Managing crises

The is no doubt the world and the economy is in crisis.  The Covid-19 pandemic had brought things to a virtual standstill as we adapt to social distancing and enforced lockdowns.

It is calculated that the UK economy will contract by 35% as a result of the pandemic.  the effects of the virus could be with us for a decade or more.

The UK government, which planned a massive spending spree has just extended its overdraft with the Bank of England and billions are being diverted into supporting incomes.  UK national debt is expected to reach 100% of GDP in the Autumn. This is at a time where every country affected by the pandemic will be competing for loans. Our debt and economic contraction means we will be a higher risk borrower.  This means higher interest rates and a lower credit rating.

In the US unemployment claims have hit a record 22 million.  This represents 15% of the US workforce.  If that is replicated in the UK we are looking at 5 million unemployed; a level of unemployment not seen since the early 1980s.

And still the UK government is resisting calls for an extension to the Brexit transition period stating that the UK will end transitional arrangements with the EU in December.  This matters because the forecasts for a Boris Johnson-style Brexit is a drop in GDP growth of between 6.8% and 7.6%. This is a long-term effect which is expected to affect the UK economy for 15 years or more.  A no deal exit will have a bigger drag effect.  It seems that as HMS Great Britain sails away from its biggest trading partner, those on the bridge are chucking a gigantic drag anchor off the stern.  It beggars belief that those in charge of protecting the UK economy are still following such a nihilistic policy.  We are facing an economic meltdown and our government is about to inflict economic sanctions on itself.

We are likely in for a deep recession.  The government’s reaction to that recession will define whether the economy bounces quickly or the whether the recession becomes a long depression.  A government deliberately putting up barriers to trade and following policy expected to hammer economic growth appears to be one happy with the latter option.

Of course, the primary response of many businesses in such an environment will be to focus on their survival.  This focus can be dangerous, especially if the decision is to contract the business.

This is what happen in America when their two big car manufacturing firms, Ford and General Motors were in crisis.  Senior managers created a survival plan that involved major closures of factories and production lines.  Both firms cut too deep.  They focused fixed costs onto a far smaller operational capacity. This cut deep into margins and di more harm than the initial crisis.  Both companies had to go to the US federal government for a bailout and towns such as Flint in Michigan and Detroit are still trying to cope with the fallout.  This is all described in Michael Moore’s book  Stupid White Men.

Businesses, like products and brands, have a lifespan.  Businesses will fail.  Crises like Covid-19 and the credit crunch often weed out those companies which are badly managed, have weak business plans and some which are simply unlucky.

Mintzberg outlined causes of business collapse.  These can be summarised as follows:

  • ‘One man rule’ – this can happen when businesses have a figurehead manager determined to follow a course of action based on his/her personal perceptions (and to be honest it is more than likely a ‘him’ rather than a ‘her’).  These firms often have a lack of management depth.  They may have a weak finance function and an unbalanced top team.  It has long been a criticism of UK businesses that they’re boards are dominated by accountants not engineers or marketers.
  •  Poor budgetary control – Firms that have poor cashflow forecasts, incompatible margins, poor costing systems and the incorrect valuation of assets.  Firms now put the value of their brands on their balance sheets.  But brands are intangible and therefore incredibly difficult to value.  Too many businesses look back to the financial results of the past; expecting the same level of results in the future; they do not properly forecast potential financial results
  • Poor responses to change – Not properly monitoring competitive trends and economic change. Some firms overtrade.  An example is Jessops, which was a small specialist camera retailer.  It rapidly expanded its store network and started selling items like laptops. In my town, Shrewsbury, population 80,000, Jessops had two retail outlets. But when everyone carries a digital camera on their phone there simply wasn’t the consumer demand to maintain so many outlets.
  • Gross Errors – For example, Gerald Ratner, the high street jeweller, beign recorded saying his stores sold ‘crap’ in an after dinner speech.  This destroyed the Ratner’s brand and had a incredibly damaging effect on other brands in the group such as H Samuel.
  • Focus on one big project – In some ways this links to last week’s blog about Arnhem.  General montgomery was focused on his big plan, Operation Market Garden, rather than smaller incremental operations, such as opening up Antwerp’s port, which required fewer assets and which may have had a greater impact on the campaign.  In today’s Sunday Times, not normally a paper to criticise the new right wing orthodoxy, there is a damning article stating that Boris Johnson’s government ignored the necessary intitial planning for Covid-19 because they were too focused on their big project, planning for a no deal Brexit.

Business collapse has symptoms.  Signs that a business is failing include a tendency for creative accounting (see Carillion as a prime example); the delaying f financial results; low staff morale and ‘doom-mongering amongst middle managers.  So if your middle managers are behaving like Private Fraser; repeatedly saying ‘we’re doomed’; it may be an indication of trouble ahead.

W Stewart Howe, in his book Corporate Strategy, outlines steps to recover from a crisis.  Firstly, to again refer to Dad’s Army, or possibly The Hitch-hikers Guide to the Galaxy, “DON’T PANIC!”:

  1. Recognise the issues within the crisis
  2. Evaluate those issues.
  3. Take emergency action.
  4. Stabilise your business
  5. Return to growth.

