EDUCONS UNIVERSITY

FACULTY OF BUSINESS ECONOMY

Consultative center Sremska Mitrovica

Seminar Paper

CRISIS MANAGEMENT

Professor

student

22.12.2014.

CONTENT
1...........................................................INTRODUCTION
2......................CRISIS MENAGEMENT IN BUSINESS
3........................................PEPSI COLA CASE STUDY
4...............................................................CONCLUSION
5................................................................LITERATURE

1. INTRODUCTION
There is no clear and unambiguous conceptual content of the term crisis, but there are numerous
and mutually dissimilar interpretations. The word crisis denotes a decisive moment which leads
to further positive or negative development. It is mainly used for describing all events and
situations that are unwanted and unexpected.
The contemporary definition of crisis was given by Paul.T.Hart: Crisis is a serious threat to the
basic structures or the fundamental values and norms of the social system which, in terms of time
pressures and very uncertain situations, requires critical decision making.
According to the Webster's Dictionary, crisis is an unstable or critical time or state of affairs,
which was produced as a consequence of a desire to make a decisive difference between better or
worse state. Although, it may seem unusual, considering it is a classical unfamiliarity of the crisis
itself, according to some theorists, certain rules can be determined and made:
-They occur suddenly, without partials
-They spread at an incredible speed

-They usually occur by night, weekend or holiday (just when you least expect them)
-Every crisis is different in its characteristics and
- They attract the media in a stunning speed (The good news is in fact the bad news.)

When the institutional structures of a system experience a relatively strong decline in legitimacy
in any field, they undergo crisis. It is not perceived as an ultimate state, but as a process that does
not have a clear beginning. Consequences of every crisis are being felt in the future, because
while it happens, there are disturbances of external and internal factors. For one company,
organization, crisis represents an environment in which it cannot operate normally. The crisis
threatens the ability to survive in the market, impedes the achievement of goals, and sometimes
puts into question the very survival of the company.
Crisis occurs for many reasons .One of the reasons is the wrong information, whether positive,
negative or premature .They usually refer to a source that has a certain credibility, and thus create
confusion. They generally begin with rumors that are mostly negative, and intend to inflict
damage, have a goal, or are premature, which can also cause considerable damage to the
business. There are also reckless statements of managers, which may present the company as
frivolous, or send the wrong message and deprive the company of a large group of consumers,
associates, or the users of their services.
A special kind of crisis is the state of emergency. In this case, media relations are mostly
completely centralized and controlled by the government, and also subjected to a rigorous
censorship. Crisis in the organization can be caused by many different situations. In an article
published in PR Week magazine, it is stated:

Imagine one of the following scenarios in your company: the withdrawal of the products from the
market; plane crash; a sexual harassment lawsuit that has gained a lot of publicity; a gunmen
holding hostages in your office; fear of infection by bacteria Escherichia coli; the stock market

crash that follows the decline in the value of shares of your company; union strike; negligence
lawsuit against a doctor in the hospital ...
There are, of course, those crises caused by natural disasters, fire, or other sudden natural factor
for which the company could not have been prepared.
All crises have three main characteristics: 1) unexpectedness, 2) unpreparedness and 3) time
pressure.
1) When a crisis occurs, it is in most cases unexpected .Although there are always signs of its
formation, the executives and the management are rarely able to anticipate it, or if they do, then
certainly not to such extent.
2) Since the crisis comes unexpectedly, of course, the management is usually unprepared for its
quick and efficient solution.
3) Crisis is a challenge for executive skills. In unexpected and unprepared conditions, the
managers are required to act quickly and make the right decisions.

