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Conceptual and methodological propositions for assessing responses to industrial crises.

Of particular interest and importance to organizational crisis researchers is the ability Of organizations to cope with environmental threats in order to ensure their longrun viability. The focal aspect of the relevant research is how effectively a crisis is managed. Effective management of crises requires the concentration of firms' efforts in minimizing potential loss and/or maximizing potential gain. In order for organizations to effectively cope with threats, they must facilitate their adaptation to their environments. Researchers have identified attributes of organizations that act as facilitators of such adaptation (Starbuck and Dutton 1973; Galbraith 1973; Hedberg et al. 1976). These attributes also distinguish successful from unsuccessful (or less successful) organizations in a crisis environment.

Organizations become less able to perceive what is happening, so they fantasize about their environments. This comes about from the tools which organizations use programming, buffering, and slack resources. These tools may enable organizations to act autonomously but they can also make them less sensitive to environmental events, and less able to respond to these perceived events (Starbuck and Hedberg 1977; Starbuck et al. 1978).

A self-designing organization is one that maximizes its long-term viability. If self-designed, it can meet social and technological changes and reap advantage from them. In such an organization, future problems are avoided by keeping the complex interactions and processes in it dynamically balanced (Hedberg et al. 1976). It is difficult for organizations to see unanticipated threats, changes and opportunities. The case may, however, be that some unanticipated events are never perceived at all, and others are only perceived after they have been developed. Organizations, even after signs of crises are evident, may underestimate the need for action. For example, organizations that are strongly tied up with their pasts, relying on the same standardized management practices for many years, usually fear rapid changes. Another rationalization for early crisis signs is fostered by the idea that organizations ought to be stable structures (Starbuck et al. 1978), and therefore, ignore any environmental change, including those early crisis signs. In other words, certain organizations operate under the assumption that their environments are stable, which prohibits them from detecting and interpreting crisis signs. Starbuck et al. suggest that the best way out of a crisis is by: a) replacing top managers, b) rejecting implicit assumptions, c) experimenting with portfolios of activities, and d) managing ideology.

Method

It is very difficult or nearly impossible to assess the degree of progress in handling a crisis while the crisis is occurring. Organizational theorists and other students of industrial crises have not yet agreed upon a single success measure of crisis management. This is mainly attributed to different perspectives taken in the study of industrial crises. Moreover, there is still not a well accepted typology of crises. This study attempts to provide a new typology of crises based on the dimensions of organizational characteristics and responses to crises.

Given all these problems, eight cases of organizations in crisis were examined in depth. The cross-case comparison technique was used in this study. The analysis of each of the cases included the following:

- a specific identification and description of the crisis and its focal event,

- a chronology of the most important reactions to the crisis, and

- a description of the organizational response to the crisis.

Each case analysis concluded with an assessment of the successfulness of the organizational reactions to the crisis. Two criteria were utilized: (1) a general examination of the financial performance of the company; the emphasis here was placed on financial measures of sales and profitability, i.e., net sales, net income, and earnings per share (EPS); and (2) the fluctuation of the company's stock price (monthly or daily) was tracked versus the performance of the market, illustrated by a financial index (Dow Jones Industry Average or S&P 500). The specific days of particular company reactions were in focus. For each organizational reaction's date, the company's performance was compared against the performance of the market at that same date. This type of comparison allows one to draw meaningful inferences about the degree of success characterizing each particular organizational response. Most importantly, however, this comparison allowed for the attribution of success/failure to either company reaction policies or market trends.

This methodological procedure was applied to eight cases, short descriptions of which are presented next.

Analysis

The study examined the characteristics which referred to the cause of each crisis, its triggering event, the extent of damage, claims and litigation expenses, mitigational responses, communications and PR programs, and certain financial highlights. These characteristics were chosen so that one can better illustrate the extent of a crisis, from: a) the societal and environmental damages perspective (environmental pollution, harmful effects on human life), and b) the organizational perspective (financial consequences as exemplified by claims against the company, litigation expenses and effects on the company's financial performance). Given the focus of the study (i.e., determining successful/unsuccessful responses to crisis), other important case characteristics were the mitigational responses and the company's communications response, a vital response variable. The cause and triggering events of each crisis were also presented primarily for definitional purposes.

