Leszek Zajc. Fragments of Crisis Management in the Company of the Hard Coal Mining Sector

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1 AKADEMIA EKONOMICZNA IM. OSKARA LANGEGO WE WROCŁAWIU WYDZIAŁ ZARZDZANIA I INFORMATYKI MAGISTERSKIE STUDIA MENEDERSKIE MASTER OF BUSINESS ADMINISTRATION Leszek Zajc Fragments of Crisis Management in the Company of the Hard Coal Mining Sector Praca magisterska Master s thesis Promotor prof. dr hab. Józef Koziski WROCŁAW 2004

2 CHAPTER 1 Crisis management as the answer for crisis situation The problem of crisis management touches every kind of business on every place of the world. Organizations fight for better future in every decision taken, movement done or strategy chosen. Achieving successes, they often forget to cope with emerging crisis or stressful situations, which are a prelude for next shocks. They must learn how to exist with crises impacting on them. This fight influences the status quo in their closer or further surroundings. As typhoons or hurricanes strike lands on the planet Earth, the same crisis can do with unaware enterprises. Sometimes a domino effect can appear, so crisis in one company may spread out very soon. And as the climate or conjuncture is changing in more or less variable function, the same can occur for crises in simple unit. This process does not have to be correlated with general phase of global or regional conjuncture (prosperity or recession). No doubt, that recessions cause an increase of number of companies fighting against crises. Nevertheless, unconscious management and employees will do nothing, if they do not see dangers coming or are not warn or informed on time by reliable sources. They must be prepared as much as possible. These situations are liberating creative thinking in companies, people are learning, understanding relations and they are possessing wider luggage of experience at the end of crisis. The most meaningful role play the top management, but information about risk of crisis is essential and should be broadcasting to all employees. They must be trained as much as possible, because the worst scenario is to be surprised by unpredicted, stressful chain of events. Crisis in business unit is a war for survive and more, sometimes for better future as an extra supplement. Crises can have two sides of a medal. One is that it may provide a real danger for the future of organization. Second is a chance that they can be leverages in the company s growth, can deliver a progress, better position on the market or gain the upper hand over others. Everybody in the organization must know that, during changing structure or systems, one can guide the firm into better environment with great perspectives. Sometimes there are many chances for improving outcomes, but they must be discovered or perceived. Important is to keep eyes widely opened and do not panic during coping the crisis. There is a need for proper reaction and effective decision making. A sober assessing of the matter will help in it. 1

3 Figure 1-1. Correlation of prevention activity with crisis management process anti-crisis brain storm degree assessment of organization run a risk of crisis before crisis will happen working out of pre-warning system working out variants of anticipated crisis working out of reaction mechanisms carrying out simulation of crisis personnel s training constant actions preparation of crisis communication plan preparation of anti-crisis plan (repair plan) problem identification when crisis will happen establishment of crisis headquarter building crisis scenarios definition of crisis scale working out of operation plan identification of destination groups evaluation of threats caused by crisis situation working out of unequivocal attitude to implementation of accepted assumptions communication with outer surrounding communication with inner surrounding community media suppliers and distributors pressure groups client local and central government monitoring, assessment and correction of operations taken Source: Tworzydło D.: Przeciwdziałanie sytuacjom kryzysowym, Firma i rynek 4/2002 1/2003, p

