Why Businesses Recover or Fail After a Disaster

Small businesses that recognize and adapt to a changed environment\r\nafter a disaster are more likely to succed, as opposed to companies that simply try to reopen and conduct business as usual.

You''ve got evacuation plans in place. You''ve got your records backed up on an outside computer. Employees know what to do in the case of emergency.

But ultimately, would your company survive a natural disaster?

Small businesses that recognize and adapt to a changed environment after a disaster are more likely to be successful, compared to companies that simply try to reopen and conduct business as usual. A new study, "Organizations at Risk: What Happens When Small Businesses and Not-for-Profits Encounter Natural Disasters," found that the effects of a disaster on a business''s customers are more important to the long-term future of the business than the disaster''s effects on the business itself.

Funded by a grant from the Public Entity Risk Institute (PERI), the research was conducted by the University of Wisconsin-Green Bay''s Center for Organizational Studies. The center found that those small businesses that are adversely affected by a disaster, and which survived over the long-term, were more often those that read the signs of the new environment and responded quickly and appropriately. Those that ultimately failed, often depleting an owner''s equity and retirement nest egg, are more often those that could not adapt to changed markets or customer bases.

Dr. Daniel Alesch, Professor of Public Administration and Director of the Center for Organizational Studies at the University of Wisconsin-Green Bay, headed the research team that interviewed more than 200 business owners in different areas of the country that were affected by different types of disasters - floods, earthquakes, hurricanes and tornadoes, and wildfires.

The goal of Dr. Alesch''s research is to help these small companies recover more robustly from disaster events. The research aimed to look beyond short-term recovery, or success at reopening the doors immediately after the event, and focused on a company''s ability to stay in business in the long run.

The research team visited seven disaster areas in thirteen municipalities, including all parts of the territorial United States. The disaster sites were as old as Hurricane Andrew (1992) and as new as the Los Alamos Fire (2000).

The team concluded from their research that for a company to survive and be successful over the long term, it shouldn''t expect to return to the status quo. Companies must either adapt to the new circumstances created by the event, or risk failure.

They also discovered that survival is not dependent on the level of physical damage suffered by the company. The research team found some companies without significant physical damage that ultimately failed, and others with significant physical damage that adapted and survived.

Several factors are critical to long-term survival of a small business after a disaster, say researchers:

The disaster''s impact on the company''s clientele. If customers or clients are displaced from the area following the disaster, it is much harder for the business community to survive.

The availability of convenient, substitute goods or services. If substitute goods or services are easily available while the company is shut down after a disaster, it will be more difficult for the business to maintain its client base.

Pre-disaster major trends in the company''s industry and the individual organization''s position in relation to those trends. If the company is in a declining industry, it is less likely to recover, especially if the company''s business is already declining.

The extent of financial resources lost by the company. The fewer financial resources the company has available to rebuild, relocate or take other appropriate action, the less likely it is to survive. Remember, many insurance policies cover direct loss, such as buildings and equipment, but do not provide reimbursement for lost business, property taxes (taxes still must be paid even though the building is destroyed or the business temporarily closed), ongoing utility bills, etc.

The owner/operator''s ability to adapt to the new business environment. If the owner/operator is unable to appreciate the change in the business environment and make the necessary changes, the company is less likely to survive.

"Organizations at Risk: What Happens When Small Businesses and Not-for-Profits Encounter Natural Disasters" is available both electronically and in print from PERI. It can be downloaded from PERI''s Web site (www.riskinstitute.org), or a print copy can be ordered through the Web site. There is no charge for the publication.

by Sandy Smith ([email protected])

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