Industrial Disaster: Transforming Catastrophe into OpportunityPartner at Oliver Wyman
The devastating wildfires that ravaged parts of Canada were estimated to cover more than 500,000 hectares, displacing thousands of residents and destroying more than 2,000 homes and buildings. Meanwhile, record-setting heat is fueling wildfires in the Western U.S. and increasing the threat for severe weather across the country, including high risk of tornadoes throughout the Midwest
These natural catastrophes are a stark reminder for companies that are generally unprepared for “black swans”(events with low probability but severe consequences), which are almost impossible to foresee and provide limited options for minimizing their effects once happening.
Black swan theory indicates that it’s useless trying to predict such events, and companies have no other choice than to develop their robustness and resilience.
As in the case of manufacturers destroyed or threatened by natural catastrophes, when facing unexpected disruptive events, companies generally don’t have a ready-to-use plan of action for tackling the situation. Roles and responsibilities are rarely defined in a comprehensive manner, which prevents companies from reacting swiftly. Companies tend to focus efforts on the most obvious and immediate issues, and in the heat of the event, neglect the needs and concerns of important stakeholders. In the end, those random decisions may lead to errors, compounding the company’s troubles later on.
Companies tend to focus efforts on the most immediate issues, neglecting the concerns of important stakeholders.
Competing Demands on Management
First, management may be overwhelmed by questions involving security, safety and legal issues. Was there anybody on-site when the disaster occurred? Should the entire facility be shut down for health and safety reasons, even if parts of the site are undamaged? Then there is the matter of employees, who are worried about their jobs and future at the company, while their union representatives want to obtain commitments from management on job security.
In addition, management must also handle external stakeholders, prioritizing which requests and expectations are the most urgent and important. Customers may become extremely intrusive in reaction to the invoking of “force majeure” (thus allowing the manufacturer to suspend or delay shipments) when it comes to their delivery plan. Customers may request updates on their orders and company inventory levels on a regular basis, putting pressure on manufacturers to get the best share of available finished products versus other customers. They also may invoke any legal terms in their outstanding contracts that could allow them to open double-sourcing options and challenge contracts.
Suppliers may adopt a defensive and protective behavior. They may ask for upfront payments and supply the company only if management is able to present a tailored production plan with sufficient cash guarantees.
At the same time, shareholders may request that management review the company’s business plan and establish a crisis and financial communication strategy. The authorities may engage management in discussions early on in the crisis, to influence decision-making in regard to the survival of the company. Finally, media scrutiny is likely to intensify the pressure, relaying information from individual interviews with employees or union representatives.
All those things can place enormous pressure on the management team, which in turn may react by making unwise and untimely decisions.
Disaster’s Transformation Opportunity
Executing the turnaround after the disaster is a true opportunity for transformation and improvement.
Following the containment of a disaster, comprehensive analysis of all potential outcomes should be taken before making any mid- or long-term decisions. It is important to identify and qualitatively describe all possible scenarios and make sure that any potential solution has been fully considered. Scenarios must address social, industrial and environmental impacts, and present a consolidated financial assessment across all dimensions.
After reviewing the most likely scenarios with key stakeholders, management needs to make a decision on the path forward and then build the relevant action plan, taking into account the following:
- If layoffs are needed, detailed phases need to be outlined according to the country’s legal framework.
- If new jobs need to be opened in other facilities, job specifications with required capabilities and experience need to be written and channels for advertising need to be specified.
- If reorganization within the company is required, a new organizational structure needs to be outlined, including key responsibilities and team sizes.
- If industrial facilities and equipment have been destroyed, it may be worth considering new technology as a replacement.
- Take the opportunity to review the product definition and its complete manufacturing process to update it to current standards of performance.
- It may also be an opportune time to digitize existing processes and assess the impact it could have on the resulting operations efficiency.
- Industrial disaster may have environmental impacts if there has been a fire or a flood, for instance.
- There may be some actions that need to be undertaken, such as wastewater treatment or building demolition that, in some cases, are costly and prevent business activities on-site.
Economic and financial impact
- Any decisions taken will result in economic and financial impact, which have to be carefully estimated.
- Additional investments may have a significant impact on debt level, future cash flows and shareholder value.
Once the action plan has been designed and stabilized, it needs to be communicated officially to all stakeholders involved in the process. This communication is critical because it’s the key for a successful implementation of the transformation plan.
For those involved in the decision-making process, such as shareholders and customers, communication consists of formalizing any decisions taken prior to building the plan of action. They should already have been briefed at this stage. For employees, suppliers, authorities and media, it consists of communicating the consequences and expected outcomes of the decision.