A2 Objectives and StrategyUnit 6

Contingency Planning

Crisis in business

Crisis – an unexpected event that threatens the well being/survival of a firm

Some are predictable and quantifiable (changes in exchange rates) and contingency planning is necessary

Others are totally unexpected (Asian Tsunami) where crisis management will be used

Task: Produce a mind map with examples of crises for a business. You may discuss it with the person next to you. (5 mins.)

Crisis in business

Environmental disasters e.g. oil spillageFraudulent activities of employees e.g. EnronHealth scares e.g. BSE, SARS, Bird FluMajor customers withdrawing their custom e.g. Rover closing for suppliersFaulty or dangerous products e.g. Cocal Cola’s Dasani WaterWorkforce strikes e.g. Fire service, London Underground workersHostile takeovers e.g. Malcolm Glazer & Manchester UnitedPressure group activities and unwanted media attentionCompetitor launching new productDemand and fashion changesSevere recession or slumpMachine failure = production problems

BBC, 2005

BBC, 2005

BBC, 2004

BBC, 2005

Contingency planning vs.

Crisis Management

Contingency Planning

Preparing for unexpected and usually unwelcome events that are reasonably predictable and quantifiable

Usually non-critical events, time to prepare and gather data and ask ‘what if’ questions

Crisis ManagementResponding to a sudden unexpected event that poses a significant threat to a firm.

Damage limitation, heavy emphasis on Public Relations and media relationships

Need flexible approach and a quick responsive crisis team

Contingency Planning (The stages)

1. Recognise the need for it

2. Distinguish between critical and non-critical future issues, deal with critical first e.g. computer system crash for a bank is critical

3. List all possible crisis scenarios using ‘what if’ and sensitivity analysis

4. Look for ways to prevent the crisis

5. Formulate crisis plans – how should each department act and what resources are necessary

6. Simulate the crises and the operation contingency plan using software or actual exercises

Sensitivity Analysis

Technique used to reduce uncertainty in decision-making

Looks at how much changing variables will impact on results of decision

E.g. what would happen if a machine fault could not be fixed in 10 days but 20 days, How will a 15% increase rather than 10% increase in raw materials cost impact on the business

The analysis uncovers at what level variables does the project become unacceptable

Costs of Contingency Planning

Can be very time consuming

Requires highly qualified staff to work on it (expensive)

May be seen as a waste of money if nothing ultimately goes wrong

Effects of crises on a functional area

Each function of a business will be effected and must be able to respond and manage a crisis situation.

Task: Describe how each of the following area will respond in a crisis? (5 mins)MarketingFinanceOperationsPersonnel/Human Resources

Think about examples such as the Dasani and the Buncefield oil depot fire examples

Answers

Marketing – Public relations needed to limit damage to reputation

Finance – Immediate cash expenditure needed on advertising campaigns, clean up campaigns or response to a hostile takeover bid

Operations – Need careful contingency plan to ensure customers needs met, particularly if JIT is used

Personnel – Direct autocratic leadership needed, quick decisions and internal communication necessary, effective, rapid and truthful external communication needed

Risk Management

All firms face risk

Management must rehearse the many things that could go wrong

The damage caused to a reputation could be permanent

Risk must therefore be carefully assessed and managed

Student ActivityIn groups you must analyse the potential crisis your chosen business may face and then produce contingency plans and crisis management strategies for each crisis.

Group A - Bill’s ButchersGroup B - Tyre manufacturer supplying a car manufacturerGroup C – A clothing retailer such as FCUK Group D – BP (British Petroleum) Group E – Nestle

Each group must come up with potential crisis the other businesses may face. Each group must then describe any contingency plans or how they would crisis manage the crisis proposed.

Student Activity

Complete question 2 on exam paper January 2004