Oct 19, 2017 in Analysis Category

2007 Financial Crisis

Following the 2007 global financial crisis, business organisations had to devise ways of ensuring that such a situation can be overcome in the future if it happens.  The financial crisis of 2007 led to a credit crunch in most parts of the world. Credit crunch entails a situation in the economy, which makes it hard, complicated and difficult to obtain capital, which can be used in investment. As a result of the financial crisis, borrowers found it challenging to obtain debt from financial institutions, especially because debt prices rose considerably. Lending institutions became wary of loan defaults, which would have emanated from bankruptcies. The crisis led to a reduction in the credit supply as most financial institutions did not want to lend money. After the 2007 financial crisis, questions emerged on how organisations should make decisions during the crisis and non-crisis scenarios. This paper seeks to examine the differences in decision making during the crisis and non-crisis scenarios. The paper will emphasise on risk management for financial strategy and financial planning.

The global financial crisis affected the financial stability of businesses, national governments, consumers, as well as large institutions, which deal with financial matters. During a crisis situation, there are certain organisational, individual, as well as situational factors, which have an impact on ethical decision making. In a crisis environmental, an organisation has to make financial decisions, which will not violate the ethical code of conduct. Often, managers face challenges of maintaining profitability and preserving the culture of the organisation and ensuring that they do not contravene the law. As such, ethical decision making in crisis situations poses a significant challenge to many business organizations. There are certain factors that guide decision making during crisis situations. These factors differentiate decision making during crisis situations and decision making during non-crisis scenarios (Savona et. al. 2011).

Since organisations act within the confines of the law, their operations depend on both the external and internal factors, which affect the operations of an organisation. Every organisation has to respond to the continuous changes taking place within the external environments in which they operate. These changes influence decision making during crisis scenarios.  Whether there is a crisis or there is no crisis, an organisation has to satisfy the needs of the various stakeholders amidst the turbulent nature of the environment in which it operates. Decision making during the crisis and non-crisis scenarios differs in a number of ways since there are various factors that dictate decision making in a crisis and non-crisis environment.

One of the key differences in decision making during a crisis situation and a non-crisis situation entails the extent to which ethics may be upheld when making decisions. During crisis situations, financial decisions may be made without due consideration of ethics that guide decision making. On the other hand, ethics tend to be strictly followed when making financial decisions in a non-crisis situation. For instance, the views of all stakeholders should be accounted for when making decisions in a non-crisis scenario. However, this is not the case in crisis scenarios as the decisions made may not be ethical. This means that during crisis situations, there tends to be a hasty decision making and the management does not give room for disagreements. As a result, some stakeholders may not embrace some of the decisions made (Savona et. al. 2011).

During a financial crisis, organisations employ strategic planning when making financial decisions. Strategic planning is a crucial aspect of decision making during times of crisis. Organisations should strive to make decisions based on strategic planning as this ensures that growth is pursued within an organisation.  During crisis scenarios, organisations tend to identify growth opportunities, which will make them remain relevant in the prevailing economic situations. However, this is not the case in non-crisis scenarios since the main aim of organisations during non-crisis situations is to gain a competitive edge in the market. As such, financial decisions during non-crisis scenarios may be based on strategic planning that ensures the organisation surpasses its competitors. A crucial aspect of risk management during a financial crisis encompasses improvement of the internal controls of an organisation. This means that an organisation ought to improve their risk reports, and make sure that these reports show accuracy. On the other hand, during a non-crisis scenario, the main emphasis mainly encompasses instituting strong external controls. This serves to ensure that the organisation experiences success in the face of competitors (Savona et. al. 2011).

The difference in decision making between crisis and non-crisis scenarios also emanates from the Corporate Social Responsibility of organisations. During a financial crisis, the decisions made may not focus too much on social responsibility of the organisation as opposed to situations when decisions are made during non-crisis situations. Corporate social responsibility calls for an obligation on the part of the organisation, to make sure that there is no violation of society values. However, the financial strategy of an organisation during a crisis scenario may ignore this call. As such, the organisation may strive to mitigate internal risks while the community is put at risk. This explains why an organisation makes risky financial decisions, which only favour its business and enhance profitability while customers are put at stake. An organisation can make financial decisions aimed at cutting costs during a financial crisis (International Monetary Fund 2009).

On the other hand, decision making during non-crisis situations places a lot of emphasis on Corporate Social Responsibility. The organisation not only mitigates the risks that may affect its business, but also strives to prevent events, which may affect  the society in which it operates. The financial strategy and financial planning of an organization during a non-crisis situation focuses on the needs of the entire society. For example, an organisation may set funds, which will be used for development projects in society. This is a rare case during a financial crisis when organisations strive to reduce expenditure (International Monetary Fund 2009).

During crisis situations, risk management and financial decisions do not place a lot of emphasis on external stakeholders as is the case for internal stakeholders. This means that financial strategies and financial plans made during crisis scenarios serve the interest of internal stakeholders. This is because financial decision making during crisis scenarios mainly occurs under the influence of dominant decision makers. For example, top managers mainly dominate financial decision making during crisis scenarios. As such, there is a lot of biases and subjectivity with regard to the decisions made since not many persons may be consulted when making decisions. The internal stakeholders, especially the employees of the organisation, tend to reap maximum benefits from the financial plans made during crisis scenarios. On the contrary, external stakeholders such as shareholders and investors may not benefit from the decisions, which the organisation makes. This is attributed to the fact that financial decision making during crisis scenarios aims at ensuring that the organisation survives despite the looming crisis. Therefore, there may be little consideration of the needs of external stakeholders (Savona et. al. 2011).

