Crisis Management Essay Example

Crisis Management Essay Crisis management is the process by which an organization deals with a major event that threatens to harm the organization, its stakeholders, or the general public. Three elements are common to most definitions of crisis: (a) a threat to the organization, (b) the element of surprise, and (c) a short decision time. [1] Venette[2] argues that crisis is a process of transformation where the old system can no longer be maintained. Therefore the fourth defining quality is the need for change.If change is not needed, the event could more accurately be described as a failure or incident. In contrast to risk management, which involves assessing potential threats and finding the best ways to avoid those threats, crisis management involves dealing with threats after they have occurred. It is a discipline within the broader context of management consisting of skills and techniques required to identify, assess, understand, and cope with a serious situation, especially from the moment it first o ccurs to the point that recovery procedures start. Contents [hide] †¢1 Introduction 2 Types of crisis o2. 1 Natural crises o2. 2 Technological crises o2. 3 Confrontation crises o2. 4 Crises of malevolence o2. 5 Crises of organizational misdeeds ?2. 5. 1 Crises of skewed management values ?2. 5. 2 Crises of deception ?2. 5. 3 Crises of management misconduct o2. 6 Workplace violence o2. 7 Rumors †¢3 Crisis Leadership o3. 1 Sudden crises o3. 2 Smoldering crises o3. 3 Signal detection o3. 4 Preparation and prevention o3. 5 Containment and damage control o3. 6 Business recovery o3. 7 Learning †¢4 Models and theories associated with crisis management o4. Crisis Management Model o4. 2 Management Crisis Planning o4. 3 Contingency planning o4. 4 Business continuity planning o4. 5 Structural-functional systems theory o4. 6 Diffusion of innovation theory o4. 7 Role of apologies in crisis management o4. 8 Crisis leadership o4. 9 Unequal human capital theory †¢5 Examples of s uccessful crisis management o5. 1 Tylenol (Johnson and Johnson) o5. 2 Odwalla Foods o5. 3 Mattel o5. 4 Pepsi †¢6 Examples of unsuccessful crisis management o6. 1 Bhopal o6. 2 Ford and Firestone Tire and Rubber Company o6. 3 Exxon †¢7 Lessons learned in crisis management 7. 1 Impact of catastrophes on shareholder value o7. 2 Crisis as Opportunity †¢8 Public sector crisis management o8. 1 Schools and crisis management o8. 2 Government and crisis management o8. 3 Elected officials and crisis management †¢9 Professional Organizations †¢10 See also †¢11 References †¢12 Further reading †¢13 External links [edit] Introduction Crisis management consists of: †¢Methods used to respond to both the reality and perception of crises. †¢Establishing metrics to define what scenarios constitute a crisis and should consequently trigger the necessary response mechanisms. Communication that occurs within the response phase of emergency management scenar ios. Crisis management methods of a business or an organization are called Crisis Management Plan. Crisis management is occasionally referred to as incident management, although several industry specialists such as Peter Power argue that the term crisis management is more accurate. [3] The credibility and reputation of organizations is heavily influenced by the perception of their responses during crisis situations.The organization and communication involved in responding to a crisis in a timely fashion makes for a challenge in businesses. There must be open and consistent communication throughout the hierarchy to contribute to a successful crisis communication process. The related terms emergency management and business continuity management focus respectively on the prompt but short lived first aid type of response (e. g. putting the fire out) and the longer term recovery and restoration phases (e. g. moving operations to another site).Crisis is also a facet of risk management, al though it is probably untrue to say that Crisis Management represents a failure of Risk Management since it will never be possible to totally mitigate the chances of catastrophes occurring. [edit] Types of crisis During the crisis management process, it is important to identify types of crises in that different crises necessitate the use of different crisis management strategies. [4] Potential crises are enormous, but crises can be clustered. [4] Lerbinger[5] categorized seven types of crises 1. Natural disaster 2. Technological crises 3.Confrontation 4. Malevolence 5. Crisis of skewed management value 6. Crisis of deception 7. Crisis of management misconduct [edit] Natural crises Natural crises, typically natural disasters considered as acts of God, are such environmental phenomena as earthquakes, volcanic eruptions, tornadoes and hurricanes, floods, landslides, tsunamis, storms, and droughths that threaten life, property, and the environment itself. [4][5] Example: 2004 Indian Oce an earthquake (Tsunami) [edit] Technological crises Technological crises are caused by human application of science and technology.Technological accidents inevitably occur when technology becomes complex and coupled and something goes wrong in the system as a whole (Technological breakdowns). Some technological crises occur when human error causes disruptions (Human breakdowns[4]). People tend to assign blame for a technological disaster because technology is subject to human manipulation whereas they do not hold anyone responsible for natural disaster. When an accident creates significant environmental damage, the crisis is categorized as megadamage. [4] Samples include software failures, industrial accidents, and oil spills. 4][5] Examples: Chernobyl disaster, Exxon Valdez oil spill [edit] Confrontation crises Confrontation crises occur when discontented individuals and/or groups fight businesses, government, and various interest groups to win acceptance of their demands and expec tations. The common type of confrontation crises is boycotts, and other types are picketing, sit-ins, ultimatums to those in authority, blockade or occupation of buildings, and resisting or disobeying police. Example: Rainbow/PUSH’s (People United to Serve Humanity) boycott of Nike [edit] Crises of malevolenceAn organization faces a crisis of malevolence when opponents or miscreant individuals use criminal means or other extreme tactics for the purpose of expressing hostility or anger toward, or seeking gain from, a company, country, or economic system, perhaps with the aim of destabilizing or destroying it. Sample crises include product tampering, kidnapping, malicious rumors, terrorism, and espionage. [4][5] Example: 1982 Chicago Tylenol murders [edit] Crises of organizational misdeeds Crises occur when management takes actions it knows will harm or place stakeholders at risk for harm without adequate precautions. 