CHARACTERISTICS OF A BUSINESS CRISIS SITUATION

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1 CHARACTERISTICS OF A BUSINESS CRISIS SITUATION This article focuses on the characteristics of crisis situations as often business ownermanagers (management) don t know, or deny, that they are in fact in a business crisis. Inevitably if the business owner-manager does not take the appropriate measures to reverse business decline a crisis situation will develop, threatening the very existence of the business. This occurrence almost always catches management by surprise, manifesting itself in high levels of stress. Only once you understand the characteristics of the crisis situation will you be able to successfully apply the appropriate strategies and operational tactics required to stabilise the crisis and turn the business around. A business crisis may have existed for a long time before it is in fact recognised or acknowledged by management, as confronting the problem is often an extremely stressful experience to those that have to deal with it, furthermore it is important to note that non-owner managers may see their employment at risk in admitting to the crisis situation, and may as a result attempt to cloak and explain away the emerging signs of crisis. This toxic recipe of emerging crisis signs and increasing stress levels has a very negative impact on management behaviour, which in-turn has a very corrosive effect on the business. The emergence of a crisis situation tends to magnify those factors which gave rise to the decline in the first place, accelerating the momentum of the decline. From our experience this is a very important juncture in this process, as it is at this time that the crisis manager (corporate doctor or advisor) should be engaged to help the team fight the crisis. The very first step in this process however is for management to acknowledge that there is a crisis otherwise the business will ultimately go into insolvency.

2 As you would expect, the nature of response to a crisis situation varies according to the people concerned and the type of crisis, with some individuals actually improving the quality of their decision-making at the time of crisis, however these people are very much the exception. Normally, managements capacity to cope with a growing crisis is severely impaired, a fact that is considerably amplified if poor management was originally one of the contributory causes of decline. As already referred to, the key characteristics of a crisis situation, namely: surprise, short decision times and a high threat to survival culminate in significantly increased stress levels. At these high levels, stress induces high levels of anxiety and may lead to some individuals believing that the situation is hopeless. As we all know there is an inverse relationship between high levels of stress and a person s ability to think straight, make quality decisions and achieve optimal performance. In a nutshell our experience has been that high levels of stress severely impact a person s span of attention, perspective of time, cognitive capability and awareness which may result in them becoming inflexible, intolerant, insensitive to others and surprisingly resistant to change. All of this ironically results in a diminished ability to methodically search for information, work through alternative options and make informed choices at a time that this is most needed. This situation is further exacerbated by most people adopting an autocratic leadership style, at a time that the business in crisis most needs a collaborative leadership style to bring key people together to address the crisis stabilisation requirements and then initiate the turnaround process. Business owner-managers in crisis situations should keep in mind that by this stage of the decline process most staff have already lost faith in leadership and certainly won t respond well to an autocratic directive leadership style. A reduction in management s span of attention As a crisis situation emerges the pace of activities usually increases as management begins to realise that something has to be done about the threatening crisis situation quickly. The effects of this faster pace of activities is a significantly increased number of communications and meetings, resulting in information overload. Management may respond to this situation in the following ways: 1. Management becomes more selective in what it wants to hear and believe, searching less thoroughly for quality information; 2. Management begins to ignore certain danger signals, choosing to avoid certain unpleasant information which does not support what they want to believe; 3. Management responds to information according to their own frame of historical reference and experiences; and 4. Less strategic decisions are made, with decisions being more once-off and scatter-gun in nature.

3 An increase in managerial inflexibility Individuals tend to become increasingly inflexible as stress levels intensify, resulting in the following behavioural patterns: 1. Intolerance; 2. A firm belief that his/her views are correct; 3. Rejection of information that challenges his/her views; and 4. Personal characteristic may be emphasised for example an anxious person becomes very anxious, an unconfident person loses all self-belief and an autocratic leader becomes totally controlling. The effect of this inflexibility is to reduce the ability to successfully identify and consider the alternatives. A reduction in management s perspective of time Perceived time pressures may adversely affect management s decision-making ability, with management tending to focus on extinguishing the immediate crisis to the detriment of longer-term business implications. In practice the pendulum can often swing too far with management over reacting and cutting away at the fabric of the business that will take prolonged periods of time, effort and investment to restore, when in fact such measures may not have been necessary. Unquestionably, at a time of crisis, time is of the essence and the sooner decisive action is taken, the better, but too much too quickly can be potentially very harmful as well.. Non-routine complex tasks may tend to suffer the most by time pressures, with management usually gravitating towards what they know and what they have used or seen in the past, without adequate consideration given to the likely consequences of such decisions, with this quite often being totally inappropriate and potentially damaging. The stages of crisis development At MVP we have identified four clear stages in the development of a business crisis, which are supported in the literature. In most instances a crisis develops over an extended period of time, with the business progressing through these distinctive stages, however in the case of smaller, more vulnerable businesses, these stages may in fact be very short and the on-set of the crisis very rapid. It never ceases to amaze us how surprised or shocked business owner-managers are when they are suddenly faced with a business crisis. The four stages of crisis development are illustrated below, along with each stage s key business characteristics.

