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How to solve product-harm crises in retailing?

Empirical insights from service recovery and negative publicity research
Dirk Standop and Guido Grunwald
Sales and Marketing Department, School of Business Administration, University of Osnabru ck, Osnabru ck, Germany

Product-harm crises in retailing 915

Received 29 May 2008 Revised 15 October 2008 Accepted 27 April 2009

Abstract
Purpose The purpose of this paper is to present the current empirical research examining communication, compensation and logistics as elements of product crises management in retailing. Design/methodology/approach The advantages and disadvantages of these three elements of crises response strategies are juxtaposed drawing on relevant empirical research. For each element of crises response the major findings of research are summarized and shown how it relates to crisis management. Needs for furtherresearch that would be necessary to solidify recommendations to retail managers are derived. Findings The investigation finds that both communicative and compensatory response elements as well as the retailers logistics can positively in uence evaluations of customers directly and indirectly affected by product problems thus enhancing brand equity. This in turn will serve to increase consumers trust in the retailer that could win him new customers and generally benefit his reputation. Research limitations/implications Most of the discussed research rests on the assumption of a given (extraneous) crisis response strategy of the manufacturer. Potential problems concerning the co-ordination or implementation of manufacturer and retailer strategies remain open to question. Additionally, further research should examine which strategies are appropriate to which crisis situation. Practical implications Materially, over-compensating customers often has a detrimental effect on solving the crisis. The impact of different compensation types on crisis resolution mostly depends on their respective signalling capabilities, the product problem constituting the crisis and consumer attributions. The use and the effects of a communicative crisis response largely depend on moderating factors such as the retailers reputation or the existence of strong retail brands and consumer expectations. Elements of logistics seem to support the effects of communication and compensation on crisis resolution but are hardly capable of solving a product-harm crisis. Originality/value The role of retailers in product-harm crisis management has been widely neglected in research although such crises are predominant. This paper outlines the current empirical work on how different crises response elements may contribute to solving a product-harm crisis for retailers. It derives relevant avenues for further research as well as useful insights to practitioners considering to using such response elements in their own crisis management strategy. Keywords Retail management, Retailing, Communication, Compensation, Complaints Paper type Literature review
I nt e rna t io na l J o urna l o f R et a il & Dis t rib ut io n M a na gem ent Vo l. 3 7 No. 1 1 , 2 0 09 pp. 9 1 5- 9 32 q E me ra ld Gro up P ubli shi ng Li mi t ed 0 9 5 9- 0 5 52 DOI 1 0 .1 10 8 / 0 95 9 0 55 0 9 1 09 9 9 3 52

The authors thank two anonymous reviewers for their valuable feedback.

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Introduction Products and providers have been increasingly receiving a bad press of late. Manufacturers and retailers often find themselves at the receiving end of a storm of public criticism at even the slightest suggestion that their products are of poor quality. High-profile product recalls by Coppenrath and Wiese (Standop, 2005, p. 125), Perrier mineral water (Barton, 1991), Coca-Cola in Belgium (Siegrist, 2001, p. 45) and Mercedes Benz A-Class (Puchan, 2001) as well as the most recent foodstuffs scandals (rotten meat, severe acute respiratory syndrome, bird u, Bovine spongiform encephalopathy and Akrylamit) provide impressive evidence of this tendency. Table I provides an overview of the most frequently appearing product-harm crises in retailing. Not infrequently, public interest for product defects creates a genuine product-harm crisis for a provider. In this paper, the term refers to an extraordinary situation with

