'a testing time' or 'emergency event'
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“A crisis is an opportunity riding the dangerous wind”
Chinese Proverb
A crisis is an abnormal situation, or even perception, which is beyond the scope of everyday business and which threatens the operation, safety and reputation of an organization. It is
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dangerous or worrying time: a situation or period in which things are very uncertain, difficult, or painful, especially a time when action must be taken to avoid complete disaster or breakdown. Any life event can take on crisis proportions if it is experienced as sudden, intense, unexpected, or emotionally super-charged. We experience crisis as overwhelming leaving us without means to cope or to adjust. Somehow, we cannot make sense of what is happening or why it is happening. Without answers to these important questions, we are left helpless. We simply do not know what to do to control or master the situation. We do not know how to make it stop. Wave after wave of emotion sweeps over us and we are unable to predict when or if this awful situation is going to end.
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“When written in Chinese, the word "crisis" is composed of two characters-one represents danger, and the other represents opportunity.”
John Fitzgerald Kennedy
TYPES OF CRISIS Crises can be categorized into a wide array of different genres on different bases; they can be classified according to different social settings or according to frequency or timing of their occurrence.
ON THE BASIS OF SOCIAL SETTINGS 1. DOMESTIC CRISIS This kind of crisis is related to domestic life of a person. This type of crisis usually occurs in the home and involves individual and members of his family. For example marital problems which can in turn lead to divorce or even separation. While this kind of crisis does not only affect spouses, it can be very devastating to children, who can grow up to be abusive or even reclusive members of society. Domestic crises also include house fire, flood, burglary and many more. 2. INDUSTRIAL CRISIS Accidents caused due to human error including neglect, miscommunication and cost cutting techniques employed by businesses so that costs can be minimized and hence profits may be maximized. These can have serious consequences not only for the business but also for the society as a whole. Such as Oil Spills near Karachi, the sinking of the titanic, Cuban missile crisis and nuclear fall outs Chernobyl. 3. NATURAL CRISIS This natural crisis happens in the environment and more often then not the activities of human beings has nothing to do with it. Examples of a natural crisis include: earthquakes, volcanoes, floods, fire and tsunami. However now it is widely believed that human beings may be the cause of natural crises as well. For example fires are created either because of natural causes or the pollution of the environment (caused by human activity). Earthquakes can be caused by shift in the earth’s tectonic plates or by building on natural fault lines. 4. PROFESSIONAL CRISIS Perhaps at first glance similar to industrial crisis, there is a significant difference between the two. Industrial crisis involves disasters such as oil spills and nuclear fall
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outs where not only an organization but also other sections of the society are affected. A professional crisis on the other hand is one whose effects are limited to the individual’s profession. For example, when a person is fired from his job, it results in feelings of inadequacy and even depression. It can also lead to feelings of hate and anger towards ones boss which could result in a vendetta against that person. 5. SOCIAL CRISIS Social crisis is one that affects society as a whole. The most simplistic example of this is crime. Let us assume that the crimes we are referring to is mugging. When such a crime is committed, everyone in a society is affected, either in a physical or a psychological way. Individuals are affected by feelings of fear and anxiety which they can only reduce by believing in a just world a form of defensive attribution where people assume that bad thing happen to bad people and good things happen to good people. This in turn increases their susceptibility to these events that they are trying to defend themselves against. Furthermore, law enforcement agencies need to reallocate resources towards quelling the crime rates. In doing so, they also play a part in increasing people’s fears through a process known as deviancy amplification. The way this works is that as the general public notices that the police are capturing or even detecting more incidences of a particular crime, they start to feel greater stress and anxiety. This is further perpetuated by the media who will invariably over sensationalize these stories. The end result is that people are fooled into thinking that the incidents of mugging are worse then they really are. Finally crimes also have a direct influence on the victims, who suffer on both an emotionally as well as monetary level. It has been documented that people who are the victims of muggings are afraid to walk on the streets alone at night, have sleeping disorders and in some cases also become introverts. 6. FINANCIAL CRISIS Crises of this nature are usually monetary crisis that an individual may face during the course of his/her own life. However, perhaps what is so dangerous about this type of crisis is that it may potentially lead to the other types of crisis mentioned above. For example, history is riddled with examples of marriages breaking up due to one partner’s inability to financially support the other. Social crisis such as crime are a direct result of people not being able to support themselves via jobs that they are qualified for and as a result have to resort to criminal activities.