Financial decision making during non-crisis scenarios serves the needs of both the external and internal stakeholders. This is because in instances when there is no crisis, the organisation does not have a lot of pressure to conform to the market needs. External stakeholders such as investors have a say on issues such as investment decisions, which the organisation will take. Risk management during non-crisis scenarios ensures that views of external stakeholders are implemented. An organisation engages in financial planning, which ensures that shareholders get maximum returns from their investments.

The making of financial decisions during crisis scenarios is mostly characterized by a lot of ambiguity, as well as uncertainty. This is because the survival of an organisation is jeopardized when there is a financial crisis. As such, the operations of the organisation do not promise that there will be an improvement in the near future. On the same note, the financial decisions that the organisation makes do not promise to bring any definite changes since the future of the organisation is unknown. As a result, an organisation tends to come up with financial measures, which will minimize financial risks that may emanate from the investments made by the organisation. There is a short term financial planning during crisis situations since decision makers lack control over the situation at hand. Consequently, there may be little responsibility undertaken by the decision makers, which means that there are challenges in using sound financial strategies (Savona et. al. 2011).

On the contrary, during non-crisis situations, the financial decisions made tend to be certain. Therefore, the organisation is better placed to predict the future and any changes, which may take place in the future. There is certainty that the decisions made by the organisation will lead to remarkable improvements. Risks are easily mitigated during decision making since the decision makers have ultimate control of the situation.  Organisations can make long term financial decisions in situations when there is no crisis. As a result, the future of the organisation is known, and sound financial strategies and financial plans can be implemented (International Monetary Fund 2009).

During a financial crisis, there are numerous regulations and restrictions that have to be put in place in order to mitigate risks. Financial institutions are subjected to some financial standards by the government. For example, there is deposit protection, which aims at ensuring a financial crisis does not happen. Crisis management during a financial crisis includes the use of contingency planning, as well as assessment of financial risks. Organizations have to come up with contingency plans, which dictate how the future operations of the business will be run (International Monetary Fund 2009).

During crisis situations, the economic environment dictates the decisions, which the organisation will make. The capacity and ability of the customers to purchase products takes centre stage when making financial decisions. As a result, the financial decisions of most businesses ensure that products are not sold at high prices. This serves to ensure that customers can afford the products sold by businesses. With a financial crisis, organisations have to come up with financial strategies, which ensure that they devise cheap products, which most of the customers can afford. Cheap versions of products have to be introduced in order to ensure that prices align to the economic conditions during a crisis. On the contrary, financial decisions with regard to pricing of commodities in non-crisis situations do not consider the capacity of the customers to purchase the products. This is because customers can afford to buy goods at a high price in non-crisis situations (International Monetary Fund 2009).

During a financial crisis, financial decisions centre on risk assessment in order to determine the extent to which an organisation can tolerate risks, which emanate from a financial crisis. In addition, the financial strategies and plans of a business during a financial crisis focus on diversification of investments. Diversification is a crucial aspect of risk management during a financial crisis. Engaging in various ventures ensures that a business does not face volatility or collapse when there is a financial crisis. The other difference in decision making during a crisis and non-crisis situation is that, during a crisis scenario, there is a lot of emphasis on capitalising on existing markets, to ensure that they do not collapse. On the other hand, during a non-crisis scenario, an organisation has the freewill to search for other markets, which will serve the needs of the organisation. When there is no crisis, an organisation can move to new markets and explore the new opportunities, which new markets can provide to the organisation (Ferrell et. al. 2010).

Financial decisions during crisis situations focus on ways, which the organisation can employ in order to reduce costs. During non-crisis situations, the financial decisions of the organisation focus on improving the products so that the emerging needs of the customers can be served. As such, there are a lot of retrenchments and lay-offs during a financial crisis as opposed to the number of retrenchments when there is no financial crisis. An organisation facing a crisis rarely recognises the numerous opportunities, which may be available in its environment. There is a tendency to bend the law when making financial decisions during non-crisis situations as compared to making decisions during crisis situations. This explains why an organisation takes greater financial risks during a financial crisis than when there is no financial crisis. For example, shareholders’ dividends can be utilised to pay the debts of the business during times of crisis. This is the contrary when the organisation does not face any financial crisis. When there is no crisis; shareholders receive their annual dividends in full and in a timely manner (Ferrell et. al. 2010).

In order to evaluate the differences in financial decision making during a crisis and non-crisis scenario, it is crucial to evaluate the case involving measures undertaken by the United States government during the crisis. A case study of the United States indicates that the Federal Reserve, the FDIC, and the Treasury took some measures to ensure stabilisation in the banking system. Financial regulation played a crucial role in determining the decisions made by financial institutions. The private sector was encouraged to increase the lending rates in order to reduce the circulation of money. The government also advocated for transparency in financial institutions. The other case can be seen during non-crisis situations in the United Kingdom; when there is stability, the treasury manages the finances of the country, sets the tax policy, and provides valuable advice on issues affecting the financial sector. During crisis situations, such responsibility shifts to the institutions themselves; they have to make decisions on their own without advice from the treasury (Ferrell et. al. 2010).

Another case study that portrays the behaviour of banks during a crisis and non crisis situations includes an assessment of financial institutions during a financial crisis. In this regard, during a crisis, there is a reduction in credit supply by parent banks, which can be regarded as financially strong. Subsidiaries got credit from parent banks, and this helped in the stabilisation of local lending. This means that financial institutions take measures during a financial crisis to mitigate the looming crisis. Some of the most crucial measures undertaken by these institutions include financial integration. The use of internal capital markets, especially by banks, during the financial crisis also indicates the differences in decision making during the crisis and non-crisis situations. During the financial crisis, the internal capital markets played a crucial role in the repatriation of funds to headquarters. For example, bank subsidiaries in the Czech Republic and Russia supported their headquarters in foreign countries using local liquidity (Ferrell et. al. 2010).

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