Name of company Date Description of crisis event Cadburys October The company recalled thousands of chocolate bars which did not have nut allergy labelling on the packaging from the retail shelves. Earlier in the year the company was fined 1 m for food safety offences linked to Salmonella in its chocolate (www.walesonline. co.uk) Aldi Sud July 2008 The food discount chain recalled bottles of their retail brand Aumu hltaler mineral water in southern Germany. The product was contaminated with germs (www.produktrueckrufe.de) H & M December The Swedish clothing retail company recalled 2008 cardigans for kids of their retail brand made of acryl and alpaca wool for posing risks of swallowing and choking pieces of uff (www.produktrueckrufe.de) Plus December The discount company recalled bitter cookies of their 2008 retail brand Casa Domani Amarettini nationwide in Germany. The product contained a hazardous substance (Amygdalin) that can release prussic acid when mixed with water (www.produktrueckrufe.de) Cougar Mountain Baking February The company issued a voluntary recall on its Peanut Company 2009 Butter Cookies and Cookie Dough products, because they have the potential to be contaminated with Salmonella. The products were sold through grocery and retail stores in selected US-states and through internet mail order nationwide (www.totalrecallinfo. com) Old Navy LLC February The San Francisco retailer recalled voluntarily stuffed 2009 toys with two button eyes that could detach from the toy, posing a choking hazard to young children (www. cpsc.gov) KiK February The textile and non-food discount company recalled a 2009 set of baby bibs in Germany for containing a hazardous substance which poses a health risk to babies (Neue Osnabruecker Zeitung, 21 February 2009) 2007

Table I. Current product-harm crises in retailing

an uncertain outcome that, from the providers point of view, is both exceptional and undesirable. A product-harm crisis directly relates to the providers products and, owing to its potential negative spillovers to a variety of other products, requires an immediate decision on the corrective action to be taken (Krystek, 1987, p. 6). Although the provider is often publicly accused of sharing the blame for product defects, he may not be responsible for it in legal terms. Whereas measures adopted by manufacturers to abate the negative consequences of product-harm crises (e.g. a loss in sales, reduced effectiveness of marketing instruments and a decrease in customer loyalty) have already been evaluated in a number of articles, the role of retailers has been subject to little systematic research in general. As far as consumers and affected manufacturers are concerned, the functions that retailers could perform in product crisis management is highly topical considering discussions within the European Commission on the further ` -vis manufacturers (Standop and Grunwald, harmonization of buyers rights vis-a 2009, p. 35). The question here is whether, in the event that a purchased item turns out to be defective, buyers should have a direct claim against the manufacturer or remain limited to a claim against sellers (i.e. retailers (Standop and Grunwald, 2008)). In turn, the practical benefit of this additional claim largely depends on the relative suitability of the measures that manufacturers and retailers adopt to solve product defects. This paper aims to answer the following questions: how can retailers reduce the detrimental effects of product-harm crises? How are these response options evaluated by the relevant empirical research? Based on these findings: what are interesting relevant avenues for further research concerning the role of retailers in product-harm crisis management? Retailer response to a product-harm crisis can be divided into three groups: communication, compensation and logistics. The next three sections summarize the empirical findings of research on service recovery and complaint management on the one hand and negative publicity on the other concerning these three elements of crises management. Negative publicity research focuses on a broader public consisting of usually not directly affected consumers or potential buyers as recipients of the crisis situation of which they are informed by mass media. Service recovery and complaint management research concentrates on directly affected consumers by the harmful product in question. As buyers they may respond directly to retailers or manufacturers by showing (dis)satisfaction with products and services including the handling of complaints. In contrast to negative publicity research individual communication rather than impersonal communication through media plays an important role in the emergence and the solution of the crisis situation. Evaluation of both research streams offers valuable insights for the management of product-harm crises as defined above representing the general term for a product-related critical company situation involving public attention threatening the companys reputation. Each of the following sections summarizes or synthesizes the major findings (what we know), explains how it relates to crisis management and derives what still needs to be done in terms of further research necessary to solidify recommendations to retail managers. Finally, the central findings of this paper will be summarized and an outlook provided on major unresolved research issues. Figure 1 shows the underlying conceptual framework of this paper.

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Elements of response strategies to product-harm crises

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communication logistics forms/ style content type amounts/

compensation organization infrastructure

level

Synopsis of empirical findings from Service recovery/ complaint management research + Negative publicity research

Evaluation of findings with regard to product-harm crisis managementin retailing Derivation of open questions and needs for future research Recommendations for practitioners Figure 1. Conceptual framework