ON THE BASIS OF FREQUENCY AND TIMING 1. OPERATIONAL CRISIS
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Operational Crises are the day-to-day, minorD are the day-to-day, minor crises crises of running the organization and serving individual customers. Though theseof running the organization and serving individual crises are minor but cannot be avoided. However, with small efforts and goodcustomers. With good management these can be management these can be avoided or promptly resolved. 2. SUDDEN CRISIS These are events that occur unexpectedly and have a major effect on the organization. These include natural disasters, sabotage and outages of vital services such as power, water or computers. The CEO should have plans for managing crises and business continuity and test the plans through realistic scenario-based simulations. Sudden crises call for prompt, decisive action, effective communication and teamwork between the CEO and board. 3. POTENTIAL CRISIS Potential Crises are serious problems that grow larger over time and become critical if they are not addressed. They include declining sales, profits and share prices, failure to respond to new competition, investigations by regulators, and financial difficulties. These problems affect the longterm viability of the entire organization and should be addressed by the CEO through the strategic planning and risk management processes. The neglect of potential crises has become an increasingly severe problem as the world moves faster, time lines shorten, expectations heighten and things become more complex and interdependent.
RELATIONSHIP BETWEEN OPERATIONAL, POTENTIAL AND SUDDEN CRISES These groupings of crises are linked. For example: • Operational crises may be symptoms of potential crises. • Operational crises can build or blow up into sudden crises. • Potential crises may weaken an organization to the point that it cannot cope with a sudden crisis. This briefing focuses on what directors can do when their organization faces sudden and potential crises. Directors are not normally involved in operational crises unless they are symptoms of problems in executive performance or strategic planning.
EXAMPLES OF CRISIS 5
1. KARACHI OIL SPILL On August 14th, the Tasmin Spirit, a 24-year-old Greek oil tanker, spilled 15,000 tones of crude oil across a 14 kilometer stretch of the Karachi coast. If immediate efforts were not made, this disaster would have spread on the entire coast line of Pakistan and in to other neighboring countries. This had already created a disaster for the marine life killing thousands of sea animals already including hundreds of rare species. The stinky smell was so strong that the adjacent areas of the entire coastline had become inaccessible for living. The affects did not end here. An estimated 90,000 fishermen were without work as the crude oil had devastated the local fisheries. Clean up operations have begun, but as with the Prestige oil spill which is now estimated to have spilled 63,000 tones of oil along the Galicia coast in Spain, and the Exxon Valdez disaster in Alaska, which spilled 38,800 tones, the ecosystem will take years to recover. New Scientist reports that the Spanish coast may take a decade to return to normal. Too many people and too many ecosystems have suffered from deadly oil spills. The only answer is to move toward a clean energy future and phase out the world's deadly addiction to oil. We can't undo the environmental devastation that's been visited on the Karachi coast, but we can do something to reduce oil consumption and prevent future spills. That means implementing the Kyoto agreement on reducing Greenhouse gasses, and taking immediate conservation steps.
2. CHERNOBYL On 26 April 1986 at 01:23:40 a.m. reactor number four at the Chernobyl Nuclear Power Plant located in the former Soviet Union near Pripyat in Ukraine exploded. The accident destroyed reactor and killed 30 people, including 28 from radiation exposure. Shortly after the accident, firefighters arrived to try to extinguish the fires. They were not told how dangerously radioactive the smoke and the debris were and many firefighters received high doses of radiation. In the aftermath of the accident, two hundred and thirty-seven people suffered from acute radiation sickness, of whom thirty-one died within the first three months. After the disaster, four square kilometers of pine forest in the immediate vicinity of the reactor turned ginger brown and died, earning the name of the "Red Forest". Some animals in the worst-hit areas also died or stopped reproducing. According to official estimates, about 95% of the fuel (about 180 tones) in the reactor at the time of the accident still remains inside the shelter.
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3.
HURRICANE KATRINA
Hurricane Katrina smashes into the Gulf Coast of the United States, killing an estimated 1,300 people and causing at least $125 billion in damage, making it the costliest natural disaster in U.S. history. The hurricane’s eye passes just east of New Orleans before traveling into Mississippi. Katrina’s tidal surge breaches a levee in New Orleans, flooding 80 percent of the city and forcing its evacuation. The tidal surge and high winds also devastate coastal regions of Mississippi and Alabama. The government’s response to the disaster, in particular, that of the Federal Emergency Management Agency (FEMA) is criticized as slow and shortsighted. Katrina is one of 27 named hurricanes in 2005, which surpasses the previous record of 21 set in 1933.