Dow Chemical: In November 1979, in Mississauga, Ontario, a Dow Chemical tank containing chlorine derailed. Dow experts immediately set up a command post and held frequent press briefings in order to allay concerns. Dow made sure to keep the public informed. It is well accepted that during a crisis situation, especially shortly after it occurs, the market responds unfavorably against the company causing the accident. In the case of Dow, however, the market responded favorably. The public was, most likely, satisfied by the information presented by the company and the manner and timeliness of its presentation. The favorable response was clear during December of the same year, which allows one to conclude that Dow's plan for coping with crises was indeed successful. Examination of Dow's weekly stock price performance revealed that a slight decrease appeared only during the second and third week of November 1979, but an increase followed during the fourth week of November, through the middle of the first week of December. Overall, it seems that the crisis did not have dramatic or detrimental effects on company's performance.

Ford - Pinto: Problems existed with Pinto's automatic transmission in the 1973-79 models, which slipped to reverse from park despite the feel and the indication that the vehicle was in park. NHTSA (National Highway Traffic Safety! Administration) received around 23,000 complaints from Ford owners and attributed 98 fatalities to the defect. Ford however, contended that Pinto's transmissions were just as safe as its competitors' (Automotive News 6/16/80:1,69). It was not until 1978 that the company took some action. By December 1980, Ford was faced with a massive recall of 16 million cars, the cost of which was estimated at $200 million. Even though Ford knew that Pinto was unsafe, it continued its production because it was more cost-effective than attempts to modify the design (Dardis and Zent 1982). In addition, the company failed to consider adverse consequences in marketing a defective product. As a result, in October 1979, the market responded very negatively to Ford's handling of the crisis. The negative reaction can be attributed to the fact that Ford had decided to recall Pintos the year before, and most importantly, the number of lawsuits that the company had to face. It was really interesting to note that the large decline in the share price started in May 1978, a period when the entire market was improving. During the same time period, NHTSA announced that 1.9 million Pintos may be recalled, which finally happened by July 1978.

A.H. Robins: From June 1970 through June 1974, the company sold 2.8 million IUD's. As soon as complaints started, the firm immediately withdrew the product from the market and stopped its production and distribution. It notified doctors and agencies that the use of the product should be discontinued. lt launched a $4 million PR campaign to communicate the decision to discontinue the product on its own; urged its removal; discouraged continued use and offered to pay for the removal expenses. It set a $615 million reserve to cover Dalkon Shield claims, and received a $35 million emergency line of credit for immediate cash obligations. In addition, at least in the first years of the crisis, the company chose to conceal vital information from the plaintiffs (WSJ 3/2/84:43; Forbes 5/21/84:214-8). Fears for bankruptcy started appearing when the costs of settling 1,000 compensatory damage claims in the first 1985 quarter took $15 million of its second quarter earnings (SCRIP 8/5/85: 13). Finally, Robins filed for court protection under Chapter 11 in August 1985. As of July 30, 1985, the company and its insurer had paid $378.3 million to settle 9,320 Dalkon Shield cases (WSJ 8/22/85:3,10). The analysis indicated that even though the market started picking up by the end of 1984, Robins followed a decline path, instead. This can allow us to infer that the crisis was indeed a cause for decline, and not bad market conditions.

Hooker Chemical: Toxic chemicals seeped into the basements of homes from an abandoned waste dump that used to belong to the company, an Occidental Petroleum subsidiary. The area, Love Canal, in Niagara Falls, N.Y., was declared unsafe and consequently, in 1978, 239 families were evacuated from it. Hooker agreed, in late 1984, to pay $20 million for claims of affected families (Baldston 1979; Business Week 8/28/78:32). According to the agreement, Occidental was responsible for past, present and future damages (Hurwitz 1984). By the end of 1985, Occidental defendants had settled claims of 1,328 plaintiffs (Annual Report 1985). Hooker itself responded to editorials that appeared in newspapers and journals by running full-page advertisements (Business Week 10/8/79:73). The Love Canal incident had a negative effect on the holding company's performance as indicated by a drastic decline in its net income and EPS for the year during which claims against it started being filed. It seemed that the company was quite passive in responding to the particular crisis situation. No systematic plan was developed to handle it.

Rollins Environmental: Rollins is considered the industry leader in the disposal of chemical waste. On August 6, 1985, it was ordered to close its Baton Rouge, Louisiana incinerator, one of the largest in the U.S. The state ordered that the incinerator be closed immediately and not reopened unless technical experts can determine that it is able to operate properly. At the same time, nearby residents complained that the plant had damaged their health, gardens and the paint of their cars (NYT 8/7/85:8). The result was a $1 billion lawsuit by a class of 1,100 plaintiffs. The incinerator finally resumed operation on October 18, 1985. It is worth mentioning that Rollins did not immediately comply with the government's order to close down the site. This resulted in the issuance of a second closure order and the doubling of the fine originally imposed against the company to $100,000 per day. Even though revenues and eamings for the fourth fiscal quarter and fiscal year were adversely affected due to Baton Rouge's incinerator shut down, 1985 was the most profitable year ever, with substantial increases in performance over the previous year. In 1985, revenues increased by 51% in comparison to increases of 44% in 1984 and 13% in 1983. It is very important to note here that these increases were a result of increased demand and higher prices, necessary to cover increased costs (Annual Report 1985).

