Crisis and Risk management

Last Updated: 12 May 2020
Pages: 8 Views: 121

The Northern Rock Bank was a prestigious establishment well founded in the financial and capital market in the United Kingdome. However in the year 2007, the company fell and as a result the fall of the capital market hit the United Kingdom at an unprecedented level. The bad credit market and an unfavorable credit crunch was made apparent one of the largest mortgage lenders in the United Kingdome officially sought for support from the bank of England. As a result on December 12, 2007 the Northern Rock was “dropped from the FTSE 100 index of leading London-listed blue chips, in the biggest shake-up of the index since the dotcom crash in 2001.

” (‘Timeline: Northern Rock bank crisis’, 2008) The crisis that ensured, prompting the Northern Rock to seek support form the Bank of England was primarily due to the high risks being faced by the company. In the global market place, companies dealing with debt and management of mortgage saw less flow of funds which were casqued by the inappropriate of mortgages made by the US mortgage companies to the subprime market affected the overall global mortgage industry and market by making a shortfall of funds.

Order custom essay Crisis and Risk management with free plagiarism report

feat icon 450+ experts on 30 subjects feat icon Starting from 3 hours delivery
Get Essay Help

The lack of liquidity of funds made the company additionally vulnerable in a market which was facing recessionary pressured since 2006 and resulted in the crisis as depicted in the case. The Northern Rock Crisis Case study depicts that the crisis faced by the company was caused by the business model of the company and the way it was operated which increased its risk to the failing global mortgage markets.

The company used a highly risky business model whereby the company used to lend the mortgages in the market by financing them in majority from loans while a small percentage were financed form the company savings in the bank (‘Northern Rock Crisis - Case study’). As a result when the money lenders sought to retract their money from the company, the company saw a shortfall of liquid cash for business operations which made the company vulnerable to the risks of operating in a business sector facing already recessionary pressures in the United States. Case Analysis Role of Organizational Culture

The role of the organizational culture is of significant importance when dealing with the organization crisis the likes of Northern Rock Crisis. The organizational culture can determine the success and the failure of the crisis management initiatives used to mitigate (Wise, 2003). This is because the employees, management and the board of directors are responsible for managing the crisis and making the company survive though it while the established values and the organizational culture from the guidelines of business practices which can add to or help manage the crisis.

Gerald Lewis highlighted the link and the importance of organizational culture when managing crisis in his book. He mentioned that “if its through cultures that values are determines and expresses, if its through cultures that external events are understood, if its through cultures that external events are understood, if its though cultures that an individual experiences a sense of community and connection, if its through cultures that one derives a sense of sense of sensibility and structure then It is obvious that a crisis management plan must start with an assessment of an organization’s culture” (Lewis, 2006, 23).

The Northern Rock Crisis depicts that the organizational culture of the companies operating in the mortgage industry led to the crisis for the Northern Rock Bank. The US based mortgage companies has the organizational culture to be highly profitable, make sales and increase their customer volume base for overall profit maximization, and the business practices of lending to a subprime market which was unable to pay back the mortgage led to the crisis for the bank when the funds in the market became insufficient for the Northern Rock Bank to operate in its traditionally high risk business model.

Crisis Management Phases and the 7 C’s of Crisis Management The three phases of crisis management are associated with the incubation stage of the crisis, the onset of the crisis and the aftermath that follows the crisis. In these three stages, the crisis is managed through the use of effective decision making, learning and employing of knowledge to resolve the issues (Boin et al, 2005).

In the incubation stage for the Northern Rock Crisis, the organization culture played a main role along with the development of high short terms costs in the face of the US mortgage market crisis of sub prime mortgages. The development and the production of the products and services was limited to focus on the market demands while the contingency planning was also insufficient s the stress tests were not conducted and the liquidity crisis was not forecasted or predicted. Additionally the role of the stakeholders was not taken into account in the communication and the decision making process.

At the onset of the crisis stage the Northern Rock Crisis was triggered and aggravated by the business model of the company which relied on attaining 77 percent of the funds from the wholesale money lenders while only 23 percent from the personal savings in the bank. This resulted in the limited liquidity of funds available to run the high risk business model which was further aggravated by the inadequacy of the company insurance to cover the retail run which in turn effected the retail banking operations of the business as well.

The third stage of the crisis legitimization depicts that the situation and the crisis of the company leaked out and was aired on the BBC television network, in the face of which the company was unable to effectively management the [public relations. Aside form these the management of the company was restructured while the search for a low risk model was made to sustain the company along with the use of turnaround strategies. “The process of crisis management entails that corporate decision makers pay attention to the necessity for turnaround strategies within the planning process.

Whilst turnaround management has been widely discussed in the literature relating to strategic management it has, of yet, been largely restricted to the marketing and financial elements of the company's activities and has focused on the development of contingency plans rather than organizational change” (Smith and Sipika, 1993). Smith and Sipika highlighted a model for post crisis management with the phases pertaining to the defensive phase the consolidation phase and the offensive phase.