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INDIAN OCEAN EARTHQUAKE TRIGGERS DEVASTATING TSUNAMI DISASTER
December 26, 2004, an undersea earthquake measuring at least 9.0 on the Richter scale and centered in the Indian Ocean off the northwestern coast of Sumatra generates a tsunami that strikes the coasts of 14 countries from Southeast Asia to northeastern Africa. The disaster, one of the deadliest in recorded history, claims the lives of more than 250,000 people. The plight of the many nations and affected communities prompts a major international humanitarian relief effort.
CRISIS MANAGEMENT
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Small scale or large scale, natural disaster or industrial accident, Karachi Oil Spill or Chernobyl, Katrina or Tsunami; a crisis can occur with little to no warning, any where, any time. It looms on the horizon of every individual, every firm and every nation. It can shock them, bankrupt them or completely destroy them if they are not equipped with the tool of crisis management.
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“Sooner or later comes a crisis in our affairs, and how we meet it determines our future happiness and success. Since the beginning of time, every form of life has been called upon to meet such crisis.”
Robert Collier
WHAT IS CRISIS MANAGEMENT? Crisis Management is the process by which the organization manages a wider impact, such as media relations, and enables it to commence recovery. It involves identifying a crisis, planning a response to the crisis and confronting and resolving the crisis. It is a systematic response to unexpected events that threaten the people, property and operating continuity of the organization. It is a set of procedures applied in handling, containment, and resolution of an emergency in planned and coordinated steps.
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“Crisis Management is the process of preparing for and responding to an unpredictable negative event to prevent it from escalating into an even bigger problem, or worse, exploding into a full-blown, widespread, life-threatening disaster.”
PURPOSE OF CRISIS MANAGEMENT There are several reasons as to why a crisis response is required. As previously mentioned a crisis can transform from a minor annoyance to a very large and complex problem that may require the business to shift large amounts of time and resources towards containing it. Also it can threaten not only the business itself but the society in which the business operates therefore there is an even greater need to create safeguards and protocols that can help people to adequately respond to a crisis. Aside from this there are several other reasons as to why a crisis response should be initiated. 1. SURVIVAL It is the most important purpose of crisis management. Crises do occur without any alarm-ringing and if not managed effectively, can make it difficult to survive. Here tools of Crisis Management play their role and help a firm, an individual or a nation to survive in and after crisis. Unfortunately, it is not always possible to prevent a crisis, and often when a crisis has already occurred the only thing a person or company may do is attempt to survive the crisis hopefully until it is resolved.
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“Failure to have a workable Crisis Management Program is akin to playing Russian Roulette with an automatic pistol. You don’t have the luxury of pulling the trigger on an empty chamber.”
Geary Sikich, “All Hazards’ Crisis Management Planning”
2. REDUCE PERSONAL LIABILITY It is generally known and accepted that Directors and Officers of a company are personally at risk for the action or inaction of the corporation they serve. It is not as well known that senior managers, agents and sometimes employees can also be at risk. When there is a catastrophic loss because of a disaster, it is likely that individuals, other than Directors and Officers, can be held personally liable for the loss if there are actions that should have been taken but were not. Persons who act for organizations are in a position of trust with that organization. They manage and protect it in the best interests of the shareholders, who are owners of the organization. If the responsible persons breach the duty of trust, they may be liable to the shareholders of the organization. 3. MINIMIZE NEGATIVE REACTION As history has proven, when an organization experiences a major crisis or physical disaster, the sudden reactions by external parties can cause more immediate and permanent harm than the incident itself. A fire, bombing or natural disaster has an obvious and abrupt impact on an organization’s ability to perform. The reaction of shareholders and customers is concern for their investment and source of supply and they will act in a manner that best protects them, without consideration for the affected organization. These actions could prevent any organization from effectively recovering from their disaster, either for a long time or permanently. 4. SAFEGUARD COMPANY ASSETS At the outset of a crisis, most, if not all, company assets could be at risk. Product, facilities, equipment and people can all be threatened by a disaster situation. Without implemented and rehearsed emergency response programs, the chaotic atmosphere and stressful conditions will prevent an organized and immediate response. The losses that could be suffered will increase substantially with every passing hour. Only the immediate actions of the organization can minimize the loss or inaccessibility of corporate assets. 