Johnson & Johnson - Tylenol: Seven people died in Chicago, in September 1982, after taking Extra-Strength Tylenol capsules spiked with cyanide. At the time of the crisis, Tylenol accounted for 7.4% of J&J's corporate revenues and 17-18% of corporate income. Tylenol commanded 37% of the $1.3 billion analgesic market. Johnson & Johnson attempted to reassure the public of the product's safety, while industry rivals had increased production and advertising to gain Tylenol's lost market share. As soon as the crisis occurred, J&J recalled all its Extra-Strength Tylenol capsules and later reintroduced them in new triple-seal packages. The costs for recalling the product reached $100 million. The company decided to rescue Tylenol's image and went directly to the public. In October 1982, it invested about $1 million in TV commercials over a four- day period. A second series of trust-building TV commercials were aired in December 1982. In addition, the company ran Sunday newspaper advertisements nationwide in late November and December offering $2.50 coupons for Tylenol purchases. The company also set up an office in Chicago to guide the corporate security response, in addition to its existing corporate security offices at New Brunswick, N.J. which coordinated the company's efforts. By February 1983, Tylenol had gained 65% of its sales and had obtained a 24% share of the market (Fannin 1983). Tylenol had recovered from the crisis and had regained almost 30% of its market, within nine weeks from the day it started implementing its crisis management plan (Bowman 1983).

Metropolitan Edison (General Public Utilities Co.) TMI:

On March 28, 1979, the company's Three Mile Island station Unit No. 2 (TMI - 2) accident resulted in significant damage to the system and its components, contamination of major portions of the plant and a release of radioactivity to the environment (Annual Report 1985). The TMI accident was caused by a combination of equipment failures, ambiguous instruments and operator failures. Insurance on the plant, at the time of the accident, totaled $300 million, $117 of which had already been spent by midyear 1980. GPU asked other utilities and the government for financial assistance (Chemical & Engineering News 8/18/80:16). Metropolitan and its affiliates projected that the cleanup of TMI-2, which started in 1979, was to be completed by 1988 at a cost of approximately $1 billion, $500 of which will be the company's share. As of December 31, 1985, GPU and its affiliates had spent $612 million. Focusing on the date of the accident, one notices a dramatic increase in GPU's stock trading volume. The number of traded stocks for February 1979 was 863,300; for March of the same year 1,156,000, and for April, 11,023,600 accompanied by a drastic stock price decrease. At the time of the accident, the market as a whole was performing much better than the company, which implies that the accident affected the company's financial performance negatively.

Johns Manville Co. - Asbestos: In August 26, 1982, the company, along with twenty of its then subsidiaries, filed separate petitions for reorganization under Chapter 11 of the Bankruptcy Code. At that time, litigation was pending against Manville on behalf of approximately 16,500 persons seeking damages for injuries alleged to have resulted from exposure to asbestos-containing products manufactured or sold by the company. Manville was receiving approximately 425 new cases per month, at a projected average cost of a conventional-tort-litigation-solved case of $40,600. The estimated total cost of disposing of such claims would be at least $1.9 billion (Annual Report & Form 10-K 1985). By early 1984, Manville had filed three asbestos liability suits against the U.S. government. It claimed that the damages it paid to workers were instead the government's responsibility. In addition, Manville planned to spend $7 million, by the end of February 1985, to fight image woes resulting from its controversial response to 50,000 lawsuits and asbestos-related claims, worth $2 billion (Business Marketing 12/84: 15). In August 1985, Manville started a cost-cutting program as part of its effort to emerge from bankruptcy. It planned to sell or close some of its operations (NYT 8/12/85: 19,22), and to focus on more promising businesses (NYT 10/9/85:35). Manville planned to pay $800 million immediately to victims of asbestos, in February 1986. However, this plan was poorly perceived by Manville's stockholders and commercial creditors, who stood to lose the most when company's resources were divided up (NYT 2/15/1986: 22; NYT 2/17/86:19,21; Business Week 3/3/86:46). When Manville filed for reorganization, the stock price started going up until May of the following year, during which time it started following a steady decline. The period of increase in stock price (August 1982 - May 1983), however, was matched with a good general market performance. The decline stage of Manville's stock price, on the other hand, was matched with a good general market's performance as well. Manville's plans to pay asbestos victims were terribly expensive due to their nature and number.

