Identifying and Analyzing Causes of Economic Crisis
CRITICAL ISSUES IN BUSINESS MANAGEMENT
This report evaluates the key causes of the financial crisis 2007-2008. It will also assess the effectiveness of tools utilised for forecasting events and predicting crisis. In addition, the strategic crisis management theory and the leadership lessons that management should remove from the economic crisis consequences will be discussed.
Financial crisis refers to the situation where some financial assets lose their economic value in a sudden situation. The rapid decrement of financial value of financial assets is also associated with financial crisis. However, according to Phillips and Nugent (2014), financial crisis may occur due to panic which leads consumers to withdraw their savings from financial institutions. Finance is not prone to crisis though results from the economic system developed. Economic crisis is not a mere incident. History has witnessed some worse financial crises. 20th century has witnessed financial crises in 1907, 1929, 1987, 1997 where 1929 being the worst among them. The first half of 21st century has witnessed financial crisis in 2001 and the worse in 2007-2008 which has destroyed the global economic system. The current assignment focuses on understanding the ways by which global as well as small scale organisations can be able to avoid such crises to thrive and survive in the competitive market.
1. Identifying and analysing main causes of the economic crisis of 2007-2008:
The crisis of 200-2008 has impacted the economy of the world as well as the organisations severely. The supreme cause of the crisis is regardless of being the Sub-prime mortgage. This includes the frozen credit market on the other hand. The overall scenario has emerged through the imbalance of trade and nation (Montgomery et al. 2015). The retrospect situation of the crisis time has given birth to the situation of bubble burst, which correspondingly doubled up the price of commodities. Selling of bad debts has also been occurred in this scenario that pre dominantly sold up things in even lower prices. Many financial organisations had to fall under the pressure of not receiving their credited payment, which is economically termed as bad loans. Many irregular practices of the organisations had accumulated huge money that deliberately facilitated the situation of tremendous crisis in 2007-2008.
Frozen credit market: On the other hand, the frozen credit market is also regarded to be as security freeze that has emerged with a number of critical financial crises (Bansal et al. 2015). The people of larger groups fell under the scenario of frozen credit in this period by being the victim of identity theft. This created a huge problem in large industries and firms as well. However, the frozen credit market is also a potential reason of the financial recession of 2007-2008.
Corporate debt levels: The debt levels of the corporate sections have emerged a valiant situation in this regard. This has deliberately allowed a group of people to invest the loan amount in business (Montgomery et al. 2015). The failure in business has led to an unstable state to pay the loan. Therefore, the corporate debt level too contributed a bit in giving rise this crisis period.
Leadership approach: Improper leadership approach in the corporate sectors is also regarded to be a valiant reason in this respect. Lack of efficiency in the job roll of a leader inclined with the specific organisations has enabled to create a mess in the economy.
Explicit Signals: However, these reasons are potential enough in determining the cause of the financial recession of the period 2007-2008; the even more valiant reason is regardless of being inclined with the explicit signals. The bankruptcy of Lehman Brothers is evidently regarded to be the spark of the recession of 2008 mainly (Romero, 2014). This is related to the conventional wisdom that predictably relates with the investment bank and consequence in frozen credit market. This situation has inevitably led the economy into ‘great recession’. However, the key failure of this scenario is regarded to be the failure of the decision of the regulator. The inconsistency in between two investment banks has simply led to this disastrous situation on world economy.
Government regulations and central bank policies: The government regulation was designed in such a manner that it helped the associates finding the gap of law. This is prevalent in giving birth to the imbalance economy. This economy has made the organisations experience a huge loss and therefore the progress and growth have been contemporarily stopped in this period (Montgomery et al. 2015). The related policies of the central bank were also responsible in this respect. The policies restricted the leaders to act accordingly; therefore it could not let impact the essence to help out of the crisis situation.
2. Evaluating the effectiveness of tools that are used for forecasting events and predicting crisis in the business environment:
Forecasting method: Forecasting method is associated with the production of any specific organisation. This helps organisation providing productive implementation strategy.
Advantage: There is variety of methods in forecasting method that helps detecting the core reason behind the crisis. The benefit of this method lies in providing valid information that can be used in decision making process. Forecasting method basically depends on the quantitative data that has been derived from the experts’ judgement. Regardless of the economic crisis of 2007-2008, the operators of many organisations have provided their views on the reasons of the crisis.
Disadvantage: This method is lacking the ability that forecasts the future and unable to predict the probable danger. The mode of data collection is quantitative, that is the reason that it cannot be relied fully to state a conclusion (Markham, 2015). Therefore, this method is not acceptable for every detailed correspondence. The information provided by the operation head cannot be relied in every situation.