5. MINIMIZE FINANCIAL LOSSES Only a small portion of possible financial losses can be protected through insurance. The loss of immediate sales, temporary loss of production capacity, inability to provide services or the disruption of a distribution capability may all be minor when compared to the permanent loss of market share through lost customers and weakened product/service allegiance. Not to mention the huge losses of advertising campaigns. Insurance may cover the short term impact of a disaster but unless the organization has formal Crisis Management and Crisis Response programs implemented, the problem will not require a short-term solution. There are many other reasons why formal crisis response programs are required within every organization. Suffice it to say that actual survival may be at risk. It should be noted that in the case of small scale businesses where there is unlimited liability such as partnerships and sole traders there is an even greater need to ensure the continuation of a firm, since the proprietors actually stands to lose everything if the business goes under. As we can see from the above, crises can affect a business in a number of ways. However as we have also seen usually it is only a group of individuals who are blamed for the havoc caused by said crisis. This is a dangerous situation for an individual as it could lead to termination of employment. Also from a psychological perspective such issues can be a very huge blow to one’s self esteem (people’s evaluation of their own self worth or the extent to
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which they view themselves as good, decent and competent), which in turn can affect the way in which these individuals behave. They may become disgruntled employees working towards harming the organization; they may lose their self confidence, they may also develop psychological problems and illnesses which could negatively impact their physical well being. It may even cause people to go into a state of perpetual self justification and counterfactual thinking (mentally changing some aspect of the past as a way of imagining what might have been).
CRITICAL SUCCESS FACTORS FOR EFFECTIVE CRISIS MANAGEMENT Much has been written on the subject of crisis management over the years. The amount of research has increased exponentially over the past few years following the impact of 9/11, SARS and more latterly the Asian tsunami. Following are certain factors for effective crisis management. 1. LEADERSHIP It is perhaps the most important required factor. To be a good leader, a leader must possess following capabilities. ◊ The ability to multitask ◊ Excellent delegation skills ◊ Cool under pressure ◊ Ability to empathize ◊ Able to make quick and effective decisions ◊ Listens but comfortable in calling tough choices ◊ Self-awareness ◊ Communication skills ◊ Ability to prioritize ◊ Time management ◊ Empowered to spend company funds 2. SPEED OF RESPONSE It is often referred to as the ‘golden hour’. This is analogous to the medical golden hour. If a critically injured person is treated at a centre of excellence within one hour, their chances of survival increase significantly. Pretty much the same applies to crisis management. If your crisis response is off to a rapid start, your chances for reputation damage decrease. This will only occur if you have an effective plan. 3. A ROBUST PLAN Noah built the Ark before the rains came. It is for this good reason you should develop robust workable plans before the crisis. Even if you have a plan: ◊ Do you have a comprehensive crisis plan? ◊ Or is it just a communication plan? ◊ When was it last updated? ◊ When were the contact details last checked? ◊ Who is on your nominated crisis team? ◊ When were they last trained? ◊ When did you last contact your team out of hours? ◊ When did you test with a simulation exercise? 4. ADEQUATE RESOURCES
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A big crisis is going to require a lot of help. These are just a few of the possible areas of support you will require - and remember crises can and often occur at the most inconvenient times - the recent tsunami is a case in point! Critical success factors include: ◊ Instant access to cash funds ◊ Ability to handle thousands of phone calls ◊ Able to continue business as usual ◊ Rapid transport to the incident scene ◊ Legal input ◊ Access to your insurance advisors ◊ Incident investigators ◊ Emotional support ◊ Adequately equipped command centre ◊ Ability to manage the media ◊ Able to deal with other communications issues 5. FUNDING A crisis is not the time to be ‘penny-wise and pound-foolish’. Here is a short list of where costs can be generated. Very few of these areas are likely to be covered by your clients’/customers’ travel insurance or your own corporate insurances: ◊ Travel and accommodation costs ◊ Trauma counseling / professional emotional support ◊ Media / PR support ◊ Use of a telephone call handling facility ◊ Crisis advisors ◊ Staff overtime ◊ Replacing lost items for survivors ◊ Refund of holiday / travel costs where appropriate ◊ Possible compensation 6. CARING AND COMPASSIONATE RESPONSE Often overlooked, but in our opinion VITAL. However good you are managing everything else, if you are not using every effort to look after your staff and customers, we guarantee your crisis response is going to fall apart rapidly. Things to consider are: ◊ Teams have necessary people skills ◊ Communicate clearly with affected people ◊ Provide basic human needs at no cost i.e. food ◊ Look after customers emotional needs ◊ Consider your staff's emotional needs ◊ Be prepared to spend funds 7. EXCELLENT COMMUNICATIONS Whole books are written on this subject alone! Here are just a few thoughts: ◊ Develop a crisis communications plan ◊ Identify ALL your stakeholders ◊ Consider crisis media training ◊ Understand how the media works ◊ Work and win with the media ◊ Be on the front foot all the time ◊ Get a press release out within the golden hour
