Psychological approaches to deal with crises in the business world

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Psychological approaches to deal with crises in the business world

How to transform disbelief back into trust

article

by Peter Shadbolt
illustrations by Martin Burgdorff

Understanding the stages of grief can help a company navigate a crisis. Disbelief, anger, bargaining and acceptance play a significant part in the journey, and it takes real character and leadership to turn a major drama into a business advantage.

Ancient Greek tragedies – such as the ones by Aeschylus, Euripides and Sophocles – can tell you all you need to know about calamity. The dramatic moves from hubris to catharsis have important lessons that hold as true today as they did 2,500 years ago.

Take the "Oresteia" by Aeschylus. When the hero Orestes' father, Agamemnon, returns after fighting in the Trojan War, he is greeted by his unfaithful wife who plots with her lover to murder him. Orestes is thrown into a state of crisis and disbelief, but directs his anger towards action. He avenges his father's murder by killing his mother and her lover. However justified his act might seem, matricide was viewed as a crime against nature and Orestes is pursued by demons bent on revenge. Faced with this unexpected consequence, Orestes prays to those Gods who might help him. It marks the beginning of a bargaining stage for justice. In the final act of the play, the Gods accept his petition and, through an enactment of justice and legal practice, Orestes accepts his new position and exoneration as a righteous defender of honor.

It is a tragedy, but it has a resolution. And it can teach today's CEOs how to handle a crisis. Whatever the fates decide to throw at your business, if you take the right steps and turn disbelief and anger into action and acceptance, then you too can reach a perfect resolution.

When crisis strikes in a Greek tragedy, much depends on the leadership of the hero. In the case of a business disaster, the CEO has to take on that heroic role and navigate disbelief and anger to progress to bargaining and acceptance.

Crisis management can be cathartic – and CEOs who have been through it say that if well-managed, disasters are often opportunities in disguise.

While the most extreme business crisis might not be as extreme as dealing with murder and revenge as it was for Orestes, nevertheless a plague of worms, a gruesome poisoning, or even an all-consuming destructive fire could suddenly wreak havoc on your brand. Read on to find out how some large companies have had to deal with just such unpredictable catastrophes.

DISBELIEF

Bharat Puri was heading up confectionary giant Cadbury's operations in India in 2003 when some worm-infested chocolate bars almost destroyed the multi-million dollar company and ruined his career.

The public relations disaster very soon became a perfect media storm. "I was traveling at that time when we had the first infestation and, as you might appreciate, infestation is very common in food products," Puri, who is now the managing director of Pidilite Industries, says. "It is not something out of the ordinary."

"Unfortunately it became a massive incident. We were on television, we were on the national media – it was almost as if every Cadbury bar had a problem."

If nothing, he said, the crisis afforded him a deeper knowledge of the life cycle of the Indian meal moth. "By now I'm an expert on the subject," Puri says. "Basically what happens is that if the aluminum foil in the bar gets punctured, it releases this lovely odor of chocolate that attracts the meal moth. They lay their eggs in there and, 60 days later, these hatch as worms. The total number of chocolate bars affected by this type of infestation was between six and eight."

Even so, Cadbury had a massive problem on its hands. The negative publicity dragged Cadbury's sales down 40% at a time when Diwali – India's main festive season – should have seen a spike of 20%. The wildfire of bad publicity soon spread to India's regulators, who were demanding answers. "Food is a state subject in India and there are more than 20 states – each of them wanted us to prove to them we didn't have a problem," Puri says.

Meanwhile, any tiny imperfection in the bars added to the furor. Even fat bloom, the unrelated result of the bar melting in transit and then being refrigerated, was perceived as being part of the infestation problem. "While I had been through situation management training, the intensity of it completely blindsided me," Puri says. "At the height of it, outside Cadbury House in Mumbai, there were any number of media vans parked around. You think, 'My God, what is happening here!' And then, of course, the politicians jump in and then we had political demonstrators outside who came to break our windows because ostensibly we were poisoning their children. Everybody jumps in – even now when I think about it, I get goose bumps."

"The intensity of it completely blindsided me."
Former Head of Operations
Cadbury India

Neil McLeod, senior consultant at crisis and reputation management company PHA Media, says that during the stages of disbelief – when the road ahead looks fraught with expensive options – it pays to look the problem straight in the eye. Rather than going to ground or seeking advice from overly cautious legal departments, it's essential for companies to put a face to the problem and show leadership. "Consumers really have an issue with this," he says. "They want to be reassured by a CEO or someone high up in the executive chain, speaking publicly, talking to the media and saying, 'We messed up but this is what we're doing to make it right. These are the reassurances I can give you.'"