4 Managing crisis situation involves often a wide range of knowledge and creativeness, because with one crisis, there are connected many aspects like financial, legal, social, personal, cultural, technological or informal. Sometimes crisis situation is constraint to the only one function in the company, but it does not mean that it is easier to win with troubles. Practical skills are important too, because such experiences enable to avoid traps or blind paths. Crisis management in organizations requires specific methods and abilities. Whole crisis management can be spitted into some spheres of actions (see Fig. 1-1). There is an area of decisions and actions taken before crisis will happen and when crisis will occur. First is important for tactical reasons. Managers can anticipate necessity of changes by following own experience from the past. They will manage to estimate degree of approaching crisis, prepare different variants of problems surmount and reaction mechanisms. In this part the important place have constant simulations, learning and training personnel. These will provide durable effects in reducing time needed to diagnose and tools matching. Brain storms and pre-warning system are key points in prevention, anti-crisis actions. Second part treats all activity as a response for situation when crisis is a real danger and touches particular departments, spheres or whole organization. The discrepancy between this and previous area is that some problems are causing worse achievements; the performance is declining due to evident reasons, which must be first of all identified. The process of proceeding assumes establishment of crisis headquarter for crisis management. This headquarter will assess the most important matters and after preliminary segregation on the ground of them will build scenarios, prepare operations and will coordinate internal and external communication. Depending on maturity of managers and employees, sacrifice, engagement, corporate identity, efficiency and results may differ in organizations. One appears to be certain, that the prevention costs, but it is the best way for crisis management, when none of worrying facts are kept in concealment or hidden for fear of a shame, which would go out from the organization. Moreover, being prepared and ready for crisis perturbation gives an advantage among firms in the same industry. It is strengthening company s position on the background of others, with same problems, troubles and difficulties caused by environmental factors. The prevalence is to know where the origin of the crisis is, what and how repair first, what 3

5 resources are needed to turn chaos and confusion into resolute growth, with better vision for success Reasons and consequences of crises situations The concept of crisis management was described in many positions and has various definitions. As G. Gierszewska presents, the crisis in a firm is a situation or state, in which accumulation of difficulties is a menace to the realization of basic functions of the enterprise, with parallel limitation of ability to revival. The reasons are, as researches prove, lack of skills to identify threats appearing in the environment and utilization of chances. These components are leading to lack of reaction and adaptation of the firm to the changes 1. Crisis situation in the enterprise is a sign either bad strategy or its bad realization 2. Analyzing the organization s strategy, managers should concentrate attention on five issues: - effectiveness of actual strategy, - strengths and weaknesses, opportunities and threats for the company, - competitiveness of prices and costs (expenditures), - assessment of the firm rival position, - identification of problems, which cause crisis in the enterprise. The company s management must answer the question whether so far mission is sufficient for exiting the crisis situation and reaching competitive supremacy. Is the actual mission comprehensible and is it a fundamental stimulant for making changes in the obligatory strategy? Another definition states that crisis in an organization is an unfavorable situation, influencing destructively on firm s activity, its employees and contracting parties 3. A bundle of weaknesses creates bad image of the company outside, employees do not identify with the firm in all, so the number of orders is reducing and work efficiency is decreasing. In the consequence, alienation and conflicts can occur rapidly causing a spiral of problems. 1 Gierszewska G.: Strategie kryzysowe w warunkach globalizacji, in: Kozyra B., Zelek A. (eds), Praktyka zarzdzania kryzysem w przedsibiorstwie, Wydawnictwo Zachodniopomorskiej Szkoły Biznesu, Szczecin 2002, p Krzakiewicz K.: Strategia i taktyka w zarzdzaniu antykryzysowym, in: Skalik J. (ed.): Zachowania organizacji wobec zjawisk kryzysowych, Cornetis, Wrocław 2003, p Olejczyk K.: Organizacja wirtualna moliwoci przeciwdziałania czy pogłbianie kryzysu organizacji, in: Skalik J. (ed.): Zachowania organizacji wobec zjawisk kryzysowych, Cornetis, Wrocław 2003, p