4] Lerbinger[5] specified three different types of crises of organizational misdeeds: crises of skewed management values, crises of deception, and crises of management misconduct. [edit] Crises of skewed management values Crises of skewed management values are caused when managers favor short-term economic gain and neglect broader social values and stakeholders other than investors. This state of lopsided values is rooted in the classical business creed that focuses on the interests of stockholders and tends to view the interests of its other stakeholders such as customers, employees, and the community.Example: Sears sacrifices customer trust[clarification needed] [edit] Crises of deception Crises of deception occur when management conceals or misrepresents information about itself and its products in its dealing with consumers and others. Example: Dow Corning’s silicone-gel breast implant [edit] Crises of management misconduct Some crises are caused not only by skewed values and deception but deliberate amorality and illegality. [edi t] Workplace violence Crises occur when an employee or former employee commits violence against other employees on organizational grounds.Example: DuPont’s Lycra[clarification needed] [edit] Rumors False information about an organization or its products creates crises hurting the organization’s reputation. Sample is linking the organization to radical groups or stories that their products are contaminated. [4] Example: Procter Gambles Logo controversy [edit] Crisis Leadership Erika Hayes James, an organizational psychologist at the University of Virginia’s Darden Graduate School of Business, identifies two primary types of organizational crisis. 6] James defines organizational crisis as â€Å"any emotionally charged situation that, once it becomes public, invites negative stakeholder reaction and thereby has the potential to threaten the financial well-being, reputation, or survival of the firm or some portion thereof. † [7] 1. Sudden crisis 2. Smolderin g crises [edit] Sudden crises Sudden crises are circumstances that occur without warning and beyond an institution’s control. Consequently, sudden crises are most often situations for which the institution and its leadership are not blamed. [edit] Smoldering crisesSmoldering crises differ from sudden crises in that they begin as minor internal issues that, due to manager’s negligence, develop to crisis status. These are situations when leaders are blamed for the crisis and its subsequent effect on the institution in question. [8] James categorises five phases of crisis that require specific crisis leadership competencies. [8] Each phase contains an obstacle that a leader must overcome to improve the structure and operations of an organization. James’s case study on crisis in the financial services sector, for example, explores why crisis events erode public trust in leadership.Jamess research demonstrates how leadership competencies of integrity, positive intent , capability, mutual respect, and transparency impact the trust-building process. [9] 1. Signal detection 2. Preparation and prevention 3. Containment and damage control 4. Business recovery 5. Learning [edit] Signal detection Signal detection is the stage in a crisis in which leaders should, but do not always, sense early warning signals (red flags) that suggest the possibility of a crisis. The detection stages of a crisis include: Sense-making: represents an attempt to create order and make sense, retrospectively, of what occurs.Perspective-taking: the ability to consider another persons or groups point of view. [edit] Preparation and prevention It is during this stage that crisis handlers begin preparing for or averting the crisis that had been foreshadowed in the signal detection stage. Organizations such as the Red Crosss primary mission is to prepare for and prevent the escalation of crisis events. Walmart has been described as an emergency relief standard bearer after having witnessed the incredibly speedy and well-coordinated effort to get supplies to the Gulf Coast of the United States in anticipation of Hurricane Katrina. edit] Containment and damage control Usually the most vivid stage, the goal of crisis containment and damage control is to limit the reputational, financial, safety, and other threats to firm survival. Crisis handlers work diligently during this stage to bring the crisis to an end as quickly as possible to limit the negative publicity to the organization, and move into the business recovery phase. [edit] Business recovery When crisis hits, organizations must be able to carry on with their business in the midst of the crisis while simultaneously planning for how they will recover from the damage the crisis caused.Crisis handlers not only must engage in continuity planning (determining the people, financial, and technology resources needed to keep the organization running), but will also actively pursue organizational resilience. [edi t] Learning In the wake of a crisis, organizational decision makers adopt a learning orientation and use prior experience to develop new routines and behaviors that ultimately change the way the organization operates. The best leaders recognize this and are purposeful and skillful in finding the learning opportunities inherent in every crisis situation. edit] Models and theories associated with crisis management [edit] Crisis Management Model Successfully defusing a crisis requires an understanding of how to handle a crisis – before they occur. Gonzalez-Herrero and Pratt found the different phases of Crisis Management. There are 3 phases in any Crisis Management are as below 1. The diagnosis of the impending trouble or the danger signals. 2. Choosing appropriate Turnaround Strategy. 3. Implementation of the change process and its monitoring. [edit] Management Crisis PlanningNo corporation looks forward to facing a situation that causes a significant disruption to their busine ss, 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. [10] [edit] 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.Pr oviding 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. [10] [edit] 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 crisisis. As a result, in the event of an actual crisis, the team members will act more quickly and effectively. [10] [edit] 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. [11] [edit] Diffusion of innovation theory Another theory that can be applied to the sharing of information is Diffusion of Innovation Theory. Developed by Everett Rogers, the 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. [edit] Role of apologies in crisis managementThere 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. [12] [edit] Crisis leadershipJames identifies six le adership competencies which facilitate organizational restructuring during and after a crisis. 