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What Factors Contribute to Product-Harm Crisis Management?

Abstract

This research looks at different versions of the definition of a product-harm crisis, various empirical research results on product-harm crisis management, as well as a list of possible factors that may contribute to effective crisis management identified by some well-known scholars in the field. Through comparing and contrasting various the findings of various studies on the subject, this research highlights that companies involved in product-harm crises should rationally evaluate each strategy in the context of their particular crisis situations, and adopt the most appropriate strategy and approach in an effort to effectively cope with such crises, successfully restore their brand trust, social responsibility, retain and attractive customers and product users.

Factors Contributing to Effective Product-Harm Crisis Management

As products are becoming increasingly complex, customers being more demanding and critical, product-related crises nowadays are even more frequent, global and hard to manage (Birch, 1994; Patterson, 1993). Moreover, such crises indicate importance to consumer or product user behavior which can significantly affect whether they will change their attitude or opinion towards a company and purchase its new product. Furthermore, product-related crises typically cost millions of dollars in the sales, market share, market value, and even stock price of the companies involved in the crises, scholars in the area have spent decades of efforts in studying the effects and potential consequence of product-harm crises, as well as various possible factors that can contribute to effective crisis management process.

Chen, Ganesan, and Liu (2009) discovered whether a firm’s product-recall strategy can affect its financial value, Lei, Dawar, and Gurhan-Canli (2012) assessed the relationship between base rate information and consumer attributions of product-harm crises, Vassilikopoulou, Lepetsos, Siomkos, and Chatzipanagiotou (2009) utilized conjoint analysis method to identify the factors that influence product-harm crisis management and ranked them by different crisis extent levels, Yannopoulu, Koronis, and Elliot (2011) revisited to what extent should media or public relations approaches should be leveraged in building brand trust, etc.

Companies should be well prepared to cope with product-harm crises. Consumers and product users typically learn about a company and its product in product-harm crises, and the company may be accused of social irresponsibility, which will severely damage its corporate image. This thesis advocates that companies should carefully identify the specific crisis situations that they face, and helps them evaluate the usefulness of each strategy and approach, and adopt the most effective one for their particular cases.

Literature Review: What is Product-Harm Crisis?

A product-harm crisis is a highly-publicized incident caused by a defective, contaminated or even dangerous product (Dawar & Pillutla 2000). A product-harm crisis occurs when a certain product can potentially pose risk or harm to product users, or does not meet a certain safety standard specified by the authority of industry, for example, Consumer Product Safety Commission (CPSC), due to its defect or harm (Mullan 2004).

A product-harm crisis can quickly and negatively impact the reputation, branding and image of a company, its products, and even the entire product category on the marketplace. Such crises can lead to decrease in a company’s revenue, loss in its market share, and even affect its stock price (Laufer & Coombs 2006; Rhee & Haunschild 2006; Siomkos & Kurzbard 1994; Sullivan 1990; Van Heerde, Helsen, & Dekimpe 2007; Chen, Ganesan, & Liu 2009).

The well-known 2008 milk scandal in China is a typical example. The incident was triggered by milk being spiked with melamine. Sanlu Group, a state-owned Chinese dairy product company, added potentially lethal chemical in order to artificially boost the protein level of its milk product. Babies fed on the contaminated infant formula suffered kidney damage. Although seemingly centered on Sanlu, many other Chinese diary product brands were influenced by the scandal, including China Mengniu Diary Company Limited (SHEK: 2319). Even until nowadays, some Chinese mothers still prefer paying a premium for foreign infant formula brands to avoid ones.

What Factors Can Contribute to Product-Harm Crisis Management?

For high-extent product-harm crises, organizational response was considered the most important determinant of product users’ attitudes and opinions towards companies involved in the crises. In terms of medium-extent product-harm crises, the time from the crisis event was identified to be the second-most important factor. Corporate social responsibility and external effects were said would mostly influence consumer purchase behavior only in severe crises (Vassilikopoulou, Lepetsos, Siomkos, & Chatzipanagiotou 2008).

