Types of crises are, from experience, a topic that is often ignored – and that’s a big mistake!
John had always dreamed of owning his own business. After years of hard work and dedication, he finally made that dream a reality. He started a small consulting firm. It gained a reputation for providing high-quality services to its clients.
But, as things were starting to take off, an economic crisis swept through his industry. It affected John’s company as well. One of his biggest clients, a large corporation went bankrupt. That corporation accounted for a significant part of his revenue. John felt devastated. He had built most of his business around this client, and now he had a significant gap in his income.
Struggling to keep his business afloat, John faced another challenge. His top employees were leaving to join a competing company. This was a huge blow, as these employees had been instrumental in the success of his business. John worried that he wouldn’t be able to deliver the same level of service to his remaining clients.
Then it got worse. A rumor started circulating that John’s company could not deliver anymore. This damaged his reputation and made it even harder for him to attract new business.
Determined not to let his business go under, John worked to rebuild his team. He brought on a few experienced professionals. They were able to help him get back on track, and he began to see a light at the end of the tunnel.
When he thought things were starting to turn around, disaster struck again. A tornado caused significant damage to his office, forcing him to close temporarily. This was a major financial setback. John had to work even harder to get his business back on track.
Despite all these challenges, John remained resilient and determined. He came up with creative solutions to address each crisis as it arose. Slowly but surely, his business began to recover. He learned the importance of being adaptable and prepared for anything. And he was grateful for the opportunity to pursue his dream of owning a successful business.
Types of crises (sources)
In a different post, I presented what crises are and how they emerge. This post expands the topic and classifies crises according to the source of their emergence. Typically, it may seem that a crisis comes out of nowhere. It is only when a particular crisis is analyzed in depth that it turns out that, indeed, it arose for a specific reason.
There can be various sources of crisis, especially when looked at in great detail. However, categorizing them, there are not that many at all. For my purposes, I distinguish nine sources of crisis formation:
- environmental (don’t call them “natural”!),
- legal and legislative,
- conflictual (confrontational),
- resulting from hostile actions,
- resulting from organizational negligence,
- resulting from violence in the workplace,
- the result of gossip and hostile communication.
Environmental crises, as the name suggests, come from the natural environment. Environmental hazards can be considered earthquakes, volcanic eruptions, hurricanes, floods, fires resulting from, for example, lightning strikes, tsunamis, etc.
The above paragraph used to be called “natural crises,” but adjusting to what is written on the #NoNaturalDisasters page, I decided to stop using this phrase. On the above page, the description refers more to the term “natural disaster,” but in any case, I decided to avoid this term so as not to cause confusion.
Quoting the text from the #NoNaturalDisasters page:
There’s no such thing as a ‘natural’ disaster…
The term “natural disaster” is incorrect and misleading.
The #NoNaturalDisasters campaign builds on the decades of work and research carried out by DRR practitioners and academics and aims to change the terminology to show that whilst some hazards are natural and unavoidable, the resulting disasters almost always have been made by human actions and decisions.
The discussion on why disasters are not natural isn’t new. It’s been written about, discussed and debated for many, many decades. This online campaign seeks to build on those discussions and reach new audiences.
The best way to demonstrate this is to take an example, let’s consider a flood. The dictionary definition is that a flood is the inundation of large areas by water as a result of a river surging. Looking at it objectively, flooding, as such, is a threat arising from nature. However, a flood itself, if it does not affect areas inhabited, or cultivated, by people, does not necessarily mean disaster. What’s more, it’s often the case that the disaster itself is the result of human actions (decisions), such as permission to develop floodplains. It was only in 2018 that a law appeared in Poland (amendment to the Water Law Act) that de facto prevents the construction of houses in floodplains. And there are entire housing estates located in such areas, such as Cracow’s Złocień estate, which is crossed by the Serafa River, which causes flooding of blocks, streets and underground garages during large downpours.
Thus, it can be seen that the source of the crisis is theoretically the environment (the river in the above example), but in fact it is the decision to build a housing development in a vulnerable area (the legal source). In this case, the problem is to be solved by reservoirs, one was built in 2015, with an additional two to be built by 2023.
