CONSULTING

Crisis management (CM)

CRISIS MANAGEMENT (CM)

“For 113 years, our success has been based on the trust consumers have in us. That trust is sacred to us…” (Douglas Ivester, Board of Directors Chairman, Coca Cola Co.)[1]

1. Introduction

Nobody can doubt the degree of certainty of this phrase. But, much to Douglas Ivester´s regret, it was not said under the best circumstances for the transnational corporation. It was the first reply given on June 16, 1999 by Coca Cola Co.´s top leader in face of the unfortunate European events that led to the ban to sell all of the company’s products in Belgium, then in Luxembourg and, later and partially (only cans) in France.[2]

The story? As it generally happens in any difficult situation that evolves up to a crisis, this consisted of the linking of simple, unpredictable facts, which caused a concrete negative impact on the company, both in terms of image and prestige, as well as economic effects, due to the reduction in sales during the crisis and afterwards. It should be noted that the party harmed by said facts was Coca Cola Co., a company with an indisputably long background and which, at the time of said events, boasted a much deserved high prestige. This allows venturing that in the case of any other company, an identical situation would have caused more severe damage, as such damage would have been significant enough to determine the bankruptcy of the affected company or, at least, its long-term withdrawal from the market(s) where the crisis began or took place.

Let us remember the facts. In Belgium and in the neighboring northern area of France, more than 200 people were intoxicated after drinking from Coca Cola Co. cans (with children being the most affected ones[3]). Ailments suffered by consumers included abdominal pain, diarrhea, vomits, and headaches, that is, none of them was excessively severe. The causes? Apparently, there were two: on the one hand, the use of a contaminated batch of carbon dioxide (used to produce bubbles in sodas) in the manufacturing of 200-cubic-centimeter bottles at the Antwerp factory (Belgium); on the other hand, the contamination of cans manufactured at the Dunquerque factory (France) with a fungicidal paint used for wood containers for the transportation of canned sodas.[4]

What happened? A lack of production controls at both factories at the same time? Misfortune? Sabotage? Overdramatized information by the allegedly affected parties aiming at a later claim (let us not forget that this is Coca Cola Co.)? The company was not able to determine the causes promptly, at a time when the victims, the public opinion, the mass media and the very shareholders of the corporation needed a concrete explanation about what had happened and the responsibilities involved. This need of promptitude, both of an explanation about the causes of the conflict and of the time required to give an effective response to all the victims (which should be a comprehensive redress of all damage caused), poses a dilemma that should be faced by the management of any company in a crisis. And I say “dilemma” because the ideal response time that the affected company would prefer to “take” is much longer than the time required to give a communicative response to the society if the company wants to prevent the crisis to become worse. Under this scenario, a decision that leads to the lesser of evils should be made. And, undoubtedly, the lesser of evils for the company will be that one that prevents the crisis from reaching its highest intensity. This, even when the company should issue communications to reach such result, take on responsibilities and give time and money to victims or harmed parties “out of its budget” and, why not saying it?, disregard the advice of managers and attorneys with respect to saying and doing nothing until the company is fully aware of the causes and consequences of the determining facts of the crisis.

It is true that companies affected by a crisis, and particularly their management, prefer to wait for time to go by without giving any explanation to the public opinion nor solutions to the victims until they find out what happened, with the highest methodological rigor as possible. This precaution is taken for the greatest security and defense of their interests (of the affected company and its management), and in connection with the content of the messages to be given and the responsibility taken on for the facts. It should be pointed out, however, that the expectation and anxiety of the public opinion, fed by the media through spreading facts and then through claims and complaints from the victims or affected parties, could significantly damage the “corporate image” (which would mean, in the short and medium term, a significant drop in sales and demotivation of their staff), as such inaction brings the potential risk that once the company decides to give explanations, it could be too late; plus the damage caused by the diminished “corporate image” may take a similar or even larger dimension to that of the original crisis.

To prevent this from happening, within the first hours of any crisis, the company should estimate the economic value at stake if “reacting right away”, depending on what is expected from it, or “waiting a little longer” to see what happens as the crisis grows and more information is gathered. This estimation of the potential negative value of the crisis should be compared to the estimation of the potential economic damage that could result from choosing to “take action now” and give explanations to the public opinion and solutions to victims or affected parties (this hypothesis also includes administrative fines, if any, and amounts to be paid in eventual lawsuits from the victims, which could be worsened by the company’s decision to give solutions and take on responsibilities.)