Public perception, he says, is everything when it comes to crisis management and, more often than not, only a full and truthful account can restore public confidence. "You've got to face up to it. You've got to give the facts as you know them, and you've got to have full and frank disclosure. You need to act swiftly and decisively. You need to tell people you're trying to get to the bottom of the situation. You need to make it clear that anyone who's been affected by this will be contacted, and the company will do the right thing."

At this juncture, prevaricating or seeming evasive are not options. "Quite often you'll get companies that hide," he says. "They will be advised by lawyers to be careful, they'll be told not to open themselves up to further liabilities, but when you've got to weigh up the future of a company against the threat facing it, the PR head has to speak louder than the legal department."

ANGER

Often trust can dissolve through no fault of the company. In these instances, where the business has been the victim of a large-scale crime, the temptation to turn the anger outward, to find other victims or to apportion blame, must be avoided.

In this, the Tylenol crisis of 1982 remains the gold standard. Before the crisis, Tylenol, one of Johnson & Johnson's leading brands, was the most successful over-the-counter painkiller in the US. The painkiller accounted for 33% of the company's year- on-year profit growth. It accounted for 37% of market share and outsold the next four leading painkillers combined. In the autumn of 1982, for reasons still unknown, cyanide-laced capsules had been resealed into Tylenol Extra Strength packages and placed on the shelves of pharmacies in the Chicago area.

By the time the crime had been identified, seven unsuspecting consumers had died horribly and Johnson & Johnson was in the invidious position of having to explain to the world why its leading brand was suddenly killing people.

Johnson & Johnson's then chairman, James Burke, immediately formed a seven-member strategy team with the simple brief: "How do we protect people? How do we save the product?"

Consumers were alerted not to buy Tylenol and the company embarked on a recall of 31 million units. Within six months it reissued the painkiller with atamper-proof seal. At a time when most companies would have regarded the case as a criminal investigation, Johnson & Johnson's initiative swung public opinion behind it. Far from being perceived as an opaque corporate monolith with a plummeting share price and a bottom line to protect, the public came to view Johnson & Johnson as another victim in the case.

Within two months its share price had recovered and within a year its market share, which had plunged to 7% from 37% following the poisoning, had climbed back to 30%.

Today, the Tylenol brand name is still one of the most trusted over-the-counter consumer products in America.

ANGER-PLUS

Tim Ward, chief executive of the UK's Quoted Companies Alliance, a nonprofit organization that represents small- to mid-cap companies in the UK and Europe, says that Johnson & Johnson's action was unprecedented. "It might look very sensible now, but at the time they took an incredibly brave decision. They simply said, 'We are going to take every single Tylenol container off the shelves,'" he says.

"They didn't try and blame anybody else. They just said this is how we're going to deal with the issue because customer health and safety and families come first.

"It's been used as a case study for years and showed that 28% of market capitalization for listed companies in the UK was based on brand equity and reputation alone.

He says research by his alliance showed that 28% of market capitalization for listed companies in the UK was based on brand equity and reputation alone.

"First and foremost, you want to protect the customers in the marketplace in which you're operating," he says. "The financial effects of that may be significant in the short term, but what you're protecting is the long-term future of your company."

Taking the initiative, he says, is essential and framing the debate in a way that places the interests of the consumer center stage can make or break a company struggling through a crisis.

"I think you've got to get stuck in, and you've got to start leading the debate before the media leads it for you," he says. "As Warren Buffett said, it takes years to build up a reputation, and it takes minutes to destroy it."

Likewise, anger directed at a company when the business is at fault also needs to be managed keeping the same precepts in mind; work from a basis of integrity and there is little to fear.

From anger to action: a case study in optimal crisis management
30%

Tylenol’s drop in market share following reports of deaths in the Chicago area in 1982.

$ 100 Million

Total cost of Johnson & Johnson’s product recall during the 1982 tampering crisis

81%

Tylenol almost fully regained its market share within one year.

0.1%

of Samsung Galaxy Note 7 devices were estimated to be affected during 2016 reports of exploding batteries.

30%

Samsung’s reported Q3 2016 drop in profits.

Merlin – the parent company of the theme park Alton Towers in the UK – had first-hand experience in managing this kind of crisis in June 2015 when its rollercoaster was involved in a collision.