Crises of technological origin
Crises of technological origin can be divided into two main categories, system errors resulting from, for example, design errors, software errors, and human errors such as work accidents.
There are many examples for these errors, but I will give only one group that perfectly illustrates the issue: data leaks. They are very commonly caused by errors in software design, implementation, or integration. The consequences of such errors can be severe, starting with the leakage of personal data, which someone can use, for example, to take loans, ending with errors that cause loss of life or health. Data loss can be very costly for an organization. Customers may leave, there may be fines from authorities, lawsuits, negative press, etc.
The category of economic crises is one closer to our intuition. It also falls into two categories, internal to the company, organization or state, and external, resulting from changes in the economy.
Sources of economic crises can be various, there are at least several factors that can cause such a crisis in a company. Examples include lack of profitability, lack of funds, lack of resources, poor management and poor customer service.
Lack of profitability is one of the most common causes of internal economic crisis. When a company does not make enough profit, it has less money, or not enough money to pay its employees, supplies and other expenses. In such a situation, the company can’t afford raises or bonuses for its employees, and it has no way to invest. It may end up being forced to cut services or even lay off some employees. This is obvious, but lack of profitability is one of the most common reasons why many companies go bankrupt.
Another common cause of internal economic crisis is lack of resources. An example is the limited supply of semiconductors, which translates into a whole host of problems in various industries, such as IT (computer availability) or automotive (whoever is waiting for a hybrid car knows). What’s more, even a short-term reduction in resource availability can have a big impact on the entire economic system, as the blockade of the Suez Canal demonstrated.
Another factor causing internal economic crisis in a company can be poor management. If a company’s managers do not do their jobs well, they may not be able to ensure the proper functioning of the organization. They may fail to keep employees motivated. This can lead to issues such as low morale, poor productivity and high employee turnover, which can result in an inability to deliver services. They may also prepare their business strategy poorly, such as the marketing and sales strategy for a newly launched product, which will translate into low sales, this will translate into lack of funds, and then you know.
A very underestimated factor that can lead to an internal economic crisis is poor customer service. If a company does not take care of its customers, it loses money, loses its reputation, loses its position in the market. It may also have to pay more for insurance or other expenses. For example, if a company has numerous complaints about its products or services, it may have to pay more for advertising or raise the price of its product or service, which in turn may reduce sales.
Legal and legislative crises
Legal and legislative crises are a very intriguing category. The sources of legislative crises can lie in changes in the law that, for example, remove the legal basis for a company’s operations. An example of such a potential crisis could be the recurring discussions about a ban on fur farming. If the ban were enacted, the farms would lose the legal basis for their operations.
Legal crises can happen to any organization. It can happen when an organization conducts activities that will be interpreted as illegal, there are many examples, such as the Optimus case (Polish company) and similar ones, resulting from the interpretation of the law by the fiscal. Legal problems can also result from ignorance or lack of understanding of regulations by company employees. It is important to know the laws that apply in a particular area and what the consequences are.
A legal crisis can cause a company to lose money, its reputation and, in the worst case, cease to exist. It can cause the company and its employees to be treated like criminals. On top of all this, there are legal fees, lost time, potential fines and penalties, and so on.
Conflict (confrontation) crises
Conflict (confrontation) crises can arise, for example, because of clashing interest groups within a company or organization. One often hears about “internal politics” or “internal political games” in various organizations and companies.
Internal organizational conflicts can cause many difficulties for a company. The first is the lack of clear leadership, as leadership is usually challenged during conflicts. In business, you need a person who can lead the team, conflict can prevent this. Another problem caused by conflicts is that employees are unable, and frequently unwilling, to trust each other. When there is a lack of trust among employees, it is difficult to cooperate and perform tasks together. The third issue is that conflicted people do not communicate with each other unless they have to. There is no way to get a message across when you don’t want to. This means that the organization can have a difficulty with decision-making, for example, and this can lead to further issues.
In the case of internal conflict, you have to find a way to resolve it. Conflict management is a separate field and perhaps material for a separate entry. In general, conflict needs to be resolved (not extinguished, resolved), such as holding a meeting with all team members and explaining the situation. In business, we may not like each other, but we should be able to work with each other. If we don’t know how to do that, then we should part ways. After such a meeting, you should make sure that everyone agrees with the decision that was made. It is also important to make sure that everyone is clear about their role in the situation.