Then, there´s a question that a company in a crisis should ask itself, for which the answer would result from the calculation of the items of the above-mentioned economic equation. And the question is: Should I take the risk to suffer the damage resulting from DOING NOTHING until I know all the facts or until time goes by (in case that the crisis is for sure a consequence of a negligent action by the company); or, on the contrary, should I TAKE THE RISK of TAKING ACTION NOW, in a timely manner, even with a current direct cost that may result in additional future costs (administrative fines and other potential claims in lawsuits filed by victims or affected parties)? Based on the comparison of both results reached after having made the economic estimations of both options, the company should decide whether taking action or not. For estimation purposes, in both cases, it is recommended to include and appraise any present and future, direct and indirect, certain and potential damage (weighing up their incidence in each case) that may be caused by each measure taken (taking or not taking action). Thus, the estimations of the option of doing nothing should include the loss caused by the potential decrease in sales (and costs related to a lower production), the eventual replacement of suppliers and large clients, new expenses incurred in to achieve staff’s motivation, higher advertising expenses required to recover corporate prestige, etc.

Generally, this analysis cannot be done conscientiously by the management when a crisis irrupts, as the severity of the primary facts resulting from it, that is, the fact that such management is right in the middle of the crisis, as well as the violent manifestation of a number of small and not-so-small problems to be solved, would not allow them to see with clarity, let alone analyze the middle and long-term scenario.[5] Therefore, the main dilemma that has been posed lies, on the one hand, between what is expected from the company within the first days after the crisis arises in terms of the “information to the mass media, related companies[6] and the rest of consumers”, and the “solution to be given to affected parties”; and, on the other hand, what the company is “willing” to give in terms of information and solutions to the affected parties (that is generally very little compared to what is expected, and in most cases this is perfectly limited to the Legal Sector of the company, which puts resistance to issuing any communication or to compensating the victims, in order to prevent the potential legal claim to grow).

What the management should be aware of, whichever the decision may be, is that once any or all the questions and inquiries made are validly answered, it could be too late to repair the damage suffered by the company, i.e. damage resulting from a reduction in sales as well as any future damage to be faced (legal claims from the affected parties; a share loss in the applicable markets and in other markets where the facts had some “incidence”; and damage to its corporate image, as well as to its prestige among consumers, and the trust created among them).

2. Crisis or controversial situation?

Let us see. In order to know when there is a crisis, we should firstly define the term itself. The question is: How could we know when, for a company, a “controversial situation” or a conflict in any of its sectors could turn into a “crisis”? We will try to give an approximate answer, so that we can get closer to the concept of “what crisis means for a company”.

1) When the fact that determines the conflict is widespread, it impacts more than one sector of the company, and a significant population (in terms of quality or quantity) of consumers or clients is affected by health problems (generally severe, even including death), it is clear that there is a “crisis”.

That would be the case of crisis resulting from accidents or incidents (being the best examples of these the radioactive leak that took place in March 1979 at the nuclear plant located in Three Mile Island, Pennsylvania, U.S.; the more than 2,000 deaths and 200,000 people affected with injuries, such as permanent blindness, in 1984 as a result of a lethal poisonous gas leak in a Union Carbide facility in Bhopal, India; the tragic events that took place in Chernobyl that were sadly famous in Argentina in connection with the issue with chickens; the Exxon-Valdez accident that took place in Alaska in 1989; and local situations experienced by Edesur some months ago and more recently by Lapa) or an attack (e.g. the case of Tylenol pills that were replaced with cyanide in Chicago in 1982 and caused 7 deaths and affected Johnson & Johnson’s prestige).

2) In other situations, however, the factor that determines the crisis is the result of a concatenation of controversial facts that take place in a brief period of time. In such occasions, each one of those facts, when analyzed individually, is not significant enough to create a crisis (i.e., they are typical conflicts), but when two or more of these controversial facts take place within a brief period of time, they together boost the negative effects, and the “pressure” on the company begins to grow until it turns into a crisis (a concrete example of this theory would be Coca Cola Co.´s case or a report from a simple consumer that, for any reason, becomes public, generally through the media, and that report is joined by others with identical or different causes against the same company and, then, the latter starts being investigated).

That is to say, this begins as a singular fact but it then becomes a significant widespread situation affecting the entire company and, particularly, its image.