Engineers failed to notice a carriage that had stopped midway through the 14-loop ride. Assuming there was a problem with the computer, they overrode the stop mechanism, setting another train in motion. Sixteen people were injured in the crash, including two teenage girls who needed leg amputations. In April 2016, Merlin admitted breaching the Health and Safety Act and was fined £5 million ($ 6 million). Merlin Corporate Affairs Director James Crampton says that while the iconic theme park had contingencies in place for just such a crisis, the company was ultimately led by doing the right thing for the people affected by the accident.

Crampton says admitting liability was an important part of the process and the company took full responsibility on the day of the incident. He adds that the company chose not to rely on long consultation with lawyers and other advisers. "We didn't underestimate the size of the incident itself," he says. "We recognized that it was a bad accident and that, more importantly, the people under our care were injured because of it."

He says Merlin Chief Executive Nick Varney immediately attended the scene at Alton Towers and took the lead in all important communications with the broader public. "At the earliest opportunity, we said to people that we admit full responsibility and we will do everything we possibly can to help those affected by this accident and we have been ever since. That's been our mantra and the rationale behind all our decision-making. It's been tough. It's been tough for a lot of people internally but it's absolutely been driven by the natural human reaction to do the right thing."

While the impact on the brand has been considerable, the company is expecting to trade at normal levels by 2018.

BARGAINING

The recent case of Samsung, meanwhile, stands at the other end of the spectrum. Its attempt to bargain its way out of a product disaster by releasing an even more problematic and hastily thrown together fix remains an object lesson in everything to avoid. While the tech giant didn't ignore the problems it was facing, it chose to negotiate with its consumers rather than to rebuild their trust or to get in front of the problem.

Within days of releasing its Galaxy Note 7, the company found itself in one of the biggest corporate public relations disasters ever. Reports came trickling in that the device sometimes spontaneously combusted. Samsung's first response: Delay shipments in order to carry out further tests.

Samsung put technicians onto the problem but, try as they might, none of them could replicate the issue. Samsung testers concluded the problem was due to a faulty battery. They switched suppliers. The solution failed.

More reports came in of exploding phones. With more issues being reported, Samsung increased the terms of the bargain. It stopped production of the Galaxy Note 7 and issued a recall kit (complete with fire-retarding packages and special gloves) to millions of users.

"The poor handling of the Note 7 saga has become a black mark against the Samsung Name."
Author
Sony vs. Samsung

According to Chang Sea-Jin, professor of business at National University of Singapore and author of "Sony vs. Samsung" – a business history that examines the divergent fortunes of the two electronics giants – Samsung has now seriously jeopardized a hard-won reputation. Its attempt to bargain with the problem could prove to have long-term consequences.

"What has to be remembered is that Samsung was a no-name brand 20 years ago," Chang says, adding that the electronics giant was once known for churning out low-end components.

"It worked really hard to build its brand. [Today] the company doesn't just produce smartphones nor was the Note 7 its only phone," he says. "In a connected, social media-driven world that thrives on bad news, its poor handling of the Note 7 saga has become a black mark against the Samsung name. This risks undermining key intangibles like customer loyalty, prestige, desirability and positive brand recognition. This is especially serious for a company that positions itself as the sole competitor in the premium end of the smartphone market able to take on Apple, a company widely regarded as having the most valuable brand in the world."

Samsung acted quickly in some senses, but in its communications it appeared guarded and slow, says Chang. "The first rule of crisis management is to communicate openly and transparently. This is even more important in the tech world, where bad news becomes viral very quickly."

Like many large companies, Chang says Samsung has a tendency towards undue secrecy and aloofness."

For example, the first Note 7 recall in the US was launched without the required coordination with the Consumer Product Safety Commission," he says. "Likewise, the recall was initially branded an " exchange program" – attempting to put a clunky public relations spin on what, in many consumers' eyes, was the sale of a potentially dangerous product. That went from bad to worse when it became apparent the replacement phones hadn't fixed the problem."

ACCEPTANCE

Owning a problem is halfway to solving it and Cadbury's comeback showed how each small success fed into a virtuous circle. Eventually, as Bharat Puri explains, the business snatched victory from the jaws of defeat.

He says that once the company had established that there was a serious problem, it immediately launched what it called Operation Vishwas (the word for "trust" in Hindi) and began to rebuild the brand starting with its own staff.