1. Building an environment of trust 2. Reforming the organization’s mindset 3. Identifying obvious and obscure vulnerabilities of the organization 4. Making wise and rapid decisions as well as taking courageous action 5. Learning from crisis to effect change. Crisis leadership research concludes that leadership action in crisis reflects the competency of an organization, because the test of crisis demonstrates how well the institution’s leadership structure serves the organization’s goals and withstands crisis. 8] Developing effective human resources is vital when building organizational capabilities through crisis management executive leadership. [13] [edit] Unequal human capital theory James postulates that organizational crisis can result from discrimination lawsuits. [14] James’s theory of unequal human capital and social position derives from economic theor ies of human and social capital concluding that minority employees receive fewer organizational rewards than those with access to executive management. In a recent study of managers in a Fortune 500 company, race was found to be a predictor of promotion opportunity or lack thereof. 15] Thus, discrimination lawsuits can invite negative stakeholder reaction, damage the companys reputation, and threaten corporate survival. [edit] Examples of successful crisis management [edit] 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 companys actions.Tamper-resistant packaging was rapidly introduced, and Tylenol sales swiftly bounced back to near pre-crisis levels. [16] 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. [17] [edit] Odwalla Foods When Odwallas 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. oli 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 wha t 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. [edit] 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 companys 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 Mattels 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 weeks end, Mattel had responded to more than 300 media inquiries in the U. S. alone. [18] [edit] 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 convenience store where a woman was caught replicating the tampering incident. The company simultaneously publicly worked with the FDA durin g the crisis. The corporation was completely open with the public throughout, and every employee of Pepsi was kept aware of the details. [citation needed] This made public communications effective throughout the crisis.After the crisis had 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. [19][citation needed] [edit] Examples of unsuccessful crisis management [edit] 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 p rinted 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. [20] [edit] Ford and Firestone Tire and Rubber Company The Ford-Firestone Tire and Rubber Company dispute transpired in August 2000.In response to claims that their 15-inch Wilderness AT, radial ATX and ATX II t ire 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 worlds top-selling sport utility vehicle (SUV). [21] 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. [22] [edit] 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 di srupted; 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. These responses also happened within days of the incident. [23] [edit] Lessons learned in crisis management [edit] Impact of catastrophes on shareholder valueOne of the foremost recognized studies condu cted 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, (Recoverers), and those that did not recover on stock price, (Non-recoverers). 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. [citation needed] [edit] Crisis as Opportunity To address such shareholder impact, management must move from a mindset that manages crisis to one that generates crisis leadership. 6] Research shows that organizational contributory factors affect the tendency of executives to adopt an effective crisis as opportunity mindset. [24] Since pressure is both a precipitator and consequence of crisis, leaders who perform well under pressure can effectively guide the organization through such crisis. [25] James contends that most executives focus on communications and public relations as a reactive strategy. While the company’s reputation with shareholders, financial well-being, and su rvival are all at stake, potential damage to reputation can result from the actual management of the crisis issue. [6] Additionally, companies may stagnate as their risk management group identifies whether a crisis is sufficiently â€Å"statistically significant†. 26] Crisis leadership, on the other hand, immediately addresses both the damage and implications for the company’s present and future conditions, as well as opportunities for improvement. [8] [edit] 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. [edit] Schools and crisis managementIn the wak e of the Columbine High School Massacre, the September 11 attacks in 2001, and shootings on college campuses including the Virginia Tech massacre, educational institutions at all levels are now focused on crisis management. [27] 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. [citation needed] 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. 28] In a similar fashion the plans aim to address all audiences in need of information including parents, the media and law enforcement officials. [29] [edit] 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 States National 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 pr ivate sector as a key partner in domestic incident management, particularly in the area of critical infrastructure protection and restoration. [30] 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. 30] FEMA offers free web-based training on the National Response Plan through the Emergency Management Institute. [31] 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. [citation needed] [edit] Elected officials and crisis management Historically, politics and crisis go hand-in-hand. In describing crisis, President Abraham Lincoln said, â€Å"We live in the midst of alarms, anxiety beclouds the future; we expect some new disaster w ith each newspaper we read. [citation needed] 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. [32] 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 a 24-hour news cycle and an increasingly internet-savvy audience with ever-changing technology at its fingertips. [32] 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 res