Nobody plans their mistakes, they just happen. And they often happen at the worst possible time.
Most of us want to fix things as soon as possible, but when your business messes up it's not always easy to notice or resolve. Little mistakes can quickly snowball into a costly endeavor that your team didn't see coming. Whether it was your fault or not, small issues can quickly get out of hand until they've escalated to a full-on crisis.
While no one wants to anticipate failure, it's important that your business is ready to handle these crises should they ever occur. To effectively deal with business crises your team will need to know what a crisis is, the different types, and how to resolve them.
What Is a Business Crisis?
A business crisis occurs when an unexpected problem puts the stability of a company or organization at risk. These dilemmas can either originate internally or they can be brought on by external influences. The problem affecting the business escalates to the point where it's out of the company's control and they can't resolve it. If left unaddressed, this issue may permanently damage the business or cause it to fail.
The easiest way to identify a business crisis is to assess the problem for three key elements. First, the problem must pose an imminent threat to the organization. Next, the situation must involve an element of surprise or shock. Finally, due to the severity of the problem as well as its unexpected nature, the situation will place pressure on the business to make timely and effective decisions. Knowing the elements that make up a business crisis can be instrumental in identifying these problems before it's too late.
However, sometimes crises are unavoidable, making it imperative that your business has a response ready to handle conflicts. Adopting a crisis management team is a great way for a company to proactively prepare for crises. These teams are in charge of anticipating potential problems and making key decisions to resolve strenuous situations. Successful crisis management teams understand the different types of business crisis and are thoroughly prepared for all situations.
Types of Crisis
Business crisis can manifest in many forms, so your team will need to be prepared to handle a variety of unique situations. Your team should ready a range of responses that are each tailored to address a different type of crisis. To help your team get started, we went ahead and compiled a list of the different types of crisis that any business could potentially face.
A financial crisis occurs when a business loses value in its assets and the company can't afford to pay off its debt. Typically, this is caused by a significant drop in demand for the product or service. In these cases, the company must move funds around to cover immediate short-term costs. Then, they'll need to reanalyze their revenue sources to look for new ways to generate long-term income as well as increase their margins.
Example of a Financial Crisis
Imagine a company that has 10 clients. Of those 10, 1 of them brings in 40% of the revenue and adds enough work that new employees were hired to keep up with capacity.
Six months later, the client terminates their contract. The company is now faced with layoffs or furloughs to stay afloat. Worse, with job security at risk, the organization worries about losing their top performers. They have to come up with revenue fast to cover their losses and prevent organizational destabilization.
Personnel crises occur when an employee or individual who's associated with the company is involved in unethical or illegal misconduct. Whether it's within the workplace or an employee's personal life, these situations can result in a serious backlash against the company. Since the organization employed or supported this individual, their lack of judgment is reflected onto the company's reputation.
In these cases, you'll need to identify the scope of the situation, determine appropriate disciplinary action, and if necessary, provide a written or verbal statement. It's important to first fully evaluate the situation and determine how severely the individual violated your company's values. This will help you determine the right responsive action to take against the convicted individual. Finally, if this situation has drawn media attention, you'll want to be transparent to these outlets and inform them about the actions you're taking.
Example of a Personnel Crisis
One of the most compelling examples of a personnel crisis was the Papa John's scandal in 2017. Sales plummeted after word got out that the founder and namesake of the company used a slur during a conference call and made other racially insensitive remarks. He later stepped down as CEO and left the board.
Organizational crises are situations where the company has significantly wronged its consumers. Rather than creating mutually beneficial relationships, these businesses used their customers as a means of benefiting the company. This type of crisis includes misconduct like withholding information, exploiting customers, and misusing managerial powers.
Changing company culture is the best way to address organizational crises because these problems are typically caused by employees who neglect customer needs. Embracing an organizational culture that's dedicated to customer success can reduce the chances of encountering an internal crisis. Additionally, backing this type of environment should result in the hiring of employees who are closely aligned with your company's values.
Example of an Organizational Crisis
The Cambridge Analytica data scandal of 2018 is an example of an organizational crisis. Millions of users' data was leaked, necessitating reforms in Facebook policy as well as Mark Zuckerberg testifying to congress.
In today's tech-driven age, businesses heavily rely on technology to perform their day-to-day functions. So when that technology crashes, they have a lot more to worry about than a few missing emails. Ecommerce sites and software companies can lose millions of potential leads if their servers suddenly break. That's not only a huge loss of potential revenue, but it's also a major hit to the product or service's reputation.
The first step to managing these crises is to work with your IT or tech provider to resolve the issue immediately. Your primary concern should be to prevent the issue from affecting any more customers. Once your software is back online, the next step is to work with your internal resources to determine what happened to your system and set up safeguards to prevent it from occurring again. Boost up your customer service and customer support teams to make sure they're ready to handle a sudden spike in calls from angry or confused customers.
If an earthquake destroys your office, you might call that a crisis. While it may be rare, natural disasters like hurricanes, earthquakes, and tornados can make a significant impact on your business. If your company is located in an area that's exposed to extreme weather, you'll need to prepare an emergency response in the unfortunate event that you're affected.
The best way to handle natural crises is to be proactive. Build your office in a structure that's resilient to weather in your area and prepare an evacuation plan in the event of an emergency. It will also help to prepare a contingency plan for business operations in case your offices become unavailable.
Example of a Natural Crisis
COVID-19 is a global pandemic that's impacted not only businesses but organizations and families alike. While it took the world by surprise, many businesses built remote work and/or health protocols into their operating model to keep employees and customers as safe as possible.
Now that we've identified a few situations that could affect your business, the next step is to understand the different management types that are used to address crises.
When a crisis hits your business, it's important to have a plan of action ready that matches the situation at hand. Responsive crisis management executes that plan and handles any unexpected roadblocks that may pop up. Responsive crisis management is used for scenarios like financial and personnel crises where it's imperative that you provide a timely response.
Example of Responsive Crisis Management: Building a plan that includes communicating with stakeholders, informing employees, and creating adaptive solutions once the crisis has happened.
Proactive Crisis Management
Proactive crisis management anticipates a potential crisis and works to prevent it, or prepare for it. While not all crises can be prevented or planned for, actively monitoring for threats to your business can help your company reduce the impact of a potential crisis.
Example of Proactive Crisis Management: Building an earthquake-resistant office and sharing an evacuation plan with employees is one method of proactive crisis management for natural crises.
Recovery Crisis Management
Sometimes we don't even see the crisis coming, and it's too late to prevent the damage it caused. Technological and personnel crises can often blindside a business, causing long-term negative effects. In these cases, your company may not be able to lessen the impact, but you can begin to salvage what's left of the situation.
Example of Recovery Crisis Management: Issuing a public apology and conducting research into what caused the unexpected crisis.
Now that you've been introduced to the types of common crises that businesses face and the strategies that are associated with specific circumstances, you can start putting your proactive crisis management in place. In addition, it always helps to think through future scenarios and examine how your team would respond and communicate to your customers in a time of crisis.
Editor's note: This post was originally published in February 2019 and has been updated for comprehensiveness.
Originally published Jul 29, 2020 8:00:00 AM, updated August 03 2020