Economy is full of uncertainties and the companies who work in are deeply affected by any of the activities occur across globe. Business, whether large or small are also affected from the hit of crises. Every crises have their unique aspects whether it is a financial , media or public crises and require to handle those crises by apply general principle (Healy and Palepu ,2012). In this report the discussion is carried out on the 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 crises is 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 This means the liquidity is reducing because available money is withdrawn from the banks .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 the 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, Lower interest rate is also one of the reason in bringing the crises because with this people started to buy house at higher price and also those person able to buy houses who could not afford. When prices began to fall and loans started going bad, there was a severe attack to 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 large surplus every year while other countries like US and UK are run through deficit. The US external deficit is affected by internal deficit in the household and government sectors.
- Lack of transparency and accountability in mortgage finances: through out the housing finances the many participates are contributed as a creation of bad mortgage and also selling of 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 participant each maximising his or her gain and passing problems on down the line the system itself collapsed. Because of the lack of participate accountable and increasing the excessive bad debts on the banks the model of mortgage finances itself become a massive risk generator (Mishkin ,2009).
- Rating agencies: the credit rating agencies give AAA ratings to the various issues of sub prime 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 refuse to lend the loans to the people. This lead to narrow in the economy. The investments and the foreign currency exchange rate was started decrease and the banks and other financial institution was going on bad debts side.
- Housing bubble: With the easy money policies, the federal reserve allow 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 try to recover their losses by initiating various activities. Banks also become an bad debts because they do not have the sufficient money to provide the businesses which makes the economy down. In this situation whole transactions stops and the economy enter into in trouble. In such conditions the central banks and higher authority take the responsibility of this crises and they try to balance the economic but they are fail to make stabilise the economic fluctuation. Many causes has been discuss and that has a direct affect on the wealth and consumption level of the persons and in their investments also.
To forecast the major crises their is need to analyse 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. Business, such as the producers of auto mobiles, furnitures and other consumables goods are operated in a stable and predictable world. In case of services firms such as banks, savings and loans. But they are failed to make a position in the recession period (Gertler and Kiyotaki ,2010). So to overcome from these crises the companies should forecast the business environment so that they are develop 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. Theses 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. If 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 take step of investment across the country.
Other than that many analyst propose variety ways to forecast the crises and issues in this business environment:
- Genius forecasting: this method is based on combination of assumptions, intuitions, insight and luck basis. There forecast is depend upon the perception of the forecaster as that what issues they are perceive 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 help 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 is responsible for creating the past use that to operate the future. This is more valid when it is use for an short term horizons but it fall short for the medium and long term forecast.
- Consensus methods: This method is involves seeking expert opinions from more than one person. Each expert is their own discipline. So their decisions is 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 help the company to predict the situation effectively.
Thus to predict the issues, problem in the business in advances it is very necessary to prepare the organisation 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 analyse the current market situation by performing extensive research work or by looking at the past and future trends the company get 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 manger need 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.
Crises management is very important to the organisation in order to control the issues and uncertainties at work place. Basically this theory suggests that it is the strategic planning that prevent and response 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 organisation is to make systematic and timely decisions which are based on facts and clear thinking in operating the 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 a crises occur then the damage of the organisation can be minimized. The experts believes that successful management of a crises is about recognizing and taking an necessary steps to reduce the issues from the situations, rather then just being heard and say the right things.
Crises management theory suggest the idea that crises has a identifiable life cycle (Popov and Udell ,2012). Understanding the crises life cycle is vital because it is use to look ahead expected results in each life cycle stages. In organisation, management need to appoint the crises mangers who have an responsibility to approach each of the step of crises life cycle with the view to meet the various company needs and also to overcome from the challenges which are 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. First stage involves error detection in which virtually all issues leave a mark of early warning signals. If the management can analyse and act upon the signals then many issues can be resolved at the same time. second stage is that which is arise simultaneously with the signal detection is prevention . Its aim is to perform all activities which help in prevention from the errors so that the initially problem can be manage effectively. third stage is damage containment which purpose is to remove the effects of the crises so that uncontaminated part of the organisation can be protect from, the infecting (Acharya and Naqvi , 2012). Fourth stage is recovery which has primary purpose is to recover the business operation from the error so that the key customers can not be lost by the company. Five stage is the process of showing that what has done right for the business and what is done wrong so that business entity take better decision in future in case of crisis management.
