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06/07/22 Copyright 2003 Daniel Diermei er 1 Strategic Crisis Management Daniel Diermeier IBM Professor of Regulation and Competitive Practice and Director – Center for Business, Government, and Society Kellogg School of Management – MEDS Department
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Page 1: 3/20/10 Copyright 2003 Daniel Diermeier

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