6 Significant meaning has the human resources department in cooperation with the board of management, which should create correct communication system based on the truth. The truth is one, the falsehoods are many and the broadcasted version can be mistaken with others, causing suffer losses for the company. The expert of crisis theory, I.I. Mitroff is saying that a crisis is an effect of appearing of unexpected disturbances in organization s activity, including internal and external factors with random nature. Such a crisis is coming suddenly, often in explosion manner and it is hard to bring the crisis situation under control 4. Managers provoke crisis situation sometimes. They have to prepare different options, strategic intents, long-term goals and draw up a vision for the future. Taking a picture of current industry situation, related by common opinions and conclusions, the top management can overestimate assumptions and may remain overoptimistic. This daily, weekly and monthly routine may cause unseeing eyes, when the estimation does not take an attention for unexpected happenings. The divergence with future reality can destroy previous assumptions, which will become inadequate for that moment. If managers did not take care of a proper strategy fit while making corporate, business and functional strategies, they can plunge their company into crisis. By P.F. Drucker 5 the crisis is a consequence of sector s life cycles, especially for specialized companies. Investments in scientific researches and innovations are not a guarantee for crisis disappearance and organization s survival. This point of view is concentrating on macroeconomic reasons, showing that not every danger comes from internal sources. Very often a crisis appears when objectives are not adjusted to resources, which are at its disposal now or would be in not far future 6. The management can asleep the moment of an opportunity, when a small investment could provide enormous profit in a short time. When 4 Mitroff I.I., Pearson Ch.M.: Zarzdzanie sytuacj kryzysow czyli jak ochroni firm przed najgorszym; podrcznik usprawniajcy zdolno organizacji do reagowania w sytuacjach kryzysowych, (tłum. z ang.), Business Press, Warszawa 1998, p. 22 and further. 5 Drucker P.F.: Innowacja i przedsibiorczo. Praktyka i zasady, Wydawnictwo Naukowe PWN, Warszawa 1992, p. 138 and further. 6 Kieszkowska-Grudny A.: Kryzys szans dalszego rozwoju?, by Brief 36/2002, [accessed March 2004]. 5

7 this occasion is passed, reservoirs needed may be twice or much bigger, or even not achievable already then. The effort is loosen, the next chance may not repeat so quickly. Suffice it to see, how nature phenomena evolve in order to anticipate future events among human surroundings, to catch a glimpse of resemblances to physical and biological principles. Then everyone can witness similar situations. Sometimes, one small case or accident may cause an avalanche of misfortunes, which can have an impact on organization s destiny and decide about path of evolution. In order to restrain unkind course of things, there must be appropriate crisis management s system implemented, to reduce total costs of crisis spin and effects, and to be safeguarded against collapse or breakdown. Crisis is not an incident event, is not growing in a short time 7. Before first symptoms occur, there are processes, phenomena, threatening attitudes feeling. If they are not counteracted, the problems will arise and become more complicated. Crisis emerges (after worsening period) on the fields of marketing, technology, production, finance, etc. It embraces managers and the rest of employees. It usually occurs as a consequence of mistakes: postponed or lack of reaction, bad coping with deteriorating symptoms, or fault management. First, small disturbances are seen, some of them are rapid accruing, other slowly. As a rule crisis is growing step by step, gradually (with few exceptions like natural disasters or terrorist attacks), as a result of many events connected by cause-effect relations 8. Organization s crisis is a process caused by badly, negative process of the advancement. As far as financial crisis is concerned, if financial situation deteriorates with small dynamics, it is rather easy to keep the situation under control. But if the situation is worsening rapidly, when firm looses financial liquidity, then crisis is coming quickly and firm s standing is braking down. Economical troubles are hard to hold back. So, continuous monitoring of crisis symptoms is very important for prevention of crises 9. 7 Urbanowska-Sojkin E.: Zarzdzanie przedsibiorstwem. Od kryzysu do sukcesu, Wydawnictwo Akademii Ekonomicznej w Poznaniu, Pozna 1998, p Kral Z., Zabłocka Kluczka A.: Istota zjawisk kryzysowych w organizacji, in: Skalik J. (ed.): Zachowania organizacji wobec zjawisk kryzysowych, Cornetis, Wrocław 2003, pp. 19, Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie. Perspektywa strategiczna, Instytut Organizacji i Zarzdzania w Przemyle ORGMASZ, Warszawa 2003, p

