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MODULE-5: CRISIS IN BUSINESS & INDUSTRY

MODULE-5: CRISIS IN BUSINESS & INDUSTRY


Nature and types of crisis, Physical damage crisis, non-physical damage crisis, Stages of
crisis like pre crisis stage, acute crisis, post crisis, consequences of and strategies for
managing crisis; Management of human and other resources, changing manpower
requirements, Growth dimensions and phases, growth barriers, succession and exit strategies.

Meaning of Crisis
Crisis refers to sudden unplanned events which cause major disturbances in the Organisation
and trigger a feeling of fear and threat among the employees.

Definition of crisis
According to Barton A Crisis is any event that can seriously harm the people, reputation, or
financial condition of an Organisation

Nature of Crisis
1. Sudden Event: Crisis is a sequence of sudden disturbing events harming the
Organisation.It is a sudden event so that it is a element of surprise to the Organisation.

2. Short Notice:

Crisis generally arises on a short notice. It does not have a reflecting


nature to alert the system, so that there is short period of time the decision making.

3. Triggers Fear: Crisis Trigger a feeling of fear and threat amongst the individuals. It
may range from light problem to the severe problem.

4. Serious Consequences: Crisis is an extraordinary condition that is disruptive and


damaging to the existing operating state of an Organisation. An Organisation Crisis, if
ignored or mismanaged, will threaten competitiveness and sustainability of the effected
entity.

5. Lack of Information: It is common that there may be a lack of clear information


about what is happening. Managers or the Owners have to tackle the situation without the
proper information about the problem.

6. Quick Response needed: After the hit of Crisis, there may be limited time in which,
managers or owners have to make decisions about what to do. The more is the time taken in
decision-making more is the impact of Crisis.

7. Reduction of Competitiveness: Because of the Crisis, several key characteristics or


resources of the organisation may be inactivated or destroyed. The final impact is the
reduction of competitiveness of the organisation.

TYPES OF CRISIS
1. Physical Damage Crisis
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MODULE-5: CRISIS IN BUSINESS & INDUSTRY


A Crisis which is characterised by the Physical damage of the individual, organisation, or the
society is called physical damage.

Types of Physical Damages


A. Natural Disasters: Every Business is vulnerable to natural disasters. These
include things such as bush fires, floods and earthquakes. Although disasters are
mostly unpredictable, some steps can be taken to reduce their impacts.
B. Accidents: Accidental crisis may include the plant explosions, fire, leak, or lengthy
power outage. Accidental disasters, including plant explosions, fires, collapse of
facilities and mines, and releases of toxic substances, account for the most-dramatic
organisational crises.
C. Intentional Acts: The intentional acts includes the following areas
Terrorism: You must be aware of your vulnerability to terrorist acts which can
potentially disrupt your business and Australia as a whole.
Sabotage: It involves the intentional damage of a product or working capacity of the
Business by an employee.
Unethical Leadership: When an organisations leadership knowingly puts its
workers, consumers, investors, or the surrounding community at risk without being
honest about that risk.

2. Non-physical Damage Crisis


The crisis reflected by no physical damage of the individual, Organisation, or society. In
this, the assets, business facilities, and the machines are not damaged or destroyed.

Product Issue Crisis: This type of Crisis occurs when a manufacturer of a


product finds that there are questions regarding the products effectiveness, credibility,
or satisfaction. It also includes the safety concern of the product in which the product
is being accused of killing or hurting customers.
Public Perception Crisis: Crisis in public perception can range from news
stories depicting the Organisation negatively to destructive rumours appearing in email, on rogue websites, or by word of mouth. A lack of communication from the
organisation may contribute to the severity of these crises. Managers are often
frustrated by the way the media covers a crisis compared to what they perceive to be
the reality of the situation.
Human resource Crisis: It takes a variety of forms, such as strikers, sexual
harassment, discrimination, and workplace violence. Even top-management
succession can create a crisis.
Economic Crisis: This type of Crisis occurs when an organisation experiences a
cash problem, a difficulty meeting its obligations, or an accusation of fuzzy
accounting. However, cash crises are typically signals of other significant
organisations problems. Hostile takes over are potential economic crises for takes
over are potential economic crises for any public traded company.

MODULE-5: CRISIS IN BUSINESS & INDUSTRY

STAGES OF CRISIS
1. The pre-crisis stage:
When someone in an organization discovers a critical situation, they usually bring it to the attention of
their supervisors/managers. This is known as either the pre-crisis warning or precursor. At this point in
time, the critical situation is known only inside the organization and is not yet visible to the general
public.