Findings of Various Studies on Product-Harm Crisis: A Comparative Analysis

The studies in the product-harm crisis management area integrated some previously identified variables that could affect the success or effectiveness in managing a product-harm crisis into broader factors. In addition, these studies introduced different levels of corporate responses to crises, including with product-recall responses and without product-recall responses, as well as voluntary product-recall process and involuntary product-recall process forced by the authority of the industry.

In the low-extent or most severe product-harm crises, companies should pay attention to media coverage (Vassilikopoulou, Lepetsos, Siomkos, & Chatzipanagiotou 2008). However, Yannopoulou, Koronis, & Elliott (2011) believes generalized public images of a product-harm crisis will generate a public perception of concern, which can possibly provide even more negative impact on the brand that actual consumers’ experience does, because purposefully building trust with such response tent to construct negative mental associations and formulate negative impressions of the well-publicized incident. The research then concluded that effective product-harm crisis management should adjust with the media and public concerns and minimize the potential negative consequence in a way that can facilitate brand trust restoring and perceived risk minimization.

In terms of product-recall management, a proactive organizational response can help a company manage the crisis effectively (Zhao, Zhao, & Helsen 2011). However, Chen, Ganesan, & Liu (2009) assets that a proactive strategy will result in greater shareholder or investor attention, leading to more significant decrease in firm value and dramatic loss in stock price.

Companies should study the empirical research results in the context of various scholars’ respective emphasis at that point of time, methodological trade-offs and limitations of their respective studies. This will enable them to reasonably understand why different conclusions were drawn upon even if similar quantitative approaches were employed, and allow them to judiciously adopt a procedure that best fits their particular crisis situations.

Conclusion

By reviewing different versions of the definition of a product-harm crisis, studying cases in the area in capital markets and the business world, considering various factors that can positively attribute to consumers’ opinion about a company, a product as well as their purchase intentions, this thesis asserts that companies can more effectively different manage product-harm crisis situations, minimize potential consequences, restore brand trust and retain customers and product users by appropriately utilizing the approaches.

This research also helps demonstrate the previous point that companies with high reputation should implement a voluntary product-recall and companies that face negative effects during crises should preferably employ a “supper effort” organizational response, since they need to prove to consumers that they are committed to commercial honesty and social responsibility. In the meantime, companies should aim to secure a second chance from the public to prove that they will have the ability to successfully handle the crises.

Furthermore, the findings conclude that companies should evaluate and monitor external effects, which stem from public reactions of press releases, along with pre-crisis consumer attitude in studying their product-harm crisis situation and make the best response and decision.

References

Chen, Y, Ganesan, S., & Liu, Y. (2009). Does a firm’s product-recall strategy affect its financial value? an examination of strategic alternatives during     product-harm crises. Journal of Marketing, 73(6), 214-226.

Lei, J., Dawar, N., & Gurhan-Canli, Z. (2012). Base rate information in consumer attributions of product-harm crises. Journal of Marketing Research, 49(3), 336-348.

Vassilikopoulou, A., Lepetsos, A., Siomkos, G., & Chatzipanagiotou, K. (2009). The importance of factors influencing product-harm crisis management cross different crisis extent levels: A conjoint analysis. Journal of Targeting, Measurement, and Analysis of Marketing, 17(1), 65-74.

Yannopoulu, N., Koronis, E., & Elliot, R. (2011). Media amplication of a brand crisis and its effect on brand trust. Journal of Marketing Management, 27(5/6), 539-546.

Zhao. Y., Zhao, Y., & Helsen, K. (2011). Consumer Learning in a turbulent market environment: Modeling consumer choice dynamics after a product-harm crisis. Journal of Marketing Research, 48(2), 255-267.

Vassilikopoulou, A., Siomkos, G., Chatzipanagiotou, K., & Pantovakis, A. (2009). Product-harm crisis management: Time heals all wounds. Journal of Retailing and Consumer Services, 16 (2009), 174-180.

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