8 Another aspect is that there can be two kinds of crisis processes: first one is permanent and the second is sporadic, escalating from time to time. Both of them can be equally devastating and harmful for enterprises. If sporadic turning-points are rare, there is little worry, and there might be a hope that any repetition will be defeated at the origin, because of previous lessons and experiences. Sometimes the amplitude of the rare crisis is so high, that it can be more dangerous than a permanent one. The same is for frequent crises, when there is no time for building barriers after preceding attack. If frequency of coming shocks is high, there is a lack of feedback or the feedback is not taken with full understanding and it carriers many injuries on defensive system of an organization, that people are exhausted and loose this fighting. In many cases, economic crisis can be represented by a curve with a few stages. In first phase crisis symptoms are occurring, and then worsening of the situation is escalating till the moment when the crisis becomes the real problem. After this stage, during an intervention, the crisis achieves the turning point, which decides about what result can be. Figure 1-2. Evolution s phases of crisis situation in an enterprise crisis symptoms crisis escalation real crisis intervention crisis extinction boom economic results rapid reaction system financial restructure crisis exit strategies strengthening strategies time bankruptcy Source: Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie. Perspektywa strategiczna, Instytut Organizacji i Zarzdzania w Przemyle ORGMASZ, Warszawa 2003, p

9 There are two series of events possible: first one with crisis extinction undergoing in the boom, second has the end in the bankruptcy, in the consequence of shortage of efficacious therapeutic actions 10. Sometimes crisis can be exploited for being a launcher or trampoline in the growth of a company, getting higher level of performance that it was before crisis became. This process is behaving like a pendulum or a swing rather, what is allowing for accelerating momentum while crisis extinction. Good managers can use it for changing crisis into success. Moreover, once employees fight for survival of their company, it is easier to carry conviction, to force them to make things with extraordinary effort. When changes are running faster, changes are lesser painful and they are less noticeable and sensible by employees. People are more elastic and they listen to orders with higher discipline. This is a simple way to excessive manipulation, but crisis specter and fears can provoke employees to better and more efficient work, which well utilized will bring success, profits and fame for the organization. A company must sustain a growth to protect against again return to crisis situation. Solving problems restore normality, build stability. However such a state of things is dangerous for the organization, because it limits creativity and eliminates chaos elements which are necessary for the future growth. The company was in a chaos before, while crisis become and it should support a constructive chaos after treatment, to make improvements and innovations. So, solving problems and innovations are as an obverse and reverse of the same coin they are deciding about current and future effectiveness of an organization 11. The same about two sides of a medal is underlined in the common definition, that crisis is turning-point, overcoming time, decisive moment, change period and breakdown of so far development line 12. Crisis can help to achieve totally different plane, a better position on the market s orbit. All depends on perceiving chances and exploiting them. As J. Penc presents 13, in many enterprises towards increasing uncertainness caused by violent changes of surrounding, and due to arising complexity of solving problems, the propensity to 10 Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie..., op.cit., pp Obłój K.: Tworzywo skutecznych strategii, PWE, Warszawa 2002, pp Nowa encyklopedia powszechna PWN, PWN, Warszawa Penc J.: Meneder w działaniu. Sekrety prowadzenia biznesu, Tom I, Wydawnictwo C.H. Beck, Warszawa 2003, p

10 risk is decreasing. However, do not taking a risk is not secure for a company, because it means a lack of necessary changes and innovations, which in consequence leads to rapid ageing and stagnation. This can bring about crisis situation. The effective counteracting means for this, there are innovations, which are indispensable connected to changes and risk. Another approach treats crisis as phases of organization s growth, when companies live through different stages from youth to maturity. Crises have various sources and character then 14. At first stage a leadership crisis can reveal, when a size of an enterprise gets grows up to a scale that it surpasses the control of initiators. The next stage appears when during extension of organizational structure, duties and competences are too much formal. At this phase autonomy crisis occurs. While this happens, restructure or reengineering process begins with empowerment of lower management levels most often. This can provide to decentralization s crisis, which forces organization to making better coordination inside a firm and it may bring a growth in succession. After this, there is possible bureaucracy crisis, which causes lowering effectiveness of functioning in big organizations. Observations prove, that giant and companies running on the market many years have periodic crisis situations in their life. If these crises are well managed, they can be a motive for accelerated growth in the future. L. Greiner, creator one of the first models of organizations evolution, noticed fluent and harmonious phases interlaced by revolutions, shocks and disorganization periods. Old structures, systems, and management, motivation or control styles are ceasing keeping up with organization s needs, so the crisis is entering, which extorts need for internal change. In such cases the achievement of the success after crisis is possible. When leadership crisis happens there is a chance for growth by creativity. When autonomy crisis appears there is a chance for growth by formalism. When decentralization crisis occurs there can be a growth by delegating authorities. When bureaucracy crisis happens than a growth by coordination is possible 15. Globalization of the markets, increasing of concurrence is causing that the success depends on intangible assets of the firm like reputation, reliability, public capital norms, values, 14 Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie..., op.cit., pp Kieszkowska-Grudny A.: Kryzys szans..., op.cit.; Urbanowska-Sojkin E.: Zarzdzanie przedsibiorstwem..., op.cit., p. 28, fig. 5. 9