2. The acute-crisis stage:


A crisis moves from the pre-crisis to the acute stage, when it becomes visible outside the
organization. At this point in time, managers have no choice but to address it. It is too late to
take preventative actions as any action taken now is more associated with 'damage control'.

3. The post-crisis stage:


A crisis moves from the acute-crisis stage to the post-crisis stage after it has been contained.
This is when the organization will try to recoup their losses. Managers must show the
customer, the shareholder, and the community that the organization cares about the problems
the crisis has caused them.

Consequences of crisis:
1. Poor capital:
Capital represents the financial resources companies use to purchase goods or labor for their
business operations. Crisis frequently have serious negative effects on a companys available
capital, since they must now spend money to restore assets rather than advance business
operations. Large companies can set aside a portion of their operational profits for future
crisis recovery plans.

2. Loss of assets:
Assets are the physical items companies use in business operations. Crisis often renders
physical assets unusable if damage is significant to the business. Large companies can
mitigate the loss of business assets from physical crisis by operating multiple locations with
multiple business assets.

3.Infrastructure destruction:
Another major impact of crisis may be the destruction of infrastructure of the business or the
company. Crisis either physical or non-physical ultimately leads to the misbalanced
infrastructure.

MODULE-5: CRISIS IN BUSINESS & INDUSTRY


4. Threatened stakeholders:
Crisis can harm stakeholders physically, emotionally, and financially. A wide array of
stakeholders is adversely affected by a crisis including community members, employees,
customers, suppliers and stockholders.

5.Damaged reputation:
Crisis damage reputations because it gives people to think badly of the organization. The
news media and the internet play a critical role as most stakeholders learn about crisis from
news reports and social media. If a reputation shifts from favorable to unfavorable,
stakeholders can change how they interact with the organization.

6. Lack of cashflow:
Most business experiences a lack of cash flow from business operations, which comes down
to two primary reasons. First, customers of the business are cutting spending in light of the
crisis, causing the cash flow coming into the business to slowdown. Because of this lack of
cash flow, many businesses turn to lenders to obtain small business loans or lines of credit.

Managing crisis
Crisis management may be defined as the technique of managing crisis situations. It is the
nature of activities to respond to a major threat to a person, group or organization. Typically,
proactive crisis management activities include forecasting potential crisis and planning how
to deal with them. It often includes strong focus on public relations to recover any damage to
public image and assure stakeholders that recovery is underway.

1. Process of Managing Crisis:


According to a study at Oxford University, organizations that actually take time to prepare
for a crisis (recoveries) regained shareholder value within 50 days. For organizations that did
not plan recovery time was always more than a year. In order to ensure a favorable result, five
steps need to be taken:

Step1: Determine the crisis potential:Studies show few organizations critically evaluate the technical, human, natural or contingent
threats they could face. Wise managers do scenario planning on how likely it is their
organizations will suddenly encounter a crisis. This also deals with the organizational
facilities and products i.e. hazardous products. Competition should also be considered. By
considering all these organization can prepare to deal with uncertain and destructive events
and can develop management strategies for the inevitable.

MODULE-5: CRISIS IN BUSINESS & INDUSTRY

Step2: Develop appropriate crisis teams and centers:Organization should develop teams that take responsibility for previewing each crisis,
developing a strategy to prevent occurrence, and then managing the event should it occur.
Crisis centers are places where teams can assemble and carry out their activities. As teams
develop they should be carefully trained to make decisions and empowered to be able to carry
them out.

Step3: Write a crisis management plan:It implies that to some degree each crisis situation can be managed. This management process
takes place before, during, and after the crisis. This includes anticipating a crisis, developing
and training a crisis team, designing and equipping a crisis center, working through a plan for
each potential crisis and handling media interviews.

Step4: Develop a communication strategy:It is the process of managing the strategy, messages, timing, and distribution channels
necessary to communicate effectively with the media, employees, core constituencies, clients,
customers and stakeholders. The focus of the crisis communications function is to facilitate
the rapid de-escalation of the crisis through timely and effective communication methods.

Step5: Practice and Revise the crisis management:*Practice the plan: An organization that has a plan in place may be tempted to rest, wait
and hope the crisis never hits. But unless the plan is practiced it is like having a football team
that has never practiced.
*Revise the plan: The useful life of a crisis plan is three or four years. Restructuring, new
personnel and new goals require its updating. Every three years the plan should be given a
major revision. That is why annual updates are recommended.