Although most crises are unexpected, researchers say that most of them could have been
predicted. Research made by Institute for Crisis Management revealed that only 14% of crises in
the world of business happened unexpectedly. The remaining 86% of the crises that this Institute
called "smoldering", in which the organization is aware of potential threats to the business long
before the public finds out about it. Also, the research shows that management (in some cases,
poor management) causes 78% of the crises.
Predictability is one of the most important characteristics of a crisis and almost every time a
dramatic crisis occurs, it is followed by public debates about whether it was possible to predict it
or not. Whether a crisis was foreseeable or not, sometimes it is very difficult to determine, so
consulting with experts can be a reliable solution, and the probability of the event plays an
important role as well.

From the viewpoint of management, it would not be wrong to say that the crisis is an extreme
contradictory phenomenon. It is, in fact, the most challenging, but at the same time the most

difficult and least desirable part of every job, because who would ever want to have crisis in his
company!? The reasons for this are simple. On one side, tense situations are those that require
ingenuity, skill, individual preparation as well as coordination of the entire management team. On
the other side, crisis is one of the concepts that carries a negative connotation, because when we
talk about it, we are usually referring to the extreme circumstances in which the organization has
found itself, that can negatively reflect its business, and the image, as well.

2. CRISIS MANAGEMENT IN BUSINESS

The most common objective of risk management is the effective planning of resources required
for restoring financial balance and operational efficiency after some form of loss.
Nowadays, in the times of new IT technologies, companies can be facing modern crisis. Modern
crisis are extended periods of serious threats and high uncertainty that spread to the level of high
politics and disrupt a wide range of social, political and organizational processes. They are
chaotic and dynamic processes, and not isolated events regularly arranged by time intervals. They
can smolder and flare up. The nature of these crises is complex, it consists of new combination
and is not influenced by the governance mechanisms applied in the classic crises. Characteristics
of future crises are major consequences / effects, a high economic cost, extreme uncertainty, the
long duration with threats that change with time, critical problems in communicating with the
media, victims, publicity, a large number of acts in stake. Modern crisis is a logical consequence
of the dominant trends such as transnationalization, mediatization, technological development
and globalization. This technological development influences the causes and characteristics of the
crisis. Even a small disruption in operations is sufficient to create a crisis. The increasing
dependence on computer systems makes social and economic systems vulnerable, and the
informational systems are endangered of hackers attacks.

More critical trends are : transnationalization (crisis can be easily transmitted from local field on
the global one), a media society (if one process becomes the topic of media, it can grow into a

crisis), technological details , dispersal of authority of the state (if the state is not solving the
crisis, its authority decreases ).
The main tasks of the management of a company are to avoid a crisis, or to diminish
the already existing crisis. A good crisis manager has the answers to the questions
"what if". The first task of the crisis manager is to recognize the signals and
symptoms of the crises as they appear, and to react proactively.
The task of crisis management in a crisis situation would be to attempt to maintain
the current liquidity of the company by including unplanned revenue, reducing or
minimizing anticipated costs (expenses), or to harmonize the terms of funds inflows
and outflows in order to avoid penalties, performing faster invoicing, introducing
more severe warnings for debt collections, shifting deadlines of annual servicing,
equipment maintenance, stopping certain investments, not employ new staff,
shortening working hours and the cost of products in order to ensure the inflow of
funds.

When already in a situation of crisis, the company management must have a plan. There are
several plans in crisis management: 1) administrative plans, 2) crisis plan
1) Administrative plans describe the basic policies and actions of the competent authorities in
managing internal processes (financial management, human resource management, employee
relations). These plans reflect a strategy of avoiding crisis.
The plan does not contain detailed instructions "how to do something" that should be known only
to individuals or groups that perform certain functions. Companies do not operate in a static
environment, and therefore must constantly update and test plans.
Leading principles for drawing up the crisis plan are:
- Do not invent the wheel", but use existing knowledge in the organization and its environment,
- No need to work alone, but use experienced people from the government and the private sector,
volunteers...

-Use Existing organizational structure. If one department daily performs the same work, in a
crisis that it will bet perform the similar kind of work.,
-Explore. Study the regulations, existing plans and agreements on mutual assistance.
Identify available resources (people, equipment and facilities) and possibilities to reach them.