Summary of results

Discussion of empirical findings relating to the in uence of retailers on solving product-harm crises Retailers communication Communication measures refer to the transmission of crisis-related information to consumers who are (allegedly) affected by a product defect. Retailers often respond by having their employees provide clarification as part of the complaints process. The first step in the communication process is taken by either the retailer or consumer. Communication efforts of retailers can be further divided into two subcategories: (1) the forms or formulation of communication (contents); and (2) the content of communication itself. Research relating to complaint management and customer recovery has examined the significance that different forms of communication have for product-harm crisis management. Table II summarizes the key findings. In literature, attributes such as friendliness and courtesy (Goodwin and Ross, 1989), willingness to help and commitment (Folkes, 1984), empathy (Parasuraman et al., 1985), supportiveness and the atmosphere of conversations (Hennig-Thurau, 1998, p. 21 f) have been investigated. The individuality of problem management (i.e. the degree of reference to the particular

Name of research paper Author (date) Major findings Salient dimensions of perceived fairness in resolution of service complaints a Consumer responses to service failures: in uence of procedural and interactional fairness perceptions a Goodwin and Ross (1989) Courtesy, compensation and paying attention to the complainant are important factors in complaint satisfaction Goodwin and Customers sense of justice is a decisive criterion Ross (1992) for successful crisis management. This criterion is primarily in uenced by procedural (e.g. inclusion of the customer) and interactional justice (e.g. apology by the company) as well as the outcome of crisis-management (e.g. correction of the service error). Both procedural and interactional justice have a positive effect on the perception of quality as a whole and on customers sense of satisfaction Johnston (1995) Readiness to help and friendliness of employees, effective information and communication as well as customer involvement are factors that make an important contribution to a successful management of crisis incidents in the customerprovider relationship Hansen and Important factors of crisis response to in uence Jeschke (2000) complaint satisfaction include the positive atmosphere of talks and friendliness of the employee receiving the complaint, the interest shown by the relevant employee in the product or service problem per se as well as the level of interest shown in the problem experienced by the customer. The processing of complaints, time taken to solve problems and the type and comprehensiveness of solutions contributed to complaint satisfaction

Product-harm crises in retailing 919

Service failure and recovery: impact, attributes and process

Beschwerdemanagement fu r Dienstleistungsunternehmen Beispiel des Kfz-Handels a

Note:

Service recovery/complaint management research

Table II. Research findings on the in uence of different forms of communication on product-harm crisis management

problem experienced by the customer or affected person in question) may be capable of in uencing product-harm crisis management (Hennig-Thurau, 1998, p. 19 ff). From the consumers point of view, the retailers communication measures relating to the crisis are therefore linked to process qualities that determine his evaluation of the crisis management. The results show that retailers as intermediaries between manufacturers and consumers are able to perform an important advisory function for customers locally. On the basis of personal interaction they inform and advise customers about product attributes, possible uses, as well as their operation and maintenance thus creating effective trust with customers. By contrast, a manufacturer generally comes into contact with purchasers only through impersonal communication. Often, there are no direct, personal contact partners either. Customers may first choose to express their dissatisfaction to the retailer due to the trust and confidence in his abilities created by the advice he has provided. A personal discussion may also prove more successful in identifying the cause of the complaint and negotiating a solution because the customer

