The economy is full of uncertainties and the companies who work in are deeply affected by any of the activities that occur across the globe. Businesses, whether large or small are also affected by the hit of crises. Every crisis has their unique aspects whether it is financial, media or public crises and require to handle those crises by apply general principles (Healy and Palepu,2012). In this report, the discussion is carried out on the main cause of the economic crises on 2007-2008. further, also evaluate the effectiveness of tools which are used to predict such crises in the business environment and also discussion is made on strategic crises management theory with providing lesson of leadership to the senior management in the case of financial crises.
A Global financial crisis is a term as a situation when the supply of money is outpaced by the demand for money. This means the liquidity is reducing because available money is withdrawn from the banks. It is important to understand the main cause of global financial crises in order to prepare the business for future issues. There are following reasons which re-mention below:
- Imprudent mortgage lending: it has happened with the excessive credit lending loans provided by the banks, the lower interest rate is also one of the reasons in bringing the crises because with these people started to buy a house at a higher price and also those people able to buy houses who could not afford. When prices began to fall and loans started going bad, there was a severe attack on the financial system (Hillier, Grinblatt and Titman,2011).
- Global imbalances: Global financial flows have been unstable in recent years. as some counties like China, Japan and Germany run a large surplus every year while other countries like the US and UK are run through the deficit. The US external deficit is affected by an internal deficit in the household and government sectors.
- Lack of transparency and accountability in mortgage finances: throughout the housing finances the many participants are contributed as a creation of bad mortgage and also selling bad securities, which makes creates more abundance of bad debts on the financial institutions and in banks also. Similarly, a trader could sell securities to investors, without fear of personal responsibility if those contracts failed and so it was for brokers, individuals in rating agencies and other market participants each maximizing his or her gain and passing problems down the line the system itself collapsed. Because of the lack of participating accountably and increasing the excessive bad debts on the banks the model of mortgage finances itself becomes a massive risk generator (Mishkin,2009).
- Rating agencies: the credit rating agencies give AAA ratings to the various issues of subprime mortgage-backed securities, critics cite poor, economic models, conflicts of interest and lack of effective regulation as reasons for the rating agencies' failure.
- Bank rejection to lend: By the affected from crises, banks are refusing to lend the loans to the people. This lead to narrow in the economy. The investments and the foreign currency exchange rate was started to decrease and the banks and other financial institution was going on bad debts side.
- Housing bubble: With the easy money policies, the federal reserve allows the housing prices to rise to unsustainable levels (Jordà, Schularick and Taylor,2011). This crisis is bursting the bubble and make banks insolvent.
Thus from the above mention global financial crisis banks are adversely affected and the economy is trying to recover their losses by initiating various activities. Banks also become a bad debts because they do not have sufficient money to provide the businesses which make the economy down. In this situation, whole transactions stop and the economy enters into trouble. In such conditions, the central banks and higher authority take the responsibility of these crises and they try to balance the economic but they fail to make stabilize the economic fluctuation. Many causes have been discussing and that has a direct effect on the wealth and consumption level of the persons and in their investments also.
To forecast the major crises there is need to analyze the business environment so that vital measures can be taken accordingly. Because of happening major changes in the business environment the strategic planning and the ability to implement is critical. Businesses, such as the producers of automobiles, furniture, and other consumables goods are operated in a stable and predictable world. In the case of services firms such as banks, savings, and loans. But they are failed to take a position in the recession period (Gertler and Kiyotaki,2010). So to overcome these crises the companies should forecast the business environment so that they are developing such tools that protect them from adversely affect. By using the quantitative as well as structural analogy approaches the impact of cries can be reduced.
Quantitative forecasting models assume that the risk of near term crises and conflict in a given country can be largely presented as a function of a discrete number of variables and also the level of those variables. These models help in generate a risk score for each country, from scale low to high of risk near term conflict. This scale helps to identify the level of risk in the economy. While in structural analogies, the forecast is based on the identification of key similarities across countries. I find a set of repeated relationship such as conflicts between states and downfall in the currency (Fidrmuc and Korhonen,2010). If the similar conditions can be identified then it is important here is how well an analyst can identify meaningful similarities. On that basis, the individual country takes the step of investment across the country.
