Apart from the analysis of potential events and important areas, preventive crisis management must identify latent events of importance in good time. This is achieved by generating information early, on emerging developments in the organization’s environment, that is, to enable the analysis of effects on the organization. Three generations of such information systems are used to achieve these aims.
With early warning systems of the first generation, shortfalls and exceeded threshold values should be determined and warnings generated. These systems concentrate on result- and liquidity-oriented indicators that already exist. Through an extrapolation based on past data, the expected actual situation should be checked against determined targets. This procedure enables the introduction of certain countermeasures and planning corrections, but is not suitable for identifying latent crises, which means the company can only react to them. In this sense, first-generation early warning systems show shortcomings that considerably limit the scope for action of preventive crisis management. In spite of the disadvantages, these systems are still used as short-term information systems.
Systems of the second generation are based on the conviction that organization-internal and -external chance and risk areas can be covered by a series of indicators and, through observation and measurement of these, timely early warning information can be generated. As a consequence, efforts are concentrated on determining the relevant observation areas and on choosing suitable indicators.
The latter must be sufficiently early in the cause and effect chain that the time interval allows a timely introduction of measures. Assuming stable environment conditions, these systems form a suitable basis for timely crisis management.
Through the early warning systems of the third development level, a new generation of systems has emerged that is based on the finding that it is difficult to ascertain complex environmental developments using systems of the second generation (based on causal relationships). Their main focus is strategic surprises, that is, future significant differences in information that influence strategic planning. Strategic surprises are based primarily on discontinuities, which are difficult to predict, but that have the quality of announcing themselves through the so-called weak signals. Systems of the third generation, therefore, concentrate on the timely detection and evaluation of these weak signals.
If these systems are assessed comparatively, it becomes clear that the objective is always the same: to provide the organization with information about changes in the environment as early as possible and
Information systems
to help to estimate the consequences. Although it became clear that early warning systems of the first generation cannot provide any suitable support for preventive crisis management, there is no doubt that the second and third generations are capable of this. Their applicability to crisis management should be made clear with the help of the situation matrix in the following diagram.
Diagram 26: Suitability of early warning systems in the situation matrix
For situations within the first cell in Diagram 26, indicator-based early warning systems prove to be the most suitable tool. The choice of usable indicators is relatively easy to make, just as the timely indication of a negative event is also relatively certain.
For the cases in the second and third quadrants in Diagram 26, indicator-based systems are to be considered as partially suitable. In the case where the importance of the area is known, but it is not possible to put the threatening events in concrete terms, it depends above all on the type of area and the relevant environment whether an indicator-based solution is possible or whether third-generation systems must be used.
The situation is similar with known events, which as a rule can be detected by indicators. The special challenge in this case lies much more in the correct interpretation of the possible consequences.
Therefore, the use of exclusively indicator-based methods would be insufficient here.
For the fourth quadrant, in Diagram 26 due to the high number of unknown components, only third- generation systems can be used.
This emphasizes the fact that both indicator-based systems and early warning achieved by the identification of weak signals offer a suitable preparation for promising preventive crisis management.
4.2.1 Indicator-based early warning
Indicator-based early warning systems use measurable indicators through which observable change should give timely hints about events that can otherwise only be detected at a later stage. The construc- tion of those systems is carried out in a step-by-step approach.
Events
Areas
Known Unknown
1. 2.
Known to be important Second generation Second and third
systems systems generation systems
3. 4.
Not known to be Second and third Third generation
important generation systems systems
Diagram 27: Development stages of an indicator-based early warning system
4.2.1.1 Determination of observation areas
Out of the huge array of possible areas for observation, those particularly important or critical for the specific aims and markets of the organization have to be selected. The determination of these areas has already been covered extensively, as has the fact that these observation areas can be both within and outside the organization (see also Section 4.1).
1. Determination of observation areas for the identification of threats and opportunities
2. Determination of early warning indicators for each observation area
Search for indicators
4. Determination of tasks of the information processing office(s) - Receive and check warning signals
- Process
- Forward early warning information
5. Arrangement of information channels
3. Determination of target value and tolerance for each indicator Relevance?
Feasibility?
Clarity?
Comparability?
no
yes
Source: Adapted from Hahn (1979)
4.2.1.2 Determination of early warning indicators
In order to ensure that they have good early warning qualities, it is necessary to choose indicators that will point, in good time, to essential changes in the environment. In addition, they should allow clear statements to be made regarding the implications/consequences for the organization when the tolerance value is exceeded, as well as remaining important over a longer period of time. In addition, when choosing the indicators, it must also be considered whether future regular data collection is economically justifiable.
Various methods are suggested for choosing early warning indicators:
• Pümpin (1980) suggests the identification of suitable indicator cause and effect chains. By loo- king at the factors that precede a negative event, it is possible to work backwards systematically to the future indicators. An additional analysis at each choice stage by means of the cross-impact analysis is to be recommended so that only the most important preceding factors are included.
The complexity of crisis situations and the multitude of possible dependencies mean that an exclusively causal determination of the indicators is only to be recommended to a limited extent.
