Risk management (specific plans dealing with high-probability events) by itself cannot account for all levels of uncertainty. Management also needs to rely on a generalized approach, a crisis-management plan to deal with low-probability but high-consequence events. This author, who has managed crises in large, multinational industrial corporations, has a practical, ten-step plan for managing a crisis.
On January 15, 2009, US Airways Flight 1549 took off from New York’s LaGuardia airport for Charlotte, North Carolina. Shortly after takeoff, the plane went through a flock of geese at 3,000 feet and both engines were knocked out. Captain Chesley “Sully” Sullenberger later said that he felt an “adrenaline rush” right to his core. As his heart rate increased, he forced himself to ignore the physical symptoms and face the situation.1
Most of us know what happened next. Captain Sullenberger and the crew were able to guide the crippled Airbus A320 to an emergency landing on the Hudson River. Despite the fact that “no modern airliner has ever ditched in water without fatalities”2, all 155 passengers survived. Sullenberger certainly hadn’t landed on water before, yet his training allowed him to make rational decisions and take appropriate actions in an extreme situation.
Though many of us have been or eventually will be involved in a crisis, surprisingly few organizations will be ready with a plan to manage the crisis. In surveying over 200 managers and executives from firms in diverse industries, I found that less than one-third could say that their organization had a crisis management plan. Moreover, very few of those managers and executives had been formally trained or rehearsed in how they would handle a crisis situation.
While organizations allot substantial resources to the development and execution of strategies and operating plans, few of them account for the management of such high uncertainty in an effective, proactive manner. Whether through chance or poor execution, many of these plans de-rail, and the crises that arise lead to lost time, failed innovations and projects, wasted investment, contentious customer issues, and potentially, legal quagmires.
The intent of this article is to highlight the benefits of planning for a crisis. We’ll start with the premise that “stuff’ will happen in our companies, whether we have a well-thought-out business plan or fly by the seat of our pants. Acknowledged, well-led organizations tend to see fewer crises, but situations will arise that demand an immediate, clear response and a series of activities to prevent the issue from getting out of hand. Recent examples will highlight some companies that have reacted well in a crisis, and others, where delayed acknowledgement and resolution of the issues led to substantial negative press, lost consumer faith and potential lawsuits. A ten-step plan will provide readers with effective strategies and tactics to manage and survive a crisis.
The nature of a crisis
On a two-by-two matrix presented3 (See Figure 1), crisis situations are what we would categorize as low-probability / high-consequence events. Typical risk management planning, even if done effectively, would not focus on these eventualities. Risk mitigation tactics become too costly and time consuming if we try to manage for all eventualities. In the end, most crises aren’t predicted, and organizations are left with the fact that events will occur that are outside their normal operating scope and that the consequences will be severe.
While assigning blame for the events will often be clear enough, our intent here is to focus on resolving the crisis. More important than identifying the cause of the crisis is that, once detected, it is dealt with effectively and efficiently. Not long ago, I worked for a company that supplied General Motors. As my company was emerging from a particular crisis, a senior supplier development executive from GM told me, “All companies have problems. We know that. What set you apart in this situation is how you dealt with the crisis.”
At the time, I could honestly say that our reaction to that crisis was appropriate, because we had been through too many crises in the past. As our organization grew and matured, a plan began to take shape that streamlined our reactions to various situations in our business – some random, some caused by suppliers’ actions and others by internal, organizational factors. In this case, we reacted quickly, notified GM immediately of a potential supply issue, and worked together to prevent a problem in a particular process from becoming a real supply issue that would impact the production schedule in their assembly facility 90 minutes from our plant. Yes, we funded significant expedited freight to GM, getting parts to their line truly just-in-time in small batches as they came out of our production process, so their line suffered no disruptions. GM helped by providing us with hour-by-hour build schedules and some leverage with the logistics providers, and we worked through it.
Since then, my research focused on various and diverse organizations (See Research Methodology.) The research spelled out a clear theme – companies that plan for a crisis have a much better chance of emerging from that crisis successfully, especially where success is measured by preserving employee morale, timeliness in problem resolution, and generating customer enthusiasm. Solid planning protects the integrity business plans, supply chain management, projects, and service operations. Great companies display clear, decisive leadership in challenging situations, leading to reduced stress internally and in the market place. Conversely, a company without a crisis plan will take longer to react, have varying results once they do react, lose employees and customers, and generally spend more funds solving the problem. In some of these cases, companies do not emerge from the crisis intact.
