All business organizations in the world, irrespective of their size and industry, face the risk of experiencing crisis.
What is crisis in business?
A business crisis is basically a serious problem or a situation of instability that disrupts a company’s normal operations and threatens its stability.
These can be sudden events or situations that build up over time. Crises are usually unexpected (e.g. computer failure), often unpredictable (e.g. natural disasters) and unique to a business (e.g. hostile takeover from a rival company).
All businesses, irrespective of their size face the risk of experiencing a crisis.
Features of business crisis
There are three elements are common to most definitions of crisis:
- A threat to the organization
- The element of surprise
- A short decision time.
There are two main ways to categorize business crises:
- Internal. Caused by actions or failures within the company, like a product safety issue or a data breach.
- External. Stem from outside forces, such as a natural disaster or a sudden shift in the market.
Effects of crisis on a business organization
Unplanned crisis events can have a devastating effect on business organizations of any size:
- Small corporate crisis: These might include crises such as fire, floods, damage inventory, illness of key staff, IT system failure, accidents on the business’s premises making it difficult or impossible to carry out normal everyday business activities.
- Big corporate crisis: These might include losing main customers or being taken over by a rival firm threatening the survival of a business and even being forced to cease trading in extreme cases.
Risks that can cause business crisis
There are two types of risks that can threaten a business organization:
- Quantifiable risks. They are definite and financially measurable threats to a business, such as fire damage to an organization (insurable risks).
- Unquantifiable risks. They are threats to business that are impossible or prohibitively expensive to examine and measure (uninsurable risks). Unplanned events can have a devastating effect especially on small businesses.
Examples of crisis in business
Here are some common examples of real business crises including:
- Environmental crisis. Extreme weather conditions. Natural disasters such as floods, storms volcano eruptions, tsunami or earthquakes. Outbreaks of infectious diseases. Delayed flights due to computer failure at airports caused by the lightning strike.
- Financial crisis. When a company cannot pay its bills or debts, often caused by a drop in sales. Downturn in the economy. A lack of working capital to pay workers and suppliers.
- Operational crisis. A disruption to core business functions, like a factory fire or a supply chain breakdown. Temporary loss of electricity due to power cut. Theft and vandalism. Computer hacking or data loss. Accidents such as fire damage to stock and property. Computer failure. Soaring levels of staff turnover.Strike action being taken by the workforce. Loss or long-term sickness of key personnel.
- Reputational crisis. Damage to the company’s image, caused by things like a product recall or a negative social media campaign. Negative and damaging media publicity. Food poisoning among customers or employees.
How to deal with crisis in business?
In the event of an actual crisis, it is very likely that it will significantly increase costs to the business in terms of both time required and money involved.
Dealing with crisis situations in a business organization can be done in the following ways:
- By using finance: Accelerate accounts receivable (payments by debtor) by offering a discount, if necessary to collect cash. Slow down payments to creditors where possible (accounts payable). Increase short-term sales by offering sales promotions. Reduce non-core critical expenses. Outsource non-core critical business activities. Re-schedule banks loans and other short-term liabilities.
- By using communication: Form a crisis team with designated one person only to speak about the crisis to the outside world. Act swiftly and decisively to prevent or counter the spread of negative information. Make use of the traditional media and social media to provide a counter argument when necessary. Do not tell untruths because trying to manipulate or distort the information will backfire sooner than later.
Effective crisis management is crucial for businesses to weather these storms. This involves planning for potential problems beforehand, responding quickly and decisively when a crisis hits, and working to minimize the damage and recover. Hence, business managers must devise appropriate crisis management plans.