Strategies for Managing crisis

MODULE-5: CRISIS IN BUSINESS & INDUSTRY


1. Strong Leadership:
It is key to establishing confidence in the way in which the organization is responding to the
crisis- it demonstrates organization and enables consistent clear communications. The
management team should be identified and a leading spokesman nominated. It should be
apparent to all those affected and the media that the team has the authority and capability to
act and resolve the crisis.

2. Swift decision making:


Delays and unnecessary debate will quickly undermine the confidence in team
and its approach. Decisions will need to be made promptly with no prevarication. However,
be aware that often a good, sound decision made promptly is far more useful than a perfect
decision made too late.

3. Prompt Effective action on Behalf of Any People Affected:


It is vital that the organization put people interests far ahead of cost
considerations. All companies are expected to behave morally. Failure to recognize the
implied duty of this expectation will translate to significant negative media and personal
reaction, the exact opposite, in other words, of what is been attempted to achieve.

4. Proactive Action to Mitigate Any Environment Impact:


Any industrial accident that leads to contamination or damage to our environment
will inevitably attract significant attention. Not only are there harsh penalties now available to
national regulators and watchdogs, ensuring the polluters pay, but the added reputational
damage will accelerate losses unless the organization is seen to act diligently to restore or
rectify the situation.

5. Clear, Proactive and continuous Communication:


Communication comes in a number of forms:
i)

There is communication to govt. or regulatory bodies;

ii)

There is communication to direct stakeholders; and

MODULE-5: CRISIS IN BUSINESS & INDUSTRY


iii)

There is broader communication with the press and media.

For each of these channels it is important to maintain a consistent and accurate flow of
information. It should be through appropriate channels and to ensure a common context
across the channels.

6. Robust Crisis Plans with Clear Roles:


Developing a clear set of crisis plans which explain the roles and responsibilities of the
various team members, along with their authorities is key. These include:
i)

Product recalls

ii)

Industrial accidents

iii)

Terrorist incidents

iv)

Protest action

v)

Industrial action

By developing a consistent planning framework that is regularly reviewed can also enhance
the companys capability to manage events more effectively.

7. Ensure Crisis Management team:


Having a CMT team is not enough; it should have the opportunity to rehearse and be properly
trained to achieve its objectives. It is important to exercise or rehearse realistic scenarios; try
to avoid a too lighthearted approach, as this will likely undermine the benefits the company is
looking to gain.

8. Good Stakeholder Relationships:


Good stakeholder relationships are the cornerstone. Have a good brand reputation. It is not
about what the company believes in the end- it is about those around it, about what they
believe.

MODULE-5: CRISIS IN BUSINESS & INDUSTRY

9. Effective Spokesperson:
Depending in the nature of markets and the size of the organization, the organization may
need to consider professional help in this area. This may be through hiring spokesperson who
would work on companys behalf or training internal candidates to fulfill the role.

10. Apologize:
Some organizations appear to be institutionally incapable of saying sorry. Demonstrating the
understanding of the difficulties of the situation and its impact on people is necessary to
manage the impact of crisis. Instead of demonstrating empathy with people and, through the
other actions and preparations, demonstrate that the company has acted reasonably as an
organization.

Management of business resources.


Introduction
Business resource are anything and everything that helps a company operate and do
business.This can include use of human capital,natural resources,tangible resource such as
property or production machinery,intangible resources such as brand image and
knowledge,financial resource and anything else a particular business may use to make a
profit.

Meaning of management of business resources.


Management of business resource is the process of using companys resources in the most
efficient way possible.Resource management can include ideas such as making sure one has
enough physical resource for ones business,but not an overabundance so that products would
not get used,or making sure that people are assigned to tasks that will keep them busy and not
have too much downtime.

Types of resources in Business.


1. Human Resources: The most important business resource for any company is its
human resource, i.e., the combined skill, efforts, abilities and knowledge of a companys
workforce. Employees have the capabilities to transform raw materials into valuable
products, or knowledge and skill into services.

MODULE-5: CRISIS IN BUSINESS & INDUSTRY


2. Other Resources: Other resources include:
A} Financial Resource: These resources concern the ability of the business to finance its
chosen strategy. For ex-significant investment in new product, distribution channels,
production capacity and working capital will place great strain on the business finance.
B} Physical Resources: These are the resources that are made by man through his
abilities and skill. The buildings, technology, and many more products that are made by
mains an example of physical resources.
C} Natural Resources: These are any resource made from the natural environment such as
paper, oil or minerals that a company uses to operate its business.
D} Intangible resources: An overlooked business resource is any intangible resource such
as brand, image, goodwill or patents. Many business have a competitive advantage and
survive by just excelling in brand image

Management of human resource


Human resource is not only unique and valuable, but it is also an organizationsmost
important resource. Human resource management deals with people dimension in
management.It seems logical that an organization would spend a great deal of effort to
acquire and make optimum utilization of such a resource. This effort is known as human
resource management.