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obtains immediate feedback. Personal communication with the retailer offers the consumer a greater chance of in uencing the outcome of his complaint than impersonal communication with the producer and thereby increases the prospects that he will achieve a positive outcome to his complaint. A large number of studies examine the way in which communication contents affect the management of product-harm crises using impression formation theory (or impression management theory) as a basis (Taylor, 1991, p. 67; Fiske, 1980; Mizerski, 1982; Kanouse, 1984; Ahluwalia, 2002; Bradford and Garrett, 1995; de Matos and Veiga, 2004). Table III shows the main results. The possible content of communication may either be unreserved acknowledgement of the existence of a problem and responsibility for it (concession) or simultaneous denials of the same (denial). A commonly used concession-strategy is an open apology by the retailer for alleged product problems. Between these two extremes one finds ambivalent strategies that either rebut responsibility for a problem whilst simultaneously acknowledging its existence (excuse) or that deny a problems existence whilst simultaneously accepting responsibility for it (justification). On the whole, current research does not regard the denial strategy as being particularly useful in managing product-harm crises. Empirical analysis of complaint management by Boshoff and Leong (1998) and Conlon and Murray (1996) and company responses to negative publicity by Bradford and Garrett (1995) regard a communications strategy that aims to acknowledge public criticism (particularly that relating to responsibility for a product defect) as far more likely to contribute to the success of product-harm crisis management than one that rebuts responsibility altogether (Boshoff and Leong, 1998, p. 24 ff; Conlon and Murray, 1996, p. 1040; Bradford and Garrett, 1995, p. 883 f). However, even if the retailer does not expressly accept any responsibility for a past mistake, recipients will often regard an apology for any inconvenience as tantamount to causal responsibility for a problems occurrence (Jorgensen, 1996, p. 348; Coombs, 1998, p. 188). Besides suggesting causal responsibility, an apology may also transmit a positive signal capable of moderating the negative information generated by the product-harm crisis. Apologies play a supportive role in the management of product-harm crises insofar as they primarily facilitate other elements of crisis management, particularly those relating to compensation (Folkes and Kotsos, 1986, p. 79; Miller et al., 2000, p. 395; Goodwin and Ross, 1992, p. 149 ff; Blodgett et al., 1997, p. 185 ff). According to Dawar and Pillutla (2000), ambivalent strategies such as excuse or justification are only appropriate if consumers already have high expectations of the brand (Dawar and Pillutla, 2000, p. 219). If consumers have high expectations, they may be tempted to interpret the facts relating to the crisis in accordance with those expectations. In cases where consumers display strong brand loyalty (i.e. where they themselves actively seek arguments to counter negative product information), Ahluwalia et al. (2000) advise companies to adopt a strategy that minimizes the relevance (i.e. value) of negative information. Accordingly, the retailer could claim that the brand being criticized is no different from its competitors as regards its controversial feature(s) because it uses the same technology. On the other hand, if consumers do not display any significant brand loyalty (i.e. they do not actively seek any counterarguments themselves), the strategy chosen should aim to provide customers with arguments countering the negative information being circulated. Counterarguments consist

Name of research paper Author (date) Major findings Consumer reactions to product failure: an attributional approach a Folkes (1984) Customers are more likely to expect an apology and material compensation (here, a reduction in the sale price) in the case of external product problems attributed to the provider than they would do in the case of internal product problems attributed to the customer Bitner et al. Explaining the cause of the problem in a given case (1990) will have a positive effect on customer satisfaction even if the provider is completely incapable of providing the desired service Baer and Hill A providers written explanation of the cause of a (1994) customer problem had the effect of reducing the predominant opinion of consumers that the provider had control over the cause of the problem and could have prevented its occurrence. Mitigating opinions determined by unfavourable attributions will result in increasing levels of satisfaction Jorgensen The author compares denial strategies with one (1996) that accepts responsibility by means of an apology. The latter strategy resulted in recipients attributing a greater degree of blame to the provider but they were less angry about the problem and expressed their understanding more readily Boshoff and Accepting responsibility for a problem, ensuring Leong (1998) that employees are competent to deal with it and issuing a statement of apology taken together have significant, positive effects on complaint satisfaction. The significance of these factors decline according to their order in the list Dawar and Consumers interpret firm response on the basis of Pillutla (2000) their prior expectations about the firm. Consumer expectations moderate the impact of firm response on brand equity, regardless of the type of firm response. Under the condition of weak expectations the impact of product-harm crisis is severely negative in both the stonewalling and ambiguous response cases. In contrast, under unambiguous support with equally weak expectations, there is no decline in brand equity. Strong expectations combined with unambiguous support increases brand equity relative to a no-crisis control situation Ahluwalia et al. Commitment is an important moderator of (2000) consumer response to negative information. Consumers who are committed to a brand instinctively counter argue negative information about the brand. Low commitment consumers, conversely, counterargue the negative information to a lesser degree
b

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The service encounter: diagnosing favorable and unfavorable incidents a Excuse making: a prevalent company response to complaints? a

Components of consumer reaction to company-related mishaps: a structural equation model approach b

Empowerment, attribution and apologising as dimensions of service recovery. An experimental study a Impact of product-harm crises on brand equity: the moderating role of consumer expectations b

Consumer response to negative publicity: the moderating role of commitment b

Notes:

Service recovery/complaint management research;

negative publicity research

Table III. Research findings on the in uence of different communication contents on product-harm crisis management

