A Model of Crisis Prevention (Based on managing change, quality management and risk management)

Luburić, Radoica Article A Model of Crisis Prevention (Based on managing change, quality management and risk management) Journal of Central Banking Theory and Practice Provided in Cooperation with: Central Bank of Montenegro, Podgorica Suggested Citation: Luburić, Radoica (2019) : A Model of Crisis Prevention (Based on managing change, quality management and risk management), Journal of Central Banking Theory and Practice, ISSN 2336-9205, De Gruyter Open, Warsaw, Vol. 8, Iss. 2, pp. 33-49, https://doi.org/10.2478/jcbtp-2019-0012 This Version is available at: https://hdl.handle.net/10419/217673 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ A Model of Crisis Prevention (Based on managing change, quality management and risk management) 33 * Central Bank of Montenegro, Podgorica, Montenegro Email: [email protected] Journal of Central Banking Theory and Practice, 2019, 2, pp. 33-49 Received: 10 April 2018; accepted: 1 June 2018 UDK: 005.6:005.931.11 DOI: 10.2478/jcbtp-2019-0012 Radoica Luburić * A Model of Crisis Prevention (Based on managing change, quality management and risk management) Prevention is better than cure. (An old saying) Abstract: The main task of this research is to create a model that enables an organization to effectively and effeciently resolve its everyday problems and potential incidents in time to prevent them from turning into a crisis. For solving problems, ad hoc measures and activities are often applicable, while incidents can be resolved by applying appropriate, predefined procedures and planned resources. On the other hand, crises are rarely resolvable through the application of any predefined procedures and plans. They demand changes and innovations, as well as a flexible, creative, strategic and sustained response. Therefore, it follows that it is incomparably better to adequately resolve problems and incidents on time, rather than to grapple with a crisis and all the complexity, uncertainty and anxiety that it brings with it. The Model of Crisis prevention presented in this research is based on effectively managing change and conflict, as well as on the synergy of Quality Management Principles and Risk Management Principles. Keywords: Problems, Incidents, Crisis, Quality Management Principles, Risk Management Principles, Change Management, a Model of Crisis Prevention JEL Classification: M10, M12, M54 Journal of Central Banking Theory and Practice 34 Introduction Every organization that strives to survive, to develop and to be sustainable, must be ready to face all the challenges that today’s turbulent and uncertain times carry with them. Organizations of all types and sizes are faced by external and internal factors and influences that make it uncertain whether they will achieve their objectives. The almost unimaginable pace of technical and technological progress, the dramatic acceleration of changes in all spheres of life, as well as the general feelings of uncertainty, have prompted organizations to make serious efforts to both timely and adequately address their ongoing problems and incidents, so that they would not grow into a crisis. Organizations, therefore, must comprehensively investigate the causes of the problems they face on a daily basis, which means that they thoroughly analyze whether they are simply the result of any mistakes made, or are in fact the result of inadequate and unsuccessful processes. Many studies have shown that the majority of problems stem from inadequate and unsuccessful processes undertaken within the organization, rather than from individual errors. Instead of simply dealing with mistakes, it is necessary to continually review and improve the processes that make up the underlying causes of the problems, so that they do not reappear. The timely and adequate resolution of the root causes of problems and incidents is the best method of preventing the emergence of a crisis. The challenges and consequences that can arise when a crisis has not been successfully prevented, could be clearly seen through numerous examples from the recent global financial and banking crisis.1 The prevention of the crisis must be systemic and based on the development of a coherent, consistent and effective model, in which change management, quality management and risk management all play a key role. The main task of research into this very current, interesting and complex topic, both from a theoretical and practical standpoint, is to create such a model. 1 For more see Fabris, N. (2018). A Model of Crisis Prevention (Based on managing change, quality management and risk management) 35 1. Problems, Incidents and Crises - key characteristics and distinctions Bearing in mind the basic starting point of this research, it is important to briefly define problems, incidents and crises, as well as, to describe their key characteristics and distinctions. What are problems? Problems are visible and invisible hurdles encountered on the way to achieving goals. Figuratively, a problem within an organization plays a similar role as pain does within the human body. Both the problem and the pain signal that something is not right (in either the organization or the body) and that this has to be recognized and diagnosed in time for the application of appropriate treatment. Problems, just like illnesses have to be dealt with in a timely way and not “swept under the carpet” and ignored. Incidents are, however, the consequences of problems that have not been resolved in a timely and adequate manner. What then is a crisis? Simply put, a crisis is most often the result of accumulated problems and incidents that have not been successfully resolved in such a timely manner. British Standard 11200, Crisis management – Guidance and good practice, defines a crisis as an „abnormal and unstable situation that threatens the organization’s strategic objectives, reputation or viability“ (BS 11200:2014, p. 2). A crisis calls into question the overall sustainability of the organization, the fate of its employees, the competitiveness of its processes, products and services, and in particular, its reputation. Therefore, it is essential that preventive action on problems and incidents are undertaken before they grow into a crisis. In order to achieve this, it is important, among other things, to understand the conceptual and practical relationship between problems, incidents and crises, as well as their key characteristics. Journal of Central Banking Theory and Practice 36 Figure 1 – Key characteristics and distinctions between problems, incidents and crises CHARACTERISTICS PROBLEMS INCIDENTS CRISES Predictability Foreseeable Usually foreseeable