4 Stage Stage 1: Crisis denial Key Business Characteristics Complacent, potentially arrogant or over-confident Symptoms completely overlooked. It is striking how many SME businesses tend to live in this stage for long periods of time, which is often brought to a head by the occurrence of an event. Stage 2: Hiding the crisis Management explain the crisis away in the hope or belief that it will take care of itself and that no action is immediately required. This can be particularly evident when the business is under employee- management who either do not know how to deal with the crisis and/or are fearful for their positions of employment. Alternatively, management is genuinely unaware of the crisis, with this often the result of inadequate monitoring, control and reporting systems. Once the crisis starts to become evident management may try to explain it away, attributing the signs of the crisis to the firm s efforts to change new product or new investment being made, suggesting that it is only a matter of time before things improve. Another common explanation provided is that the poor performance is as a result of short-term fluctuations in the business environment beyond the control of management. These arguments support the view that remedial action is not necessary to deal with the looming crisis, in fact denying the existence of a crisis. Unfortunately, at this stage management often still sincerely believes that it is on the right track and that the business strategy is correct, and that the problems being experienced are temporary in nature. Stage 3: The business begins to fall apart Management start to take some action but typically underestimate the level of action and urgency required. Our experience is that management is most often inclined to move the tough decisions to the bottom of the to-do list, particularly when they involve the exiting of people. These and other tough actions should in fact be the first to be dealt with. It is in this stage that management begins to panic, autocratic rule takes over and team collaboration starts to crumble. Management becomes more secretive and starts to take input only from those that support his/her views. Those feeling threatened, or at risk, baton down the hatches and start directing their energies towards taking care of self-interest. The incremental decision and actions being taken by management do little more that slow down the inevitable process of decay. Stage 4: The business fails Management run out of options and there is no ability or capacity left in the business to take the required actions. It often comes as a surprise when management suddenly realises that there is no more money in the bank, there are no more lines of credit and there are still debts to pay. This is the end of the road.

5 About The Author Doug Verley (DipBusMan, BCom(Hons), HDipCoLaw, ExecMBA, GAICD) Advisor and business coach to small-to-medium businesses in the areas of strategy, business improvement, leadership & management, succession planning, family-business dynamics & conflict resolution, M&A transactions and equity & debt funding. M: E: A: South Perth, Western Australia This article is directed at small-to-medium business (SMB) owners and managers operating predominantly in Western Australia (WA). Our clear desire is to help you, the SMB business owner, achieve your personal and business objectives. We hope to be a positive catalyst for the WA economy. Please note that the information conveyed, and views expressed in this article are those only of the writer. The writer may have drawn on a vast body of reference material over many years, and as such does not lay claim to any originality in the information provided, acknowledging references where possible. About MVP Financial MVP Financial prides itself on being a friendly, accessible and easy-to-deal-with firm of accountants, business advisors and wealth specialists whose purpose it is to help you achieve your business and personal wealth creation and preservation needs. MVP Financial has been a successful privately owned Western Australian business for over 30 years. Our team have developed an in-depth appreciation of the challenges you and other business owners and leaders face, from making effective business decisions to maximising and protecting your personal net worth, making us an integral part of your advisory team. Keeping ahead of new trends, policies and procedures our extensive team of highly qualified and experienced people pride themselves on being able to cut through business and financial complexity, delivering easy to understand high-quality outcomes. We believe our work and service ethic, quality of people and commitment to you, our client, are among the very best, relentlessly striving to improve in these areas. We take the time to listen to our clients and translate observations into practical, useful recommendations and actions to help you achieve your business and personal wealth objectives. Please be assured that we are passionate about forging a long-term mutually beneficial and trusted relationship with you and your business.