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of information that challenges the accuracy (validity), reliability and completeness of the negative information (Ahluwalia et al., 2000, p. 211 f). Most of the discussed articles on the communication aspect of crisis management are experimental studies using hypothetical brands or critical incidents experienced by consumers as a basis. While these studies are usually well founded in theories of behavioural psychology their external validity is limited. As micro-analyses (using consumer data on a disaggregated level) they show direct implications for the use of specific company response styles which might be beneficial to retail managers: a retailer may reject responsibility attributed to him publicly perhaps because there is a lack of evidence or an unconvincing public discussion. By expressing his opinion on the responsibility for a publicly-discussed problem he is accused of having, the retailer may be able to in uence recipients allocation of blame in an attempt to ensure a more favourable outcome for himself. By adopting a clarification-oriented justification strategy, a retailer may ultimately win (back) the trust of customers, e.g. through the insight and understanding obtained thereby. Research also draws attention to potential moderators (like brand commitment or expectations) of the in uence of crisis information as well as company reactions on dimensions of customer evaluation. As far as retailers are concerned high-customer expectations of a brand or high-brand commitment could imply high-retailer reputation or presence of strong retail brands (Purohit and Srivastava, 2001, p. 131). Hence it follows, that only highly reputable retailers, which might have built up their reputation for high-product quality through strong retail brands, could use defensive communication strategies such as minimizing problems or blaming other parties. In search for more potential moderators of the in uence of crisis information on consumers first purchase decisions Cleeren et al. (2008) found that both pre-crisis loyalty and familiarity form an important buffer against the product-harm crisis, althoughthis resilience decreases over time. The authors use real-life household-scanner data that record consumer purchases before, during and after a well publicized product-harm crisis to enhance external validity of results (Cleeren et al., 2008, p. 263). More research like this is necessary in a specific retailer setting including different communication response styles to derive valuable insights for practitioners. In order to attempt to quantify the financial implications of product-harm crises and company reactions some authors conduct macro-analyses using aggregated market-data such as market shares, stock prices or brand sales (van Heerde et al., 2007). However, macro-analyses do not seem appropriate to reveal impacts of specific company response types on individual consumer behaviour and to control for the multiple in uences that are present in the aggregated data. A practical issue in this regard concerns the size of the event window (i.e. the time period before andafter a crisis event or crisis response strategy) which is used to statistically detect the full consequences of a product-harm crisis or company response. In general, the longer the event window which is used, the higher is the probability of a high external but low internal validityof results since more andmorenon-crisis related factors will beincluded in the data set (Bromiley and Marcus, 1989; Jarrell and Peltzman, 1985). Retailers compensation Compensation measures adopted by the retailer refer to the offer or announcement of material redress for (alleged) product problems. From the consumers point of view,

the retailers compensatory measures constitute result-related qualities that allow him to evaluate the outcome of the crisis management strategy adopted. Table IV summarizes the key findings of the relevant empirical research. Studies on complaint management and customer recovery research largely agree that availability of compensation per se is of central importance to the management of product-harm crises (Davidow, 2003, p. 236). Affected consumers who receive compensation for a problem are generally more satisfied (more loyal) and, on the whole, evaluate the provider more positively than those who are not granted any compensation at all (Brown et al., 1996, p. 41; Bitner et al., 1990). Three major aspects seem to determine what form or type of compensation (e.g. product replacement, repair or payment) is required for a successful crisis management (Grunwald, 2008b, p. 64 ff): (1) the kind of problem experienced by consumers (process or result-related errors), i.e. the crisis situation itself (Smith et al., 1999, p. 360); (2) consumer preferences derived from attributions concerning potential causes of the product problem in question (stable or unstable causes) (Folkes, 1984, p. 398 ff); and (3) the signalling effects that go along with certain compensation forms (Kashyap, 2001, pp. 10 and 12). The latter factor states that by promising compensation, retailers signal that they are basically prepared to accept responsibility for future product problems as well. Specifically, the promise of product replacement instead of monetary compensation may indicate that the retailer is firmly convinced of the performance of his advertised product (now and in the future) and will not drop products from his range. Future research is necessary to examine the relationship between the signalling abilities or contents of certain compensation types on the one hand and consumers preferences for a specific compensation on the other (Grunwald, 2008a, p. 38). In management practice, however, an evaluation of a retailers decision to provide a certain type of compensation will first and foremost take account of factors relating to customer loyalty. Replacing or repairing the product instead of repaying the sale price (or paying-out compensation that exceeds the sale price) gives the retailer an opportunity to bind customers in the long-term (Grunwald and Hempelmann, 2006, p. 359). On the other hand, if the problems cause is perceived to be stable, compensation by means of a monetary payment will often herald the end of a business relationship. Empirical research is divided as to the effects that different amounts of compensation have on the successful outcome of crisis management (usually the restoration of customer satisfaction or reduction of customer dissatisfaction in the event of negative consumer experiences (Kerr, 2004, p. 35 ff). Generally speaking, a retailer has the option to place those affected by a problem in a position that is materially equivalent (full compensation), better (over-compensation) or worse (partial compensation) than the position they would have been in had the problem never occurred. Some studies can prove the positive effect of over-compensation on successful crisis management (Boshoff, 1997; Gilly and Hansen, 1985; Gilly and Gelb, 1982). The results of certain studies even suggest the existence of a so-called recovery paradox: it has been established that in cases where customers negative