2.) The crisis plan consists of three elements: a basic plan, functional annexes and addition to the
specific risks
-Basic Plan is a document that describes the purpose of the plan .On contains the user manual of
the plan, statement of purpose, and the most importantly, it deals with the distribution of
authority during the risks. Its sole purpose is to specify who will be responsible for key functions.
Functional annexes relate to specific activities crucial for crisis response and immediate recovery
that support the basic plan. It contains the same parts as the basic plan.
- Addition to the specific remarks operationalizes the functional annexes in terms of special and
unique response procedures, notifications, protective actions and other needs that generate
particular risk (fire, earthquake, terrorist attack). It contains technical information, details and
methods used in specific emergency operations .. This ensures consistency of the plan since all
three parts of the overall plan are similar, only the details vary. Plan must be written in clear and
precise language to avoid ambiguity or incorrect interpretations. Technical terminology is
necessary in some parts.
There are many examples of solving crises in modern business, some examples are bad, but there
are also good examples of to solve the crisis the fastest possible without major consequences,
which is the goal of every management, one of them is a multinational company Pepsi-Cola.

3. PEPSI-COLA-CASE STUDY

In 1993, the Pepsi-Cola company was found in a crisis situation when a man from the city of
Tacoma, Washington, claimed that he had found a syringe inside a can of Diet Pepsi. Shortly

after the publication of the story in the news, similar claims have emerged across the country.
People have claimed to have found a variety of items, from bullets to vials of crack cocaine. The
management of Pepsi knew that the only way that was possible was if someone outside the
company "tinkered" with their packaging.

Pepsi-Cola decided to use defensive strategies, claiming they were innocent of all charges.
Proving the companys innocence was crucial in protecting the reputation of Pepsi brand, and
consequently the protection of its work. Pepsi launched a variety of strategies to deal with this
problem.

Firstly, Pepsi responded to the accusations by saying that the items were inserted after the cans
had been opened, and that people who were spreading these rumours did so to gain money in
court settlement. The company clearly stated that it would "continue the legal action against any
fraudulent claims and accusations."

Secondly, Pepsi was using a strategy of denial, claiming that there was no crisis. The president of
Pepsi Company Craig Weatherup appeared in various television and radio broadcasts claiming
that Pepsi bottling line was extremely safe. Pepsi had even brought video cameras in their
bottling lines to show the bottling process and the impossibility of inserting a foreign body in a
can of Pepsi before it was sealed.

Thirdly, Pepsi had set up cameras by their production machines in order to show its
determination to catch the culprit of this crisis.
Of course, it was discovered then that it was a fraud, just as Pepsi had claimed. The persons who
deliberately inserted foreign objects in cans were brought before the court where they answered
for their crime. Pepsi managed to recover from fraud using an effective crisis campaign for public
relations, which combined a number of different strategies of crisis management.

The biggest concerns about these kinds of crises are that potentially false claims may lead to a
reduction in the number of customers who turn to other manufactures in fear of finding foreign

objects in their beverages. Another big concern of the company was that its damaged reputation
could terminate their relations with distributors of beverages. It was managed by constant
communication with the media, by demonstrating transparency in their work and by
collaboration.
During the crisis, the company was communicating with customers by almost all media, but also
took care that the employees retain full confidence in its work, which is also important, because
in these situations it is crucial to prevent the spread of such information within the company. It
initiated its own investigation in order to maintain the integrity of the company. When the
company proved, in all ways possible, that it was impossible to insert any foreign objects into
their cans, the crises abated.

In this case, the crisis occurred due to false allegations. Although the real crisis in the company
had never even occurred, the claims that were made in the public aroused suspicion among the
public that they might be true, which could have damaged the image of the company, and lead to
much deeper problems in the company.
This case study shows that the perception of the crisis can be just as harmful to the company as
the real crisis, both ultimately lead to loses. The important thing for the management of a
company is to grasp the extent of the consequences it could have on the business in time and to
react quickly.
It can be of help to other companies how to prevent the occurrence of the crisis, or minimize it.
In order to show the public that the crisis actually does not exist, it is important to communicate
with the public. Honesty and open communication make managing crisis management a lot
easier, especially in the early stages of the crisis, so that an easy and quick solution can be
formed.