Predictive method: On the other way, the predictive method can be used to evaluate the effectiveness. This method depends on specific data and statistics in order to predict the result. This method is even stronger in detecting the unknown events with relevant outcomes depending on relevant statistics. An advantage of this method lies in the fact that it depends on the trends and specific information. But, the varied information may be contradictory. Therefore concluding confusion from the varied sources may not be proved fruitful (Markham, 2015). Moreover, the source of data too may be irrelevant serving the disadvantage of using this method. Management of any organisation can post wrong or mischievous information too; therefore, it cannot be relied all the times.
Quantitative method: Quantitative method is quite useful in forecasting economic crisis due to its ability to predict events. In order to illustrate the consequences of the economic crisis in this situation, the Delphi method has been used.
Delphi method: This is a structures communication method that is deliberately used technically to conclude any necessary information. However, this method is to some extent proved bias in determining the root essence (Markham, 2015). This procedure is useful in making worth of the opinion of the experts in comparison with the numeric data. Due to this factor, it has the predictive ability whereas is flexible enough for economists to forecast events scientifically. However, Montgomery et al. (2015) pointed out that due to invalid experts, analysis might not be done properly which might lead to invalid and inappropriate forecasts of events.
Marketing research method: This method provides relevant data on the current status of market. On the other hand, due to inappropriate data, there might be bias in forecasting events. Most importantly, while making use of quantitative methods, many special cases are not taken into consideration. For example, Focardi and Fabozzi (2015) identified that; any unexpected occurrences in the economy might not be taken into consideration which in turn might create bias in the result.
Consumer survey method: This method provides a helpful source of data in a very practical mode. However, this survey is accompanied with an unstable state of consumers’ resistance. Therefore, this cannot be reliable fully. Further, due to globalisation, a global economic context has been created. Making use of economic condition of one country is not effective in forecasting the events. If the experts are unable to analyse the data properly for future insights, forecasting of an economic crisis might be invalid.
Executive opinions: A thorough survey on the selective executives of the priotarised companies are made in this process. Therefore a varied detail regarding the specific situation is attained over this (Markham, 2015). But; in this respect executive does not discloses all the company specific information and what they provide seeks a huge gap with reality. Thus, it cannot be believable. However, all these modes in an accumulating way contribute to intend to a conclusion. This helps in detecting the reason behind the crisis and recommends ways of coming out of that.
A. Time series method: This method puts focus on the previous records and consequences of it. Different procedures and steps are concerned in this method.
a. Native Methods: This method fosters deep insight into the previously occurred reasons. Therefore, it is efficient in detecting the strongest reason behind the crisis (Focardi and Fabozzi, 2015). The research on the long going reasons of the financial crisis or the reason of crisis in 1939 provides relevant data with help of this method.
b. Moving average: The opinion of different types of people can contradict in a particular proportion. Therefore, to conclude the overall discussion, an average conclusion is attempted and thereby a valid reason of the crisis is estimated.
The other potential methods are Exponential smoothing and Trend analysis.
c. Exponential smoothing: In the exponential smoothing form data follows no trend or seasonal pattern. This mode does not depend on any nearby behaviour or the currently occurred trend. This intends conclusion only based on the specific occurrence and that is the reason this form of data collection is very prominent and specific as well.
d. Trend analysis: This procedure forecasts the data that has already occurred in any situation and has consequence over a versatile impact. This method analyses the detailed information of previous or even earlier crisis and comes in conclusion based on that. Thus, keeping note that conclusion, specific measurements are taken to help solve the status of this crisis period (Focardi and Fabozzi, 2015).
e. Decomposition of time series: This particular type focuses on the time series and the modification that time has attempted. Based on the time gap, it comes to a clear demonstration of the reason and then plans resolution in accordance to that.
B. Explanatory methods forecasts: This method is attempted to set a connection between the ideas so that it might come to an understandable state to relate the cause and effects. After deriving the ideas through exploratory and descriptive methods, this explanatory method helps in explaining the overall details.
The necessary steps in this regard can be simple regression or it may be attained through multiple regression or economic modelling.
Simple regression: This procedure is applied in detecting solution with help of a single predicted method. In this case the outcomes need not to be tallied. Therefore it initiates lesser complication and constraint in intending procedure of coming out of the crisis period.
Multiple regressions: This procedure inevitably attains to be dealt with a multiple predictions. Therefore different look outs can be drawn through this and the best possible ideas to resolve the crisis can be attempted through (Focardi and Fabozzi, 2015).
Economic modelling: This is an economic process that uses the specific data and logical factors to constitute an idea on the predominant state. This is very helpful in this regard to detect the reasons of the crisis of 2007-2008 and to take adequate measure in calculative ways.
