A2 Objectives and Strategy Unit 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 spillage Fraudulent activities of employees e.g. Enron Health scares e.g. BSE, SARS, Bird Flu Major customers withdrawing their custom e.g. Rover closing for suppliers Faulty or dangerous products e.g. Cocal Cola’s Dasani Water Workforce strikes e.g. Fire service, London Underground workers Hostile takeovers e.g. Malcolm Glazer & Manchester United Pressure group activities and unwanted media attention Competitor launching new product Demand and fashion changes Severe recession or slump Machine failure = production problems

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 Management Responding 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) Marketing Finance Operations Personnel/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 Activity In 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 Butchers Group B - Tyre manufacturer supplying a car manufacturer Group 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