3) Lastly, there are crisis that are caused by companies themselves. They are those resulting from corporate decisions made without having carefully analyzed the effect those decisions could have on their clients, suppliers and the public in general (I consider that this first option is caused by a lack of foresight), or those resulting from a wrong deliberate business decision that is hazardous for the health of consumers or that may cause physical or psychic damage or affect the use of any other product used by consumers (I consider that this second option is caused by a criminal decision).

An example of the first option (caused by the company for a lack of foresight) would be the case of decisions related to the discontinuity of a product; to a change in their marketing (cases including a change in the distribution chain, for instance, such as the one that experienced Massalin Particulares in Argentina when, in 1997, its number of distributors was dramatically reduced and they were assigned new areas aiming at benefiting retailers with an additional 5% profit. This resulted in a lack of information as the change came into effect, as well as uncertainty across the entire distribution chain, an initial poor service for retailers essentially caused by said change and a different service “culture”, shortage during the first weeks, as well as complaints from distributors terminated, and the resulting decrease in sales during the first period for a lack of Massalin cigarettes at drugstores and other retailers); to a factory relocation or downsizing; also decisions resulting from a disproportionate and unplanned growth (that makes employees lose their way and, generally, the company’s financial situation); or from a takeover or merger operation or, in certain occasions, from a company with a different culture being incorporated as majority shareholder. Examples of the second option (caused by a criminal decision) would be the cases of product adulteration (adding water to fuel or the improper use of methyl alcohol in wine, as it happened with Bodegas Torraga in 1993, which caused 29 deaths and that resulted in the owners of such winery being imprisoned).

This entire third category of crisis (caused by companies) is one that, with good planning and structure, may at least be prevented or handled for end results to be less traumatic for the company. Obviously, in the case of crisis caused by a criminal decision, the way to prevent such crisis is not making such wrong business decision, as once it is made, the effect of the crisis is usually devastating for the company with serious consequences for its management.

To sum up, the following chart lists the various implications of each type of crisis for a company:

Types of crisis Degree of Damage to Need to Implement Changes
Responsibility of Production Management Exposure in the Media Corporate Image Human Capital Value Chain
Accident-incident MEDIUM HIGH HIGH MEDIUM HIGH YES
Attack LOW-MEDIUM HIGH LOW-MEDIUM LOW LOW YES
Concatenation of controversial facts (brief period of time) LOW LOW-HIGH MEDIUM to HIGH MEDIUM to HIGH MEDIUM to HIGH UNCERTAIN
Self-caused by lack of foresight HIGH LOW MEDIUM HIGH HIGH YES
Self-caused by criminal decisions CRITICAL HIGH HIGH HIGH HIGH YES

As stated above, the key factor that appears to clearly differentiate a crisis from a controversial situation would be the fact that, in a crisis, the effects of the facts that caused it are independent from ordinary (usual) consequences that they typically produce, and they are limited to the subjects involved. They are most often limited in terms of time and, in general, they only impact a sector of the company. Also, as part of a fishy situation, such effects turn into THE greatest problem, which are different from the immediate consequences of the initial facts (that continue to require an appropriate solution). This greater problem or “crisis”, in turn, has its own features, which face us with potentially greater damage, and they are:

●    Parties involved become the affected company and its whole environment (including suppliers, clients, competitors, non-client consumers, all the residents in certain city or region, and, in general, any region where the company provides its services or products, governmental organizations, etc.), as the facts and people that determined the initial conflict disappear from the “spotlight”.
●    This new conflict (i.e., the crisis) is incremental, and its consequences spread to sectors of the community and get worse for the company (damage) at a supersonic speed if proper steps are not taken.
●    The subject that the company, under any crisis, should satisfy with its answers and solutions is the public opinion (which is generally done with an appropriate communication through the media) and, in many cases, governmental agencies.
●    The key factor that determines the success or failure of a company in a crisis is the company´s reaction (which is manifested through concrete facts aiming at solving the conflict and, also, through a good explanation about what happened), particularly, the credibility of its first statements made to the public opinion and the mass media.
●    Employees and, in many cases, the managers of the affected company become paralyzed when faced with the devastating evolution of a crisis, and, if there is no corporate reaction at that time, with the appropriate tools, and showing internal consistency and clear goals to solve the crisis, it is very hard for them to break such paralyzing apathy as time moves on.

