Critical Issues in Business Management Level 6

Task 1

A global financial crisis is defined as a situation when the supply of money is outpaced by the demand for money. This means the liquidity is reducing because available money is withdrawn from the banks. It is important to understand the main cause of global financial crises in order to prepare the business for future issues. There are the following reasons, which are mentioned below:

• Imprudent mortgage lending: it has happened with the excessive credit lending loans provided by the banks. The lower interest rate is also one of the reasons for the crisis because, with this, people started to buy houses at a higher price and also those people able to buy houses who could not afford them. When prices began to fall and loans started going bad, there was a severe attack on the financial system (Hillier, Grinblatt, and Titman, 2011).
• Global imbalances: Global financial flows have been unstable in recent years. as some countries like China, Japan, and Germany run large surpluses every year while other countries like the US and UK run through deficits. The US external deficit is affected by internal deficits in the household and government sectors.
• Lack of transparency and accountability in mortgage finances: throughout the housing finances, the many participants are contributing as a creation of bad mortgages and also selling of bad securities, which creates more abundance of bad debts on the financial institutions and in banks also. Similarly, a trader could sell securities to investors without fear of personal responsibility if those contracts failed, and so it was for brokers, individuals in rating agencies, and other market participants, each maximising his or her gain and passing problems on down the line until the system itself collapsed. Because of the lack of accountability and increasing excessive bad debts on the banks, the model of mortgage finances itself has become a massive risk generator (Mishkin, 2009).
• Rating agencies: the credit rating agencies give AAA ratings to the various issues of subprime mortgage-backed securities; critics cite poor economic models, conflicts of interest, and a lack of effective regulation as reasons for the rating agencies failure.
• Bank rejection to lend: By the affected from crises banks are refusing to lend the loans to the people. This led to a narrowing in the economy.  The investments and the foreign currency exchange rate were starting to decrease, and the banks and other financial institutions were going on the bad debt side.
• Housing bubble: With the easy money policies, the federal reserve allows the housing prices to rise to unsustainable levels (Jordà, Schularick, and Taylor, 2011). This crisis is bursting the bubble and making banks insolvent.

Thus, from the above mention of the global financial crisis, banks are adversely affected, and the economy is trying to recover its losses by initiating various activities. Banks also become bad debts because they do not have sufficient money to provide the businesses, which makes the economy down. In this situation, whole transactions stop and the economy enters into trouble. In such conditions, the central banks and higher authorities take the responsibility of this crisis, and they try to balance the economy, but they fail to stabilize the economic fluctuation. Many causes have been discussed, and that has a direct affect on the wealth and consumption level of the persons and in their investments also.

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Task 2

To forecast the major crises, their is a need to analyse the business environment so that vital measures can be taken accordingly. Because of major changes in the business environment, strategic planning and the ability to implement are critical. Businesses, such as the producers of automobiles, furniture, and other consumable goods, are operated in a stable and predictable world. In the case of service firms such as banks, savings, and loans. But they failed to make a position in the recession period (Gertler and Kiyotaki, 2010). So to overcome these crises, the companies should forecast the business environment so that they can develop tools that protect them from adverse effects. By using quantitative as well as structural analogy approaches, the impact of crying can be reduced.

Quantitative forecasting models assume that the risk of near-term crises and conflict in a given country can be largely presented as a function of a discrete number of variables and also the level of those variables. These models help in generating a risk score for each country, from low to high of risk for near-term conflict. This scale helps to identify the level of risk in the economy. While in structural analogies, the forecast is based on the identification of key similarities across countries. If find a set of repeated relationships such as conflicts between states and downfall in the currency (Fidrmuc and Korhonen, 2010). If the similar conditions can be identified, then it is important here how well an analyst can identify meaningful similarities. On that basis, the individual country takes steps of investment across the country.

Other than that, many analysts propose a variety of ways to forecast the crises and issues in this business environment:

• Genius forecasting: this method is based on a combination of assumptions, intuitions, insight, and luck. The forecast depends upon the perception of the forecaster as to what issues they perceive from the environment and, for that, which important measures he or she suggests to the company. Some individuals are capable of predicting the accurate forecast, and that helps the business reduce some losses.
• Trend basis: these methods are used to forecast by examining the trends and cycles in historical data and then using mathematical techniques to estimate the future. There are many mathematical models, but the most feasible is collecting the historical data, which presents the trends in a clear manner. The assumptions of all these tools are based on the forces that are responsible for creating the past and using that to operate the future. This is more valid when it is used for short-term horizons but falls short for medium- and long-term forecasts.
• Consensus methods: This method is involves seeking expert opinions from more than one person. Each expert is their own discipline. So their decisions reflect varying issues, and with the combination of their opinions, the final forecast is obtained (Claessens Kose and Terrones, 2012).
• Combination forecast: if all the other methods are not appropriate for the situation, then the individual can use the combination of the above. This helps the company to predict the situation effectively.

