Crisis management: here’s how to manage a crisis
Unreliable contractors or an international trade war: no company is protected from unexpected crises. Unforeseeable events threaten the existence of otherwise healthy businesses. Where business development falters, a strategic business plan can put a company back on track to success. More serious threats include collapsing profits and the possibility of insolvency. Start-ups are particularly prone to the effects of even smaller emergencies than well-established SMBs.
Insolvency is not inevitable. Using the right measures, company owners and founders can get their act together. Together with a savvy crisis team, the right strategies, and good communication, a company can overcome a difficult situation. Where precautionary crisis management strategies are in place, businesses can recover even quicker because they’re able to detect symptoms of a crisis rapidly and are able to act according to plan. If you know the different phases of a business emergency and which measures are proven to work, you’re able to avert damage to staff and your brand’s reputation.
- What is a company crisis?
- Types of business crises: how to detect ominous signs
- What is crisis management?
- Tips for successful crisis management
- Crisis management step by step
- Returning to business as usual
What is a company crisis?
All businesses face difficult times, from contract or delivery cancellations, to many staff off sick or broken servers. Some problems are caused by internal disparities such as a lack of innovation or bad management of finances, while others are due to external circumstances, for example, a stock market crash, natural catastrophes, or politically motivated delivery shortages.
What constitutes a crisis? An industrial or business crisis is an event that disrupts the operation of a company long-term. Problems may escalate and can only be solved through radical changes. Depending on the state and type of crisis, the situation may even threaten the existence of a business. Where a company refuses to adequately manage a crisis, bankruptcy is likely to follow in the short or long run. To avert an existential crisis, managers and employees must adhere to challenging measures. Crises are not as quickly rectified as a normal problem.
A business crisis often follows a certain course of progression. The main phases of an emergency constitute a (sometimes indiscernible) beginning, a turning point, and the end. The end may be marked by a return to business as usual or insolvency. If an employer goes bankrupt, a crisis management strategy will come in too late. However, all emergencies are marked by symptoms. What is important is identifying these symptoms early on.
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Types of business crises: how to detect ominous signs
A business crisis usually goes through several stages. Owners who are aware of these phases can detect symptoms and the causes of a difficult time and pull the brake early on. It’s important to understand that each phase requires a different crisis management strategy.
The initial phase of a business emergency is often hard to pinpoint because it usually will not be evident from turnover figures or productivity targets. Financially, a company may appear to be on stable ground. Companies that manage to notice early warning signals, however, have a much broader playground to stop an exacerbating crisis. During this time, it becomes evident that long-term business goals are no longer possible. Often, this may be due to a lack of awareness of developing market trends. Innovative ideas may be used up and unique selling points might no longer work.
In some cases, products and services may no longer meet changing consumer behaviors and a business may miss out on technological innovation. The catalysts can include:
- Lack of promising and market-driven strategic focus
- Outdated production processes, services, or employee qualifications
- Lack of acceptance and investment in new distribution channels
- Lack of reaction to external factors such as expiring patents, new legal bills, mismatched headquarters
- Customers are flocking to competitors and orders are diminishing
- Market share declines
Profit and revenue crisis
During these stages, a crisis becomes more noticeable. Financial controllers are usually among the first to realize that the numbers no longer add up, goals aren’t being met, profits drop, and costs threaten to overwhelm available budgets. The weaknesses of a business’s products and services may be laid bare during these times. Their market position may be noticeably poor, and competitors are becoming a growing threat. At the same time, you may lose regular customers.
At this stage, employees will feel the effects too. This is often accompanied by lower motivation and a worsening work climate. Typically, certain symptoms may disappear momentarily, and it may appear as if the situation is improving.
A crisis is rarely temporary. The later you intervene, the more difficult it will be to get a grip on the situation. Soon, debt will continue to grow. What’s more, to get your act together, small changes usually won’t suffice. The following signals demand proper crisis management:
- Net losses and decreasing profits, declining reserve funds, increasing costs, rising debt capital
- Loss of regular customers and fewer new contracts/sales
- Employees and production runs aren’t at capacity
- Demotivated staff, growing number of employees quitting, and worsening work climate
- Service and product quality, and vendor liabilities diminish
- Bank and business partners point out payment declines, decreasing credit worthiness
- However, liquidity is still secured
Symptoms of a business crisis are difficult to ignore internally or externally. Many companies make the mistake of addressing problems with management and staff once its already too late and the situation has progressed to an advanced level. During this phase, it becomes much harder to change the company’s direction.
