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The Dimensions of Risk - September 1998

By Michael Vincent

28 December, 2006

Crisis management, few topics have generated as much interest in the business community of late.  It is an area of risk management that sits somewhere between the incident and the process of business resumption.   It is also potentially the worst managed aspect in the process of risk management, usually because of the reluctance of an organisation in the early stages of a crisis to admit a catastrophe has occurred.  When the incident becomes public knowledge the firm can become defensive and exhibits a very bad image to the larger community. 

 

This project was undertaken by Marc Kaemper,   Marc has considerable experience in the area and he completed his studies by distance education. Invariably, crises are managed in a demanding environment of time pressure, lack of information, high stakes, emotion and stress.  The purpose of the study was to investigate how stress affects crisis management performance in a tiered crisis management system.

 

 Some very public cases, e.g. Tylenol product tampering incidents, the Exxon Valdez oil spill, the chemical leak at Union Carbide's Bhopal plant and the Dow Corning breast implants incident; clearly demonstrates the severity with which a badly managed crisis can affect organisations.

 

A study at Oxford University concluded that significant loss incidents appear to affect shareholder value in complex ways and seems to result in a re-evaluation of management performance, this may be positive or indeed negative.  The results suggest that the impact of losses on shareholder value is not dominated by the direct financial consequences of the loss; in other words the market's estimate on the organisation's future cashflow value.  Rather value is judged by a more indirect set of factors arising from what major loss scenarios reveal about management skills that previously have not been reflected in the value of the shares.

 

A crisis provides a unique opportunity for management to demonstrate its skills under a critical spotlight.  Depending on how the incident is managed using internal crisis management processes, management can significantly enhance the position of the company by effective control of the key variables during a crisis.

 

Two major models were examined to ascertain the validity of application:

 

1. The Critical Stress Model: The application here is the identification of well-known stressors. It allows for the measurement of the effect of time pressure, lack of information, risk and decision making, interaction with unknown individuals and organisations, high personal stakes, unfamiliarity with the situation, lack of sleep, inadequate food intake, intense media pressure and interaction with highly emotional individuals.

 

2. The Crisis Management Performance Model: This allows for investigation on the performance and the influence of critical stress in the management process over the term of the disaster. It allows for measurement of the ability to undertake effective external communication, side by side with effective strategy development and implementation.

 

           

 

The report found that critical stress and crisis management performance are positively correlated.  Critical stress is defined as "the level of external stimuli, which causes individuals to experience a physiological and psychological reaction, which changes their behaviour and or their ability to function."

 

Stress is an integral part of managing a crisis.  A high number of stressors are likely to result in high stress levels.  Team members exposed to sufficiently high stress levels for a long period of time will eventually react to stress.  Any reaction will be tactical in nature and will compromise the team's strategic performance.  Positive leadership can bring a "stressed" and tactically behaving team back on track.

The report found that crisis management performance could be improved by implementing the following steps:

 

1. Ensure a strong leader is guiding the crisis management team.

2. Isolate, as far as possible, team members engaged in developing strategies from sources of stress, especially outside entities. Further boost as required the number of the communication and media personnel. The aim here is to create and maintain a separation between the outside world and the crisis management team.

3. Ensure team members are aware of and trained about the effects of stress. Managers should be trained in techniques that change the flight or fight characteristic into a more controlled or even neutral approach.

4. The team leader has a prime duty to ensure team members take regular breaks. It is imperative that team members who exhibit obvious signs of stress are replaced or stood down.

 

Crisis management is the key link between disaster management, disaster recovery and business resumption.  How well the business resumes is largely governed by the management of the crisis in real terms.  An effective strategy for implementation and team management will move the firm along the road of effective survival.

About the Authors

Department of Accounting and Finance

Faculty of Business and Economics

Monash University

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