Discussion

A summary of the organizational responses to crisis for the eight cases studied is presented in Table 1. The labeling of crisis management as successful or unsuccessful was determined by the comparison of the firm's financial performance with the performance index of the general market, for a particular crisis period. If a crisis-infocus can be characterized as an "accident," a sudden, low probability, or high impact event, it will be called a "discrete" crisis situation. If the crisis, on the other hand, was evolving for many years and its impact or knowledge of harm appeared at a later time, will be called a "continuous" crisis situation. The latter include the cases of latent crises that remain dormant for years. Figure 1 provides a better conceptualization of the dimensions of interest, where the eight cases are classified into three relevant groups. The suggested classification is only an initial typology of organizational characteristics versus responses to cnses.

Successful crisis management cases are reported separately from unsuccessful ones. As can be noticed, continuous crisis cases normally lead to unsuccessful handling of the crisis, even if a proactive approach to crisis management is taken (e.g., the case of A.H. Robins). On the other hand, successful handling of crises are associated with discrete crisis cases (e.g., Dow and J&J). Most continuous crisis cases lead to unsuccessful crisis management. Dow Chemical exerted less effort than J&J to get out of the crisis perhaps because the crisis effects were less obvious to the general public, and did not involve human deaths. The case of Rollins Environmental cannot clearly be identified as a successful or unsuccessful handling of the crisis; although the company did not proactively react to the crisis, it did not suffer any financial losses because of noncrisis related reasons, as was presented earlier.

Discrete Cases (Group A)

The Dow Chemical and Johnson & Johnson Tylenol cases can be clearly classified as successful handling of crises. Both were discrete crises, and the firms followed a proactive approach with the main emphasis on keeping the public-at-risk informed about the crisis and the corporate responses. Public communication programs were developed and implemented immediately as soon as each crisis arose. In the Tylenol case, the company used public relations and advertising campaigns heavily, as well as product packaging improvements to enhance safety. The product was immediately recalled and reintroduced to the market only after it was made safe. Dow Chemical applied a positive approach to crisis management, believing that "silence implies guilt." It made sure to keep the public informed from the first moment that the derailment of its tank cars occurred.

In contrast to this open communication approach, companies that face continuous crises usually suppress information initially, and inform the public only under legal pressure.

Continuous Cases (Group B)

The Ford Pinto, Hooker Chemical, A.H. Robins and Johns Manville - asbestos cases were unsuccessfully handled and were characterized by the following reactions: (a) recalling the product, or stopping its production only after the firms were ordered to do so; (b) lack of use of PR or advertising campaigns; (c) no specific action or systematic plan implemented; (d) restructuring the organization (cost- cutting programs; focusing on other businesses); and (e) blaming government as responsible for the crisis.

Even though Robins had followed a proactive approach to communications, it did not do so early enough, and initially suppressed information. Then, under legal pressure, it kept the public informed through heavy use of PR and advertising campaigns and recalled the product.

The case of Ford's Pinto was additionally characterized by other techniques such as continued production of the product even though its lack of safety was known; attempting to delay the passage of unfavorable laws to the company (the Federal Motor Vehicle Safety Standard 301) through the use of lobbying; undertaking minor alterations to meet the minimal federal standards; and most importantly, not admitting its fault and responsibility for a defective product. One should also note here that two of these companies (A.H. Robins and Johns Manville) filed for protection under Chapter 11 of the Bankruptcy Act of 1978, since they were unable to handle the heavy financial burden of the claims filed against them.

Central Group Cases (Group C)

The Rollins Environmental case was difficult to classify, so in Figure 1 it appears in Group C. Evidence suggested that even though Rollins stopped its production operations (only after the second order that it received and after it was fined for that delay) and had not taken any specific action against the crisis, the financial effects of the crisis were minimal. Here, it is important to consider other factors besides systematic crisis management, in order to explain how a company can cope with a crisis. Such factors included Rollins' strong market position - it was the market leader - and increased demand for the firm's services.

The TMI case was also classified in Group C, since, even though it was a "discrete" case, and organizational responses did not manage to avoid very negative financial consequences (i.e., dramatic stock price decrease), unlike other "discrete" cases of Group A.