Crisis management that focuses on the full realignment of a company strategy could help to save a business from insolvency. During the final phase, a company is still liquid, but its reserves are used up. People in charge will be looking for investors and creditors. As a last resort, businesses should prepare for insolvency. Signs of a looming liquidity crisis include:
- Rapid profit losses (over 25%)
- Payment obligations are no longer being met, accounts are overdrawn
- Crisis is having an external effect
- Banks refuse credit or make obtaining credit harder
- Suppliers demand advance payments
- Business partners bail out
- Introduction of work-sharing or not being able to pay wages
- Restricted scope of action across all areas
- Liquidity shortages and looming insolvency
What is crisis management?
Crisis management takes on many facets and a company’s approach will differ depending on the stage it finds itself in. Some tasks begin during times of business-as-usual. This is mostly to identify weaknesses, warning signals, and design tried-and-tested emergency procedures. The tasks of the crisis management team is to detect critical phases in time and initiate appropriate measures. Where an emergency is already in progress, crisis management defines the necessary measures to take and to coordinate.
As soon as an emergency is overcome, an evaluation takes place. Crisis managers will then analyze the actions taken to extract useful information for future scenarios. For a company to fully stabilize or rehabilitate, these analytical insights are useful to avert future issues.
In the first instance, the aim of crisis management is to prevent business disasters or to overcome and evaluate them. The strategies are well-defined, and measures are laid out to help avert or control a crisis. These are used to uphold a company’s operations and draw conclusions to avoid emergencies in the future.
Crisis managers are tasked with creating all the conditions for a business to deal with emergencies more effectively. In this way, a crisis plan is developed, and a company creates a personalized structure, for example, in the form of a taskforce. A dedicated crisis team usually consists of select employees with specialist skills within crisis management. Often, a team of managing staff and external experts is entrusted with these tasks.
Business owners and executives are well advised to keep the team to a small number of insiders selected for their specific skills. After all, it’s the duty of this emergency task force to bring order to the chaos and make some difficult decisions during tough times. Crisis management is marked by the following challenges:
- Planning and evaluation of measures to overcome crises require thorough insights into the structure of the business alongside broad market knowledge
- Despite limited resources, sustainable measures require consequent and efficient implementation
- Important decisions will need to be made under time pressures despite missing information and a general level of uncertainty
- Often, it can be assumed that decisions will interfere with existing structures and may not be welcomed by employees, customers, or business partners.
Tips for successful crisis management
Before we discuss concrete measures and illustrate possible solutions for every single phase of a crisis, we have collected some general tips below that distinguish a good crisis response from a bad one.
Crisis prevention requires time and staff resources. Nevertheless, it’s a good investment. Emergencies rarely happen entirely unexpectedly. An early warning system sounds the alarm as soon as difficult times arise. Measures to prevent a crisis help to overcome a problematic situation without heavy losses or a threat to the existence of a company. When an emergency occurs, founders and managers are well-prepared and can act immediately.
Naturally, the resources of start-ups will reach their limits more rapidly than those of established SMBs. Reserve funds designed to bridge long-term financial squeezes are rarely available to start-ups because they haven’t established themselves in the market just yet. This makes preparation more important for small businesses. At the very least, business owners can supervise emergency measures and maintain an oversight of finances. Instead of an early warning system, strengths and weaknesses of a business strategy and market position can then be tested using a SWOT analysis.
Don’t waste time
Don’t wait for a crisis to end. Even if this results in difficult decisions and setbacks, it’s never a good idea to wait. At the same time, it’s no good sounding the alarm too early and rush to action. A quick response is vital where profits are dropping. However, a CEO should first examine the reasons for an emergency and not immediately alienate employees. Taking actions cautiously is just as important to success and should not be made by a single person. A company that has prepared a crisis management plan and assigned employees experienced in dealing with emergencies will be better prepared.
Competent crisis team
The success of a crisis team also depends on the personnel involved. To remain actionable, the team should be kept small. It’s best to assign decision makers early and distribute competencies evenly across team members. Among the social competencies of a taskforce are assertiveness, flexibility, tolerance of uncertainties, working efficiently under time pressure, decisiveness, and objective judgement.
Those in charge should emphasize thought-out crisis communication. After all, any decisions made will result in staff having to adapt to new working processes and this requires tact. On the one hand, staff must be informed of changes in a transparent manner, while on the other hand, they should remain motivated and not feel discouraged.
To avoid damage to a company’s reputation, keep information confidential. Communication is an integral component of crisis management. This should be prepared as part of a crisis communication plan during times of stability and address the following points:
- Quick updates: Even before rumors have a chance to spread, employees should learn more about problems and any measures being taken to address them.