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◊ ◊ ◊ ◊ ◊
Express Pity, Praise and Promise Tell it all, tell it fast and tell the truth Never get defensive - however tough things get Be prepared with company information packs Get professional crisis communications support
COMPONENTS OF CRISIS MANAGEMENT 1. EMERGENCY RESPONSE It consists of all activities pertaining to safe management of immediate physical, health, and environmental effects of the crisis. 2. BUSINESS CONTINUITY It is the company's ability to continue delivering goods and services despite the crisis. 3. CRISIS COMMUNICATIONS It pertains to the internal and external PR management activities during a crisis. 4. HUMANITARIAN ASSISTANCE The company's efforts to alleviate the physical, emotional and psychological effects of the crisis on other people 5. DRILLS AND EXERCISES This component allows personnel to rehearse what they need to do in a crisis situation. All of these measures help ensure that the crisis is dealt with in most smooth manner leaving no aspect of the crisis untouched. In the business context, this ensures that even during the crisis the business (a profit maximizing one) can continue doing business and look to make profits while simultaneously dealing with the crisis in hand. The basic point is that by taking crisis management seriously, everyone can be sure to perform well under crisis situations. However, even then there are certain factors, social and psychological which will inhibit optimum crisis management.
METHODS OF CRISIS MANAGEMENT 1. RESOURCE REALLOCATION Businesses will often resort to managing their resources towards ensuring that minimum damage is sustained, both to the company’s reputation (if this is a Public Relations crisis caused by harmful defects in products) and to its manufacturing or operations (destruction of a major plant). 2. PREVENTION This is perhaps one of the best if not the best ways to handle a crisis. Prevention involves ensuring that a crisis never even occurs. While it is not always possible to do this as no one is capable of monitoring every aspect of their daily lives and operations 24/7, it does make sure that those crises that could have been avoided do not cause any unnecessary harm. Prevention has several advantages. First, it ensures that very little to no resources of an individual have to be reallocated towards subduing a crisis as it never allows one to occur in the first place. Furthermore it shows initiative on the part of a company which can be used as a unique selling point. However, it should be noted that often preventative measures need to be planned and built in to a system (especially with
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respect to organization systems). This requires foresight on the part of managers as well as a very large initial investment. However it is safe to say that the initial costs of integrating preventative measures are far outweighed by the costs of allowing a crisis to occur unchecked. 3. CONTINGENCY PLANNING Often companies with the foresight will adopt pre-placed contingency plans to help them weather the crisis. It should be noted that contingency planning can be undertaken by people as well as organizations. Contingency planning is a five stage process: •
Recognizing the need to plan: Indeed the only way to plan for a crisis is to first admit that such a plan in needed. It was observed that until very recently, most businesses would never undertake this first step either due to a short sightedness or ignorance towards the need for planning. It could also have been because of an overconfidence barrier (the fact that people have too much confidence in the accuracy of their judgments) that exists in the minds of a few of the higher decision makers. It is however unknown exactly how many households and individuals undertake contingency planning, at least with regards to crises on a larger scale than running out of money or losing all of their possessions. It could very well be that there is a cultural aspect to this with those in more prosperous countries being a little more likely to plan ahead as they do not live a “hand to mouth” sort of existence.
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“There cannot be a crisis next week. My schedule is already full.”
Henry Kissinger (American Political scientist. b.1923)
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Catalogue as many crisis scenarios as possible: This stage requires a very pessimistic approach to management and life. This type of analysis is often called “What If” analysis and should include as many if not all crisis situations.
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Search for ways to prevent each crisis: The third stage is connected in part to Prevention of a crisis which was discussed earlier. It involves using those strategies that will help avoid each crisis which has been identified in previous steps.
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Formulate plans for dealing with each crisis: Having identified all possible crises, plans can be made as to how to deal with them. This should involve a detailed description of what resources will be required and how they will be used to handle the crisis situation. Resources would include land, labor and capital (both financial as well as physical capital). This is of course with respect to firms only.