These also incorporated the turnaround strategies for the company. In the defensive phase the company insufficiently managed the stress the unpredicted liquidity crisis at the company. The FSA assigned a crisis decision unit to the company which reported that the crisis was brought on due to the US subprime crisis. In addition the news was leaked to the media about the crisis which was addressed in an inefficient manner by the company which employed no personal and public relations management.

At this stage the Virgin Group also attempted a takeover of the company which was managed by the company through the controlling of the share prices while the bailout was made by the bank of England which made the company go public. In the consolidation phase a bailout plan was made which provided liquidity support along with guarantee arrangements. Moreover the business was restructured along with the management while the balance sheet was made smaller though the recovery made of the loans that existed on the books of the company and though the sale of company assets.

The offensive phase saw the overall restructuring of the organization where the management and the business model were all changes to incorporate organizational learning as well as a focus on long termism instead of the previous short termism whereby the continuity of the business was ensured. The influence of the cultural web or the elements of the organizational culture can also be observed through the 7C’s model for crisis management.

The 7 C’s model includes the elements like contingency planning, the culture of the organization, the control executed, the configurations made, the coupling and complexity involved, communications and costs that have been depicted above for the case. These elements revolve around the stories, symbols, power structures, organizational structures, control systems, and rituals and routines for the paradigm which form the cultural web (Johnson and Scholes, 2001).

These are presented in the following table as they applied to the Northern Rock Crisis. The stakeholder analysis is a analysis strategy employed to determine the stakeholders of the business and what their role should be in the decision making and the operations of a business. “There are two major elements to Stakeholder Management: Stakeholder Analysis and Stakeholder Planning. Stakeholder Analysis is the technique used to identify the key people who have to be won over” (‘Stakeholder Analysis’).

This strategy can be used by the Northern Rock Bank to determine its stakeholders and how best their roles can be used to manage the business interests effectively. For the Northern Rock Crisis case the stakeholders that were associated with the company were the employees, the customers, the management, the shareholders as well as the depositors who had deposited their savings in the bank as well as the media which is an external stakeholder.

The media played the role of an aggregator when it released information about the crisis at the Northern Rock to the general public which alerted the customers and the shareholders. The customers sought to takeout their deposits from the bank all at the same time while the shareholders sought to cash in their investments while still possible which aggravated the crisis. The company has a choice of using multiple strategies for incorporating the stakeholders in the business.

These pertain to the stakeholder interests, and their power. The company should seek to develop a contingency plan which incorporates the interests of the strong power holding stakeholder entities into consideration while also alleviating the fears and the consequences faced by the victims of the crisis which include the customers as well as the employees of the company by taking their interests into account in the process of decision making. Recommendations and Conclusion

Through the stakeholder analysis it has been determine that the stakeholders have a strong influence on the organization and its future continuity, especially where the interests of the stakeholders are concerned. As a result it is proposed that the Northern Rock Bank should take the all the stakeholders including the customers, the employees, the prospective customers, the community, the media as well as the management into consideration when making decisions, devising policies or strategies for business instead of only aiming for pleasing the shareholders with high returns in the form of dividends.

Through CSR (Kotler and Lee, 2004, p3) the company should develop a more comprehensive public relations division which is effective in managing media releases while restructuring the organization to create a long term orientation with effective management to support the new culture of long termism. The CEO of the company should also be changed to someone who has a more sound financial background. References Northern Rock Crisis- Case Study ‘Stakeholder Analysis - Winning Support for your Projects’, Mind Tools, available at http://www. mindtools. com/pages/article/newPPM_07. htm

‘The Cultural Web - Aligning your organization's culture with strategy’, Mind Tools, available at http://www. mindtools. com/pages/article/newSTR_90. htm 2008, ‘Timeline: Northern Rock bank crisis’, BBC News, available at http://news. bbc. co. uk/2/hi/business/7007076. stm Bion, A. , t’Hart, P. , Stern, E. , Sundelius, B. , 2005, The Politics of Crisis Management Public Leadership Under Pressure, Cambridge University Press Coles, E. , ‘Crisis Leadership: An Academic Perspective’, Work-Based Learning - Leeds University Business School, available at http://74. 125. 153. 132/search? q=cache:8r3CxaXHF34J:www.

thebci. org/reports/EveColes. pdf+smith+and+sipika+1993&cd=4&hl=en&ct=clnk&gl=pk Holmes, A. , 7 Principles of Crisis Management, available at http://anthonyholmes. org/7principles. aspx Johnson, G. , Scholes, K. , 2001, Exploring Public Sector Strategy, Prentice Hall Kotler, P. , Lee, N. , 2004, Corporate social responsibility: doing the most good for your company and your cause, John Wiley and Sons Lewis, G. W. , 2006, Organizational crisis management: The human factor, CRC Press Pearson, C. M. , 2007, International handbook of organizational crisis management, Sage Publications

Cite this Page

Crisis and Risk management. (2018, Jul 14). Retrieved from

Don't let plagiarism ruin your grade

Run a free check or have your essay done for you

plagiarism ruin image

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Save time and let our verified experts help you.

Hire writer