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Replacement after a product harm crisis.

Replacement After A Product Harm Crisis

Recent research has shown that in a product harm crisis denial of responsibility and involuntary involuntary adj. or adv. without intent, will, or choice. Participation in a crime is involuntary if forced by immediate threat to life or health of oneself or one's loved ones, and will result in dismissal or acquittal.

 product recall are detrimental det·ri·men·tal  
Causing damage or harm; injurious.

 to both high- and low-reputation companies (Jolly & Mowen, Mowen & Ellis ELLIS - EuLisp LInda System. An object-oriented Linda system written for EuLisp. "Using Object-Oriented Mechanisms to Describe Linda", P. Broadbery <> et al, in Linda-Like Systems and Their Implementation, G. Wilson ed, U Edinburgh TR 91-13, 1991. , Siomkos). Specifically, it has been concluded that consumer attitudes deteriorate de·te·ri·o·rate
1. To grow worse in function or condition.

2. To weaken or disintegrate.
 and consumers are not willing to buy the new product that is developed to replace the defective defective adj. not being capable of fulfilling its function, ranging from a deed of land to a piece of equipment. (See: defect, defective title)  one (Siomkos). There was, however, a call for future research work in the area of enhancing its generalization gen·er·al·i·za·tion
1. The act or an instance of generalizing.

2. A principle, a statement, or an idea having general application.
 and external validity External validity is a form of experimental validity.[1] An experiment is said to possess external validity if the experiment’s results hold across different experimental settings, procedures and participants.  of these findings.

While consumer interest in a new product to replace the recalled defective product can be measured, managers of companies-in-crisis still have to make an important decision. They must decide on whether they should initiate a new product development process. Given that sufficient consumer interest in a new product to replace the defective one exists, several important factors must be considered: new product development costs; estimated time that will take the company to come up with a new, safer product; and money and people resources allocated to the new product development process.

This study presents managers with a first attempt to determine analytically an·a·lyt·ic   or an·a·lyt·i·cal
1. Of or relating to analysis or analytics.

2. Dividing into elemental parts or basic principles.

 the number of new product development experiments or trials the company has to devote its resources to, in order to come up with a new, safer replacement. That number of trials would consequently determine the cost of the whole new product development process.

Consumer interest in a product replacement after a crisis

In Siomkos' study, a variable was introduced describing the degree of consumers' interest in buying a new model of a hair dryer, which the company was about to produce to replace the defective model (variable name: NEW). The study examined, among others, the influence of three fundamental factors in a product harm crisis on NEW. The factors and their levels were: company reputation (high - low), external effects that the company faced during the crisis (positive - negative), and organizational response (denial of responsibility - involuntary product recall - voluntary product recall - super effort). NEW lay closer to an action-orientation on the part of the consumer reaction to a crisis than any other variable presented in the same study. Consumers were directly asked to respond to the question, "How interested would you be in buying the new model to replace the defective?" on a 7-point scale (1 = very much interested; 7 = not at all interested). A 2x2x4 experimental design was used; subjects were presented with 16 treatments (combinations of the different factors' levels).

The same study was replicated later by Siomkos for a different product, i.e., apple juice. Subjects were presented with a real case of product adulteration Mixing something impure with something genuine, or an inferior article with a superior one of the same kind.

Adulteration usually refers to mixing other matter of an inferior and sometimes harmful quality with food or drink intended to be sold.
: the apple concentrate used in making the juice was a blend of synthetic ingredients, some of which could be poisonous poi·son·ous
Relating to or caused by a poison.


having the properties of a poison.

poisonous bride's bush

Ranking of the means of variable NEW for the two products offer similar results as in the Siomkos study (Table 1). Analysis of variance The discrepancy between what a party to a lawsuit alleges will be proved in pleadings and what the party actually proves at trial.