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Stimulate crisis and the operation of each plan: After preparing all of the above stages, it is important to try and practice the plan in a simulation of the crisis. This is done with the idea of gaining enough practice in dealing with specific crisis so that when the time comes, people will know exactly what protocols to follow. This also has the added advantage of identifying any weaknesses in the plan and taking steps to correct it.
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“Try to relax and enjoy the crisis.”
Ashleigh Brilliant (English Author and Cartoonist, b.1933)
BARRIERS TO CRISIS MANAGEMENT 13
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PSYCHO-SOCIAL ISSUES The first one is concerned with individuals and is sometimes termed as psycho-social issues. These relate to perception, assumptions, core beliefs and a range of psychological processes that shape behavior. Furthermore the difficulties people have in perceiving nature of problems they face can severely inhibit their abilities to make sense of a situation thereby increasing the risk of error. There are several ways in which this error can be made: 1. First there is the use of schemas in our daily lives. Schemas are part of our automatic thinking process i.e. the type of thinking that is involuntary, unconscious, uncontrolled and inadvertent. Even social psychologist agree that schemas are a very good way to make quick, in the moment decisions, however they will also agree that sometimes the use of schemas as a guide is a very risky decision as it may result in the wrong action being taken. 2. Furthermore people are likely to be affected by overconfidence barriers where they place too much faith in the accuracy of their own judgments. This can prevent people from perceiving a crisis and can also lead to faulty decision making with regards to how the crisis should be dealt with.
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CULTURAL AND GROUP ISSUES The next set of barriers operates on the cultural and group level of the organization. They reflect the wider set of issues around the ways that the organization works, the behavior of groups within a specific organizational setting and the role that management style can play in the creation of cultural norms and behaviors. It is assumed that a group can make better decision than individual and that is why in crisis situation, group decision is given more preference than that of an individual. But below are certain factors which can cause a group to make worse decisions and can create hurdles in crisis management. 1. Process Loss: Any aspect of group interaction that may inhibit good and effective problem solving or decision making. While there are several different forms of process loss, they all invariably lead to the same problems. The following is a list of the more prominent forms of process loss:
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Lack of shared information: It is common for people in a group to focus only on information that is common to all the members of a group. Even in the situation of DaimlerChrysler this will hold true. Suppose the group were to meet up to formulate a plan to solve the crisis. They have just finished creating a rough idea of a plan to solve the current crisis but the plan is flawed because the group has not taken one piece of information into account. The reason for this is that one member had access to this information but was under the impression that the rest of the group was also aware of it and had, as a result, taken it into account. Therefore he never brought it up in the meeting. This lack of sharing information could possibly result in a plan that is ineffective at averting the crisis or even worse, a plan that worsens the effects of the crisis.
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Groupthink: A kind of thinking in which group cohesiveness and solidarity is more important than considering the facts in a realistic manner. As can be seen from the above situation involving DaimlerChrysler, several of the antecedents and symptoms of groupthink can be identified: 1. It is stated in the article that one of the co-chairmen left his post thus leaving his partner as the sole individual in charge of the organization. This in turn could have lead to a classic groupthink symptom where there is a directive leader who controls all decision making. 2. Furthermore all of the issues that soon followed such as the lay offs, and pulling out of shareholders etc. could have created a high stress situation for the new chairman and (assuming he had any) his team of advisers considering that naturally the group would itself be blamed for not taking preemptive action to ensure that the crisis did not get out of hand. 3. The fact that profits initially rose could have meant that group cohesiveness may have increased. People may have felt that it was the decision making powers of the top management that led to the success, and as a result the interest to be part of this group may have increased. It may have also created an illusion of invulnerability in the group, which made it think that it was incapable of making mistakes. 4. The fact that several German managers were placed into important positions at Chrysler could be considered a way of creating a group isolation environment. It could also have been done as a way to set up mind guards to protect the leader from conflicting decisions that could have jeopardized the cohesiveness of the group. 5. It is possible that the decisions made in point 4 could have been due to poor decision making procedures; also it could have been done due to a false belief in the moral correctness of the group. 6. It is also worth mentioning that the article mentions that discord (that is to say disagreement) had erupted behind the scenes of DaimlerChrysler. This could have resulted in pressures to make the dissenters conform to the norm. When this strategy did not work, they were fired or perhaps even forced into retirement. This point of view will be further expanded upon in the section on social influences. The end result of all of this (that is group think, group polarization and lack of shared information) is that it disrupts good decision making in the following ways: because of a need to maintain high cohesiveness the group does not consider other points of view or other options that may be more viable. Also the group becomes isolated. Furthermore a group has a directive leader, there is high stress in the group, and there are a very poor set of decision making procedures. To protect itself from these