Two examples, in this case based solely on information published in the business press, are The Gap and Mattel. The Gap was accused of employing child labour in the manufacture of certain clothing items. Within 24 hours, Gap President Marka Hansen had conducted an interview on CNN, commenting that the incidents involving sweat shops and child labour were, “deeply disturbing,” effectively presenting the company’s position4. The Gap’s clothing supplier that had allegedly recruited the local labour in India was immediately suspended, and key executives from the clothing chain were on their way to India to investigate the situation.
As the largest clothing retailer in the United States, The Gap had a lot to lose. Their reaction to the reports, however, was swift and unequivocal. They reminded the public of their Code of Conduct that spelled out the appropriate use of labour and environmental practices, and that they had fined or fired 23 suppliers in the past year for violating that Code. Specific to the products in question, seasonal clothing for the upcoming holidays, The Gap announced that none of that clothing would be brought to the U.S. and sold, despite the costs already incurred and resulting loss in revenues. As well, 90 supplier quality reps from The Gap would be increasing the frequency of their unannounced visits to subcontractors5.
Consumers and industry watchdogs alike in this situation were left with the impression that the crisis occurred despite the best efforts of The Gap, and that the retailer reacted appropriately to the circumstances. Indeed, The Gap’s stock price, as an indicator of public opinion, did not change materially after the event6. Internally, employees remained confident in leadership’s ability to execute in times of need.
Contrast this situation with that of several toy and pet food companies supplied by manufacturers in Asia over the past year. In the case of contaminated pet food, the initial problems were reported by consumers on February 20th, 2007, but responses from the manufacturer, including a widespread recall, did not happen until March 16th, a lag of almost a month. The company, it was stated, was more concerned about a court of law than the court of public opinion7. That court of law recently awarded $24 million to owners of dogs and cats that were sickened after eating the pet food.8
In August through October 2007, Mattel Inc. announced a series of recalls for toys produced in China that were suspected of having excess levels of lead in the paint. Mattel attempted to keep initial recalls quiet until all the product had been removed from stores9. It wasn’t until September 7, 2007 that the company took out full-page advertisements in national newspapers proclaiming how seriously they were taking the incidents10. There was a lag of a month before the company addressed the public. Shares of Mattel Inc. fell about 20 percent in the three months following the initial events.11
The point here isn’t the crisis itself. Indeed, some advocate that these types of problems are “Made in America”12, as competition and the drive to reduce costs force companies to off-shore products to low-cost countries in search of supply-chain efficiency.1 While the use of unvetted suppliers and unclear supply expectations are significant issues, our focus here is on how the ensuing crisis was handled. With The Gap, the reaction was prompt and clear, while the toy and pet food companies procrastinated, looking for opportunities to salvage a win. In the case of a crisis, however, it’s about managing the outcome, and less about winning14.
How a company manages through a crisis cannot be left to chance or good “management reflexes.” Indeed, entire consulting practices and advisory groups have been formed in the interest of supporting companies’ needs in crisis management. In most cases, however, a plan, sound communication,15 and employee training will go a long way towards effectively managing the majority of crises.
Consider firefighters, who go through hundreds of hours of training every year. Firefighters generally acknowledge that training actually mimics very few real life occurrences.16 However, the repeated training does teach the firefighters how to think clearly in a crisis situation by keeping stress levels low. The firefighters’ experience and training levels help them think rationally, make decisions in an emergency, and react well to whatever crisis they are in. In effect, they practice feeling competent, and preserve the ability to make decisions. The military bases its training exercises on similar principles. The flight simulator exercises employed by US Airways, other airlines and the military can’t predict every situation that could develop on the aircraft, but running pilots through the process in a virtual environment helps prepare them for real-life emergencies, such as the one that occurred on Flight 1549.
Effective risk-management planning should account for most high-probability events and even some low-probability situations when the investment is justified. Crisis management plans are broad-brush strategies and tactics to help the firm manage those events without specific risk management plans or tactics. Some organizations, however, take things to the next level, and spend significant time and resources developing plans to deal with worst-case scenarios.
