Competence by leaderships in crisis situations

Table of Contents

1. Introduction

2. Basics of a Company Crisis
2.1. Types, Causes and Consequences of Company Crises
2.2. Typical Process of Company Crises

3. Competence Approaches of Leaders during Company Crises

4. Conclusion

Bibliography

1. Introduction

Nowadays, company crises are the everyday life. The developments show that not only small but also medium-sized companies and even corporate groups are effected: breaches of company rules at Siemens and Volkswagen, SARS at Lufthansa or products recall at Haribo.^[1] These situations are not only big challenges for the management but also for the creditors and employees. Therefore the highest priority is to restore the competitiveness of the company.^[2]

Usually, company crisis does not appear suddenly but there are already important warning signals in the forefront of the crises. If these warning signals are ignored and different determinants like the following of a conservative, centralistic and autocratic leadership, intransparency of production costs or a missing controlling system are cumulated, there is a danger for a crisis. An essential cause for company crisis is a bad qualification of the management in combination with missing problem solving competence within the deciding process of the management level. Therefore, the management needs to be qualified by leadership skills in order to react in the right way on warning signals for crises.

This working paper shows what competences managers in companies affected by crises need. First it is important to present the basics of a company crisis. The working paper describes the types, causes and consequences of company crises, and the typical process of crises. Later, different competence approaches are presented being important for each modern manager as a company crisis can affect each company any time.

2. Basics of a Company Crisis

2.1. Types, Causes and Consequences of Company Crises

There is no uniform theoretical basis for the phenomenon of a company crisis. From the business administration point of view, there are a couple of crisis specific qualities. There is an extensive consensus that in general, a crisis is a breach of a continuous development.^[3] Furthermore crises are not planned and – independent of their ending – temporally limited^[4] and they can be of a macroeconomic-cyclical or a corporate-structural nature.^[5]

A classification of the types of crises can be presented on the basis of different criteria.^[6] First, the company development can be affected of a crisis. There is difference between the growth crisis, the stagnation crisis and the decline crisis. Another criterion can be the cause of the crisis. There is a difference between endogenously and exogenously caused crises. The latter one is caused by impacts of the environment, while endogenous crises have its seeds in the company itself and are divided by supply crises, financial crises and distribution crises. A clear separation of these both fields is most often not possible as external impacts, developments or changes are often considered too late by the management whereby an efficient internal reaction is too late in many cases.

According to Grieger (2004), a deep understanding of crisis causes can only be developed by theories which are related to the origin of company crises.^[7] Especially evolutionary explanatory models tend to describe crises as an inevitable evil of the company existence. Thus crises are for example often understood as growth or life-cycle crises whereby problems usually appear during the changes to the next life cycle of the company, the so-called critical growth barriers. Mostly, the companies are not able to adapt to the new circumstances and have to low investments, low increases of productivity, quality problems, a low degree of rationalisation, bad financing and a sluggish market share.^[8]

Krystek (1987) call it in this context multi-localities. That means that the causes often depend on external and internal factors but there is an extensive consensus that most of the crises are caused within the company.^[9] Thus mistakes and failures of the management are mostly the reasons for crises. “Allerdings ist kritisch einzuwenden, dass sich im Prinzip jede beliebige Fehlentwicklung ex post auf Fehlentscheidungen zurückführen lässt. Und zwar auch dann, wenn diese Entscheidungen ex ante wohl begründet waren.“^[10] [But it needs to be said that in principle every undesirable development can be traced back to wrong decisions ex post. Also if these decisions were well justified ex ante.]

Another criterion is the time pressure linked with the crisis. If the crisis just started or if it is predictable that it will start soon, it is a so-called potential crisis. In this case, there is still enough time for the realisation of a crisis management. If the crisis has started already but has not yet caused a big damage, it is a latent crisis and there is still enough time for an effective reaction of the management. A crisis which appeared already and effected economic damages is an acute crisis which causes the biggest necessity for acting as there is usually not much time available. The crisis is often, however, noticed or admitted by the management, if it is already acute.

The type of the threatened corporate targets is the last category. According to the classification of strategic, operative and liquidity targets, there are strategy crises^[11], profit crises^[12] and liquidity crises. Another kind of reasons for crisis are incidents which lead for example to the emissions of substances posing a risk to health to the environment or which cause security risks for the consumers.^[13] But also environment changes or changes of the public opinion about certain corporate activities can cause such a crisis. Thus the public opinion plays an important role in such cases. The image damage for the company is mostly fatal and is only hard to repair. A wrong crisis management causes a durable negative range of opinion what leads to declining market shares, falling turnovers and can cause the insolvency of a company. These types of “public crises”^[14] are solved by sophisticated communication strategies in order to position the image of the company in the public in the right way.

The centre of this study is on the type of the corporate targets affected by the crisis. Also if it is not possible to classify all crises clearly and a public crisis can also be the reason for a liquidity crisis,^[15] this working paper is limited on the presentation of the crisis management of strategy, profit and liquidity crises. This implies indirectly the time factor for counter measures. On the long-term, improper corporate strategies lead to profit crises and earlier or later to liquidity crises, if no proper counter measures are carried out on time. Often, there is only a short time span for solving the crisis.

2.2. Typical Process of Company Crises

Company crises usually proceed in four successive periods: strategy crisis, profit and profitability crisis, liquidity crisis and insolvency. While the strategy crisis is characterised by an impulsive day-to-day business, the profit and profitability crisis is indicated by warning signals like a negative operating income, a falling cash flow, a decreasing productivity, a high consumption of equity capital, short-time work and dismissals. Within the period of the following liquidity crisis, missing liquid funds and arrears in payment for fiscal authorities, health insurances, salaries and suppliers can be identified.^[16] If there is no successful crisis management during the first three periods, the company enters the fourth crisis period which is the insolvency. A bankruptcy petition is filed in the bankruptcy court having jurisdiction. The bankruptcy court designates a liquidator who starts immediately measures to save the company.^[17] The following figure shows the four periods of a company crisis.

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^[1] Cp. A&B One Kommunikationsagentur GmbH (2007), p. 1.

^[2] Cp. Donau (2007), p. 1.

^[3] Cp. Krystek (1987), p. 3.

^[4] Cp. Hertig (1996), p. 22.

^[5] Cp. Kaiser / Müller-Seitz / Ringsletter (2004), p. 4.

^[6] Cp. to all Müller (1982), p. 24-26.

^[7] Cp. Grieger (2004), p. 6.

^[8] Cp. Albach et al. (1985), p. 195-197.

^[9] Cp. Krystek (1987), p. 69.

^[10] Krystek (1987), p. 68.

^[11] For example, the management fail to orientate at new market developments and to adjust the company. The corporate strategy is not any longer determined by innovations and advancements but caught in old structures.

^[12] For example, an estimated target was not reached and the company is in the short-term threatened by insolvency.

^[13] Common known examples are the elk test of the Mercedes Benz A Class or the incidents in the atomic power plants in the German cities of Brunsbüttel and Krümmel on 28 June 2007 what showed negative impacts on the public opinion about atomic power in general and about the electricity provider Vattenfall in particular.

^[14] Wiedemann (1994), p. 33.

^[15] This shows for example the multi-causality of reasons for crises. Corporate crises often develop by a variety of coactive determinants. Cp. Krystek (1987), p. 67.

^[16] Cp. Leidig / Jordans / Merzbach (2007), p. 4-5.

^[17] Vgl. Leidig / Jordans / Merzbach (2007), p. 11-12.