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potentially group threatening ideas several steps will be taken including group isolation, self censorship, pressuring those of other views to conform, creating a false sense of unanimity and implanting mind guards. In the end the group ends up doing incomplete surveys of alternative ways to solve the crisis, fails to examine the risks of the chosen plan, there is poor information search in this regard as well also there is failure to develop contingency plans which as we have already discussed is a very important way to avert or at least contain a crisis. To explain further take the example of DaimlerChrysler provided above. Suppose that there is a way to avert the crisis described but it involves creating a disruption in the group then it will not be taken into consideration. The sad fact is that ever individual is susceptible to these barriers as invariable we all belong to some sort of group and we all face a crisis situation at some point in our life times. 2. Social Influence: This is the effect that the words, actions or even the mere presence of other people have on an individual’s thoughts feelings attitudes or behaviorisms. Primarily, there are two different variants of social influence and both of them can apply here. o
Informational Social Influence: The type of social influence that occurs when people do not know what is the correct thing to do or say. They essentially put their faith in the actions of other believing that they may know more about a given social situation then the individual. As such informational social influence may not have played too large of a role in the crisis faced by DaimlerChrysler. However, for the moment let us assume that one of the members of the advisory team was a relatively new member of the group. In such a crisis oriented and potentially ambiguous situation where he is surrounded by people who in his opinion are experts, he may have had no choice but to conform to the expectations of his group. It should be noted that in this case there is a situation of private acceptance in that he individual conforms to group expectations because he/she genuinely believes what the group is doing or saying is right.
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Normative Social Influence: A form of social influence that occurs when we change our behaviors to match those of others as we want to remain a member of that particular group. This form of social influence can be said to have a very important and profound effect in this situation. Recall that we mentioned how there was dissention within the ranks of DaimlerChrysler. In such a situation very powerful normative pressures are placed on the individual to conform. Initially other group members will try to bring the dissenter back into the fold by talking to him and trying to persuade him to accept the general views of the group. Assuming this does not work, the individual is ignored by the group and may in fact not even be allowed to express his/her own feelings. This may in turn create an illusion of unanimity within the group. Furthermore, if the group successfully manages to persuade the dissenter to conform to the group norms, it may lead to him/her self censoring their conflicting viewpoints. This is because usually normative social influences result in public compliance a situation where people overtly conform to the group norms but privately do not believe what the group is doing or saying is correct. The question of why we change our behaviors to suit the group’s social norms and rules is in part due to a phenomenon called the “Looking Glass Self”. Invented by the sociologist Charles Horton Cooley, the “Looking
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Glass Self” theory is composed of three parts. First it states that we imagine how we appear to other people. Next we imagine the judgments other people make about us based on that appearance. Finally, we develop ourselves via and based on these judgments. In order to gain approval and hence earn the companionship of the group we must ensure that they make a positive judgment about us and then do everything in our power to maintain this favorable judgment. •
ENVIRONMENTAL PRESSURE Finally the last set of barriers exists at the system level and include a range of structural and environmental pressures and constraints that impact upon the organization at various points in time and space. These also include issues around complexity and its impact upon management.
WHAT TO DO IF CRISIS COULD NOT BE PREVENTED? As was the case with DaimlerChrysler, it is not always possible to avert a disaster and invariably in such situations there is very little an organization can do except try and weather the crisis. This is a process of several steps 1. Do an objective assessment of the cause(s) of the crisis: In order to do this though people must first start using their own cognitive abilities rather then succumbing to social influences and becoming, quiet literally in some cases ‘one of the mob’. This is essential irrespective of whether we refer to an individual or a business. By adequately and effectively caring out an objective assessment people will be capable of decreasing the overall impact that the crisis may have on an individual’s life. In the case of businesses or other social groups, this objective analysis can also be heightened by bringing in people from outside the organization, who can give their own views on the situation without worrying too much about the impact conflicting decisions may have on solidarity of the group. There is also the added advantage that it will prevent a tightly knit social group from becoming susceptible to group think and group polarization. Group think is when maintaining group cohesiveness and solidarity is more important that considering the facts in a realistic manner.
