Planning in a Turbulent Environment
Contingency plans define organization responses to be taken in the case of emergencies, setbacks or unexpected conditions.
Contingency plans include sets of actions to be taken when a company’s initial plans have not worked well or if events in the external environment demand a sudden change.
Disasters and unexpected ugly turn of events in recent times including terrorists attacks, hurricanes such as Katrina, snowstorms, sudden spurt in gasoline prices, computer breakdowns, changes in customer tastes, etc., have reminded many businesses how important contingency planning can be.
Morgan Stanley Dean WitterOpens in new window, the World Trade Centre’s largest tenant with 3,700 employees adopted a crisis management plan (which indicates steps to be taken and by whom when a crises occurs) for abnormal events after bomb threats during the Persian Gulf War in 1991. Top managers credit its detailed evaluation procedures for saving the lives of all but six employees during the 11th September, 2001 attack.
To develop contingency plans, planners identify important and uncontrollable factors such as recession, surging supply costs, technological developments or safety accidents.
To minimize the impact of these potential factors, a planning team can forecast the worst-case scenarios and develop responses to minimize or negate their impact. For example, if sales fall 20 per cent and prices drop 8 per cent, what will the company do?
Managers can develop contingency plans that might include lay-offs, emergency budgets, new sales efforts, or new markets.
A real-life example comes from the airlines, which had to scramble to develop contingency plans after problems in the electrical system of the new Boeing 787’s capabilities for fuel efficiency, long-range, and seating capacity, had to be closed or redesigned when the Federal Aviation Administration (FAA)Opens in new window grounded the new plane.
As uncertainty over when the Dreamliner would return to the skies lingered, airline managers began formulating contingency plans for what to do if the 787 remained out of commission for an extended period of time.
- Should they lease temporary aircraft to fill the gap?
- Should they substitute larger existing planes from their fleet and sell more seats at a discount to keep traffic and revenues moving, or shut down routes altogether?
- What kind of alternative marketing plans were needed to reassure passengers that the plane would be safe once it returned to service?
The grounding of the Dreamliner and further delays to delivery meant many flights had to be cancelled while airlines decided how to fill the capacity gap – some leased aircraft, some cancelled orders and shifted to the Airbus A380, and others just waited for the aircraft to be reinstated.
Today, the Dreamliner is back in the skies and airlines are creating new routes for the aircraft’s exceptionally long range (i.e. direct flights between Australia and London).
- Research data for this work have been adapted from the manual:
- Managerial Accounting: Tools for Business Decision Making By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso