Ethical Behavior, Crisis Management, and Contingency Planning

Ethical behavior

From the conventional perspective, businesses work to create wealth for their owners. They make as much profit as possible by building a competitive advantage. If successful in creating a sustainable competitive advantage, they generate above-average returns, which ultimately translate to capital gains and regular dividend distributions.

However, the demand for ethical business practices has increased recently. It requires businesses to pursue three motives: profit, people, and the planet. So, they have to balance the three, not just chase profits as in the conventional approach. So, as well as maximizing the owner’s wealth, they also work in ways that benefit society and the environment.

Ethical businesses act fairly and honestly. On the one hand, they operate to meet the owner’s needs. But on the other hand, they operate with care and consider their implications and impact on society and the environment.

Examples of ethical and environmentally friendly behavior

There are many ways to behave ethically and environmentally friendly. For example, small businesses are reducing carbon energy consumption and switching to eco-friendly energy, such as solar panels. Or they use energy-efficient machines or equipment, reducing the carbon footprint they create from their operations.

Several other companies have switched to paperless. They digitize business processes and reduce paper usage. They convert documents and other papers into digital form.

Other examples are:

• Avoid wasting water
• Avoid using plastic bags
• Using environmentally friendly and recyclable raw materials
• Invest in green projects, either directly or indirectly
• Encourage workplace diversity
• Implement company transparency to the public
• Provide fair compensation to employees
• Eliminate discriminatory practices

The costs and benefits of ethical business

Operating ethically and environmentally friendly offers several benefits. For example, companies can reduce costs by going paperless because they no longer need to buy paper. Duplicating documents has also become easier through digitization without consuming additional paper.

Recycled materials and packaging can also save costs. Companies can reuse them to create new products. They can also reduce costs associated with waste management.

Ethical and environmentally friendly practices also support the company’s image. As a result, companies can use it as a unique selling point (USP) and provide a competitive advantage.

In addition, this practice also increases consumer interest in dealing with the company’s products. Their increased attention to fair and environmentally friendly practices encourages them to be selective in purchasing products.

Another benefit is good publicity. For example, a company might get an award for good environmental practices. Or, they avoid and minimize the costs associated with government fines or public outcry.

Crisis management

Crisis management is the systematic steps companies take in the event of a disaster, negative publicity, or other unforeseen events. It aims to minimize damage, loss, or threats to the company due to these events.

In this case, the company is reactive to a sudden adverse event. As a result, they formulate the best response to a crisis to minimize impact. In addition, crisis management also requires fast action and control, effective communication, and transparency with stakeholders.

Crisis management is critical because it minimizes the damage to company finances, company image, and employee optimism.

Crisis management requires companies to:

• Detect potential problems or danger signals;
• Plan responses to all possible potential crises;
• Establish monitoring systems to detect early warning signals for any potential troubles;
• Develop appropriate plans and strategies to deal with; and
• Establish and train a crisis management team.

The processes above ideally involve as many stakeholders as possible. They are involved in all stages, from planning to action.

Elements of a crisis

A crisis contains three general elements, namely:

• Threat to business
• Shock
• Short decision time

Threat to business. The crisis poses a threat to the company. For example, a business experiences a crisis due to a fire at its production facility. This causes normal daily activities to be disrupted. As a result, the company cannot produce as usual.

This crisis requires proper handling. For example, a company might take action in the short run by leveraging warehouse inventory to meet demand while improving production facilities.

Conversely, if not handled properly, the company loses revenue and customers. In fact, the company may have to be forced to stop operations. In other cases, the creditor may file for bankruptcy because it is unlikely that the company will be able to recover its finances.

Shock. A crisis creates a shock for the business, which can result in a potential loss or threat to the business.

The crisis may occur due to unexpected and unpredictable events, such as natural disasters such as earthquakes, hurricanes, and floods.

Alternatively, a crisis may also occur as an unanticipated consequence of potential risk. For example, a human-made fire may be a potential risk for a company. The company should have procedures in place to prevent that from happening. However, although policies and procedures have been implemented, fires may still occur because some employees are negligent.