11 knowledge, and employee s motivation 16. Public capital becomes a strategic asset for many potentates of the world. Measuring of loses caused by productions breaks is easier than counting long-term loses as a result of rude and incompetent employees. This may be a reason of forthcoming crisis, when no one knows from where it has a source Threats discrimination and segmentation The area of crisis appearance can be located in many departments and parts like human resources, marketing, IT/technology, accounting, finance, legal, supply, production, sales, assets maintenance, service and many others. There are no sure territories, because in every process a mankind is involved. The human being is least anticipating creature and most deceptive component of the organization. By reason of this, every point of a firm may be a target of crisis stroke. So knowledge management takes important place on the map of anticrisis programs. There are crises dependent on financial or organizational factors or both together. Financial crises are most often derivative of internal organizational systems, behaviors and poor strategy, but sometimes they come from outside reasons. Finance is reflecting like a mirror earlier mistakes and errors done by a firm, industry or broader market. Crises can be considered in many ways. One of them considers these situations as exception, incident or simple episode, other that in many cases, crises are like processes. The second approach is more common and frequently repeating. One of the ways of crises segmentation is presented, distinguish two fundamental sorts: anticipated and unexpected 17. Crisis management appears to be easier in situations when a danger can be foreseen, when grounds and successions are known. Anticipated crisis is consciously generated for instance when a great number of employees are dismissed or the enterprise is liquidated. The results of this crisis can be reduced, especially on the personnel field, by preventive operations like outplacement programs, changing qualifications by trainings and other legal and material help for employees. 16 Obłój K.: Tworzywo..., op.cit, p Tworzydło D.: Przeciwdziałanie sytuacjom kryzysowym, Firma i rynek 4/2002 1/2003, p

12 When an unexpected crisis is occurring, which could not have been anticipated (or the organization was not able to), there are decisions and operations taken which should counteract threats and more or less terrible consequences. The reasons can be as it is following: social unrest due to worsening economic situation of the country, legal and economical due to bad financial results of the company, personal when dismissing of employees and strikes are appearing, technological due to damage of machines, informative due to existence of insider trading or industrial espionage in the company, and natural like disasters, cataclysms and so on. Some approaches say that crisis process can be split on three phases 18. First there is a potential crisis, when various internal and external effects and events cause a danger for an organization. Then this crisis is passing to hidden crisis. At this stage there are first problems and difficulties with achieving goals and managing resources. If there is no effective reaction, a firm goes to next phase with open crisis, with economical dangers and very hard inner disturbances. When time factors are considered there can be recognized sudden and smolder crises 19. The sudden crisis happens without warning of danger. Most often media are relating this event as sensational, and this is causing deterioration of the company s situation. The proximate and direct cause of crisis is done by shocks inside or outside the organization, which are resulting in worsening bi-lateral relations among contractors or suppliers. All are influencing the image and good will of a firm. Second type, the smolder crisis is defined as growing up in a time business problem, independently to basic reasons and sources (internal, external). It can last for years and symptoms can be revealed gradually in a time. The market value of a firm may drop by stages in such situations due to slow, but unequivocal fall of trust to the company between customers, investors and employees. 18 Urbanowska-Sojkin E.: Zarzdzanie przedsibiorstwem..., op.cit., p. 29; Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie..., op.cit., pp Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie..., op.cit., p