Organisation has to perform different actions in each stages which are as follows:
- Pre-crises stage: this stage include actions which are taken before the issues are arise which are signal detection, preventions and crisis preparations which is mention in crisis life cycle (Reinhart and Rogoff ,2011). In management crisis manger need 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 future.
- Crisis event: this stage is starts with the detection of errors and finish with the removal of problems. It involves two substage which are Crisis recognition and Crisis containment. Crisis recognition includes to obtain knowledge about nature of crises and gather the crisis related information while crisis containment concentrates on the companies crisis response and also include communication with stakeholders through words and actions is a critical part of this stage.
- Post crisis stage: the work of crisis manger 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 the crisis management, learning from the crisis and other post crisis actions such as follow up communication with the stakeholder by continuously evaluation of the problems related to the crisis.
Thus to reduce the impact of crisis, the manger work regularly and prepare the company for the day when crisis occur. Moreover, crisis manger carefully remove each crisis by using the crisis life cycle in order to prevent, prepare and response 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 get affected adversely (Beck, Demirgüç and Merrouche ,2013). So the organisation should know their stakeholders and their importances and try to develop and maintain the strong relationships with them. Successful organisation are those that communicate openly and accurately to their multiple audiences immediately after a crisis occur.
The senior manager should learn leadership in case of crisis in order to guide the business in right direction. There are seven lessons for leaders to learn in the critical situations.
- Leaders need to look at the organisation and require to analyse 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 manger to work in reality with that they understand the real situations which helps 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 crisis the senior management try 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 organisation healthy by taking opportunities from the market.
- Senior management should be build confidences during a crisis. As in critical time people are in a state of shock and fear. So the primary objective of crisis communication are to demonstrate competences while prioritizing human needs over business needs.
- The superior manger can be learn to produce quality products and services by satisfaction of the consumers and the work place safety (Petr, Sirpal and Hamdan ,2012). The crisis had an adversely affect on the company as well as the employees as they are not get their salary on time which make them frustrated so in order to make them happy it is necessary to protect their interest by also recognise their preferences.
- The superior leader is need to have an information about the external forces so that they protect the organisation from the extensive issues and help the company to maintain their position for a longer period of time.
- The company can also take necessary advice regarding the legal professional such as what kind of remedies are to be adopted in order to overcome from the issues. By taking the advice from any experts helps the business to deal it nicely (Healy, and Palepu ,2012).
- Senior manager is require 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 have not require to put their extra efforts to make everyone understand about the company operations.
- It is must for the company to build and protect the culture at the time of crisis. By creating the positive environment so that company enjoys the healthy working atmosphere. It helps in doing the work at 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 an 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 to do. So the corporates have words with the investors that in the difficult condition, their money has been destroyed but the business try 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 the organisation in controlling and maintaining its good will in the market.
Thus from the above mention leadership lessons is require 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. With this also learned that how the economy fluctuation can be control and how we can protect from the disasters which is happen at the economy (Mishkin ,2009). It is very necessary for the manger to take care 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 the major issues.
In this report it is concluded that financial crisis is affected adversely to the business operations and their workings. It creates an situation in which business faces trouble to run their day today activities. In modern economy working capital is needed to operate the function of the organisation. The crisis can be collapse the large financial institution if they are not manage 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 rate, 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 advances 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 the leadership lessons in order to suggest the senior management of the company so that by using them they mange the business properly in the time of crisis. Hence it is concluded that financial crisis have an great influences over the business and in their operations.
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