3. Discussing by taking help of strategic management theory, the dos of organizations to survive and thrive before and after such a crisis:
Strategic planning is not only to benefit the future of the organization; it is attempted to impact long-term sustainability. Strategic management helps in attempting solution with applied harmony and impacting in a durable solution (Romero, 2014). There are a number of theories in this respect. These theories helped in attaining success intended with the companies in a deliberate manner. The contingency theory, the structural-functional theory has helped many an organization coming out of the critical issues. As recommended by Van de Venet al. (2013), the different perspectives that the contingency theory is elaborated with is shown in the below-mentioned diagram.
Figure 1: Different perspectives of Contingency Theory
(Source: de Venet al. 2013, p.411)
This theory identifies the problem of the organization first and relates the causes and effects. The organizational approach is elaborated to resolving the critical state of the current situation. With help of this theory, this organization evaluates the terms of the situation with great care and situation analysis (Clegg and Dunkerley, 2013). This approach is applied towards an inclined suggestion for the betterment of the organization. Contingency theory helps the organisation in determining the issue with the systematic viewpoint (Romero, 2014). This theory is very helpful for understanding the behavioural viewpoint of the managers. Significantly this helps understand the approaches and influence of the managers on the entire system (Clegg and Dunkerley, 2013). Traditionally this theory helps to manage the organization as well as the management of the organization to plan, organize, lead and control accordingly to solve the specific issue. Based on this theory, the leaders are amended to work in accordance with the suitability of the particular leadership style (Bryman and Bell, 2015).
Focussing on the Gonzalez-Herrero and Prat (1966) model, three distinctive stages are stated to be followed to impact on the crisis redemption:
Diagnosis of crisis: The first stage is inclined to identify the root cause of the crisis. The high default rate in subprime home mortgage sector has been identified as the main reason of this recession. This type of crime if occurs, organisation should identify the reason first and then to put it up to planning.
Planning: Second step follows an intellectual planning for quick as well as permanent solution of the state. The planning is intended to be implemented by focusing on the purpose and market share of the organisation. The strategic department is neededto intend a task wise planning in helping out of the crisis to foster a quick solution to the organisation.
Adjusting to changes:
The recession made deliberate change in the market scenario. Thus, the solution process is undermined to a strategic compromise on the overall situation. If this type of situation occurs, organisations need to plan a strategic change and to make adjustable solution based on the demand of the situation.
There is many a crisis model that forecasts the probable ways of solving the status. Alan Hilburg’s crisis model also intends to some specific solution to the crisis scenario. This model is associated with three stages of solution that includes crisis avoidance, crisis mitigation and crisis recovery. Crisis recovery is the optimum state that is at the focal point. The other points are attempted to come to the submerging status of recovery. However, Erika Hayes James (2007) tells about five distinctive stages while attempting to solve crisis.
Signal detection: This stage is detected to attempt to a prominent allocation of the issue (Clegg and Dunkerley, 2013). A prominent identification would be associated to detect emerging planning in relevance with the specific situation.
Preparation and prevention: After detecting the specific issue, the former stage is associated with preparing a helpful situation to come up with prevention. The solution is in respect with the specific issue that is applied in planning the contingency for the specific demand of the situation (DuBrin, 2013)
Containment and damage control: However, this stage deals with the beneficial aspect that helps the organization in controlling the damage by an alternative adoption in regard to the situation (Romero, 2014).
Business recovery: Business recovery is associated with the solution of the arisen issue. Thus it contains with it a prominent plan that helps business having an alternative benefit to control the damage of the earlier crisis
Learning: This phase helps in gaining knowledge in this regard on handling the critical situation to come up to a soluble state.
Erika's model helps an organisation in the planning process of diffusion innovation. In respect to the particular crisis of diffusion, this model helps in identifying the issues and finally gives innovate a permanent solution to the organization. Moreover, in planning procedure of contingency for the organization too, this model helps in contaminating a damage control that is facilitated over the scenario of business (Clegg and Dunkerley, 2013). On the other hand, the final recovery is attempted over the specific adoption of right planning and strategic decision. As stated by Romero (2014), this can be achieved through the decision-making process. And the successful decision comes up with analytical view on the model of Erica by proper analysis of the detected stages on this prospect.
Figure 2: Diffusion of innovation theory
(Source: Fox, 2013, p.43)
4. Discussing the leadership lessons that the senior management should take as a result of the financial crisis:
The period of financial crisis of 2007-2008 has brought into a significant change in many organisations. Thus, economy went under crisis for a certain period that evokes a keen leadership approach in bringing rapid change and improvement. The preferable leadership approach is needed to be applied based on the requirement of the specific organisation. In an organisation of UK, the Moral leadership approach has been set as medium of improvement in that period of recession. By adoption of that means, the base of organisation has been seen to maintain its estimated growth (Clegg and Dunkerley, 2013). This leadership style basically helps in promoting its employees with keen leadership and guidance. This approach also evaluates the concerned sections of improvement with practical examples and experiences as well. This is also accompanied with a personal integrity by creating a deliberate essence bestowed with ethics and moral adoptions.