Process of managing Human resource


Organizations mission and objectives: HRM process should be alignment with
the organizational goals and objectives so that it can enhance the effectiveness and
efficiency of the overall output
Job analysis and design: Organization objectives are archived through a process of
break-up of various tasks, duties, and function.Adequate and competent
manpower is required to handle these tasks,duties and function.Now to know what
tasks, duties and function are required to be performed for achieving the goals and
objectives of the organization, and what kind of human resource is required for
optimum performance of these, entails job analysis.
Human resource planning:It is the most vital function of an organisation, and is
therefore the heart of human resource planning is critical to the success of
organisation strategy and planning.
Recruitment, selection and Induction of employees: Recruitment is the process of
attracting the best qualified individuals to apply for a given job. From application
pool, selection is undertaken. The process of helping the selected individuals fit
smoothly into the organization is known as induction.
Human Resource Development: It is the process of learning, training and
development of employees through an organized and systematic approach for
achieving organizational excellence.
Performance management: IT is a multi-step process of aligning employees work
behaviours with the strategy and goals of the organisation. It is the process of

MODULE-5: CRISIS IN BUSINESS & INDUSTRY


creating a work environment in which people are enabled to perform to best of
their abilities.
Compensation Management: it is the strategic process of analyzing, developing,
implementing, administering and performing ongoing evaluation of total
compensation system for all employee group consistent with organizations
objectives and goals.
Safety and Health Management: It is the process of analyzing, developing,
implementing, administering, and performing ongoing evaluation of programmes,
policies, practices and service to promote and preserve the physical and mental
well-being of individuals in the workplace.
Industrial Relation: It refers to the relation between unions and management. It
impacts employees, organizations tax-payers, and consumers.

Management of other resource


Apart from human resources there are many other resource which are important for
businesses. Following are the resources which are managed for the success of the business:

Financial Resources: Managing the finances of the firm in an efficient manner is the
most important aspect of managing a business. It is the process of managing finance
involves cashflow management which is concerned with inflow and outflow of money
in and out of a business.
Natural resources: Any component of natural environment that can be utilized by
man to promote his welfare is considered as natural resource. A natural resource can
be substance, an energy unit or a natural process or phenomenon, e.g..land, soil,
water, forests, grassland etc.
Physical Resource: These are the tangible resource of a business. Physical resource
are the resource that business need to maintain in order to carry out its activities and it
includes things like building, plant and machinery, materials, supplies etc..,
Intangible resource: An overlooked business resource is any intangible resource
such as brand,image,goodwill or patents. Many business have a competitive
advantage and survive by just excelling in brand image.eg: Mcdonalds.

MAN POWER PLANNING


Introduction: Manpower Planning which is also called as Human Resource Planning
consists of putting right number of people, right kind of people at the right place, right time,
doing the right things for which they are suited for the achievement of goals of the
organization. Human Resource Planning has got an important place in the arena of
industrialization. Human Resource Planning has to be a systems approach and is carried out
in a set procedure.

The procedure is as follows


Making future manpower forecasts- Once the factors affecting the future manpower forecasts
are known, planning can be done for the future manpower requirements in several work units.

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Analysing the current manpower inventory: Before a manager makes forecast of future
manpower, the current manpower status has to be analysed .

Developing employment programmes-Once the current inventory is compared with


future forecasts, the employment programmes can be framed and developed
accordingly, which will include recruitment, selection procedures and placement
plans.
Design training programmes- These will be based upon extent of diversification,
expansion plans, development programmes,etc. Training programmes depend upon
the extent of improvement in technology and advancement to take place. It is also
done to improve upon the skills, capabilities, knowledge of the workers.

Need of man power planning:


1. Employment - unemployment situation: In general, the number of educated
unemployment is on the rise, there is acute shortage for a variety of skills. This
emphasizes the need for more effective recruitment and retaining people.
2. Technological changes:The changes in production technologies, marketing
methods and management techniques have been extensive and rapid.These changes
cause problem relating to redundancies, re-training and re-deployment. All these
suggest the need to plan man power intensively and systematically.
3. Organisational changes: In the turbulent environment marked by cyclical
fluctuations, discontinuities,the nature and the pace of change in organizational
environment,activities and structure affect manpower requirements and require
strategic considerations
4. Demograpic changes: The changing profile of the workforce in the terms of
age,gender participation,literacy,technical inputs and social background have
implications for man power planning.
5. Skill Shortages: Organizations have become complex and thus,in terms require
more specialist skill that are rare and scarce. The result is more dependency on the
professionals.
6. Governmental influence: Governmental control and changes in legislation with
regard to affirmative action for disadvantaged group,working condition and hours of
work, restrictions on women and child employment, causal and contract labour etc..,
have stimulated the organization to become involved in systematic manpower
planning.