13 Deriving from K. Olejczyk 20, factors which generate crises in organizations can be divided into two basic groups: dependent on the market and dependent on the firm. Enterprises are able to have an impact and to counteract on the market situations a little or not at all. On the contrary to that, most factors generated by firm itself are modifiable and possible to minimizing. The most important factors with the market origin are: - recession it reflects a crisis in all free-market economy, - restrictive government politics, like high taxes, - problems with public institutions, like the tax board, courts, etc., - suppliers troubles, if concern many of them, - lack of customers and high degree of competition (a little influence a firm may have). Factors of organization origin are: - financial reserves, own capital, loans and credits, - management, incorrect managers and decisions taken, - employees, they have a potential resources to beat the crisis, - technologies, need of new investments. At the literature, there are many examples of internal and external reasons for crises. They are a supplement for those mentioned previously. This is a list of intrinsic causes: - lack of vision and mission, lack of clear goals, - lack of long-term strategy for the company, - weak knowledge of objectives by employees and managers, - scarcity of identification employees with a firm, - personnel conflicts, disappointments and frustrations among employees, - lack of liquidity, too much stress on maximization of profit, bad financial management, - high level of costs, low productivity, - obsolete style of management, organizational methods, - too much self-satisfaction from results achieved, shortage of monitoring effects, - internal chaos, loss control of expenditures, stocks and receivables, - old material and technological base, obsolete know-how, - shortage of brand new products, lack of diversification, - poor marketing strategy. 20 Olejczyk K.: Organizacja wirtualna..., op.cit., pp

14 Among external reasons there are mentioned as follow: - speed of economic growth of the world, country and region, - economic and fiscal politics of the local and central government, legislation, - oscillation of boom and recession periods, - too much enterprises on the market, customers demand structure and volume, consumption model, - the level of population s incomes, propensity for saving money, - high level of sector concurrence on the market, - speed of technological changes and improvements. Figure 1-3. Basic factors which determine crisis in organizations Factors causing crisis in organization Dependent on the market Dependent on the firm Recession Restrictional government s politics Financial resources Management Troubles with state institutions Suppliers troubles Employees of the firm Technologies applied Shortage of customers Competition Source: Olejczyk K.: Organizacja wirtualna moliwoci przeciwdziałania czy pogłbianie kryzysu organizacji, in: Skalik J. (ed.): Zachowania organizacji wobec zjawisk kryzysowych, Cornetis, Wrocław 2003, p Technological environment is a force of organization s success or failure. Tempo of technological changes, novelty scale in an assortment offered, and in necessary equipment for manufacture as well (like production technology, production devices, organization of stands 13

15 and employees teams or sales network) are determinants 21. These changes are pre-reasons for shortening of products life cycles. They decide about necessity of firms adaptation. Technological threats are sometimes ignored, although the danger is serious and often unpredictable. People are rather unaware of disasters that may be caused by the changing weather or a serious sabotage attacks possible every day, at every place of the world. The aim of the natural or planned human attacks can be own organization or another, which is very close bound to it. The objectives of the attacks can be concerned to the power or water supply and distribution, machinery park, air-conditioning and ventilation systems, computer and communication network, and employees too. All depend on the level of the force, which destroys any resources. There can be financial, integrity of data or moral loses, all of them are very painful. Once the Internet era became, new security problems have way out on the surface. Security of the computer network was not a key feature of this new communication and data transfer tool. As market researches prove 22, there are so many hackers, crackers, and viruses attacks daily on the privacy and confidential data, that it is looming large. The most threatened are computers with wide bandwidth link. In the investigated group only 17 % users used antispam software, 56 % had firewalls and 77 % used anti-virus software. The average risk of successful attack was estimated on 75 %, but random attacks touched all users, apart from type of connection to the Internet (through the modem or fast link). Users and firm s administrators are threatened and sleepless when thinking of computer viruses and worms, they are bothered what they could lose. Moreover, a typical Internet user is not able to updating protections with required frequency. The rapport is concluded by the sentence, that there are expectations of more directed (the aim orientated) and sophisticated attacks, when the broadband Internet with 24 hours connection will become more popular and available. Software viruses and worms are a kind of computer code which enables an invader to take the control of another computer and command it to make malicious operations. These tasks are causing disclosure confidential information, burdening the processor by DOS attacks (denial of service) or destruction of more or less important information. 21 Urbanowska-Sojkin E.: Zarzdzanie przedsibiorstwem..., op.cit., p Wyrzykowski A.: Bezpieczestwo IT. Nieustajcy atak, Teleinfo 31 st May 2004 No 24, p

