A Complementary Approach to Crisis Management
Uppdaterad: 7 nov 2020
A crisis can be defined as a frightening moment of rapid and enforced change, where the importance of great leadership is amplified. A poorly managed crisis can destroy a business, while a properly managed one can strengthen and even improve its long-term outlooks.
What is the nature of a crisis? How is a crisis affecting a business or an industry? What are the proper solutions for managing a crisis?
Crisis situations are characterized by a lot of uncertainty and these questions are all significant in clarifying the circumstances. The uncertainty in a crisis inflicts huge amounts of stress on managers and it might lead to poor decision making, guided by strong feelings of fear or opportunism. However, the feeling of confusion can be minimized with the right tools and the proper knowledge. This complementary approach to crisis management aims to clarify the chaos experienced in a crisis situation, by shedding light on the common patterns that can be observed throughout every crisis. The ability to identify familiarities will make a new situation seem much less frightening.
There are many forms of crises; some are temporary and inflict only transient adaptions, while others can mark the beginning of a new paradigm and change the operative landscape for good. They can arise from the inside of a business or they can be inflicted upon it by a sudden outside force. In either case, the crisis can be viewed as an opportunity to improve or to get ahead of competitors.
Different crises occur naturally in society and make up an important part of evolution. They are inevitable and they create dynamic environments where changes to the status quo become possible. A crisis environment requires fast adaption to the change by the actors in it. The alternative to this is extinction. Crises are times of disruption and redistribution of power where winners and losers are created. Crises are those which cause creative destruction.
There are no situations where great management plays as important a role as in moments of crisis. The future of a business in a crisis is highly dependent upon the immediate response of its management.
Therefore, it is extremely important that the management team is able to identify what kind of crisis they find themselves in. They need to be able to categorize the crisis correctly to be able to respond with the proper actions. A false comprehension of reality seldom leads to the right actions. A doctor trying to diagnose a patient’s symptoms without being able to categorize them as a specific disease, would most certainly prescribe the wrong medicine.
A Tool for Defining a Crisis
The matrix below is a tool that the management can use to prevent a misdiagnosis by understanding a crisis better. The matrix provides a common ground for discussion by categorizing a crisis on the bases of its origins and consequences. Once a correct definition of a crisis has been made, the management can start to consider solutions.
A crisis can either cause a temporary disruption or it can mark the beginning of a new paradigm. If it marks the beginning of a new paradigm, the business or the industry need to make permanent adaptions. If the crisis only causes a temporary disruption the business needs to act more defensively and plan for a successful recovery.
When a crisis arises from within the business itself, for example as a consequence of bad corporate culture or inefficient processes, the management team needs to assess how they can renew themselves and their firm. A crisis can also surprise a perfectly managed business from the outside. Outside causes to a crisis could be natural disasters, technological innovations or social unrest.
Using this matrix, we can identify four major types of crisis. In all cases however, the crisis will demand change from the business. But the proper solutions will vary depending on the type of the crisis.
A Three Phase Process of Crisis Management
When facing a crisis situation, the first thing every management team needs to do is to make clear for themselves what kind of crisis they find themselves in. They need to categorize the crisis. In this first step of the process the matrix could be a convenient tool.
The second thing a management team needs to do is to find out how the crisis is affecting the business. Is it a threat or an opportunity? Or is it both? The management needs to evaluate the crisis.
The third and final thing a management team needs to do is to go through the different solutions. They need to decide on what measures should be taken.
If the management team has misinterpreted the crisis already in the categorization phase, their evaluations and proposed actions will most certainly also be wrong. The matrix is convenient in the first step of the crisis management process where a categorization should be made. By categorizing a crisis correctly, the management will improve their odds of making the right decisions further down in the process.
However, it can be very difficult to define a crisis once it is still ongoing. It is a lot easier to define it afterwards, with the answers on hand. Great intuition or experienced leadership will make all the difference here. A great leader will be able to make the right decisions and define the situation correctly even under uncertainty. Nevertheless, even great leaders are empowered by great tools.
Actions taken on a false perception of reality usually turn out to be dire. An example where a categorization error leads to an unwanted end result can be found in the movie rental business:
A crisis of customer loss that emerged from the new streaming technology was categorized as being temporary, when it in fact turned out to be permanent. The movie rental chains underestimated the new streaming services and could therefore not react in time. Instead, many believed that the customers would return once they realized how much more fun it would be to go out and rent a physical movie. With this belief many started to sell candy and popcorn in their stores to improve the old in-store movie rental experience instead of renewing themselves. If they had understood that the disruption caused by the new technology was permanent, they could have acted in time to set up their own streaming services. This was a clear categorization mistake that lead to the wrong solutions.
A different example where an error in the evaluation phase lead to severe consequences can be taken from the Finnish banking industry. Even though the first step in the process was conducted successfully and the crisis was categorized correctly, failure by the management to further evaluate the crisis had as severe consequences as the categorization error in the first example.
In the beginning of the 20th century many banks in Finland had large loans in Swedish crowns on their balance sheets. When the First World War broke out it was perceived to become a short war that would be over by Christmas. However, this was not ultimately the case and the prolonged war resulted in a collapse in the value of the Finnish mark compared to the war neutral Swedish crown. This led to the greatest banking crisis in Finnish history where many large banks diminished, and Finland’s GDP declined by 35%. In this case, a crisis was correctly defined as temporary – the First World War indeed ended, but the temporary time horizon was evaluated as much shorter than it actually turned out to be. Despite the temporary impact of the crisis, the consequences became permanent in lack of a proper defensive strategy. If the evaluation of the temporary time horizon had been more successful, the banks could have set up a more persistent defense and avoided a permanent consequence of going out of business.
These were just a few examples of why it is extremely important to have a good understanding of what kind of crisis is being dealt with.
To sum up the article briefly, the crisis management process can be divided into three steps. Firstly, the crisis needs to be defined and then its impact needs to be evaluated. Lastly, when the categorization and evaluation is in place, the crisis has to be dealt with. The introduced matrix is designed to support a management group in the first step of this process – to categorize and define.
Great tools and clear processes will support the management in their decision making. Enhanced clarity will minimize panic and improve the odds of the management placing their firm on the winning side of any crisis.