Crisis

Management
Chapter 5
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Topics Covered
• Introduction
• The nature and causes of crises
• The pattern of crisis development
• Components of a crisis management program

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Introduction
• Crises happen even to firms that take
measures to avoid them
• Acts of nature and random events occur

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Crisis
• A situation in which harm to people or
property either has occurred or is
imminent

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Features of a Crisis
• Unexpected
• Can escalate quickly
• Can damage a firm’s:
• Operating performance
• Reputation
• Credibility of management
• Requires a response or action under time pressure
• Can attract the media and the attention of public and private
politics actors

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Examples of Crises
• Tylenol
• Exxon Valdez
• Société Génerale
• Goldman Sachs
• BP

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Stages of Crisis Management
• Identification
• Escalation
• Intervention
• Resolution

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Components of a Crisis Management
Program
• Avoidance
• Preparedness
• Root cause analysis
• Response
• Resolution and beyond the crisis

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Figure 5.1 - Crisis Management and
the Crisis Life Cycle

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Avoidance
• Reduce the likelihood of a crisis developing

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Preparedness
• Crisis management teams
• Policies
• Earmark resources
• Organizational learning
• Insurance against the cost of a crisis

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Root Cause Analysis
• First step - Developing an effective response
is to analyze the crisis
• Second step - Objective of identifying the
causes of the crisis

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Response
• Includes actions to:
• Resolve the crisis
• Deal with the root cause
• Communicate with stakeholders, the public, and the government
• Effective and ineffective communication
• Two principal components of crisis response
• Communication
• Rectification
• Concerns about liability
• In formulating a strategy for addressing a crisis, a firm must
consider its:
• Exposure to liability
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• Response to stakeholders and the public

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Resolution
• Once a crisis has been resolved, a firm
must reassess its crisis avoidance
measures and its preparedness

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Cases - Mattel: Crisis Management
or Management Crisis
• On June 6 Intertek found high levels of lead in the paint on
some Mattel toys
• The incident led Mattel to undertake an internal investigation,
which found lead in the paint of a number of its toys
• Further investigation revealed that a Mattel-certified paint
supplier had run out of yellow pigment
• Arranged on the Internet to buy 330 pounds of powder from a
local company
• Mattel had to assess whether its current policies and
procedures were sufficient to ensure safety

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Cases - Johnson & Johnson and Its
Quality Reputation
• Johnson & Johnson had grown rapidly over the past two
decades
• In 2009 Johnson & Johnson discovered a possible problem
with Children’s Tylenol produced in its McNeil Consumer
Healthcare plant in Fort Washington, Pennsylvania
• In 2008 McNeil discovered that it had produced Motrin with
less strength than stated on the label and the package and
that two lots failed to dissolve properly
• Inspections at McNeil’s Fort Washington, Pennsylvania plant
identified 20 manufacturing problems

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Cases - Johnson & Johnson and Its
Quality Reputation
• House Oversight committee Chairman Edolphus Towns (D-NY)
and ranking Republican Darrell Issa (R-CA) held a hearing into
Johnson & Johnson’s conduct in May 2010
• In March 2010 the NGO Campaign for Safe Cosmetics released
test results on Johnson & Johnson baby products alleging that:
• Nearly half the products tested contained formaldehyde and 1,4-
dioxane
• Johnson & Johnson also recalled products produced in its Las
Piedras, Puerto Rico plant after the FDA found that a chemical
used in treating wooden pallets caused a musty smell in the
products

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