In Zoning law, an official permit to use property in a manner that departs from the way in which other property in the same locality
 yielded similar results as well. Results suggest that main effects were significant in both product cases (Table 2). The replication In database management, the ability to keep distributed databases synchronized by routinely copying the entire database or subsets of the database to other servers in the network.

There are various replication methods.
 of the study offers higher external validity to the results by combining findings from the original study and its extension, specific conclusions can be drawn.

Consumers are more likely to be interested in buying the new product from the same company when the company: is well-known well-known
1. Widely known; familiar or famous: a well-known performer.

2. Fully known: well-known facts.
; rates high in reputation; faced positive external effects during the crisis; and voluntarily recalls the harmful product.

New product development

It is strongly recommended to companies in product harm crises that they voluntarily recall the product. For those that do, another problem arises that demands an immediate solution. The company has to decide whether to introduce a new (safer) model of the product to replace the defective one, or to simply kill the product after its recall. Consumers' interest in a new model is not enough to base making a go/no go In engineering and manufacturing, a go/no go (or Go-NoGo) is a process or device used in quality control. In psychology, a go/no-go test requires a participant to perform an action given certain stimuli (e.g.  judgment on. Cost considerations are involved and should be seriously taken into account.

Therefore, it seems logical for a manager of a company-in-crisis to ask:

* given that consumers express a strong interest in the new model

(which is to replace the defective), how many additional

experiments will be necessary to develop a better, safer, new

product? * given the new product development efforts, i.e., number of

trials required to develop a safer product, what would be the

total cost to the company if it is to decide that it will go ahead

with the new product introduction? * what are some of the fundamental considerations before

deciding to continue with the new product development process

after the harmful product is recalled?

With these questions in mind, they were two central objectives in developing a model:

* to determine the number of trials it would take the company to

develop a new, safer product, and * to incorporate new product development costs, so that

managers would use the model in deciding whether they should

proceed with new product development after the defective

product is recalled.

The new product development decision

Having recalled a harmful product, a company is faced with making a decision. Should it forget about the product altogether, or should it attempt to develop a new, safer model of the product and introduce it in the market. The company is then concerned with finding the optimal number of experiments (n*) to be performed in order to develop the replacement product, when the costs of experimentation (C for each run) are accounted for. In order to ensure consistent dimensions in the objective function, we must incorporate total market sales volume. Also, letting n be the total number of experiments; T be the total sales volume of the product market in which the recalled model belonged; S be the maximum market share obtainable by the replacement; and, k be a discounting factor, the objective function becomes:

V(n) = TkSn/(n+1) - nC and its solution is

n* = (TkS/C)1/2 - 1 It should be noted that k, the discounting factor, represents the present value coefficient coefficient /co·ef·fi·cient/ (ko?ah-fish´int)
1. an expression of the change or effect produced by variation in certain factors, or of the ratio between two different quantities.

 of expected future cash flows Expected future cash flows

Projected future cash flows associated with an asset.
. Thus if the time to introduce the replacement product to the market is one year and the discount rate is 10 percent, k = 1/(1 + .10) = .90.

As an example, consider a case of new product development experiments. It is recognized that the maximum market share obtainable is S = 30 percent. The cost of each experiment run is C=$20,000. The discounting factor is k = .90. The present value of the total volume of market sales is T = $7.4 million at the end of the experimentation period. The magnitude of k indicates that this period is approximately one year. The approximate solution is:

n* = (1,998,000/20,000)1/2 - 1 = 9 Evaluating V(n*) from above,

V(n*) = $1,618,200

Thus it is apparent that management should proceed with the new product development using nine trials which will result in an expected value Expected value

The weighted average of a probability distribution. Also known as the mean value.
 of an overall profit of $1,618,200. It can be noted that cost (n*C) to achieve the V(n*) equaled $180,000. If V(n*) proved to be negative, then the company would forsake a new product development.