• Another method is deduced from feedback diagrams. This, based on Gomez’s (1981) system- theoretical approach, observes the symptoms as part of a complex system determined by diverse influences. To identify the causes of a particular problem situation, this is set firstly in relation to the essential influential factors and then the type of relationship is put in concrete terms. In addi- tion to positive and negative relationships, other important aspects can be considered such as strength, long-term nature or cause area of the influence.
Diagram 28: Structure of a feedback model for analysing population growth in a holiday area
Source: Adapted from Gomez, 1981; Copyright by Paul Haupt Berne.
_
_
What is important is that effect relationships describe a cycle situation through which repercussions are likewise included in the analysis. The improvement of the feedback structure in further steps through the integration of additional cycles leads to a complete structure model of the problem situation. Not only is the relevant subject well structured but it is also easy to see if certain factors have a stabilizing or strengthening effect on the system as a whole.
For the final determination of indicators, the various identified, influential variables of the feedback model are examined and evaluated in the previously described interaction matrix. The variables identified as active and critical are especially suitable as early warning indicators.
4.2.1.3 Indicators for country risks
Those interested in foreign trade are traditionally interested in the evaluation of risks in foreign countries which influence their trade and investment activities. Therefore, typically the economic, legal, social and political situation are analysed and assessed by quantitative and qualitative criteria.
Several specialized institutes, some public, some private, are working in this field and register, evaluate and publish regularly those risks commonly described as country risks.
The services have been recently extended and include specific information of relevance to the tourism sector. This is based on several influences. Foreign trade is very much linked with travel to establish and maintain contacts or for negotiations. Acting globally is not a privilege to a few but is rather becoming more normal even for smaller businesses. Thus, business travellers are seeking information to prepare better for their travel and to reduce the risks.
Below, a selection of important information services, their functioning and the usefulness of the indicators will be discussed.
4.2.1.3.1 Country @ratings – Coface
The Compagnie française d’assurance pour le commerce extérieur (Coface), a subsidiary of Natexis Banques Populaires and the Banque Populaire Group prepares several indices. The ‘Country @ratings’ monitors the risks of 150 countries and are published annually. Prepared as a classical index for foreign trade risks it assesses the extent to which the local business, financial and political outlook affects the financial commitments of an individual company.
The Country @ratings are based on information of the commercial missions of the French embassies. With staff in 168 missions, a total of 120 countries are directly covered and have taken regional responsibilities into account.
Another 36 countries are covered indirectly. Another feed of information is received through the network of Oxford Analytica. The latter is a consulting company which, according to its own information, is supported through a network of 1000 researchers and academics from the University of Oxford and other research institutions.
Excerpt of the Country @ratings
Source: Coface
The indicators of the Country @ratings are organized in seven categories:
1. Political factors likely to interrupt payment or performance of contracts in progress;
2. Currency shortage risks resulting from a crisis in the balance of payments, which could lead to a transfer crisis and/or rescheduling of foreign debt contracted by public or private debtors;
3. Government capacity to meet commitments abroad;
4. Risks of devaluation following sudden capital flight;
5. Crisis of the banking system assessed by considering both the banking sectors soundness and the likelihood of financial bubbles bursting;
6. Economic risk, reflecting the likelihood of a slowdown in short-term growth independent of any external financial crises stemming from one of the risks described above;
7. Payment behavior on transactions payable in the short-term.
The first three indicators cover areas which have been typically reflected in indices for foreign trade risks. The categories 4-6 of the index monitor developments which were the origins of more recent crises. The seventh indicator is based on information which Coface and their partners in the Credit Alliance network gather through their operational activities.
The overall short-term country risk is summarized in two main risk categories:
• Ratings between A1 and A4 (with A1 being the highest rating) represents a short-term risk ranging from very low to acceptable,
• Ratings B, C or D, describe a highly uncertain economic and political environment, with middle to very high risk.
Furthermore, mid-term risks are evaluated on a 6-level scale and risk factors of special importance for the country are described.
The Country @ratings is the example of an index covering the country risks. Indices of this kind are also produced by other countries and institutions which provide export guarantees.
Evaluation
Suitable instrument for the evaluation of political risks for tourism.
As other countries with interest in foreign trade are also producing those evaluations, country specific indicators are available. Those independent evaluations of the country risks are of interest for internationally active tourism companies or destinations looking at different source markets.
Information is retrieved from a broad span of sources.
Economical.
Although the index is from its composition not aimed at the tourism industry, its evaluation gives a neutral and not tourism sector-specific perspective.
4.2.1.3.2 Business Risk Service
The Business Risk Service (BRS) is a widely-known index in foreign trade based on a multidimensional concept. (There are single-and multi-dimensional point-evaluation systems. In the former, the evaluation only concerns a single criterion, whereas multidimensional methods cover individual components that are normally judged by country-specific panels of experts, evaluated according to the gravity of the problem and summarized into a total value.) The BRS
predicts and evaluates business climate and political stability in more than 100 states. For a core group of 50 countries the data are collected, evaluated and finally published on 1 April, 1 August and 1 December.