Thus, to predict the issues and problems in the business in advance, it is very necessary to prepare the  organisation in such a way that they can forecast the various conditions so that they take essential steps in order to overcome them. To be taken effective decision-making in the business predictor need to analyse the current market situation by performing extensive research work or by looking at the past and future trends, the company get an idea about the upcoming issues (Ivashina and Scharfstein, 2010). The economic fluctuation is also adversely affected by the companies, so to work in any international company, the manager needs to estimate the present and upcoming updates, which helps in reducing the risk of failure. With this, it is inferred that forecasting is crucial for businesses, individuals, and every investor in order to protect themselves from the risk.

Read more : Management Accounting

Task 3

Crises management is very important to the organisation in order to control the issues and uncertainties at work. Basically, this theory suggests that it is strategic planning that prevents and responds in the situation of crises or any negative consequences. The process to remove the risk of uncertainties and allow the management to work smoothly For that, the crisis management role is vital. They are  the key elements for the business. The objective of crisis management for the organisation is to make systematic and timely decisions that are based on facts and clear thinking in operating in critical situations (Ivashina and Scharfstein, 2010). If anyone has a little knowledge about the essential basics of critical management, then crises can be reduced. It is said that when the right plans have been adopted before crises occur, then the damage to the organisation can be minimized. The experts believe that successful management of a crisis is about recognizing and taking necessary steps to reduce the issues from the situations, rather than just being heard and saying the right things.

Crises management theory suggests the idea that crises have an identifiable life cycle (Popov and Udell, 2012). Understanding the crisis life cycle is vital because it is used to look ahead to expected results in each life cycle stage. In organizations, management needs to appoint the crisis managers, who have a responsibility to approach each step of the crisis life cycle with the view to meet the various company needs and also to overcome the challenges that arise in different stages.

The cries life cycle includes five stages, which are divided as a CM function into discrete segments executed in a specific order. The first stage involves error detection, in which virtually all issues leave a mark of early warning signals. If the management can analyse and act upon the signals, then many issues can be resolved at the same time. The second stage is that which arises simultaneously with the signal detection: prevention. Its aim is to perform all activities that help in the prevention of errors so that the initial problem can be managed effectively. The third stage is damage containment, whose purpose is to remove the effects of the crises so that an uncontaminated part of the organisation can be protected from the infecting (Acharya and Naqvi, 2012). The fourth stage is recovery, whose primary purpose is to recover the business operation from the error so that the key customers cannot be lost by the company. The fifth stage is the process of showing what has been done right for the business and what has been done wrong so that business entity can take better decisions in the future in case of crisis management.

The organization has to perform different actions in each stage, which are as follows:

• Pre-crises stage: this stage includes actions that are taken before the issues arise, which are signal detection, preventions, and crisis preparations, which are mentioned in the crisis life cycle (Reinhart and Rogoff, 2011). In management, crisis managers need to develop their capacity to identify the issues so that necessary actions can be taken at the same time and avoid major problems in the future.
• Crisis event: this stage starts with the detection of errors and finishes with the removal of problems. It involves two substages, which are crisis recognition and crisis containment. Crisis recognition includes obtaining knowledge about the nature of crises and gathering crisis-related information, while crisis containment concentrates on the companies crisis response and also includes communication with stakeholders through words and actions, which is a critical part of this stage.
• Post-crisis stage: the work of a crisis manager does not end with the critical point. There are key activities that must take place after the crisis (Crotty, 2009). This involves three steps, which are evaluating the crisis management, learning from the crisis, and other post-crisis actions such as follow-up communication with the stakeholder by continuously evaluating the problems related to the crisis.

Thus, to reduce the impact of crises, the manager works regularly and prepares the company for the day when crises occur. Moreover, crisis managers carefully remove each crisis by using the crisis life cycle in order to prevent, prepare, and respond to the critical issues. An important part of CM is the consideration of the stakeholders. As they are the key areas of success for the company. With any action of them, the business gets affected adversely (Beck, Demirgüç, and Merrouche, 2013). So the organisation should know their stakeholders and their importance and try to develop and maintain strong relationships with them. Successful organizations are those that communicate openly and accurately to their multiple audiences immediately after a crisis occurs.

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Task 4

The senior manager should learn leadership in case of crisis in order to guide the business in right direction. There are seven lessons for leaders to learn in critical situations.