- Matter of fact: Crisis managers should steer clear of blaming single departments or the general economy. If the reasons for a critical situation aren’t certain, managers are better off reserving their comments.
- Unambiguous: Problems should be clearly stated. Avoid flowery phrases. Otherwise, you risk insecure and demotivated employees and partners.
- Distinguish fact from speculation: During difficult times, decisions must be made without any promise of success. New developments could change plans. To prepare employees for the future, it is worth providing an outlook and appealing to the staff’s flexibility. To avoid resentment and confusion, it is important to distinguish between fact and speculation.
- Keep it simple: For a better understanding and protection of business secrets, it’s a good idea to keep communications brief and simple.
Get expert advice
Start-ups and early-stage SMBs are often inexperienced in dealing with crises and lack the necessary know-how. There are lots of points in favor of internal crisis management, but there are also some against it.
An important advantage of external crisis managers is that they have a fresh point of view and a more objective image of the situation. Additionally, external parties aren’t involved in internal conflicts of interest. After all, it’s not about the survival of a single department. However, they won’t be used to the company structure and often need to be briefed before beginning their work. You can appoint crisis managers who look after your business long-term and are involved in planning crisis prevention schemes during healthy times. Make sure that the person you choose is an expert in your field and has good references.
At the same time, businesses must be aware that experts often look for experts at the same time. So, if a third-party is hired to help with crisis management, be aware that they’ll gain access to confidential information. Sometimes it’s possible to contractually forbid experts to work with competitors. One challenge for SMEs is the high fee charged by external experts. In that case, it’s worth checking the alternatives.
Businesses can consult dedicated trade organizations, communal business development organizations, or bankruptcy advisors. The US Chamber of Commerce is also a good resource. Sometimes venture capitalists may sponsor external crisis management. Other business founders, business angels, or the start-up community could also be good resources to consult for information.
In case of legal action, appointing lawyers and mediators is unavoidable.
Crisis management step by step
Crises go through multiple phases and each phase requires a different approach.
Even “healthy” companies should work out a concept that helps them to detect critical phases early on. It’s a good idea to have an established crisis management plan at the ready. Initially, this should focus on investigating risks and uncovering solutions. In terms of business liquidity, it’s important to assess various possible dangers and detriments. This makes it easier to create meaningful reserves. A functional early warning system also defines company-specific indicators.
A crisis plan usually manages the structure and sequence of a company’s crisis management. It provides guidelines in case of emergency, prevents chaos, and enables rapid action. The plan determines organizational structure and lists the most important points.
The goal is to always be able to call upon a crisis team when necessary. This ensures that no single person makes the decisions, but experts collectively agree on how to proceed. The plan appoints employees and their responsibilities and creates the legal foundation for an emergency procedure.
A taskforce should look something like this:
- A core team of 1 to 3 people with expanded decision-making power
- A team leader who has the final say
- An extended special working group to incorporate management and other departments
- Where applicable, an external advisor
Start-ups without enough manpower are doing well if they’re able to detect signs of a looming crisis. Even discussions between employees could offer insight. A transparent company culture avoids hiding problems.
Aside from personnel set-up, sustainable crisis prevention should provide recommendations for operational procedures:
- Who is the right contact person when a situation escalates?
- Who should be informed first? Who is authorized to initiate measures?
- Who evaluates and controls the success of these measures?
All these questions should be answered by the internal coordination and scheduling department. Importantly, there should be a chain for communication so that important co-workers can be brought up to speed swiftly. At least one member of staff should monitor which actions are successful.
Crisis management begins with an appraisal
It happened: your delivery chain has collapsed, trade is in the red, stormy weather or a burglary has left your office in a state. To ensure cautious action, crisis management should begin by investigating the reasons for what happened and introducing the necessary measures.
Where a crisis plan is on hand, the relevant personnel should be notified. Otherwise, it’s a good idea to quickly assemble a skilled team. Some problems can be addressed immediately before a company descends deeper into problems. For example, if an office can no longer be used, employees could work from home.
Find out more about the right equipment for focused working from home in our dedicated article on designing a home office. Topics such as data security in a home office should also be resolved. To ensure that communication between team members is maintained, a range of free collaboration tools are available.
To address more complex issues, whose reasons and impacts are not necessarily immediately evident, crisis management should take stock of the situation and evaluate it. If you have a picture of the situation, you know the phase your company is currently in and which actions may be more suitable. For example, if traditional sales are no longer generating the desired profits, an inventory of your least profitable products could be a solution. Sometimes you’ll find that your stock is not your problem, but your sales channel is.
