5.7 Crisis management and contingency planning (HL only)

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Crisis management is the process of managing the business as a reaction to an event that has taken place. It is a strategy that that places the business in a better position to recover following the crisis. Crisis management is therefore reactive to an event.
Contingency planning is the process of identifying potential risks to the business and thereby developing a plan that allows the business to fall back to the plan in the event of a crisis. This is therefore proactive planning.
The difference between crisis management and contingency planning
Contingency planning and crisis management are two complimentary elements used in business to handle a crisis. Although one is reactive (crisis Management) and the other is proactive (contingency planning) if companies do not operate both these two strategies at the same time, the consequences may involve failure to fully recover from the event.
Because crisis management is designed to prevent or lessen the damage of a crisis, it has a number of phases that included (1) pre-crisis - prevention, (2) crisis- response, and (3) post-crisis – preparation and planning for the next crisis. The post-crisis phases of crisis management is essentially contingency planning which now identifies, plans and rehearses the response to potential threats that may reoccur.

The following factors that affect effective crisis management:
• Transparency
Following the occurrence of an event, full disclosure involves being transparent and being truthful to all stakeholders. If companies fail to be transparent, the aftermath of when the truth emerges can harm the business and have more detrimental consequences on the company. In addition, not being transparent may further deepen the crisis. (Examples)
• Communication
This is most likely the single most important aspect in Crisis Management. The way that the business is able to communicate during the crisis will determine if the event itself of the consequences of the ongoing event will spiral and escalate out of control and be a minor setback. By developing a crisis communication plan, understanding how media works, taking advantage the golden hour (the hour immediately following the crisis event) the business will prevent the wrong information from circulating.

• Speed


The reference to the “golden hour” above refers to the speed of response. A swift response within the shortest period of time will ensure that the damage is minimized and damage control measures are in place
• Control
Control here implies ensuring that at all times during the crisis, measures are taken to move from the crisis stage to the post-crisis stage with a well planned effective strategy. The lack of a strategy in effect implies no control.
The following advantages and disadvantages of contingency planning for a given
organization or situation:

• Cost
Although the planning costs for planning a crisis can be frustrating, expensive and overwhelming, the cost of not having a plan in place can be catastrophic. Despite the costs, contingency planning helps firms be better prepared and eliminates the indecision and uncertainty that usual follows an event.
• Time
Depending on the number of contingency related events that a firm may wish to prepare for, the opportunity cost of time spent that is needed to identify the events, plan the events, and rehearse the events can require months or years. A business that spends too much time and excessive resources on planning the contingency may find itself unable to execute on its primary. On the other hand, the more time spend on contingency planning, the more prepared a business is and therefore able to recover from the crisis. A balance between time spent on contingency planning and dedication to the core business activity must be well planned.
• Risks
Contingency planning begins with identifying the potential risks and involves minimizing the risk itself and its outcome. Similar to any planning, the time and effort spent it risk aversion and become excessive and impede the core business activity. However, if risks are identified and risk preparedness is at its optimum, the outcome of the risky event will be easily contained.
• Safety
The most valuable resource of any business is its labor. Safety to all is of paramount importance for reasons that clearly go beyond the concern for the business. Involving employees in the safety standards, planning and rehearsal process ensures that all are secured. Since the preparation and execution of a contingency plan must involve workers, their safety in the process must also be taken into account. The preparation of focused and practical contingency plans requires the help of all those involved in an organization and can not function without this involvement. Managers and employees therefore must collectively take part in identifying the proper processes and their safety related qualities in order to ensure the long-term prospects of the business.