• Leaders need to look at the organisation and analyze the situations so that they recognize the issues, then they should gather the team together and discuss the problems with them. Widespread recognition of reality is the crucial step before problems can be solved. It is very necessary for the manager to work in reality so that they understand the real situations, which helps them to detect the problem and provide the remedies for that. In order to understand the real reason for the crisis, everyone on the leadership team must be willing to share the whole data so that the manager can solve the problems easily (Alfaro, Kalemli, and Volosovych, 2008).
• In the case of a crisis, the senior management tries to find out the cause of the root of the issues so that corrective actions can be taken. It is better for leaders to anticipate and make organizations healthy by taking opportunities from the market.
• Senior management should build confidence during a crisis. As in critical times, people are in a state of shock and fear. So the primary objective of crisis communication is to demonstrate competences while prioritizing human needs over business needs.
• The superior manager can learn to produce quality products and services for the satisfaction of the consumers and the workplace safety (Petr, Sirpal, and Hamdan, 2012). The crisis had an adverse affect on the company as well as the employees, as they are not getting their salary on time, which makes them frustrated, so in order to make them happy, it is necessary to protect their interests by also recognizing their preferences.
• The superior leader needs to have information about the external forces so that they protect the organisation from the extensive issues and help the company to maintain their position for a longer period of time.
• The company can also take necessary advice regarding the legal professional, such as what kind of remedies are to be adopted in order to overcome the issues. Taking the advice from any experts helps the business deal with it nicely (Healy and Palepu, 2012).
• The senior manager is required to follow good internal communication in the company. If the flow of information is correct and accurate, then at the time of crisis, the manager does not have to put in their extra efforts to make everyone understand the company's operations.
• It is a must for the company to build and protect the culture in times of crisis. By creating the positive environment so that company enjoys the healthy working atmosphere. It helps in doing the work at times of hardship, under pressure, and allows them to work without stress (Hillier, Grinblatt, and Titman, 2011).
• The company can perform forecasting and help the investor. By learning to be transparent, they help the investor to invest their sums in the company because they have the faith that the business can return them. But at a time of crisis, the company cannot do it. So the corporations have words with the investors that in the difficult condition, their money has been destroyed, but the business tries its best so that the proper and adequate return can be provided to the investors. By being more transparent, the company can protect the interests of the investors. This can result in the organization controlling and maintaining its good will in the market.

Thus, from the above mention, leadership lessons are required to be followed by the senior management so that they manage the crisis easily. The estimation of risk helps in controlling the financial crisis at the company. With this, we also learned how the economy fluctuation can be controlled and how we can protect from the disasters that happen at the economy (Mishkin, 2009). It is very necessary for the manager to take care of both the external as well as the internal environment so that they identify the factors that affect them badly and, at the same time, find the required prevention to control them. It is proven that leadership qualities always help in protecting the business from major issues.

Conclusion

In this report, it is concluded that the financial crisis is adversely affected to the business operations and their workings. It creates a situation in which businesses face trouble running their day-to-day activities. In the modern economy, working capital is needed to operate the functions of the organisation. The crisis can collapse the large financial institutions if they are not managed properly. In this report, discussion is made on the global financial crisis that occurred in 2007-2008. because of excessive lending, a lower interest rate, and unstable global development, the biggest crisis. Further also evaluate the tools for effective forecasting, which can be done through assumption basis, trend analysis, and historical data. All these tools help in predicting the issues in advance so that relevant precautions can be taken. After that, the prior, during, and post-crisis management theory is studied in order to evaluate the remedies at the time of crisis. Lastly, discuss the leadership lessons in order to suggest them to the senior management of the company so that, by using them, they manage the business properly in times of crisis. Hence it is concluded that financial crises have great influences over businesses and their operations. 

References

• Acharya, V., and Naqvi, H., 2012. The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics. 106(2). pp. 349-366.
• Albertazzi, U., and Gambacorta, L., 2009. Bank profitability and the business cycle. Journal of Financial Stability. 5(4). pp. 393-409.
• Alfaro, L., Kalemli-Ozcan, S., and Volosovych, V., 2008. Why doesn't capital flow from rich to poor countries? An empirical investigation. The Review of Economics and Statistics. 90(2). pp. 347-368.
• Beck, T., Demirgüç-Kunt, A., and Merrouche, O., 2013. Islamic vs. conventional banking: business model, efficiency, and stability. Journal of Banking & Finance. 37(2). pp. 433-447.
• Campello, M., Graham, J.R., and Harvey, C.R., 2010. The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics. 97(3). pp. 470-487.
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• Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture'. Cambridge journal of economics. 33(4). pp. 563-580.
• Fidrmuc, J., and Korhonen, I., 2010. The impact of the global financial crisis on business cycles in Asian emerging economies. Journal of Asian Economics. 21(3). pp. 293-303.
• Gertler, M., and Kiyotaki, N., 2010. Financial intermediation and credit policy in business cycle analysis. Handbook of monetary economics. 3(3). pp. 547-599.
• Healy, P.M., and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.
• Hillier, D., Grinblatt, M., and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
• Ivashina, V., and Scharfstein, D., 2010. Bank lending during the financial crisis of 2008. Journal of Financial Economics. 97(3). pp. 319-338.
• Jordà, Ò., Schularick, M.H., and Taylor, A.M., 2011. When credit bites back: leverage, business cycles, and crises (No. w17621). National Bureau of Economic Research.
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• Petr, P., Sirpal, R., and Hamdan, M., 2012. Post-Crisis Emerging Role of the Treasurer. European Journal of Scientific Research. 86(3). pp. 319-339.
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