5.

7 Crisis Management and Contingency Planning

Business Management HL (only)

Learning Objectives
On completing this chapter you should be able to;
Analyse and apply:
● The difference between crisis management and contingency planning (AO2)
● Factors that affect effective crisis management; such as transparency,
communication, speed, and control (AO2)
● Advantages and disadvantages of contingency planning; such as cost, time, risks, and
safety (AO2)
A crisis is any unpredicted event that has widespread negative consequences. In a business
management context, this means a crisis causes major disruptions to the normal operations
of an organization.
Crisis management is about the response a business takes in the event of an actual crisis.
Contingency planning is about devising and developing pre-arranged plans to deal with a
crisis, in case it actually occurs.
This topic examines how crises can affect the operations of a business organization and
how it can prepare to deal with crises, should they ever occur.
Crises can occur due to numerous reasons, including:
● Human activity and human error, such as financial crises, illnesses, and wars.
● Accidents, such as gas explosions, burst water pipes and fires.
● Natural disasters, such as rainstorms, hurricanes, earthquakes and droughts.
Setting the Scene
Points to consider and Key Concept link
● Is there any point in preparing for disasters when completely unique risk can
occur?
● Why is effective communication important when dealing with a crisis such as this?
● Do you think all businesses should consider what to do in the event of a major
disaster?

Responding to crisis and unforeseen events requires careful planning. Attempting to

‘cover up’ a disaster because the organization is in no way prepared to handle it can
lead to claims of unethical behaviour. Accidents happen and stakeholders will responds
more positively to organizations that are prepared for their consequences than those that
adopt a culture of ‘hope for the best’ and claim ‘it was so unexpected’.
Case study - Toyota's product recall crisis
The difference between crisis management & contingency planning
(AO2)
Fire drills are part of contingency planning

A crisis can be defined as any unpredicted event that has widespread negative consequences. In a
business management context, this means a crisis causes major disruptions to the normal
operations of an organization.

Crisis management is about the response a business takes in the event of an actual threat, disaster
or crisis. It is about the way in which a business reacts during a real crisis. This is particularly
important if the crisis is major enough to threaten the survival of the business.

Contingency planning is about devising and developing pre-arranged plans to deal with a crisis, in
case it actually occurs. It involves the use of risk assessments in order to be better prepared for a
crisis, such as a fire, should it ever happen.
Examples of crises include:
● Power failure
● A fire
● Workers going on strike
● Severe weather conditions, e.g. flooding, hurricanes, droughts, snowstorms and forest fires
● An economic recession
● A global financial crisis, as occurred in 2008
● Political turmoil, such as in Turkey 2016
● The outbreak of a highly infectious disease, such as SARS (2003) the norovirus (2016), and the coronavirus
(2019 - 2020)
● A widespread product recall, such as Toyota's recall of 5.8 million cars worldwide
● Technological failures, e.g. security breaches, machinery breakdowns and problems with internet
technologies
● Natural disasters, e.g. earthquakes, volcanic eruptions, landslides, and tsunamis.
● Traffic congestion and delays, e.g. international flight cancellations or delivery problems, such as KFC
running out of chicken products
● Liquidity problems (a financial crisis faced by an individual organization).
Contingency planning involves pre-emptive and preventative actions, whereas crisis management is reactive
and being responsive in a crisis situation.

Contingency planning is about scenario planning (also known as ‘what if’ scenarios) in order to have plans
to minimise the impact of a real crisis, should it ever occur. A detailed but succinct contingency plan allows
people to know what to do in an emergency situation.

For example, most countries require businesses to have fire drills so employees can practice these and take
immediate actions in the event of an actual fire in the workplace. Some schools have a lockdown procedure
in place, in case there is a threat to the safety of students and staff on campus from an intruder. Theatre
operators and concert organisers have contingency (backup) plans, just in case their lead actors or artists
become ill before a performance. Governments have contingency plans too, just in case there is a threat to
national security. The Japanese government, for example, has contingency plans for tsunamis and earthquake
disasters.
Case study - Apple & Beats

In June 2015, Apple had a worldwide product recall of 230,000 units of its Beats speakers
due to fire risks. The $335 loud speaker system was prone to overheating of its battery.

There were reports of a burn to a consumer’s finger and damage to a consumer’s desk.
Apple had bought Beats Electronics for $3 billion just a year earlier in 2014.
Case study - Camiko London
Out of every crisis lies business opportunities. Camiko London is one of many businesses around the world that
entered the market to produce face masks due to the global coronavirus pandemic. Camiko London was
established in July 2020 in London, UK. It is a family-run business that specialises in handmade non-surgical
face masks for men, women, teenagers and young children. The business uses a range of unique designs to cater
for different consumer tastes. Camiko London relies on social media marketing and e-commerce for sales.