Unique, rare, usually unforeseen Onset Ongoing hurdles Gradual failures with warning signs Often sudden and with no notice. Escalation of incidents. Urgency and Duration Mainly urgent and short term Usually urgent and limited term Great urgency and long term uncertainty Understanding and Impact Problems are understood and their impact is limited Incidents are usually understood and can be ap plied to predefined responses. Their impact can potentially be widespread. Because of its complexity, its impact maybe difficult to assess and fully comprehend. May affect the entire organization. Media Coverage Not covered by the media Attracts little media attention. However, it has the potential to escalate into a crisis. Significant public an d med ia i ntere st. Some coverage in the media and on social networks might be partly inaccurate and could rapidly deepen the crisis. Manageability through established plans and procedures Ad hoc solutions are often applicable Incidents can be resolved by applying appropriate, predefined procedures and planned resources. Crises are rarely resolvable through the application of predefined procedures and plans. They demand changes and innovations, as well as a flexible, creative, strategic and sustained response. Modified from: BS 11200:2014, Crisis management – Guidance and good practice, p. 4. As shown in Figure 1, six basic characteristics of problems, incidents and crises have been analyzed, with a particular focus on their key distinctions, which are significant for preventive action. When it comes to Predictability, it can be seen that problems are foreseeable, incidents are usually foreseeable, while crises are unique, rare, and usually unforeseen. At their Onset, problems are manifesta- A Model of Crisis Prevention (Based on managing change, quality management and risk management) 37 tions of ongoing hurdles, incidents are gradual failures with warning signs and are caused by unresolved problems. Crises, however, can be sudden and with no notice and they are often an escalation of existing incidents. When we take a look at Urgency and Duration, problems are mainly urgent and short term, incidents are usually urgent and of limited term, while crises are of great urgency and followed by long term uncertainty. In regards to the characteristic of Understanding and Impact, problems are well understood and their impact is limited. Incidents are usually understood and can be applied to predefined responses, although their impact can potentially be widespread. A crisis is different because of its complexity and its impact maybe difficult to assess and fully comprehend. It may also affect the entire organization. When it comes to Media Coverage, problems are not generally covered by the media, and incidents attract little media attention. A crisis attracts significant public and media interest. It is important, however, to keep in mind that some of the coverage in the media and on social networks might be partly inaccurate and this could rapidly deepen the crisis. The characteristic of Manageability through established plans and procedures, is the very essence of successful crisis prevention. For solving problems, ad hoc measures and activities are often applicable, while incidents can be resolved by applying appropriate, predefined procedures and planned resources. On the other hand, crises are rarely resolvable through the application of any predefined procedures and plans. They demand changes and innovations, as well as a flexible, creative, strategic and sustained response. From all of the above, it follows that it is incomparably better to adequately resolve problems and incidents on time, rather than to grapple with a crisis and all the complexity, uncertainty and anxiety that it brings with it. 2. Quality Management Principles and Crisis Prevention According to the international standard ISO 9000:2015, Quality management systems – Fundamentals and vocabulary, quality management is based on seven principles, as shown in Figure 2: Customer Focus, Leadership, Engagement of People, Process Approach, Improvement, Evidence–based Decision Making, and Relationship Management (ISO 9000:2015, pp. 3-9).2 2 For more about Quality Management Principles and their benefits, see Luburić, R. (2015). Journal of Central Banking Theory and Practice 38 Figure 2 – Quality Management Principles in terms of Crisis Prevention Customer Focus is the first principle of Quality Management and one of the key factors for business success. Turning full attention to customers, as well as their demands, needs and expectations, unites the efforts of employees and other relevant stakeholders. Understanding the current and future needs of customers contributes to overall success as they are the best interpreters and followers of the mission and vision of the organization.3 The principle of Quality Management, Leadership, is key to the successful management of change, the prevention of a crisis and the achievement of the sustainable success of each organization. The role of the leader in achieving success is also highlighted by the ISO 9000:2015 standard, which states that, „leaders at all levels 3 How new technologies have enabled customers and what kind of changes they have caused, for more see Siggelkow, N. and Terwiesch, C. (2019). A Model of Crisis Prevention (Based on managing change, quality management and risk management) 39 establish unity of purpose and direction and create conditions in which people are engaged in achieving the organization’s quality objectives“ (ISO 9000:2015, p. 4). Leaders make it possible to adequately take into account the external and internal context of the organization, to always be aware of the situation in which it is located, to balance and effect its policies, goals, strategies, processes and resources, which is of particular importance for crisis prevention and achieving sustainable success. The principle Engagement of People, rightly emphasizes that people are the most important factor for achieving success and the very essence of an organization itself. Only the full engagement of employees guarantees a safe path to achieving sustainable success. The task of the organization’s management is to find ways to adequately involve its employees in making the most important decisions, because if they accept them as their own, they will feel a greater responsibility and obligation to fully implement them. According to ISO 9000:2015, „competent, empowered and engaged people at all levels throughout the organization are essential to enhance the organization’s capability to create and deliver value“ (ISO 9000:2015, p.5). It is therefore essential that employees possess the knowledge required to be competent, and that they