Crises arising from hostile actions
Crises arising from hostile actions can include global actions such as armed conflict, as well as local ones such as terrorist activities, sabotage, or even the actions of competitors.
It is easy to imagine a business crisis that is caused by a competitor who decides to use unethical or illegal practices to pick up customers, destroy a company’s reputation, or otherwise harm the company. The means may vary, but the goal is usually one, which is to destroy the company to take over its market.
Examples include acts of unfair competition, such as collusion by other market participants to get rid of another organization. Some of these unethical or illegal methods are used by competitors, others by the government. The government may use unethical or illegal methods to harm a particular organization, such as by giving contracts or exclusive rights to some activity to a competing (preferred) company.
In some cases, the attack doesn’t even have to be directed at the company. It could be an attack on a specific employee, supplier, or customer. In such a situation, it may be (and typically is) necessary to act against the attacker. It is necessary to act quickly to limit the damage, and sometimes even to save the company.
Crises resulting from organizational negligence
One of the more obvious categories is crises arising from organizational negligence. These range from the kind of simple “someone didn’t include something in the procedure,” to errors in strategy, such as directing attention to the welfare of shareholders rather than customers, to errors in management. This category often reveals itself as an escalating crisis.
Organizational negligence is a common cause of corporate failure. They can be the source of many business problems. This common issue, could be avoided by implementing operating procedures, or using proper safety plans. Companies are prone to accidents. They can be small or large, but they are all exposed to the same risks. Accidents can be caused by a variety of factors, ranging from the company’s product, employees, equipment, and the environment.
Imagine a case where a company operated in a way that was unsafe for its employees. They did not follow safety procedures, and management did not take the necessary steps to ensure safety. The factory had been operating for a long time and was well established. However, over the years there had been more than a dozen accidents at the plant, and management had failed to act and implement the necessary changes. Another accident occurred. This time, an employee was electrocuted when he came into contact with an unprotected electrical wire on the production line. The employee suffered severe health damage and decided to sue his employer. The investigation revealed that management knew about the dangers of working in this factory, yet continued to operate without taking any steps to prevent a recurrence of such an accident.
The result may have been that the company incurred litigation costs and injury compensation payments. The factory lost its reputation and people began to leave their jobs, fearing for their health and lives. In addition, unions launched strike action to force an upgrade in safety. This translated into the need to conduct an audit and implement a new security system. As a result of management negligence, security procedures were not in place, leading to an avoidable business crisis.
Crises resulting from workplace violence
Media reports are increasingly reporting on crises resulting from workplace violence. This is not just physical violence, but also psychological or economic violence. These are very relevant types of crises these days. I know of a case where practically the entire team handed in their terminations due to a new boss who turned out to be a bully.
An example would be a manager who bullies his subordinates. He forces his subordinates to work overtime without proper pay or rest breaks. Or he assigns unreasonable tasks that he does not delegate properly. He is not fair to his employees. Subordinates do not even try to talk to this manager’s supervisor because they are afraid of upsetting him if information about their complaint reaches him. The manager’s behavior undermines the morale of employees, who fear being fired. They are afraid to tell higher management about what is happening because they fear retaliation. People start quitting, rumors start circulating that this organization is not a good place to work.
It turns out that the organization is beginning to struggle with a shortage of people to work with. Few people want to get hired, even though the company offers a very attractive social package in addition to salary. Due to the lack of manpower, the execution of orders is delayed, the organization has to pay contractual penalties. Moreover, some customers are withdrawing from cooperation, as are suppliers who are not getting paid on time. Another case of a crisis that could have been avoided.
Crises resulting from rumors and hostile communication
Last, but especially relevant these days, rumors and hostile communication can be a source of crisis. I’m sure most people have heard of at least one case where one organization released (officially or not) unfavorable (and not necessarily true) information about another organization, which caused big problems for the latter. At least initially because there were also cases where the “attacking” organization became a victim of its actions.