The Kroger Co., the U.S.-based grocery chain, developed a Discreet Event Simulation program that presents its supply chain as an entity, and allows it to evaluate what happens if one of its 31 Distribution Centers(DCs) goes “off-line” due to fire, hurricane, tornado, a labor strike, or some other event.17 How well does the rest of the supply chain react to protect their 2,500 grocery stores? Though the program was costly (several hundred thousand dollars), Kroger determined that its supply chain was robust, in that it could take a hit in one of the distribution centers. With the help of the software, Kroger could re-route goods from other DCs and maintain delivery to its retail locations.
GE’s Aircraft Division spent $300 million developing and implementing its Business Continuity Plan to ensure the delivery of aircraft engines, components and other industrial goods whenever and wherever needed.18 At one point, this included maintaining two Boeing 747s “on-call” to transfer product should no other transport be available. This may sound extreme, but the products involved included engine components for F16 fighter jets stationed in the Middle East that could not afford to be grounded.
Progressive organizations will learn from the crises and build specific risk management procedures around potentially similar events to ensure it doesn’t happen again. Crisis Management, on the other hand, is a broader, generalized plan developed prior to events like this, that helps the organization react when they do happen. Without the time and resources to develop risk management plans for every eventuality, organizations need to build “planned reaction.”
Developing a company’s plan starts by defining what is core to the business’s strategy and operating plan, and consequently, what needs to be protected. In some service organizations, it is simply a matter of training employees in “What if” scenarios that mimic basic customer problems. Call centers do this all the time. Some manufacturing companies carry an extra day of finished-goods inventory to protect against production, quality or shipping issues. Whatever plans a company makes, however, the true crises are those that happen outside the best-made plans. Ultimately, a firm will be judged by its customers, peers and employees on how they react to that crisis.
Below are 10 Steps an organization can take to develop an effective crisis management plan. (See Figure 2). The core principle is to have a plan in the first place, communicate that plan, and train your employees.
Ten steps to crisis management
The best defense is a good offence. Establish guidelines for all key supervisors, managers and executives for Crisis Prevention, Early Detection and Management. Communicate the fact that you have a plan and ensure that all parties know their roles. Then, train employees to execute that plan. Conduct practice runs; simulate a truck going off the road or a supplier having a labour issue in Mexico. How do employees react in the case of a simulated illness that keeps a third of the workforce at home?
Tell me now. Communicate quickly, according to internal guidelines, when something comes up. When in doubt, always have your people contact the most senior person in the organization who may be available. Keep in mind that junior employees may be overconfident in their ability to resolve the situation themselves. In other cases, employees are less comfortable waking people up in these situations. If it’s three o’clock in the morning when you get the call, you have a four-hour jump on the situation compared to your normal arrival time at seven o’clock.
Rally the team. Gather the affected team members, key decision makers and problem solvers as soon as possible. Have a pessimist or devil’s advocate or two in the room as well to make sure people see the worst in the situation while reactions are being crafted, but keep the team size to a functional 6-8 people and blitz the problem.
Identify and verify the issue. Is the customer involved? Do we need to inform them? (Generally, the answer is “Yes”). What about the media? Toyota has a principle in its management philosophy called, essentially, “Go and See”19. Like The Gap executives, get someone you trust, or perhaps yourself, on the scene to witness exactly what is going on. Being able to say, “Yes, I’m there now, and this is what I see…” is extremely powerful and goes a long way towards soothing affected parties and facilitating a problem-solving environment, rather than a hostile one.
The truth is easier to remember. The Spin Doctors will always try to make it sound better, and that may be OK. Stick to the main thread of the truth, however, as the truth will always come out eventually. Don’t think it didn’t hurt The Gap to admit that its sub-contractor violated clear expectations, which basically meant their Supply Chain Management group had dropped the ball. That issue can be resolved internally, while untruths aren’t easily forgotten.
Appoint a champion. This is one key spokesperson for any customer, employee or press release. Who this is depends on the severity of the issue (with The Gap, it was the president). This person is responsible for any “spin” associated with #5.
Isolate and contain the problem. This step could be anywhere on the list, and is usually carried out concurrently with other steps. Go further, however, and ensure that upstream and downstream processes or products are not affected by the crisis, and ensure unequivocally that no further suspect product is shipped or a sub-par service is provided. This was not done in the case of the contaminated pet food or toys with lead paint, as third and fourth recalls occurred over several months and destroyed any remaining consumer confidence.
Fix it. Correct the problem and prove to customers that the correction is irreversible; this means trying to get the system to fail or be disrupted by a similar event again. Our friends at GM called this Irrevocable Corrective Action.
