CHAPTER 2 LITERATURE REVIEWS The main objective of this study is to investigate the practice of strategic management during economy crisis in an Asian Manufacturer Company ( Company X ) in Rayong Province, Thailand. Through combining the analysis of the investigation and the theories, it comes up with the package of strategic management principles being conducted by this company in Asia during economic crisis. In this chapter, some journals and text books from library and internet are collected to get some information, knowledge relating to theories of crisis management, strategic human resources management as the background of this study. The Theory and Principles of Crisis Management An organizational crisis is a low-probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly (Pearson & Clair, 1998). Crisis management is the process by which an organization deals with a major unpredictable event that threatens to harm the organization, its stakeholders, or the general public. Three elements are common to most definitions of crisis: a threat to the organization, the element of surprise, and a short decision time. (Seeger, Sellnow, & Ulmer, 1998) Crisis management process involves a systematic attempt by managers to prevent crisis from occurring and to manage crises successfully when they do take place. It begins long before a crisis occurs and continues long after recovery. Three major stages of Crisis Management include (Castillo, 2004; Heath, 1998) 1. Pre-crisis Planning 2. The crisis itself 3. Post-crisis or Recovery
5 Crisis Management Process Precrisis Crisis Itself Post crisis Figure 1 Crisis Management Process The pre-crisis planning is the preparation that responds to the potential crisis. Actually in the organization, no matter how forward-thinking company managers are, there is no way to plan to predict when a crisis will strike. What managers can do is learn from the events which had happened to own company or other companies before. And then, they need to well-prepared for the next time. As far as the economic crisis is concerned, although it is unique every time due to the different background, causes and places, the organization still learn from the previous downturn. For example, many researchers compare the 1997 Asian Financial Crisis with 2008 world economic crisis began from U.S, and tried to use experiences to help to recover the current global economic downturn. During the crisis, it is the response to the crisis in hopes of reducing or mitigating its impact. In fact, the most difficult point is to estimate the recovery type in crisis. Mark Thomas, Head of strategy and marketing at PA Consulting says companies should prepare for three potential scenarios: a quick V shaped Recovery, a much slower L-Shaped rebound or the dreaded double-dip recession that is W-shaped. (Richard, 2009)
6 V-Shape L-Shape Quick Recovery Slow Rebound Figure 2 Three Potential Scenarios of Economic Crisis Recovery W-Shape Double-Dip Recession Organizations appear to go through three learning phases after a crisis: defensiveness, openness, and forgetfulness. 1. The defensiveness phase is characterized by crisis containment. In this phase, managers fixate on controlling the crisis situation and are not likely to recognize or evaluate the situation for possible learning opportunities. Although information is collected during the defensiveness stage, managers use it to minimize and deal with the immediate crisis, not for long-term learning. 2. During the openness phase, leaders become more accessible to examine the crisis response and understand organizational weaknesses. Most learning occurs in the openness phase because participants are willing to question core assumptions and beliefs of the organization that typically are unconscious and resistant to change. It is a good chance to deep learning, because attention is directed toward finding solutions. 3. During the forgetfulness phase, managers lose their sense of urgency and, although the crisis is not forgotten, the motivation for change and opportunities for learning decline. From the above 3 phases obvious that not all organizations learn from disasters, some organizations are too deeply mired in assigning blame, denying responsibility, and other dysfunctional behaviors. Healthier organizations are better able to get on with rebuilding or revitalization. These organizations are able to engage in a discourse of renewal that links the pre-crisis, crisis, and post-crisis stages, forming a frame for motivation and cooperation (Seeger, et al., 2005). This is the most opportune time for managers to undertake a discourse of renewal and examine their organizations crisis management plans, before forgetfulness and complacency set in. In Chinese, Crisis is a combination of two characters, one is danger and the other is opportunity. The crisis shines a light on organizational weaknesses that might otherwise remain hidden or be ignored. Crises can motivate the parties involved to search for a wider portfolio of responses for future crises and can encourage experimentation and practice that ultimately may lead to increased flexibility and adaptability (Sitkin, 1996). The ultimate outcome of any crisis is for organizations to learn from it and then reduces future risks. During Hamburger crisis, some companies bankrupted, some companies laid
7 off, but some companies still operate well and profit. Most companies goals are survive overcome the downturn. Actually, it is the right time to know which one is the best company; the best company is able to find the opportunity from the economic crisis and earn, such as healthy financial operation, retain talents and even recruit talents from competitors, and even takeover competitor, etc. Table 1 Hamburger crisis s 1 Year Anniversary Memo Date Hamburger crisis 2008.09.15 LehGman Brothers Holdings bankrupt 2008.09.17 U.S Government take over AIG 2008.10.3 2008.10.6 2008.10.8 2008.11.4 2008.11.5 2008.11.15 2008.11.24 2008.11.26 2008.12.4 2008.12.6 2009.1.20 2009.2.17 2009.3.9 2009.4.2 2009.4.10 2009.4.10 2009.6.1 2009.6.17 2009.9. U.S Government approve 700Billion USD recovery plan Dow Jones Index Fall Down Below 10000 U.S, Euro, China, U.K s Rate Cut Barack Obama s Elected to U.S President China government publish 4000Billion RMB economic stimulus plan G20 in Washington U.K government publish 22Billion USD Economic Stimulus Plan EU approve 200Billion Euro Economic Stimulus Plan France publish 33Billion USD Economic Stimulus Plan FED reduce interest to 0.25% Barack Obama assume a post of U.S President Obama approve 787Billion USD Economic Stimulus Plan Global Stock Market Hit the Bottom G20 in London Japan government publish 1540Billion Yan Economic Stimulus Plan Chrysler file for Bankruptcy Protection GM file for Bankruptcy Protection Obama publish A Plan For Regulatory Reform G20 in Pittsburgh
8 Human Resource Role in Crisis Management Crisis Management should be multifunctional and an important part of a company s strategic planning process. Key management players from across the organization should be involved in crisis management planning and implementation to ensure a comprehensive approach. Human Resource management function is the one area of an organization that deals with every employee and act as liaisons between managers and employees. Human resource management plays a strategic role in the process of crisis management. Organizations must give more consideration to the effects of critical events on their employees, without its human resources, a company s plan for disaster response and recovery cannot be realized. HR may not be the lead role in crisis management, but it should be an active participant begins long before a crisis strikes and continues throughout the crisis response and recovery stages. One of the most important points during economic crisis is finance. Many companies may face the common problems from both internal and external, such as customer order reduction, profit decrease, lower Confidence index, increasing unemployment rate, etc. Human resource management function is to assist organization to reduce the cost and recover from the downturn. The study in this chapter led to the summaries that the economic crisis could be managed well by strategies during the crisis periods of Pre-Planning Crisis, Crisis itself and Post-crisis or Recovery. Different organizations have different attitude to face the economic recession, such as defensive, openness and forgetfulness. Crisis means difficulty, however it goes with opportunity as well. It s the right time to recognize the best company during and after the downturn. The best company could not only survive but also find out opportunity for future business. As far as Human Resource Management is concern, it could assist companies to conquer from economic crisis by strategies, like cost reduction, retain and develop talents, communication and leadership improvement.