In Argentina, the Edesur case, which took place few months ago, is a paradigm of everything that should not be done during a crisis and, in addition, a manifestation of the consequences a company can suffer when it is not prepared for a crisis and does not seek for thorough advice to face such crisis once the company is in the middle of the turmoil. Let us imagine for a moment that Edesur is not positioned in an economy sector where it has a de jure monopoly… Would it have commercially survived? Probably not. Current figures handled by Coca Cola Co. in connection with the losses resulting from the can crisis amount to a potential loss of US$95 million[7], plus its share loss in Western Europe, which would surely be absorbed by Pepsi Co. and hard to recover in the future. The sadly famous Lapa case also taught us about the proper handling of information[8] and the treatment that victims and their families should receive.

3. Crisis definition. Stages

Therefore, it could be said, in line with Steven Fink[9], that a crisis, analyzed from a business viewpoint, is any prodromal situation under the risk of:

●    Increasing in intensity;
●    Falling under the scrutiny of the mass media or the government;
●    Interfering with the normal turn of the business;
●    Endangering the positive image that the company and its management have before the public opinion;
●    Damaging the company and its sales in any way.

It should be noted that crisis have been identified as a disease, hence the use of the word “prodrome” to define the term, and the search for similarities with the various stages of a disease to explain the cycles of a crisis, i.e. its “anatomy”. The above-mentioned author tells us that there are four potential stages (even when not all of them can be identified during a crisis):

●    a) Prodromal stage
●    b) Acute stage
●    c) Chronic stage, and
●    d) Crisis-resolution stage

While the “acute stage” is the most critical one in a crisis, in modern times, companies should pay singular attention to the first one of those stages, i.e. the prodromal one, for preventive purposes (i.e. in order to prevent, if not the crisis itself, once it begins, its effects from being too harmful). To fulfill this purpose, the company is expected to be prepared to detect any symptom that would indicate a warning about a situation that may result in a crisis and, in addition, it is expected to know what to do and how to act upon the manifestation of the first symptoms of the crisis.

In turn, once the crisis begins, the company should take the required steps to reach the fourth stage as soon as possible, that is, the crisis resolution.

Therefore, it is essential that companies are aware of how harmful a crisis could be, and their internal organization should be adequately prepared, aiming at:

●    Detecting any situation that could potentially result in a “crisis”;
●    Systematizing the internal procedure, the “steps to follow” in face of a dangerous situation which could result in a “crisis”;
●    Being ready to react when faced with a “crisis” promptly and with the determined attitude that its severity may require;
●    Having predefined “support structures” and “tools” to cope with
●    the “crisis”.

Some useful tools to face a crisis

There are procedures and tools that allow designing a tactic to cope with a situation with the lowest possible cost for the company.
To assess this, the big picture should be analyzed (not only the isolated facts of the crisis), and it should never be forgotten that the company´s goal is to keep a sustained profitability through time (this clearly explains why Coca Cola Co. decided to take all its products off the market in Holland before damage to its image and effects on potential consumers´ health could escalate).

It´s preferable to have an earnest image before the public opinion (even when such decision may increase losses) so as to be able to continue selling the product in the future. Readers should note that Coca Cola Co. took said products off the Dutch market voluntarily, even when (or most precisely “because”) in its current business structure, 26% and 73% of its profit depends on its sales in Europe and outside the U.S., respectively.[10]

Today, most transnational companies are prepared to cope with a crisis. The various crisis scenarios that other companies went through[11] and the negative consequences they experienced for not handling them properly taught executives that:

●    Any company is exposed to having to cope with a crisis scenario.
●    It is recommended to be institutionally prepared to cope with a crisis. Such preparation should involve the development of a Crisis Handbook that covers the following:
●    The setting up of the company´s “Internal Crisis Committee” (ICC), which should be made up of permanent members (generally the CEO, the Chairman of the Board of Directors or the Corporate Affairs and HR Managers, the internal or external legal advisor of the company and the head of the Financial Department), and variable members (who will be complementary, based on the features of each one of them in each particular case). The Handbook should set forth the procedures that will determine the need of an ICC meeting, the way to summon it and the information that each person attending should take to the meeting.
●    Also, the company´s Crisis Handbook should set forth in which cases the “Internal Crisis Committee” should be made up of people external to the company, which is recommended in any situation the company is faced with a conflict with the public opinion. Such new committee shall be called the “Crisis Definitive Committee (CDC)”.
●    The Handbook should consider the various and likely crisis scenarios, and schedule, in a standardized and on a task basis fashion, how the rest of the company should continue to work during a crisis. It is fundamental that all managers and other associates understand that the company must continue to operate during a crisis, and that the best collaboration on their end to reach a solution shall be fulfilling the behavior expected from them and required by the company, which should be outlined and explained in the Handbook.
●    The way in which information, both internal and primarily external, shall be handled, should also be set forth. In addition, the Handbook must cover the channels to be implemented to keep all members of the Crisis Definitive Committee (CDC) informed of all news. Moreover, an appointed member shall be exclusively responsible for centralizing such tasks of gathering and communicating information to the CDC members.[12]–
There is not just one way to understand and handle a crisis and the way out of it. For such reason, there are different opinions with respect to the number of Committees that there should be and their roles. In this study, we opted for one, which could perfectly apply to an Argentine company, either an SMB or a larger business. However, in certain occasions, it is recommended to work with a threefold structure: A Core Committee (at the headquarters, and fundamentally made up of the managers of the affected company); a Crisis Committee (where events take place, and with a mixed composition, external and internal); and a Communications Committee (located in both places and with a mixed composition). Everything shall depend on the crisis significance and kind. –

In any crisis, it is highly recommended to count with external advice. During a crisis, a company´s priorities and interests go through certain distortion that it is very hard to be duly weighed up by the individuals at the company who are immersed in the crisis. Even the view on the company´s finance, the handling of human resources during a crisis, and the legal situation or reaction in face of the facts that triggered it should be analyzed and handled from another perspective[13]. The company´s financiers, HR officials and attorneys target other goals with their actions, typical of their permanent roles and defined by the history, tradition, culture and budgets of the company, where the scope and view of their actions are more time-limited. During a crisis, these values and budgets should be set aside, and people should think in terms of the company´s benefit, and, for such reason, there is a need for this contribution to be external, and to be as little “rigid” as possible and “decontaminated” from the ties of the affected company. It has already been pointed out that, in certain occasions, the consequences on the company´s corporate image and prestige, in the long term, could be really serious for not having reacted on time. For such reason, during a crisis, the management of the affected company is advised to make decisions and embrace behaviors that do not match the history and usual procedures (such as promptly apologizing for what happened –which is not the same as taking on responsibility or blame for such facts–, which would actually be rarely recommended by an attorney of the company; providing compensations in advance, even before knowing the damage caused to the affected clients; and never gambling nor speculating with the cause of the facts; etc.).

Even with said precautions, however, it could not be ensured that a company could come out of a crisis unharmed. It could be stated, though, and without any doubt, that the damage to the company could be minimized.

[1] The Wall Street Journal of America, Thursday 6/17/99, La Nación, Page 6, Section 2.
[2] It´s worth mentioning that the company took products off voluntarily from the Dutch market, which was a very good decision in order to avoid greater harm to its corporate image.
[3] In Belgium alone, there were more than 100 children with health problems, which made Coca Cola Co.´s situation even worse because, when children are involved, the public opinion becomes even more sensitive.
[4] Ámbito Financiero, 6/16/99, Page 10.
[5] This is one of the reasons why a crisis should be handled by a multidisciplinary Committee that includes the active and permanent involvement of “external” advisors for the company.
[6] Suppliers, distributors, wholesalers, and any other company involved in the “production and marketing chain” of the affected company.
[7] The Wall Street Journal of America, Friday 6/25/99, La Nación, Page 6, Section 2.
[8] The lack of consistent information during the first hours of the accident made the public opinion have a negative image of the company, which became even worse on the following days due to the lack of truthful information from the company (that enabled the public opinion to have the growing feeling that the accident was the result of failures in the maintenance of the aircraft), and the inadequate attention paid to victims and their families.
[9] “Crisis Management”, Amacom (American Management Association), 1986, USA, Page 15 and following pages.
[10] Clarín, Económico, Sunday 7/11/99, Pages 15 and 16.
[11] As in the above-mentioned cases involving Exxon-Valdez, Three Mile Island, Tylenol, Coca Cola Co, etc.
[12] In Coca Cola Co.´s conflict, for instance, the CEO was informed of all the news, emerging everywhere, in connection with the crisis, every two hours.
[13] See “Risk Issues and Crisis Management”, Michael Regester & Judy Larkin, Kogan Page Limited, London, 1997.