Train all team members. Ensure that everyone understands what went wrong and what was done right. Fine tune detection and prevention practices if necessary, especially quality guidelines that suppliers must follow off site. In some cases, (as with GE and Kroger), actual events can facilitate the tuning of your risk management plans.
Congratulate the team. You’ve worked through a crisis.
In reviewing this plan, you will see that the first two and last two points are “environmental” steps, activities that embody a proactive crisis management culture in the firm. Steps 3 through 8 are situation specific and are tailored by the firm to suit the specific event. Your Top 10 may differ from this list. As long as you have a process, however, the firm is well positioned.
In some firms, managers I have talked to apply a theory of “Deny, deny, deny” in the case of a crisis. They express outrage with the accusation, or worse yet, fail to acknowledge that there is really a situation at hand. Crises like that, however, tend to fester and get worse very quickly. Shortly, the press or lawyers (or both) are involved, and it becomes like wrestling with a pig – you both get dirty, but the pig likes it.
Properly managed, however, a crisis enhances morale in your company, and even customer and public enthusiasm. Also, key team members develop a bit of a swagger. Consider our final example, Stella Artois, the European beer company. In 2007, six (6) bottles of beer were suspected of being tampered with, likely after the beer had been sold by Stella. The company’s reaction was swift and clear, and full-page ads in national papers again proclaimed the ‘facts’ to consumers, in most cases before any had heard of the situation.20
It is the nature of business that a crisis will happen at some point. Projects and innovations increase the level of uncertainty in our operations, yet it just isn’t possible to account for all the uncertainty inherent in our risk management. An effective crisis management plan and preparation will distinguish an organization as a company that manages well in those situations that do happen, whether it’s a result of an internal fault or one in the supply chain, or just plain dumb luck. Forewarned is forearmed.
As the probability of an event that would derail a project increases, Risk Management becomes more important. Low probability, but high consequence events require a broader approach that may manage numerous scenarios.
Figure 2 – Top 10 Steps To Crisis Management
- The Best Defense is a Good Offence
- Tell Me Now
- Rally the Team
- Identify and Verify the Issue
- The Truth is Easier to Remember
- Appoint a Champion
- Contain and Isolate the Issue
- Fix it
- Train All Team Members
- Congratulate the Team
- B. Hewitt and N. Weisensee Egan. “Flight 1549: The Right Stuff”, People, 64
- Adapted from Y. Sheffi and J.B. Rice Jr., “A Supply Chain View of the Resilient Enterprise.” MIT Sloan Management Review, Fall 2005, Vol 47 No. 1.
- The Gap: Report of kids’ sweatshop ‘deeply disturbing’; October 29, 2007; www. CNN.com.; and company information.
- The Gap: Report of kids’ sweatshop ‘deeply disturbing’; October 29, 2007; www. CNN.com.
- In fact, The Gap (gps-n) rose roughly 10% in the two months following the event, while the Dow Jones Average fell roughly 5%. www.globeinvestor.com
- Z. Olijnyk, “A doggone shame”, Canadian Business, April 9, 2007, 66-67.
- “Pet Food Settlement wins U.S. Judge’s Approval”, Globe and Mail, October 15, 2008
- “Fisher-Price recalls toys made in China”, Calgary Herald, August 2, 2007
- “Mattel: We take our promises seriously”, National Post, September 7, 2007
- K. Wutkowski, “Toy safety crisis was made in America,’ watchdog group says, National Post, December 20, 2007
- H. Lee, “The Triple-A Supply Chain,” Harvard Business Review, October 2004
- Z. Olijnyk, “A doggone shame”, Canadian Business, April 9, 2007, 66-67.
- C. Pearson, “A Blueprint for Crisis Management”, Ivey Business Journal, Jan/Feb 2002, 69-74
- R. McAlpine, Captain, Barrie Fire Department, Barrie, Ontario; Interview with author.
- B. Bonner, “Supply Chain Planning in the 21st Century: Dealing with Risk in a Lean Environment” (presentation at the Symposium held at TechSolve, Inc, Cincinnati, November 29, 2007).
- S. W. McIver, “Supply Chain Planning in the 21st Century: Dealing with Risk in a Lean Environment” (presentation at the Symposium held at TechSolve, Inc, Cincinnati, November 29, 2007).
- J. Liker, “The Toyota Way”, McGraw Hill, 2003
- “A Word About Trust From Stella Artois”, The Globe and Mail, July 14, 2007.