If the cost structure of the experimentation consisted of a fixed component in addition to the unit cost (C), the optimal number n* would remain the same since the additional fixed component is constant. The overall value of V(n*) would be reduced by this fixed component. For example, if the fixed component was $100,000, then V(n*) would equal $1,518,200.

Future research

We have presented a model for determining the optimal number of new product development experiments for replacing a product that has been withdrawn from the market. The optimal number of experiments is based upon costs of experimentation, the time value of money, and an estimate of the potential market share.

Future research should deal with the specifics of implementation of the model by incorporating such items as promotional costs.
RANK   A B C   NEW    A B C   NEW
  1    H 4 +   3.58   H 3 +   3.42
  2    H 3 +   3.50   H 4 +   3.08
  3    H 2 +   2.92   H 1 +   2.42
  4    L 3 +   2.42   H 3 -   2.00
  5    H 1 -   2.42   H 4 -   1.83
  6    L 1 +   2.33   L 3 +   1.75
  7    H 4 -   2.00   L 1 +   1.67
  8    L 4 +   1.92   H 1 -   1.50
  9    H 3 -   1.92   H 2 +   1.33
  10   L 2 +   1.75   L 4 +   1.33
  11   L 3 -   1.58   H 2 -   1.25
  12   H 2 -   1.58   L 4 -   1.17
  13   H 1 +   1.17   L 1 -   1.17
  14   L 4 -   .92    L 3 -   1.00
  15   L 2 -   .83    L 2 -   .75
  16   L 1 -   .75    L 2 +   .67

Table 1

Source of variation Hair Dryer Apple Juice

Main Effects:
Reputation (A)         12.4(a)        23.0(a)
Response (B)            2.7(b)         5.6(b)
External (C)           21.7(a)        10.7(a)

Interaction Effects:
A x B                   1.4            1.2
A x C                    .7            2.3
B x C                   1.8            1.4
A x B x C               3.5(b)          .3
a:p<.005   b:p<.05   c:p<.10

Further reading

Jolly, D.W. and Mowen, J.C., 1984. "Product recall communications: the effects of source, media and social responsibility information." Advances in Consumer Research, Vol. 12. Kabak, Irwin W. and Bertram S Ber´tram

n. 1. (Bot.) Pellitory of Spain (Anacyclus pyrethrum).
. Kabak, 1985. "On breaking records and some applications." Industrial Engineering News-Operations Research Division, Vol. 19, No. 4 (Spring). Mowen, J.C. and Ellis, H.W., 1981. "The product defect defect - bug : management and consumer implications." Review of Marketing. American Marketing Association The American Marketing Association, one of the largest professional associations for marketers, has 38,000 members worldwide in every area of marketing. For over six decades the AMA has been the leading source for information, knowledge sharing and development in the marketing profession. , Chicago, Ill. Siomkos, George J., 1989. "Managing product-harm crises." Industrial Crisis Quarterly, Vol. 3, No.I.

Irwin W. Kabak, Ph.D., is professor of operations research operations research

Application of scientific methods to management and administration of military, government, commercial, and industrial systems. It began during World War II in Britain when teams of scientists worked with the Royal Air Force to improve radar detection of
, statistics and operations research department, Stern School of Business, New York University New York University, mainly in New York City; coeducational; chartered 1831, opened 1832 as the Univ. of the City of New York, renamed 1896. It comprises 13 schools and colleges, maintaining 4 main centers (including the Medical Center) in the city, as well as the , New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
, NY. George J. Siomkos, Ph.D., is adjunct adjunct (aj´ungkt),
n a drug or other substance that serves a supplemental purpose in therapy.

 assistant professor of marketing, Stern School of Business, New York University, New York, NY.
COPYRIGHT 1991 Institute of Industrial Engineers, Inc. (IIE)
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:ensuring consumer satisfaction after recalling a defective product
Author:Kabak, Irwin W.; Siomkos, George J.
Publication:Industrial Management
Date:Sep 1, 1991
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