3/20/10 copyright 2003 daniel diermeier
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04/10/23 Copyright 2003 Daniel Diermeier 1
Strategic Crisis Management
Daniel Diermeier
IBM Professor of Regulation and Competitive PracticeandDirector – Center for Business, Government, and Society
Kellogg School of Management – MEDS Department
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What is a Crisis?
Traditional view:“An event that can destroy or affect an entire organization.” Mitroff et al. 1996
Strategic View:“A decisive moment, a turning point for better or worse”
Crises are defining moments present threats and opportunities define company’s public image (reputation!)
e.g. Johnson and Johnson versus Bayer test management and organization (learning!)
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Why “Strategic” ?
Crisis management needs to be integrated with company’s strategy
affects the whole organization is not primarily a PR or legal issue
Most crises involve social actors Examples:
media activists regulators legislators competitors investors …
Companies need to learn to anticipate and understand their motivations capabilities
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Example 1: Mercedes and the A-Class
In October 1997 Daimler-Benz AG introduced a new car to its European customers: the A-Class
Significant strategic shift (“down-market”) Goal: reach new customer groups (young,
women) Risk: weaken Mercedes-brand Central values: safety, quality, technology
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The A-Class
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Design and Marketing
Car-design is driven by marketing strategy Appeal to new customer groups Maintain core values
Example: protection from frontal impact crash small exterior is critical for appeal to urban drivers, but creates safety problem for frontal impact crash Solution: innovative safety technology that has
engine “slide” under driver and passengers in case of frontal crash
Leads to slightly higher seating position Pre-marketing starts in 1993 (!); total cost: $100
mil.
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Pre-Marketing Advertisements
“This is what our future customers want.We are working on it.”
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The Moose Test
In late October 1997 the company learns that an A-class car flipped-over during a “Moose-Test”. No official test; conducted by Swedish
journalists Extensive media coverage in German mass
media Daimler cannot replicate test internally
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The A-Class in the Media
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A-Class Humor
“…honestly, we haven’t done anything!”
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Daimler’s response
In a first press-conference J. Hubbert (head of Mercedes-Benz Passenger Cars) points to tires and casts doubt on validity of test
Increased media coverage German mass market press “replicates” test (with wrong
tires!) On November 11, Daimler CEO Schrempp declares global
recall 18,000 cars Cars will be retro-fitted with ESP (electronic stability program)
and will undergo other minor adjustments At the time of the announcement Daimler’s engineers are
convinced that the minor adjustments are sufficient Recall costs about $150 mil.
Relaunch on Feb. 28, 1998 Extensive media campaign (humor, celebrities) A-class becomes best-selling new car in 1998 (16th overall,
best-selling Mercedes)
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Re-Launch Campaign with Tennis Star Boris Becker
“Strong is the one who does not make mistake. Stronger is the one who learns from his mistakes.”
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Recovery
“We have reinvented safety. The new A-Class”
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Crisis Dynamics
ManagerialControl
Impact onManagement
Before During After
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Crisis Dynamics – Cont’d
Before During After
Prevention
Preparation
Identification
Containment
Solution
Recovery
Learning
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The Media and Public Opinion
Media as businesses Demand side Coverage and production of news is given
primarily by audience interest Media as social institutions
Supply side Coverage and production of news is determined
primarily by societal significance
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Theory of media coverage
audience interest
Likelihoodof coverage
societal significance
advocacyposition taking
explorationof significance
Interpretationof events
description offacts and events
treatment
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Combined theory of media
Audience demand
Soc
ieta
l sig
nifi
can
ce
Incr
easin
g pr
open
sity
for p
ositio
n ta
king
Moderate
Advocacy
Moderate
Facts, Interpretation
Low
Factual
High
Advocacy, Action
News Hour, Economist
60 minutes, Dateline
USA Today, Inside Edition...
FT, WSJ, trade press
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Safety and technology of A-class
Soc
ieta
l Sig
nific
ance
Audience Demand
Daimler in the Media
Moose-Test
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Leadership at Daimler
Daimler’s CEO Schrempp immediately takes control of situation
But no statements and interviews before November 11. Internal communication:
“Don’t Panic, we will get through this stronger.” “What is the opportunity here? There must be one!”
Permanent Crisis Task Force Multi-functional Top-management involved (but not CEO) Meets every night at 7:00 (open end) [55 meetings]
Schrempp pushes through decision to recall and retrofit with ESP even tough engineers are convinced that this is (technological) unnecessary
Regains credibility with general public Reestablishes safety leadership in compact car segment
(opportunity seized!) Extensive Post-Crisis Audit
“quality gates” and extensive scenario planning for every new model.
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Example 2: Andersen and Enron
In 1998 the SEC starts an investigation into accounting fraud at Waste Management (an Andersen client for decades)
Other cases: Sunbeam, Baptist Foundation In June 2000 Andersen settles with SEC (fine, injunction
against “future wrong-doing”) Key in the case were internal Andersen documents that
indicate that Andersen knew of Waste Management practices Andersen decides to change its document retention policy
Preserve central audit work, but destroy related documents (emails, memos etc.) “as quickly as possible”
puts Richard Kutsenda, who was sanctioned by SEC in Waste Management case, in charge of new policy
lack of staff to implement policy; this leads to massive shredding in October 2001.
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Economic effects of e.g. auditor rotation
Soc
ieta
l Sig
nific
ance
Audience Demand
Andersen in the Media
Enron
Document Shredding
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Key problem areas include Decentralization
externalities coordination
Control of information “shredding” versus “full disclosure”
Ownership and incentives (global) partner structure at Andersen
Once potential problems are recognized they need to be addressed at the level of the organization.
Crisis management must not be delegated to PR-people or lawyers Daimler changed technological solution in response to PR concerns.
Code of conduct or common values are key (as are incentives) Andersen’s shredding policy Quality, safety, and technological leadership at Daimler
Crises present supreme learning opportunities Andersen after Waste Management Daimler after the A-Class
Organization and Culture
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5 Key Mistakes
Warning signs are ignored Andersen: Waste Management, Sunbeam, etc. Daimler: problem at earlier test
No preparation for typical scenarios Andersen: legal, regulatory Daimler: recalls
The crisis is misunderstood Sole focus on who is at fault, who is liable The role of public perception
Key actors’ incentives are not understood Daimler: mass media versus car journalists Andersen: media, regulators, legislators, partners
Main lessons are not learned Andersen: document retention