A basic premise of good strategic management is that firms strive to be proactive, planning ways to deal with unfavorable and favorable events before they occur. Too many organizations prepare contingency plans just for unfavorable events; this is a mistake, because both minimizing threats and capitalizing on opportunities can improve a firm’s competitive position.
Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events, such as strikes, boycotts, natural disasters, arrival of foreign competitors, and government actions, can make a strategy obsolete. To minimize the impact of potential threats, organizations should develop contingency plans as part of their strategy-evaluation process. Contingency plans can be defined as alternative plans that can be put into effect if certain key events do not occur as expected. Only high-priority areas require the insurance of contingency plans. Strategists cannot and should not try to cover all bases by planning for all possible contingencies. But in any case, contingency plans should be as simple as possible.
Some contingency plans commonly established by firms include the following:
- If a major competitor withdraws from particular markets as intelligence reports indicate, what actions should our firm take?
- if our sales objectives are not reached, what actions should our firm take to avoid profit losses?
- if demand for our new product exceeds plans, what actions should our firm take to meet the higher demand?
- if certain disasters occur—such as loss of computer capabilities; a hostile takeover attempt; loss of patent protection; or destruction of manufacturing facilities because of earthquakes, tornadoes, or hurricanes—what actions should our firm take?
- if a new technological advancement makes our new product obsolete sooner than expected, what actions should our firm take?
Too many organizations discard alternative strategies not selected for implementation although the work devoted to analyzing these options would render valuable information. Alternative strategies not selected for implementation can serve as contingency plans in case the strategy or strategies selected do not work. When strategy-evaluation activities reveal the need for a major change quickly, an appropriate contingency plan can be executed in a timely way. Contingency plans can promote a strategist’s ability to respond quickly to key changes in the internal and external bases of an organization’s current strategy. For example, if underlying assumptions about the economy turn out to be wrong and contingency plans are ready, then managers can make appropriate changes promptly. Sometimes, external or internal conditions present unexpected opportunities. When such opportunities occur, contingency plans could allow an organization to quickly capitalize on them. Linneman and Chandran report that contingency planning gives users, such as DuPont, Dow Chemical, Consolidated Foods, and Emerson Electric, three major benefits, as follows:
- it enables quick responses to change.
- it prevents panic in crisis situations.
- it makes managers more adaptable by encouraging them to appreciate just how variable the future can be.
in addition, Linneman and Chandran suggest that effective contingency planning involves a five-step process, as follows:
- identify both good and bad events that could jeopardize strategies.
- Determine when the good and bad events are likely to occur.
- Determine the expected pros and cons of each contingency event.
- Develop contingency plans for key contingency events.
- Determine early warning trigger points for key contingency events.13
Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).