"I think we had about 300 salespeople back then," Puri says. "I asked all of them to go out and buy 1,000 rupees' worth of chocolate from different outlets." With a brief to take the chocolate and feed it to friends and family, the salespeople were told to immediately report back to Puri if there was a problem. "Of course there weren't any problems, but it gave them a lot of confidence in the product," he says.

A case of sweet success: putting customers first
6-8

Cadbury chocolate bars infested with meal moth worms were discovered in India.

40%

immediate drop in sales in affected areas.

300

increase in sales since the 2003 incident.

The next step was to lay down a set of principles by which the Cadbury team could act and refer back to at any time in the process. "The first principle was that we were going to do what was right by the consumer. It's a given that eventually the bureaucrats and the press would go away, but when the consumer comes back to us, then the problem is truly over," Puri says.

"The second was that we wouldn't do anything that was short-term and that we would later regret. Thirdly, we made sure that all the teams were in step and that we were all on the same page. We were getting back consumer research every week and we were mining it for three simple sets of data: Would I feed it to my child? Would I gift it to somebody? Would I consume it?"

Puri lobbied for visible signs of change to Cadbury's packaging. "I said: 'Listen, we could all argue that we sell a million bars in India and six of these have been found with a problem, but the fact is that our sales are down 40% in affected areas and 20% overall. We need to show the consumer we're taking action.'"

New factory floor machines were installed that sealed the chocolate bars from both ends to prevent meal moth infestation. "In a multinational, normally getting capital approved is a rather long and painstaking process. In this case it was done before one evening was out," Puri says. "We realized that what we had to tell the consumer was: 'You believe there's a problem, and we've acted.'"

The real game changer, however, came after Cadbury took on Amitabh Bachchan – India's famous Bollywood actor – as brand ambassador. Puri says the star insisted on visiting the factory, a grassroots exercise that further served to build back trust.

He says their best estimates had been for the crisis to pass and for Cadburry to be back to where it was within 12 months. "Actually, in eight months we came back and today Cadbury is three times the size of what it was."

TAKE ACTION

Dimitrios Tsivrikos, consumer and business psychologist at University College London, says that leadership is everything under crisis management situations and that companies need to be seen to be connecting with their consumers if they are to reverse a negative perception.

"The worst thing you can do is be sketchy or downplay the effect."
Consumer and business psychologist
University College London

"Recalling the product is the first step," Tsivrikos says. "I think in crisis management, the worst thing you can do is try to be sketchy about what's happening or downplay the effect."

In the case of Samsung, he says that its rival Apple would likely be watching the company closely – not purely to profit from its faltering position – but as a case study in what not to do.

"The first thing is to assess what has caused the problem, who has been affected by it and then develop the best possible vehicle to address it," Tsivrikos says. Consumers are not merely buying a product. They are also buying into the lifestyle, the context and the dream the brand is built on. "We call it brand equity and sometimes it's worth more than the assets, the technology and the people in a company combined," he says.

Clawing back a damaged reputation can be a painful and expensive process. The consequences can include a plummeting share price, a quarterly profits warning and a product recall, and the shockwaves from such a corporate debacle can be felt for years.

Nevertheless, crises of the magnitude of Johnson & Johnson and the Tylenol case can provide valuable opportunities in the right hands. Within one year, Johnson & Johnson had restored its share price and its company Chairman James Burke was being hailed as a hero.

Johnson & Johnson has now risen to count itself among the world's most powerful pharmaceutical companies. Similarly, Cadbury's travails in India are now counted as one of the country's classic corporate case studies and the company still reigns supreme in one of the world's biggest markets.

WIN WISDOM

As for the opportunities the crisis offered him, Puri says the discomfort of the situation is still too fresh in his mind. "It helped us become much stronger because it suddenly makes you realize as a food company how vulnerable you are," he says. "I remember Sir John Sunderland, my chairman, telling me at the time, 'Bharat, you know, you might not realize it now, but what you've actually been through is a privilege.' My immediate thought was: 'What has the man been drinking last night!'"

There wasn't a business book for Cadbury to follow. Its crisis was unique and could have a left a nasty taste in the mouth. But good leadership turned a near catastrophe to its advantage by putting trust at the heart of the recovery and faith in the process to win back consumer confidence. Thus, the company managed to transform near tragedy into sweet success. Or, as Aeschylus sums it up best in the Oresteia: "There is a place where what is terrible is good … There is advantage in the wisdom won from pain."

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