Spotting a Modern Business Crisis — Before It Strikes – Harvard Business Review

Companies are embedded in their social, economic, and political context — not separate from it. That means they are directly connected to the major crises that engulf society, from climate change to income inequality and beyond.

Further, research shows that younger generations are more likely than others to see large firms as sociopolitical actors that can have a positive impact on their communities.

But since not every crisis affects all companies equally, it can be challenging for organizations to identify which ones pose a threat to their businesses, their employees, their customers, and their communities. Today’s crises are also more complex and fast-moving than those from decades past, Covid-19 being the most recent example.

To better understand what companies are facing and how they can successfully respond to the challenges ahead, Harvard Business Review posed four questions to scholars and practitioners.

Here’s an edited collection of their responses.

Tima Bansal, professor of strategy at Ivey Business School and founder of the Network for Business Sustainability:

The 1997 Asian financial crisis was a real awakening. A seemingly remote event — the collapse of the Thai baht — destabilized currencies and stock markets across Asia and quickly disrupted U.S. stock exchanges too, signaling a new and deep interdependence among financial markets worldwide.

In the decades since, crises have only become more global, more frequent, and more volatile, and this is likely to continue. Covid-19 is the most recent example: A public health crisis in a specific locality — Wuhan, China — became a global disaster. Why? Because products, financial assets, people, and information flow quickly and cheaply today. Transportation and communication networks have created a complex, interconnected world. What’s more, we’re now seeing the limits of industrial growth. Companies are extracting natural resources faster than the Earth can regenerate them, and ecosystems are being stretched to the breaking point. Given our finite resources, the business environment is increasingly dynamic, chaotic, and unpredictable and small events are amplified.

Maziar Minovi, CEO of Eurasia Group:

For most of the past half century, the West enjoyed relative peace and prosperity. The free movement of ideas, information, money, goods, services, and people lifted billions out of poverty. As a result, large corporations in rich countries were populated with two generations of risk managers who didn’t have to think much about politics.

That age of complacency is over. We’re in a world where the soon-to-be-largest economy, China, is dominated by a small group of people who make decisions in secret and have the power to direct government policy toward their political survival rather than economic dynamism. Meanwhile, rising concerns about inequality have given rise to populist fury and unpredictable politics in many parts of the West. Our global financial interconnectedness magnifies these dynamics. It’s why China’s decision to tighten control of its technology or financial sector matters to businesses in Singapore, Austin, and London, and a vote from a single U.S. senator on a bill today can upend strategic plans in Frankfurt and Tokyo tomorrow.

Marianna Fotaki, professor of business ethics at Warwick Business School:

Globalization has created unprecedented competition for labor and opportunities, leading to exponential growth for transnational businesses. At the local level, this ease of doing business across borders has allowed some companies to acquire disproportionate power to influence local politics and governance. When that happens, they assume a dominant role in making policy decisions that affect people in a society — which can then undermine democracy and public good in the region. Ironically, the lack of strong legislative institutions, which makes all this possible, can be a cause of instability in society, affecting businesses in turn.

At the global level, the absence of strong economic regulatory institutions to ensure equitable and fair business practices means that corporations have no limits on their size and influence. The result is industries turning into monopolies or oligopolies, and giant companies preventing newer ones from entering the market. When left unchecked, these anticompetitive behaviors can exacerbate inequalities between rich and less developed countries, creating global disparities.

Sinziana Dorobantu, associate professor at New York University’s Stern School of Business:

Modern technologies such as more-efficient supply chain operations, the internet, and social media have not only increased the pace of change in business but have also drawn more attention to its impact on society. Fifty years ago, oversight of companies was largely the domain of regulatory agencies and specialized consumer groups. What the public knew was largely defined by what businesses were required to disclose. Today, however, public perception of businesses is affected by a diverse range of stakeholders — consumers, activists, local or national governments, nongovernmental organizations, international agencies, and religious, cultural, or scientific groups, among others. My own research shows that when businesses operate in a highly transparent society with new media technologies and a free press, even decentralized, uncoordinated events can easily escalate into a significant crisis for the firm.

Chang Hoon Oh, William and Judy Docking Professor of Strategy at the University of Kansas School of Business:

There are a few ways businesses can identify risks. One, externalize expertise through insurance and consulting companies that identify sociopolitical or climate risks. Two, hire the right talent for risk assessment. Three, rely on government agencies, media, industry-specific institutions, or business leaders’ own experience of risk perception. A fail-safe approach is to use all three mechanisms in tandem, if possible.

That said, risk assessment is only the first step. Any uncertainty or risk can become a crisis if the company is not prepared for it. Take the 2011 Fukushima Daiichi nuclear disaster in Japan, an event my colleague Jennifer Oetzel and I have been studying. While it was triggered by natural events — an earthquake and a tsunami — many argue that the spillover of radioactive elements from the nuclear plant happened due to an error in foresight.

Sarah A. Soule, senior associate dean and Morgride Professor of Organizational Behavior at the Stanford Graduate School of Business:

The rise of social media has made it easier to identify crises. Smart leaders are paying attention to what’s trending to anticipate how these issues impact their businesses. For example, some businesses were carefully tracking the emergence of the Covid-19 virus in China in December 2019 through social media and other sources, even as governments seemingly failed to do so. Another example is the Black Lives Matter movement in the U.S., which, especially after the killing of George Floyd, has forced companies to reevaluate their responsibility to stakeholders and change their strategies both externally (such as marketing efforts) and internally (such as increased focus on diversity, inclusion, and equity).

