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Managerial experience with natural disasters affects corporate ability to prepare for future catastrophes

Wed, 06/02/2021

LAWRENCE — In the Midwest, a thunderstorm is considered commonplace.

“Sometimes we just ignore it. We might have a little flooding, yet most of the time it doesn’t matter. People in management who experience these kinds of low-intensity natural disasters gain confidence and simply work through it,” said Chang Hoon Oh, the William and Judy Docking Professor of Strategy at the University of Kansas School of Business.

“But managers who gain experience in low-intensity disasters usually misjudge their ability and don’t really prepare for when a high-intensity disaster occurs.”

His new article titled “A storm is brewing: Antecedents of disaster preparation in risk prone locations” shows how organizational experience with natural disasters increases preparedness for future hazards. It appears in a forthcoming issue of Strategic Management Journal.

Co-written with Jennifer Oetzel, the article emphasizes that catastrophes and other risk events can “cause disruptions to supply chains, decrease sales, lower productivity and lead to lost business opportunities.” But by planning in advance, businesses can diminish the damage caused by such threats and recover more quickly afterward.

“What we found is that corporations may use some type of statistics or estimation method to prepare for natural disasters, but it is impossible to prepare based on these means. Two years ago we never expected to have COVID-19,” Oh said.

He determined companies that eschewed statistics and tried to learn from different stakeholders — such as government experts or supply chain partners – fared much better. He also discovered that managers are more willing to learn from others in locations characterized by high-impact, low-frequency disasters. In areas with low-impact, high-frequency disasters, they are more likely to misjudge the severity of these events.

“So we have to prepare, not based on statistical facts, but based on our vision and experience,” he said.

“A storm is brewing” highlights two unique surveys: an international survey in 18 disaster-prone countries and a U.S. survey in New York City and Miami. Approximately 4,500 international and 2,400 domestic managers received the survey (which was translated into eight languages), with nearly 1,000 responding.

Complicating the reactions of managers is that they tend to focus on short-term costs rather than long-term benefits. With catastrophes being inherently unpredictable, managers often devote resources to immediate threats. But Oh’s research indicates preparation for exogenous calamities minimizes a corporation’s vulnerability.

The professor became interested in this topic nearly 15 years ago when he ran across an issue of Time magazine.

“I looked at what Time considered to be the most important events of 2007, and there were only a few things about the economy. Mostly, it was about natural disasters and political events. I wondered why businesses didn’t focus on natural forces and external shocks more than human activity,” he said.

Oh cites a current quandary within the automotive industry as a perfect example. Since 2020, the industry has faced a scarcity of semiconductors used for the chips required by vehicle electrical systems.

“I just tried to buy a new car in the states, but right now the automotive industry can’t get enough semiconductors,” said Oh, who came to KU a year ago after working in Canada for the last decade.

“During COVID-19, the automakers didn’t have enough demand. Instead, people stayed at home and relied more on their computer, iPad or iPhone. The semiconductor industry signed huge contracts with the tech industry, and they now don’t have enough production capacity for other industries. Automakers may have the capability to make great cars, but they can’t produce them without their supply chain partners, including these semiconductor chips inside. These companies can be considered myopic in that way in regard to not preparing for catastrophic business environments.”

He also points to how automakers learned from and forgot the lessons of a similar situation.

“After Japan’s tsunami (in 2011), some auto and parts makers tried to build alternative supply chains. In addition to their partners in Japan, they also established partners in Germany, Korea, Taiwan and other countries to try to diversify their supply chains. That kind of high-impact natural disaster provides us a momentum to change our views, but unfortunately automakers already seem to have forgotten the lessons learned,” the South Korea native said.

Oh wants to change the perception that natural disasters are something people cannot necessarily control.

“We can control it and prepare for it,” he said. “We need a lot of research to do that, but managers need to recognize the importance of these disasters and not forget the lessons learned. Based on the lessons, they have to transform their entire business processes and find ways to lower the impact of nature for a longer term.”

Photo credit: Pixabay.



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