A perfect leadership approach is required in handling the crisis situation in the organisation. The leadership style is applied in accordance to the type and specification of the demand. The structure of the organisation is also required in this regard. However, the leadership approach can be of different types. The moral leadership can be very helpful in dealing with the critical situations. This approach helps organisation getting a strict and determined view towards mitigation of the problem. In this period the organisations fell under the situation of insufficient cash liquidity. This problematic situation can be dealt with a direct perspective over the reality. This style is significant in solving the crisis with internal care and support that provides organisation long term sustenance (Romero, 2014). In this aspect leaders confront the danger with responsible attitude and self-confidence. With subtle approach the leaders handle situations by identifying the key issues. By applying this attitude, a number of organisations had been able to avoid crisis in the global crisis period too. Moreover, this is associated with a solemn responsibility and governance to the organisation.
The perspective of the leaders in crisis period should be focussed in creating sustenance for the organisation. In the crisis, the view of the organisation should not be concerned in making profit or gaining hike position. The optimum estimation should be resolved in attaining stable condition. The moral leaders play key role in this regard to help the organisation providing probable support for adopting stability instead of increment. However, this approach is fostered with the power of unity too. The leaders of the inclined organisation put emphasis on the joint venture of the employees. This collaboration is associated with a united work to achieve success. This works in resistance to gain the stable supervision of the organisation so that it might assist in acquiring its position. This is involved with the united force that evokes concern of every people to fight with the issues and fixes glory for the same. In the crisis period, many an organisations have been found mislead due to the lack of good leadership or of the scarcity in efficiency (Clegg and Dunkerley, 2013). The financial organisation A seemed to lead with deliberate efficiency in this situation with the effort of the huge number of employees that set by the leader.
On the other hand, a true leader always looks for the gap in situation. The excellence of the leaders lies in grasping the opportunity that the obstacle situations offer. In the global crisis period, the leaking news from the financial sources has been used as source by the leaders of A and experienced to gain a huge benefit. Contradictorily, the organisation B has not used it in relevant way, therefore, the suffering period of this organisation were experienced to be harder comparatively. A good leadership is required in terms of maintaining the reputation. The critical situations are needed to deal with proper care so that the reputation might not get hampered. This should be the working essence of the leaders (Dinnie, 2015). Thus, in case if the organisations would have applied moral leadership, the sufferings of them might not be so severe. In difficulties too, some leaders of specific organisations seemed to be very confident as well as steady. This peeps into the confinements related to the organisations. Thereby, the effort associates in eradicating the confinement for having an integral growth to the organisation.
The leadership approach is inclined with saving the organisation from further crisis. This is related with the on-going transactions of the organisations and therefore it predicts the upcoming situation with clear demonstration (Schild, 2013). This approach cheers up the other employees towards enhancement of lost glory and fosters improvement and manifestation towards the goal. However, the leaders deal the situation with compact analysis. With proper consideration the leaders create a positive value of the situation and therefore remove the problem. Thus, in order to detect further crisis and to identify the inclined issue, this approach is very effective. The proper planning is also structured by the leader if it gets appointed in proper way (Bryman and Bell, 2015). By identifying proper system, this leadership approach works deliberately in attaining success for the concerned organisation. Therefore, the entire concerned organisation needs to apply this supportive leadership approach to provide its company with huge marginal profit.
Over the entire study, the types of issues and a vivid analysis of assuming tendency of the issues have been analysed. The method of detecting and so as resolving the issues is, however, potential enough; still, the procedures are indulged with the chances of being failed. The theories that detect critical approaches cannot provide the helpful solution in most of the critical cases.
1. Keep on focusing on the existing resources and to plan financial strategy in accordance to that will initiate help to come out of the crisis period. Example analysis can be one valid as well as potential support in this scenario.
2. Furthermore, taking tangible step on the very first stage can also help organisation having measurable impact from getting rid of the crisis period.
3. Use of strategic management principles is required in order to ensure that preventing measures are already taken for any foreseeable event.
4. The top management and the leaders’ needs to use have charismatic leadership attributes not only for motivating their employees, but also for forecasting future events that may harm or benefit the firm.
5. Organisations need to constantly make use of market research and expert opinion in their strategic activities whereas need to be prepared always for such unexpected events.
So finally is could be concluded that the issues concerned with business can be solved with a proper strategic adoption. This intends a keen insight on the management of the revolved organization. The keen analysis on the situation and specific adoption on the planning process with ample distribution is regardless of coming to a conclusion. Thus, the decision-making process evokes an inherent concentration on the specific demand of the scenario. The strong management is also required in this regard. So, critical analysis of the overall procedure and keen note on the regulated extents are intended in this situation to help solve the issues permanently.