Bansal:

Limiting the responsibility of companies to their shareholders or stakeholders is not enough. I believe that companies are responsible to all people in society — not just today but for generations to come. That’s because, in most cases, crises simmer over years; their impact may only be noticeable in the future. And it can be hard to know who caused the crisis — there may be many perpetrators. For example, microplastics are being detected in the placentas of pregnant women after decades of plastics accumulating on land and in water. The effects of carbon emissions are only being discussed now, despite their roots dating back to the Industrial Revolution. Instead of just focusing on the exact cause of a crisis, it’s important for businesses to recognize the broader ways in which they can support communities.

When Hurricane Katrina ravaged the Gulf Coast of the U.S. in 2005, Walmart was among the first organizations to provide disaster relief. Walmart employees brought food and water and offered shelter to thousands of people in New Orleans who were affected. Lee Scott, the CEO at the time, seems to have made the decision not because it mattered to stakeholders but because Walmart could help.

Fotaki:

Businesses do not exist in a vacuum. Rather, they grow out of societies, even if they ultimately turn into transnational corporations. And business outcomes, both positive (such as increased employment) and negative (pollution) affect everyone, whether they participate in the business activity or not. The global climate crisis, for instance, is a consequence of doing business that affects everyone. Companies helped create it and so have a responsibility to help fix it.

Dorobantu:

During crises, businesses need to focus on their purpose, which should be intrinsically linked to the customers they serve, the employees and suppliers that make that service possible, and the communities and public authorities that give consent to operate. “Why do we exist?” may seem like a very big question, but it allows businesses to direct financial and operational resources to serve their purpose and make a positive impact on society.

Take the example of global mining companies during the early months of the Covid-19 pandemic. The purpose of mining firms is to extract raw materials that are critical for the manufacturing of medical devices, electrical and electronic equipment, and automobile parts, among other things. To do this, mining companies need to not only focus on the operational and financial aspects of their business but also take care of the people and communities in which they operate — especially when they are cut off from other distribution channels during a crisis. Doing so is a win-win for everyone: Local governments can rely on mining companies to deliver essential supplies like food and medicines to the people in the area of operation, communities’ essential needs are fulfilled, and mining companies can continue their business operations.

Dr. Ruha Shadab, founder of LedBy Foundation:

We’ve seen that we need to be wedded to the cause, not the problem. Any crisis is an opportunity to reevaluate your mission, rethink what drives your organization, and become flexible and agile to achieve that mission. When you do, it helps you adapt more quickly to change. I’ve seen this with my own social venture.

When the pandemic started, our hybrid professional-development training — 80% virtual, 20% in-person — had to go 100% virtual. We had to revisit the problem we were solving (training more women to be workforce-ready at a time when female unemployment in service-sector jobs was rising) and reiterate our mission (it was more important than ever for us to help women become more employable). That pushed us to strategize a new approach to virtual training, such as creating new course materials, shorter workshops, and more offline homework.

The other lesson is empathy. Everything is really about people — especially those who work with (and for) you. Recognize that your employees, team members, and colleagues are not just “resources” but humans with lives beyond their jobs. They are your first set of allies. Building this empathy requires trust and transparency, and that starts with being honest about the challenges, risks, and opportunities for the people supporting your business in times of crisis. When you do this, it’s likely to create an enabling and rewarding environment for everyone.

Sarah Kovoor-Misra, professor at CU Denver Business School:

The pandemic has taught us that an individualistic, self-interested approach is not effective in a crisis. For instance, essential workers and their organizations have had to collaborate and support each other through the crisis to save lives and meet needs, demonstrating that collective and altruistic efforts matter. Leaders need to develop cultures that support collaboration and positive behaviors in the workplace and reward these behaviors. In addition, they must pay greater attention to their employees’ mental health and protect them from burnout — both during and after a crisis. The last year and a half has shown us that crises have psychological and social consequences, and that we’re all more than the work we do. Paying attention to their employees’ needs outside their job roles and tasks, such as by providing employee assistance programs, childcare benefits, caregiving support, inclusive leave policies, and flexible work schedules, is a positive step in that direction.

Minovi:

The pandemic has demonstrated just how interconnected today’s crises are. Policy makers, investors, and business decision-makers must spot the many connections among first- and second-order emergencies and think carefully about both their local and global implications. Leaders must become perceptive and game out many potential scenarios for unexpected shocks. They must stay active in the global forums that will set the rules and standards to govern business in the future. Finally, corporations need to move away from virtue-signaling and create strategies to address possible triggers for crises.

Oh:

It remains to be seen whether leaders will remember the early lessons from the pandemic — something that doesn’t always happen after a crisis. For example, since last year, there has been a shortage of semiconductor chips in the automobile industry due to restricted supply chains. The industry experienced the same kind of shortage following the Fukushima disaster. In the aftermath of that crisis, companies developed alternative and reliable supply chain partners. But in the absence of predictable threats, they later forgot the lessons they learned — leaving them unprepared in 2020.

This example highlights one of the key lessons for leaders: To improve business adaptability and resilience, prepare for crises before they strike. Doing that requires an ongoing strategy of proactive thinking and foresight — whether there is a crisis on the horizon or not.

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