Short decision time. The crisis requires immediate action to handle it. Management must make decisions quickly to limit the threat to the company.

Factors influencing effective crisis management

Several factors influence effective crisis management, including:

• Transparency
• Communication
• Speed
• Control

Transparency. This requires the company to be honest about what happened. Stakeholders, like owners, want to be informed about what’s d going on because they have an interest in the company. Therefore, management must be transparent to them. They should also outline steps on how to deal with the impact.

Communication. Management must honestly communicate to stakeholders about what happened, how it impacted, and how to deal with it. Regular communication is needed to keep up with the latest developments and progress to deal with their impact. Effective communication will increase stakeholder trust and prevent them from taking detrimental actions to the business.

Speed. Management must act quickly and devise countermeasures if the first approach is unsuccessful. Taking immediate action is essential to prevent panic and a more significant impact.

But speed must also be accompanied by caution and consideration. Reacting quickly often results in hasty and ill-considered decisions, which do not solve problems but only worsen matters.

Control. Management must take critical steps to control the situation as soon as possible. First, they design an action plan to address the problem and monitor progress. In addition, they also have to build a backup plan if the initial plan does not work effectively to overcome the situation.

Contingency planning

Contingency planning is a company’s effort to implement procedures to deal with crises and anticipate them through scenario planning. Companies proactively respond to changing business environments by developing plans before crises or adverse events occur. That reduces the risk and the impact on the company.

The company creates a crisis plan and details the procedures, roles, and responsibilities for each possible scenario. Because the environment is constantly changing, companies should test and possibly update it periodically.

The difference between crisis management and contingency planning

Crisis management is for reactive action. It lays out the company’s systematic steps and efforts to limit threats resulting from a sudden crisis. The company takes action after a crisis to maintain its credibility and reputation.

Meanwhile, contingency planning is for proactive action. The company anticipates a crisis to occur. So they develop scenario plans for prevention. And they also have action plans and implement procedures to deal with crises and respond effectively.

Stages in contingency planning

Predicting something that will happen in the future is not always accurate. However, contingency planning is essential to reduce risk when a severe shock occurs.

Through contingency planning, companies develop procedures to handle, prevent, and overcome emergencies in planned and coordinated steps. Its goal is to ensure the business can continue its activities.

Contingency planning uses a “what happens if” scenario planning approach. In simple terms, the steps include:

• Question what might happen and identify potential disasters
• Assess the chances of it happening – including how often it happens
• Identify potential impacts and alternative solutions to resolve problems or minimize their effects
• Develop early warning systems and related measures to address or prevent them from becoming bigger
• Monitor, test, and routinely update existing procedures to remain relevant and consistent with potential future risks

Advantages and disadvantages of contingency planning

Costs. Developing and implementing contingency plans can be expensive. It engages senior managers with full responsibility. The company may also engage specialist consultants to assist.

However, the above costs may be less than the crisis costs. For example, if the crisis is not resolved, it can cause companies to lose revenue, go bankrupt or even close their business.

Time. Contingency plans take time and effort to develop and implement. Additionally, it may require the company to continually update it to make it relevant to the context. And a constantly changing external environment can make it even more time-consuming.

But, the time and effort spent may be better than allowing a crisis to occur. Crises don’t just take energy to deal with. But it’s also mind-blowing and involves pressure and stress because it requires speed to overcome the situation.

Risk. Contingency planning is not always accurate because predicting what will happen in the future with a 100% chance is impossible. Likewise, developing an action plan to deal with this waste effort due to inaccurate predictions.

However, contingency planning is essential to prevent crises from occurring. Or, if a crisis occurs, it prevents it from getting bigger and incurring more losses. Thus, companies reduce risks through contingency planning because damage can be overcome and minimized.

Safety. Contingency planning cannot completely prevent disasters or avoid shocks. It also does not one hundred percent eliminate risks and threats.

However, contingency planning makes crises more measurable by developing better contingency plans. For companies, it reduces potential losses.

Meanwhile, for employees, it fulfills the need for a sense of security in their work and income because business risks are minimized. Finally, it increases their participation and motivation to implement procedures and programs in contingency planning.