Conclusions

The preceding discussion suggests that heavy use of PR and advertising campaigns as means for coping with a crisis, and in general, a proactive approach (keeping the public informed) is the way to successful crisis management, depending on the type of crisis. It seems that a proactive approach only works in cases where crises are "discrete." Certain crisis-handling strategies are effective under "discrete" but not under "continuous" crisis cases.

Normative implications from this study's results should only be limited to organizational crisis cases originated from man-made accidents whose consequences are either exemplified as product harm or environmental pollution. Thus, the success of particular organizational responses was assessed for this category of crisis, limiting the general applicability of results in all crisis situations. With this clarification in mind, three specific conclusions can be drawn from the analysis.

First, the distinction of organizational crises into "continuous" or "discrete" types adds an important analysis dimension which can explain why certain firms are more successful in crisis handling management than others. Most of past crisis research has dealt with organizational/structural and environmental dimensions, and either did not identify or simply neglected the continuous-discrete dimension. The results of the present study showed that the same strategy may work under one but not under the other type of crisis. This suggests that future corporate crisis researchers should seriously consider this dimension in their studies, when attempting to provide crisis handling managers with more specific suggestions.

Second. comparing a company's performance during a crisis period. against the entire market's performance during the same period. enables researchers and managers to determine whether the success (failure) with which a crisis is handled is due to successful (unsuccessful) organizational responses, or due to favorable (unfavorable) market trends during the crisis period.

Finally. the results provided additional support to the suggestions of PR proponents who have illustrated the advantages of a positive proactive approach in crisis situations (Truskie 1979; Rossie 1983; Stephenson 1983 and 1984). 1n sum. what they suggested - and the present study supported - is that a positive. proactive approach can make the most out of the "opportunities" which emerge as results of crises. Crises are sudden. urgent and instantly visible to the public. and involve top management. Responding to crises. the firm has to make sure that the public be fully and immediately informed of a crisis and the information provided must be correct. consistent. and current. It is vital to make management aware of the need to prepare for handling crises and to be open in communicating with the public.

References

1. Baldston. Ken (1979), "Hooker Chemical's Nightmansh Pollution Record," Business and Society Review. No. 30. Summer. 25-28.

2. Bowman. RuseIl D. (1983). "The Fourth Annual Advertising and Sales Promotion Report: A $64 Billion Industry." Marketing Communications, Vol. 8. No. 8 (August). 5-8.

3. Dardis. R. and C. Zent (1982). "The Economics of the Pinto Recall," Journal of Consumer Affairs, Vol. 16. No. 2 (Winter). 261-277.

4. Fannin, Rebecca (1983). "Diary of an Amazing Comeback." Marketing and Media Decisions. Vol. 18 (Spring). 129-134.

5. Galbraith. Jay R. (1973). Designing Complex Organizations. Mass: Addison-Wesley.

6. Hedberg Bo L.T., Paul C. Nystrom. and William H. Starbuck (1976). "Camping on Seasaws: Perceptions fpr a Self-Designing Organization." Administrative Science Quarterly, Vol. 21 (March), 41-65.

7. Hurwitz, Sheldon (1984), "Liability Lessons from Love Canal (Part 2)." National Underwriter (Property/Casualty). Vol. 88. No. 38. September 21, 36-37.

8. Rossie. Charles M., Jr. (1983). "Now Is The Time." Communications Journal. Vol. 1, No. 4 (Nov/Dec), 18-23.

9. Starbuck. William H., and John M. Dutton (1973). "Designing Adaptive Organizations." Journal of Business Policy. Vol. 3; 21- 28.

10. , and Bo L.T. Hedberg (1977), "Saving an Organization from a Stagnating Environment." in Strategy + Structure = Performance/The Strategic Planning Imperative, Hans B. Thorelli (ed.), Bloomington: Indiana University Press.

11. , Arent Greve. and Bo L.T. Hedberg (1978), "Responding to Crises." in Studies on Crisis Management. Smart C.F., and W.T. Stanbury (eds.). Toronto: Butterworth.

12. Stephenson, D.R. (1983). "Internal PR Efforts Further Corporate Responsibility: A Report from Dow Canada," Public Relations Quarterly. Vol. 28. No. 2 (Summer), 7-10.

13. (1984), "Are You Making the Most out of Your Crisis?" Public Relations Journal. Vol. 40, No. 6 (June), 16-18.

14. Truskie. Stanley D. (1979). "In-House Supervisory Training Programs: High Caliber, High Impact," Personnel Journal. Vol. 58. No. 6 (June). 371-373.
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Author:Siomkos, George J.
Publication:Review of Business
Date:Mar 22, 1992
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