Objectives of manpower planning

Forecasting manpower Requirements: HRP is essential to determine the future


manpower needs in an organization.In the absence of such plan it is difficult to have
the service of the right kind of people at the right time.
Analyse current workforce: HRP helps in analysing the competency of present
workforce. It determines the current workforce strengths and abilities.

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Effective management of change: Proper HR planning is required to cope with


change in market conditions, technology, products and government regulations in an
effective way.
Realising Organisational Goals: HRP helps in effective meeting the need of
expansion, diversification and other growth strategies of an organization.
Provide information: The information gathered through HRP is used for identifying
surplus and unutilized manpower.It provides a comprehensive skill inventory,which
can be used which facilitates decision making.
Effective utilization of Manpower: Planning for manpower is the prime
responsibility of management to ensure effective utilization of present and future
manpower.
Determine man power gap: HRP identifies the gap in existing manpower so that
suitable training programmes may be developed for building specific skills, required
in future.

Factors influencing estimation of manpower planning:


Several factors affect man power planning.These factors can be classified as follows:
1)External Factors influencing estimation of manpower:These are factors which affect the
manpower planning externally.They include:

Government policies:Policies of government like labour policy, industrial policy,


policy towards reserving certain jobs for different communities affect manpower
planning.
Level of economic development:It determines the level of manpower in the country
and there by supply of man power in future in the country.
Business environment:Business environment means the internal and external factors
influencing the business.Business environmental factors influence the volume of
production mix and thereby the supply of manpower in the future.
Level of technology:Technology is the application of knowledge to practical tasks
which lead to new inventions and discoveries. The invention of the latest technology
determines the kind of manpower required

2)Internal factors:These are factors which affect manpower internally.These includes the
following;
A. Company policies and Strategies: The organization policies and strategies relating to
expansion, diversification, etc..,determine manpower demand in terms of quality and
quantity.
B. Manpower policies:Manpower policies of the company regarding quality of
manpower,compensation level,quality of working conditions, etc..,influence manpower
planning.
C. Job analysis:Detailed study of the job including the skill needed for a particular
job.Manpower planning is based on job analysis which determines the kind of
employees to be procured.

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D. Type and quality of information:Any planning process needs qualitative and
accurate information about the organizational structure, capital budget, functional
areas objectives, level of technology being used job analysis,recruitment sources etc..,
E. Companys production operational policy:Companys policies regarding how much
to produce and how much to purchase from outside in order to manufacture the final
products influences the number and kind of people required.
F. Trade union:If the union declare that they will not work for more than and hour a day,
It affects the manpower planning.

Changing manpower requirements:


Manpower planning in the past was typically reactive with business needs.But with the
expansion of business, adoption of complex technology and professional management
techniques, the process of manpower planning has now become proactive and assumed a
greater significance.Manpower planning is the process of forecasting manpower requirements
and manpower availability,and matching their demand and supply.

Process of manpower planning


I.

II.

III.

IV.

V.

VI.

Environmental scanning:The HR planning process is influenced by environment of


business. Environmental scanning provides a better understanding of content in which
HR decisions will be made.It helps HR planners to identify and anticipate source of
problem, threats, opportunities that should drive the organizations strategic planning.
Organizational objectives and policies: After scanning the environment objectives
and strategic planes of the organization are analysed.Plan concerning production,
technology, finance, marketing, expansion and diversification give an idea about
volume of future work activity.
Demand forecasting:It is the process of estimating the future quantity and quality of
people required.In making forecast for manpower requirement all those factors which
have impact on the relationship between volume of operation and number of
employees taken into consideration.
Supply forecasting:A manpower inventory is a data system which describes the
workforce of the organization.HR demand analysis provides the manager with a
means of estimating the number and kind of employees that will be required.
Estimating manpower gaps:Gap analysis is the process of comparing the workforce
supply projections to the workforce demand forecast.An analysis should consider the
composition of workforce, including demographic characteristics, geographic
location,size and employee competencies level.
Action planning:Once the manpower gaps are identified,plans are prepared to bridge
these gaps. Plans to meet surplus manpower may be redeployed in other units and
retrenchment in consultation with the trade unions.

GROWTH DIMENSIONS
Growth dimensions are the methods for the growth of business.