The most dangerous course in a crisis is to take incorrect actions which hasten organisational failure.

There are two sources of crisis; from organisational shortcomings; and from environmental effects.  Businesses fail when those two elements interact.

It is important not to simply rely on perceptions from within your organisation.  Getting a ‘critical friend’ or an external view can be important in surviving a crisis.  It is the time for trouble-shooters.  Defects within your organisation will affect your perceptions of the crisis.  There may be a willingness to blame your organisational defects on the effects of the environment.  Reality can be distorted.

Reactions to crises vary.  Some may try to ignore the crisis.  President trump initially described Covid-19 as a hoax.  He then said he had it ‘beat’.  Now America has the most recorded deaths from the virus and the highest rate of infection.

There may be attempts to blame the crisis away.  This can often be seen in accounting reports where poor results are blamed on the environment rather than the business’s reaction to that environment.  Again, see Trump’s claims that the US’s poor response to the Covid-19 virus is because ‘the germ is clever’.

There may be a failure to plan for the exceptional.  There is an ‘It’ll never happen to us’ culture.  Again, in the Sunday Times report, Boris Johnson’s government is criticised for ignoring expert advice on the levels of PPE and ventilators required to be available to cope with the Covid-19 outbreak.  The BBC reported yesterday that some hospitals will run out of PPE this weekend, but the UK exported lots of PPE to China in February.  It could also be argued that the austerity of the last decade critically damaged UK public services ability to cope with a major emergency such as Covid-19.  It could also be argued that the focus on deficit reduction, rather than debt reduction, hamstrung the UK’s ability to react.

Successive government’s have been accused of only planning for the short to medium-term; ignoring necessary long-term objectives.  Often in businesses, long-term planning is formulaic. This all makes reacting to unexpected events difficult.

Often the early signs of a crisis are ignored.  This certainly happened in China where the Doctor who initially reported the outbreak was ridiculed.  Many argue that the UK’s initial response to the outbreak was also lackadaisical e.g. the delays in closing schools and imposing lockdown.  People are still flying into the UK with no checks at airports to see if they are carrying the virus.

People fear rapid change and crisis is often created by a rapid change.  In such circumstances we often incorrectly look to the past.  An example is all the references in the media to the 1918 ‘Spanish’ flu outbreak.  Those making the comparison often ignore that the environment around that pandemic were completely different.  the virus spread in transit camps for troops and in refugee camps from the First World War.  Many of the troops and refugees in these camps were living in squalor and had depressed immune systems.  The ‘churn’ of people moving through these camps was a perfect environment for the flu to spread.

Some, in the face of crisis, will go into denial.  Initially this was Donald Trump’s response; that the virus was a hoax.  People in denial will see no need for strategic realignment.  Those in the UK government still pushing for an end to the Brexit transition in December could also be seen as being in denial.

Those responsible for creating plans and strategies will often see those strategies as being perfect and not needing alteration in the face of a crisis.  they may try to delay reactions to a crisis to maintain those strategies and to prevent strategic change.  But ‘normal’ behaviour in the face of a crisis will often make things worse, not better.

Centralising control in a crisis to inappropriate people can exacerbate that crisis.  Again, look at the actions and statements of President Donald Trump.

Finally, in a crisis, do not live in a collapsing palace.  Palaces are large robust buildings. But if the land beneath those palaces begins to crumble, the palace will collapse.  This goes back to the biblical parable of the man who built his house on sand.  Palaces on subsiding ground can only be shored-up temporarily.  to survive a crisis you need to be flexible.  The large solid prop forward of a business which normally tries to bulldoze its way through the market is less suited to surviving a crisis than the fleet of foot winger of a business.

To survive a crisis:

  • Avoid excesses and ‘magic bullet’ strategies – no one prescription can render a crisis impossible. You need agility
  • You may need to replace senior management or lok externally to your organisation for solutions (consultants or trouble shooters)
  • Have the capacity to act with urgency.
  • Reject implicit assumptions – they are often wrong
  • Experiment with your portfolios.  Look for new markets, new products, new technology, new routes to market and new ways of operating.  Recognise experimentation so that it can be properly managed.  People who have an experimental mindset are often never satisfied.  They will always strive for better results.
  • Look to change your management ideology.  Senior managers are often seen as the villains in a crisis.  They can be seen as steering an organisation towards a crisis rather than away from it.  they can become fall guys.  An example is Demi Moore’s character in the film Margin Call.  She is sacked not because she was to blame for the crisis but because the CEO needed a sacrificial lamb to placate the bank’s board.  Changing your management ideology may be the best way to recover from a crisis.

Remember, the Chinese symbol for crisis is made up of two other symbols; one representing danger; the other representing opportunity.  To survive a crisis, look for opportunities in that crisis; do not see events solely in terms of danger.

Remember the guidance of Sun Tzu in The Art of War:

“There is no one constant supremacy”. “Victorious campaigns are unrepeatable they take form in response to the infinite varieties of circumstance”.