Contingency Planning in Business Strategy

Importance of Contingency Planning

• An important part of business strategy.
• Often not covered in detail by textbooks.
• Necessary for managing risk and uncertainty.
• Expect the unexpected: things rarely go as planned.

Concept of Risk

• Risk: Possible events or conditions that may negatively affect business.
  • Losing money.
  • Incurring significant additional costs.
  • Reputational damage, affecting brand and customer relationships.
  • Failure to achieve key business objectives.
• Risk is the flip side of not achieving expected success.

Risk Management Methods

• Ignoring Risk: Wait and see what happens.
• Risk Minimization:
  • Taking out insurance.
  • Contingency planning as risk management.
• Embracing Risk: Handling risks better than competitors.

Examples of Day-to-Day Business Risk Management

• Operations:
  • Spare capacity to handle increase in demand.
• Finance:
  • Investment appraisal using payback or net present value.
• Marketing:
  • Test marketing products in specific locations.

Contingency Planning

• Focus: Bigger risks with significant potential impact.
• Preparation:
  • Identifying and quantifying potential problems.
  • Planning responses to crises or changes in external environment.

Examples of Contingency Planning Failures

• Toyota: Major product recalls, significant costs, and reputational damage.
• Volkswagen (VW): Emissions test manipulation leading to fines and damages.
• Horse Meat Scandal: Processed meat products containing horse meat.
• Travel Industry:
  • High risk due to geopolitical situation and terror threats.
  • Thomas Cook: Poor crisis management in response to customer deaths.
• Brexit: Few businesses have completed contingency plans for potential UK exit from EU.
• Data Security: Increasing significance of personal data breaches, e.g., TalkTalk cyber attack.

Key Points

• Businesses cannot plan for every eventuality.
• Identify significant risks and assess their probability and impact.
• Major risks cannot be ignored, especially for larger businesses.
• Rising importance of contingency planning for the board of directors.