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MERGER: The combining of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in exchange for the
surrender of their stock.
ACQUSITION: A corporate action in which a company buys most, if not all, of the target
company's ownership stakes in order to assume control of the target firm. Acquisitions are
often made as part of a company's growth strategy whereby it is more beneficial to take over
an existing firm's operations and niche compared to expanding on its own. Acquisitions are
often paid in cash, the acquiring company's stock or a combination of both.
JOINT VENTURES: A business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task. This task can be a new
project or any other business activity. In a joint venture (JV), each of the participants is
responsible for profits, losses and costs associated with it. However, the venture is its own
entity, separate and apart from the participants' other business interests.
ORGANIC GROWTH: The growth rate that a company can achieve by increasing output
and enhancing sales. This excludes any profits or growth acquired from takeovers,
acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits
generated within the company, and are therefore not considered organic.

GROWTH PHASES
Larry E Greiner has identified five stages in the growth of an organization each of which
begins with a prolonged period of peaceful growth
CREATIVITY
In this early stage, there are only few people in the company. They know each other well and
share their experience, knowledge, and information. All relevant issues are discussed among
all people. This is the typical creative start-up culture.
DIRECTION
Now the company is able to direct certain issues and tasks to certain people. Normally,
directives and control are highly centralized at this stage.
DELEGATION
Management delegates some tasks, functions and authorities to other people in the company.
Departments emerge and develop their own dynamics.
CO-ORDINATION
Projects and tasks are coordinated between all parts and departments of the company so that
they are well in tune with each other.
COLLABORATION
The co-operation between all parts of the company is so well organized that they really can
work together effectively in whatever situation.

GROWTH BARRIERS
Following are the main growth barriers for the business.

FINANCIAL BARRIERS

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These are the one of the biggest barriers to growth in business. The saying goes in
order to make money business should be willing to spend money, and this may be
particularly challenging for business.
ORGANISATIONAL BARRIERS
It can also be known as internal barriers these include managerial Capacity and
capability, skills and knowledge, objective of firm among other things. A start-up firm
may be well run by just a couple of individuals but as the company grows in size
fixed personnel will need to be employed to fill those gaps.
EXTERNAL BARRIERS
Michael Porter explains through five forces model the threats firms face when they
want to grow. But these are the same threats a company faces when they want to
grow. Any of these could affect the growth of a business.
SOCIAL BARRIERS
Recent studies have emphasized the need for networking trust and developing social
capital between entrepreneurs as ways if stimulating development and growth of
small enterprises.
LEGAL OR INSTITUTIONAL BARRIERS
Complicated laws rules and regulations can be big barriers when it comes to growth
of small companies. It may be in terms of unsuitable tax system and various
discriminatory legal regulations towards small firms that can really hinder their
capability

SUCCESSION STRATEGIES
Succession planning is described as having the right people in the right place at the right
time.
According to Bohlander and Snell, Succession planning is the process of identifying,
developing and tracking key individuals for executive positions.
Various succession planning strategies are follows;
VALUATION: The rule of thumb is that any time there is a transaction involving all
or part of the business, and then a valuation is recommended.
E.g.: competitors, customers or suppliers.
When appraising a company, a valuator generally uses one or more of the following
approaches,
1. Asset Approach: looks at the market value of the assets on the
balance sheet. It can also take into account items such as goodwill
2. Market approach: compares a business to recent sale prices of
similar companies in same and similar industries and conditions
(company size, geographic area etc.)
3. Income approach: looks at the income the business can produce. This
approach utilizes projections and other economic factors.

KEEPING IT IN THE FAMILY: Many family business owners want to continue


family ownership of the business. Unfortunately, 70% of family business do not
survive to the second generation.

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The tools available should be used to form a cohesive overall strategy for ownership
and management succession:
1. Gifting stock: it is an alternative that is widely used and can
completely avoid taxation on much of the value of the business.
Often gives are used along with other tools for an overall strategy to
pass on the business.
2. Trusts: these are another tool which can help to reduce taxation,
provide continued income to the former owner and his/her spouse,
then pass the business on the next generation.
3. Selling to a Family Member: Selling to a family member should be
explored carefully. The parties should arrive at a realistic, legally
defensible value for the business. A valuation performed by an
independent, qualified valuation advisor may be very worthwhile.

BUY-SELL AGREEMENTS: These are a useful and flexible way to plan for
ownership succession. A Buy-sell agreement is a legally binding agreement between
or among shareholders and the company that requires the shareholders or the
company to purchase the stock of the business owner.
There are three types of buy-sell agreements;
1. Stock Redemption: It occurs when the business itself purchases stock from
the existing shareholders.
2. Cross Purchase: It is between shareholders. Agreement is to purchase the
shares of one another upon certain trigger events
3. Wait and See plans: These plans combine the redemption and cross purchase
strategies. They first allow the other shareholders to purchase stock and then
require the company to redeem the remaining shares.