Other than that many analysts propose a variety ways to forecast the crises and issues in this business environment:
- Genius forecasting: this method is based on a combination of assumptions, intuitions, insight and luck basis. Their forecast is dependent upon the perception of the forecaster as that what issues they are perceived from the environment and for that which important measures he or she is suggested to the company. Some individual is capable to predict the accurate forecast and that helps the business to reduce their some loss.
- Trend basis: these methods are used to forecast by examine the trends and cycles in historical data and then use mathematical techniques to estimate the future. There are many mathematical models but the most feasible is collecting the historical data which presents the trends in a clear manner. The assumptions of all these tools is based on the forces that are responsible for creating the past use that to operate the future. This is more valid when it is used for short term horizons but it falls short for the medium and long term forecast.
- Consensus methods: This method involves seeking expert opinions from more than one person. Each expert is their own discipline. So their decisions reflect varies in issues and with the combination of their opinions the final forecast is obtained (Claessens, Kose and Terrones,2012).
- Combination forecast: if all the other method is not appropriate for the situation then the individual can use the combination of above. This helps the company to predict the situation effectively.
Thus to predict the issues, the problem in the business in advances it is very necessary to prepare the organization in such a way they can forecast the various conditions so that they take essential steps in order to overcome. To be taken effective decision making in the business predictor need to analyze the current market situation by performing extensive research work or by looking at the past and future trends the company gets an idea about the upcoming issues (Ivashina and Scharfstein,2010). The economic fluctuation is also adversely affected the companies so to work in any international company the manager needs to estimate the present and upcoming updates which helps in reducing the risk of failure. With this, it is inferred that forecasting is crucial for the business, individual and every investor in order to protect themselves from the risk.
Crisis management is very important to the organization in order to control the issues and uncertainties at the workplace. Basically this theory suggests that it is the strategic planning that prevents and responds in the situation of crises or any negative consequences. The process to remove the risk of uncertainties and allow the management to work smoothly For that crisis management role is vital. They are the key elements for the business. crisis management objective for the organization is to make systematic and timely decisions that are based on facts and clear thinking in operating critical situations (Ivashina and Scharfstein,2010). If anyone has a little knowledge about the essential basics of critical management then crises can be reduced. It is said that when the right plans has been adopted before crises occur then the damage of the organization can be minimized. The experts believe that successful management of a crisis is about recognizing and taking necessary steps to reduce the issues from the situations, rather than just being heard and say the right things.
Crises management theory suggests the idea that crises have an identifiable life cycle (Popov and Udell,2012). Understanding the crisis life cycle is vital because it is used to look ahead expected results in each life cycle stage. In an organization, management needs to appoint the crisis managers who have a responsibility to approach each of the steps of the crisis life cycle with the view to meet the various company needs and also to overcome the challenges which arise in different stages.
The cries life cycle includes five stages which are divided as a CM function into discrete segments executed in a specific order. The first stage involves error detection in which virtually all issues leave a mark of early warning signals. If the management can analyze and act upon the signals then many issues can be resolved at the same time. the second stage is that which arises simultaneously with the signal detection is prevention. Its aim is to perform all activities which help in prevention from the errors so that the initial problem can be managed effectively. the third stage is damage containment which purpose is to remove the effects of the crises so that the uncontaminated part of the organization can be protected from, the infecting (Acharya and Naqvi, 2012). Fourth stage is recovery which has a primary purpose is to recover the business operation from the error so that the key customers can not be lost by the company. Five stages are the process of showing that what has done right for the business and what is done wrong so that business entities take better decisions in the future in case of crisis management.
The organization has to perform different actions in each stage which are as follows:
- Pre-crises stage: this stage includes actions that are taken before the issues arise which are signal detection, preventions and crisis preparations which are mention in the crisis life cycle (Reinhart and Rogoff,2011). In management, crisis manager needs to develop their capacity to identify the issues so that necessary actions can be taken at the same time and avoid the major problems in the future.
- Crisis event: this stage starts with the detection of errors and finishes with the removal of problems. It involves two substages which are Crisis recognition and Crisis containment. Crisis recognition includes to obtain knowledge about the nature of crises and gather the crisis-related information while crisis containment concentrates on the companies crisis response and also includes communication with stakeholders through words and actions is a critical part of this stage.
- Post-crisis stage: the work of crisis manager is not end with the critical point ends. There are key activities that must take acre after the crisis (Crotty, 2009). This involves three steps which are evaluating crisis management, learning from the crisis and other post-crisis actions such as follow up communication with the stakeholder by continuous evaluation of the problems related to the crisis.