A business rumor is information that may not be true, but which has been believed and spread in the community. Rumors can cause a business crisis for two reasons. The first reason is that the rumor is untrue and harms the organization in question. The second reason is that the rumor is true, but the company fails to deal with it properly, to respond appropriately.
An example of a business rumor is when someone starts to believe that a company is collapsing, when in fact this is not the case at all. Consider the following scenario, the rumor began with a blog post that was written about a certain company. The blogger claimed that the company was about to declare bankruptcy. He also stated that the company has been selling the same product for a long time and doesn’t really have an idea about its future.
The company responded to this blog post. It informed the blogger that the company will not go bankrupt and that it has a future, with plans to release new products. The company also stated that the blogger was wrong about the company and that he was not a reliable source. The blogger ignored the company’s response and continued to spread the rumor. The rumor spread to other blogs. People began to believe the rumor. They started sharing the blog post and the rumor on their social media accounts.
After a while, the company received countless negative comments and feedback. The company was forced to moderate comments on its social media accounts. In addition, the trust of customers, suppliers, and investors was shattered, making it necessary for the company to take additional measures to rebuild that trust.
Moreover, it’s worth to mention the cancel culture. This is an increasingly popular form of action in social media. It is a method of punishing individuals or companies that are perceived as problematic or offensive. It is a form of mob justice that is used to force certain behaviors from companies, or to silence people who have dissenting opinions.
As of 2019, cancel culture is on the rise. Social media users were quick to label anyone with whom they disagreed as a racist, sexist, homophobic or simply “the bad guy.” They expressed their dissatisfaction on Twitter, Facebook, Instagram and other platforms. They used phrases such as “cancel,” “unfollow,” “block” and “report.”
The cancel culture has become ubiquitous and out of control. People use it to attack those with whom they disagree on political, racial and sexual grounds. They also attack companies that act differently from what they expect. It is used to silence those who have a different opinion. It is also used to “punish” those who have not actually done anything wrong, but fall victim to an online lynching. This is a consequence of the speed at which information spreads on the Internet. People often “act” by passing on a post, clicking “unfollow,” etc. without checking whether the information on which they base their decision, which they pass on, is true. The Internet has become an unpredictable place. Even if someone has the best of intentions, someone else can take advantage of this and make a particular company face a crisis.
As a business owner, you can use the knowledge about different crisis types to your advantage by taking steps to prepare for and manage these crises when they occur. Here are a few specific ways that you can use this information:
- Identify crisis threats: By understanding the different types of crises that can affect your business, you can start to identify potential threats that you may face. This can help you to be better prepared for a crisis when it does occur.
- Develop response plans: Once you have identified the threats, you can use this information to develop response plans for these crises. This can include identifying the resources that you will need, determining who will be responsible for different tasks, and outlining the steps that you will take to manage the crisis.
- Monitor for early warning signs: For some types of crises, such as financial or operational failures, it is important to be able to identify early warning signs that a crisis may be coming. This can allow you to take proactive steps to prevent the crisis from escalating, or to respond more quickly if the crisis does emerge.
- Train and educate staff: Ensuring that your staff are trained and educated on how to identify and respond to different types of crises can help to ensure that you are prepared to manage crises effectively. This can include training on how to recognize early warning signs of crises, as well as how to respond appropriately.
- Implement crisis prevention strategies: Implementing crisis prevention strategies can help to mitigate the impact of a crisis on your business. This can include measures such as improving your building for dealing with environmental disasters, implementing redundant systems to prevent technological failures, or implementing policies to prevent workplace violence.
- Communicate effectively: In the event of a crisis, it is important to communicate effectively with stakeholders, including employees, customers, and the media. Having a plan in place for how to communicate during different types of business crises can help to minimize the negative impact on your business.
In conclusion, the nine types of crises presented show that a crisis can come from any direction. Each crisis shows that the future can be unpredictable, volatile, and that it depends on a great many factors. However, the above list is also a source of valuable information. The more we know about the causes of crises, the more we can prepare for them. And it is the avoidance of a crisis that should be the goal of every organization. Prevention is better than cure – as Hippocrates, the forerunner of prevention, proclaimed.