GIFTING OF SHARES: It is an excellent long term succession strategy. It is a good


reason to begin the process early.
Each of these options has different tax implications,
1. Gifting to Each Family Member: A business owner can transfer the annual
exclusion amount worth of stock each year to each heir. If the business owner
is married, both the owner and his spouse can each give the annual exclusion
amount.
2. Gifting to a Trust: Individuals can also make annual gifts to trust. The
taxability of such donations depends on the status of the trust of the
beneficiary.

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TRUSTS: These are widely used in estate and succession planning. The basic benefit
of trusts is that the assets contributed by business owners to some trust can be
excluded from their estates. This will reduce the size of the estate and the amount of
taxes paid.

MANAGEMENT BUYOUT: These are an excellent way to maintain a business


when there are no other clear successors. A management buyout will keep the
company closely held and will likely continue the business in a way that the owner is
likely to find appealing.

SALE TO EMPLOYEES: These are two basic methods of doing so. The most
common is the employee stock ownership plan. An ESOP is a very flexible, tax
advantaged tool in succession planning. It can be combined with other ownership
succession strategies including majority family ownership or a management buyout.

SALE TO AN OUTSIDER: Selling a business to an outside party is not traditionally


considered succession planning because the business often ceases to exist as an
independent entity.
A sale to an outsider is generally a four process
Step1: The owner must prepare the business to be sold. Much like selling a car or
home, this is the process off cleaning up to make it look attractive to potential
buyers.
Step2: The owner will need to bring in an advisor for the sale.
Step3: The business is put on the market and advisor responds to the interested
buyers.
Step4: Finally when a buyer is found, negotiations take place and a deal is closed.

LIQUIDATION OF THE BUSINESS: Liquidation of a corporation does not strictly


fit into succession planning. There is not much succession when a company
simply cease to exist. Liquidation value of a business is simply the market value of
the assets less liabilities. It is generally lower than the value of the business as
ongoing company.

IMPORTANCE OF SUCCESSION PLANNING


1. Provides Leadership Continuity: One important benefit of succession plan is
continuity of leadership. Organization that develop leaders from the ranks of current
employees are more likely to adhere to their missions and manage new challenges.
2. Enhances Reputation: It is another benefit of a succession plan. When employees
and those outside the organization realize that a succession plan is in place, they are
more likely to have confidence in the organization and its mission.
3. Eliminates Confusion: succession planning helps to eliminate confusion as to who
will carry on the legacy of the business when employer is no longer available to make
decisions.

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4. Builds Confidence: With succession planning helping to create a healthy business
future, managers can build a level of security into how they do their job. This means
that they can try out new things to build their business.
5. Save Times: Succession planning creates capable people. Capable of taking the
weight from management, to ensure they do not have to do it all. This is hugely
relieving for a manager and means that they can focus on bigger picture issues.

EXIT OF BUSINESS
Exit strategies are methods used by companies to discontinue products, business, or
relationships with customers or suppliers. Exit strategies are techniques used by companies to
abandon products, divisions, or even entire industries.
REASONS FOR EXITING
Business owners make difficult decisions all the time in business. One of toughest decisions
can be whether to close their company. Several reasons can exist for closing a business.

Economic Conditions: There are common reason for closing the business. Low
national economic growth often due to a recession or depression directly effects the
company operations.
Low Profits: The inability to generate sufficient business profits is a common reason
to close a company. Business owners spend money on inventory, production over
head and general business expenses in operating a company.
Unavailable Resources: Companies need economic resources to produce consumer
goods and services. Economic resources include land, labour and capital. Land
represents the natural resources found in an economy. Labour represents the human
resources available to convert raw materials into consumer products. Capital
represents money, facilities and other physical assets needed to run a business.
Tough Competition: Competition represents the number of companies in the
economic market competing for consumers. Small business can face difficult
competition when attempting to maintain sufficient market share.
Better Future Goals: If the entrepreneur feels that a better business can be setup that
other opportunities is more exciting and profitable, the closing the current business is
the best option. To start a new venture exiting the ongoing business is very important.