Source: https://camikolondon.com/

(photos reproduced with kind permission of Camiko London)

Exam Practice Question
a). Define the term crisis. [2 marks]

b). Define the term contingency planning. [2 marks]

Factors that affect effective crisis management

"It'll take time to restore chaos." - George W. Bush, 43rd President of the USA (2001 to 2009)

Crisis management is about how a business organization responds in the event of a rea crisis faced by the
organization. It is about the way in which the business reacts during a real crisis. This is particularly
important if the crisis is major enough to threaten the survival of the organization.

The purpose of crisis management is to return to normal business operations as quickly possible. To
achieve this aim, businesses usually rely on their contingency plans that were prepared just in case the
crisis actually occurred.

The four key factors affecting the effectiveness of crisis management are:
● Transparency
● Communication
● Speed, and
● Control.
# Transparency

Transparency is about being open and honest with all stakeholders during a crisis. It is about disclosing the
truth, such as the scale or severity of the crisis situation. People are far more receptive to bad news and are
more forgiving during a time of crisis, especially if the crisis was beyond the organization’s control. However,
people do not like to be lied to. They are far less sympathetic if important information is discovered at a later
time; hiding the truth from the media is particularly not well received!

Stakeholders want the business to act responsibly before, during and after a crisis. As part of its corporate
social responsibilities (CSR), the business will need to remain transparent, not just in communicating about
the crisis, but keeping stakeholders informed about its recovery plan. Workers, for example, will want to
know that they still have their jobs or that it is safe for them to return to work.

In the case of the Volkswagen diesel scandal (see case study below), the carmaker initially tried to hide their
unethical business practices, resulting in an unfavourable court hearing in the USA. Had the company
communicated in a transparent way, the severity of the crisis would not have been prolonged, nor would it
have cost the company so much money. Essentially, transparency can help an organization to maintain its
integrity and uphold its corporate image.
Case Study - The VW diesel scandal
In September 2015, the US Environmental Protection Agency (EPA) issued a notice of violation of the
Clean Air Act to Volkswagen. The EPA found that VW had deliberately programmed its diesel engines to
cheat laboratory emissions tests. The nitrogen oxides being emitted (which causes air pollution) was
about 40 times higher than what is allowed in the US. The EPA found that the German carmaker had
deployed such programming in around 11 million vehicles in its cars made between 2009 and 2015, with
about 500,000 of these in the USA.

Volkswagen was deceptive with the truth, which resulted in its share price plummeting and its CEO
resigning over the scandal. Several senior staff were also suspended over the incident. VW announced it
would spend $18.32bn to rectify the emissions issue; a very costly price to pay for a crisis that could
have been handled much better. In April 2017, a US federal judge ordered VW to pay a $2.8bn criminal
fine for “rigging diesel-powered vehicles to cheat on government emissions tests.”
# Communication

"The single biggest problem in communication is the illusion that it has taken place" -

George Bernard Shaw (1856 - 1950), Irish playwright

Effective communication is vital during a time of crisis. Internal communication with employees will help them to know
and understand the issue, and the course of action for business continuity and the role that workers play in this. External
communication is equally important as customers, suppliers and the general public are more likely to be understanding,
sympathetic and supportive if they know what is going on. Insurance companies will also need to be clearly
communicated with if they are to compensate the insured business for damages incurred.

Clear and open communication can therefore help a business to earn support and goodwill from internal and external
stakeholders at a time when it is needed the most. A business that chooses not to communicate with its stakeholders risks
a public relations disaster (see above case study about VW’s car emissions scandal). In the worst case scenario, a lack of
open communication, in an attempt to hide the scale of a crisis, risks damaging the reputation of the business beyond
repair. Effective and honest communication can win the support of the mass media and general public.

It is not always necessary to communicate with the general public about a crisis. The business needs to consider which
stakeholders are the most important ones that need to know, although all responses and reaction to the crisis must be
done so in a socially responsible manner.
# Speed

The purpose of crisis management is to return to the business to its normal operations as
soon as possible. Hence, a speedy response is needed during a crisis in order to contain the
situation and to keep people safe. Decisive actions are easier to take if the business has an
effective contingency plan that can be implemented. Prompt action includes communications
with all stakeholders (see above), perhaps through a staff meeting or press conference.

Business continuity becomes far less of an issue if the organization has an effective
contingency plan to act in a swift way. Speed can also prevent a heavily biased or false
version of the crisis being reported on social media or through other means, which could
potentially worsen the problems.

A slow response can easily prolong or even worsen the crisis. However, a rushed decision
will not always be the best one, which is why contingency plans are important.
Case Study - BP oil disaster
BP was far too complacent with its safety checks which lead
to an oil rig exploding, killing 11 workers and causing an oil
spillage in the Gulf of Mexico in 2010. The slow response
that followed resulted in the company losing 4.9 million
barrels of oil and being fined a record $14bn by the
authorities. The overall cost of the oil spill to BP was around
$40bn. The disaster was so colossal that the Hollywood
made a movie about it. Watch the movie trailer for
Deepwater Horizon here.
If you have time, this excellent hour-long documentary from Real Stories, first screened in
2017, covers the BP oil crisis in detail.
# Control

Some crises can be preventable, such as improved health and safety practices in the workplace to
prevent major accidents and fires. Improved security measures can prevent loss of stock and other
valuable assets. Many businesses use a crisis management team to handle a crisis situation and ensure
there is effective control. Taking control of a crisis situation is essential to prevent the matter
worsening or damaging news being spread beyond control via social media and other channels of
communication.