In a second step, people responsible should examine the situation more clearly. To create a case study, you could evaluate customer and employee opinions and consult marketing personnel. If they confirm your initial assumptions, it’s likely the business is experiencing a crisis of strategy. Now, the taskforce can select and roll out corresponding actions.
One solution may be to sell products via an online shop or alternative platforms. Before you implement any changes, however, check your technological and personnel capacities. Perhaps you already have a website through which you could sell products? Or maybe some of your employees have know-how of online marketing? Only once you’ve verified these points, you can introduce digital distribution channels.
Overcoming a crisis of strategy
A crisis of your strategy requires that you correct your business model. Before additional customers are jumping ship and profits break away, a company must adapt to the market situation. Would new markets and distribution channels be more lucrative? Is your range of products outdated? Does your current production line no longer deliver a high quality?
In the first instance, company owners must evaluate the signs of a problem to determine the underlying reasons and launch an effective crisis management plan. The following points should be addressed:
- Critically assess previous areas of business
- Determine areas that may hinder development (e.g. outdated product lines)
- Assess core competencies and focus on these
- Examine and readjust working tools and personnel resources
- Define new strategic goals
- User synergy effects with other business partners and markets
- Uncover new key markets – if applicable internationally – and distribution channels
- Accelerate competition and market watch approaches
- Demonstrate innovation and competency through the launch of new products
To conclude the example above, where high street sales alone aren’t enough, an online shop could be a promising channel of distribution.
Your budget for an online shop is not enough? Digital sales do not require you to reinvent the wheel or invest large sums of money. Companies can use existing shop systems such as WooCommerce, available from IONOS.
Ways out of a profit and revenue crisis
During the advanced phases, strategic changes alone won’t be enough. Furthermore, finances will have decreased by then, making a substantial investment in new areas of business not feasible. To keep the business going, business leaders should focus on minimizing costs whilst boosting efficiency and profits. This will often require significant changes to the business and may require the following approaches:
- Adaptation of sales price, development of cheaper sources of supply, product optimization, or improved marketing
- Monitoring of expenses and avoidable expenditures
- Reduction of expenses (e.g. cheaper distributor, dissolving storage unit, separation from late-paying customers)
- Exploring hinderances for efficient working with employees (e.g. lengthy decision-making processes)
- Outsource fewer lucrative areas of business
- More offensive marketing across proven areas of business
- Evaluate price war and radical competition over quality
- Adjust products to meet demand
- Implement cost-saving production processes
Avert bankruptcy during liquidity crisis
During this phase, crisis managers should focus solely on averting insolvency to save the company. This can only be achieved if a crisis manager communicates openly with the finance department, bank, local tax office, business partners, and other parties expecting payments. Naturally, this will result in damage to a company’s reputation, may lower its credit worthiness in the long run, and risk investor trust in a company. However, at this stage, the damage is done, and it becomes about survival.
- A cash check provides an overview of current expenditures, income, and reserves
- Which repayments are the most important ones? Create a list of priorities
- Is enough equity available?
- Consider selling shares
- Collect outstanding sums from other distributors or customers
- Gain trust from bank advisors or business partners and consider deferred payments
- Contact tax office to minimize advance payments
- Grow credit volume
During this phase, it’s a good idea to consult external advisors. Some communities and chambers of commerce offer free consultation hours with insolvency advisors.
Returning to business as usual
Where a business has overcome a crisis, it will quickly return to business as usual. Many employees may still feel the effects, especially if there were layoffs or other structural changes to the company. Distributors and business partners will likely have taken notice of the situation. In case of a self-inflicted liquidity crisis, it will require some effort to regain their trust.
Things are different where an economic crisis was caused by circumstances beyond a company’s control. Either way, crisis management should form part of a company’s internal and external communication strategy. To further the internal know-how and find new talent, strategies must be reevaluated.
In some cases, restoration measures will be ongoing to ensure a company remains stable. Importantly, business owners should consider whether these measures affect the whole company or certain departments.
Evaluate where you could save by dissolving areas of the business. Good recovery planning ensures that a company continues to be competitive long-term. Reflections on lowering fixed costs and boosting efficiency will keep a crisis management team busy long after its survival of a liquidity crisis.
Mistakes can be learned from. This is an important aspect during crisis management follow-ups. It’s an investment in the future when members of team members can look back and evaluate measures and actions that were taken. Any insights gained during this stage should form part of crisis planning to prepare for the next potential threat to the business.
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