Another group of 50 countries is evaluated on an annual basis. The BRS comprises three components: the Operations Risk Index (ORI), the Political Risk Index (PRI) and the Remittance and Repatriation Factor (R Factor).
The ORI serves to evaluate business climate and concentrates on fifteen factors that impede the realization of profit abroad, that is, it indicates the investment climate. The index is based on the evaluation of over 100 experts from banks, industrial companies and government offices, whereby at any given time five to ten experts, with comprehensive lists, assess a country they know well according to set criteria. The scoring of the factors evaluated ranges from 0 (unacceptable conditions) to 4 (very favourable conditions). The ORI for each country is made up of the sum of the arithmetic mean of the criteria evaluated by the experts.
The PRI serves to assess political stability in a country. It covers ten criteria; eight describe the causes of instability and two describe symptoms.
Political scientists and sociologists are predominantly enlisted as experts for the evaluation, whilst business people are consciously avoided. In this case, the possible scores range from 0 (extraordinary problems) to 7 (no
problems). A further thirty points can be allocated to criteria of particular importance.
The R Factor covers a country’s ability and obligation to pay and evaluates the possibilities of converting capital and profits into other currencies in order to transfer them. In contrast to the other sub-indices, the R factor is based on predominantly quantitative data.
The individual results of the ORI, PRI and R Factor are summed up, divided by three and result in the Profit Opportunity Recommendation (POR) which classes a country for the actual year into one of the following categories:
1. Business transactions not recommended. Advise against all business relationships.
2. Suitable for trade only. The situation in the country allows no investment. Only short-term transactions without movement of capital are recommended.
3. Suitable for profit-independent payments only. Realization of profit via the transfer of know-how or licences only is to be recommended.
4. Suitable for investment; investment of capital recommended. Problems in relation to conversion of currency or transfer of dividends are not expected.
A simplified form of the POR is also given for each country as a prognosis for the following year as well as for the situation in 5 years.
Excerpt of the BRS
Source: BERI. The data for each country are displayed on a two pages report.
Evaluation
Suitable instrument for the evaluation of political risks for tourism.
Information is retrieved from a broad span of sources.
Individual requests to evaluate specific aspects of a country can be made.
No distortion attributable to governmental interests.
Although the index is not from its composition aimed at the tourism industry, its evaluation gives a perspective which is neutral and not specifically for the tourism sector.
Number of countries covered within the core group.
4.2.1.3.3 Risk Map – Control Risks Group
The annually published Risk Map from Control Risks is anot- her product in the area of indices for the foreign trade. More than 130 countries are evaluated in respect of two criteria:
1. For the evaluation of the political risk, state and non- state political actors are examined and assessment is made on the activities that might occur and that could affect a company negatively. The extent to which the state is willing and able to guarantee existing contracts is especially looked at.
2. For the evaluation of the security risk the likelihood with which state and non-state actors are causing harm to the financial, physical or human assets of a company in analysed.
The sources of information for the Risk Map are manifold.
According to information of Control Risks, the company has
many primary sources in the countries (these are called ‘stringers’; they carry out these tasks in addition to their main profession as for example lawyer, police officer or journalist). Those sources are complemented through secondary open sources such as news agencies.
The evaluation is handled exclusively through analysts of Control Risks.
Both the political and the security risk are evaluated on a 5-level scale from insignificant to low, medium, high and extreme. The classification is of value for the whole country. However, often different assessments are also given for regions and even cities. The general assessment on this scale is complemented by an individual description and evaluation of the different risks.
Excerpt of the Risk Map
Source: Control Risks (2004)
Country Risk Forecast
Source: Control Risks (2004)
A more up-to-date and complete form of the Risk Map is provided with the ‘Country Risk Forecast’.
This online-service provides continuously up-to-date ratings for the political, security, and terrorism but also travel risk. The before-mentioned 5-level scale is also applied to the two additional categories, i.e. terrorism and travel risk. This service is much more tailored to the needs of business travellers who also have to travel to regions in crisis or with an elevated risk of crisis. In that sense these evaluations have a direct link to tourism since with these ratings an evaluation of the personal risk for the traveller is made which can only be found in the travel advisories.
Evaluation
While the configuration of the Risk Map is more aimed at middle-term and long-term activities, the more complete online-service takes also short-term developments into account.
Both products are suitable for the evaluation of the country risk.
The evaluation of the terrorism and travel risk is of direct importance for the tourism sector.
No distortion attributable to governmental interests.
Individual requests to evaluate specific aspects of a country can be made.
4.2.1.3.4 Travel advice
Travel advice is a specific information system for tourism. Publishers of travel advice are normally the governmental foreign offices in the most important tourism source markets. The information generated by them is aimed, in the first instance, at tourists and only secondly at tourism organizations.
Diagram 29: The system of travel advice in major source markets
USA Consular information Public announcement Travel warning
United
Unclassified travel advice Advice against all but
Advice against all travel
Kingdom essential travel
Germany Unclassified travel advice Security advice Travel warning Security risk
Austria
Good security Alleviated High Very high Travel
standard security risk security risk security risk warning
France Advice against travel except
Advice against all travel for imperative business reasons