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Name of research paper Author (date) Major findings Post-purchase consumer processes and the complaining consumer a Gilly and Gelb (1982) The authors found that where the problem had led to the customer suffering financial loss there was a significant, positive correlation between the partial satisfaction of the sum demanded by the customer and his complaint satisfaction. This finding suggests that partial repayment will not be sufficient to restore customer satisfaction to pre-crisis levels. On the other hand, the actual amount of the sum demanded does not appear to affect complaint satisfaction at all Folkes (1984) The stability and locus of a problems cause determine whether consumers prefer to have the sale price reduced or repaid or to be given a replacement product instead. As soon as the customer determines the problems cause to be stable, he will prefer a monetary payment (e.g. reimbursement of sale price) to product replacement. Problems attributable to the consumer will also be considered less stable than those attributable to the provider. Therefore, the consumer will prefer monetary payments to product replacements if the problems cause is attributable to the latter Gilly and The authors prove that over-compensation has a Hansen (1985) positive effect on satisfaction, intention to repurchase as well as positive word-of-mouth communication Blodgett and The authors found that only a complete replacement Tax (1993) positively affected customer satisfaction (restoring it to pre-crisis levels Boshoff (1997) Boshoff finds signs of a positive (linear) correlation between the amount of compensation and degree of customer satisfaction following negative consumer experiences in the service sector. Therefore, satisfaction levels will rise if the provider pays out high amounts of compensation as part of his crisis management strategy Smith et al. The authors uncover a positive relationship between the (1999) amount of compensation and customers perception of distributive justice, that in turn positively affects their level of satisfaction. Customers tend to associate result errors with financial loss (e.g. a hotel room reserved by the customer is no longer available because the hotel has been over-booked), whereas process errors imply losses of a social or psychological nature (e.g. the experience of unfriendly service). The amount of materialcompensationhas a greater effect oncustomers perceptions of distributive justice in the case of a result error than in the case of a process-related error. The size of the customers problem (e.g. the amount of financial loss) affects the degree to which the amount of compensation contributes to successful crisis management. The effect of the amount of material compensation on perceptions of distributive justice declines as the size of the problem increases (continued)

924

Consumer reactions to product failure: an attributional approach

Consumer complaint handling as a strategic marketing tool a The effects of distributive and interactional justice on complainants repatronage intentions and negative word-of-mouth intentions a An experimental study of service recovery options a

A model of customer satisfaction with service encounters involving failure and recovery a

Table IV. Research findings on the in uence of compensation measures on product-harm crisis management

Name of research paper Author (date) Major findings The effectiveness of compensation given to complaining consumers: is more better? a Garrett (1999) Satisfaction with complaints handling does not depend significantly on the amount of compensation granted. This finding relates to a range of compensation between 100 and 300 per cent of the sale price of the low-priced goods. However, Garrett assumes that there might be a stronger connection with complaint satisfaction particularly where compensation amounts to less than 100 per cent of the sale price McCollough etal. Full or over-compensation positively affects customer (2000) satisfaction following product-harm crisis management Estelami and de Maeyer (2002) The authors demonstrate that over-compensation by a service provider negatively affects consumer opinions