16 Figure 1-4. Threats from rogue code over the Internet Internet Rogue code Threats Disclosure of information Compromising information integrity Denial of service User s system Source: Benson S., Standing C.: Information Systems. A Business Approach, John Wiley & Sons Australia, Milton 2002, p Monitoring, measuring, and diagnosis of crisis symptoms Crises happen in well and badly managed enterprises. Some of them are overoptimistic about the future, about position in which they are. In such cases, unrealistic assessment of the current and forthcoming situation may disrupt self control and strengthen a belief in own indestructibility. Quite often the crisis topic is under taboo among managers in organizations. So they are not thinking about such things, they do not talk about it too much. This causes, if crisis happens, they are not prepared enough to fight against heavy problems. Serious and important problem in crisis diagnosis is accessibility of information and its correlation to level of significance 23. Some of information is insufficient or not available to external subjects. Internal knowledge is easy to possess in most cases, but without external point of view gives incomplete sight on real threats and problems. Also too many information without effective elaborating system is useless and is not much readable. Composition of strategic information, its extent, structure, topicality and degree of processing are crucial. 23 Zelek A.: Zarzdzanie kryzysem..., op.cit., p

17 In practice there are at least two models of crisis behaving. First is a traditional model, where the real crisis situation is a stimulator to set free actions, which should neutralize any future threats. In the second model, risk management procedure is constantly integrated with the company management. This procedure has to isolate the organization from crisis menaces 24. Figure 1-5. Traditional and risk management models in prevention of crises TRADITIONAL MODEL Crisis as management stimulator Repair and healing program FEEDBACK - feedback loop, experience, learning with taking into account risk management RISK MANAGEMENT MODEL Crises identification Neutralization program of a risk FEEDBACK - feedback loop, experience, learning with taking into account risk management Source: Zelek A.: Zarzdzanie kryzysem w przedsibiorstwie. Perspektywa strategiczna, Instytut Organizacji i Zarzdzania w Przemyle ORGMASZ, Warszawa 2003, p None of business entities can be confined to holding possessed status quo; it must introduce internal changes and be flexible. It will assure security. The security is understood as such organization s state, which is characterizing of keeping to a minimum of negative factors for the efficiency and potential. This safety will allow the firm to exist in effective way and to be 24 Zelek A.: Zarzdzanie kryzysem..., op.cit., pp

18 resistant on crisis threats 25. If the company wants to be crisis proof, there is a necessity of more or less dynamic changes to the environment 26. The growth and progress are available only, when procedures, structures, competences and culture are improved with harmony of changes outside the company. As far as crisis situation identification is concerned, there are some methods available with quality management implementation. The ISO standards require carrying through regular internal audits, when examination of quality management system and conformation of this to standards and norms are done. Properly prepared audits ought to bring as much as possible information about implemented procedures and process. Audits must be realized with adequate frequency, and then audit s processes are useful and can deliver pre-warning signals about crises detected or coming 27. Symptoms of enterprise crisis are most often admitted as unsuccessful operations in these domains, which manifest on the outside the condition of organization. As E. Urbanowska Sojkin presents 28, the most painful are: - difficulties in financing of current and development operations, which are representing the organization s ability to do investments, - unbeneficial range changes on volume, dynamics and structure of sales as a result of miscellaneous reasons, i.e. obsolete products, lack of new, competitive products, expansive moves of competitors, changes of demand range, weak distribution system, - instability of proportion between speed of market growth and speed of company s product sales growth (decreasing of market share), - deterioration of company s image (among subjects of environment like stakeholders) due to disappointments resulting from difference between expectations and reality, - declining of company s good-will, - employees alienation, particularity in activity, and internal conflicts. 25 Penc J.: Meneder w działaniu. Skuteczne działanie i samodoskonalenie, Tom II, Wydawnictwo C.H. Beck, Warszawa 2003, p STRATEGOR: Zarzdzanie firm. Strategie, struktury, decyzje, tosamo, Pastwowe Wydawnictwo Ekonomiczne, Warszawa 1995, pp Wierzbic A.: Wymagania normy ISO 9001:2000, a kryzys organizacji, in: Skalik J. (ed.): Zachowania organizacji wobec zjawisk kryzysowych, Cornetis, Wrocław 2003, p Urbanowska-Sojkin E.: Zarzdzanie przedsibiorstwem..., op.cit., pp