are empowered to make decisions and organize themselves to solve problems. This approach is based on the logic that employees not only live with problems, but also with the opportunities for improvement. They are in the best possible position to not only identify the causes of the problem, but also to find the best solutions and ways to improve, which is crucial for the prevention of a crisis. The principle, Process Approach, is based on the concept that „consistent and predictable results are achieved more effectively and efficiently when activities are understood and managed as interrelated processes that function as a coherent system“ (ISO 9000:2015, p. 6). These interconnected processes are how an organization produces results and enables it to optimize its performance. Process and system management as a whole can be achieved by using the „Plan - Do - Check - Act (PDCA) cycle“, with special focus on „risk-based thinking“ in order to take advantage of opportunities and prevent undesirable results, which is key to preventing a crisis (ISO 9001:2015, p. vii). A special place and role in management is rightly given to the principle Improvement, because there can be no achievement of sustainable success without continual improvement. In the international standard ISO 9000:2015, it is stated that „successful organizations have an ongoing focus on improvement“, which is explained by the rationale that continual improvement is „essential for an organization Journal of Central Banking Theory and Practice 40 to maintain current levels of performance, to react to changes in its internal and external conditions and to create new opportunities“ (ISO 9000:2015, pp. 6-7). In order for the organization to be sustainably successful and to effectively and efficiently be able to prevent a crisis, it is necessary to continually review, improve and innovate its processes, products and services. As we have already said, the ISO 9001:2015, international standard, which promotes the process approach, includes the PDCA cycle. This approach to improvement is particularly important because it enables the organization to properly manage the processes, to determine the improvement opportunities and to act accordingly. PDCA methodology is a universal approach, suitable for all domains of work, both from the real economy and the public sector. This methodology has the basic attributes of the quality management philosophy and a scientific approach to understanding and improving the processes. PDCA cycles relate to all the processes in the organization. If applied, this methodology clearly speaks about the commitment of management to its basic role – continual improvement, which is the best way to help prevent the escalation of problems and incidents and strengthens the organization’s resilience to crisis. The principle of Evidence-based Decision Making, is explained in the standard as „decisions based on the analysis and evaluation of data and information are more likely to produce desired results“ (ISO 9000:2015, p. 7). This statement is explained by the fact that decision-making can be a complex process and it always involves some uncertainty and subjectivity. It is important to take into account cause and effect relationships and potential unintended consequences. Facts, evidence and data analysis lead to greater objectivity and confidence in decision making. Decisions that are neither well understood nor accepted as correct often lead to destructive conflict. Evidence-based decision making and its objectivity greatly assist in the process of change and conflict management and preventing a crisis. Relationship Management, as a principle of management implies that the building of mutual trust and mutual respect not only between the employees in the organization, but also with all partners, is a precondition for the successful management of changes and conflicts. Crisis prevention and sustained success are better achieved when the organization effectively manages its relationships with all interested parties. In the international standard ISO 9000:2015, it states that „for sustained success, organizations manage their relationships with relevant A Model of Crisis Prevention (Based on managing change, quality management and risk management) 47 Conclusion In the turbulent and uncertain environment of today, characterized by almost unimaginable technical and technological advances, as well ever accelerating changes in all spheres of life, it is not simple for organizations to be able to survive, thrive and develop sustainably. This often causes problems that, if not solved and if they accumulate, can turn into incidents and later escalate into a crisis. Nothing can “shake” an organisation as much as the challenges arising from accelerated changes for which top management is not prepared and for which it has no timely and adequate response. This research has created a model that enables an organization to both effectively and efficiently resolve its everyday problems and potential incidents in time to prevent them from turning into a crisis. For solving problems, ad hoc measures and activities are often applicable, while incidents can be resolved by applying appropriate, predefined procedures and planned resources. On the other hand, crises are rarely resolvable through the application of any predefined procedures and plans. They demand changes and innovations, as well as a flexible, creative, strategic and sustained response. A crisis calls into question the overall sustainability of the organization itself, the fate of its employees, the competitiveness of its processes, products and services, and in particular, its reputation. Therefore, it is essential that preventive action on problems and incidents are undertaken before they grow into a crisis. In any case, it is incomparably better to adequately resolve problems and incidents on time, rather than to grapple with a crisis and all the complexity, uncertainty and anxiety that it brings with it. If organisations are run on Quality Management Principles and Risk Management Principles, they will be able to successfully manage crisis situations. This requires continual and comprehensive improvements as well as innovations to the framework of systems and processes, together with the engagement and full commitment of both management and employees. When Quality Management Principles and Risk Management Principles are complementary and work together in full harmony, synchronicity and synergy, they have a beneficial influence on all management processes. The essence of the philosophy of change management, as well as that of risk management, are primarily focused on preventive action. 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