Product-harm crises in retailing 925

An empirical investigation of customer satisfaction after service failure and recovery a Customer reactions to service provider overgenerosity a Note:
a

Service recovery/complaint management research

Table IV.

consumer experiences were unexpectedly successfully eliminated through the use of appropriate response strategies, they turned out to be even more satisfied and loyal and evaluated the provider more positively than customers who did not have any equivalent negative consumer experiences with their provider (Michel, 2001; Miller et al., 2000; Smith and Bolton, 1998; Goodwin and Ross, 1992; Hart, 1993; Kelley et al., 1993; Bitner et al., 1990). By contrast, the recommendations of other studies are considerably more reserved as regards the appropriateness of over-compensation to manage product-harm crises. There is evidence supporting the existence of a so-called plateau effect according to which compensation no longer has any significant effect on the reduction of, e.g. customer dissatisfaction resulting from negative consumer experiences once it exceeds a certain level (Davidow, 2003, p. 236 ff; Kerr, 2004, p. 37; Garrett, 1999, p. 26 ff). Some studies even support the proposition that over-compensation may have a detrimental or negative effect (Estelami and de Maeyer, 2002, p. 205 ff). In some cases, authors point to the existence of a phenomenon contradicting the recovery paradox that has also been described as a (double) deviation effect. In this connection, a crisis response strategy that mainly consists of over-compensation tends to increase the already existing dissatisfaction of customers many times over or reduce their opinion of the provider. Maxham and Netemeyer (2002) identify such an effect in a case where a provider made repeated unsatisfactory management efforts to correct several product problems (Maxham and Netemeyer, 2002, p. 57 ff). Based on these contradicting findings future research should analyse the role of compensation as an element of crisis response strategies in different product-harm crises situations. Product-harm crises could be divided further according to the types (e.g. potential financial, functional, physical or psychic loss) and amounts of consumer risks involved. There is a large need for crisis specific or situational analyses in the retailing setting. Different consumers may also be affected differently (more or less directly) by a specific product-harm crisis, a circumstance which could be used as a segmentation variable in future studies. Furthermore, potential moderator

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variables of the effect of (over-)compensation on consumer behaviour in product-harm crises should be examined. A starting point for the analysis of moderating effects may be the empirical analysis by Purohit and Srivastava (2001) based on cue utilization theory. The authors found that either retailer or manufacturer reputation (but not necessarily the latter) must be high before a generous (as opposed to limited) compensation (as an element of a product warranty) can act as a quality signal (Purohit and Srivastava, 2001, p. 131). However, it is unclear whether the reputations of the manufacturer and retailer play a similarly diagnostic role in the customers evaluation of product quality. In this context, Dawar and Parker (1994) point out that the manufacturers reputation is far more dependent on the product than the retailers (Dawar and Parker, 1994, pp. 81-95). The latters reputation is the sum total of his product range that may feature many different manufacturers as well as retail brands whereas the manufacturers reputation, as a rule, stands or falls by a few products or even one. Studies by Grewal et al. (1998) and Rao and Monroe (1989) show that it is the latters reputation that exerts the greater in uence over consumers perception and evaluation of quality (Grewal et al., 1998, pp. 331-352; Rao and Monroe, 1989, pp. 351-357). Retailers logistics Elements of crisis management grouped under logistics relate to organizational and technical infrastructure that is used to manage a crisis: are returns sent directly to the manufacturer or are retailers and other intermediaries used? For example, how is the return of defective products by customers to the manufacturer via the retailer organized? Are the companys technical and personnel resources (including the skills of employees) sufficient to ensure that products are returned efficiently? What lines of communication (e.g. info hotlines) are available? From the consumers point of view, the logistical aspects of crisis management relate partly to process-related factors (such as the speed at which the retailer responds to or deals with complaints) and partly to capability-related factors (such as the personnel and technical resources of complaints departments). The latter relate to providers ability to deal with crises and as such they in uence customers opinions regardless of the course and outcome of the crisis management (Hennig-Thurau, 1998, p. 19). Table V summarizes key findings of the relevant empirical research. As far as reaction and processing speed are concerned, a number of empirical investigations offer clear evidence supporting the general proposition that a quick (as opposed to slow) retailer response and complaints processing play an important role in product crisis management (Smith et al., 1999; Johnston, 1995; Boshoff, 1999). In sum, retailer logistics perform an important function in supporting the communication and compensation measures adopted by the retailer or manufacturer. The logistics of crisis management may facilitate the use and increase the effectiveness of communicative and compensatory actions but cannot substitute them in any way. Further research should focus on the joint effects of a retailers logistics, communication and compensation with regard to solving different product-harm crises situations. Retail managers will particularly be interested in issues concerning the co-ordination between these three elements of crisis management which should be addressed by future research.