19 Resembling symptoms were defined in KPMG s reports, which were cited by A. Zelek 29 : - increasing financial loses disturbing cash-flow, - weak, not reactive management, - improper reactivation plan, - abrupt or accruing of overdue liabilities, - adverse indexes of sector s growth, - conflicts between shareholders, - falling sales and/ or profit, - delays in preparation of financial statements, - excessive and increasing financial leverage in the capital structure, - loss of main purchasers and/ or suppliers. There are some methods of crisis threats identification as far as groups of functional and quantitative types are concerned 30. First types of methods are: logical deductive and empirical inductive. The others are called: scoring s models, multi-criteria models and TRIADA model. The logical deductive method is based on assumption, that payable ability of the company can be evaluated on the grounds of financial analysis. This method is put together from quantitative and qualitative appraisals. The diagnosis is restricted due to lack of comparison to financial condition of others enterprises. In methods of this kind, assessment of financial statements and integrated models like Du Pont are used. The Du Pont analysis is an instrument to analyze the profit situation and is very useful tool for identification of crisis symptoms in finances of companies. There is a possibility to discover threats coming from bad capital structure (Total Assets / Equity) and from depreciation of Returns on Assets (ROA) as well. A fall in Equity Multiplier is a sign of threat concerned with rising of longand short-term liabilities quota in financing of assets. This last ratio depends on the Net Profit Margin and Total Asset Turnover. To illustrate the Du Pont chart there are some quotations below. Deriving from Return on Equity ratio (measures economic efficiency of a company) we obtain: Net Income Net Income Total Assets ROE = = (1) Equity Total Assets Equity 29 Zelek A.: Zarzdzanie kryzysem..., op.cit., pp Zelek A.: Zarzdzanie kryzysem..., op.cit., pp

20 which means that: Total Assets ROE = ROA (2) Equity we can split (1): Net Income Sales Total Assets ROE = (3) Sales Total Assets Equity which explains that ROA depends on: ROA = Net Profit Margin Total Asset Turnover (4) The Du Pont Chart can be more detailed at the bottom of the pyramid, so there is possible to unmask all mistakes in financial management 31. Some of the most important ratios are related with financial liquidity. There are some definitions and there can be distinct four ratios most often used in practice: - Cash Ratio = (cash means + value papers) / short-term liabilities it shows a level of solvency by cash means and their equivalents; its value should be not less than 0,3 - Acid / Quick Ratio = (current assets inventory) / short-term liabilities it defines short-term liquidity level, its value should be within a range 1,0 1,2 (1,5) - Current Ratio = current assets / short-term liabilities it defines a general financial liquidity level, its value ought to be more than 2,0 - Treasury Ratio = cash means / immediate payments it determines a level of instant solvency. The alternative model of assessing financial liquidity is the Lambda index, which measures probability of business entity s insolvency. As distinguished from other liquidity ratios, Lambda index uses prognosis of future cash-flows and it is more attractive in current controlling of solvency 32. begining liquidity reserve + sum of forcasted net cash flows in considered period LAMBDA = uncertainness degree connected with net cash flows in considered period The most wanted level of Lambda index is equal 3,0. If Lambda index < 3,0 it means that a company may have financial problems. 31 Zelek A.: Zarzdzanie kryzysem..., op.cit., p. 92, fig Zelek A.: Zarzdzanie kryzysem..., op.cit., p

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