4. CONCLUSION
Large companies have in recent years become aware of the importance of crisis management and
reacted by positioning a director of crisis management with the task to simultaneously perform
works related to risk assessment prior to the incident and, if necessary, provide operational
guidance in case a crisis occurred. This is not a generally accepted way of doing business, so

there are big differences on the acceptance and implementation of risk management from
company to company.
Today, companies are moving towards merging crisis and risk management, so this function is
sometimes taken over by a crisis manager, which happens in some companies in the US and
Europe. In Asia, even in these conditions of rapid industrial growth and globalization, the risk
management is still only beginning to rise.

Crisis management is easily connected with the busy times of crisis decision-making, but it also
covers managerial area of prevention, preparation, and response to the crisis ..
In a broader understanding of risk management, it is taken into account the need to understand
the contingencies and the further implementation of plans in those changed conditions, which is
one of the main objectives of risk management.
The inconsistent nature of modern crisis has a direct impact on crisis management. Strategy of
prevention and intervention is no longer sufficient, for modern businesses, crises are becoming
more complex and interdependent.

Modern risk management must be based on assumptions and it must consider potential crisis. The
manager in modern risk management must be capable to deal with problems related to products,
problems in the industry result of man work, so to speak, the negative effects of any kind which
may endanger the potentials for the survival of the organization, as well as its advancement. The
manager in risk management must be responsible for quality control, business forecast, and many
other areas, not only for preventing a larger crisis. Regardless of the specificities and differences
in these areas, he must take care of all circumstances which may generate potential losses for the
company.
Today, more and more attention is paid to companies that are experiencing crisis because it is
now clear that crisis are inevitably occurring and it is only a matter of time when they come to
surface.
Entrepreneurial crisis are able to cause deep changes and the development of future-oriented
concepts, and contribute to breaking the existing but outdated structures. The crises allow the

appearance of previously undiscovered innovative possibilities and the crash of resistance

towards new things.
In order to survive the times of crisis, companies are more willing to take risks, which leads to
initiations of various manufacturing and process innovations. And that is exactly what is needed.

After each crisis, the participants should meet and carry out a comprehensive analysis of what
was done well but also of the errors and omissions that have been made. In this respect, some
questions should be answered: considering the knowledge at that time, was it possible to avoid
the crisis and how?; What were the early warning signs and were we able (and in what way) to
recognize beforehand?; Which early warning signs were taken into consideration and which were
neglected? When exactly did we realize the existence of crisis?; Did we have already prepared
plans and teams or did we improvise?; Were the plans good?; Was the crisis team well formed?
How loud was the spokesman effective?; Was the management sufficiently present in public?;
Were the reactions of the organization timely and according to the situation?; What was done
well?; What could have been done better?; What were the main mistakes?; Considering the
current knowledge and experience, how can the repetition of the same or similar crises could be
prevented?; If we were able to go back to the beginning of the same event, what things would be
done differently? The goal of these questions is not to determine guilt but to analyse the work of
the crisis team and examples for the future, so it is useful to obtain information from anyone who
played an important role as well as from the experts from the organization or outside of it. It can
all be organized into a chart and serve the future teams for making more efficient answers for the
future crises.

5. LITERATURE
1) w.w.w.efect.of.comunitacion.com date of entering-17.12.2014.
2) w.w.w.caruk.rs date of entering -17.12.2014.
3) crisispublicrelations.com date of entering-14.12.2014.
4) w.w.w.socioeconomica.info date of entering -14.12.2014.
5) Paul T. Heart The Politics of Crisis Management, Cambridge University Press,
2005.
6) w.w.w.prweek.com date of entering 26.07.2013.