Name of research paper Service failure and recovery: impact, attributes and process
a

Author (date) Major findings Johnston (1995) A quick company response contributes to a successful management of crisis incidents in the customerprovider relationship. In particular, the authors emphasize the important contribution made by employees to successful crisis management In their experimental study the authors succeed in proving that response time and initiative of response can affect consumer satisfaction following crisis management The author finds that the following factors in uence satisfaction with complaints-handling: difficulty of contacting the companys complaints department (negative), duration and difficulty of processing (both negative), atmosphere and friendliness of the answer to the complaint (both positive) as well as the extent of compensation (positive) The authors results highlight the role of operational activities in service recovery. A fast company response is crucial to successful customer recovery

Product-harm crises in retailing 927

A model of customer satisfaction with service encounters involving failure and recovery a Beschwerdemanagement: State-of-the-art der Beschwerdezufriedenheitsforschung a

Smith et al. (1999)

HennigThurau (1998)

Service recovery: a framework and empirical investigation a Note:

a

Miller et al. (2000)

Service recovery/complaint management research

Table V. Research findings on the in uence of logistics on product-harm crisis management

Conclusion Besides manufacturers, also retailers often suffer considerably from the effects of a product-harm crisis. By way of being actively involved in crisis management a retailer can turn a product-harm crisis situation to his advantage and use it to obtain a considerable gain in reputation. This paper has discussed the effectiveness of the various measures available to retailers in their efforts to manage product-harm crises considering the findings of empirical research on service recovery and negative publicity. The use of measures relating to retailers logistics, communication and compensation can serve to increase consumer satisfaction, their perceptions of justice and product quality and to reduce attributions of blame that could damage a providers reputation. The use and the effects of crisis communication largely depend on moderating factors such as the retailers reputation which might be concomitant with the existence of strong retail brands and consumer expectations. Retail managers should be aware that a high reputation may not be sufficient to protect oneself from negative consequences of a crisis but it increases the effectiveness of a given crisis response of the retail company. The impact of different compensation types on crisis resolution mostly depend on their respective signalling capabilities, the perceived product problem constituting the crisis and consumer preferences derived from consumer attributions. Materially over-compensating customers often has a detrimental effect on solving the crisis and certainly is no prerequisite for successful crisis management. Elements of a retailers logistics seem to support the effects of communication and compensation on crisis resolution but taken alone are hardly capable of solving a product-harm crisis. Should the retailer select the appropriate

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strategy, consumers will show their appreciation by forming positive beliefs of the retailer in question. Such positive beliefs or opinions may, in turn, prove beneficial to the brand affected by the product-harm crisis and the manufacturers brand equity. In turn, the manufacturer can integrate the retailers involvement into his own crisis management strategy, exploit synergies and possibly reduce the costs of crisis management. Research on product-harm crisis management in retailing is still in its infancy. In particular, there is a lack of studies that provide recommendations for using the available response strategies within the context of different crises situations. Besides, potential moderators of crisis information and crisis responses in the retailing setting should be analysed, especially with regard to the role that (strong) retail brands might play. Since usually more than only one of the three elements of crisis management is used simultaneously to combat a crisis, future research should try to measure their relative and joint effects on consumer behaviour. Also co-ordination problems between the elements of communication, compensation and logistics deserve greater attention. This paper has not considered any co-ordination problems that may arise between measures adopted by the retailer and manufacturer in order to manage product-harm crises or the ways in which they interact with each other. Such considerations may form the subject of future research.
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