Evaluate crisis responses and contingency plans by balancing continuity, risk, stakeholders and recovery in IB Business Management HL cases.
Production of oil is suffering because oil is a fossil fuel and worldwide demand for petroleum and other oil products is declining as part of a major trend towards reducing carbon emissions. Oil fields have passed their peak production levels, meaning production costs are increasing. MM is reducing operations in Alberta in response to concerns about impacts on indigenous peoples and the environment. MM is trying to improve its image by developing energy-efficient production methods, supporting research into more efficient uses of energy, offsetting carbon emissions by funding reforestation and other environmental projects, researching diversification into alternative fuels such as hydrogen, and strengthening ethical values throughout the business, particularly in oil production. The demand for palladium has been falling over the last 20 years. Governments are discouraging the use of diesel and petrol cars for environmental reasons, and sales of electric cars, which do not use palladium, are increasing. Although palladium from MM’s South African mine is highly profitable, cash flow can be a problem. MM’s gold mine in Egypt has technical problems and some areas are unsafe, with a risk of flooding if heavy rains fall. Some lorry drivers have threatened strike action because of safety and pay issues. MM is exploring ways to reduce costs. The fastest growing section of the mining industry is lithium extraction. The current rapid growth in demand for lithium has been caused by increased use of lithium-ion batteries, which are essential for electric vehicles, smartphones and other electronic equipment. MM’s board sees opportunities for major growth in this sector, but members disagree about whether to seek a license for a new lithium mine, take over an existing lithium producer or enter a joint venture.
M M uses just-in-time (JIT) production in its Oil Production Division.
The long-term demand for oil is usually predictable, and production is reliable unless major problems occur. In 2020, however, there was an unexpected decrease in demand for oil. Uncertainties in the world economy and responses to climate change now make predictions more difficult.
M M has prepared a sales forecast for its oil production for 2022 and 2023 (Table 2).
Table 2: Sales forecast for oil production for 2022 and 2023 (millions of barrels)
§ calculated using a four-quarter moving average based on six years of historic data
† calculated by comparing actual sales with a four-quarter moving average
In 2020, M M had some major problems:
- A catastrophic fire occurred at one of its oilfields.
- The gold mine in Egypt collapsed, trapping 23 miners.
- It experienced a cyber-attack on its computer network.
- An earthquake in Chile damaged the country's transport system.
In response to these problems, M M had to rely on its contingency planning and its crisis management procedures.
JG Mining (JG) wants to buy MM's tar sands mining operation for $50 million, but the board of directors are divided. MM recently invested $15 million in their tar sands operation in addition to the original million set-up cost in 1986 . Production is at designed capacity, and, although the long-term average rate of return (ARR) for the tar sands operation is below those of most of MM's other investments, it provides a reliable source of income. However, M M has difficulty selling sulphur, a by-product of tar sands production.
Employees at the tar sands operation are against selling the operation to JG. However, the income from the sale would help M M finance other investments, such as lithium mining, and the sale could help improve MM's corporate image. MM's Finance Director, Ethan, estimates that the net present value (NPV) of the tar sands operation is $46 million.
With reference to M M, explain the difference between crisis management and contingency planning.
Crisis management and Mapa
The Portuguese company Mapa manufactures a handheld global positioning system (GPS)* device. In the winter of 2012, Mapa received reports that its GPS devices often failed in extremely cold weather. According to the media, the problem first appeared in 2011, when mountain climbers with the Mapa GPS devices discovered inaccuracies in the coordinates the devices provided. Rumours of the GPS failure began to circulate in the climbing community. Then, after several accidents in the mountains, including fatalities, television news programmes began to report the problem. Only then did Mapa begin to take action.
Engineers concluded that the problem resulted from where and when the quality testing was being performed. The production of a component part outsourced to a company in Iceland was being quality tested in Portugal in the summer. There was also poor communication between the producer of the component part and Mapa because of differences in language and culture.
Mapa's tall organizational structure, bureaucracy (and bureaucratic corporate culture) and centralized decision making meant that no manager acted until the Chief Executive Officer (CEO) formally apologized. As a result, Mapa had taken too long to admit that there was a problem and so consumer confidence fell and Mapa's reputation suffered.
The production process of the GPS device is shown in the table below:
\footnotetext{
* global positioning system (GPS): provides location, including geographic coordinates and time information to users anywhere on earth as long as their receivers (commonly a handheld device such as a smartphone with a GPS application) have unobstructed lines of wireless transmission to various GPS satellites
}
Using a (cause-and-effect) fishbone diagram, explain why Mapa was slow to respond to the problem with its GPS devices.
Examine the importance of communication for Mapa in its management of the crisis.
Safe Passage (SP)
Trent Peters is one of seven partners at Safe Passage (SP). It provides bodyguard* services to film stars, politicians and other important people in Europe and the Americas. Trent would like to satisfy a growing demand from Asia but has to choose from two options for the recruitment and training of bodyguards. These are:
- offshoring by setting up it's own overseas branch in Asian country X or Y or Z
- subcontracting by using an external agency in Asian country X or Y or Z .
The forecast costs and revenues of offshoring are given below (all figures in US$ millions):
The forecast costs of subcontracting to the same Asian countries are given below:
Country X: US$1.5 million.
Country Y: US$2.8 million.
Country Z: US$4.2 million.
\footnotetext{
* bodyguard: a person who is responsible for protecting a person from harm
}
The three suitable Asian countries are located in earthquake zones. An earthquake expert assured Trent that all three areas are safe. Trent is concerned and decides to prepare a contingency plan for each possible location in Asia.
Control over recruitment and training of bodyguards is vital to S P. Customer service and trust are their unique selling propositions (USP). Clients will pay high fees to ensure their safe transport to concerts, meetings and important events. However, Trent is refusing valuable contracts in Asia due to a lack of suitably trained bodyguards. As a result S P is missing out on large profits.
Trent has mentioned to a previous customer of his plans to subcontract the recruitment and training of bodyguards. She has threatened not to use S P again and would tell her friends if the plans went ahead. Trent is concerned as word-of-mouth promotion is crucial to S P.
He calls a meeting of all the partners. Three partners prefer subcontracting the recruitment and training as it is cheaper, quicker and less risky. The three other partners prefer offshoring. They believe that subcontracting will damage SP's USP. They argue that the higher costs of offshoring will be covered by the forecast high revenue.
Explain two benefits and one cost to S P of preparing a contingency plan of the three possible locations in Asia.