Q
“The easiest period in a crisis situation is actually the battle itself. The most difficult is the period of indecision — whether to fight or run away. And the most dangerous period is the aftermath. It is then, with all his resources spent and his guard down, that an individual must watch out for dulled reactions and faulty judgment.”
Richard M. Nixon
2. Determine whether the cause(s) will have a long term effect or whether it will be a short term phenomenon: There are several ways to tackle this and they primarily revolve around whether we take the crisis to be with regards to an individual or a firm. A firm may begin to consult graphs in order to look for trends that may give them an idea of exactly how long the crisis will last. They may also call in experts on the crisis to give their own professional opinions to ascertain how long the crisis may last. As for individuals, they may begin to consult their past schemas about similar situations and what measures were taken to reduce the overall impact of the previous crisis. Further more it should be noted that individuals may also, as stated earlier, utilize informational social influences (which is the influence of other people that leads us to conform because we see them as a source of information to guide our behavior) and act in a similar
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manner to how people around them are reacting to a crisis. While this is a good way to respond to a crisis situation, care should be taken that they do not fall prey to pluralistic ignorance where bystanders assume that nothing is wrong in an emergency because no one else looks concerned. If they see that a group of people are not responding to a crisis they too will act as if the crisis does not exist. This in turn will not only result in a lack of focus on the crisis at hand but may also allow the crisis to increase in destructive magnitude. 3. Project the most likely course of events: Forecasting techniques and referring to similar situations that may have occurred in the past is a very effective way of properly predicting how the crisis will run its course. Also a company could construct decision trees to help them clearly see exactly what options are available to them and the probabilities associated with those options, that is, how likely those options are to fail or succeed. 4. Focus all the most capable people (this would include yourself as well) on activities that will mitigate or eliminate the problem: It should be noted however that this will severely affect the company’s performance in the short run as more and more resources will be diverted to reconciling the problem and this may in turn affect short run cash flows. 5. Look for opportunities - there could be a "silver lining": This can best be achieved using management tools such as SWOT (strengths, weaknesses, opportunities, threats) diagrams and other management techniques and models that help to make sense of the social situation. 6. Immediately act to guard cash flow: While this is not something that is too relevant to an individual, it is important in terms of businesses as this is supposedly the main reason why most businesses fail within the first year of operation.
Q
“The crisis of today is the joke of tomorrow.”
H. G. Wells (English Novelist, Journalist, Sociologist and Historian. Best known for his science fiction books. 1866-1946)
DaimlerChrysler CASE REVISITED Each crisis is unique, and managers adjust and respond differently to each situation. In addition, the same situation may be a crisis at one time, but not at another. As noted in the case given at the start of the chapter, the cultural differences between Daimler-Benz and Chrysler were an important foundation for the mutual attraction between the two companies. The Germans admired the entrepreneurial spirit and innovative thinking of the Americans, while the Americans respected the methodological engineering and technical capabilities of the Germans. The leaders of these two corporate giants were attracted to their opposites. And, like many marriages of opposites, the differences led to a crisis disaster. No one seemed to know how to discover common ground and act on the crisis situation at hand.
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It would have been much better if Schrempp had recognized the crisis as an organizational culture issue, gathered around him a special team of culturally-sensitive Daimler and Chrysler management personnel and, in this major crisis situation, taken action to appropriately inform individuals that he and his team were personally responsible for managing the process of response. The language of crisis conditions is very important. In times of crises, words and their use have great power. Consequently, the public affairs office of the firm needs to be kept informed of all issues relating to the crisis as well as any element that has the potential of becoming an issue. In crisis situations, the president and other selected people, particularly key stakeholders, should be informed as expeditiously as possible if they are not directly involved. In other words, all appropriate stakeholders should be appropriately informed in a timely manner.
BIBLIOGRAPHY •
Key Readings in Crisis Management o System and Structures for Prevention and Recovery
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o by Dominic Elliot •
Docleaf Crisis & Risk Management
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Microsoft Encarta 2007
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Crisis Management and Disaster Recovery Info o www.crisismanagement-disasterrecovery.com
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MSN Encarta o encarta.msn.com
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(www.businessdictionary.com)
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(en.wiktionary.org)
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(en.wikipedia.org)
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(www.dti.gov.uk)
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(www.siliconfareast.com)
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(www.greenpeace.org)
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