TYPES OF EXIT STRATEGIES

Liquidation: Business data struggling to survive may choose to liquidate their assets.
A common example of liquidation is the going out of business sale. When a
company liquidates it usually marks down the prices of its inventory to sell it quickly.
Friendly Sale: A business owner may choose to sell his or her enterprise in order to
retire or use the proceeds to start a new venture. This often occurs in family
businesses where the operation is passed from one family member to another.
The Life Style Company: In a life style company, the intent of the owner is to make
us possible for himself without planning for future expansion. All profits go directly
into her pocket instead of being put back into the business to help it grow, and
expenses are kept to the bare minimum.

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IPO: An Initial Public Offering (IPO) occurs when a privately owned business
decides to sell shares of stock to the public. This can be highly profitable for the
entrepreneur and investors, as this can generate a large amount of revenue in a short
period of time.
Mergers and Acquisition: with a merger or acquisition, the owner sells the
controlling interest in the business to another party but may still assume a smaller role
in the day to day operation. This strategy is often employed by an owner who wants to
live the business gradually without selling it out right.

LONG TERM PREPERATION FOR EXITING


If an entrepreneur is sure that he wants to sell the business, he has to start the planning
process in advance. Entrepreneur has to take a number of decisions that will help make the
business more attractive and valuable to the buyer.

Goals: The goals to accomplish in the near term and in the long term are essential
factors to consider in business. A big, dynamic and motivational goals highlight the
odds of success.
Resources: Regardless of the business, market or industry, availability of the right
mix of resources is the key to success. Buyers may also observe that whether the
organization has the right combination of human talent, technology, capacity and
financial resources to achieve the Companies goal.
Management: The quality of management team will generally be of paramount
importance to a purchaser, especially where one is proposing to leave the business at
the time of,or shortly after, a sale. It is important to be able to demonstrate to the
purchaser that there is competent second tire management available to assume
executive control of the business following a sale.
Diverse Customer Base: the old saying do not put all your eggs in one basket
rings true here. Because there is always a risk of losing a customer, the business will
attract more buyers if it has many customers.
Audit Contracts & Agreements: All written contracts should be reviewed to
determine when they expire, whether they are affected by a sale of the business or if
they remain accurately reflect current business dealings and economics.
Regulatory Compliances: a firm needs various permits license and regulatory
compliances to be able to conduct its business. Many of these clearances are difficult
to get, often, there are loan delays in getting such clearances.

SHORT-TERM PREPERATION FOR EXITING


Once a decision has been taken to look for a buyer, a lot of planning has to go into the short
term measures to getting the business ready for the sale.
Handling The Profits: it takes some time, atleast few months, before spending the
profits from the sale. One should create a plan outlining the financial goals and learn
about any tax consequences associated with the sudden wealth.

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Preparing Documents: entrepreneur must gather all the financial statements and tax
returns dating back 3 to 4 years and to review them with an accountant. In addition,
develop a list of equipment that is being sold with the business.
Business Valuation: once the entrepreneur has decided to sell the business one must
determine the worth of business. The first step for valuation should be to locate a
business appraiser
Appoint financial advisor: there are a number of reasons why it is preferable for one
to engage in the services of a professional advisor to sell the business. These include
the ability of financial advisors to maintain confidentiality, there superior knowledge
of and access to potential purchasers and their negotiation skills.
Demonstration of trustworthiness: If an entrepreneur hides something from the
would be buyer and buyer finds out something disregarding, the buyer may flee out
of fear that one lacks of forthrightness signals that there are also other problems
Resolve Problems: Any pending or threatened litigation, customer complaints or
similar issues that may decrease the value of the business must be resolved.
Update Books: buyers will want to look at past years financial performances. Keep
audited balance sheets and profit and loss accounts of the previous years ready for
scrutiny by prospective buyers.
First Impression: the first impression counts a lot. So, keep the business ready to
impress the buyer at the first instants itself. The buyer should see a neat, orderly place
of business and well maintained books and smooth processes.

CONSIDERATIONS IN EXIT STRATEGIES


Evidencing the increased emphasis on exit strategy was research conducted during the mid1960s through the mid 1970s that analyzed the exit process and created a frame work. The
business decision makers could use to determine when and how to exit.
For example, Conrad Berenson posited an exit model in 1963 that identified 5 categories
are as follows,
1. Financial security: It entails determining if the minimum return on investment is
being met for the firm.
2. Financial opportunity: Financial opportunity, or calculating the return on alternative
uses of the firms resources.
3. Marketing Strategy: It determines the value of the product above pure financial
profit, such as brand-name worth and value of established distribution channels
4. Social Responsibility: Social responsibility, or criteria that encompass the firms
responsibilities to customers, employees, suppliers, and so forth.
Organized Intervention: it takes into accounts actions by govt., society, or labour
groups as a result of the decision to exit.

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