A crisis will typically require clear leadership, so senior executives will adopt an autocratic leadership
to take effective control of the situation. Autocratic leaders are decisive decision makers, which can
also help to reassure and motivate employees. Taking control prevents further damage being done, so
helps to keep the situation under control as far as possible.

In summary, a transparent, speedy response backed by honest communications allows a business to

take better control of a crisis situation. The combination of these four factors enables a business to
stand a greater chance of returning to normality.
ATL Activity - Dealing with business crises

Read this excellent article from Business Insider about how nine different
companies dealt with what were potentially very damaging public relations fiascos.
● Create a summary of the main strategies used by these companies as part of
their crisis management strategy.
● Connect these case studies with strategy as a CUEGIS concept to help
consolidate your understanding and learning for Paper 2 Section C.
ATL Activity - Miss World Mishap - Watch this short video clip on YouTube to see what happened:

In December 2015, the producers of Miss Universe 2015 faced a publicity disaster when the presenter announced
the wrong winner of the competition.
Task
Recommended time: 45 minutes

Consider what you would do as the producer of this event that was broadcast live on television to
billions of people around the world.

Choose one from these various formats that you can use for this task, such as:
● Presenting your response at a press conference (role play)
● Writing a press release for The Wall Street Journal or USA Today
● Using a 1-2 slide PowerPoint presentation to explain your response

Extension task

Recommended time: 25 minutes

Some critics have said the mishap was the fault of the producers as the design of the announcement
card was so poor. Watch the video clip again from the fifth minute. Design a new announcement card
that the producers could have used to avoid the mishap.
The advantages of contingency planning (AO2)
The advantages of contingency planning for a given business or situation can be explained
under four main categories: Cost, Time, Risks and Safety.

# Cost
● Contingency planning is far less expensive than dealing with a major crisis without a
business continuity plan, especially if the case results in lawsuits. In other words, crisis
management without contingency planning can be extremely costly.
● Contingency plans can include plans for contingency funds (finance used for
emergency purposes) in order to help deal with the costs of a crisis should it occur.
● Effective contingency planning minimises the chances of the organization making
expensive mistakes during a period of immense pressure. Hence, it can help to
minimise financial losses incurred during a crisis situation.
# Time
● A detailed contingency plan should help with making prompt and well-judged decisions at
times of crisis. This can be invaluable and help the business to return to normality as quickly
as possible.
● Timely and well considered action plans help to reassure all stakeholders that in the event of a
crisis, things will be dealt with effectively and the business will be in control of the situation.
# Risks
● Effective contingency planning enables organizations to be in a better position to deal with a
crisis should it occur, thereby reducing the risks arising from a crisis.
● Well-thought out contingency plans can help an organization to minimise the risks of a crisis
occurring, especially quantifiable risks such as accidents or a fire in the workplace. In many
case, this can limit financial losses for the organization and even prevent loss of life caused by
workplace accidents.
# Safety
● Contingency planning helps to protect the safety of employees and customers should
a crisis occur. The safety of key stakeholder must be the priority for all businesses,
which is why most organization have fire drills (fire evacuation processes).
● Without a well thought out contingency plan, it is likely that in a crisis situation,
organizations will be under immense pressure to make decisions in a hurry. This can
seriously hinder the safety of workers and customers, especially if the wrong decision
is made.
● An effective contingency plan means that if a crisis occurs, the chances of the threat
or damage is limited. This is because the crisis situation has been thought about, with
clear plans to ensure the safety of both people and property.
Case Study - Safety first: Severe weather affecting IB examinations

It is common for IB World Schools to have contingency plans in the event that severe
weather conditions mean that IB examinations have to be postponed. For example, in
some countries, severe monsoons, typhoons and flooding in May mean that students are
unable to travel to school to take their external exams. Therefore, schools need to include
a detailed communications strategy that outlines how students, parents and staff will be
contacted in the event of such an incident.

Take a look at this example here from the English Schools Foundation in Hong Kong.

Snowstorms can cause

school closures, even
during exams
Exam Practice

During the coronavirus pandemic, London went into lockdown three times, with all
schools and non-essential businesses closing their doors to customers. Businesses such as
bars, restaurants, gyms, beauty salons, and retail outlets had hoped to benefit from the pre-
Christmas peak shopping season in the UK but the government announced lockdown rules
just before Christmas and did not reopen the country's capital city until the spring of 2021.
These non-essential businesses needed to have contingency plans to deal with staffing
issues, the loss of revenues, and excess stock levels.

a. Define the term contingency planning. [2 marks]

b. Explain two advantages of contingency planning for businesses during the lockdown.
[4 marks]
CUEGIS Essay

Examine how organizational culture and ethics affect the contingency planning and crisis
management for an organization you have studied.

[20 marks]