Thus to reduce the impact of the crisis, the manager works regularly and prepares the company for the day when a crisis occurs. Moreover, the crisis manager carefully removes each crisis by using the crisis life cycle in order to prevent, prepare and respond to the critical issues. An important part of CM is the consideration of the stakeholders. As they are the key areas of success for the company. With any action of them, the business gets affected adversely (Beck, Demirgüç and Merrouche,2013). So the organization should know their stakeholders and their importance and try to develop and maintain strong relationships with them. A successful organization is those that communicate openly and accurately to their multiple audiences immediately after a crisis occurs.
The senior manager should learn leadership in case of a crisis in order to guide the business in the right direction. There are seven lessons for leaders to learn in critical situations.
- Leaders need to look at the organization and require to analyze the situations so that they recognize the issues then they should gather the team together and discuss the problems with them. Widespread recognition of reality is the crucial step before problems can be solved. It is very necessary for the manager to work in reality with that they understand the real situations which help them to detect the problem and provide the remedies for that. In order to understand the real reason for the crisis, everyone on the leadership team must be willing to share the whole data so that manger can solve the problems easily (Alfaro, Kalemli and Volosovych,2008).
- In the case of a crisis, the senior management tries to find out the cause of the root of the issues so that corrective actions can be taken. It is better for leaders to anticipate and make the organization healthy by taking opportunities from the market.
- Senior management should be build confidence during a crisis. As in critical times, people are in a state of shock and fear. So the primary objective of crisis communication is to demonstrate competences while prioritizing human needs over business needs.
- The superior manger can learn to produce quality products and services by the satisfaction of the consumers and the workplace safety (Petr, Sirpal and Hamdan,2012). The crisis had an adverse effect on the company as well as the employees as they are not getting their salary on time which makes them frustrated so in order to make them happy it is necessary to protect their interest by also recognize their preferences.
- The superior leader needs to have information about the external forces so that they protect the organization from the extensive issues and help the company to maintain its position for a longer period of time.
- The company can also take necessary advice regarding legal professionals such as what kind of remedies are to be adopted in order to overcome the issues. By taking advice from any experts helps the business to deal with it nicely (Healy, and Palepu,2012).
- The senior manager is required to follow good internal communication in the company .if the flow of information is correct and accurate then at the time of crisis the manger has not to require to put their extra efforts to make everyone understand the company operations.
- It is a must for the company to build and protect the culture at the time of crisis. By creating a positive environment so that the company enjoys a healthy working atmosphere. It helps in doing the work at the time of hardships, under pressure and allow them to work without stress (Hillier, Grinblatt and Titman,2011).
- The company can perform forecasting and help the investor. By learning a transparent they help the investor to invest their sums in the company because they have the faith that the business can return them. But at the time of crisis, the company can not do. So the corporates have words with the investors that in the difficult condition, their money has been destroyed but the business tries its best so that the proper and adequate return can be provided to the investors. By being more transparent the company can protect the interest of the investors. This can result in the organization in controlling and maintaining its goodwill in the market.
Thus from the above mention leadership lessons are required to follow by the senior management so that they manage the crisis easily. By estimation of risk helps in controlling the financial crisis at the company. This also learned how economic fluctuation can control and how we can protect from the disasters which are happening in the economy (Mishkin,2009). It is very necessary for the manager to take care of both the external as well as the internal environment so that they identify the factors which affect them badly and at the same time they find required prevention to control them. It is proved that leadership qualities always help in protecting the business from major issues.
In this report, it is concluded that the financial crisis is affected adversely to the business operations and their workings. It creates a situation in which a business faces trouble to run their day-to-day activities. In modern economy working capital is needed to operate the function of the organization. The crisis can collapse the large financial institution if they are not managed properly. In this report it is discussion is made on the global financial crisis which occur at 2007-2008. because of the reason of excessive lending, lower interest rates, unstable global develop the biggest crisis.
Further also evaluate the tools for the effective forecasting which can be done through assumption basis, trend analysis, historical data all these tool help in predicting the issues in advance so that relevant preventions can be taken. After that the prior, during and post-crisis management theory is studied in order to evaluate the remedies at the time of crisis. Lastly, discuss the leadership lessons in order to suggest the senior management of the company so that by using them they manage the business properly in the time of crisis. Hence it is concluded that the financial crisis have a great influence over the business and in their operations.
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